Tahmina Proulx v. 1400 Pennsylvania Avenue, SE, LLC ( 2019 )

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DISTRICT OF COLUMBIA COURT OF APPEALS
No. 16-CV-1200
TAHMINA PROULX, APPELLANT,
V.
1400 PENNSYLVANIA AVENUE, SE, LLC, APPELLEE.
Appeal from the Superior Court of the
District of Columbia
(CAR-3639-14)
(Hon. Ronna Lee Beck, Trial Judge)
(Argued February 15, 2018 Decided January 10, 2019)
Marvin Liss for appellant.
Gary D. Wright for appellee.
Before GLICKMAN and MCLEESE, Associate Judges, and RUIZ, Senior Judge.
RUIZ, Senior Judge: Tahmina Proulx appeals the trial court’s determination
that she is liable for breach of a contract for commercial property that was sold to
her by appellee 1400 Pennsylvania Avenue, SE, LLC. Appellant argues that the
court erred in (1) finding that the contract was not a contract of adhesion, and (2)
concluding that the liquidated damages provision was valid. We affirm the
judgment of the trial court.
2
I.
In February of 2012, Remy Esquenet, an attorney and real estate broker
representing appellee, and Ken Noroozi, a real estate broker representing appellant,
began negotiations regarding the lease and sale of a property located at 1400
Pennsylvania, SE in Washington D.C. Appellant’s brother, Mian Amir, was also
heavily involved in the contract negotiations. The property, a vacant ground floor
retail unit and basement, was to be used by appellant, her brother, and their family
for their family business, a pizza restaurant. While negotiating the sale of the
property to appellant, appellee was in the process of incorporating as an LLC and
purchasing the property from its previous owner.
On March 7, 2012, appellant and appellee entered into a commercial
Contract of Purchase and Sale (“the Contract”), which provided that appellant
would purchase the property for $550,000. 1 Under the terms of the Contract and
pursuant to a Commercial Pre-Occupancy Agreement (“the Pre-Occupancy
1
Appellant executed the contract through her brother, whom she authorized
to sign on her behalf.
3
Agreement”) attached to the Contract,2 appellant would take possession of the
property between March 15 and 26, 2012, and final settlement on the sale would
take place during the twelve-month period after the first year of occupancy, i.e.,
March 2013 to March 2014. 3 The Contract called for a non-refundable $150,000
deposit, which would ultimately be credited towards the purchase price of
2
Under the Pre-Occupancy Agreement, appellant would pay a monthly rent
of $4,000 until the settlement on the purchase.
3
Paragraph 6 of the Contract specifies that the “[p]ossession [d]ate . . . shall
be as early as March 15th, 2012 or latest March 26th, 2012,” and Paragraph 7 states
that “Seller and Purchaser shall make full settlement of the purchase and sale (the
‘Settlement’) on or within twenty four (24) months but not earlier than twelve (12)
months after the Possession Date, (the ‘Settlement Date’).” The Pre-Occupancy
Agreement provides that the settlement date is to be “no earlier than April 1, 2013
and no later than March 31, 2014.”
4
$550,000 at the time of settlement. 4 The Contract also provided that, in the event
of breach by appellant, the $150,000 deposit would serve as liquidated damages. 5
4
Paragraph 4(a) of the Contract reads, in relevant part:
4) Deposit
a) The Purchaser shall deposit . . . the amount of [one]
Hundred Fifty Thousand Dollars ($150,000) (the
“Deposit”), payable to the Seller upon receipt by Seller
of this Contract fully executed by the Seller and
Purchaser. . . . This deposit is non-[re]fundable except in
the event that the Seller defaults or in any way is unable
to settle under the terms of this Contract. . . . The
Deposit shall be applied as a credit to the Purchase Price
[($550,000)].
