Young v. Allen Homes

NOTICE: NOT FOR OFFICIAL PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

MICHAEL E. YOUNG, et al., Plaintiffs/Appellants,

v.

ALLEN HOMES, LLC, Defendant/Appellee.

No. 1 CA-CV 21-0740
FILED 9-29-2022

Appeal from the Superior Court in Maricopa County
No. CV2019-056337
The Honorable Sally Schneider Duncan, Retired Judge

REVERSED AND REMANDED

COUNSEL

The Kozub Law Group, PLC, Phoenix
By Richard W. Hundley
Counsel for Plaintiff/Appellant

FENNEMORE CRAIG, P.C., Phoenix
By J. Christopher Gooch, Emily Ward
Counsel for Defendant/Appellee

MEMORANDUM DECISION

Judge D. Steven Williams delivered the decision of the court, in which
Presiding Judge David D. Weinzweig and Judge Randall M. Howe joined.

YOUNG, et al. v. ALLEN HOMES
Decision of the Court

W I L L I A M S, Judge:

¶1 Michael Young and Debra Lux-Young (“the Youngs”) sued
Allen Homes, LLC (“Allen Homes”). Allen Homes counter-sued the
Youngs. The superior court granted summary judgment for Allen Homes
on its breach of contract counterclaim. The Youngs appeal. For the
following reasons, we reverse and remand.

FACTUAL AND PROCEDURAL HISTORY

¶2 The Youngs hired Allen Homes, a small custom home
builder, to construct their new single-family residence for the agreed sum
of nearly $2 million. The Youngs paid Allen Homes a “non-refundable
deposit of $80,000.00” as the parties’ written contract required. The contract
further required that the Youngs “be responsible for making application for
the [city] building permits,” as well as “all additional permits necessary”
for Allen Homes to complete the project.

¶3 The Youngs submitted their building plans to the
homeowner’s association (“HOA”) for approval, but were informed
approval was “unlikely” because of, in part, the direction the garage doors
were facing. The Youngs had their architect redesign the project by moving
the garage and its doors. And over the next few months, the Youngs had a
series of back-and-forth communications with the HOA about the building
and landscaping plans. Ultimately, the Youngs decided against submitting
the plans for the HOA’s final approval or continuing with the project.

¶4 The Youngs then requested Allen Homes refund the
$80,000.00. When Allen Homes refused, the Youngs sought declaratory
relief and claimed Allen Homes was unjustly enriched. More specifically,
the Youngs argued that the $80,000.00 deposit was an unenforceable
penalty because it did not reasonably compensate Allen Homes for its
actual or anticipated losses. In the alternative, the Youngs claimed that no
contract was formed because it was based on the mutually mistaken
assumption that the HOA would approve the building plans.

¶5 Both parties moved for summary judgment. The superior
court granted summary judgment for Allen Homes on the Youngs’ unjust
enrichment claim but denied the remainder of both parties’ motions. Allen
Homes then counter-sued the Youngs for breach of contract and
successfully moved for summary judgment on its counterclaim, rendering
the Youngs’ remaining claim for declaratory relief moot. The court awarded

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YOUNG, et al. v. ALLEN HOMES
Decision of the Court

Allen Homes its costs of $1,380.66 and attorney’s fees of $54,080.93. After
unsuccessfully moving the court to reconsider, the Youngs timely appealed.

¶6 We have jurisdiction under Article 6, Section 9, of the Arizona
Constitution and A.R.S. § 12-2101(A)(1).

