in Re Texas State Board of Public Accountancy ( 2010 )

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-08-00549-CV
Michael P. Barry, Appellant
v.
Donald Jackson and Karen Jackson, Appellees
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 353RD JUDICIAL DISTRICT
NO. D-1-GN-03-000710, HONORABLE STEPHEN YELENOSKY, JUDGE PRESIDING
OPINION
In mid-July 2002, appellant Michael P. Barry entered into a contract with appellees
Donald and Karen Jackson under which he agreed to buy their home for $370,000. The Jacksons
then signed a contract to buy another house. Shortly after the Jacksons’ option period on their new
house expired, Barry informed the Jacksons that he would not be going through with the purchase.
The Jacksons lost the earnest money they had deposited in conjunction with the contract for their
new house, as well as an option-period fee and a fee to have the new house inspected. The Jacksons
re-listed their house after doing a number of repairs, eventually selling it in late October 2003 for
$339,000. The Jacksons sued Barry for breach of contract. Following a bench trial, the trial court
entered judgment in favor of the Jacksons, awarding them breach-of-contract damages in the amount
of $46,965, $3,889 for “out of pocket” damages, and $23,165 in attorney’s fees. Barry appeals,
complaining that the trial court erred because (1) the Jacksons sought to be awarded Barry’s earnest
money, thus electing a contractual remedy that bars them from receiving damages; (2) there was
insufficient evidence of the property’s market value to support the trial court’s award of damages;
and (3) because the damages were improper, the attorney’s fees award should be reversed. We will
reverse the trial court’s judgment, render judgment awarding the Jacksons $3,889 in damages, and
remand the cause to the trial court for reconsideration of the issue of attorney’s fees.
Summary of the testimony
In July 2002, Barry, acting through his realtor,1 approached the Jacksons about buying
their home, which at the time was not listed for sale. On July 13, after some negotiations, the parties
signed a contract under which Barry would buy the Jacksons’ house for $370,000. The contract
provided that Barry could cancel within seven days after receiving a seller’s disclosure notice from
the Jacksons; the disclosure was provided on July 15, 2002, giving Barry until July 22 to terminate
the contract. Barry placed $3,000 in escrow on July 16. After signing the contract with Barry, the
Jacksons started looking for a new house, and on July 17, they signed a contract to buy a house on
Pebble Garden Court, placing $3,000 in escrow, paying the sellers $500 for the unrestricted right to
cancel the contract within seven days, and paying $389 for an inspection.
On July 23, Barry had the Jacksons’ property inspected. The inspector found about
twenty issues, including wood rot in a door frame, a rotten wiring conduit under the deck, a broken
handle on the built-in microwave, a leak in the kitchen faucet, and some problems with the pool.
Mr. Jackson testified that he and his wife had only known that the microwave needed a new handle.
That night, Barry met with the Jacksons to discuss the inspection report. Mr. Jackson testified that
1
The same realtor represented both Barry and the Jacksons in preparing the contract. In
2003, the Jacksons used a different realtor to re-list and eventually sell the property.
2
during the meeting, Barry said he thought the agreed price was too high and that the Jacksons would
be “making too much profit.” The next day, however, the parties’ realtor called to say Barry “was
going to proceed to buy [their] house,” so the Jacksons let the option period run on the Pebble
Garden house, intending to close that contract the same day they closed with Barry on their house.
On July 25, one day after the Jacksons’ option period expired, Barry called to tell the Jacksons that
he was not going to buy the house. The Jacksons were forced to cancel their contract on the Pebble
Garden house, losing their escrow money, option-period fee, and inspection fee.
