Summary Calendar BB/NAPERVILLE LP. v. Larry Worchell

*Local Rule 47.5 provides: "The publication of opinions
that have no precedential value and merely decide particular
cases on the basis of well-settled principles of law imposes
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that this opinion should not be published.
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IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 94-10075
Summary Calendar
_____________________
BB/NAPERVILLE LP., ET AL.,
Plaintiffs-Appellants,
v.
LARRY WORCHELL, ET AL.,
Defendants-Appellees.
_________________________________________________________________
Appeal from the United States District Court
for the Northern District of Texas
(3:93-CV-827-AH)
_________________________________________________________________
(August 26, 1994)
Before KING, HIGGINBOTHAM and BARKSDALE, Circuit Judges.
PER CURIAM:*
BB/Naperville L.P., BB/Olympia Fields L.P., and BB/Morrow
L.P. (collectively, "Appellants") appeal from the district
court's grant of summary judgment to Larry Worchell, Laura
Worchell, Michael Epsteen, Maxine Sonnenburg and Irving Karpman

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(collectively, "Appellees") in a suit concerning the
enforceability of an alleged liquidated damages clause in a
contract between Appellants and Appellees. Finding no error, we
affirm.
I. BACKGROUND
Appellees are the partners in 2nd and Vermont Associates,
Ltd. ("Appellees' Partnership"), a California general
partnership. On June 7, 1990, Appellees' Partnership purchased
three tracts of real propertySQthe Olympia Fields and Naperville
properties in Illinois, and the Morrow property in Georgia
(collectively, "the property")SQfrom Appellants, each of which is
a Texas limited partnership. Appellees' Partnership acquired the
property subject to existing indebtedness and liens on the
property. Prior to closing the sale, Appellants required the
Appellees to sign an Indemnity Agreement (the "Agreement").
Paragraph No. 1 of the Agreement required Appellees to
perform all pre-existing secured loan obligations for the
property. Appellees agreed to indemnify and hold harmless
Appellants from
any and all claims, actions, proceedings, costs, expenses,
damages and liabilities, including but not limited to
attorneys' fees, arising out of, connected with, or
resulting from Purchaser's failure to perform all
obligations of the borrower under such loan documents when
due.
The Agreement was to remain in force until the loans were paid in
full or until Appellants were released from the loan obligations
by the lenders.

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Paragraph No. 2 of the Agreement required Appellees to use
their "best efforts" to assume all three outstanding loans with
the consent of the lenders or to obtain replacement loans and pay
off the three existing loans. Paragraph No. 2 further provided
that if the existing loans were not assumed or replaced within
nine months of June 7, 1990, the date of execution of the
Agreement, Appellees would transfer $60,000 to an escrow agent,
and if neither alternative was completed within one year, the
$60,000 would be delivered to Appellants.
The loans on the Naperville and Morrow properties were
assumed on July 20, 1990, and May 31, 1991, respectively.
However, due to various financing obstacles, the Olympia Fields
loan was not replaced until February 24, 1992, more than eight
months after the agreed deadline for assuming or replacing the
loans.
Appellants brought suit in Texas state court on March 29,
1993. Appellees removed the case to the United States District
Court for the Northern District of Texas. The case was then
transferred by consent to a magistrate judge for further
proceedings and entry of judgment.
Appellants contend that Paragraph No. 2 of the Agreement is
a consensual, negotiated provision for liquidated damages. They
allege that because Appellees did not assume or replace the
Olympia Fields loan until after the deadline, Appellants are
entitled to judgment against Appellees in the amount of $60,000.

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Appellants moved for summary judgment, and Appellees filed a
cross-motion for summary judgment on the grounds that the
provision in Paragraph No. 2 is not a liquidated damages
provision, but an unenforceable penalty, which is void as a
matter of law. The district court granted Appellees' cross-
motion for summary judgment and dismissed Appellants' motion with
prejudice, with costs taxed to Appellants. Appellants filed a
timely notice of appeal.
II. STANDARD OF REVIEW
We review a summary judgment de novo, applying the same
criteria used by the district court. Conkling v. Turner, 18 F.3d
1285, 1295 (5th Cir. 1994). Summary judgment is appropriate "if
the pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and that
the moving party is entitled to judgment as a matter of law."
Fed. R. Civ. P. 56(c). We review the facts drawing all
inferences in the light most favorable to the nonmoving party,
Lemelle v. Universal Mfg. Corp., 18 F.3d 1268, 1272 (5th Cir.
1994), but if the record taken as a whole could not lead a
rational trier of fact to find for the nonmoving party, there is
no genuine issue of material fact to be resolved at trial.
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,
587 (1986).

