Opinion ID: 12207
Heading Depth: 2
Heading Rank: 3

Heading: Public Records Doctrine

Text: 48 The conclusion reached by both the bankruptcy court and the district court, that the public records doctrine does not preclude application of the confusion doctrine to extinguish the Lease under Article 3411(1), is correct--as far as it goes. Both courts accurately noted that Louisiana's public records doctrine, which has now been made statutory in Revised Statute § 9:2756, specifies that all unrecorded sales, contracts, and judgments affecting immovable property shall be utterly null and void, except between the parties thereto. 26 It follows that even though the Deed, until filed for registry, would have been primed by a third party's subsequently executed but previously recorded conveyance or encumbrance, this unrecorded act was nonetheless capable of translating ownership (as distinct from record title) between the parties, i.e., the Debtor and the Parish, but only to the extent the Parish owned the Foundry (as distinct from holding record title to it)--assuming arguendo that ownership (as distinct from record title) had ever passed from the Debtor to the Parish in the first place. 49 As such, for purposes of confusion the Deed was, with respect to the obligations under the Lease, legally sufficient to consolidate--confuse--in the person of the Debtor the qualities of both obligee and obligor and thereby extinguish the Lease. 27 Consequently, in the absence of operative facts or effective stipulations of the parties to the contrary, the public records doctrine could not prevent the Deed from effectively extinguishing the Lease--and thus the Mortgage--pursuant to Article 3411(1). This is so because the leasehold, as the thing mortgaged, ceased to exist the instant the Deed was executed--assuming, of course, that nothing in the Mortgage or about the Lease transaction would vary the result supplied by Article 3411(1). 50 By the same token, the public records doctrine does, however, afford protection to the holder of the note secured by the Mortgage against third parties to the extent that this security device contains provisions proscribing unilateral acts of the mortgagor, whether or not in concert with third parties, to the prejudice of the mortgage. This doctrine likewise protects provisions of the Lease, such as extension and repurchase options, against intervening acts of third parties that might otherwise destroy the efficacy of such provisions. 51 D. Contractual Variations From Article 3411(1)--Suppletive and Imperative Laws in the Louisiana Civil Code and the Pact de Non Alienando 52 Up to this point, our analysis essentially replicates the principal thrust of the Government's argument as well as the conclusions of the bankruptcy and district courts: Execution of the Deed would directly extinguish the Lease by confusion, and indirectly extinguish the Mortgage by confusion. Where we depart is in our recognition that there could be something about the transaction or some enforceable stipulation, such as an after-acquired property clause, that might produce a different result. Indeed, it is at precisely this point that the Government, the bankruptcy court, and the district court (1) misapprehended--and thus misapplied--an important principle of Civilian methodology and (2) overlooked basic features of Louisiana mortgage law, thereby producing reversible error. The methodology to which we refer is the one employed in classifying provisions of law as either imperative or suppletive and the role of public policy in achieving the proper classification. The basic features of mortgage law to which we refer are the pact de non alienando and its statutory counterpart, the anti-alienation rule as currently manifested in both Article 3307 of the Civil Code and Article 2701 of the Louisiana Code of Civil Procedure. And the reversible error to which we refer is the failure of those courts to (1) classify Article 3411(1) as merely suppletive, and (2) enforce the stipulations of the parties in the Mortgage. In short, the court erred in mischaracterizing and misconstruing the key anti-alienation stipulation in § 11(l)(3) of the contract between the Debtor and the Ross Group as the parties to the Mortgage, a stipulation obviously intended to limit, vary, or prohibit the results of transactions that would otherwise be governed by former Article 3411(1)'s rule that extinction of the thing mortgaged extinguishes the mortgage.
