Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_02-cv-05200/USCOURTS-caed-1_02-cv-05200-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Account Receivable

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

FLAGSHIP WEST, LLC; MARVIN G.

REICHE; and KATHLEEN REICHE,

Plaintiffs,

v.

EXCEL REALTY PARTNERS, L.P.; NEW

PLAN EXCEL REALTY TRUST, INC.,

Defendants.

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1:02-cv-05200 OWW DLB

MEMORANDUM DECISION AND

ORDER RE POST-TRIAL

ELECTION OF REMEDIES

I. INTRODUCTION

Plaintiffs FLAGSHIP WEST, LLC; MARVIN G. REICHE; and

KATHLEEN REICHE (“Plaintiffs”), following a jury trial and

verdicts in their favor, elect to rescind their lease with

Defendant EXCEL REALTY PARTNERS, L.P. (“Defendant”), and to be

awarded restitution and consequential damages in lieu of the

contract damages that were awarded at that jury trial. Defendant

opposes the election and argues that Plaintiffs are not entitled

to rescission, and in the alternative that if rescission is

effected, Plaintiffs are only entitled to restitution and not to

consequential damages.

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Plaintiffs also argue that if they are granted rescission,

sufficient evidence was adduced at trial for the court to

determine the amount of damages. Defendant argues first that the

Plaintiffs’ measure of restitution damages is improper, and

second, that there is insufficient record evidence to determine

the amount of damages. Defendant contends that an evidentiary

hearing should be held and that the court sitting in equity

determine the damages amount after the appropriate discovery is

conducted and expert damages reports are submitted.

II. BACKGROUND

A. Procedural History.

This case arises out of a dispute relating to a 15-year

ground lease (“Lease”) between the parties. The Lease provided

that Plaintiffs would have the “exclusive right to operate a self

service buffet style family restaurant within [a shopping complex

owned by Defendants].” (Id. at 2 (quoting Doc. 302, Ex. A, Lease

§ 6.3)) The Lease commenced on July 16, 1998. (Id. at 1) 

Marvin and Kathleen Reiche are the only members of Flagship. 

Marvin Reiche is Flagship’s manager. To construct the restaurant

on the leased real property, Flagship borrowed approximately $2

million from The Money Store for a twenty-five year term. This

loan was secured by a deed of trust on Flagship’s leasehold

interest in the real property. The Reiches also executed written

personal guarantees of the loan.

On June 10, 1999, Plaintiffs opened their restaurant. 

Approximately one year later, a buffet restaurant serving Chinese

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1 The verdict form stated in pertinent part:

Question 5: Have Plaintiffs proved by a

preponderance of the evidence that it was

reasonably certain that the [Restaurant] in

Modesto would have earned net profits? 

Yes _X__ No ___

***

Question 6: If your answer to Question 5 is

“yes,” what is the total amount of damages

Plaintiffs proved by a preponderance of the

evidence were caused by Defendant’s breach of

contract?

$1,502,00.00

***

Question 7: Have Defendants proved by a

preponderance of the evidence that Plaintiffs

failed to take reasonable steps to mitigate

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food opened in Defendants’ shopping complex in a location

directly across from restaurant. Plaintiffs contend that the

Defendants breached the exclusive use provision of the Lease

(§ 6.3) by allowing the operation of the other buffet restaurant

and that the breach caused the Plaintiffs’ restaurant to become

unprofitable, leading to its closure on April 1, 2001. (See id.)

Plaintiffs filed suit alleging breach of contract, fraud,

and negligent misrepresentation, requesting contract damages and

alternatively rescission damages. The case was tried to a jury. 

The trial commenced on November 12, 2003 and verdicts were

returned on December 3, 2003. The general verdict with

interrogatories found in favor of the Plaintiffs and awarded them

$1,480,740.00 in contract damages.1 (Doc. 279, Minutes of

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or reduce the damages caused by Defendants’

breach of the lease?

Yes ___ No _X_

***

Question 8: What amount of Plaintiffs’

damages (your answer to Question 6) could

have been avoided if Plaintiffs had

undertaken reasonable efforts to mitigate or

reduce their damages?

$21,260.00

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Dec. 3, 2003, 10th Day of Jury Trial) The entry of judgment was

deferred in order to allow Plaintiffs to elect between the

remedies of contract damages or rescission. (See Doc. 327,

December 3, 2004 Transcript 1683:6-10)

Plaintiffs elected rescission in a brief filed December 29,

2003 (Doc. 301), after which a series of nine (9) briefs were

filed by the parties and two oral arguments were heard. (Doc.

353, November 2004 Order 3-4 (recounting procedural history of

post-trial filings))

This memorandum decision is the second of two relating to

Plaintiffs’ post-trial election of rescission and rescission

damages. The first order (Doc. 353), issued on November 19, 2004

(“November 2004 Order”), addressed a number of issues relating to

Plaintiffs’ election of remedies, all of which were hotly

contested by the parties. The November 2004 Order scheduled

another hearing for December 13, 2004 to address unanswered

questions. At the hearing, which was later rescheduled and held

on February 7, 2005, the parties were given permission to file

one additional brief each to address the open questions. On

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March 14, 2005, Plaintiffs filed a brief titled “Plaintiffs’

Post-Trial Brief Requesting Further Proceedings.” (Doc. 358,

“Pls.’ Mem.”) On April 5, 2005, Defendants filed opposition. 

(Doc. 360, “Def.’s Opp.”)

The sole issues now before the court for decision are:

(1) Whether rescission is warranted in this case and

the effect of the jury’s specific finding of a

material breach of the exclusive use provision

(§ 6.3) of the Lease.

(2) If rescission is warranted, what categories of

damages may be awarded.

(3) In light of the categories of damages that are

allowed, whether sufficient evidence exists in the

record to determine the exact amount of damages to

be awarded or whether additional proceedings are

required, including either a jury trial or an

evidentiary hearing before the court sitting in

equity on the issue of the damages amount.

(See Doc. 353, November 2004 Order 36-37, 53-54)

The issues presented as to the effect of the jury’s verdicts

and entitlement to rescission are questions of law. 

B. Categories and Amounts of Damages Claimed by

Plaintiffs.

