Dean v. Kruse Foundation, Inc., Dean Kruse and Kruse International v. Jerry W. Gates , 973 N.E.2d 583 ( 2012 )

FOR PUBLICATION FILED
Aug 07 2012, 9:09 am
CLERK
of the supreme court,
court of appeals and
tax court
ATTORNEYS FOR APPELLANT: ATTORNEYS FOR APPELLEE:
THOMAS E. DENSFORD GEOFFREY M. GRODNER
ALICIA C. SANDERS KENDRA G. GJERDINGEN
Bauer & Densford Mallor Grodner, LLP
Bloomington, Indiana Bloomington, Indiana
IN THE
COURT OF APPEALS OF INDIANA
DEAN V. KRUSE FOUNDATION, INC., )
DEAN KRUSE and KRUSE INTERNATIONAL, )
)
Appellants-Defendants, )
)
vs. ) No. 59A05-1201-CT-37
)
JERRY W. GATES, )
)
Appellee-Plaintiff. )
APPEAL FROM THE ORANGE CIRCUIT COURT
The Honorable Roger D. Davis, Special Judge
Cause No. 59C01-0610-CT-312
August 7, 2012
OPINION - FOR PUBLICATION
RILEY, Judge
STATEMENT OF THE CASE
Appellants-Defendants/Counterclaim Plaintiffs, Dean V. Kruse Foundation
(Foundation), Dean V. Kruse (Kruse), and Kruse International (collectively, the Kruse
Parties), appeal the trial court’s judgment against Appellee-Plaintiff/Counterclaim
Defendant, Jerry W. Gates (Gates).
We reverse and remand with instructions.
ISSUE
The Kruse Parties raise two issues on appeal, which we consolidate as the
following issue: Whether the trial court erred when it interpreted the parties’ agreement
to contain a liquidated damages clause.
FACTS AND PROCEDURAL HISTORY
The Foundation is a charitable organization operating a World War II and
automobile museum in Auburn, Indiana. In 2003, Kimball International donated its
furniture factory, a 42.79-acre parcel of real estate with a 300,000 square foot
manufacturing facility, located in West Baden, Indiana, to the Foundation. Although the
facility housed at least one tenant, the high cost of maintaining the property adversely
impacted the Foundation. The Foundation encountered a number of difficulties,
including the payment of property taxes, utility bills, and insurance as well as theft and
vandalism. The Foundation continued to lose money on the property, and had to take out
loans and requesting advances from a tenant to pay expenses.
2
Beginning in 2004 or 2005, the Foundation made a number of attempts to sell the
property. Although the property was sold once, the Foundation later took back the
property because the buyer failed to make payments. In March 2006, the Foundation
retained Colliers Turley, Martin, Tucker (Colliers), a real estate broker, to list and market
the property. Colliers conducted a market survey for the property, providing three values
for the property based on three classifications of potential buyers. The first tier of
potential buyers included those who would make the highest and best use of the property,
i.e., as an income producing property, resulting in a sales range of $4.5 million to $5.2
million. The second tier included those buyers who would put the property to secondary
uses. The value range in this case was between $3.5 million and $4.5 million. The third
tier of potential buyers consisted of speculators for whom the property had a value range
of $2 million to $3.5 million. Based on these values, Colliers generated an asking price
of $5,750,000 for the property.
Thereafter, Colliers was unsuccessful in locating a buyer. Kruse, an auctioneer
and licensed real estate broker, decided to auction the property. Kruse believed the
property to be worth five million dollars given its size, which even then was a “junk
price.” (Transcript p. 129). Kruse International and Colliers conducted marketing efforts
advertising the auction.
On July 12, 2006, the property was auctioned on site. The auction was conducted
as a final, rather than as a reserve, auction. Each bidder received a brochure, disclosures,
a bidder’s agreement, and the Purchase Agreement, which was a standardized agreement
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from the Indiana Realtors Association. The terms of the Purchase Agreement were
published in the packet, including the amount of earnest money and the date of closing.