DISCUSSION

¶7 Summary judgment is appropriate when “there is no genuine
dispute as to any material fact and the moving party is entitled to judgment
as a matter of law.” Ariz. R. Civ. P. 56(a). To obtain summary judgment on
its own breach of contract claim, Allen Homes had to prove every element
of its claim with “undisputed admissible evidence that would compel any
reasonable juror to find in its favor.” Wells Fargo Bank, N.A. v. Allen, 231
Ariz. 209, 213, ¶ 18 (App. 2012) (citation omitted). A motion for summary
judgment “must stand on its own and demonstrate by admissible evidence
that the [moving party] has met its burden of proof and that it is entitled to
judgment as a matter of law.” Wells Fargo Bank, 231 Ariz. at 211, ¶ 1. The
party asserting a claim always bears the ultimate burden of persuasion,
Ariz. R. Evid. 301, and “the mere absence of a genuine dispute of material
fact does not automatically entitle” that party to judgment. Wells Fargo Bank
at 211-13, ¶¶ 1, 16.

¶8 We review a grant of summary judgment de novo, Dreamland
Villa Cmty. Club, Inc. v. Rainey, 224 Ariz. 42, 46, ¶ 16 (App. 2010), “view[ing]
the facts and reasonable inferences in the light most favorable to the
non-prevailing party,” Rasor v. Nw. Hosp., LLC, 243 Ariz. 160, 163, ¶ 11
(2017).

I. Liquidated Damages

¶9 The Youngs contend that the “non-refundable deposit of
$80,000.00” was an unenforceable penalty. Because contract remedies are
compensatory in nature and not punitive, a contract term providing a
punitive remedy for breach of contract is unenforceable as a matter of
public policy. Dobson Bay Club II DD, LLC v. La Sonrisa de Siena, LLC, 242
Ariz. 108, 110, ¶ 9 (2017).

¶10 However, parties to a contract can agree in advance to an
amount of liquated damages should either party breach. Id. at 110, ¶8. And
liquidated damages provisions are enforceable if they are intended “to
compensate the non-breaching party rather than penalize the breaching
party.” Id. at 109 ¶ 1. The party seeking to avoid enforcement of a liquidated
damages clause—here, the Youngs— “has the burden of persuading [the

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YOUNG, et al. v. ALLEN HOMES
Decision of the Court

court] that the provision imposes an unenforceable penalty.” Id. at 112,
¶ 17. Whether a contract provides for proper liquidated damages, or an
improper penalty is an issue of law we review de novo. Id. at ¶ 18.

¶11 The Arizona Supreme Court in Dobson Bay adopted the
Restatement (Second) of Contracts § 356(1) to test the enforceability of a
liquidated damages provision. Id. at 111, ¶ 15. Section 356(1) provides that
a liquidated damages provision will be enforced “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.” Id. at ¶ 12. Thus, courts must
consider “(1) the anticipated or actual loss caused by the breach, and (2) the
difficulty of proof of loss.” Id.

A. Anticipated Loss

¶12 On its face, the nonrefundable deposit is an inflexible forecast
of losses that does not “var[y] with the nature and extent of the breach.”
Pima Sav. & Loan Ass’n v. Rampello, 168 Ariz. 297, 300 (App. 1991). Whether
the Youngs breached on the first day of the contract or the hundredth day,
they would lose the entire $80,000.00. This fixed amount weighs against
concluding that the deposit was a reasonable estimate of anticipated losses
at the time the contract was entered into. See Dobson Bay, at 112, ¶ 21
(holding that a late fee was unenforceable in part because it was “static”
and “payable on demand whether the payment [was] one day late or one
year late.”) And the contract is silent about what anticipated costs or
damages went into arriving at the $80,000.00 figure. On this record, we
cannot say that $80,000.00 was a reasonable estimate of anticipated losses
at the time the contract was entered.

B. Actual Loss

¶13 But a liquidated damages clause may also be based on actual
losses under the Second Restatement. And Allen Homes presented some
evidence of its actual damages, including superintendent costs,
opportunity costs, and pre-construction work.

¶14 First, the contract was entered into April 20, 2018, and the
Youngs cancelled September 15, 2018. During those five months, Allen
Homes retained a superintendent for the project at the cost of $900.00 per
week. Thus, the record shows that Allen Homes suffered roughly
$18,900.00 in damages (21 weeks x $900.00 per week) by way of payment to
its superintendent.

