Sutton v. Epperson

• Citation: 631 So.2d 832
• Parties: Harold S. SUTTON, M.D. v. Roy T. EPPERSON, Sr., et al. 1920737.
• Decision Date: 29 October 1993
• Court: Alabama Supreme Court

Page 832

631 So.2d 832

Harold S. SUTTON, M.D. v. Roy T. EPPERSON, Sr., et al.

1920737.

Supreme Court of Alabama.

Oct. 29, 1993.

Rehearing Denied Dec. 22, 1993.

James W. Webb, Daryl L. Masters and Bart Harmon of Webb & Eley, P.C., Montgomery, for appellant.

Donna L. Knotts of Parnell, Crum & Anderson, P.A., and Frank M. Wilson and James Allen Main of Beasley, Wilson, Allen, Main & Crow, P.C., Montgomery, for appellees.

SHORES, Justice.

We granted permission, pursuant to Rule 5, Ala.R.App.P., to appeal from a partial summary judgment entered for the defendant sellers in an action based on a contract for the sale of corporate stock. The judgment held that, as a matter of law, a liquidated damages clause in the agreement was a penalty and therefore void as against public policy. We reverse and remand.

The material facts are not disputed. Harold S. Sutton, M.D., and Roy T. Epperson, Sr., were the largest stockholders of Old Southern Life Insurance Company. Mr. Epperson Sr. was the chairman and chief executive officer of Old Southern Life for more than 25 years. Roy T. Epperson, Jr., was an officer in the corporation. Sutton had become dissatisfied with Epperson Sr.'s management of the closely held company and had caused a special meeting of the board of directors to be called for September 9, 1989. At that meeting, the board of directors voted to remove Epperson Sr. from further management of the company.

Epperson Sr. approached Sutton shortly after being ousted from his management position with the company with an offer either to buy Sutton's shares or to sell Sutton the Epperson family's shares for $2,000,000.

Sutton agreed to purchase the Eppersons' stock in Old Southern Life Insurance Company for $1,750,000. The Epperson stock was held in the names of various family members. Some shares were held in the name of Roy Epperson, Sr.; some were held in the name of his wife, Barbara Epperson; some in the name of Roy Epperson, Sr. or Roy Epperson, Jr.; still other shares were held in the joint names of Epperson Sr. and Epperson Jr.

Sutton retained a lawyer to draft a stock purchase agreement. The Eppersons were also represented by counsel. The stock purchase agreement was drafted by Sutton's lawyer and reviewed by the Eppersons' lawyer, who made several revisions, some of which were included in the contract. No objection was made to the liquidated damages provision. The agreement provided that Sutton was to purchase 247,261 shares from the Eppersons for $1,750,000, to be paid in yearly installments of $350,000, interest free. The agreement provided for Sutton to pay a $50,000 binder to the Eppersons at closing, the binder to be deducted from the first installment. The liquidated damages clause at issue is as follows:

"12. If for any reason the Eppersons' title to the stock of Old Southern Life Insurance Company is found to be non-merchantable or if this transaction is disapproved by the Commissioner of Insurance, the binder shall be refunded to Sutton and this contract shall terminate. If the Eppersons' title is merchantable, the agreement is approved by the Commissioner of Insurance of the State of Alabama, and Sutton fails or refuses to consummate the sale within the period allowed, the binder shall be retained by Eppersons as liquidated damages for the breach of this contract."

Sutton delivered his check in the amount of $50,000 to Epperson Sr. on March 9, 1990. On April 25, 1990, the date set for consummation of the sales agreement, the parties met to consummate the transaction. However, Epperson Jr., joint owner of some of the shares of stock with Epperson Sr., was not present and did not sign the escrow agreement signed by the remainder of the parties to the contract; nor did Epperson Jr. execute a stock transfer covering the shares held jointly with his father. All of the parties agree that the April 25th meeting was not a closing and could not have been because Epperson Jr. had not signed an irrevocable stock transfer. The next day, April 26, 1990, Sutton learned for the first time that the financial condition of Old Southern had significantly deteriorated. He was advised that Old Southern's new financial statement would show a loss of approximately $2 million and that the company was possibly insolvent. He immediately informed the Eppersons that he was withdrawing his offer and would not complete the purchase. The Eppersons negotiated Sutton's check for $50,000.

On May 25, 1990, the Eppersons sued Sutton, seeking damages for breach of the contract to buy their shares of stock in Old Southern. Sutton answered, raising the liquidated damages provision as a limitation on damages for the breach of contract. Both sides moved for summary judgment, and, after argument and briefs, the trial court entered a partial summary judgment in favor of the Eppersons, holding that the liquidated damages provision of the contract was punitive and therefore void as contrary to public policy. The trial court certified the issue as a controlling issue of law for purposes of Rule 5, Ala.R.App.P., and we granted permission to appeal under that rule.

The sole issue before this Court is whether the liquidated damages clause is a penalty and therefore void as against public policy.

At common law, courts refused to enforce a penalty set out in a contract, but did enforce pre-breach stipulations as to damages, but it was often difficult to distinguish between the two. "Was the sum ... expressed in the contract ... stipulated damages, or was it a mere penalty? Few questions in the law-books are more difficult of satisfactory solution, than [this] one...." McPherson v. Robertson, 82 Ala. 459, 462, 2 So. 333, 334 (1887).

In all of the other cases that have reached this Court, the breaching party has sought to escape the application of a liquidated damages provision by claiming that the provision was excessive and punitive. This is the first case in which the provision has been defended by the party who is obligated to pay the specified amount, and attacked as void by the party who is entitled to the payment. Here, the Eppersons have not offered to return the $50,000 stated in the contract to be liquidated damages in case of a breach by Sutton, but seek, in addition to the $50,000 that they have retained, additional damages from Sutton for his failure to perform under the agreement to purchase their stock. They also retain title to the shares of stock.

It is difficult to conclude that either party is being punished by this contractual provision so that it becomes a prohibited penalty under our cases. We have recently defined a penalty in this context to mean "a security for performance designed to punish one party for breach of contract." Milton Construction Co. v. State Highway Dep't, 568 So.2d 784, 790 (Ala.1990). Refusal to enforce penalty provisions in contracts dates back to medieval England, where the equity courts designed the rule to "prevent over-reaching" in oppressive and unfair contracts, Dobbs, Law of Remedies § 12(9) p. 246 (2d ed. 1993), and Corbin on Contracts § 1056 (1964), particularly contracts containing penal bonds executed between lenders and debtors whose bargaining powers were highly disproportionate, the debtor frequently being uneducated and unsophisticated. Scholars frequently question the application of the rule in present-day commercial activities, particularly where the parties, as here, are represented by outstanding legal counsel and are, themselves, sophisticated businessmen. Dobbs, supra, at 246. "When two sophisticated par...