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Corner Property Investments, LLC v. Susan Winderman


August 22, 2011


On appeal from the Superior Court of New Jersey, Law Division, Union County, Docket No. L-1234-09.

Per curiam.


Argued June 7, 2011

Before Judges Graves and Messano.

Following a non-jury trial, final judgment was entered in favor of plaintiffs, Corner Property Investments, LLC (CPI) and Anthony Nardone, against defendants Susan Winderman and Zalika Mitchell, in the total amount of $30,939.18 -- $30,617.28 in compensatory damages and $321.90 in costs. Defendants now appeal, essentially contending that the contract between the parties contained an unambiguous liquidated damages provision limiting plaintiffs' recovery to $5000. We have considered the arguments raised on appeal in light of the record and applicable legal standards. We reverse.

Nardone, CPI's sole member, was the only witness produced at trial by either side. Nardone "was in the business of buying and turning over houses" and had been involved in "[w]ell over a hundred" closings. On April 5, 2008, on behalf of CPI, Nardone entered into a real estate purchase agreement with Shirley Ridley for the sale of her home in Roselle (the sales contract). The purchase price was $131,000.

Pursuant to the terms of the sales contract, CPI tendered no deposit and had thirty days to obtain a mortgage for the full purchase price. The estimated date of closing was July 19. Ridley was not represented by counsel, and CPI "agree[d] to pay [her] attorney['s] fee[s] up to $250[]."

On May 13, CPI entered into an "Assignment of Contract of Sale," drafted by its attorney, in which it "assign[ed] its rights and interest in the [sales contract]" to defendants (the Assignment).*fn1 Defendants were not represented by an attorney.

The Assignment required defendants to pay $34,000 to CPI "at closing of [the] transaction between [defendants] and [Ridley]" "on July 19, 2008 but not before." Defendants were required to deposit $5000 with CPI's attorney by 5:00 p.m. of the day after execution of the Assignment. Defendants' "total purchase price" was $165,000. The Assignment provided that defendants could not further assign "[t]he [A]ssignment and/or [the sales contract] . . . without the consent of [CPI]."

The Assignment utilized the term "liquidated damages" twice. The following appeared in bold letters on page one:

Both parties mutually agree that this Assignment . . . is fully contingent upon [defendants] providing [CPI] with proof that [they] ha[ve] the cash readily available to perform this contract and/or should financing be required, proof of a FULLY approved loan (loan commitment). Such proof shall be provided no later than 5:00 p.m. on the NEXT business day after signing this agreement and the proof shall be written documentation indicating that the funds are or will be available at least 48 hours prior to the closing date stated herein. If [defendants] do[] not provide the required proof to [CPI] by such time or if the proof provided is not acceptable to [CPI], then this Assignment . . . shall be NULL and VOID and [CPI] is entitled to keep the full amount of the non-refundable assignment fee as liquidated damages.

The "non-refundable assignment fee" was never defined. Paragraph 11 of the Assignment provided:

In the event that [defendants] fail[] to close this transaction or [are] in default of the agreement, [CPI] shall have the right to terminate this assignment of contract and declare [defendants] in default, wherein, [CPI] shall [(a)] retain the sum of $5000.00 as liquidated damages and (b) all right, title, and interest pursuant to [the sales contract] shall automatically revert to [CPI] without notice.

CPI also retain[ed] the right to renegotiate the price on [the sales contract] with [Ridley] at any time up to the closing date. At closing, the newly reduced price w[ould] be reflected on [the] settlement statement. [CPI's] assignment fee [would] be increased by the amount of the price reduction. [Defendants'] total purchase price would remain the same.

Defendants apparently immediately assigned their rights to a third party, Cherie McPherson, who in turn assigned her rights to Donald Cila.*fn2 On May 15, Cila tendered a check for $5000 to CPI. Cila also showed Nardone a "HUD statement" involving another transaction as proof that he would have the requisite funds by closing.

On July 29, CPI's attorney wrote Cila's attorney noting that the original closing date -- July 19 -- was extended to July 24 at the request of Cila and "other principals involved." Further noting that the closing had not been rescheduled, CPI's counsel "advised that if this matter d[id] not close within the next two days, CPI intend[ed] to take the steps it deem[ed] appropriate to protect its interests, which may include the issuance of a time of the essence notice to [defendants]."

