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FILED

JUN 02 2017

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

NOTFOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. AZ-16-1337-JuLB

)

ERIK SAMUEL DE JONG and ) Bk. No. 2:14-bk-00886-PS

DARYL LYNN DE JONG, )

)

Debtors. )

______________________________)

ERIK SAMUEL DE JONG; DARYL )

LYNN DE JONG, )

)

Appellants, )

)

v. ) M E M O R A N D U M*

)

JLE-04 PARKER, LLC, )

)

Appellee. )

______________________________)

Argued and Submitted on May 18, 2017

at Phoenix, Arizona

Filed - June 2, 2017

Appeal from the United States Bankruptcy Court

for the District of Arizona

Honorable Paul Sala, Bankruptcy Judge, Presiding

_____________________________________

Appearances: Michael W. Carmel argued for appellants Erik

Samuel de Jong and Daryl Lynn de Jong; Lindsi M.

Weber of Gallagher & Kennedy argued for appellee

JLE-04 Parker, LLC. 

_____________________________________

Before: JURY, LAFFERTY, and BRAND, Bankruptcy Judges.

* This disposition is not appropriate for publication.

Although it may be cited for whatever persuasive value it may

have (see Fed. R. App. P. 32.1), it has no precedential value. 

See 9th Cir. BAP Rule 8024-1.

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 Appellants-debtors, Erik Samuel de Jong (Erik) and Daryl

Lynn de Jong (collectively, Debtors), operated a dairy farm on

real property leased from chapter 111 debtor Sonora Desert

Dairy, LLC (Sonora Desert). During Sonora Desert’s bankruptcy,

the property was foreclosed upon and sold at a trustee’s sale to

appellee-creditor, JLE-04 Parker, LLC (JLE), thereby

extinguishing Debtors’ leasehold interest under Arizona law. 

Debtors refused to vacate the property. 

JLE filed a forcible entry and detainer proceeding (FED)

against Debtors in the Arizona state court. On the eve of

trial, Debtors filed a chapter 11 petition. After JLE obtained

relief from the automatic stay, the state court found Debtors’

leasehold interest was extinguished by the trustee’s sale. JLE

then sought relief in the bankruptcy court to have Debtors

vacate the property. Debtors contended that they needed months

to move their cows and silage (feed) off the property. JLE

objected, asserted Debtors were trespassers, and claimed

millions of dollars in damages for Debtors’ conscious and

continuing trespass, which were embodied in a proof of claim

(POC). The POC sought damages of $8,863,250.00, which included,

among other things, restitution damages for disgorgement of

profits. JLE later filed an Application for Administrative

Priority Claim (Administrative Claim) for $7,900,000.00 for

damages allegedly incurred due to Debtors’ postpetition

1 Unless otherwise indicated, all chapter and section 

references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, 

“Rule” references are to the Federal Rules of Bankruptcy

Procedure, and “Civil Rule” references are to the Federal Rules

of Civil Procedure.

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trespass. 

After Debtors objected to JLE’s POC and Administrative

Claim, the matter proceeded to trial to liquidate JLE’s damages. 

In a memorandum decision, the bankruptcy court concluded that

JLE had a prepetition claim for $558,716.24 and a postpetition

administrative claim for $1,517,069.64. JLE filed a motion for

clarification on the calculation of damages, and Debtors filed a

motion for reconsideration. The bankruptcy court granted JLE’s

motion in part and denied Debtors’ motion. On September 30,

2016, the bankruptcy court entered an amended order on JLE’s POC

finding that JLE had a prepetition claim in the amount of

$579,072.51 and a postpetition administrative claim for

$1,571,916.11. This appeal followed. 

For the reasons explained below, we AFFIRM the bankruptcy

court’s findings regarding Debtors’ conscious trespass in the

pre and postpetition periods. We VACATE the bankruptcy court’s

postpetition damage award and REMAND for a calculation of

damages consistent with this memorandum. 

 I. FACTS2

A. Prepetition Events

Sonora Desert owned three properties referred to throughout

this case as Dairy I, Dairy II, and Dairy III. Debtors entered

into a lease agreement dated February 27, 2012 (February 27,

2012 Lease), with Sonora Desert and Robert Lueck (Lueck), its

managing member. The lease was for Dairy I with monthly rent of

$30,000 and a term of three years with an option to extend. 

2 Most of the background facts are set forth in the

bankruptcy court’s memorandum decision.

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Debtors used the property, located in Buckeye, Arizona, to run

their business known as Valkyrie Dairy.

When Debtors entered into the lease agreement, Sonora

Desert was a chapter 11 debtor-in-possession in a bankruptcy

case filed in the District of Arizona.3 Lueck advised Erik that

the bankruptcy court had to approve the lease before Debtors

moved onto Dairy I. Debtors did not wait for court approval,

instead moving 1649 cows onto Dairy I one day after they signed

the lease. 

In a matter of days, Debtors executed a new lease for

Dairy I dated March 1, 2012 (March 1 Lease). The March 1 Lease

provided that either party could terminate the lease upon

180 days written notice to the other party. Section 18.1 of the

lease gave Debtors the right of first refusal if Sonora Desert

or Lueck sought to sell Dairy I and its other dairy properties.4

On May 29, 2012, the bankruptcy court in Sonora Desert’s 

case approved the March 1 Lease with some variations (Sonora

Order). The Sonora Order provided, among other things, that

Debtors, as lessees, acknowledged that the lessors were

currently marketing Dairy I for sale and also that the March 1

Lease was junior to a first priority deed of trust held by

Agstar and a second priority Wells Fargo replacement lien. The

Sonora Order also clarified that the March 1 Lease provided that

3 Sonora Desert’s case was substantively consolidated with

the cases of Sonora Desert Dairy II, LLC, Sonora Desert

Dairy III, LLC, Lueck Cattle Company, LLC, and Bob Lueck Farms,

LLC.

4 The right of first refusal pertained to all three

properties.

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Debtors would pay $2,615.42 per month for real estate taxes on

the Dairy I property and $921.46 in real estate taxes on the

nine residential housing units also located on the property. 

