Ralph and Carolee Thomas v. Montelucia Villas , 232 Ariz. 92 ( 2013 )

SUPREME COURT OF ARIZONA
En Banc
RALPH THOMAS and CAROLEE THOMAS, ) Arizona Supreme Court
husband and wife, ) No. CV-12-0156-PR
)
Plaintiffs/Appellees, ) Court of Appeals
) Division One
v. ) No. 1 CA-CV 10-0761
)
MONTELUCIA VILLAS, LLC, a ) Maricopa County
Delaware limited liability ) Superior Court
company, ) No. CV2009-004659
)
Defendant/Appellant. )
)
) O P I N I O N
__________________________________)
Appeal from the Superior Court in Maricopa County
The Honorable J. Richard Gama, Judge
VACATED AND REMANDED
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Opinion of the Court of Appeals, Division One
229 Ariz. 308, 275 P.3d 607 (App. 2012)
VACATED IN PART
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BEUS GILBERT PLLC Phoenix
By Franklyn D. Jeans
Tiffany E. Cale
Cassandra H. Ayres
Attorneys for Ralph Thomas and Carolee Thomas
LAKE & COBB, P.L.C. Tempe
By Joel E. Sannes
Kiel S. Berry
Blake Rebling
Attorneys for Montelucia Villas, LLC
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B R U T I N E L, Justice
¶1 Buyers of a new home anticipatorily breached the
purchase contract and then sued to recover progress payments
made to the seller during the home’s construction. The contract
provided that these payments were to serve as liquidated damages
in the event of the buyer’s breach. We hold that the defendant
seller, in order to retain the payments, must prove that it was
ready, willing, and able to perform under the contract.
I.
¶2 On January 20, 2006, Ralph and Carolee Thomas signed a
contract with Montelucia Villas, LLC for the construction of a
custom villa for $3,295,000. As part of the purchase agreement,
the Thomases made three installment deposits totaling $659,000,
or twenty percent of the villa’s purchase price. The remainder
of the purchase price was due at close of escrow. Although the
deposits became due as construction progressed and could be used
by Montelucia rather than held in escrow, the contract
characterized them as “earnest money deposits.” The contract
also provided, however, that Montelucia could elect to treat the
payments as liquidated damages if the buyers breached.
¶3 On April 25, 2008, Montelucia notified the Thomases by
letter that it had set the closing date for May 16. When the
letter was sent, Montelucia did not have a certificate of
occupancy for the property, which the contract required as a
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condition for closing escrow.
¶4 The Thomases responded on May 6 with a letter stating
that they would not close on May 16 and they were terminating
the purchase contract because the agreement was illusory,
Montelucia had not performed, and Montelucia had violated
Arizona statutes governing the sale of subdivided land. The
letter asked Montelucia to return the $659,000 in deposits.
Montelucia did not respond to the letter or refund the deposits.
Instead, it unsuccessfully attempted to obtain a certificate of
occupancy for the property on May 8 and May 14. Montelucia
ultimately obtained the certificate on August 27.
¶5 In February 2009, the Thomases sued to recover the
deposits. Montelucia counterclaimed for breach of contract.1 On
cross-motions for summary judgment, the trial court ruled that
Montelucia had breached the contract by, among other things, not
completing certain resort amenities, access points, and
infrastructure and not providing a certificate of occupancy by
the closing date. The court concluded that the Thomases were
entitled to a refund of the $659,000 in deposits.
¶6 The court of appeals reversed and remanded, holding
that the Thomases had anticipatorily repudiated the contract by
sending the May 6 letter. Thomas v. Montelucia Villas, LLC, 229
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Montelucia’s counterclaim is not before us.
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Ariz. 308, 310 ¶ 7, 275 P.3d 607, 609 (App. 2012). The court
concluded that because Montelucia was not a plaintiff seeking
affirmative relief, but instead was seeking to retain the
deposits in the face of the Thomases’ lawsuit, Montelucia was
not required to show its ability to perform. Id. at 310–11
¶¶ 8, 10, 275 P.3d at 609–10.
