Matthew Wiggins v. Janet Northrup, Trustee ( 2016 )

Case: 15-40606 Document: 00513461692 Page: 1 Date Filed: 04/12/2016
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 15-40606 United States Court of Appeals
Fifth Circuit
FILED
In the matter of: AMELIA VICTORIA KELLY, April 12, 2016
Lyle W. Cayce
Debtor Clerk
------------------------------
MATTHEW D. WIGGINS,
Appellant
v.
JANET NORTHRUP, Trustee,
Appellee
Appeal from the United States District Court
for the Southern District of Texas
USDC No. 3:14-CV-200
Before JONES and SMITH, Circuit Judges, and BOYLE,* District Judge.
EDITH H. JONES, Circuit Judge:**
This appeal arises from an adversary proceeding in the bankruptcy
court. Janet Northrup, the chapter 7 trustee of Amelia Kelly’s bankruptcy
* District Judge of the Northern District of Texas, sitting by designation.
** Pursuant
to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
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estate, sued Matthew Wiggins for trespass based on his operation of a bed-and-
breakfast in a house that Kelly owned. Northrup prevailed and received a
judgment for over $155,000. The district court affirmed on appeal. We
MODIFY the judgment in part and otherwise AFFIRM.
BACKGROUND
In 2006, Kelly purchased a house at 701 Bay Avenue in Kemah, Texas
for over $693,000. In order to purchase the home, Kelly executed a note,
payable to First Franklin Bank, which was secured by a deed of trust on the
property. Kelly’s plan was to operate the property as a bed and breakfast.
Three years later, Wiggins became her partner in the bed and breakfast
enterprise. Wiggins loaned her money (allegedly $400,000, but this was not in
evidence before the bankruptcy court) and in return Kelly executed a deed of
trust on the Bay Avenue property in his favor.
Kelly never paid Wiggins anything. Just seven months later, in January
2010, Wiggins’s trustee foreclosed on Kelly’s interest in the property. Wiggins
bought the property at the subsequent foreclosure sale and took possession.
In February 2011, Wiggins refinanced the property through Texas
Citizens Bank (TCB). Wiggins executed a note for $1,000,000 and a deed of
trust on the Bay Avenue property in favor of TCB. He used approximately
$706,000 of the loan amount to pay off Kelly’s First Franklin note.
Later that month, Kelly sued Wiggins in the 122nd District Court in
Galveston County, Texas seeking, inter alia, to void the foreclosure. After a
trial in February 2012, the state court entered a judgment that the foreclosure
was void and there were no valid agreements between Kelly and Wiggins. The
court awarded title and possession to Kelly, but granted Wiggins a $660,000
judgment lien on the Bay Avenue property in recognition of the money he had
spent to purchase, preserve, and improve the property.
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In spite of the judgment, Wiggins remained in possession of the Bay
Avenue property and operated it as a bed and breakfast called “Captain’s
Quarters.”
In October 2012, Kelly filed a voluntary petition for relief under chapter
13 of the Bankruptcy Code. This was converted to a chapter 7 petition less
than one month later. Northrup was appointed as the trustee of Kelly’s
chapter 7 bankruptcy estate. Before the conversion, Wiggins moved for, and
received, relief from the stay to foreclose on the property, and Northrup, after
her appointment, did not object.
In January 2013, however, Northrup filed this adversary proceeding,
demanding that Wiggins vacate the property and seeking trespass damages
against him. The bankruptcy court held a trial in November 2013 and entered
judgment one month later. The bankruptcy court found that the Bay Avenue
property was owned by the bankruptcy estate (because Kelly retained only a
limited interest therein) and was subject to TCB’s first lien and Wiggins’s
second lien. The court also found that Wiggins was liable for trespass from the
date he took possession of the property following his purchase at the voided
foreclosure sale until the present.
Several months later, the court awarded trespass damages, based on a
reasonable rental rate for the property from January 2010 until February
2014, in the amount of $196,000. The bankruptcy court, however, allowed
Wiggins an offset for the amount he paid in property taxes during that period,
thus reducing the judgment to $155,502. The court rejected Wiggins’s
additional offset claims for his payment of the insurance on the Bay Avenue
property and note payments to First Franklin and TCB.
Wiggins timely appealed to the district court, which affirmed in all
aspects relevant to this appeal. Wiggins now timely appeals to this court.
