Wartzman v. Hightower Productions, Inc.

Court of Special Appeals of Maryland · Contracts

ContractsReliance damagesAttorney malpracticeMitigation of damagesPrejudgment interestreliance interestdevelopment costsspeculative profits

Facts

Hightower Productions was formed to finance a promotional flagpole-sitting venture by selling stock to the public, and its principals specifically retained the defendant law firm to incorporate the business so it could raise the necessary capital. The firm incorporated Hightower but failed to prepare an offering memorandum and failed to assure compliance with Maryland securities disclosure requirements, so after $43,000 in stock had been sold, Hightower was told it could not sell more stock and would need a securities specialist at substantial additional cost. Because it lacked funds to escrow the prior stock proceeds, hire the specialist, or continue operations during the delay, the shareholders discontinued the project. At trial, Hightower sought expenditures and obligations incurred in reliance on having a corporation authorized to raise the needed capital, and the jury returned a verdict in its favor.

Issue

May a plaintiff recover reliance damages or development costs when a defendant's breach prevents a new venture from proceeding and anticipated profits are too speculative to measure? Relatedly, did the trial court err in refusing mitigation and prejudgment-interest submissions to the jury?

Rule

Ordinarily lost profits are recoverable for breach of contract, but when anticipated profits are too speculative to determine, the injured party may recover reliance damages, including expenditures made in preparation for performance or in performance of the contract. That recovery is limited by the breaching party's right to prove with reasonable certainty that full performance would have produced a net loss, and mitigation instructions are required only when supported by evidence. Prejudgment interest is unavailable on unliquidated damages not reasonably ascertainable before verdict.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Denver, Maya Torres hired Front Range Legal Group to organize a new beverage festival venture so it could lawfully sell investment units and raise startup capital. The firm formed the entity but failed to complete the disclosure steps required for the planned fundraising, and after early sales the venture had to stop raising money and shut down before any track record existed.

If Maya's company sues the firm for breach of contract, which measure of damages is most likely available if projected profits from the festival are too uncertain to prove?

Explanation. When anticipated profits are too speculative to determine, the injured party may recover reliance damages, including expenditures made in preparation for performance or in performance, if those losses were induced by reliance on the contract and rendered worthless by the breach. The breaching party may reduce that recovery by proving with reasonable certainty that full performance would still have produced a net loss. (Derived from Wartzman v. Hightower Productions, Inc. (n.d.).)