Court Opinion

ID: 7920899
Source: CourtListenerOpinion
Date Created: 2022-09-08 22:22:37.519651+00
Date Added: 2024-06-11T16:32:53.859274
License: Public Domain

BATTAGLIA, J.,
dissenting, in which HARRELL, J., joins.
I respectfully dissent. Although we have been asked to determine, in this economic climate, how lost profit damages *468in the context of a speculative real estate venture are to be measured, what the Majority has done is affirm an award of damages as lost profits that is really punitive in nature, rather than acknowledge that any standard for awarding damages lacks certainty and eviscerates foreseeability. I believe, in this framework, that the Landlords1 should have been afforded their day in court.
In this case, the trial court erred in barring the Landlords from introducing evidence of the depressed residential real estate market as it existed at the time Tenants’ claimed lost profits were expected to materialize. As Landlords described at trial, “the world had changed” due to a downturn of the real estate and credit markets caused by the “economic Armageddon in [20]08.” The Majority’s holding that such drastic economic factors cannot inform an assessment of damages when the nature and extent of such damages were not foreseen by the contracting parties provides a windfall to the non-breaching party by excluding evidence that such profits would not have arisen had the contract been performed. This places the breaching party in the position of a guarantor of the non-breaching party’s ultimately unrealistic expectations.
To put the case in context:
Developer Tenants were prevented from building, renting, and selling apartment buildings on Landlords’ tracts in Montgomery County. In June of 2004, the parties entered into ground leases under which Tenants would build two high-rise apartment buildings, Tower I, anticipated to be completed in 2008 or 2009, and Tower II, with completion contemplated in 2012. Tenants projected, for their own purposes and as justification for obtaining financing, multimillion dollar profits from the planned development, based on projections made in 2006 of continuing growth in the residential real estate market. In 2007, Landlords breached their contracts, and in 2008, the U.S. housing market crashed. Subsequently, Tenants *469sued for lost profits. Before the case was tried, however, the judge barred Landlords from introducing any “evidence of, or ... arguments based upon, post-breach market conditions for the purpose of refuting [Tenants’] claimed damages,” thus precluding introduction of evidence of the real estate market downturn that occurred after the breach but before development of the Towers was to be completed.
The Landlords proffered that they would have offered expert testimony taking into account “the economic downturn and the resulting impact on the real estate market.” Landlords’ designated damages expert, R. Larry Johnson, according to his proffer, would have opined “that no profits would have been earned by [Tenants], even if there had been no breach, because the Tower I building would have been delivered into a rental market (in 2008 or 2009) which does not support the projections upon which [Tenants’ expert’s] conclusions are based.” Landlords would have introduced expert testimony to rebut Tenants’ damage claims, contending that Tenants’ projections “are too high, and even slight decreases in market rental rate eliminates the profit in the damages claim.” Furthermore, Landlords proffered expert testimony regarding the unrealistic nature of Tenants’ projections when viewed in light of “the current market,” the “[sjtagnant rental rates in [the real estate] market over the last several years,” and evidence of “what the market is/was at the time the Project would have been available for rent.”
At trial, Tenants’ expert had estimated lost profits based on Tenants’ profit projections made in October 2006 for the purposes of obtaining financing for the project.2 The jury awarded damages in the amount of $36,350,239.00.
In this case, Landlords as well as Tenants had to rely on experts in economics and real estate. To that extent, the parties were evenly matched in their proffered expert testi*470mony, until the trial court barred Landlords’ proffered testimony on damages. Obviously neither method for defining lost profits, an inquiry that focuses on foreseeability at time of contracting as the Majority espouses, or market-based calculations from the anticipated time of completion sought by Landlords, can be other than speculative because the buildings in issue were never built. The trial court thus erred in allowing the use of Tenants’ assumptions to prove the amount of damages but foreclosing Landlords from rebutting such projections with evidence of the real estate market as it existed at the time the development would have come to fruition.
