Damages for Lost Profits Not Too Speculative

In Silver Sage Partners, Ltd. v. City of Desert Hot Springs, 2001 WL 585539, the Ninth Circuit Court of Appeals determined that a developer had adequately proved the damages that it suffered as a result of opposition by the City of Desert Hot Springs to one of the developer’s projects.


Developer, Silver Sage Partners, Ltd., was organized to purchase and develop low-income housing at a mobile home park in the City of Desert Hot Springs, California. Developer ultimately received a commitment for a 55-year mortgage in the amount of $4,233,265 from the California Housing Department under its Rental Housing Construction Program. However, under Cal. Const. Art. XXXIV, § 1, before the transaction could go through, the low-rent housing project had to be approved by local voters. City’s council voted to deny approval of the project.

Developer sued City under the Fair Housing Act. A jury returned a verdict in favor of Developer in the amount of $3,040,439. The jury verdict was ultimately reduced after the district court found that it was “grossly excessive.” Therefore, Developer appealed to the Ninth Circuit Court of Appeals.

The Court of Appeal’s Decision

The Court of Appeals rejected the district court’s finding that damages regarding lost profits were “too speculative.” The district court based its finding on evidence allegedly showing (1) that the projected income stream would not have been sufficient to pay much if any of the principal or interest on the loan and (2) that the partnership could not have received a profit until after it had paid off the loan (which it would not have been able to do).

According to the Court of Appeals’ interpretation of the evidence, however, Developer had specifically projected payments of interest for the first fifteen years and payments of principal thereafter. Furthermore, the Court of Appeals determined that there was no evidence showing that Developer could have made a profit only after the entire loan was repaid. Rather, there was expert evidence that Developer would have received some profits in any year where operating income would exceed payment on the loan.

Comparison with Vestar Development, II v. General Dynamics Corp., 249 F.3d 958 (9th Cir. 2001)

We recently presented a legal alert on Vestar Development, II v. General Dynamics Corp., 249 F.3d 958 (9th Cir. 2001), in which the Ninth Circuit Court of Appeals held that damages based on lost profits arising out of the breach of an agreement to negotiate the sale of real estate were too speculative. Although, at first blush, Vestar may seem to conflict with the Court of Appeals’ decision in Silver Sage, the two cases are quite different.

In Silver Sage Developer had received a commitment for the financing it needed to develop the mobile home park, while in Vestar the Buyer had received no commitment from the Seller that it would sell the property in question to the Buyer. In other words, the transaction itself in Vestar was speculative making the possibility of any profits also speculative.

Furthermore, in Vestar the Buyer merely had a commitment to negotiate the sale; there was no commitment to sell which would have allowed the Buyer to go forward with the development project. In Silver Sage, on the other hand, Developer had an actual commitment that would have allowed it to go forward with its project; however, the commitment was thwarted by City’s wrongful actions.