United States Court of Appeals

Fifth Circuit



## FILED

November 22, 2005

Charles R. Fulbruge III

Clerk UNITED STATES COURT OF APPEALS

FIFTH CIRCUIT

____________

No. 04-11420

____________

In The Matter Of: JAMES ALBERT JAY,

Debtor,

------------------------------------------------------------

NESCO ACCEPTANCE C ORPORATION; NESCO INC; LINC

ACQUISITION ONE LLC,

Appellants,

versus

JAMES ALBERT JAY; ANN C. JAY,

Appellees.

Appeal from the United States District Court

For the Northern District of Texas

Before REAVLEY, HIGGINBOTHAM, and GARZA, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

Nesco Inc. and Nesco Acceptance Corporation (collectively, “Nesco”) appeal the district

court’s judgment affirming the bankruptcy court’s order voiding a warranty deed between Nesco and

James and Ann Jay (“the Jays”) over a .85 acre tract of land. Nesco avers that the bankruptcy court1 The Jays contended that Pullman had acquired the tract through a wrongful

foreclosure. The transaction was structured in this way to avoid any questions about title.

-2- erred by finding that the property in question was a business homestead.

I

The Jays acquired title to an .85 acre tract sometime in 1984 and have since used the land to

operate a service station and convenience store. The Jays also acquired title to a neighboring 1.04

acre plot, which was used only intermittently for business. The Jays have never resided on either

parcel of land. In November 1999 the Jays entered into negotiations wit h Nesco to finance

improvements on the .85 acre property. Nesco told the Jays that it would provide financing only if

the Jays agreed to convey the property to Nesco. The Jays testified before the bankruptcy court that

Nesco agreed to build a new facilit y that it would then lease back to them. The resulting Retail Store

Lease (“Lease”) was signed by the parties on December 15, 1999. The Lease provided, inter alia,

that the term would begin on April 1, 2000, and run twenty years. The Lease also gave the Jays, as

tenants, an opti on to repurchase both tracts at any time during the lease or upon its termination. The

exist ing facilities were demolished in early January 2000, and on the 13th of that month, the Jays

conveyed to Nesco title to the property by warranty deed. At the same time, the Jays conveyed by

quitclaim deed the 1.04 acre tract to Saul Pullman, who then executed a warranty deed and conveyed

the land to Nesco. 1

The new facilit

ies were eventually completed, and the Jays opened the new service station.

The Jays, however, never made any lease payments to Nesco as required under the terms of the lease.

Nesco filed a forcible entry and detainer suit in state court to eject the Jays from the property

. The

Jays sought bankruptcy protection and removed the case to bankruptcy court.2 Subsequent to their transactions with the Jays, Nesco obtained a loan from Bank One

in exchange for a lien on the .85 acre property

. Bank One sold its interest in the Nesco note to Linc

Acquisition One, LLC (“Linc”). Linc is also appealing the bankruptcy court’s decision.

-3- The bankruptcy court held that the Jays owned a business homestead as defined under the

Texas Constitution on the .85 acre tract. The court further held that the sale/leaseback arrangement

was a “pretended sale” in violation of the Texas Constitution; that the deed to Nesco was void; that

Nesco’s mortgage lien on the property was void; and that Nesco possessed an unsecured claim for

money Nesco had paid the Jays as an investment in inventory and working capital, which the court

considered to be a simple loan. 2 The dist rict co urt affirmed the bankruptcy court’s decision in all

respects.

II

Nesco raises three issues on appeal. First, Nesco contends that the bankruptcy and district

co urt s erred in applying the business homestead requirements provided in the Texas Constitution

prior to the 1999 amendment. Second, Nesco argues that the courts wrongly concluded that this was

a “pretended sale” prohibited by the Texas Constitution. Finally, Nesco contests the co urt s’

deter m ination that Linc was not an innocent lienholder with rights to enforce the lien against the

property

.

We review the decision of a district court, sitting as an appellate court, by applying the same

standards of review to the bankruptcy court’s findings of fact and conclusions of law as applied by

the district court. C

arrieri v. Jobs.c om Inc. , 393 F.3d 508, 517 (5th Cir. 2004). A bankruptcy

court’s findings of fact are reviewed for clear error and its conclusions of law de novo

. Id.

