OPINION
This contract case is before the court after trial in Pasadena, California. Previously, this court ruled that the Internal Revenue Service (IRS) breached a contract with plaintiff when it voided the sale of property it had seized from another individual for the payment of taxes. See Koby v. United States,
I. FACTS
On March 25, 1997, the Internal Revenue Service (“IRS”) seized a 20-unit apartment complex located in Oceanside, California (the “Oceanside property”) due to the nonpayment of internal revenue taxes by the property’s owner, Ronald D. Bachrach. That same day, the IRS issued a Notice of Public Auction Sale, which stated that on April 30, 1997, the Oceanside property would be sold at public auction pursuant to section 6335 of the Internal Revenue Code of 1986, 26 U.S.C. § 6335 (1994). The revenue officer responsible for the seizure and sale of the Oceanside property was Michaеl Rude, a twenty-year veteran of the IRS. Following IRS procedure, Mr. Rude prepared for the auction by completing a minimum bid worksheet on the
In determining the market value of the property, Mr. Rude considered its location, condition and potential rental income stream. His assessment relied heavily on his personal judgment of the physical appearance of the property, which he based on a site visit. According to his testimony, he found the complex to be “run down” with “trash everywhere” and significant deferred maintenance. It was also located in an area he considered to be “very poor” with “high crime.” The minimum bid worksheet prepared for the April 30th auction listed the value of the property as $300,000, with a corresponding minimum bid of $30,549.
Before the auction, Mr. Rude made several announcements to the thirteen assembled bidders. Critically, he indicated that the IRS had complied with all of the required procedures, including notifying Mr. Bachrach, the taxpayer-owner. He also reminded the bidders that the taxpayer had a statutory right to redeem the property within 180 days of the sale and, therefore, warned the successful bidder not to expend money on the property during that period. Daniel Koby was the successful bidder at the April 30th auction, proffering $171,000 for the Oceanside property. Mr. Koby marshaled the funds to purchase the property by borrowing against his assets, drawing from personal savings, and partnering with his brother, Alan Koby, who sold stocks and secured an advance on his credit card in order to contribute money to the venture.
Soon after the sale, Mr. Koby felt compelled to address what he considered to be significant safety and health hazards on the property. These included such things as trash and dangerous debris in common areas, faulty wiring, leaky plumbing and defective venting, as well as various security problems (e.g., broken exterior lights). At trial, he testified that he believed that, under California law, he was obligated immediately to remedy these conditions, rather than awaiting the October 29, 1997, expiration of the taxpayer redemption period.
On June 27,1997, the IRS determined that Mr. Rude had not provided proper statutory notice of the sale to Mr. Baehraeh, as required by 26 U.S.C. § 6335(b); in fact, Mr. Baehraeh had not received notice of the April 30th sale of his property until May 14, 1997. Accordingly, the IRS made arrangements to void the April 30th sale to Mr. Koby and to reseize and resell the property. On July 15, 1997, Mr. Rude completed the new seizure documents and on July 16, 1997, he scheduled the second public auction of the Oceanside property for August 29, 1997. Also on July 16, 1997, Mr. Rude left a telephone message with Mr. Koby requesting a meeting. This cryptic voice mail message was Mr. Kob^s first indication that something had gone awry with the April 30th sale.
Concerned and a little agitated, Mr. Koby appeared at Mr. Rude’s office on July 17, 1997, where Mr. Rude informed him that the IRS was canceling the April 30th sale and that the property would be reseized and resold. Mr. Koby refused to accept Mr. Rude’s offer of a Treasury check refunding his $171,000 purchase price. Embarrassed by his failure to comply with proper procedure, Mr. Rude did not tell Mr. Koby the real reason for the cancellation or the defects in the first sale — indeed, as corroborated by several witnesses, rather than revealing that notice to the taxpayer had not been sent at all, Mr. Rude told plaintiff that the problem was that Mr. Baehraeh was insisting upon personal service.
