Strong Construction Co., Inc., et al., Respondents, vs. Atlantis Developers, et al., Defendants, Creekside Homes, LLC, et al., Appellants.

Strong Construction Co., Inc., et al., Respondents, vs. Atlantis Developers, et al., Defendants, Creekside Homes, LLC, et al., Appellants. A05-1363, Court of Appeals Unpublished, June 6, 2006.

This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480 A. 08, subd. 3 (2004).

 

STATE OF MINNESOTA

IN COURT OF APPEALS

A05-1363

 

Strong Construction Co., Inc., et al.,

Respondents,

 

vs.

 

Atlantis Developers, et al.,

Defendants,

 

Creekside Homes, LLC, et al.,

Appellants.

 

Filed ­­­June 6, 2006

Affirmed

Dietzen, Judge

 

Anoka County District Court

File No. C5-02-6137

 

 

Todd M. Johnson, Scott A. Johnson, Johnson Law Group LLP, 10801 Wayzata Boulevard, Suite 120, Minnetonka, MN 55305 (for respondents)

 

Stanford P. Hill, Bassford, Remele, P.A., 33 South Sixth Street, Suit 3800, Minneapolis, MN 55402-3707 (for appellants)

 

            Considered and decided by Stoneburner, Presiding Judge; Dietzen, Judge; and Harten, Judge.*

U N P U B L I S H E D   O P I N I O N

 

DIETZEN, Judge

 

            Appellants Creekside Homes, LLC, et al., challenge the district court order and judgment awarding $130,825.81 in damages to respondent Strong Construction Co., Inc. for appellant's tortious interference of contract, arguing that the district court erred in its determination of damages.  By notice of review, respondents also challenge the district court's determination of damages.  We affirm.

FACTS

 

            Respondent Strong Construction Co., Inc. (Strong Construction) is a Minnesota corporation engaged in the construction of residential homes and is owned by respondent Timothy D. Strong (Strong).  Appellants David O. Harris and Randi Erickson are experienced and licensed real estate sales agents.

            In January 2000, Strong Construction entered into a purchase agreement to acquire property located in Andover, for the purpose of developing an eight-unit townhouse complex.  Before then, Strong Construction, Strong, Erickson, and Harris executed a document entitled "Atlantis Developers," which described a business plan to develop the subject property.  The business plan provided that the parties would form Atlantis Developers, a Minnesota general partnership; and Erickson and Harris would each own 40% and Strong would own 20% of the partnership.  The business plan contemplated that Atlantis Developers would purchase the subject property from Strong Construction, obtain the necessary zoning approvals for developing the property, and be responsible for certain costs related to the development.  The eight lots were to be sold to Strong Construction at a price of $15,000 per lot, and Strong Construction would be responsible for construction of the townhouses.  Strong Construction would then be responsible for the "on-site" work, including the utility hookup and fees and permits associated with the construction of the townhouses.  Erickson and Harris would be given the exclusive right to market and offer for sale the completed townhouses, with sales commissions of 6%.

            In February 2000, Harris, Erickson, and Strong executed the Atlantis Development partnership agreement.  For his initial contribution, Strong assigned his interest in the purchase agreement for the subject property to the partnership.  Harris borrowed $25,000 from a bank and contributed that amount as his capital contribution.  Erickson made no initial contribution.

            Harris then contacted the City of Andover (the city) and applied to rezone the subject property for the proposed townhouse development.  Harris made at least two appearances before the city council, procured engineering plans, submitted various applications, and paid plan-review fees.  In April 2000, the city council passed a moratorium temporarily blocking any rezoning of certain real property, including the subject property.  Consequently, the townhouse project was put on hold. 

            In August 2000, relations between Erickson and Strong became strained, for reasons that are unclear from the record.  The two severed some of their existing business relationships with each other, but neither resigned as a partner of Atlantis Developers.

In September 2000, Harris sent a letter to Strong and Erickson advising them that the rezoning moratorium on the subject property remained in place and requesting payment for some of the partnership expenses, including a portion of his capital contribution to the partnership.  Harris requested payments of approximately $6,000 and $12,000 from Strong and Erickson, respectively, which payments were not made.

