In re Brown, Bankruptcy No. 04-10703.

Decision Date14 March 2005
Docket NumberBankruptcy No. 04-10703.,Adversary No. 04-1066.,Bankruptcy No. 04-10706.,Adversary No. 04-1067.,Adversary No. 04-1065.,Bankruptcy No. 04-10709.
Citation325 B.R. 169
PartiesIn re Robert Arlin BROWN, Debtor. Claude C. Lightfoot, Jr., Plaintiff, v. Jon M. Huffman, Defendant. In re William Robert Memmott, Debtor. Claude C. Lightfoot, Jr., Plaintiff, v. Jon M. Huffman, Defendant. In re Kevin John Allison, Debtor. Barbara Rivera Fulton, Plaintiff, v. Jon M. Huffman, Defendant.
CourtU.S. Bankruptcy Court — Eastern District of Louisiana

Timothy Triffiley, Pivach, Pivach, Hufft & Triffiley, LLC, Belle Chasse, LA, for the Debtor.

Paul Douglas Stewart, Jr., Stewart, Hood & Robbins LLC, Baton Rouge, LA, for the trustees.

MEMORANDUM OPINION

JERRY A. BROWN, Chief Judge.

This matter came on for trial on October 4, 2004 on the complaints of Claude C. Lightfoot, Trustee and Barbara Rivera-Fulton, Trustee (hereinafter collectively referred to as the "trustees") to recover estate property under 11 USC §§ 541, 544, 548 and Louisiana Civil Code 2036, et seq. and objections to the proofs of claim filed by Jon M. Huffman ("Huffman"). The defendant, Huffman, has answered each complaint with a general denial, pleaded several affirmative defenses and contends that the estate owes him $47,817.59. The adversary proceedings were consolidated by order of April 6, 2004.

For the reasons stated below, the court will enter a judgment for the trustees and against Mr. Huffman in the amount of $93,809.29, and disallow the claims filed by Mr. Huffman in each of the above-captioned bankruptcy proceedings.

I. Background

On February 4, 2004, Robert Arlin Brown, William Robert Memmott, and Kevin John Allison (hereinafter the debtors) each filed for Chapter 7 bankruptcy after they were unable to meet their obligations under a bond for deed contract to acquire a bed and breakfast owned by Huffman.

Initially, the debtors intended to buy the property outright for $700,000, but were unable to obtain the requisite funding. The lack of funding combined with a "due on sale" clause in the mortgage encumbering the property led the parties to enter into a bond for deed contract, executed on or about July 10, 2003. The contract provided that the debtors would 1) offer a down payment of $140,000,1 2) pay $5,679.89 per month for approximately three years to Escrow Services, Inc.2 (hereinafter the "escrow agent"), and 3) pay a balloon payment of $497,161.73 or the amount remaining on the balance as of September 1, 2006. The contract stated that upon the debtors' default, Huffman had the right to cancel the contract and repossess the property after providing notice of such intent 45 days in advance. Default was defined in the contract as non-payment of insurance, taxes, or the monies owed to the escrow agent.

To fix portions of the property that were damaged, Huffman gave the debtors a $4,000 repair credit.3 In addition, Huffman advanced $5,576 of prepaid room rentals to the debtors so that they could honor reservations at this New Orleans bed and breakfast. The parties have stipulated that after deduction of costs of sale paid by the defendant, Huffman received a total of $105,886.48 in cash at the closing.4

During the period in which the debtors adhered to the terms of the contract they paid sums to satisfy the insurance bill for the property. These sums totaled $5,797.10 for the insurance coverage.

Huffman paid taxes, insurance, and the mortgage on the property, even though these were contractual obligations of the debtors, both before and after the debtors' default. These payments amounted to $1,635.60 for insurance, $11,510 for the mortgage, and $12,026.48 for the property taxes. The total of these payments was $25,172.01.

The debtors made two payments to the escrow agent in August and November 2003, totaling $11,409.78, and then defaulted on the two payments falling due in December 2003 and January 2004. In a letter dated December 15, 2003, the escrow agent informed the debtors of Huffman's intention to cancel the contract and repossess the property if the debtors did not cure the default within 45 days. Because the debtors were unable to cure their default, Huffman filed a Cancellation of Bond for Deed and Special Mortgage in the public records on February 3, 2004. The debtors filed for Chapter 7 relief on February 3, 2004 and did not vacate the property until they were evicted on March 17, 2004, after the automatic stay was lifted.

