CR–RSC Tower I, LLC v. RSC Tower I, LLC

• Decision Date: 27 November 2012
• Docket Number: No. 115,Sept. Term, 2011.,115
• Citation: 56 A.3d 170,429 Md. 387
• Parties: CR–RSC TOWER I, LLC, et al. v. RSC TOWER I, LLC et al.
• Court: Maryland Court of Appeals

429 Md. 387

56 A.3d 170

CR–RSC TOWER I, LLC, et al.

v.RSC TOWER I, LLC et al.

No. 115, Sept. Term, 2011.

Court of Appeals of Maryland.

Nov. 27, 2012.

Andrew J. Graham (Steven M. Klepper of Kramon & Graham, P.A., Baltimore, MD), on brief, for petitioners/cross-respondents.

Brian L. Schwalb (Mitchell Y. Mirviss and Samantha M. Williams of Venable LLP, Rockville, MD), on brief, for respondents/cross-petitioners.

Argued before BELL, C.J., HARRELL, BATTAGLIA, GREENE, ADKINS, BARBERA, and McDONALD, JJ.

ADKINS, J.

In this case, we determine the proper measure of lost profit damages in a breach of contract case, a question uncommon for our docket. We also review the rare situation when a trial court has permitted a litigant to discover and introduce into evidence communications between an opposing party and its attorneys, based on an implied waiver of the attorney-client privilege via testimony. Finally, we answer four other issues raised by the parties relating to this urban real estate development that failed to come to fruition.

The owners of two adjoining properties leased them to developer-tenants for the purpose of building an apartment building on each. As construction was beginning, the landlords breached the ground leases by refusing to provide estoppel certificates and contesting the tenants' building permits. The landlords' breach prevented the tenants from obtaining financing, which ended the development project. The tenants sued for lost profits.

In discovery, the landlords admitted to breaching but refused to explain why they had breached, stating simply that they had relied on the advice of counsel. Before trial, the Circuit Court for Montgomery County ruled against the landlords on several motions, holding that (1) the tenants could discover and introduce evidence of the landlords' reasons for breaching, including communications with their former counsel, (2) the landlords could not introduce evidence of the 2008 crash in the real estate market to show that the tenants would not have made profits, and (3) the landlords could not argue or present evidence that the tenants, having planned to create a shell company to operate the apartment buildings, were not the real party in interest. The jury awarded the tenants over $36 million in damages, holding the landlords jointly and severally liable. The trial court also awarded joint and several attorneys' fees.

The landlords appealed, contesting the issues mentioned above, as well as whether joint and several liability was proper. The Court of Special Appeals held that the landlords could not be held jointly and severally liable for damages but otherwise affirmed. Both parties petitioned for certiorari. For the reasons explained below, we shall affirm the judgment of the Court of Special Appeals.

Facts and Legal Proceedings

On June 16, 2004, Respondents/Cross–Petitioners RSC Tower I, LLC and RSC Tower II, LLC (“Tenants”) entered into separate ground leases to develop adjoining properties in Rock Spring Park in Montgomery County, Maryland. The owners of the properties, Camalier L.P. and Davis Brothers Montgomery Farm L.P. (“Landlords”), signed the ground leases. The ground leases provided that Tenants—corporate entities formed by Penrose development company for the purpose of developing the two parcels—would build “high rise multifamily apartment project[s]” on each parcel as part of a common plan. Specifically, RSC Tower I, LLC agreed to build “Tower I” on Parcel 20, with construction to start no later than July 15, 2004. RSC Tower II, LLC agreed to build “Tower II” on Parcel 21, with construction to start no later than July 1, 2009. ¹ Each tower was to contain approximately 350 units.

The plan for the two properties changed later in 2004, when Tenants and Landlords discussed building instead condominium units, a hotel, and a spa resort. The developer for this new project was to be Canyon Ranch, an outside development company. On March 3, 2005, Tenants obtained approval of the site plan amendment for the new project from the Maryland National Capital Park and Planning Commission (“Commission”). Additionally, because Maryland law prohibits developing residential condominiums on leasehold estates,² on September 13, 2005 Landlords agreed to sell the parcels to Tenants, modifying the ground leases accordingly and entering into sales contracts to convey the land. As a preliminary step to selling the properties, Landlords assigned their interests in the ground leases to Petitioners/Cross–Respondents CR–RSC Tower I, LLC, Second CR–RSC Tower I, LLC, CR–RSC Tower II, LLC, and Second CR–RSC Tower II, LLC, four corporate entities wholly owned by the owners of the properties.³

