Wallace Real Estate Inv., Inc. v. Groves

• Decision Date: 31 January 1994
• Docket Number: No. 31254-5-I,31254-5-I
• Citation: 72 Wn.App. 759,868 P.2d 149
• Court: Washington Court of Appeals
• Parties: WALLACE REAL ESTATE INVESTMENT, INC., a Washington corporation, Appellant, v. Joanna C. GROVES and James L. Groves, a marital community; Charles R. Siler and Jane Doe Siler, a marital community; James R. Siler and Jane Doe Siler, a marital community; Respondents.

Page 759

72 Wn.App. 759

868 P.2d 149

WALLACE REAL ESTATE INVESTMENT, INC., a Washington corporation, Appellant, v. Joanna C. GROVES and James L. Groves, a marital community Charles R. Siler and Jane Doe Siler, a marital community; James R. Siler and Jane Doe Siler, a marital community Respondents.

No. 31254-5-I.

Court of Appeals of Washington Division 1.

Jan. 31, 1994.

Review Granted May 12, 1994.

Harold Chesnin and Mathews Garlington--Mathews & Chesnin, Seattle, for appellant.

Steven Philip Michael, Everett, for respondents.

PEKELIS, Acting Chief Judge.

Wallace Real Estate Investment, Inc. (Wallace) appeals the dismissal of its claim for the refund of $260,000 in earnest money and extension payments retained as liquidated damages under a real estate purchase and sale agreement. We affirm.

I

On August 1, 1989, Roddy Cox, Wallace's assignor, and Joanna Groves, James Siler, and Charles Siler ("the sellers") executed a real estate purchase and sale agreement and first addendum whereby Cox agreed to pay $1,520,000 for 10 acres of undeveloped property located in Snohomish County, Washington.

The sellers and Cox, the assignor-purchaser, negotiated the purchase price. At the time of contracting, property values were escalating and were in considerable flux. With this in mind, the sellers established the purchase price to encourage a quick cash sale. ¹

The agreement and first addendum required a $20,000 earnest money deposit. A standard form liquidated damages provision applied to the deposit:

DEFAULT AND ATTORNEY FEES

In the event of default by Buyer, Seller shall have the election to retain the earnest money as liquidated damages, or to institute suit to enforce any rights Seller has. In the event that either the Buyer, Seller, or Agent shall institute suit to enforce any rights hereunder, the successful party shall be entitled to court costs and a reasonable attorney's fee. In the event of trial, the amount of the attorney's fee shall be as fixed by the court....

The first addendum provided for 12 monthly extension periods and required a $15,000 payment for each extension. Although the first addendum did not specifically mention liquidated damages, paragraph 7 stated: "The $20,000 deposit and subsequent extention [sic ] payments are non-refundable...."

The sellers sought the extension payments as compensation for the delay in closing. Specifically, the $15,000 amount represented the lost investment value of the purchase price, calculated at 12 percent simple interest of the $1,520,000 purchase price.

Although Cox was the initial purchaser, he negotiated the agreement with the intention of assigning his interest to Wallace, which he did in September 1989. During the negotiation process, Cox consulted with William Wallace, the president of Wallace Real Estate Investment, Inc., about the sellers' objectives and terms, including the purpose of the extension payments.

In a January 29, 1990, letter to Wallace, Joanna Groves explained the purpose of the $15,000 extension payments: "The payments, as you know, represent the appreciation in value that we estimated was being lost for the period of time we were to hold the property for the purchaser."

After the last $15,000 extension payment, the parties negotiated a second addendum to the purchase and sale agreement. During the negotiations, Wallace and the sellers exchanged at least three versions of the second addendum before Cox and the sellers actually executed the final version on September 19, 1990. The second addendum provided for two $30,000 extension payments for October and November 1990 and established December 17, 1990, as the new closing date. William Wallace countersigned the second addendum.

The non-standardized liquidated damages provision to the second addendum provided:

Liquidated damages: The parties hereto agree that in the event Buyer or its assign fails to comply with the terms of this Agreement, as amended and compromised, Seller shall retain all payments made to date (earnest money and extension payments) as liquidated damages and not as penalty, in order to indemnify the Seller against loss as a result of breach of this agreement. It is agreed that damages that result to Seller include: freezing the purchase price at a time when real estate land values were escalating at unprecedented rates; compensating seller for holding the property off the market and losing the time value of its property were the property liquidated and funds invested; lost opportunity for larger profits; and related costs. Sellers and Buyer, and its assign, recognize a general measure of the damages to Seller is represented by the earnest money and extension payments. It is further agreed that the damages that may result from a breach of this agreement are uncertain and difficult to ascertain any more than Seller and Buyer have done, and that the agreed amount is a reasonable estimate of the probable damages to Seller. ²

(Emphasis added).