According to Kruse, “[e]very single bidder” had to sign the documents in order to qualify
as a bidder. (Tr. p. 122). Seven to nine bidders registered and four to six bidders
participated, including Gates. Gates was a professional and experienced real estate
developer, whom Kruse had known and served with on the Board of the Indiana
Association of Realtors for many years. At the end of the bidding process, Gates was the
high bidder with a bid of $4 million, which, with a 5% buyer’s premium, resulted in a
purchase offer of $4,200,000. Thereafter, both Gates and Kruse filled out the blank
portions of the Purchase Agreement.
The Purchase Agreement provided, in relevant part, as follows:
[Buyer] agrees to pay therefore the sum of Four Million Dollars
($4,000,000) on the following terms: Cash At Closing Plus 5% Buyers
Premium[.] One Hundred Thousand Dollars ($100,000) of said purchase
price is hereby deposited as earnest money with Kruse Real Estate[,] same
to be refunded if the above offer is not accepted on or before today or if the
title to the above property is found defective and said defects cannot be
remedied within a reasonable time. However, if the buyer fails to complete
the purchase within a reasonable time due to no fault of the seller, then the
earnest money deposited is forfeited, and seller may sue for specific
performance.
(Appellant’s App. p. 27).
On August 9, 2006, Gates informed the Kruse Parties in writing that he was
terminating the Purchase Agreement. Prior to that, Kruse spoke with Gates regarding
problems with the property’s title and condition. Gates expressed his reluctance to handle
4
a large project. Kruse threatened specific performance of the Purchase Agreement, which
Gates rebuffed.
Subsequently, Kruse and Colliers contacted the other bidders and other potential
buyers of the property. Through the combined efforts of Colliers and the Kruse Parties,
over a thousand potential buyers, ranging from institutional to individuals, were solicited
for offers. In the end, Colliers received an offer for $5 million, which fell through for
lack of financing; an offer for $1.1 million, which was rejected for being too low; and one
offer of $2 million, to which Colliers and the Kruse Parties made a counter-offer of $3.5
million. The $1.1 million and $2 million offers were both made in September 2006, and
written on the same form as the Purchase Agreement. Ultimately, the Kruse Parties and
French Lick-West Baden Development Park, the latter offeror, agreed upon a sales price
of $2,350,000 and executed a purchase agreement.
On October 4, 2006, Gates filed suit against the Kruse Parties and Colliers for
breach of contract, fraud, and conversion. On November 27, 2006, The Kruse Parties
filed a counterclaim for breach of contract and slander of title. On February 27, 2009,
Gates moved for partial summary judgment on the breach of contract claims. On July 10,
2009, the Kruse parties filed their response and cross-motion for partial summary
judgment on breach of contract, fraud, and conversion. On December 21, 2009, the trial
court granted summary judgment in Gates’ favor and the Kruse Parties were ordered to
return the earnest money with interest.
5
The Kruse Parties appealed. In Dean V. Kruse Foundation v. Gates, 932 N.E.2d
763 (Ind. Ct. App. 2010), trans. denied (Kruse I), we reversed the trial court and
remanded with instructions to enter summary judgment in favor of the Kruse Parties on
Gates’ breach of contract claim as well as on the Kruse Parties’ breach of contract, fraud,
and conversion claims. Further, we instructed the trial court to hold a hearing on the
appropriate amount of damages. On August 5, 2011, Gates’ guardians were substituted
by joint stipulation, and on August 19, 2011, the trial court entered a summary judgment
order in favor of the Kruse Parties.
On December 2, 2011, the trial court held a hearing on damages. The Kruse
Parties sought damages in the amount of $2,468,794. This amount was based on the
difference between the purchase price in the Purchase Agreement ($4 million) and the
purchase price from the subsequent sale of the property to French Lick-West Baden
Development LLC ($2,350,000). In addition, the Kruse Parties sought the buyer’s
premium of $200,000 and prejudgment interest in the amount of $718,794. The amount
of $100,000, the earnest money deposit, was credited against the foregoing.
On December 20, 2011, the parties filed their Joint Request for Court to Enter
Judgment. On January 3, 2012, the trial court issued its Entry Determining Damages as
Required by the Court of Appeals. The trial court awarded damages to the Kruse Parties
in the amount of $100,000 based on its conclusion that the Purchase Agreement
contained a liquidated damages provision coupled with an option for the Kruse Parties to
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pursue specific performance against Gates. In particular, the trial court concluded as
follows.
