Court Opinion

ID: 3044698
Source: CourtListenerOpinion
Date Created: 2015-10-13 23:14:27.136835+00
Date Added: 2024-06-11T08:53:23.557500
License: Public Domain

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 (Jefferson-
Pilot) 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

      1
        The Honorable Robert W. Pratt, United States District Judge for the Southern
District of Iowa.
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 Jefferson-
      Pilot 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 Jefferson-
      Pilot'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

                                           -3-
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.

                                         -4-
       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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