AB CORPORATION v. Futrovsky

Smith, J., delivered the opinion of the Court. We are here concerned with the effect of the breach of a specific warranty in a contract for sale of real estate. The trial judge entered judgment against appellants, A. B. Corporation (the seller) and Messrs. Brown, Schoolfield and Harris, all of whom were directors of the seller, in the amount of $21,901.44.

Mr. Brown was the ⁶⁷ president and sole stockholder. Plaintiffs were the appellees, Charles J. Futrovsky, Charles Santos and Angelo Santos, certified public accountants (the buyers). We shall affirm the judgment against the corporation and reverse the judgment against the individuals. The points here raised are (1) that the damages awarded by the court were not within the contemplation of the parties at the time the contract was executed and were speculative, (2) there was a variance between the allegations of the declaration and the proof presented, and (3) it was error to hold the officers and directors of A. B. Corporation liable.

In the summer of 1964 the seller owned a tract of land in Prince George’s County improved by 27 or 28 apartments. (Statements as to both numbers appear.) One of the buyers discussed with a realtor the possibility of purchasing a property that would show “ten per cent syndication cash flow.” The buyers ultimately inspected the property of the seller. It had been completed and “rented in full almost through July of that same year, ’64.” The seller was asked for and delivered to the realtor books of the corporation. With the books was a notice of assessment and the tax bills that had been received by the seller.

A cash flow statement was prepared by the realtor and delivered with the books to the buyers. The “asking price” for the property was given as both $315,000.00 and $325,000.00. The buyers instructed the realtor to prepare a contract for $295,000.00, with cash to be paid for the sum in excess of the existing first lien. One of the buyers testified that this offer was based on the cash flow.

In the cash flow statement as originally prepared the figure “$4,500.00” appeared relative to taxes. Someone struck through this figure and inserted “$3,000.00”. The buyers claimed they were unable to find in the books any payment for taxes other than “[a] very nominal figure * * * for personal property tax.” The realtor was advised that before the buyers would sign a contract they would want the seller to warrant that the taxes were under $2,900.00. Ultimately, a counteroffer for a purchase ⁶⁸ at $305,000.00 was agreed to, including a “Second Trust note” in the amount of $10,000.00 and assumption of the existing first lien.

Written into the contract was: “Seller warrants that real estate taxes have been assessed and levied on the completed project and that these taxes do not exceed $2,900. per annum.” The contract by its terms provided also: “* * * [T] he provisions hereof shall survive the execution and delivery of the deed * * * and shall not be merged therein * * *.” Mr. Brown testified that after the counteroffer was made the question of taxes arose and he was asked if he “would make a statement to the fact the taxes did not exceed $2,900”. He said that he computed state, county and city of Laurel taxes on the basis of the assessment form and believed that the figure was “about $2,880” and used $2,900.00 as a round figure. He was willing to warrant the $2,900.00 figure. Settlement was duly made.

At settlement on February 23, 1965, taxes were adjusted on the basis of $1,923.99 state and county taxes and $744.53 city of Laurel taxes. In September of 1965 the buyers were notified by “the mortgage company that [they] had a shortage in [their] escrow account in the amount of $500 and some odd dollars.” They then received a bill from the county with an explanation saying there had been an additional assessment made in March of 1965. It ultimately developed that the assessor assessed only 15 of the apartments from July 1, 1964. On February 1, 1965, he inspected the premises and on March 5, 1965, (after settlement) sent out a notice indicating an assessment on the remaining 12 apartments dated from January 1,1965.

The buyers sued the seller, the individual defendants and realtor. There were two counts in the declaration. The first count recited the contract, which was attached; ⁶⁹ the warranty in it; the negotiations; the fact that the tax assessment had only been made on 15 of the 28 units; that the final tax bill was in excess of $5,000; that “ [t] he contract and [cash flow] statement provided $2,900 for real estate taxes and showed a net return on the capital investment of approximately 10 to 12%”; that “[b]oth the contract and the statement contain [ed] material representations, as [previously] stated * * * which induced [buyers] and upon which [buyers] relied in purchasing the property”; that the seller was the owner and the individual defendants were officers of the corporation and acted on behalf of the corporation in the sale of the property ; that they knew or should have known that the warranty in the contract was a misrepresentation of a material fact; and that they knew or should have known “that the statement presented by the real estate agent showing the operating cost of the townhouses, which included $2,900 for real estate assessments, was a misrepresentation of a material fact”, with the concluding paragraphs : “That because of the increase in the real estate assessment, when finally made on the completed project as described, there is no net return on the property and the resale value of the property has been greatly decreased. “That thereby the defendants deceived and defrauded the plaintiffs. “WHEREFORE, the plaintiffs demand judgment against the defendants, jointly and severally in the amount of $80,000.00 in compensatory and exemplary damages, plus the costs of this suit.” The second count of the declaration incorporated the allegations of the first count by reference. It then said : “That the aforesaid warranty made by the Seller as follows: ‘Seller warrants that real estate taxes have been assessed and levied on the ⁷⁰ completed project and that these taxes do not exceed $2,900 per annum’ was breached by the defendants as aforesaid.”, and demanded judgment “against the defendants jointly and severally in the amount of $30,000.00”.

