IN THE COURT OF APPEALS OF IOWA
No. 15-0487
Filed July 27, 2016
PENNIE CARROLL,
Plaintiff-Appellee,
vs.
REO, L.L.C., d/b/a RE/MAX OPPORTUNITIES, INC., and its Successors in
Interest, DS VENTURES, L.L.C., d/b/a RE/MAX OPPORTUNITIES, INC.,
Defendants-Appellants.
________________________________________________________________
Appeal from the Iowa District Court for Polk County, Lawrence P.
McLellan, Judge.
RE/MAX appeals the district court’s finding that a liquidated damages
clause was an unenforceable penalty clause. AFFIRMED.
David A. Morse of Rosenberg & Morse, Des Moines, for appellants.
Gregory G.T. Ervanian of Graham, Ervanian & Cacciatore, L.L.P., Des
Moines, for appellee.
Considered by Vogel, P.J., Potterfield, J., and Scott, S.J.*
*Senior judge assigned by order pursuant to Iowa Code section 602.9206 (2015).
2
SCOTT, Senior Judge.
REO, LLC, d/b/a Re/Max Opportunities Inc., and its successors in interest,
DS Ventures, LLC, d/b/a Re/Max Opportunities (RE/MAX) appeal the district
court’s finding that a liquidated damages clause was an unenforceable penalty
clause. Specifically, RE/MAX argues the district court (1) impermissibly placed
the burden on RE/MAX to establish the liquidated damages clause was not a
penalty clause and (2) erred in analyzing the reasonableness of the damages by
comparing them to the actual provable loss at the time of the breach instead of
the anticipated loss at the time of the contract. We affirm.
I. Background Facts and Procedure
Pennie Carroll is a real estate agent who, in 2010, began working for
RE/MAX, a real estate brokerage, pursuant to an Independent Contractor
Agreement (ICA). Dennis Liberty and Stephanie VanDerKamp are the owners of
RE/MAX.
Paragraph 7.B. of the ICA provides the means by which a party may
terminate the agreement:
B. TERMINATION. This Agreement may be terminated
(i) by RE/MAX for cause, immediately and without notice, in the
event [Carroll] defaults or otherwise fails to conduct h[er] business
in accordance with the terms of this Agreement or engages in
conduct which is disloyal or disrupts the office or is likely to bring
discredit to the RE/MAX name, or (ii) by either party without cause,
at any time, upon giving of 30 days’ notice to the other.
On September 16, 2013, Carroll gave notice of her termination of the ICA.
By letter dated September 25, 2013, RE/MAX terminated Carroll for cause. On
3
October 4, 2013, Carroll filed suit, requesting a permanent injunction1 and
declaratory relief against RE/MAX, seeking to enjoin RE/MAX from taking any
portion of her real estate commissions and to have the liquidated damages
provision of the ICA declared an unenforceable penalty clause.
In paragraph 7.F. of the ICA, the liquidated damages provision provides:
F. COMMISSIONS FOLLOWING EXPIRATION/
TERMINATION. Following termination or non-renewal of this
Agreement, [Carroll’s] entitlement, of any, to receipt of further
commissions shall be determined in accordance with the policy and
procedures/practice of RE/MAX pertaining to such commissions.
The commission split to [Carroll] for pending transaction closing
after termination will be paid out on a 50/50 split after the 5%
Broker Fee.
A bench trial was held in November 2014. By order dated February 19,
2015, the district court found in Carroll’s favor, determining the clause in dispute
did “not constitute a reasonable liquidated clause but rather a penalty.” RE/MAX
appealed.
II. Standard and Scope of Review
Though the current action was brought as one for declaratory judgment,
the dispute of the parties arises out of contract. See Van Sloun v. Agans Bros.,
Inc., 778 N.W.2d 174, 178-79 (Iowa 2010) (finding a declaratory judgment action
based on a breach of contract claim was an action at law reviewed for errors at
law). The determination of whether a liquidated damage clause is an
unenforceable penalty clause is a question of law that is dependent upon the
court’s construction of the contract. See Rohlin Constr. Co. v. City of Hinton, 476
N.W.2d 78, 79 (Iowa 1991); see also Aurora Bus. Park Assocs., L.P. v. Michael
1
Carroll also sought a temporary injunction, which she voluntarily dismissed and the
court dismissed by order dated February 14, 2014.
