Lenamon et al v. Morris Family Trust Partnership

Filing 21

Memorandum Opinion and Order: For the foregoing reasons, the appeal is DENIED and the bankruptcy court's oral ruling and final judgment are hereby AFFIRMED. (Ordered by Judge Reed C. O'Connor on 8/15/2018) (skg)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS
FORT WORTH DIVISION
JOEL E. LENAMON,

Appellant,
v.
MORRIS FAMILY TRUST
PARTNERSHIP,
Appellee.

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Civil Action No. 4:17-cv-00958-O

MEMORANDUM OPINION AND ORDER
Before the Court are Appellant Joel E. Lenamon’s (the “Appellant”)1 Brief (ECF No. 11),
filed May 3, 2018; Appellee Morris Family Trust Partnership’s (the “Appellee”) Brief (ECF No.
15), filed June 15, 2018; and Appellant’s Reply (ECF No. 16), filed June 28, 2018. This action is
an appeal from of an order of the United States Bankruptcy Court for the Northern District of
Texas, Fort Worth Division. After considering the motion, briefing, the record on appeal, and
relevant law, the Court DENIES the appeal and holds that the bankruptcy court’s order should be
and is hereby AFFIRMED.
I.

JURISDICTION
This appeal arises from the bankruptcy court’s November 17, 2017 Order on Judgment on

Remand. The bankruptcy court found that Appellee was entitled to out-of-pocket damages and
these damages were nondischargeable in bankruptcy. The bankruptcy court awarded damages in

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Joel Lenamon passed away soon after filing this appeal as a pro se litigant. See Notice of Death, ECF No.
5. The Probate Estate of Joel Lenamon was substituted as the appropriate party. See April 4, 2018 Order,
ECF No. 9 (granting motion to substitute party). The Court will refer to Appellant as Lenamon or Appellant
throughout this Order.
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the amount of $333,807.31. Appellant Reply (J. Remand) [hereinafter “J. Remand”], ECF No. 164. This Court exercises jurisdiction pursuant to 28 U.S.C. § 158(a).
II.

UNDERLYING PROCEEDINGS
Appellant filed a Chapter 7 bankruptcy proceeding on September 18, 2013. On December

23, 2013, Appellee initiated an adversary proceeding against Appellant, alleging that Appellant
tricked it into investing in a real estate partnership that eventually failed. Appellee claimed
damages equal to its investment. On June 26, 2015, the bankruptcy court found that Appellant
defrauded Appellee and awarded Appellee $333,807.31—the amount of the original investment.
Appellant appealed that decision to the district court on July 29, 2015, alleging two grounds
for appeal: (1) the legal standard used to calculate damages was inappropriate; and (2) the evidence
to prove damages was insufficient. On March 1, 2016, the district court vacated and remanded the
case back to the bankruptcy court, stating that while the evidence supported the finding of fraud,
it could not review the damage award because the bankruptcy court did not specify the theory it
used to calculate damages under state law. Mar. 1, 2016 Order 1, Lenamon v. Morris Family
P’ship, No. 4:15-cv-00570-Y, (N.D. Tex. Mar. 1, 2016), ECF No. 13.
On March 25, 2016, Appellant appealed the district court’s order to the Fifth Circuit,
arguing the district court’s order allowed the bankruptcy court conduct an additional evidentiary
hearing and open the case to new evidence. The Fifth Circuit dismissed the appeal, finding it did
not have jurisdiction because the district court’s order was interlocutory, requiring further
proceedings in the bankruptcy court. On May 18, 2017, the bankruptcy court conducted an
additional hearing where neither party offered new evidence. The bankruptcy court stated that it
did not have the liberty to revisit the issue of whether Appellee was damaged, rather its only job
was to “articulate the theory of damages and the calculation of those damages.” Appellant Reply

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(H’rg Remand) [hereinafter “H’rg Remand”] 9, ECF No. 16-5. The bankruptcy court issued its
order on November 17, 2017, finding that Appellee was entitled to damages based on an out-ofpocket damage theory and that these damages were nondischargeable under § 523(a)(6). The
bankruptcy court did not revisit the amount of damages. On November 30, 2017, Appellant filed
a pro se notice of appeal. Appellant passed away soon after. Because of his passing, Appellant’s
probate estate was substituted as Appellant on April 4, 2018.2 Appellant brings this appeal,
challenging the November 17, 2017 judgment on remand from the bankruptcy court.
III.