Plaintiffs assert that their rescission damages consist of

two main categories of damages, restitution and what they term

“special” damages. Plaintiffs first assert they are entitled to

restitution damages, including rent and costs of improvements to

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Defendants’ real property. Plaintiffs also assert they are

entitled to “special,” or consequential, damages, including costs

of opening, running, and closing the restaurant, interest on both

the initial construction loan and The Money Store loan, and

prejudgment interest. These amounts are set forth in Exhibits A

and B to Plaintiffs’ brief (Doc. 358). The amounts in Exhibits A

and B are not consistent in all respects. Plaintiffs concede

Defendant is entitled to some off-set. Plaintiffs contend the

off-set consists of money they received from selling the

restaurant equipment at auction ($11,260) and for rent received

by Plaintiffs from a sub-tenant ($10,000).

III. ANALYSIS

A. Choice of Law.

The parties have agreed that in this diversity action the

substantive law of the state of California provides the rule of

decision.

B. Whether Rescission of the Lease is Warranted.

The sub-issues to be decided are: (1) whether rescission is

warranted based on the jury’s finding of a material breach;

(2) Defendant’s argument that the court committed “prejudicial

error” in holding that Defendant is estopped from asserting the

Lease’s anti-rescission provision (§ 4.5) as a bar to rescission;

(3) Defendant’s argument that Plaintiffs are not entitled to

rescission because they have an adequate remedy at law.

//

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1. Whether Rescission Is Warranted Based on the

Jury’s Finding of a Material Breach.

California Civil Code § 1689(b) provides that “[a] party to

a contract may rescind the contract,” if, among other things, the

consideration fails in one of three ways:

* * *

(2) If the consideration for the obligation of the

rescinding party fails, in whole or in part,

through the fault of the party as to whom he

rescinds.

(3) If the consideration for the obligation of the

rescinding party becomes entirely void from any

cause.

(4) If the consideration for the obligation of the

rescinding party, before it is rendered to him,

fails in a material respect from any cause.

* * *

Cal. Civ. Code § 1689(b) (emphasis added).

Read together, these provisions are interpreted to mean that

a contract may be rescinded if there is either a total failure of

consideration or a partial but material failure of consideration. 

North Pac. S. S. Co. v. Terminal. Inv. Co., 43 Cal. App. 182, 188

(1919); Newcomb & Co., Ltd. v. Sainte Claire Realty Co., 55 Cal.

App. 2d 437, 443-44 (1942); Medico-Dental Bldg Co. of Los Angeles

v. Horton & Converse, 21 Cal. 2d 411, 433-34 (1942); Wilson v.

Corrugated Kraft Containers, 117 Cal. App. 2d 691, 697 (1953);

Crofoot Lumber, Inc. v. Thompson, 163 Cal. App. 2d 324, 332-33

(1958) (citing Corbin on Contracts, § 1104, p. 464); Calabrese v.

Rexall Drug and Chem. Co., 218 Cal. App. 2d 774, 782 (1963);

Nelson v. Sperling, 270 Cal. App. 2d 194, 195 (1969); Wyler v.

Feuer, 85 Cal. App. 3d 392, 403-4 (1979); FDIC v. Air Florida

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Sys., Inc., 822 F.2d 833, 839-40 (9th Cir. 1987); Bradley v.

Chiron Corp., 136 F.3d 1317, 1327 (1998) (applying California

law). 

Rescission is warranted if there has been a material breach. 

A breach resulting in a partial failure of consideration is

material if the breach goes to the essence of the contract. 

FDIC, 822 F.2d at 840 (“[A] partial failure of consideration

justifies rescission only if the failure is material, or goes to

the essence of the contract.”); Wyler, 85 Cal. App. 3d at 403-4

(“Case law has uniformly held that a failure of consideration

must be ‘material,’ or go to the ‘essence’ of the contract before

rescission is appropriate.”); Crofoot Lumber, 163 Cal. App. 3d at

333 (“The injured party...can not maintain an action for

restitution of what he has given the defendant unless the

defendant’s non-performance is so material that it is held to go

to the ‘essence’....”) (quoting Corbin on Contracts § 1104, p.

464).

Factors considered in determining whether a partial breach

was material, include: the intent of the parties, the language

of the lease or contract at issue, and the context and subject

matter of the agreement. Medico-Dental, 21 Cal. 2d at 433. An

additional factor is whether a party would have entered into the

contract without the provision in question. Id. The question of

materiality is one of fact. Calabrese, 218 Cal. App. 2d at 782

(“This matter of materiality of the failure poses a question of

fact.”); FDIC, 822 F.2d at 840 (same).

One way of determining whether a breach is material is to

decide whether the covenant breached was independent or

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dependent. Breach of an independent covenant is not, as a matter

of law, a material breach. By definition, an independent

covenant does not go to the essence of a contract. Mills v.

Richmond Co., Inc., 56 Cal. App. 774, 776 (1922); Medico-Dental,

21 Cal. 2d at 418-20. Dependent covenants run to the whole of

the consideration, whereas independent covenants run to only part

of the consideration. Medico-Dental, 21 Cal. 2d at 419-20. 

Factors considered in determining whether a covenant is

independent or dependent overlap with factors considered in

determining whether a breach is material. Id. at 433. Covenants

are deemed dependent or independent based on the intent of the

parties, the language of the lease or contract at issue, and the

context and subject matter of the agreement. Id. at 419-20. If

the fact-finder determines that a covenant breached is

independent, then it follows that the breach was not material and

no rescission is warranted. However, the fact-finder need not

necessarily answer the question whether the covenant breached is

independent in order to decide that the breach was material. 

California case law has long held that the answer to the

materiality question is determinative. North Pac., 43 Cal. App.

at 188; Newcomb, 55 Cal. App. 2d at 443-44; Medico-Dental,

21 Cal. 2d at 433-34; Wilson, 117 Cal. App. 2d at 697; Crofoot

Lumber, 163 Cal. App. 2d at 332-33; Calabrese, 218 Cal. App. 2d

at 782; Nelson, 270 Cal. App. 2d at 195; Wyler, 85 Cal. App. 3d

at 403-4; FDIC, 822 F.2d at 839-40; Bradley, 136 F.3d at 1327. 