4
Albert, Inc., 548 N.W.2d 153, 155 (Iowa 1996) (“Whether a contract provision is a
valid liquidated damages clause or an unenforceable penalty is a question of law
for the court.”). “Our review is for correction of errors at law.” Id. “We are bound
by well-supported findings of facts, but are not bound by the legal conclusions of
the district court.” Am. Family Mut. Ins. Co. v. Petersen, 679 N.W.2d 571, 575
(Iowa 2004).
III. Analysis
A. Applicable Law
Iowa law allows contractually proscribed liquidated damages so long as
those damages do not constitute a penalty. See Aurora, 548 N.W.2d at 156.
“[P]arties may fix damages by contract when the amount of damages is uncertain
and the amount fixed is fair.” Rohlin, 476 N.W.2d at 79.
Damages for breach by either party may be liquidated in the
agreement but only at an amount that is reasonable in the light of
the anticipated or actual loss caused by the breach and the
difficulties of proof of loss. A term fixing unreasonably large
liquidated damages is unenforceable on grounds of public policy as
a penalty.
Id. at 80 (quoting Restatement (Second) of Contracts § 356(1) (Am. Law. Inst.
1981)); see also Grunwald v. Quad City Quality Serv., Inc., No. 01-1353, 2003
WL 182957, at *3 (Iowa Ct. App. Jan. 29, 2003) (same). The Iowa Supreme
Court has adopted the following test for a penalty as set forth in the Restatement
(Second) of Contracts:
Under the test stated in Subsection (1), two factors combine in
determining whether an amount of money fixed as damages is so
unreasonably large as to be a penalty. The first factor is the
anticipated or actual loss caused by the breach. The amount fixed
is reasonable to the extent that it approximates the actual loss that
has resulted from the particular breach, even though it may not
5
approximate the loss that might have been anticipated under other
possible breaches. Furthermore, the amount fixed is reasonable to
the extent that it approximates the loss anticipated at the time of the
making of the contract, even though it may not approximate the
actual loss. The second factor is the difficulty of proof of loss. The
greater the difficulty either of proving that loss has occurred or of
establishing its amount with the requisite certainty, the easier it is to
show that the amount fixed is reasonable. To the extent that there
is uncertainty as to the harm, the estimate of the court or jury may
not accord with the principle of compensation any more than does
the advance estimate of the parties. A determination whether the
amount fixed is a penalty turns on a combination of these two
factors. If the difficulty of proof of loss is great, considerable
latitude is allowed in the approximation of anticipated or actual
harm. If, on the other hand, the difficulty of proof of loss is slight,
less latitude is allowed in that approximation. If, to take an extreme
case, it is clear that no loss at all has occurred, a provision fixing a
substantial sum as damages is unenforceable.
Rohlin, 476 N.W.2d at 80 (quoting Restatement (Second) of Contracts § 356 cmt.
b); see also City of Davenport v. Shewry Corp., 674 N.W.2d 79, 85 (Iowa 2004)
(“We adopted the Restatement test for a penalty, which focuses on two factors:
(1) ‘the anticipated or actual loss caused by the breach’; and (2) ‘the difficulty of
proof of loss.’” (citation omitted)). Though “liquidated damage clauses are
favored,” Shewry Corp., 674 N.W.2d at 85, they “must compensate for loss rather
than punish for breach,” Rohlin, 476 N.W.2d at 81 (citation omitted).
“A party seeking to recover for breach of contract is entitled only to be
placed in as good a position as the party would have occupied had the contract
been performed.” Grunwald, 2003 WL 182957, at *2 (citing Midland Mut. Life
Ins. Co. v. Mercy Clinics, 579 N.W.2d 823, 831 (Iowa 1998)). Even, as here,
where the contract calls for liquidated damages, “[a] party is not entitled to use
the breach to better its position by recovering damages not actually suffered.” Id.
