ACCEPTED
03-15-00088-CV
5696947
THIRD COURT OF APPEALS
AUSTIN, TEXAS
6/16/2015 2:29:17 PM
JEFFREY D. KYLE
CLERK
No. 03-15-00088-CV
FILED IN
3rd COURT OF APPEALS
IN THE THIRD COURT OF APPEALS AUSTIN, TEXAS
6/16/2015 2:29:17 PM
AUSTIN, TEXAS
JEFFREY D. KYLE
Clerk
GRAYCO TOWN LAKE INVESTMENT 2007, LP
Appellant,
v.
COINMACH CORPORATION
Appellee.
On Appeal from the County Court at Law Number 1
of Travis County, Texas, Trial Court Case No. C-1-CV-08-09655,
Hon. Eric Shepperd, Presiding
REPLY BRIEF OF APPELLANT
Dobrowski, Larkin & Johnson LLP
Frederick T. Johnson
SBN 00785429
Cody W. Stafford
SBN 24068238
Akilah F. Craig
SBN 24076194
4601 Washington Ave, Suite 300
Houston, Texas 77007
Counsel for Appellant
ORAL ARGUMENT REQUESTED June 16, 2015
TABLE OF CONTENTS
Page
ARGUMENT IN REPLY ............................................................................ 1
A. GRAYCO HAD NO NOTICE OF THE 2002 LEASE. .................................. 1
1. The Memorandum of Lease is insufficient to identify
the 2002 Lease. ............................................................................ 2
2. The presence of laundry machines at Regatta did not
provide notice of the 2002 Lease. ............................................. 10
B. COINMACH’S ARGUMENT THAT GRAYCO BREACHED THE
2002 LEASE IS CONTRARY TO ITS OWN ADMISSIONS. ....................... 12
C. COINMACH PRESENTED NO COMPETENT EVIDENCE OF DAMAGES. ... 14
1. Coinmach’s “lost profits” are too speculative. .......................... 14
2. Kemmerer’s testimony was flawed, unreliable, and
no evidence of damages. ............................................................ 17
a. Kemmerer based all of his opinions on an incorrect
date of breach. ........................................................................ 18
b. Kemmerer incorrectly calculated the net present
value of the alleged lost profits.............................................. 20
c. The trial court acknowledged that Kemmerer’s
calculation was wrong. ........................................................... 21
d. Kemmerer’s damages calculation is premised on an
unsupportable “average daily collection rate.” ..................... 22
i
D. COINMACH FAILED TO PROVIDE ONE, COMPLETE CALCULATION OF
LOST PROFITS, WHICH REQUIRES REVERSAL AND RENDITION........... 23
PRAYER .................................................................................................... 25
ii
INDEX OF AUTHORITIES
Cases
Atlas Copco Tools, Inc. v. Air Power Tool & Hoist, Inc.,
131 S.W.3d 203 (Tex. App.—Fort Worth 2004, pet. denied) ............... 16
Beutell v. United Coin Meter Co.,
462 S.W.2d 334 (Tex. Civ. App.—Waco 1970, writ ref’d n.r.e.) ..... 10, 11
Cadle Co. v. Caamano,
930 S.W.2d 917 (Tex. App.—Houston [14th Dist.] 1996, no writ) ........ 8
Holt Atherton Indus., Inc. v. Heine,
835 S.W.2d 80 (Tex. 1992)..................................................................... 15
Hue Nguy. Chapa,
305 S.W.3d 316 (Tex. App.—Houston [14th Dist.] 2009,
pet. denied) .............................................................................................. 8
Kellmann v. Workstation Integrations, Inc.,
332 S.W.3d 679 (Tex. App.—Houston [14th Dist.] 2010, no pet.) ....... 26
Merrell Dow Pharms., Inc. v. Havner,
953 S.W.2d 706 (Tex. 1997) ................................................................... 19
Sandoval v. Guzman,
2002 WL 31412529 (Tex. App.—Corpus Christ Oct. 24, 2002,
no pet.) ................................................................................................. 6, 7
State v. Cent. Expressway Sign Assocs.,
302 S.W.3d 866 (Tex. 2009) ................................................................... 18
Tex. Instruments, Inc. v. Teletron Energy Mgmt., Inc.,
877 S.W.2d 276 (Tex. 1994) ................................................................... 16
Univ. Gen. Hosp., LP v. Prexus Health Consultants, LLC,
403 S.W.3d 547 (Tex. App.—Houston [14th Dist.] 2013, no pet.) ....... 25
iii
Vista Chevrolet, Inc. v. Lewis,
709 S.W.2d 176, 177 (Tex. 1986) ........................................................... 26
Waggoner v. Morrow,
932 S.W.2d 627 (Tex. App.—Houston [14th Dist.] 1996, no pet.) ......... 5
Wells Fargo Bank Nw., N.A. v. RPK Capital XVI, L.L.C.,
360 S.W.3d 691 (Tex. App.—Dallas 2012, no pet.) .............................. 19
Wiley-Reiter Corp. v. Groce,
693 S.W.2d 701 (Tex. App.—Houston [14th Dist.] 1985, no writ) ...... 14
Rules
TEX. R. EVID. 703....................................................................................... 18
iv
ARGUMENT IN REPLY
Coinmach’s response brief is grounded on at least three distinct
errors: (1) it misleadingly argues that Grayco’s awareness that a
laundry lease existed necessarily binds it to the undisclosed 2002 Lease;
(2) it assumes that because Coinmach had made profits on its machines
at times, that it was entitled to similar revenue in the future, despite
the absence of any contractual guarantee of revenue; and (3) it defends
its expert’s calculation of lost profits, despite the fact that the
calculations are hopelessly flawed, a fact the trial court tacitly
admitted.