Plaintiffs argue rescission of the Lease is warranted

because the jury found Defendant’s breach of the exclusive-use

provision (§ 6.3) was a material breach. (See Doc. 280, Verdict

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Interrogatories 2, 3) Defendant argues rescission of the Lease

is not warranted because the exclusive-use provision is an

independent covenant, and that, as a matter of law, breach of an

independent covenant does not warrant rescission. Defendant

impliedly argues that the jury’s finding that the breach was

material is insufficient grounds to entitle Plaintiffs to the

remedy of rescission or is not supported by substantial evidence.

The Lease was for a site that would be exclusively used for

a buffet restaurant at Defendants’ shopping center. Plaintiffs

established they were not willing to invest two million dollars

to build a restaurant and to commit to a fifteen (15) year term

lease without an exclusive use lease contract. Plaintiffs

bargained to be the sole and exclusive buffet restaurant in the

center. Defendant’s position abdicates the jury’s materiality

finding. Defendant’s argument is reasonably construed as another

argument to support a Rule 50(b) renewed motion for judgment as a

matter of law. Defendant has made no such motion. Even if

Defendant had properly brought such a motion, Defendant’s

argument still fails.

The law in California is well-established that a material

breach of contract is sufficient grounds to support the remedy of

rescission. North Pac., 43 Cal. App. at 188; Newcomb, 55 Cal.

App. 2d at 443-44; Medico-Dental, 21 Cal. 2d at 433-34; Wilson,

117 Cal. App. 2d at 697; Crofoot Lumber, 163 Cal. App. 2d at 332-

33; Calabrese, 218 Cal. App. 2d at 782; Nelson, 270 Cal. App. 2d

at 195; Wyler, 85 Cal. App. 3d at 403-4; FDIC, 822 F.2d at 839-

40; Bradley, 136 F.3d at 1327. The jury in this case found that

breach of the exclusive use provision was material. That finding

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2 Jury Instruction No. 21, titled “RESCISSION” stated in

full:

Plaintiffs claim and have the burden of

proving, by a preponderance of the evidence,

that the contract with Defendant Excel Realty

Partners was canceled.

A party to a contract may cancel the contract

if for any reason the party does not receive

the material performance that was promised to

be provided by the other party or if an

important part of the performance that was

promised was not provided. The term

“material” as used in this instruction, means

important or serious. You must decide

whether Plaintiff failed to receive any

material performance Defendant promised to

provide. Performance is material if it is

important to a contract and if it is likely

to cause a reasonable person not to have

entered into the contract if such performance

was not provided.

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was supported by substantial evidence based on the Plaintiffs’

need for commercial protection of its buffet restaurant business

within the shopping center.

Plaintiffs note that the interrogatory regarding materiality

was propounded to address their option to elect rescission after

the trial was over. The record bears this out. First, the jury

was instructed on the law regarding materiality:

You must decide whether Plaintiff failed to

receive any material performance Defendants

promised to provide. Performance is

“material” if it is important to a contract

and if it is likely to cause a reasonable

person not to have entered into the contract

if such performance was not provided.

(Doc. 281, Jury Instruction No. 21)2

Plaintiffs also cite to the transcript of the conference on

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jury instructions to corroborate that Question 2 on the verdict

form (“Was Defendant’s breach of paragraph 6.3 of the lease

agreement, material?”) was intended to test Plaintiff’s

entitlement to rescission:

MR. FAIRBROOK: Your Honor, for you to know whether we

have a right to rescission, don’t we

need them to determine whether there was

a material breach, or is that number 2,

is that what you are saying? Oh, yes,

number 2 is fine.

THE COURT: We are asking them to find if there is a

material breach --

MR. FAIRBROOK: I stand corrected, your Honor.

THE COURT: -- specifically.

(Doc. 336, Jury Trial Day 9, Transcript 1535:7-10) 

Finally, Plaintiffs cite a portion of its counsel’s

(Mr. Fairbrook’s) final argument during trial:

I want to explain to you a couple of things

that you are going to see on your verdict

forms. There is going to be a series of

questions that ask you to answer questions

and answer further questions.

The second question you are going to be

asked, I believe it’s number two, is whether

or not you determine that the breach is

material.

One of Plaintiffs’ claims is rescission. The

only thing you have to do is make a claim as

to the materiality of the breach. You do not

have to calculate damages with respect to

this.

(Id. at 1585:15-25)

Defendant does not dispute that the option of rescission was

discussed during the conference on jury instructions, included in

the jury instructions themselves, and discussed during closing

arguments. Instead, Defendant’s only response is this cursory,

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confusing assertion: 

Plaintiffs wrongly assert that rescission is

justified because the jury found a “material

breach” had occurred. However, this is not

so. California Civil Code § 1689 requires a

“failure of consideration” to justify

rescission. 

(Doc. 360, Def.’s Mem. 4) Defendant’s argument is wrong. 

Defendant fails to acknowledge that California Civil Code § 1689

requires a material failure of consideration. A material breach

can constitute a material failure of consideration. See FDIC,

822 F.2d at 840; Crofoot Lumber, 163 Cal. App. 2d at 332-33. 

Contrary to Defendant’s contention, Plaintiffs are correct that

the right to rescission is established because the jury found a

material breach of the Lease.

After a nine-day jury trial, the jury found that breach of

the exclusive use provision (§ 6.3 of the Lease) was a material

breach. The purpose of the Lease was for Plaintiffs to invest

over two million dollars to build a buffet-style restaurant in a

shopping center where they were to pay substantial rent for more

than fifteen (15) years. In return for this commitment of

capital and rent, Plaintiffs sought an exclusive right to limit

competition in the center from another buffet-style restaurant. 

The term was material to the conduct of Plaintiffs’ business and

is integral to the purpose of the Lease, operation by the tenant

of a buffet-style restaurant. Defendant argued and lost its

contention that a “Chinese” buffet was not within the “buffetstyle” restaurants to be excluded. The evidence showed that

Plaintiffs would not have undertaken the very substantial

financial risk of constructing a restaurant that would become the

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property of the lessor, if a competing buffet-style restaurant

were operating in the center directly across from Plaintiffs’

restaurant. Plaintiffs would not have entered into the Lease.