In January 2001, the city lifted the moratorium, but neither Harris nor Erickson informed Strong, who resided in the Philippines at that time.  A few months later, Harris and Erickson formed a new entity, Creekside Homes, LLC.  Strong was not made a member or officer, nor was he informed of the formation of Creekside Homes.  Harris and Erickson, on behalf of Creekside Homes, negotiated a development contract with the city and began work on the townhouse complex.  Harris and Erickson then prepared and executed two quit-claim deeds conveying the subject property to Creekside Homes without the knowledge or consent of Strong Construction. 

When respondents discovered the actions of Harris and Erickson, they commenced a lawsuit against Creekside Homes, Harris and Erickson (appellants), alleging breach of contract, breach of fiduciary duty, tortious interference with contract, and other claims.  At the time of the complaint, the townhouse construction had already begun.[1]

At trial, Strong Construction[2] called two damage witnesses.  The first was an appraisal expert, James S. Foster.  Foster testified that the actual market value was $70,000 per lot, or $560,000 in total.  Foster opined that if Strong Construction had the
right to purchase the fully developed lots from the partnership, which the development agreement set at a price of $15,000 per lot, Strong Construction was entitled to recover lost profits, which in this case would be $55,000 per lot.  Alternatively, Foster testified that the average townhouse builder purchasing the lots at market value would have enjoyed a 10-15% profit from the appreciated gross sale price of the completed townhouses, based on national averages, and adjusted regionally.  Foster opined that the completed townhouses should have sold for an average price of approximately $185,000.  Based on Foster's estimates, Strong Construction's lost profits were between $150,000 and $225,000.

Strong Construction also presented the testimony of James L. Fraser, certified public accountant (CPA), who testified as a financial expert.  Based on his review of the tax returns for the preceding three years, Fraser opined that Strong Construction had a gross profit of 10% for the construction of townhouses.  Fraser stated that to calculate gross profits, he deducted "material costs and subcontractor costs, land costs, and other related costs" from gross sales.  He did not deduct certain "fixed costs," such as taxes, insurance, and license fees, reasoning that it was not appropriate to deduct those costs because they were an ordinary cost of doing business and did not proportionally increase the cost per lot.  Based on the same reasoning, he did not deduct the yearly interest expense on the loan to acquire the property.

Following the trial, the district court concluded, inter alia, that appellants tortiously interfered with the contract between Strong Construction and Atlantis Developers and awarded Strong Construction damages of $130,826 together with its costs and disbursements.  The court rejected the appraiser's testimony, concluding that it was grossly exaggerated because he did not use the proper valuation date, and did not consider what a reasonable buyer would pay in determining the fair market value of the lots.  But the court found that the respondent's accountant expert's methodology of calculating damages, i.e., gross sales minus certain costs, was persuasive.  The court reasoned:

Comparing net profit to gross sales would unfairly depress Strong Construction's damages, because the difference between gross profit and net profit would be the fixed costs incurred by Strong Construction . . . .  Had Strong Construction taken on the additional eight unit townhouse project on the property, its fixed costs would not have increased.

 

This appeal follows.

D E C I S I O N

Appellants do not challenge the district court's determination that appellants tortiously interfered with the contract between Strong Construction and Atlantis Developers.  Rather, appellants challenge the district court's methodology for the calculation of lost profit damages.  We review an award of damages for abuse of discretion.  Dallum v. Farmers Union Cent. Exch., Inc., 462 N.W.2d 608, 614 (Minn. App. 1990) (quotation omitted), review denied (Minn. Jan. 14, 1991), and must view the evidence in the light most favorable to the award.  Rayford v. Metro. Transit Comm'n, 379 N.W.2d 161, 165 (Minn. App. 1985), review denied (Minn. Feb. 14, 1986).  We will not disturb a damage award "unless . . . failure to do so would be shocking or would result in plain injustice."  Hughes v. Sinclair Mktg., Inc., 389 N.W.2d 194, 199 (Minn. 1986). 

Findings of fact, whether determined by a jury or court sitting as trier of fact, shall not be set aside unless clearly erroneous, and "due regard shall be given to the opportunity of the trial court to judge the credibility of the witnesses."  Minn. R. Civ. P. 52.01.  In applying rule 52.01, "we view the record in the light most favorable to the judgment of the district court."  Rogers v. Moore, 603 N.W.2d 650, 656 (Minn. 1999).  A finding is clearly erroneous only if the reviewing court is "left with the definite and firm conviction that a mistake has been made." Fletcher v. St. Paul Pioneer Press, 589 N.W.2d 96, 101 (Minn. 1999) (quoting Gjovik v. Strope, 401 N.W.2d 664, 667 (Minn. 1987)).  "If there is reasonable evidence to support the district court's findings, we will not disturb them."  Moore, 603 N.W.2d at 656. 

