Ross Dress for Less, Inc. v. Makarios-Or., LLC

Decision Date08 January 2021
Docket NumberCase No. 3:14-cv-1971-SI
Citation512 F.Supp.3d 1138
Parties ROSS DRESS FOR LESS, INC., Plaintiff and Counterclaim-Defendant, v. MAKARIOS-OREGON, LLC; Walker Place, LLC; Charles W. Calomiris; Katherine Calomiris Tompros; and Jennifer Calomiris, Defendants and Counterclaim-Plaintiffs.
CourtU.S. District Court — District of Oregon

Gregory D. Call and Tracy E. Reichmuth, Crowell & Moring llp, 3 Embarcadero Center, 26th Floor, San Francisco, CA 94111; Joel A. Parker, Rebecca A. Boyette, and Jessica Schuh, Schwabe Williamson & Wyatt pc, 1211 SW Fifth Avenue, Suite 1600, Portland, OR 97204. Of Attorneys for Plaintiff.

Jeffrey M. Edelson, Molly K. Honoré, Paul S. Bierly, and Vivek A. Kothari, Markowitz Herbold pc, 1455 SW Broadway, Suite 1900, Portland, OR 97201. Of Attorneys for Defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW AT PHASE II

Michael H. Simon, District Judge.

This lawsuit involves a dispute over the contractual obligations of a commercial tenant upon the expiration of two leases, each spanning more than 50 years, with two landlords for two adjacent and partially conjoined buildings in downtown Portland, Oregon. Before the leases expired, the tenant (or lessee) filed this action, seeking declaratory relief regarding its end-of-lease obligations. After bifurcating the case, the Court held a bench trial on the lessee's request for declaratory relief and issued a ruling. That was Phase I. After the leases expired, the lessee surrendered the premises. The two landlords (or lessors) filed supplemental counterclaims for damages, alleging that the lessee failed to comply with its end-of-lease obligations. This is Phase II. The lessee (Ross Dress for Less, Inc.) eventually settled with one of the lessors (Walker Place, LLC) but not with the other (Makarios-Oregon, LLC).

A nonbreaching party to a contract typically is entitled to the benefit of its bargain (also known as its "expectation" interest).1 Upon the expiration of a lease, a lessor generally may recover damages caused by a commercial lessee's breach of an express covenant to return the premises in good order, condition, and repair, reasonable wear and tear excepted. In most cases, the cost of repair is a convenient and appropriate way to measure the damages that a lessor suffers in these circumstances. When the facts of a specific case, however, indicate that the cost of repair is unrelated to a lessor's actual damage, the general rule might not fully apply. Instead, when the cost of repair substantially and disproportionately exceeds any diminution in market value of the relevant property caused by the lessee's nonperformance of its express obligations, the diminution in market value may be a better measure of damages.

The pending dispute focuses on whether the lessee (Ross Dress for Less, Inc.) surrendered the premises of the non-settling lessor (Makarios-Oregon, LLC) in the condition required under the parties’ relevant lease and, if not, whether that lessor is entitled to the full cost of remediating all deficiencies in performance without regard to whether a specific deficiency (or all deficiencies collectively) caused any loss in market value to the leased premises. Stated another way, this case concerns the application of the "economic waste doctrine" in the context of a commercial building with a lease spanning more than 50 years.

Oregon contract law applies to the commercial lease in this case. As discussed more fully below, Oregon's version of the economic waste doctrine provides that when the cost of repair is not the "prudent" remedy to apply because that remedy would create "economic waste," the diminution in market value is the better measure of damages. As also discussed more fully below, to avoid the risk of denying a contracting party the benefit of its bargain, this alternative remedy must be applied carefully and cautiously. When a commercially leased building is vacated, or surrendered, in a condition that materially breaches the lessee's express covenant in multiple respects, especially when the costs to repair some items are disproportionately high in relation to any effect the condition of those specific items might have on the market value of the premises, this caution militates in favor of evaluating the appropriate measure of damages on an item-by-item basis.

In December 2019, the Court held a four-day bench trial on the supplemental counterclaims asserted by the non-settling lessor (Makarios-Oregon, LLC) against the lessee (Ross Dress for Less, Inc.). Afterward, the Court allowed the parties to file post-trial briefs and responses. The Court then weighed and evaluated all evidence in the same manner that it would instruct a jury to do and has fully considered the legal arguments of counsel. The Court now makes the findings of fact and conclusions of law stated below. Any finding of fact that constitutes a conclusion of law also is adopted as a conclusion of law, and any conclusion of law that constitutes a finding of fact similarly is adopted as a finding of fact.