Meanwhile, prior to the second auction, Mr. Rude revised the minimum bid worksheet for the Oceanside property. The revised worksheet listed the value of the property at $450,000 with a minimum bid price of $120,549, nearly four times the minimum bid at the first auction. Despite repeated requests by both Mr. Koby and Mr. Saavedra, the IRS, prior to the August 29th auction, left plaintiff in the dark as to its reason for canceling the first sale or its rationale for revising the minimum bid. On August 22, 1997, Mr. Koby filed a quiet title action in California state court naming as defendants Mr. Bachrach and a “John Doe” (a plaсeholder for the successful bidder at the second auction).
On August 29,1997, the Oceanside property was again sold at public auction, this time to Thomas McNamara for $155,000. Mr. McNamara had participated unsuccessfully in the first auction. There were only three registered bidders at the second auction, all of whom were informed of Mr. Kob/s pending state court action. Acting on the advice of counsel, Mr. Koby attended the auction, but did not participate in it. Indeed, he uneontrovertedly testified that he would not have had adequate funds to participate without cashing the IRS’s refund check from the first sale. The taxpayer redemption period following the second sale expired February 25, 1998. On February 24, 1998, Mr. Bachrach reclaimed the property by paying the redemрtion price of $172,287.65. Following this redemption, Mr. Koby voluntarily dismissed his quiet title action.
On May 18, 1999, Mr. Koby filed suit in this court seeking damages from the government for breach of the sales contract established by the April 30, 1997, auction. In an opinion issued on the parties’ cross motions for summary judgment, the court determined that the government’s conduct constituted a breach of an enforceable contract. See Koby v. United States,
II. DISCUSSION
Two key issues must be resolved here. The first involves defendant’s asserted mitigation defense; the second concerns the propriety, as a matter of law, of various of plaintiffs asserted theories of damages. The court will consider these matters seriatim.
A. Failure to Mitigate
Defendant’s centerpiece contention is that by not participating in the second auction, Mr. Koby failed to mitigate his damages, thereby significantly limiting the amount he can recover. To a certain extent, but not entirely, this argument presupposes that, because the sale price of the property was $16,000 less at the second auction, Mr. Koby would have handily won the property a second time had he simply bid using the monies refunded from the first sale. For the reasons stated, the court finds these contentions not well-taken.
There is no dispute over the basic legal principles here — a non-breaching party generally may not recover damаges attributable to that party’s failure to take reason
Whether or not the buyer’s obligation to mitigate damages has been discharged depends on the reasonableness of its conduct. In this connection, reasonable conduct is to be determined from all the facts and circumstances of each case, and must be judged in the light of one viewing the situation at the time the problem was presented. Where a choice has been required between two reasonable courses, the person whose wrong forced the choice can not complain that one rather than the other was chosen.
In re Kellett Aircraft Corp.,
Burnishing this “undue risk and expense” standard, Williston on Contracts provides that “almost any risk of considerable loss to thе injured person if he attempts to mitigate damages should be considered undue.” 11 Samuel Williston, A Treatise on the Law of Contracts (Williston on Contracts) § 1353 (3d ed.1968); see also Brazos Electric Power Coop., Inc. v. United States,
Defendant asservates that the IRS’s second auction presented plaintiff with a “suitable substitute transaction” on substantially the same terms as the first sale. It, therefore, claims that it was unreasonable for Mr. Koby not to participate in the second round of bidding, so as to mitigate the damages owed on the breach of the original contract. Per contra.
Of course, the second auction involved the same property as the first sale. But, after that, the terms of the two transactions diverged dramatically. The second auction was not an offer to sell plaintiff the Oceanside property, even on less advantageous terms, but rather an open-ended offer, extended to the public at large, to sell the apartments to the highest bidder. The latter transaction thus did not involve remotely the same type of performance owed under the prior contract — one required a sale at a specified price, subject only to the property being redeemed by its original owner; the other was little more than an offer to make an offer, with’ the price yet to be determined, and no assurance whatsoever that plaintiff would be the highest bidder. Indeed, apart from the basilar difference between a contract of sale and a mere invitation to participate in an auction, the terms of the second auction also differed significantly from those of the first — the second minimum sale price was almost four times the original minimum, and the second auction, under the terms of the tax redemption statute, afforded the pri- or owner 121 additional days in which to redeem the property {e.g., 180 days from the second auction date).
