Atlas Noble, LLC v. Krizman Enterprises et al
Filing
96
Memorandum Opinion and Order: Defendants will not be permitted to proceed with their Counterclaim III. They bargained for, and received by order of this Court, liquidated damages in the form of the escrow amount, plus any accrued interest. Therefore, the Court intends to dismiss Counterclaim III, issue final judgment, and close this case. (Related Doc. No. 86 ). Judge Sara Lioi on 11/16/2015. (P,J)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF OHIO
EASTERN DIVISION
ATLAS NOBLE, LLC,
PLAINTIFF,
vs.
KRIZMAN ENTERPRISES, et al.,
DEFENDANTS.
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CASE NO. 5:13CV1505
JUDGE SARA LIOI
MEMORANDUM OPINION
AND ORDER
Before the Court is defendants’ memorandum in support of permitting
Counterclaim III to proceed to trial on damages. The Court has construed this memorandum as a
motion. (Doc. No. 86 [“Motion”].) Plaintiff has filed a memorandum in opposition (Doc. No. 87
[“Opp’n”]), and defendants have filed a reply (Doc. No. 88 [“Reply”]). For the reasons set forth
herein, defendant’s motion is denied.
I. BACKGROUND
On July 11, 2013, plaintiff Atlas Noble, LLC (“Atlas” or “plaintiff”) filed its
complaint against defendants Krizman Enterprises, Wayne Hammond Enterprises, Inc., and
MKE Producing, Inc. (collectively, “defendants”) asserting a single breach of contract claim
based on defendants’ alleged failure to authorize release to Atlas of a certain escrow account
under the terms of a Purchase and Sale Agreement (“PSA”) between the parties. (Doc. No. 1.)
Defendants answered, and counterclaimed for breach of contract, seeking a
declaratory judgment that they are entitled to the escrow account plus an award of damages equal
to the amount in the escrow account ($2,411.290.00) plus interest, along with damages in the
amount of the negotiated purchase price ($9,284,694.50), plus interest. (Doc. No. 8, as amended
Doc. No. 37.)
On cross-motions for summary judgment with respect to the complaint and two
counts of the counterclaim, this Court ruled, on February 5, 2015, that defendants were entitled
to have the escrow account paid to them, plus interest.1 The Court noted that neither side had
sought summary judgment on defendants’ third counterclaim for compensatory damages, but that
“[i]n light of … the remedies contained in § 1.2 of the PSA for a failure to close the transaction,
the Court questions whether defendants are entitled to proceed on this claim.” (Doc. No. 73
[“MOO”] at 3280.)2
II. DISCUSSION
A.
The Parties’ Respective Positions
1.
Defendants’ Position on Opening Brief
Defendants argue that their Purchase and Sale Agreement (“PSA”) with plaintiff
allows a non-breaching party to seek compensatory damages in addition to recovering the escrow
monies. They point specifically to PSA § 7.5, providing for waiver of consequential damages.
(Doc. No. 86 at 3394.) Applying the canon of construction “expressio unius est exclusio alterius”
(the expression of one thing is the exclusion of the other), defendants argue that compensatory
damages are notably missing from the list of types of damages waived by § 7.5.
According to defendants, where there is a breach of contract, compensatory
damages should be awarded to place the injured parties in the position they would have been in
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Plaintiff subsequently filed a motion to alter or amend, but the Court adhered to its original ruling. (See Doc. No.
85 [“MOO-2”].) In MOO-2, the Court also indicated its intent to dismiss the third counterclaim and enter final
judgment, absent a showing of good cause by defendants. That directive triggered the current briefing.
2
All page number references are to the page identification number generated by the Court’s electronic docketing
system.
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had the contract been performed. (Id. at 3394, citing Livi Steel, Inc. v. Bank One, Youngstown,
N.A., 584 N.E.2d 1267, 1272 (Ohio Ct. App. 1989).) Defendants assert that where, as here, the
buyer anticipatorily repudiates a real estate contract, compensatory damages to the seller are
calculated by showing “the difference between the original contract price and the ultimate
purchase price or fair market value.” (Id., citing cases, but with no pinpoint citations.)
