STAR FINANCIAL CORPORATION, Plaintiff,
v.
HOWARD NANCE COMPANY, Defendant.
No. COA98-286.
Court of Appeals of North Carolina.
December 15, 1998.*535 John E. Hodge, Jr., Charlotte, for plaintiff-appellant.
Perry, Patrick, Farmer & Michaux, P.A. by John H. Carmichael, Charlotte, for defendant-appellee.
HORTON, Judge.
The issue on appeal is whether the buyer under a contract to purchase real estate, who does not comply with the terms of the contract, may recover the amounts paid to the seller prior to the buyer's breach. North Carolina follows the common law rule, which is the majority American view, that a defaulting buyer may not recover any portion of consideration paid prior to his breach.
It is settled law that where a party agrees to purchase real estate and pays a part of the consideration therefor and then refuses or becomes unable to comply with the terms of his contract, he is not entitled to recover the amount theretofore paid pursuant to its terms.
Scott v. Foppe, 247 N.C. 67, 70, 100 S.E.2d 238, 240 (1957).
In Walker v. Weaver, 23 N.C.App. 654, 209 S.E.2d 537 (1974), this Court applied the holding of Scott and held that the trial court was correct in awarding the seller a $500.00 "part payment on the purchase price" made by the buyer under a contract to purchase real estate where the buyer had defaulted under the contract. We note that there was no forfeiture provision in the real estate contracts involved in Scott and Walker, nor were the amounts paid in those cases referred to as either earnest money or liquidated damages. In both cases, as in the case sub judice, the amounts paid were to be applied to the total purchase price. Thus, in the present case, the trial court correctly entered *536 summary judgment for the seller. Plaintiff buyer, having breached the real estate sales contract, was not entitled to recover the amounts paid prior to its breach.
We are aware that the common law rule has been criticized in some jurisdictions as being inequitable where the amount forfeited is more than the seller's actual damages resulting from the breach. See Walker, 23 N.C.App. at 656, 209 S.E.2d at 539. That may be the situation in the instant case. However, it is not for this Court to depart from a rule that our Supreme Court has described as "settled law."
For the foregoing reasons, the decision of the trial court is
Affirmed.
Judge LEWIS concurs.
Judge GREENE dissents.
GREENE, Judge, dissenting.
I disagree with the majority that the law in North Carolina provides that every person under a contract to purchase real estate, who defaults under the contract, forfeits to the seller any monies paid pursuant to the contract prior to the default, absent a specific agreement to the contrary.
The general rule provides that in a contract for purchase and sale, the vendor, upon breach by the purchaser, may either sue for the difference between the agreed price and the fair market value, or for damages which have been occasioned by the purchaser's failure to comply with his contract. See, generally, 77 Am.Jur.2d Vendor and Purchaser § 577-79 (1997). The parties, however, are free to expressly provide "that a certain sum will be paid by the purchaser as liquidated damages if the purchaser fails to perform, and such a provision will be given effect unless the situation of the parties and the surrounding circumstances show that, notwithstanding the words used, a penalty was intended." Id. at § 581.
[A] stipulated sum is for liquidated damages only (1) where the damages which the parties might reasonably anticipate are difficult to ascertain because of their indefiniteness or uncertainty and (2) where the amount stipulated is either a reasonable estimate of the damages which would probably be caused by a breach or is reasonably proportionate to the damages which have actually been caused by the breach.[[1]]
Knutton v. Cofield, 273 N.C. 355, 361, 160 S.E.2d 29, 34 (1968); 22 Am.Jur.2d Damages § 701 (1988) (provisions fixing damages "in an amount grossly disproportionate to the harm actually sustained or likely to be sustained... is an agreement to pay a penalty"). Liquidated damages are collectable, but penalties are not enforceable. Id.
In this case, the parties did not stipulate a sum that would be forfeited upon the purchaser's breach. Indeed, the provision that the $100,000.00 paid by the purchaser would be "earnest" money forfeited upon default by the purchaser was deleted from the contract. This deletion evidences the parties' intent to have no forfeiture clause, thus relegating the seller to an action for damages in the event of the purchaser's default.
In any event, to the extent the contract could be read to provide that the $100,000.00 would be forfeited upon the purchaser's breach, that amount constitutes a penalty because it is so large as to be out of proportion to the probable loss of the seller and does not represent a fair estimate of the damages actually sustained.[2] I would therefore hold that summary judgment for Nance was error, that Nance was not entitled to retain the $100,000.00 as a forfeiture, and that the case must be remanded for a determination of Nance's actual damages arising from Star's default.
I do not believe that Scott v. Foppe, 247 N.C. 67, 100 S.E.2d 238 (1957), and Walker v. Weaver, 23 N.C.App. 654, 209 S.E.2d 537 *537 (1974), require that we reach a different conclusion. In Scott, the Court was careful to note that the seller was under no obligation "under the facts" of that case to refund to the defaulting purchaser the consideration paid pursuant to the contract. Scott, 247 N.C. at 72, 100 S.E.2d at 241. In Walker, this Court found it unnecessary to deviate from the general rule enunciated in Scott because application of that rule to the facts presented in Walker "produced no harsh result." Walker, 23 N.C.App. at 656, 209 S.E.2d at 539. Even if we read these cases as holding that in the absence of a forfeiture clause, one will be implied, it does not follow that in each instance it will be treated as a liquidated damages clause, as opposed to a penalty clause. That, however, is the construction placed on these cases by the majority and it is a construction with which I disagree.
I would reverse summary judgment and remand.
NOTES
[1] The fixing of unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty. Restatement (Second) of Contracts § 356(1) (1981).
[2] If there is "a doubt whether a sum is in fact a penalty or liquidated damages, courts are inclined to hold that it is a penalty." 22 Am.Jur.2d Damages § 691 (1988). That determination presents a question of law, not a question of fact. Id. at § 692.