San Francisco Distribution Center v. Stonemason Partners, LP

On January 16, 2012, San Francisco Distribution Center, LLC (San Francisco) entered into a contract to buy a commercial property from Stonemason Partners, LP (Stonemason) for $5.25 million. The contract required San Francisco to close within 45 days and to pay a $400,000 deposit, which was to be held in escrow. The contract provided Stonemason a choice between two remedies in the event of San Francisco’s default. Stonemason could either retain San Francisco’s deposit as liquidated damages or it could seek specific performance. San Francisco failed to close, and Stonemason demanded the $400,000 deposit as liquidated damages. San Francisco’s broker told Stonemason that the deposit had been returned to San Francisco. Stonemason sued San Francisco for breach of contract. San Francisco admitted that it had failed to close, but it asserted three defenses. First, San Francisco argued that Stonemason was not entitled to the $400,000 deposit because, several months after the default, Stonemason had sold the property to another buyer for an additional $200,000 and thus had suffered no damages. Second, San Francisco argued that the contract’s liquidated-damages clause was unconscionable and void because it was unreasonable and unrelated to Stonemason’s actual damages. Third, San Francisco argued that the liquidated-damages clause was an unenforceable penalty clause because it allowed Stonemason to elect the alternative remedy of specific performance. The trial court granted Stonemason’s motion for summary judgment and ordered San Francisco to pay $400,000 in damages plus interest, attorneys’ fees, and costs. San Francisco appealed.