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United States Court of Appeals,

Fifth Circuit.

No. 96-60162.

In the Matter of Tommy Ray HENSON; Viola Norwood Henson,

Debtors.

Tommy Ray HENSON; Viola Norwood Henson, Appellants,

v.

FIRST TOWER LOAN, INC., doing business as Tower Loan of Prentiss,

Appellee.

Jan. 22, 1997.

Appeal from the United States District Court for the Southern

District of Mississippi.

Before GARWOOD, DAVIS and STEWART, Circuit Judges.

STEWART, Circuit Judge:

Tommy Ray Henson and Viola Norwood Henson ("the Hensons")

appeal a district court order, which affirms a ruling from the

Bankruptcy Court for the Southern District of Mississippi. The

order being appealed overruled the Hensons' objection to First

Tower Loan, Inc.'s, ("Tower") proof of claim and ruled that a

second Deed of Trust which was executed by the Hensons in favor of

Tower was valid and enforceable despite the presence of a covenant

in a first Deed of trust held by the Farmers Home Administration

("FmHA") providing that "[n]either the property nor any portion

thereof or interest therein shall be leased, assigned, sold,

transferred, or encumbered, voluntarily or otherwise, without the

written consent of the Government." For the following reasons, we

affirm the order of the district court.

FACTS
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On May 25, 1982, the Hensons executed a Deed of Trust to FmHA

in the amount of $24,000.00 ("the first Deed of Trust"). On

December 29, 1993, the Hensons executed a Promissory Note,

Disclosure Statement, and Security Agreement with Tower in the

amount of $3,124.09. On the same date, the Hensons executed a Deed

of Trust to Tower ("the second Deed of Trust") on the same piece of

property on which the FmHA holds the first Deed of Trust.

On February 22, 1994, the Hensons commenced a case under

Chapter 13 of the Bankruptcy Code. On April 20, 1994, Tower filed

a proof of claim for $4,140.00 as secured interest based upon its

second Deed of Trust. On August 2, 1994, the Hensons filed an

objection to the proof of claim filed by Tower, alleging that the

second Deed of Trust was void because of Tower's failure to obtain

the written consent of the FmHA. In addition, the Hensons claimed

that Tower should be relegated to the status of unsecured creditor

and an Order be entered canceling the second Deed of Trust. On

August 5, 1994, Tower filed an answer to the Hensons' Objection to

Tower's proof of claim.

On June 27, 1995, Edward R. Gaines, Bankruptcy Judge for the

Southern District of Mississippi, entered an order denying the

Hensons' objection to Tower's proof of claim. The court concluded

that the Hensons' argument that the second Deed of Trust is void

for failure to obtain consent by the FmHA is unsupported by law.

The decision was appealed to the United States District Court for

the Southern District of Mississippi.

On February 7, 1996, Judge Charles W. Pickering, Sr., affirmed
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the decision of the bankruptcy court denying the Hensons'

objection. In his opinion, Judge Pickering adopted and expanded

the reasoning of the Bankruptcy Court opinion, stating: "Like the

bankruptcy court, this Court is unaware of any positive law which

would require a finding that the second Deed of Trust held by Tower

Loan should be declared void." Record Vol. I:3.

On March 6, 1996, the Hensons' filed a Notice of Appeal to

this court from the order of the district court.

DISCUSSION

The facts of this case are not disputed and have been

stipulated by the parties. As such, we review the district court's

ruling de novo. This is an issue of first impression for this

Court.

The first Deed of Trust executed by the Hensons' to the FmHA

on May 25, 1982, provides, in pertinent part, as follows:

BORROWER for Borrower's self, Borrower's heirs,

executors, administrators, successors, and assigns COVENANTS

AND AGREES as follows:

 ....

(12) Neither the property or any portion thereof or

interest therein shall be leased, assigned, sold, transferred,

or encumbered, voluntarily or otherwise, without the written

consent of the Government (FmHA). The Government shall have

the sole and exclusive rights as beneficiary hereunder,

including but not limited to the power to grant consents,

partial releases, subordinations, and satisfaction, and no

insured holder shall have any right, title or interest in or

to the lien or any benefits hereof.

Appellants' R.E. at 18-19 (emphasis added).

Both of the lower courts' rulings were based on the fact that

the preceding excerpt, although prohibitive, did not contain
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language declaring transfers or assignments without consent to be

void. In the absence of "legal or contractual authority," both

courts declined to make a determination that the second Deed of

Trust was void. Furthermore, the district court noted that the

contract provided that failure "to abide by the covenants set forth

in the first Deed of Trust would amount to an incident of default,

thereby permitting the Farmers Home Administration to declare the

entire amount immediately due and payable and allowing

foreclosure." Record Vol. I:2.

The statement by the district court indicates its analysis of

the first Deed of Trust incorporated a reading of paragraph twelve

with the remedies paragraph, paragraph eighteen which reads as

follows:

(18) SHOULD DEFAULT occur in the performance of discharge

of any obligations in this instrument or secured by this

instrument, ... the Government (FmHA), at its option, with or

without notice, may: (a) declare the entire amount unpaid

under the note and any indebtedness to the Government hereby

secured immediately due and payable, ...

Appellants' R.E. at 19 (emphasis added).

Thus, the district court's analysis has the effect of reading

paragraphs twelve and eighteen together as a "due on sale clause."

We agree.

Specifically, we hold that the contract language contained in

the first deed of trust clearly states that failure to obtain

written consent from the FmHA prior to further encumbering the

Hensons' property creates an incident of default only, and that the

clause at issue is analogous to a "due-on-sale" clause and is

thereby enforceable at the option of the FmHA against the Hensons.
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The Hensons argue that the rulings of the lower courts are in

error; the second Deed of Trust should be declared void as

violative of the first Deed of Trust; conveyance instruments like

the first Deed of Trust are recorded instruments and a

sophisticated lender, such as Tower, had a the burden of examining

the documents previously recorded, and; the Hensons and their five

children should not lose their home because Tower was not diligent.

The Hensons, however, do not provide any specific legal or

contractual authority supporting their position. In the absence of

any positive law which would require a finding that the second Deed

of Trust should be declared void, we find the Hensons' arguments

unpersuasive.

Our decision today is consistent with prior decisions of the

Mississippi Supreme Court. That court has held that a valid due on

sale clause can give the first lienholder the right to foreclose on

the property, but does not necessarily have the effect of voiding

a subsequent encumbrance on the property. See Unifirst Federal

Savings & Loan Assoc. v. Tower Loan of Mississippi, 524 So.2d 290

(1988). In Unifirst, a holder of a second Deed of Trust, which had

foreclosed its interest, brought a civil action against the first

deed of trust holder seeking declaratory, injunctive, and other

relief after the first Deed of Trust holder invoked the due on sale

clause in its Deed of Trust. There, the court held that although

the specific due on sale clause did not prohibit subordinate

encumbrance on the property, the clause was valid and enforceable

upon foreclosure of the junior lienholder.
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CONCLUSION

For the foregoing reasons, the ruling of the district court is

AFFIRMED.