Court Opinion

ID: 902519
Source: CourtListenerOpinion
Date Created: 2013-06-14 17:10:21.32776+00
Date Added: 2024-06-11T09:08:35.145371
License: Public Domain

SUPREME COURT OF ARIZONA
                            En Banc

RALPH THOMAS and CAROLEE THOMAS,  )    Arizona Supreme Court
husband and wife,                 )    No. CV-12-0156-PR
                                  )
            Plaintiffs/Appellees, )    Court of Appeals
                                  )    Division One
                 v.               )    No. 1 CA-CV 10-0761
                                  )
MONTELUCIA VILLAS, LLC, a         )    Maricopa County
Delaware limited liability        )    Superior Court
company,                          )    No. CV2009-004659
                                  )
             Defendant/Appellant. )
                                  )
                                  )    O P I N I O N
__________________________________)

        Appeal from the Superior Court in Maricopa County
               The Honorable J. Richard Gama, Judge

                      VACATED AND REMANDED
________________________________________________________________

          Opinion of the Court of Appeals, Division One
             229 Ariz. 308, 275 P.3d 607 (App. 2012)

                        VACATED IN PART
________________________________________________________________

BEUS GILBERT PLLC                                            Phoenix
     By   Franklyn D. Jeans
          Tiffany E. Cale
          Cassandra H. Ayres
Attorneys for Ralph Thomas and Carolee Thomas

LAKE & COBB, P.L.C.                                        Tempe
     By   Joel E. Sannes
          Kiel S. Berry
          Blake Rebling
Attorneys for Montelucia Villas, LLC
________________________________________________________________

                                   1
B R U T I N E L, Justice

¶1         Buyers      of   a   new    home    anticipatorily    breached     the

purchase contract and then sued to recover progress payments

made to the seller during the home’s construction.                The contract

provided that these payments were to serve as liquidated damages

in the event of the buyer’s breach.              We hold that the defendant

seller, in order to retain the payments, must prove that it was

ready, willing, and able to perform under the contract.

                                        I.

¶2         On January 20, 2006, Ralph and Carolee Thomas signed a

contract with Montelucia Villas, LLC for the construction of a

custom villa for $3,295,000.           As part of the purchase agreement,

the Thomases made three installment deposits totaling $659,000,

or twenty percent of the villa’s purchase price.                 The remainder

of the purchase price was due at close of escrow.                 Although the

deposits became due as construction progressed and could be used

by   Montelucia     rather      than    held    in   escrow,     the   contract

characterized them as “earnest money deposits.”                   The contract

also provided, however, that Montelucia could elect to treat the

payments as liquidated damages if the buyers breached.

¶3         On April 25, 2008, Montelucia notified the Thomases by

letter that it had set the closing date for May 16.                    When the

letter   was   sent,    Montelucia      did    not   have   a   certificate   of

occupancy for the property, which the contract required as a

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condition for closing escrow.

¶4           The Thomases responded on May 6 with a letter stating

that they would not close on May 16 and they were terminating

the   purchase       contract    because     the    agreement       was     illusory,

Montelucia     had     not    performed,     and    Montelucia       had     violated

Arizona statutes governing the sale of subdivided land.                          The

letter   asked   Montelucia       to   return      the   $659,000    in    deposits.

Montelucia did not respond to the letter or refund the deposits.

Instead, it unsuccessfully attempted to obtain a certificate of

occupancy for the property on May 8 and May 14.                            Montelucia

ultimately obtained the certificate on August 27.

¶5           In February 2009, the Thomases sued to recover the

deposits.     Montelucia counterclaimed for breach of contract.1                  On

cross-motions for summary judgment, the trial court ruled that

Montelucia had breached the contract by, among other things, not

completing     certain        resort    amenities,        access     points,     and

infrastructure and not providing a certificate of occupancy by

the closing date.            The court concluded that the Thomases were

entitled to a refund of the $659,000 in deposits.

¶6           The court of appeals reversed and remanded, holding

that the Thomases had anticipatorily repudiated the contract by

sending the May 6 letter.          Thomas v. Montelucia Villas, LLC, 229

1
      Montelucia’s counterclaim is not before us.

                                         3
Ariz. 308, 310 ¶ 7, 275 P.3d 607, 609 (App. 2012).                                     The court

concluded that because Montelucia was not a plaintiff seeking

affirmative      relief,       but     instead           was     seeking    to     retain    the

deposits in the face of the Thomases’ lawsuit, Montelucia was

not required to show its ability to perform.                                  Id. at 310–11

¶¶ 8, 10, 275 P.3d at 609–10.