2.
Plaintiff’s Position in Opposition
Plaintiff points to PSA §§ 1.2 and 1.3 to support its view that the parties agreed to
liquidated damages (i.e., the escrow amount), and that defendants cannot recover compensatory
damages because that would constitute impermissible double recovery. (Doc. No. 87 at 3399.)
Plaintiff finds further support for its argument in the same PSA § 7.5 cited by defendants.
Plaintiff, however, emphasizes language in § 7.5 that defendants failed to quote in their brief,
namely, that “such damage waiver is to be given the fullest effect, notwithstanding the
negligence …, gross negligence, willful misconduct, strict liability or other legal fault of any
party.” Plaintiff also notes that the escrow account (originally $2,411,290.00) constitutes 26% of
the contract price of $9,265,381.83 and is, therefore, “extremely generous compensation” under
the circumstances.
Plaintiff also argues that, since defendants failed to retain a valuation expert to
calculate the compensatory damages they claim entitlement to, they would be unable to meet
their burden of proof as to any such damages, rendering the entire issue moot. In fact, plaintiff
claims that, due to the “many market variables that an expert would have to consider before they
[sic] could make an educated estimation regarding the value of the mineral subject to leases – at
the time of the contract formation, when the breach occurred, or as of today[,] [t]he PSA’s
liquidated damage provisions are the practical answer to that question.” (Id. at 3404.)
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3.
Defendants’ Reply
In addition to reiterating its original arguments, defendants’ reply brief argues that
the mere provision in a PSA of a requirement that the purchaser deposit funds in an escrow
account does not mean that such provision is a liquidated damages clause. Defendants point out
that, in a real estate purchase agreement, earnest money acts as “consideration for the privilege
of keeping the offer open for a certain stated period of time.” (Reply at 3413-14, quoting
Windsor v. Riback, Nos. 2007-G-2775, 2007-G-2781, 2008 WL 1849617, at * 7 (Ohio Ct. App.
Apr. 25, 2008) (quoting Reedy v. Cincinnati Bengals, Inc., 758 N.E. 2d 678, (Ohio Ct. App.
2001) (Gorman, P.J. dissenting)).) Defendants assert that, when they entered into the PSA with
Atlas, they agreed to forego other opportunities while Atlas conducted its due diligence. But
Atlas chose to anticipatorily repudiate the PSA, thereby forfeiting the escrow account and,
according to defendants, subjecting itself to a separate claim for breach, with resulting
compensatory damages.
Defendants also argue that no valuation expert is required to establish damages
because, under the “owner-opinion rule,” an owner of real estate is permitted to offer his opinion
regarding the value of his own property. Proctor v. Bader, No. 03 CA 51, 2004 WL 1879060, at
* 5 (Ohio Ct. App. Aug. 16, 2004) (“The general rule, in Ohio, is that a property owner is a
competent witness to testify as to the value of his or her own property.”).
B.
Analysis
Whether defendants are entitled to separately pursue compensatory damages or
must accept the escrow account as liquidated damages requires interpretation of the parties’ PSA
in light of controlling Ohio law. This Court must give effect to the parties’ intent, which
presumably rests in the language they chose to employ. St. Marys v. Auglaize Cnty. Bd. of
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Comm’rs, 875 N.E.2d 561, 566 (Ohio 2007) (“The role of courts in examining contracts is to
ascertain the intent of the parties. Where the terms in a contract are not ambiguous, courts are
constrained to apply the plain language of the contract.”). In addition, “a contract is to be read as
a whole and the intent of each part gathered from a consideration of the whole.” Cincinnati Ins.
Co. v. CPS Holdings, Inc., 875 N.E.2d 31, 35 (Ohio 2007). Therefore, “a court’s construction
should attempt to harmonize all provisions of the contract, and should not dismiss any provision
as inconsistent if there exists a reasonable interpretation that gives effect to both.” Broad St.
Energy Co. v. Endeavor Ohio, LLC, 975 F. Supp. 2d 878, 884 (S.D. Ohio 2013).