As a result, the trial court’s judgment against Grayco is erroneous
and must be reversed.
A. GRAYCO HAD NO NOTICE OF THE 2002 LEASE.
Coinmach attempts to retroactively impose the 2002 Lease on
Grayco by arguing that Grayco’s knowledge that a laundry lease existed
meant that it was automatically charged with constructive notice of the
unrecorded 2002 Lease. But Coinmach’s argument is legally untenable.
If accepted, Coinmach’s argument would bind purchasers to any
unrecorded encumbrances that could ever conceivably be found through
1
an exhaustive search. That is not the standard, nor should it be. If
accepted, every real estate purchaser’s due diligence would be subjected
to a post-hoc review in which the reasonableness of its due diligence
would be judged based on the accuracy of its due diligence. But such a
standard would introduce tremendous uncertainty into all real estate
transactions. That is why the standard Coinmach advocates is
unworkable, unacceptable, and a departure from Texas law.
The injustice in such a standard is on full display in this case.
Here, Grayco conducted its due diligence and did not discover the 2002
Lease. 2 RR 83:17-24. This is unsurprising since the 2002 Lease was
never recorded. 2 RR 23:24 – 24:1. Coinmach does not argue otherwise.
Rather, Coinmach claims that (1) the Memorandum of Lease (which
never mentions the 2002 Lease) was sufficient to put Grayco on notice
of the terms of the 2002 Lease or (2) the presence of laundry machines
at Regatta put Grayco on notice of the 2002 Lease. Neither is correct.
1. The Memorandum of Lease is insufficient to identify the
2002 Lease.
To fully appreciate the inadequacy of the Memorandum of Lease
to put Grayco on notice of the 2002 Lease, the Court need only consider
the facts as Grayco knew them. When Grayco decided to buy Regatta, it
2
conducted a due diligence search related to the property. 2 RR 83:2-4.
That search revealed the only laundry lease that had been recorded: the
1992 Lease.1 2 RR 83:17-24. That search also revealed the recorded
Memorandum of Lease on which Coinmach now hangs its hat. Id. But
the Memorandum of Lease only vaguely references a “written Lease
Agreement” related to “laundry rooms.” Tab C.
The most logical “written Lease Agreement” related to “laundry
rooms” to which the Memorandum of Lease referred was the recorded
1992 Lease. And, as Grayco continued to reasonably pursue all facts of
which it was aware, all of the available evidence confirmed that logic.
For instance, Regatta’s seller, Foley, affirmatively represented to
Grayco that Coinmach was the “successor-in-interest” to the 1992
Lease. Tab D, at GP 000064. Moreover, Coinmach itself never informed
Grayco of the 2002 Lease, despite discussions between Grayco’s agent
(Greystar) and Coinmach at the time of purchase. See, e.g., Ex. D-9.
1 Coinmach contends that recording a memorandum of lease instead of the lease
itself is “common practice” in the leasing industry. Coinmach Br. at 16, n.14.
Indisputably, however, Coinmach could have recorded the 2002 Lease in the same
manner that the 1992 Lease had been recorded. By deciding not to record the 2002
Lease, Coinmach ran the risk of an innocent purchaser failing to learn of its laundry
lease; thus, this litigation. (Coinmach also claims—without citation to authority—
that a memorandum of lease places the unrecorded lease within the chain of title.)