After Barry backed out of the contract, the Jacksons put their house back on the
market, listing it for sale by owner for $369,900 until mid-November 2002, at which time they
discovered their dishwasher was leaking. They took the house off the market, replaced the
dishwasher, and removed the hardwood flooring in the kitchen, replacing it with tile. They put the
house back on the market in late May 2003, first listing it for sale by owner, and then contracting
with a different realtor to list the house in July 2003. In late September 2003, they contracted to sell
the house for $339,000; the contract closed in late October 2003.2 The Jacksons’ realtor at the time
of the sale testified that $339,000 was “probably pretty close” to the property’s fair market value at
the time the sale closed. The Jacksons sued Barry, seeking to recover damages for his breach.3 In
2
The Jacksons assert that under the later contract, they were obligated to pay $9,000 in
closing costs and a $465 residential service policy, neither of which was required by the contract
with Barry, and about $2,000 for repairs done at the buyers’ request. The Jacksons further asserted
that when they eventually sold the house, they had to include a trampoline, pool equipment,
barstools, the refrigerator, and window treatments. However, we note that the Barry contract
includes pool equipment and window treatments except for “curtains/valances” in six rooms.
3
The Jacksons initially sued only their realtor and her brokerage company, filing suit in
March 2003. They amended their suit in May 2003 to add Barry as a defendant. The Jacksons
settled their claims against their realtor and her brokerage company for $17,000.
3
their amended petition, the Jacksons sought the following damages that they alleged were the result
of Barry’s breach: lost earnest money, option money, and inspection fees on the Pebble Garden
house; $31,000 for the difference in the contract prices; and various consequential damages as a
result of Barry not closing his contract as agreed. The Jacksons did not seek Barry’s $3,000 in
earnest money as an alternative remedy.
In a letter to the parties after the bench trial, the trial court stated that it was ruling in
favor of the Jacksons, acknowledging that the proper measure of damages was the difference
between the contract price and the market value of the property on the date of the breach.4 The court
also observed that “the market value is fixed by the actual resale price if it is a fair resale (open
market) within a reasonable time after the breach.” The court concluded that because the house was
listed for a number of months at the original $370,000 contract price but no offers were made until
the final sale for $339,000, “the best evidence of the market value on the date of the breach is the
resale price.” The court stated, “The difference between the contract price and the resale price is
$46,965. This is a windfall profit for the Jacksons, but, under the law, it is the benefit of their
bargain with Mr. Barry,” concluding that the Jacksons should recover $46,965,5 plus $3,889 for out-
4
We recognize that the court’s letter to the parties is not a finding of fact, Cherokee Water
Co. v. Gregg County Appraisal Dist., 801 S.W.2d 872, 878 (Tex. 1990), but we believe it is
nonetheless instructive background regarding the court’s reasoning in calculating the Jacksons’
damages.
5
Presumably, the $46,965 award is the $31,000 difference in the contract prices, plus
$15,965, which apparently includes repairs made during the year the Jacksons continued to own and
live in the house, additional closing costs they paid under the new contract, and increased real estate
commissions. It is unclear what the nearly $16,000 is for, however, because the trial court’s findings
of fact stated only that the October 2003 contract required the Jacksons “to pay $15,965 more than
the Barry contract.” The court did not provide further explanation, despite Barry’s request for
additional findings and conclusions, which was related to market value and the measure of damages.
Barry did not specifically note a lack of information about the details of the $15,965 award.
4
of-pocket damages and $24,590 in attorney’s fees. The court later entered findings of fact and
conclusions of law finding that the parties contracted for Barry to buy the Jacksons’ house for
$370,000; that the Jacksons paid $3,500 in earnest money and $389 in inspection fees for the Pebble
Garden house and then lost the earnest money when they were forced to default on the contract; that
the Jacksons eventually sold their house for $339,000 and that the contract required them to pay
$15,965 more than did their contract with Barry. The court concluded that the Jacksons had incurred
$46,965 in actual damages, $3,889 in additional out-of-pocket damages, and $23,165 in reasonable
and necessary attorney’s fees.
Discussion
On appeal, Barry contends that (1) the Jacksons elected a contractual remedy that bars
them from receiving damages, (2) there was insufficient evidence of the property’s market value to
support the trial court’s damages award, and (3) because the damages award was improper, the award
of attorney’s fees should be reversed. Because we agree that the evidence is legally insufficient to
establish the market value of the Jacksons’ property at the time of Barry’s breach, we hold that the
Jacksons failed to prove that they were entitled to the $46,965 awarded by the trial court.6
We review a trial court’s factual determinations after a bench trial for legal and
factual sufficiency, using the same standards applied to jury verdicts. Ortiz v. Jones, 917 S.W.2d
770, 772 (Tex. 1996). A challenge to the legal sufficiency will be sustained if there is a complete
absence of evidence of an essential fact, the trial court was barred by rules of law or evidence from
giving weight to the only evidence proving an essential fact, no more than a scintilla of evidence was
6
Because we conclude that the evidence is legally insufficient to support the trial court’s
damages award, we need not address whether the evidence was also factually insufficient.
