Daily Development for Tuesday, October 30, 2001

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

VENDOR/PURCHASER; REMEDIES; DAMAGES: Where court determines that property is not unique and that a lis pendens will be expunged in order to permit seller to sell property and leave buyer to buyer's action for damages, upon seller's posting of a bond, the bond amount will be limited to the difference between the value of the property and the market value at closing on buyer's contract, rather than the considerably larger amount that buyer might obtain had it succeeded in a specific performance action.

Reese v. Hung Kim Wong, No. AO93684 (Cal. App. 1st Dis 10/24/01)

Seller had breached the contract with Buyer. California has a statute that states the common law concept for a buyer's damages in such a case - the difference between fair market value and contract price at closing.

Seller had contracted to resell the property for price that was $35,000 more than Buyer's contract, so the fact and the amount of damages by this measure was clear.

But Buyer did not sue for damages - it sued for specific performance and filed a lis pendens on the property. Under another California statute, a lis pendens can be expunged from property upon the posting of a bond when the court concludes that the property is not unique and that buyer will be made whole with a damages remedy. The court originally required a bond for the statutory damages amount of $35,000. Buyer convinced the court, however, that if the Buyer should prevail on its claim for specific performance, and Seller sold the property in the face of a specific performance claim, the damages could be much higher. First, Buyer would be entitled to costs and attorney's fees (under the contract).

Second, Buyer would be entitled to the damages for the loss of the property at its value as of the time of the specific performance decree, which, it was clear, would be much higher. The court therefore raised the amount of the bond to $145,000. The Seller appealed this order, but a write of mandate was summarily denied.

Seller posted the bond and sold the property.

Later, the case went to trial and the court found that the breach occurred and awarded Buyer the $35,000 difference. Buyer appealed, arguing that it was entitled to the larger amount of damages. Here is the language of the statute in question (CC 3306):

"The detriment caused by the breach of an agreement to convey an estate in real property, is deemed to be the price paid, and the expenses properly incurred in examining the title and preparing the necessary papers, the difference between the price agreed to be paid and the value of the estate agreed to be conveyed at the time of the breach, the expenses properly incurred in preparing to enter upon the land, consequential damages according to proof, and interest."

The court found that this statute expressed the limit of damages not only for breach of contract actions but also for a case such as the one at bar, which began as a specific performance action. It rejected the plaintiff's argument that the expectation damages that it sought could be justified as "consequential damages," noting that this term had a rather specific meaning and did not state an alternative basic measure of damages.

Comment 1: It would be unusual for a court in most other jurisdictions to conclude that a buyer's action for specific performance can be "bonded off" into an action for damages. In this case, the subject property was a two story commercial building. The seller must have made a very telling case that the building was "fungible" with other properties. Or is it just California?

Comment 2: The court says nothing in the opinion about attorney's fees, except to mention that they were a factor in the setting of the original bond. Presumably, since the seller went to trial on the issue of whether there was a breach at all, and lost, the seller would be liable for those fees.

Comment 3: Intriguingly, the court, in a footnote, suggested that there might have been another way for the plaintiff to skin this cat:

"[W]e note that the specificity of section 3306 is in marked contrast to the language of the statute conditioning expungement of a lis pendens on the filing of an undertaking. Code of Civil Procedure section 405.33 provides broadly that the undertaking must be "in such amount as will indemnify the claimant for all damages proximately resulting from the expungement which the claimant may incur if the claimant prevails upon the real property claim." The section also provides that recovery may be had on the undertaking pursuant to Code of Civil Procedure section 996.440 [authorizing enforcement of liability on a bond in an action by a motion]. Nevertheless, because the issue is not before us, we express no opinion on what appellants would be entitled to recover on a motion to enforce the undertaking."

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