Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_02-cv-05200/USCOURTS-caed-1_02-cv-05200-2/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.; and NEW

PLAN EXCEL REALTY TRUST, INC.,

 Defendants.

1:02-CV-05200 OWW DLB

MEMORANDUM DECISION RE

RESCISSION DAMAGES AND

AVAILABILITY OF

PREJUDGMENT INTEREST 

I. INTRODUCTION

Following a jury trial, verdicts in their favor, and an

award of contract damages in the amount of $1,480,740.00,

Flagship West, Marvin G. Reiche, and Kathleen Reiche

(“Plaintiffs”) elected to rescind their lease with Defendants. 

Plaintiffs seek restitution and consequential damages in lieu of

the contract damages awarded. The only remaining issues to be

decided in this case are (1) the amount, if any, of rescission

and consequential damages that can be awarded based on the

evidence in the trial record; (2) whether Plaintiffs are entitled

to recover prejudgment interest on any or all of the damages

award.

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II. BACKGROUND/PROCEDURAL HISTORY

The dispute between the parties has been explained in great

detail in prior decisions. For the purposes of this memorandum,

only a brief summary is necessary. 

This case arises out of a 15-year lease between the parties

for the “exclusive right to operate a self service buffet style

family restaurant” within a shopping complex owned by Defendants

in Modesto, California. (Lease § 6.3.) The Lease commenced on

July 16, 1998. (Id. at 1.) Marvin and Kathleen Reiche then

began construction of a “Golden Corral” restaurant on the leased

property. To finance the construction, Plaintiffs borrowed

approximately $2 million from The Money Store for a twenty-five

year term. 

On June 10, 1999, Plaintiffs opened their restaurant. 

Approximately one year later, a buffet restaurant called the Four

Seasons serving Chinese food opened in Defendants’ shopping

complex in a location directly across from the Golden Corral. 

Plaintiffs contend that 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 Plaintiffs’

restaurant to become unprofitable, leading to its closure on

April 1, 2001. 

Plaintiffs filed suit alleging breach of contract, fraud,

and negligent misrepresentation, requesting contract damages and,

alternatively, rescission damages. The case was tried before a

jury, beginning on November 12, 2003. Verdicts were returned on

December 3, 2003. The general verdict with interrogatories found

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in favor of the Plaintiffs and awarded them $1,480,740.00 in

contract damages. (Doc. 279.)

Plaintiffs elected rescission in a post-trial brief filed

December 29, 2003 (Doc. 301), after which a series of nine (9)

briefs were filed by the parties and two oral arguments on the

issues of rescission damages and related remedies were heard. 

(See Doc. 353, 3-4.) Two memorandum decisions issued concerning

Plaintiffs’ post-trial election of remedies 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 several

open questions. A second memorandum decision issued on September

30, 2005, ruled:

(1) The right to rescission was established by the jury’s

finding that the Lease had been materially breached. 

(Doc. 362 at 7-15.)

(2) Defendants were properly estopped from asserting that

an anti-rescission clause contained within the lease

barred rescission. (Id. at 15-19.) 

(3) Rescission is not barred by the availability of an

adequate legal remedy. (Id. at 19-21.)

(4) Plaintiffs are entitled to both restitution and certain

types of consequential damages to return them to the

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status quo ante. (Id. at 21-27.)

(5) The appropriate measure of damages for the improvements

to the land (i.e., the construction of the restaurant)

is either the cost expended by the buyer (if

reasonable) or the value to the seller, whichever is

greater. (Id. at 27-29.)

(6) Defendants are entitled to an equitable adjustment for

the monthly fair rental value of the property, but

Defendants are not entitled to an enhanced offset for

the rental value of improvements Plaintiffs funded. 

(Id. at 29-30.)

(7) The subcategories of consequential damages sought by

Plaintiffs needed to be clarified. To the extent that

Plaintiffs claim rent payments made pursuant to the

forbearance agreement, such payments are recoverable as

consequential damages. However, to the extent that

Plaintiffs seek “lost profits,” such damages are

contractual, not consequential, and are therefore not

recoverable in rescission. (Id. at 30-33.) 

Thereafter, Plaintiffs submitted citations to the evidence

to aid the district court’s calculation of rescission damages

(Doc. 365), and Defendants responded (Doc. 371). Defendants then

submitted a brief essentially requesting further discovery with

respect to documents pertaining to the forgiveness of interest

and or principal on Plaintiffs’ loans held by The Money Store. 

(Doc. 374.) Plaintiffs opposed any such further discovery. (See

Doc. 375.) Next, the parties filed briefs regarding the recovery

of prejudgment interest. (Docs. 378 & 379.) Finally, letter

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briefs were submitted addressing evidence of Plaintiffs’ payment

of rent. (Docs. 381, 382, & 384.) A final teleconference was

held on June 29, 2006, at which time the parties endeavored to

answer several remaining questions posed by the district court. 