¶7          We granted review to address whether a defendant must

prove    ability    to       perform    to     retain          damages     for    anticipatory

repudiation, a recurring issue of statewide importance.                                  We have

jurisdiction       under      Article        6,        Section     5(3)    of     the    Arizona

Constitution and A.R.S. § 12-120.24.

                                              II.

¶8          At the outset, the Thomases challenge the court of

appeals’    holding          that      they           anticipatorily        repudiated       the

contract.        They    argue       that     Montelucia          breached       the    contract

before May 6, thereby excusing their performance.                                The Thomases,

however, did not seek review on this issue.                            We therefore accept

for purposes of our analysis that the Thomases anticipatorily

breached the contract by sending their May 6 letter.

¶9          “An anticipatory repudiation is a breach of contract

giving    rise     to    a    claim     for       damages        and   also      excusing    the

necessity for the non-breaching party to tender performance.”

United Cal. Bank v. Prudential Ins. Co. of Am., 140 Ariz. 238,

283, 681 P.2d 390, 435 (1983) (citing Kammert Bros. Enters.,

                                                  4
Inc. v. Tanque Verde Plaza Co., 102 Ariz. 301, 428 P.2d 678

(1967); Restatement (Second) of Contracts § 277 (1981); 4 Corbin

on Contracts § 977 (1951)).                   Yet, an anticipatory breach, by

itself,       does    not    entitle    the    injured    party       to   damages.     To

recover damages, “[i]n addition to proving repudiation, the non-

breaching party need only show ‘that he would have been ready

and willing to have performed the contract, if the repudiation

had not occurred.’”            Id. at 288–89, 681 P.2d at 440–41 (quoting

Petersen v. Wellsville City, 14 F.2d 38, 39 (8th Cir. 1926)).

Thus,       “[a]   party’s     duty    to   pay   damages      for    total    breach   by

repudiation is discharged if it appears after the breach that

there would have been a total failure by the injured party to

perform his return promise.”                  Restatement (Second) of Contracts

§ 254(1) (1981) (“Restatement”).

¶10            The    court    of     appeals     held   that    plaintiffs       seeking

damages for anticipatory repudiation must show the ability to

perform, but that a defendant who seeks to retain damages need

not make that showing.               Thomas, 229 Ariz. at 311 ¶ 10, 275 P.3d

at 610.       We disagree.

¶11            A     distinction      between     a    party    seeking       affirmative

relief and a party trying to retain damages in the face of

another’s claim is unwarranted.                       Restatement § 254(1) states

that a “[repudiating] party’s duty to pay damages” is discharged

if    the    “injured       party”    would    have    failed    to    perform.       This

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language       does    not     distinguish               between      damages      sought    by     the

injured party and damages already obtained from the repudiating

party which the injured party seeks to retain.                                        Furthermore,

applying       the    ready,        willing,             and    able    requirement         to     both

parties seeking damages and parties seeking to retain damages

ensures that the non-breaching party actually suffered injury

from the anticipatory repudiation, a primary justification for

the requirement.             See Record Club of Am., Inc. v. United Artists

Records, Inc., 890 F.2d 1264, 1275 (2d Cir. 1989) (requiring the

non-breaching party to show ability to perform “is merely an

application of the general rule that the complaining party must

demonstrate that the breach caused him injury”).                                    Likewise, any

distinction          between    the       party           making       the    claim    —     whether

plaintiff or defendant — is similarly unwarranted.                                     See United

Cal.    Bank,       140    Ariz.     at    283–84,             681   P.2d    at     435–36       (“[T]o

recover damages for anticipatory breach, the injured party need

only show that he had the ability to perform his own obligations

under the agreement.” (emphasis added)).

¶12            Here, the Thomases’ anticipatory repudiation on May 6

excused Montelucia from further performance and gave Montelucia

a     claim     for       damages     for        breach.               But    the     anticipatory

repudiation          alone     does       not    entitle             Montelucia       to    damages.

Because       the    Thomases’      duty        to       pay    damages      was    discharged       if

Montelucia could not have performed, Montelucia’s entitlement to

                                                     6
the    deposits    rests    upon     its    ability       to    have   performed    its

contractual obligations.           If Montelucia could not have closed in

accordance with the contract, then the Thomases are under no

duty    to   pay     damages    for        their     anticipatory       breach,     and

Montelucia cannot retain the deposits.

