In re: Erik Samuel De Jong and Daryl Lynn De Jong
AZ-16-1337-JuLB
| 9th Cir. BAP | Jun 2, 2017Background
- Debtors (Erik and Daryl de Jong) operated Valkyrie Dairy on property (Dairy I) leased from chapter 11 debtor Sonora Desert; Sonora’s bankruptcy order approved a March 1, 2012 lease but subordinated it to prior deeds of trust.
- JLE purchased the dairy properties at a nonjudicial trustee’s sale on December 6, 2013, which under Arizona law extinguished Debtors’ leasehold interest. Debtors remained on the property and continued operations.
- JLE served notices demanding possession, filed a forcible entry and detainer (FED) action in state court, won possession, and later sold Dairy I. Debtors filed chapter 11 on January 23, 2014.
- JLE filed a proof of claim (POC) asserting prepetition damages (including disgorgement) and later an administrative claim for postpetition damages; bankruptcy court found Debtors were conscious trespassers and awarded disgorgement-based damages (prepetition and postpetition amounts).
- On appeal, the BAP affirmed liability for pre- and postpetition trespass and the finding of conscious trespass, but vacated and remanded the postpetition damages calculation for double-counting (silage treated both as expense and separate benefit).
Issues
| Issue | Plaintiff's Argument (JLE) | Defendant's Argument (Debtors) | Held |
|---|---|---|---|
| Whether state FED ruling precludes relitigation of trespass (issue preclusion) | State court’s finding that Debtors had no right to possession establishes trespass preclusively | FED labeled Debtors "tenants at sufferance," so only rent is recoverable; trespass not litigated | BAP: issue preclusion proper for possession; FED’s limited scope doesn’t bar separate trespass damages action; preclusion applies to unauthorized possession question |
| Whether Debtors were trespassers (independently) | JLE: trustee’s sale extinguished lease; Debtors’ continued presence was unauthorized trespass | Debtors: lease approval and bankruptcy orders authorized occupancy; not trespassers | BAP: independent summary-judgment finding correct—trustee’s sale terminated rights; Debtors were trespassers pre- and postpetition |
| Whether Debtors were "conscious" trespassers (state of mind) | JLE: Debtors knew rights were terminated and continued to occupy to benefit | Debtors: claimed reliance on lease/permissions; bankruptcy court’s temporary scheduling protected them | Held: factual finding of conscious trespass not clearly erroneous—record shows knowledge and continued use |
| Proper measure and calculation of damages for trespass | JLE: restitution/disgorgement of Debtors’ profits (pre- and postpetition) and other components | Debtors: recovery limited to fair market rental; bankruptcy court miscalculated/postpetition double-counted silage | Held: restitution/disgorgement is an available remedy under Arizona law; but bankruptcy court erred in postpetition calculation by double-counting silage (silage is an operating expense), so remand for corrected computation |
Key Cases Cited
- Reading Co. v. Brown, 391 U.S. 471 (U.S. 1968) (administrative priority principles cited for postpetition tort-based claims)
- State ex rel. Purcell v. Superior Court, 535 P.2d 1299 (Ariz. 1975) (unauthorized physical presence constitutes trespass)
- Heywood v. Ziol, 372 P.2d 200 (Ariz. 1962) (FED actions are summary proceedings determining right to actual possession only)
- Murdock-Bryant Construction, Inc. v. Pearson, 703 P.2d 1197 (Ariz. 1985) (Arizona recognizes flexible restitutionary remedies in appropriate circumstances)
- Anderson v. Bureau of Indian Affairs, 764 F.2d 1344 (9th Cir. 1985) (lessor not strictly limited to rent; disgorgement or other relief may be appropriate where lessee knowingly continued after lease termination)