Roscoe-Gill v. Newman

• Decision Date: 19 December 1996
• Docket Number: CA-CV,No. 2,ROSCOE-GILL,T-L,2
• Citation: 937 P.2d 673,188 Ariz. 483
• Parties: , 232 Ariz. Adv. Rep. 22 Carolyn A., a married woman in her sole and separate right, Plaintiff/Appellant, v. Charles R. NEWMAN and Bonnie L. Newman, husband and wife;ink Ranches, Inc., a Nevada corporation, Defendants/Appellees. 96-0140.
• Court: Arizona Court of Appeals

Page 673

937 P.2d 673

188 Ariz. 483, 232 Ariz. Adv. Rep. 22

Carolyn A. ROSCOE-GILL, a married woman in her sole and separate right, Plaintiff/Appellant, v. Charles R. NEWMAN and Bonnie L. Newman, husband and wife; T-Link Ranches, Inc., a Nevada corporation, Defendants/Appellees.

No. 2 CA-CV 96-0140.

Court of Appeals of Arizona Division 2, Department A.

Dec. 19, 1996.

Review Denied June 5, 1997.

[188 Ariz. 484] Aboud & Aboud, P.C. by Michael J. Aboud, Tucson, for Plaintiff/Appellant.

Cochran & Dahl, P.C. by Jerry L. Cochran, Phoenix, for Defendants/Appellees.

OPINION

PELANDER, Presiding Judge.

The key issue in this case is whether a seller in a real estate sales transaction is bound by and limited to a liquidated damage provision in the parties' contract or instead may avoid the provision and recover from the buyer a greater amount of damages allegedly caused by the latter's breach. After granting summary judgment for the buyer on that issue, the trial court entered a stipulated judgment for the seller, plaintiff/appellant Carolyn Roscoe-Gill, in the amount of the liquidated damages specified in the contract. She appeals from that judgment. For the reasons stated below, we affirm.

We view the evidence and all reasonable inferences therefrom in the light most favorable to plaintiff. Angus Medical Co. v. Digital Equip. Corp., 173 Ariz. 159, 840 P.2d 1024 (App.1992). Plaintiff owned a ranch in Greenlee County, Arizona. In September 1994, she entered into a written agreement to sell the ranch to defendants/appellees, Charles Newman (Newman) and his wife, Bonnie. The agreement, which was drafted by plaintiff's attorney, provided for a $380,000 purchase price, $5,000 of which was to be paid as earnest money when escrow opened. The agreement contained the following liquidated damage provision:

DEFAULT BY BUYER. If Buyer defaults hereunder, actual damages to Seller will be difficult to calculate, but Buyer and Seller agree that the Earnest Money is a reasonable approximation thereof. Accordingly, if Buyer defaults, Seller may terminate this Agreement and Escrow Agent shall pay to Seller the Earnest Money.

On the initial closing date of November 2, 1994, Newman informed plaintiff and her attorney that he could not complete the purchase at that time because he had not received money expected from the sale of his farms in Mexico. Plaintiff and her attorney agreed to extend the closing date to December 7 and negotiated several conditions. The purchase price was increased to $404,000; Newman's corporation, defendant T-Link Ranches, was substituted as buyer; and Newman was to provide a caretaker and properly manage the ranch until the sale closed.

Defendants still were unable to close on December 7, and thereafter plaintiff agreed to extend the closing date two more times. Plaintiff and her attorney consented to and documented each extension in a written agreement. In none of the extensions did plaintiff obtain an agreement to increase the liquidated damages amount. After Newman failed to close on the final, extended date, January 30, 1995, plaintiff declared a breach and terminated the escrow in March 1995. Faced with a pending foreclosure and trustee's sale, plaintiff ultimately sold the ranch under financially pressured circumstances to a new purchaser for $260,000.

Plaintiff filed suit against defendants for breach of contract in April 1995, seeking damages exceeding $140,000. ¹ The parties filed cross-motions for summary judgment on the issue of whether the liquidated damages clause limited plaintiff's damages to the $5,000 earnest money deposit. The trial court granted defendants' motion and denied plaintiff's, ruling that "[i]f the liquidated damages clause was to be set aside during the period of extensions, that should have been expressed between the parties." The parties then stipulated to judgment for plaintiff in the amount of $5,000, and this appeal followed.

When liquidated damages are specified in a contract, the terms of the contract generally control. Davis v. Tucson Arizona Boys Choir Soc., 137 Ariz. 228, 233, 669 P.2d 1005, 1010 (App.1983); Roy H. Long Realty Co. v. Vanderkolk, 26 Ariz.App. 226, 228, 547 P.2d 497, 499 (1976). This court has previously noted that "[a] provision for the forfeiture of earnest money on breach of a contract to purchase real estate has been held a stipulation for liquidated damages." Lyons v. Philippart, 140 Ariz. 36, 38, 680 P.2d 172, 174 (App.1983). A contractual clause that fixes an unreasonably large sum of liquidated damages, however, is unenforceable because it is deemed to be a penalty. Restatement (Second) of Contracts § 356 (1981); Pima Sav. and Loan Ass'n v. Rampello, 168 Ariz. 297, 299, 812 P.2d 1115, 1117 (App.1991). Plaintiff contends that the liquidated damage amount provided in the subject contract is an unenforceable penalty because it is too low. She relies in part on comment a to § 356 of the Restatement, which provides that "[a] term that fixes an unreasonably small amount of damages may be unenforceable as unconscionable."

There are no Arizona cases directly on point. The Washington Supreme Court, however, has held that a seller in a real estate sales transaction cannot seek to avoid a contractual liquidated damages clause on grounds that it constitutes a penalty because it is too low. See Mahoney v. Tingley, 85 Wash.2d 95, 529 P.2d 1068 (1975). As that court stated:

A penalty exists where there is an attempt to enforce an obligation to pay a sum fixed by agreement of the parties as a punishment for the failure to fulfill some primary contractual obligation. In this case, it is not the party in default who seeks relief from an excessively high liquidated damages provision. Rather, the provision operates to limit the recovery of the party who incurred a loss as a result of the other parties' breach. There being no element of punishment involved, it cannot be said that plaintiff is being penalized in any sense.

85 Wash.2d at 98, 529 P.2d at 1070 (citations omitted). The court noted that, in making an earnest money agreement, the seller "can simply demand more protection--a larger deposit of earnest money--or even dispense with a liquidated damages provision altogether." Id. at 100, 529 P.2d at 1071. It then concluded that, in the absence of extraordinary circumstances such as fraud by the buyer, "a seller who chooses to utilize the device of liquidated damages in an earnest money agreement, with its attendant features of certainty and reliance upon the limitation, cannot avoid the effect of that agreement." Id.; cf. Margaret H. Wayne Trust v. Lipsky, 123 Idaho 253, 259, 846 P.2d 904, 910 (1993). See generally Linda A. Francis, Annotation, Provision in Land Contract for Liquidated Damages Upon Default of...