When the closing did not occur, on July 31, 2008, CPI's counsel served defendants with a "time of the essence" letter setting a closing date of August 11, 2008, at 2:00 p.m. The letter further advised that failure to close would be a breach of the Assignment and CPI would "hold [defendants] liable for any and all damages sustained as a result of [their] failure to perform." Cila's counsel was copied.

The closing did not occur. Ridley never served CPI with any time of the essence notice, nor did she ever notify CPI that it was in breach of the sales contract. Nardone testified Ridley asked him constantly when the closing would occur and, when the sale to Cila foundered, Ridley told Nardone that she would "hold [him] responsible for damages." On September 4, 2008, CPI closed on the property with Ridley and marketed the property "immediately on closing."

On September 25, 2008, CPI entered into another contract to sell the property to Francisco Valdez for $168,000. That transaction closed on November 11. Nardone testified that CPI incurred costs of approximately $15,409.02 to purchase and maintain the property from September to the Valdez closing. Combined with "fees and brokers" commissions paid at closing, CPI netted a profit of $3,382.72.*fn3 CPI claimed it was entitled to compensatory damages reflecting the difference between its anticipated profit from the Assignment and its actual profit, i.e., $30,617.28.

The judge rendered an oral decision immediately following trial. She reached the following conclusions regarding Paragraph 11 of the Assignment:

[The Assignment] has one provision [Paragraph 11] where if you really can't follow through, you . . . lose your five grand, which I think is more in line with plaintiff's testimony about getting rid of tire kickers.*fn4 But to me, that comes off as a total penalty. It's like, you want to play in this game, and you don't have the money, you lose your five grand.

And it doesn't relate to anything . . . about losses. And it basically was designed as sort of a . . . screening device to keep people out. And they just lose their money if . . . they're not serious . . . .

I really don't have any basis for the $5,000 to make any sense at all, except for this screening device to keep people out who can't really play the game . . . in the first place. Because . . . [Nardone] says it doesn't relate to anything with respect to what he had to do . . . if there was a default, and [defendants] haven't told me anything that relates to it either. So, basically, all I got is what [Nardone] says it relates to, which is trying to screen out people that aren't serious.

[D]oes [the $5000 deposit] reflect a reasonable estimate of what's going to happen if [this] thing falls apart? No, it doesn't. It doesn't do anything except try to get people to think twice about getting into it if they don't want to take a chance on losing five grand.

So . . . based on that law that we've been reading, the plaintiff[s] [have] met their burden to show that [the] $5,000 clause does not reflect a reasonable foreseeable estimate of . . . what the costs would be if the deal defaulted.

On August 9, 2010, the judge entered an order of judgment in plaintiffs' favor for the full amount of compensatory damages sought together with costs. The order further provided that the $5000 that CPI's attorney held in trust was "released to the plaintiff[s] in partial satisfaction of the judgment." This appeal followed.

Defendants do not challenge the judge's conclusion that they breached the Assignment.*fn5 They argue instead that the liquidated damages provision in the Assignment was clear, unambiguous and reasonable under all the circumstances. Thus, judgment should have been limited to $5000.

Our review of the factual findings made by the trial judge in a non-jury trial is quite limited. Estate of Ostlund v. Ostlund, 391 N.J. Super. 390, 400 (App. Div. 2007). "'[W]e do not weigh the evidence, assess the credibility of witnesses, or make conclusions about the evidence.'" Mountain Hill, L.L.C. v. Twp. of Middletown, 399 N.J. Super. 486, 498 (App. Div. 2008) (quoting State v. Barone, 147 N.J. 599, 615 (1997)). In general, the judge's factual "findings . . . should not be disturbed unless they are so wholly insupportable as to result in a denial of justice." Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474, 483-84 (1974) (quotations omitted).

However, "[a] trial court's interpretation of the law and the legal consequences that flow from established facts are not entitled to any special deference." Manalapan Realty, L.P. v. Twp. Comm., 140 N.J. 366, 378 (1995). Since it presents purely a legal question, "[t]he interpretation of a contract is subject to de novo review by an appellate court." Kieffer v. Best Buy, 205 N.J. 213, 222 (2011) (citing Jennings v. Pinto, 5 N.J. 562, 569-70 (1950)).