Prior to November 1999, a property owner could establish a business homestead under the

Texas Constitution if the property in question was used “as a place t o exercise the calling of-4-

business.” Tex. Const. of 1876, art. XVI, § 51. Property designated a homestead is granted certain

protections, including exemption from forced sale for the payments of debts. This protection also

voids all “pretended sales” of the homestead to avoid these constitutional restrictions. Tex. Const.

art. XVI, § 50(a), (c). In November 1999, an amendment to the Constitution, approved by Texas

voters, provided homestead protecti on only if the property “shall be used for the purposes of a home,

or as both an urban home and a place to exercise a calling or business.” Tex. Const. art. XVI, § 51.

On January 1, 2000, a provision of the Texas Property Code went into effect that expressly applied

the newly amended definition to “all homesteads in this state w henever created .” Tex. Prop. Code

Ann. § 41.002(d) (Vernon 2000) (emphasis added).

Because the business dealings between the Jays and Nesco cross the operative dates for the

amendment and the stat ut e, t he relevant question for purposes of this appeal is which homestead

definition applies. The district court determined that the amendment to the Texas Constitution was

passed after the creation of the Jays’ homestead and thus did not affect their rights. Furthermore,

under the district court’s reasoning, the retroactivity of the amendment triggered by the Texas

Property Code on January 1, 2000 did not matter in this case becaus e the rights had vested on

December 15, when

t he part ies signed the lease agreement. Nesco offers several reasons that the

amended defin it io n o f a business homestead should apply, thus stripping the .85 acre tract of its

homestead protection. Nesco argues that the amendment is expressly retroactive, that the relevant

transaction took place after the amendment to the Constitution, and that it was imp roper f or the

bankruptcy court to find that the execution of the warranty deed in mid-January related back to the

lease date in December.

There is no need to consider the retroactivity of the constitutio nal amendment or the-5-

application of the statute because we determine that it was improper for the district court to “relate

back” the execution of the warranty deed in January 2000, to the signing of the lease agreement in

December 1999. It is a well-settled principle of Texas law that a deed takes effect from the date of

its delivery. J

ames H. Tuttle v. Turner, Wilson & Co. , 28 Tex. 759 (1866). “The presumption that

a grantee will accept a deed because it is beneficial to him will never, it is said, be carried so far as

to consider him as having actually accepted it.” I d. Where there has been a contract fo r sale,

however, the deed can be said to “relate back” to the date of the contract, when t he rights of the

p arties were fixed. A lexander v. Anderson

, 207 S.W. 205, 208 (Tex. 1918); see also Steed v.

Crossland

, 252 S.W.2d 784, 787 (Tex. Civ. Ap p

. )) Beaumont 1952, writ ref’d) (“If there be no

question concerning relation back, it is held that a deed takes effect between the parties wh e n it is

delivered to the grantee.”).

Those cases concerning deeds which allow relation back, however, refer only to a contract

of sale between the parties. S ee, e.g.

, Wilkerson v. Wilkerson

, 992 S.W.2d 719, 72 2 (Tex.

App. )) Austin 1999, no pet.) (“When real prope rty is acqui red under a contract for deed or

inst allment contract, t he inception of title relates back to the time the contract was executed.”);

Jenkins v. Chambers

, 9 Tex. 167, 1852 WL 4043 at *23 (“A deed executed in pursuance of a

previous contract relates back to the time of the contract and covers all intermediate acts.”); see 26A

C.J.S. Deeds § 166 (discussing the relation-back doctrine and its application in limit ed circumstances,

including antedating a deed, correcting a deed, and executing a deed pursuant to a contract for sale).

Relation-back cases that do not deal with deeds similarly use the language of contract: “ When parties

enter into a contract the law presumes they intend the consequences of its performance. I t follows

that performance or implementation of the contractual provisions relate back to and are authorized3 The dissent urges that we should follow the bankruptcy court and relate the date of

the sale back to December 1999 because of the existence of an oral or implied contract between the

parties predating even the Lease agreement. Contrary to the dissent’s assertion, the bankruptcy court

did not make sufficient findings to support the existence of a legally binding oral contract between

the parties. “[T]he terms of an o ral co nt ract must be definite, certain, and clear as to all essential

terms.” F arone v. Bag’n Baggage, Ltd.