53 One tenet that is basic to every Civilian legal system is the distinction between imperative and suppletive laws. Former Article 11 of the Louisiana Civil Code (which was in effect when the Mortgage was executed and recorded and the substance of which was not affected when in 1988 it and Article 12 were replaced by Article 7) expressed this distinction succinctly: 54 Individuals cannot by their conventions, derogate from the form of laws made for the preservation of public order or good morals. 55 But in all cases in which it is not expressly or impliedly prohibited, they can renounce what the law has established in their favor when the renunciation does not affect the rights of others, and is not contrary to the public good. 28 56 Although neither former Article 11 nor its replacement employ the precise terms imperative or suppletive, traditional civilian doctrine has, in the words of Professor Alejandro Garro, long characterized: 57 as imperative those legal precepts rooted in public policy which may not be set aside by private agreement. Suppletive laws, on the other hand, are those legal norms designed to supplement the parties' will in cases wherein its application is not excluded. 29 58 With this clear distinction in mind, then, we must ask whether former Article 3411(1)'s provision for the extinguishing of mortgages when the thing mortgaged ceases to exist is imperative or suppletive. 59
60 The task of distinguishing between suppletive and imperative laws is best approached, not in an abstract inquiry into the character of a particular provision in light of the elusive concepts of public order or the public interest, but, as Professor Garro instructs, by examining the particular clause of the agreement which does away with a rule of law, and ... ask[ing] whether the enforcement of the clause would be against public policy. 30 When we follow this sage counsel in the instant case, we discover that enforcement of the Mortgage's covenant addressing the encumbering of a leasehold interest, as stipulated by the Debtor and the Ross Group, would not be violative of public policy. To the contrary, its terms are entirely consistent with Louisiana mortgage law and practice. 31 61 We recall first that § 11(l)(3) of the Mortgage specifically provides: 62 Mortgagor will not surrender any of its leasehold interests hereinabove described, nor terminate or cancel the Lease, and will not, without the prior written consent of the Mortgagee modify, change, supplement, alter or amend the Lease, either orally or in writing, and any such termination, cancellation, modification, change, supplement, alteration or amendment of the lease without prior written consent of the Mortgagee shall be void and of no force and effect. As further security to the Mortgagee, Mortgagor does hereby deposit with the Mortgagee the original copy of the Lease and the Assignment thereof to be retained by the Mortgagee until all indebtedness secured hereby is fully paid. 63 By including this stipulation in the Mortgage, the Debtor as mortgagor expressly agreed not to take any action unilaterally that might terminate, cancel or modify the Lease or the Debtor's leasehold interest. Thus the Debtor agreed, inter alia, not to alienate or modify the property encumbered to secure the indebtedness owed to the holder of the collateral mortgage note in any way that would prejudice the Mortgage. 32 By proscribing such prejudicial actions of the mortgagor, the parties to the Mortgage were acknowledging between themselves--and, through the public records, were informing the rest of the world--that an action taken by the mortgagor in contravention of this covenant shall be of no effect vis-a-vis the Mortgage or the mortgagee. In this regard, the covenant is a specialized version of the venerable pact de non alienando, 33 or non-alienation clause, uniquely tailored here to fit the collateral mortgaging of a lessee's interest in a lease. 64 In its earliest form, the pact de non alienando (or pact de non) simply prohibited the mortgagor from selling, alienating, or encumbering the mortgaged property to the prejudice of the mortgagee or the creditor's mortgage. 34 Not an absolute contractual prohibition against sale, 35 however, this prototype pact de non primarily served as a procedural tool: It allowed a mortgage creditor to disregard a violation of the pact and proceed to foreclose via executiva on mortgaged property that had passed into the hands of a third party. 36 This in turn made unnecessary the preliminary step, in foreclosing via ordinaria, of first obtaining a judgment against the mortgagor and then naming the third party as a defendant in a subsequent suit. In short, the pact de non allowed the foreclosing mortgage creditor to ignore any transfers and encumbrances of the mortgaged property executed after recordation of the mortgage. 65 Ever since the Louisiana Supreme Court reaffirmed the validity of the pact de non in several early 19th century challenges to the device, reasoning that the sole basis for the effect of the clause derives from its mutual introduction by the parties into the mortgage contract, 37 Louisiana courts have consistently pointed to the pact de non when permitting mortgagees to foreclose directly on mortgaged property. This is permitted notwithstanding subsequent transfers or alienation, in a wide variety of contexts, including involuntary expropriations, 38 dissolution of marital communities, 39 insolvency, 40 and successions. 