IN THE SUPREME COURT OF TEXAS
444444444444
NO . 12-0539
444444444444
KEVIN T. MORTON, PETITIONER,
v.
HUNG NGUYEN AND CAROL S. NGUYEN, RESPONDENTS
4444444444444444444444444444444444444444444444444444
ON PETITION FOR REVIEW FROM THE
COURT OF APPEALS FOR THE FOURTEENTH DISTRICT OF TEXAS
4444444444444444444444444444444444444444444444444444
JUSTICE GREEN delivered the opinion of the Court, in which CHIEF JUSTICE JEFFERSON ,
JUSTICE HECHT , JUSTICE JOHNSON , JUSTICE GUZMAN , and JUSTICE DEVINE joined.
JUSTICE BOYD filed a concurring and dissenting opinion, in which JUSTICE WILLETT and
JUSTICE LEHRMANN joined.
Chapter 5, Subchapter D of the Texas Property Code imposes various conditions and
disclosure requirements on sellers entering into contracts for deed—also known as “executory
contracts for the conveyance of real property.” See TEX . PROP . CODE §§ 5.061–.085. A seller’s
failure to comply with Subchapter D’s requirements entitles a buyer to “cancel and rescind” a
contract for deed and “receive a full refund of all payments made to the seller.” E.g., id.
§ 5.069(d)(2). The primary issue in this case is whether a buyer who exercised the statutory right
to cancel and rescind a contract for deed must restore to the seller all benefits the buyer received
under the contract. We hold that Subchapter D’s cancellation-and-rescission remedy contemplates
mutual restitution of benefits among the parties. Thus, we conclude that the buyers here must restore
to the seller supplemental enrichment in the form of rent for the buyers’ interim occupation of the
property upon cancellation and rescission of the contract for deed. We reverse the court of appeals’
judgment, in part, and remand the case to the trial court for proceedings consistent with this opinion.
I. Background
In January 2007, Kevin Morton, as seller, and Hung and Carol Nguyen, as buyers, entered
into a contract for deed. The contract required the Nguyens to make a $5,000 down payment and
monthly installments of $1,533.90 for approximately thirty-five years before obtaining the deed. The
contract provided for an initial interest rate of 8.875%. After five years, the interest rate was set to
escalate yearly by 1% until it reached 12.875%. The transaction was purportedly structured to
encourage the Nguyens to seek out a new financing arrangement in a few years after rebuilding their
credit. The Nguyens also agreed to pay for homeowners’ insurance, property taxes, and
homeowners’ association fees. The Nguyens made payments for almost three years. During this
time, Morton sent the Nguyens an annual statement that reported the amount of interest paid each
year and the balance remaining under the contract. However, Morton did not provide the Nguyens
with all of the information in the annual statement required by section 5.077 of the Property Code.
See TEX . PROP . CODE § 5.077(b) (providing that the annual statement must include, inter alia, the
amount paid under the contract and the number of payments remaining under the contract).
In November 2009, the Nguyens notified Morton that they were exercising their statutory
right to cancel and rescind the contract for deed. The Nguyens demanded return of all thirty-four
monthly payments, the down payment, and the taxes and insurance premiums they paid during the
2
contract’s term. Morton ordered the Nguyens out of the house and allegedly began to harass the
Nguyens by demanding payments under the contract and demanding that they immediately vacate
the property. Morton then sued the Nguyens for breach of contract. The Nguyens counterclaimed,
seeking monetary damages, rescission, and statutory damages due to alleged violations under the
Property Code, the Finance Code, and the Deceptive Trade Practices Act (DTPA). Morton asserted
various affirmative defenses to the Nguyens’ counterclaims and alleged that he was entitled to a
setoff in the amount of the fair market rental value of the property for the time the Nguyens occupied
the house.
