Wartzman v. Hightower Productions, Ltd.

Getty, J., delivered the opinion of the Court. Woody Hightower did not succeed in breaking the Guiness World Record for flagpole sitting; his failure to accomplish ⁶⁵⁸ this seemingly nebulous feat, however, did generate protracted litigation. We are concerned here with whether Judge Robert L. Karwacki, presiding in the Superior Court of Baltimore City, correctly permitted a jury to consider the issue of "reliance damages” sustained by the appellees. Additionally, we are requested by the appellees, as cross-appellants, to determine if the trial court’s refusal to permit the jury to consider prejudgment interest is error.

Hightower Productions LTD. (appellees and cross-appellants) came into being in 1974 as a promotional venture conceived by Ira Adler, Frank Billitz and J. Daniel Quinn. The principals intended to employ a singer-entertainer who would live in a specially constructed mobile flagpole perch from April 1, 1975, until New Years Eve at which time he would descend in Times Square in New York before a nationwide television audience having established a new world record for flagpole sitting. The young man selected to perform this feat was to be known as "Woody Hightower”.

The venture was to be publicized by radio and television exposure, by adopting a theme song and by having the uncrowned champion make appearances from his perch throughout the country at concerts, state fairs and shopping centers. In November, 1974, the three principals approached Michael Kaminkow of the law firm of Wartzman, Rombro, Rudd and Omansky, P.A., for the specific purpose of incorporating their venture. Mr. Kaminkow, a trial attorney, referred them to his partner, Paul Wartzman. The three principals met with Mr. Wartzman at his home and reviewed the promotional scheme with him.

They indicated that they needed to sell stock to the public in order to raise the $250,000 necessary to finance the project. Shortly thereafter, the law firm prepared and filed the articles of incorporation and Hightower Productions Ltd. came into existence on November 6, 1974. The Articles of Incorporation authorized the issuance of one million shares of stock of the par value of 100 per share, or a total of $100,000.00. ⁶⁵⁹ Following incorporation, the three principals began developing the project. With an initial investment of $20,000, they opened a corporate account at Maryland National Bank and an office in the Pikesville Plaza Building.

Then began the search for "Woody Hightower”. After numerous interviews, twenty-three year old John Jordan emerged as "Woody Hightower”. After selecting the flagpole tenant, the corporation then sought and obtained a company to construct the premises to house him. This consisted of a seven foot wide perch that was to include a bed, toilet, water, refrigerator and heat.

The accommodations were atop an hydraulic lift system mounted upon a flat bed tractor trailer. Hightower employed two public relations specialists to coordinate press and public relations efforts and to obtain major corporate backers. "Woody” received a proclamation from the Mayor and City Council of Baltimore and after a press breakfast at the Hilton Hotel on "All Fools Day” ascended his home in the sky. Within ten days, Hightower obtained a live appearance for "Woody” on the Mike Douglas Show, and a commitment for an appearance on the Wonderama television program.

The principals anticipated a "snow-balling” effect from commercial enterprises as the project progressed with no substantial monetary commitments for approximately six months. Hightower raised $43,000.00 by selling stock in the corporation. Within two weeks of "Woody’s” ascension, another stockholders’ meeting was scheduled, because the corporation was low on funds. At that time, Mr. Wartzman informed the principals that no further stock could be sold, because the corporation was "structured wrong”, and it would be necessary to obtain the services of a securities attorney to correct the problem.

Mr. Wartzman had acquired this information in a casual conversation with a friend who recommended that the corporation should consult with a securities specialist. The problem was that the law firm had failed to prepare ⁶⁶⁰ an offering memorandum and failed to assure that the corporation had made the required disclosures to prospective investors in accordance with the provisions of the Maryland Securities Act Article 32A. (The Act was repealed and re-enacted in 1975 as C A Sec. 11-101 to 11-805). Mr. Wartzman advised Hightower that the cost of the specialist would be between $10,000.00 and $15,000.00.

Hightower asked the firm to pay for the required services and the request was rejected. Hightower then employed substitute counsel and scheduled a shareholders’ meeting on April 28,1975. At that meeting, the stockholders were advised that Hightower was not in compliance with the securities laws; that $43,000.00, the amount investors had paid for issued stock, had to be covered by the promoters and placed in escrow; that the fee of a securities specialist would be $10,000.00 to $15,000.00 and that the additional work would require between six and eight weeks. In the interim, additional stock could not be sold, nor could "Woody” be exhibited across state lines.