6
B. Burden of Proof
RE/MAX first argues the district court erred by improperly placing the
burden on RE/MAX to demonstrate the liquidated damages clause was not a
penalty. See Gordon v. Pfab, 246 N.W.2d 283, 288 (Iowa 1976) (“A party who
contends that a liquidation clause is in reality a penalty has the burden to plead
that fact and prove the actual damages in the trial court.”).
In its ruling, the district court stated, “The court will review the totality of
the evidence to determine if Carroll met her burden of establishing that [the
provision in dispute] constitutes a penalty.” It further acknowledged, “Carroll is
required to prove that the liquidated sum is unreasonable in light of anticipated or
actual losses.” The district court then went on to analyze all the evidence
presented—having noted first that “Carroll called all the witnesses that testified at
trial in her case-in-chief.” The evidence considered included the testimony of
Liberty, VanDerKamp, and Carroll. The district court based its holding on
numerous factors, including (i) the lack of explanation for why a 50/50 split was
chosen; (ii) Liberty’s claim the rate was imposed to keep the company from
getting “slaughtered” when an agent left and to recoup the tremendous
investment made in getting an agent started; (iii) the operating expenses Carroll
paid for her RE/MAX office and the numerous payments and fees Carroll
incurred pursuant to RE/MAX policies; (iv) the failure of the parties to discuss the
purpose of the 50% rate at the time the ICA was executed; (v) that Carroll was
aware of the provision and did not view the provision as a penalty at the time she
signed the ICA; (vi) that RE/MAX would not have allowed renegotiation of the
provision as it was included in all of its form contract; (vii) that no party attempted
7
to demonstrate the actual cost of the work RE/MAX performed as a result of the
termination of the ICA; (viii) that RE/MAX never applied the 50% rate to other
agents that left and had pending sales; and (ix) that the record was insufficient to
establish the reasonableness of the 50% commission rate as there was
insufficient evidence of the anticipated or actual losses.
Each witness was called by Carroll, and no RE/MAX employee was able
to explain why the 50% rate was applied—as opposed to any other rate of
increase—or the value of RE/MAX’s actual or anticipated losses. It is clear from
the record the district court considered all the evidence, as did the Rohlin court,
and did not impose an impermissible burden on RE/MAX. See Rohlin, 476
N.W.2d at 80-81 (noting “[a] review of the record reveals uncertainty of how the
sum of $400 per day for liquidated damages was derived,” the person who set
the amount was not called as a witness, no witness was called to justify the
amount, and no studies were presented to justify the amount, concluding “[t]here
is no valid justification for the individual liquidated damage amounts contained in
each of the three contracts” at issue).
C. Reasonableness of Damages
RE/MAX next argues the district court erred in comparing the liquidated
damages to actual provable losses rather than to the anticipated loss at the time
of the contract. See Aurora, 548 N.W.2d at 157 (“The amount fixed in a
liquidated damage provision ‘is reasonable to the extent that it approximates the
loss anticipated at the time of the making of the contract, even though it may not
approximate the actual loss.’” (citation omitted)).
8
When finding in favor of Carroll, the district court noted the governing
standard: “To determine if the amount fixed is fair the court requires the amount
to be reasonable in light of the anticipated or actual loss caused by the breach.”
(Emphasis added.) Quoting Engel v. Vernon, 215 N.W.2d 506, 516 (Iowa 1974),
the district court further noted the provision will be treated as a penalty where the
“sum stipulated is out of reasonable proportion to the loss or injury actually
sustained or reasonably to be anticipated.” (Emphasis added.)
In its analysis, the district court considered both the anticipated and actual
losses, noting “the record contains insufficient evidence to establish what the
anticipated or actual losses would be” and thus “[t]he evidence did not establish
that [the liquidated damages] bore a reasonable relationship to the anticipated
losses or actual losses.” The court repeatedly noted the lack of evidence
demonstrating why the 50/50 split was imposed, see Rohlin, 476 N.W.2d at 81
(noting the lack of “valid justification for the individual liquidated damage
amounts”), or what amount of damages was actually incurred by RE/MAX that
would justify the marked increase in the commissions paid to RE/MAX, see
Grunwald, 2003 WL 182957, at *3 (“In this case, the amount of liquidated
damages provided by the contract was not reasonable in light of the actual loss
sustained by the breach.”). We find no error.