Defendant asserts that materiality is not the central

inquiry, and rather, the key inquiry is whether the covenant

breached is independent. It is true that some courts approach

the question of rescission based at least in part on an analysis

of whether the provision breached was a dependent or independent

covenant. See e.g., Medico-Dental, 21 Cal. 2d at 418-19; Mills,

56 Cal. App. at 776. This follows because the factors that

determine whether a covenant is independent, overlap with the

factors that in determine whether a breach was material. MedicoDental, 21 Cal. 2d at 433. Breach of an independent covenant

does not warrant rescission because, by definition, breach of an

independent covenant is not material. By its very nature, an

independent covenant does not run to the whole of the

consideration. However, what Defendant has not provided is a

citation to any authority holding that exclusive use provisions,

such as the one at issue here, are independent covenants as a

matter of law. In fact, the courts in the two cases upon which

Defendant relies, Kulawitz and Medico-Dental, found that the

exclusive use covenants at issue there were dependent, based on

an analysis of the factors and the factual record.

In this case, the jury has already made a finding that the

breach was material. It is not necessary for the court to now

decide, as a matter of law, that the covenant at issue was

independent. The provision was integral to the Lease, which

would not have been entered into without it. The answer to the

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mixed question of law and fact as to independence of the

provision is irrelevant to the question whether the Plaintiff is

entitled to elect rescission. The jury’s finding of materiality

provides sufficient grounds for rescission, according to wellestablished California law.

2. Defendant’s Argument that it was “Prejudicial

Error” for the Court to Hold that Defendant Is

Estopped from Asserting § 4.5 of the Lease Does

Not Bar Rescission.

While Defendant argues Plaintiffs are not entitled to

rescission notwithstanding the jury’s finding of materiality,

Defendant states that its primary argument against rescission is

based on § 4.5 of the Lease, an anti-rescission clause, which

allegedly bars Plaintiffs from electing the remedy of rescission. 

(Doc. 360, Def.’s Mem. 3) Defendant argues that the Court’s

holding in the November 2004 Order that Defendant was estopped

from asserting § 4.5 as a bar to rescission was “prejudicial

error.” Defendant argues that the elements of neither judicial

estoppel nor equitable estoppel are present. When the issue of

the anti-rescission clause was presented at trial, Plaintiffs

argued this Defendant had not previously asserted § 4.5 as a

defense.

“Judicial estoppel is an equitable doctrine that precludes a

party from gaining an advantage by asserting one position, and

then later seeking an advantage by taking a clearly inconsistent

position.” Hamilton v. State Farm Fire & Casualty Co., 270 F.3d

778, 782 (9th Cir. 2001); see also Wagner v. Prof’l Eng’rs in

Californial Gov’t, 354 F.3d 1036, 1044 (9th Cir. 2004) (“Judicial

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estoppel, sometimes also known as the doctrine of preclusion of

inconsistent positions, precludes a party from gaining an

advantage by taking one position, and then seeking a second

advantage by taking an incompatible position.” (quoting Rissetto

v. Plumbers & Steamfitters Local 343, 94 F.3d 597, 600 (9th Cir.

1996)). Furthermore, judicial estoppel is invoked “not only to

prevent a party from gaining an advantage by taking inconsistent

positions, but also because of ‘general consideration[s] of the

orderly administration of justice and regard for the dignity of

judicial proceedings’ and to ‘protect against a litigant playing

fast and loose with the courts.’” Hamilton, 270 F.3d at 782

(quoting Russell v. Rolfs, 893 F.2d 1033, 1037 (9th Cir. 1990)).

Three factors set forth by the United States Supreme Court

in New Hampshire v. Maine, 532 U.S. 742, 751 (2001) are

considered in determining whether judicial estoppel should be

invoked. These factors are: (1) “a party’s later position must

be clearly inconsistent with its earlier position”; (2) the court

must have relied on, or accepted, the party’s previous

inconsistent position; and (3) “whether the party seeking to

assert an inconsistent position would derive an unfair advantage

or impose an unfair detriment on the opposing party if not

estopped.” New Hampshire, 532 U.S. at 751; see also Hamilton,

270 F.3d at 782-3.

The first issue is whether Defendant’s current position

regarding § 4.5 is clearly inconsistent with its earlier

position. Defendant argues that the Court held that § 4.5 bars

rescission and that it never argued to the contrary. (Doc. 360,

Def.’s Mem. 8-9) The issue, however, is not whether the language

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3 The Pretrial Order stated:

F. Defendants alleged failure to perform their duties

under the Ground Lease was not a material breach

and therefore did not relieve FLAGSHIP or the

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of § 4.5 bars rescission. The issue is whether rescission may

now be elected as a post-verdict remedy by Plaintiffs. Defendant

previously took the position that rescission was available to

Plaintiffs. (See Doc. 353, November Order 52-3) Defendant never

previously asserted in the litigation that § 4.5 barred

rescission. It did not move to dismiss or for summary judgment

based on the anti-rescission clause. It did not identify the

issue. Now, Defendant does identify the issue. Defendant’s

earlier position throughout the case and before trial, not to

raise or rely on § 4.5, is clearly inconsistent with its later

position at trial.

The second issue is whether the court accepted Defendant’s

earlier position. Some reliance is required for the acceptance

prong to be satisfied. Interstate Fire & Cas. Co., an Illinois

Corp. v. Underwriters at Lloyd’s, London, 139 F.3d 1234, 1239

(9th Cir. 1998). Here, the court accepted Defendant’s position. 

The court deferred entering judgment to allow the Plaintiffs to

decide whether to elect rescission. In addition, as the November

2004 Order held, the Court accepted Defendant’s litigating

position regarding rescission when it “adopted the Pretrial Order

as the parties’ accurate and full description of the issues to be

determined at trial.” (Doc. 353, November 2004 Order 53) 

Defendant asserted the independent covenant and materiality

defenses to rescission as set forth in the Pretrial Order.3 It

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REICHES of their separate and distinct obligations

under the Ground Lease and Guaranty of Lease. As

such, Plaintiffs are not entitled to rescission of

either the Ground Lease or the Guaranty Lease.

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never asserted § 4.5 prior to trial. The November 2004 Order

noted that Defendant’s statements and actions during trial gave

no indication that it was relying on a contract term barring

Plaintiffs’ right to rescind. Defendant does not assert that it

objected to the deferred entry of judgment, nor does Defendant

suggest it reserved the issue in the final Pretrial Order which

superceded the pleadings and defined the issues of fact and law

for trial. El-Hakem v. BJY Inc., 415 F.3d 1068, 1077 (9th Cir.