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DISCUSSION
In a bankruptcy appeal, when the district court is the court of first
review, this court applies “the same standards of review to the bankruptcy
court’s findings of fact and conclusions of law as applied by the district court.”
U.S. Dep’t of Educ. v. Gerhardt (In re Gerhardt), 348 F.3d 89, 91 (5th Cir. 2003).
Thus, we review the bankruptcy court’s legal conclusions de novo and the
court’s factual findings for clear error. Id.
On appeal, Wiggins challenges both the bankruptcy court’s finding of
trespass liability and its damages calculations. We discuss each issue in turn.
I. Wiggins’s status as a mortgagee-in-possession
Wiggins argues initially that, instead of being a trespasser at the Bay
Avenue property, he was a mortgagee-in-possession under Texas law and thus
lawfully in possession of the house. See, e.g., Dominey v. Unknown Heirs &
Legal Representatives of Lokomski, 172 S.W.3d 67, 74 (Tex. App.—Fort Worth
2005, no pet.). Northrup challenges this argument while also contending that
Wiggins waived the issue by not raising it before the bankruptcy court.
Wiggins has indeed waived this argument. In the bankruptcy court,
Wiggins testified that he believed his possession lawful under the 2009 deed of
trust. But he never articulated or argued a mortgagee-in-possession theory in
his pleadings or at trial, nor did he cite any case that would establish his lawful
possession under Texas law. To preserve an argument for appeal, it must be
“raised to such a degree that the trial court may rule on it.” Templeton v.
O’Cheskey (In re Am. Hous. Found.), 785 F.3d 143, 159–60 (5th Cir. 2015)
(quoting Butler Aviation Int’l, Inc. v. Whyte (In re Fairchild Aircraft Corp.),
6 F.3d 1119, 1128 (5th Cir. 1993)). Moreover, “[i]t is well established that we
do not consider arguments or claims not presented to the bankruptcy court.”
Gilchrest v. Westcott (In re Gilchrest), 891 F.2d 559, 561 (5th Cir. 1990). It is
certainly not enough to put facts into evidence that could support a legal theory
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without identifying the theory, the legal significance of those facts, and any
favorable case law. Thus, Wiggins has waived his mortgagee-in-possession
argument.
II. Damages barred by res judicata
Wiggins’s first argument against the damage award is that the trespass
damages for the period preceding the state court judgment are barred by res
judicata because Kelly could have sued for them in her state court litigation.
See, e.g., Test Masters Educ. Servs., Inc. v. Singh, 428 F.3d 559, 571 (5th Cir.
2005).
Again, Wiggins has waived this argument by failing to present it to the
bankruptcy court. Wiggins’s answer to the adversary complaint stated that he
planned to raise res judicata as an affirmative defense, but he did not specify
how he believed res judicata applied. The parties’ joint pretrial statement and
Wiggins’s proposed findings of fact and conclusions of law list res judicata as a
contested issue of law, but only as applied to Northrup’s attempt to relitigate
facts from the November 2012 relief from stay proceedings: “[N]amely that
Wiggins was not adequately protected and was entitled to pursue all of his
available rights under state law, including foreclosure of the property.”
The first time Wiggins raised the res judicata effect of the state court
judgment on his trespass damages was in the designation of issues on appeal
to the district court. See Fed. R. Bankr. P. 8009(a)(1)(A). This is simply too
late. To preserve this argument, Wiggins must have first presented this
iteration of the res judicata defense to the bankruptcy court. See Gilchrest,
891 F.2d at 561. It is waived.
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III. Damages during the period after the property was claimed
as exempt
Wiggins contends that Northrup had no right to seek damages after
Kelly claimed the property as exempt from her bankruptcy estate under
11U.S.C. § 522(l). He asserts that the property was, at that point, outside of
the estate and thus Northrup had no capacity to seek damages for trespass.
This argument may be incorrect on the merits, see Schwab v. Reilly, 560 U.S.
770, 781–82, 130 S. Ct. 2652, 2661–62 (2010), but in any event, it is also waived
because Wiggins never raised it with the bankruptcy court. In arguing that
the issue is properly preserved, Wiggins cites only his brief before the district
court and the district court’s opinion, but the citations prove the insufficiency
of error preservation.