¶13          Montelucia     argues     that        it    can    keep   the     deposits

without showing that it was ready, willing, and able to perform

because the deposits were earnest money that was forfeited when

the Thomases anticipatorily repudiated the contract.                         But while

the contract referred to the deposits as “earnest money,” the

deposits are more accurately characterized as progress payments.

¶14          Earnest money is a “comparatively small amount . . .

paid to an escrow agent” to show that the “purchaser is in

earnest and in good faith.”                 Brigham v. First Nat’l Bank of

Ariz., 129 Ariz. 160, 162, 629 P.2d 996, 998 (App. 1981) (citing

Mortenson    v.    Fin.    Growth,    Inc.,        456   P.2d    181   (Utah   1969)).

Typically, earnest money remains in neutral escrow until the

sale closes or the purchaser has forfeited the earnest money by

defaulting on the contract.            See, e.g., Esplendido Apartments v.

Olsson, 144 Ariz. 355, 363, 697 P.2d 1105, 1113 (App. 1984).

Earnest money usually does not finance construction.

¶15          The deposits in this case do not serve the traditional

function of earnest money deposits.                 Like progress payments on a

construction       contract,   the     deposits          here   were   made    at   the

                                            7
completion of specific phases of the villa’s construction and

were    immediately      available   to       Montelucia    to   use    “for    costs

related to the development of the Montelucia Villas.”                     Thus, the

deposits did not serve to show the Thomases’ good faith; rather

they enabled Montelucia to fund the construction.                      As a result,

we    conclude    that   the    deposits      constituted    progress      payments

rather     than    earnest      money,        notwithstanding      the     contract

language.    Cf. Aztec Film Prods., Inc. v. Quinn, 116 Ariz. 468,

470, 569 P.2d 1366, 1368 (App. 1977) (“It is well settled that

in determining whether a particular clause calls for liquidated

damages or for a penalty, the name given to the clause by the

parties is not conclusive, and the controlling elements are the

intention of the parties and the special circumstances of the

case.”).

¶16         Montelucia further argues that it was not required to

show that it was ready, willing, and able to perform because the

contract characterized the deposits as liquidated damages, and a

party seeking liquidated damages need not prove actual damages.

We are not persuaded.          “To bring an action for the breach of the

contract, the plaintiff has the burden of proving the existence

of the contract, its breach and the resulting damages.”                        Graham

v. Asbury, 112 Ariz. 184, 185, 540 P.2d 656, 657 (1975).                            A

liquidated damages clause relieves the plaintiff of the burden

of proving the amount of actual damages caused by the breach.

                                          8
Mech. Air Eng’g Co. v. Totem Constr. Co., 166 Ariz. 191, 193,

801    P.2d    426,        428   (App.   1989).           But   it    does    not       establish

whether a breach sufficient to support damages has occurred.

See Bowen v. Korell, 587 P.2d 653, 657 (Wyo. 1978) (holding that

when    a     contract       contemplates       liquidated           damages      only     for   a

specified breach, “the provision will have no force and effect

except upon proof of the breach provided for by the agreement”).

Although the contract stipulated the amount of damages, this

provision       did        not    relieve      Montelucia            of     the     burden       to

demonstrate          its     willingness       and    ability         to     perform       before

recovering or retaining any damages.

¶17            The    parties        dispute   whether          Montelucia        was    able    to

perform its obligations; therefore, we remand to the superior

court for a determination of this issue.                         On remand, Montelucia,

as the party in the best position to marshal the evidence, bears

the burden of showing it was able to close in accordance with

the contract.              See 10 Corbin on Contracts § 978 n.11 (1951)

(noting that the non-repudiating party “can much more readily

prove what the facts were in respect of his own ability to

perform”).       If it is ultimately determined that Montelucia was

ready, willing, and able to perform as required by the contract,

the court can then determine the appropriate remedy available to

Montelucia under the contract.

¶18            Both        parties     request       an     award      of    attorney        fees

                                               9
pursuant to the contract and A.R.S. § 12-341.01.                We deny this

request   without   prejudice   to    the   trial    court    awarding   fees,

including those incurred on appeal, to the party that ultimately

prevails.

                                     III.

¶19         For   the   foregoing    reasons,   we   vacate    the   court   of

appeals’ opinion, except ¶¶ 6–7, and remand to the trial court

for further proceedings consistent with this opinion.

                             __________________________________
                             Robert M. Brutinel, Justice

CONCURRING:

__________________________________
Rebecca White Berch, Chief Justice

__________________________________
Scott Bales, Vice Chief Justice

__________________________________
John Pelander, Justice

__________________________________
Ann A. Scott Timmer, Justice

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