¶7 We granted review to address whether a defendant must
prove ability to perform to retain damages for anticipatory
repudiation, a recurring issue of statewide importance. We have
jurisdiction under Article 6, Section 5(3) of the Arizona
Constitution and A.R.S. § 12-120.24.
II.
¶8 At the outset, the Thomases challenge the court of
appeals’ holding that they anticipatorily repudiated the
contract. They argue that Montelucia breached the contract
before May 6, thereby excusing their performance. The Thomases,
however, did not seek review on this issue. We therefore accept
for purposes of our analysis that the Thomases anticipatorily
breached the contract by sending their May 6 letter.
¶9 “An anticipatory repudiation is a breach of contract
giving rise to a claim for damages and also excusing the
necessity for the non-breaching party to tender performance.”
United Cal. Bank v. Prudential Ins. Co. of Am., 140 Ariz. 238,
283, 681 P.2d 390, 435 (1983) (citing Kammert Bros. Enters.,
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Inc. v. Tanque Verde Plaza Co., 102 Ariz. 301, 428 P.2d 678(1967); Restatement (Second) of Contracts § 277 (1981); 4 Corbin
on Contracts § 977 (1951)). Yet, an anticipatory breach, by
itself, does not entitle the injured party to damages. To
recover damages, “[i]n addition to proving repudiation, the non-
breaching party need only show ‘that he would have been ready
and willing to have performed the contract, if the repudiation
had not occurred.’” Id. at 288–89, 681 P.2d at 440–41 (quoting
Petersen v. Wellsville City, 14 F.2d 38, 39 (8th Cir. 1926)).
Thus, “[a] party’s duty to pay damages for total breach by
repudiation is discharged if it appears after the breach that
there would have been a total failure by the injured party to
perform his return promise.” Restatement (Second) of Contracts
§ 254(1) (1981) (“Restatement”).
¶10 The court of appeals held that plaintiffs seeking
damages for anticipatory repudiation must show the ability to
perform, but that a defendant who seeks to retain damages need
not make that showing. Thomas, 229 Ariz. at 311 ¶ 10, 275 P.3d
at 610. We disagree.
¶11 A distinction between a party seeking affirmative
relief and a party trying to retain damages in the face of
another’s claim is unwarranted. Restatement § 254(1) states
that a “[repudiating] party’s duty to pay damages” is discharged
if the “injured party” would have failed to perform. This
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language does not distinguish between damages sought by the
injured party and damages already obtained from the repudiating
party which the injured party seeks to retain. Furthermore,
applying the ready, willing, and able requirement to both
parties seeking damages and parties seeking to retain damages
ensures that the non-breaching party actually suffered injury
from the anticipatory repudiation, a primary justification for
the requirement. See Record Club of Am., Inc. v. United Artists
Records, Inc., 890 F.2d 1264, 1275 (2d Cir. 1989) (requiring the
non-breaching party to show ability to perform “is merely an
application of the general rule that the complaining party must
demonstrate that the breach caused him injury”). Likewise, any
distinction between the party making the claim — whether
plaintiff or defendant — is similarly unwarranted. See United
Cal. Bank, 140 Ariz. at 283–84, 681 P.2d at 435–36 (“[T]o
recover damages for anticipatory breach, the injured party need
only show that he had the ability to perform his own obligations
under the agreement.” (emphasis added)).
¶12 Here, the Thomases’ anticipatory repudiation on May 6
excused Montelucia from further performance and gave Montelucia
a claim for damages for breach. But the anticipatory
repudiation alone does not entitle Montelucia to damages.
Because the Thomases’ duty to pay damages was discharged if
Montelucia could not have performed, Montelucia’s entitlement to
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the deposits rests upon its ability to have performed its
contractual obligations. If Montelucia could not have closed in
accordance with the contract, then the Thomases are under no
duty to pay damages for their anticipatory breach, and
Montelucia cannot retain the deposits.
¶13 Montelucia argues that it can keep the deposits
without showing that it was ready, willing, and able to perform
because the deposits were earnest money that was forfeited when
the Thomases anticipatorily repudiated the contract. But while
the contract referred to the deposits as “earnest money,” the
deposits are more accurately characterized as progress payments.