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III. ANALYSIS
The question of whether a contract provision operates as an
enforceable liquidated damages clause or as an unenforceable
penalty is a question of law for the court to decide. Phillips
v. Phillips, 820 S.W.2d 785, 788 (Tex. 1991). In making its
decision, the court should consider the provision "in light of
the circumstances as the parties perceived them at the formation
of the contract." Advance Tank & Constr. Co. v. City of DeSoto,
737 F. Supp. 383, 384 (N.D. Tex. 1990). Further, the agreement
to liquidate damages must be express, and in the absence of an
express agreement for liquidated damages, a court cannot make one
for the parties. Birdwell v. Ferrell, 746 S.W.2d 338, 341 (Tex.
App.SQAustin 1988, no writ). Whenever there is a doubt as to
whether a clause is a liquidated damages provision or a penalty,
the clause should be declared a penalty. Scurlock v. Lovvorn,
410 S.W.2d 525, 532 (Tex. Civ. App.SQDallas 1966, no writ).
Under Texas law, a liquidated damages provision will be
enforced by the court only when both prongs of a two-part test
are met. First, the harm caused by the breach must be "incapable
or difficult of estimation," and second, the amount of liquidated
damages must be "a reasonable forecast of just compensation."
Phillips, 820 S.W.2d at 788. We conclude that the Agreement does
not comport with the second requirement and therefore need not
consider whether it satisfies the first.
The specified damages provision of the Agreement is not a
reasonable forecast of just compensation for two reasons. Under

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Texas law, a contractual provision does not provide a reasonable
forecast of just compensation where it fails to exclude further
liability for actual damages. See Robert G. Beneke & Co. v.
Cole, 550 S.W.2d 321, 322 (Tex. Civ. App.SQDallas 1977, no writ)
(refusing to enforce a specified damages clause that "fail[ed] to
exclude further liability for any actual damages proved"); see
also Birdwell, 746 S.W.2d at 340-41 (stating that "the intent
that the [specified] sum be in lieu of other damages must be
evident"). Paragraph No. 2 of the Agreement fails to exclude
further liability for actual damages and does not limit
Appellants to recovery of the alleged liquidated damages set
forth in Paragraph No. 2. There is no intent expressed in the
Agreement that the alleged liquidated damages be in lieu of
actual damages. Nor does the Agreement prohibit Appellants from
making indemnity claims in addition to the specified sum of
$60,000. Indeed, a representative of the Appellants opined in
deposition that the Appellants could claim the alleged liquidated
damages pursuant to Paragraph No. 2, and claim any additional
actual damages pursuant to the indemnification provision in
Paragraph No. 1. This possibility leads us to conclude that
Paragraph No. 2 of the Agreement is an unenforceable penalty
provision under Texas law.
Moreover, Texas courts have long held that a contract that
provides the same reparation for the breach of any of its
covenants "would be unreasonable and a violation of the principle
of just compensation." Stewart v. Basey, 245 S.W.2d 484, 487

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(Tex. 1952). That principle is applicable in the instant case.
The Agreement concerns the assumption of three separate loans by
the Appellees. Paragraph No. 2 provides for the same amount of
specified damages to be paid by the Appellees regardless of
whether they fail to meet the deadlines as to one, two, or all
three loans. This failure to distinguish between lesser and
greater breaches of the Agreement would lead a Texas court to
conclude that Paragraph No. 2 is an unenforceable penalty clause.
See Krenek v. Wang Lab., Inc., 583 S.W.2d 454, 457 (Tex. Civ.
App.SQWaco 1979, no writ) (invalidating a specified damages
clause that provided for a single measure of damages for any
breach of a contract containing both major and minor covenants).
We find no error in the magistrate judge's conclusion that
Paragraph No. 2 is an unenforceable penalty clause. Appellants
do not attack the magistrate judge's determination that they
suffered no actual damages, so we do not reexamine this finding.
Summary judgment for the Appellees was appropriate.
IV. CONCLUSION
For the foregoing reasons, we AFFIRM the judgment of the
district court.

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