In the opinion of the Court, the facts found are all supported by the record, even though the Court might not provide specific record citations. Also, unless otherwise noted, when evidence is subject to an objection and the Court has relied on that evidence, the Court has overruled the objection for the reason or reasons identified either by the Court or, if the Court is silent, by the party offering the evidence in response to the other side's objection. When the Court has declined to consider evidence subject to an objection, the Court may state its basis for sustaining the evidentiary objection; alternatively, the Court simply may have found that the evidence subject to objection was not persuasive, thus making the objection moot. All objections to evidence that the Court has not relied on and all procedural objections not expressly addressed are denied as moot.

For the reasons stated below, the Court finds that Ross Dress for Less, Inc. materially breached its end-of-lease and rent-payment obligations owed to Makarios-Oregon, LLC. The Court separately will enter a judgment in favor of Makarios-Oregon, LLC in the total amount of $2,931,829, which include prejudgment interest through January 8, 2021.

PROCEDURAL BACKGROUND

Plaintiff and Counterclaim-Defendant Ross Dress for Less, Inc. (Ross) filed this lawsuit in December 2014. At that time, Ross leased portions of two buildings from Defendants and Counterclaim-Plaintiffs Makarios-Oregon, LLC (Makarios) and Walker Place, LLC (Walker Place). Both leases expired on September 30, 2016. Before their expiration, Ross sought a judicial declaration that, among other things, Ross's proposed end-of-lease plans would satisfy its contractual obligations under the two leases. Makarios and Walker Place asserted that Ross's plans were inadequate; they also asserted counterclaims, seeking both a judicial declaration clarifying the extent of Ross's end-of-lease obligations and money damages for breach of contract.

All parties moved for partial summary judgment, which the Court granted in part and denied in part in March 2016. Ross Dress for Less, Inc. v. Makarios-Oregon, LLC , 180 F. Supp. 3d 745 (D. Or. 2016). The parties then agreed to bifurcate this lawsuit and waive their right to have a jury resolve all factual disputes. In Phase I, the Court held a bench trial to determine the extent of Ross's end-of-lease obligations. In June 2016, the Court issued Phase I Findings of Fact and Conclusions of Law. Ross Dress for Less, Inc. v. Makarios-Oregon, LLC , 191 F. Supp. 3d 1189 (D. Or. 2016).

On September 6, 2016, Ross moved for an order determining whether, over the objections of Makarios and Walker Place, Ross could remain on the premises of the two buildings after the leases expired to complete any work that still needed to be done to surrender the premises in the condition required under the leases. On September 27, 2016, the Court ruled that after the two leases expired on September 30, 2016, neither Ross nor its agents could enter or remain on the premises of either building over the objection of the respective lessor. Ross Dress for Less, Inc. v. Makarios-Oregon, LLC , 210 F. Supp. 3d 1259 (D. Or. 2016). In April 2017, both Makarios and Walker Place filed supplemental counterclaims for money damages against Ross, to be resolved in Phase II. Several months later, Walker Place settled its dispute with Ross. In December 2018, Makarios amended its supplemental counterclaims. ECF 306.

As its first supplemental counterclaim, Makarios alleged that when Ross's lease expired on September 30, 2016, and Ross vacated the building leased from Makarios (the Richmond Building), Ross failed to return the premises in the condition contractually required under the relevant lease (the Richmond Lease). Makarios sought money damages for "costs of the required work and repairs, architectural, engineering, and other professional fees, legal fees, permit fees, inspection fees, and fees and costs associated with bringing the Richmond Building to the condition required by the Richmond Lease." ECF 306, ¶ 13. As its second supplemental counterclaim, Makarios alleged breach of the implied covenant of good faith and fair dealing and sought "damages in an amount to be proved at trial." ECF 306, ¶ 24.2 As its third supplemental counterclaim, Makarios alleged that Ross breached its obligation under the Richmond Lease to pay rent and now owes Makarios unpaid rent through the end of the lease period. ECF 306, ¶33.

FINDINGS OF FACT

The Court finds the following facts by a preponderance of the evidence:

A. Background

1. From 1907 through 1976, members of the Failing family and related entities (collectively, the Failings) owned a building located at 620 SW Fifth Avenue, in Portland, Oregon (the Failing Building). It was originally constructed in 1907 as a six-story building. In 1913, an additional six floors were added. The Failing Building currently consists of twelve...

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  • Dissecting Contract Breach Terminology, Warranties, and Remedies: Part One
    • United States
    • ABA General Library The Construction Lawyer No. 42-3, July 2022
    • 1 Julio 2022
    ...court used economic waste in its analysis of damages for partial completion. 41 . Ross Dress For Less, Inc. v. Makarios-Oregon, LLC, 512 F. Supp. 3d 1138, 1155 (Ore. 2021) (holding diminution in value is the proper measure of damages when the cost of repair is disproportionate to the diminu......

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