ACREL News & Notes November 2019

Liquidated in Iowa

Kathleen K. Law, Nyemaster Goode, P.C., Des Moines, IA

QUESTION 1: MAY THE SELLER CHOOSE INSTEAD OF LIQUIDATED DAMAGES (SO THAT LIQUIDATED DAMAGES ARE NOT AN EXCLUSIVE REMEDY)?

In Iowa, a seller can likely choose specific performance instead of liquidated damages.

Iowa allows sellers to choose among three alternative remedies when purchasers breach land . Gordon v. Pfab, 246 N.W.2d 283, 287 (Iowa 1976). These remedies include (1) rescinding the , (2) “tender[ing] compliance with the contract and bring[ing] an action for specific performance,” and (3) “retain[ing] the land and bring[ing] an action for damages for loss of the bargain.” Id.

Thus, the remedy of specific performance is available to sellers of real under Iowa law. See also Utterback v. Stewart, 277 N.W. 735, 738 (Iowa 1938) (“Since the contract is one which the vendee might enforce in and compel a delivery of a deed, the vendor is recognized as having the same right [to specific performance] even though his demand is in substance to recover money for .”); Jones v. Bashaw, 188 N.W. 769 (Iowa 1922) (finding that seller of land was entitled to specific performance in the absence of fraud, duress, and ).

The Eighth Circuit has indicated that a seller can generally select the remedy of specific performance, even if the land contract contains a liquidated-damages provision. Logue v. Seven-Hot Springs Corp., 926 F.2d 722, 725 (8th Cir. 1991). However, the Circuit emphasized that this general rule does not apply if “[the contract] is clear that the liquidated damages clause was to be the exclusive remedy.” Id. In Gordon, the Iowa Supreme Court implicitly endorsed this holding by indicating that the seller could select between three alternative remedies, including specific performance, even though the land contract contained a liquidated-damages provision. Gordon, 246 N.W.2d at 287. Thus, in Iowa, a seller can likely choose specific performance instead of liquidated damages.

However, when the seller elects to bring an action for damages (as opposed to specific performance), a valid liquidated damages clause in a contract for the sale of land generally restricts the contract vendor to recovery of the stipulated amount upon the buyer’s default. Gordon v. Pfab, 246 N.W.2d 283 (Iowa 1976).

QUESTION 2: MAY THE SELLER CHOOSE ACTUAL DAMAGES INSTEAD OF LIQUIDATED DAMAGES (SO THAT LIQUIDATED DAMAGES ARE NOT AN EXCLUSIVE DAMAGE REMEDY)?

No, in Iowa, a seller may not choose actual damages instead of liquidated damages because “alternative” remedies (including actual damages) invalidate a liquidated- damages provision. Elzy v. Waterloo, C.F. & N. Ry. Co., 183 N.W. 378 (Iowa 1921).

In Elzy, the defendant railroad company sublet grading of a roadbed to plaintiff Elzy. Elzy, 183 N.W. at 379. When Elzy’s estate sought to collect compensation for his services, the railroad claimed that the compensation should be reduced in accordance with a liquidated-damages provision because Elzy had not “completed the work within the agreed time.” Id. at 379-80. However, the contract paragraph that contained the liquidated-damages provision also provided the railroad with alternative remedies for Elzy’s failure to timely complete his work, including the right to be reimbursed for all damage. Id. at 380-81. The Iowa Supreme Court held that the railroad forfeited the benefits provided under the liquidated-damages provision by “fortif[ing] [itself] behind a barrier of ‘alternative’ remedies.” Id. at 382.

In its reasoning, the Iowa Supreme Court explained that there must be mutuality of obligation between parties for a liquidated-damages provision to be valid. Id. at 381. However, such mutuality did not exist under the given contract because the railroad was not bound by the liquidated-damages provision due to its ability to elect alternative damages. Id. at 382. Thus, the Court held that the contract did not provide for liquidated damages. Id.

QUESTION 3: IF THE SELLER MAY CHOOSE LIQUIDATED DAMAGES OR ACTUAL DAMAGES, MAY IT HAVE BOTH?

This question is inapplicable because a seller may not choose actual damages instead of liquidated damages in Iowa. Elzy, 183 N.W. at 382. (See Question 2).

QUESTION 4: IF THE SELLER MAY CHOOSE LIQUIDATED DAMAGES OR ACTUAL DAMAGES, BUT NOT BOTH, WHEN MUST IT DECIDE?

