Basic Capital Mgmt., Inc. v. Dynex Commercial, Inc. (“Basic III”)
Dallas Court of Appeals, No. 05-04-01358-CV (February 13, 2013)
Chief Justice Wright and Justices Moseley (Opinion) and Lang
In the third round of a long-running dispute concerning commercial real estate loans, the court restored a plaintiffs’ verdict for “increased cost” and “lost opportunity” damages caused by breach of a $160 million financing commitment, but upheld a JNOV on a smaller award for failure to fully fund certain loans. The Dallas court previously had affirmed the trial court’s JNOV for the defendants on all counts. But the Texas Supreme Court reversed. On remand, the Dallas court determined there was legally sufficient evidence to support all but one of the jury’s original findings. Consequently, the case was remanded to the trial court for determination of attorneys’ fees and interest payable to the plaintiffs and entry of judgment.
In 1998, Dynex executed agreements to make loans to three wholly-owned subsidiaries of a real estate investment trust that was managed and partially owned by Basic, secured by commercial buildings in New Orleans. The “New Orleans Loans” were contingent on execution of a Commitment between Dynex and Basic, which contemplated an additional $160 million in similar loans to Basic affiliates. When market interest rates increased, making the rates contemplated by the Commitment unfavorable to the lender, Dynex refused to fund tenant improvements under the New Orleans Loans or to make any additional loans under the Commitment. The borrowers and affiliates sued for breach of the contracts, and a jury ultimately found for the plaintiffs and awarded $27,706,610 in “increased costs” and “lost opportunity” damages for breach of the Commitment, and $252,577 in “lost opportunity” damages for breach of the New Orleans Loans. The trial court, however, granted JNOV for defendants on several grounds (including that the affiliated entities were not parties to the contracts), and the court of appeals affirmed. Basic Capital Mgmt., Inc. v. Dynex Commercial, Inc., 254 S.W.3d 508 (Tex. App.—Dallas 2008) (“Basic I”).
The Texas Supreme Court reversed and remanded, holding that the corporate owners of the borrowers were third-party beneficiaries of the contracts, and that consequential damages for the lender’s breach were foreseeable. Basic Capital Mgmt., Inc. v. Dynex Commercial, Inc., 348 S.W.3d 894 (Tex. 2009) (“Basic II”). On remand, the Dallas court reviewed the evidence on each of the jury’s liability findings, including existence and breach of the contract and failure of affirmative defenses of excuse and release, and found that they were supported by legally sufficient evidence. Damages for breach of the Commitment were calculated by plaintiffs’ expert Ray Perryman as direct damages (increased cost) and consequential damages (lost opportunity). The “increased cost model” calculated the difference between the contractual rate of interest and the higher rates the borrowers paid to a replacement lender, and was easily affirmed. The more controversial “lost opportunity model” calculated the profits plaintiffs would have gained by investing $155 million they did not receive under the Commitment. The court held that Perryman’s assumptions were consistent with the evidence and his model satisfied the requirement that lost profits “be shown by competent evidence with reasonable certainty” (quoting Holt Atherton Indus., Inc. v. Heine, 835 S.W.2d 80, 84 (Tex. 1992). The court held, however, that plaintiffs “failed to establish that they sustained lost profits as a result of Dynex’s breach of the New Orleans Loans.”
Finally, the court held that the award of $1,950,000 in attorneys’ fees, which was predicated on plaintiffs’ prevailing on both contract claims, must be retried in light of the judgment setting aside the verdict on the smaller of the two claims (which accounted for less than one percent of the damages found by the jury). The court explained it could not “be reasonably certain the jury was not influenced by the amount of damages erroneously found with respect to the breach of the New Orleans Loans.”
