Error in Admitting Evidence of “Lost Real Estate Investment Profits” Shaves $1.3 Billion Off Gargantuan Judgment
“Lost profits” as a form of damages in a real estate dispute can often involve big numbers, but due to their somewhat speculative nature they can be difficult to recover.
An opinion recently published by California’s Second Appellate District — Jogani v. Jogani — illustrates the point.
Facts: Brothers build diamond and real estate empire; feuds erupt
In the 1970s, four brothers — Haresh, Shailesh, Rajesh, and Chetan Jogani — formed an oral partnership to form what would become a global diamond business.
In 1995, they orally agreed on a separate partnership with a fifth brother, Shashikant (Shashi) Jogani, to invest in and grow Shashi’s existing real estate portfolio consisting primarily of apartment properties in Southern California. By 2001, Shashi had acquired approximately 170 apartment buildings worth about $1 billion for the partnership.
Disputes later erupted between the brothers regarding whether partnerships existed and who owned the assets. Haresh claimed all partnership assets were his alone.
Shashi sued Haresh and certain related entities, and the brothers filed multiple cross-claims against one another.
Trial court: judgment for $6.85 billion, almost $2 billion of which consisted of “lost profits”
After a five-month jury trial, the court entered judgment in favor of Shashi (and some of his brothers) awarding damages and prejudgment interest totaling approximately $6.85 billion payable by Haresh and the partnership entities.
Part of the damage award was based on expert witness opinion testimony regarding “lost profits,” to which Haresh had objected during the trial. The opinion concerned alleged lost profits from investments that the real estate partnership, under Haresh’s control, sold during the 2008 housing and financial crisis. Shashi’s expert testified those investments would have appreciated to $1.98 billion if the partnership had continued to hold them through the crisis instead of Haresh selling them in a “panic” in 20008 at a $445 million loss.
Haresh appealed the judgment on multiple grounds, including the asserted improper admission of this expert witness testimony.
Court of Appeal: $1.3 billion of the lost profits award vacated
The Court of Appeal rejected all of Haresh’s appeal arguments except for one — the one challenging the lost profits award.
The court found that the expert’s lost profits testimony was not properly disclosed. Before trial, Shashi designated the expert (William Ackerman, a forensic accounting expert) to testify regarding several issues, including his analysis of the financial records and cash flows of the disputed properties, the valuation of the properties, and damage calculations. Ackerman produced a 706-page written report that summarized his opinions. In his deposition testimony, he noted the $445 million realized loss in 2008 triggered by the sale of certain properties.
But nowhere in Ackerman’s report or his deposition testimony did he offer “any opinion about future unrealized investment gains if Haresh had not sold investments in 2008.” When asked if he would provide testimony at trial regarding “what would have been a prudent investment strategy in 2008” Ackerman responded in the negative.
At trial, however, Ackerman testified that if Haresh had not sold and incurred the $445 million loss and had let it sit there and appreciate or if the same amount was invested in the S&P 500, “Today it would be worth $1.98 billion.” The trial court overruled Haresh’s attorney’s objection to this line of testimony.
The Court of Appeal held this was erroneous because the substance of Ackerman’s opinions regarding the lost profits damages was not properly disclosed before trial. The court held that Ackerman’s expert declaration and report “included a calculation of the $445 million loss, but they gave no indication that he also intended to opine that Haresh should not have sold and that the assets sold at a loss would now be worth $1.98 billion.” And his deposition testimony confirmed he would offer no additional opinions. Ackerman never disclosed that he would use the S&P 500 as a proxy for the investments’ performance had they not been sold, and offered no opinion before trial as to why such a proxy would be appropriate in the context of real estate investments.
As such, Haresh was “not given a fair opportunity to respond.” The court ordered a new trial unless Shashi and the other brothers agreed to a reduction of the lost profits award in the amount of $1.3 billion (the total lost profits award of $1.98 billion less the $445 million confirmed loss).
Lesson
Lost profits damages are difficult to recover by nature. As shown by the Jogani opinion, if any expert testimony is offered on the issue the nature of that testimony must be properly disclosed before trial.