(Doc. 386.) The matters of rescission damages and prejudgment

interest were then submitted for decision

III. DISCUSSION

A. Rescission Damages Calculation.

1. Pre-Opening Expenses.

a. Construction.

Plaintiffs seek $1,270,252 for the cost of construction. 

Defendants asserts that only $1,096,978 of this is reflected in

the trial record. 

To support the higher figure, Plaintiffs cite the testimony

of expert Rob Wallace (Trial Transcript (“Tr.”) at 924) and Joint

Trial Exhibit (“JTE”) 157. Defendants assert that JTE 181 is

also relevant.

Defendants make three objections to the evidence offered by

Plaintiffs. First, Defendants object to the consideration of Mr.

Wallace’s testimony as evidence on the issue of damages. Mr.

Wallace, who was called as an expert on financial matters,

examined Flagship’s financial records and testified, using a

series of pie charts, as to the total investment made by

Plaintiffs in the Golden Corral restaurant, including his

estimate that $1,270,252 was spent on construction. The pie

charts were admitted into evidence as Plaintiffs’ Exhibit (“PE”)

58. Defendants object that Wallace’s testimony is hearsay on the

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issue of damages, because Wallace had no firsthand knowledge of

any of the alleged construction expenses to which he testified. 

Defendants point to statements Plaintiffs’ counsel, Mr.

Fairbrook, made during the trial that, at first glance, appear to

have disclaimed any right to cite Wallace’s testimony pie charts

as evidence of damages:

MR. FAIRBROOK: I might be able to shortcut this a

little bit because I think what Mr. Carroll is

concerned about is those pie charts that showed the

total investment of about $3.5 million. I will not

argue that that is a measure of damage. I will not

argue that that is the amount that should be recovered. 

That is evidence in the case. It shows a

compilation of various expenses, it shows the

investment. It serves to test some of the

reasonableness of some of the other calculations.

With respect to our special damages and the

recoupment of our losses and investments, those will be

done specifically item by item, cost by cost, and it

does not equal that total number of those pie charts,

so I will not be arguing that that equates to our

damages.

(Tr. at 1517:1-15.) However, Defendants quote Plaintiffs’

counsel out of context. The above-quoted statement was made in

the context of crafting the jury instructions regarding contract

damages. There was a lengthy discussion between the parties and

the district court concerning the appropriate measure for

contract damages and whether Mr. Wallace’s various analyses could

be referenced as evidence of contract damages. (Tr. at 1462-

1472.) In fact, counsel for Defendants specifically argued that

one of Wallace’s assertions was that “every single dime that has

ever been inserted into this business should somehow be given

back because there has been a purported breach of contract.” 

(Tr. at 1470:14-15.) This, Defendants asserted, was relevant

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only to “rescission.” (Id.; Tr. at 1516.) In response,

Plaintiffs’ counsel eventually conceded that he would not argue

that Wallace’s estimates were evidence of contract damages. Now,

however, it is entirely proper for Plaintiffs to utilize

Wallace’s estimates as evidence of rescission damages. 

Defendants themselves acknowledged as much. 

Wallace specifically testified that $1,270,252 was spent on

construction. (Tr. at 924:15.) Defendants present no directly

contrary evidence. He is both a CPA and a financial analyst. He

was entitled and qualified to review and prepare a compliation,

summary, or abstract of construction and business expenses from

Flagship’s underlying accounting and business records.

Even if Wallace’s testimony was inadmissible, JTE 157

enumerates that $1,239,030 was spent on the “building.” 

Defendants object to reliance on JTE 157, a one-page summary

document that explains that $1,239,030 was spent on the

“building.” Mr. Reiche testified that JTE 157 was prepared by

Flagship’s bookkeeper Lynn Myers. (Tr. at 599.) Defendants

object that Mr. Reiche was not qualified to provide any

foundation as to payments described in JTE 157. Ms. Myers, the

author of the document, testified at trial, but she did not

provide any foundation for JTE 157. However, the exhibit was

admitted into evidence without objection through Mr. Reiche (Tr.

at 599), who was consulted whenever bills were payed, so it may

be relied upon.

JTE 181 provides further support for Wallace’s estimate. 

Page 124 of JTE 181 is an invoice from Flagship’s general

contractor, indicating the total cost of construction of the

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Defendants also argue that the invoices contained 1

within JTE 181 are hearsay. But, it does not appear that

Defendants raised this objection (at least not successfully)

during trial. The exhibit was admitted in to evidence and is

part of the record and is appropriately referenced in calculating

rescission damages. It was a business record of Flagship’s and

Defendants did not dispute its authenticity as a contractor

invoice.

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restaurant as of June 24, 1999 was $1,239,030. Defendants point

out that the invoice indicates that only $1,096,978 was paid by

Flagship as of the date of that invoice (i.e., a balance of just

over $142,000 was due). However, there was general testimony

from Ms. Meyers suggesting that, with the exception of interest

due on the Money Store loan after Flagship defaulted on the loan,

Flagship paid all of its bills that were actually due (i.e.,

those bills that were not disputed or disputable in some way). 

