Village Place LTD and Bob Yari v. VP Shopping, LLC

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.

40

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

41

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.

42

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.

43

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.

44