RRE VIP Borrower, LLC and Collateral Services, Inc v. Leisure Life Senior Apartment Housing, LTD.

Reversed and Remanded and Memorandum Opinion filed May 3, 2011.

In The

Fourteenth Court of Appeals

NO. 14-09-00923-CV

RRE VIP Borrower, LLC and Collateral Services, Inc., Appellants

v.

Leisure Life Senior Apartment Housing, LTD., Appellee

On Appeal from the 55th District Court

Harris County, Texas

Trial Court Cause No. 2009-47300

MEMORANDUM OPINION

            Appellants RRE VIP Borrower, LLC and Collateral Services, Inc. (collectively, RRE) bring this interlocutory appeal of the trial court’s order granting appellee Leisure Life Senior Apartment Housing, Ltd.’s (LLS) application for a temporary injunction, prohibiting RRE from foreclosing on the property that is the subject matter of this proceeding.[1] We reverse and remand. 

Background

            In 1997, LLS purchased and renovated the subject property—a 223-unit apartment complex, which is mostly leased to senior citizens.  LLS financed the purchase and renovation through a loan from Chase Bank.[2] RRE alleges that it purchased the loan on June 3, 2009, after LLS’s loan had been sold or assigned to a series of lenders.  Collateral Services, Inc. is the substitute trustee under the deed of trust and the entity designated to conduct RRE’s scheduled foreclosures. 

            The property sustained serious damage as a result of Hurricane Ike in September 2008.  Although LLS has made some repairs, approximately forty units remain in a state of disrepair and are uninhabitable.[3] On June 3, 2009, the same day that RRE purchased LLS’s loan, RRE sent LLS a letter notifying LLS that it was in default for failing to meet certain insurance requirements.  On June 30, 2009, RRE sent LLS notice of certain non-monetary defaults under the loan documents and notice of intent to accelerate the note.  The asserted defaults include the failure to: (1) meet the insurance requirements, (2) keep the property free and clear of liens, and (3) prevent waste, impairment, or deterioration of the property.  RRE demanded that LLS “promptly commence” repairs and cure the defaults by July 10, 2009. 

            On July 10, 2009, RRE sent LLS notice of acceleration and notice of a substitute trustee’s sale scheduled for August 4, 2009.  On July 27, 2009, LLS filed an original petition, application for temporary restraining order, and application for temporary injunction.  LLS alleged that RRE had anticipatorily breached the note, deed of trust, and security agreement by falsely asserting invalid events of default and wrongfully accelerating the note, and sought a judgment declaring the rights and duties of RRE and LLS under the loan documents.  LLS also sought an injunction preventing the scheduled August 4, 2009 foreclosure of the property. 

            On July 29, 2009, the trial court signed a temporary restraining order, prohibiting RRE from foreclosing on the property in August 2009, and setting the hearing on the temporary injunction for August 10, 2009.  On August 12, 2009, the trial court signed an agreed order extending the temporary restraining order so that the parties could conduct reasonable discovery prior to the hearing on the temporary injunction.  The August 12, 2009 order also prohibited RRE from foreclosing on the property in August and September 2009, but allowed RRE to post the property for an October 6, 2009 foreclosure.

            On August 21, 2009, LLS filed its first supplemental petition, alleging that RRE is not the owner and holder of the note and, therefore, does not have standing to declare the note in default, accelerate the note, or post the property for foreclosure.  RRE explained that it financed the purchase of the LLS loan through Värde Investment Partners, L.P and collaterally assigned its rights under the loan documents to Värde.  According to RRE, on June 3, 2009, RRE endorsed the note as collateral and delivered it to Värde, which became the physical holder of the note, and Värde entered into an agreement acknowledging that it intended to effect a collateral assignment of the note.  On September 1, 2009, Värde endorsed the note and, on September 2, 2009, delivered it to RRE.  RRE asserts that this resolved any doubt as to RRE’s status as the holder and owner of the note with the authority to enforce it.  On September 3, 2009, RRE sent LLS a new notice of default, citing additional events of default, and intent to accelerate.  On September 14, 2009, RRE sent LLS notice of acceleration and notice of a substitute trustee’s sale scheduled for October 6, 2009. 

            The trial court held the temporary injunction hearing over three separate days—the afternoon of September 25, 2009, the afternoon of October 1, 2009, and all day on October 2, 2009.  By the end of the day on October 2, LLS had called two witnesses, and RRE had cross-examined the first witness but had not finished cross-examining the second witness.  The trial court terminated the temporary injunction hearing over RRE’s objection that it had not completed its cross-examination of LLS’s second witness, had not cross-examined LLS’s expert witness on valuation, and had not presented a defense, including its own two experts on valuation.  The trial court further denied RRE’s request to make an offer of proof.  The trial court admitted the expert reports into evidence without any testimony and took the matter under advisement. 

            On October 5, 2009, the trial court granted the temporary injunction and enjoined RRE from foreclosing on the property over RRE’s renewed objection that it did not have the opportunity to put on a defense or make an offer of proof.  RRE brings this interlocutory appeal seeking to set aside the temporary injunction. 

