By: Fredrick J. Dunn, Esq.
In early December, the Massachusetts Appeals Court affirmed a 2008 decision of the Superior Court in the case of NRT New England, Inc. d/b/a Coldwell Banker Residential Brokerage v. Ashby C. Moncure, 24 Mass. L. Rep. 181 (2008). In question was the enforceability of the liquidated damages clause within the terms of a Purchase and Sale Agreement. In March 2004, the defendant and Seller, Ashby C. Moncure (“Moncure”), contracted with Coldwell Banker to list certain real estate. Subsequently, a Purchase and Sale Agreement was executed by Moncure and the Buyer, Plain Road. At that time, Plain Road placed a deposit of $92,500.00 with Coldwell Banker to be held in escrow. The terms of the Agreement contained a standard liquidated damages clause as follows:
“If the Buyer shall fail to fulfill the Buyer’s agreements herein, all deposits made hereunder by the Buyer shall be retained by the Seller as liquidated damages, as Seller’s sole and exclusive remedy, without further recourse hereunder, in equity or at law.”
On the day of the closing, Plain Road failed to appear and the transaction came to a halt. Coldwell Banker did not release the deposit monies to Moncure and instead held the funds for some time. Coldwell Banker then acted as agent for Plain Road in a subsequent unrelated transaction. Upon the completion of that transaction, Plain Road owed Coldwell Banker a brokerage commission. Coldwell Banker agreed to an assignment from Plain Road of any interest to the escrowed funds of Plain Road in connection with the transaction with Moncure. Coldwell Banker then brought an action against Moncure for declaratory judgment alleging that it was the rightful owner of the escrowed funds and that the liquidated damages clause within the Purchase and Sale Agreement with Moncure was unenforceable. Moncure moved for summary judgment in connection with a counterclaim against Coldwell Banker for breach of fiduciary duty and violation of G.L.c. 93A.
The issue in dispute was whether the liquidated damages clause of the Purchase and Sale Agreement was enforceable. Ultimately, the Court determined that the liquidated damages clause was enforceable and that Moncure was entitled to receive Plain Road’s deposit as liquidated damages. Citing NPS, Inc. v. Minihane, 451 Mass. 417 (2008), the Court indicated that such clauses should be enforced provided that the provisions of the liquidated damages clause are not so disproportionate to anticipated damages so as to amount to a penalty. Referencing the same case, the Court further stated that the burden was on the plaintiff challenging the provision to show that the liquidated damages clause is unenforceable. Here, Coldwell Banker was not able to prove that the clause should be unenforceable.
The Court also drew its opinion from Kelly v. Marx, 428 Mass. 877 (1999), in which a liquidated damages clause was upheld where the Seller was able to convey the property to a subsequent Buyer for a higher amount than originally contemplated. What is interesting is that within the circumstances surrounding the Kelly matter, the Seller suffered no actual loss. However, the Court held that the question was not whether the Seller suffered actual damages, but rather whether the parties understood at the time the contract was signed that the potential damages for Buyer’s breach were difficult to determine and, as a result, the parties agreed to certain amounts to be payable as liquidated damages. The Buyer’s deposit of five percent was a reasonable forecast of Seller’s losses that may result in the event of Buyer’s breach as the list of unforeseeable circumstances include the time associated with finding a subsequent Buyer and the status of the real estate market. Where the potential damages were difficult to determine at the time the agreement was executed by the original parties, in the Court’s opinion, the deposit amount as agreed upon as liquidated damages was a reasonable amount in the event of Buyer’s future breach. The circumstances within the Moncure case are substantially similar.
Coldwell Banker argued that the liquidated damages clause was unenforceable as Moncure knew what his actual damages would be. Upon learning that the closing with Plain Road might fail, Moncure took steps to obtain financing for the purchase of other real property that was originally to be purchased with the proceeds from the sale to Plain Road. Thus, Coldwell Banker alleged that Moncure knew his actual damages and was able to prevent his inability to purchase the subsequent property by obtaining financing. The Court did not agree. While Moncure was able to determine potential losses just before the failed closing, such loses were not similar to the anticipated losses at the time the Purchase and Sale Agreement was signed. The Court stated that at the time of the Purchase and Sale Agreement, the Seller could not know what delays might become prevalent in finding a subsequent Buyer, how the failed sale might affect Seller’s future plans, or what might occur in the real estate market after a failed sale. Even where Moncure was fortunate enough to secure financing just before the failed sale, the Court stated that it does not mean that Moncure’s actual damages were ascertainable at the time the contract was entered into.
Coldwell Banker was also unsuccessful in its defense against Moncure’s G.L.c. 93A claim. The Court stated that Coldwell Banker’s attempt, in filing an adversarial action, to obtain the very funds it was entrusted to hold as escrow agent were unethical and unscrupulous. By filing the action, Coldwell Banker sought to satisfy a debt owed, by Plain Road to Coldwell Banker, by seeking to obtain the funds it held as escrow agent. By doing so, Coldwell Banker placed its own interests ahead of its fiduciary duty to Moncure, thus acting unethically and unscrupulously, thereby violating G.L.c. 93. The case indicated a subsequent hearing would be held to determine Moncure’s damages as a result of Coldwell Banker’s violation.