By: Rob Harris
Many years ago, as a young attorney, I represented two individuals who claimed that they were deprived of a real estate development opportunity by the defendant’s improper actions in steering the opportunity to another investor. The expert witness engaged to calculate damages opined that, under market conditions existing at the time, the project could reasonably be projected to earn lost profits of a gazillion dollars. Then, the real estate market collapse of the late 1980′s occurred. Developers lost their shirts; banks failed.
Amid this maelstrom, my clients’ case worked its way through the court backlog and it was time for trial. The experts rosy projections of two years’ prior did not seem so solid. The attorney for the defendant asserted (seriously, not jokingly) that my clients should be grateful they (allegedly) were deprived of the opportunity.
Through it all, the expert stood his ground. Unlike every other development in the Northeast, he was confident this one–with features that others lacked–would have been a success.
A recent decision from a Rhode Island court brought this case to mind. Shareholders in an entity that had development rights to a golf course and assorted residential amenities alleged that, through various nefarious conduct, they were unlawfully deprived of an opportunity to acquire the investment. Among their claimed damages were the profits they would have / could have / should have received.
The court, however, was not impressed, rejecting the valiant effort put forth by plaintiffs’ expert witness, concluding that his damage theory was nothing more than a speculative house of cards that toppled for want of a solid foundation.
As the court explained,
“Plaintiffs contend their losses [include] the profits which could have been made by developing the Property. Specifically, the Plaintiffs point to lost profits from condominium sales, house lots, and revenues generated by a golf course, exercise facility, and restaurant…
“[Plaintiff's expert witness] Houle’s testimony demonstrates the amount of conjecture involved in formulating the Plaintiffs’amount of potential lost profits. In order to obtain a profit in this venture, Houle first assumed that certain construction permits from the Town of Hopkinton and the Rhode Island Department of Environmental Management (DEM) would be renewed within a short amount of time after the Plaintiffs purchased the Property… In the absence of any additional evidence that demonstrates the necessary permits could easily be renewed, Houle’s later determination of the Property’s value—which assumes all permits will be in place—is highly speculative… Further, Houle’s testimony regarding the amount of damages relies on several inferences. One such inference includes the Plaintiffs being able to obtain financing to complete development.
“Also, the Plaintiffs have not presented evidence, beyond conjecture, regarding what the costs of construction would be to fully develop the Property. Without evidence pertaining to construction costs and financing, Plaintiffs’ lost profits cannot be proven with reasonable certainty… Although Houle states that he is willing to testify as to the amount of profits a generic developer could make on this project, his assumption of a 20% profit is based on unsupported documentation… In fact, the underlying information used by Houle in creating his appraisal for the Property’s value once fully developed has been destroyed.Consequently, Houle’s testimony regarding the estimated profits to be made from developing the Property was made from his memory and recollection… Therefore, the Court is unable to ascertain whether Houle’s estimates are based on articulated facts or mere speculation…
“In summary, the Plaintiffs have not presented sufficient evidence to raise a factual issueof whether lost profits existed. Houle’s testimony, the sole source relied on by the Plaintiffs,does not create a factual issue regarding lost profits. To testify to lost profits, Houle would have to assume the price paid by the Plaintiffs for the Property, the terms of any financing to develop the Property, and lastly, the ability to sell all the developed residential lots… It is clear that absent further evidence, the testimony of Houle regarding lost profits is heavily grounded in a series of speculative events occurring.”
So it goes.