The measure of damages for tortious interference with contractual relations is the loss of the benefit of the contract or the prospective relationship and other losses directly caused by the interference.  Potthoff v. Jefferson Lines, Inc., 363 N.W.2d 771, 777 (Minn. App. 1985).  Once a loss is established, "the difficulty of proving its amount will not preclude recovery so long as there is proof of a reasonable basis upon which to approximate the amount."  Id. at 775 (quoting Polaris Indus. v. Plastics, Inc., 299 N.W.2d 414, 419 (Minn. 1980)).  Lost profits may be recovered where they are shown to be the natural and probable consequences of the wrongful act and their amount is shown with a reasonable degree of certainty and exactness.  Cardinal Consulting Co. v. Circo Resorts, Inc., 297 N.W.2d 260, 266 (Minn. 1980).  But speculative, remote, or conjectural lost profits are not reasonable.  Id. at 267.

Appellants argue that respondent is only entitled to recover its net profits for the construction of the eight townhouses.  Appellants suggest that all expenses for the project must be deducted to arrive at net profits.  We disagree. 

Here, the district court concluded that the methodology used by Fraser to calculate lost profits was the most persuasive.  In doing so, the court rejected appellant's argument that all fixed costs must be deducted, reasoning that the fixed costs in question were already incurred and did not proportionally increase Strong Construction's cost per lot; and that deducting such fixed costs would artificially depress Strong Construction's damages.  As the trier of fact, the district court concluded that the methodology used by Fraser, which included his opinion as to what expenses should be deducted, was the most accurate measurement of the losses directly caused by the interference.  On this record, we cannot conclude that the district court's findings are clearly erroneous. 

Both parties cite Cardinal Consulting Co., 297 N.W.2d 260, as support for their positions regarding the district court's determination of damages.  In that case, the jury found that Circo, a hotel operator, had breached its contract with Cardinal, a charter touring agency, and awarded Cardinal damages of $71,500, all but $1,095 of which consisted of lost profits.  Id. at 262, 265.  On appeal, Circo argued that the damage award was excessive because the charter tour agency failed to introduce evidence of the expenses saved as a result of the nonperformance to arrive at lost net profits.  Id. at 26869.  The supreme court disagreed and affirmed the damage award, concluding, inter alia, that the plaintiff may be awarded damages on the basis of its anticipated gross profits if the breach did not significantly reduce overhead.  Id. at 269.  The Cardinal court reasoned that Cardinal had no saved expenses as a result of the nonperformance because it had attempted to conduct other tours to mitigate its damages.  Id.

Here, the dispute is not over whether Strong Construction has any "saved expenses," but rather over whether all fixed expenses must be deducted to determine lost profits.  In that regard, the Cardinal court did not hold that all fixed costs must be deducted to arrive at lost profits.  Rather, the Cardinal court affirmed an award of lost profits that it concluded "lack[ed] precision" but was reasonably supported by the record.  Here, Strong Construction presented expert testimony that it was not reasonable to subtract "fixed expenses" that were already incurred and did not significantly increase the cost per lot.  On this record, there is sufficient evidence to support the district court's findings regarding the deduction of expenses to arrive at lost profits.    

Appellants further argue that the district court erred by not deducting interest expenses incurred on the loan for appellant's purchase of the developed lots.  Here, the district court used a 9.44% gross-profit factor to calculate damages rather than the 10% factor suggested by Fraser.  Thus, it appears that the district court did not accept all of Fraser's testimony.  As a result, we cannot say that the district court's finding on the deduction of interest expenses is clearly erroneous or that the district court abused its discretion in calculating damages.

Appellants cite two other cases in which the damage award was determined, on appeal, to be excessive:  Deutz & Crow Co., Inc. v. Anderson, 354 N.W.2d 482 (Minn. App. 1984), and In re Commodore Hotel Fire and Explosion Case, 324 N.W.2d 245 (Minn. 1982).  In Deutz, the district court concluded that the manufacturer breached its contract with a distributor and awarded the distributor damages, using lost gross sales as the measure of damages.  354 N.W.2d at 492.  This court reversed and remanded the damage award for a determination of lost net profits, rather than gross sales, as the measure of damages.  Id.  Here, the district court did not use lost gross sales as the measure of damages.  Rather, it deducted those costs that it concluded were necessary to arrive at lost profits.  Therefore, Deutz is factually distinguishable.