The trial judge entered judgment in favor of the realtor, from which there has been no appeal. In the trial of the case the buyers abandoned the first count and relied on the second count, the breach of warranty issue. An expert witness was presented by the sellers who valued the property by the income approach. His was the only testimony relative to value.

He capitalized net income allocable to improvements at 9%. By this method he determined the value of the property with taxes at $5,010.00 per annum as $247,260.00 and the value with taxes of $2,900.00 per annum as $270,704.44. The difference of $23,444.44 he rounded off at $23,500.00. A part of the increase of taxes to $5,010.00 was attributable to an increase in the tax rate.

By the expert’s calculation this produced an adjusted difference in value attributable to the breach of warranty of $21,901.44, which was the amount of judgment entered against the seller. I. It is undisputed that there is here a breach of warranty. The seller urges that the damages awarded by the court were not within the contemplation of the parties at the time the contract was executed and proceeds to point out some fly specks in the hypotheses upon which the expert rested his conclusions. The fact remains, however, that there was no objection to the testimony of the expert, there was no motion to strike the testimony of the expert and the final figure at which he arrived is less than a capitalization of 10-12% on the tax differential, the basis upon which the buyers said in their declaration they were buying.

In Casualty Ins. Co. v. Messenger, 181 Md. 295 , 29 A. 2d 653 (1943), Judge Delaplaine said for the Court: ⁷¹ “The rule for the measure of damages for breach of contract, as laid down in England by Baron Alderson in the leading case of Hadley v. Baxendale, 9 Exch. 341, 5 Eng. Rul. Cas. 502, 504, has been adopted in the State of Maryland as well as generally by the [courts] of the United States.

The rule is that the amount of damages recoverable for breach of contract is such as may reasonably be considered as arising naturally from the breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the [probable] result of the breach of it. Winslow Elevator & Machine Co. v. Hoffman, 107 Md. 621, 635 , 69 A. 394, 396 , 17 L. R. A., N.S., 1130; Primrose v. Western Union Telegraph Co., 154 U. S. 1 , 14 S. Ct. 1098, 1106 , 38 L. Ed. 883, 894 , 15 Am. Jur., Damages, Sec. 52.” Id. at 300-301. See also 22 Am.Jur.2d Damages, § 56 (1965); Correlli v. National, 240 Md. 627 , 214 A. 2d 919 (1965); M & R Builders v. Michael, 215 Md. 340, 346 , 138 A. 2d 350 (1958); and Abbott v. Gatch, 13 Md. 314 (1859).

The Hadley v. Baxendale rule to which Judge Delaplaine alluded was set forth by our predecessors in U. S. Telegraph Co. v. Gildersleve, 29 Md. 232 (1868), where Judge (later Chief Judge) Alvey said for the Court: “Lastly, as to the measure of damages, if there be a breach of the contract. This is a subject about which there has been a considerable diversity of opinion, and great want of precision in the attempts to define rules of general application. But, by the latest and best considered cases upon the subject, the rule seems to be now pretty well established, that a party can only be held responsible for such consequences as may be reasonably supposed to have been in the contemplation of both parties at the time of ⁷² making the contract, and that no consequence, which is not the necessary or ordinary result of a breach, can be supposed to have been so contemplated, unless full information be imparted to the party sought to be held liable at the time of entering into the engagement. This is the rule furnished by the case of Hadley v. Baxendale, 9 Exch. 341, 354, and which has been recognized and approved in Fletcher v. Tayleaur, 33 Eng.

L. & E. 187-191, and other cases, as being in all respects the most correct and precise. The case of Hadley v. Baxendale was this: The plaintiffs, owners of a steam mill, broke a shaft, and desiring to have another made, they left the broken shaft with the defendant, a carrier, to take to an engineer to serve as a model for a new one. At the time of making the contract, the defendant’s clerk was informed that the mill was stopped, and that the plaintiffs desired the broken shaft to be sent immediately. Its delivery was delayed, however, and the new shaft kept back in consequence.

The plaintiffs brought their action for a breach of this contract with the carrier, and they claimed, as special damages, the loss of profits while the mill was kept idle. But because it was not made to appear that the defendant was informed that the want of the shaft was the only thing that was keeping the mill from operating, it was held that he could not be made responsible to the extent claimed. And the court, in delivering its judgment, said : ‘We think the proper rule in such a case as the present, is this—where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be, either such as may fairly and substantially be considered as arising naturally, i.e., according to the usual course of things, from such breach. ⁷³ of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach of it. Now, if the special circumstances under which the contract was actually made, were communicated by the plaintiff to the defendant, and thus known to both parties, the damages resulting from the breach of such a contract which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of a contract under these special circumstances so known and communicated. “ ‘But on the other hand, if those special circumstances were wholly