(Tr. at 1491:19-20; 1494-96.) Defendants present no evidence to

the contrary.1

There is an unexplained discrepancy between Wallace’s

estimate that $1,270,252 was spent on construction and the

$1,239,030 figure provided on both JTE 157 and JTE 181. Although

Wallace explained that his estimate was based upon his review of

the company’s financial records and his calculation was not

challenged in substance during the trial, JTE 157 was prepared by

Lynn Meyers, Flagship’s own bookkeeper, based upon Flagship’s

records of which she had personal knowledge. There is no

specific evidence to support Wallace’s higher damages figure.

Plaintiffs will be awarded $1,239,030 in rescission damages for

construction costs incurred, as documented on Flagship’s own

summary and confirmed by the contractor invoice. 

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b. Equipment.

Plaintiffs seek $598,782 for expenditures on restaurant

equipment. Defendants assert only $581,526 is documented in the

record, leaving $17,256 unaccounted for. 

An invoice from the Coastal Equipment Company indicates a

total balance due of $589,272 for equipment. (JTE 181 0133.) 

Although the invoice reflects that only $581,526 had been paid as

of the invoice date, there was testimony from Ms. Meyers that all

bills were paid in full (Tr. at 1491), and no evidence to the

contrary.

Plaintiffs’ higher $598,782 figure is based on Wallace’s

testimony. (Tr. at 924:16) Wallace testified he reached this

number by examining the financial records of the company. His

calculation was not challenged in substance during the trial. 

However, again, under Federal Rule of Evidence 1006, underlying

records were not provided to support the higher figure. (See JTE

181.) It is most reasonable to award Plaintiffs the lower, but

better-documented $589,271 in rescission damages for equipment,

less any offset for salvage. See Part III.E. 

2. Opening Inventory.

Plaintiffs seek $30,000 in damages expended for “opening

inventory.” Defendants assert that there is no non-hearsay

evidence that this expense was incurred. Specifically,

Defendants insist that there is no independent evidence that

Plaintiffs incurred a $30,000 opening inventory expense above and

beyond the $598,782 equipment costs.

Mr. Reiche testified explicitly that Flagship spent $30,000

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on inventory in connection with opening the store. (Tr. at 606.) 

Defendants made no objection at the time to this testimony.

Defendants objected at the March 14, 2006 hearing that there

was no evidence separating the $30,000 from the other opening

expenses, suggesting that Plaintiffs are seeking a duplicate

award. But, Mr. Reiche clearly differentiated between the

$30,000 spent on opening inventory (Tr. at 606) and the other

categories of opening expenses such as training costs (id.),

equipment costs (id. at 604), and the franchise fee (id. at 602). 

An award of $30,000 for opening inventory is fully justified. 

3. Building and Related Fees.

Plaintiffs claim that $104,176 were expended on building

fees. Defendants assert that only $73,763 is documented in the

record, leaving unaccounted $30,413.

Plaintiffs’ initial figure comes from Wallace’s testimony. 

(Tr. at 924:18.) Defendants suggest that this figure counts

certain costs that are not properly classified as “building

fees.” JTE 157 specifically enumerates a number of expenses that

are obviously building permit fees, specifically $70,467 for

“City of Modesto Fee,” $2,217 for “City of Modesto Filing Fee,”

$221 for “City of Modesto Plan Check,” and $857 for “Modesto City

Schools,” which total $73,763. There are also some additional

architectural, engineering, and environmental assessment fees on

JTE 157. Specifically, there are three entries on JT 157 for

“Lehmann Mehler HRST,” totaling $36,550, a $3,074 itemization for

“Kleinfelder,” and two entries for “Northwest Environcon”

totalling $3,100. Mr. Reiche testified that Lehmann Mehler was

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Although a slightly higher award reflecting the sum of 2

all of the City of Modesto, Lehmann Mehler, Northwest Environcon,

and Kleinfelder entries on JTE 157 might have been justified

here, Plaintiffs only requested $104,176. 

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Flagship’s architect, and that Kleinfelder and Northwest

Environcon performed various environmental and engineering

testing for the construction site. (Tr. at 602 & 603.) In

total, adding these fees to the $73,763 figure, the grand total

is $116,486. This figure actually exceeds Wallace’s $104,176

estimate by more than $12,000. Defendants object, essentially,

that Plaintiffs’ recovery should be limited to the $73,763 of

expenses listed on JT 157 that are clearly “building fees.” 

Plaintiffs have acknowledged that their initial request for

$104,176, based on Wallace’s estimate, may lump together a number

of different types of fees, some of which are not strictly

building permit fees. But, all such fees, including engineering

and site assessment fees were incurred in connection with the

design and construction of the restaurant in reliance on the

lease. They are therefore all recoverable. 

Defendants suggested during the March 14, 2006 hearing that

these miscellaneous expenses are not recoverable because they

were incurred before the lease was signed in July of 1998. But,

these fees were all incurred in connection with the disputed

lease site and are therefore reasonably deemed to have been

expended in reliance on the lease terms.

