Opinion ID: 562073
Heading Depth: 1
Heading Rank: 2

Heading: measure of contractual damages

Text: 11 Ordinarily, the amount of the fraudulent transfer calculated by the trial court would represent a factual finding shielded by the clearly erroneous rule. Bustamante argues that the bankruptcy court incorrectly calculated the damages he suffered from McConnell's breach of contract. First, he asserts that paragraphs 9.2 and 9.7 of the contract allow him to retain the $600,000 of earnest money as liquidated damages. 2 The courts of Texas will enforce liquidated damages provisions only in certain circumstances: 12 [I]f the parties actually intended the provision to constitute their estimate of the damages that would actually be sustained by the party harmed by the breach, and the amount so fixed is a reasonable estimate of just compensation for the harm contemplated by the breach, and the amount of damages is incapable or hard to determine, it is enforceable. 13 Community Devel. Serv. v. Replacement Parts Mfg., 679 S.W.2d 721, 727 (Tex.Ct.App.1984); see also Stewart v. Basey, 150 Tex. 666, 669, 245 S.W.2d 484, 486 (1952). Even assuming that the parties intended the retention of earnest money to operate as liquidated damages rather than as a penalty, the amount McConnell ultimately paid ($600,000) was not a reasonable estimate of just compensation for the harm contemplated by McConnell's failure to close the sale. No reasonable person would have estimated, at the time of making the contract, either that $600,000 represented a reasonable liquidated damage amount in comparison to an $819,000 purchase price, or that the property McConnell was contracting to purchase would lose nearly 75% of its value in the time before closing. The provision allowing Bustamante to keep $600,000 if McConnell failed to buy Ironwood I for $819,000 was an unenforceable penalty. 14 In the absence of a valid liquidated damages clause, Texas courts fall back on the traditional measure of damages for breach of a promise to purchase property--contract price less market value at the time of the breach. Kempner v. Heidenheimer, 65 Tex. 587 (1886). The bankruptcy court found the market value of Ironwood I to be $320,000 on September 30, 1986, the date of McConnell's breach. (The Trustee claims this figure is too low; see Part IV below.) The court subtracted this amount from the contract price of $819,000 to yield damages of $499,000. Bustamante argues that although $819,000 was the price in January 1986, the price had increased by $59,607.24 to $878,607.24 on September 30, 1986. He cites paragraph 9.7 of the contract as providing for price increases of $258.04 per day from February 11 to September 30. ($258.04/day X 231 days = $59,607.24) In addition, as he observes, the Trustee employed the $878,607.24 price as correct in his own estimates of contract damages before the bankruptcy court. 3 15 The Trustee responds that the last sentence of paragraph 9.7 provides that in case of McConnell's default, Bustamante agrees that [retention of the earnest money] shall be [his] sole remedy and this provision [for $258.04 per day] shall not otherwise be enforceable. Technically, Bustamante is not attempting to enforce the provision. Rather, he is claiming it as a formula that fixes the contract price depending on the date of closing. As the Trustee put it in his trial memorandum in the bankruptcy court: This figure was arrived at by negotiation and was to cover a loss of interest on the sales price, accruing taxes and continuing operating losses on the property. 16 The bankruptcy court did not discuss whether paragraph 9.7 influenced its calculation of damages. Reviewing that provision in light of the court's reasoning and the parties' arguments, however, we cannot say that the bankruptcy court clearly erred in its calculations or its legal conclusions. The automatic per diem increase does not bind the parties or the court, as it was intended to apply only if the sale closed. Pending closing, and after the sale failed to close, Bustamante presumably could have retained the $600,000 earnest money in an interest-bearing account and thus mitigated some of his delay damages. We are not prepared to say that the bankruptcy court's deviation of less than ten percent from Bustamante's preferred hypothetical sales price constituted clear error. Absent any other offset or reduction, the judgment for the Trustee at this point reflects the difference between the earnest money that Bustamante retained ($600,000) and the court's assessment of his contract damages that accrued when McConnell did not close ($499,000), yielding $101,000.