IV. Offsets to trespass damages
Finally, Wiggins argues that he is entitled to offset the trespass damages
by his insurance payments and note payments to First Franklin and TCB.
Wiggins properly preserved this contention in the bankruptcy court.
Furthermore, we agree that the bankruptcy court erred in refusing these
offsets.
“[T]he measure of damages in a trespass case is the sum necessary to
make the victim whole, no more, no less.” Coinmach Corp. v. Aspenwood
Apartment Corp., 417 S.W.3d 909, 921 (Tex. 2013) (quoting Meridien Hotels,
Inc. v. LHO Fin. P’ship I, L.P., 255 S.W.3d 807, 821 (Tex. App.—Dallas 2008,
no pet.). 1 When calculating trespass damages in cases involving rental
property, it makes sense to begin with a reasonable rental rate. See id. at 921–
22. In this case, the bankruptcy court found—based on Wiggins’s testimony—
1See also Stevenson v. E.I. DuPont De Nemours & Co., 327 F.3d 400, 408 (5th Cir.
2003) (“Recovery for temporary trespass is limited to the ‘amount necessary to place the
owner of the property in the same position he occupied prior to the injury.’”) (quoting Kraft
v. Langford, 565 S.W.2d 223, 227 (Tex. 1978)).
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that the reasonable rental rate was $4,000 per month. Wiggins admits and we
agree this was not a clearly erroneous finding.
Next, adjustments must be made to this reasonable rental rate to
account for the facts underlying the trespass. See Mullendore v. Muehlstein,
441 S.W.3d 426, 428 (Tex. App.—El Paso 2014, pet. abated) (“The calculation
of damages for temporary injuries to real property should be tailored to the
circumstances of the specific case.”). This is evident from the Texas Supreme
Court’s admonition that damages in a trespass case endeavor to make the
victim whole, not provide a windfall. The bankruptcy court correctly applied
this principle when it reduced the total damages by the amount of taxes
Wiggins paid on the property. Taxes were owed regardless of who possessed
the property. Since Northrup did not make those payments, awarding her the
full amount of a rental rate without deducting Wiggins’s tax payments would
constitute a windfall.
This approach, adjusting the reasonable rental rate to account for the
factual circumstances of the trespass, comports with the limited Texas case
law on trespass damages. See Coinmach, 417 S.W.3d at 920 (“[W]e have rarely
addressed trespass damages in detail . . . .”). For instance, in Mangham v.
Hall, a case cited with approval in Coinmach, id. at 921 & n.7, a plaintiff sued
for damage done to its business due to trespass. 564 S.W.2d 465, 468–69 (Tex.
App.—Corpus Christi 1978, writ ref’d n.r.e.). The trial court had calculated
the damages based on projected gross receipts. Id. at 470. But the court of
appeals vacated the plaintiff’s damages award and remanded for a
consideration of the proper measure of damages: net profits, not gross receipts.
Id. In doing so, the court stressed that the trial court must ascertain the
plaintiff’s precise expenses to calculate net profits. Id. at 470–71. An award
of gross receipts failed to account for the fact that the plaintiff’s lost business
would have generated increased expenses in addition to increased profits. Id.
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at 470. The court stated that allowing the plaintiffs to recover gross receipts
would operate as a “windfall” and “place them in a better financial condition
than they would have occupied had the trespasses not occurred.” Id. 2
The bankruptcy court’s failure also to adjust the reasonable rental rate
by deducting the insurance and note payments is a windfall for Northrup.
Wiggins testified that the “fair market rental” value of the property was $4,000
per month. As the gross rental rate, 3 that rate would have covered all the
regular expenses of maintaining and operating the rental property. See Rexam
Bev. Can Co. v. Bolger, 620 F.3d 718, 733 (7th Cir. 2010) (“In a gross rent
situation, a landlord needs to use some of the rent payments (or other funds
under his control) to cover utilities, insurance, taxes, and other ‘costs and
expenses of maintaining the property.’”). The property’s expenses would
2 We recognize that the Restatement (Second) of Torts provides that a trespass
plaintiff “is entitled to recover as damages for the loss of the value of the use, at least the
rental value of the chattel or land during the period of deprivation.” § 931, cmt. b (1979)
(emphasis added); see also 1 Dan B. Dobbs, Law of Remedies § 5.8(2), at 789 (2d ed. 1993)
(“Use of the objective rental value measure . . . means that[:]” “whether the trespasser
actually gained any benefit from the land is not controlling and he remains liable for rental
value even if he lost money in his use of the land” and “plaintiff is entitled to recover rental
value even if the plaintiff himself could not reach the land, did not intend to use it, and would
not have rented it to others.”).
