Unpublished Disposition, 917 F.2d 1307 (9th Cir. 1989)

Nos. 89-55623, 89-55720.

United States Court of Appeals, Ninth Circuit.

Before: ALARCON and WILLIAM A. NORRIS, Circuit Judges and CALLISTER^** , District Judge.

California Diesel & Equipment, Inc. ("Cal Diesel") sued the Sun Exploration and Production Co. ("Sun") for breaching a contract to sell real property. The parties bifurcated the liability and damages determinations. In the liability phase, the trial court rejected Sun's statute of frauds and rule against perpetuities defenses and held that Cal Diesel had properly exercised its option to purchase the commercial property subject to a lot split for $325,000.

Pursuant to California Civil Code Sec. 3306,¹  the court subsequently awarded Cal Diesel $215,000 in expectancy damages together with 7% prejudgment interest, plus $475,000 in consequential damages for lost appreciation, attorney's fees and costs. The court denied Cal Diesel consequential damages for lost profits as too speculative.

Although Sun does not dispute the liability finding, it appeals the district court's damage award as excessive. It seeks attorney's fees on appeal pursuant to the terms of the contract. Cal Diesel cross appeals the court's refusal to admit evidence of and denial of lost profits. Cal Diesel also seeks attorney's fees on appeal, as well as damages and double costs on the ground that Sun's appeal is frivolous. We reverse the district court's award of lost appreciation and affirm its denial of lost profits. In addition, we remand to the district court to make explicit findings of fact as to whether the lot split was included in the appraised fair market value of the property. We grant Sun attorney's fees as the prevailing party on all issues appealed, except for the issue of expectancy damages, which is remanded for further findings of fact.

* The amount of damages suffered is a question of fact reviewable under the clearly erroneous standard. See U.S. for Use of Morgan & Son v. Timberland Paving & Construction Co., 745 F.2d 595, 599 (9th Cir. 1984). To the extent the damage award is based upon an interpretation of state law, it is reviewable de novo. See Matter of McLinn, 739 F.2d 1395, 1397 (9th Cir. 1984) (en banc), cert. denied, 110 S. Ct. 3273 (1990).² 

The district court's decision to exclude testimony of lost profits is reviewed for abuse of discretion. See McGlinchy v. Shell Chemical Co., 845 F.2d 802, 806 (9th Cir. 1988).

Finally, the district court's interpretation and application of state law is reviewed de novo. See McLinn, 739 F.2d at 1397.

II

In determining expectancy damages pursuant to Sec. 3306, the district court awarded Cal Diesel "the difference between the price agreed to be paid"³  ($325,000) and "the value of the lot at the time of the breach"⁴  ($440,000). In addition, the court added to the value of the estate agreed to be conveyed, the $100,000⁵  in costs that Sun would have been required to incur to obtain a subdivision lot split required by the city.⁶ 

Sun contends that the district court should not have included the $100,000 lot split cost as part of the value of the estate to be conveyed. To the contrary, Sun contends, the value of the estate--assessed at $440,000--already included the cost of the improvements. See Appellant's Opening Brief at 19-22. To bolster its claim, Sun points to the testimony of Robert Fuller, who appraised the value of the lot at the time of the breach at $440,000. Asked on cross-examination whether he had appraised the property as a "finished, completed lot," Fuller responded in the affirmative. Appellant's Reply Brief at 4 (citing RT 4/12/89 at 51).⁷ 

Cal Diesel counters that Fuller "understood" such question as "referring to the entire property ... without improvements" and for that reason, he "answered in the affirmative." Appellee's Brief at 12. Moreover, it argues, Fuller's direct testimony clearly indicates that his assessment did not in any way include the costs of improvements associated with the lot split. See Appellee's Brief at 12 (citing RT 4/12/89 at 30, 50).⁸ 

It is not clear from the record whether the assessed value of the property included the cost of the lot split. Accordingly, we remand to the district court to make explicit factual findings as to whether the lot split was included in the assessed property value.