2005).

Third, Defendant would obtain an unfair advantage if it is

allowed to assert § 4.5 as a bar to rescission at such a late

stage in the litigation. Discovery was not conducted as to

§ 4.5. Plaintiffs did not know the section would be invoked as a

defense by any dispositive motion or the Pretrial Order. The

contract damages awarded by the jury that Defendant would have to

pay amount to approximately $1.5 million; the damages that

Defendant could potentially pay if rescission is granted are

substantially more, up to the approximately $3.9 million. 

Finally, estoppel in this situation serves the overall policy

goal of judicial estoppel to “protect against a litigant playing

fast and loose with the courts.” Russell, 893 F.2d at 1037

(internal quotations and citations omitted).

Defendant also argues that the court erred in holding that

equitable estoppel barred Defendant from asserting § 4.5 as a

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4 Four elements must ordinarily be proved to establish an

equitable estoppel: (1) the party to be estopped must know the

facts; (2) he must intend that his conduct shall be acted upon,

or must so act that the party asserting the estoppel had the

right to believe that it was so intended; (3) the party asserting

the estoppel must be ignorant of the true state of facts; and,

(4) he must rely upon the conduct to his injury. Salgado-Diaz v.

Ashcroft, 395 F.3d 1158, 1166 (9th Cir. 2005); Hampton v.

Paramount Pictures Corp., 270 F.2d 100, 104 (9th Cir. 1960).

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defense. While it is true that the court cited the elements of

equitable estoppel in the estoppel section of its decision, it is

not the case that the court actually held that equitable estoppel

applied.4 A careful reading of the estoppel discussion reveals

that the court’s reasoning followed the law of judicial estoppel. 

At the end of the section, the court stated that “[b]y staying

silent on § 4.5 until the 9th day of trial and leading the court

and Plaintiffs to believe that rescission was being actively

litigated, Defendants are estopped from raising § 4.5 as a bar to

a rescission remedy.” (Doc. 353, November 2004 Order 53) The

court’s discussion of the equitable estoppel standard and the

absence of specific reference to judicial estoppel, even if

ambiguous, does not prevent the application of judicial estoppel. 

This holding requiring Defendant to be bound by its conduct

throughout the litigation is not clearly erroneous. Defendant

was properly estopped from asserting § 4.5 as a bar to

rescission.

3. Defendant’s Argument that Plaintiffs Are Not

Entitled to Rescission Because Plaintiffs Have an

Adequate Remedy at Law.

Finally, Defendant argues that Plaintiffs are not entitled

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to rescission, an equitable remedy, because Plaintiffs have an

adequate remedy at law. Defendant asserts that “[i]t is well

established under California law that where a breach can be

compensated in damages, rescission is not an appropriate remedy.” 

(Doc. 360, Def.’s Mem. 10) The only cases Defendant cites in

support, Integrated, Inc. v. Alec Fergusson Elec. Contractors,

250 Cal. App. 2d 287, 296-98 (1967); Fountain v. Semi-Tropic Land

& Water Co., 99 Cal. 677, 680 (1893), do not support this

contention. These cases re-state the established rule in

California regarding rescission discussed at length above, i.e.,

that rescission is warranted only if the breach is material. The

cited cases involve the former distinction between law and equity

that applied to rescission as an equitable remedy.

Defendant also cites the general principle that equitable

relief is not warranted when there is an adequate remedy at law,

and a number of cases that support this contention, Wilkison v.

Wiederkehr, 101 Cal. App. 4th 822 (2002); Taliaferro v.

Taliaferro, 144 Cal. App. 2d 109 (1956); Ketchum v. Crippen, 37

Cal. 223 (1869); and Philpott v. Super. Ct., 1 Cal. 2d 512

(1934). Defendant’s argument is a red herring. California Civil

Code § 1689 provides for the remedy of rescission in cases where

the consideration for a contract fails in whole or in a material

way and § 1692 authorizes damages in such cases. This is part of

the statutory abrogation of the equitable-legal distinction

applicable to rescission that formerly existed under California

law. See Radinsky v. T. W. Thomas, Inc., 264 Cal. App. 2d 75, 78

(1968). There is no requirement in the modern law of rescission

that the remedy at law be inadequate before the plaintiff is

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5 The analysis of “consequential” versus “incidental”

damages in the November 2004 Order was related to the question

whether Defendants had a Seventh Amendment right to a jury trial

on the issue of rescission damages. The Seventh Amendment right

to a jury trial, unlike the measure of damages, is a question of

federal law. In diversity cases, when a party’s Seventh

Amendment right to a jury trial is contingent upon whether the

relief to be awarded is legal or equitable in nature, the court

turns to federal law to characterize the remedy as one or the

other. Simler v. Conner, 372 U.S. 221, 222 (1963); Granite State

Ins. Co. v. Smart Modular Techs., Inc., 76 F.3d 1023, 1026-7 (9th

Cir. 1996). The November 2004 Order therefore looked to federal

law to determine whether the remedy sought was legal or equitable

in nature.

The Seventh Amendment right to a jury is no longer at issue. 

The distinction between damages defined as “consequential” or

“incidental” under federal law is not relevant to the issue of

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entitled to rescission whether it is characterized as legal or

equitable relief. Any such requirement has been superceded by

Cal. Civ. Code § 1692.

4. Conclusion.

None of Defendant’s arguments to bar the remedy of

rescission are legally accurate or persuasive. The jury found a

material breach of the Lease. Plaintiffs have elected

rescission, an available remedy, pursuant to Cal. Civ. Code

§§ 1689 and 1692. Plaintiffs are entitled to rescind and to

rescission damages.

C. Types of Rescission Damages That May Be Recovered.

1. Whether Plaintiffs Are Entitled to Restitution,

Consequential Damages, or Both.

The next issue is the types of damages that may be awarded

under rescission.5 California Civil Code § 1692 provides that

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the measure of damages based on rescission under California law. 

Section 1692 governs and Section 1692 provides for

“consequential” damages as interpreted by California case law. 

In a diversity case, the issue of measure of damages is one of

substantive law as governed by the law of the forum state. 

Clausen v. M/V NEW CARISSA, 339 F.3d 1049, 1064-65 (9th Cir.