41 Some courts have also held that when the pact de non is carefully worded, it can serve as a contractual bar to certain activities and may even allow a mortgagee to foreclose on mortgaged property despite the mortgage payments being current. 42 Finally, we note that the Louisiana legislature enshrined the pact de non's protections for mortgagees, at least as far as sales or subsequent encumbrances of the mortgaged property are concerned, in Article 3397 of the Louisiana Civil Code of 1870 and in current Article 3307(2), 43 as well as in Article 2701 of the Louisiana Code of Civil Procedure. 44 66 This brief history of judicial and statutory recognition of the pact de non in Louisiana law sets the stage for us to answer the crucial question whether enforcement of this particular covenant in the particular mortgage at issue under these particular circumstances would violate public policy. We answer this question in the negative. 67 Our threshold inquiry is whether the parties sought by their own stipulations to vary the results that would otherwise be supplied under Article 3411(1) if, but only if, the parties should fail to adopt a contrary contractual provision. Here, the covenant embodied in the Mortgage, prohibiting the Debtor from unilaterally canceling, terminating, or in any way modifying his leasehold interest to the prejudice of the Mortgage, is undeniably a pact de non. Moreover, this one is specifically tailored to recognize that the thing mortgaged is the lessee's interest in a lease. As such, its clear intent is to protect the mortgagee from any transactions unilaterally undertaken by the mortgagor with respect to the mortgaged leasehold interest that would prejudice the mortgagee's rights or the value or nature of its collateral. Just as clearly the parties intended results different from those that would be supplied by Article 3411(1) in the absence of a contractual provision. So, the Mortgage's provision, if not proscribed by public policy, will trump Article 3411(1)'s suppletive rule that extinction of the thing mortgaged extinguishes the mortgage.
68 Even if we were to grant arguendo that the extinguishing of a lease by confusion under Article 1903 somehow embodies public policy, we still would discern no embodiment of public policy in Article 3411(1)'s provision for extinguishing a mortgage when the thing mortgaged is destroyed or extinguished. We hold therefore that under the instant circumstances enforcing the contractual covenant in such a manner that the effects of the Mortgage would continue to affect the Foundry (now, the proceeds of its sale) cannot be a violation of public policy; to the contrary, it is consistent with Louisiana's well established policy of favoring the pact de non's protection of a mortgagee's interests in collateral from the untoward effects of transactions undertaken by a mortgagor that would otherwise prejudice the mortgage or the thing that it encumbers. 69 To put it another way, our examination of the role of the pact de non in Louisiana mortgage law in general and the subject covenant in the Mortgage in particular--especially in the context of the financing arrangement which includes a merely pignorative transfer of record title coupled with a right of redemption, 45 all of which is patently obvious from the provisions of the recorded instrument--convinces us that (1) Article 3411(1)'s provision for the extinguishing of mortgages when the thing mortgaged is extinguished or destroyed is merely suppletive, reflecting no identifiable public policy, and is thus susceptible of being subordinated by otherwise valid and non-absurd contractual variations that are in substance pacts de non, and (2) the particular covenant present here is fully susceptible of being enforced as a contractual alternative to Article 3411(1)'s suppletive provision without reaching any absurd result. Indeed, it is only the enforcement of this stipulation that avoids an absurd result, i.e., giving the Government an unintended windfall and saddling the Ross Group with an unintended gotcha. 46 70 This determination is reinforced by the realization that, in the context of Louisiana's public records doctrine, (1) both the Mortgage and the Lease were filed for record long before the subject tax liens were filed; (2) the Mortgage contained language expressly proscribing any prejudicial effects of unilateral alienation by the lessee qua lessee; and (3) the Lease, containing inter alia both extension and repurchase (right of redemption) options in favor of the Debtor as lessee, all of which puts the world on notice that this is not a true lease situation but a pignorative arrangement under which only record title (but not ownership) is transferred. 47 It follows inescapably that no third party, including the Government, is entitled to disregard the reasonably anticipated legal effects of any provisions of the Lease or the Mortgage, or their interplay with each other, once those documents were inscribed on the public records. 