3
Indeed, as late as August 4, 2008, nearly a year after Regatta closed,
Coinmach’s Ed Greene wrote to Grayco:
For your inspection and review, I am enclosing the following:
A copy of the lease agreement dated January 30, 2002 for the
Regatta Apartments. This lease was for a ten year period.
...
A copy of the Supplemental Agreement showing that
Coinmach paid $14,000.00 for the lease.
Ex. D-21. Mr. Greene’s letter is the first written evidence of the 2002
Lease being supplied to Grayco, nearly 15 months after Grayco acquired
Regatta.
Coinmach claims the Memorandum of Lease refers to the 2002
Lease on its face because it is between two different entities than the
1992 Lease. But that argument misses the mark (and completely
ignores Grayco’s brief). Indeed, Grayco reasonably concluded that the
Memorandum of Lease memorialized a renewal and extension of the
1992 Lease by new parties. Grayco Br. at 6. Thus, the very fact that
new parties filed the Memorandum of Lease, which ostensibly referred
to the already-recorded 1992 Lease, led to the reasonable conclusion
that the new parties were adopting and renewing the 1992 Lease, which
4
was to renew automatically in 2002. Coinmach argues that the
Memorandum of Lease made no mention of the parties to the 1992
Lease—De Narde and McNair—but neither did it refer to the 2002
Lease. If anything, Coinmach’s argument only underscores the flaw
inherent in the Memorandum of Lease and Coinmach’s questionable
decision to rely on it rather than record the 2002 Lease.
Coinmach’s sole legal authority for its proposition is Waggoner v.
Morrow, 932 S.W.2d 627 (Tex. App.—Houston [14th Dist.] 1996, no
pet.). But Waggoner is inapposite. Indeed, Waggoner stands for the
unremarkable proposition that a purchaser can be bound by an
unrecorded encumbrance. Grayco does not argue otherwise. In
Waggoner, however, the unrecorded partition was plainly referenced by
the owner’s deed, and the owner did not contend that she had been
unable to find a copy upon diligent search and inquiry. Id. at 632. In
this case, however, the issue is unique. There is no question that Grayco
was on notice that a laundry lease existed; the question is whether
Grayco can be bound by a second, unrecorded lease of which it had no
knowledge or notice.
5
Grayco was aware of the recorded 1992 Lease. But, unlike the
reference to the specific partitions in Waggoner, the Memorandum of
Lease in this case refers generally to a “written Lease Agreement” that
it fails to identify. And, unlike the partitions in Waggoner, in this case
there were two laundry “lease agreements”—one recorded and one
unrecorded, a fact unknown to Grayco but well known to Coinmach.
Though the due diligence in Waggoner was bound to find the correct
partition, there was no assurance that reasonable due diligence in this
case would find the unrecorded laundry lease agreement; indeed,
Grayco’s reasonable due diligence only discovered the recorded 1992
Lease.
If anything, this case is similar to Sandoval v. Guzman, 2002 WL
31412529 (Tex. App.—Corpus Christ Oct. 24, 2002, no pet.) (not
designated for publication). In Sandoval, a party (Sandoval) tried to
enforce an unrecorded easement against a subsequent purchaser
(Guzman). Like Coinmach here, Sandoval relied on Waggoner to argue
that an unrecorded partition constitutes notice. Id. at *4. However, the
court of appeals summarily rejected that argument, noting that one is
only bound by recitals contained in recorded instruments that are an
6
essential link in the purchaser’s chain of title: “A purchaser is bound by
every recital, reference, and reservation contained in or disclosed by an
instrument which forms an essential link in the chain of title under
which he claims.” Id. The Sandoval court indicated that no such
constructive notice arises for instruments that are not an essential link
in the purchaser’s title:
However, in [Waggoner], the partition created the easement,
thereby making the partition an “essential link in the chain
of title.” In the case at bar, the Easement Agreement is not
an essential link in the chain of title because it did not create
Guzman's property. Also, Mendietta agreed to convey the
property to Guzman on November 18, 1992, five days before
the execution of the Easement Agreement. Guzman could
not have inspected the grant of easement even with an
extensive search. Furthermore, the Lueras did not record the
Easement Agreement until after Guzman purchased the
property. Therefore, neither Mendietta nor Guzman had
constructive notice of the Easement Agreement.
Id. (internal citations omitted).
This comports with well-established principles of Texas property
law. It has long been the law that one is only charged with constructive
knowledge of the contents of a recorded instrument if that instrument is
in the buyer’s chain of title. “A purchaser of land is only charged with
information contained in instruments of record which are in his chain of
title at the time he purchases the property.” Cadle Co. v. Caamano, 930
7
S.W.2d 917, 920 (Tex. App.—Houston [14th Dist.] 1996, no writ)
(emphasis added); see also Hue Nguy. Chapa, 305 S.W.3d 316, 324 (Tex.