5
Paragraph 18 of the Contract reads, in relevant part:
18) Performance
a) If the Purchaser fails to perform under this Contract,
the Deposit shall be forfeited to the Seller as the Seller’s
sole remedy and the Purchaser[] and Seller shall have no
further liability to one another. Seller and Purchaser
acknowledge and agree that, (i) it would be extremely
difficult to accurately determine the amount of damages
suffered by Seller as a result of Purchaser’s default; (ii)
the Deposit constitutes a fair and reasonable amount to be
received by Seller as agreed and liquidated damages for
Purchaser’s default under this Contract, as well as a fair,
reasonable and customary amount to be paid as
liquidated damages to a seller in an arm’s length
transaction of the type contemplated by this Contract
upon a default by the purchaser; and (iii) receipt by Seller
of the Deposit upon Purchaser’s default shall not
constitute a penalty or a forfeiture.
5
On March 12, 2012, appellee was incorporated as an LLC, and, on March,
13, 2012, appellee purchased the property from its previous owner for $465,000.
Appellant then paid appellee the $150,000 deposit,6 and, by March 26, 2012, took
possession of the property.
Thereafter, the parties performed under the Pre-Occupancy Agreement:
appellee paid property taxes and condominium fees, while appellant occupied and
exercised control over the property, paying appellee $4,000 per month in rent
before later falling delinquent. Appellant was also unable to close on the purchase
before the final possible settlement date under the Contract: March 26, 2014. 7 In
April of 2014, the property was vacant and no business was being conducted; on or
around May 1, 2014, appellee changed the locks on the property.
On June 13, 2014, appellant filed a complaint alleging that the Contract
should be rescinded and that the $150,000 liquidated damages provision was an
6
The exact dates in March of 2012 on which the payment of the deposit
occurred and on which appellee acquired the property from the previous owner
were litigated before the trial court, but are not raised on appeal.
7
While neither the record nor the briefs clearly establish why appellant was
unable to close, Noroozi testified that Amir told him that he was “behind [on] the
rent payment [and] . . . trying to get the money together.” Amir also testified that
he did not apply for a loan to assist him in making the closing payment.
6
unenforceable penalty and the deposit should be returned. Appellee filed a
counterclaim alleging that appellant was in breach of the Pre-Occupancy
Agreement, and owed $24,000 in past-due rent. Following a bench trial, the trial
court ruled in favor of appellee on the complaint and counterclaim, finding that
rescission of the Contract would be unjust, allowing the liquidated damages clause
to stand, and holding that appellant owed appellee $24,000 for unpaid rent and
$779 for the insurance purchased by appellee that had been appellant’s
responsibility, as well as attorney’s fees and costs. Appellant filed this timely
appeal. 8
II.
Appellant contends that the Contract is a contract of adhesion and that the
trial court therefore erred in finding that the Contract was enforceable. “A contract
of adhesion is defined generally as one imposed upon a powerless party, usually a
consumer, who has no real choice but to accede to its terms.” Woodroof v.
Cunningham, 147 A.3d 777, 789 (D.C. 2016) (quoting Andrew v. American Imp.
Ctr., 110 A.3d 626, 633 n.8 (D.C. 2015)). Determining whether a contract is a
8
Appellant does not challenge the trial court’s ruling on the counterclaim
(for unpaid rent and insurance premiums) or the award of attorney’s fees; she
challenges only the trial court’s ruling on her complaint.
7
contract of adhesion is a fact-specific inquiry, in which the court examines the
relative bargaining power of the parties and the circumstances under which the
contract was negotiated and signed. See Andrew, 110 A.3d at 633 n.8, 637-38;
Moore v. Waller, 930 A.2d 176, 182 (D.C. 2007) (“There must be a showing that
the parties were greatly disparate in bargaining power, that there was no
opportunity for negotiation and that the services could not be obtained elsewhere.”
(citation omitted)). We review the trial court’s findings of fact for clear error. See,
e.g., Boyd v. Kilpatrick Townsend & Stockton, 164 A.3d 72, 78 (D.C. 2017);
Ballard v. Dornic, 140 A.3d 1147, 1150 (D.C. 2016).