III

Section 3306 permits recovery for "consequential damages according to proof." In the absence of case law under this provision,⁹  the district court analogized the case to breach of contract cases. Relying on state cases,¹⁰  the district court ruled that Cal Diesel had not established with reasonable certainty the occurrence and extent of prospective lost profits. However, the court found that Cal Diesel was entitled to recover for the loss in appreciation it suffered on the property.

In computing lost appreciation, the court concluded that the evidence indicated that the present value of the vacant land totaled about $700,000. The required improvements for the lot split, the court continued, brought the value to about $800,000. Thus, the court awarded Cal Diesel $800,000 less the $325,000 purchase price, or $475,000 in lost appreciation.

Sun disputes the court's award of lost appreciation on several grounds. First, it argues, there is no legal basis for awarding damages for lost appreciation. Second, it contends, the court improperly calculated lost appreciation from the date of the breach to the time of trial. Section 3306, Sun argues, requires damages to be awarded based on the value of the property at the time of the breach. Because the property was assessed at $440,000 at the date of the breach, it argues, the $700,000 figure necessarily includes a valuation of the property two and one half years after the breach.¹¹  Holding a defendant accountable for losses suffered up to the time of trial, it contends, is unreasonable and contrary to the "plain meaning" of the statute. See Appellant's Reply Brief at 7-9. Finally, it argues, allowing Cal Diesel to recover for the value of the subdivided lot as expectancy and as part of lost appreciation constitutes "double damages." Id. at 11.

Cal Diesel counters that Section 3306 must be construed liberally to promote justice, and that where lost profits are considered too speculative, lost appreciation should be recoverable as an alternative, less speculative measure of consequential damages. See Appellee's Brief at 13 (citing Calif.Civ.Code Sec. 4) (stating that the code should be "liberally construed with a view to effect its objects and to promote justice.")). Had Sun split the lot and conveyed the property, Cal Diesel argues, it would have benefited from the appreciation in the property's value to date.

Moreover, it maintains, it is proper to calculate lost appreciation at the time of trial because the statutory language limiting recovery to the value of the property "at the time of the breach" only modifies expectancy damages, and not consequential damages. Limiting recovery for consequential damages to the date of breach, it argues, effectively would eliminate all consequential damages because they only occur after a seller has breached.¹² 

As Sun points out, there is no case law support for the proposition that loss of appreciation should be awarded as part of consequential damages. Although plaintiffs may recover for consequential damages that were "reasonably forseeable as a probable result of the breach when the contract was made," Restatement Second Sec. 35; see also E. Farnsworth Contracts Sec. 12.14 (1982), they may not recover for duplicative or inconsistent items. See Dollar Systems v. Avcar Leasing Systems, Inc., 890 F.2d 165, 174 (9th Cir. 1989).

Granting Cal Diesel the fair market value of the property at the time of the breach less the contract price plus interest makes the aggrieved party whole. Allowing a buyer to benefit from increases in market value after the date of breach without the risk of market declines finds no support in the law. Had Cal Diesel wanted to capture appreciation in value, it should have sued for specific performance.

Neither the district court nor the plaintiffs offer any authority for recovery of lost appreciation. Nor does the record provide any indication that Cal Diesel should be permitted to collect more than its expectancy. Thus, although a trial court's damage award should be accorded deference, it must be overturned where, as here, it is "clearly unsupported by the evidence." Roberts v. College of the Desert, 870 F.2d 1411, 1417 (9th Cir. 1988).

IV

Cal Diesel contends that the district court improperly excluded evidence of lost profits.¹³  It argues that it should have been permitted to admit evidence of lost profits earned by Cal Diesel's representative in the purchase and development of other vacant commercial properties in the same area. See Appellee's Brief at 18-25. Such testimony, Cal Diesel contends, would have established that its lost profits were substantial.

Sun counters that the excluded testimony was speculative and irrelevant and that Cal Diesel had ample opportunity to prove lost profits, which it could not. Moreover, Sun contends that Cal Diesel did not make an adequate offer of proof pursuant to the Federal Rules of Evidence Sec. 103.

