Howard M. Hook, Appellant, v. Thomas J. Bomar, As Trustee for Kitimat Corporation, Appellee, 320 F.2d 536 (5th Cir. 1963)

Kitimat Corporation filed a reorganization petition under Chapter X of the Bankruptcy Act. Thomas J. Bomar was appointed Trustee of the property and assets of the debtor Kitimat Corporation. This controversy was referred to the Referee as Special Master. The nature of the controversy and the factual situation from which it arose are set forth in the Special Master's Report. The appellant and the appellee are in agreement as to the correctness of the facts as found by the Special Master. The Master's findings and conclusions appear in the margin.¹  Objections of the Trustee to the Special Master's Report were sustained by the district court. In its order, the district court stated that the retention of the sums paid, absent proof of damages, would be a forfeiture and a penalty so shocking to the judicial conscience as not to be sustained. Hook has taken this appeal. Both parties urge that the Florida precedents sustain their contentions.

In 1948 the Supreme Court of Florida had before it a case where the purchaser had defaulted in the performance of a contract of sale and purchase of real property for a consideration of $67,500. Receipt by the vendor of earnest money in the amount of $6,200 was acknowledged. The contract provided, among other things, that in case of default by the purchaser, and at the option of the vendor, the contract should be terminated and "the purchaser shall forfeit said earnest money, and the same shall be retained by the seller as liquidated damages." The purchaser stopped payment on the $6,200 check he had given in making his earnest money payment and the vendor brought suit for the amount it represented. The statements by the court have declared the principles by which the Florida courts have been guided in like cases. We therefore set forth in extenso these principles thus stated:

"Whether the sum stipulated in a contract to be paid in the event of a breach will be considered as a penalty or as liquidated damages is always a question of law to be determined by the court in each particular case. The real purpose in permitting a stipulation for damages to stand as compensation for a breach being `to render certain and definite that which appears to be uncertain and not easily susceptible of proof', Chace v. Johnson, 98 Fla. 118, 123 So. 519, 521, the fact that a stipulation denominates a sum to be paid for breach of a contract as `liquidated damages' or as a `penalty' will not in and of itself be conclusive. The courts will always look to the nature of the contract, the terms and purposes of the whole instrument, the natural and ordinary consequences of a breach and the peculiar circumstances attending each case, to determine its real character and purpose. [Authorities cited].

"Though no fixed or settled rule can be stated by which the courts may always determine whether a stipulation for the payment of a fixed sum should be treated as a penalty or as liquidated damages, there appears to run throughout the many cases in which the question has been considered the following controlling principle: Where compensation for injury resulting from a breach of contract is reasonably susceptible of measurement by some adequate and approved legal standard, a stipulation providing for the payment of an amount which may easily be excessive with reference to the terms, nature, and purpose of the contract, making it a matter held in terrorem over either party, should be construed as a penalty, even though it be specifically designated as liquidated damages. Greenblatt v. McCall & Co., 67 Fla. 165, 64 So. 748. Where the actual damages contemplated when the contract was made are in their nature uncertain and may so depend upon extrinsic considerations and circumstances as to be incapable of ascertainment with any reasonable degree of exactness, and the fixed sum stipulated to be paid is not disproportionate to the probable injury likely to result from a breach of the contract, effect should be given to the stipulation as one for liquidated damages, without regard to its designation or the amount of injury actually suffered as the result of the breach. Southern Menhaden Co. v. How, 71 Fla. 128, 70 So. 1000. [Authorities cited]

"All this is but another way of saying that in the final determination of the question whether or not a stipulation should be construed as providing for a penalty or for liquidated damages the guiding principle for the courts to observe should be that of `just compensation' for injury resulting from the breach of the contract, and the controlling object should be to place the injured party in as advantageous position as he would have occupied had his contract not been broken. So long as the contracting parties keep this principle in view the courts will very generally allow them to agree upon such a sum as will probably be the fair compensation for the breach of a contract. But when they go beyond this and undertake to stipulate not for compensation but for a sum entirely disproportionate to the measure of liability which the law regards as compensatory, the courts will refuse to give effect to the stipulation and will confine the parties to such actual damages as may be pleaded and proved. [Authorities cited].

"In every case involving a contract providing for a fixed sum to be paid in the event of a breach the real issue involved, therefore, is whether the contract adheres to the fundamental rule of `just compensation' which we have stated and whether the parties intend that the sum named shall be paid over to the injured party for the particular breach which has occurred. Moses v. Autuono, 56 Fla. 499, 47 So. 925, 20 L.R.A.,N.S., 350; Arnold v. First Savings & Trust Co. of Tampa, 104 Fla. 545, 140 So. 660, 141 So. 608.

