Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-07-03820/USCOURTS-ca8-07-03820-0/pdf.json

Parties Involved:
Jefferson-Pilot Life Insurance Company
Appellee
Ladco Properties XVII
Appellant

Document Text:

1

The Honorable Robert W. Pratt, United States District Judge for the Southern

District of Iowa.

 United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 07-3820

___________

Ladco Properties XVII, *

*

Plaintiff - Appellant, * Appeal from the United States

* District Court for the Southern

v. * District of Iowa.

*

Jefferson-Pilot Life Insurance *

Company, *

*

Defendant - Appellee. * 

___________

Submitted: June 13, 2008

 Filed: June 26, 2008 

___________

Before MURPHY, BYE, and SHEPHERD, Circuit Judges.

___________

MURPHY, Circuit Judge.

Ladco Properties XVII (Ladco), filed this action seeking recovery of its

liquidated damages deposit which Jefferson-Pilot Life Insurance Company (JeffersonPilot) retained after Ladco failed to meet its obligations under the parties' loan

commitment agreement. The parties filed cross motions for summary judgment and

the district court1

 concluded that Jefferson-Pilot was entitled to retain the deposit

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amount because the liquidated damages provision was valid and enforceable. Ladco

appeals from the adverse judgment. We affirm.

Ladco, an Iowa limited liability corporation, joined with Mercy Medical Center

in 2002 to develop the Mercy North medical office facility in Ankeny, Iowa. In 2004

Ladco retained a mortgage broker to assist it in obtaining sources of permanent

financing for the development. The broker presented Ladco with loan proposals from

three competing lenders including Jefferson-Pilot. Ladco applied and was approved

for a $12,590,000 loan from Jefferson-Pilot to be funded under the terms of a loan

commitment agreement which the parties entered into on January 14, 2005. 

The terms of the agreement, which is governed by North Carolina law,

obligated Jefferson-Pilot to fund the loan if Ladco satisfied certain conditions

precedent prior to expiration of the loan commitment period. Before signing the

agreement, Ladco's attorney reviewed it and Ladco negotiated several of its terms,

including some terms within the deposit provision, which states,

Upon acceptance of this Loan Commitment, Ladco shall pay JeffersonPilot a deposit in the amount of $377,000 [3% of the loan amount]. . . .

In the event that the Loan does not close by the Expiration Date (except

solely through the wrongful failure of Jefferson-Pilot to fund the Loan),

the Deposit will be forfeited as liquidated damages and becomes the sole

property of Jefferson-Pilot and will be considered earned in payment for

[loan preparation and reservation of funds necessary to close the Loan].

It is understood and agreed that an actual determination of JeffersonPilot's expenses is not feasible and that the Deposit represents a

reasonable estimate of such costs and expenses. (Emphasis added.)

Ladco breached the loan commitment agreement by failing to meet its obligations

thereunder prior to expiration of the commitment period, after which Jefferson-Pilot

retained the $377,000 deposit as liquidated damages according to the terms of the

agreement. 

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Ladco's complaint alleged that the liquidated damages deposit amounted to an

unenforceable penalty because 3% of the loan amount was not a reasonable estimate

of Jefferson-Pilot's probable damages. The parties filed cross motions for summary

judgment, and the district court granted Jefferson-Pilot's motion because a 3%

liquidated damages amount fell within the industry standard and was comparable to

the other two loan offers, Ladco had agreed in the liquidated damages deposit

provision that 3% was reasonable, and the parties are sophisticated, experienced

business entities who exercised equal bargaining power. 

We review de novo a district court's grant of summary judgment, viewing the

record in the light most favorable to the nonmovant. Med. Liab. Mut. Ins. Co. v. Alan

Curtis LLC, 519 F.3d 466, 471 (8th Cir. 2008). Summary judgment is proper where

there are no genuine issues of material fact and the movant is entitled to judgment as

a matter of law. Id. A liquidated damages provision is used to discourage a party

from breaching a contract and to avoid later controversy over the amount of actual

damages resulting from a breach. See Knutton v. Cofield, 160 S.E.2d 29, 34 (N.C.