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YOUNG, et al. v. ALLEN HOMES
Decision of the Court

¶15 Second, Allen Homes claims “the non-refundable deposit was
in place because [it] was required to forego other opportunities to build
homes for clients due to its commitments and obligations” to the Youngs.
And the record contains evidence that Allen Homes passed up as many as
two potential home-building projects because of its contract with the
Youngs.

¶16 Third, Allen homes contends the non-refundable deposit
“provided payment for . . . pre-construction work for [the Youngs’] home,
such as (1) applying for septic tank permits; (2) clarifying scopes of work
for Trades; (3) selections of finishes and materials for the home; (4)
obtaining additional bids from Trades; and (5) creating a construction
schedule.”

¶17 Even so, summary judgment for Allen Homes was not
warranted because the record did not establish actual damages with
“undisputed admissible evidence that would compel any reasonable juror
to find in its favor.” Wells Fargo Bank, 231 Ariz. at ¶ 18. Allen Homes did not
assign any dollar amount to the lost contracts, and Allen Homes offered no
monetary value of its alleged pre-construction work. And while the Youngs
did not present any evidence to contradict the losses Allen Homes’ claims,
that is not enough. See Wells Fargo Bank, 231 Ariz. at 211, ¶¶ 1, 16 (“[T]he
mere absence of a genuine dispute of material fact does not automatically
entitle a plaintiff to judgment.”).

¶18 Consequently, we reverse the grant of summary judgment for
Allen Homes, including its award of attorney’s fees and costs, and remand
for further proceedings. To be clear, we do not conclude that the $80,000.00
provision is necessarily unenforceable, only that on this record $80,000.00
does not reasonably reflect Allen Homes’ actual losses. On a fuller factual
record, the superior court may or may not conclude otherwise. See Orme
School v. Reeves, 166 Ariz. 301, 311 fn. 10 (1990) (“Discovery is complete
when the parties have completed all the discovery they intend, when they
have completed the discovery allowed by the court, [or] when the time for
discovery allowed by rule of the court has expired . . . .“).

II. Mutual Mistake of Fact

¶19 The Youngs also claim that their contract was unenforceable
because they and Allen Homes made a mutual mistake of fact about the
HOA building plan approval. We disagree.

¶20 A party seeking to void a contract based on a mutual mistake
of fact must prove that “(1) the parties made a mistake about a basic

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Decision of the Court

assumption on which they made the contract, (2) the mistake had a material
effect on the exchange of performances, and (3) the party seeking avoidance
does not bear the risk of mistake.” Hall v. Elected Officials’ Ret. Plan, 241 Ariz.
33, 42, ¶ 25, (2016) (citing the Restatement (Second) of Contracts § 152(1)
(1981)).

¶21 According to the Youngs, “the mutual mistake was the
assumption the building plans specifically identified in the Contract
Agreement would be approved” by the HOA “and the residence built to
these specifications.” Because the HOA did not approve the building plans,
the Youngs argue a mutual mistake of material fact arose that voided the
contract.

¶22 The Youngs agree that the contract placed the onus on them
to obtain not just city permits, but also HOA approval. The contract
acknowledged that the building plans had not yet been approved and “may
change,” even providing a process for change orders to the building plans.

¶23 Though the Youngs submitted their initial building plans to
the HOA, they acknowledge they opted not to re-submit the amended plans
for final HOA approval because they were dissatisfied with the changes to
the plans the HOA required and “cancelled the Construction Agreement.”
Whether the HOA’s required changes to the building plan specifications
were minor in nature, or material in nature (a distinction the Youngs press),
their contractual obligation to obtain “all additional permits necessary” to
complete the project remained unchanged. On this record, no mutual
mistake of material fact existed.

CONCLUSION

¶24 For the foregoing reasons we reverse and remand.

AMY M. WOOD • Clerk of the Court
FILED: JT

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