Ralph and Carolee Thomas v. Montelucia Villas

SUPREME COURT OF ARIZONA
En Banc

RALPH THOMAS and CAROLEE THOMAS, ) Arizona Supreme Court
husband and wife, ) No. CV-12-0156-PR
)
Plaintiffs/Appellees, ) Court of Appeals
) Division One
v. ) No. 1 CA-CV 10-0761
)
MONTELUCIA VILLAS, LLC, a ) Maricopa County
Delaware limited liability ) Superior Court
company, ) No. CV2009-004659
)
Defendant/Appellant. )
)
) O P I N I O N
__________________________________)

Appeal from the Superior Court in Maricopa County
The Honorable J. Richard Gama, Judge

VACATED AND REMANDED
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Opinion of the Court of Appeals, Division One
229 Ariz. 308, 275 P.3d 607 (App. 2012)

VACATED IN PART
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BEUS GILBERT PLLC Phoenix
By Franklyn D. Jeans
Tiffany E. Cale
Cassandra H. Ayres
Attorneys for Ralph Thomas and Carolee Thomas

LAKE & COBB, P.L.C. Tempe
By Joel E. Sannes
Kiel S. Berry
Blake Rebling
Attorneys for Montelucia Villas, LLC
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B R U T I N E L, Justice

¶1 Buyers of a new home anticipatorily breached the

purchase contract and then sued to recover progress payments

made to the seller during the home’s construction. The contract

provided that these payments were to serve as liquidated damages

in the event of the buyer’s breach. We hold that the defendant

seller, in order to retain the payments, must prove that it was

ready, willing, and able to perform under the contract.

I.

¶2 On January 20, 2006, Ralph and Carolee Thomas signed a

contract with Montelucia Villas, LLC for the construction of a

custom villa for $3,295,000. As part of the purchase agreement,

the Thomases made three installment deposits totaling $659,000,

or twenty percent of the villa’s purchase price. The remainder

of the purchase price was due at close of escrow. Although the

deposits became due as construction progressed and could be used

by Montelucia rather than held in escrow, the contract

characterized them as “earnest money deposits.” The contract

also provided, however, that Montelucia could elect to treat the

payments as liquidated damages if the buyers breached.

¶3 On April 25, 2008, Montelucia notified the Thomases by

letter that it had set the closing date for May 16. When the

letter was sent, Montelucia did not have a certificate of

occupancy for the property, which the contract required as a

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condition for closing escrow.

¶4 The Thomases responded on May 6 with a letter stating

that they would not close on May 16 and they were terminating

the purchase contract because the agreement was illusory,

Montelucia had not performed, and Montelucia had violated

Arizona statutes governing the sale of subdivided land. The

letter asked Montelucia to return the $659,000 in deposits.

Montelucia did not respond to the letter or refund the deposits.

Instead, it unsuccessfully attempted to obtain a certificate of

occupancy for the property on May 8 and May 14. Montelucia

ultimately obtained the certificate on August 27.

¶5 In February 2009, the Thomases sued to recover the

deposits. Montelucia counterclaimed for breach of contract.1 On

cross-motions for summary judgment, the trial court ruled that

Montelucia had breached the contract by, among other things, not

completing certain resort amenities, access points, and

infrastructure and not providing a certificate of occupancy by

the closing date. The court concluded that the Thomases were

entitled to a refund of the $659,000 in deposits.

¶6 The court of appeals reversed and remanded, holding

that the Thomases had anticipatorily repudiated the contract by

sending the May 6 letter. Thomas v. Montelucia Villas, LLC, 229

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Montelucia’s counterclaim is not before us.

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Ariz. 308, 310 ¶ 7, 275 P.3d 607, 609 (App. 2012). The court

concluded that because Montelucia was not a plaintiff seeking

affirmative relief, but instead was seeking to retain the

deposits in the face of the Thomases’ lawsuit, Montelucia was

not required to show its ability to perform. Id. at 310–11

¶¶ 8, 10, 275 P.3d at 609–10.