The order further amended the March 1 Lease, reducing the time

period for Debtors to exercise their right of first refusal if

the leased property were sold.

About a year later, in May 2013, Erik communicated with

Brian Van Leeuwen about leasing his dairy farm (Van Leeuwen

Property) to Debtors. Erik learned that if he moved his dairy

operation to the Van Leeuwen Property he would not have room for

all his cows.

 Lueck mailed Debtors a Notice of Termination (NOT) dated

May 30, 2013, which stated that the March 1 Lease would

terminate on November 30, 2013.5 In September 2013,

Mr. Havranek, the real estate broker hired to help Sonora Desert

sell its properties, advised Erik that a trustee’s sale of the

property was set for December 6, 2013. 

On October 16, 2013, Sonora Desert’s attorney, Mr. May,

mailed and emailed a letter to Erik reminding him of the

termination of the March 1 Lease and the need to vacate Dairy I. 

Debtors made no plans to move from the property. 

At the December 6, 2013, trustee’s sale, JLE purchased

Dairy I, Dairy II, and Dairy III for $6,936,264.02. Erik and

5 Whether Debtors received proper notice for termination of

the March 1 Lease is not at issue in this appeal. The bankruptcy

court found that Debtors’ trespass began December 6, 2013, the

date of the trustee’s sale, and ended when they vacated the

Property on May 31, 2014. The court calculated JLE’s damages

based on that time period.

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other family members attended the trustee’s sale but did not

bid. The sale included the real property and fixtures used to

operate dairy farms at the Sonora Dairies. The trustee’s sale

extinguished any leasehold interest or any other interest that

Debtors had in Dairy I as of December 6, 2013. 

JLE purchased the properties using all of the funds

available to it from a 1031 exchange sale; a $1,000,000 loan

from Mr. Accomazzo/Ambien Dairy; and loans from the families of

Joseph Echeverria and Chad Odom. JLE leased Dairy II to the

Accomazzo/Ambien Dairy entity for no rent through May 2014 and

for $15,000.00 per month thereafter. JLE leased Dairy III to

Rio Loco for $50,000.00 per month. 

 About a week after the trustee’s sale, Mr. Echeverria and

Mr. Odom had multiple conversations with Erik confirming their

prior communications that JLE did not want to enter into a lease

or other arrangement with Debtors and that Debtors needed to

vacate the Dairy I property. Mr. Odom and Mr. Echeverria made

various proposals to Erik for a reasonable and rapid exit from

the property. Erik made no proposals to leave and after further

conversations, Erik insisted he did not have to leave because of

the March 1 Lease and his belief that no court would remove him

from the Dairy I property. 

JLE’s counsel served Debtors with a notice and demand

letter dated December 20, 2013, in which JLE’s counsel notified

them of JLE’s purchase and current ownership of the property and

explained that any right of possession had been terminated by

the NOT and trustee’s sale. The letter gave notice that any

remaining tenancy or leasehold interest that Debtors had in the

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Property was terminated immediately. Finally, it informed

Debtors that as a holdover tenant at will, they would be liable

to JLE for a fair market rental value of the property from the

date of ownership through the date Debtors vacated. JLE

asserted a right to recover $30,000 in monthly rent plus other

expenses. In the end, JLE demanded that Debtors vacate Dairy I

by January 14, 2014, and if they did not do so, JLE would file a

FED action against them.

Debtors responded to the letter by sending a copy of the

February 27, 2012 Lease to JLE’s counsel. This was not the

lease that was approved by the bankruptcy court in the Sonora

Order. 

 On January 7, 2014, JLE’s counsel faxed and emailed Debtors

another notice and demand, informing them that the January 14,

2014 date was a typographical error and that they needed to

vacate Dairy I by January 4, 2014. The notice informed Debtors

that JLE would file a FED action against them on January 9,

2014, if they did not comply. Debtors refused to vacate the

property. 

Prior to the filing of Debtors’ bankruptcy petition, Erik

was worried about the loss of the value of Debtors’ silage,

which would be worthless if Debtors were forced to move. To

preserve the value of the silage, Erik identified three

potential exit plans and settlement proposals which he

communicated to JLE: (i) sell the feed silage and other feed

inventory to JLE and auction the cattle by the end of February

2014; (ii) feed the silage and other feed inventory to his

cattle and, when exhausted, auction the cattle and likely occupy

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the property until at least the end of July; or (iii) move to

another dairy, if he could find an affordable dairy, after

selling or using the silage and feed inventory. 

JLE filed the FED action on January 9, 2014. Prior to the

scheduled January 23, 2014 trial in the FED action, Thomas

de Jong, Erik’s father, made an offer on Debtors’ behalf to sell

Debtors’ cows and feed to JLE. JLE declined. In addition,

counsel for Debtors, Reed Haddock, presented an exit plan

settlement proposal to JLE. On January 21, 2014, Mr. Haddock

advised Erik and his father that JLE had not responded to the

proposal and that there was a good chance that JLE would prevail

in getting a restitution order. 

B. Bankruptcy Events 

On January 23, 2014, Debtors filed a chapter 11 petition

which stayed the FED action. On the petition date, Debtors

owned or leased approximately 3538 cows worth $2,178.85 per

head. 

1. JLE’s Emergency Motion For Relief From Stay

JLE filed an emergency motion seeking a determination that

the automatic stay did not apply or, in the alternative, for

relief from the automatic stay to proceed with the FED trial.6

The bankruptcy court modified the stay by order entered on

February 13, 2014, allowing the state court to hold the FED

trial and to decide the issue regarding Debtors’ right to

possession, including whether the trustee’s sale extinguished

the March 1 Lease under Arizona law. At the stay relief

6 JLE also sought to dismiss the bankruptcy case.

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hearing, the bankruptcy court had observed that the Sonora Order

stated that Debtors’ leasehold interest was subordinated to the

first deed of trust and replacement lien and, therefore, the

March 1 Lease would be affected by the trustee’s sale. 

