{"id":40,"date":"2015-10-21T19:54:59","date_gmt":"2015-10-21T19:54:59","guid":{"rendered":"https:\/\/kentmaynard.com\/WP\/?p=40"},"modified":"2019-04-30T17:16:58","modified_gmt":"2019-04-30T17:16:58","slug":"everything-you-wanted-to-know-about-liquidated-damages-but-were-afraid-to-ask","status":"publish","type":"post","link":"https:\/\/kentmaynard.com\/WP\/2015\/10\/21\/everything-you-wanted-to-know-about-liquidated-damages-but-were-afraid-to-ask\/","title":{"rendered":"Everything You Wanted to Know About Liquidated Damages, But Were Afraid to Ask"},"content":{"rendered":"

(Originally Posted on<\/span> January 28, 2013<\/a>)<\/span><\/h2>\n
\n

\"Wednesday,<\/a><\/p>\n

Everybody remembers liquidated damages from law school.\u00a0 The parties to a contract agree, at the outset, that damages flowing from a breach\u00a0will be hard to ascertain.\u00a0 Accordingly, to avoid a costly fight in the future,\u00a0they agree to a dollar amount of \u201cliquidated damages\u201d as their best (good faith) \u201cguesstimate\u201d of what the actual\u00a0damages will be.\u00a0 Then, when a breach occurs, somebody gets that amount, without a lot of fuss.\u00a0 Simple, right?\u00a0 Wrong.\u00a0 What you don\u2019t know about liquidated damages could, in the context of a real property sale (and escrow),\u00a0cost you big\u00a0money.<\/p>\n

Suppose that you are the seller of real property.\u00a0 Suppose further that the sale is closed while a contingency (such as a rezoning)\u00a0is pending that could substantially increase the value of the property.\u00a0 Suppose finally that the parties agree to escrow\u00a0part of the sale consideration, to be returned to buyer in the event the contingency is not realized.\u00a0 The parties pick a date that appears to permit ample time for the contingency to be definitively\u00a0 realized \u2014 or not.\u00a0 They think, \u201cIf the contingency hasn\u2019t happened by\u00a0such date, then\u00a0it\u00a0seems certain that it won\u2019t be realized at all.\u201d<\/p>\n

But they are wrong.\u00a0 The contingency is realized a few weeks after after the specified\u00a0date has passed.\u00a0 Buyer demands the escrow amount.\u00a0 Seller objects, pointing out that buyer got the (long-term) value of the contingency, albeit subject to a short (and immaterial) delay.\u00a0 Seller further points out that buyer has not suffered any quantifiable damage from the delay.<\/p>\n

Who gets the escrow?\u00a0 More to the point, does buyer get the escrow because it may be\u00a0properly construed as \u201cliquidated damages\u201d for seller\u2019s breach?<\/p>\n

That is what the trial court found in GK Development, Inc. et al. v. Iowa Malls Financing Corp.<\/em>, Case\u00a0No. 06 CH 03427<\/a>,\u00a0a case that is now on appeal and\u00a0fully briefed in the First District Appellate Court (as\u00a0Appeal 1-11-2802).<\/p>\n

In our opening\u00a0brief<\/a>\u00a0and reply brief<\/a>,\u00a0we argued that to be enforceable under Illinois law, liquidated damages must be a good-faith prediction of damages that\u00a0might flow from a breach, and not be\u00a0punitive in nature.\u00a0 We argued that\u00a0forfeiture of the escrowed amount might make sense for a complete failure of the contingency, but forfeiture of the escrow could not be\u00a0justified as a reasonable prediction of damages\u00a0from a short delay.\u00a0 Buyer contended that the trial court\u2019s ruling was entitled to deference on appeal, because it was necessarily based on findings of fact.<\/a><\/p>\n

We believe that Illnois courts do not enforce \u201cliquidated damages\u201d that are not reasonably connected to\u00a0actual damages.\u00a0 We further\u00a0believe that an escrow amount established in respect of the complete failure of a contingency cannot be awarded as \u201cliquidated damages\u201d for mere delay.\u00a0 Suffice it to say here that more details will follow, when the First District decides the issues presented.<\/p>\n

In the meantime, if you are selling real property\u00a0subject to an escrow, be sure that the contract carefully defines the nature of the escrow, to ensure that the escrow amount\u00a0cannot be construed as a Draconian penalty \u2014 in the guise of\u00a0liquidated damages \u2013\u00a0for an inconsequential\u00a0delay.\u00a0 <\/em><\/p>\n

If you have a related \u2014 or unrelated \u2014 concern or\u00a0need\u00a0advice concern\u00a0an appeal\u00a0please call Kent Maynard at \"\"312 423 6586<\/span><\/span><\/span><\/span>.<\/em><\/p>\n

UPDATE as of November 10, 2013:<\/strong><\/p>\n

The Fourth Division of the First District Appellate Court heard oral argument in this case on September 5, 2013. You can listen to a recording of the argument by clicking HERE<\/a>.<\/p>\n

We will share a copy of the Court\u2019s decision when it is handed down.<\/p>\n

-KM<\/p>\n

UPDATE as of December 22, 2013:<\/strong><\/p>\n

Last week the First District Appellate Court issued its Opinion in\u00a0GK Development, Inc. et al. v. Iowa Malls Financing Corp.<\/em>; Appeal 11-2802. The Court reversed the trial court\u2019s finding that a forfeiture of $4.3 million placed in escrow was justified as an award of liquidated damages for breach of contract \u2014 an award that we sucessfully contended was an unenforceable penalty for a transitory and inconsequential breach. A copy of the Opinion, which will be published by the First District, can be viewed HERE<\/a>. It would be an understatement to say that we were heartened by the Court\u2019s closely-reasoned Opinion, which comes just in time for the holidays.<\/p>\n

