Coal Trial Ends; Decision Expected By Xmas Weekend

The trial of Phil Tagami’s state court breach of contract case against the City of Oakland came to a close on the first day of December, four and a half months after it began. Two weeks ago, Judge Noël Wise issued her final statement of decision on liability, finding the City breached the developers’ lease by failing to allow an extension of time to meet initial construction deadlines.The final week of trial was devoted to testimony and closing arguments on the remedy to which the developers are entitled.

A decision is expected soon. Judge Wise has indicated that she plans to issue a proposed statement of decision by December 22. The parties will then have seven days to file objections. Objections rarely result in a major change to a proposed statement of decision, so the key terms that will be revealed in the next few weeks are likely to become Judge Wise’s final say on remedy.

Tagami is seeking to choose between two alternative remedies that he has proposed: (1) $19.1 million in damages and reinstatement of his lease with 2½ years to commence construction ; or, (2) $159.6 million in damages to walk away from the project.

The City argues that the Court can only award an extension of time for the developer to meet construction milestones. An extension is the  remedy provided in the lease where the developer’s failure to meet a deadline results from force majeure  – typically, an unforeseeable event such as an earthquake. In this case, the Court concluded in a November 22 statement of decision on liability that the City itself interfered in ways that constituted force majeure, preventing the developers from meeting their initial milestone by, among other things, applying a coal ban enacted by the City Council in 2016 to the OBOT project.

Given the Judge’s ruling on liability, the City concedes the availability of some extension of time for the developers to commence construction. As a result, the four-day trial on remedies focused largely on the question of monetary damages. Phil Tagami, former coal executive James Wolff, and expert witness Peter Brown, a forensic accountant, testified on behalf of OBOT. Expert witness Jonathan Borck, an economist, testified on behalf of the City.

Lost Profits 

Most of the damages at stake are “lost profit” damages:  $13.9 million of the $19.1 million in the first scenario that involves reinstatement of the lease; and $154.4 million of the $159.6 million in the second scenario for a cash only award. Naturally, the experts had a lot to say about the lost profits claims, for and against.

Before delving into the courtroom battle, it may help to review a bit of background law.

Lost profits are sometimes awarded in breach of contract cases. These awards rest on a comparison between the actual world and the “but for” world, the imagined world that would have existed but for the breach of contract. It can be a steep challenge to show that the profits would have been earned and not merely might have been earned. In California, the rule is that such damages must “be proven to be [reasonably] certain both as to their occurrence and their extent, albeit not with ‘mathematical precision.’”

The California Supreme Court had a bit of fun in explaining this rule in its 2012 Sargon decision: “World history is replete with fascinating ‘what ifs.’ What if Alexander the Great had been killed early in his career at the Battle of the Granicus River, as he nearly was? … Many serious, and not-so-serious, historians have enjoyed speculating about these what ifs. But few, if any, claim they are considering what would have happened rather than what might have happened.”

As difficult as it may be for an ongoing business to prove what “would have happened” with reasonable certainty, it is doubly so for an unestablished business (like the Oakland Bulk and Oversized Terminal) with no track record to rely on, no history of revenues, no market share to defend, no proven managerial prowess in running a successful business. In this case, Tagami’s team of developers and Insight Terminal Solutions’ management had no experience with building or operating a marine export terminal.

Peter Brown produced elaborate spreadsheets summarizing his calculation of lost profits between February 2016 and February 2082, the entire 66 years of the lease. Brown assumed that 5.0 million tons of coal and 1.5 million tons of soda ash would pass through the terminal each year because those were the numbers in a preliminary “Basis of Design” document; and that Insight Terminal Solutions, a brand new business with four employees, would pay rent to OBOT under the sublease signed in September 2018.  Brown testified that, based on documents he had reviewed and conversations with the principals and employees of OBOT and CCIG, the project would have succeeded if the City had not terminated the lease in November 2018. He was convinced that financing was available, supply and demand for coal and soda ash were adequate for the 66-year term of the lease, and the Oakland coal terminal would have been a (financial) success.