Following a bench trial, the trial court found that Morton failed to comply with various
sections of Subchapter D pertaining to disclosures in contract-for-deed transactions. As a matter of
law, the trial court found that Morton’s good-faith defense based on Flores v. Millennium Interests,
Ltd., 185 S.W.3d 427 (Tex. 2005), did not apply to the Nguyens’ counterclaim for liquidated
damages under section 5.077 of the Property Code. The trial court rendered judgment in favor of
the Nguyens, awarding the Nguyens the following: (1) $63,693.47 in actual damages—which
included all payments the Nguyens made under the contract for deed, their down payment, insurance
payments, tax payments, and the value of improvements—for cancellation and rescission of the
contract for deed under Subchapter D; (2) $160,000 as liquidated damages for violation of section
5.077 of the Property Code; (3) $300 as the statutory remedy for Finance Code violations;
(4) $10,000 for mental anguish damages; (5) $67,020 in attorney’s fees; and (6) $696.74 in costs.
Both parties appealed.
3
The court of appeals reversed the trial court’s judgment on liability for the statutory penalty
under section 5.077 of the Property Code and remanded that issue to the trial court to determine
whether Morton made a “good faith attempt to inform [the Nguyens] of the current status of their
contractual relationship,” as laid out in Flores. 369 S.W.3d 659, 668–69 (Tex. App.—Houston [14th
Dist.] 2012) (quoting Flores, 185 S.W.3d at 443). The court of appeals also reversed the $300
awarded for Finance Code violations because the trial court’s findings of fact did not support the
award. Id. at 676. Finally, the court of appeals affirmed the portion of the trial court’s judgment
awarding the Nguyens rescission and restitution under the Property Code, attorney’s fees, and mental
anguish damages. Id. at 674, 677. Only Morton petitioned this Court for review, arguing that the
court of appeals erred by (1) denying him mutual restitution upon cancelling and rescinding the
contract for deed, and (2) affirming the awards of attorney’s fees and mental anguish damages after
reversing the only claims that could support such awards. The Nguyens do not challenge the court
of appeals’ judgment related to the section 5.077 claim or the claim for damages under the Finance
Code, so we do not address them. We address the challenged issues in turn.
II. Subchapter D’s Cancellation-and-Rescission Remedy
We begin by noting that the court of appeals erred by holding that Morton waived the issue
as to whether Subchapter D’s cancellation-and-rescission remedy incorporates the common law
requirement of mutual restitution. Morton’s briefing at the court of appeals was sufficient under
Rule 38.1(i) of the Texas Rules of Appellate Procedure to warrant consideration of the issue. See
TEX . R. APP . P. 38.1(i); see also Republic Underwriters Ins. Co. v. Mex-Tex, Inc., 150 S.W.3d 423,
427 (Tex. 2004) (“[W]e have instructed the courts of appeals to construe the Rules of Appellate
4
Procedure reasonably, yet liberally, so that the right to appeal is not lost by imposing requirements
not absolutely necessary to effect the purpose of a rule.” (quoting Verburgt v. Dorner, 959 S.W.2d
615, 616–17 (Tex. 1997))). Morton argued in his opening brief that if the Nguyens were entitled to
rescission and restitution, then he was entitled to a setoff for the value the Nguyens received for their
occupancy of the house. He provided citations to three cases that discussed recovery of the value
of the use and occupation of land upon rescission. Morton also addressed the issue more thoroughly
and cited to additional authority in his reply brief. Finally, as Morton pointed out in his motion for
rehearing, he did not have the benefit of this Court’s decision in Cruz v. Andrews Restoration, Inc.,
364 S.W.3d 817 (Tex. 2012), at the time he filed his briefs in the court of appeals. The court of
appeals had the opportunity to review Cruz and did so in reference to the common law restitution
requirements of notice and tender. 369 S.W.3d at 671 (citing Cruz, 364 S.W.3d at 825–27). The
court of appeals should have also addressed the issue here related to mutual restitution. Rather than
remanding to the court of appeals to address Morton’s issue, we address this issue in light of our
decision in Cruz.
