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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Carr-Gottstein Properties v. Benedict (6/20/2003) sp-5704

Carr-Gottstein Properties v. Benedict (6/20/2003) sp-5704

     Notice:   This opinion is subject to correction  before
     publication  in  the  Pacific  Reporter.   Readers  are
     requested to bring errors to the attention of the Clerk
     of  the  Appellate  Courts, 303  K  Street,  Anchorage,
     Alaska 99501, phone (907) 264-0608, fax (907) 264-0878,
     e-mail corrections@appellate.courts.state.ak.us.


            THE SUPREME COURT OF THE STATE OF ALASKA


CARR-GOTTSTEIN PROPERTIES,    )
LIMITED PARTNERSHIP,          )    Supreme Court No. S-10579
                              )
             Appellant,            )    Superior Court No.
                              )    3AN-01-03545 CI
     v.                       )
                              )    O P I N I O N
RUTH L. BENEDICT and          )
GERRY L. ZEEK,                )    [No. 5704 - June 20, 2003]
                              )
             Appellees.            )
________________________________)



          Appeal  from the Superior Court of the  State
          of    Alaska,   Third   Judicial    District,
          Anchorage, Peter A. Michalski, Judge.

          Appearances:   Dani  Crosby  and  William  S.
          Cummings,  Ashburn & Mason, P.C.,  Anchorage,
          for Appellant.  No appearance by Appellees.

          Before:    Fabe,  Chief  Justice,   Matthews,
          Eastaugh, Bryner, and Carpeneti, Justices.

          FABE, Chief Justice.


I.   INTRODUCTION

          A  lot owner violated a covenant in her subdivision  by

taking more than one year to finish construction on her lot.  The

covenant  contained  a  flat-rate, per  diem  liquidated  damages

provision for covenant violations.  The issue presented  by  this

appeal  is whether flat-rate, per diem liquidated damages can  be

charged for construction delays that violate subdivision covenant

regulations.  We reverse the superior court and hold that such  a

clause  is  permissible  in  this  case  because  the  developers

liquidated  damages clause attempts to address a situation  where

it   would  be  difficult  to  ascertain  actual  damages  or  to

reasonably forecast the damages likely to occur in the  event  of

breach.

II.  FACTS AND PROCEEDINGS

          Carr-Gottstein  Properties  developed   the   Southport

Subdivision Addition No. 1 in Anchorage.  Carr-Gottstein executed

a  Declaration  of Covenants, Conditions and Restrictions  (CC&R)

that  regulates  the  use of lots within  the  subdivision.   One

covenant  in  the  CC&R  requires  owners  of  lots  within   the

subdivision to complete any construction of a dwelling within one

year.1   A  purpose of this one-year covenant is to  protect  the

aesthetics  of the subdivision.  The CC&R contains  a  liquidated

damages  clause that provides a $25 daily fine for any  violation

of the CC&R.

          Ruth  Benedict  owned Lot 15, Block 4 in the  Southport

Subdivision  Addition No.  1 (Lot 15).  On  September  20,  1999,

Benedict  began  construction on her lot.  On October  31,  2000,

Carr-Gottstein gave Benedict written notice that Benedict was  in

violation of the one-year construction limitation covenant.

          Carr-Gottstein filed suit to require completion of  the

construction  and  for assessment of liquidated  damages.   Carr-

Gottstein  moved  for partial summary judgment  on  the  question

whether  Benedict was in compliance with the covenant.   Benedict

opposed  Carr-Gottsteins  motion and  filed  a  cross-motion  for

summary  judgment  challenging the  validity  of  the  liquidated

damages  provision.   The trial court granted  both  motions  for

summary  judgment,  finding that Benedict was not  in  compliance

with  the  covenant  but also that the CC&Rs  liquidated  damages

clause  was  impermissible because of our ruling  in  Kalenka  v.