App.—Houston [14th Dist.] 2009, pet. denied) (“It is a well-established
rule that a deed or instrument lying outside of his chain of title imports
no notice.”) (emphasis added). The instrument on which Coinmach
relies does not provide notice of the terms or existence of the 2002
Lease. At most, the recorded instrument provides notice only of the
existence of an unspecified laundry lease. That does not suffice to
charge Grayco with knowledge of either the terms or existence of the
unrecorded 2002 Lease, especially when, as here, a diligent records
search uncovered the recorded 1992 Lease,
Moreover, as in Sandoval, Coinmach’s unrecorded 2002 Lease did
not create Grayco’s property; thus, the 2002 Lease was not an essential
link in the chain of title. Coinmach also failed to record the 2002 Lease,
which prevented Grayco from finding it and inspecting its terms during
due diligence. Therefore, Grayco had no constructive notice of the 2002
Lease.
In the end, the only evidence demonstrates that Grayco
reasonably pursued all facts of which it became aware regarding the
8
laundry lease. Those facts led it to reasonably conclude that the 1992
Lease governed the relationship between the parties. Coinmach argues,
with the benefit of hindsight of course, that Grayco could have done
more in its due diligence to discover the 2002 Lease. But that is not the
standard. Purchasers of real property are not required to conduct a
search in every potentially conceivable place an encumbrance might
hide; rather, they must reasonably pursue facts of which they are
aware. Grayco did that. Texas law requires nothing more.
Coinmach does not contend that it provided the 2002 Lease to
Grayco prior to its purchase of Regatta. Nor is there any dispute that
Coinmach failed to record the 2002 Lease. And the record affirmatively
establishes that Foley (Regatta’s seller) failed to provide the 2002 Lease
to Grayco, and affirmatively led Grayco to believe the 1992 Lease had
been renewed.2 Consequently, the Memorandum of Lease did not
provide Grayco constructive notice of the 2002 Lease.
2Coinmach makes much of the fact that Grayco did not sue Foley. But Grayco’s
decision not to sue another party has no bearing on its ability to defend itself from
Coinmach’s claims or on its bona fide purchaser status.
9
2. The presence of laundry machines at Regatta did not provide
notice of the 2002 Lease.
Coinmach next argues that Grayco was aware of the 2002 Lease
because Coinmach had possession of the laundry rooms at Regatta. But
Coinmach’s possession was equally consistent with the recorded 1992
Lease and the unrecorded 2002 Lease.
Coinmach’s sole legal support for its argument is Beutell v. United
Coin Meter Co., 462 S.W.2d 334 (Tex. Civ. App.—Waco 1970, writ ref’d
n.r.e.). In Beutell, the purchaser of an apartment building was charged
with knowledge of an unrecorded laundry lease after it accepted
payments under that lease for at least 15 months. Id. at 336. The court
of appeals held that the presence of the lessee’s laundry equipment in
the laundry room, together with the acceptance of rentals, provided
notice to the lessor of the laundry lease. Id. Coinmach tries to persuade
the Court that Beutell is directly on point. But Beutell is of little value
to the facts here because, like the other cases cited by Coinmach, it only
concerns a purchaser being charged with a duty to find one lease. For
the purchaser in Beutell, the laundry machines pointed them to the
only laundry lease for the property. That is quite unlike the situation
10
in this case, where a diligent search revealed a recorded laundry lease,
but failed to reveal an unrecorded laundry lease.
Grayco does not contend that it was unaware that Coinmach had
a laundry lease at Regatta. Rather, Grayco contends that it had no
notice, specifically, of the 2002 Lease. The mere presence of laundry
machines in Regatta’s laundry room might have provided Grayco with
inquiry notice of a laundry lease, but it did not provide Grayco with
notice of a specific unrecorded laundry lease. The laundry machines
only imposed on Grayco a duty to conduct a reasonably diligent inquiry
for a laundry lease, which Grayco did. Because the 2002 Lease was
never recorded by Coinmach, however, Grayco did not discover that
lease. Instead, Grayco discovered the 1992 Lease and the vague
Memorandum of Lease, which confirmed the terms of the 1992 Lease
among new parties. Grayco’s reasonable search confirmed its
understanding that the 1992 Lease governed its relationship with
Coinmach. No other parties provided a different lease, nor did
Coinmach alert Grayco to the 2002 Lease.