A contract for deed, unlike a typical secured transaction involving a deed of trust, is a
financing arrangement that allows the seller to maintain title to the property until the buyer has paid
for the property in full. See Flores, 185 S.W.3d at 429. Under Subchapter D, real estate transactions
involving contracts for deed require the seller to make certain disclosures and provide certain
notices. See, e.g., TEX . PROP . CODE §§ 5.069, .070, .072, .085. Various sections in Subchapter D
entitle a buyer to “cancel and rescind” the contract for deed and “receive a full refund of all payments
made to the seller” if the seller fails to comply with the disclosure and notice requirements. See, e.g.,
5
id. §§ 5.069(d), .070(b), .072(e). For instance, if the seller fails to comply with disclosure
requirements related to property that is encumbered by an existing lien, then the buyer can “cancel
and rescind” the contract for deed and receive from the seller “all payments of any kind made to the
seller under the contract” and reimbursement for (1) taxes paid by the buyer, and (2) the value of any
improvements made to the property by the buyer. Id. § 5.085(c)(2).
Morton argues that Subchapter D’s cancellation-and-rescission remedy incorporates the
common law principle of mutual restitution, which requires buyers under a contract for deed to
restore the benefits they received under the rescinded contract. The Nguyens, on the other hand,
argue that the Legislature did not intend to codify in Subchapter D the common law principle of the
equitable remedy of rescission. We addressed a similar issue within the context of the DTPA in
Cruz, and our analysis in that case instructs the issue presented here. See Cruz, 364 S.W.3d at at
824–26.
In Cruz, a consumer sought the remedy of “restoration” under section 17.50 of the Business
and Commerce Code for alleged DTPA violations. Id. at 823. Subsection 17.50(b)(3) provides that
a consumer may obtain “orders necessary to restore to any party to the suit any money or property,
real or personal, which may have been acquired in violation of this subchapter.” TEX . BUS. & COM .
CODE § 17.50(b)(3). The consumer argued that section 17.50’s restoration remedy did not
incorporate the common law principle of rescission, which necessarily includes mutual restitution.
See Cruz, 364 S.W.3d at 825. Therefore, the consumer averred, he was entitled to all the money paid
by him (or on his behalf) under the agreement, without surrendering any benefits that he had
received—even though such an approach would give the consumer a windfall. Id. at 823, 826. We
6
disagreed with the consumer’s position, in part, holding that section 17.50’s restoration remedy
contemplates mutual restitution, but not the wholesale adoption of all the common law rescission
requirements. Id. at 826. We reach the same conclusion in this case.
Our analysis begins with Subchapter D’s text, which provides that a buyer’s remedy for the
seller’s noncompliance with certain disclosure requirements is “to cancel and rescind the executory
contract and receive a full refund of all payments made to the seller.” See TEX . PROP . CODE
§§ 5.069(d)(2), .070(b)(2), .072(e)(2), .085(c)(2). As we recognized in Cruz, rescission is the
common name for the composite remedy of rescission and restitution. Cruz, 364 S.W.3d at 825
(citing RESTATEMENT (THIRD ) OF RESTITUTION AND UNJUST ENRICHMENT § 54 cmt. a (2011)); see
also BLACK’S LAW DICTIONARY 1420–21 (9th ed. 2009) (providing that “rescission” is “[a] party’s
unilateral unmaking of a contract for a legally sufficient reason . . . generally available as a remedy
. . . and is accompanied by restitution of any partial performance, thus restoring the parties to their
precontractual positions”). It is a term that requires each party to “restore[] property received from
the other,” or in other words, mutual restitution. Cruz, 364 S.W.3d at 825–26. In line with Cruz,
we conclude that the Legislature intended Subchapter D’s cancellation-and-rescission remedy to also
contemplate the common law element of mutual restitution.
