Village Place LTD and Bob Yari v. VP Shopping, LLC , 2013 Tex. App. LEXIS 6224 ( 2013 )

Opinion issued May 21, 2013.
In The
Court of Appeals
For The
First District of Texas
————————————
NO. 01-12-00364-CV
———————————
VILLAGE PLACE, LTD. AND BOB YARI, Appellants
V.
VP SHOPPING, LLC, Appellee
On Appeal from the 125th District Court
Harris County, Texas
Trial Court Case No. 2010-47980
OPINION
Village Place, Ltd. purchased the Village Shopping Center with a non-
recourse promissory note secured by a deed of trust pledging the property as
collateral. The deed of trust included provisions that under certain circumstances
created exceptions to the non-recourse nature of the loan. Bob Yari guaranteed the
loan. When Village Place defaulted, VP Shopping, LLC (VPS), the noteholder at
the time, foreclosed on the pledged shopping center, leaving an unpaid balance of
over $1.8 million. After subtracting the foreclosure proceeds, the remaining unpaid
principal and interest on the loan was $379,234. VPS did not seek to recover this
unpaid loan balance1 because the loan was non-recourse; instead, it sought and
obtained a judgment holding Village Place and Yari jointly and severally liable for,
generally speaking, two categories of damages it claims it suffered as a result of
Village Place’s failure to comply with obligations created by the exceptions to the
non-recourse provisions: (1) $109,720.90 for its out-of-pocket expenses and (2)
$554,258.60 for the reduction in value of the collateral, primarily Village Place’s
failure to maintain the property. The trial court awarded both measures of damages
and entered judgment awarding VPS $663,979.50 in damages, attorney’s fees, and
court costs.
On appeal, Village Place contends that the trial court erroneously awarded
“a windfall” of almost $300,000 more than the unpaid loan balance. 2 Village Place
raises five issues but primarily argues that the trial court’s damages award was
1
We use the phrase “unpaid loan balance” to refer to the unpaid principal and
interest.
2
Village Place and Yari filed one brief, and Yari joins in all of Village Place’s
contentions. Because Village Place is the signatory on the note and deed of trust,
we will refer to the arguments concerning these documents and the amount of
liability under the documents as arguments of Village Place. The arguments
regarding the construction of the guaranty are made by Yari alone.
2
wrong for two reasons: (1) recovery under the portion of the indebtedness that was
converted from non-recourse to recourse under the provisions of the loan
documents creating exceptions to the non-recourse nature of the loan was limited
or capped by the amount of the unpaid loan balance (i.e., $379,234) and (2) it was
entitled to an offset for the fair market value of the pledged shopping center rather
than an offset for the foreclosure price. VPS contends that it seeks to collect the
amount of “full recourse carveout liabilities” created by the exceptions to non-
recourse provisions in the loan documents and those amounts are not capped at the
amount of the unpaid loan balance. Alternatively, VPS contends that the price it
paid at foreclosure represented the shopping center’s fair market value.
We conclude that the carveout-liabilities provisions reinstate the personal
liability that was removed by the non-recourse provisions of the loan documents
for the amount of VPS’s covered out-of-pocket expenses. For VPS’s claim for
reduction in value damages, however, the reinstated personal liability is capped at
an amount equal to the unpaid loan balance. We further conclude that Village
Place is entitled under Texas Property Code section 51.003 to have the property’s
fair market value determined and offset against VPS’s claim.
On VPS’s claims against Yari as the guarantor, we hold that Yari did not
waive the statutory right to an offset granted to Village Place under Texas Property
Code section 51.003.
3
We reverse in part the judgment’s awards for damages and attorney’s fees
and remand for a new trial on the reversed portions of the award.
Background
In May 1999, Village Place executed a promissory note payable to non-party
Salomon Brothers Realty Corp. in the principal amount of $2.6 million to finance
its purchase of the Village Place Shopping Center in Houston. The loan provided
for monthly payments for ten years and a final balloon payment on June 1, 2009.
Village Place also executed a deed of trust pledging the property as collateral for
the note. Besides imposing on Village Place the obligation to “promptly pay when
due the principal and interest on the indebtedness evidenced in the Note” (section
1), the deed of trust imposed several additional obligations, including: payment by
monthly installments for annual taxes, insurance premiums, and “other Funds for
other taxes, charges, premiums, assessments and impositions . . . which Lender
shall reasonably deem necessary to protect Lender’s interests,” with such payments
deposited into a fund maintained by the lender (section 2); an obligation to “not
commit waste or permit impairment or deterioration of the Property” (section 6);
an obligation “to restore or repair promptly and in a good and workmanlike manner
all or any part of the Property to the equivalent of the Pre-existing Condition”
(section 6); and an assignment of rents and revenues generated from the property
(section 26). The note and deed of trust generally were non-recourse with respect
4
to Village Place’s obligations; however, the instruments indicated several
exceptions, or carveout liabilities, under which Village Place could become
personally liable. 3
3
The note and deed of trust contain a virtually identical provision regarding the
exceptions to non-recourse liability. The provision reads in pertinent part:
Notwithstanding the foregoing provisions of this paragraph or any
other agreement, [Village Place] shall be fully and personally liable
for any and all:
(1) liabilities, costs, losses, damages, expenses or claims
(including without limitation, any reduction in the value of
the Property or any other issues, property or amounts which
are collateral or security for the Loan) suffered or incurred by
the [noteholder] by reason of or in connection with
...
(b) any failure to pay taxes, insurance premiums
(except to the extent that such taxes and insurance
premiums are then held by the [noteholder]),
assessments, charges for labor or materials or other
charges that can create liens on any portion of the
Property,
(c) any misapplication of (i) proceeds of insurance covering
any portion of the Property, or (ii) proceeds of the sale or
condemnation of any portion of the Property,
(d) any rentals, income, profits, leases and products received
by or on behalf of [Village Place] subsequent to the date on
which the [noteholder] gives written notice that a default has
occurred under the Loan and not applied to the payment of
principal or interest due under this Note or the payment of
operating expenses (including any operator’s, manager’s, or
developer’s fee payable to [Village Place] or any affiliate of
[Village Place]) of the Property,
(e) any failure to maintain, repair or restore the Property in
accordance with any Loan Document to the extent not
covered by insurance proceeds made suitable to the
[noteholder],
5
Simultaneous with the signing of the note and deed of trust, Yari executed a
document entitled “Exceptions to Non-Recourse Guaranty.” In this guaranty, Yari
agreed to personally pay the amounts for which Village Shopping had liability
under the exceptions to non-recourse liability. Furthermore, Village Place and Yari
signed an Environmental Indemnity Agreement (EIA) that obligated them to
indemnify the noteholder against any damages arising from the presence of
hazardous materials on the property.
When the note matured in June 2009, Village Place made several payments
but defaulted on the obligation to pay the entire remaining loan balance. The loan
was not reinstated, renewed, or otherwise refinanced. One year later, in June 2010,
(f) any failure by [Village Place] to deliver to the [noteholder]
all unearned advance rentals and security deposits paid by
tenants of the Property received by or on behalf of [Village
Place], and not refunded to or forfeited by such tenants,
(g) any failure by [Village Place] to return to, or reimburse
the [noteholder] for, all personalty taken from the Property by
or on behalf of [Village Place], except in accordance with the
provisions of the instrument, and
(h) any and all indemnities given by [Village Place] to the
[noteholder] set forth in the Environmental Indemnity
Agreement or any other Loan Document in connection with
any environmental matter resulting to the Property; and
(2) court costs and all reasonable attorneys’ fees provided for in any
Loan Document.
The guaranty obligated Yari to pay the amounts “for which [Village Place] may
from time to time be personally liable” under the loan documents.
