Thursday, February 11, 2010
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C.A. Orders Sellers to Return ‘Nonrefundable’ Deposit
By SHERRI M. OKAMOTO, Staff Writer
The Fourth District Court of Appeal has ordered the sellers of an oceanfront home in Laguna Beach to return a deposit to a buyer who backed out of the sale, even though the sales agreement specified the deposit was nonrefundable.
In a Feb. 3 decision ordered published yesterday, Div. Three ruled that William and Rhonda Smith were not entitled to retain the $620,000 in escrow payments that Bradford Kuish had made.
Kuish had entered into an agreement to buy the Smiths’ home in December 2005 for $14 million. The agreement required Kuish to make two “nonrefundable” payments into escrow in early 2006.
In September 2006, Kuish requested that escrow be cancelled. The Smiths later sold the property to another buyer for $15 million but declined to return any portion of the deposit payments Kuish had made.
Kuish then filed a complaint against the Smiths, asserting claims for conversion, unjust enrichment, money had and received, and declaratory relief.
At trial before Orange Superior Court Judge David T. McEachen, the Smiths did not claim any consequential damages as a result of the aborted sale to Kuish other than the cost of repairs to the roof during the escrow period.
McEachen found the Smiths’ retention of $600,000 of the deposit constituted separate and additional consideration for their agreement to extend the escrow closing date and that it was not a forfeiture “because both parties were ‘big boys,’ that is, sophisticated business people, [who] understood all the ramifications of their actions in freely negotiating to make the deposits nonrefundable.”
He ruled that the remaining $20,000 was refundable, but this amount had to be offset by the $9,483.15 the Smiths had paid for roof repairs and the interest Kuish owed.
Writing for the appellate court, however, Justice Richard D. Fybel explained that the Smiths’ retention of the $600,000 was an invalid forfeiture pursuant to Freedman v. The Rector (1951) 37 Cal.2d 16.
Freedman addressed a similar situation, involving a seller who sought to retain a buyer’s down payment after the buyer breached the purchase agreement. In that case, the California Supreme Court ruled that the buyer was entitled to recover the amount of his down payment since the seller had been able to resell the property for more than the buyer had agreed to pay and suffered no additional damages.
“If [the seller] is allowed to retain the amount of the down payment in excess of its expenses in connection with the contract it will be enriched and plaintiff will suffer a penalty in excess of any damages he caused,” the high court said.
Fybel said it was undisputed that the Smiths had been able to sell the property for $1 million more than Kuish had agreed to pay and had not sustained any consequential damages as a result of Kuish’s breach.
In such a rising market, the justice reasoned, “an interpretation of the nonrefundable term of the agreement as precluding the return of plaintiff’s deposit above and beyond any damages suffered by defendants as a result of plaintiff’s breach would render that provision unenforceable.”
Additionally, construing the term “nonrefundable” to establish the Smiths entitlement to Kuish’s deposit without regard to their actual damages “would essentially create a liquidated damages provision,” Fybel reasoned, but the parties had expressly stipulated that the agreement did not contain a liquidated damages provision, and did not argue otherwise.
Even if the provision were construed as a liquidated damages provision, it would not be enforceable because it was not separately signed or initialed by each party to the contract, the justice added.
Joined by Presiding Justice David G. Sills and Justice Eileen C. Moore, Fybel further concluded that the trial court had erred in finding Kuish’s deposit was separate and additional consideration for an extension of the escrow closing date since the “nonrefundable” provision was part of the original agreement.
The case is Kuish v. Smith, G040743.
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