¶14 Earnest money is a “comparatively small amount . . .
paid to an escrow agent” to show that the “purchaser is in
earnest and in good faith.” Brigham v. First Nat’l Bank of
Ariz., 129 Ariz. 160, 162, 629 P.2d 996, 998 (App. 1981) (citing
Mortenson v. Fin. Growth, Inc., 456 P.2d 181 (Utah 1969)).
Typically, earnest money remains in neutral escrow until the
sale closes or the purchaser has forfeited the earnest money by
defaulting on the contract. See, e.g., Esplendido Apartments v.
Olsson, 144 Ariz. 355, 363, 697 P.2d 1105, 1113 (App. 1984).
Earnest money usually does not finance construction.
¶15 The deposits in this case do not serve the traditional
function of earnest money deposits. Like progress payments on a
construction contract, the deposits here were made at the
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completion of specific phases of the villa’s construction and
were immediately available to Montelucia to use “for costs
related to the development of the Montelucia Villas.” Thus, the
deposits did not serve to show the Thomases’ good faith; rather
they enabled Montelucia to fund the construction. As a result,
we conclude that the deposits constituted progress payments
rather than earnest money, notwithstanding the contract
language. Cf. Aztec Film Prods., Inc. v. Quinn, 116 Ariz. 468,
470, 569 P.2d 1366, 1368 (App. 1977) (“It is well settled that
in determining whether a particular clause calls for liquidated
damages or for a penalty, the name given to the clause by the
parties is not conclusive, and the controlling elements are the
intention of the parties and the special circumstances of the
case.”).
¶16 Montelucia further argues that it was not required to
show that it was ready, willing, and able to perform because the
contract characterized the deposits as liquidated damages, and a
party seeking liquidated damages need not prove actual damages.
We are not persuaded. “To bring an action for the breach of the
contract, the plaintiff has the burden of proving the existence
of the contract, its breach and the resulting damages.” Graham
v. Asbury, 112 Ariz. 184, 185, 540 P.2d 656, 657 (1975). A
liquidated damages clause relieves the plaintiff of the burden
of proving the amount of actual damages caused by the breach.
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Mech. Air Eng’g Co. v. Totem Constr. Co., 166 Ariz. 191, 193,
801 P.2d 426, 428 (App. 1989). But it does not establish
whether a breach sufficient to support damages has occurred.
See Bowen v. Korell, 587 P.2d 653, 657 (Wyo. 1978) (holding that
when a contract contemplates liquidated damages only for a
specified breach, “the provision will have no force and effect
except upon proof of the breach provided for by the agreement”).
Although the contract stipulated the amount of damages, this
provision did not relieve Montelucia of the burden to
demonstrate its willingness and ability to perform before
recovering or retaining any damages.
¶17 The parties dispute whether Montelucia was able to
perform its obligations; therefore, we remand to the superior
court for a determination of this issue. On remand, Montelucia,
as the party in the best position to marshal the evidence, bears
the burden of showing it was able to close in accordance with
the contract. See 10 Corbin on Contracts § 978 n.11 (1951)
(noting that the non-repudiating party “can much more readily
prove what the facts were in respect of his own ability to
perform”). If it is ultimately determined that Montelucia was
ready, willing, and able to perform as required by the contract,
the court can then determine the appropriate remedy available to
Montelucia under the contract.
¶18 Both parties request an award of attorney fees
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pursuant to the contract and A.R.S. § 12-341.01. We deny this
request without prejudice to the trial court awarding fees,
including those incurred on appeal, to the party that ultimately
prevails.
III.
¶19 For the foregoing reasons, we vacate the court of
appeals’ opinion, except ¶¶ 6–7, and remand to the trial court
for further proceedings consistent with this opinion.
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Robert M. Brutinel, Justice
CONCURRING:
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Rebecca White Berch, Chief Justice
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Scott Bales, Vice Chief Justice
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John Pelander, Justice
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Ann A. Scott Timmer, Justice
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