In McMahon v. City of Newark, 195 N.J. 526, 545-46 (2008), the Court re-established the following guideposts that inform our review:

[T]his Court repeatedly has hewed to the maxim that [c]courts cannot make contracts for parties. They can only enforce the contracts which the parties themselves have made. In other words, [w]hen the terms of [a] contract are clear, it is the function of a court to enforce it as written and not to make a better contract for either of the parties [because t]he parties are entitled to make their own contracts. Thus, [a]s a general rule, courts should enforce contracts as the parties intended. In doing so, the judicial task is clear: the court must discern and implement the common intention of the parties [and its] role is to consider what is written in the context of the circumstances at the time of drafting and to apply a rational meaning in keeping with the expressed general purpose. [Ibid. (alterations in original) (citations and quotations omitted).]

"The court makes the determination whether a contractual term is clear or ambiguous." Schor v. FMS Fin. Corp., 357 N.J. Super. 185, 191 (App. Div. 2002). "If the terms of the contract are susceptible to at least two reasonable alternative interpretations, an ambiguity exists. In that case, a court may look to extrinsic evidence as an aid to interpretation." Chubb Custom Ins. Co. v. Prudential Ins. Co. of Am., 195 N.J. 231, 238 (2008) (citation omitted).

However, even if the terms of the contract are not ambiguous, "[w]e consider all of the relevant evidence that will assist in determining the intent and meaning of the contract." Conway v. 287 Corp. Ctr. Assocs., 187 N.J. 259, 269 (2006). "Such evidence may 'include consideration of the particular contractual provision, an overview of all the terms, the circumstances leading up to the formation of the contract, custom, usage, and the interpretation placed on the disputed provision by the parties' conduct.'" Ibid. (quoting Kearny PBA Local # 21 v. Town of Kearny, 81 N.J. 208, 221 (1979)).

"Historically, courts have closely scrutinized contract provisions that provided for the payment of specific damages upon breach." MetLife Capital Fin. Corp. v. Washington Ave. Assocs. L.P., 159 N.J. 484, 493 (1999) (citing Wasserman's Inc. v. Twp. of Middletown, 137 N.J. 238, 248 (1994)). "The need for close scrutiny arises from the possibility that stipulated damages clauses may constitute an oppressive penalty." Ibid.

"'[T]he overall single test of validity is whether the [stipulated damage] clause is reasonable under the totality of the circumstances.'" Id. at 495 (second alteration in original) (quoting Wassenaar v. Panos, 331 N.W.2d 357, 361 (Wis. 1983)). "Treating reasonableness 'as the touchstone,' . . . the difficulty in assessing damages, intention of the parties, the actual damages sustained, and the bargaining power of the parties all affect the validity of a stipulated damages clause." Ibid. (citing Wasserman's, supra, 137 N.J. at 250-54). Nevertheless, "liquidated damages provisions in a commercial contract between sophisticated parties are presumptively reasonable and the party challenging the clause bears the burden of proving its unreasonableness." Id. at 496 (citing Wasserman's, supra, 137 N.J. at 252-53).

Initially, we conclude the liquidated damage provision of paragraph 11 of the Assignment was clear and unambiguous. Indeed, plaintiffs do not contend otherwise.

Paragraph 11 clearly set forth that if defendants "fail[ed] to close" or otherwise were "in default of the agreement," CPI "ha[d] the right to terminate" the Assignment and "declare the [defendants] in default."*fn6 Upon such an event, paragraph 11 provided that CPI "shall [(a)] retain the sum of $5000[] as liquidated damages and (b) all right, title, and interest pursuant to [the sales contract] shall automatically revert to [CPI] without notice." (Emphasis added).

The judge somewhat conflated two separate inquiries. She credited Nardone's explanation of the paragraph -- it was intended to screen out "tire kickers," i.e., "people that [we]ren't serious," but not intended to limit damages -- to conclude that paragraph 11 was 1) not a liquidated damages clause; and 2) was not reasonable and, hence, not enforceable.

However, the paragraph that appeared on the first page of the Assignment, in bold type and with appropriate underlined emphasis, may have supported Nardone's claim that he was trying to "screen out" "tire kickers." That provision, although ambiguous, required that proof of the ability to consummate the transaction must be furnished within twenty-four hours of the Assignment's execution. A reasonable reading of that provision supports Nardone's claim that CPI wanted assurances that any assignees were "serious investors." The claim that paragraph 11 served the same purpose is illogical. Paragraph 11 speaks explicitly to the failure to close or some other breach of the Assignment. Those events, per force, would occur much later in time and well after CPI had the opportunity to "screen out" potential assignees.