2003) (citing Browning-Ferris Indus. v. Kelco Disposal, Inc., 492

U.S. 257, 278, 109 S.Ct. 2909 (1989) (“In a diversity action, or

in any other lawsuit where state law provides the basis of

decision, the propriety of an award of...damages for the conduct

in question...[is a] question [ ] of state law.”)).

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two types of damages, restitution and consequential damages, are

awardable as rescission damages:

A claim for damages is not inconsistent with

a claim for relief based upon rescission. 

The aggrieved party shall be awarded complete

relief, including restitution of benefits, if

any, conferred by him as a result of the

transaction and any consequential damages to

which he is entitled; but such relief shall

not include duplicate or inconsistent items

of recovery.

The purpose of rescission damages, including both

restitution and consequential damages, is to restore the parties

to the status quo ante. Runyon, 2 Cal. 3d at 314-15 (“It is the

purpose of rescission to restore both parties to their former

position as far as possible...and to bring about substantial

justice by adjusting the equities between the parties despite the

fact that the status quo cannot be exactly reproduced.”)

(internal quotations and citations omitted), quoted in Gardiner

Solder Co. v. Suppaloy Corp., 284 Cal. App. 3d 1537, 1544 (1991);

see also Millar v. James, 254 Cal. App. 2d 530, 533 (1967)

(“[T]he 1961 enactment of Civil Code section 1692 makes clear the

policy of this state to give full relief in a case of rescission,

unimpeded by any technical distinction between restitution and

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damages.”).

Section 1692 provides that the determination of the types of

damages necessary to restore the plaintiff to the status quo ante

is within the discretion of the trial court: 

If in an action or proceeding a party seeks

relief based upon rescission, the court may

require the party to whom such relief is

granted to make any compensation to the other

which justice may require and may otherwise

in its judgment adjust the equities between

the parties.

Cal. Civ. Code § 1692; see also 12 Harry D. Miller and Marvin B.

Starr, California Real Estate (“Miller and Starr”)

“Reimbursement” or “Consequential Damages” § 34:9, § 34:9 (3d ed.

2004) (“Rescission ‘damages’ are simply a court-determined

adjustment of the equities between the parties.”); Gardiner

Solder, 232 Cal. App. 3d at 1546 (in case where restitution

damages were awarded, the appellate court noted that “[t]he

manner in which restitution is to be made is addressed to the

sound discretion of the trial court”) (citing Runyon, 2 Cal. 3d

at 316); Utemark v. Samuel, 118 Cal. App. 2d 313, 318 (1953).

Restitution is the restoration to the rescinding party of

his consideration. See Nelson, 270 Cal. App. 2d at 195

(“Restitution means that the defendant must hand back to the

plaintiff what the defendant has received from the plaintiff in

the transaction.”); see also Ogden Martin Sys., Inc. v. San

Bernardino County, Cal., 932 F.2d 1284, 1287 (9th Cir. 1991) (en

banc) (“In a rescission action, the complaining party may receive

restitution for all benefits conferred on the other party,

restoring both parties to economic status quo ante.”); Crofoot

Lumber, 163 Cal. App. 2d at 331; 12 Miller and Starr at § 34:9. 

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6 Plaintiff labels its claimed consequential damages as

“special” in an attempt to be consistent with the distinction

made between consequential and incidental damages in the November

2004 Order. As explained above, however, this distinction is not

a meaningful one with respect to the application of § 1692. 

Damages claimed by Plaintiffs other than restitution are

therefore referred to as “consequential” for the sake of

consistency with the language of § 1692.

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Consequential damages are any other relief necessary to restore

the plaintiff to the status quo ante, or to as near an economic

position as he was in before the contract was entered into. 

Runyon, 2 Cal. 3d at 316-17; Lobdell v. Miller, 114 Cal. App. 2d

328, 343 (1953); see also O’Neill v. Spillane, 45 Cal. App. 3d

147, 159 (1975) (in fraud cases the term “additional damages”

means expenses and other consequential damages stemming from the

fraud).

Plaintiffs argue they are entitled to both restitution and

consequential damages under § 1692. Plaintiffs identify several

subcategories of damages under the primary categories of

restitution and consequential damages.6 First, Plaintiffs assert

they are entitled to the following subcategories of restitution:

(1) All Rent Paid to Defendants under the

Lease; and

(2) Costs of Improvements to the Land,

including:

(a) Building Construction Costs

(b) Equipment Costs

Second, Plaintiffs assert they are entitled to the following

subcategories of consequential damages:

(1) Expenses Relating to Opening, Running,

and Closing the Restaurant, including:

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7 According to Defendant, Plaintiffs agreed to pay

approximately one year rent owed to Defendant by the Bank of

America, a former tenant. Defendant asserts this agreement was

made before the Lease was entered into and was independent of the

Lease. The court could not verify this assertion. Defendants

cited “Plaintiff’s Exhibit P” but provided no copy. Plaintiffs

do not discuss this agreement in their brief.

8 Pursuant to the “Forbearance Agreement,” which Plaintiffs

entered into with their lender, The Money Store, Plaintiffs

agreed, inter alia, to continue to pay rent to Defendants pending

the conclusion of the lawsuit.

9 In exchange for Plaintiffs’ agreement to continue to pay

rent, The Money Store agreed under to the Forbearance Agreement

to allow interest on the loan to accrue unpaid pending resolution

of the case. In accordance with that agreement, Plaintiffs have

not paid this interest and it continues to accrue to date.

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(a) Opening Inventory;

(b) Franchise Fee to Golden

Corral; 

(c) Training Costs;

(e) Interest Paid on Construction

Loan;

(f) “Bank of America” rent;7

(g) Rent paid under Plaintiffs’

Forbearance Agreement with

their Lender;8 and

(h) Other “Losses” and “Expenses.”

(2) Accrued But Unpaid Interest;9 and

(3) Prejudgment Interest.

Defendant does not contest that if rescission is awarded,

Plaintiffs are entitled to restitution damages. Specifically,

Plaintiffs are entitled to reimbursement for the rent paid under

the Lease and the improvements to the land. Defendant does

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10 Defendant argues that Plaintiffs are not entitled to

consequential damages because this court held that Plaintiffs

waived their right to consequential damages by failing to submit

the issue to the jury. Defendant cites to no portion of the

November 2004 Order in support of its contention. Defendants

cite only to the court’s comment during the February 7, 2005,

hearing:

I believe that my ruling communicates my view

that the issue of consequential damages was

not submitted to the jury, and to that

extent, it was not reserved.