6
the note, deed of trust, guaranty, and EIA were assigned to VPS. 4 Soon thereafter,
VPS purchased the shopping center through a foreclosure, having made the highest
bid of $1.5 million. At the time of foreclosure, VPS’s pre-foreclosure collection
costs, accrued unpaid interest, and principal totaled $1,879,234. Thus, after
subtracting the foreclosure purchase price, the remaining unpaid loan balance owed
by Village Place was $379,234. Approximately ten months later, VPS sold the
property to a third party for a gross price of $1,950,000.
VPS sued Village Place and Yari for breaches of the note, deed of trust,
guaranty, and EIA. VPS alleged that Village Place and Yari personally were liable
because some of the note’s and deed of trust’s exceptions to non-recourse liability
had been triggered and, further, that they personally were liable under the EIA for
certain environmental related costs.
In response, Village Place and Yari asserted that under Texas Property Code
section 51.003 they were entitled to offset the property’s fair market value against
the “deficiency” on the loan. They also filed a “Motion to Determine the Fair
Market Value of the Property and for Offset” pursuant to Texas Property Code
section 51.003. Based on a report prepared by a certified general real estate
appraiser, they asserted that the property’s fair market value was $3,184,002.50 at
the time of foreclosure. They requested that the trial court offset this amount “or
4
ORIX, a real estate investment firm, created VPS as a special purpose entity to
serve as the noteholder for foreclosure purposes.
7
such other amount as the Court may determine is the fair market value of the
Property” against VPS’s claims.
VPS replied that its suit was “not a suit for a deficiency following
foreclosure” but rather sought the amounts due under the loan documents’
exceptions to non-recourse liability. Therefore, VPS argued, these amounts are
independent of the unpaid loan balance, section 51.003 was inapplicable, and the
amounts should not be offset by either the value of the property or the foreclosure
price. Alternatively, VPS argued that Yari’s guaranty waived his rights to offset
under section 51.003. In any event, VPS contended, the best evidence showed that
the property’s fair market value was $1.5 million, the same figure for which it sold
at foreclosure.
After a pre-trial hearing on the motion for offset, the trial court denied the
motion without explanation. The case proceeded to a three-day bench trial. At the
outset of the second day of trial, the court altered course on the admissibility of the
evidence on the property’s value and announced that it would “go ahead and allow
some testimony on this issue about valuation.” Subsequently, the parties presented
some evidence regarding the property’s value at the time of the foreclosure. At the
close of trial, the court rendered judgment awarding VPS damages amounting to
$663,979.50 against Village Place and Yari jointly and severally, plus interest,
8
attorney’s fees, and court costs. The court additionally ordered that Village Place
and Yari take nothing on their counterclaims.
The court subsequently entered findings of fact and conclusions of law. The
findings relevant to the $109,720.90 awarded for VPS’s out-of-pocket expenses
included the following:
• After receiving notices of default, Village Place failed in its obligation to
turn over to VPS security deposits and rents from the property totaling
$17,397.34 and $17,189.52, respectively.
• Village Place failed to pay $38,909.88 in taxes and $4,624.94 in insurance
premiums, which VPS ended up paying.
• In breach of the EIA, Village Place failed to pay $12,997.50 for the costs of
environmental testing reports.
• Village Place is liable for VPS’s out-of-pocket expenses of $18,601.72
arising from various breaches of the loan documents, specifically,
$10,164.51 in “miscellaneous expenses,” $500 for a “REMIC opinion,”
$5,200 for a survey, and $2,737.21 for inspection/travel by VPS’s
representatives.
• Village Place’s breach of the carveout-liability sections of the loan
documents created liability for Yari under the guaranty.
The findings relevant to the $554,258.60 awarded for the reduction in value of the
collateral included the following:
• Village Place caused damage “and/or” failed to repair and maintain the
property in accordance with its obligations under the deed of trust, resulting
in a reduction of the property’s fair market value by at least $516,258.60.
• In breach of the EIA, Village Place failed to enroll the property into the State
of Texas’s Dry Cleaner Remediation Program, which caused the property’s
9
fair market value to be reduced by at least $38,000—the cost of enrollment
in the program.
The findings of fact and conclusions of law described these damages as “carveout
liabilities” created under the note’s and deed of trust’s exceptions to non-recourse
liability. With respect to Village Place’s requested offset, the trial court found that
VPS’s “winning bid of $1,500,000 at the foreclosure sale in July 2010 was
consistent with the property’s fair market value at that time,” and thus Village
Place was “not entitled to an offset from the debt” owed by VPS.
Village Place and Yari filed a motion to modify the judgment, which was
denied. They also filed a motion for new trial, which was overruled by operation of
law. Village Place and Yari timely filed notice of appeal.
Standard of Review
“Findings of fact in a case tried to the court have the same force and dignity
as a jury’s verdict upon questions.” Anderson v. City of Seven Points, 806 S.W.2d
791, 794 (Tex. 1991); see also Milton M. Cooke Co. v. First Bank & Trust, 290
S.W.3d 297, 302 (Tex. App.—Houston [1st Dist.] 2009, no pet.). Thus, “the trial
court’s findings of fact are subject to sufficiency challenges under the same
standards we apply to address the sufficiency of the evidence to support a jury’s
answer.” Milton M. Cooke Co., 290 S.W.3d at 302. “If findings of fact are not
challenged, they are binding on the parties and on this Court.” In re K.R.P., 80
S.W.3d 669, 673 (Tex. App.—Houston [1st Dist.] 2002, pet. denied).
10
To determine whether legally sufficient evidence supports a challenged
finding, we must consider evidence that favors the finding if a reasonable fact-
finder could consider it, and we must disregard evidence contrary to the challenged
finding unless a reasonable fact-finder could not disregard it. See City of Keller v.
Wilson, 168 S.W.3d 802, 827 (Tex. 2005). We may not sustain a legal
insufficiency, or “no evidence,” point unless the record demonstrates (1) a
complete absence of evidence of a vital fact; (2) that the court is barred by rules of
law or of evidence from giving weight to the only evidence offered to prove a vital
fact; (3) that the evidence offered to prove a vital fact is no more than a mere
scintilla; or (4) that the evidence conclusively establishes the opposite of the vital
fact. Id. at 810.
In reviewing a challenge to the factual sufficiency of the evidence, we must
consider and weigh all the evidence and should set aside the judgment only if it is
so contrary to the overwhelming weight of the evidence as to be clearly wrong and
unjust. Arias v. Brookstone, L.P., 265 S.W.3d 459, 468 (Tex. App.—Houston [1st
Dist.] 2007, pet. denied) (citing Cain v. Bain, 709 S.W.2d 175, 176 (Tex.1986)).
The trial court acts as fact-finder in a bench trial and is the sole judge of the
credibility of witnesses. HTS Servs., Inc. v. Hallwood Realty Partners, L.P., 190
S.W.3d 108, 111 (Tex. App.—Houston [1st Dist.] 2005, no pet.).
11
We review conclusions of law by the trial court de novo and will uphold
them if the judgment can be sustained on any legal theory supported by the
evidence. Noble Mortg. & Invs., LLC v. D & M Vision Invs., LLC, 340 S.W.3d 65,
74–75 (Tex. App.—Houston [1st Dist.] 2011, no pet.). The trial court’s
conclusions of law are not subject to challenge for factual insufficiency, but we
may review the legal conclusions drawn from the facts to determine their
correctness. Brown v. Brown, 236 S.W.3d 343, 348 (Tex. App.—Houston [1st
Dist.] 2007, no pet.).