The stay relief order stated that the parties should

provide the state court with a copy of the Sonora Order and

ordered JLE not to pursue a writ of restitution or otherwise

enforce the judgment until further hearings in the bankruptcy

court. Finally, the order prohibited JLE from removing or

repossessing any of the livestock, personal property, or feed

existing on the Dairy I property as of the petition date without

a further order from the bankruptcy court. 

2. The FED Trial

The state court held the FED trial on March 10, 2014, and

took the matter under advisement. On March 13, 2014, the state

court issued a minute entry ruling in JLE’s favor. The state

court found that Debtors’ leasehold interest was terminated by

the nonjudicial foreclosure of the deed of trust. Accordingly,

the state court concluded that when Debtors continued in

possession they became tenants at sufferance and remained on the

property “without any right to be there.” The state court

further found that the notices sent by JLE on December 20, 2013,

and January 7, 2014, met or exceeded the procedural requirements

for notice and demand of possession. In the end, the court

concluded that Debtors were guilty of forcible detainer. 

3. JLE Sells Dairy I

On February 5, 2014, JLE signed a Purchase and Sale

Agreement and opened escrow to sell the Dairy I property to

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G & K Land & Cattle, LLC (G&K) for $2,228,006.12. Escrow was

scheduled to close on the earlier of (a) December 31, 2014, or

(b) ten (10) days following written notice from the buyer to the

seller and escrow agent. On September 5, 2014, JLE and G&K

executed a first amendment to the Purchase and Sale Agreement. 

The purchase price did not change. Escrow closed on

September 29, 2014, at the purchase price of $2,228,006.12. 

4. The March 18, 2014 Hearing

After the ruling in the FED action, JLE filed a motion in

the bankruptcy court to expedite consideration of that ruling,

seeking to compel Debtors to vacate Dairy I. At the March 18,

2014 hearing, Debtors argued that they needed to remain on the

property until June 1, 2014. JLE objected and put Debtors on

notice that their failure to vacate the property exposed them to

continuing damages for trespass and other claims. The

bankruptcy court acknowledged that JLE claimed damages as a

result of Debtors’ delay in vacating the property and set a

pretrial schedule to address those damages. In the end, the

bankruptcy court concluded that Debtors must vacate the property

on June 1, 2014, unless JLE notified the court that an earlier

date was warranted. The bankruptcy court also told JLE to file

its POC. 

After this hearing, on March 26, 2014, Erik sent a text

message to Mr. Accomazzo, the principal of JLE’s purchaser for

Dairy I. In the message, Erik indicated that he got exactly

what he wanted from the bankruptcy court and that he was “making

a sh**load of money off his cows.”

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5. Debtors Object To JLE’s POC

On March 28, 2014, JLE filed its POC, asserting damages in

the amount of $8,863,240.00, including, among other things,

disgorgement of Debtors’ profits and its own lost profits due to

Debtors’ trespass. Debtors objected to the POC, arguing that

JLE was not entitled to a claim for disgorgement of profits or

lost profits under any legal theory. In reply, JLE claimed over

$2 million in its lost profits and sought disgorgement of

Debtors’ profits in the amount of approximately $4.8 million. 

JLE argued that under Arizona law, it was entitled to recover

for any physical damages to the property, the cost of restoring

the property, the fair market rental value of the land during

Debtors’ trespass, as well as compensation for annoyances and

damages for loss of use of the Property. JLE further asserted

that it was entitled to its actual/compensatory damages as a

result of Debtors’ trespass and that those damages included lost

profits of JLE. Finally, JLE argued that under the Restatement

(Second) of Torts, disgorgement of Debtors’ profits was an

appropriate element of damages as a result of Debtors’ trespass. 

6. The April 2, 2014 Hearing

Apparently displeased with the March 18, 2014 ruling, JLE

sought an expedited hearing in the bankruptcy court by filing a

Motion for Clarification and Supplemental Relief Re: Court’s

Ruling Regarding Debtors’ Continuing Trespass and Wrongful

Possession. At the April 2, 2014 hearing on the matter, the

bankruptcy court reiterated that Debtors would leave the

property by June 1, 2014. The bankruptcy court also appointed

an onsite manager at JLE’s request to make sure Debtors left the

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property by that date. 

By May 31, 2014, Debtors had moved all of their cows from

Dairy I and were no longer operating their business on the

property. 

7. Cross Motions For Summary Judgment on JLE’s POC

Meanwhile, Debtors filed a motion for summary judgment

(MSJ) on their objection to JLE’s POC. They argued, as a matter

of law, they were not trespassers because (1) they entered the

Dairy I property pursuant to the terms of a valid lease which

was approved by the bankruptcy court in Sonora Desert’s

bankruptcy case and (2) the bankruptcy court directed that

Debtors remain on the property and operate their business. 

Debtors further maintained that under Arizona law, JLE could

recover damages for rent, or a fair and reasonable satisfaction

for the use and occupation of the property. 

JLE filed a cross MSJ. JLE argued that, as a matter of

law, the state court conclusively established that Debtors were

in wrongful possession of the Dairy I property after JLE

purchased the property at the trustee’s sale on December 6,

2013. JLE maintained that after that point in time, Debtors

were trespassers. JLE asserted that under Arizona law, certain

types of damages were proper to assess for trespass, including

damages for lost profits and disgorgement of profits resulting

from the trespass. Finally, JLE contended that any postpetition

damages should be granted administrative priority. 

On October 14, 2014, the bankruptcy court heard oral

argument on the cross MSJs and took the matter under advisement. 

On December 14, 2014, the court granted JLE’s MSJ and

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denied Debtors’ MSJ, placing its oral findings of fact and

conclusions of law on the record. The bankruptcy court observed

that central to both motions was the issue of trespass and thus

the undisputed facts must establish one way or another that

Debtors’ physical presence on JLE’s property after the trustee’s

sale was without authorization. 

 The bankruptcy court applied the doctrine of issue

preclusion in granting JLE’s MSJ on the issue of Debtors’

prepetition trespass. The court observed that the state court’s

findings in the FED action regarding ownership of Dairy I and

Debtors’ unauthorized possession of the property were entitled

to preclusive effect. Therefore, the court concluded that

Debtors’ continued possession of the property after the

trustee’s sale constituted a trespass as a matter of law. 