, 165 S.W.3d 795, 802 (Tex. App. )) Eastland 2005, no pet.)

(citing Meru v. Huerta , 136 S.W.3d 383, 390 (Tex. App. )) Corpus Christi 2004, no pet.). Even if

there were a generalized prior agreement )) as the bankruptcy court assumed must have existed prior

to the parties’ entering the Lease )) it would not constitute a definite and clear contract for sale, with

specific and determined terms. And to imply a contract in this situation would open all negotiations

for the sale of land to the danger that a court could find a prior binding contract, thereby, in effect,

negating the clear rules governing the sale of real property

. Therefore, we need not reach the further

question of whether such an oral or implied contract would trigger the relation-back doctrine.

-6- at the time of execution of the contract.” C ain v. State

, 882 S.W.2d 515, 518 (Tex. App

. )) Austin

1994, no writ) (quoting Curry Auto Leasing Inc. v. Byrd

, 683 S.W.2d 109, 112 (Tex. App. )) Dallas

1984, no writ).

A lease does not constitute a contract of sale. The Lease between the Jays and Nesco did not

trigger any duties for either party until April 1, 2000. The demolition of the buildings on the .85 acre

tract did not begin until January 2000, and was not undertaken pursuant to any language in the Lease.

The Jays deeded the land to Nesco on January 13, 2000, and it is improper to relate the date of the

vesting of the rights back to December 1999. To expand the relation-back doctrine to include not

only a contract for sale, but also all written instruments that allude to or reference a future transfer

of property

, would expand the principle so far as to undermine the clear rule regarding the execution

of deeds. 3

Because the deed was executed in January of 2000, the amended definition of a business

homestead is controlling. Since the Jays have never lived on the .85 acre tract, the land does not meet

the requirement of a

business homestead and is thus not due the special protection granted

homesteads by the Texas Constitution. There is no need to reach the additional arguments made by-7-

Nesco, as they are premised on a determination that the .85 acre tract was a homestead under the

Texas Constitution. Because we do not so find, these other arguments need not be addressed.

Accordingly, the district court’s decision is REVERSED and REMANDED for proceedings

not inconsistent with this opinion.-8-

PATRICK E. HIGGINBOTHAM, Circuit Judge, dissenting:

I

I am not persuaded by the majority opinion. With respect, I dissent.

The bankruptcy court, affirmed by the district court, found that the effective date of the deed

related back to December 15, 1999, by which time there was a contract for sale. The majority holds

that the January 13, 2000 delivery of the deed did not relate back to December 15, persuaded that

there was no such contract to sell the property.

The courts below held that a contract for sale existed by December 15, the date the parties

signed the Lease. Nesco demolished the existing building and began construction on January 2 or

3 and received the deed on January 13. They concluded, and I agree, that it makes little sense for

Nesco to demolish a building on property it had no right to purchase, or for the Jays to deliver a deed

to land for which there was no contract for sale, oral or otherwise. And Nesco could not lease

property to the Jays that it did not own.

There is more than the strangeness of the events as portray ed by the majority. By the Lease

terms, Nesco was the owner and lessor and t he Jays were the lessees; that is, there was to be a

purchase of the land by Nesco and its lease back to the Jays. No surprise here, since the claim in this

case is that the transaction was a “pretended sale” in which the parties structured what was a lien as

a sale and leaseback, with the “lease” which set the “r e nt” and the terms on which the Jays could

“buy” bac k t heir pro perty embodying the pretended sale. It was not a normal lease. More to the

point, to say simply that “[a] lease does not constitute a contract for sale” begs the question of

whether this was a lease or a loan - that is the issue in the case.4 The bankruptcy court also included a useful f ootnote attempting to explain the delay between

the signing of the Lease on December 15, 1999 and the delivery of the deed on January 13, 2000.

It noted that a third-party had allegedly foreclosed on the 1.04 acre tract and that both parties had

contacted this third-party, who eventually executed his own deed after Nesco paid him off. I agree

with the court that, “as is more than like ly, t he delay in execution of the deed was logistical.