¶7 We granted review to address whether a defendant must

prove ability to perform to retain damages for anticipatory

repudiation, a recurring issue of statewide importance. We have

jurisdiction under Article 6, Section 5(3) of the Arizona

Constitution and A.R.S. § 12-120.24.

II.

¶8 At the outset, the Thomases challenge the court of

appeals’ holding that they anticipatorily repudiated the

contract. They argue that Montelucia breached the contract

before May 6, thereby excusing their performance. The Thomases,

however, did not seek review on this issue. We therefore accept

for purposes of our analysis that the Thomases anticipatorily

breached the contract by sending their May 6 letter.

¶9 “An anticipatory repudiation is a breach of contract

giving rise to a claim for damages and also excusing the

necessity for the non-breaching party to tender performance.”

United Cal. Bank v. Prudential Ins. Co. of Am., 140 Ariz. 238,

283, 681 P.2d 390, 435 (1983) (citing Kammert Bros. Enters.,

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Inc. v. Tanque Verde Plaza Co., 102 Ariz. 301, 428 P.2d 678

(1967); Restatement (Second) of Contracts § 277 (1981); 4 Corbin

on Contracts § 977 (1951)). Yet, an anticipatory breach, by

itself, does not entitle the injured party to damages. To

recover damages, “[i]n addition to proving repudiation, the non-

breaching party need only show ‘that he would have been ready

and willing to have performed the contract, if the repudiation

had not occurred.’” Id. at 288–89, 681 P.2d at 440–41 (quoting

Petersen v. Wellsville City, 14 F.2d 38, 39 (8th Cir. 1926)).

Thus, “[a] party’s duty to pay damages for total breach by

repudiation is discharged if it appears after the breach that

there would have been a total failure by the injured party to

perform his return promise.” Restatement (Second) of Contracts

§ 254(1) (1981) (“Restatement”).

¶10 The court of appeals held that plaintiffs seeking

damages for anticipatory repudiation must show the ability to

perform, but that a defendant who seeks to retain damages need

not make that showing. Thomas, 229 Ariz. at 311 ¶ 10, 275 P.3d

at 610. We disagree.

¶11 A distinction between a party seeking affirmative

relief and a party trying to retain damages in the face of

another’s claim is unwarranted. Restatement § 254(1) states

that a “[repudiating] party’s duty to pay damages” is discharged

if the “injured party” would have failed to perform. This

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language does not distinguish between damages sought by the

injured party and damages already obtained from the repudiating

party which the injured party seeks to retain. Furthermore,

applying the ready, willing, and able requirement to both

parties seeking damages and parties seeking to retain damages

ensures that the non-breaching party actually suffered injury

from the anticipatory repudiation, a primary justification for

the requirement. See Record Club of Am., Inc. v. United Artists

Records, Inc., 890 F.2d 1264, 1275 (2d Cir. 1989) (requiring the

non-breaching party to show ability to perform “is merely an

application of the general rule that the complaining party must

demonstrate that the breach caused him injury”). Likewise, any

distinction between the party making the claim — whether

plaintiff or defendant — is similarly unwarranted. See United

Cal. Bank, 140 Ariz. at 283–84, 681 P.2d at 435–36 (“[T]o

recover damages for anticipatory breach, the injured party need

only show that he had the ability to perform his own obligations

under the agreement.” (emphasis added)).

¶12 Here, the Thomases’ anticipatory repudiation on May 6

excused Montelucia from further performance and gave Montelucia

a claim for damages for breach. But the anticipatory

repudiation alone does not entitle Montelucia to damages.

Because the Thomases’ duty to pay damages was discharged if

Montelucia could not have performed, Montelucia’s entitlement to

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the deposits rests upon its ability to have performed its

contractual obligations. If Montelucia could not have closed in

accordance with the contract, then the Thomases are under no

duty to pay damages for their anticipatory breach, and

Montelucia cannot retain the deposits.

¶13 Montelucia argues that it can keep the deposits

without showing that it was ready, willing, and able to perform

because the deposits were earnest money that was forfeited when

the Thomases anticipatorily repudiated the contract. But while

the contract referred to the deposits as “earnest money,” the

deposits are more accurately characterized as progress payments.