In this case the amount of $100,000.00 is not grossly excessive or unjust
considering the four million dollar purchase price. The trial court finds the
evidence as to the value of the property was uncertain. The [c]ourt also
finds the property in question may have been sold for more if a longer
period of time were available to market it. Mr. [Luke] Wessel [(Wessel) of
Colliers] testified the value of the property was $3.5 million after the sale
fell through with Gates. Therefore, the damages were uncertain. Any
certainty arises solely from the sale of the property to a different buyer.
Regarding the evaluation of whether the $100,000.00 provision is a
liquidated damages clause or a penalty, the trial court notes the Kruse
[P]arties would be required to mitigate damages if they were entitled to
claim legal damages. The trial court heard evidence at trial for damages
from Mr. Wessel and the evidence was far from clear regarding the value of
the property before the sale to Gates and the value after the sale fell
through.
Mr. Wessel testified as to value before the sale to Gates and gave his
opinion of the value in ranges. For highest and best use the range was $4.5
to $5.2 million. For secondary use the range was $3.5 to $4.5 million for
speculator price the range was $2.0 to $3.5 million. Mr. Wessel testified
that the two top tiers (other than the speculator price) would be 90% of
prospective buyers. Mr. Wessel’s opinion of value of the property in
September of 2006 after the sale fell through was $3.5 million. Mr. Kruse
had been initially advised the property would bring $4-5 million and it was
listed for $5.75 million. The uncertainty regarding the value of the property
and what it could be sold for within a certain time frame supports a
conclusion that the ease of determining actual damages in this case is not
what it may seem on the surface.
The trial court finds the provisions in the [P]urchase [A]greement prepared
by the Kruse Parties to be unambiguous regarding what was to happen in
the event of a breach by the purchaser. The Seller “may sue for specific
performance[.”] The Kruse [P]arties elected not to pursue specific
performance. Also, the Seller got to keep the $100,000.00. It was
“forfeited[.”] Nothing more was provided in the way of remedies for the
purchaser’s breach of the contract prepared by the Kruse Parties and the
document had an integration clause that it contained “all the terms and
7
conditions agreed upon” and there were no others “not stated in this
instrument[.”] The court should give unambiguous liquidation clauses
“force and effect[.”] [See Beck v. Mason, 580 N.E.2d 290, 294 Ind. Ct.
App. 1991)].
The trial court finds and concludes the $100,000.00 provision in the
[P]urchase [A]greement prepared by the Kruse Parties was a liquidated
damages clause and the Kruse Parties chose not to pursue specific
performance. The [P]urchase [A]greement did not provide for any further
remedies and the [P]urchase [A]greement contained all of the terms,
conditions, and agreement of the parties according to the language of the
[P]urchase [A]greement. The [P]urchase [A]greement was prepared by the
Kruse Parties. The Kruse Parties were sophisticated and experienced in
commercial real estate transactions. Therefore since the Kruse parities have
already received the $100,000.00 the trial court finds they are not entitled to
anything further. The trial court finds the Kruse Parties damages to be
$100,000.00 pursuant to the [P]urchase [A]greement prepared by the Kruse
Parties.
(Appellant’s App. pp. 9-12).
The Kruse Parties now appeal. Additional facts will be provided as necessary.
DISCUSSION AND DECISION
I. Standard of Review
Here, the parties jointly requested an entry of judgment, and the trial court issued
its Entry Determining Damages as Required by the Court of Appeals, which contains
findings of fact and conclusions of law. Ind. Trial Rule 52(A) governs the trial court’s
use of findings and conclusions when matters are adjudicated at a trial by the court
without a jury. Pursuant to T.R. 52(A), we will set aside the judgment only upon a
showing that the judgment is clearly erroneous. Ream v. Yankee Park Homeowner’s
Ass’n, Inc., 915 N.E.2d 536, 540 (Ind. Ct. App. 2009), trans. denied. In determining
whether a judgment is clearly erroneous, we will neither reweigh the evidence nor
8
determine the credibility of witnesses, but will consider only the evidence supporting the
judgment and the reasonable inferences to be drawn from that evidence. Id. Where, as
here, the trial court has issued written findings and conclusions, we engage in a two-
tiered review, determining first, whether the evidence supports the findings and second,
whether the findings support the judgment. Id. In deference to the trial court's proximity
to the issues, we will disturb the judgment of the trial court only where there is no
evidence supporting the findings or the findings fail to support the judgment. Id.However, when a question of law is dispositive, we owe no deference to the trial court
and review the issue de novo. Id.The issue before us is whether the forfeiture provision in the Purchase Agreement
constitutes liquidated damages or an unenforceable penalty. “The question whether a
liquidated damages clause is valid, or whether it constitutes a penalty, is a pure question
of law for the court.” Gershin v. Demming, 685 N.E.2d 1125, 1128 (Ind. Ct. App. 1997).