Indeed, contrary to defendant’s claims, it is far from clear that Mr. Koby could have avoided any losses by participating in the second auction. Looking at the end result of that second auction, defendant blithely assumes that plaintiff would have won the property with a bid significantly lower than what he originally paid. But, this is rank speculation. The record offers multiple possible reasons why the winning bid at the second auction was less than at the first, despite the $90,000 increase in the minimum bid price. Mr. Roby’s pending quiet title action and his threat to sue the winning bidder at the second auction, as well as the government’s failure to announce its reasons for holding a second sale and revising the minimum bid, all likely contributed to reduce the number of bidders and, in turn, depress the resulting sale price. Had Mr. Koby relented and participated in the second auction, removing the cloud of extensive litigation over the property, the resulting price might have been much higher. We will never know. Defendant provided essentially no evidence on this point, choosing instead simply to assume, rather than prove, that the resulting price would have been the same. In the court’s view, this assumption is not borne out by the record and represents a pedantic form of “Monday-morning quarterbacking” that is contrary to the established standard of evaluating reasonableness from the perspective of “one viewing the situation at the time the problem was presented.” In re Kellett Aircraft,
Even had Mr. Koby prevailed in the second sale, he could have, by his very participation, severely compromised his ability to seek any damages under the first contract. Mr. Koby testified that he used all of his available resources to pay the purchase price of the first sale and, therefore, did not have funds available to bid at the second sale without cashing the check he had received from the IRS relating to the first sale. Accepting the reimbursement of his consideration and engaging in further negotiations with the defendant for sale of the same property could easily have been construed as abandoning his rights under the first con
While it is unlikely that cashing the refund check alone would have been sufficient to indicate Mr. Koby’s intent to abandon his contract rights, see Avemco Ins. Co.,
To be sure, plaintiff might have expressly reserved his rights under the first contract, indicating that his cashing of the check and participation in the second auction were not intended to waive defendant’s prior breach. See U.S. Navigation Co. v. Black Diamond Lines, Inc.,
Thus, the circumstances, as they were actually known to Mr. Koby prior to the second auction, were that the IRS had unilaterally and for questionable reasons canceled the original sales contract and then initiated a second public bidding process using a drastically increased minimum sales price. As explained in the letter Mr. Saavedra sent to Mr. Rude a week before the second sale, plaintiffs conclusion from these circumstances was that “the IRS simply wants another chance to sell this property at a higher price.” The IRS perpetuated this view by failing to respond to the various inquiries and meeting requests made by plaintiff and his counsel. Plaintiff, acting on the advice of counsel, ultimately chose to encourage defendant to perform on the first contract, rather than make a second offer to purchase the property. On the facts known to Mr. Koby prior to the second auction, and given the relatively little time in which he had to act, the court cannot say that plaintiffs choice was unreasonable. Compare Hale Container Line, Inc. v. Houston Sea Packing Co.,
That plaintiff might have acted differently had he known what Mr. Rude and the IRS knew is irrelevant — “[mjitigation does not require prescience; it requires reasonableness.” Ketchikan Pulp Co. v. United States,
Summarizing, this court finds that Mr. Koby acted reasonably in not participating in thе second auction. As such, he did not fail
B. Viability of Plaintiffs Damage Theories
The court’s next task is to determine, based on the facts revealed so far, whether any of plaintiffs damage theories are unviable. As will be discussed below, the court concludes that the viability of plaintiffs damage theories hinges on various yet unresolved questions of fact.