The question here is whether PSA § 1.2 constitutes a liquidated damages clause or
merely an earnest money clause that would not preclude an action for compensatory damages.
“Liquidated damages are an agreed upon amount of money to be paid in lieu of actual damages
in the event of a breach of the contract.” Gaskins v. Young, No. 20148, 2004 WL 1178278, at *4
(Ohio Ct. App. May 28, 2004) (citation omitted). Such damages “constitute both the maximum
and minimum damages available to a non-defaulting party[.]” Id. at *5. “Unlike liquidated
damages, … a reasonable (and, therefore, enforceable) earnest money provision sets forth the
minimum, but not the maximum, damages. When actual damages exist, the non-breaching party
may also pursue specific performance or actual damages.” Id.
The Court concludes that the parties’ intent was that the escrow account would
constitute liquidated damages, in lieu of actual damages.3 PSA § 1.2 provided:
§ 1.2: Within three days (3) days [sic] of the execution of this Agreement and
upon receipt by the Bank of the completed CIP Questionnaire from each Seller,
Buyer shall deposit as an earnest money deposit an amount in cash equal to one
3
“Actual damages” are “an amount awarded to a complainant to compensate for a proven injury or loss; damages
that repay actual losses. – Also termed compensatory damages; tangible damages; real damages.” DAMAGES,
Black’s Law Dictionary (10th ed. 2014).
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thousand dollars per net acre conveyed to Buyer, which amount is anticipated to
be the sum of $2,411,290.00 (the “Escrow Amount”), assuming that Seller
conveys to Buyer leases covering 2411.29 acres. The Escrow Amount shall be
deposited into a jointly controlled account (the “Deposit Account”) established by
Buyer and Seller at Wells Fargo Bank, National Association (the “Bank”). If the
transaction contemplated by this Agreement closes, then the Escrow Amount shall
be forwarded by the Bank to Seller and the Escrow Amount shall reduce the Base
Purchase Price as described in Section 1.3 below. If the transaction contemplated
by this Agreement does not close because of Seller’s failure to satisfy one of
Buyer’s Conditions to Closing as set forth in Section 6.2 hereof, then Bank shall
return the Escrow Amount to Buyer. If the transaction contemplated by this
Agreement does not close for any reason other than as set forth in Section 6.2,
then Bank shall pay the Escrow Amount to Seller. The Parties shall execute such
withdrawal instructions as the Bank shall require for the Bank to remit the Escrow
Amount in the Deposit Account to the appropriate party as described in this
Section 1.2. The costs and expenses associated with initiating, maintaining and
distributing the Deposit Account shall be deducted from the distribution of the
Escrow Amount and shall be borne solely by the recipient(s) of the Escrowed
[sic] Amount; provided; [sic] however, that Seller’s total costs associated with the
escrow established with the Bank shall in no event exceed $3500.00 and Buyer
shall pay any excess escrow costs and fees.
(Doc. No. 1-2 at 13.) The referenced § 6.2 set forth Atlas’s conditions to closing. If these
conditions were not met, under § 1.2, Atlas was entitled to a return of the escrow amount. But, if
the deal failed to close for a reason other than failure of one of the buyer’s conditions to closing,
then defendants, as sellers, were to receive the escrow amount. This Court has already ruled that
the agreement failed to close because Atlas repudiated it prior to the relevant deadline, giving
defendants the right to recover the escrow amount.
Defendants agree that they should recover the escrow amount, plus interest, but
they argue that PSA § 7.5 permits them to also recover compensatory (i.e., actual) damages.
Section 7.5 provides:
§ 7.5: Waiver of Consequential Damages. Notwithstanding any other provision
of this Agreement, each party hereby expressly disclaims, waives and releases the
other party from its own special, exemplary, punitive, consequential, incidental,
and indirect damages (including loss of, damage to or delay in profit, revenue or
production) relating to, associated with, or arising out of this Agreement and the
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transactions contemplated hereby. No law, theory, or public policy shall be given
effect which would undermine, diminish, or reduce the effectiveness of the
foregoing waiver, it being the express intent, understanding, and agreement of the
parties that such damage waiver is to be given the fullest effect notwithstanding
the negligence (whether sole, joint or concurrent), gross negligence, willful
misconduct, strict liability or other legal fault of any party.
