The California Court of Appeal's unanimous decision in Kuish v. Smith affirmed the legal principle that, without a liquidated damages clause, a deposit identified as nonrefundable in the purchase contract can be refundable under certain circumstances.

On February 3, 2010, the California Court of Appeal unanimously granted Samuels, Green & Steel, LLP's appeal in a published decision on behalf of one of the firm's real estate clients, Mr. Bradford Kuish.

In early 2006, Mr. Kuish entered into a contract for a six-month escrow for his purchase of an oceanfront home in Laguna Beach, California, for $14,000,000. In counteroffers leading up to the contract, Mr. Kuish and the seller eliminated the contract's liquidated damages clause. Mr. Kuish made deposits totaling $620,000, which the contract specifically stated were nonrefundable.

When Mr. Kuish experienced difficulties obtaining governmental approval of his development plans for the property, he terminated the contract and cancelled the escrow. Two months later the seller sold his property to a third party for $15,000,000 ($1,000,000 more than Mr. Kuish had agreed to pay).

Following that sale, Samuels, Green & Steel, LLP, contacted the seller for Mr. Kuish, demanding the return of his deposits. When the seller refused, Samuels, Green & Steel, LLP, sued the seller to recover the deposits. The trial judge ruled for the seller, stating Mr. Kuish was a "big boy" (i.e., a sophisticated businessman) and should suffer the consequences of his express agreement that his deposits were nonrefundable.

Samuels, Green & Steel, LLP's litigation partner Phil Green appealed the trial judge's ruling on the ground that under California law, Mr. Kuish's loss of his deposits constituted an illegal forfeiture. The appellate court unanimously agreed, reversing the trial court's decision and holding that when a buyer breaches a real estate purchase contract that lacks a liquidated damages clause and the seller immediately resells the property for a higher price than the first buyer had contracted to pay, the seller has not suffered any damages and cannot keep the first buyer's deposits. This is so even if the contract states the deposits are nonrefundable. The court stated "any provision by which money ... would be forfeited without regard to actual damage suffered would be an unenforceable penalty. To construe the term 'nonrefundable' to establish [the seller's] entitlement to the full deposit without regard to actual damages would essentially create a liquidated damages provision. The parties, however, expressly stipulated that the agreement did not contain a liquidated damages provision..."

This decision does not create new law, but instead reaffirms a legal principle established nearly 60 years ago by the California Supreme Court in Freedman v. The Rector (1951) 37 Cal.2d 16. The Kuish decision also involves a legal issue of continuing public interest because real estate buyers and sellers sometimes agree the buyer's deposits will be nonrefundable if the buyer defaults, but they do not initial or include a valid liquidated damages provision. This decision will help "spread the word" that people must think twice before assuming they have lost, or conversely may retain, that deposit following a buyer default.

Kuish v. Smith - filed February 3, 2010, publication ordered February 10, 2010, Fourth District, Div. Three. The opinion can be viewed at:

http://www.courtinfo.ca.gov/opinions/documents/G040743.PDF

For more information, contact litigation partner Phil Green (phil.green@sgsattorneys.com) or transactional partner, Bill Steel (bill.steel@sgsattorneys.com).

Related news stories at:
http://www.metnews.com/articles/2010/kuis021110.htm.
http://www.sacrealtor.org/blog/
http://jpledesma.wordpress.com/

This communication is being circulated to clients and friends of the law firm of Samuels, Green & Steel LLP, and is not intended to provide legal advice.

© 2010 Samuels, Green & Steel, LLP