The trial court did not err in its determination that the Contract between
appellant and appellee was not a contract of adhesion, but was a negotiated deal
between parties of equivalent bargaining power. There were oral negotiations
between the parties and multiple drafts of the Contract were sent back and forth
between them. Appellant, Amir, and Noroozi testified that they were highly
educated and experienced in real property transactions. 9 Because there was ample
evidence in the record to support the trial court’s finding that the bargaining
9
The trial court noted that “Plaintiff has an undergraduate degree and a
Master’s Degree in business. Her brother to whom she delegated decision making
has been running businesses for over 10 years and has been involved in negotiating
leases previously. Plaintiff and her brother were represented by an experienced
real estate broker, Mr. Noroozi . . . .”
8
process was fair, we discern no error in the trial court’s determination that the
Contract was not one of adhesion.
III.
Appellant makes the same argument, specifically addressed to the liquidated
damages clause, arguing that it was unilaterally foisted into the Contract by
appellee, and that the meaning of that provision was not explained to her. As
discussed above, the Contract was negotiated between parties of equal bargaining
power, so neither party acted unilaterally. While Noroozi, appellant’s broker,
testified that he “agreed to [the $150,000] be[ing] nonrefundable,” i.e., the
liquidated damages provision, because refusing would have been a “deal breaker”
for appellee, his testimony makes clear that this occurred in the context of active
negotiations between real estate professionals. As implied by the term “deal
breaker,” appellant was free to walk away if an agreement could not be reached.
And while appellant testified that she did not read the Contract thoroughly or
consult an attorney, but instead gave her brother full authority to sign the Contract
on her behalf, she had a duty to familiarize herself with what she was signing.
“We have . . . consistently adhered to a general rule that one who signs a contract
has a duty to read it and is obligated according to its terms. . . . [A]bsent fraud or
9
mistake, one who signs a contract is bound by a contract which [s]he has an
opportunity to read whether [s]he does so or not.” Pyles v. HSBC Bank USA, N.A.,
172 A.3d 903, 907 (D.C. 2017) (quoting Pers Travel, Inc. v. Canal Square Assocs.,
804 A.2d 1108, 1110 (D.C. 2002)). 10 There is no factual or legal support for
appellant’s contention that the circumstances under which the liquidated damages
clause was negotiated and agreed excuse her from being bound by its terms.
IV.
Finally, Appellant asserts that the liquidated damages clause should not be
enforced, as it is excessive and amounts to a penalty.
10
Other jurisdictions have found similar evidence sufficient to establish that
liquidated damages clauses were binding on the parties. See, e.g., Fuqua Constr.
Co. v. Pillar Dev., Inc., 667 S.E.2d 633, 635-36 (Ga. Ct. App. 2008) (holding an
appellant’s complaint that the appellee had “unilaterally foisted the language into
the deal” was unfounded where parties to a “sales contract were experienced real
estate developers and residential home builders”); Jameson Realty Grp. v.
Kostiner, 813 N.E.2d 1124, 1132-33 (Ill. App. Ct. 2004) (finding the liquidated
damages provision of a real estate brokerage contract was valid because it “was
clear and unambiguous on its face” and defendant was “an experienced developer
of residential real estate” who actively negotiated the agreement and could “not
reasonably argue that he was not aware of the presence or import of this
provision”); Wilmington Tr. Co. v. Aerovias de Mexico, S.A. de C.V., 893 F. Supp.
215, 218 (S.D.N.Y. 1995) (“Relevant to [the liquidated damages bargaining]
inquiry is the sophistication of the parties and whether both sides were represented
by able counsel who negotiated the contract at arms length without the ability to
overreach the other side.”).
10
A.
“It is well-settled that parties to a contract may agree in advance to a sum
certain to be forfeited as liquidated damages for breach of contract.” Burns v.