The crux of this appeal is the meaning and application of contested
provisions in the loan documents. “In construing a written contract, the primary
concern of the court is to ascertain the true intentions of the parties as expressed in
the instrument.” J.M. Davidson v. Webster, 128 S.W.3d 223, 229 (Tex. 2003). We
“examine and consider the entire writing in an effort to harmonize and give effect
to all the provisions of the contract so that none will be rendered meaningless. No
single provision taken alone will be given controlling effect; rather, all the
provisions must be considered with reference to the whole instrument.” Seagull
Energy E & P, Inc. v. Eland Energy, Inc., 207 S.W.3d 342, 345 (Tex. 2006)
(quoting Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983) (emphasis in original)
(citations omitted)). If the written instrument is so worded that it can be given a
certain or definite legal meaning or interpretation, then we construe the contract as
12
a matter of law. Enter. Leasing Co. of Houston v. Barrios, 156 S.W.3d 547, 549
(Tex. 2004) (per curiam) (citing Coker, 650 S.W.2d at 393).
Village Place’s Liability under the Exceptions to Non-Recourse Liability
for Reduction in Fair Market Value Is Limited to the Unpaid Loan Balance
A. The parties’ contentions
Village Place contends as an initial matter that a “lender is entitled only to
full payment of the loan” and that this governing general principle is reflected in
the loan documents. In light of this principle, Village Place specifically argues that
it has no personal liability under the non-recourse loan documents except for an
amount capped at “the unpaid principal and interest only to the extent of the
amounts that fall within the exceptions to the non-recourse provision that
eliminates their personal liability.” In other words, Village Place contends that its
liability under the carveout-liabilities provisions is limited to the unpaid loan
balance after the foreclosure sale: $379,234 (unless, per section 51.003 of the
Property Code, that amount is lower because the fair market value of the property
should be used to calculate the deficiency rather than the foreclosure price).
Village Place contends that the trial court’s award of $663,979.50 enabled VPS to
impermissibly obtain a judgment for much more than the unpaid loan balance and
put VPS in a better position than it would have been if Village Place had paid the
loan in full.
13
VPS argues that the general principles do not control this contract dispute
because those principles are not reflected in the loan documents. VPS did not seek
a “deficiency judgment” based on the unpaid balance of the loan; rather, it seeks
and is entitled to recover damages based on Village Place’s default of the carveout-
liability obligations created by the deed of trust. And what the full-recourse
carveout-liabilities provision in the loan documents creates, according to VPS, is
an obligation independent from the payment of the loan, enabling it to recover “for
the debts caused by [Village Place’s] specific breaches of the carveout
obligations,” including its contractual obligation to perform required maintenance,
which caused the property’s value to decline. VPS interprets the loan documents as
allowing full, uncapped recovery for the carveout liabilities, including a reduction
in the property’s fair market value, “separate and apart” from the unpaid loan
balance. Thus, the foreclosure sale price and the property’s fair market value “have
no relevance to any issue before this court.” Village Place counters that this
interpretation of the loan documents effectively gives VPS an “independent, free-
floating claim” for carveout liabilities in contravention of the loan documents’
language and Texas law.
B. The loan documents create liability for certain out-of-pocket expenses
incurred by VPS
At the outset, we agree with VPS that the deed of trust obligates the
borrower, Village Place, not only to pay the principal and interest on the loan but
14
also to pay for certain expenses associated with the property, such as taxes,
insurance, and reasonable maintenance expenses. These contractual provisions are
obligations that are “separate and apart” from the obligation to pay the loan.
Accordingly, we conclude that Village Place would have personal liability for any
damages suffered by VPS as a result of Village Place’s breach of its obligations to
pay the loan and to pay for certain expenses associated with the property but for
the non-recourse provisions of the loan documents. 5
C. The loan documents do not afford VPS reduction-in-value claims
against Village Place beyond the unpaid loan balance
The next question is whether the carveout-liabilities provisions of the loan
documents reinstate personal liability for Village Place—liability that otherwise
would not exist by virtue of the note’s non-recourse provisions—for a reduction in
the value of the property due to Village Place’s failure to maintain it or enroll it in
the dry cleaner remediation program. If so, VPS presented evidence that the
shopping center’s value decreased $554,258.60 at the time of the foreclosure due
5
Village Place does not challenge the specific components of the out-of-pocket
expenses awards, namely: unremitted security deposits and rents, unpaid taxes and
insurance premiums, costs for environmental reports, and VPS’s other out-of-
pocket expenses. Village Place does, however, interpret a clause in the guaranty
prescribing the order in which foreclosure proceeds should be applied as
extinguishing the entirety of the damages awards. We deem this portion of Village
Place’s argument as challenging the damages award as a whole without
challenging the legal or factual sufficiency of particular components making up
the entire damages award. We address this argument in the section of our opinion
entitled “Liabilities Arising Out of the Non-Recourse Exceptions Are Not ‘Other
Expenses’ to Which the Foreclosure Proceeds Should Have Been First Applied.”
15
to Village Place’s breach of these contractual obligations. The trial court found that
these breaches caused the property’s fair market value to decline by an identical
amount.
The note and the deed of trust contain virtually identical provisions
specifying exceptions to the general provisions of non-recourse liability—that is,
liabilities that are reinstated. The paragraph begins by stating that “[s]ubject to the
qualifications” described later in the paragraph, Village Place is liable “for
payment and performance of all of the obligations” under the loan documents “to
the full extent (but only to the extent) of all of the” pledged property. It then
provides that if Village Place defaults, it shall not “be personally liable for the
repayment of any of the principal of [or] interest on” the loan or “other charges or
fee due in connection with the [l]oan [or] the performance of any covenants”
created in the loan documents or “for any deficiency judgment.” The paragraph
then moves to what Village Place calls the “non-recourse exceptions” and what
VPS and the trial court call the carveout liabilities (although neither phrase appears
in the loan documents): “Notwithstanding the foregoing provisions of this
paragraph,” Village Place is “fully and personally liable” for (1) “any and all . . .
liabilities, costs, losses, damages, expenses or claims (including without limitation,
any reduction in value of the Property or any other issues, property or amounts
which are collateral or security for the loan)”, that are (2) “suffered or incurred by
16
[VPS]”, (3) “by reason of or in connection with” one of several specified
circumstances.
Village Place argues that decreases in the property’s value can result in
damages to the lender only up to the amount of the unpaid loan balance, but
decreases beyond that point are not cognizable as damages to the lender. In other
words, Village Place contends that with respect to VPS’s claim for reduction in fair
market value, the carveout-liabilities provisions reinstate liability only in part. We
agree. These provisions reinstate Village Place’s liability to the extent that VPS
was damaged for breach of the obligations to maintain the property, and those
damages are capped or limited by the amount of the unpaid loan balance. We
conclude that the unpaid loan balance caps the liabilities reinstated by the
carveout-liabilities provisions for reduction in value claims for the following three
reasons.
1. VPS did not “suffer or incur” the reductions in the property’s fair
market value in excess of the loan deficiency
First, the loan documents tie the carveout liability to a loss or damage
“suffered or incurred” by VPS, and VPS did not suffer an additional loss from the
reduction in the shopping center’s value over the unpaid loan balance (again,
subject to offset for the property’s fair market value).
The carveout-liability provisions reinstate liability when a reduction in the
shopping center’s value from inadequate maintenance or any other breach of
17
Village Place’s contractual obligations covered by the carveout-liabilities
provisions results in damages “suffered or incurred” by VPS. The words “suffered”
and “incurred” are not defined in the loan documents. Therefore, we give them
their “plain, ordinary, and generally accepted meaning unless the instrument shows
that the parties used them in a technical or different sense.” Heritage Resources,
Inc. v. NationsBank, 939 S.W.2d 118, 121 (Tex. 1996). “Suffer” in this context of
a corporate person like VPS means “[t]o sustain injury, damage, or loss; to be
injured or impaired.” 17 THE OXFORD ENGLISH DICTIONARY 123 (2d ed. 1989).