When Huffman re-entered the property, he found damage caused by the debtors. According to Huffman the debtors allowed certain portions of the property to rot, removed sections of the weather board, cut a hole in the ceiling of the rear stair case, and broke the controls to a spa. Huffman spent $1,938.66 to repair the damage in order to return the property to its former state. In addition, Huffman claims that the debtors purloined $11,385.105 of prepaid room receipts.

Huffman eventually re-sold the property to Philip Lege and David Smith for $650,000. This price is a $50,000 less than the $700,000 initially agreed upon by Huffman and the debtors.

The trustee asserts that, under the Louisiana jurisprudence governing bond for deed contracts, Huffman is liable for the return of all moneys paid by the debtor under the Bond for Deed, subject to a credit for the reasonable rental value of the property. Alternatively, the trustee asserts that the sums paid by the debtor to Huffman are subject to avoidance under § 544 or as a fraudulent conveyance under § 548 and/or Louisiana Code art. 2036. The trustee additionally asserts that the proofs of claim filed by Huffman in the bankruptcy cases should be disallowed in their entirety.6

Huffman's answer contains a general denial and several affirmative defenses, including that, under Louisiana law, he is entitled to retain all funds received by him at the closing of the Bond for Deed, that the trustees are not entitled to recover funds paid by third parties for the properties, and that he is entitled to an offset or to recoup lost profits, lost revenues, lost income, lost sales opportunity, real estate commissions, note payments, rental income and the fair rental value of the property.

II. Law and Analysis

The parties stipulated that the debtors paid a total of $164,061.75 towards the bond for deed contract, including the down payment, mortgage and insurance.7 In addition, the parties have stipulated to both a fair market rental value of $35,0008 and $1,938.66 in repair costs for damage to the property during the debtors' occupancy. The rental value and the costs of the repairs were deducted from the total amount paid by the debtors in the bond for deed contract leaving $127,123.09 in contention.

Huffman argues that the debtors' estate owes him at least $8,081, after liability to the plaintiffs is reduced by his damages.9 He arrived at this number by deducting claims for lost profit, recoupment, and reimbursement for the tax, mortgage, and insurance payments from the $164,061.75 the parties have stipulated they initially paid for the property, as follows:

                                                       Amount of the trustee's
                                                       claim ($164,061.75
                Huffman's Claim         Amount         stipulated paid value)
                ---------------------------------------------------------------
                Fair Rental Value
                  (Stipulated)          $35,000        $129,061.09
                ---------------------------------------------------------------
                Property Damage
                  (Stipulated)         $1,938.66       $127,123.09
                ---------------------------------------------------------------
                Fair Rental Value
                  post petition        $8,649.45       $118,473.64
                ---------------------------------------------------------------
                Lost Profit             $50,000        $ 68,473.64
                ---------------------------------------------------------------
                Second Sale
                  Transaction
                  Costs                 $28,807        $ 39,666.64
                ---------------------------------------------------------------
                Prepaid Room
                  Deposits
                  Recoupment            $18,576        $ 21,090.64
                ---------------------------------------------------------------
                Repair Credit            $4,000        $ 17,090.64
                ---------------------------------------------------------------
                Taxes, Insurance
                  and Mortgage          $25,172       ($  8,081.36) due Huffman
                ---------------------------------------------------------------
                

The trustee asserts that he is due $127,123.09 by Huffman. This figure is composed of the total sums that the debtors paid under the bond for deed contract less the fair rental value for the property and the cost of repairs. In response to Huffman's assertions regarding the lost profit claim, the trustee argues that this is not an appropriate form of compensation for a breached bond for deed contract. Instead, the trustee asks that the court allow only the fair rental value and the repair costs to Huffman as recompense for the debtors' breaches. Additionally, the trustee argues that the repair credit claim is invalid because Huffman never actually paid this sum to the debtors. Finally, the trustee contends that the recoupment claims pleaded by Huffman are unrecoverable.

The parties' disagreement can be trifurcated into 1) remedies for the debtor's breach of the bond for deed contract, 2) availability of recoupment for the prepaid room deposits, and 3) amount of rent attributable to the time between the debtors' bankruptcy petitions and their eviction from the property.

1. Remedies for Breach of a Bond for Deed Contract

The bond for deed contract is the Louisiana version of the common law conditional sale.10 Louisiana law defines the bond for deed contract as "... a contract to sell real property, in which the purchase price is to be paid by the buyer in installments and in which the seller after payment of a stipulated sum agrees to deliver title to the buyer."11 There is little jurisprudence in Louisiana on the appropriate...

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