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Trial court erred in finding provision was liquidated damages clause

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A forfeiture provision in a purchase agreement between the Dean V. Kruse Foundation and Jerry Gates, the buyer of West Baden property, did not constitute a liquidated damages clause as the trial court ruled, the Indiana Court of Appeals held Tuesday. The judges ruled that the Kruse parties are entitled to more damages as a result of Gates’ breach of contract.

The Kruse Foundation was given a large parcel of property and 300,000 square foot manufacturing facility in West Baden. The foundation is the charitable organization that operates a World War II museum and automobile museum in Auburn. The foundation found that the costs were too much to maintain the property and it continually lost money, so the foundation sought to sell the property. Those attempts were unsuccessful, so Dean Kruse, an auctioneer and licensed real estate broker, auctioned the property. The auction was final and required earnest money. Gates bought the property with a $4 million bid and 5 percent buyer’s premium. He gave $100,000 to Kruse as earnest money. A few weeks later, Gates informed Kruse he was terminating the purchase agreement.

The property was eventually sold for $2.35 million. Gates then sued Kruse and the foundation for breach of contract, fraud and conversion, seeking the earnest money back. The Kruse parties counterclaimed for breach of contract and slander of title. After a ruling for Gates and an appeal that reversed, the trial court entered summary judgment for the Kruse parties and found the $100,000 was the appropriate amount of damages. The trial court believed the purchase agreement contained a liquidated damages provision and the Kruse parties were only entitled to the earnest money. The Kruse parties appealed.

Using caselaw, the Court of Appeals found that the provision at issue in the purchase agreement indicates intent to penalize the purchaser for a breach rather than intent to compensate the seller in the event of a breach. Although there is no mention of forfeiture as a penalty, the provision is also not labeled as liquidated damages, Judge Patricia Riley wrote.

“Further, the Purchase Agreement provides that the remedy of specific performance may be available to the seller in the event of default, suggesting that there is no ability for the purchaser to simply ‘walk away’ in the event of his breach. These features arguably favor interpretation of the provision as a penalty rather than as one providing for liquidated damages,” she wrote.

The appellate judges also disagreed with the trial court that the evidence of the property’s value was uncertain as there was sufficient evidence to determine the fair market value of the property at the time of the breach. They also disagreed that the Kruse parties are precluded from asserting legal damages for Gates’ breach. The judges remanded with instructions for the trial court to calculate the measure of damages as a result of the breach of contract.

 

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  5. I whole-heartedly agree with Doug Church's comment, above. Indiana lawyers were especially fortunate to benefit from Tom Pyrz' leadership and foresight at a time when there has been unprecedented change in the legal profession. Consider how dramatically computer technology and its role in the practice of law have changed over the last 25 years. The impact of the great recession of 2008 dramatically changed the composition and structure of law firms across the country. Economic pressures altered what had long been a routine, robust annual recruitment process for law students and recent law school graduates. That has, in turn, impacted law school enrollment across the country, placing upward pressure on law school tuition. The internet continues to drive significant changes in the provision of legal services in both public and private sectors. The ISBA has worked to make quality legal representation accessible and affordable for all who need it and to raise general public understanding of Indiana laws and procedures. How difficult it would have been to tackle each of these issues without Tom's leadership. Tom has set the tone for positive change at the ISBA to meet the evolving practice needs of lawyers of all backgrounds and ages. He has led the organization with vision, patience, flexibility, commitment, thoughtfulness & even humor. He will, indeed, be a tough act to follow. Thank you, Tom, for all you've done and all the energy you've invested in making the ISBA an excellent, progressive, highly responsive, all-inclusive, respectful & respected professional association during his tenure there.

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