The trial court interpreted the Purchase Agreement to contain a liquidated damages clause
thereby limiting the Kruse Parties’ damages to the earnest money deposit.
On appeal, the Kruse Parties contend that the forfeited earnest money deposit
constituted a penalty, rather than liquidated damages. In support of this interpretation the
Kruse Parties assert that (1) the parties intended that the earnest money was to secure
performance of Gates’ obligation to purchase the property; (2) their damages were
ascertainable; and (3) the language of the Purchase Agreement did not limit their
remedies for breach solely to retention of the earnest money and specific performance.
9
Arguing in support of the trial court’s ruling, Gates contends that the forfeited
earnest money deposit represents liquidated damages as evidenced by (1) our opinion in
Kruse I, which Gates contends determined the forfeiture provision to be a liquidated
damages clause; (2) the Kruse Parties’ refusal to return the earnest money following
breach; and (3) interpretation of the forfeited earnest money as an unenforceable penalty
would render other provisions of the Purchase Agreement meaningless.
II. Law of the Case
We first address Gates’ argument that because this court’s opinion in Kruse I
impliedly found the forfeited earnest money to be liquidated damages, the law of the case
doctrine precludes further consideration of this issue. Specifically, because this court
recognized that the earnest money was forfeited under the Purchase Agreement, Gates
contends that this court by implication must have first concluded that the forfeiture
provision equated to an enforceable liquidated damages provision. As a result, Gates
argues that the issue has been decided and the law of the case precludes our further
consideration of whether the forfeited earnest money constitutes liquidated damages or a
penalty.
The law of the case doctrine provides that an appellate court determination of a
legal issue is binding on the trial court and this court in any subsequent appeal in the
same case and involving the same facts. In re Guardianship of Stalker, 953 N.E.2d 1094,
1101-02 (Ind. Ct. App. 2011). The purpose of the doctrine is to minimize unnecessary
relitigation of legal issues once they have been resolved by an appellate court. Id. at
10
1102. All issues decided directly or by implication in a prior decision are binding in all
further portions of the same case. Id. However, we also note that the law of the case
doctrine is a discretionary tool. Id. To invoke this doctrine, the matters decided in the
earlier appeal must clearly appear to be the only possible construction of an opinion. Id.Thus, questions not conclusively decided in the earlier appeal do not become the law of
the case. Id. Moreover, statements that are not necessary in the determination of the
issues presented are dicta, are not binding, and do not become the law of the case. Id.We find that the law of the case doctrine does not apply for the following reasons.
First, Kruse I does not analyze whether the forfeiture clause at issue is a liquidated
damages clause; it merely noted that under the express terms of Purchase Agreement the
earnest money is forfeited. Kruse I, 932 N.E.2d at 767, 769. Second, the issues before us
in Kruse I were expressly limited to those raised by the parties in their respective motions
for summary judgment. Those included 1) whether either party breached the Purchase
Agreement; 2) whether the Kruse Parties committed fraud; and 3) whether the Kruse
Parties’ retention of the earnest money constituted conversion. See Kruse I, 932 N.E.2d
at 767-69. For the third issue, this court reasoned that Gates could not show that the
Kruse Parties were “aware that there was a high probability that [their] control over the
property was unauthorized,” since retention of the earnest money “was expressly allowed
under the contract in the event of the purchaser’s breach.” Id. at 769. We therefore
found that Kruse was “contractually entitled to keep the earnest money when Gates
refused to close the sale.” Id.11
Gates’ argument assumes that retention of earnest money forecloses any other
monetary remedy. If anything, Kruse I would seem to imply that the provision at issue
was a penalty as evidenced by this court’s remand for consideration of the damages
issues.