The Nguyens and the dissent argue that the statutory scheme in Subchapter D compels a
different result than that reached in Cruz. We disagree. Like the DTPA’s restoration remedy,
Subchapter D’s cancellation-and-rescission remedy is not intended to be punitive—it merely
7
provides the buyer the option of unwinding the transaction.1 See Cruz, 364 S.W.3d at 826. Allowing
a buyer to recover all benefits bestowed upon the seller upon rescission without also requiring the
buyer to surrender the benefits that he received under the contract would result in a windfall
inconsistent with the general nature of Subchapter D’s cancellation-and-rescission remedy. See id.
at 825–26. “[R]escission is not a one-way street.” Id. at 825. Rather, as we explained in Cruz,
“[recission] requires a mutual restoration and accounting, in which each party restores property
received from the other.” Id. at 825–26 (citing RESTATEMENT (THIRD ) OF RESTITUTION AND UNJUST
ENRICHMENT § 37 cmt. d (2011)). A seller’s wrongdoing does not excuse the buyers from counter-
restitution under the circumstances of this case. See id. at 826. But here, as in Cruz, we similarly
hold that notice and restitution or a tender of restitution are not prerequisites to the cancellation-and-
rescission remedy under Subchapter D, as long as the affirmative relief to the buyer can be reduced
by (or made subject to) the buyer’s reciprocal obligation of restitution. See id. at 827 (citing
RESTATEMENT (THIRD ) OF RESTITUTION AND UNJUST ENRICHMENT § 54(5) (2011)).
The dissent concludes that the statutory language “and receive a full refund of all payments
made to the seller” evidences the Legislature’s intent not to incorporate the common law elements
1
As recognized by the dissent, we have held that the liquidated damages provisions in sections 5.077 and 5.079
of Subchapter D are indeed punitive. ___ S.W .3d at ___ (Boyd, J., dissenting) (citing Flores, 185 S.W .3d at 432–33);
see also T EX . P RO P . C O D E §§ 5.077(d) (providing liquidated damages and attorney’s fees if a seller fails to provide a
buyer with an annual statement), .079(b) (providing liquidated damages and attorney’s fees if a seller fails to comply with
certain title-transfer requirements). Yet this fact does not compel a conclusion that all of Subchapter D’s remedies were
intended to be punitive. Cf. Cruz, 364 S.W .3d at 826 (recognizing that the DTPA claims are generally punitive but that
“[r]estoration is different”). In addition, we note that sections of Subchapter D that allow a buyer to cancel and rescind
a contract for certain violations also make those same violations actionable under the DTPA. See, e.g., T EX . P RO P . C O DE
§§ 5.069(d)(1), .070(b)(1), .072(e)(1), .085(c)(1). W e disagree with the Nguyens and the dissent that Subchapter D’s
cancel-and-rescind remedy should be treated differently than the DTPA’s restoration remedy that we characterized as
non-punitive in Cruz.
8
of rescission. ___ S.W.3d at ___; see, e.g., TEX . PROP . CODE §§ 5.069(d), .070(b), .072(e). In
reaching this conclusion, the dissent misconstrues the term “full refund” as being a one-sided
transaction when, in reality, a refund in a typical transactional setting contemplates both parties
giving back what they received.2 See WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY 1910
(2002) (defining “refund” as “to give or put back” and “to return (money) in restitution”). This
language is consistent with our construction requiring the mutual restoration of benefits. In contract-
for-deed transactions, the buyer cannot give back the title to the property in exchange for “a full
refund of all payments made to the seller” because the buyer receives title only after all payments
have been made. See Flores, 185 S.W.3d at 429. Instead, the buyer must return what it received
under the contract for deed at that time—the occupation of the property. See RESTATEMENT (THIRD )
OF RESTITUTION AND UNJUST ENRICHMENT § 37 cmt. d (2011) (“Rescission is mutual: a plaintiff
seeking to be restored to the status quo ante must likewise restore to the defendant whatever the
plaintiff has received in the transaction.”); Cruz, 364 S.W.3d at 825–26 (citing same). While the
buyer remains entitled to “a full refund of all payments made to the seller,” cancellation and
rescission of a contract also requires that the buyer restore to the seller the value of the buyer’s
occupation of the property.