This question is inapplicable because a seller may not choose actual damages instead of liquidated damages in Iowa. Elzy, 183 N.W. at 382. (See Question 2).

QUESTION 5: IS THERE AN APPLICABLE STATUTE ADDRESSING LIQUIDATED DAMAGES CLAUSES?

No, Iowa does not have a liquidated damages statute for real estate transactions.

QUESTION 6: WHAT IS THE TEST FOR A VALID LIQUIDATED DAMAGES CLAUSE?

In Iowa, liquidated damages provisions are favored. City of Davenport v. Shewry Corp., 674 N.W. 2d 79, 85 (Iowa 2004). The only way liquidated damages provisions are not enforceable is if the objecting party can prove that the damages are unreasonable and constitute a penalty. Aurora Business Park Assoc., L.P. v. Michael Albert, Inc., 548 N.W. 2d 153, 156 (Iowa 1996). Iowa uses a two part test to determine whether the objecting party has carried his burden of proving that the liquidated damages provision is unreasonable: 1) the extent to which the amount reasonably approximates the anticipated or actual loss caused by a breach; and 2) the difficulty in proving that a loss has occurred

or in establishing the amount of a loss with certainty. Rohlin Const. Co., Inc. v. City of Hinton, 476 N.W.2d 78, 80 (Iowa 1991). Liquidated damages fixed in a contract are reasonable to the extent the liquidated damages estimate the actual loss resulting from the particular breach, even though they might not estimate the loss anticipated under other possible breaches. Id. Moreover, the amount fixed is reasonable to the extent it estimates the loss anticipated when the contract was entered into even though it may not approximate the actual loss. Id.

With respect to the second factor, the greater the difficulty of proving the loss has occurred or establishing the amount of loss with certainty, the more difficult it is to prove that the amount is unreasonable. Midwest Oilseeds, Inc. v. Limagrain Genetics Corp., 387 F.3d 705, 716 (8th Cir. 2004)

QUESTION 7: WHO HAS THE BURDEN OF PROOF?

“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.” Gordon v. Pfab, 246 N.W.2d at 288 (Iowa 1976).

QUESTION 8: AS OF WHEN IS “REASONABLENESS” TESTED?

See Question 6 above. Liquidated damages fixed in a contract are reasonable to the extent the liquidated damages estimate the actual loss resulting from the particular breach, even though they might not estimate the loss anticipated under other possible breaches. Id. Moreover, the amount fixed is reasonable to the extent it estimates the loss anticipated when the contract was entered into even though it may not approximate the actual loss Id. Rohlin Const. Co., Inc. v. City of Hinton, 476 N.W.2d 78, 80 (Iowa 1991).

QUESTION 9: WHAT PERCENTAGE OF THE PURCHASE PRICE IS LIKELY ACCEPTABLE AS LIQUIDATED DAMAGES?

Liquidated damages fixed in a contract are reasonable to the extent the liquidated damages estimate the actual loss resulting from the particular breach, even though they might not estimate the loss anticipated under other possible breaches. Rohlin Const. Co., Inc. v. City of Hinton, 476 N.W.2d 78, 80 (Iowa 1991). Moreover, the amount fixed is reasonable to the extent it estimates the loss anticipated when the contract was entered into even though it may not approximate the actual loss. Id. (See Question 6 above).

QUESTION 10: ARE ACTUAL DAMAGES RELEVANT FOR LIQUIDATED DAMAGES AND, IN PARTICULAR, WILL LIQUIDATED DAMAGES BE ALLOWED WHEN THERE ARE NO ACTUAL DAMAGES?

See answer to Question 6 above. Iowa uses a two part test to determine whether the objecting party has carried his burden of proving that the liquidated damages provision is unreasonable: 1) the extent to which the amount reasonably approximates the anticipated or actual loss caused by a breach; and 2) the difficulty in proving that a loss has occurred or in establishing the amount of a loss with certainty. Rohlin Const. Co., Inc. v. City of

Hinton, 476 N.W.2d 78, 80 (Iowa 1991). Liquidated damages fixed in a contract are reasonable to the extent the liquidated damages estimate the actual loss resulting from the particular breach, even though they might not estimate the loss anticipated under other possible breaches. Id. Moreover, the amount fixed is reasonable to the extent it estimates the loss anticipated when the contract was entered into even though it may not approximate the actual loss. Id.