Analysis

Termination of the Temporary Injunction Hearing

            In its first issue, RRE contends that the trial court abused its discretion by refusing to hear RRE’s case-in-chief.  “No temporary injunction shall be issued without notice to the adverse party.”  Tex. R. Civ. P. 681.  The notice requirements of Rule 681 impliedly require that the adverse party have the right to be heard.  Elliott v. Lewis, 792 S.W.2d 853, 855 (Tex. App.—Dallas 1990, no writ); Reading & Bates Constr. Co. v. O’Donnell, 627 S.W.2d 239, 243 (Tex. App.—Corpus Christi 1982, writ ref’d n.r.e.); City of Houston v. Houston Lighting & Power Co., 530 S.W.2d 866, 869 (Tex. Civ. App.—Houston [14th Dist.] 1975, writ ref’d n.r.e.); City of Austin v. Tex. Pub. Emps. Ass’n, 528 S.W.2d 637, 640 (Tex. Civ. App.—Austin 1975, no writ); Oertel v. Gulf States Abrasive Mfg., 429 S.W.2d 623, 623 (Tex. Civ. App.—Houston [1st Dist.] 1968, writ). The opportunity to be heard and present evidence must amount to more than the mere opportunity to cross-examine the other party’s witnesses.  Elliott, 792 S.W.2d at 855; Reading & Bates Constr. Co., 627 S.W.2d at 244. 

In a temporary injunction hearing, the trial court is entitled to reasonably limit the proceedings.  Elliott, 792 S.W.2d at 855; Reading & Bates Constr. Co., 627 S.W.2d at 244; City of Houston, 530 S.W.2d at 869.  However, the trial court may not deprive a party of its right to offer any evidence.  Elliott, 792 S.W.2d at 855; City of Houston, 530 S.W.2d at 869.  The trial court’s limitation cannot be arbitrary in its nature or it will be considered an abuse of discretion.  Elliott, 792 S.W.2d at 855 (holding that terminating a temporary injunction hearing and entering a temporary injunction against a party before the party has had an opportunity to present its defenses is an abuse of discretion).  The trial court is simply not authorized to enter an order of temporary injunction against a party before that party has had an opportunity to present its defenses and has rested its case.  Kramer Trading Corp. of Tex. v. Lyons, 740 S.W.2d 522, 524 (Tex. App.—Houston [1st Dist.] 1987, no writ); City of Austin, 528 S.W.2d at 640; Oertel, 429 S.W.2d at 624. 

            On September 25, 2009, the first day of the hearing, LLS called David Zive, RRE’s corporate representative, as its first witness.  LLS continued its questioning of Zive on October 1 and 2.  On October 2, after RRE had questioned Zive, LLS called Charles Miller, LLS’s corporate representative, as a witness and questioned him.  RRE then cross-examined Miller until one of LLS’s attorneys informed the trial court that they only had an hour left and “[w]e’ve got at least one appraiser to put on.” 

When it became clear there was insufficient time remaining on October 2, 2009, to complete the testimony, the trial court admitted the expert reports and concluded the hearing without further testimony. The trial court overruled RRE’s objection that it should have the opportunity to cross-examine the expert witness and its request to continue its cross-examination of Miller.  The trial court further denied RRE’s request to make an offer of proof. 

            The trial court then heard the parties’ closing arguments and took the matter under advisement.  On October 5, 2009, the trial court announced that it was granting the temporary injunction against RRE.  RRE again objected that it did not have an opportunity to put on a defense or make an offer of proof.

            Thus, the trial court terminated the temporary injunction hearing and granted LLS’s application for a temporary injunction without allowing RRE the opportunity to complete its cross-examination of Miller, cross-examine LLS’s valuation expert, and present its defense case-in-chief, witnesses, and evidence.  This court, along with several other courts of appeals, has found the granting of a temporary injunction under similar circumstances to be an abuse of discretion.[4] 

            LLS argues that “it [is] not an abuse of discretion to grant a temporary injunction based upon stipulated facts and argument thereon together with summaries of other expected evidence on both sides.”  Reading & Bates Constr. Co., 627 S.W.2d at 244.  However, here there were no stipulated facts or any summarizations of the parties’ expected evidence.  To the contrary, the subject matter of the expert reports—the valuation of the collateral—was a hotly disputed issue.  The trial court’s decision to admit expert reports into evidence without affording RRE its requested opportunity to question the expert witnesses does not fulfill RRE’s right to be heard in a temporary injunction proceeding.  Cf. EMS USA, Inc. v. Shary, 309 S.W.3d 653, 660 (Tex. App.—Houston [14th Dist.] 2010, no pet.) (holding that the trial court’s denial of a temporary injunction without hearing testimony regarding the validity of a non-compete covenant was an abuse of discretion).[5] 

            We hold that the trial court abused its discretion by granting LLS’s application for a temporary injunction without allowing RRE the opportunity to cross examine LLS’s expert witness and present its own defense case-in-chief, witnesses, and evidence.[6] Accordingly, we sustain RRE’s first issue. 