5
offered to prove an essential fact, or the evidence conclusively establishes the opposite of the
essential fact. City of Keller v. Wilson, 168 S.W.3d 802, 810 (Tex. 2005). We view the evidence
in the light most favorable to the trial court’s determination, crediting favorable evidence if a
reasonable fact finder could have done so and disregarding contrary evidence unless a reasonable fact
finder could not. Id. at 807. The trial court as fact finder is the sole judge of the witnesses’
credibility and the weight to be given their testimony, and we will not disturb the court’s resolution
of evidentiary conflicts that turn on credibility determinations or the weight of the evidence. Young
Chevrolet, Inc. v. Texas Motor Vehicle Bd., 974 S.W.2d 906, 914 (Tex. App.—Austin 1998, pet.
denied); see City of Keller, 168 S.W.3d at 819.
Initially, we disagree with Barry that the Jacksons elected to receive the earnest
money that was on deposit with the court and therefore were barred from seeking damages for breach
of contract. Although the Jacksons filed a motion for summary judgment seeking the release of
Barry’s earnest money, that was sought and granted by the trial court in partial satisfaction of the
breach-of-contract damages they sought. Shortly after Barry announced his intention to breach his
contract, the Jacksons refused to sign a form that would have given them the earnest money and
released Barry from further liability. In their amended petition, the Barrys were very clear in seeking
damages for breach of contract, which their contract with Barry allowed.7 There is sufficient
evidence to show that the Jacksons did not elect to receive liquidated damages, relinquish their right
to sue, or engage in conduct inconsistent with that right. See Martin v. Birenbaum, 193 S.W.3d 677,
7
The contract provided that if Barry breached, the Jacksons could seek specific performance
and “other relief as may be provided by law,” or could terminate the contract and “receive the earnest
money as liquidated damages,” in which case the parties were released from the contract.
6
683-84 (Tex. App.—Dallas 2006, pet. denied). We overrule Barry’s complaints related to the
Jacksons’ purported election of remedies.
We next turn to Barry’s complaint related to the evidence supporting the trial court’s
damages award. Barry argues that the Jacksons did not present sufficient evidence to show the
property’s market value at the time of his breach. In their brief, the Jacksons state, “At the time of
the breach, the market value was the contract price between Barry and the Jacksons of $370,000.00.”
They assert that $339,000 was the fair market value “[u]pon resale,” and that they are entitled to the
$31,000 difference, plus damages for repairs during the year they lived in the house after Barry
breached the contract and additional closing costs that they were required to pay under the later,
completed contract. We disagree.
The general rule in a breach-of-contract case is that damages should put the plaintiff
in the same economic position he would have been in had the contract been performed. See
American Nat’l Petroleum Co. v. Transcontinental Gas Pipe Line Corp., 798 S.W.2d 274, 278
(Tex. 1990). When the breached contract is for real estate, the measure of damages is the difference
between the contract price and the property’s market value at the time of the breach.
Kempner v. Heidenheimer, 65 Tex. 587, 591 (1886); Smith v. Herco, Inc., 900 S.W.2d 852, 861
(Tex. App.—Corpus Christi 1995, writ denied); Ryan Mortgage Investors v. Fleming-Wood,
650 S.W.2d 928, 935 (Tex. App.—Fort Worth 1983, writ ref’d n.r.e.).8 The market value of the
8
The Jacksons note that Kempner v. Heidenheimer, 65 Tex. 587 (1886), was decided
120 years ago and assert that applying the Kempner measure of damages is problematic in the current
real estate market, in which closings often occur within thirty days of a contract being made, arguing
that “a Court would never find damages since the contract is an indicator of market value, and there
would very rarely be any factors that would change the value in a short period of time.” However,
7
property may be determined by “a fair resale, after notice to the party, . . . within a reasonable time
after the breach.” Kempner, 65 Tex. at 591 (emphasis added).
