Kelly v. Marx, 96-P-0114

• Citation: 694 N.E.2d 869,44 Mass.App.Ct. 825
• Decision Date: 21 May 1998
• Docket Number: No. 96-P-0114,96-P-0114
• Parties: John E. KELLY & another 1 v. Steven A. MARX & another. 2
• Court: Appeals Court of Massachusetts

Page 869

694 N.E.2d 869

44 Mass.App.Ct. 825

John E. KELLY & another ¹ v. Steven A. MARX & another. ²

No. 96-P-0114.

Appeals Court of Massachusetts,

Worcester.

Argued Dec. 3, 1997.

Decided May 21, 1998.

Howard E. Stempler, Worcester, for plaintiffs.

David J. Kneeland, Jr., Worcester, for defendants.

Before JACOBS, GILLERMAN and SPINA, JJ.

JACOBS, Justice.

The plaintiffs (buyers) essentially concede they repudiated their agreement to purchase real estate from the defendants (sellers). At issue is the buyers' right to recover a deposit made by them in conjunction with that purchase and sale agreement. ³ Acting on cross motions for summary judgment, a Superior Court judge ruled in favor of the sellers. We reverse and order the entry of a judgment requiring the return to the buyers of their $17,750 deposit.

The law's abhorrence of contractual penalties engenders no greater controversy than when it affects the enforcement of liquidated damages clauses contained in real estate purchase and sale agreements. A slim majority of jurisdictions, see appendix, appear to favor a "single look" approach, which tests the validity of such a clause only as of the time of contract. That view gives pragmatic deference to the bargain struck by the parties and in the words of Justice Holmes cautions courts "so far as precedent permits ... to enforce contracts according to their plain meaning and not to undertake to be wiser than the parties." Guerin v. Stacy, 175 Mass. 595, 597, 56 N.E. 892 (1900). Competing with that approach in an almost equal number of jurisdictions, see appendix, is that espoused by this court and requiring in some circumstances a "second look" as of the time of the breach to determine if the sum stipulated as liquidated damages is "unreasonably and grossly disproportionate to the real damages from a breach, or is unconscionably excessive." Shapiro v. Grinspoon, 27 Mass.App.Ct. 596, 603, 541 N.E.2d 359 (1989). As briefed, this case primarily raises questions as to the methodology for taking a "second look" and only incidentally as to the propriety of such an approach.

The pertinent undisputed facts are as follows. On March 18, 1994, the buyers signed an offer to purchase residential property in Worcester for $355,000 which soon thereafter was accepted by the sellers. By the first week of May, 1994, the parties entered into a purchase and sale agreement. The agreement acknowledged the deposit of $17,750 against a purchase price of $355,000 and provided for a closing "on or before" September 1, 1994. One of its clauses stated: "If the Buyer shall fail to fulfill the Buyer's agreements herein, all deposits made hereunder by the Buyer shall be retained by the Seller as liquidated damages." ⁴ By letter dated August 9, 1994, an attorney for the buyers authorized the sellers "to market the subject property for sale at this time." The letter also stated, "if no purchaser is found by September 1 and the [buyers] have procured a purchaser for their home ... they would still close as agreed." ⁵ There is no contention that the buyers were ready to purchase on September 1, 1994. On August 24, 1994, the sellers accepted an offer from a third party to buy the property for $360,000. The accepted offer states: "This agreement is contingent upon the Kellys not performing after which the seller [the Marxes] will be able to convey to offerer." Following the execution of a purchase and sale agreement on September 8, 1994, reciting a deposit of $18,000, the property was conveyed to the third party on September 20, 1994, for the recited consideration of $360,000.