Hanover Ins. Co., 454 A.2d 325, 237 (D.C. 1982). This is because a liquidated
damages clause serves “to simplify the resolution of a breach of contract dispute”
by “giving the parties an opportunity to resolve the damages question without
resorting to litigation” and by “fix[ing] the measure of damages at the outset before
a breach even occurs.” Vicki Bagley Realty, Inc. v. Laufer, 482 A.2d 359, 367
(D.C. 1984). “Such a provision is particularly appropriate . . . where the
damages . . . are uncertain in amount and cannot be easily ascertained.” Id.(citation and internal quotation marks omitted).11
11
See also Priebe & Sons v. United States, 332 U.S. 407, 411-12 (1947)
(“Today the law does not look with disfavor upon ‘liquidated damages’ provisions
in contracts. When they are fair and reasonable attempts to fix just compensation
for anticipated loss caused by breach of contract, they are enforced. . . . They serve
a particularly useful function when damages are uncertain in nature or amount or
are unmeasurable . . . . And the fact that the damages suffered are shown to be less
than the damages contracted for is not fatal. These provisions are to be judged as
of the time of making the contract.” (citations omitted)).
11
Thus, this court has held that a “liquidated damages clause is valid unless it
is found to constitute a penalty,” Burns, 454 A.2d at 327, and has adopted “the
prevailing rule” that the burden is on “the party challenging [] enforceability . . . to
establish that the liquidated damages clause was a penalty.” S. Brooke Purll, Inc.
v. Vailes, 850 A.2d 1135, 1138 (D.C. 2004) (citations and internal quotation marks
omitted). As this court has recognized, “it has become increasingly difficult to
justify the peculiar historical distinction between liquidated damages and penalties.
Today the trend favors freedom of contract through the enforcement of stipulated
damage provisions as long as they do not clearly disregard the principle of
compensation.” Id. at 1137 (quoting E. Allen Farnsworth, Farnsworth on
Contracts § 12.18, 303-04 (3d ed. 2004)). 12
To distinguish between enforceable liquidated damages provisions and
unenforceable penalties, we consider the reasonableness of the terms of the
liquidated damages clause, as compensation for breach, viewed as of the time and
under the circumstances when it was agreed.
12
See also Priebe & Sons, 332 U.S. at 413 (“All provisions for damages
are, of course, deterrents of default. But an exaction of punishment for a breach
which could produce no possible damage has long been deemed oppressive and
unjust.” (citation omitted)).
12
If under the circumstances and expectations of the parties
existing at the time of execution it appears that the
provision is a reasonable protection against uncertain
future litigation the provision will be enforced even
though no actual damages were proved as of the date of
the breach. If, on the other hand, it appears that the
stipulation is designed to make the default of the party
against whom it runs more profitable to the other party
than performance would be, it will be void as a penalty.
Thus, damages stipulated in advance should not be more
than those which at the time of the execution of the
contract can be reasonably expected from its future
breach, and agreements to pay fixed sums plainly without
reasonable relation to any probable damage which may
follow a breach will not be enforced.
Davy v. Crawford, 147 F.2d 574, 575 (D.C. Cir. 1945). Because the touchstone is
reasonableness as of the time of execution, “agreements to pay fixed sums plainly
without reasonable relation to any probable damage which may follow a breach
will not be enforced,” Order of AHEPA v. Travel Consultants, Inc., 367 A.2d 119,
126 (D.C. 1976) (citation and internal quotation marks omitted), and “liquidated
damages must not be disproportionate to the level of damages reasonably
foreseeable at the time of the making of the contract.” Council v. Hogan, 566 A.2d
1070, 1072 (D.C. 1989). Thus, we have stated that “[t]he common law views
liquidated damages clauses with a gimlet eye.” District Cablevision Ltd. P’ship v.
