Co-Build Companies, Inc. v. Virgin Islands Refinery Corp., CO-BUILD

• Decision Date: 13 February 1978
• Docket Number: Nos. 77-1664 and 77-1743,CO-BUILD,s. 77-1664 and 77-1743
• Citation: 570 F.2d 492
• Parties: COMPANIES, INC., and Warren L. Trafton and Rogers P. Bressi, Christiansted, St. Croix v. VIRGIN ISLANDS REFINERY CORPORATION. Appeal of LATIMER & BUCK, INC., Co-Build Companies, Inc., Warren L. Trafton and Rogers P. Bressi.
• Court: U.S. Court of Appeals — Third Circuit

Page 492

570 F.2d 492

CO-BUILD COMPANIES, INC., and Warren L. Trafton and Rogers P. Bressi, Christiansted, St. Croix v. VIRGIN ISLANDS REFINERY CORPORATION Appeal of LATIMER & BUCK, INC., Co-Build Companies, Inc. Warren L. Trafton and Rogers P. Bressi.

Nos. 77-1664 and 77-1743.

United States Court of Appeals Third Circuit.

Argued Dec. 6, 1977.

Decided Feb. 13, 1978.

David M. Doret, H. Robert Fiebach, Wolf, Block, Schorr & Solis-Cohen, Philadelphia, Pa., for appellant, Latimer & Buck, Inc.

Stuart H. Savett, Kohn, Savett, Marion & Graf, P. C., Philadelphia, Pa., for appellant, Co-Build Companies, Inc.

David S. Mortensen, F. Anthony Mooney, Hale & Dorr, Boston, Mass., for appellants, Warren L. Trafton and Rogers P. Bressi.

John D. Merwin, Merwin, Alexander & O'Brien, Frederiksted, St. Croix, V. I., for appellee.

Before ADAMS, ROSENN and HUNTER, Circuit Judges.

OPINION OF THE COURT

ADAMS, Circuit Judge.

This appeal presents the question whether the trial court erred in determining that a liquidated damages provision in a sales contract pertaining to real estate in the Virgin Islands barred the recovery of actual damages by the seller when the buyer refused to go ahead with the transaction. We have concluded that it was not error in this case to limit the plaintiffs' recovery to the amount contemplated by the liquidated damages clause.

A.

Plaintiffs, Co-Build Companies, Inc. (Co-Build), Warren L. Trafton, and Rogers P. Bressi, agreed on April 10, 1974, to sell two parcels of land located on the island of St. Croix to defendant Virgin Islands Refinery Corporation (VIRCO). The first parcel of land consisted of 201.35 acres, and it was to be sold for $4,201,920, of which $315,000 was to be paid by the buyer as a deposit. ¹ The second parcel, totalling approximately 21 acres, was to cost $954,352, and was to be paid for at the closing. ²

Prior to the closing, which was to occur no later than November 15, 1974, the buyers delivered to the sellers a note for $315,000, the amount of the deposit. But the sale itself was never consummated. On November 18, 1974, the plaintiffs filed a complaint seeking specific performance, and on February 11, 1975, VIRCO filed a counterclaim for return of the deposit that had been paid to the plaintiffs. ³

The two parcels of real estate covered by the sales agreements were part of a larger tract subject to a first mortgage held by the Correa family. There was another lien on the property, namely, a second mortgage held by Latimer & Buck, Inc. On January 20, 1975, the Correa family declared the first mortgage to be in default and initiated foreclosure proceedings. It apparently had been the expectation of the sellers that the Correa mortgage would be satisfied by the purchase price paid to them by VIRCO. When VIRCO defaulted on the contracts and the Correa family sought to foreclose on the mortgage, Co-Build found it necessary to institute bankruptcy proceedings under Chapter XI of the Bankruptcy Act, and did so on February 28, 1975.

After the bankruptcy judge enjoined VIRCO from taking further action on its counterclaim against Co-Build, the District Court for the Virgin Islands, on May 5, 1975, stayed all proceedings in the case. More than one year later, on October 27, 1976, after the bankruptcy judge had issued an order providing that all matters in the action should be determined by the district court, the district judge lifted the stay. In its directive of October 27, 1976, the district court granted plaintiffs' motion for leave to proceed with pre-trial discovery. Additionally, it set the dates by which discovery was to terminate and the trial was to commence, and granted plaintiffs' motion to amend the complaint in order to substitute a prayer for monetary damages instead of the one for specific performance. ⁴

The substitution of a request for monetary relief in place of the one for specific performance was necessitated by the financial condition of plaintiffs, who had insufficient funds with which to retire the outstanding debt on the land in question, and thus were unable to tender the land free and clear of encumbrances in order to demand specific performance on the part of VIRCO. Consequently, the plaintiffs amended their complaint, and the defendants filed an answer in response to it.