1968). Such a provision is valid if the liquidated damages amount represents an

estimate of actual damages likely to result from the breach; if instead it represents a

fixed amount designed solely to punish a party for a breach, it amounts to an

unenforceable penalty. See id. at 36-37. The party seeking to invalidate the liquidated

damages provision has the burden of showing that it amounts to an unenforceable

penalty. Seven Seventeen HB Charlotte Corp. v. Shrine Bowl of the Carolinas, Inc.,

641 S.E.2d 711, 714 (N.C. App. 2007). 

Under North Carolina law, a liquidated damages provision is enforceable and

will not be considered a penalty where (1) damages are speculative or difficult to

ascertain, and (2) the amount stipulated is a reasonable estimate of probable damages

or the amount stipulated is reasonably proportionate to the damages actually caused

by the breach. Knutton, 160 S.E.2d at 34. On appeal Ladco does not dispute that the

damages were speculative or difficult to ascertain under the first factor, but argues that

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the provision fails the second because the amount stipulated was neither a reasonable

estimate of probable damages nor reasonably proportionate to the damages actually

caused by the breach.

Regarding the reasonableness of the estimate, Ladco urges us to ignore its

acknowledgment in the deposit provision that "the Deposit represents a reasonable

estimate" of actual damages. Ladco claims that the clause was mere boilerplate even

though its attorney reviewed the agreement and it had negotiated several of the terms

itself. Ladco argues that estimating the liquidated damages deposit at 3% of the loan

amount was not reasonable, suggesting that Jefferson-Pilot was required to make a

good faith effort to estimate actual damages by calculating estimated administrative

costs, any potential loss due to a fluctuation in interest rates, and other factors.

Jefferson-Pilot counters that no such requirement to estimate actual damages exists

under North Carolina law, that a 3% deposit is within the 2-4% industry standard, that

Ladco explicitly agreed in the deposit provision that the amount was reasonable, and

that requiring it to perform the detailed calculations Ladco requests would vitiate the

benefits liquidated damages provisions were created to provide.

The evidence in the record supports the district court's conclusion that a 3%

liquidated damages deposit is reasonable in part because it falls within industry

standards. Jefferson-Pilot's expert stated that the industry average for a liquidated

damages deposit is 2% to 4% of the loan amount. Ladco's professional mortgage

banker stated by affidavit that of the three loan offers he presented to Ladco, two

requested a liquidated damages deposit of 3% and one requested 2%, and that these

percentages are "not unusual" for a forward loan commitment of this type. Ladco's

argument that Jefferson-Pilot was required to perform a calculation involving

expected administrative costs and predicted interest rate fluctuations does not comport

with industry standards and no case has been found where a party was required to

perform such a calculation.

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The record also supports the district court's conclusion that the liquidated

damages amount was reasonable because it was freely negotiated by sophisticated

businesses, neither of which exerted superior bargaining power over the other. North

Carolina courts have recognized that parties are free to negotiate any reasonable

amount of liquidated damages, and that reasonableness is supported by findings that

the parties are experienced with this type of transaction and exercised equal

bargaining power in the negotiation. See Coastal Leasing Corp. v. T-Bar S Corp., 496

S.E.2d 795, 798-99 (N.C. App. 1998) (no genuine issue of material fact existed as to

reasonableness of liquidated damages clause where negotiated by experienced parties

with equal bargaining power and where clause protected party's expectation interest).

It is undisputed that these were sophisticated parties with commercial real estate

experience, and there is no evidence in the record that Jefferson-Pilot exercised

superior bargaining power over Ladco in negotiating the loan commitment agreement.

Ladco is managed by a large commercial real estate development company, and this

near $13 million loan commitment was characterized as a "fairly large deal" for

Jefferson-Pilot. Ladco retained the services of a professional mortgage banker who

identified three potential lenders and negotiated on its behalf, and it hired an attorney

to review the loan commitment agreement before signing it.

The undisputed facts show that these sophisticated business entities stipulated

to a liquidated damages deposit amount which fell within the industry standards and

the common law requirements for reasonableness. The district court did not err in

concluding that the liquidated damages provision was valid and enforceable.

For these reasons we affirm the judgment of the district court.

_________________________

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