Page 43 - Economic Damage Calculations

What if a plaintiff does not desire to sell his property? [An award based in the diminution in val-
ue would not yield] damages sufficient to restore the building to its original condition. The [dim-
inution-in-value test] is in reality forcing the plaintiff to sell the building in order to restore him-
self to the same position employed before the injury. Certainly such a measure of damages par-
tially compensates a plaintiff for injury done to his building and affords some protection to a part
of his property rights. However, it would seem more proper to place the plaintiff in a position
where he could be unrestricted in the exercise of his property rights of continued ownership...

Value to the Plaintiff

A further consideration is whether the damages computation should address any unique value of the
property to the plaintiff. This potential increment of value has been expressed as follows:

This is the notion of ‘value to the owner.’ While of course the market value—what he can get for
it—is a value to the owner, the present doctrine is recognition that property may have other val-
ues to him which, in exceptional circumstances, form a better measure of compensation than
what the article would bring. (Charles McCormick, Handbook on the Law of Damages, p. 560
([West Pub. Co., 1935]), 560)171 [1935])

The fact that the plaintiff owned the asset in question prior to the damages event suggests that the value
to the plaintiff was at least, if not more than, the value to a willing buyer and seller. Although the market
may assign a high discount rate to a subject stream of expected future cash flows, perhaps the owner of
those cash flows perceived less risk (especially under his or her ownership or management), which may
be why he or she owned it. For example, there is empirical support in a business valuation context for
the idea that ownership rights in a business with control of management or operations are worth more
than equivalent rights without control. fn 16

The discount rate, as discussed previously, relates to the expected variability of future cash flow streams.
There may, however, be a discrepancy in the expected variability or levels of the income streams be-
tween the plaintiff’s expectations and that of the market in general (especially as seen in a market of eq-
uity owners with minority interests). A plaintiff may also be better able to better manage risks and run a
company, assuming control, than a company with minority investors.

Although the points in this section may lend themselves to a lower discount rate and higher damages
figure that recognizes the unique value of an asset to its owner, many would argue that the intent of
compensatory damages is to award the plaintiff with a measure of damages that has been calculated us-
ing both objective and unbiased projected cash flow and discount rates, which would result in a value
that would be agreed to by a willing buyer and a willing seller.

fn 16 For example see, FactSet Mergerstat®/BVR Control Premium Study, 2009; FactSet Mergerstat, LLC; and Shannon P. Pratt, Busi-
ness Valuation Discounts and Premiums, 2d ed. (Wiley, 2009).

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