WHEN LIQUIDATED DAMAGES PROVISIONS FAIL

             John and Rosa Castro leased residential property from Fred Graylee in May 2015, for $3105 rent per month. In June 2018 Fred sent the Castros notice that they had three days to vacate, and that they owed $27,120 in unpaid rental.

             The Castros neither paid nor vacated, so Fred filed an eviction lawsuit.

             On October 2, 2018, the parties entered a stipulation with the Court. Under the stipulation, Fred was awarded possession as well as a judgment for $28,970 if the Castros failed to return the keys and vacate by October 31, 2018. The stipulation worked much like a settlement agreement.

             In January 2019 Fred filed a motion for entry of a $28,970 judgment against the Castros. Fred’s motion was based on both the stipulation as well as the declaration of Fred’s Property Manager, who claimed that the tenants had not vacated by October 31 but instead moved out the following day – November 1, 2018.

             The trial court entered judgment for Fred; Castros appealed.

             The Castros claim that the judgment amount of $28,970 was based upon a liquidated damages provision in the stipulation, but it is unenforceable as it bears no reasonable relationship to the range of actual damages the parties could have anticipated based on a short-term tenancy holdover.

             The appellate court accepted Castros’ position that the stipulation contained a “liquidated damages” clause. From there, the court considered “liquidated damages” as compensation to be paid in the event of a breach of contract, as determined by an agreement. The court further allowed that liquidated damages clauses become an unenforceable penalty if it bears no reasonable relationship to actual damages.

             LD clauses must provide for fair average compensation for an anticipated loss.

             In situations where the parties do not attempt to anticipate actual damages but instead merely select an arbitrary amount, the provision can fail. Also, LD provisions that provide for penalties in order to motivate a party to pay are unenforceable.

             Courts can look at the efforts undertaken by the parties to calculate the amount of damages that can be anticipated. The result can be measured, after a party has been damaged, against the amount of such damages.

             This “look back” procedure automatically makes delicate any LD provision.

             In the stipulation, the Castros did not concede the merits of the eviction claim. Neither did they admit to owing $27,100 in unpaid rent. Seeing “no meaningful relationship between the $28,970 judgment and the tenant’s failure to [timely vacate]” allowed the appellate court to determine that the $28,970 amount is an unenforceable penalty.

             The trial court’s judgment was reversed; Castros win and Fred loses. See Graylee v. Castro; Case Nos. G057901 and G058409; California 4^th Appellate District; Division Three; July 13, 2020: https://cases.justia.com/california/court-of-appeal/2020-g057901.pdf?ts=1596564065.       

            Lessons / Questions / Issues:

1. Question: How many disputes have you resolved that require a future payment? Have you added something extra to motivate a party? Might want to rethink that.
   

2. Question: How can you anticipate future damages? Perhaps the mechanism you used should be inserted into your settlement agreement / stipulation / judgment. That way, if later contested, a Court can review your algorithms and spreadsheets to better understand how you arrived at the LD amount.
   

3. Question: Why do Courts have the ability to review LD provisions after the event that triggers the LD payment, to determine if it was, at the time the LDs were contemplated, a reasonable forecast of future damages? Ok so that one might be rhetorical, but still . . .

                                                                                                            Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization

Licensed in the States of Texas and New York

WHOOPS, PERHAPS I SHOULD HAVE DISCLOSED THAT

             Bryan Parmelly owned 700 acres in Taylor County. The acreage was naturally divided by a steep bluff into “upper” and “lower” portions. In 1999, Bryan signed a surface lease covering most of the property, for a 20-year term with renewal options.

             Under the lease, Vulcan Construction had the right to remove rock, dump dirt and waste, construct plants, and conduct mining operations. Vulcan started its operations upon the upper portion of the property, although its lease allowed it to conduct similar operations on the lower part as well.

             Bryan hired A.E. Nelson Jr. to sell the lower tract in 2013, consisting of 225 acres. Gary McCall, principal of McCall Motors and experienced real estate investor, saw an advert and expressed his interest.

             Gary viewed the property several times and observed Vulcan’s mining operations on the upper tract. The lower tract border was merely feet from the edge of the rock quarry.

             McCall Motors elected to purchase the 225-acre lower parcel for $1,500 per acre. The Contract of Purchase and Sale failed to disclose the existence of any surface leases and instead affirmatively provided: “None at time of closing.”

             Remember those five words – they become relevant later.

             Before closing Gary received a title commitment which specifically excluded coverage for the Vulcan lease and two other oil and gas leases that were recorded in Taylor County. Under the terms of the contract, Gary had the right to object to adverse title matters and if Bryan did not provide a remedy, then Gary could terminate the deal and receive the full return of all earnest monies.

             Gary acknowledged receipt but claimed he did not review. Regardless, Gary neither objected nor terminated. So, McCall Motors purchased the lower acreage subject to the Vulcan lease.

             McCall Motors elected to sell the property in 2015 to Jeremy and Jennifer Britten, who offered $500,000 – a substantial and quick profit. Ultimately M/M Britten terminated the deal when they objected to the title commitment, which disclosed the existence of the Vulcan lease.

             McCall Motors sued Bryan Parmelly, A.E. Nelson Jr., and others claiming the existence of the Vulcan lease was not properly disclosed; Bryan Parmelly settled his portion before trial. 11 members of the jury determined that Nelson committed fraud. The jury awarded McCall Motors $16,000 in damages and $30,000 for lost profits on each of McCall’s fraud claims.

             The trial court ultimately converted the jury’s award into a judgment for McCall of $130,660 for actual damages and $177,500 attorney’s fees. Nelson appealed, claiming that McCall had no right to claim it relied upon the statement in the Contract of Purchase and Sale.

             On appeal McCall contended that Nelson made a representation that there would be no surface leases on the property at the time of closing. See the magic five words. Although the Vulcan lease was in existence at the time the Contract was signed, Seller would cause it to be terminated by closing at least to the target 225-acre parcel.

             That was McCall’s position, anyway.

             The Appellate Court started by enumerating “red flags” (that’s the term in the decision): (a) the neighboring quarry operation was “very apparent”; (b) there was a sign present on the site identifying Vulcan; (c) Parmelly intended to maintain ownership of all minerals at and under the property; (d) Gary McCall, a sophisticated real estate investor, failed to object to the Vulcan lease when he received the title commitment; and (e) Gary had been engaged in over 160 real estate deals and understood the significance of a title commitment.

             The Court of Appeals concluded that McCall did not justifiably rely on the statement “None at time of closing” with regard to the Vulcan lease. Consequently, the trial court’s Judgment was reversed; Nelson wins and McCall loses. See Nelson v. McCall Motors; Case No. 11-17-00307-CV; Eastland Court of Appeals of Texas, 11^th District; May 29, 2020; https://scholar.google.com/scholar_case?case=2214463018347336545&hl=en&as_sdt=6&as_vis=1&oi=scholarr.    

            Lessons / Questions / Issues:

1. Question: Is this the correct decision – what gives an appellate court the right to re-examine the facts and determine that Gary McCall did or did not rely – isn’t that the sole job of the trial jury?

2. Question: Will this cause you to rethink how you disclose title and survey matters?
   

3. Question: Why was the broker tagged with this trial court Judgment anyway – shouldn’t it have been only against the property owner since the broker is merely the agent for the owner?

                                                                                                                         Stuart A. Lautin, Esq.* 

 

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,Texas Board of Legal Specialization

Licensed in the States of Texas and New York