Because the trial court did not consider the value of the Nguyens’ interim occupation of the
property, we remand the case to the trial court to determine the Nguyens’ liability for the rental value
of the property during their occupation.
2
For example, if a retail store has a policy that entitles a buyer to a full refund for a defective product, surely
no logical consumer would think that he or she is entitled to both the product and a refund of the price paid for the
product simply because the policy entitles the consumer to a “full refund of the purchase price.”
9
III. Attorney’s Fees and Mental Anguish Damages
We turn next to Morton’s issue concerning the awards of attorney’s fees and mental anguish
damages. Morton argues that the Nguyens are not entitled to either attorney’s fees or mental anguish
damages because no claims supporting the awards survived the court of appeals’ judgment. We
agree. The trial court found that Morton’s conduct violated various sections of Subchapter D and
constituted statutory fraud in a real estate context. The trial court then utilized those findings to
afford the Nguyens the maximum recovery by rendering judgment on the Subchapter D violations
and Finance Code violations, which included an award of $67,020 in attorney’s fees. On appeal, the
court of appeals reversed the only two causes of action that supported an award of attorney’s
fees—the claim for liquidated damages under section 5.077 of the Property Code and the Finance
Code claims. See 369 S.W.3d at 669, 676. Because no remaining cause of action supports an award
of attorney’s fees, the court of appeals should have also reversed the award of attorney’s fees
predicated on the section 5.077 claim and the Finance Code claims. Cf. Parkway Co. v. Woodruff,
901 S.W.2d 434, 441 (Tex. 1995) (reversing an award of attorney’s fees when the only cause of
action that supported the award was reversed on appeal). To the extent that the Nguyens prevailed
on their section 5.077 claim on remand or elected to recover under their alternative statutory fraud
theory, the trial court could award attorney’s fees based on either of those causes of action. See TEX .
PROP . CODE § 5.077(c) (providing for reasonable attorney’s fees); see also TEX . BUS. & COM . CODE
§ 27.01(e) (providing for reasonable and necessary attorney’s fees for claims of statutory fraud in
10
real estate transactions); Boyce Iron Works v. Sw. Bell Tel. Co., 747 S.W.2d 785, 787 (Tex. 1988)
(holding that a “[prevailing] party may seek recovery under an alternative theory if the judgment is
reversed on appeal”).
For similar reasons, we conclude that the court of appeals should have also reversed the
award for mental anguish damages when it reversed the trial court’s judgment for damages under
the Finance Code. Cf. Parkway, 901 S.W.2d at 441. The Nguyens’ pleadings demonstrate that they
sought mental anguish damages only for the Finance Code violations and DTPA claims. The trial
court did not find that Morton violated the DTPA, and the court of appeals reversed the award for
damages under the Finance Code. See 369 S.W.3d at 676. Accordingly, no cause of action supports
an award of mental anguish damages. Because the Nguyens’ pleadings do not support an award for
mental anguish damages under any other claim, the court of appeals should have also reversed the
award in conjunction with reversal of the Finance Code claim.3 See TEX . R. CIV . P. 301 (providing
that a “judgment of the court shall conform to the pleadings”).
IV. Conclusion
Accordingly, we grant Morton’s petition for review and, without hearing oral argument, TEX .
R. APP . P. 59.1, we reverse the portion of the court of appeals’ judgment affirming the trial court’s
3
The court of appeals held that Morton waived the issue because he did not argue “that the trial court could not
have awarded mental anguish damages in conjunction with [the Property Code] violations.” 369 S.W .3d at 676. Even
assuming the Nguyens pled for mental anguish damages for the Subchapter D claims, we are not convinced that mental
anguish damages are recoverable for the Property Code violations found by the trial court in this case.
11
awards of actual damages for cancellation and rescission, mental anguish damages, and attorney’s
fees, and we remand the case to the trial court for proceedings consistent with this opinion.
_________________________________
Paul W. Green
Justice
OPINION DELIVERED: August 23, 2013
12