The word “incurred” has multiple meanings. See, e.g., Am. Indem. Co. v. Olesijuk,
353 S.W.2d 71, 72 (Tex. Civ. App.—San Antonio 1961, writ dism’d) (surveying
multiple meanings of “incur”). It can mean something akin to “brought on,”
“occasioned,” or “caused.” See Schwab v. Schlumberger Well Surveying Corp.,
198 S.W.2d 79, 81 (Tex. 1946) (interpreting “incurred” in statutory context). But
in this context, that sense of the word is untenable because the carveout-liabilities
provisions would operate to make Village Place and Yari liable for situations
“brought on,” “occasioned,” or “caused” not by themselves but by VPS. Therefore,
we construe “incurred” to have another common meaning often recognized in case
law: to become liable to pay. 6 Thus, in order for a liability, cost, loss, damage,
6
See Quick v. City of Austin, 7 S.W.3d 109, 133 n.2 (Tex. 1999) (op. on reh’g);
Keever v. Finlan, 988 S.W.2d 300, 308 (Tex. App.—Dallas 1999, pet. dism’d)
(citing Beasley v. Peters, 870 S.W.2d 191, 196 (Tex. App.—Amarillo 1994, no
18
expense, or claim to trigger one of the specified exceptions to non-recourse
liability, VPS must either sustain it or be liable to pay for it. 7
VPS did not pay for the repairs or dry cleaner remediation program and did
not incur any liability as a result of Village Place’s failure to repair the property or
enroll in the program. VPS might have sustained a loss due to Village Place’s
breach of these obligations, insofar as the property’s impaired condition reduced
the amount of foreclosure proceeds available to pay off the loan balance. But if the
property had sold at foreclosure for more than the loan balance, VPS would have
been required to pay the excess to Village Place; it was not VPS’s to keep. 8 Here
writ)); see also BLACK’S LAW DICTIONARY 771 (7th ed. 1999) (defining “incur”
as “[t]o suffer or bring on oneself (a liability or expense)”); 7 THE OXFORD
ENGLISH DICTIONARY 835 (2d ed. 1989) (defining “incur” as “[t]o run or fall into
(some consequence, usually undesirable or injurious); to become through one’s
own action liable or subject to; to bring upon oneself”). Cf. Haygood v. De
Escabedo, 356 S.W.3d 390 (Tex. 2012) (analyzing meaning of “actually . . .
incurred” in context of section 41.0105 of Texas Civil Practice and Remedies
Code).
7
VPS’s covered out-of-pocket expenses are losses “suffered” or “incurred” by VPS.
8
Not only is it a general principle that secured creditors do not keep the excess after
foreclosure and application of the proceeds to the loan balance, see First Nat’l
Bank of Seminole v. Hooper, 104 S.W.3d 83, 86 (Tex. 2003), but the deed of trust
apparently contemplates this situation by providing:
Trustee shall apply the proceeds of the [foreclosure] sale in the
following order, (a) to all reasonable costs and expenses of the sale,
including, but not limited to, reasonable and customary Trustee’s
fees, reasonable attorney’s fees and costs of the title evidence; (b) to
all sums secured by this instrument in such order as the Lender, in
19
the pledged property sold for less than the loan balance, but VPS’s loss is not the
reduction in value of the property, which it did not own before the foreclosure. Its
loss is the damages it suffered as a result of Village Place’s breach: the unpaid loan
balance and its other out-of-pocket expenses covered by the carveout-liabilities
provisions. 9 In other words, the carveout-liabilities provisions do not eliminate the
necessity that VPS suffer damages for Village Place’s breach of its contractual
obligations, and the damages suffered by VPS function as a cap on Village Place’s
liability. To the extent that the pledged property’s reduction in value from
inadequate maintenance and failure to enroll in the dry cleaner remediation
program exceeds the amount of the unpaid loan and covered expenses, VPS was
not damaged.10 In other words, the loss VPS “suffered or incurred” is the unpaid
Lender’s sole discretion, directs, and (c) the excess, if any, to the
person legally entitled thereto.
(Emphasis supplied.)
9
The covered losses, based on the trial court’s findings, are (1) $38,909.88 for
taxes, (2) $4,624.94 in insurance premiums, (3) $12,997.50 for environmental
testing reports, and (4) $18,601.72 for other out-of-pocket expenses.
10
To illustrate, the decrease in value of the collateral was $516,258.60 due to failure
to maintain the property and $38,000 for failure to enroll the property in the dry
cleaner remediation program. Thus, the property would have been worth over
$2,054,000 at foreclosure (not $1,500,000) if Village Place had satisfied these two
contractual obligations. But VPS’s loss was not $554,000; its loss was the unpaid
loan balance and any covered expenses it incurred. The suffered or incurred
limitation in the carveout liabilities provision, in effect, caps the reinstated liability
to this amount.
20
loan balance plus its other covered expenses less the property’s fair market value,
and to that extent, and only to that extent, Village Place’s liability is reinstated.
2. Nature of the loan documents
Second, the nature of a secured loan supports this interpretation. The rights
granted to a secured creditor like VPS are for its protection, not for it to recover a
windfall. And the interest it needs protecting is the repayment of the loan and
payment of accrued interest and costs. See First Nat’l Bank of Seminole v. Hooper,
104 S.W.3d 83, 86 (Tex. 2003). A secured creditor usually does not
own the collateral securing a debt; the creditor has no rights in the
collateral except as necessary to protect the claim. The debtor
continues to own the property; the secured creditor has only the right
to force its liquidation for the sole purpose of paying the secured debt.
A secured creditor is not entitled to collect more than the amount of
the debt from such a liquidation of the collateral.
Id. (quoting Anand v. Nat’l Republic Bank, 210 B.R. 456, 459 (Bankr.N.D.Ill.
1997)). The carveout-liabilities provisions protect the lender who has made a loan
based on its assessment that the pledged property’s value is sufficient to cover its
risk of non-payment. But the lender’s risk increases when either (a) it pays other
expenses out of pocket (such as insurance and taxes) or (2) the pledged property’s
value is reduced through the borrower’s neglect. Both contingencies are covered
by the carveout-liabilities provisions. If either of these contingencies occurs, the
lender’s additional damages are covered by our construction of the carveout-
liabilities provisions. If this had been a recourse loan, VPS could have recovered
21
the difference between (a) the unpaid loan balance and its covered out-of-pocket
expenses and (b) the fair market value of the collateral. VPS’s interpretation would
make Village Place liable for more: it would have to pay for a reduction in the
collateral’s value resulting from its inadequate maintenance and failure to enroll in
the dry cleaner remediation program resulting in a reduction in the collateral’s fair
market value even if Village Place had paid off the entire loan. To allow VPS to
recover more than these damages would grant it a windfall.
3. Avoidance of an absurd result
Third, we agree with Village Place that VPS’s interpretation of the loan
documents would lead to absurd results. We avoid constructions that would lead to
absurd results. Kourosh Hemyari v. Stephens, 355 S.W.3d 623, 626–27 (Tex.