Plaintiffs are entitled to recover the full amount

requested: $104,176 for building fees, engineering and 2

architectural services, and environmental and site assessment

costs. 

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4. Franchise Fee.

Defendants do not object to Plaintiffs’ request for

reimbursement of the $30,000 franchise fee, a request that is

supported by record evidence. (JTE 157; Tr. at 924:18.)

5. Training.

Plaintiffs seek $18,749 for expenses incurred training new

staff to open the restaurant. Mr. Wallace articulated this

figure during his trial testimony. (Tr. at 924:19.) Defendants

assert that this figure represents the cost of training managers

for all three Flagship restaurants and, therefore, that

Plaintiffs are only entitled to recovery of one-third, or $6,250. 

However, Mr. Reiche testified generally that these claimed

expenses were incurred for training only for the Modesto

managers. (Tr. at 604-05.) This assertion is supported by a

document in evidence entitled “Breakdown of Management Training

Costs for Modesto Store,” which indicates that the total cost for

“Training for Modesto Management” was $18,749. (JTE 181 0111-

0112.) Defendants do not cite any contrary evidence. 

Plaintiffs are entitled to recover $18,749 for expenses

incurred training managers for the Modesto restaurant. 

6. Construction Interest.

As part of the pre-opening initial investment, Plaintiffs

seeks $27,956 in “construction interest” purportedly paid prior

to the opening of the restaurant as part of the pre-opening

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Plaintiffs separately request an award of $303,556 they 3

claim to have paid toward interest on the money store loan

incurred after the opening of the restaurant but prior to the

execution of the forbearance agreement. This request is analyzed

below.

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initial investment. The only direct evidence supporting this 3

figure is Mr. Wallace’s testimony. Wallace describes this figure

as “interest on the loan prior to the opening,” and includes it

as a part of the total expenses incurred at or prior to the

opening of the Modesto Restaurant. (Tr. at 924:20-21.) 

Defendants object to this requested award, asserting that there

is no evidence that any such interest was ever paid. 

There is some indirect evidence, however, that suggests all

of the interest due on the Money Store loan was paid in full

prior to July 2000, at which time Flagship went into default on

the Money Store Loan. Mr. Reiche specifically testified that the

first payment that “was missing” was the July 1, 2000 interest

payment. (Tr. 655: 814.) As discussed in greater detail below,

Flagship’s financial statements specifically reflect the monthly

interest costs incurred by Plaintiffs from the time the

restaurant opened in mid-1999 until the end of 2000. (See

generally JTE 147.) Mr. Wallace’s testimony, and common sense,

support the assertion that interest was to be paid on the loan

prior to completion of the construction. Wallace unequivocally

categorized the $27,956 interest as a portion of the initial

investment made by Plaintiffs in the Modesto store and Defendants

present no evidence to the contrary. 

Plaintiffs are entitled to $27,956 for interest paid on the

Money Store Loan during construction. 

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B. Rent Paid to Excel.

Plaintiffs initially asserted that they paid $394,081 in

rent to Defendants, but revised this number downward to $372,575

in subsequent submissions. (See Doc. 381, March 31, 2006

letter). Defendants assert that the correct figure is $369,775. 

The difference between these two figures is $2800. Plaintiffs’

higher figure includes a rent increase for several months in 2003

set forth in the lease. Defendants acknowledge that the lease

contains such a provision, but assert that Flagship was never

billed for the increased rent and never paid any increased rent. 

Defendants, however, cannot point to any record evidence in

support of this assertion. Instead, Defendants submit extrarecord evidence regarding the actual amount of rent paid by

Flagship. (Doc 371, filed Mar. 22, 2006.) The district court

previously ruled that rescission damages in this case will be

calculated based on record evidence presented during the jury

trial. It was for Defendants to present the evidence of payment

at trial. The new evidence cannot be considered. Plaintiffs are

entitled to post-trial recovery of $372,575 for rent before the

breach of the lease.

C. Interest.

1. Interest Paid on The Money Store Loan. 

Plaintiffs assert that they paid $303,556 in interest on the

The Money Store loan, interest that was incurred from the

completion of construction through 2000. The evidence Plaintiffs

cite in support of this figure is the forbearance agreement

entered into by The Money Store and Flagship (JTE 113), Mr.

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For an unexplained reason, the June 1999 statement does 4

not reflect any interest due (JTE 147 0084-85), and the July 1999

statement actually reflects an interest credit of $1,197 (JTE 147

0087). Starting in August 1999, the interest due is stated to be

$15,921, a figure that increases slightly every month thereafter

(see generally JTE 147). 

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Reiche’s testimony (Tr. at 589), and a number of profit and loss

statements for 1999 and 2000 (e.g., JTE 147 0097 and 0207). 

(Doc. 365 at 6.) 

First, it is not clear how the cited page from Mr. Reiche’s

testimony supports any assertion as to the payment of interest on

The Money Store loan. At page 589, Reiche testified that

Flagship paid $7200 under the lease each month for rent and

maintenance of the common shopping center areas. However, Mr.