The court also independently found Debtors were trespassers

under Arizona law. The court observed that the trustee’s sale

extinguished Debtors’ right to remain on Dairy I based on Ariz.

Rev. Statutes (A.R.S.) § 33-811(e), which provides that a

trustee’s deed conveys title clear of liens, claims, and

interests junior to the deed of trust. Accordingly, Debtors’

right to possess Dairy I terminated on December 6, 2013, and

after that date Debtors’ possession of the property was

unauthorized.

The bankruptcy court made no determination regarding

Debtors’ trespass or liability for their postpetition occupancy

of the property since JLE’s POC was based on prepetition

actions. The bankruptcy court also found that JLE presented no

evidence of pre or postpetition damages and thus the court would

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not offer an advisory ruling. 

On January 20, 2015, the bankruptcy court entered an order

denying Debtors’ MSJ and granting JLE’s MSJ in part, solely as

it related to Debtors’ prepetition trespass on the Dairy I

property. 

8. JLE’s Administrative Claim

On December 31, 2014, JLE filed its Administrative Claim 

which included a claim for Debtors’ postpetition trespass. 

JLE then filed an MSJ addressing Debtors’ postpetition trespass,

seeking a determination that Debtors’ trespass was conscious and

that Debtors were required to disgorge their profits. JLE also

argued that any damages resulting from Debtors’ wrongful

postpetition conduct should be granted administrative priority

under the holding in Reading Co. v. Brown, 391 U.S. 471, 483-85

(1968). 

 The bankruptcy court held a hearing on August 20, 2015,

and granted JLE’s MSJ in part as to the trespass based on the

state court’s ruling in the FED action and its own determination

that Debtors were trespassers since they had no authorization to

remain on the Dairy I property. As to the damages, the court

denied summary judgment finding factual issues on whether

Debtors’ trespass was intentional and, if so, the degree to

which they benefitted. The court also denied summary judgment

on the issue of administrative priority, concluding that any

priority issue would be determined after JLE had proved its

damages. 

9. The Trial 

The bankruptcy court held a trial on the issues of whether

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Debtors’ trespass was conscious and the appropriate measure of

damages. After trial, JLE advised the bankruptcy court that it

was seeking judgment for the following: For the trespass: 

(a) Loss of use of land: lost opportunities - $97,500 and lost

profits - $3,503,831; (b) cost of restoration of land -

$1,200,000, plus additional amounts after March 28, 2014; 

(c) annoyance/discomfort of owner - $70,000, plus additional

amounts after March 28, 2014; (d) fair market rental value -

$83,000 as of March 28, 2014; (e) punitive damages - TBD; 

(f) disgorgement of Debtors’ profits: prepetition - $1,145,000

and postpetition - $7,632,756. For waste/conversion bailment: 

(a) physical damage to property - $2,500. Although included in

its POC, JLE was no longer pursuing claims for (1) damages to a

hay barn, (2) stall cleaning costs, or (3) potential liability

to the Arizona Department of Water Resources. As to JLE’s

claims for lost profits, JLE advised the bankruptcy court that

the claim was brought as an alternative to the disgorgement

claim and agreed that it was not entitled to lost profits and

disgorgement. The bankruptcy court took the matter under

advisement. 

On April 19, 2016, the court issued a memorandum decision

finding that Debtors were conscious trespassers from at least

the time of the trustee’s sale on December 6, 2013. The court

determined that due to Debtors’ conscious trespass, they were

liable to JLE for the benefits they received for wrongfully

staying on the Dairy I property. In the end, the bankruptcy

court found that disgorgement of Debtors’ profits was

appropriate and concluded that JLE’s prepetition damage claim

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was $558,716.24 and its postpetition administrative claim was

$1,517,069.64. The court entered an order consistent with its

ruling on the same day. 

10. Debtors’ Motion for Reconsideration; JLE’s Motion For 

Clarification

On May 2, 2016, Debtors filed a motion for reconsideration

and/or to alter or amend the bankruptcy court’s (1) January 20,

2015 order denying Debtors’ MSJ regarding Debtors’ prepetition

trespass; (2) September 17, 2015 minute entry ruling regarding

Debtors’ postpetition trespass; (3) Memorandum Decision; and

(4) Order re proof of claim filed by JLE-04. 

In the motion, Debtors maintained that the state court

determined Debtors were tenants at sufferance. Since JLE never

appealed that decision, Debtors argued that JLE was bound by

that ruling under the principles of issue and claim preclusion. 

Debtors asserted that under these circumstances, JLE was

entitled to damages only in the form of reasonable rent.

On September 30, 2016, the bankruptcy court denied the

motion, finding there was no basis to reconsider or alter or

amend the rulings. The bankruptcy court noted that FED

proceedings were limited in scope with the only issue being the

right of actual possession. The court further observed that due

to the narrow scope of FED proceedings, the Arizona legislature

made clear that plaintiffs could pursue claims for damages by a

separate action, including claims for trespass damages. A.R.S.

§ 12-1183. Accordingly, the bankruptcy court concluded that the

state court’s statement that Debtors were tenants at sufferance

did not preclude JLE from seeking a determination that they were

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conscious trespassers liable for damages based on restitution.

The bankruptcy court also concluded that the state court’s

determination that Debtors were tenants at sufferance was not

necessary or essential to its decision regarding whether

Debtors’ occupancy was lawful. Rather, once the state court

found that completion of the trustee’s sale terminated Debtors’

right to possess the Property, the status attributed to Debtors’

post-termination occupancy was of no import to its decision. 

Finally, the bankruptcy court noted that the issue of

trespass was not litigated nor was it required to be litigated

in the state court FED proceeding. The court also observed that

JLE obtained limited relief from stay authorizing the FED action

to go forward, but JLE was prohibited from executing on the

judgment if obtained. Therefore, the issues regarding damages,

if any, were to be determined in the bankruptcy court. For

these reasons, the court concluded that the trespass issue was

not and should not have been raised in the summary FED

proceeding. In the end, the court found no grounds to disturb

its rulings that Debtors were trespassers in the pre and

postpetition periods.

