RAMESH PATEL APPELLANT v. TUTTLE PROPERTIES LLC BT QUICK MART LLC CECIL TUTTLE AND BRIAN TUTTLE APPELLEES

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Court of Appeals of Kentucky.

RAMESH PATEL APPELLANT v. TUTTLE PROPERTIES, LLC;  BT'S QUICK MART, LLC;  CECIL TUTTLE;  AND BRIAN TUTTLE APPELLEES

NO. 2010–CA–001544–MR

Decided: June 17, 2011

BEFORE:  NICKELL AND THOMPSON, JUDGES;  ISAAC, Double SENIOR JUDGE. BRIEFS FOR APPELLANT:  M. Alex Rowady Winchester, Kentucky BRIEF FOR APPELLEE:  Jesse R. Hodgson Mt. Sterling, Kentucky

NOT TO BE PUBLISHED

OPINIONAFFIRMING

Ramesh Patel appeals from an award of summary judgment to Tuttle Properties, LLC;  BT's Quick Mart, LLC;  Cecil Tuttle;  and Brian Tuttle (collectively appellees).   Patel claims appellees should have been required to refund to him the $125,000.00 he had placed in an escrow account pending the failed sale of a convenience store/gas station.   The sale was aborted when Patel could not secure financing.   Upon review of the briefs, the record and the law, we affirm.

FACTS

Brian Tuttle was the operator of BT's Quick Mart in Mt. Sterling, Kentucky.   The business was operated on land leased from Brian's father, Cecil Tuttle, for $3,000.00 a month.   Brian negotiated the sale of the business and land to Patel for $450,000.00.   Pursuant to an Asset Purchase and Sale Agreement, Patel deposited with an escrow agent the amount of $125,000.00 as an earnest money deposit as described in the following clause:

3. Earnest Money Deposit.   As evidence of good faith binding this Agreement, [Patel] has, simultaneously with the execution of this Agreement, deposited with White Peck Carrington, LLP, as escrow agent for Seller, Quick Mart and [Patel], earnest money in the sum of $125,000.00 receipt of which is hereby acknowledged by Seller and Quick Mart, the same to be applied on the total purchase price due and payable hereunder at closing, or refunded to [Patel] if the Closing does not take place pursuant to the terms, conditions and provisions of this Agreement due to no fault of, or breech (sic) hereunder by [Patel].

The closing date was specified to be “not later than 120 calendar days after the date of this Agreement[,]” which was signed on October 12, 2006.   At the time of closing, Patel was required to “deliver to Seller the sum of $325,000.00 in immediately available funds.”   The Agreement, executed by Cecil Tuttle as manager of Tuttle Properties, Brian Tuttle as an authorized member of BT's Quick Mart, and Patel as the buyer, stated, “[t]ime is of the essence in regard to all aspects of this Agreement.”

According to Cecil's deposition, the closing was scheduled for October 18, 2006.   On that date, Patel announced he was having trouble securing the purchase price and asked whether he could lease the store for $1,500.00 a month.   Cecil testified he rejected the proposal because he had been receiving $3,000.00 in monthly rent from Brian and could not meet expenses were he to receive only half that amount in rent.   According to Cecil, Patel then proposed that if he could lease the store for four months at a monthly rate of $1,500.00 he would allow Cecil to use the $125,000.00 earnest money deposit

as I choose to help me with the amount of money that I owed.   Because $1500 a month was not enough.   Brian was paying me three, you know, every month.   So that's the reason he agreed to let me have that, to use as I wanted to, and we have a document there that he signed.

The document Patel signed on October 18, 2006, was styled “First Amendment to Asset Purchase and Sale Agreement.”   It provided:

[i]n consideration of the mutual benefits to be derived therefrom by the parties hereto, Tuttle, Quick Mart and [Patel] agree that the entirety of the $125,000.00 earnest money deposit currently held by White Peck Carrington, LLP, Mt. Sterling, Kentucky, as Escrow Agent for Tuttle, Quick Mart and [Patel] under the above referenced Agreement, shall be transferred and paid this date by White Peck Carrington, LLP, as Escrow Agent aforesaid, to Tuttle as the earnest money deposit under the Agreement, the same to be applied on the total purchase price due and payable under the Agreement at Closing, or refunded to [Patel] if the Closing does not take place pursuant to the terms, conditions and provisions of the Agreement due to no fault of, or breach under the Agreement by, [Patel].