Reiche did not even suggest that this figure included any

interest paid on The Money Store loan. 

Second, the forbearance agreement on its face does not shed

any light on the amount of interest paid, at least with respect

to the four corners of the document. 

The affirmative evidence of interest paid comes from two

sources in the record: Flagship’s profit and loss statements

(“P&Ls”) (JTE 147 and 162) and Mr. Reiche’s testimony. The P&Ls

chronicle the amount of interest incurred under the loan each

month. Specifically, the P&Ls indicate that $84,668 in interest 4

was incurred in 1999, while $218,888 was incurred for 2000. 

However, the P&L’s do not prove that the incurred interest was

ever paid. The only relevant record evidence that could be

located by the district court (which was cited by neither party)

is Mr. Reiche’s testimony that Flagship defaulted on its interest

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Interest on The Money Store loan first appears in the 5

P&Ls in July 1999.

See JTE 147 0195, which reflects the total amount of 6

interest incurred from January 2000 through June 2000. 

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payments for the first time on July 1, 2006. (Tr. 655) Contrary

to Defendants’ assertion, this implies that Flagship paid in full

all interest due on the loan prior to that date. However,

Reiche’s trial testimony is inconsistent with Plaintiffs’ present

assertion that they paid interest after that date. Rather, the 5

record suggests that Plaintiffs only paid interest through June

2000. Accordingly, the total award for interest paid after

completion of construction is $84,668 for 1999 and $101,726 for 6

2000, for a grand total of $186,394, not the $303,556 claimed by

Plaintiffs, which is unsupported by the evidence. 

2. Accrued Interest on The Money Store Loan Through

Trial.

Plaintiffs also request an award equal to the amount of

interest accrued (but unpaid) on The Money Store loan through the

end of trial: $548,155. Plaintiffs note that the district court

previously ruled in this case that “interest (paid and unpaid) on

the...the Money Store loan” was a recoverable form of rescission

damages under California Civil Code § 1692 and Runyon v. Pacific

Air Industries, Inc., 2 Cal. 3d 304, 316-17 (1970). (Doc. 362 at

31.) Section 1692 provides that in an action for rescission

“[t]he 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

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he is entitled; but such relief shall not include duplicate or

inconsistent items of recovery.” Runyan stands for the principle

that in a rescission case consequential damages may be awarded

“to restore both parties to their former position as far as

possible.” 2 Cal. 3d at 316. 

First, as discussed above, Mr. Reiche’s testimony that

Flagship defaulted on its interest payments as of July 1, 2000

establishes that any interest due thereafter went unpaid (i.e.,

interest began to accrue in July 2000). There is record evidence

regarding the amount of this accrued interest for the remainder

of 2000. Subtracting the interest paid through June 2000

($101,726) from the total amount of interest due in 2000

($218,888), leaves a remainder of $117,162 unpaid (accrued)

interest for 2000. 

It is not as easy to discern from the record the amount of

interest accrued from the start of 2001 through the jury’s

verdict on December 3, 2003. The only relevant record evidence

is an estimate and related diagram prepared by Mr. Wallace. (Tr.

at 956; PE 58.) Specifically, Wallace testified that the accrued

interest on The Money Store loan was $548,155, a figure he based

on “a calculation” rather than financial statements “because we

didn’t know the exact amount of that interest, so we had to make

some estimates there as to the interest rate and the term.” (Tr.

at 956.) This estimate is reflected in a set of pie charts used

by Mr. Wallace to answer two questions: (1) “Where did the money

come from to build and operate the Modesto Golden Corral,” and

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 For an unexplained reason, Mr. Wallace’s pie charts 7

indicate that the $548,155 in estimated accrued interest should

be considered both part of the initial investment pie chart and

part of the expenditures pie chart.

The Forbearance agreement also concerned a separate 8

loan (the “Stockton Loan”) and included various provision

requiring specific payments toward that loan.

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(2) “Where did the money go?” (PE 58.) Wallace testified that 7

all of the estimates presented in PE 58, cover a time period from

the inception of the Modesto restaurant in June 1999 through

December 2003. (Tr. 905-907.) 

This relatively straightforward record is complicated by the

forbearance agreement, which took effect in October 2001. (JTE

113 0001-0006.) Under the terms of that agreement, The Money

Store agreed to release its interest in the Modesto Golden Corral

restaurant property in exchange for a lump sum payment of

$900,000 from the proceeds of the sale of the Modesto property. 

(Id. at ¶6.) The agreement specifically provides that this

$900,000 “shall be applied to past due arrearages on the Modesto

loan and then to the principal on the Modesto loan. At no time

should the payment under this paragraph exceed the balance due

under the loan.” (Id.) In addition to the $900,000 lump sum

payment from the proceeds of the property sale, Plaintiffs agreed

to assign to the Money Store the net proceeds of this lawsuit

(originally filed by Flagship and Reiche in Stanislaus County),

to be applied to past-due arrearages on the Modesto Loan, if any,

and then to a reduction of the principal balance. (Id. at ¶7.)8

The parties agreed that “[t]he first $500,000 of the net proceeds

[from the litigation] would go to [The Money Store]. Any net

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proceeds over $500,000 from the litigation will be equally

divided between [The Money Store] and Flagship.” (Id.)