Documents had to be prepared, and [the third-party] and others had to be contacted and persuaded

to release their liens.”

5 The majority rejects this conclusion because the terms of the contra ct were allegedly

insufficient ly definit

e, thereby creating the danger that all negotiations could be judicially recast as

contracts. In fact, t he t erms here were exact, as they are embodied in the Lease itself. The Jays

contracted to sell definite land (the two tracts) for a definite price (the amortization schedule) under

definite conditions (the other terms in the Lease). The contract was clear as to all essential terms.

The majority ignores the real issue here: whether the Lease was a lease or a contract embodying a

pretended sale. Put another way, it is of course necessary fo r an o ral o r implied contract to have

definite terms. But there is no dispute here over what the terms were - we can tell what they were

by the parties’ own course of performance. The dispute is only over w hen the terms were agreed to.

And it is clear that they were agreed to by December 15, when the parties put onto paper their intent

that the Jays would “sell” t he land to Nesco, who would then “lease” is back to them. Whatever

agreement existed, existed by that date. Everything after that date was performance of the contract,

performance perfectly in line with the precise terms of the contract.

-9- It is difficult to quarrel with the conclusion of the bankruptcy court that “no doubt” an oral

or implied contract for sale was formed. 4 If so, the lower courts did not “expand the relation-back

doctrine” to reach a lease. They rather found that there was an agreement for sale. We should affirm

the bankruptcy court’s well-supported con clusion that the Jays satisfied the widely accepted, if

exacting, requirements for showing the existence of an oral or implied contract, giving it discretion

to apply the equitable relation back doctrine. 5

And I would affirm its application of t hat discretion. Finding there to be “little doubt that

Nesco structured its transaction to circumvent Texas homestead laws,” the court applied the doctrine

for two reasons: 1) to give effect to the parties’ intentions, because the parties believed that the .85

acre tract constituted the Jays’ business homestead, and 2) to preserve rights that would otherwise

be lost, because the Jays lost rights by January 13, 2000, a loss not contemplated in the December6 Morante v. Am. Gen. Fin. Ctr. , 157 F.3d 1006, 1009 (5th Cir. 1998).

7 T EX

. C ONST

. art. XVI, § 50(a), (c) (2005).

8 T EX

. C ONST

. art. XVI, § 51 (1999).

9 T EX

. C ONST

. art. XVI, § 51 (c) (2005).

10 The act making the change was passed on May 28, 1999, but it provided that it was to “take

effect January 1, 2000, but only if the constitutional amendment...is approved by the voters.”

11 T EX

. P ROP

. C ODE A NN . § 41.002(a),(d) (Vernon 2002).

-10- 1999 Lease. The exercise of discretion in light of either rationale was proper.

II

Having agreed with the lower courts that the operative date for the transaction was December

15, 1999, I must reach the question of which definition of “homestead” controlled on that date. We

review the lowers courts’ ruling on this legal question de novo

. 6

The Texas constitution protects homesteads from “forced sales...for the payment of debts.” 7

Prior to 1999, the constitution defined “homestead” to include a home or place of business; the latter

is called a “business homestead.” 8 In November 1999, an amendment to the constitution redefined

a business homestead as property that is both a home and place of business. 9 The Texas legislature

enacted a statutory provision reflecting this change on January 1, 2000, 10 leaving alone the nearby

statutory section stating that the statutory definition applied to all homesteads “whenever created.” 11

Here, both parties agree on appeal that if the new definition applies, the Jays cannot recover because

they never lived on either of the two tracts. The Jays, of course, argued that the old definition should

apply, and the lower courts agreed.

The lower courts found that the amendment was “self-effectuating” when passed in November

1999, meaning that no legislative or other action was needed to change the definition of “homestead.”12 The Jays do not challenge this conclusion on appeal.

13 As noted above, both on December 15, 1999 and January 1, 2000, T EX

. P ROP

. C ODE A NN

. § 41.002(d) had the same language applying the statutory definition in § 41.002(a) to homesteads

“whenever created.” That is, the January 1, 2000 statutory amendment did not alter the retroactivity

section of the statute. But on December 15, 1999, the statutory definition was the old definition.