JLE also filed a motion for clarification of the bankruptcy

court’s calculations for the amount of its pre and postpetition

claims. In a September 30, 2016 memorandum decision, the

bankruptcy court granted JLE’s motion in part and entered an

amended order on September 30, 2016, finding that JLE had a

prepetition claim for $579,072.51 and a postpetition claim

entitled to administrative priority in the amount of

$1,571,916.11. The bankruptcy court entered an amended order on

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JLE’s POC on the same day. Debtors filed a timely appeal from

that order. 

 II. JURISDICTION

The bankruptcy court had jurisdiction over this proceeding

under 28 U.S.C. §§ 1334 and 157(b)(2)(B). We have jurisdiction

under 28 U.S.C. § 158.

III. ISSUES

A. Did the bankruptcy court err by applying issue

preclusion to the state court’s findings in the FED action and

granting JLE’s MSJ on the issue whether Debtors were

trespassers? 

B. Did the bankruptcy court err by independently deciding

that Debtors were trespassers in the pre and postpetition

periods?

C. Did the bankruptcy court err by finding that Debtors

were conscious trespassers?

D. Did the bankruptcy court err by applying an incorrect

measure of damages for trespass; i.e., damages beyond the fair

market rental value of Dairy I?

E. Did the bankruptcy court err by improperly calculating

JLE’s postpetition damages?

IV. STANDARDS OF REVIEW

Rulings based on claim and issue preclusion are reviewed de

novo as mixed questions of law and fact in which legal questions

predominate. Khaligh v. Hadaegh (In re Khaligh), 338 B.R. 817,

823 (9th Cir. BAP 2006) (citing Robi v. Five Platters, Inc.,

838 F.2d 318, 321 (9th Cir. 1988)). Once it is determined that

preclusion doctrines are available to be applied, the actual

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decision to apply them is left to the trial court’s discretion. 

In re Khaligh, 338 B.R. at 823. When state preclusion law

controls, such discretion is exercised in accordance with state

law. Id. (citing Gayden v. Nourbakhsh (In re Nourbakhsh),

67 F.3d 798, 800–01 (9th Cir. 1995)).

We review de novo a bankruptcy court’s summary judgment as

well as its interpretation and application of relevant state

law. Botosan v. Paul McNally Realty, 216 F.3d 827, 830 (9th

Cir. 2000); Kona Enters. Inc. v. Estate of Bishop, 229 F.3d 877,

883 (9th Cir. 2000). 

We review factual findings such as the conscious nature of

Debtors’ trespass for clear error. Banks v. Gill Distribution

Ctrs., Inc., 263 F.3d 862, 869 (9th Cir. 2001). A bankruptcy

court’s factual finding is not clearly erroneous unless it is

illogical, implausible or without support in the record. Retz

v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010).

Whether the bankruptcy court used the correct legal

standard in computing damages is reviewed de novo. Neptune

Orient Lines, Ltd. v. Burlington N. and Santa Fe Railway Co.,

213 F.3d 1118, 1119 (9th Cir. 2000). 

The bankruptcy court’s “computation of damages is a finding

of fact we review for clear error.” Simeonoff v. Hiner,

249 F.3d 883, 893 (9th Cir. 2001). 

V. DISCUSSION

A. The bankruptcy court did not err by finding Debtors liable 

for trespass in the pre and postpetition periods.

Debtors argue that the bankruptcy court erred by finding

them guilty of trespass on several grounds. First, they contend

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that the state court’s finding in the FED action that Debtors

were tenants at sufferance was preclusive as to their status

regardless of when they vacated the Property. According to

Debtors, they were liable as tenants at sufferance, if at all,

for the reasonable rental value of the Property. 

Next, Debtors argue that the state court never made any

factual findings or legal conclusions that Debtors were

trespassers. Therefore, Debtors assert that the bankruptcy

court erred by applying issue preclusion as a basis for granting

JLE’s summary judgment on the issue of Debtors’ trespass and

erroneously drew no distinction between a tenant at sufferance

and a trespasser. 

Finally, Debtors maintain they could not be trespassers

postpetition when the bankruptcy court directed them to remain

on the Property. As explained below, we are not persuaded by

these arguments. 

1. Issue Preclusion

Whether the state court’s finding of facts or legal

conclusions are entitled to preclusive effect is determined

under Arizona law. Child v. Foxboro Ranch Estates, LLC

(In re Child), 486 B.R. 168 (9th Cir. BAP 2013). Under Arizona

law, issue preclusion applies when: (1) the issue or fact to be

litigated was actually litigated in a previous suit; (2) a final

judgment was entered; (3) the party against whom the doctrine is

to be invoked had a full opportunity to litigate the matter;

(4) actually did litigate it; and (5) such issue or fact was

essential to the prior judgment. Id. at 172 (citing Chaney

Bldg. Co. v. City of Tucson, 716 P.2d 28, 30 (1986)). 

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Before applying these factors to this case, we briefly

examine the nature of an FED action to place Debtors’ “tenants

at sufferance” argument in context. Since Debtors’ leasehold

interest was terminated by the trustee’s sale, JLE had an

immediate right to the Property. A.R.S. § 33-811(e). Under

Arizona law, an FED action is one way to obtain possession of

one’s property. A.R.S. § 12-1173.01 (FED action proper when

property has been sold at a trustee’s sale). The FED proceeding

is statutory and meant “to provide a summary, speedy and

adequate means for obtaining possession of premises by one

entitled to actual possession.” Heywood v. Ziol, 372 P.2d 200,

201 (Ariz. 1962). The only issue determined in the proceeding

is the right to actual possession of the property. Id. (citing

A.R.S. § 12-1177(A): “On the trial of an action of forcible

entry or forcible detainer, the only issue shall be the right of

actual possession and the merits of title shall not be inquired

into.”). Given the limited scope of FED actions, “the only

appropriate judgment is the dismissal of the complaint or the

grant of possession to the plaintiff.” United Effort Plan Trust

v. Holm, 101 P.3d 641, 645 (Ariz. Ct. App. 2004). Because the

state court is not authorized to decide any other issue besides

the right of actual possession, the Arizona Legislature has

provided in A.R.S. § 12-1183 that the FED action and judgment

does not bar a separate action for trespass or trespass damages.