2011) (per curiam); Henry v. Masson, 333 S.W.3d 825, 846 (Tex. App.—Houston
[1st Dist.] 2010, no pet.). Furthermore, we construe contracts “from a utilitarian
standpoint bearing in mind the particular business activity sought to be served” and
“will avoid when possible and proper a construction which is unreasonable,
inequitable, and oppressive.” Frost Nat’l Bank v. L & F Distribs., Ltd., 165 S.W.3d
310, 312 (Tex. 2005) (quoting Reilly v. Rangers Mgmt., Inc., 727 S.W.2d 527, 530
(Tex.1987)). VPS’s position leads to an absurd result, as Village Place points out
in its reply brief: based on this interpretation, if Village Place and Yari “failed to
spend $500,000 in needed repairs, [VPS] would be entitled to recover that
22
$500,000—even if the property was sold at foreclosure for twice (or ten times) the
amount owed under the loan.”
We therefore conclude that the loan documents reflect the general principle
that a lender is entitled only to full payment of the loan plus any other damages it
incurs for breach of other contractual obligations by the borrower, and therefore
the carveout-liabilities provisions cap Village Place’s liability for reductions in fair
market value. In other words, the carveout-liabilities provisions reinstate the right
of the lender (or here noteholder) to recover for specific damages “suffered or
incurred” by VPS, but those amounts cannot exceed the unpaid loan balance and
any covered expenses incurred by the lender.
Application of Property Code Section 51.003
A. The parties’ contentions
Having decided that VPS was entitled to recover for fair-market-value
reductions up to the amount of the unpaid loan balance and any covered expenses,
we now turn to whether Village Place was entitled to an offset for the fair market
value of the shopping center. Village Place contends that section 51.003 of the
Texas Property Code—which affords borrowers the right to a fair market valuation
of foreclosed property and offset against creditors’ “deficiency” claims—applies to
this case, arguing that “this is a suit for a deficiency judgment that is permitted by
the loan documents to the extent of the exceptions to the non-recourse provision.”
23
VPS argues that it sued for and recovered carveout liabilities, not a “deficiency,”
and therefore section 51.003 has no application to this case. Anticipating this
argument, Village Place maintains that the “breach of contract claim is predicated
on, and limited to, the unpaid loan balance” and that section 51.003 applies. We
conclude that VPS has in substance sued for recovery of the deficiency under
51.003.
B. Section 51.003 applies to this case
The crux of the dispute over section 51.003’s applicability is whether VPS
has sued for a deficiency within the meaning of that statute. Texas Property Code
section 51.003 implicitly defines “deficiency” as “the unpaid balance of the
indebtedness secured by the real property” less “the price at which real property is
sold at a foreclosure sale under Section 51.002.” See TEX. PROP. CODE ANN.
§ 51.003(a) (West 2007). Subsection b provides that “[a]ny person against whom
such a recovery is sought” may request a fair-market-value determination;
subsection c provides the conditions and calculation for such an “offset against the
deficiency.” See id. § 51.003(b), (c). Thus, the statute’s provisions are applicable in
the context of an action to recover a deficiency, as that term is implicitly defined in
the statute. See Interstate 35/Chisam Road, L.P. v. Moayedi, 377 S.W.3d 791, 797
(Tex. App.—Dallas 2012, pet. filed) (examining legislative history and observing
24
that statute “was designed to protect borrowers and guarantors in deficiency
suits”).
To determine the nature of VPS’s claims, we review the factual allegations
in the pleadings, the evidence adduced in support of those allegations, and the type
of relief sought. See Newsom v. Brod, 89 S.W.3d 732, 734 (Tex. App.—Houston
[1st Dist.] 2002, no pet.). Artful pleading does not alter the underlying nature of a
claim. See Omaha Healthcare Ctr., LLC v. Johnson, 344 S.W.3d 392, 394 (Tex.
2011) (discussing principle in context of health care liability claims). In its original
petition, VPS asserted that Village Place executed a promissory note that Yari
guaranteed and that after default and foreclosure, “a deficiency [was] still owing
under the Note, in the amount of $373,920.44 . . . .” In its second amended
petition, VPS deleted the allegation regarding a deficiency on the loan and
specifically asserted that it was “not seeking to recover a deficiency from” Village
Place or Yari because the loan was non-recourse “subject to” the carveout-
liabilities provisions. The original and second amended petition both alleged that
the deed of trust imposed obligations on Village Place (and Yari, per the guaranty)
to not commit waste, to keep the property in good repair, and to deliver tenants’
advance rentals and security deposits and both alleged breach of contract claims.
Despite the new theory alleged by VPS, we conclude that the nature of its
claims remained as stated in the original petition: VPS sought to recover the
25
“deficiency,” as that term is defined in section 51.003, remaining after
foreclosure.11 As we have already determined, the carveout-liabilities provisions do
not impose additional liability for Village Place. Rather, they conditionally restore
personal liability on Village Place for breach of the obligations created by the loan
documents—such as the obligations to pay principal and interest, taxes and
insurance. Village Place would have no personal liability for these obligations but
for the carveout-liabilities provisions. Village Place’s restored liability is limited
by the unpaid loan balance and VPS’s other covered expenses.
We conclude that insofar as VPS sought to recover damages under the
carveout-liabilities provisions for reductions in the value of the pledged property,
11
VPS relies on Wells Fargo Bank, N.A. v. HB Regal Parc, LLC, 383 S.W.3d 253
(Tex. App.—Dallas 2012, no pet.), which was a suit to collect on a non-recourse
note brought by Orix, as servicing agent, on behalf of a noteholder. Like this case,
the note contained “certain ‘carve outs’ or exceptions under which the lender
would have the right to recover from the borrower.” Id. at 256. The trial court
concluded that the borrower did not breach the carveout-liabilities provisions and
therefore “the loan remained a non-recourse obligation.” The court of appeals
concluded that because the loan remained non-recourse, “the amount of any
deficiency between the value of the property at foreclosure and the amount of the
loan is irrelevant.” Id. at 261. This one sentence—without any analysis—does not
control the result here. First, the terms of the carveout-liabilities provisions there
were different than the terms here; the provisions there did not include the suffered
or incurred language upon which we rely. Second, because the loan remained non-
recourse, the borrower had no liability and thus the property’s value was not an
offset for determining the unpaid loan balance. In this case, in contrast, the loan
became, in part, a recourse loan because Village Place breached its contractual
obligations covered by the carveout-liabilities provisions; the question here is the
amount for which the borrower became personally liable. And because of that
personal liability here, we must address the impact of section 51.003, an inquiry
that apparently was unnecessary in Wells Fargo.
26
VPS was seeking in substance recovery for a loan “deficiency”: “the unpaid
balance of the indebtedness secured by the real property” less “the price at which
real property is sold at a foreclosure sale.” TEX. PROP. CODE ANN. § 51.003(a)
(West 2007). Accordingly, we hold that section 51.003 applies in this case.
C. VPS did not establish waiver of Yari’s rights under section 51.003 as a
matter of law
VPS argues that the guaranty signed by Yari expressly waived his rights to
an offset under section 51.003. The trial court did not find a waiver by Yari.
Therefore, VPS has the burden of demonstrating waiver as a matter of law. See
Dunn v. Dunn, 177 S.W.3d 393, 396–97 (Tex. App.—Houston [1st Dist.] 2005,
pet. denied) (stating that when party attacks legal sufficiency of adverse finding on
which it had burden of proof, party must establish all vital facts in support of issue
as matter of law). VPS failed to do so.
VPS relies, in its initial brief, on section 5(j) of the guarantee. That section
provides in pertinent part:
The Guarantor[] unconditionally waive[s] the following:
....
(j) any rights or defenses based upon an offset by the Guarantor
against any obligation now or hereafter owed to the Guarantor by
Borrower . . . .
VPS compares this waiver clause to a purportedly similar waiver clause that was
deemed to have waived rights under section 51.003 in a Fifth Circuit opinion,
27
LaSalle Bank Nat’l Ass’n v. Sleutel, 289 F.3d 837 (5th Cir. 2002). Yari argues that
the waiver at issue in LaSalle was much broader than the one in this case, which
does not waive section 51.003 rights.