Yet on August 28, 2006, Tenants reverted to the original plan to build the apartment towers, filing another site plan amendment with the Commission. Tenants returned to the original plan because Canyon Ranch withdrew from the project, citing what it called “the overall slow down in the condominium marketplace” and “some missteps during the development project.” A power struggle ensued, with Landlords asserting that they had the “sole authority” to determine whether to return to the apartment plan or to proceed with the condominium plan. Nevertheless, the Commission approved the site plan amendment. Landlords then instituted administrative actions contesting the Commission's approval of the site plan amendments as well as the decision of the Montgomery County Department of Permitting Services (“DPS”) to issue a building permit for Tower I.

Tenants moved forward with the apartment project, entering into a Memorandum of Understanding (“MOU”) with Northwestern Mutual Life Insurance Company (“NML”) under which NML agreed to provide an $85 million construction loan and purchase $30.1 million in equity in the apartment towers. To finalize the financing agreement, in October 2006 Tenants requested that Landlords execute estoppel certificates, as called for by the ground leases. In simple terms, the estoppel certificates would certify that Tenants were in compliance with all terms of the lease. There was some back and forth about the terms of the estoppel certificates, and when Landlords still had not signed them by October 26, 2006, Tenants threatened to sue.

On November 3, 2006, Landlords wrote to Tenants, attaching draft estoppel certificates with several reservations. In those certificates, Landlords asserted that Tenants were in breach of the ground leases. When Tenants showed the certificates to NML, it said the certificates were not sufficient to finalize the financing agreement because Landlords said that Tenants were in breach. Tenants then filed a declaratory action against Landlords in the Circuit Court for Montgomery County.

While the lawsuit was pending, Tenants continued negotiating with NML, ultimately agreeing to a financing arrangement under which Tenants would assign their interest in Tower I to a separate corporate entity, Sorrento, which would be owned by NML and Tenants as “90/10 partners.” ⁴ The plans further provided:

Cash flow will be split 90/10 [until] both parties earn a 10% cumulative preferred return. Thereafter, cash flow will be split 60% to [NML] and 40% to [Tenants].

These plans were reflected in Tenants' formal application for financing on December 8, 2006. In anticipation of the financing agreement, both NML and Tenants prepared pro formas projecting the towers' expected profits.

On April 4, 2007, the Circuit Court entered summary judgment in Tenants' favor, finding that Landlords had breached the ground leases by failing to provide the requested estoppel certificates and pursuing administrative actions against the site plan amendments and building permits. The Circuit Court ordered Landlords to execute the requested estoppel certificates within three days and dismiss the administrative actions.

Landlords appealed, and the Court of Special Appeals stayed the order to dismiss the administrative actions. Landlords signed the estoppel certificates but attached cover letters expressly reserving “all claims asserted in the pending litigation” and “all claims regarding the existence of any default, event, or condition that was not addressed by the Court in its Order, the final adjudication of which may [cause] any of the certifications contained in the Estoppel Certificates to be inaccurate.” Of course, these reservations caused NML to reject the estoppel certificates, and the financing deal remained stalled. The Court of Special Appeals ultimately affirmed the order to dismiss the administrative actions, which Landlords did on September 8, 2008. This appellate decision, though, is not what we review today. We review issues arising in a second suit brought by Tenants against Landlords.

In September 2008, when the Court of Special Appeals' decision came down, the previous financing arrangement with NML was no longer available, and the building permits had expired. Thus, instead of attempting to move forward with the project,⁵ Tenants filed their second lawsuit on March 3, 2009, seeking damages from Landlords in the amount of $30 million.⁶ An amended complaint filed on October 29, 2009, increased the demand to $50 million and alleged that Landlords had acted in bad faith and committed a “succession of breaches” following the initial refusal to sign the estoppel certificates.

In discovery, Tenants questioned Landlords about their reasons for refusing to sign the estoppel certificates and instituting the administrative actions. Landlords' responses almost uniformly pointed to conversations with counsel as the reason for their actions. Accordingly, Tenants filed a motion to compel discovery from Landlords' former counsel, Hogan & Hartson, which Landlords opposed. The trial court ruled in Tenants' favor, ordering discovery from Hogan & Hartson regarding Landlords' reasons for breaching. In discovery, Tenants obtained an email from Davis Camalier, one of Landlords,...