In Commodore, the appellant/hotel owner sought to recover from the respondent damages it sustained as a result of a hotel fire in excess of those damages reimbursed by its own property damage fire insurance.  324 N.W.2d at 246.  On appeal, the hotel owner argued, inter alia, that the district court erred by restricting damages for loss-of-use of the income-producing property to lost profits and by instructing the jury that the definition of lost profits was the narrow accounting definition of net profits, i.e., the gain that remains from gross sales after deduction of all expenses and costs.  Id. at 249.  The hotel owner acknowledged that the Commodore Hotel incurred losses every year and, therefore, had no claim for "lost profits" under the narrow definition, but argued that it should be entitled to recover its loss-of-use of the damaged property, i.e., the loss of contribution to fixed overhead from lost revenue from its bar, hotel, and rental facilities.  Id. The Minnesota Supreme Court reversed and remanded for a new trial on the issue of damages, holding that

if an owner of income-producing real property which has been damaged by a tortfeasor can establish by a fair preponderance of the evidence that, but for the tort, his gross income would have been sufficient to pay all or part of his fixed unabatable overhead costs during the reasonable time of restoration or repair, as an element of loss of use of the property the owner may recover from the tortfeasor those costs that would have been paid from the lost income.

 

Id. at 251.  It concluded that appellant could present evidence of loss-of-use damages it sustained "as the result of loss of gross income to pay fixed and unabatable overhead costs."  Id.

Commodore is distinguishable for several reasons.  First, it involved a loss-of-use claim, and not a lost profits claim.  Id.  Second, Commodore did not determine what costs should be deducted from gross revenues to arrive at a loss-of-use, or lost profits claim.  Here, the district court, as the trier of fact, relied on expert testimony to determine the expenses it deemed necessary to determine lost profits.  Therefore, Commodore is not controlling, and the district court did not abuse its discretion in calculating the damage award.

II.

By notice of review, Strong Construction contends that the district court erred in rejecting Foster's testimony that it had the right to acquire the developed townhouse lots at below fair market value, and thus underestimated the amount of damages owed to Strong Construction.  Findings of fact shall not be set aside unless clearly erroneous.  Minn. R. Civ. P. 52.01.  We defer to the district court's determination of the credibility of witnesses and the weight to be given to their testimony.  Fraser v. Fraser, 702 N.W.2d 283, 287 (Minn. App. 2005), review denied (Minn. Oct. 18, 2005). 

The district court rejected Foster's testimony.  The district court found that his testimony was "grossly exaggerated" and lacked credibility.  The district court noted,

First, the appraiser's opinion is based on figures presumed in October of 2004.  The appropriate date of valuation is at the time of the breach, or July of 2001.  Second, the appropriate fair market value of the property is what a reasonable buyer would pay for it.  In this case, Strong Construction was to purchase the property for $120,000.  Therefore[,] the fair market value of the property is $120,000.

 

            Here, the record supports the district court's findings regarding the valuation of the property.  In 2001, the parties agreed to give Strong Construction the option to buy the property for $120,000.  The breach occurred in July 2001, and neither party disputes that this is the relevant date of valuation.  Given the parties' experience in the industry, it was not clear error for the district court to rely on the value placed on the property by the parties.  Further, the district court found that Foster's testimony was not credible.  Therefore, the district court did not clearly err in rejecting Strong Construction's appraiser's testimony, and did not underestimate the damages award.

            Affirmed.

* Retired judge of the Minnesota Court of Appeals, serving by appointment pursuant to Minn. Const. art. VI, § 10.

[1]Strong Construction also filed a notice of lis pendens against the property with the county recorder.  Because the notice of lis pendens interfered with the sale of the townhouse units, Harris and Erickson moved the district court to cancel it.  The district court granted the motion and ordered the notice of lis pendens canceled, but this court reversed, reinstating the notice of lis pendens.  Strong Const. Co., Inc. v. Atlantis Developers, 2003 WL 21915789 (Minn. App. 2003).

[2] For ease of reference, we will refer to respondents collectively as Strong Construction.