Defendants argue that the forbearance agreement operates to

bar any recovery in rescission for accrued interest. But,

Defendants offer no legal authority to support this assertion, 

nor is there any logic to Defendants’ position. All the

forbearance agreement accomplishes is to assign proceeds from

this litigation to the lender to compensate the lender for both

accrued interest and the principal balance on the loan. Nowhere

does the forbearance agreement indicate any intent by the lender

to forgive interest payments already accrued or to stop the

accrual of interest on The Money Store loan pending any recovery

in this lawsuit. The forbearance agreement does not bar recovery

of accrued interest. 

The question remains, however, whether Mr. Wallace’s

“estimate” is sufficient proof to warrant the full recovery

requested by Plaintiffs. Defendants offered no evidence at trial

to undermine Mr. Wallace’s estimates. Wallace explained the

source of the information he used to generate his estimates (Tr.

at 905:5-7). This was a proper subject for expert testimony and

the evidence was accepted without objection to its accuracy or

foundation. (Tr. at 954, admission of PE 58.) 

 There is record evidence, however, tending to suggest that

Mr. Wallace’s estimate of interest accrued encompasses interest

accrued during the second half of 1999 and the first half of

2000, for which Plaintiffs have been awarded separate

reimbursement of $186,394 for “interest paid.” Specifically, Mr.

Wallace testified that all of the estimates presented in PE 58,

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the pie charts described above, are calculated from the inception

of the Modesto restaurant in June 1999 through December 2003. 

(Tr. 905-907.) Although this period appears not to include any

interest accrued during the construction phase (for which

Plaintiffs have been separately awarded $27,956 in interest paid

during the construction phase), it does encompass the period of

time for which Plaintiffs have been awarded $186,394 for

“interest paid. 

Most critically,. what Wallace did not do was to calculate

(or otherwise consider) the effect of the forbearance agreement

on the calculation of interest accruing after October 2001. Nor

did he give credit for the $900,000 lump sum payment or calculate

interest based on the reduced unpaid principal balance resulting

from the lump sum payment. It was incumbant on Plaintiffs to

make these calculations. They have not done so. They have

failed to prove the amount of any accrued unpaid interest on the

Money Store Loan and the effect of the forbearance agreement on

the accrual of interest. Plaintiffs did not present this

information at trial and refused to provide such evidence post

trial. They are bound by their choice. Plaintiffs shall not

recover any other accrued interest.

3. Accrued Interest on The Money Store Loan since the

Jury’s Verdict.

Plaintiffs initially requested an additional $358,416 to

reimburse them for interest accrued on The Money Store loan since

the conclusion of the trial. To reach this figure, Plaintiffs

estimated interest using the same calculation Wallace employed to

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Plaintiffs reach this figure by taking the sum of two 9

general categories of “losses” identified by Mr. Wallace, the

$359,289 lost before the Four Seasons Buffet opened and $525,271

lost after the Four Seasons Buffet opened, which total $884,560. 

Plaintiffs assert, however, that this figure included rent

payments made by Plaintiffs through trial ($394,081) as well as

interest paid on the Money Store loan prior to entering into the

Forbearance Agreement ($303,576). Subtracting these two figures

from the $884,271 equals the requested $186,903. 

Notably, if Plaintiffs are correct that the $844,560 figure

includes interest paid on the Money Store loan, this arguably

conflicts with the court’s conclusion that Mr. Wallace’s accrued

interest calculation includes at least a portion of the interest

Plaintiffs claim to have paid during 1999 and 2000. However,

Plaintiffs provide no record citations to support their assertion

and the district court could locate no such evidence in the

record.

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calculate accrued interest prior to the jury’s verdict. However,

at the March 14, 2006 hearing, Plaintiffs withdrew this request. 

In light of the court’s ruling on accrued interest, this

withdrawn claim is also moot.

D. Business Losses.

Plaintiffs seek $186,903 in “business losses.” Generally, 9

business losses are considered a form of unrecoverable benefit of

the bargain contract damages. Plaintiffs, however, insist that

these loses are recoverable to restore Plaintiffs to the status

quo ante. Specifically, Plaintiffs argue that they sunk $186,903

into operating expenses at the Golden Corral in excess of

revenues generated by the restaurant. A portion of these sunk

costs were actually expended prior to the opening of the Four

Seasons Buffet, while some were incurred after the opening of the

competing Buffet.

Defendants first object that any losses incurred prior to

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the opening of the Four Seasons were simply ordinary losses

incurred by a new restaurant running an unprofitable business. 

Defendants also object that any losses incurred after the opening

of the Four Seasons, and any expectation on Plaintiffs part that

they would be recouped, are part of the “benefit of the bargain.”

