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REPORTED IN THE COURT OF SPECIAL APPEALS OF MARYLAND Nos. 280 &2535 September Term, 2010

CR-RSC TOWER I, LLC, ET AL.

v.

RSC TOWER I, LLC, ET AL.

Krauser, C.J., Eyler, James R., Graeff,

JJ. Opinion by Eyler, James R., J.

Filed: October 26, 2011

CR-RSC Tower I, LLC, Second CR-RSC Tower I, LLC, CR-RSC Tower II, LLC, and Second CR-RSC Tower II, LLC, (appellants or CR-RSC), appeal from a judgment entered by the Circuit Court for Montgomery County in favor of RSC Tower I, LLC and RSC Tower II, LLC, (appellees or RSC). The court entered judgment after a jury verdict in favor of appellees, finding breach of two contracts for which appellants were jointly and severally liable and awarding damages for lost profits and expenses incurred in reliance on the contracts. Appellants contend that the circuit court erred in not granting their motion for judgment. In the alternative, appellants contend that the court erred in permitting certain evidence to be introduced, in its instructions to the jury, and in the wording of the verdict sheet. In addition, appellants contend that the court erred in awarding attorneys' fees and costs to appellees. We conclude that appellants are not jointly and severally liable. Thus, we shall remand to the circuit court with instructions to enter the judgment in favor of RSC Tower I, LLC against CR-RSC Tower I, LLC and Second CR-RSC Tower I, LLC only and the judgment in favor of RSC Tower II against CR-RSC Tower II, LLC and Second CR-RSC Tower II, LLC only. On all other issues, we shall affirm. Factual and Procedural Background Appellants own a 53-acre tract of land in Montgomery County. On June 16, 2004, appellants as landlords entered into two 90-year ground leases with appellees as tenants. Appellees are partially owned and controlled by the Penrose Group, a real estate

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development company. One lease was for approximately three acres, and the other lease was for approximately two acres, together with easements to use certain common areas in the rest of the tract. The parties executed a "DECLARATION OF EASEMENTS AND RELATED AGREEMENTS" on June 16, 2004. At that time, the parties contemplated that appellants would develop the portion of the tract not subject to the ground leases. Indeed, in 2003, the owners of the entire tract, appellants' assignors, and Penrose Development Company, LLC entered into a Development Services Agreement pursuant to which Penrose Development Company, LLC agreed to act as a consultant to the owners in connection with development of the tract. Pursuant to the terms of the ground leases between the parties herein, each appellee agreed to construct an apartment building (hereinafter Tower I and Tower II) on its respective site. After construction and initial rental, the parties contemplated that appellees would sell the buildings. The parties projected that construction on Tower II would begin approximately two years after construction of Tower I. The leases contained provisions obligating the parties to cooperate with each other in the development of the apartment buildings and the rest of the tract. After executing the leases, in late 2004 and early 2005, the parties modified their agreements to permit development of condominium buildings, a hotel, and spa rather than apartments (the "Canyon Ranch project"). The parties executed several agreements in furtherance of the Canyon Ranch project, but in September 2006, the parties

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abandoned the project and entered into a termination agreement. Appellees then obtained county approval to revert to the original plan to build apartments. Appellees also arranged financing with Northwestern Mutual Life Insurance Company ("NML") to construct Tower I. In late September, appellees requested appellants to execute estoppel certificates in which appellants would represent that appellees were not in default under the ground leases. The project's financing terms required that appellees provide such estoppel certificates and the leases required appellants to execute such certificates to the appellees. Specifically, paragraph 14.6 in both leases provided: Estoppel Certificate . Each party agrees from time to time, upon no less than fifteen (15) days' prior written request of the other, to execute, acknowledge, and deliver to the other a statement in writing certifying (i) that this Lease is unmodified and in full force and effect (or, if there have been any modifications, that the same is in full force and effect as modified and stating the modifications), (ii) the Lease Commencement Date and Fixed Rent Commencement Date, (iii) the then current amount of the Fixed Rent, (iv) the dates to which the Fixed Rent and Additional Rent has been paid, (v) to such party's knowledge, whether there exists any uncured default by the other party and, if so, the nature of such default, and (vi) such other matters relating to this Lease as the party requesting the statement may reasonably require. Any such statement delivered pursuant to this Section 14.6 may be relied upon by any prospective purchaser or mortgagee or any prospective holder of a sublease from Tenant or any prospective assignee of any such holder of a mortgage or sublease. Appellants disagreed with the language in the proposed certificates. The parties