In Shapiro v. Grinspoon, supra, this court determined that a liquidated damages provision in a real estate purchase and sale agreement is subject to two alternative tests. "[T]he judge should first determine whether the actual damages to the [sellers] are difficult to ascertain. If they are, in view of the reasonableness of the forecast of those damages, the liquidated damages provision should be enforced. If not, he should consider whether [the amount designated as liquidated damages] is so 'unreasonably and grossly disproportionate' to, or is 'unconscionably excessive' of, the actual damages caused by the breach so as to make the liquidated damages a penalty. Finally, if the judge determines that the liquidated damages provision is unenforceable, and that the [sellers'] losses exceed the difference between the contract price and the saleable value of the property at the time of breach, he should award to the defendants the amount of the actual damages." Id. at 605, 541 N.E.2d 359 (citation omitted). This formulation relied heavily upon the analysis of a liquidated damages provision in A-Z Servicenter, Inc. v. Segall, 334 Mass. 672, 675, 138 N.E.2d 266 (1956), a case involving an acceleration clause in a promissory note. Our court also found support in Restatement (Second) of Contracts § 356, comment b and illustration 4 (1981), ⁶ and adopted a rule which we opined was "consistent with compensatory damages principles, gives continued recognition ... to the validity of fair and freely bargained for liquidated damages provisions, preserves the power of the court to grant equitable relief on retrospective consideration, and provides a fixed and final point at which to measure damages." Shapiro v. Grinspoon, 27 Mass.App.Ct. at 604, 541 N.E.2d 359. The court also noted the decision in Colonial at Lynnfield, Inc. v. Sloan, 870 F.2d 761, 765 (1st Cir.1989), released four months earlier, where it was stated that the conclusion that a "liquidated damages provision was a reasonable estimate of difficult-to-ascertain damage at the time the parties agreed to it ... does not end our inquiry.... Massachusetts law clearly envisions a retrospective appraisal of a liquidated damages provision in certain circumstances. If the actual damages turn out to be 'easily ascertainable,' a court must consider whether the stipulated sum is 'unreasonably and grossly disproportionate to the real damages from a breach,' " quoting from A-Z Servicenter, Inc. v. Segall, supra at 675, 138 N.E.2d 266.

The "second look" approach enunciated in Shapiro v. Grinspoon is not lacking for critics, especially in the context of real estate agreements ⁷ where there is substantial economic purpose in permitting the parties to avoid litigation and to be secure in their determination of the monetary risk and compensation in the event of a default by the buyer. It is arguable that such considerations may well call for legislative remediation or for a departure from Shapiro v. Grinspoon, as advocated by the dissent. We believe, however, that the unusual circumstances with which we are confronted militate against any retreat from precedent in this action. We have here precisely the case envisioned by our court in an opinion strongly affirming the role of a liquidated damages provision as "a well established solution to the problems of expense and uncertainty in litigating the precise damages" caused by a breach of a real estate agreement, while, at the same time, acknowledging the possible exception to enforcement which might exist when "the house sold within days of the first buyer's default, at about the same price, and without complicating factors which make the actual damages difficult to calculate with precision." Lynch v. Andrew, 20 Mass.App.Ct. 623, 628, 481 N.E.2d 1383 (1985).

Were our inquiry limited to the circumstances obtaining at the time the parties entered into their agreement, we would permit the sellers to retain the deposit, amounting to five percent of the purchase price. Not only were the potential damages from a breach by the buyers, possibly occurring up to four months later, difficult to predict at the time of contracting, but the amount of the deposit (five percent of the purchase price) was within the ordinary range for a real estate purchase and sale agreement. See Schrenko v. Regnante, 27 Mass.App.Ct. 282, 284, 537 N.E.2d 1261 (1989) (recognizing a 4.4 percent liquidated damages clause as "routine" and reasonable); 1 Residential Real Estate Basics at 7 (MCLE 1996) (indicating that buyers often negotiate a five percent deposit); Mendler, Massachusetts Conveyancers' Handbook § 1:17 (3d ed.1984) (recommending that sellers obtain a ten percent deposit). As found by the judge, the clause, viewed at the time of its acceptance, "was objectively fair to both parties."

Under the Massachusetts approach, however, the inquiry must be further informed by a retrospective view taken "as of the time of the breach." Shapiro v. Grinspoon, 27 Mass.App.Ct. at 604, 541 N.E.2d 359. The judge undertook such a "second look," inferentially acknowledging that it encompasses the circumstances which follow the breach and includes expenses such as additional mortgage service costs, taxes, and legal fees. ⁸ He concluded that damages were "not difficult to ascertain" because there was "no evidence that the [sellers] incurred any actual damages." That conclusion appears to derive from the fact that the sellers, in their discovery responses and summary judgment submissions, did not attach a monetary figure to their claimed and quantifiable damages. ⁹ In the context of the parties' cross motions for summary judgment and the sellers' concession that there was no dispute of material fact, the failure to quantify these readily ascertainable damages supports the judge's conclusion that there is no proof of actual damages. In any event, even if the sellers had attached dollar amounts to their claims, the brevity of the period between the breach and the subsequent sale, coupled with the absence of evidence of a complicating factor such as a lost opportunity to the sellers to purchase substitute housing during that period, see Lynch v. Andrew, 20 Mass.App.Ct. at 627, 481 N.E.2d 1383, support the conclusion that damages are easily ascertainable.

It is when we turn, as did the judge, to the final question under the ...