Illingworth v. Bushong

• Citation: 688 P.2d 379,297 Or. 675
• Parties: , 39 UCC Rep.Serv. 903 Robert A. ILLINGWORTH, Respondent on Review, v. Charles R. BUSHONG, Ruby Bushong, and George Chick Iverson, Petitioners on Review. TC 80-108-L, CA A20104, SC 29315. . *
• Decision Date: 23 October 1984
• Court: Supreme Court of Oregon

Page 379

688 P.2d 379

297 Or. 675, 39 UCC Rep.Serv. 903

Robert A. ILLINGWORTH, Respondent on Review, v. Charles R. BUSHONG, Ruby Bushong, and George Chick Iverson Petitioners on Review.

TC 80-108-L, CA A20104, SC 29315.

Supreme Court of Oregon In Banc. ^*

Argued and Submitted June 6, 1983.

Reassigned November 29, 1983.

Decided Sept. 5, 1984.

Rehearing Denied Oct. 23, 1984.

Walter L. Cauble, Grants Pass, argued the cause for petitioners on review. With him on briefs was Schultz, Salisbury & Cauble, Grants Pass.

Patrick G. Huycke, Medford, argued the cause and filed briefs for respondent on review.

LENT, Justice.

The narrow issue is whether the trial court erred in deciding that a forfeiture clause in an earnest money agreement was not a valid liquidated damages provision. We hold that there was no error in that respect. The broader question addressed in this opinion is how the validity of such clauses is to be tested.

Undisputed Facts

Defendants owned a 373 acre ranch, which they listed for sale in July, 1978. Plaintiff viewed the property in August and on September 8 entered into an earnest money agreement to purchase the ranch for $490,000. That writing provided for an earnest money deposit of $50,000, of which $30,000 was paid at that time, and an additional $20,000 was to be paid on October 10. Plaintiff paid the additional earnest money.

The initial writing provided that closing was to occur on November 10, at which time another $124,000 was to be paid, and the defendants were to carry the balance on a contract. In mid October an addendum was added to the initial writing, extending the closing date to December 12. Plaintiff was unable to perform on that date.

The basic part of the earnest money agreement was on a printed form copyrighted by the Oregon Association of Realtors and, in this instance, supplied by the listing broker and salesman. A part of the printed portion was entitled "FORFEITURE PROVISIONS" and, in pertinent part, was as follows:

" * * * If the said sale is approved by the seller and title to said premises is marketable, and the purchaser neglects or refuses to comply with any conditions of sale within ten (10) days from the furnishing of a preliminary title report, or make payments promptly as set forth on the reverse side hereof, then the earnest money and additional earnest money receipted for on the reverse side hereof shall be forfeited, the cost of title insurance, escrow and attorney fees paid, and the remainder divided as provided on the reverse side hereof under Sellers [sic] closing instructions and fee agreement between the seller and the REALTOR to the extent of the agreed upon fee, and the residue, if any, paid to the seller as liquidated damages and this contract shall thereupon be of no further binding effect, or at his option, seller may seek damages or specific performance of this contract."

When plaintiff was unable to perform on December 12, defendants advised him that they would not return the earnest money. The entire $50,000 earnest money, which had been deposited with a local title company, was released to defendants on December 13.

While the foregoing events were taking place, two other prospective purchasers had made offers to buy the ranch, but both offers had been withdrawn prior to plaintiff's failure to perform on December 12. One of those purchasers made a new offer in a writing dated December 13, and that offer was accepted by defendants on December 30. That sale closed January 25 1979, for the same purchase price as the sale to plaintiff would have been, but with a higher down payment.

Plaintiff demanded return of the $50,000. Defendants refused to comply with the demand. Plaintiff then commenced this cause to recover that sum.

Proceedings in the Trial Court

The key issue was whether the above-quoted FORFEITURE PROVISION was valid as being a clause for liquidated damages or invalid as being a penalty for nonperformance. The parties waived a jury, and the trial court decided that the clause was unenforceable. The trial court decided that defendants had suffered actual damages as a result of plaintiff's breach in the amount of $6,500, and awarded plaintiff judgment for $43,500. ¹ As a predicate for judgment for plaintiff, the trial court made findings from the bench at the close of the trial: ²

"THE COURT: Well, I'm going to, as I indicate, decide this case from the bench. It's been requested I make findings. I'm going to try because of the amount of money involved. I think this case has every likelihood of appeal. I'm going to try to specifically show what I find as a finding and what I'm using as a conclusion.