Taylor.2   Carr-Gottstein now appeals the granting  of  Benedicts

motion for summary judgment.3

III. STANDARD OF REVIEW

            The  general  enforceability of  flat-rate  per  diem

          liquidated damages clauses is a question of law.  Whether a

particular  liquidated damages clause is  validly  applied  is  a

mixed  question of law and fact.4  What legal test a court should

apply  in determining the validity of a liquidated damages clause

is  a legal issue.5  Whether facts in a particular case meet  the

proper  liquidated damages test is a factual determination.   For

questions of law, the standard of review is de novo; we adopt the

rule  of  law  that  is  most persuasive in light  of  precedent,

reason,  and  policy.6  We review a courts factual determinations

under the clearly erroneous standard.7

IV.  DISCUSSION

          Generally, parties to a contract are free to  stipulate

in  advance  an  amount to be paid as compensation  for  loss  or

injury which may result in the event of a breach of the contract,

and  such stipulations are valid and enforceable.8  However, such

an  advance stipulation may only provide compensation for  breach

of  the contract and may not serve as a penalty that punishes the

breaching  party.9   Contractual  penalties  serve  no   positive

purpose, which is why courts do not enforce them.10  Courts  must

determine on a case-by-case basis whether a damages provision  is

a valid liquidated damages clause or an unenforceable penalty.11

          We  have  instructed trial courts to employ a  two-step

test  in  making their determinations regarding the  validity  of

liquidated  damages  clauses:   Liquidated  damages  clauses  are

proper  .  .  .  where it would be difficult to ascertain  actual

damages,  and  where  the  liquidated amount  [is]  a  reasonable

forecast of the damages likely to occur in the event of breach. 12

The Restatement of Contracts uses this widely adopted test.13

          Carr-Gottsteins  liquidated damages  clause  meets  the

first part of our test. The liquidated damages clause in question

is  meant  to  address  the aesthetic harm caused  by  delays  in

construction.   In  its summary judgment decision,  the  superior

court found that the damages caused by [Benedicts] breach are  of

an aesthetic nature which result in damages that are difficult to

          quantify, but which nonetheless require a remedial response[.]

Moreover,  it  is  generally accepted  that  injuries  caused  by

construction delays are nearly always difficult to determine .  .

. .14  Carr-Gottsteins liquidated damages provision thus meets the

first requirement of our liquidated damages test.

          Carr-Gottsteins clause also meets the  second  part  of

our  test,  as a $25 daily fine is a reasonable forecast  of  the

damages  likely  to  occur as a result of this  covenant  breach.

First,  because injury caused by [construction] delay  is  nearly

always  difficult to determine, courts are strongly  inclined  to

accept  and  enforce an amount agreed to in a liquidated  damages

provision  for construction delay.15  Furthermore, the  per  diem

liquidated damages provision takes into account the magnitude  of

the  breach  because the temporal length of the  breach  in  this

situation  affects the magnitude of the breach.  One  purpose  of

the  one-year  limitation on construction is  protection  of  the

subdivisions aesthetics.  Lots with unfinished construction often

contain work equipment, displaced earth, unfinished edifices, and

other  unpleasant sights.  Such aesthetic blight harms  the  sale

value  of other lots within the subdivision and hampers the other

lot  owners enjoyment of their property.  Each additional day  of

unfinished  construction prolongs this harm, and  its  magnitude,

therefore,  is correlated to its temporal length.  In  setting  a

per   diem  fee,  Carr-Gottsteins  liquidated  damages  provision

attempts  to  reasonably forecast damages by assigning  different

damages to breaches of different magnitudes.

          The superior court also agreed that Carr-Gottsteins $25

per  diem  liquidated damages clause was an attempt to  ascertain

approximate  damages, rather than an attempt to  set  a  penalty:

The  $25 liquidated damages provision in the current case is much

more in keeping with the type of provisions commonly allowed  for

breach   of  covenant  claims.  Because  the  liquidated  damages

provision in question meets both prongs of our test and is not  a

penalty, it is enforceable.

          In  properly applying our two-prong test, the  superior

          court made factual

determinations that suggested it would have preferred to  enforce

the liquidated damages provision in question.  The superior court

apparently  determined, however, that it could not enforce  Carr-

Gottsteins liquidated damages provision as a matter of law due to

our  decision in Kalenka v. Taylor.16  In its ruling,  the  trial

court stated that the liquidated damages clause in question would

be  perfectly reasonable, but for the ruling in Kalenka.  Relying

on  Kalenka,  the  trial  court concluded  that  the  failure  to

differentiate between degrees of covenant violations is fatal  to

the  liquidated damages provision of a covenant.  The Kalenka and

Carr-Gottstein damages clauses are similar in that they both  set

flat-rate  per  diem  fees  for  covenant  violations.   Kalenkas

holding,  however,  does  not prohibit  all  flat-rate  per  diem

damages clauses.  Thus, our holding in Kalenka does not in itself

make Carr-Gottsteins liquidated damages clause unenforceable.

