Pima Sav. and Loan Ass'n v. Rampello, 2

• Decision Date: 30 April 1991
• Docket Number: No. 2,CA-CV,2
• Citation: 168 Ariz. 297,812 P.2d 1115
• Parties: PIMA SAVINGS AND LOAN ASSOCIATION, an Arizona corporation, Plaintiff/Appellee, v. John RAMPELLO and Nancy Rampello, husband and wife, Defendants/Appellants. 90-0179.
• Court: Arizona Court of Appeals

Page 1115

812 P.2d 1115

168 Ariz. 297

PIMA SAVINGS AND LOAN ASSOCIATION, an Arizona corporation, Plaintiff/Appellee, v. John RAMPELLO and Nancy Rampello, husband and wife, Defendants/Appellants.

No. 2 CA-CV 90-0179.

Court of Appeals of Arizona,

Division 2, Department B.

April 30, 1991.

[168 Ariz. 298] Waterfall, Economidis, Caldwell, Hanshaw & Villamana, P.C. by James W. Stuehringer, Tucson, for plaintiff/appellee.

Rosen & Friederich by Gayle D. Reay and Dennis A. Rosen, Tucson, for defendants/appellants.

OPINION

HOWARD, Presiding Judge.

This is an appeal from the granting of a partial summary judgment in favor of Pima Savings and Loan Association (Pima). ¹ Pima sued the Rampellos for breach of contract and for violation of A.R.S. § 12-671 (insufficient funds checks) which arose out of the Rampellos' contract with Pima to purchase 65 condominium units located in Bullhead City, Arizona. The facts leading up to this suit are as follows.

I.

On April 15, 1988, the Rampellos contracted to buy the Roadhaven Condominiums from Pima for $4.7 million with a $290,000 cash downpayment and the balance to be financed by purchase money loaned by Pima. John Rampello gave a $165,000 check as part of the downpayment.

The contract provided for liquidated damages as follows:

If the closing does not occur due to default of buyer, the parties agree that Pima shall be paid the sum of two hundred ninety thousand dollars ($290,000.00) as liquidated damages, which sum the parties agree is a reasonable sum considering all of the circumstances existing on the date of this agreement ...

The contract also gave the Rampellos through April 24, 1988, to review and inspect the condition of the real estate and the condition of its title, and made the sale contingent upon the Rampellos' approval by the end of April 24. If they did not give written notice of disapproval within the period, the contract provided that the Rampellos would be deemed to have approved.

John Rampello conducted his inspection of the premises one or two days prior to April 24, 1988. On April 29, he sent a $125,000 check for the balance of the downpayment. On May 20, 1988, well after the time set forth in the agreement, Rampello sent a letter rescinding the contract which Pima received on May 25, 1988. After it received the Rampellos' letter, Pima approved Rampello's loan. The checks that Pima had received from the Rampellos were returned due to insufficient funds and Pima demanded that they pay, as liquidated damages, the sum of $290,000 as set forth in the contract. This suit followed the Rampellos' refusal to pay.

Pima's motion for summary judgment was supported by the testimony of one its employees, Michael Foor, who had negotiated the agreement on Pima's behalf and who was responsible for calculating the liquidated damages that were set forth in the agreement. He testified as to the various factors he took into consideration in arriving at the figure of $290,000. Those factors which were considered difficult to estimate were: any loss of the opportunity to sell the property while it was in escrow, the effect of a failed sale on the market value of the property, the depreciation of the property until it is sold and the effect of such depreciation on market values, and potential hazards of ownership not fully covered by insurance. He also considered one or two factors which may not have been compensable damages; however, he did not assign any dollar value or percentage to any of the factors.

There was also evidence that one year before the Rampello agreement, Pima entered into an agreement with another buyer, New Age Investment (NAI), which provided for liquidated damages in the sum of $25,000. An affidavit presented by Pima stated that Pima's damages were $77,573.87, not including financing discounts, Pima's in-house administrative costs, and anticipated ongoing warranty expenses. Furthermore, the evidence was that, at the time of the motion for summary judgment, all but three of the units had been sold. Pima moved for summary judgment on its claim for liquidated damages, which was granted by the trial court.

The main issue in this case is whether the provision for liquidated damages constituted an unenforceable penalty. The Rampellos also contend that the previous contract with NAI raised an issue as to the reasonableness of the liquidated damage provision and that there was evidence that they rescinded the contract, thus precluding summary judgment in Pima's favor.

II.

The traditional role of liquidated damages provisions is to serve as an economical alternative to the costly and lengthy litigation involved in a conventional breach of contract action, and efforts by the contracting parties to avoid litigation and to equitably resolve potential conflicts through the mechanism of liquidated damages should be encouraged. Restatement (Second) of Contracts § 356, comment a (1981). However, the parties to a contract are not free to provide a penalty for its breach. The central objective behind the system of contract remedies is compensatory, not punitive. Punishment of a promisor for having broken his promise has no justification on either economic or other ground and a term providing such a penalty is unenforceable on the grounds of public policy. Id.

Whether a stipulation is for liquidated damages or a penalty is a question of law for the court. Marcam Mortgage Corp. v. Black, 686 P.2d 575 (Wyo.1984).

The test for whether a contract fixes a penalty or liquidated damages is whether payment is for a fixed amount or varies with the nature and extent of the breach, Miller Cattle Company v. Mattice, 38 Ariz. 180, 298 Pac. 640 (1931), which means that an agreement made in advance of a breach is a penalty unless both of two conditions are met. First, the amount fixed in the contract must be a reasonable forecast of just compensation for the harm that is caused by any breach. Second, the harm that is caused by any breach must be one that is incapable or very difficult of accurate estimation. Larson-Hegstrom & Associates, Inc. v. Jeffries, 145 Ariz. 329, 701 P.2d 587 (App.1985). ²

The difficulties of proof of loss are to be determined at the time the contract is made and not at the time of the breach. Hutchison v. Tompkins, 259 So.2d 129 (Fla.1972); Leeber v. Deltona Corp., 546 A.2d 452 (Me.1988). Furthermore, the amount fixed is reasonable to the extent that it approximates the loss anticipated at the time of the making of the contract, even though it may not approximate the actual loss. Restatement (Second) of Contracts § 356, comment b (1981). However, the amount retained upon a contract's breach will be considered a penalty if it is unreasonable. Marshall v....