 Against this background, the state court’s finding that

Debtors were tenants at sufferance cannot be given preclusive

effect - their legal status as tenants at sufferance was neither

litigated nor essential to the FED judgment. As noted by the

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bankruptcy court, once the state court found that the completion

of the trustee’s sale terminated Debtors’ right to possess the

Dairy I property, the status attributed to Debtors’ post

termination occupancy was of no import to its decision.

In contrast, the state court’s findings regarding JLE’s

right to possession of the property are entitled to preclusive

effect on the issue of Debtors’ trespass. Issue preclusion bars

relitigation of identical issues that were resolved in a prior

proceeding, even if the later suit involves a different cause of

action. Fund for Animals, Inc. v. Lujan, 962 F.2d 1391, 1399

(9th Cir. 1992). “At common law, any unauthorized physical

presence on another’s property is a ‘trespass.’” State ex rel.

Purcell v. Sup. Ct. In and For the Cty. of Maricopa, 535 P.2d

1299, 1301 (Ariz. 1975). Restatement (First) of Torts (1934)

§ 329 defines a trespasser as a “person who enters or remains

upon land in the possession of another without a privilege to do

so created by the possessor’s consent or otherwise.” See

Webster v. Culbertson, 761 P.2d 1063, 1065 n.3 (Ariz. 1988)

(following Restatement (First) of Torts in connection with

landowner’s liability towards trespassers). 

 The state court found that the trustee’s sale terminated

Debtors’ right to possess the Dairy I property and thus Debtors

“had no right to be there.” For purposes of determining whether

Debtors were trespassers under the Purcell definition or the

Restatement (First) of Torts definition, the identical issue

regarding Debtors’ lawful or authorized possession of the

property was actually litigated in the FED action. In other

words, Debtors’ physical presence on Dairy I was unauthorized

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and they remained on the property without the consent of JLE. A

final judgment was entered, Debtors had a full opportunity to

litigate the matter and actually did litigate it, and the issue

was essential to the prior judgment. Therefore, since all the

elements for issue preclusion were met, we discern no error with

the bankruptcy court’s decision granting JLE’s MSJ on the issue

of Debtors’ trespass based on issue preclusion.

Even if issue preclusion was not appropriate, the

bankruptcy court independently decided on summary judgment that

Debtors were trespassers as a matter of law. Under either the

Purcell definition or the Restatement (First) of Torts

definition of trespass, the record shows that JLE never

consented to Debtors’ continued possession of Dairy I. 

Accordingly, Debtors’ possession was unauthorized and they had

“no right to be there.” The bankruptcy court thus properly

found that Debtors were trespassers under Arizona law. 

Debtors’ reliance on their “tenants at sufferance” status

in the FED action for their damage claim is misplaced. As the

Arizona Court of Appeal explained:

Use of the word ‘tenant’ in this phrase is unfortunate

as a tenancy at sufferance is not a true landlordtenant relationship, but rather an interest in

property. It exists when a party who had a lawful

possessory interest in property wrongfully continues

in possession of the property after its interest

terminated. 

Grady v. Barth ex rel. Cty. Maricopa, 312 P. 117, 120 (Ariz. Ct.

App. 2013). Contrary to Debtors’ view, there is little, if any

distinction, between a tenant at sufferance and a trespasser

under Arizona law. As tenants at sufferance, Debtors had no

right to possession and thus they continued to occupy Dairy I

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wrongfully. As trespassers, Debtors remained on the property

without JLE’s consent and therefore Debtors’ possession was

unauthorized. Indeed, the relationship between JLE and Debtors

was that of owner and trespassers absent some agreement as to

Debtors’ continued occupancy. In short, whether tenants at

sufferance or trespassers, Debtors were wrongdoers by their

unauthorized continued possession of Dairy I. 

In the end, the status of Debtors as tenants at sufferance

is not legally inconsistent with being a conscious trespasser

and the bankruptcy court implicitly so found. See generally

Brady v. Scott, 175 So. 724, 725 (Fla. 1937) (“[A] tenant at

sufferance is the most shadowy estate recognized at common law

and practically the only distinction between such a tenant’s

holding and the possession of a trespasser is that the landowner

may, by his acquiescence at any time base upon the tenancy at

sufferance the relation of landlord and tenant, which he cannot

establish at law against a mere trespasser, and that the tenant

cannot be subjected to an action in trespass before entry or

demand for possession.”). 

In sum, the FED action did not bar JLE’s separate action

for trespass or trespass damages. See A.R.S. § 12-1183. Based

on the record before us, the bankruptcy court properly found

Debtors were trespassers under Arizona law when they continued

in possession of Dairy I after the trustee’s sale.

2. The bankruptcy court did not immunize Debtors from 

liability for their postpetition trespass.

Debtors maintain that the bankruptcy court specifically

directed them to remain on Dairy I until June 1, 2014, and

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therefore they cannot be deemed trespassers and liable for

trespass damages. This argument is without merit. We found no

place in the record where the bankruptcy court authorized

Debtors’ occupancy of Dairy I nor did we find any place where

the court specifically directed them to remain on the property

or indicated an intent to limit the damages available to JLE. 

Rather, the court’s ruling in its April and May 2014 orders was

that Debtors would leave the property by June 1, 2014. Further, 

as the bankruptcy court properly observed, the bankruptcy filing

could not grant Debtors property rights that the state court

ruled did not exist. See Dominic’s Rest. of Dayton, Inc. v.

Mantia, 683 F.3d 757, 760-61 (6th Cir. 2012) (a debtor’s

bankruptcy filing does not protect the debtor from claims

relating to the tortious use of another’s property.). In short,

Debtors’ delay in vacating Dairy I after the conclusion of the

FED action had nothing to do with the bankruptcy court’s

rulings.