Clearly, courts prefer a rule that allows admission of evidence of actual performance when such evidence is available. The Majority acknowledges as much when it contends that the cases cited by Landlords all consider the admissibility of evidence of post-breach substitute performance and notes that “none of Landlords’ Maryland cases directly support admitting post-breach market evidence to prove lost profits.” Op. at 416, 56 A.3d at 187. In Macke Company v. Pizza of Gaithersburg, Inc., we noted that plaintiffs substitute performance after the breach but before trial might be “a more appropriate measure of damages” because it is “grounded on ... actual experience.” 259 Md. 479, 492, 270 A.2d 645, 652 (1970). We have further stated that “the actual gain made under the substituted contract must be considered in measuring the damages to which the builder is entitled.” M & R Contractors & Builders, Inc. v. Michael, 215 Md. 340, 356, 138 A.2d 350, 359 (1958). Thus, it is clear that when evidence of actual performance is available, any rule setting the benchmark for damages determinations either at the time of contracting or at the time of the breach must yield to more relevant evidence of “plaintiffs ‘actual experience’ with substitute performance.” Op. at 414, 56 A.3d at 186, quoting Macke, 259 Md. at 493, 270 A.2d at 652.
This principle is supported by Justice Benjamin N. Cardozo’s explanation in Sinclair Refining Company v. Jenkins Petroleum Process Company, that post-breach evidence of *471actual performance must be admitted to avoid providing a financial windfall based on inaccurate prediction:
The law will make the best appraisal that it can, summoning to its service whatever aids it can command.... At times the only evidence available may be that supplied by testimony of experts as to the state of the art, the character of the improvement, and the probable increase of efficiency or saving of expense.... This will generally be the case if the trial follows quickly after the issue of the patent. But a different situation is presented if years have gone by before the evidence is offered. Experience is then available to correct uncertain prophecy. Here is a book of wisdom that courts may not neglect. We find no rule of law that sets a clasp upon its pages, and forbids us to look within.
289 U.S. 689, 697-98, 53 S.Ct. 736, 739, 77 L.Ed. 1449, 1456 (1933) (internal citations omitted). Justice Cardozo further determined that “[t]o correct uncertain prophecies in [measuring the damages for a breach of contract] is not to charge the offender with elements of value non-existent at the time of his offense. It is to bring out and expose to light the elements of value that were there from the beginning.” Id. at 698, 53 S.Ct. at 739, 77 L.Ed. at 1456 (allowing evidence of the actual profits gained from defendant’s post-breach use of the plaintiffs device for purposes of proving damages).3
The question then becomes, how should lost profits be computed when actual performance is not available as a benchmark. Faced with such a situation, post-contract market evidence has been admitted to prove lost profits. Hoang *472v. Hewitt Avenue Associates, LLC involved the breach of a sales contract for two adjacent parcels of raw land on which town homes were to be built. 177 Md.App. 562, 936 A.2d 915 (2007). In the case, a developer “sought to recover collateral lost profits, i.e., the profits it anticipated it would have realized upon the sale of the 14 town houses it planned to construct on the property, and would have constructed but for [the sellers’] breach by failure to convey.” Id. at 607, 936 A.2d at 941-42. The sales contract, executed in May 2004, was to close within 60 days. When, in July 2004, the sellers failed to close on the sale, the developer filed suit. Following entry of default against the sellers, the court held an evidentiary hearing on the issue of damages in April 2005. At that hearing, the trial court admitted expert testimony regarding estimated profits on the town homes that were never built. Specifically, the trial court admitted testimony about:
... the costs [that the developer] likely would have incurred in developing the land into a community of 14 town houses, the probability of the completed town houses being sold in that area of Montgomery County, the prices the finished town houses would have fetched on the real estate market as it existed at the relevant time, and the profit that would have been returned to [the developer] on the expected sales.