The Amendment, which modified the Agreement executed on October 12, 2006, was signed by Cecil, Brian and Patel.   The Amendment did not alter the closing date which was specified as “not later than 120 calendar days after” October 12, 2006.   The sale was never consummated because Patel was unable to secure the necessary financing.

The store still has not sold.   During the time Patel ran the entity, daily receipts fell from $7,188.00 to $1,200.00.   After the sale collapsed, Cecil took over day-to-day operations of the store.   Patel filed suit to recoup the $125,000.00 in earnest money he deposited.   Appellees responded that Patel breached the Agreement so no refund was due.   The trial court awarded summary judgment to appellees.   This appeal followed.

LEGAL ANALYSIS

Summary judgment is proper only “when it would be impossible for the respondent to produce any evidence at the trial warranting a judgment in his favor.”  Steelvest, Inc. v. Scansteel Serv. Ctr., Inc., 807 S.W.2d 476, 483 (Ky.1991) (internal quotation marks omitted).   In ruling on a motion for summary judgment, we must construe the record “in a light most favorable to the party opposing the motion ․ and all doubts are to be resolved in his favor.”  Id. at 480.   A party opposing a summary judgment motion “cannot rely on the hope that the trier of fact will disbelieve the movant's denial of a disputed fact, but must present affirmative evidence in order to defeat a properly supported motion for summary judgment.”  Id. at 481 (internal quotation marks omitted).

Based upon our review of the Agreement and the Amendment, we agree with the trial court's award of summary judgment to the appellees.   As stated in the Agreement, refund of the $125,000.00 earnest money deposit to Patel was appropriate only “if the Closing does not take place pursuant to the terms, conditions and provisions of this Agreement due to no fault of, or breech (sic) hereunder by, [Patel].”   It is undisputed that the only reason the sale was not completed was Patel's failure to secure financing.   The failure of the sale being solely Patel's fault or breach, the award of summary judgment was entirely appropriate.

While Patel argues the Agreement did not contain a valid liquidated damages clause under United Services Auto. Ass'n v. ADT Sec. Services, Inc., 241 S.W.3d 335 (Ky.App.2006), we see no reason to address that issue given the express language of the Agreement.   Therefore, the order of the Montgomery Circuit Court is affirmed.

NICKELL AND tHOMPSON, JUDGES, CONCUR.

ISAAC, SENIOR JUDGE, DISSENTS.

ISAAC, SENIOR JUDGE, DISSENTING:

I respectfully dissent.   The critical issue in the appeal is whether the retention of the $125,000.00 security deposit constituted a valid liquidated damages award or is unenforceable as a penalty.   Although this was the main issue argued in the briefs of each party, the majority chooses not to address it and simply pronounces that the award was appropriate.

Each party cites United Services Auto. Assn v. ADT Sec. Services, Inc., 241 S.W.3d 335, 340–41 (Ky.App.2006), which states,

[a] provision in a contract providing for liquidated damages will be enforced, provided it is in actuality liquidated damages and not a penalty.   If such provision is in fact a penalty it will not be enforced and the injured party will be entitled to recover the actual damages suffered.   Where, at the time of execution of the contract, damages may be uncertain in character or amount, or difficult to reasonably ascertain, a provision for liquidated damages will be enforced, provided the amount agreed upon is not greatly disproportionate to the injury which may result.  (Internal citations omitted).

The validity of a liquidated damages provision is a question of law and the party seeking to avoid enforcement of the provision bears the burden of proof.   Further, the court must make findings of fact necessary to determine the question of law in a liquidated damages case.  Mattingly Bridge Co., Inc. v. Holloway Son Const.   Co., 694 S.W.2d 702, 705–706 (Ky.1985).  Mattingly further states, [i]n short, while we respect the right of the parties here to fix liquidated damages by contract, we do not abandon our previous rule that forbids their award when nothing more than a penalty or forfeiture.  Id. at 706.

