Part 2 – What About Liquidated Damages Clauses In California Real Estate Contracts?

Posted: February 18, 2010 | Author: | Filed under: real estate | Tags: , , , | 2 Comments

In my previous post, I discussed a case where the parties had a “non- refundable” deposit in their real estate purchase contract, but the court refunded it anyway.

Liquidated damages are damages whose amount the parties agree during the formation of a contract for the injured party to collect as compensation upon a breach.

In addition to the forfeiture concern, the court also noted that to find that the seller was entitled to keep the deposit without regard to actual damages would essentially create a “liquidated damages provision. Among other problems with this view, the court noted that California Civil Code section 1677 requires a liquidated damages clause to be”separately signed or initialed by each party to the contract.” That was not the case here. But what does it take to enforce a clause liquidating damages in a real estate purchase contract?

For contracts in general, a liquidated damages clause is presumed valid unless it can be shown to be unreasonable under the circumstances at the time the contract was entered. There are more specific requirements for residential real estate contracts.

As mentioned, the provision must be separately signed or initialed by the parties; if a printed form, it must be in specified type.

When the contract involves four or fewer residential units, it is also required that the amount to be forfeited does not exceed 3% of the purchase price. To avoid the clause in this instance, the buyer has the burden of proving that this amount is not reasonable.

If, on the other hand, the amount paid by the buyer to be held as liquidated damages exceeds 3% of the purchase price, it is presumed to be invalid. To enforce the clause in this instance, the seller has the burden of proving that the amount specified is reasonable

Different rules may apply to condominium units.

Law Office of James J. Falcone

Arbitration Becomes More Dangerous- an obvious error is not enough for Court intervention

Posted: November 10, 2009 | Author: | Filed under: Business, real estate | Tags: , , , | Leave a comment

I have noted in a prior post how difficult it is to have a court review legal errors in an Arbitrator’s decision. A recent Federal Court Ninth Circuit decision nails the coffin closed under the Federal Arbitration Act.

The FAA provides that a court may vacate an award “where the arbitrators exceeded their powers.” Arbitrators exceed their powers when they express a “manifest disregard of law.” For this to be shown, court’s have concluded that it must be clear from the record that the arbitrator recognized the applicable law and then ignored it.’

In this case regarding a lawsuit between limited and general partners, the Arbitrator awarded the GP $1.5 million damages, plus $20 million in punitive damages.

The Arbitrator’s decision did not include a substantial discussion of the law on which the decision was based. The court stated that the moving party must show that the arbitrator understood and correctly stated the law, but proceeded to disregard the same. Here, with no arbitrator discussion as to the law considered, the appellant lost his argument- the decision stands.

It is no surprise that the arbitrator did not provide an analysis- I for one have experienced arbitrators who provide only a bare bones win-lose decision, which I believe is specifically done to avoid any challenges. In this case, based on the facts, the appellant knew the arbitrator had made a mistake, but the court of appeals would not address it. Arbitration is dangerous.
Arbitration Between Bosack v. Soward
— F.3d —-, 2009 WL 3416227; 9th Circ. No. 08-35248

Law Office of James J. Falcone

False financial statements are forever.

Posted: July 10, 2009 | Author: | Filed under: Business, real estate | Tags: , , , | Leave a comment

Long ago in law school a bankruptcy professor pointed out to us that, if you exaggerate your income on a credit card application, you might have a problem eliminating that card debt in bankruptcy. The bankruptcy code has a provision prohibiting discharge of debts to the extent they were obtained by use of statement in writing that is materially false, on which the creditor reasonably relied.

I’d be surprised if a credit card company could produce an original credit application from 10 years ago, but in other circumstances an exaggerated statement could seem to last forever, or so it may appear to the debtors in a recent decision. The 9th Circuit Court of Appeal, which governs Federal Courts in California, concluded in May 2009 that, even if the objecting creditor had not relied on the false statements, they could prevent the debt being wiped out in bankruptcy.

The case involved Blue Corporation, a commercial tenant. In signing a 1999 lease with the landlord, two corporate officers submitted personal financial statements and guaranteed the lease. The landlord sold its interest in the lease to Matsco in 2002. Blue Corp subsequently defaulted on the lease, and Matsco obtained a judgment for $193,ooo against the corporation & both officers. Matsco assigned the judgment to Stornawaye. In 2004 Stornawaye assigned the judgment to Blue Falls, and the two officers then filed for bankruptcy.

Blue Falls objected to discharge of the debt, claiming that the officers submitted false financial statements. The two corporate officers argued that Blue Falls had not relied on the statements- they were three parties removed from landlord and the lease negotiation that had occurred years prior.

The Court of Appeals considered that, under general principles of assignment law, an assignee steps into the shoes of the assignor. In this circumstance, the is nothing in the bankruptcy code to the contrary. The landlord, who relied on the false statements, had the right to object to a discharge, and assigned that right to Matsco, which assigned it to Stornawaye, who assigned it to Blue Falls.

Blue Falls has not won yet; it still has to go back to the trial court and prove that the financial statements (now ten years old) were materially false, with an intent to deceive the creditor. But you can expect that, whenever the value is high enough, the financial statements are in a file in a box in a storage unit somewhere and will last forever, or at least until the debt is paid off.
(In the matter of Boyajian, 9th Circ. 07-55716.)
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