¶14 Earnest money is a “comparatively small amount . . .

paid to an escrow agent” to show that the “purchaser is in

earnest and in good faith.” Brigham v. First Nat’l Bank of

Ariz., 129 Ariz. 160, 162, 629 P.2d 996, 998 (App. 1981) (citing

Mortenson v. Fin. Growth, Inc., 456 P.2d 181 (Utah 1969)).

Typically, earnest money remains in neutral escrow until the

sale closes or the purchaser has forfeited the earnest money by

defaulting on the contract. See, e.g., Esplendido Apartments v.

Olsson, 144 Ariz. 355, 363, 697 P.2d 1105, 1113 (App. 1984).

Earnest money usually does not finance construction.

¶15 The deposits in this case do not serve the traditional

function of earnest money deposits. Like progress payments on a

construction contract, the deposits here were made at the

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completion of specific phases of the villa’s construction and

were immediately available to Montelucia to use “for costs

related to the development of the Montelucia Villas.” Thus, the

deposits did not serve to show the Thomases’ good faith; rather

they enabled Montelucia to fund the construction. As a result,

we conclude that the deposits constituted progress payments

rather than earnest money, notwithstanding the contract

language. Cf. Aztec Film Prods., Inc. v. Quinn, 116 Ariz. 468,

470, 569 P.2d 1366, 1368 (App. 1977) (“It is well settled that

in determining whether a particular clause calls for liquidated

damages or for a penalty, the name given to the clause by the

parties is not conclusive, and the controlling elements are the

intention of the parties and the special circumstances of the

case.”).

¶16 Montelucia further argues that it was not required to

show that it was ready, willing, and able to perform because the

contract characterized the deposits as liquidated damages, and a

party seeking liquidated damages need not prove actual damages.

We are not persuaded. “To bring an action for the breach of the

contract, the plaintiff has the burden of proving the existence

of the contract, its breach and the resulting damages.” Graham

v. Asbury, 112 Ariz. 184, 185, 540 P.2d 656, 657 (1975). A

liquidated damages clause relieves the plaintiff of the burden

of proving the amount of actual damages caused by the breach.

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Mech. Air Eng’g Co. v. Totem Constr. Co., 166 Ariz. 191, 193,

801 P.2d 426, 428 (App. 1989). But it does not establish

whether a breach sufficient to support damages has occurred.

See Bowen v. Korell, 587 P.2d 653, 657 (Wyo. 1978) (holding that

when a contract contemplates liquidated damages only for a

specified breach, “the provision will have no force and effect

except upon proof of the breach provided for by the agreement”).

Although the contract stipulated the amount of damages, this

provision did not relieve Montelucia of the burden to

demonstrate its willingness and ability to perform before

recovering or retaining any damages.

¶17 The parties dispute whether Montelucia was able to

perform its obligations; therefore, we remand to the superior

court for a determination of this issue. On remand, Montelucia,

as the party in the best position to marshal the evidence, bears

the burden of showing it was able to close in accordance with

the contract. See 10 Corbin on Contracts § 978 n.11 (1951)

(noting that the non-repudiating party “can much more readily

prove what the facts were in respect of his own ability to

perform”). If it is ultimately determined that Montelucia was

ready, willing, and able to perform as required by the contract,

the court can then determine the appropriate remedy available to

Montelucia under the contract.

¶18 Both parties request an award of attorney fees

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pursuant to the contract and A.R.S. § 12-341.01. We deny this

request without prejudice to the trial court awarding fees,

including those incurred on appeal, to the party that ultimately

prevails.

III.

¶19 For the foregoing reasons, we vacate the court of

appeals’ opinion, except ¶¶ 6–7, and remand to the trial court

for further proceedings consistent with this opinion.

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Robert M. Brutinel, Justice

CONCURRING:

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Rebecca White Berch, Chief Justice

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Scott Bales, Vice Chief Justice

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John Pelander, Justice

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Ann A. Scott Timmer, Justice

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