## Facts

- In 1999, Brandon Park, LLC borrowed money from First United Bank (FUB) to develop a townhome project, secured by a deed of trust.
- John Watson guaranteed repayment of the FUB loan in exchange for a guaranty fee to be paid from project proceeds.
- Brandon Park hired Calahan Construction Company as the general contractor.
- When Brandon Park had trouble paying Calahan, Brandon Park agreed to transfer its rights in the project to Cal-Three, LLC—an entity created by Calahan’s principal—through a set of new, related agreements.
- Watson participated in negotiating the new agreements and accepted a reduced guaranty fee.
- In August 2002, Watson sent Cal-Three a notice asserting Cal-Three was in default of the new agreements, including for allegedly failing to pay the outstanding balance due to FUB.
- A completed townhome was scheduled to close on October 24, 2002. The title company requested a payoff letter from Watson for that specific unit.
- Watson instead provided a payoff amount for the entire project, and the sale did not close.
- Watson filed suit against Cal-Three seeking appointment of a receiver for the property, and a receiver was appointed.
- Watson later paid the remaining balance owed to FUB and initiated foreclosure proceedings in December 2002.
- At a February 2003 foreclosure sale, Watson purchased the property.
- Watson later sold the completed townhomes for $414,326.55 and sold the remaining land for $783,000.
- After trial in the receiver-related action, the trial court found Cal-Three had not been in default when Watson sent the August 2002 default notice and entered judgment for Cal-Three.
- The trial court awarded Cal-Three damages measured by the resale amounts tied to Watson’s post-foreclosure sales.
- Watson appealed, challenging the damages calculation.

## Issues

1. Whether the trial court erred by awarding Cal-Three compensatory damages measured by Watson’s post-foreclosure resale amounts (i.e., a gain-based measure) rather than Cal-Three’s proven loss.
2. Whether the record supported the amount of damages awarded, including whether the award improperly treated resale prices as “profits” without accounting for costs and other factors required to show actual damages.

## Decision

- The appellate court reversed the damages award because it was not properly tied to Cal-Three’s compensatory loss.
- The court remanded for further proceedings to determine damages under a legally proper measure supported by the evidence.

## Legal Principles

- Compensatory damages are intended to reimburse the injured party for its own loss and must be proven with reasonable certainty.
- A damages award generally may not be based solely on the opposing party’s gain (such as resale proceeds) unless the law authorizes that remedy and the necessary proof is made.
- Sale price is not automatically the same as “profit”; proving profit-based figures requires accounting for amounts such as costs and other deductions needed to determine net gain and causation.

## Conclusion

Watson arose from a failed townhome-development restructuring that ended in a blocked unit closing, receivership, foreclosure, and Watson’s later resale of the property. Although Cal-Three prevailed at trial, the appellate court held that the damages award was improperly calculated because it relied on Watson’s resale amounts instead of Cal-Three’s proven compensatory loss, and it sent the case back for a proper damages determination.


Watson v. Cal-Three, LLC, 254 P.3d 1189 (2011)