In LaSalle, the guarantor signed a guaranty agreement containing the
following clause:
To the extent allowed by applicable law, Guarantor expressly waives
and relinquishes all rights and remedies now or hereafter accorded by
applicable law to guarantors or sureties, including, without limitation:
. . . (III) any defense, right of offset or other claim which Guarantor
may have against Borrower or which Borrower may have against
Lender or the Holder of the Note; . . . and (VI) all rights of
redemption, homestead, dower, and other rights or exemptions of
every kind, whether under common law or by statute.
LaSalle, 289 F.3d at 840. The issue before the Fifth Circuit was whether the
Legislature permitted rights under section 51.003 to be subject to waiver by a
guarantor, and the court concluded that they were. See id. at 841–42. The parties
apparently did not dispute that if such a waiver were legally possible, the clause
effectively waived the guarantor’s rights under section 51.003. 12 The issue in this
case, however, is whether the guaranty agreement contains language effective to
waive Yari’s rights under section 51.003.
By the guaranty language above, Yari waived offset rights based upon
obligations owed by Village Place (“Borrower”) to him. But the clause does not
12
The LaSalle court mentioned in dicta that the clause “of course” waived any right
of offset that may be had under section 51.003. LaSalle Bank Nat’l Ass’n v.
Sleutel, 289 F.3d 837, 842 (5th Cir. 2002).
28
mention waiver of potential offset rights with respect to the lender or noteholder.
Section 51.003 grants rights to the borrower in order to ensure that collateral is
sold for its fair market value; it does not impose obligations on the borrower. A
guaranty agreement is “strictly construed . . . and will not be extended by
construction or implication.” Coker, 650 S.W.2d at 394 n.1. Moreover, it “should
be given a construction which is most favorable to the guarantor,” Yari. Id.
Accordingly, we hold that section 5(j) does not waive Yari’s rights under section
51.003 with respect to VPS.
Shortly before argument, VPS changed its argument. Now it contends that
Yuri waived his right to the statutory protections of section 51.003 in two different
paragraphs in section 4 of the guaranty. The first paragraph provides that the
guaranty’s obligations “shall not be subject to any . . . set-off . . . based upon any
claim the Guarantor may have against Lender [VPS] or Borrower [Village Place].”
The second paragraph in section 4 provides that VPS’s exercise or non-
exercise of any of its rights shall not “give the [Guarantor] . . . any recourse or
defense against Lender [VPS].” VPS does not identify, however, any right that it
exercised (or failed to exercise) that forms the basis for the statutory protections of
section 51.003. Section 51.003’s statutory rights are for the protection of the
borrower, not the lender. Accordingly, we hold that section 4 does not waive
Yari’s rights under section 51.003 with respect to VPS.
29
Sufficiency of Evidence Supporting Fair-Market-Value Finding
A. The parties’ contentions
The next question is whether there is legally and factually sufficient
evidence to support the trial court’s finding that VPS’s foreclosure bid of $1.5
million was “consistent with” the fair market value. 13 Village Place asserts that the
evidence overwhelmingly establishes that the property’s fair market value at
foreclosure far exceeded VPS’s winning foreclosure bid of $1.5 million. Therefore,
Village Place argues, when a correct fair market value is applied to offset VPS’s
claim, VPS’s damages are either reduced or eliminated. VPS responds that the trial
court’s finding that the foreclosure bid of $1.5 million was “consistent with” the
fair market value was supported by the evidence.
B. Competent evidence of fair market value
The term “fair market value” as used 51.003 is not statutorily defined. See
TEX. PROP. CODE ANN. § 51.0001 (West Supp. 2012) (providing several definitions
but not “fair market value”). That said, “market value” is defined in other contexts
as “the price the property will bring when offered for sale by one who desires to
sell, but is not obliged to sell, and is bought by one who desires to buy, but is under
no necessity of buying.” City of Harlingen v. Estate of Sharboneau, 48 S.W.3d
177, 182 (Tex. 2001) (quoting State v. Carpenter, 89 S.W.2d 979, 979, modifying
13
For the purposes of this appeal only, we assume that this is a finding that the
property’s fair market value at the time of foreclosure was $1.5 million.
30
89 S.W.2d 194, 202 (1936)); Exxon Corp. v. Middleton, 613 S.W.2d 240, 246
(Tex. 1981) (same); cf. TEX. TAX CODE ANN. § 1.04(7) (West 2008) (for Tax Code
purposes, defining “market value” in similar terms). This court and other courts of
appeals have used the same definition for “fair market value.” See, e.g., Burns v.
Rochon, 190 S.W.3d 263, 270 (Tex. App.—Houston [1st Dist.] 2006, no pet.);
Henson v. Reddin, 358 S.W.3d 428, 436 (Tex. App.—Fort Worth 2012, no pet.).
And our sister court has used this same definition in the context of section 51.003.
See Preston Reserve, L.L.C. v. Compass Bank, 373 S.W.3d 652, 658 (Tex. App.—
Houston [14th Dist.] 2012, no pet.). We, too, adopt the foregoing definition for the
term “fair market value” as used in section 51.003.
Section 51.003 provides that the “fair market value shall be determined by
the finder of fact after the introduction by the parties of competent evidence of
value.” TEX. PROP. CODE ANN. § 51.003(b) (West 2007). It also enumerates,
without limitation, several types of competent evidence:
(1) expert opinion testimony; (2) comparable sales; (3) anticipated
marketing time and holding costs; (4) cost of sale; and (5) the
necessity and amount of any discount to be applied to the future sales
price or the cashflow generated by the property to arrive at a current
fair market value.
Id. “The three traditional approaches to determining market value are the
comparable sales method, the cost method, and the income method.” City of
Harlingen, 48 S.W.3d at 182 (citing Religious of the Sacred Heart v. City of
31
Houston, 836 S.W.2d 606, 615–17 n.14 (Tex. 1992)). “In certain circumstances, a
fourth method, the subdivision development method, may also be used.” City of
Sherman v. Wayne, 266 S.W.3d 34, 48 (Tex. App.—Dallas 2008, no pet.) (citing
City of Harlingen, 48 S.W.3d at 186)).
Evidence of the purchase price of property can be some evidence of its
value. See, e.g., Edlund v. Bounds, 842 S.W.2d 719, 728 (Tex. App.—Dallas 1992,
writ denied); Burris v. Krooss, 563 S.W.2d 875, 879 (Tex. Civ. App.—Eastland
1978, no writ). However, “evidence of what property sold for at a foreclosure sale
is not competent evidence of its fair market value, since the transaction is not a free
one between a willing seller and a willing buyer.” SPT Fed. Credit Union v. Big H
Auto Auction, Inc., 761 S.W.2d 800, 801–02 (Tex. App.—Houston [1st Dist.]
1988, no writ) (quoting Price v. Gulf Atl. Life Ins. Co., 621 S.W.2d 185, 187 (Tex.
Civ. App.—Texarkana 1981, writ ref’d n.r.e.)); accord Preston Reserve, 373
S.W.3d at 663. Also, evidence of the property’s purchase price during a different
time period is not competent evidence of fair market value unless it is accompanied
by evidence showing the circumstances of the sale, such as how the property was
marketed and comparability of market conditions. See Preston Reserve, 373
S.W.3d at 663; see also Broesche v. State, 348 S.W.2d 770, 772 (Tex. Civ. App.—
Houston 1961, no writ) (observing that when actual purchase date is too remote,
purchase price is not competent evidence of value); cf. Z.A.O., Inc. v. Yarbrough
32
Drive Ctr. Joint Venture, 50 S.W.3d 531, 547 (Tex. App.—El Paso, 2001, no pet.)
