North American Consol., Inc. v. Kopka

• Decision Date: 12 September 1986
• Docket Number: Civ. A. No. 86-0932-Y.
• Parties: NORTH AMERICAN CONSOLIDATED, INC., Plaintiff, v. John S. KOPKA, III, Defendant.
• Court: U.S. District Court — District of Massachusetts

644 F. Supp. 191

NORTH AMERICAN CONSOLIDATED, INC., Plaintiff, v. John S. KOPKA, III, Defendant.

Civ. A. No. 86-0932-Y.

United States District Court, D. Massachusetts.

September 12, 1986.

John O. Mirick, Mirick, O'Connell, Demallie & Lougee, Worcester, Mass., for plaintiff.

Thomas F. Maffei, Edward H. Seksay, Choate, Hall & Stewart, Boston, Mass., for defendant.

MEMORANDUM AND ORDER

YOUNG, District Judge.

This action arises out of the alleged breach of a contract for the purchase and sale of a hotel in Gardner, Massachusetts. Jurisdiction exists under 28 U.S.C. § 1332. By the terms of the purchase and sale agreement the law governing its interpretation and the rights and obligations of the parties thereunder is that of the Commonwealth of Massachusetts.

The plaintiff-seller, North American Consolidated, Inc. ("North American") brought suit in the Superior Court of the Commonwealth of Massachusetts against the defendant-purchaser, John S. Kopka III ("Kopka") in three counts seeking, in the alternative, 1) specific performance of the agreement (Count I); 2) actual damage of $1,000,000 and punitive damages for unfair and deceptive business practices, Mass. Gen.Laws c. 93A, § 11 (Count II); and 3) enforcement of the liquidated damages provision of the agreement (Count III). Removed to the federal district court, the case is before the Court on the defendant's motion, pursuant to Fed.R.Civ.P. 12(b)(6), to dismiss Counts I and II on the theory that, even if there was a breach, the liquidated damages provision constitutes the plaintiff's exclusive remedy and claims for specific performance or damages are therefore barred.

For the purposes of resolving the pending motion, the following factual outline may be taken as true. On January 23, 1986, North American and Kopka entered into an agreement for the purchase and sale of the Heritage Place Inn in Gardner, Massachusetts for the sum of $5,350,000. Kopka paid a deposit of $200,000 which, by the terms of the agreement, was the amount to become the property of North American as liquidated damages in the event of default by Kopka. The relevant provision, entitled "Liquidated Damages," provides that:

If the buyer shall default in the performance of its obligation under this agreement, the amount of the deposit shall become the property of the seller as liquidated damages and neither party hereto shall have any further obligations hereunder.

It is undisputed that, prior to the closing date set for March 1, 1986, Kopka informed North American that he would not purchase the property. In dispute are the reasons for Kopka's decision and whether, in light of the financing provisions of the agreement, Kopka's failure to go through with the purchase was a valid rescission entitling him to return of the deposit or whether, instead, he is in default and therefore liable to North American. These issues are not before the Court. The sole issue at this stage of the proceedings is whether North American's claims for specific performance and damages under Mass.Gen.Laws c. 93A are precluded because the liquidated damages clause provides an exclusive remedy.

For the reasons which follow, the Court rules that neither claim is barred and defendant's motion to dismiss is DENIED as to both Counts I and II.

Specific Performance

In his supporting memoranda, Kopka advances two basic arguments which will be discussed in order. The first, in essence, is an argument that since the liquidated damages provision is valid and enforceable it should therefore preclude claims for any other remedy. Kopka relies primarily upon Lynch v. Andrews, 20 Mass.App.Ct. 623, 481 N.E.2d 1383 further rev. denied, 396 Mass. 1101, 484 N.E.2d 102 (1985), for the proposition that the "common Massachusetts practice is to include liquidated damages provision sic in purchase and sale agreements as the parties' exclusive remedy in the event of default." Defendant's Response to Plaintiff's Opposition to Motion to Dismiss at 2. In making this assertion, however, it appears that Kopka has grafted onto the Lynch holding and reasoning a notion of exclusivity of remedy which is unsupported. In Lynch, the issue was whether the seller, where the buyer was found to have defaulted, was entitled to retain the buyer's deposit as liquidated damages as an alternative option to specific performance, or whether the sum of money in question was so disproportionate to the losses experienced as to constitute a penalty. No claim was made that specific performance was barred nor did the Massachusetts Appeals Court address the issue. Whether the liquidated damages provision in the instant case is enforceable may become an issue at a later stage of these proceedings; at present it is immaterial.