71 By merging or consolidating into the person of the Debtor the Parish's underlying precarious record title as nominal lessor with the Debtor's existing interest as lessee coupled with its right to redeem record title of the underlying leased premises, the repurchase retroactively re-vested the Debtor with full title to the Foundry property in the condition that such title existed when the Lease was first registered in the Conveyance Records of the Parish. Thus, repurchase restored the Debtor's interest to that of full ownership, which it had held before making the pignorative transfer of record title to the Parish as the collateral aspect of the sale and leaseback bond financing arrangement. The only result that would not be absurd, then, is that the Mortgage attached, ipso facto, to the underlying property at the instant it was merged into or consolidated with the already-encumbered leasehold, in the person of the Debtor, by virtue of confusion. Without questioning that (1) the Lease was extinguished by confusion when the Deed was executed by the Parish, or (2) the Mortgage no longer encumbered just the leasehold rights of the Debtor as lessee when the Lease itself was extinguished by confusion, we nevertheless conclude that--at precisely the same instant--the Mortgage attached to and encumbered the Foundry property nunc pro tunc, with its title in the same condition as it had been when the Lease (and thus the repurchase option contained in the lease) was registered. In a nutshell, the Mortgage's expanded, particularized pact de non, coupled with the possession and redemption rights retained in the Lease, allowed the Mortgage to retain its rank senior to the liens of the Government and other junior encumbrances when the Debtor's re-acquisition of record title to the underlying Foundry property extinguished the Lease by confusion into the person of the mortgagor. 72 We speculate that we might not be here today if the Mortgage had coupled its pact de non with an express after-acquired property clause. Nevertheless, the law neither insists on perfection nor requires the uttering of talismanic words when, as here, it is gin clear from the four corners of the duly recorded documents--the Lease and the Mortgage--that re-consolidation of all facets of ownership, i.e., record title (the lessor's portion of those rights) and peaceable possession and enjoyment of fruits and revenues (the lessee's portion of those rights), in the Debtor (the person of the current and future owner) never divested the debtor of those rights of possession and enjoyment. This re-consolidation occurred by operation of law (confusion) upon execution of the Deed in redemption of its record title by the Debtor pursuant to the re-purchase option. It follows that the Mortgage, by virtue of its covenants and provisions--that were no more violative of public policy than would have been an after-acquired property clause or a replacement or substitution of collateral provision--thereafter encumbered all rights of ownership to the same extent as it had always encumbered the possession, use, and enjoyment rights, via the leasehold, from its inception. We need not and therefore do not speculate on whether the same results would appertain had the transaction not been a pignorative arrangement or had confusion resulted in consolidation of ownership of the Foundry in a person other than a lessee/mortgagor. 73
74 Having said all this, we briefly address the bankruptcy and district courts' response to the Ross Group's arguments based on the Mortgage's anti-alienation covenant, i.e., the pact de non. Both courts held that this stipulation could only be given effect by finding that the Foundry continues to be owned by the Parish and never formed part of the Debtor's bankruptcy estate, making the trustee's sale of the Foundry a nullity. But, stated both courts, the Ross Group should have raised this argument prior to the trustee's sale of the Foundry, not subsequently as a basis for claiming the proceeds of that sale. The district court also agreed with the Government's alternative position that even if the Debtor's reacquisition of the Foundry was a breach of the covenant, it only gave rise to an action against the Debtor and did not render the Deed void. 75 Both the bankruptcy and district courts' holdings on this issue miss the mark. 48 As the district court's brief alternative holding recognizes, a breach of a pact de non alienando, like the mortgage covenant at issue here, does not invalidate a transfer. 49 What it does do, however,--and what those courts failed to recognize--is alter the effects of the transfer: The covenant prevents a transfer that is prohibited by the pact de non from invalidating or prejudicing the creditor's mortgage. 50 In this instance, the covenant supplied by the parties to the Mortgage allows the Mortgage to (1) survive the mortgagor's acts that would unilaterally extinguish the Lease by confusion to the benefit of the mortgagor, i.e., the Debtor's acquisition of the underlying property by exercise of its repurchase option, and (2) continue as an encumbrance on the Foundry as the underlying property that gave rise to the leasehold interest in the first place (more accurately now, to the proceeds of the trustee's sale of that property). 76