In their counterclaim, the Kruse Parties request “all damages incurred as a
result of the breach … including all transaction costs, auction fees, buyer
premiums, realtor commissions, costs of collection and reasonable attorney
fees, and for all other proper relief. Because the record before us does not
include this information, we reverse and remand for a determination of
damages.
Id. at 768 (internal citations omitted). In light of the foregoing, we find that the issue was
not decided directly or by implication. Therefore, the law of the case doctrine does not
preclude our subsequent determination.1
III. Liquidated Damages
A liquidated damages clause provides for the forfeiture of a stated sum of money
upon a breach of contract without proof of damages. Rogers v. Lockard, 767 N.E.2d 982,
990 (Ind. Ct. App. 2002). Liquidated damages clauses are generally enforceable where
the nature of the agreement is such that damages for breach would be uncertain, difficult,
or impossible to ascertain. Id.1
Gates also argues that the Kruse Parties impliedly argued that the earnest money was liquidated
damages in Kruse I and to assert the opposite now is incongruous with their prior position. However, the
opinion in Kruse I contains no mention that the Kruse Parties asserted that the forfeited earnest money
constituted liquidated damages, but merely mentions that the Kruse Parties sought damages for Gates’
breach.
12
While liquidated damages clauses are ordinarily enforceable, contractual
provisions constituting penalties are not. Id. at 991. The distinction between a penalty
provision and one for liquidated damages is that a penalty is imposed to secure
performance of the contract and liquidated damages are to be paid in lieu of performance.
Gershin, 685 N.E.2d at 1128. To determine whether a stipulated sum payable upon
breach of contract constitutes liquidated damages or a penalty, the facts, the intention of
the parties, and the reasonableness of the stipulation under the circumstances of the case
are all to be considered. Id. The use of the words “damages,” “penalty,” “forfeiture,”
and “liquidated damages” are not conclusive, but should be considered in connection
with other provisions in the contract to determine the nature of the provisions. Rogers,
767 N.E.2d at 991. However, despite the plethora of abstract tests and criteria for the
determination of whether a provision is one for a penalty or liquidated damages, there are
no hard and fast guidelines to follow. Id.A. Purchase Agreement
Here, the Purchase Agreement does not label the forfeited earnest money as
liquidated damages. Instead, the Purchase Agreement only provides that the earnest
money is part of the purchase price, forfeitable upon breach by Gates. The parties cite to
three cases to identify relevant characteristics analogous to the kind of contractual
provision involved in this case. However, only one of these cases involves a contractual
provision not expressly referred to as liquidated damages and none address a sale
conducted in the manner as was done in this case.
13
In Mandel v. Owens, 330 N.E.2d 362, 363 (Ind. Ct. App. 1975), trans. denied, we
considered a provision in a residential housing purchase agreement that called for
forfeiture of earnest money in the event of the purchaser’s breach. The purchaser failed
to complete the transaction and the seller brought suit to collect its damages. Id. The
agreement provided that the earnest money constituted part of the purchase price but was
otherwise silent on whether the earnest money was liquidated damages. Id. at 366. The
court could not determine from the language whether the forfeiture provision constituted
liquidated damages or a penalty. Id. Relying upon the presumptions that “a lump sum
named by the parties to a contract is a penalty rather than liquidated damages” and that
ambiguities in the contract must be construed against the drafter, the court ultimately
concluded the provision was an unenforceable penalty. Id.In Rogers v. Lockard, 767 N.E.2d 982 (Ind. Ct. App. 2002) and Beck v. Mason,
580 N.E.2d 290 (Ind. Ct. App. 1991), the court reviewed contractual provisions expressly
cast as liquidated damages. Beck also involved the sale of residential real estate, with the
purchaser providing a $1,000 deposit on the property. Id. at 291. The purchase
agreement explicitly labeled the deposit as “liquidated damages and not as a penalty or
forfeiture.” Id. The purchasers did not obtain financing and requested return of the
deposit. Id. The seller kept the deposit and sued for actual damages, claiming that the
deposit, even as liquidated damages, did not preclude recovery of their actual damages.