Plaintiffs suggest that these business losses are

recoverable in rescission as a means “to restore both parties to

their former position as far as possible.” Runyan, 2 Cal. 3d at

316. In Runyan, the California Supreme Court reasoned that “[i]t

is the purpose of rescission ‘to restore both parties to their

former position as far as possible.’” Id. The trial court in

Runyan entered judgment rescinding an exclusive franchise

contract and awarded the plaintiff franchisee restitution of the

price of the franchise as well as consequential damages. The

consequential damage award included a sum of money to compensate

him for the income he would have gained if he had remained at his

prior place of employment. The California Supreme Court affirmed

this award, reasoning that 

[P]laintiff recovered his original consideration and

the damages he sustained in reliance on the contract.

[Defendant] retrieved the exclusive franchise and was

given credit for what it in effect had produced. We are

satisfied that the trial court thus “adjusted the

equities” between the parties and restored them to

their former positions so far as it was possible to do

so.

Id. at 319. 

Here, the nature of the reimbursement requested is quite

different. Plaintiffs seek reimbursement not for lost income

from a source external to the contract, but for losses suffered

as a result of business activities undertaken pursuant to the

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contract. There was testimony at trial indicating that it is

normal and expected for a Restaurant to experience losses during

its first few years of operation. (See, e.g., Tr. at 617-18.)

Some restaurants succeed in recouping these expenses through the

operation of the business, while others do not. 

On the one hand, Defendants are correct that Plaintiffs

expectation of recouping their operating losses over time is a

benefit of the bargain that can only be classified as a form of

contract damages. On the other hand, Plaintiffs assert that they

relied upon the lease in incurring those losses. But,

Defendants’s response is compelling: 

Post contract operating losses such as those claimed by

Plaintiffs (as opposed to set up expenditures), are, as

a matter of law, compensable only as expectation

(contract) damages. This is because pre-breach losses

were not caused by Excel – by definition Excel had not

breached the contract yet, and accordingly, it cannot

have caused those losses. And post breach losses –

equally by definition – are not compensable in

rescission because they could not have been incurred in

reliance on the Lease. Plaintiffs are not entitled to

operating losses in rescission. An award of such losses

would result in an inequitable windfall, an outcome

that no court in equity will allow. Plaintiffs must

elect either expectation damages or rescission damages.

They may not recover both....

(Doc. 371-1, at 9.) Plaintiffs offer no authority squarely

indicating that rescission damages are appropriate under the

circumstances. Accordingly, this request for recovery of

operating losses is DENIED. 

//

//

//

//

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E. CREDITS

1. Use of Premises by Plaintiffs

Defendants seek a $434,716 credit to account for rent

actually paid or rent payments that are due. (See Doc. 362, at

30, prior memorandum decision holding that Defendants should

receive a credit for the fair rental value of the leasehold as

evidenced by the lease.) This represents a setoff for the

reasonable rental value of the premises for the period of

Plaintiffs’ occupancy from May 1999 to June 2004. Plaintiffs do

not dispute Defendants’ entitlement to a setoff credit in this

amount. Defendants shall receive a credit of $434,716 for rent

actually paid by Plaintiffs to Excel and for unpaid rent due.

2. Plaintiffs’ Rental Income

It appears to be undisputed that Excel is entitled to a

$10,000 credit for rent Plaintiffs collected after Plaintiffs

sublet the leased property. 

3. Equipment Sold at Auction

It also appears undisputed that Excel is entitled to a

$11,260 credit to account for the funds collected after

Flagship’s equipment was sold at auction. Excel seeks an

additional credit for the full cost of the equipment, asserting

that The Money Store forced Plaintiffs to sell the equipment at a

“commercially unreasonable firesale.” Excel, however, cites

absolutely no legal authority to support this assertion. 

Excel shall receive only a $11,260 credit for the funds

collected after the auction. 

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F. Prejudgment Interest.

The availability of prejudgment interest is governed by

California Civil Code Section 3287(a), which provides: 

Every person who is entitled to recover damages

certain, or capable of being made certain by

calculation, and the right to recover which is vested

in him upon a particular day, is entitled also to

recover interest thereon from that day, except during

such time as the debtor is prevented by law, or by the

act of the creditor from paying the debt. This section

is applicable to recovery of damages and interest from

any such debtor, including the state or any county,

city, city and county, municipal corporation, public

district, public agency, or any political subdivision

of the state.

Under section 3287(a), prejudgment interest is available when

“defendant actually know[s] the amount owed or from reasonably

available information could the defendant have computed that

amount.” Cassinos v. Union Oil. Co., 14 Cal. App. 4th 1770, 1789

(1993). In Cassinos, a case relied upon by both sides, the

defendant was found liable for having improperly injected

wastewater into plaintiffs property. The Cassinos court found

that, at the time of the improper conduct, the defendant both

knew that it was injecting wastewater onto Plaintiffs land, knew

the market rate for properly disposing of the wastewater, and

could track the volume of wastewater disposed of in this manner

“from which it could calculate its indebtedness.” Id. Under

such circumstances, prejudgment interest may be awarded from the

“inception of the occurrence.” Id.