Id. at 611, 936 A.2d at 945. The testimony of the expert real estate appraiser, James Donnelly, was based upon his appraisals of the land dependant upon comparable sales and market conditions at the time of the 2005 hearing. Additionally, Mr. Donnelly had opined that the profit projections were conservative based on the residential real estate market as it existed at the time of the 2005 hearing. The trial court referenced those “conservative” estimates in finding that “the amount of profits in this case can be determined with reasonable certainty.” Id. at 574, 936 A.2d at 922. The Court of Special Appeals affirmed the trial court’s award of lost profits, concluding that the evidence the of post-contracting real estate market admitted at the hearing was “legally sufficient to prove that [the developer] sustained collateral lost profits due to the breach of contract to convey the property.” Id. at 610-11, 936 A.2d at *473944 (2007). Clearly, when actual performance is absent, evidence of post-contract conditions is admissible and is not rejected as too speculative, unforeseeable and lacking reasonable certainty.
In fact, in the present case, the evidence adduced by Tenants was more speculative than that put forth by the developers in Hoang, based as it was on “market conditions as of October, the October 2006 time frame, to determine whether or not the assumptions that were utilized in [Tenants’ projections] prepared at that time were reasonable assumptions.” Tenants relied on projections of a real estate market three to five years in the future, which turned out, as we know, to be unreliable. As such, it was no more certain than Landlords’ proffered testimony as to the state of the real estate market when the Towers would have been built and reached the market.
The Majority contends, however, that post-breach market evidence is not “a necessary part of any consequential lost profits claim.” Op. at 417, 56 A.3d at 188. Practical application of the Majority’s rule would require that the Landlords here were guarantors of future profits and could not introduce similarly speculative evidence of potential gains and losses to mitigate lost profit damages. The Restatement (Second) of Contracts expressly disclaims such a scenario when it states, “[t]he expectation interest is not based on the injured party’s hopes when [it] made the contract but on the actual value that the contract would have had to [it] had it been performed.”4 *474Restatement (Second) of Contracts Section 344, comment b, at 104 (1981). The Restatement provides an example that is analogous to the situation in this case:
A makes a contract with B under which A is to pay B for drilling an oil well on B’s land, adjacent to that of A, for development and exploration purposes. Both A and B believe that the well will be productive and will substantially enhance the value of A’s land in an amount that they estimate to be $1,000,000. Before A has paid anything, B breaks the contract by refusing to drill the well. Other exploration then proves that there is no oil in the region. A’s expectation interest is zero.
Restatement (Second) of Contracts, Section 344, illustration 5 at 105. Although relied upon by this Court in 1987, this Restatement provision governing lost profits are not addressed by the Majority. David Sloane, Inc. v. Stanley G. House & Associates, 311 Md. 36, 42, 532 A.2d 694, 697 (1987).
In determining lost profits when no evidence of actual performance is available, admission of evidence to assist the jury in determining damages that are as close as possible to the actual value of performance is a necessity.5 By allowing *475Tenants to exclude evidence of post-breach market conditions, the Majority effectively puts the Landlords in the position of “A” in the Restatement example, thereby awarding Tenants damages based upon projections that the Landlords were not permitted to rebut.6
By embracing the jury verdict that was not informed by the Landlords’ expert testimony, the Majority reinforces an award that is punitive in nature. It is clear from the evidence presented at trial that the apparently willful and acrimonious breach on the part of the Landlords colored the jury’s damage award. The trial court admitted an email from Landlords to their former counsel requesting that counsel “stop the bastards,” and in denying Landlords’ pre-trial motion in limine to exclude this communication, the trial court reasoned,
I think a jury has a right to know how everything was formed, and what happened.... I also think [the discovery] goes to credibility. If they think that one side is basically trying to undermine the other side, a jury can evaluate their credibility by examining that.
And, also motive and intent, I think are relevant in this case.... [I]f you had no defense, other than, yes, we breached it, we screwed the deal royally, we’re the bad guys, and let’s basically only talk dollars and cents, then I probably would take a different position.... ”
*476The Majority references the “bastards” e-mail, suggesting it may have been the “smoking gun” in the case, op. at 402-08, 56 A.3d at 179, highlighting the spectre that the damages awarded are really punitive in nature because, what would it be a “smoking gun” of, other than willfulness? Certainly we should not be sanctioning punitives in the guise of “lost profits.” The Landlords should have had their day in court; I respectfully dissent.
Judge HARRELL has authorized me to state that he joins this dissenting opinion.