On December 13, 1990, William Wallace wrote to the sellers seeking to extend the closing, stating:

I am prepared to close with all the sellers on the same date. This would have been done on December 17, 1990 had not (i) the Phase I sellers unexpectedly demanded a January closing, and (ii) Cox's attempts to prevent my closings unless I pay him more money than he had agreed to.... I request a new agreement with everyone to close on or about January 7, 1991.

The sellers refused and, in a December 14, 1990, letter, informed Wallace that they were prepared to close as scheduled on December 17, 1990.

On December 17, 1990, Joanna Groves and Charles Siler attended the closing, however, James Siler could not attend due to a back injury. William Wallace did not attend. Despite Wallace's failure to attend, Joanna Groves express mailed the deed and closing papers to James Siler in order to complete the closing. ³ On December 20, 1990, Siler returned the closing documents to Joanna Groves, who then delivered them to Tyee Escrow on December 21, 1990.

On December 24, 1990, Tyee Escrow received the sellers' Notice of Cancellation, which they had executed on December 21, 1990. The sellers then retained the $260,000 in earnest money and extension payments as liquidated damages.

Wallace filed suit alleging breach of contract and seeking specific performance. These claims were dismissed upon sellers' summary judgment motion. However, the validity of Wallace's claim for the $260,000 of earnest money and extension payments was reserved for trial.

At trial, Dr. Eugene Silberberg, a University of Washington economics professor, testified to the reasonableness of the $15,000 extension payments. He opined that the $15,000 amount per payment based on 12 percent interest wasreasonable because, at minimum, a lender would charge 12 percent interest to finance a project similar to that planned by Wallace. In addition, Silberberg stated that Wallace's willingness to pay 13 percent interest on a loan to cover the extension payments further indicated the reasonableness of the $15,000 amount.

Following the bench trial, the trial court made the following unchallenged findings of fact: the purchase price "was a compromise figure largely motivated by consideration of the sellers receiving the purchase price in cash through an early closing." Furthermore, the terms were intended to encourage a "quick sale" and closing and to compensate the sellers for any delay in closing.

As to the $15,000 extension payments, the court found:

For every thirty days closing was delayed the buyer and sellers agreed a reasonable interest value was fifteen thousand dollars per month, an amount suggested by the buyer, Mr. Cox. Although the contract does not so designate the payment as interest, the buyer, Mr. Cox, and the sellers understood that was the price for the extension of the delay in closing, which was rationally based upon what the buyer and sellers perceived any delay would actually cost the sellers. Mr. Cox was a credible, forthright witness, who amply supports that finding.

The buyer and sellers calculated the cost of the delay in closing based upon 12 percent simple interest on the investment value not realized. The interest component was contemplated to represent the cost to the sellers of holding the property off the market.

(Emphasis added).

The court further found that Mr. Cox, as purchaser, and the sellers "freely negotiated and accepted the extension payment amount as a reasonable amount with a rational basis, as a component of the initial transaction ..."

The court found that Joanna Groves' January 29, 1990, letter to Wallace "was not inconsistent with the settling with Mr. Cox to have the extension payments represent interest on the unrealized return of the asset."

As to the $30,000 extension payments, the court found:

With respect to the two $30,000.00 payments made for extensions in October and November 1990, $15,000.00 of each payment constituted a penalty, because nothing had changed from before with respect to the previous interest rationale. The first $15,000 still represented the loss of access to the purchase money. The second $15,000 per month was a reasonable penalty under the circumstances.

With respect to Wallace's performance on December 17, 1990, the final closing date, the court found:

The plaintiff by letter to the sellers dated December 13, 1990 [Exhibit 49], clearly stated he was not going to perform on December 17, 1990. He made no suggestion that he had the money and was ready to perform, or that he would attend closing.

Everything in the defendants' history of their dealing with the plaintiff supported the conclusion that when he said he was not going to be there with the purchase monies of approximately one million five hundred thousand dollars, he was not going to be there to perform.

With respect to the sellers' performance, the court found:

Mr. James Ronald Siler, who resided in the State of Oregon, was...