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attempted to reach agreement on the language, were unable to do so, and appellants did not execute the certificates. Appellants also initiated proceedings to challenge the county's approval of appellees' site plans and building permits. On November 8, 2006, appellees filed suit against appellants1 in the Circuit Court for Montgomery County, alleging that appellants had breached the leases, and seeking declaratory and injunctive relief (the 2006 action), which would require appellants to perform their obligations under the leases. On January 16, 2007, the court issued a preliminary injunction, ordering appellants to deliver executed estoppel certificates to appellees. On January 26, 2007, appellees filed a motion for summary judgment. On April 4, 2007, the court entered summary judgment in favor of appellees. The court, inter alia, ruled that appellants breached their obligations under the ground leases; the breaches prohibited appellees from obtaining financing; and appellees could not obtain equity investment or financing without a final order in their favor. The court ordered appellants to specifically perform their obligations under the leases, extended the term and certain due dates in the leases, and suspended payments required by appellees pending the entry of a final non-appealable order. The order included the following paragraph: Nothing in this Order prohibits Plaintiffs from pursuing any other remedies or rights they may have, including claims for monetary damages or claims under the Force Majure provision of the Ground Leases, resulting from these or other breaches by Defendants of Plaintiffs' rights and/or the

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Initially, appellees also sued the assignors of appellants, but later dismissed them. -4-

Ground Leases. On April 16, 2007, appellants delivered estoppel certificates to appellees along with a cover letter reserving all rights under all agreements and all rights that they had asserted in the litigation. Appellees' position was that the certificates did not comply with the terms of the leases, and no one, including lenders, could or would rely on them. On April 11, 2007, appellants appealed to this Court, arguing that the circuit court had erred in issuing the injunction and in granting summary judgment. In an unreported opinion, this Court affirmed the judgment. Camalier Limited P'ship v. RSC Tower I, LLC, No. 2704, September Term 2006 (Md. Ct. Spec. App. Aug. 4, 2008). On September 3, 2008, this Court issued its mandate. After issuance of the mandate, appellants abandoned their challenge to the county approvals of the project. On September 8, 2008, in the 2006 action, appellees filed an "Amendment by Interlineation of Plaintiffs' Amended Verified Complaint" and a "Motion for Supplemental Relief." In the amendment by interlineation, appellees amended their requests for relief, to include, for the first time, a claim for monetary damages "in an amount no less than $30 million, plus interest" and the costs and expenses of litigation including attorneys' fees, to adjust the terms of the ground leases and certain due dates in the ground leases, and to suspend appellees' payment obligations under the leases pending the obtainment of financing. In the motion for supplemental relief, appellees, inter alia , alleged that the real

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estate and credit markets had deteriorated subsequent to the April 4, 2007 order and appellees had not been able to obtain financing for the apartment project. In addition, they alleged that Montgomery County no longer considered its prior approvals of the project to be valid. Appellees requested monetary damages and supplemental equitable relief. Appellees' requests tracked the amended requests for relief in the amendment by interlineation. Appellees also asked the court to extend the due dates contained in the leases and to require appellants to pay certain fees and costs while appellees determined whether the project was still viable. On December 23, 2008, appellants filed a motion to dismiss or, in the alternative, to strike appellees' amendment by interlineation and appellees' motion for supplemental relief. The memorandum in support of that motion is not in the record extract, but we assume that at least one of the grounds argued was that the requested relief was not available procedurally in the 2006 action. On March 3, 2009, appellees filed a new complaint against appellants in the Circuit Court for Montgomery County (the 2009 action). On December 8, 2009, appellees filed an amended complaint. In their amended complaint, appellees alleged essentially the same facts and sought essentially the same relief as in their amendment by interlineation and motion for supplemental relief previously filed in the 2006 action. Also on December 8, 2009, appellees filed a motion to consolidate the 2006 and 2009 actions. On February 5, 2010, the court granted that motion.

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In late 2009, appellants filed a motion to dismiss the complaint, as amended, in the 2006 action, and a motion to dismiss the amended complaint in the 2009 action. By order docketed on February 5, 2010, the court denied the motions. On February 16, 2010, appellees filed a motion for leave to file a third amended complaint in the consolidated actions. By order dated March 1, 2010, the court granted the motion. Based on appellants' breach of the lease, before and after April 4, 2007, appellees sought declaratory, injunctive, other equitable relief, and damages. In the third amended complaint, appellees alleged that appellants' continued refusal to execute unconditional estoppel certificates and their efforts to hinder governmental approval of the apartment project constituted continuing or successive breaches of the leases, including breach of the implied covenant of good faith and fair dealing. In addition to other allegations, appellees alleged, for the first time, that each appellee was a third party beneficiary of the other appellee's ground lease and was entitled to enforce it because "its terms are covenants running with the land." Based on that allegation, appellees requested that any monetary judgment be entered against appellants jointly and severally. Appellees requested damages in an amount no less that $52 million, plus interest, which amount reflects the monetary damages and losses caused by Defendants' breaches of the Ground Leases and resulting interference with Plaintiffs' valuable development rights; to the extent Plaintiffs reasonably determine that it is feasible to re-start and complete the Project, in an amount no less than $63 million to compensate Plaintiffs for the additional costs and additional equity to re-start and complete the Project; or, -7-