Any risk involved, Brown said, was accounted for in his estimates by a discount rate, a mathematical factor that discounts expected returns the farther out they are in the future. The discount rate would have little effect on the massive front-loading of OBOT’s assumed rental income resulting from balloon payments of over $60 million from ITS in the earliest years of the sublease.

Consistent with its view that OBOT is entitled to no monetary damages, the City did not produce an alternative damage model or calculation. Their expert, Jonathan Borck, explained that his assignment had been to review the methodology by which Brown reached his conclusions. Borck attacked Brown’s work for failing to analyze and address the uncertainty of his assumptions with thorough research beyond documents, marketing materials, and projections provided him by the would-be developers and their allies.

For an unestablished business, Borck said he would have expected an independent analysis of the markets, potential competitors, profits of comparable businesses, and potential disruptions of supply and demand for the commodities. Borck cited VCRs as an example of how abruptly demand for a product can disappear.

Instead of doing a full-scale economic analysis, Brown made assumptions that the terminal would have been financed and built; Insight Terminal Solutions as the operator would have been viable and able to make rent payments, including massive balloon payments in the early years; and future markets would have supported ITS’s profits into the latter part of the 21st century. On the question of uncertainty in demand for coal in overseas markets that would be served by the proposed terminal, Borck pointed to Japan’s plan to reduce its reliance on coal power for electricity generation from 32% in 2019 to 19% in 2030; China’s plan to phase down demand for coal over 20 years; the potential effect of climate change policies; and the possible substitution of other commodities (such as gas) for coal (as has already happened on a large scale in the United States).

“If you make too many assumptions, it turns into a hypothetical rather than an analysis,” said Borck.

“House of Cards”

In its closing argument, the City also attacked Brown’s damages model as resting on a foundation of testimony based on hearsay – conversations and documents that weren’t admitted into evidence for their truth but only for their impact on actions taken by the plaintiffs – meaning that Judge Wise cannot infer that the testimony describes the real world, only the perceptions and beliefs of the developers.

Prior to 2016, this might not have posed a problem so long as Brown could substantiate that he “reasonably relied” on the information provided to him by the plaintiffs. Lawyers could sneak some hearsay in through the back door by characterizing it as the facts underlying an expert’s opinion. But in the 2016 Sanchez decision, the California Supreme Court ruled that experts cannot testify about any case-specific facts other than those which are supported by evidence in the record.

Second-year law school students have sleepless nights wrestling with the intricacies of hearsay, which can vex even experienced trial lawyers at times. “Hearsay” in the legal context refers to evidence of statements made out of court by someone who is not present in court to give testimony and face cross-examination. For example, a letter received from one person cannot be admitted through the testimony of another person to show that the contents are true.

Virtually the entire damage model constructed by plaintiffs’ expert suffered from a lack of properly supported evidence in the record. Brown relied heavily on statements made by others and, during the course of the trial, OBOT’s attorneys failed to get these statements admitted under one or another exception to the hearsay rule.

In one key example, Barry Lee, OBOT’s chief trial counsel, tried to get into the record a hodge-podge of documents purporting to show that the terminal proponents had lined up adequate financing in 2018.  Brown testified that he relied on these documents to support his assumption that the ITS’s and OBOT’s business would have gotten off the ground but for the City’s termination of the lease.  But these key documents wound up in limbo, admitted solely for the purpose of showing their impact on the recipients.

Danielle Leonard, in closing arguments for the City, called Brown’s damages model a “house of cards” that could not stand under Sanchez. “If you remove the foundation that violates Sanchez, it brings the whole thing down,” she argued.

The Court’s proposed statement of decision will make clear by December 22 how much, if any, of the damages sought will be awarded and what choices there will be for plaintiffs under the two remedy scenarios.  After the court issues a final statement of decision, OBOT will be required to prepare a proposed judgment by January 5, 2024 or 7 calendar days after the final statement of decision, whichever is later.

By that point, the Oakland community will know the outcome of the trial, as plaintiffs will have to choose their remedy from the alternatives offered by the court.

Both sides have the right to appeal.