ISSUES ON APPEAL
The two issues Appellant presents on appeal are:
1. Did the bankruptcy court err in finding 11 U.S.C. § 523(a)(6) constituted an
additional cause of action?
2. Did the bankruptcy court err in finding that the record supported a $333,807.31
damage award against Appellant on an out-of-pocket damages theory?

Appellant’s Br. 9, ECF No. 11.
IV.

STANDARD OF REVIEW
When a district court reviews a bankruptcy court’s decision, it functions as an appellate

court and utilizes the same standard of review generally applied by a federal court of appeals. In
re Webb, 954 F.2d 1102, 1104 (5th Cir. 1992). In reviewing conclusions of law on appeal, a de
novo standard of review is applied. In re Young, 995 F.2d 547, 548 (5th Cir. 1993); In re Allison,
960 F.2d 481, 483 (5th Cir. 1992). A bankruptcy court’s findings of fact are subject to the clearly
erroneous standard of review. Young, 995 F.2d at 548; Allison, 960 F.2d at 483. These findings are

For convenience, the Court refers to both Lenamon and Lenamon’s probate estate as “Appellant” in this
Order.
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reversed only if, based on the entire body of evidence, the court is left “with the definite and firm
conviction that a mistake has been made.” Id.
V.

ANALYSIS
Before the Court addresses the issues on appeal, it must address whether Appellant waived

its right to appeal by filing an improper Notice of Appeal. Appellee claims that Appellant waived
the issues on appeal because it failed to designate them in his notice of appeal. Appellee Br. 5,
ECF No. 15. Appellant responds that it was initially operating pro se when Mr. Lenamon filed the
notice of appeal and then he passed away days after, and now requests permission to file a belated
Statement of Issues on Appeal under Federal Rule of Civil Procedure 6(b)(1), which allows for
extension of time due to excusable neglect. Appellant Br. 2, 3, ECF No. 16; Mot. Supplement Rec.,
ECF No. 17. After Appellant passed away, see Notice of Death, ECF No. 5, the Court substituted
Appellant’s probate estate as a party on April 4, 2018, at which time the record had already been
transmitted to the district court. See April 4, 2018 Order, ECF No. 9. The Court finds that this
constitutes excusable neglect under Rule 6(b)(1). Therefore, the motion to supplement the record
is GRANTED and the Court now considers the two questions on appeal.
A.

Damages from Willful Misconduct under 11 U.S.C. § 523

Appellant argues that the bankruptcy court incorrectly calculated fraud damages under the
state law out-of-pocket damage theory and also erroneously found damages against it under willful
misconduct based upon a nondischargeability provision in 11 U.S.C. § 523. Appellant Br. 10, ECF
No. 11. In its brief, Appellant argues that Appellee neither pled nor argued this issue, did not prove
it at trial, and that the bankruptcy court simply created a new and independent federal tort. Id.
Appellee responds that its live pleading at trial included an argument that the debt should not be
discharged under 11 U.S.C. § 523(a)(6). Appellee Br. 5, ECF No. 15.

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First, it is clear that Appellee’s live pleadings presented a claim for nondischargeability
under § 523(a)(6) for willful and malicious conduct. Compl. 1, Lenamon v. Morris, No. 13-04140rfn (N.D. Tex. Bankr. Dec. 23, 2013), ECF No. 1. The resolution of this issue appeared in the
bankruptcy court’s oral and written judgments on June 8, 2015 and June 26, 2015. See Tr. J. at 3,
Lenamon v. Morris, No. 13-04140-rfn (N.D. Tex. Bankr. May 19, 2015), ECF No. 74; June 26,
2015 J. 3, Lenamon v. Morris, No. 13-04140-rfn (N.D. Tex. Bankr. June 26, 2015), ECF No. 75.
Second, in his findings, the bankruptcy judge considered the amount of damages
nondischargeable under § 523(a)(6). The bankruptcy judge asked if “willful and malicious injury
under § 523(a)(6) is a standalone cause of action or whether it is just a provision that depends upon
the existence of an independent cause of action and that merely provides the elements for
nondischargeability of the damages that arise from that independent cause of action.” Appellant
Reply, Ex. 4 (Oral J.) 8, ECF No. 16-4. In the Fifth Circuit’s decision in Williams v. Int’l
Brotherhood of Elec. Workers, it found that a claim for nondischargeability under § 523(a)(6)
constituted a narrower category of tortious conduct than intentional torts. 337 F.3d 504, 509 (5th
Cir. 2003). In order to find a debt nondischargeable under § 523(a)(6), there must be a finding of
“an intentional or substantially certain injury.” Id.
The bankruptcy court engaged in this examination to determine the amount of damages
that are nondischargeable in bankruptcy. It utilized the Fifth Circuit’s measurement of damages in
In re Modicue, which held that the calculation for nondischargeable damages under § 523(a)(6) as
the value of the property that is lost. 926 F.2d 452, 455 (5th Cir. 1991). The bankruptcy court
concluded that “Defendant violated both § 523(a)(2) and § 523(a)(6). The Plaintiff was damaged
in the amount of at least $333,807.31. And that amount is nondischargeable.” Appellant Reply,
Ex. 4 (Oral J.) 11, ECF No. 16-4.