Under Massachusetts law, and generally, it is well settled that a liquidated damages provision "does not necessarily exclude specific performance." De Blois v. Boylston & Tremont Corp., 281 Mass. 498, 518, 183 N.E. 823 (1933). "The question is to be determined according to the intent of the parties." Id. at 518, 183 N.E. 823. Where the intent of the parties is that the liquidated damages provision is security for the performance of the contract rather than an alternative to performance, specific performance is not barred. Rigs v. Sokol, 318 Mass. 337, 342-343, 61 N.E.2d 538 (1945). The rationale for these widely accepted principles is that:

A contract provision for payment of a sum of money as damages may not afford an adequate remedy even though it is valid as one for liquidated damages and not a penalty (§ 356). Merely by providing for liquidated damages, the parties are not taken to have fixed a sum for the privilege not to perform. The same uncertainty as to the loss caused that argues for the enforceability of the provision may also argue for the inadequacy of the remedy it provides. Such a provision does not, therefore, preclude the granting of specific performance or an injunction if that relief would otherwise be granted.

3 Restatement Contracts 2d, § 361, comment a (1982); See also Novelty Bias Binding Co. v. Shevrin, 342 Mass. 714, 175 N.E.2d 374 (1961); 71 Am.Jr.2d Specific Performance §§ 57-59 (1973).

The second prong of Kopka's argument is more directly germane to the key issue here — the parties' intent. Kopka argues that the language in the liquidated damages provision which provides that "neither party hereto shall have any further obligations hereunder" is a clear statement of intent to waive all other remedies. He concludes that this language is so unambiguous that this Court must hold, as matter of law, that the liquidated damages provision was intended as an exclusive remedy or a true alternative performance. "Although parties who merely provide for liquidated damages are not taken to have fixed a price for the privilege not to perform, there is no reason why parties may not fix such a price if they so choose." 3 Restatement Contracts 2d, § 361, comment b (1982).

While nothing prohibits parties from electing to include a provision for alternative performance in the form of liquidated damages, the inquiry remains one of the parties' intent, to be deduced from the whole instrument and the surrounding circumstances. A motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) may be granted only if North American could prove no set of facts which would entitle it to the requested relief. Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).

The parties do not cite any Massachusetts case which addresses the issue of the effect of language such as that of the liquidated damages provision at issue here, and this Court is not aware of any such case. Courts of other jurisdictions which have faced this issue have concluded that, in order for a liquidated damages provision to bar suit for specific performance, the intent of the parties to provide an exclusive remedy must be explicit. In Miller v. U.S. Naval Institute, 47 Md.App. 426, 423 A.2d 283 (1980), the Court of Special Appeals of Maryland reversed the lower court's grant of a motion to dismiss. There, the defendant/appellee had similarly argued that, even assuming a breach, specific performance was precluded since the contract contained a liquidated damages provision designed to constitute the plaintiff's sole remedy.¹ In reversing the decision of the lower court, the Maryland Court of Special Appeals held that the language cited here did not evince a clear expression of intent to relinquish rights to specific performance. The Court also noted that a rule requiring explicit relinquishment is especially warranted with contracts for the sale of real property where, when breached, specific performance is often the only adequate remedy. See also Rubenstein v. Rubenstein, 23 N.Y.2d 293, 296 N.Y.S.2d 354, 244 N.E.2d 49 (1968).

This Court finds the reasoning of the Miller Court highly persuasive. The "no further obligations" language relied upon here is no more explicit than that in Miller. This Court likewise rules that the...