Bassin, 828 A.2d 714, 723 (D.C. 2003). Still, “[w]hen a liquidated damages
provision is the product of fair arm’s length bargaining, particularly between
13
sophisticated parties, common law suspicions may be eased and more latitude may
be afforded the contracting parties to agree as they wish on the remedies for
breach.” Id. at 723-34. Using this framework, courts have generally upheld
liquidated damages provisions.13
13
See S. Brooke Purll, Inc., 850 A.2d at 1139 (liquidated damages clause
requiring homeowner to pay 35 percent of full contract price for cancellation of
home improvement contract was not an unenforceable penalty because two thirds
of the contract price represented materials and labor and one third represented the
contractor’s profit); Vicki Bagley Realty, Inc., 482 A.2d at 367 (liquidated damages
clause in contract for sale of home, which provided for forfeiture of purchaser’s
deposit if full settlement was not made, was reasonable because of the difficulty of
measuring actual damages and mitigation of those damages — and thus the clause
was not an unenforceable penalty); Burns, 454 A.2d at 327 (liquidated damages
clause in construction contract, which stated that construction company must pay
owners an amount corresponding to the length of the company’s delay in
completing the project and calculated based on actual costs, was not an
unenforceable penalty); Order of AHEPA, 367 A.2d at 127 (liquidated damages
clause in contract for travel services was not an unenforceable penalty, even
though it provided for a fixed sum of $100,000 in the event of breach, when
payments under the contract were to be made on a commission basis, as
determining the precise amount of damages at the time of contracting would have
been difficult); Red Sage Ltd. P’ship v. Despa Deutsche, 254 F.3d 1120, 1127-31
(D.C. Cir. 2011) (liquidated damages clause requiring commercial landlord to
reduce tenant’s rent by 50 percent for violating an exclusive covenant was not an
unenforceable penalty because landlord’s grant of a lease to a competitor business
could cause significant and difficult-to-calculate losses to tenant’s profits, new
business opportunities, and goodwill); cf. Falconi-Sachs v. LPF Senate Square,
LLC, 142 A.3d 550, 557-58 (D.C. 2016) (liquidated damages provision imposing a
10 percent late fee on rent paid more than five days late may be an unenforceable
penalty such that a complaint should survive a motion to dismiss because tenant
asserted that the breach is nominal, the fee is the same regardless of how late the
payment is made after five days, and the fee is far higher than a reasonable forecast
of damages); District Cablevision Ltd. P’ship, 828 A.2d at 724-25 (liquidated
damages clause requiring cable customers to pay cable company a late fee that was
(continued . . . )
14
B.
We turn to the application of these principles to the liquidated damages
provision in this case, which called for forfeiture of the $150,000 deposit in the
event that appellant did not close on the purchase. 14 Appellant argued at trial that,
because appellee purchased the property for $465,000 and then agreed to sell it to
appellant for $550,000 under the Contract, liquidated damages should have been
capped at $85,000, as that was the amount appellee stood to lose if the sale was not
completed. Appellant also contends that the Contract price of $550,000 was
$50,000 over market value at the time the Contract was executed (March of 2012),
so actual damages from default would have been no more than $50,000 — and
_______________________
( . . . continued)
more than twice the actual cost to the company of processing late payments was
not “shockingly disproportionate,” but could still be construed as a penalty by a
jury); Council, 566 A.2d at 1072-74 (liquidated damages clause providing that
party defaulting on repayment of a $500 loan would have to turn over an $8,000
automobile may amount to a penalty and the trial court must gather further
evidence); Davy, 147 F.2d at 575 (lease agreement “covenants [that] are so strictly
drawn that the slightest slip on the part of the tenant will cause him to lose his
entire equity,” particularly in light of “[o]ther provisions in the contract [that]
emphasize its unconscionable and overreaching character,” amount to
unenforceable penalties).
14
In the event that appellee defaulted on the sale, the $150,000 deposit
would be returned to appellant. See supra note 4.
15
thus, liquidated damages should have been capped at $50,000. 15 In either case,
appellant’s argument is that liquidated damages in the amount of $150,000 should
be void for excessiveness, as this amount is disproportionate to the damages
foreseeable at the time of contracting, and that a damage award of $150,000 creates
a situation in which it was more profitable to appellee for appellant to default than
to go through with the sale contemplated in the Contract. See Davy, 147 F.2d at
575.