"Under the contract involved in this appeal the parties agreed that the appellees should pay as the purchase price of the property the sum of $67,500.00. They agreed that the appellees, at the time they signed the contract of purchase, should pay the sum of $6200.00 `as earnest money and in part payment on account of the purchase price' and should pay the balance of the purchase price at the closing of the transaction. They agreed that in payment of the balance of the purchase price the appellees should assume two subsisting mortgages of the face amount of $26,900.00 at their then rates of interest and amortization payments, and pay in cash the sum of $34,400.00. They agreed that possession of the property should not be surrendered to the appellees until the passing of title. They agreed that the transaction should be closed and that the appellees should pay the balance of the money due under the contract, and execute all papers necessary for the completion of the purchase within five days from the delivery of abstract of title or title insurance commitment. Finally, they agreed that time should be of the essence of the contract and that if the appellees failed `to make either of the payments, or any of the covenants on [their] part entered into', the `earnest money' should be forfeited and retained by the sellers as liquidated damages.

"In our view the contract clearly provided for a penalty and not for liquidated damages.

"There was nothing in the transaction which could have rendered the damages which might reasonably have been expected to flow from a breach of the contract uncertain, conjectural or speculative. The only real damages which could have been sustained by the sellers as the result of the purchasers failing to go through with the contract were the profits to be realized from the sale. As to these, they were definitely ascertainable in accordance with settled legal principles for the admeasurement of damages; the measure of the sellers' damage ordinarily being in such cases the difference between the agreed purchase price and the actual value of the property at the time of the breach of the contract of purchase, less the amount paid. [Authorities cited]." Pembroke v. Caudill, 160 Fla. 538, 37 So. 2d 538, 540-541, 6 A.L.R.2d 1395.

The primary reliance of the appellants is placed upon Beatty v. Flannery, 49 So. 2d 81, decided by the Supreme Court of Florida in 1950. There, a $3,000 deposit had been made on a $30,000 purchase. After default, the purchaser brought suit for the earnest money paid, pointing to Pembroke v. Caudill, supra, in support of its claim. The vendor denied that the Pembroke decision was controlling and argued that the prior decisions of the Florida court required a judgment for the vendor. In adopting the vendor's contention, the court said:

"It is well settled that, even in the absence of such a forfeiture provision, a vendee in default is not entitled to recover from the vendor money paid in part performance of an executory contract." 49 So. 2d 81, 82.

In the opinion the court also stated:

"We recognize that there are exceptions to the general rule that a vendee in default cannot recover, but we find no such circumstances in this case. There was no intimation of fraud on the part of the vendor, nor that the vendee's failure to fulfill the contract was due to any misfortune beyond his control that gave the vendor a benefit, the retention of which was shocking to the conscience of the court. Nor is it here contended that there was a mutual rescission of the contract." 49 So. 2d 81, 82.

The court distinguished the Pembroke decision on the ground that it was a case where the vendor was seeking to recover and not, as in Beatty v. Flannery, a situation where the purchaser was seeking to recover.

Three years after Beatty v. Flannery the Supreme Court of Florida decided Haas v. Crisp Realty Co., Fla., 65 So. 2d 765. There the action was brought by the purchasers to recover a down payment of $6,050 on a total purchase price of $15,550. The purchasers were unable to perform the contract and complete the purchase because the insufficiency of their income and resources prevented them from qualifying for an F.H.A. mortgage loan on the property they had agreed to purchase. The court observed the absence of any showing in Beatty v. Flannery that the purchaser's failure to perform was due to any misfortune beyond his control that gave the vendor a benefit, the retention of which was shocking to the conscience of the court. The absence of income and resources of Kitimat Corporation were as unfortunate as those of the purchasers in the Haas case. In each the unfortunate circumstance was the inadequacy of the financial position of the purchasers. The ratio here between down payment and purchase price is greater than in Pembroke although less than in Haas. We think the district court was fully justified in its conclusion that the forfeiture constituted such a penalty as to shock the judicial conscience. Cf. O'Neill v. Broadview, Inc., Fla.App., 112 So. 2d 280. The district court directed, as was done in the Haas case, that the cause be remanded for the taking of proof as to the actual damages sustained by the vendor. This was a proper disposition of the matter.

The judgment of the district court is

Affirmed.