QUESTION 11: IS MITIGATION RELEVANT FOR LIQUIDATED DAMAGES?

In re Estate of Anderson, 781 N.W.2d 303, *2 (Iowa Ct. App. 2010), the court upheld a District Court’s decision that reduced a liquidated damages award because the party had not mitigated its damages.

QUESTION 12: IS A “SHOTGUN” LIQUIDATED DAMAGES CLAUSE ENFORCEABLE?

Iowa case law does not appear to use the term “shotgun clause” with respect to liquidated damages provisions. For a liquidated damages clause to be valid, the liquidated damages cannot constitute a penalty. (See Question 6 above). Therefore, it is unlikely an Iowa court would enforce a “shotgun clause” where the seller would have the right to liquidated damages for any buyer default.

The Iowa Supreme Court’s decision in Holt supports the contention that an Iowa court would not enforce a “shotgun” clause. Holt v. Doty, 187 N.W. 550 (Iowa 1922). In Holt, purchasers of real estate sued the sellers for failure to perform the contract. Id. at 551. The contract contained a provision that stated the parties would pay $10,000 for every act they failed to perform. Id. The seller was bound to “perform eight different acts of varying importance” under the contract, including conveying the real estate, loaning money, and clearing the real estate of liens. Id. at 551-52. Under these circumstances, the Court held that the provision requiring the seller to pay $10,000 was a penalty, rather than liquidated damages. Id. at 552-53. In reaching this decision, the court explained that “[i]t is well settled that if a contract or bond is given to secure the performance of two or more conditions of varying degrees of importance, . . . the agreement will be construed to provide a penalty, notwithstanding that the term ‘liquidated damages’ is used and prescribed. ” Id. at 552; see also Huntsman v. Eldon Miller, Inc., 101 N.W.2d 531, 533- 34 (Iowa 1960).

QUESTION 13: DOES A LIQUIDATED DAMAGES CLAUSE PRECLUDE RECOVERY OF ATTORNEYS’ FEES BY THE SELLER?

In Iowa, a liquidated damages clause likely does not preclude recovery of attorney’s fees.

The Iowa Supreme Court has held that parties can stipulate attorney’s fees via contract. Kuhn v. Myers, 37 Iowa 351, 355 (1873); McIntire v. Cagley, 37 Iowa 676, 677 (1873). In fact, in Iowa, “[t]he general rule is that attorney's fees are not allowable in the absence of statute or an agreement by the party to be charged.” Smith v. Bd. of Sup'rs of Des Moines Cty., 320 N.W.2d 589, 593 (Iowa 1982).

Iowa courts have allowed parties to recover both liquidated damages and attorney’s fees when the attorney’s fees are dictated by statute. Dutcher v. Randall Foods, 546 N.W.2d 889, 895-98 (Iowa 1996) (finding that employee was entitled to liquidated damages and attorney fees under the Fair Labor Standards Act because the Act “mandates an award of reasonable attorney fees . . . to the prevailing party”); IBEW Local Union No. 347/NECA, Health & Welfare Fund v. Generation Elec. Inc., No. 4:07-CV-00163, 2007 WL 9711404, at *2-3 (S.D. Iowa July 6, 2007) (finding that plaintiffs were entitled to liquidated damages and attorney fees under ERISA because the Act mandated reasonable attorney fees).

Likewise, Iowa courts will likely allow parties to recover both liquidated damages and attorney’s fees when the parties contractually agree to attorney’s fees. For instance, in Joeckel, the parties entered into a contract for the sale of land, which provided that either party would forfeit $1,000 and attorneys’ fees by failing to comply with the contract. Joeckel v. Johnson, 159 N.W. 672, 673 (Iowa 1916). When the purchaser failed to perform, the Court held that the purchaser was liable for both $1,000 in liquidated damages and attorney’s fees as dictated by the contract. Id. at 677; 674. In its reasoning, the Court explained that “[the parties] had the right so to stipulate, and, having done so, it is not for the courts . . . [to] relieve either of the burden he has voluntarily assumed.” Id. at 676.

Thus, in Iowa, a liquidated damages clause likely does not preclude recovery of attorney’s fees. This conclusion is further supported by the fact that other states that only allow attorney’s fees when dictated by statute or contract, have allowed “recovery for both liquidated damages and attorney’s fees.” Paragon Grp., Inc. v. Ampleman, 878 S.W.2d 878, 882 (Mo. Ct. App. 1994).

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