The Jacksons sold their house in October 2003, more than a year after Barry breached
the contract. Although we recognize that “[w]hat is a reasonable time is a question of fact, varied
by the circumstances of each case,” id., the Jacksons provided no evidence related to whether
thirteen months was a reasonable time, especially considering that they took the house off the market
for a number of months and for a time had the property listed for sale by owner, rather than through
a realtor who could list it in the MLS system. For example, they did not present testimony by an
appraiser or realtor as to whether the real estate market had undergone significant fluctuations during
that year, that the eventual sales price would have been a fair market value for the property at the
time of the breach, or whether market conditions in October 2003 were similar to those in
the Kempner rule was announced by the Texas Supreme Court, has not been disavowed, and has
been applied consistently since its pronouncement. See, e.g., Telfener v. Russ, 145 U.S. 522, 534
(1892) (“The measure of damages for breach of a contract of sale of land by the purchaser is the
difference between the contract price and the salable value of the property. That is the rule laid down
by the Supreme Court of Texas in Kempner v. Heidenheimer, 65 Tex. 587.”); Kollmeyer v. Stewart,
No. 05-00-01787-CV, 2001 Tex. App. LEXIS 8194, at *10 (Tex. App.—Dallas Dec. 11, 2001, no
pet.) (not designated for publication); Ozlat v. Nhan Van Hua, No. 01-97-00568-CV, 1998 Tex. App.
LEXIS 3020, at *8 (Tex. App.—Houston [1st Dist.] May 21, 1998, no pet.) (not designated
for publication); Tindall v. Ledford, No. 07-96-00400-CV, 1998 Tex. App. LEXIS 1180, at *20
(Tex. App.—Amarillo Feb. 25, 1998, pet. denied) (not designated for publication); Smith v. Herco,
Inc., 900 S.W.2d 852, 861 (Tex. App.—Corpus Christi 1995, writ denied); Johnson v. Price, No. 14-
84-00656-CV, 1985 Tex. App. LEXIS 7394, at *2-3 (Tex. App.—Houston [14th Dist.] Jan. 24,
1985, no writ) (not designated for publication); Roselawn Cemetery, Inc. v. Martin, 415 S.W.2d 442,
445 (Tex. Civ. App.—San Antonio 1967, no writ). When a buyer defaults, the seller may seek
specific performance, see Restatement (Second) of Contracts § 360 cmt. e (1981) (“seller who has
not yet conveyed is generally granted specific performance on breach by the buyer” because “it may
be difficult for him to prove with reasonable certainty the difference between the contract price and
the market price of the land”), or usually receives any earnest money and retains the value of the use
and ownership of the property.
8
August 2002. Recent events in the nationwide real estate market show without a doubt that one year
can make an enormous difference in the value of real estate, and Texas courts have recognized this
fact. See id. (period of time that “would give room for fluctuations in the market in the [usual] order
of things . . . would be unreasonable”); Chiu Moon Chan v. Montebello Dev. Co., No. 14-06-00936-
CV, 2008 Tex. App. LEXIS 5980, at *11 (Tex. App.—Houston [14th Dist.] July 31, 2008,
pet. denied) (mem. op.) (quoting Naylor v. Siegler, 613 S.W.2d 546, 547 (Tex. Civ. App.—Fort
Worth 1981, no writ)) (“‘[r]eal property has a fluctuating value’ and ‘[t]here is no way to ascertain
at any given time what the value of a particular tract of real property might be in the future’”). As
plaintiffs, it was the Jacksons’ burden to establish the property’s market value as of August 2002,
not October 2003, and thus it was their burden to establish that the later sale was within a reasonable
amount of time.9 See Kempner, 65 Tex. at 592; see also Barraza v. Koliba, 933 S.W.2d 164, 170
(Tex. App.—San Antonio 1996, writ denied) (only evidence of market value was buyer’s testimony
about property’s value at time of trial six years later; “[a]ccordingly, the Barrazas have failed to
establish this component of their damages”); Smith, 900 S.W.2d at 860 (plaintiff called appraiser to
9
In Kempner, the supreme court held that the trial court did not err in refusing to use the
price obtained for property in a private sale seven months after the breach. 65 Tex. at 591-92. In
Kollmeyer, the court held that a price from a resale four months after the breach was some evidence
showing market value, apparently assuming but not discussing whether this was a reasonable time.