The laws abhorrence of contractual penalties engenders no greater controversy than when it affects the enforcement of liquidated damages clauses contained in real estate purchase and sale agreements.   A slim majority of jurisdictions ․ appear to favor a “single look” approach, which tests the validity of such a clause only as of the time of contract․  Competing with that approach in an almost equal number of jurisdictions, [including Kentucky in Mattingly ] ․ is [the view that requires] in some circumstances a “second look” as of the time of the breach to determine if the sum stipulated as liquidated damages is “unreasonably and grossly disproportionate to the real damages from a breach, or is unconscionably excessive.”

Kelly v. Marx, 694 N.E.2d 869, 870, 44 Mass.App.Ct. 825, 826 (1998) (internal citations omitted).

A New York case, L & L Wings, Inc. v. Marco–Destin Inc., 756 F.Supp.2d 359, 363 (S.D.N.Y.2010), is also instructive in setting out the factors that should be considered by the court in these cases.

The reasonableness of such a liquidated damages provision is a question of law for the Court, “giving due consideration to the nature of the contract and the circumstances.”  Bates Adver.   USA, Inc. v. 498 Seventh, LLC, 7 N.Y.3d 115, 120, 818 N.Y.S.2d 161, 850 N.E.2d 1137 (2006) (internal quotation marks and citation omitted).   New York law “favors freedom of contract through the enforcement of stipulated damage provisions so long as they do not clearly disregard the principle of compensation.”  JMD Holding Corp. v. Cong. Fin. Corp., 4 N.Y.3d 373, 380–81, 795 N.Y.S.2d 502, 828 N.E.2d 604 (2005) (quoting 3 Farnsworth, Contracts § 12.18 at 303–04 (3d ed.)).  “Parties to a contract have the right ․ to specify within a contract the damages to be paid in the event of a breach, so long as such a clause is neither unconscionable nor contrary to public policy.”  Rattigan v. Commodore Int'l Ltd., 739 F.Supp. 167, 169 (S.D.N.Y.1990).

As such, a liquidated damages provision will be upheld “if the amount liquidated bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation․  If, however, the amount fixed is plainly or grossly disproportionate to the probable loss, the provision calls for a penalty and will not be enforced.”  Kingsbridge Med. Ctr., P.C. v. Hill, 357 F.Supp.2d 754, 758 (S.D.N.Y.2005) (citing Truck Rent–A–Center, Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420, 393 N.Y.S.2d 365, 361 N.E.2d 1015 (1977)).

In order to challenge a liquidated damages provision, a party “must demonstrate either that damages flowing from a prospective [breach] were readily ascertainable at the time [the parties] entered into their [contract], or that the [liquidated damages are] conspicuously disproportionate to these foreseeable losses.”  JMD Holding, 4 N.Y.3d at 380, 795 N.Y.S.2d 502, 828 N.E.2d 604.  “The burden is firmly on the party challenging the provision to provide that justification by demonstrating that the stipulated damages are, in fact, an unconscionable penalty.”  GFI Brokers, LLC v. Santana, 2009 WL 2482130, Nos. 06 Civ. 3988(GEL), 06 Civ. 4611(GEL), at *2 (Aug. 13 2009 S.D.N.Y.).  “[W]here there is doubt as to whether a provision constitutes an unenforceable penalty or a proper liquidated damage clause, it should be resolved in favor of a construction which holds the provision to be a penalty.”  Willner v. Willner, 145 A.D.2d 236, 538 N.Y.S.2d 599, 602 (2d Dep't 1989).

When evaluating a liquidated damages provision, a court must also give due consideration to “whether the parties were sophisticated and represented by counsel, the contract was negotiated at arms-length between parties of equal bargaining power, and ․ that [the provision] was freely contracted to.”   The Edward Andrews Group, Inc. v. Addressing Servs.   Co., Inc., No. 04 Civ. 6731(LTS)(AJP), 2005 WL 3215190, at *6 n. 3 (S.D.N.Y. Nov. 30, 2005) (internal quotation marks and citations omitted).

In the case sub judice, the trial court's judgment does not contain findings sufficient to support a determination either that the earnest money deposit is an allowable award of liquidated damages or that it is not allowable as a penalty.   It does not appear that the trial court considered any of the required factors in making its determination.   Therefore, I would reverse and remand the case for the trial court to make such findings and conclusions.

NICKELL, JUDGE: