Daily Development for Monday, August 30, 1999

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

VENDOR/ PURCHASER; SELLER'S REMEDIES FOR BUYER'S BREACH; DAMAGES: New Mexico case reviews rules for seller's damages recovery for buyer's breach, and springs the "value trap."

Jones v. Lee, 971 P.2d 858 (N.M. App. 1998).

Buyers agreed to purchase Seller's house for $610,000. Two months later, Buyers told Sellers that they lacked financial resources to close on the house and proposed simply to forfeit their earnest money of $6000. Sellers rejected the offer and relisted and resold the house four months later for $540,000. They sued and their brokers sued Buyers for damages. Buyers responded with an offensive of their own, charging the real estate brokers with all manner of malpractice and breach of agency.

At trial the trial court found that Buyers' claim of weak financial circumstances was bogus. In fact they had over $600,000 in bank accounts and earned a monthly income of over $16,000, plus commissions. It also found that Buyers had improperly harrassed one of the Sellers in order to get her to agree to the settlement. The court also dismissed all of Buyer's claims against the brokers. In essence, the trial court "threw the book" at the Buyers.

The trial court awarded the $70,000 difference between the contract price and the resale price, interest on the mortgage, expenses in preparing for the closing, such as inspection costs borne by Seller, and even architect's fees and other costs related to the Seller's plan to build a home on another lot with the lost proceeds of this sale. Sellers, facing severe cash problems as a consequence of the blown sale, were forced to sell the other lot (although they sold at a substantial profit). Finally, the court awarded the Sellers $33,000 in punitive damages, which it commented was about one third of the total actual damages awarded.

On appeal: held: Affirmed in part and reversed in part.

The biggest problem for sellers may have been brought on themselves. Without explaining why, the court points out that the parties stipulated that at the time of breach the property was worth $610,000, even though it resold four months later for $540,000.

The buyers pointed out that in a breach of contract case, the award of damages should compensate the nonbreaching party with just compensation equal to the loss incurred by such nondefaulting party. New Mexico follows the "loss of the bargain" rule in determining the damages in a breach of a purchase contract involving real property. The "loss of the bargain" rule measures damages as the difference between the purchase contract price and the market value of the property at the time of the breach. When the contract price and the market value of the real estate at the time of the breach are the same, then the nondefaulting party is generally limited to the recovery of nominal damages only or the forfeiture of any earnest money deposit unless such party can prove that it incurred special damages arising from the breach of the contract.

Buyers argued that, in awarding damages to the sellers, the District Court did not determine the fair market value of the subject property at the time of the breach of the contract but instead incorrectly used the subsequent resale price. The Court of Appeals agreed and remanded the case in order for the trial court to adopt findings of fact in accordance with the "loss of the bargain" rule.

Buyers also raised the issue of whether or not the sellers should have been awarded special damages. Special damages may be awarded in a breach of contract case if damages incurred can be shown to have resulted as the natural and probable consequence of the breach of the contract. The breaching party should have known or anticipated that such damages may be incurred by the nonbreaching party upon the nonperformance of the contract. Whether or not the damages were reasonably foreseeable is a question of fact to be determined by the fact finder. In this case the Court of Appeals affirmed the trial court's award of special damages to the sellers for the additional mortgage interest paid by sellers from the date of the breach of the contract to the date that the house was subsequently sold, since the sellers were forced to place the real property back on the market after the buyers' breach, and for the inspection charges. It refused to allow damages related to the other lot, as Sellers did not show that Buyers even knew of the arrangement with the other lot, much less that Sellers might be forced to forfeit their investment in it..

Buyers also argued that the punitive damages award by the trial court was not supported by substantial evidence. An award of punitive damages requires proof that the breaching party intended to inflict harm on the nonbreaching party or engaged in conduct that violates community standards of decency. The Court of Appeals indicated that there was enough evidence to support punitive damages in this case but that since the calculation of the amount of the punitive damages was based on the incorrectly calculated compensatory damages (not based on the "loss of the bargain rule" as discussed above), the punitive damages award was remanded.

Comment 1: The case points out the danger of the traditional damages action for breach of a land sale contract. Courts tend to look at the value of the property at the time of the breach, ignoring the fact that the seller really anticipated getting money, and doesn't want the property back.

This "value trap" is one into which Sellers blundered when they stipulated that the property was worth the price for which they contracted to sell it. It's natural for Sellers to take that view, of course, as they don't want to appear that the original contract was unfair. But competent counsel should be aware that the nautre of the damages computation requires that Sellers demonstrate indeed that at time of sale they stood to receive a price in excess of the value of the property at that moment in time.

Comment 2: In light of the "value trap," Sellers are faced with a Hobson's Choice. They may sell for specific performance, and get the actual price offered, but in this event they must retain the property to have it available for the specific performance remedy, and they run the risk of noncollection from the buyer, even if they win, while they risk the potential further deterioration in the value of the property in addition to the cost of carrying it unsold. Or they may sue for damages, which permits them to resell the property, but then their damages very often will not clearly reflect their true loss of cash return because the seller may convince the court that the final resale price does not reflect the value at time of breach.

Comment 3: You won't see many punitive damages awards in cases like this, but New Mexico is perhaps unique in permitting punitive damages in appropriate contract actions.

Comment 4: Both selling and listing brokers got judgments for their commissions. This likely became the biggest single element of damages, and, unless the court changes its method of computation of punitive damages, will form the principle basis of computation of those damages, even though they are paid to Seller.

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