(holding that evidence of real property’s “current” rental value was not evidence of
rental value during relevant time period). An unaccepted offer to purchase is not
competent evidence of fair market value. Hanks v. Gulf, Colo. & Santa Fe Ry. Co.,
320 S.W.2d 333, 336–37 (Tex. 1959); Preston Reserve, 373 S.W.3d at 664; Sw.
Bell Tel. Co. v. Wilson, 768 S.W.2d 755, 762 (Tex. App.—Corpus Christi 1988,
writ denied).
C. There was legally insufficient evidence that the property’s fair market
value was $1.5 million at the time of foreclosure
We now consider the sufficiency of the evidence of the property’s fair
market value. The parties dispute what evidence concerning fair market value was
properly admitted at trial, but in this case we do not need to resolve the
admissibility issue in order to resolve the sufficiency issue. Assuming, without
deciding, that all the testimony and evidence concerning the property’s fair market
value were properly admitted, we conclude that there was legally insufficient
evidence that the property’s fair market value was $1.5 million at the time of
foreclosure.
33
1. Britt’s testimony
VPS presented two witnesses to testify regarding the property’s fair market
value: Steve Britt and John Marshall. Britt and Marshall are both asset managers
employed by ORIX Capital Markets, LLC, which is the manager of VPS. In
anticipation of foreclosure, Britt prepared a recommendation on how much to bid
on the property at the foreclosure sale. He recommended an opening foreclosure
bid of $1 million up to a maximum bid of $1,875,000. At the foreclosure sale, VPS
and one other party bid on the property. The other party’s maximum bid was
$1,250,001, while VPS made the winning bid of $1.5 million. Britt did not provide
any testimony that the property’s fair market value was a certain amount or fell
within a certain range at the time of foreclosure.
VPS’s winning bid of $1.5 million at the foreclosure sale is not itself
competent evidence of fair market value because the sale was not a free one
between the buyer and seller. See SPT, 761 S.W.2d at 801–02. Similarly, Britt’s
range of recommended foreclosure bids does not indicate the property’s fair market
value because, even at the maximum end, it contemplates a seller (the substitute
trustee) who is obligated by the terms of the deed of trust to sell the property. See
id. Moreover, there was no evidence concerning how the property was marketed
leading up to the foreclosure sale. See Preston Reserve, 373 S.W.3d at 663. The
unaccepted third-party bid of $1,250,001 also was not competent evidence of value
34
because of the foreclosure context in which the bid was made and because it was
unaccepted. See SPT, 761 S.W.2d at 801–02; Preston Reserve, 373 S.W.3d at 664.
2. Marshall’s testimony
After foreclosure, Marshall was involved in marketing the property and
approving its resale to third parties. During the ten months between foreclosure and
subsequent resale, VPS expended approximately $20,000 on repairs and
maintenance. VPS and a third party contracted for a selling price of $2 million, but
the prospective buyer “terminated” the contract upon discovering an environmental
condition. Shortly thereafter, VPS and another third party contracted for a selling
price of $2 million, but that was subsequently reduced by $50,000 due to the
environmental condition such that the final closing price was $1,950,000. Like
Britt, Marshall did not provide any testimony that the property’s fair market value
was a certain amount or fell within a certain range.
The first resale offer of $2 million did not result in a consummated sale. It is
no evidence of fair market value because the buyer was ultimately not a “willing”
one. See Preston Reserve, 373 S.W.3d at 664.
As to the final closing price of $1,950,000, we realize that the property’s
purchase price at a later date can sometimes serve as some evidence of fair market
value. See Burris, 563 S.W.2d at 879. However, the record here does not reflect the
necessary additional evidence that would permit a reasonable inference that the
35
property’s fair market value was only $1.5 million at the time of foreclosure, ten
months earlier. After taking title to the property with a winning bid of $1.5 million,
VPS expended only $20,000 in repairs. There was no evidence that these
improvements enhanced the fair market value by $450,000. Nor was there any
evidence that market conditions had markedly changed between the foreclosure
date and the resale date. Thus, even assuming that the final resale price of
$1,950,000 is some evidence of fair market value, it does not in itself support a
finding that the property’s fair market value was $1.5 million, or $450,000 less, at
the time of foreclosure. Cf. Preston Reserve, 373 S.W.3d at 663 (“Evidence of the
property’s sale price of $980,000 a year after the foreclosure sale also is not
competent evidence of fair market value” in part because “[t]here is no evidence
regarding how the property was marketed a year later and whether market
conditions were comparable . . . .”).
3. Brokers’ opinions of value and appraisals
In carrying out their respective responsibilities, Britt and Marshall had
reviewed two brokers’ opinions of value (BOV) and an appraisal prepared by
outside firms: Collier’s BOV, dated ten months before foreclosure, estimated the
property’s value between $3.5 million and $4.25 million; Moody Rambin’s BOV,
dated nine months before foreclosure, estimated the property’s value between
$3,488,660 and $3,987,040; and Greenbriar’s appraisal, dated four months before
36
foreclosure, estimated the property’s value at $4,675,000. These reports were
admitted into evidence. The Collier, Moody Rambin, and Greenbriar reports
assumed that the property could achieve “stabilized” occupancy rates of 87%,
75%, and 85%, respectively. At the time of foreclosure, the property had an actual
occupancy rate of 27% or less. None of the reports expressly reflected that they
accounted for unperformed repairs or environmental conditions revealed during
inspections undertaken in connection with the property’s resale.
The trial court also admitted into evidence the same appraisal that Village
Place had attached to its motion requesting a determination of fair market value
and offset. The appraisal, prepared by a certified general real estate appraiser,
estimated the property’s fair market value at $3,184,002.50. It assumed a
“stabilized” occupancy rate of 85%.
VPS argues that the fair-market-value estimates in the BOVs and appraisals
are too high because they do not account for the 27% actual occupancy, the
unperformed maintenance, and the environmental condition of the property. Britt,
Marshall, and Yari testified that the occupancy level and physical condition of the
property can impact its fair market value. No one testified about a methodology by
which to adjust the BOVs and appraisals to account for potentially faulty
assumptions and thereby arrive at a value of $1.5 million.
37
We must “closely scrutinize” any appraisal technique differing from the
traditional methods approved by the Texas Supreme Court. See City of Harlingen,
48 S.W.3d at 187. Whatever technique the trial court may have used with respect
to the BOVs and appraisals, it would not have been one of the three traditional
techniques for assessing fair market value. See Religious of the Sacred Heart of
Tex., 836 S.W.2d at 615 (overviewing three traditional techniques). Without any
evidence about a reliable methodology for adjusting the BOVs and appraisals to
arrive at an accurate fair market value, the court’s implied departure from those
reports represents a “leap entirely outside of the evidence in answering” the fair
market value question, Callejo v. Brazos Elec. Power Coop., Inc., 755 S.W.2d 73,
75 (Tex. 1988), which it cannot do. Accordingly, to the extent that the court may
have found the fair market value by taking an estimate from one or more BOVs or
appraisals and adjusting it downward, the finding lacks legally sufficient evidence.
4. Pre-foreclosure offers to purchase the note
After default but before foreclosure, ORIX listed the property for sale on its
web site without stating an asking price. It received six offers to purchase the note
for between $725,000 and $1,500,000, none of which was accepted. Also during
this time period, Village Place offered to purchase the note for approximately
$1,540,000; the offer was not accepted.