          Kalenka continues our line of cases in which we  forbid

punitive  damages  for contractual breaches.17   Although  courts

generally  enforce  bargains according to their  terms,18  public

policy limits this principle.  We stated in Kalenka that the lack

of   a   public   policy  justification  for  allowing   punitive

contractual  damages  prevents us from permitting  such  damages:

Punishment  of  a promisor for having broken his promise  has  no

justification  on either economic or other grounds,  and  a  term

providing  such a penalty is unenforceable on grounds  of  public

policy.19

            We found such a penalty provision to be unenforceable

in Kalenka, where  the developer of a subdivision had executed  a

restrictive  covenant  that contained  the  following  liquidated

damages  clause: A penalty of $1000.00 per day shall be  assessed

for  unapproved  construction.20  In affirming the  trial  courts

dismissal  of  this liquidated damages clause,  we  observed  two

troubling aspects of the clause.  First, we noted that the clause

          was, on its face, a penalty provision:  We . . . are inclined to

disallow  the  penalties sought by the Kalenkas  based  on  their

moniker  alone.21  Second, we were concerned that the $1,000  per

day  penalty  failed to distinguish between types of  contractual

breaches.   While  discussing this second point  in  Kalenka,  we

reaffirmed  our previous treatment of liquidated damages  clauses

by holding that a liquidated damages clause is invalid when there

is  no attempt to forecast actual damages.22  We added that  [a]n

indication of this lack of calculation is deemed present when the

amount  of stipulated damages is the same for a total or  partial

breach, or for breach of minor or major contract provisions.23

          We   distinguish  Carr-Gottsteins  liquidated   damages

clause  from  that in Kalenka in two ways.  First, Carr-Gottstein

does  not  describe  the CC&Rs liquidated  damages  clause  as  a

penalty provision.  Second, and more importantly, Carr-Gottsteins

$25  per  diem provision is substantively different from Kalenkas

$1,000  per diem penalty.  When we disapproved of the $1,000  per

day penalty in Kalenka, we were not frowning on the flat-rate per

diem  aspect  of  the  clause.  In fact, we have  recognized  the

validity of flat-rate liquidated damages for per diem violations:

[T]here  is  no legal objection to stating liquidated damages  in

terms  of a per diem percentage of the contract price or in terms

of  a stated sum per day . . . .24  Additionally, as noted above,

the  magnitude of the breach in this case is directly  linked  to

its temporal length; consequently, the flat-rate per diem damages

provision  assigns  different  damages  to  different  levels  of

breach.

          Rather  than criticizing the flat-rate per diem  aspect

of  Kalenkas  penalty  provision, we  reasoned  that  the  $1,000

liquidated  damages provision was flawed because  it  assigned  a

high  penalty to all breaches, whether they were major or  minor.

For  example, an unapproved alteration to a fence calls  for  the

same  penalty  as  the unapproved construction of  a  building.25

Liquidated damages provisions are meant to compensate and not  to

          punish, and it is hard to imagine that an unapproved alteration

to  a fence could justify daily compensation of $1,000.  In other

words, it was the disproportionately high penalty, not the  flat-

rate  per diem aspect of Kalenkas liquidated damages clause, that

we  found  problematic.  In assigning a high flat-rate  per  diem

penalty, the Kalenkas did not attempt to forecast actual damages;

rather, they attempted to maximize a penalty.

          The  $25  per  diem  damages clause  in  this  case  is

different.   As  the superior court noted, [u]nlike  the  current

situation,  the  provision  at issue in  Kalenka  was  a  penalty

provision rather than a damages provision and the amount provided

was  quite extreme.  The superior court clearly made the  factual

determination that, instead of asserting a high, penalty-like per

diem  charge  for  any violation, Carr-Gottstein  incorporated  a

legitimate damages provision into its subdivision covenant.  This

finding was not clearly erroneous.

V.   CONCLUSION

          Because  Kalenka does not prohibit reasonable flat-rate

per  diem  liquidated  damages clauses and because  the  superior

court   recognizes  Carr-Gottsteins  clause   as   a   reasonable

liquidated damages clause, we REVERSE the courts grant of summary

judgment to Benedict and order the superior court to grant  Carr-

Gottstein liquidated damages.