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Rather than going beyond the scope of the Order to Remand, the bankruptcy court
articulated the theory used to calculate damages. It then proceeded to determine what amount of
those damages were nondischargeable under § 523(a)(6). The bankruptcy court did not add an
additional injury finding as Appellant claims here. Instead, in light of Fifth Circuit precedent, and
the order of remand, the bankruptcy court clarified the standards it used to determine damages and
identify the amount that is nondischargeable under § 523(a)(6). See Tr. J. 5–6, Lenamon v. Morris,
No. 13-04140-rfn (N.D. Tex. Bankr. Oct. 5, 2017), ECF No. 130; see also Williams, 337 F.3d at
510. This clarification was not error and did not change the damages amount against the Appellant.
Appellant’s objection to this issue is DENIED and the bankruptcy court is AFFIRMED.
B.

Support for the Finding of Damages

Appellant also argues that the bankruptcy court incorrectly found that the record supported
the amount of damages under the out-of-pocket theory. Appellant Br. 11, ECF No. 11. Appellee
responds that the bankruptcy court adequately supported its reasoning and findings. Appellee Br.
6, ECF No. 15.
First, on a previous appeal, the district court found that “the bankruptcy court had a
sufficient evidentiary basis for its factual findings regarding fraud.” Lenamon v. Morris Family
P’ship, No. 4:15-cv-570-Y, 1, ECF No. 13. This Court does not revisit that decision. Lyons v
Fisher, 888 F.2d 1071, 1074 (5th Cir. 1989) (the “law of the case” doctrine provides that “a
decision of a factual or legal issue by an appellate court establishes the ‘law of the case’ and must
be followed in all subsequent proceedings.”).
The bankruptcy court found that the out-of-pocket damage theory was the appropriate
measure of damages. J. Remand, 3, ECF No. 16-4. This is a state law theory of damages, articulated
in Formosa Plastics Corp., USA v. Kajima Int’l, Inc. 216 S.W.3d 436, 458 (Tex. App.—Corpus

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Christi 2006). “Out-of-pocket damages compensate a defrauded party for the difference between
the value of that with which he or she has parted and the value actually received.” Id. The
bankruptcy court found that Appellee parted with at least $333,807.31, and in its judgment the
bankruptcy court found that Appellee received nothing in return. J. Remand, 6, ECF No. 16-4.
Appellant objects that Appellee did not prove the value of the consideration it received, and
therefore, the out-of-pocket theory of damages does not support the damage award. Appellant Br.
12, ECF No. 11.
While Appellant relies on Arthur Anderson, the court in Formosa explained that Arthur
Anderson applied only to the purchase and sale of a business rather than to fraud damages. See
Formosa, 216 S.W.3d at 458 (citing Arthur Anderson & Co. v. Perry Equip. Corp., 945 S.W.2d
812, 817 (Tex. 2005)). The only question for this Court to decide is whether the bankruptcy court
committed error when it applied the out-of-pocket damages theory to this case. The bankruptcy
court found that Appellant never intended to convey to Appellee any interest in the partnership,
and therefore Appellee never received anything in exchange for its contribution. J. Remand 5, ECF
No. 16-4. The difference between the value of that with which Appellee parted, and the value
actually received, was the full contribution—$333,807.31. Accordingly, Appellant’s second
objection is DENIED and the bankruptcy court’s judgment is AFFIRMED.
VI.

CONCLUSION
For the foregoing reasons, the appeal is DENIED and the bankruptcy court’s oral ruling

and final judgment are hereby AFFIRMED.
SO ORDERED on this 15th day of August, 2018.

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Reed O’Connor
UNITED STATES DISTRICT JUDGE
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