Maxton Builders v. Lo Galbo

In Maxton Builders v. Lo Galbo, 68 N.Y.2d 373 [1986], plaintiff contracted to sell a house to defendants, who remitted as a down payment a check for a sum representing 10% of the purchase price. The contract of sale included a rider reserving to defendants the right to cancel the contract if the real estate taxes on the property exceeded thirty-five hundred ($ 3500) dollars. Written notice to the seller was required to be served within three days of the date of the signing of the contract. Compliance with these notice provisions entitled defendants to the return of their deposit. On the day following this accord, the parties established that the taxes would exceed the $ 3500 amount. Counsel for the purchasers informed plaintiff's counsel by telephone that his clients wished to cancel the contract. A letter was mailed to plaintiff's attorney two days after the contract was signed, and received by the attorney four days after remittance, and six days after the execution of the contract of sale. Plaintiff's attorney also received notice from the bank that defendants had stopped payment on the check. Plaintiff sued for recovery of the down payment, claiming a breach when defendants stopped payment on the check. Defendants answered that they were entitled to cancel the contract pursuant to the rider. During the pendency of the action, plaintiff sold the house to another purchaser for the same amount, although they were required to engage a real estate broker for a fee of twelve thousand ($ 12,000) dollars. Both parties moved for summary judgment. Plaintiff contended that defendants had not properly cancelled the contract, and defendants claimed that they did. Plaintiff argued that under authority of Lawrence v. Miller, 86 NY 131 [1881], it was entitled to retain the down payment. Plaintiff further claimed that although it was not seeking actual damages, it had incurred additional losses in excess of the down payment. Special Term found that defendants breached the contract when they failed to notice their intent to cancel the same in the manner and within the time frame specified in the rider. However, it denied plaintiff summary judgment on the ground that an issue of fact existed on whether plaintiff was seeking to exact a penalty by retaining the deposit, particularly since it had re-sold the property at the same price, albeit after the expenditure of additional monies. The Second Department modified and granted summary judgment to plaintiff for the amount of the down payment, finding that defendants had breached the contract, and that a defaulting purchaser could not recover a deposit, even where the seller resells the property for an equal or greater amount than the contract price. On appeal, defendants challenged the finding of a breach, and argued in the alternative that the Appellate Division should have limited plaintiff's recovery to actual damages, and not the full amount of the down payment, thereby urging the court to overrule Lawrence v. Miller, 86 NY 131. In reviewing the history of the Lawrence rule and the efforts to have it abrogated in favor of the more "equitable" rule limiting recovery to actual damages, thereby allowing a defaulting party to seek restitution for part performance, the Maxton court, noted that "'unless impelled by the most cogent reasons'", it would not depart from the Lawrence holding. It observed that "when contractual rights are at issue, 'where it can reasonably be assumed that settled rules are necessary and necessarily relied upon, stability and adherence to precedent are generally more important than a better or even a 'correct' rule of law'" (Maxton Bldrs v. Lo Galbo, 68 N.Y.2d at 381). It noted further that the rule permitting a party in default to seek restitution for part performance has much to commend it in its general applications. But as applied to real estate down payments approximating 10% it does not appear to offer a better or more workable rule than the long-established 'usage' in this State with respect to the seller's right to retain a down payment upon default. (Id., at 381-382). In the footnote that followed, the court emphasized that it was not deciding whether provisions requiring installment payments beyond 10% would be enforceable. It simply deemed the 10% down payment as a reasonable amount for assessing damages, given the "recognized difficulty of estimating actual damages" (Id., at 382). The court further observed that the reasonableness of the liquidated damages provision depended on the terms of the contract itself, that is, on whether the agreement provided for such relief upon its breach. If the contract terms established a "risk of overreaching", then the provision would not be enforced. In allowing for a defaulting party to avoid the imposition of what would be an unconscionable penalty, the court affirmatively identified real estate contracts as "probably the best examples of arm's length transactions" to illustrate a circumstance where overreaching was unlikely to occur. Absent a "real risk of overreaching, there should be no need for the courts to relieve the parties of the consequences of their contract. If the parties are dissatisfied with the [Lawrence] rule, the time to say so is at the bargaining table." (Id., at 382).