D. Whether the Liquidated Damages Clause was a Penalty
Finally, RE/MAX contends the district court erred in determining the
liquidation damages clause was a penalty clause.
“We first address whether the amount of actual damages resulting from a
breach of the lease were uncertain.” Aurora, 548 N.W.2d at 156. “The greater
9
the difficulty either of proving that loss has occurred or of establishing its amount
with requisite certainty, the easier it is to show the amount fixed is reasonable.”
Shewry Corp., 674 N.W.2d at 85 (citation omitted). The district court noted that,
after Carroll left, RE/MAX spent three or four weeks obtaining information on
Carroll’s listings that were not in the listings’ respective files, including contact
information for the sellers and missing forms required to service the accounts.
RE/MAX also had to contact the sellers about their homes in order to assign
each seller an appropriate agent. The district court determined, however, “the
record did not demonstrate that damages for a breach of the ICA were so
uncertain that a liquidated damage clause was needed.”
RE/MAX argues damages are particularly hard to calculate in this instance
because there is no hourly rate for real estate agents; thus, there is no objective
measure for the time expended on these tasks. However, the record indicates
that the office staff, Liberty, and VanDerkamp dealt with Carroll’s listings for the
first four to six weeks, not the other contract realtors.
Liberty testified that Carroll had over one hundred listings at the time of
her departure.2 He further stated that, had Carroll remained with the company,
she would have handled the open houses, viewings, and offers on those
properties, as well as all communications with the potential buyers and sellers
and their agents. But the record establishes that the listings—those properties
2
Carroll testified that of these approximate one hundred listings, only ten of them stayed
with RE/MAX. The rest either elected to stay with Carroll while others found a new
broker. Of the ten, two closed with RE/MAX and resulted in commissions. In addition,
there were approximately twenty-one pending sales at the time Carroll left—that is,
properties for which there had been an offer and acceptance—resulting in approximately
$100,000 in pending commissions.
10
where no offer and acceptance had occurred as of the time of termination—were
reassigned to other realtors. Liberty testified that once one of Carroll’s listing
was transferred to a new agent, that agent received any resulting commissions
instead of Carroll. This testimony was reinforced by Carroll, who testified her
understanding was that the remaining listings were reassigned to new realtors.
Carroll testified that work resulted from her departure but that this was simply a
shifting of work to other realtors that were then eligible to receive a commission
for that work. Carroll indicated her departure would not have caused RE/MAX a
significant amount of additional work, as most of the tasks incurred were already
part of the broker’s responsibility. Thus, the new agents were compensated for
their time, in the same manner they would have been for any other listing, and
RE/MAX received its usual commission in accordance with the contractual
agreements it had in place with those agents.
Even assuming the amount of loss were difficult to prove with any degree
of certainty, we must also consider “whether the amount of liquidated damages
under the [applicable] clause is reasonable.” Aurora, 548 N.W.2d at 156; Shewry
Corp., 674 N.W.2d at 85-86 (considering “the question whether the damages set
in the contract . . . is an unreasonably large sum in view of the anticipated or
actual harm”). The district court concluded, in relevant part, (1) “[t]he record is
insufficient to establish that the 50% commission rate is a reasonable rate since
the record contains insufficient evidence to establish what the anticipated or
actual losses would be,” and (2) “no evidence was presented to demonstrate the
value of that work or whether [RE/MAX] suffered damage as a result since they
receive at least the 5% commission rate they were allowed under the ICA no
11
matter who closed the sale.” Again, the district court based its findings on the
testimony Carroll presented through RE/MAX employees who were unable to
explain how the 50/50 rate was reached or what the actual damages or
anticipated damages were.