(Doc. No. 1-2 at 24-25.) Defendant would have the Court conclude that the lack of express
mention of “compensatory damages” in § 7.5 entitles them to pursue such damages because they
are not waived. Plaintiff relies upon § 7.5 to support its argument that the section must be given
its “fullest effect” and, therefore, compensatory damages are also waived.
The Court is required to read § 7.5 together with § 1.2, in a manner that renders
them consistent. Broad St. Energy Co. v. Endeavor Ohio, LLC, No. 14-4223/4278, 2015 WL
7074622, at *3 (6th Cir. Nov. 13, 2015 (“In Ohio, as elsewhere, courts do their best to give a fair
reading to the contract, one requirement of which is to give content where possible to each term
of the contract.”) (citing Farmer’s Nat’l Bank v. Del. Ins. Co., 94 N.E. 834, 839 (Ohio 1911)).
The Court concludes that recovery of the escrow amount under § 1.2 was intended to serve as
liquidated (i.e., compensatory/actual) damages, and that § 7.5 was merely emphasizing that all
other forms of damages (i.e., other than compensatory damages)4 would be waived. This would
be the only interpretation that would give the damage waiver in § 7.5 its “fullest effect
notwithstanding the … legal fault of any party.”
“When [liquidated damages provisions] are fair and reasonable attempts to fix just
compensation for anticipated loss caused by breach of contract, they are enforced.” Priebe &
Sons v. United States, 332 U.S. 407, 411, 68 S. Ct. 123, 92 L. Ed. 32 (1947) (citations omitted).
4
Every one of the other kinds of damages listed in § 7.5 are indirect types of damages, not actual, or compensatory,
damages. See DAMAGES, Black’s Law Dictionary (10th Ed. 2014). If a non-breaching party were allowed to
pursue these damages, in addition to receiving the liquidated damages, that would effectively defeat the purpose of
liquidated damages. The PSA was seeking to avoid that.
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“They serve a particularly useful function when damages are uncertain in nature or amount[.]”
Id.
Here, defendants bargained for the recovery of the escrow amount should the
agreement not close through no fault of theirs. The parties intended that the escrow amount
would either be put toward the purchase price in the event of closing, or would go to the nonbreaching party in the event of a breach. If the buyer was the non-breaching party, it would get
its money back. If the seller was the non-breaching party, it would receive the escrow amount by
way of liquidated damages for both having lost the deal and having foregone other opportunities
to sell to someone else. See Broad St. Energy Co., supra, at *7 (“One could well imagine the
strategic benefits of leaving damages at the $3.5 million escrow figure and avoiding the kinds of
push-and-pull complications that would arise at trial over assigning values to the leases[.]”). The
Court has previously determined that Atlas breached by anticipatorily repudiating the contract.
This entitles defendants to recover the contractual liquidated damages, and no more.
To permit defendants to recover the escrow amount and compensatory damages
would amount to double recovery. This is impermissible both under Ohio law, see Mentor
Lagoons, Inc. v. Laity, No. 10-184, 1985 WL 9999, at * 1 (Ohio Ct. App. May 24, 1985) (“To
allow a party to recover liquidated damages, as stipulated in the contract, and to also prove and
recover actual damages allows a double recovery since liquidated damages are a pre-determined
amount of what the actual damages will be in case of a breach.”), and under the terms of the PSA
between the parties.
III. CONCLUSION
For the reasons set forth, defendants will not be permitted to proceed with their
Counterclaim III. They bargained for, and received by order of this Court, liquidated damages in
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the form of the escrow amount, plus any accrued interest. Therefore, the Court intends to dismiss
Counterclaim III, issue final judgment, and close this case.
IT IS SO ORDERED.
Dated: November 16, 2015
HONORABLE SARA LIOI
UNITED STATES DISTRICT JUDGE
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