Tuesday, July 12, 2005

Lu v. Grewal (Cal. Ct. App. - June 28, 2005)

I think that this is the first substantial opinion that I've read by Justice Zelon (who was appointed to the Court of Appeal in August 2003). And I'm predisposed to be excited about her. She's a former partner at Morrison & Foerster (at which I once worked as a summer associate), is a fellow graduate of HLS ('77), and was -- like yours truly -- an editor on the Harvard Civil Rights-Civil Liberties Law Review. Plus she was born in Durham, North Carolina, not far from the birthplace of my lovely wife. So I'm somewhat psyched to have her join the bench.

Which means I was slightly sad to see her get this one what I think is at least a tiny bit wrong. Here's the basic "Law School Hypothetical" version of the facts. D breaches a lease by abandoning a property (here, for a gas station) and not paying rent. P tries unsuccessfully to release the property to mitigate P's damages, so decides to run the business herself, and makes a healthy profit doing so. Assume that the lease was for $5000/month and that P earned a net profit of $8,000/month from running the business. If there were 12 months left on the lease at the time of the breach, what are P's recoverable damages? Would your answer change if P made only $3000/month (rather than $5000/month) from the business?

What do you think? To me, there's at least a reasonable argument that P has fully mitigated her damages in the former example, since she is up a total of $36,000 ($8000 profits minus $5000 rent times 12 months) as a result of the breach, and hence is entitled to no recovery. And, under this (plausible) theory, in the latter example, P has partially mitigated her damages, so is entitled to recover $24,000, which is $5000/month minus $3000/month times 12 months.

But Justice Zelon holds that P is entitled to recover $60,000 in both settings, and that the benefits that P has received as a result of the breach categorically do not count in mitigation. She also decries (on page 10) that any contrary holding would "def[y] principles of public policy and offend[] notions of fairness, justice and common sense."

Well, I certainly disagree with the rhetoric. A contrary position seems quite plausible, and hardly absurd.

But mroe to the point, I think it's Justice Zelon's apparent position that is contrary to public policy. My view is that plaintiff can't obtain the benefits of both a rent-free business and leasehold damages at the same time. At a minimum, the fact that plaintiff elected to utilize the property conclusively establishes that it does, in fact, have some fair rental value that was utilized and should offset damages: after all, plaintiff essentially elected to rent it herself. For example, if D breaches a residential lease and P moves into the property herself during the unexpired term, does D really get no mitigation since the property was only utilized by P rather than a third party? I think not.

I think that Justice Zelon is led a bit astray by the compelling facts at issue here; in particular, the fact that the business was a success (and hence resulted in mitigation profits) only because P's husband worked as the manager of the gas station virtually 24/7. Which is why, I think, Justice Zelon asserts that defendants "are not entitled to the benefits of appellant's hard work and capital in making the property productive; nor should [P] be punished for bringing the property back to life."

But it's not punishment; it's mitigation, and is no different than "punishing" a landlord by reducing her damages based upon her releasing of a property. Which, of course, similarly "takes" her hard work and efforts to release the property, but is something that we routinely require. Plus, under a proper mitigation doctrine, any "hard work and capital" that P invested in the property would be deducted from the amount of mitigation. So if, for example, P's husband worked 4000 hours to manage the business, at a fair hourly rate of $20/hour, then the profits of the business available for mitigation would be $80,000 less. Ditto for any expenditures necessary to run the business. So there's no really "usurping" of plaintiff's capital here, much less "punishment".

Now, admittedly, I don't think that defendant is entitled to a risk-free option on the plaintiff's business; i.e., that there's mitigation that benefits defendant if the business succeeds but no penalty (notwithstanding the investments by plaintiff) if the business fails. So I think that, for this reason, Justice Zelon's basic holding may in fact be right -- that you can't simply offset damages with profits. But there's definitely at least some offset due here, if only because the fair rental property of an asset that is actually used is greater than zero. This is the proper middle ground, and it's not one that Justice Zelon particularly explores. Which is too bad, since it's the position that I think is right. Oh well. I'm confident in Justice Zelon's intellect, and am sure that I'll agree with her more times than not. Just not totally on this one.