This absolutist view that reasonable rental value sets the floor for trespass damages
finds some support in Texas case law. See City of Austin v. Teague, 570 S.W.2d 389, 394 (Tex.
1978) (“Loss of rentals is an appropriate measure of damages for the temporary loss of use of
land. Rental value is ‘that amount which, in the ordinary course of business, the premises
would bring or for which they could be rented, or the value, as ascertained by proof of what
the premises would rent for, and not the probable profit which might accrue.’”) (citations
omitted and emphasis added) (quoting 76 C.J.S. Rental at 1168 (1952)).
However, this view finds no foothold in the Texas Supreme Court’s most recent (and
thorough) pronouncement on trespass damages, Coinmach, where Teague is not even
mentioned or cited. Furthermore, one Texas appeals court recently dismissed Teague’s
language on rental value as dicta. See Mullendore, 441 S.W.3d at 429.
3Whether the $4,000 reasonable rent is gross or net of expenses is not explicit in the
record but can be inferred from the bankruptcy court’s ruling: it must be gross. Otherwise,
it would have been inappropriate for the bankruptcy court to subtract taxes from the rental
value net of expenses.
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necessarily have included insuring the property and paying the notes: the
notes would remain payable no matter who possessed the property and the
deeds of trust required the property to be insured. Awarding Northrup the full
amount of the rental rate without deducting Wiggins’s payments on behalf of
the property constitutes a windfall.
The bankruptcy court, however, found that the insurance and note
payments should not be offset from the damages award because they were
made “primarily for [Wiggins’s] benefit.” But that misses the point of the Texas
Supreme Court’s admonition in Coinmach that the proper measure of trespass
damages is the amount necessary to make the plaintiff whole—no more and no
less. The point, therefore, is that Northrup should not be able to recoup those
payments as “expenses” built into the reasonable rental rate when Wiggins
made the payments. Put otherwise, had Wiggins failed to make these
payments (and the banks, counterintuitively, had not foreclosed), Northrup
would have used up all of the “fair market rental” value—and more—to
reinstate the loans; she should not be compensated for costs of preserving the
property that she did not have to bear.
In this case, unfortunately for Northrup, that leaves her with nothing.
Northrup has the burden of proving damages. See Mangham, 564 S.W.2d at
469. The bankruptcy court concluded that the total damages, based on the
reasonable rental rate, were $196,000. But as the bankruptcy court recounts
in the findings of fact section of its opinion, Wiggins presented evidence that
he paid $40,498 in property taxes, $12,000 to insure the property from 2012 to
2013, and $205,900 in note payments (attributable to the property) to First
Franklin Bank and TCB. He also testified that the Bay Avenue property was
“not profitable” during the time he operated it. Northrup did not contradict
these figures, nor did she present evidence of her own describing what portion
of the $4,000 per month would be net profit and what portion constituted
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expenses. Northup also testified that the estate had no money to insure or
maintain the property or operate it as a bed and breakfast. Since Wiggins’s
evidence was uncontroverted, there can be no clear error in these findings.
Based on the above figures and testimony, after deducting the relevant
expenses—taxes, insurance, and note payments—the Bay Avenue property
operated at a loss. 4 Making Northrup whole, as the Texas Supreme Court
instructs we must, means awarding her nothing.
CONCLUSION
For the foregoing reasons, the judgment of the bankruptcy court is
MODIFIED to award $0 to Northrup as damages for trespass. To the extent
that Wiggins challenged other aspects of the judgment, the judgment of the
district court affirming the judgment of the bankruptcy court is itself
AFFIRMED.
4 This should come as no shock. According to one bed and breakfast industry expert,
“the industry doesn’t track the failure rate of B&Bs but . . . overleveraging and
overpaying . . .‘cause failures on a fairly large scale.’” Alyssa Abkowitz, A New Crop of Bed
and Breakfasts: Healthy Demand for Intimate Lodging is Spurring a New Generation of
Investor-Innkeepers, Wall St. J., Nov. 27, 2013, http://www.wsj.com/articles
/SB10001424052702304337404579212391514154998
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