Upcoming from the Ky Supreme Court - (Un)Reasonable Liquidated Damages

Upcoming from the Kentucky Supreme Court –

 (Un)Reasonable Liquidated Damages

      The Kentucky Supreme Court has granted discretionary review in Patel v. Tuttle Properties, LLC, wherein it will consider a ruling of the Court of Appeals upholding, on summary judgment, the loss of an earnest money deposit made in connection with a proposed assets sale.  Patel v. Tuttle Properties, LLC, No. 2010-CA-001544-MR (June 17, 2011) (Not To Be Published).

      As recounted by the Court of Appeals, Patel entered into an asset purchase and sale agreement pursuant to which he would acquire a convenience store and the related real property for a purchase price of $450,000.  In connection with entering into the asset purchase and sale agreement, Patel, the purchaser, deposited into escrow $125,000 as earnest money.  The agreement provided that the closing on the transaction would take place within 120 days and further provided that the earnest money deposit would be (i) applied to the purchase price or (ii) refunded if the closing did not place absent the fault or breach by Patel.  However, only six days after the asset purchase agreement was signed, Patel advised the sellers that he was having trouble securing financing.  In connection therewith, the asset purchase agreement was amended to provide, inter alia, that the earnest money deposited would be transferred from escrow to the sellers to be ultimately applied to the total purchase price or refunded if the closing did not take place other than due to default or breach by Patel.  The scheduled closing date of 120 calendar days after October 12, 2006 was not altered.  Ultimately, Patel was not able to secure the necessary financing, and for that reason did not closed on the acquisition.  Patel filed suit to recover the $125,000.  The trial court awarded the sellers summary judgment to the effect that there was no obligation to refund the earnest money deposit.

     The Court of Appeals upheld the summary judgment on the basis that:

It is undisputed that the only reason the sale was not completed was Patel’s failure to secure financing.  The failure of the sale being solely Patel’s fault or breach, the award of summary judgment was entirely appropriate.

      Patel argued, but the Court of Appeals panel rejected, a claim that the loss of the earnest money deposit constituted an unreasonable liquidated damage or a penalty, citing United Services Auto Ass’n v. ADT Sec. Services, Inc., 241 S.W3d 335 (Ky. App. 2006).  However, in a dissent by (Senior) Judge Isaac, he argued that the summary judgment should be overruled on the basis that there were insufficient findings to determine whether the standards of United Services had been satisfied.

      Discretionary review was granted on May 16.  It does not appear that any of the briefs have yet been filed with the Court, and as of this time oral arguments have not been scheduled.