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Muniz v. Miller

A-6865-00T5, 2003 WL 21686057 (N.J. Super. App. Div. 2003)

CONTRACTS; DAMAGES — If, at the time of contracting, no one could have predicted actual damages but the suffering of damages upon a breach was certain, liquidated damages can be an appropriate remedy.

A buyer and a seller entered into a contract for the purchase of a unique house for $4,600,000. A ten percent deposit was paid by the buyer. The contract, which was reviewed the parties’ attorneys, contained a liquidated damages clause. It provided that the if the buyer failed to close title in accordance with the contract, the deposit was to be paid to the seller as liquidated damages. It also provided an alternative whereby the seller could “commence an action for damages it has suffered, and, in such case, the deposit monies paid on account of the purchase price shall be applied against such damages.” The contract was firm, without contingencies. The seller planned to relocate out of state and had contracted to buy a replacement house there. It also gave away or sold most of its furniture. The buyer looked at the property on numerous occasions with “experts, landscape architects, interior decorators and plumbers.” The buyer also purchased a significant amount of marble to replace existing marble at the house and bought a substantial number of replacement tiles. Then, the buyer lost interest in the house because of a separation and a divorce. The deposit check was never placed in the seller’s attorney’s trust account, but when the seller’s attorney was advised that the buyer did not want to complete the transaction, he immediately deposited the check and sent a “time of the essence” letter. In response, the buyer’s attorney responded that the buyer would not proceed with closing and that the buyer had placed a stop payment on the check. Shortly thereafter, the buyer acquired another residence, for cash, in the same neighborhood.

The seller sued for specific performance and an order that the deposit check be made “good.” It also sought compensatory and punitive damages, attorney’s fees, and costs. Lastly, it asked that the buyer be restrained from purchasing the other house until the matter was concluded. The lower court immediately denied specific performance. The seller filed a motion for summary judgment. The buyer did not deny that it had breached the contract. Instead, it “argued that the liquidated damages clause was unreasonable and amounted to a penalty, and that the [sellers] may not be damaged at all because the property had been relisted at almost $1,000,000 over the contract price.” The lower court granted the seller’s motion for summary judgment. It held that there was no credible evidence to support the buyer’s statement that the seller had “listed the property at a very much higher price.” The lower court sought to assess reasonableness “either at the time the contract was formed or at the time of the breach.” The burden of proving that a liquidated damage clause is unreasonable rests on the party challenging the provision. Here, the lower court pointed out that at the time the contract was negotiated, “the parties could not have predicted the actual damages in the event of a breach.” Further, the parties were “sophisticated people of substantial means.” It was an expensive house. The parties were represented by counsel. No one could have adequately predicted actual damages. In fact, at the time of the lower court’s decision, almost a year later, the property had still not been sold. The lower court held that the seller had “been deprived of the benefit of [its] bargain… .” It would have received the entire purchase price; it would have paid off its mortgage, real estate taxes continued. There was no suggestion that the seller was not acting in good faith to resell the property. Consequently, the Court calculated that if a sale didn’t take place for another two years, the actual damages might have amounted to over $1,000,000, making the ten percent deposit amount “a bargain to the buyer[] because no matter how you look at this [it has] responsibility for damages; whether they’re actual damages or whether they’re liquidated damages.”

The lower court also mused about the liquidated damages clause which called for “forfeiture of the funds on deposit.” Here, there was an odd situation that there were actually no funds on deposit because the deposit check had not been negotiated or cashed by the seller’s attorney. The lower court decided to ignore that “mere technicality” because it was obvious that the funds was intended to be on deposit and that parties contemplated the amount of the deposit to be the liquidated damages.

The Appellate Division affirmed substantially for the reasons expressed by the lower court. It further rejected the buyer’s assertion that there were no funds on deposit (and therefore, the seller was entitled to nothing) because there would have been funds on deposit had the buyer not stopped payment of its check. According to the Court, such actions by the buyer should not inure to its benefit, “particularly in a court of equity.” Further, the Court believed that the evidence in favor of the seller was so one-sided that the seller was entitled to prevail as a matter of law.

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