_______________________________
     1    This covenant is located in Article VII, Section 7.8 of
the CC&R.

     2    896 P.2d 222 (Alaska 1995).

     3    After the summary judgment motion, Matrix General, Inc.
bought  Lot  15  in a judicial foreclosure sale.   Carr-Gottstein
added  Matrix General, Inc. as a defendant.  Subsequently,  Gerry
Zeek  bought  the lot from Matrix General, Inc.  The trial  court
then  substituted Gerry Zeek as the real party  in  interest  for
Matrix General, Inc.

     4    When there is a mixed question of law and fact, we will
evaluate  the  legal  and factual issues separately.   Wyller  v.
Madsen, 2003 WL 21040213, at *3 (Alaska, May 9, 2003);  see  also
Central Bering Sea Fishermans Assn v. Anderson, 54 P.3d 271,  277
(Alaska  2002); Nickels v. Napolilli, 29 P.3d 242, 246-47 (Alaska
2001).

     5    Central Bering Sea Fishermens Assn v. Anderson, 54 P.3d
271, 277 (Alaska 2002).

     6    Bennett v.  Bennett, 6 P.3d 724, 726 (Alaska 2000).

     7     Gillum  v.  L  & J Enters., 29 P.3d 266,  268  (Alaska
2001).

     8    Annotation, Contractual Provision for Per Diem Payments
for  Delay  in  Performance  as One  For  Liquidated  Damages  or
Penalty, 12 A.L.R. 4th 891, 899 (1982).

     9    See id.

     10    Restatement (Second) of Contracts  356 cmt. a (1981).

     11     11 Arthur Linton Corbin & John E. Murray, Jr., Corbin
on Contracts  1057 (Interim ed. 1964 & Supp. 2002).

     12     Zerbetz  v. Alaska Energy Ctr., 708 P.2d  1270,  1281
(Alaska 1985) (quoting Williwaw Lodge v. Locke, 601 P.2d 236, 239
(Alaska 1979)).

     13    Restatement (Second)  of Contracts  356(1) (1981); see
also  22  Am. Jur. 2d Damages  690 (1988); Melvin Aron Eisenberg,
The  Limits of Cognition and the Limits of Contract, 47 Stan.  L.
Rev.  211, 225 (1995); Milton Constr. Co. v. State Highway  Dept,
568  So.  2d 784, 790 (Ala. 1990); Powder Horn Constrs., Inc.  v.
City  of Florence, 754 P.2d 356, 365 (Colo. 1988); Brazen v. Bell
Atlantic Corp., 695 A.2d 43, 48 (Del. 1997); Sun Ridge Investors,
Ltd.  v.  Parker,  956 P.2d 876, 878 (Okla.  1998);  Phillips  v.
Phillips, 820 S.W.2d 785, 788 (Tex. 1991).

     14    11 Corbin on Contracts  1072 (Interim ed. 1964 & Supp.
2002).

     15    Id.

     16    896 P.2d 222 (Alaska 1995).

     17     See, e.g., Lee Houston & Assocs. v. Racine, 806  P.2d
848,  856  (Alaska 1991) (reiterating that punitive damages  only
available   if  conduct  constituting  breach  also   constitutes
independent  tort); ARCO Alaska, Inc. v. Akers,  753  P.2d  1150,
1153 (Alaska 1988) (same).

     18    Melvin Aron Eisenberg, The Limits of Cognition and the
Limits of Contract, 47 Stan. L. Rev. 211, 211 (1995).

     19    Kalenka, 896 P.2d at 229 (quoting Restatement (Second)
of  Contracts   356  cmt. a (1981)); see also   22  Am.  Jur.  2d
Damages  686 (1988).

     20    Kalenka, 896 P.2d at 229.

     21    Id.

     22    Id.

     23     Id.  (quoting  United States Sch. Dist.  No.  315  v.
DeWerff, 626 P.2d 1206, 1209 (Kan. App. 1981)).

     24     Arctic Contractors, Inc. v. State of Alaska, 564 P.2d
30,  49  (Alaska 1977), disapproved of on an unrelated matter  by
Native  Alaska  Reclamation & Pest Control, Inc. v.  United  Bank
Alaska, 685 P.2d 1211, 1219 (Alaska 1984).

     25    Kalenka v. Taylor, 896 P.2d at 229 (internal quotations
omitted).