Further UPDATE as of February 10, 2014<\/strong>:<\/p>\n

The Chicago Daily Law Bulletin<\/em> published an article about the First District\u2019s December 22, 2013 decision on its front page on February 10, 2014. It can be viewed HERE<\/a>. Unfortunately, the article appears to overlook a footnote in the Opinion. That footnote states, in pertinent part, \u201c. . . it appears that Buyer did not suffer any \u2018lost\u2019 rent as the 20-plus-year lease was merely pushed back 91 days. Buyer will still receive the entire profit anticipated from the 20-year lease.\u201d There is, as the Court noted, no lost rent \u2014 only, at most, a delayed onset of increased rent.<\/p>\n

-KM<\/p>\n

Further UPDATE as of March 10, 2014:<\/strong><\/p>\n

Will this litigation never end? On February 24, 2014 Appellees (Buyer) filed a Petition for Leave to Appeal to the Illinois Supreme Court. It can be viewed HERE<\/a>. The PLA invokes Adam Smith and Milton Friedman to argue that Illinois should abandon the Second Restatement approach to enforcement of liquidated damages, as summarized in the Jameson<\/em> case. Today we filed on behalf of Seller an Answer wherein we point out that it was only after the First District found that the trial court\u2019s award of \u201cliquidated damages\u201d did not pass muster under Jameson<\/em> that Buyer first complained that Jameson was<\/em>\u00a0\u201coutmoded\u201d and \u201cpaternalistic.\u201d Our Answer can be viewed HERE<\/a>.<\/p>\n

We will report as to how the Illinois Supreme Court rules on the PLA in due course.<\/p>\n<\/div>\n

Further UPDATE as of October 21, 2015:<\/strong><\/p>\n

The PLA was denied ages ago and the case remanded to the trial court.<\/p>\n

In its December 2013 Order<\/a>, the First District remanded the consolidated appeal to the Circuit Court for a determination of two issues: first, whether Buyer suffered any cognizable damage from the 91-day delay in permitting the Hy-Vee leasehold at issue; and second, whether Seller could prove an entitlement to attorney’s fees.<\/p>\n

Almost two years later, the process of litigating those two remanded issues has yet to begin. Why is that so? Because Buyer took the position that Buyer’s claim in a related case that was previously pending\u00a0 should be litigated in the remanded proceeding. When that seemed unlikely, Buyer “re-filed” its so-called “Parking Lot Claims” in a new action (hereinafter “the Parking Lot Case”), and then successfully moved to transfer the case to the same docket as the remanded case. After that claim was dismissed, Buyer appealed and moved to stay the remanded case pending the appeal. The trial court agreed to stay the remanded action in deference to the appeal of the separately filed action. We appealed, on grounds set forth in our opening brief which can be viewed HERE<\/a>.<\/p>\n

Appellee’s brief can be viewed HERE<\/a>. Our Reply can be viewed HERE<\/a>.<\/p>\n

We will report on the First District’s response to our appeal of the stay order as soon as a decision is handed down.<\/p>\n

Further UPDATE as of June 28, 2016:<\/strong><\/p>\n

First, the First District Appellate Court affirmed the circuit court’s stay of the remanded, post-appeal action pending a decision in the appeal of Buyer’s separate, “re-filed” Parking Lot Claims. The Court’s decision can be viewed HERE<\/a>.<\/p>\n

Second, thereafter the First District Appellate Court AFFIRMED the trial court’s dismissal of the “re-filed” Parking Lot Claims, in a separate re-filed action. The Court relied on Illinois Supreme Court Rule 273 to affirm. Its Opinion can be viewed. HERE.<\/p>\n","protected":false},"excerpt":{"rendered":"

(Originally Posted on January 28, 2013) Everybody remembers liquidated damages from law school.\u00a0 The parties to a contract agree, at the outset, that damages flowing from a breach\u00a0will be hard to ascertain.\u00a0 Accordingly, to avoid a costly fight in the … Continue reading →<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1],"tags":[],"_links":{"self":[{"href":"https:\/\/kentmaynard.com\/WP\/wp-json\/wp\/v2\/posts\/40"}],"collection":[{"href":"https:\/\/kentmaynard.com\/WP\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/kentmaynard.com\/WP\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/kentmaynard.com\/WP\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/kentmaynard.com\/WP\/wp-json\/wp\/v2\/comments?post=40"}],"version-history":[{"count":2,"href":"https:\/\/kentmaynard.com\/WP\/wp-json\/wp\/v2\/posts\/40\/revisions"}],"predecessor-version":[{"id":97,"href":"https:\/\/kentmaynard.com\/WP\/wp-json\/wp\/v2\/posts\/40\/revisions\/97"}],"wp:attachment":[{"href":"https:\/\/kentmaynard.com\/WP\/wp-json\/wp\/v2\/media?parent=40"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/kentmaynard.com\/WP\/wp-json\/wp\/v2\/categories?post=40"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/kentmaynard.com\/WP\/wp-json\/wp\/v2\/tags?post=40"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}