Coinmach finally argues that Grayco must have known about the
2002 Lease because Grayco’s agent, Savanna Sharpe-Bogardus of
11
Greystar, allegedly made some notes on an email. Coinmach Br. at 18.
But that argument fails for at least two reasons. First, the only
evidence at trial is that Ms. Sharpe-Bogardus did not make the
handwritten notes on the exhibit. Ex. C-1, Depo. of Savanna Sharpe-
Bogardus, 49:20-50:7. No one testified otherwise. Second, the vague,
mostly-undecipherable notes apparently refer to “2/2012”—which is
approximately when the 1992 Lease would be expected to either renew
or expire for the second time on its own terms. Thus, the email and the
notes on it are consistent with Grayco’s understanding that the 1992
Lease renewed in 2002 and would expire in 2012.
Consequently, there was no evidence, or factually insufficient
evidence, that Grayco had notice of the 2002 Lease. Rather, the
evidence established that Grayco was a bona fide purchaser of Regatta
and not subject to the 2002 Lease.
B. COINMACH’S ARGUMENT THAT GRAYCO BREACHED THE 2002 LEASE IS
CONTRARY TO ITS OWN ADMISSIONS.
Of course, even if Grayco were bound by the 2002 Lease,
Coinmach’s claims still fail. See Grayco Br. at 24-27. In its brief,
Coinmach fails to explain how Grayco’s complete closure of Regatta is a
breach, yet a decision to not renew tenant leases would not have been.
12
Coinmach admitted that Grayco could have renewed or not renewed as
many or as few tenant leases as it wanted without breaching the 2002
Lease. See, e.g., 2 RR 26:8-11, 35:21-36:2, 36:17-22.3 Of course, that
would necessarily have decreased—or even negated—Coinmach’s
revenue. Coinmach’s argument then is a distinction without a
difference: Grayco was empowered to effectively close Regatta by not
renewing tenant leases, but Grayco had to keep the building “open” for
the remainder of the laundry lease. That is the epitome of the tail
wagging the dog, and it makes no sense.
Additionally, Coinmach now, for the first time, comes up with
completely new alleged breaches of the 2002 Lease. Coinmach argues
that Grayco failed to keep the laundry room clean and failed to
“cooperate” with Coinmach under the 2002 Lease. Coinmach Br. at 20-
22. Even if Coinmach had properly presented these arguments to the
3 This admission also guts Coinmach’s new argument that Grayco breached the
2002 Lease because the Real Estate Contract between Foley and Grayco Partners,
LLC provided that no tenant leases of more than six months would be entered into.
Coinmach Br. at 10, n.11. Not only does that argument make no sense on its face,
Coinmach admits the 2002 Lease did not require renewal of any set number of
tenant leases or any minimum occupancy.
13
trial court for consideration, Coinmach never tied any of its alleged
damages to these supposed breaches. Thus, they fail as a matter of law.4
C. COINMACH PRESENTED NO COMPETENT EVIDENCE OF DAMAGES.
Simply put, it was Coinmach’s burden at trial to provide
competent evidence of its damages. It failed to do so.
1. Coinmach’s “lost profits” are too speculative.
Assuming, arguendo, the 2002 Lease bound Grayco, nothing in the
2002 Lease guaranteed any income to Coinmach. In its brief, Coinmach
assumes that the mere fact that it had made profits at times in the past
necessarily entitled it to profits in the future. Of course, Coinmach fails
to buttress this argument with any legal authority and, indeed, it is
inconsistent with Texas law on recovery of lost profits.
The rule concerning adequate evidence of lost profit damages is
well established:
Recovery for lost profits does not require that the loss be
susceptible of exact calculation. However, the injured party
must do more than show that they suffered some lost profits.
The amount of the loss must be shown by competent
4 With the exception of passing references to Grayco’s supposed duty to maintain
the laundry room, Coinmach never advanced these arguments until now. Coinmach
did not rely on these supposed breaches as a basis for its causes of action. CR 213-
16; 409-10. Because these theories were not pleaded or tried, they are waived on
appeal. Wiley-Reiter Corp. v. Groce, 693 S.W.2d 701, 704 (Tex. App.—Houston
[14th Dist.] 1985, no writ).
14
evidence with reasonable certainty. What constitutes
reasonably certain evidence of lost profits is a fact intensive
determination. As a minimum, opinions or estimates of lost
profits must be based on objective facts, figures, or data from
which the amount of lost profits can be ascertained.