At trial, Liberty argued the purpose of the damages clause was “to keep
the company from just being slaughtered financially from agents leaving and
leaving us behind with all the costs that we’ve incurred [from] helping them build
their businesses.” But the damages provision and 50/50 split is in every realtor
contract. The damages do not decrease over time to adjust for the profit made
from these agents—which presumably recoups investment expenses. Per the
terms of the standard contract, this same penalty would be imposed upon an
agent that had been with the company for a few months the same as it would for
one who had been with the company for decades. In addition, despite the
purported purpose of the provision being recoupment of investment, the record
establishes this is the first time RE/MAX elected to exercise this provision in the
eighteen months before Carroll left, despite fifteen other agents leaving; agents
for whom RE/MAX presumably incurred investments expenses.
Further, a considerable portion of these investment costs were already
paid for by Carroll and the other realtors. Carroll paid, amongst other costs and
fees, a portion of each closing to RE/MAX, transaction fees, seller and buyer
fees, and an office free of $1500 a month for overhead costs.3 Carroll also paid
for her own administrative assistant, her own signage, her own personal
3
Carroll admitted that there were certain operating expenses generally incurred by
RE/MAX for the company and its realtors, including advertising for RE/MAX, office space
for its realtors, utilities, and office furniture and equipment.
12
advertising, some of the general office advertising, and, for part of her time with
RE/MAX, for the cleaning services and receptionist. Finally, Liberty testified the
50/50 split is an industry standard that helped to cover the expense of other
personnel hired for the operation of the company. Yet there is no indication that
these expenses were incurred by virtue of Carroll’s breach of the ICA. See
Rohlin, 476 N.W.2d at 80 (providing it is “[d]amages for breach” that “may be
liquidated in the agreement” (citation omitted)).
RE/MAX also argues the damages clause helps them recoup the
expenses incurred based upon Carroll’s poor record keeping, including her
failure to maintain files in the office and her failure to keep complete information
on each file. But the evidence also shows RE/MAX already had the responsibility
to ensure these records were retained, regardless of whether Carroll had stayed
or left. Liberty testified RE/MAX had a “responsibility as a broker . . . to have
things in order” and “review[ed] files as they c[a]me in. . . . If there was
something missing, you know, we probably should have caught it.” Liberty
further testified that, when a file gets to closing, they “have to make sure
everything is right and documented” and that the broker’s responsibility does not
change regardless of whether the realtor has remained with or left RE/MAX.
Liberty stated there is a checklist or procedure the office goes by pursuant to
which other employees review the listings and send notifications when
information is missing. Liberty also admitted that, when asked, Carroll was
forthcoming with the missing information. There is simply no indication that the
13
time spent to fix poor record keeping was an anticipated damage or a damage
resulting from Carroll’s departure.4
Specific to those listings Carroll had where a signed offer and acceptance
had been secured, Liberty indicated RE/MAX still had to re-walk-through those
properties, follow-up with attorneys and the closing department, and complete
paperwork. But Liberty also indicated “the agents do not realize that because it’s
going on all behind the scenes.” There was no indication that these tasks were
different than what already would have been required of RE/MAX had Carroll not
left.
RE/MAX also points to the time expended by other real estate agents, but,
as noted above, in the event the case was reassigned to a new agent, the terms
of that agent’s contract governed. There simply is no evidence to support that
this marked increase reflects any actual or anticipated losses.
As noted by the district court, the amount of liquidated damages set here
equals “tens of thousands of dollars.” It is an unexplained increase from
RE/MAX’s entitlement to 5% of the commission to 52.5% of the commissions,
which is “unreasonably large and goes far beyond the anticipated loss” resulting
from Carroll’s departure. See Rohlin, 476 N.W.2d at 81. There is no indication
what amount of losses RE/MAX actually sustained and no explanation why the
50/50 split reasonably portrayed the anticipated or actual losses. Upon our
4
Another former realtor for RE/MAX, who worked for three years in the same location
where Carroll had been employed, also testified that she never included phone numbers
or e-mail addresses on the listing contracts, which was some of the information Liberty
indicated was missing from Carroll’s files. She further testified that her listings were
reviewed as a matter of course by other persons in the office, and that she was notified
when necessary information was missing. She stated that when she left RE/MAX the
50/50 split was not applied to the commission she received from her remaining listing.
14
review, we find the district court did not err in finding the liquidation clause was
an unenforceable penalty clause.
IV. Conclusion
For the foregoing reasons, the judgment of the district court is affirmed.
AFFIRMED.