Lost profits may be recovered as consequential damages so long as "1) they are within the contemplation of the parties at the time the contract was made, 2) they are the proximate cause of defendant's breach and 3) they are proven with reasonable certainty." Milgard Tempering, 902 F.2d at 710 (quoting Larsen v. Walton Plywood, Co., 65 Wash. 2d 1, 390 P.2d 677, 686, modified, 65 Wash. 2d 1, 396 P.2d 879 (1964)). The plaintiff need establish with certainty the "fact of damage," not the exact amount suffered. Id.

In the case at bar, the district court apparently concluded that the testimony in dispute¹⁴  was not sufficiently probative of lost profits to warrant its admission. The excluded testimony involved the details of Cal Diesel's previous business enterprises, including whether it had made a profit on other vacant lots it had developed.

The trial court did, however, allow both Mr. Mattox and Mr. Murat to testify about Cal Diesel's planned development project and its likelihood of commercial success. For instance, Mr. Mattox testified that Cal Diesel's planned use of the property for industrial or automotive purposes was financially prudent, see RT 4/18/89 at 98-99, and that the sale price of the property, if developed, would have been ten times its value. See id. at 120. This potential is reflected in the market value of the property at the time of the breach. Given the wide breadth of testimony permitted, we conclude that the trial court did not abuse its discretion in denying plaintiffs the opportunity to answer a handful of leading or conclusory questions.

Nor did the trial court abuse its discretion in concluding that Cal Diesel's claim of lost profits was unduly speculative. Trial courts are permitted broad discretion in assessing evidence and determining the existence and amount of damages. See Milgard Tempering, 902 F.2d at 711 (citing Barnard v. Compugraphic Corp., 35 Wash. App. 414, 677 P.2d 117, 120 (1983); Long v. T-H Trucking Co., 4 Wash. App. 922, 486 P.2d 300, 303 (1971)). Whether, and to what extent, Cal Diesel would have earned a profit on the vacant lot was anyone's guess; given the uncertainties in the real estate market, and Cal Diesel's unfamiliarity with the automotive servicing business, we conclude that it was not unreasonable for the court to find Cal Diesel's claim of lost profits unduly speculative. Finally, the profit potential in developing the property already would be reflected in its market value at the time of the breach, making any additional award excessive.

Although new businesses will not be denied recovery "if factual data is available to furnish a basis for computation of probable losses," Milgard Tempering, 902 F.2d at 711 (quoting Larsen, 390 P.2d at 687 (quoting Barbier v. Barry, 345 S.W.2d 557, 563 (Tex.Civ.App.1961), expert testimony provides sufficient proof only if it is "based upon tangible evidence rather than mere speculation or hypotheses." Id. (quoting Larsen, 390 P.2d at 688). In the present case, the evidence of Cal Diesel's profits was based on the general success of industrial or automotive properties in the area and predictions of the likelihood of commercial success. Such evidence is not sufficiently tangible to warrant a finding of lost profits. As the Shell Chemical court stated, a trial court does not abuse its discretion where evidence of lost profits "rests on unsupported assumptions and unsound extrapolation." 845 F.2d at 807. The trial court's denial of lost profits is thus affirmed.

V

Both parties seek attorney's fees for this appeal pursuant to the terms of their contract.¹⁵  Since we have overturned the district court's award of lost appreciation and affirmed its denial of lost profits, we conclude that Sun is the prevailing party on appeal. Accordingly, it is entitled to attorney's fees pursuant to the terms of the contract. Whether, and to what extent, either party is entitled to attorney's fees on the issue of the award of expectancy damages is reserved until the district court has issued a finding on the lot split.

CONCLUSION

The judgment is REVERSED to the extent that it awarded Cal Diesel $475,000 as lost appreciation. The judgment is VACATED and REMANDED to the extent that it awarded Cal Diesel $100,000 for the value of the lot split as part of expectancy damages. Otherwise, the judgment is AFFIRMED. Attorney's fees are granted to Sun as the prevailing party on appeal, except no fee award is made at this time in connection with expectancy damages for the lot split.