. For the purposes of this dissent, I adhere to the Majority’s designations of the parties as "Landlords” and "Tenants."

. Tenants' expert, Wiley R. Wright, testified that, "[f)or purposes of determining the net gain that would have been realized,” the "primary sources of data” were "the stabilized pro forma operating statements and the development budgets that were prepared by [Tenants]” in 2006.

. See also David Sloane, Inc. v. Stanley G. House & Associates, 311 Md. 36, 41-42, 532 A.2d 694, 696-97 (1987) (affirming a decision by the trial court to calculate lost profits based on the breaching party’s post-breach expenditures); Fishman v. Estate of Wirtz, 807 F.2d 520, 552 (7th Cir.1986) (rejecting a “time of the breach” benchmark and upholding a damages calculation that employed actual gains rather than ex ante profit predictions); Advent Systems Limited v. Unisys Corp., 925 F.2d 670, 682 (3d Cir.1991) (noting that the court had “serious reservations about the validity of expert testimony based on prior predictions of sales for a given period when actual performance data for that same time span are available”).

. This Court looked to the Restatement provision governing "the measure of damages for breach of contract” in David Sloane, Inc. v. Stanley G. House & Associates, in its reasoning:
The measure of damages for breach of contract is addressed generally in Restatement (Second) Contracts, [Section] 347 (1981) which recognizes that
"the injured party has a right to damages based on his expectation interest as measured by
(a) the loss in the value to him of the other party’s performance caused by its failure or deficiency, plus
(b) any other loss, including incidental or consequential loss, caused by the breach, less
*474(c) any cost or other loss that he has avoided by not having to perform.”
311 Md. 36, 42, 532 A.2d 694, 697 (1987). The "expectation interest” that the Sloane Court cited is defined in Section 344(a) of the Restatement (Second) of Contracts as a promisee’s "interest in having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed.” Section 347(c) of the Restatement contemplates that a factor in damages is loss avoided by saving a party from financial injury. The evidence proffered, but not received, would have shown that the market had deteriorated to the point that the Tenants avoided financial disaster as a result of the Landlords’ breach. That evidence should have been allowed under the Restatement as the cost avoided by the Tenants "not having to perform.” Restatement (Second) of Contracts, § 344(c).

. See 11 Corbin on Contracts § 55.3, at 7 (Rev. ed.2005) (stating that the aim of contract damages is to "put the injured party in as good a position as that party would have been in if performance had been rendered as promised"). See also Knapp v. Eagle Property Management Corp., 54 F.3d 1272, 1282 (7th Cir.1995) ("Defendants cannot be forced to put [plaintiff] in a better position than she would have been absent *475their conduct.”); Dopp v. Pritzker, 38 F.3d 1239, 1248 (1st Cir.1994) (holding that the trial court's instructions that "full damages ... reflect the amount necessary to put Dopp in as good a position as he would have been if the oral contract had been fully performed” amounted to "virtually a hornbook restatement and application of the concept of contractual wholeness.”).

. By setting the threshold after which market evidence may not be considered at the time of contracting, the Majority moves the bar further back in time, from the 2006 "time of the breach” inquiry that Tenants request and that the trial court and the Court of Special Appeals used, to 2004, when the ground leases were executed. CR-RSC Tower I, LLC v. RSC Tower I, LLC, 202 Md.App. 307, 337, 344, 32 A.3d 456, 473, 478 (2011). The Majority’s rule effectively requires evidence that is more speculative and uncertain than even the 2006 projections, misguided in themselves.