-11- They also found that the constitution’s new definition of “homestead” prevailed over the old, contrary

statutory definition, which was not updated to reflect the constitutional change until January 1, 2000.

“The result is that, as of December 15, 1999, t he change in Texas law was complete - an urban

homestead could not be [created] without the maintenance of a home thereon.” 12

However, the courts also found that the amendment applied prospectively by default, meaning

that property which previously had attained the status of homestead retai ned that status absent a

constitutional or statutory provision stating that the constitutional amendment applied retroactively.

Because there was no such constitutional or statutory provision providing for retroactivity of the new

definition on December 15, 1999, 13 the Jay s’ property was protected on that date.

It was no t until January 1, 2000, when the statutory provision updating the definition was

ena ct ed, that the amendment became retroactive and the Jays’ .85 acre tract lost its status as a

homestead. The courts then held that the tract lost its status as a homest ead only with respect to

transactions entered into after January 1, 2000, because any retroactive application for transactions

occurring before January 1, 2000 would alter the substantive rights and obligations of the parties in

violation of the Texas constitution’s prohibition against ex post facto or retroactive laws.

In short, the lower courts held that the amendment was silent regarding retroactivity when

passed and became retroactive by virtue of the Janu ary 1, 2000 statute, retroactive only for

transactions entered into after January 1, 2000. In other words, the “retroactivity” enacted by the14 See Linch v. Broad , 70 Tex. 92, 93-95 (1888) (“The provision of the present constitution

enlarging the homestead exemption cannot be given retroactive application...so as to embrace in 1877

all property which in 1859 did not ex ceed in value the enlarge exemption prescribed by the

constitution of 1876, without regard to value in 1877.”); Wright v. Straub , 64 Tex. 64, 66 (1885);

McLane v. Paschal , 60 Tex 102, 106-07 (1884).

15 See Dallas Power & Light Co. v. Loomis , 672 S.W. 2d 309, 310 (Tex. App.-Dallas, writ

ref’d n.r.e.).

16 See In re Niland

, 825 F.2d 801, 807 n.2 (5th Cir. 1987) (suggesting that earlier amendments

were not re t roactive until T EX

. P ROP

. C ODE § 41.002(c), passed in 1984, applied changes in the

definition of homestead to homesteads “whenever created ”); In re Starns

, 52 B.R. 405, 413 (Bankr.

S.D. Tex. 1985) (holding that amendment receives retroactive application because T EX

. P ROP

. C ODE

§ 41.001(c) provides retroactivity); In re Barnhart

, 47 B.R. 277, 282 (Bank. N.D. Tex. 1985)

(recognizing distinction between cases before 1983 amendment to constitution and 1984 codification

of T EX

. P ROP

. C ODE § 41.001(c), where there was no retroactivity, and cases after the amendment

and codification of there, which specifically provided retroactivity).

-12- s tatute removed the homestead shield from property like the Jays’ in Texas, propert y which had

gained that shield in the past, but not for past transactions.

I agree with the bankruptcy court t hat amendments to the

homestead provision of the Texas constitution are not retroactive

when silent about the retroactive reach. The Texas Supreme Court

has so held. 14 Other federal and state courts, in holding that the

a mendment itself 15 or a statute 16 can overcome the default and

provide retroactivity, concur. As the bankruptcy court held, “some

positive action, either by constitutional or legislative provision,

is re quired to divest property of its homestead character....”

Consequently, we also agree with the bankruptcy court’s conclusion

that the January 1, 2000 statute validly made the amendment

retroactive.

I also agree with the bankruptcy co urt that, as a result of17 Wessely Energy Corp. v. Jennings , 736 S.W. 2d 624, 626 (Tex. 1987).

18 See, e.g., Harman v. Urban , 946 S.W. 2d 546, 551 (Tex. App. - Corpus Christi 1997, no

writ) (“The substantive rights and duties of a party pursuant to an agreement are those under the law

as it existed at the time the agreement was made. A subsequent law that changes those rights and

duties would violate the Texas Constitution’s prohibition against ex post facto laws.”).

19 The defendants argue that a constitu t io nal grant of retroactivity for the definition, as

opposed to a statutory grant, is valid even if it “conflicts” with t he constitutional prohibition on

retroactive laws. Although this may be true, c f. Dallas Power & Light Co.

