Tag: compensatory damages

Direct Damages, Loss of Use Damages and the Defective A/C System: A Florida Tale

AC

A prosaic fact pattern involving a busted home air conditioning system sets the stage for a Florida court’s nuanced discussion of the policy reasons that underlie compensatory damages and the differences between direct damages and loss of use (delay) damages.

In Gonzalez v. Barrenechea, 2015 Fla.App.LEXIS 647 (Fla.3d DCA Jan. 21, 2015), the plaintiff homeowner sued the defendant HVAC contractor for installing a defective home air conditioning system.  He sued for damages incurred in paying another contractor to install a new system (direct damages) and also sought loss of use damages for the 20 months it took for the new system to be installed and during which time the homeowner had only sporadic use of the home.

The trial court entered judgment for about $80K in direct damages and denied the plaintiff’s claim for loss of use damages.  Plaintiff appealed.

Held: Direct damages affirmed; trial court reversed on loss of use damages.

Plaintiff sought lost use damages of $15,500 per month – the reasonable rental value of a similar home according to plaintiff’s real estate appraiser expert.  The trial court disallowed the delay damages because the appraiser didn’t factor in plaintiff’s limited use of the home – including storing furniture there, parking cars in the garage, and allowing a family member to intermittently sleep in the home.

Under Florida law, a homeowner who loses the use of a structure because of delay in completion is entitled to damages for lost use.  The measure of damages for delay in completing construction are measured by the rental value of the building under construction during the delay.

Typically, a plaintiff trying to recover loss of use damages must offer expert testimony from a real estate appraiser (or someone similar) who testifies as to the reasonable rental value of the structure in question.  The damages testimony must be reliable. However, where the expert witness’s testimony is based on faulty comparables, the loss of use testimony is unreliable.

Reversing the trial court, the Florida appellate court held that none of the limited uses of the home was significant enough to negate the rental value assigned by plaintiff’s expert.  The court even pointed out that parking cars and storing furniture on the site may have even saved the plaintiff money.

Procedurally, the court held that since plaintiff made out a prima facie case for loss of use damages, the burden shifted to the defendant to establish a set-off to the claimed damages.  And since the defendant didn’t plead set-off in defense of the plaintiff’s complaint, it was barred from doing so on appeal.

There was also a policy reason for the appeals court’s reversal on the loss of use damages.  Acknowledging that failing to offset the delay damages by the limited uses during the 20-month delay period, the court noted that the law favors a “small windfall” for the plaintiff over a “large windfall” to defendants like the sued HVAC contractor.

The dissenting judge found that the trial court properly denied loss of use damages.  Since plaintiff’s expert based his rental value on flawed comparable data (a home that didn’t include the various limited uses made by the plaintiff), his damage evaluation of $15,500 per month was entirely lacking in evidentiary support.

Afterwords:

A troubling result from a defense standpoint and a boon to contract plaintiffs.  The court seems to have reversed the parties’ applicable burden of proof.  The plaintiff clearly failed to meet his burden of establishing the rental value of the home during the 20-month delay period by relying on a deficient “comp” (comparable property).  Because of this, the plaintiff’s delay damages should have been $0.

That aside, this case shows the importance of timely asserting affirmative defenses.  In hindsight, the defendant contractor probably should have asserted a set-off defense: that plaintiff’s loss of use damages should have been reduced by plaintiff’s periodic use of the property over the 20-month time span.  The defendant’s failure to allege a set-off made it impossible for the appeals court to reduce plaintiff’s claimed damages.

 

IL First Dist. Examines Punitive Damage Standards In RE Fraud Suit

In K2 Development, LLC v. Braunstein, 2013 IL App (1st) 103672-U, the First District addressed Illinois law’s compensatory and punitive damages guideposts in a convoluted real estate fraud suit filed by an LLC against one of its two members.

The plaintiff LLC – through one of its members (a real estate novice) – sued the LLC’s other member – an experienced real estate developer – for fraud in connection with the defendant’s sale of an undeveloped piece of land to the plaintiff. 

The court awarded compensatory damages of nearly $400K and punitive damages of over $750K after a bench trial and the defendant appealed.

Held: Affirmed.

Rules/reasoning: The Court upheld the trial court’s damage awards based on the  evidence that the defendant orchestrated a fraudulent scheme and took advantage of his neophyte business partner (the other LLC member). 

In Illinois, compensatory damages are awarded as compensation, indemnity or restitution for a wrong or injury suffered by a plaintiff.  The purpose of compensatory damages is to make the injured party whole and restore him to his pre-loss condition. 

Compensatory damages are not designed to provide plaintiff with a windfall or profit.  Damage computations present a fact issue and a damage award will be overturned where the trial court ignores the evidence or the damage calculation is palpably erroneous.  ¶ 28 

The Court held that the trial court’s damage award based on defendant’s ill-gotten profits on the fraudulent deal coupled with the amount of asecret lien and easement defendant recorded/allowed to be recorded against the property had support in the record.  ¶¶ 28- 29

Punitive damages aim to (1) act as retribution against a defendant; and (2) deter the defendant and others from similar conduct.  The defendant’s conduct must be willful, outrageous and evince an “evil motive” or “reckless indifference” to others’ rights.  Punitive damages can be awarded in Illinois fraud actions; particularly where the false statements are made repeatedly and are particularly egregious. ¶¶ 32-34. 

Applying these rules, the Court held that punitive damages were appropriate based on the defendant’s continuing pattern of fraudulent conduct that saw   him make repeated misstatements and omissions. 

The K2 Court also rejected defendant’s claim that the $750K punitive damage award was unconstitutional.  The constitutional calculus for punitive damages includes (1) the degree of defendant’s “reprehensibility”, (2) disparity between actual or potential harm suffered by plaintiff and the punitive damage award, and (3) the difference between the punitive damages awarded and civil penalties authorized or imposed in comparable cases.  ¶ 37.

The Court addressed factors 1 and 2 above (factor (3) didn’t apply since there was no civil penalty for fraud or breach of fiduciary duty)).  In finding the defendant’s conduct reprehensible, the Court noted the defendant repeatedly made false statements to the plaintiff concerning the nature of property and the investment.  This showed a pattern of deceitful conduct. 

On the actual vs. punitive damage issue, the court noted that the punitives awarded ($750K) were about double the amount of the compensatory damages ($382K).  This 2:1 punitive:compensatory damages ratio clearly fell within reasonable damages bounds under Illinois law where anything more than a 4:1 punitive to actual damages ratio is “close to the line” (e.g. $400,000 punitive on a $100,000 actual damage award) of permissible punitives.  ¶¶ 41-42

Comments: A key factor in the Court’s damage analysis was that defendant owed and breached fiduciary duties to the plaintiff LLC’s other member.  

The disparity in business acumen between the parties clearly led the Court to affirm the trial court’s over $1M aggregate damage award for the plaintiff. 

K2 is particularly instructive on the “ratio issue”: how much a punitive damage can exceed an actual damage award without the court viewing it as excessive.  While there’s no bright-line rule, K2 suggests that anything higher than 4 to 1 can invoke elevated court scrutiny and a possible damage reduction.  

K2 also illustrates that a pattern of conduct – more than an isolated incident – will likely lead to a finding of reprehensible fraud and support a punitive damage award.