It is the rule that if damages may be determined by

reference to reasonably ascertainable market values,

they are 'capable of being made certain by calculation'

within the meaning of section 3287...The mere fact that

proof is required to determine the market value of

property on a designated date, will not prevent the

allowance of interest under section 3287 .... 

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In support of their request for prejudgment interest on 10

its entire damages award, Plaintiffs also cite Marine Terminals

Corp. v. Paceco, Inc., 145 Cal. App. 3d 991, 995 (1983), which

involved a claim for breach of contract and negligence arising

from the faulty repair of a piece of construction equipment by

the defendant. After defendant’s errors were discovered, the

plaintiff supplied defendant with invoices reflecting how much it

would cost to fix the equipment properly. Defendant denied

liability for the costs reflected in the invoices, but did not

dispute the charges contained in the invoices. “By submitting

the invoices to defendant, plaintiff made its damages known to

defendant and rendered them ‘certain.’” Id. at 996. But, Marine

Terminals is distinguishable, as Plaintiffs never made an

unconditional demand for rescission. (See Tr. 1429:1-8; 1431:1-

4; 1438:19-25 (finding that only a conditional tender was made).)

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Id. In contrast, prejudgment interest is not available where

damages are “considered uncertain until [they] have been

determined by the court upon presentation of evidence.” Id. As

an example, the Cassinos court mentioned actions in quantum

meruit, where “[t]ypically, plaintiff's claim is in the nature of

an unliquidated and uncertain demand and therefore prejudgment

interest is disallowed.” Id. A number of cases cited by

Plaintiffs are in accord, exemplifying situations where the

amount due can be determined by reference to a fixed standard. 

See e.g., Leaf v. Phil Ranch, Inc., 47 Cal. App. 3d 371

(1975)(sum paid by plaintiffs for automobile was fixed by the

terms of the contract and therefore was certain enough to be

subject to prejudgment interest, even though there was dispute as

to offset allowed defendant for plaintiff’s use of the car prior

to rescission); Tripp v. Swoap, 17 Cal. 3d 671, 682

(1976)(welfare benefits are capable of calculation because

welfare laws set forth fixed payment schedules).10

Here, a number of damages categories could not have been

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calculated by reference to a fixed standard or fixed payment

schedule: $1,239,030 for construction costs, $589,271 for

equipment, $30,000 for opening inventory, $104,176 for building

and associated fees, $30,000 for the franchise fee, and $18,749

for training. These categories total $2,011,226. Under no

reasonable reading of the law could these categories of damages

be calculable as required by § 3287 to be the subject of a

prejudgment interest award. 

The two remaining types of damages to which Plaintiffs are

entitled could conceivably have been calculated “from reasonably

available information.” Cassinos, 14 Cal. App. 4th at 1789. 

Specifically, the rent and interest payments could have been

calculated by reference to a fixed standard or fixed payment

schedule. However, any award to Plaintiffs for rent payments

made have been offset entirely by the credit to Defendants for

the reasonable rental value of the property. This leaves the

amount of interest paid and accrued on the Money Store loan, a

total of $214,350 (including the $27,956 in construction

interest, and $186,394 in interest paid). 

The question then becomes, can the $576,111 award for

interest paid and accrued on the Money Store Loan be severed from

the remainder of the award for purposes of a prejudgment interest

calculation. No authority supporting such a procedure has been

provided or was located, nor is severance of certain categories

of damages consistent with the overall purpose of restricting

prejudgment interest to cases in which a person’s entitlement to

recover damages is “certain, or capable of being made certain by

calculation.” Cal. Civil Code. § 3287(a). “[I]nterest

traditionally has been denied on unliquidated claims because of

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the general equitable principle that a person who does not know

what sum is owed cannot be in default for failure to pay.” 

Chesapeake Indus., Inc. v. Togova Enter., Inc., 149 Cal. App. 3d

901, 906 (1983). 

IV. CONCLUSION 

For all the reasons set forth above:

(1) Plaintiffs are entitled to an award of $2,142,175 for

damages in rescission:

$1,239,030 Construction Costs

$589,271 Equipment Expenditures

$30,000 Opening Inventory for Restaurant

$104,176 Building and Related Fees

$30,000 Franchise Fee

$18,749 Training of Modesto Staff

$27,956 Construction Interest

$372,575 Rent Paid to Excel

$186,394 Interest Paid After Opening

($434,716) Credit for Rent Paid or Owed to Excel

($10,000) Credit for Rental Income Credit

($11,260) Credit for Equipment Sale

$2,142,175 Total

(2) Plaintiffs demand for an award of prejudgment interest

is DENIED.

Plaintiffs shall submit a form of judgment consistent with

this memorandum decision.

SO ORDERED

Dated: November 14, 2006

 /s/ Oliver W. Wanger 

 Oliver W. Wanger

UNITED STATES DISTRICT JUDGE

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