Holt Atherton Indus., Inc. v. Heine, 835 S.W.2d 80, 84 (Tex. 1992)
(citations omitted) (emphasis added). “Reasonable certainty” is not
demonstrated when the profits claimed to be lost are largely
speculative, as from an activity dependent on uncertain or changing
market condition, on chancy business opportunities, or on promotion of
untested products or entry into unknown markets or unproven
enterprises. Tex. Instruments, Inc. v. Teletron Energy Mgmt., Inc., 877
S.W.2d 276, 279 (Tex. 1994); Atlas Copco Tools, Inc. v. Air Power Tool &
Hoist, Inc., 131 S.W.3d 203, 206–07 (Tex. App.—Fort Worth 2004, pet.
denied).
At trial, Coinmach was unable to meet the bar of “reasonable
certainty.” Rather, Coinmach’s own collections inquiries established
that the revenues from the laundry machines at Regatta began
declining in 2006, and that trend continued into 2007. Ex. D-25 at GP
000008 – GP 000011. Coinmach blames Grayco for this decline and
argues that “Grayco’s actions in not keeping the laundry rooms clean
15
and maintained and in not renewing leases at the Apartments caused
the laundry income to decline.” Coinmach Br. at 23. But there are three
problems with this: (1) Coinmach admitted that Grayco’s decision not to
renew tenant leases was not a breach of the 2002 Lease; (2) there is no
evidence as to how many leases Grayco renewed or did not renew; and
(3) Grayco did not own Regatta when the declines in revenue began—
thus, the trial court could not possibly have found that the non-renewal
of leases caused a decline in laundry income.
In any event, given Grayco’s ability to renew or not renew tenant
leases in the face of the crime and vandalism at Regatta, the market
conditions for 2007 and beyond were not only entirely uncertain, they
were also changing. Given that Coinmach’s profits were entirely
dependent on Regatta’s occupancy and the tenants’ voluntary use of the
laundry machines, there is no way to accurately predict what
Coinmach’s profits would have been beyond 2007, regardless of whether
Grayco bought the property. This is especially true given the increasing
crime at Regatta and the failure of the previous owners to effectively
manage the property. See, e.g., Exs. D-9 and D-14. Coinmach’s
uncertainty as to its future profits—it admits it could not force Grayco
16
to make tenants use the machines—makes its lost profits award too
speculative to sustain. 2 RR 26:15-18.
2. Kemmerer’s testimony was flawed, unreliable, and no
evidence of damages.
Coinmach’s sole evidence related to the calculation of its alleged
lost profits was Jon Kemmerer. His testimony and calculations,
however, were fraught with incorrect assumptions and numerical
sleights of hand—all of which had the undeniable effect of overinflating
the damages calculation.
To be relevant, an expert’s opinion must be based on the facts; to
be reliable, the opinion must be based on sound reasoning and
methodology. State v. Cent. Expressway Sign Assocs., 302 S.W.3d 866,
870 (Tex. 2009). Rule 703 allows an expert to rely upon facts or data of a
type reasonably relied upon by experts in the field, even if the facts or
data are inadmissible in evidence. TEX. R. EVID. 703. However, “if the
foundational data underlying opinion testimony are unreliable, an
expert will not be permitted to base an opinion on that data because
any opinion drawn from that data is likewise unreliable.” Merrell Dow
Pharms., Inc. v. Havner, 953 S.W.2d 706, 714 (Tex. 1997). When the
expert “brings to court little more than his credentials and a subjective
17
opinion,” this is not evidence that would support a judgment. Havner,
953 S.W.2d at 714; see also Wells Fargo Bank Nw., N.A. v. RPK Capital
XVI, L.L.C., 360 S.W.3d 691, 710-11 (Tex. App.—Dallas 2012, no pet.).
Here, Kemmerer provided an opinion founded on unreliable data
and assumptions. Thus, Kemmerer’s opinions and calculations are
irrelevant and no evidence of Coinmach’s alleged lost profits.
a. Kemmerer based all of his opinions on an incorrect
date of breach.
Contrary to Coinmach’s argument, Kemmerer improperly
concluded that Coinmach’s damages began to accrue in March 2006,
more than 18 months before Grayco’s alleged breach (and one year
before Grayco even owned Regatta). This error infects all of Kemmerer’s
calculations.
In essence, Kemmerer decided that Grayco was responsible for the
decline in revenues beginning in 2006 at Regatta because it supposedly
began to lease-down Regatta at that time. He admitted, however, that
he did not know if Grayco owned Regatta at that time, nor was he ever
aware of how many tenant leases Grayco chose to renew or not renew.