, 672 S.W.2d at 311, we

do not decide the issue because the grant of retroactivity here was statutory.

-13- the statute, the .85 acre tract “lost its character as a business

homestead” only “with respect to transactions entered into after”

January 1, 2000. It held that this was so because “[t]he laws

existing at the time a contract is made become a part of the

c ontract and govern the transaction,” 1 7 and because the new

definition could not be applied to old transacti ons without

violating the Texas Constitution’s prohibition against retroactive

laws. 18

While agreei ng with the bankruptcy court’s conclusion, I do

not decide whether providing statutory retroactivity 19 for

transactions occurr ing before the change in definition would

violate the p rohibition on retroactive laws. Rather, I construe

the statute to avoid that constitutional question. The statutory

language

- “[t]he definition of a homestead as provided in this

section applies to all homesteads in this state whenever created”

-

does not answer the question of whether the new definition applies

to transactions occurring before the statute was enacted, as

distinguished from the redefinition of all homesteads whenever20 Id. at 310 (quoting the Texas Hous e Joint Resolution accompanying the proposed

amendment).

21 Id . (emphasis added).

22 Cf. Wright

, 64 Tex. at 66 (“Obviously it was no t the intention of the convention, in

extending the homestead exemption, to divest or interfere with previously existing rights. But if it

had been the intention of the convention [to do so], still it has been held by the supreme court of the

United States that an existing judgment lien is such a vested right as is beyond the power [possibly

because of the contracts clause of the federal constitution] of a constitutional convention to divest

or destroy .”) In W

right

, a creditor received a judgment lien on a house which later fell under the new

definition of a homestead. The court held that it was not the intent of the amendment to destroy a

previously existing right

- the lien on the house. Here the Jays had a similar previously existing right -

homestead protection making an alleged lien invalid. What is good for the creditor seems good for

-14- created from that date foreword. I have found no case where the

c ourt applied that or similar retroactivity provisions to such

transactions; all of the retroactivity cases involve application of

the new wording to land that was designated a homestead before the

change, either maintaining or removing its homestead st atus for

future transactions. Moreover, in one of those cases the court,

after holding that the 1970 amendment “applies to all homesteads in

this state, including homesteads acquired b efore the adoption of

this amendment,” 20 held that “its framers and adopters [intended it

to be] retroactive with respect to judgment liens attaching after

its effective date.” 21

And this, to my eyes, was the likely intent of the

legislature, to redefine which properties received homestead

protection in the future, potentially stripping old homesteads of

their protection. I cannot assume that it intended to upset

concluded transactions framed against settled laws. 22 And we needthe debtor.

23 United States v. Marek , 238 F.3d 310, 322 (5th Cir. 2001).

24 As discussed by the court in W right

, see supra note 18, it may also violate th e federal

constitution.

25 T EX

. C ONST

. art. XVI, § 50(a), (c) (2005).

-15- not decide whether the contrary construction would violate the

Texas constitution to be cognizant of the specter of constitutional

infirmity in readin g this ambiguous statute. 2 3 The construction

urged by appellants would mea n that contracts for liens on

homesteads violative of the homestead provision when made, and thus

void, coul d be revived years later by statutory change. At a

minimum this would engage the Texas constitution’s prohibition on

retroactive laws, a path to be avoided in statutory construction. 24

For these reasons, I would hold that the old definition of

“business homestead” applied to the December 15, 1999 transaction.

The parties agree that the .85 acre tract satisfies that

definition.

III

Because the .85 acre tract was a homestead, “[a]ll pretended

sales of the homestead involving any condition of defeasance [are]

void.” 25 The “question of whether an instrument written as a deed

is actually a dee d or is in fact a mortgage” is a question of26 Johnson v. Cherry , 726 S.W.2d 4, 6 (Tex. 1987).

27 F ED

. R. B ANK

. P. 8013.

28 Mosher Steel & Mach. Co. v. Nash

, 6 S.W.2d 158, 162 (Tex. Civ. App.

- Dallas 1928, writ

dism’d w.o.j.).

