In a per curiam opinion, the Texas Supreme Court has restated the rule for calculating damages in a breach of a real estate contract case when “(1) a buyer breaches [the contract] (2) after the seller has fully performed, and (3) the value of the property at the time of the breach exceeds the contract price.”
MSW Corpus Christi Landfill, Ltd. v. Gulley-Hurst, L.L.C. (No. 21-1021; delivered March 24, 2023) arose initially from the Gulley-Hurst’s sale of a 50% interest in a landfill to MSW. MSW financed the sale, and the parties entered into an agreement under which MSW operated the landfill and paid Gulley 50% of the net operating income. The parties fell out and subsequently entered into a mediated settlement agreement allowing MSW to buy Gulley’s remaining 50% interest within 120 days of execution of the agreement. MSW did not complete the sale, so the agreement required it to sell its 50% interest back to Gulley, which agreed to refinance a $5 million loan MSW acquired to make the original purchase, as well as to write off a $3.5 million promissory note. MSW was thus the “seller” and Gulley the “buyer” under the settlement agreement. Accordingly, MSW conveyed its interest back to Gulley, but Gulley did not refinance the loan. MSW sued for breach of the settlement agreement.
By the time trial rolled around, the landfill had appreciated in value. The jury awarded MSW lost benefit of the bargain” damages of $10.225 million and “lost opportunity” costs of more than $372,000. In doing so the jury followed the trial court’s instruction to award the difference between the market value of the property at the time of the breach (north of $17 million) and the contract price ($7.5 million). After the verdict, the trial court, admitting that it improperly instructed the jury, rendered judgment notwithstanding the verdict for Gulley and awarded zero benefit of the bargain damages. The trial court, however, rendered judgment for MSW on the “lost opportunity” damages.
The Corpus Christi Court of Appeals affirmed, and both parties sought review. SCOTX upheld the court of appeals’ finding that the benefit of the bargain damages were incorrectly calculated and were $0 as a matter of law, but reversed as to MSW’s lost opportunity damages. As the Court observed, the general rule for benefit of the bargain damages “is to calculate the difference between what was promised and what was received” (citations omitted). But that formula “applies only when the value of the property has remained the same or decreased after the purchaser’s breach, leaving the seller unable to receive the expected value of the contract.” If the property value has gone up, “the correct measure of benefit of the bargain damages is the difference between the promised contract price and what the seller received.” The policy underlying this rule makes perfect sense because “[p]ermitting a seller to recover more than the contract price would place him in a better economic position than had the contradt been performed. Worse, this windfall would come at the buyer’s expense.”
If the contract had been fully performed, MSW would have received $7.5 million, not the more than $10 million awarded by the jury pursuant to the trial court’s erroneous instruction. The proper measure of benefit of the bargain damages is thus the difference between $7.5 million and what MSW received from Gulley, i.e., writing off the $3.5 million note. As the Court observed, MSW, in arguing for damages based on the increased value of the property, “conflates its economic position absent the contract with its economic position absent GH’s breach. As expectation damages compare a party’s current position to the position it would occupy had the contract been fully performed—not had there been no contract at all—MSW’s reliance on its economic position absent the contract is beside the point.”
The Court likewise rejected MSW’s lost opportunity damages because, at the time Gulley agreed to refinance the $5 million loan, “the lender [Gulley] must have known . . . the nature of borrower’s intended use of the loan proceeds” (citation omitted). MSW presented no evidence that GH knew anything about MSW’s plans for the loan proceeds, so it could not be held liable for any “lost opportunity” that may have occurred when MSW couldn’t invest the proceeds in another deal. Any such damages were thus not “reasonably foreseeable” and could not be recovered under a lost opportunity theory.
There were some other issues in the case as to trial court’s summary judgment rulings, affirmed by the court of appeals, in favor of Gulley. SCOTX found nothing in the record to warrant disturbing them and ruled further that MSW failed to preserve its request for rescission.