B. Damages 

Debtors argue that the bankruptcy court erred by finding

that they were conscious trespassers and awarding damages to JLE

on the basis of the disgorgement of profits. According to

Debtors, the bankruptcy court’s use of restitution damages is

not supported by any cases or statutes. Therefore, they are

liable, if at all, for the fair market rental value of the

property. Finally, Debtors maintain that the bankruptcy court’s

calculation of postpetition profits was not supported by the

evidence and constitutes clear error. 

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1. The bankruptcy court did not err in finding Debtors 

were conscious trespassers.

A “conscious wrongdoer” is one who benefits by his

misconduct and who acts “with knowledge of the underlying wrong

to the claimant,” or “despite a known risk that the conduct in

question violates the rights of the claimant.” Restatement

(Third) of Restitution and Unjust Enrichment § 51(3) (2011). 

Misconduct is defined as “actionable interference by the

defendant with the claimant’s legally protected interests for

which the defendant is liable.” Id. at § 51(1).

The bankruptcy court found that Debtors’ trespass was

conscious from the December 6, 2013 trustee’s sale until they

vacated Dairy I on May 31, 2014. We need not repeat each of the

facts that support the bankruptcy court’s conclusion, as the

record contains ample instances showing Debtors’ knowledge that

their right to remain on Dairy I was coming to an end — either

by termination of the March 1 Lease or by its extinguishment at

the trustee’s sale. The record demonstrates that Debtors knew

that they had to vacate the Dairy I property at the latest by

the date of the trustee’s sale. Furthermore, Erik knew that JLE

was the owner of the property and, based on the email from

Mr. May and Erik’s statement to Judge Haines at the June 26,

2014 hearing, Debtors knew that the trustee’s sale extinguished

their rights in the March 1 Lease and their right to occupy the

Dairy I property. Nonetheless, Debtors continued to operate

their dairy at the property until May 31, 2014. Given these

facts, the bankruptcy court’s finding that Debtors were

conscious trespassers was logical, plausible, and supported by

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inferences drawn from facts in the record. 

2. The bankruptcy court did not err by using a 

restitutionary measure of damages, including 

disgorgement of profits, to determine Debtors’ 

liability. 

We found no Arizona case or statute that discusses

restitution damages and disgorgement of profits in a trespass

case such as this. Where the state’s highest appellate court

has not spoken on an issue, the federal court’s role is to

predict what decision the state’s highest court would reach. 

See Evanston Ins. Co. v. OEA, Inc., 566 F.3d 915, 921 (9th Cir.

2009). A federal court uses “intermediate appellate court

decisions, decisions from other jurisdictions, statutes,

treatises, and restatements as guidance” to predict how the

state’s highest court would rule. Assurance Co. of Am. v. Wall

& Assocs. LLC of Olympia, 379 F.3d 557, 560 (9th Cir. 2004). 

In the absence of controlling law, Arizona courts follow

the Restatements. Keck v. Jackson, 593 P.2d 668, 669 (Ariz.

1979). Restatement (Third) of Restitution and Unjust Enrichment

§ 40 states: “A person who obtains a benefit by an act of

trespass . . . is liable in restitution to the victim of the

wrong.” In comment b to this section, the Restatement explains

that “[e]richment resulting from intentional trespass is not

properly measured by ordinary rental value.” Id. § 40, cmt. b

(noting that when restitution takes the form of a money

judgment, the measure of recovery depends on the blameworthiness

of the defendant). “[A] conscious wrongdoer will be stripped of

gains from unauthorized interference with another’s property.” 

Id. 

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There are policy reasons for mandating disgorgement of the

wrongdoer’s profits:

Restitution requires full disgorgement of profit by a

conscious wrongdoer, not just because of the moral

judgment implicit in the rule of this section, but

because any lesser liability would provide an

inadequate incentive to lawful behavior. If A

anticipates (accurately) that unauthorized

interference with B’s entitlement may yield profits

exceeding any damages B could prove, A has a dangerous

incentive to take without asking - since the

nonconsensual transaction promises to be more

profitable than the forgone negotiation with B. The

objection of that part of the law of restitution

summarized by the rule of § 3 is to frustrate any such

calculation.

. . .

If a conscious wrongdoer were able to make profitable,

unauthorized use of the claimant’s property, then pay

only the objective value of the assets taken or the

harm inflicted, the anomalous result would be to

legitimate a kind of private eminent domain (in favor

of a wrongdoer) and to subject the claimant to a

forced exchange. The law of restitution responds to

this anomaly by making the wrongdoer liable to

disgorge profits wrongfully obtained, whenever such

profits exceed recoverable damages. 

Id. § 40, cmt. c. 

Restatement (Third) of Restitution and Unjust Enrichment

§ 51(4) states: 

The unjust enrichment of a conscious wrongdoer . . .

is the net profit attributable to the underlying

wrong. The object of restitution in such cases is to

eliminate profit from wrongdoing while avoiding, so

far as possible, the imposition of a penalty. 

Restitution remedies that pursue this object are often

called ‘disgorgement’ or ‘accounting.’ 

The Arizona Supreme Court has held that the “remedy of

restitution is not confined to any particular circumstance or

set of facts. It is, rather, a flexible, equitable remedy

available whenever the court finds that ‘the defendant, upon the

circumstances of the case, is obliged by the ties of natural

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justice and equity’ to make compensation for benefits received.” 

Murdock-Bryant Const., Inc. v. Pearson, 703 P.2d 1197, 1202

(Ariz. 1985). Although the facts in Murdock-Bryant are

distinguishable from those here, the Arizona Supreme court’s

view on the remedy of restitution demonstrates that it can be

used in a variety of circumstances and its application is left

to the court’s discretion. In other words, restitutionary

damages are not per se foreclosed in a trespass case such as

this. 