2 RR 47:3-25, 50:6-14. The decline in revenue at Regatta could have
been due to any number of factors, none of which Kemmerer
18
considered.5 Thus, Kemmerer had no basis to use only the period from
December 22, 2004, through March 1, 2006, as his basis for the
“normal” income from the machines. And Kemmerer’s arbitrary decision
to ignore the decline in revenue after March 1, 2006, undeniably
resulted in overinflated “lost profits” that the trial court accepted.
For instance, in his report Kemmerer states that “Grayco made a
decision to change the use of [Regatta] at some time prior to March 7,
2006. Pursuant to that decision, Grayco did not renew tenant leases at
[Regatta] nor did it enter into any new tenant leases at [Regatta] . . . .”
Ex. P-7 at p. 3 (¶ 5). As previously discussed, there is no evidence that
Grayco had any ability to “change the use” of Regatta in 2006, because
it did not own Regatta at that time. 2 RR 82:9-15. Moreover, Kemmerer
admitted that, despite the statement in his report, he had no
information regarding how many leases came up for renewal or were
renewed. 2 RR 47:3-25; 50:11-51:1. So Kemmerer’s testimony revealed
not only that his underlying assumptions and supposed factual data
5 For example, tenants could have chosen, on their own, not to renew their leases
due to the conditions at Regatta. Or tenants may have simply stopped using the
laundry rooms because the machines were in poor condition. Or perhaps tenants
chose not to renew their leases and live elsewhere because they were upset with the
previous owners. Though Kemmerer repeatedly states that he “took all differences
into account” to provide his opinion, that was not true.
19
were unsupported by any competent evidence but were also complete
misstatements.
Moreover, Kemmerer’s report and testimony are at odds with
Coinmach’s own admissions. Coinmach admitted that Grayco’s decision
to lease-down Regatta—which would likely reduce laundry revenue—
was not a breach of the 2002 Lease. See, e.g., 2 RR 26:8-11, 35:21 – 36:2,
36:17-22. Kemmerer, on the other hand, made the lease-down a central
component of Coinmach’s supposed damages. Ex. P-7 at p. 5 (¶ 11).
b. Kemmerer incorrectly calculated the net present value
of the alleged lost profits.
Additionally, an essential part of Kemmerer’s lost profits
calculation was to discount five years of future lost profits to net
present value. 2 RR 45:1-12; see also Ex. P-7 at p. 5 (¶ 12). Though
unclear in his report, Kemmerer’s testimony revealed that he
discounted the present value back to March 2006, the date Grayco’s
supposed change of Regatta’s use was made known to Coinmach. 2 RR
45:13-16. But that methodology is incorrect. Kemmerer’s decision to
discount the future lost profits to March 2006 is based on his
underlying—yet incorrect—assumption that Grayco breached the 2002
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Lease in 2006. 2 RR 43:1-44:3; Ex. P-1 at p. 5 (¶ 11). Again, this error
resulted in erroneous damages figures.
c. The trial court acknowledged that Kemmerer’s
calculation was wrong.
Coinmach attempts to argue its way out of this self-imposed
conundrum by claiming that the trial court did not accept all of
Kemmerer’s calculations—those prior to Grayco’s alleged breach—so
“no harm, no foul.” But, in making this argument, Coinmach all but
admits—as it must—that Kemmerer’s calculation is inherently flawed.
In the end, then, Coinmach recognizes that its own expert miscalculated
the damages, yet attempts to persuade the Court to ignore that
discrepancy.
And, indeed, the trial court appears not to have included any lost
profits prior to October 31, 2007, the alleged date of breach. So the trial
court understood that Kemmerer’s decision to include damages prior to
the alleged breach was wholly unsupportable. What the trial court
failed to understand, however, is that Kemmerer’s decision to begin
calculating damages in 2006 also undermined—and rendered
unsupportable—his “average daily collection rate” upon which he
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calculated all of the alleged lost profits, including the ones after October
31, 2007. The vagaries of that calculation are discussed next.
d. Kemmerer’s damages calculation is premised on an
unsupportable “average daily collection rate.”
Finally, Coinmach meets itself coming and going when it tries to
defend Kemmerer’s average daily collection rate of $99.81, which he
used to calculate the supposed lost future profits. As discussed earlier,
this daily rate is necessarily inflated because Kemmerer intentionally
excluded approximately 18 months of data that showed lower revenues.
To create his daily rate, Kemmerer calculated average collections
from December 22, 2004 until March 1, 2006. Ex. P-7 at p. 4 (¶ 9).
Kemmerer then assumed Coinmach would make at least that much
every day from March 2006 through March 2012. See, e.g., Ex. P-7 at p.