2001 Tex. App. LEXIS 8194, at *12. In Ozlat, a sale nine days after the breach was sufficient
evidence of the property’s market value. 1998 Tex. App. LEXIS 3020, at *9. In Corpus Christi
Development Corp. v. Carlton, on the other hand, the court held that testimony about the property’s
value at the time of trial, seventeen months after the breach, was no evidence of the property’s value
at the time of the breach. 644 S.W.2d 521, 522 (Tex. App.—Corpus Christi 1982, no writ).
Similarly, in Barraza v. Koliba, because “[t]he only evidence arguably admitted on this issue [of
market value] again came in through the Barrazas, whose testimony was limited to the market value
of the land as of the date of trial,” there was no evidence of the property’s market value at the time
of the contract. 933 S.W.2d 164, 169-70 (Tex. App.—San Antonio 1996, writ denied).
9
testify as to value of property as represented and actual value of property at time of breach). Because
the Jacksons did not present any evidence that would support reasonable inferences either that the
October 2003 sale occurred within a “reasonable time” or that the October 2003 sales price reflected
the property’s value at the time of Barry’s breach more than a year earlier, the trial court erred in
awarding them the difference between the two contract prices.
As for the remaining breach-of-contract damages, the trial court found that the terms
of the October 2003 contract required the Jacksons “to pay $15,965 more than the Barry contract.”
Thus, the additional damages are related to the difference in market value between the Barry contract
and the October 2003 contract. In other words, the October 2003 contract not only provided a
contract price $31,000 lower than did the Barry contract, it apparently burdened the Jacksons with
nearly $16,000 in less favorable contractual terms. Because we have held that the evidence is legally
insufficient to support findings that the October 2003 contract was within a reasonable time or
reflected the property’s value at the time of the breach, the evidence is likewise insufficient to
support the trial court’s award of nearly $16,000 that was subsumed into the later contract’s terms.
The Jacksons did, however, establish that they were entitled to recover the earnest
money they lost when they had to break their contract for the house on Pebble Garden Court, as well
as the option fee and inspection costs. Although Barry insists that the full measure of damages
should be limited only to the difference in market value and contract price, the Jacksons presented
ample evidence that they entered into the Pebble Garden contract due to Barry’s signing of the
contract and that they were forced to break the contract, losing $3,889 in inspection fees, option fees,
and earnest money, when Barry informed them that he was breaching his contract too late for them
10
to cancel the Pebble Garden contract without penalty. See Mood v. Kronos Prods., Inc., 245 S.W.3d
8, 12 (Tex. App.—Dallas 2007, pet. denied) (“measure of damages for breach of contract is that
which restores the injured party to the economic position he would have enjoyed if the contract had
been performed” and may include foreseeable consequential damages that can be traced to breach).10
We reverse the trial court’s judgment and render judgment that the Jacksons are
entitled to recover $3,889 in damages for Barry’s breach of contract. Because we have significantly
recalculated the damages award, we remand the cause to the trial court for recalculation of attorney’s
fees. See Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 818 (Tex. 1997)
(providing factors to consider in calculating contingent attorney’s fees).
__________________________________________
David Puryear, Justice
Before Justices Patterson, Puryear and Pemberton;
Concurring and Dissenting Opinion by Justice Patterson
Reversed and Rendered in part, Reversed and Remanded in part
Filed: January 15, 2010
10
Barry argues that the measure of damages following a breach of a real estate contract are
limited solely to the difference in contract price and market value at the time of breach, citing
Kempner, 65 Tex. at 591. That measure, however, explains how courts should determine basic
damages for breach of a real-estate contract. It does not bar litigants from seeking foreseeable
consequential damages that can be traced to the breach. See Mood v. Kronos Prods., Inc.,
245 S.W.3d 8, 12 (Tex. App.—Dallas 2007, pet. denied).
11