in an amount not less than $23 million which reflects Plaintiffs' out of pocket expenditures incurred in furtherance of the development of the land and the Project. Appellees also sought the costs of litigation, including attorneys' fees. On March 1 through 10, 2010, the case was tried before a jury. In appellees' words: among other things, [appellees] demonstrated that, in reliance on the ground leases and its bargained-for development rights, [they] had incurred nearly $23 million in out-of-pocket expenses ($16,770,134 in connection with Phase I and $6,226,518 in connection with Phase II). [Appellees] also introduced the contemporaneous financial analyses that it and [NML] had conducted at the time of [appellants'] breaches as to the Apartment Project's projected profits, along with the testimony of real estate experts supporting those financial analyses. Based on that evidence and the testimony of expert forensic accountants, [appellees] argued that [they] had suffered lost profits (after the return of its out-of-pocket expenses) in excess of $28 million ($18,082,103 in Phase I and $10,491,313 in Phase II.) (Extract and appendix references omitted.) At the close of appellees' case, appellants moved for judgment in their favor on the grounds that appellees (1) had failed to prove lost profits or reliance damages with reasonable certainty; (2) had failed to prove that any damages were caused by appellants' breach of the leases; (3) had failed to establish third party beneficiary status or any basis for joint and several liability; (4) could not use the implied covenant of good faith and fair dealing to impose additional contract obligations on appellants; and (5) had not introduced any evidence to show that any breaches subsequent to April 4, 2007 had -8-

caused damages. The court denied appellants' motion for judgment. Appellants renewed the motion at the close of all of the evidence. The court reserved on the motion and allowed the case to go to the jury. The jury found that each appellant had breached the ground leases after the court's April 4, 2007 order and that each appellee was entitled to enforce the other's ground lease either as a third party beneficiary or a "third-party entitled to the benefit of a covenant running with the land." The jury awarded damages against appellants in the total amount of $36,350,239.00. On April 9, 2010, after the entry of final judgment, appellants noted an appeal. In July 2010, appellants filed a request for an award of attorneys' fees and costs. In December 2010, the court granted the motion and awarded $3,654,633.40. In January 2011, the court denied appellants' motion for judgment, treating it as a motion for judgment notwithstanding the verdict. Appellants filed new notices of appeal. We shall include additional facts when we discuss the issues. Appellants' Contentions As phrased by us, appellants contend that: 1. The court erred in denying appellants' motion to dismiss and motions for judgment on the ground that (a) monetary damages could not be granted as supplemental relief in the 2006 action, which was concluded by final judgment on the merits when this Court filed its opinion on August 4, 2008, and its mandate on September 3, 2008, and (b) the 2009 action was barred by res judicata .

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2. The court erred in denying appellants' motions for judgment on the ground that appellees failed to produce legally sufficient evidence that appellants' breaches caused any lost profits damages and failed to produce legally sufficient evidence that appellees sustained lost profits damages with reasonable certainty. 3. The court erred in denying appellants' motions for judgment on the ground that appellees failed to produce legally sufficient evidence that appellants' breaches caused reliance damages. 4. The court erred in denying appellants' motions for judgment with respect to joint and several liability and also erred in submitting a verdict sheet that contained questions relating to joint and several liability. 5. The court erred in evidentiary rulings (a) relating to expert testimony on damages; (b) in permitting bad conduct evidence relating to appellants that predated the April 4, 2007 order and excluding bad conduct evidence relating to appellees; and (c) violating appellants' attorney client privilege. 6. The court erred in its instructions to the jury. 7. If a new trial is ordered by this Court, this Court should order that the case be re-tried before a different trial judge. 8. If this Court reverses the underlying judgment, this Court should reverse the attorneys' fees and costs award on the ground that appellees were not the prevailing party within the meaning of the leases. Additionally, this Court should reverse the award in any

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event because the court abused its discretion. Discussion 1. Final Judgment and Preclusion of Issues Appellants first state that the circuit court erred in denying its motions to dismiss the 2006 and 2009 actions because (a) monetary damages could not be granted as supplemental relief in the 2006 action, which was concluded by final judgment on the merits when we filed our opinion on August 4, 2008, and the mandate on September 3, 2008 and (b) the 2009 action was barred by res judicata . Appellants observe that, in the 2006 action, appellees asked for a declaratory judgment regarding the obligation to provide estoppel certificates but also sought and obtained injunctive relief. Appellants further observe that appellees sought damages, for the first time, in their amendment by interlineation and motion for supplemental relief, both filed in the 2006 action, and in their complaint filed in the 2009 action. They argue that the request in the 2006 action came too late to amend or alter the final judgment and that the request was not further relief within the meaning of the Maryland Declaratory Judgment Act. Maryland Code (2006 Repl. Vol.)

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