"* * *

"I find that there's no question that the Plaintiff knew that there was a forfeiture clause. I find that the failure of the sale was entirely due to the buyer. Any changes because of this contract were minor or non-existent and were not--the reason that the contract, that the sale didn't go through, it was totally due to the buyer not having the money and not being able to come up with it. The question then comes as to whether this is a forfeiture or whether it's liquidated damages. It's my feeling it's a penalty. This is a point upon where we get to the question of law which is as I say, can be corrected on appeal if necessary.

"It is difficult perhaps to anticipate or to make an effort to find what the reasonable relationship of the stipulated amount bears to the actual damages. This means difficulty due to anticipating, not mechanical difficulty. Much has been made of the fact that it costs $50,000 a year to operate the ranch. That was not considered at that time. We heard the $50,000 a year to operate the ranch actually for the first time in the trial. That $50,000 a year was not broken down and the testimony was also that it included mortgage payments. We know that mortgage payments, part of them are capital. There was attempt to break down the actual operating costs. There was discussion of this. The evidence seems pretty clear that it was just a 10 percent rule of thumb because this is the way the state did it and this was custom. I don't think the question of backup buyers or not backup buyers are important, per se, except as to whether this could be reasonably anticipated if they were seriously considering actual damages." Proceedings in the Court of Appeals

On appeal the defendants contended that the trial court had erred in holding that, "as a matter of law," the liquidated damages provision was a "penalty" and not an enforceable provision. They further contended that there was no evidence ³ to support the trial court's findings of fact:

(1) That the clause was a "penalty."

(2) That the figure of $50,000 as the yearly cost of operating the ranch was not considered at the time of making the contract.

(3) That the dollar figure chosen ($50,000) was just a 10% (of the purchase price) rule of thumb for earnest money and was the figure used by the state in its land dealings and that 10% was "custom."

The Court of Appeals first stated what it would take as the governing rules of law as they appear from two of our fairly recent decisions and one of that court's own decisions:

"A contract provision for liquidated damages is valid if it is designed to provide just compensation for the injured party in the event of a breach; if it goes beyond just compensation, however, it is unenforceable as a penalty. Wright v. Schutt Construction, 262 Or. 619, 623, 500 P.2d 1045 (1972). The test is whether:

" '(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.' 262 Or. at 623 , quoting Restatement of Contracts § 339(1) (1932).

"To satisfy the first requirement, there must be a genuine pre-estimate of the injury; that is, the parties must make an honest and good faith effort to arrive at an accurate estimate. Dean Vincent, Inc. v. McDonough, 281 Or. 239, 246, 574 P.2d 1096 (1978). A showing that the liquidated damages are 'grossly disproportionate' to actual damages is evidence that the estimate was not reasonable. 281 Or. at 246 . The burden of proof, however, is on the party who seeks to avoid the clause. 281 Or. at 249 . The question is for the trier of fact, unless reasonable minds could not disagree as to the facts and the conclusions to be drawn from them. Foster v. Peterson, 42 Or App 249, 258, 600 P2d 490 (1979)."

61 Or.App. at 155, 656 P.2d 370.

The Court of Appeals then found there was substantial evidence to support the trial court's findings of fact resulting in the trial court's ruling that the clause was for a penalty:

"Here, the trial court specifically found that there was not a genuine pre-estimate of the damage that defendants would suffer should plaintiff fail to perform; rather, the amount of damages was selected on the basis of a rule of thumb that an earnest money deposit should represent 10 percent of the purchase price. There was substantial evidence in the record to support this determination, including defendants' inability, at deposition before trial, to state the amount of their monthly expenses in operating the ranch and the fact that their actual damages were, as the evidence showed, grossly disproportionate to the proposed liquidated damages. The trial court did not err in refusing to enforce the liquidated damages clause." (Footnotes omitted.)

61 Or.App. 155-56, 656 P.2d 370.

Review of Decisions of this Court

We allowed the defendants' petition for review because of apparent ambiguity, if not confusion, in our pronouncements of the law applicable to this kind of case.

"Because of clashing precedent, it has become difficult to predict the result in any close case on the validity of a stipulated damages provision. The outcome often depends upon which set of conflicting rules the court chooses to follow; and...