Substantive Findings

            In its second issue, RRE contends that the trial court abused its discretion by finding that LLS’s failure to the repair hurricane damage to the property did not constitute a default under the loan documents that would support foreclosure.  RRE contends that addressing this additional substantive issue would provide substantial guidance to both the parties and the trial court in the remand proceedings, including the trial on the merits. 

            However, in light of our disposition of RRE’s first issue and our determination that it was error to issue a temporary injunction upon this incomplete evidentiary record, it would be improper for this court to consider the incomplete record and render an advisory ruling on the likelihood of success on the merits.  See Tex. R. App. P. 47.1.  Accordingly, we overrule RRE’s second issue.

            Having determined that the trial court abused its discretion by granting LLS’s application for a temporary injunction, we vacate the temporary injunction, reverse the trial court’s judgment, and remand the case to the trial court for proceedings in accordance with this opinion. 

                                                                        /s/        Sharon McCally

                                                                                    Justice

Panel consists of Justices Anderson, Seymore, and McCally.

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[1] See Tex. Civ. Prac. & Rem. Code Ann. § 51.014(a)(4) (West 2008) (providing for the interlocutory appeal from the trial court’s grant or refusal of a temporary injunction). 

[2] The purchase and renovation of the property was also financed by another loan from the City of Houston.  RRE has the first lien, and the City of Houston has the second lien.

[3] LLS asserts that repairs to the forty units remain because (1) a dispute exists between LLS and its hazard insurance carrier as to the cost to repair the property, (2) RRE refuses to allow insurance proceeds tendered to LLS by its insurance carrier to be used to repair the storm damage, (3) RRE’s demands regarding insurance coverage and mechanic’s liens have diverted time and resources from the repair of the property, and (4) RRE and LLS cannot agree on a plan for the completion of the repairs to the property.

[4] See, e.g., Elliott, 792 S.W.2d at 855 (holding that the trial court abused its discretion by granting a temporary injunction where the trial court terminated the hearing while the appellant was cross-examining the appellees’ first witness—before the appellees had rested and the appellant had presented her defense); Kramer Trading Corp. of Tex., 740 S.W.2d at 523 (holding that the trial court abused its discretion by granting a temporary injunction where the trial court terminated the hearing before the appellee had rested his case and the appellant had presented its defense); City of Houston, 530 S.W.2d at 869 (holding that the trial court abused its discretion by granting a temporary injunction without allowing the City to offer any evidence and denying the City the right to offer evidence on a bill of exception); City of Austin, 528 S.W.2d at 640 (setting aside the order granting a temporary injunction where the trial court terminated the hearing during the appellant’s cross-examination of the first witness without allowing the appellant to present any evidence of its defense); Oertel, 429 S.W.2d at 623 (reversing the judgment on temporary injunction where the trial court did not permit the appellants to call witnesses and present their defense, although they were permitted to cross-examined the appellee’s witnesses); see also Great Lakes Eng’g, Inc. v. Andersen, 627 S.W.2d 436, 437 (Tex. App.—Houston [1st Dist.] 1981, no writ) (holding that the trial court’s denial of a temporary injunction was an abuse of discretion where it did not allow the appellant to fully develop his evidence and the trial court terminated the hearing prior to the appellant resting or the appellee presenting his defense).

[5] LLS further asserts that it was not necessary to allow RRE to present its case, witnesses, or evidence because RRE’s counsel was able to cover in his closing argument the proffer and lines of examination he wished to make regarding the property’s condition and value.  However, argument of counsel is not evidence.  Love v. Moreland, 280 S.W.3d 334, 336 n.3 (Tex. App.—Amarillo 2008, no pet.); Potter v. GMP, L.L.C., 141 S.W.3d 698, 704 (Tex. App.—San Antonio 2004, pet. dism’d); Pues v. Veterans of Foreign Wars Post 8246, No. 14-08-00333-CV, 2009 WL 2620564, at *8 (Tex. App.—Houston [14th Dist.] Aug. 27, 2009, no pet.) (mem. op.). 

[6] RRE also asserts in its first issue that, as another independent ground for remanding the case to the trial court, the trial court abused its discretion by refusing to allow it to make an offer of proof.  In light of our ruling on the trial court’s abuse of discretion in not allowing RRE to present its case, we need not address this argument.  Under these circumstances, it is not necessary for the record to reflect what RRE’s evidence may have been.  See Great Lakes Eng’g, Inc., 627 S.W.2d at 437 (holding that, because neither party was permitted to make a bill of exceptions to show what their additional evidence would have been, it was not necessary that the record reflect what the evidence might have been from the appellant’s witnesses who were not permitted to testify in the temporary injunction hearing); Oertel, 429 S.W.2d at 624 (“Since the judgment entered in this case certifies that the trial court refused to allow appellants to present any evidence at the [temporary injunction hearing] and that appellants duly objected to this action, there is no necessity for a bill of exceptions and the judgment must be reversed.”).