However, Defendant fails to cite the lines of the transcript

immediately following this statement:

However, what restitutionary damages that

would result from rescission or any other

incidental damages or other damage that would

be permitted by law is, as far as I’m

concerned, reserved and open. 

26

dispute, however, that equipment costs should be included as

“restitution” damages. Defendants did not keep the equipment;

instead it was sold at auction for $11,260, an amount which was

received by Plaintiffs. Restitution is the disgorgement of

unjust profits. See Nelson, 270 Cal. App. 2d at 195; Runyon, 2

Cal. 3d at 316-17; Lobdell, 114 Cal. App. 2d at 343; Ogden

Martin, 932 F.2d at 1287. Defendants did not keep the equipment

and did not profit by its purchase. Equipment costs are not

restitution; they are instead sought as consequential damages.

Although Defendant does not dispute Plaintiffs’ entitlement

to restitution, Defendant does dispute Plaintiffs’ entitlement to

consequential damages. However, Defendant offers no persuasive

argument or legal authority why § 1692 does not apply in this

case.10 Section 1692 explicitly provides for consequential

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This statement by the court was based on Defendant’s stated

position trial that rescission damages would be addressed by the

court after the jury trial. The court had ruled that the

Plaintiffs elected to not submit the issue of the amount of “all

consequential damages” to the jury.

Second, Defendant fails to address § 1692 at all in its

brief despite that Plaintiffs discuss § 1692 at length in their

brief. Ignoring the law violates Defendant’s counsel’s

professional responsibility to cite and address authority adverse

to their position. This conduct makes the court’s job manifestly

more burdensome.

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damages in cases where rescission is awarded.

Plaintiffs are entitled to both restitution and

consequential damages. Whether Plaintiffs are entitled to all

categories of consequential damages they claim is discussed below

in subsection III.C.3.

2. Calculation of Restitution Damages.

While Defendant does not dispute Plaintiffs’ right to

restitution as rescission damages, Defendant disputes the way in

which Plaintiff calculates restitution damages, specifically cost

of improvements to the land and rent.

(a) Measure of Damages for Plaintiffs’

Improvements to the Land.

First, Defendant argues that the proper measure of damages

for the improvements to the land (i.e., the construction of the

building) is the fair market value of the building. Plaintiffs

argue that out-of-pocket cost is the correct measure. (Doc. 360,

Def.’s Opp. 21; Pls.’ Mem. 18-19) Miller and Starr note that, in

cases involving the sale of real estate, “[w]here the seller has

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committed fraud on the buyer, the decisions are unclear whether

the buyer receives the cost of his or her improvements or their

value.” 12 Miller and Starr at § 34:9. Miller and Starr cite a

case upon which Defendant relies, Kent v. Clark, 20 Cal. 2d 779,

785 (1942), as an example of a case where a buyer under a land

sale contract was awarded the value of improvements, rather than

their cost. In Kent, the buyer rescinded the land contract based

on the seller’s fraud.

However, Miller and Starr cite two other cases as examples

of the opposite situation, where the buyers were found entitled

to the cost of the improvements, not the fair market value. 

Lobdell v. Miller, 114 Cal. App. 2d 328, 341, 343; Utemark v.

Samuel, 118 Cal. App. 2d 313, 315-16 (1953). Utemark reasoned

that in a land sale contract where the buyer makes improvements

and the seller refuses to convey, upon rescission, the buyer may

recover the cost of permanent improvements placed on the land in

good faith. 118 Cal. App. 2d at 314. The buyer is entitled to

be restored what has been expended, not just the increased value

of the land by virtue of the improvement. Id. (citing Montgomery

v. Meyerstein, 186 Cal. 459, 464 (1921)). Determination of

restitution damages is in the discretion of the trial court. 

Cal. Civ. Code § 1692; Gardiner Solder, 232 Cal. App. 3d at 1546;

Runyon, 2 Cal. 3d at 316; Utemark, 118 Cal. App. 2d at 318. It

is the goal of the court sitting in equity to determine what

damages will best put the plaintiff in a position as close to the

status quo ante as possible. 

While this case does not involve fraud, Plaintiffs

nevertheless relied on the exclusive use provision when entering

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into the Lease and investing over two million dollars in the

Restaurant. Cost is likely the greater amount. Miller and Starr

at § 34:9 (“The more equitable result is to award either the cost

expended by the buyer (if reasonable), or the value to the

seller, whichever is greater, since the seller induced the buyer

to rely on the contract in making the expenditures.”). The more

equitable measure here is cost. The precise calculation of cost

is not possible based on Plaintiffs’ current submissions. A

further hearing is necessary to determine whether the cost of the

building can be calculated based on the evidence in the record.

(b) Measure of Damages for Rent.

Second, Defendant argues it is entitled to an equitable

adjustment of the monthly rent based on the fair market value of

the building. Defendant argues that “[e]quity is not achieved

merely by deducting the ground lease payments from Plaintiffs’

claim.” (Doc. 360, Def.’s Opp. 22 (emphasis in original)) 

Defendant argues it is entitled to an off-set for the reasonable

rental value of the land while it was in Plaintiffs’ possession,

taking into account the increased value of the property with the

restaurant that Plaintiffs built. Defendant cites Kent v. Clark,

20 Cal. 2d 779, 785 (1942), and Runyon, 2 Cal. 3d at 315, in

support. The court in Kent stated that:

[The plaintiff] may elect to rescind the

contract for fraud, restore possession to the

vendor, and recover the purchase money paid

less the fair rental value for the use of the

property during his occupancy. This right of

rescission is available to a vendee in

default.

20 Cal. 2d at 784. Kent was cited with approval for this

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principle in Mahurin v. Schmeck, 95 Ariz. 333, 342 (1964);

Warfield v. Richey, 167 Cal. App. 2d 93, 99-100 (1959); McCoy v.

West, 70 Cal. App. 3d 295, 301 (1977). 