Id. Though concluding that a liquidated damages clause does not necessarily bar
additional damages, the court held that the provision at issue reflected the parties’ intent
14
that the deposit constituted liquidated damages because of its express labeling as such.
Id. at 293.
In Rogers, the court considered a provision that expressly labeled earnest money
as liquidated damages, but also permitted the sellers to seek their legal and equitable
remedies. Rogers, 767 N.E.2d at 989. In its interpretation of a residential real estate
contract, the court compared its provision to that appearing in Mandel and Beck. Id. at
991-92. It distinguished Beck by concluding that the addition of the sellers’ right to seek
equitable and legal remedies rendered an interpretation of the provision as a liquidated
damages clause inconsistent. Id. at 991. As a result, the court concluded that the
provision operated as punishment for the purchaser’s breach and “not as an estimation of
the actual damages.” Id. at 992.
Applying these precedents to the case at bar, we find that the provision before us
indicates an intent to penalize the purchaser for a breach rather than an intent to
compensate the seller in the event of breach. The earnest money deposit is clearly
specified as partial payment of the purchase price, suggesting that the earnest money was
not paid in lieu of performance, but rather as compulsion for the purchaser to complete
his purchase of the property following the auction. Although there is no mention of
forfeiture as a penalty, the provision is also not labeled as liquidated damages. Further,
the Purchase Agreement provides that the remedy of specific performance may be
available to the seller in the event of default, suggesting that there is no ability for the
purchaser to simply ‘walk away’ in the event of his breach. These features arguably
15
favor interpretation of the provision as a penalty rather than as one providing for
liquidated damages.
Support for this interpretation also emerges from the facts and circumstances of
the transaction itself. Mandle, Beck, and Rogers all involved residential real estate
purchases between individuals. The case at bar involves an auction of commercial real
estate to the highest bidder. The Foundation auctioned the property in the face of
unsustainable maintenance costs and failed attempts to sell the property. Kruse believed
the property to be worth five million dollars based on its size. As the trial court found,
“both parties to the [P]urchase [A]greement were sophisticated individuals with extensive
experience in commercial real estate transactions for decades.” (Appellant’s App. p. 9).
The contract used was a form agreement from the Indiana Association of Realtors and
both Kruse and Gates had been board members of said association. Kruse testified that
all bidders were informed of the required earnest money amount. Kruse also stated that
the earnest money was used to pre-qualify bidders for participation in the auction. Kruse
stood ready to perform his part of the bargain and, even without a breach, would have
been entitled to retain the earnest money, applying to part of the purchase price under the
express terms of the Purchase Agreement. This suggests that the earnest money was not
intended to be taken in lieu of purchase. Thus, the facts and circumstances point to an
interpretation of the provision as compulsion for the purchaser to consummate the
transaction, rather than a reasonable forecast of the damages to be paid in lieu of
performance.
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B. Additional Factors
We consider two additional factors to determine whether a provision constitutes
liquidated damages or a penalty. We consider the proportion of the amount claimed to be
liquidated damages with the amount of the loss likely to occur in the event of breach.
Gershin, 685 N.E.2d at 1128. We also consider whether the damages were certain or
ascertainable in the event of breach. See Rogers, 767 N.E.2d at 992-93.
First, a party seeking to enforce a liquidated damages provision must demonstrate
some proportionality between the loss and the sum established as liquidated damages.
Harbours Condominium Ass’n , Inc. v. Hudson, 852 N.E.2d 985, 993 (Ind. Ct. App.
2006). If the sum is not greatly disproportionate to the loss likely to occur or the loss
sought to be avoided, the provision will be accepted as a liquidated damages clause and
not as a penalty. Gershin, 685 N.E.2d at 1128. However, if the sum sought to be fixed is
grossly disproportionate to the loss which may result from the breach, courts will treat the
sum as a penalty rather than as liquidated damages. Id.Here, the trial court found that the earnest money of $100,000 represented 2.5% of
the purchase price. Citing Mandle, the trial court concluded that 2.5% of the purchase
price in this case was not grossly excessive or unjust because the purchase agreement in
Mandle specified an earnest money deposit of 1% of the purchase price. However, Kruse
testified that the amount of the earnest money deposit was known to bidders beforehand
in order to pre-qualify them for participation at the auction. Presumably, neither the
parties nor the other bidders would know what proportion the earnest money would bear
17
to the winning bid. We therefore do not find the proportion of the forfeited amount to the
sales price to be dispositive.