In our mind, the language of the Assignment is susceptible of only one meaning. If defendants failed to close or otherwise breached the Assignment, CPI could declare default and terminate the Assignment, retaining $5000 as liquidated damages and all its rights under the sales contract.

Plaintiffs argue that the express terms of paragraph 11 did not limit their recovery to the $5000 deposit. Because paragraph 11 permitted them to close with Ridley, they were free under the terms of the Assignment to pursue defendants for compensatory damages occasioned by their breach.

But that right only existed if the liquidated damages provision was not "reasonable under the totality of the circumstances." MetLife Capital Fin. Corp., supra, 159 N.J. at 495 (quotations omitted). The entire inquiry, therefore, devolves to whether the liquidated damages provision in paragraph 11 was enforceable as a limitation upon plaintiffs' claim for damages under the standards we have set forth above.

At trial, both attorneys acknowledged the unusual nature of this dispute. The party seeking to enforce a liquidated damages clause is usually the beneficiary of its terms, and the party seeking relief usually contends the liquidated damages are unreasonable, i.e., a penalty. Indeed, all the cases cited by the parties at trial and on appeal before us apply the analytic paradigm outlined above in such circumstances, not in the circumstances presented here.

In Naporano Associates, L.P. v. B & P Builders, 309 N.J. Super. 166 (App. Div. 1998), however, we squarely considered this issue. There, the plaintiff/seller entered into a contract for the sale of real estate that required the defendant/buyer to deposit 10% of the $128,000 purchase price. Id. at 168. The contract included the following language:

In the event that the closing does not take place on or before May 1, 1996 through no fault of Seller, Buyer shall be deemed to be in default under the terms of the within Contract and the deposit shall automatically and without notice be paid over to Seller as liquidated damages.


When the closing did not take place, the seller entered into another contract with a third party for $85,000. Id. at 170. The buyer objected, affirmed its intention to close title, and claimed an equitable lien on the property. Ibid. As a result, the third-party buyer refused to close until the dispute was settled. Ibid.

The seller filed suit, seeking a declaration that the contract had been breached by the buyer, the right to retain the deposit, and compensatory and punitive damages occasioned by the breach and the buyer's alleged tortious interference with the third-party contract. Id. at 170-71. The seller moved for summary judgment claiming that it incurred nearly $7000 in actual losses as a result of the buyer's breach, and that the third-party's significantly lower offer was the only legitimate offer received in the ensuing months after the default. Id. at 171.

The motion judge granted the seller summary judgment on liability but held a proof hearing on plaintiff's damage claim. Id. at 173. After the hearing, the judge awarded the seller "damages in the amount of $45,056.62, less a credit for the forfeited deposit." Id. at 174.

We considered the buyer's argument that the judge erred by not enforcing the liquidated damages provision and limiting the seller's damage award to $12,800. Id. at 175-76. We noted the unusual nature of the parties' contentions:

Generally, the question whether a liquidated damages clause is enforceable has arisen in a context where the seller seeks the enforcement of the clause and the buyer seeks to have it declared invalid. That is, the seller's actual damages are substantially less than the liquidated damages and the buyer challenges the liquidated damages provision as a penalty.

In the instant matter, however, the roles are reversed. The defendant-buyer is seeking to enforce the liquidated damages clause, while the plaintiff-seller seeks damages in excess of the liquidated damages provision. In our view, the analysis is the same. The essential question is still whether the liquidated damages amount is reasonable in light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. Moreover, we should consider this question either at the time the contract is negotiated or at the time of the breach. [Id. at 176-77 (citation omitted).]

Applying the principles in Wasserman, supra, "we f[ound] no impediment to the enforcement of the liquidated damages clause." Id. at 177. We further noted that the parties were "sophisticated business people represented by counsel," and "[a]t the time that the parties negotiated the contract and addendum . . . the[y] . . . could not predict the actual losses in the event of a breach." Ibid. We also noted that at the time of the breach, the seller "was faced with several unanswerable questions" regarding the actual value of the property and the likelihood it could be sold for a reasonable price. Id. at 178. We concluded that "[w]hether we assess reasonableness at the time of the making of the contract or at the time of the breach, the liquidated damages clause agreed to here, by sophisticated commercial parties, was reasonable." Ibid.