Plaintiff seeks damages on a myriad of alternative legal theories. First, in the nature of expectancy damages, he asserts that he is entitled to recover lost profits for rental income for the time period between the date of the breach and the date of trial. Alternatively, he seeks expectation damages as measured by the difference between the value of the property on the date of the breach and the contract price, plus consequential damages. Finally, he seeks reliance damages to recoup the expenses he incurred attempting to restore the habitability of the property while he was the beneficial owner. Defendant challenges each of these theories, arguing that plaintiff should receive no more than the amount of interest he would have earned had Mr. Bachrach redeemed the property prior to the end of the first redemption period. Because of the unique nature of this contract, however, defendant’s attempts to limit plaintiffs damage awards are, at least, premature.
Under the contrаct here, defendant could fulfill its obligation by either: (i) conveying a Director’s Deed to plaintiff upon the expiration of the redemption period; or (ii) refunding plaintiffs purchase price plus interest upon redemption by the taxpayer. Such contracts, typically referred to as alternative contracts, present unique damage issues when the party with optional performance commitments repudiates the contract anticipatorily. See In the Matter of The Community Medical Center,
The difference here, of course, is that the election of performance alternatives was not to be made by either contracting party, but rather by the third-party taxpayer, who had 180 days in which to redeem the property. This distinction renders sui generis the rule limiting plаintiff to the alternative least burdensome to the defendant. See Podlesnick,
Defendant also seeks to deny plaintiff the ability to recover the lost profits it arguably would have earned had it received the property. Defendant argues that plaintiff cannot prove such damages with sufficient certainty to meet the rigorous standards established for the recovery of lost profits. In the limited cases where lost profits have been awarded, plaintiffs have been required to show, by a preponderance of the evidence, that: (i) the loss was caused by the breaching party’s action; (ii) the lost profits were foreseeable by the breaching party; and (iii) the amount of the lost profits can be established with “reasonable certainty.” See Energy Capital Corp. v. United States,
Finally, addressing one of plaintiffs alternative damage theories, defendant argues that Mr. Koby should not be allowed to recover the funds he expended on the property during the first redemption period. Defendant stresses that Mr. Rude warned the bidders at the first auction that they should not incur expenses on the property until the redemption period ran. It contends that plaintiff could not have recouped these expenses had the first sales contract been fully performed and asserts, therefore, that these expenses cannot be considered expectation damages, which are designed to place the wronged party in the position it would have been had the contract been performed. See White v. Delta Constr. Int’l, Inc.,
Such expenses, however, may be reeoupable as reliance damages. As observed by the Federal Circuit, “[i]n order to be recoverable as reliance damages, ..., plaintiffs loss must have been foreseeable to the party in breach at the time of contract formation.” Landmark Land Co., Inc. v. FDIC,
Instead, defendant correctly argues that this court must decide whether, and to what extent, hazards actually existed on the property that needed to be immediately remedied. Although the trial focused on facts relating to mitigation, the record incidentally included information that suggests that hazards, indeed, may have existed on the property. Thus, for example, Mr. Koby testified that there was abandoned furniture (including old mattresses), trash, and a ear up on blocks in the common areas of the apartment complex, around which children were playing. He also testified as to pressing problems involving oil spills, broken exterior safety lighting, plumbing, exposed electrical sockets, other unsafe wiring, and blocked exhaust vents. Left unexplored at the trial were any significant details regarding these problems, and whether all the costs incurred by Mr. Koby related to these types of hazards and were reasonable in amount. In the court’s view, proof that such hazards existed and that Mr. Koby appropriately responded to his obligations under California law as the property’s landlord could pave the way for him to recover his reasonable expenses as reliance damages. Resolution of that matter, however, awaits another day.
III. CONCLUSION
So ends round two of this litigation. For the foregoing reason, this court finds that plaintiff was not required to mitigate its damages in the fashion that defendant contends. Further, in the court’s view, all of plaintiffs damage theories remain viable, subject, of course, to further proof of the critical elements thereof. Toward the latter end, by September 23, 2002, the parties shall file a joint status report indicating how this case should proceed, including, if relevant, a schedule for trial proceedings on damages.
IT IS SO ORDERED.