38
The pre-foreclosure bids to purchase the note are not competent evidence,
first because they are unaccepted offers, Preston Reserve, 373 S.W.3d at 664, and
second because they are offers to buy the note rather than the property itself. The
prospective buyer of the note bargains for the rights of a noteholder, not of a real
property owner. A third-party noteholder would not own the property outright;
upon foreclosure, its ownership would be contingent upon making the winning bid
and the possibility that the foreclosure would be set aside. Even if Village Place
had purchased the note against its own property, it has not actually purchased the
property (which it already owns); rather, it has effectively purchased the release of
its debt.
For the foregoing reasons, we hold that there was legally insufficient
evidence that the property’s fair market value at the time of foreclosure was $1.5
million.
Liabilities Arising Out of the Non-Recourse
Exceptions Are Not “Other Expenses” to Which the
Foreclosure Proceeds Should Have Been First Applied
A. The parties’ contentions
As an alternative argument against its liability, Village Place argues that the
guaranty contains a clause whose operation extinguishes VPS’s claims. That
clause, delineating the priority in which proceeds from the foreclosure sale should
be applied, states in pertinent part:
39
If Lender exercises its power of sale set forth in the Deed of Trust or
otherwise realizes upon the collateral given by Borrower or any other
person as security for the Loan, then all proceeds . . . shall be applied
[1] first to Lender’s cost of collection, attorney’s fees, court costs, and
other expenses, [2] then to accrued but unpaid interest on the Note, [3]
then to that portion of the unpaid principal balance of the Note that is
not guaranteed by Guarantors, and [4] finally to the remaining
principal balance of the Note that is guaranteed by Guarantors.
Village Place argues that by process of elimination, the carveout liabilities are not
[2] unpaid interest on the note, or [3] the unguaranteed portion of the unpaid
principal balance on the note, or [4] the guaranteed portion of the remaining
principal balance on the note; therefore, the carveout liabilities must fall within [1]
“Lender’s . . . other expenses,” which is the category to which the foreclosure
proceeds must be first applied. It argues that because the foreclosure proceeds of
$1.5 million far exceed the carveout liabilities and other items in the first category,
the carveout liabilities are extinguished upon the foreclosure.
VPS responds that Village Place’s reading of the guaranty’s priority clause
would render the guaranty a nullity. VPS asserts that the final category—“the
guaranteed portion of the remaining balance on the note”—is the category into
which the carveout liabilities fall, and because the sale proceeds were insufficient
to extinguish the first three categories, there are no proceeds remaining to be
applied to the carveout liabilities.
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We adopt neither side’s interpretation of the guaranty’s clause regarding the
priority of foreclosure proceeds. Instead, we conclude that the deed of trust’s
priority clause covers the carveout liabilities found by the trial court.
B. The deed of trust’s priority clause should be construed with the
guaranty’s priority clause
Village Place’s argument that the carveout liabilities fall within “other
expenses” rests on their assumption that the guaranty’s priority clause “gives an
exclusive list of the four categories to which foreclosure proceeds can be applied
. . . .” The deed of trust, however, also contains a clause on the priority of
foreclosure proceeds, a clause that states:
Trustee shall apply the proceeds of the [foreclosure] sale in the
following order, (a) to all reasonable costs and expenses of the sale,
including, but not limited to, reasonable and customary Trustee’s fees,
reasonable attorney’s fees and costs of the title evidence; (b) to all
sums secured by this instrument in such order as the Lender, in
Lender’s sole discretion, directs, and (c) the excess, if any, to the
person legally entitled thereto.
It is a rule of contract interpretation that “separate instruments or contracts
executed at the same time, for the same purpose, and in the course of the same
transaction are to be considered as one instrument, and are to be read and construed
together.” Jones v. Kelley, 614 S.W.2d 95, 98 (Tex. 1981); see also Vista Dev.
Joint Venture II v. Pac. Mut. Life Ins. Co., 822 S.W.2d 305, 307 (Tex. App.—
Houston [1st Dist.] 1992, writ denied) (applying rule to promissory note and deed
of trust). We construe subclause (a) in the above quoted material as a parallel to the
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first category of items in the guaranty’s priority clause, namely, “[1] Lender’s cost
of collection, attorney’s fees, court costs, and other expenses.” Thus, when the loan
documents are construed together, the deed of trust illuminates that the guaranty’s
phrase “Lender’s . . . other expenses” is restricted to the “expenses of the
[foreclosure] sale.”
C. Ejusdem generis
Our interpretation is bolstered by the canon of ejusdem generis: “[W]hen
words of a general nature are used in connection with the designation of particular
objects or classes of persons or things, the meaning of the general words will be
restricted to the particular designation.” Hilco Elec. Coop., Inc. v. Midlothian
Butane Gas Co., Inc., 111 S.W.3d 75, 81 (Tex. 2003). The word “other” in the
term “other expenses” renders that term one of a similar nature. See Hilton v. Sw.
Bell Tel. Co., 936 F.2d 823, 828 (5th Cir. 1991). Thus, connecting the phrase
“other expenses” to the particular terms in the same subclause—“Lender’s cost of
collection, attorney’s fees, [and] court costs”—we construe “other expenses” to be
restricted to VPS’s foreclosure-related costs; they do not include the diverse
carveout liabilities awarded by the trial court, such as withheld security deposits
and rents, unpaid taxes and insurance premiums, and costs of environmental testing
reports.
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A question remains about what priority the loan documents give to the
carveout liabilities with respect to foreclosure proceeds. We conclude that those
carveout liabilities are encompassed within “all sums secured by this instrument”
contemplated in the deed of trust’s priority clause. 14 Under that clause, VPS has
“sole discretion” to direct the application of foreclosure proceeds; therefore, it is
not required to apply the proceeds first to the carveout liabilities.
We hold that the priority clauses in the guaranty and deed of trust do not
require the foreclosure proceeds to be first applied to the carveout liabilities
awarded by the trial court.
Attorney’s Fees
Village Place argues that a reduction in VPS’s damages warrants a reduction
in the amount of attorney’s fees awarded. The factors governing an award of
attorney’s fees include consideration of the “results obtained.” Young v. Qualls,
223 S.W.3d 312, 314 (Tex. 2007) (per curiam) (quoting Arthur Anderson & Co. v.
Perry Equip. Corp., 945 S.W.2d 812, 818 (Tex. 1997)). A meaningful reduction in
the amount of damages on appeal may support remand for a new trial on attorney’s
fees. See, e.g., Powell Elec. Sys., Inc. v. Hewlett Packard Co., 356 S.W.3d 113,
129 (Tex. App.—Houston [1st Dist.] 2011, no pet.) (citing Barker v. Eckman, 213
14
The deed of trust indicates that the instrument “SECURE[S] TO LENDER . . . (d)
the performance of the covenants and agreements of Borrower herein contained . .
. .” Thus, the carveout liabilities are part of the sums secured by the deed of trust
instrument.
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S.W.3d 306, 314 (Tex. 2006), and Young, 223 S.W.3d at 314–15). Although we
do not render judgment concerning VPS’s total damages, we recognize that our
disposition on the question of VPS’s damages may result in a meaningful reduction
of those damages on remand. Accordingly, we remand for a new trial on attorney’s
fees, as well. See id.
Conclusion
We affirm the trial court’s award of $109,720.90, subject to an offset based
on the property’s fair market value. We reverse in part the damages awarded in the
judgment to the extent of $554,258.60 and hold that the damages for any reduction
in the value of the collateral are limited to the unpaid loan balance after offsetting
the property’s fair market value. We reverse the awards of attorney’s fees. We
remand for a new trial to determine the property’s fair market value and the offset,
if any, that Village Place is entitled to under section 51.003 of the Texas Property
Code. We remand for a new trial on attorney’s fees, as well.
Harvey Brown
Justice
Panel consists of Chief Justice Radack and Justices Higley and Brown.
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