Courts in other jurisdictions have also applied traditional analysis to determine whether a liquidated damages provision is enforceable or an unenforceable penalty in similar circumstances, i.e., where a non-breaching seller sues for a greater amount of actual damages. See, e.g., Underwood v. Sterner, 387 P.2d 366, 369 (Wash. 1963)(holding that where the parties had extensive experience in real estate transactions, possible damages would have been difficult to predict, and the seller's counsel had drafted the terms of the agreement, the amount specified was not unreasonable); Berggren v. Hill, 928 N.E.2d 1225, 1230 (Ill. App. Ct. 2010) ("The fact that the amount of liquidated damages stated in the provision does not equal a party's subsequent damages is not determinative of whether the provision is valid and enforceable," and, thus, "[the] seller's sole monetary remedy."); Warstler v. Cibrian, 859 S.W.2d 162, 166 (Mo. Ct. App. 1993) ("[T]he stipulated amount controls as to the measure of damages and recovery is limited to that amount, even though the actual loss may be greater or less."); Germany v. Nelson, 677 S.W.2d 386, 388 (Mo. Ct. App. 1993) (finding that where a liquidated damages provision is reasonable, the non-breaching party cannot recover actual damages in addition to the agreed upon liquidated damages); but see Beck v. Mason, 580 N.E.2d 290, 293 (Ind. Ct. App. 1991) (upholding the liquidated damages provision, but further noting that the seller could not rely on case law where the parties challenged "liquidated damages [as] unreasonably excessive, thereby triggering the traditional test for determining the enforceability of such clauses").

Returning to the case at hand, we conclude that the judge erred in not limiting plaintiffs' claim to the agreed upon liquidated damages of $5000. In Wasserman, supra, 137 N.J. at 252, the Court cited with approval the Restatement Second (Contracts), § 356(1) (1981), which provides:

Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty.

"[T]he amount fixed is reasonable to the extent that it approximates the loss anticipated at the time of the making of the contract, even though it may not approximate the actual loss." Id. comment b. Moreover, "[t]he greater the difficulty either of proving that loss has occurred or of establishing its amount with the requisite certainty . . . the easier it is to show that the amount fixed is reasonable." Ibid.

Undoubtedly, Nardone was a sophisticated businessman whose stock in trade was "buying and turning over houses." See MetLife Capital Fin. Corp., supra, 159 N.J. at 496. He negotiated the sales contract with Ridley, who was unrepresented and, "for personal reasons," was anxious to sell the property.

CPI made no deposit and was free to finance the entire purchase price.

Within weeks, Nardone negotiated the Assignment, by which CPI anticipated making $34,000 without incurring any liability to Ridley or defendants. Indeed, under the terms of the Assignment, Nardone remained free to continue to negotiate a lesser sales price, thus, enlarging CPI's profit under the Assignment.

In return for the anticipated $34,000 profit, CPI compelled defendants to post $5000 and agreed to that amount as liquidated damages if defendants failed to close or otherwise breached the Assignment. This deposit reflected almost 15% of CPI's anticipated profits, an amount that is both reasonable and greater than the frequently-used 10% deposit figure in many real estate contracts.

When the Assignment was executed, the measure of plaintiffs' actual damages if defendants breached was difficult to ascertain. Plaintiffs would retain all their rights under the sales contract; in other words, they were in no worse position than when they signed the agreement with Ridley. Despite defendants' breach, plaintiffs were able to purchase the property and resell it, as they in fact did.

Additionally, the actual damages plaintiffs would suffer in the event of defendants' breach were difficult to ascertain both when the Assignment was executed and when the breach occurred. As noted, Ridley never served CPI with a time of the essence letter nor did she declare a default. Moreover, CPI decided to immediately resell the property after taking title. It is not necessary to resolve whether the ultimate sales price to Valdez was reasonable, or whether CPI could have held on to the property, used it as rental income, and sold it at a later date at a greater profit. See Naporano, supra, 309 N.J. Super. at 178 (discussing the difficulty in assessing the fair market value of property in such circumstances).

The point is clear. At the time of the execution of the Assignment and at its breach, plaintiffs' damages were difficult to ascertain, thus, making the liquidated damages clause more likely reasonable, and not a penalty.

Under the circumstances presented, the liquidated damages provision in the Assignment was reasonable. We therefore are compelled to reverse the judgment under review. The matter is remanded to the trial judge for entry of judgment in favor of plaintiffs in the amount of $5000.


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