Notes
. Additional facts concerning the breach of contract here may be found in this court’s earlier opinion,
. At trial, Mr. Rude intimated that he may have provided Mr. Koby with more details regarding why the first sale actually was canceled. He also suggested that he was even more specific with Mr. Koby’s attorney. This testimony, however, was controverted by plaintiffs witnesses and flatly inconsistent with Mr. Rude’s earlier deposition testimony (given only a couple of months earlier) at which he indicated that he provided no specific details either to Mr. Koby or his attorney. At that deposition, for example, Mr. Rude, when asked whether he had informed Mr. Koby of the reasons for the cancellation and new auction, stated:
No, I mean, obviously, it was embarrassing for me to make such a mistake. I mean, I was*496 pretty vague with him because I obviously was embarrassed about making a mistake.
Mr. Rude gave similar deposition testimony regarding his conversations with Mr. Koby's attorney. When asked why his recollection had improved at trial, Mr. Rude responded that his memory had been refreshed, in part, by reviewing his case history. Yet, when pressed by plaintiffs counsel, he could not identify any entries in that history that might conceivably have served this restorative purpose. This court finds Mr. Rude's fuzzy trial testimony incredible and credits, instead, his clearer deposition testimony.
. See also Cain v. Grosshans & Petersen, Inc.,
. Notably, this extension of the redemption period occurred at a time when real estate prices were appreciating. Defendant admits that as the price of the property appreciated, the likelihood of the taxpayer redeeming increased.
. See Avemco Ins. Co. v. Northern Colo. Air Charter, Inc.,
. With a surreal twist, defendant blithely maintains that Mr. Koby could have participated in the second auction, bid whatever was necessary to win, and then recouped the difference between his first bid and his second from the United States. This contention, of course, flies in the face of defendant’s initial litigating position in this case, to wit, that it had not breached any contract in canceling the first sale. Were this position correct, Mr. Koby could not have received any damages had he bought the property for a higher price at the secоnd auction. The fact that defendant’s position has since been rejected by this court does not alter the risks reasonably perceived by Mr. Koby at the time of the breach of the sale contract.
. Mr. Rude testified that he did not remember exactly what he had told either Mr. Koby or his attorney prior to the sale. As noted above, in his deposition concerning his conversations with Mr. Koby, he indicated more candidly that "I was pretty vague with him because I obviously was embarrassed about making a mistake.” Plaintiff’s confusion regarding the reasons for the cancellation of the first sale apparently persisted through August 21, 1997, when Mr. Saavedra sent Mr. Rude a letter specifically requesting "a written explanation for the basis of canceling the
. In a September 22, 1997 letter from the IRS district counsel to Mr. Koby’s attorney, the government for the first time clearly acknowledged that “In this case, Mr. Rude did not give notice of the sale to the owner until after the sale ... The sale to Mr. Koby was not conducted in accordance with the sale provisions of the Internal Revenue Code.”
. It is less clear, at this time, what impact Mr. Bachrach's testimony will have on any damages awarded. There are two possible ways to account for his testimony. The first would be to award plaintiff a full measure of damages if it is determined, based on a preponderance of the evidence, that Mr. Bachrach was not prepared to redeem the property within the first redemption period. The second approach, which some courts have called the loss of chance doctrine, would be to award plaintiff damages based upon the percentage likelihood that Mr. Bachrach would have redeemed the property — if there were 25 percent chance of redemption, then certain of plaintiff’s damages would be discounted to reflect this likelihood of redemption. The latter approach is suggested by Restatement (Second) Of Contracts § 348(3), which provides that — "If a breach is of a promise conditioned on a fortuitous event and it is uncertain whether the event would have occurred had there been no breach, the injured party may recover damages based on the value of the conditional right at the time of breach.” In the court's view, the choice between these approaches may either be informed by future factual development here or rendered moot thereby (e.g., if proof indicated that it was a 100 percent surety either that Mr. Bachrach would redeem or not redeem the property). See Wright v. St. Mary’s Medical Center of Evansville, Inc.,
. See, e.g., Camacho v. Du Sung Corp.,