7 (JEK-2). Coinmach defends this daily rate by saying Kemmerer was
justified in not using any data after March 1, 2006, because Regatta’s
owner at the time—not Grayco—“was preparing to sell the property to
Grayco’s agent . . . .” Coinmach Br. at 26. But, as discussed above,
Grayco had no control over Regatta in 2006. Even worse, Coinmach
admitted at trial that even if Grayco had decided to not renew tenant
leases, that would not be a breach of the 2002 Lease. Thus, it is illogical
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to exclude revenues from the daily rate during a period in which Grayco
had done nothing wrong.
Consequently, Kemmerer’s damages calculation is inherently
flawed from start to finish. The trial court even tacitly acknowledged
that Kemmerer’s calculation was inherently flawed when it excluded
any lost profits prior to October 31, 2007. But excluding those lost
profits does not remedy Kemmerer’s calculation because, as discussed
above, all of Kemmerer’s calculations for lost profits are premised on a
flawed daily rate that Kemmerer calculated using an incorrect date of
breach, as well as other unjustifiable assumptions. Despite those flaws,
the trial court entered judgment for speculative and incorrectly-
calculated “lost profits.” And now Coinmach invites this Court to affirm
Kemmerer’s flawed math based on flawed assumptions. The Court
should decline the invitation.
D. COINMACH FAILED TO PROVIDE ONE, COMPLETE CALCULATION OF LOST
PROFITS, WHICH REQUIRES REVERSAL AND RENDITION.
A party seeking lost profit damages must demonstrate one
complete calculation of lost profits. Univ. Gen. Hosp., LP v. Prexus
Health Consultants, LLC, 403 S.W.3d 547, 551 (Tex. App.—Houston
[14th Dist.] 2013, no pet.) (citing cases). As discussed above,
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Kemmerer’s calculation—upon which Coinmach entirely relies—did not
provide the trial court with one complete calculation of alleged lost
profits. Thus, Coinmach presented legally insufficient evidence of its
alleged lost profits.6
Generally, the proper legal remedy for legal insufficiency of the
evidence is rendition of judgment for the appellant. Vista Chevrolet,
Inc. v. Lewis, 709 S.W.2d 176, 177 (Tex. 1986). That same rule applies
when the evidence of lost profits is insufficient. Kellmann v.
Workstation Integrations, Inc., 332 S.W.3d 679, 686-87 (Tex. App.—
Houston [14th Dist.] 2010, no pet.). As a result, the Court should
reverse the trial court’s award of damages and render judgment that
Coinmach take nothing.7
6As further discussed in Grayco’s Brief, the evidence is also factually insufficient to
support Coinmach’s damages.
7The only damages Coinmach was awarded besides lost profits were attorney’s fees.
Because the award of attorney’s fees was premised on Coinmach prevailing on its
breach of contract claim, a reversal of the lost profits award necessarily requires
reversal of the attorney’s fees award.
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PRAYER
The judgment should be reversed and rendered. Alternatively, the
judgment should be reversed and remanded for a new trial on damages.
Respectfully submitted,
DOBROWSKI, LARKIN & JOHNSON LLP
By:/s/ Cody W. Stafford
Frederick T. Johnson
SBN 00785429
Cody W. Stafford
SBN 24068238
Akilah F. Craig
SBN 24076194
4601 Washington Ave, Suite 300
Houston, Texas 77007
713.659.2900 – Telephone
713.659.2908 – Facsimile
COUNSEL FOR APPELLANT GRAYCO
TOWN LAKE INVESTMENT 2007, LP
CERTIFICATE OF COMPLIANCE
I hereby certify that the computer program used to prepare the
foregoing Reply Brief of Appellant shows that 5,002 words are in the
Reply Brief of Appellant. This word count does not include those words
that TEX. R. APP. P. 9.4(i)(1) excludes from such word count. I further
certify that the Reply Brief of Appellant was prepared using l4-point
font with footnotes typed in l2-point font.
/s/ Cody W. Stafford
Cody W. Stafford
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CERTIFICATE OF SERVICE
I hereby certify that a true and correct copy of Reply Brief of
Appellant Grayco Town Lake Investment 2007, LP has been served on
this 16th day of June, 2015 as follows:
VIA CERTIFIED MAIL RETURN RECEIPT REQUEST
AND E-FILING
R. Kemp Kasling
Kasling, Hemphill, Dolezal & Atwell, L.L.P.
301 Congress Avenue, Suite 300
Austin, TX 78701
J. Bruce Bennett
Cardwell, Hart & Bennett, LLP
807 Brazos, Suite 1001
Austin, Texas 78701
/s/ Cody W. Stafford
Cody W. Stafford
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