Plaintiffs later moved for summary judgment with respect to the issue of liability. VIRCO sought summary judgment so as to limit the plaintiffs' recovery to liquidated damages in the amount of the deposit, relying on a paragraph in the sales agreements dealing with the deposit as liquidated damages. ⁵

After granting both parties' motions, the district court entered an order on behalf of plaintiffs for the sum stipulated as liquidated damages. Plaintiffs appealed the judgment that restricted their recovery to the amount set forth in the liquidated damages clause.

B.

The law applicable to the present dispute is that of the Virgin Islands, for the agreements in question arose in the Virgin Islands, the situs of the land covered by the agreements is located in the Virgin Islands, and the contracts entail no significant relationship outside of the Virgin Islands. However, our attention has been drawn to no case law of the courts of the Virgin Islands bearing on the particular subject of concern here.

When no precedents relate specifically to the adjudication of a Virgin Islands dispute, the courts are directed to turn to the various Restatements of Law, approved by the American Law Institute, which are to provide the rules of decision for such cases "in the absence of local laws to the contrary." ⁶ Thus, since the law of the Virgin Islands should be applied in the present case, and since there are no Virgin Islands' precedents which are directly applicable, we must look in the first instance at the relevant provisions in the Restatement of Law, Contracts.

§ 339(1) of the Restatement, which elaborates the governing principles regarding liquidated damages, provides:

(1) An agreement, made in advance of breach, fixing the damages therefor, is not enforceable as a contract and does not affect the damages recoverable for the breach, unless

(a) the amount so fixed is a reasonable forecast of just compensation for the harm that is caused by the breach, and

(b) the harm that is caused by the breach is one that is incapable or very difficult of accurate estimation.

The rule stated in § 339(1) is made applicable by § 340 to situations, such as the one here, involving liquidated damages. As § 340 provides:

A sum of money or other property deposited by a promisor as security for performance by him and against loss to the other party, to be forfeited in case of breach, may be either a penalty or liquidated damages in accordance with the rule stated in § 339(1).

The Restatement thus calls for a two-part inquiry. First, is the amount that is said to be liquidated damages a "reasonable forecast of just compensation"? Second, is the harm from the breach as viewed at the time that the contract is made, not at the time of breach ⁷ "incapable or very difficult of accurate estimation"?

As to the first point, the district court concluded that the sum retained by the plaintiffs was "a fair and reasonable estimate of the actual harm" that would be incurred by the plaintiffs in the event of a breach by the buyer. The trial judge noted that the funds deposited by VIRCO amounted to between 6 and 9% Of the total purchase price provided by the contracts of sale. This sum, said the district court, compares favorably with the figures accepted as reasonable by other courts dealing with real estate agreements.

With regard to the second point, relating to the harm that would result from the breach, the district court stressed that the plaintiffs simply did not make an issue of the matter. As the court wrote, "(p)laintiffs do not contest, and it is well settled, that the harm flowing from the breach of a real estate sales contract" is so difficult to ascertain in advance that the enforcement of a stipulated amount of damages contained in such a contract is justified. As support for its view, the district court referred to § 1064 of Corbin on Contracts (1964), where it is written:

The injury caused by breach of a contract for the conveyance of land is not capable of such reasonably exact measurement as to prevent enforcement of an advance agreement that is not unconscionable.

Accordingly, although the district court did not discuss the issue in detail, in the view of the trial judge, this case involves a transaction as to which a reasonably accurate total of the damages resulting from the breach would have been "incapable or very difficult" to estimate.

In their brief on appeal, the sellers contend that the analysis of the controversy here should not stop with a consideration of the precepts embodied in the Restatement of Law, Contracts, but also should encompass "such authorities as the court may find to be well reasoned on a common law approach." Consonant with this view, sellers refer to cases in a range of jurisdictions which, they maintain, compel a result different from that reached by the district court.

First, they argue that the presence in the contracts of a liquidated damages clause does not preclude an award of actual damages. This contention is said to rest upon the following three propositions embodied in the case law: (1) clauses providing for the forfeiture of funds paid to the seller by the buyer as liquidated damages are for the benefit of the seller; (2) the seller is to be given, as the sellers here phrase it, "the right to sue on the contract notwithstanding a clause which purports to restrict" its remedies to liquidated damages; and (3) the seller's right to sue on the contract will be eliminated only in exceptional cases.

The core of the sellers' argument is proposition (2): that sellers such as the plaintiffs may "sue on the contract " despite the presence of a clause...