Faced with these problems, the shareholders decided to discontinue the entire project. On October 8, 1975, Hightower filed suit alleging breach of contract and negligence for the law firm’s failure to have created a corporation authorized to raise the capital necessary to fund the venture. At the trial, Hightower introduced into evidence its obligations and expenditures incurred in reliance on the defendant law firm’s creation of a corporation authorized to raise the $250,000.00, necessary to fund the project. The development costs incurred included corporate obligations amounting to $155,339 including: initial investments by Adler and Billitz, $20,000; shareholders, excluding the three promoters, $43,010; outstanding liabilities exclusive of salaries, $58,929; liability to talent consultants, $25,000; and accrued salaries to employees, $8,400.

Individual liabilities to the three promoters, Adler, Billitz and Quinn, totaled $88,608, including loans to the corporation, $44,692; repayment of corporate debt to ⁶⁶¹ Maryland National Bank, $8,016; and loss of salaries, $36,000. The trial court disposed of the individual suit filed by the promoters, Adler, Billitz and Quinn and the cross complaint filed by the appellants. The only claim submitted for the jury’s consideration was the claim of the corporation, Hightower, against the defendant law firm. The jury returned a verdict in favor of Hightower in the amount of $170,508.43.

Wartzman, Rombro, Rudd and Omansky, P.A., appealed to this Court. Hightower filed a cross appeal alleging that the jury should have been permitted to consider prejudgment interest. The appellants raise four issues for our consideration: 1. The trial court erred in permitting Hightower to recover "reliance damages” or "development costs”. 2.

If "reliance damages” were recoverable, the trial court failed to properly instruct the jury on the law concerning their recovery. 3. The trial court erred in refusing to instruct the jury on the duty to mitigate damages. 4. The trial court erroneously permitted a member of the plaintiffs law firm to testify as a witness in the case. Reliance Damages The appellants first contend that the jury verdict included all of Hightower’s expenditures and obligations incurred during its existence resulting in the law firm being absolute surety for all costs incurred in a highly speculative venture.

While they do not suggest the analogy, the appellants would no doubt equate the verdict as tantamount to holding the blacksmith liable for the value of the kingdom where the smith left out a nail in shoeing the king’s horse, because of which the shoe was lost, the horse was lost, the king was lost and the kingdom was lost. Appellants contend that there is a lack of nexus or causation between the alleged failure of Mr. Wartzman to discharge his duties as an attorney and the loss claimed by Hightower. Stated differently, an unjust result will obtain where a person performing a collateral ⁶⁶² service for a new venture will, upon failure to fully perform the service, be liable as full guarantor for all costs incurred by the enterprise. Ordinarily, profits lost due to a breach of contract are recoverable.

Where anticipated profits are too speculative to be determined, monies spent in part performance, in preparation for or in reliance on the contract are recoverable. 5 Corbin, Contracts, Sec. 1031, Restatement of Contracts, Sec. 333, cited with approval in Dialist Co. v. Pulford, 42 Md. App. 173 (1979). In Dialist, supra, a distributor, Pulford, brought suit for breach of an exclusive contract that he had with Dialist. Pulford paid $2500.00 for the distributorship, terminated his employment with another company and expended funds in order to begin developing the area where the product was to be sold. When Pulford learned that another distributor was also given part of his territory he terminated his services.

This Court upheld the award of development costs to Pulford which included out of pocket expenses, telephone installation, office furniture, two months of forfeited salary and the value of medical insurance lost. The Court determined that the expenditures were not in preparation for or part performance of a contract, but in reliance upon it. "Such expenditures are not brought about by reason of the breach. They are induced by reliance on the contract itself and rendered worthless by its breach.” Id. at 181 .

Recovery based upon reliance interest is not without limitation. If it can be shown that full performance would have resulted in a net loss, the plaintiff cannot escape the consequences of a bad bargain by falling back on his reliance interest. Where the breach has prevented an anticipated gain and made proof of loss difficult to ascertain, the injured party has a right to damages based upon his reliance interest, including expenditures made in preparation for performance, or in performance, less any loss that the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed. Restatement, Second, Contracts, Sec. 349, Holt v. United ⁶⁶³ Security Life Ins. & Trust Co., 72 Atl. 301 (N.J.) (1909), In Re Yeager Company, 227 Fed. Supp. 92 (N.D. Ohio, E.D. 1963).

The appellants’ contention that permitting the jury to consider reliance damages in this case rendered the appellants’ insurers of the venture is without merit. Section 349 of the Restatement, cited above, expressly authorizes the breaching party to prove any loss that the injured party would have suffered had the contract been performed. Such proof would avoid making the breaching party a guarantor of the success of the venture. As Judge Learned Hand stated in Albert & Son v. Armstrong Rubber Company, 178 F. 2d 182 , (2d Cir. 1949), "It is often very hard to learn what the value of the performance would have been; and it is a common expedient, and a just one, in such situations to put the peril of the answer upon that party who by his