Next, we turn to trial court’s determination that damages in the event of breach
were uncertain, except as determined by the sales price later received by the Kruse
Parties. The trial court concluded that evidence of the property’s value was uncertain
because of the different market values for the property provided by Wessel. Wessel
testified to Colliers’ appraisal of the property based on multiple uses, with value ranges
listed for each type of potential buyer – up to $5.2 million for an investor using the
property for income purposes and $2 million for speculators. Upon Gates’ breach,
Colliers noted that the property was thereafter tainted: potential buyers would learn of
Gates’ refusal to purchase and being inquisitive as to why Gates refused to consummate
the transaction, would therefore be reluctant to purchase the property, resulting in lower
offers.
Wessel was equivocal on the approximate percentage of potential buyers per
category and insisted on the original asking price of $5.6 million because he was without
instructions to offer less following Gates’ breach. However, Wessel testified that he
believed the fair market value of the property at the time of the breach to be $3.5 million,
which represented the Kruse Parties’ counter-offer to the eventual buyer of the property
following its sale in October 2008. Finally, Wessel offered his opinion that the Kruse
Parties may have been able to receive more for the property if they had more time to
market the property. Based on this testimony, the trial court concluded “[t]he uncertainty
18
regarding the value of the property and what it could be sold for within a certain time
frame supports a conclusion that the ease of determining actual damages in this case is
not what it may seem on the surface.” (Appellant’s App. p. 11).
We cannot agree with the trial court that evidence of the property’s value was
uncertain. “[I]n most real estate purchase agreements, a measure of damages should be
readily ascertainable.” Rogers, 767 N.E.2d at 990, fn. 6. The measure of damages in a
breach of real estate contract is the difference between the sale price of the property to be
sold and the fair market value of the property at the time of breach. Showalter, Inc. v.
Smith, 629 N.E.2d 272, 275 (Ind. Ct. App. 1994), abrogated on other grounds by
Mitchell v. Mitchell, 695 N.E.2d 920 (Ind. 1998). The price paid by a subsequent
purchaser following the breach may also be admissible as evidence of the property’s fair
market value. See id.Here, there was sufficient evidence for the trial court to determine the fair market
value of the property at the time of breach. Wessel testified to his opinion of fair market
value at the time of breach, $3.5 million. Approximately two months following the
breach, by October 2008, the Kruse Parties sold the property for $2.35 million. This
evidence was uncontested at the hearing. Further, we note that the lapse of time between
the breach and the date of the subsequent sale does not necessarily render the foregoing
amounts “unsuitable for determining the fair market value of the property at the time of
the breach.” Showalter, 629 N.E.2d at 275. Accordingly, because the Kruse Parties
provided sufficient evidence to allow the trial court to determine the fair market value of
19
the property following Gates’ breach, we find that the trial court erred by concluding that
damages were uncertain. Cf. Patel v. United Inns, Inc., 887 N.E.2d 139, 150-51 (Ind. Ct.
App. 2008), reh’g denied.
C. Exclusivity of Remedies
Finally, we examine the trial court’s conclusion that the Kruse Parties were
precluded from exercising any remedy except specific performance upon Gates’ breach.
The Purchase Agreement provided that upon forfeiture of the earnest money deposit, “the
seller may sue for specific performance.” (Appellant’s App. p. 27). The trial court found
this language to be unambiguous and limited the Kruse Parties to retention of the earnest
money and specific performance. Further, the trial court relied upon an integration clause
in the Purchase Agreement to determine that the Kruse Parties could only avail
themselves of specific performance and the forfeited deposit as remedies following
breach. Because the Kruse Parties elected to sell the property, the trial court concluded
that they waived the availability of specific performance and their damages were limited
to the earnest money deposit. The integration clause provided that the Purchase
Agreement contained all “the terms and conditions agreed upon, it being agreed that there
are no conditions, representations, warranties or agreements not stated in this
instrument.” (Appellant’s App. p. 27).
