December 03, 2012

Court of Appeals Affirms $40M Verdict in Favor of Venable Client, The Penrose Group

5 min

Washington, DC (December 3, 2012) – Venable attorneys prevailed in Maryland’s highest court last week on behalf of their client, The Penrose Group, affirming a $40 million judgment resulting from the largest jury verdict in Maryland in 2010.  Penrose’s claims arose out of the development of a two-tower, high rise luxury apartment complex in Bethesda, Maryland.

After a 2 week trial in March 2010, the jury found that the Camalier and Davis families who had ground leased to Penrose approximately five acres near the intersection of Old Georgetown Road and Rock Spring Drive in Bethesda, MD, breached the ground leases and completely undermined the financing necessary to complete the project. The jury awarded Penrose in excess of $36M in damages and lost profits; under the ground leases, Penrose was also awarded more than $3.7M in attorneys’ fees.

That judgment was appealed to Maryland’s Court of Special Appeals, which affirmed the damages and attorneys fee awards in October 2011.  Thereafter, Maryland’s Court of Appeals granted a writ of certiorari to review the case.  Oral argument took place in June 2012, and on November 27, 2012, the Court of Appeals affirmed the awards.

Background on the original case 

The Penrose Group had the right to develop, build, operate and own a two-tower luxury apartment complex pursuant to ground leases it entered into with entities owned by the Camalier and Davis families. The jury found that the defendants breached the ground leases, and in so doing, interfered with the more than $115 million of construction financing and equity that Northwestern Mutual Life Insurance Company had committed to invest in the deal, monies which Penrose needed to complete construction.

At the time, Venable partner and Vice-Chairman Brian L. Schwalb, who led the 2010 trial team, said, “The jury's verdict recognizes the substantial harm that Penrose suffered as the direct consequence of defendants' conscious business decisions to renege on the contractual commitments they made.”

The Appeal

In its 95-page published opinion, the Maryland Court of Appeals affirmed the Court of Special Appeals opinion, which had affirmed the jury verdict and attorneys fee award.  In affirming the original decision and monetary award, Maryland’s highest court resolved an issue that has divided other courts regarding how breach of contract damages, and particularly lost profits,  should be measured when market conditions change from the time the contract was signed to the time of trial.  In light of the downturn in the economy after 2007, the defendants argued that the project would have lost money and Penrose was not entitled to any lost profits.  At a minimum, they insisted that the jury should have been allowed to consider the effect of the downturn on Penrose’s damages for lost profits. 

The Court of Appeals agreed with Penrose, and in a case of first impression in Maryland, held that where the parties contemplated that their real estate development contract would be highly profitable, the breaching party cannot use an unforeseen plunge in the real estate market to avoid paying the damages that were reasonably foreseeable at the time of the contract (and the breach).  As cases involving disrupted development projects get brought during this post-recession period, the decision is likely to serve as a significant precedent for other courts. 

The court also addressed an issue of first impression concerning when a party waives the protections of the attorney-client privilege by claiming to have relied on counsel’s advice.  In this case, the defendants had declined to explain the business reasons for their breaching actions and instead pointed to their lawyers as the driving force.

In the high court’s opinion, the Camalier and Davis families had waived the attorney client privilege when they cited private conversations with their lawyer to justify their actions.  The decision stated, “Where a defendant in a breach of contract action testifies in defense of a charge of bad faith by referencing specific communications with attorneys that purportedly provide a good faith basis for their actions, but then refuses to allow any further investigation into those communications, they have waived the attorney-client privilege.”  While agreeing that attorney-client privilege is “the oldest of the privileges for confidential communications known to the common law…the court  states that the privilege is not absolute,” adding, “one way in which the privilege is “not absolute” is that “[w]aiver may be effected by the client’s testifying to a significant part of the privileged confidential information.”

Venable’s Schwalb, who along with Venable partners Mitchell Mirviss and Samantha Williams, also represented Penrose in the appeals, commented on the privilege issue, saying, “the defendants were trying to use the privilege issue as both a sword and a shield.” He added that he did not see the Court of Appeals’ decision as a deviation or erosion of the privilege but an accurate application of prior case law on the matter of privilege. “This has been a long, difficult road for Penrose and its owners, Mark Gregg and Ole Kollevoll.  We are pleased that, at every level, the Maryland court system vindicated their valuable development rights. "

The case is known as CR-RSC Tower I, LLC, et al. v. RSC Tower I, LLC, et al.  It was argued June 7, 2012 and the opinion was reported Nov 27, 2012. In addition to Brian Schwalb, Mitchell Mirviss and Samantha Williams, the Venable team included Greg Hauptman, Mike Bracken and Jana Gibson.

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