Finally, the case of Anderson v. Bureau of Indian Affairs,

764 F.2d 1344, 1348 (9th Cir. 1985), stands for the proposition

that a lessor of real property is not limited to the recovery of

rent and may be entitled to a portion of profits earned by a

holdover tenant who knows that a lease has been terminated and

wrongfully holds over. In Anderson, the Bureau of Indian

Affairs (BIA) appealed from a summary judgment awarding it

$35,938.00 of $1,000,000.00 in proceeds from crops planted and

harvested on tribal land by former lessees after termination of

their lease, and awarding the balance of the proceeds to the

lessee. The district court relied upon two Arizona statutes: 

A.R.S. § 12-1271, which permits a landowner to bring an action

to “recover rent, or a fair and reasonable satisfaction for the

use and occupation of real property . . . when a tenant remains

in possession after termination of his right of possession” and 

A.R.S. § 12-1257, which states that “[a] tenant in possession in

good faith, under a lease . . . , is not liable beyond the rent

in arrears at the time the action is brought, and that which

afterward accrues during continuance of his possession.” The

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district court concluded that the tribe was entitled to recover

rent in arrears under A.R.S. § 12-1271 and was limited to the

recovery of the rent under § A.R.S. 12-1257. 

The Ninth Circuit reversed. The court construed the

meaning of “fair and reasonable satisfaction” in A.R.S.

§ 12-1271 and concluded that the BIA was not limited to the

recovery of rent when the lessees planted their cotton crop

knowing that the lease had been terminated. The court reasoned

that it would be neither fair nor reasonable to limit the BIA’s

and tribe’s recovery to an amount equivalent to the rent due

because the tribe members could have chosen to farm the land

themselves, and if they had, the crop proceeds would be theirs. 

However, the court found that the lessees should recover the

costs they incurred in producing the crops as otherwise the BIA

would receive a windfall. 

While the Anderson court does not mention the Restatement

(Third) of Restitution and Unjust Enrichment, the reasoning of

the case supports the conclusion that a landlord is not limited

to the recovery of rent for the wrongful use and occupation of

his or her property. Instead, a court may order the

disgorgement of profits as a remedy under certain

circumstances.7

7 Debtors contend the case is distinguishable because JLE

could not have used the Dairy I property to run a dairy farm

itself. While it is true that JLE was the entity created for

holding the dairy properties, the record shows that

Mr. Echeverria’s and Mr. Odom’s business plan was to update all

three dairies on a rotating basis so that the Accomazzo/Ambien

Dairy and Rio Loco dairy could operate effectively. They were

(continued...)

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In sum, these authorities collectively show that under

Arizona law a plaintiff in a trespass action is permitted to

claim restitution as a measure of damages as an alternative to

damages for payment of rent. Accordingly, we conclude that the

bankruptcy court did not err by calculating JLE’s damages using

a restitutionary measure of damages, including the disgorgement

of profits. Since none of the cases cited by Debtors are

binding or compel a different result, it is not necessary for us

to discuss them. 

3. The bankruptcy court erred in calculating the 

postpetition profits.

Where the trespasser’s conduct is conscious, his or her

liability may be measured by the trespasser’s benefit or profit

from the trespass. Restatement of Restitution §§ 40, 51(4). 

In calculating Debtors’ liability under this standard, the

bankruptcy court first considered Debtors’ use of its silage,

which Erik admitted would have been valueless if Debtors were

required to move from the property. The court calculated the

amount of silage used by Debtors on a daily basis and 

multiplied that number by the number of days they used JLE’s

property postpetition to arrive at a total representing Debtors’

benefit. 

Next, the court considered the profits Debtors gained by

being able to operate a larger dairy during the trespass period. 

In this regard, the bankruptcy court noted that to move onto the

7(...continued)

unable to implement that plan due to Debtors’ trespass on

Dairy I.

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Van Leeuwen Property, Debtors had to sell 1405 dairy cows at a

May auction. The remainder of their herd was moved to the Van

Leeuwen property and used in Debtors’ continued dairy

operations. The court found Debtors directly benefitted to the

extent they profited from being able to use the 1405 cows on the

Dairy I property that they could not use on the Van Leeuwen

property. The court then calculated Debtors’ profit based on

these additional cows. After applying credits for rent paid,

the bankruptcy court found in the September 30, 2016 order that

JLE had a prepetition claim for $579,072.51 and a postpetition

claim entitled to administrative priority in the amount of

$1,571,916.11. 

Debtors contend that the bankruptcy court erred in

calculating JLE’s postpetition claim. According to Debtors, the

bankruptcy court make a “critical mistake” of double-counting. 

This double-counting occurred because the court took the amount

of silage used in the relevant time period and added that figure

to a portion of the net income derived from its profits gained

from operating a larger dairy operation on JLE’s property. 

Debtors argue that it was error to include both items in the

measure of restitution. Debtors also contend that the court’s

analysis of the amount of silage utilized by Debtors during

their occupancy is not a proper method to calculate “profits”

since it is an expense item. We agree.

 The proper measure of recovery in this case must be the

benefits, or net profits, received by Debtors from the wrongful

use of JLE’s property. Net profit is the business’s gross

revenues less any operating expenses. An operating expense

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would include the silage that was bought by Debtors to feed

their cows, including the extra cows that Debtors kept on the

property by virtue of their wrongful trespass. Debtors did not

generate a direct profit, or benefit, by use of the silage after

their trespass. Instead, they simply avoided a loss of

something that they had already paid for. Nonetheless, their

purchase of the silage was a legitimate operating expense

because it was fed to the cows which generated the profits that

accrued to Debtors as a direct result of their wrongful

trespass. Accordingly, the bankruptcy court erred by

considering the silage as a separate component of damages which

resulted in overstating and double counting the wrongfully

obtained profits. Therefore, we vacate the bankruptcy court’s

postpetition damage award and remand for a calculation of

damages consistent with this memorandum.

 VI. CONCLUSION

For the reasons stated, we AFFIRM the bankruptcy court’s

findings regarding Debtors’ conscious trespass in the pre and

postpetition periods. We VACATE the bankruptcy court’s

postpetition damage award and REMAND for a calculation of

damages consistent with this memorandum.

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