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In a 2004 opinion in Waggoner Motors v. Waverly Church of Christ, the Tennessee Appeals Court included a lengthy discussion on the concept of lost profits damages, the calculation of such damages and the use of experts to make those calculations.
Background
In the summer of 1997, Waverly Church of Christ (the Church), acting as its own general contractor, was constructing a 9,000-square-foot general purpose building located behind the existing church building. The Church hired a painter to spray paint the steel beams supporting the roof. The painter testified that despite his concerns that overspray would reach the cars on the nearby lot, the Church instructed him to proceed. At some point that afternoon, an employee of Waggoner Motors, Inc. (Waggoner), the car dealership located next door to the Church, informed the Church that the cars at the dealership were being covered by fine droplets of paint.
Approximately one month after receiving assurance from the Church’s insurance company that the affected cars would be cleaned and detailed, Mr. Waggoner received permission from both Chrysler Insurance and Cincinnati Insurance to have the automobiles cleaned and detailed (which was successful to varying degrees) in order to sell them. All of the affected automobiles were sold by the end of 1997.
Immediately after the overspray incident occurred, Mr. Waggoner informed Chrysler’s Dealer Relations Manager that paint overspray had damaged the lot’s entire fleet of vehicles. An unintended consequence of this telephone call was the triggering of a review by Chrysler of the dealership’s finances. Chrysler concluded that the level of floor plan financing in place at Waggoner Motors was not supported by the dealership’s level of sales. Chrysler reduced the amount of floor plan financing available to the dealership, in turn reducing the number of cars the dealership was able to purchase using Chrysler’s low cost dealer financing. This resulted in the owners of the dealership having to borrow at higher rates from other capital providers in order to purchase cars at auction.
Waggoner filed suit against the Church, claiming its negligence regarding the spray painting resulted in financial damages to the dealership, including lost profits.
Case Summary (Primary Issues Raised)
A portion of Waggoner’s case was predicated on the contention that the damage sustained to the dealership’s vehicles caused Chrysler to reduce the dealership’s floor plan financing. Waggoner asserted that the reduction in financing had “devastating, long-term effects” on the dealership’s ability to buy and sell new and used vehicles and, thus, to make a profit.
The Church argued that an employer of an independent contractor was not liable for damages caused by the contractor’s negligence. In addition, it argued that Waggoner had “serious financial problems” prior to the overspray incident and implied that any reduction in financing by Chrysler was the direct result of these past financial issues. Additionally, the Church claimed the financial impact of the damage caused by the overspray to the dealership’s profits was both minor and brief.
During the trial, the plaintiff’s expert (an economist) claimed that Waggoner had suffered approximately $718,000 in damages as a result of the paint overspray ($509,000 in lost profits and $209,000 in other damages). By comparing Waggoner’s financial performance following the incident with its performance during the three full calendar years preceding the incident, the plaintiff’s expert testified that the dealership had experienced lost profits with a present value of $509,000. The expert also testified that Waggoner would continue to be damaged by the overspray incident until profits returned to their three-year baseline average and the dealership’s floor plan financing was restored to levels consistent with those experienced prior to the incident.
The defense expert (a CPA employed by a firm experienced in calculating economic damages) testified that the automobile dealership’s financial performance had steadily declined in the two years immediately preceding the overspray incident and that the rate of loss during the six months leading up to the incident was greater than the rate of loss over the previous two full calendar years. The expert further testified that the financial records of the company did not show any loss of income attributable to the overspray incident after November 1997. Ultimately, the defense expert asserted that Waggoner’s lost profits did not exceed $44,000.
Trial Court Ruling
The trial court found that the Church violated its duty to properly supervise the painting of the new building and that this violation directly resulted in damage to the dealership’s vehicles. Moreover, the court found that it was possible that the overspray incident led to Chrysler’s decision to reduce Waggoner’s floor plan financing.
The trial court expressed displeasure with the convoluted testimony given by both experts. After instructing the parties to present additional evidence regarding damages resulting from the reduced level of financing, the trial court awarded Waggoner approximately $345,000 in damages and $11,000 in discretionary costs. The Church appealed the trial court’s ruling, arguing that the court was incorrect in finding that it was liable for the damages caused by the overspray. The Church and Waggoner both appealed the amount of damages and discretionary costs awarded.
Appellate Court Ruling
The appellate court concluded that the Church was responsible for both the damage inflicted on the vehicles parked in Waggoner’s lot and for the business injuries suffered as a result of the overspray.
Regarding the trial court’s decision to award damages for lost profits, the Church argued that Waggoner was not entitled to damages for lost profits because it was not a profitable business at the time the incident occurred. The appellate court ruled that even though it did not agree with the amount of damages awarded by the trial court, the Church’s argument that non-profitable companies (or firms with no history of profits) are not entitled to lost profit damages is flawed. “To hold otherwise would produce a particularly egregious result in cases like this one in which the injured party is hovering around the break-even point. Were we to follow the Church’s logic, Waggoner could recover if the overspray occurred during one of its good years but not if the injury occurred during one of its down years.”
The appellate court agreed with the Church that the trial court erred in the amount of damages it awarded Waggoner and adjusted the amount downward to award lost profit damages of approximately $86,000 and discretionary costs of $8,500.
The appellate court discussed in considerable detail its reasoning and conclusions regarding the calculation of lost profits damages beyond the question of lost profits for a marginally-profitable or unprofitable company.
Other significant points in its opinion include:
- The standard of reasonable certainty applies chiefly to the evidence regarding the existence of damages, and the amount of damages does not have to be proven with exactness or absolute precision. It states that it is more important that an injured party not be deprived of just compensation merely because the extent or amount of damages suffered cannot be proven with certainty.
- Anticipated future profits can reasonably be based upon past performance, taking into consideration other factors which may have affected past performance as well as future profits.
- Damages awards are limited to “net profits”, not gross revenues or gross profits. Net profits must take into account the costs of generating the lost revenue.
- Overhead expenses that would have been incurred regardless of the wrongful act should not be deducted from gross revenues.
- The burden is on the plaintiff to prove not only the revenues lost, but also the expenses associated with the lost revenues.
- The opinion addresses the determination of the appropriate past time period to be used for calculating those anticipated future profits.
- Lost profits damages can be established by expert testimony, calculated using both objective facts and data, and established and accepted methodology, applied in a proper manner. A lack of any of these factors will result in flawed results. In its opinion, the appellate court criticized the plaintiff’s expert’s methodology as so flawed that it resulted in a calculation of lost profits which was speculative and therefore not a satisfactory basis for an award of damages.
Tennessee has not historically had a rich body of case law from which to draw in lost profits damages cases, and this case provides some much-appreciated commentary from the appellate court on how to evaluate lost profits claims. Its conclusions emphasize the importance of knowledgeable experts who use reliable data to apply reasonable and accepted methodologies. Both the trial court and the appeals court were presented with evidence that was in part economically sound and in part flawed. Both courts attempted to distinguish one from the other, and we at DAS are encouraged by the effort the courts made to examine the underlying economics of the claims.
Decosimo Advisory Services provides lost profits damages calculations for both plaintiffs and defendants. We have not only the economic and accounting knowledge to correctly compute damages, but also the communication and teaching skills to help triers of fact understand economic concepts. If you would like to discuss a lost profits matter, please call us in confidence at 800.782.8382.
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