29 Johnson , 726 S.W.2d at 6.

30 The court also found it o dd that Nesco would buy the 1.04

acre tract but build only on the .85 acre tract and that the Jays

would lease back the 1.04 acre tract and do nothing with it, as

they had for years. Both acts make sense, of course, if the 1.04

acre tract was never sold but was merely additional security for a

loan.

-16- fact, 26 reviewed for clear error. 27 I would affirm the lower courts’

conclusion that the deed was a disguised mortgage.

Under the Texas constitution, an option to repurchase, such as

the one held by the Jays, is a sufficient “condition of defeasance”

to void a pretended sale. 2 8 Whether a sale was “pretended” is

determined primarily by the intent of the parties. 2 9 The lower

courts made sev eral observations in concluding that the parties

intended to disguise a mortgage. First, Mr. Jay originally sought

a loan, and later he rejected two offers for “sale” which did not

include options to repurchase. Moreover, Nesco was not in the

business of owning and leasing real estate, but rather was a

finance company with its own constructions crews.

More importantly, the courts noted that the Jays conveyed both

the .85 and 1.04 acre tracts, 30 worth a total of $306,000, of which

approximately $240,000 was equity after Nesco paid off $60,000 in

alleged liens. Nesco never paid the Jays this $240,000. The-17-

evidence revealed that Nesco considered this money part of the

funds it was advancing to the Jays and which the Jays would have to

pay back in t he “lease” payments. Thus, the equity could never

have been paid because whatever money the Jays might have received

they would have had to pay back.

The courts further noted that, while Nesco never explained to

them its failure to pay the $240,000, the failure was made plain by

its August 14, 2000 letter to the Jays, demanding increased lease

payments before it would pay the Jays the $240,000. The original

amortization schedule attached to the lease listed the principal

balance owing as $1,267,898.76. Unforeseen increased construction

costs may have eaten u p all of this money, leaving nothing with

which to pay the $240,000. As a result, Nesco may have demanded

increased lease payments to cover the addition a l construction

costs. Whatever the case, I agree with the lower courts that if

Nesco agreed to pay $240,000 in purchase money for the properties,

it should have paid th at amount. That it did not, and that it

conditioned paying such amount on an increa se in monthly rent

payments, is compelling evidence that the $240,000 was not purchase

money but part of a loan secured by the properties. Much about the

original intent of contracting parties is found in their subsequent

performance of the contract.

T he bankruptcy court also observed that part of the

$1,267,8 9 8.76 balancing owing listed on the Lease represented

$150,000 in wo rking capital provided to the Jays, although only31 In re Perry , 345 F.3d 303, 312 (5th Cir. 2003).

-18- $50,000 of that was paid. No one can explain why this money was

anything but a loan, unconnected in any way to the value of the

property, for which the property was security.

In sum, that the whole transaction was a loan is clear: “loan”

appeared everywhere on the Lease, with the Lease payments based not

on rental value but on an amortization of the “loan amount” with

payments reducing the “balance” due. In addition, the Jays would

have had to pay a set fee to exercise the option to “repurchase”

the property. The fee had no relation to the property’s market

value, decreasing after time to $64,050 plus the balance owing for

the so-called lease payment. Thus, after paying off the loan, the

Jays could have “repurchased” their property for t he fire-sale

price of $64,050.

This is overwhelming evidence that this was a mortgage

t ransparently cast as a sale. The lower courts were not clearly

erroneous in so concluding.

Nesco, quoting a case from this court, argues that

[t]he mere fact that the [land] may h ave been

transferred...solely in order to avoid the prohibition

against encumbering the homestead does not alone convert

a legitimate sale into a ‘pretended sale’ or sham

transaction. Rather, a sale is ‘pretended’ if the

parties to the sale did not intend for title to vest in

the purchaser. 31

It emphasizes that the only person to te stify at trial to the

intent to vest title was Mr. Jay, who stated that “[t]hey were to32 T EX

. C ONST

. art. XVI, § 50(a)(5) (2005).

-19- build me a convenience store of my specifications, they were to

furnish me with inventory and working capital, pay me for the

equity of my land, and I had an option to repurchase.” The lower

courts were not clearly erroneous in concluding that this

testimony, when view ed in light of the evidence described above,

especially Mr. J ay’s testimony that he rejected other financing

offers because they did not include an option to repurchase, was

insufficient to find that Mr. Jay had the intent to vest title in

Nesco.