The Runyon court discussed monetary awards given in

conjunction with restitution in pre-1961 law actions, and stated

that “[w]here the vendor rescinded, the vendee was liable for the

rental value of the land while he had possession.” 2 Cal. 3d at

315 (citing Austin v. Burns, 139 Cal. App. 747, 753 (1970). 

Plaintiffs note that Utemark qualified this rule, holding that

the defendants “were not entitled to receive as a credit the

value of the use of the improvements installed by plaintiffs.” 

118 Cal. App. 2d at 318. The rule in California is discussed in

Miller and Starr at § 34:9, which provides the seller (lessor) is

entitled to credit for a reasonable rental value for the period

of the buyer’s (lessee’s) occupancy. Miller and Starr also note

that the seller (lessor) is not entitled to the rental value of

improvements made by the buyer, and cite Utemark as authority. 

The more equitable result here is to prevent Defendant from

benefitting from Plaintiffs’ efforts and expenditures in

improving the land. Plaintiffs invested over two million dollars

to build their Restaurant in reliance on the Lease that

Defendants later breached. Defendants should not benefit from

their breach by an enhanced off-set for the rental value of

improvements that Plaintiffs funded. The Lease is prima facie

evidence of the fair rental value of the leasehold with

improvements.

//

//

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3. Subcategories of Consequential Damages to Which

Plaintiffs Are Entitled.

The next issue is which specific subcategories of

consequential damages Plaintiffs may collect under § 1692. 

Consequential damages are any damages in addition to restitution

required to make the plaintiff whole. Cal. Civ. Code § 1692; see

also Runyon, 2 Cal. 3d at 316-17; Lobdell, 114 Cal. App. 2d at

343. Plaintiffs claim they are entitled to several subcategories

of consequential damages, some of which are allowed under § 1692

and others which are not.

The subcategories of consequential damages claimed by

Plaintiffs allowable under § 1692 include: opening inventory

costs, equipment costs, the franchise fee to Golden Corral,

training costs, rent paid under the Forbearance Agreement, and

interest (paid and unpaid) on the construction loan and the Money

Store loan. These subcategories of damages are recoverable under

§ 1692 because they would restore the Plaintiffs to a position as

near as possible to the status quo ante. These are expenses

Plaintiffs incurred in reliance on the Lease and would not have

been incurred if the restaurant had not been built and opened. 

It is not possible based on Plaintiffs’ submissions for the court

to determine the exact amounts for these subcategories of

consequential damages. The figures submitted on Exhibits A and B

of Plaintiffs’ brief do not appear to agree. A further hearing

is necessary to clarify whether the amount of damages can be

calculated based on the evidence in the record.

Other subcategories of consequential damages claimed by

Plaintiffs are difficult to discern from the ambiguous statements

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in their brief and on the attached exhibits. (Doc. 358, Pls.’

Mem. at 24-25, Ex. B at 2) Based on these ambiguous submissions,

Plaintiffs appear to claim several subcategories of damages that

are not consequential damages.

First, Plaintiffs’ explanation of the sources of the damages

listed in Exhibit B as “Losses prior to closure and after

closure” and “Additional Expenses (losses) incurred from the date

of Rob Wallace’s analysis through commencement of trial (Rent

payments)” is not clear. (Doc. 358, Pls.’ Mem., Ex. B at 2) It

has not been possible to locate Plaintiffs’ citations to the

record. The entries that start with “JT” have Bates Stamp

numbers. Approximately 15 to 20 sets of “JT” documents have been

located, but not others. To the extent Plaintiffs claim “losses”

based on Plaintiffs’ alleged lost future profits, such damages

are not allowed in a rescission case. Lost profits are “benefit

of the bargain” damages, which are damages that contemplate

continuing performance under the contract. Runyon, 2 Cal. 3d at

316 n. 15; 12 Miller and Starr at § 34:9 (“There is a material

distinction between ‘reimbursement damages’ based upon rescission

and the damages available to a buyer [lessee] who elects to

affirm the contract and recover damages for the seller’s

[lessor’s] fraud. The measure of damages for breach of contract

provided in [Cal. Civ. Code § 3343] does not apply to any action

for rescission.”). Plaintiffs cannot claim the benefit of the

bargain when they have elected rescission damages which returns

the parties to the status quo ante as if there had been no

contract. 

Second, to the extent Plaintiffs claim rent payments made

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pursuant to the Forbearance Agreement, these are consequential

damages. However, to the extent Plaintiffs claim other

unexplained “expenses” or “losses,” Plaintiffs are not entitled

to such damages unless they are explained.

Finally, Defendants argue that the “Bank of America” rent

claimed by Plaintiffs is not recoverable. According to

Defendants, the Bank of America rent was paid pursuant to an

agreement between the parties that was independent of the Lease

and that provided Plaintiffs would pay the “Bank of America” rent

regardless of whether a ground lease was entered into. Defendant

provides no copy of the agreement, which it refers to as

“Plaintiff’s Exhibit P.” To the extent Defendant’s

representation of this agreement (Plaintiff’s Exhibit P) is

correct, i.e., that the Bank of America rent was to be paid

regardless of whether a lease was eventually entered into,

Plaintiffs are not entitled to this rent since it is not required

to return Plaintiffs to the status quo.

As to claims of interest, in diversity cases, prejudgment

interest is calculated at the state law rate. James B. Lansing

Sound, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 801

F.2d 1560, 1569 (9th Cir. 1986); Fidelity Federal Bank, FSB v.

Durga Ma Corp., 387 F.3d 1021, 1024 (9th Cir. 2004). Postjudgment interest rate is determined by federal law. In re

Cardelucci, 285 F.3d 1231, 1235 (9th Cir. 2002). 

D. Whether Further Proceedings Are Necessary to Determine

the Amount of Damages.

The court will not take evidence without a jury. However, a

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hearing based on the applicable measure of damages from evidence

in the record is necessary given the parties’ manifest

disagreement as to whether sufficient evidence exists in the

record to calculate damages and an absence of consistency in

amounts listed on Plaintiffs’ Exhibits A and B. 

A hearing on the issues identified above will be held

November 1, 2005, at 9:00 a.m. in Courtroom 2.

SO ORDERED. 

DATED: September 30, 2005

/s/ OLIVER W. WANGER 

______________________________

 Oliver W. Wanger

UNITED STATES DISTRICT JUDGE

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