Here, the Kruse parties contend that the provision at issue is permissive in scope
and thus its damages are not limited solely to specific performance and the forfeited
deposit. The Kruse parties argue that the language of the Purchase Agreement does not
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contain the word ‘exclusive’ and that there is no other express or implied limitation on
their contractual remedies. They also contend that the integration clause does not exclude
their remedies at law because an exclusion of remedies must be stated definitely and
affirmatively in the contract to show clear intent to exclude a remedy.
In contrast, Gates relies upon his argument that the forfeited earnest money
constitutes liquidated damages as well as the integration clause to argue that the Purchase
Agreement “did not provide for any other remedies, and specified it contained all the
terms and conditions agreed upon by the parties.” (Appellee’s Br. p. 12). As such, Gates
contends that the Kruse Parties are without a remedy, except as specified in the Purchase
Agreement.
We cannot agree with the trial court that the Kruse Parties are precluded from
asserting legal damages. Generally, a party is entitled to damages at law unless
specifically excluded in the agreement. See Four Seasons Mfg., Inc. v. 1001 Coliseum,
LLC, 870 N.E.2d 494, 502 (Ind. Ct. App. 2007). While it is true the Purchase Agreement
makes no mention of remedies other than specific performance, the clear import is that
the Kruse Parties were entitled to such remedies as the law may allow and may elect from
among them the remedy of specific performance. The remedy of specific performance is
preceded by the word “may,” which connotes permission rather than a requirement.
Moreover, providing a party with a remedy does not necessarily make it exclusive. Thus,
the language indicates that the Kruse Parties had a choice between either remedies – it
could pursue specific performance, an equitable remedy, but was not required to do so.
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See Rogers, 767 N.E.2d at 992. As such, we find that the provision does not provide a
definite and affirmative limitation. Thus, the Kruse Parties’ remedies were not limited
solely to the forfeited earnest money deposit and specific performance.
The integration provision in the Purchase Agreement does not alter this
conclusion. Generally, where the parties to an agreement have reduced the agreement to
a written document and have stated in an integration clause that the written document
embodies the complete agreement between the parties, the parol evidence rule prohibits
courts from considering parol or extrinsic evidence for the purpose of varying or adding
to the terms of the written contract. I.C.C. Protective Coatings, Inc. v. A.E. Staley Mfg.
Co., 695 N.E.2d 1030, 1035 (Ind. Ct. App. 1998), trans. denied. The underlying
assumption advanced by the trial court and by Gates is that legal remedies contradict the
terms of the Purchase Agreement. As discussed above, they do not. Accordingly, we
conclude that the Kruse Parties’ remedies were not limited by the Purchase Agreement to
the forfeited earnest money and specific performance, but instead also include the full
measure of damages for breach of contract.
In sum, we hold the contractual provision to be an unenforceable penalty based on
the following factors. First, the language of the Purchase Agreement, the facts and
circumstances of the transaction demonstrate that the parties intended the provision at
issue to act as a penalty, rather than an agreed measure of damages. Second, evidence of
damages presented to the trial court was reasonably certain, therefore precluding a
finding of liquidated damages. Finally, the Purchase Agreement does not preclude the
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Kruse Parties from seeking damages for Gates’ breach. Thus, we conclude that the
provision at issue cannot be enforced as a liquidated damages provision and instead
represents an unenforceable penalty.
Because the trial court concluded that the provision at issue constituted a
liquidated damages provision, it necessarily did not determine the amount of contractual
damages awardable to the Kruse Parties. Having determined the earnest money forfeiture
provision to be a penalty, we remand to the trial court for a proper determination of
damages consistent with this opinion.
CONCLUSION
Based on the foregoing, we conclude that the trial court erred in determining that
the forfeiture provision in the Purchase Agreement constituted a liquidated damages
clause. We reverse the judgment of the trial court and remand with instructions to the
trial court to calculate the measure of damages as a result of Gates’ breach of contract.
Reversed and remanded with instructions.
DARDEN, S.J. and MAY, J. concur
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