I also agree with the lower courts’ rejection of Nesco’s

argument that, because it could have placed a lien on the .85 acre

tract for purpos es of improving it, 3 2 its lack of motive to

circumvent the homestead provision proves it had no intent to do

so. Nesco conceded that it could not have placed a lien over the

$150,000 in working capital. Its arguments that that aspect of the

transaction was “plainly secondary” and that it would not have

risked a potential $1 million proper lien for improvements to get

an additional $150,000 improper lien for inv entory are not

compelling.

I would hold that the lower courts did not clearly err in

deeming the “lease” a disguised mortgage and in invalidating that

mortgage.

IV33 Nesco gave to Bank One a lien on the .85 acre tract as

additional security for a previously issued note. Bank One later

sold that note to Linc. Because Linc “stands in the shoes of his

assignor,” Houk v. Commissioner

, 173 F.2d 821, 825 (5th Cir. 1949),

the issue is whether Bank One

- not Linc - was an innocent

purchaser for value without notice.

34 Witty v. Delta Air Lines, Inc. , 366 F.3d 380, 382 (5th Cir.

2004).

35 Johnson , 726 S.W.2d at 7-8.

36 Eylar v. Eylar

, 60 Tex. 315, 316 (1883); Red River Nat’l Bank

v. Latimer , 110 S.W.2d 232, 237 (Tex. Civ. App. - Texarkana 1937,

no writ).

-20- Having found the underlying transaction to be a “pretended

sale” prohibited by the Texas constitution, I must also reach the

question of whether the lien held by Linc, transferred from Nesco

to Bank One to Linc, was valid because Bank One was an innocent

lienholder for value without notice. 33 Because the ruling here

turns on a question of law, review is de novo

, 34 and I would reverse

the lower courts, which found that Linc’s lien was void because

Bank One had constructive notice of the underlying transaction.

When a transfer of property is found to have been a pretended

sale prohibited by the Texas constitution, the deed is void and the

pretended buyer holds an unsecured debt for the amount loaned to

the pretended seller. 3 5 However, a subsequent purchaser or

lienholder can prevail against a homestead claimaint if the

subsequent purchaser or lienholder was an innocent purchaser for

value without notice of the facts giving rise to the homestead

claim. 36 To be classified as an innocent purchaser or lienholder,37 896 F.2d 107 (5th Cir. 1990).

38 60 Tex. 315 (1883).

39 109 Tex. 64 (1917).

40 In re Mercer , 246 F.3d 391, 402 (5th Cir. 2001).

-21- the party must have acted in good faith.

It is undisputed that Bank One paid value for the lien, acted

in good faith, and had no actual knowledge of any potential claim

by the Jays. The lower courts found that it had constructive

notice of a potential homestead claim by the Jays. Interpreting I n

re Rubarts

, 37 which ostensibly reconciled Eylar v. Eylar 38 with Moore

v. Chamberlain

, 39 the lower cou rts concluded that “a homestead

claimant’s posse ssion of property imposes upon the third-party

purchaser or lender a duty of inquiry that is not automatically

discharged by merely checking the record title.” Because the Jays

were in possession of the tracts and Bank One made no investigation

beyond a record check, the lower courts held that it should be

charged with constructive knowledge. Because the question of

whether a record check is insufficient to discharge a lender’s duty

of inquiry where the homestead claimant is in possession is a pure

question of law, we review de novo

. 40

While the lower courts’ interpretation of R ubarts was not

unreasonable, I think it equally plausible to read that case to the

contrary, as requiring no more than a record check where the

homestead claimant is in possession and where there is no other-22-

reason to suspect a homestead claim. Any further inquiry by Bank

One past the record check here probably would have been futile. In

December 2000, the Jays verified the lease in response to a letter

from Nesco’s auditors seeking verification. If Bank One had asked

the Jays about the lease, nothing suggests that the Jays would have

offered a different response. Asking an innocent lender like Bank

One to shoulder the burden of figuring out whether the Jays had a

homestead claim

- a task which it would have taken this court more

than fifteen pages to perform

- is commercially unreasonable and I

do not read Texas law to do so.