The flaw in appellant’s argument is that it equates liquidated damages,
which are a prospective estimate set at the time of contract execution, with the
benefit of the bargain if settlement had taken place at the outset, and with actual
damages, which can be ascertained only after breach has occurred. In evaluating
the reasonableness of a liquidated damages clause, the court must assess the
situation as of the time of execution of the contract and from the perspective of the
negotiating parties looking at possible breach. See, e.g., Davy, 147 F.2d at 575; S.
Brooke Purll, Inc., 850 A.2d at 1137-38; Order of AHEPA, 367 A.2d at 127; see
also Red Sage Ltd. P’ship, 254 F.3d at 1127.
15
Appellant mentions the $50,000 figure for the first time on appeal,
apparently based solely on Noroozi’s statement at trial — unsupported by an
appraisal or other documentation — that the property was worth $500,000.
16
As the trial court noted, the real estate market is unpredictable, and
calculating how much appellee would be damaged if appellant defaulted could be
an expensive proposition that, at best, would be only an educated guess. In this
case, an accurate prediction was made particularly difficult because closing on the
sale of the property could have taken place at any time during a twelve-month
period that would not begin to run until one year after the Contract was executed.
See supra note 3. Hence, the process of determining “damages to be ascertained,”
S. Brooke Purll, Inc., 850 A.2d at 1138 (citation and internal quotation marks
omitted), was simplified for both parties at the outset by agreeing to release all
liability claims in exchange for retaining the deposit.
Appellant has not carried her burden to establish that the $150,000 amount
of liquidated damages was a penalty. Appellant appears to contend that her breach
caused only limited harm to appellee, presumably because appellee could have
resold the property at a profit. At trial, Noroozi offered an upbeat assessment,
testifying that the real estate market in the neighborhood where the property was
located was going up during 2012, and that it was an “[i]mproving neighborhood”
for commercial purposes.16 But real estate markets might go up or down, and, in
16
As with the $50,000 figure, see supra note 15, Noroozi’s statement was
unsupported by data or documentation.
17
early 2012, the parties may have reasonably decided to avoid the financial
rollercoaster of prices they could not control by agreeing to an amount they could
plan for. See, e.g., Stanford Hotels Corp. v. Potomac Creek Assocs., L.P., 18 A.3d
725, 742 (D.C. 2011) (“It is generally known that in the last few years there have
been wide fluctuations in the real estate market . . . .”).
Moreover, even if the parties could have known for certain in 2012 that
property values would rise, this would not necessarily mitigate the damages to
appellee in case the sale did not go through due to appellant’s breach. On the
contrary, it is possible that, during the two years between execution of the Contract
and the final settlement date, appellee would have to forgo an opportunity to sell
the property at a profit greater than $150,000 — an opportunity that it might not be
able to reclaim if and when appellant breached. From appellant’s perspective, she
fixed and capped her liability in the event of breach, a contingency that was
entirely within appellant’s control and that appellant might have described as an
unlikely event. The fact that appellant’s calculus did not play out as expected does
not invalidate the bargain she struck. In addition, appellee would have incurred
costs associated with carrying the property for up to twenty-four months and for
selling the property to another buyer. Thus, from appellee’s perspective, the
18
liquidated damages provision would have been necessary to guarantee a
meaningful profit in the event of appellant’s breach.
Given the complexities and uncertainties of the D.C. real estate market, as
well as these additional costs, it is entirely possible that appellee’s damages as a
result of appellant’s breach could have been in excess of $150,000. Thus,
appellant has not borne her burden of showing that forfeiture of the deposit is a
penalty because it exceeded reasonably expected damages at the time of execution
or made default more profitable than performance. As there is no evidence that the
parties were unequally matched in their negotiations, and the delayed closing
contemplated under the Contract justified their agreeing on a liquidated damages
clause up front to settle on ascertainable damages, the clause is valid and
enforceable.
V.
We conclude that a full consideration of the record supports the trial court’s
determination that the Contract was not one of adhesion and that the $150,000
liquidated damages clause was not unreasonable under the circumstances. We
19
therefore affirm the trial court’s ruling that appellee may retain the $150,000
deposit as liquidated damages for appellant’s breach.
Affirmed.