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Mueller v. Johnson

March 14, 1991

FRED B. MUELLER, ET AL, RESPONDENTS,
v.
R.G. JOHNSON, ET AL, APPELLANTS, ALL AMERICAN HOMES, INC., RESPONDENT



Worswick, C.j. Alexander and Morgan, JJ., concur.

Author: Worswick

If an earnest money agreement allows the seller to recover "actual damages" upon the buyer's default, are those damages limited to the difference between the purchase price set forth in the agreement and the price for which the property later sold? We hold that they are not so limited.

R.G. and Patricia Johnson signed an earnest money agreement to buy Fred and Patricia Mueller's house. The Johnsons defaulted. Five months later, the Muellers sold the house for $3,500 less than the Johnsons agreed to pay.

The Johnson earnest money agreement gave the Muellers a choice between retaining the earnest money as liquidated damages, seeking specific performance, or recovering "actual damages." They sued for actual damages. The Johnsons made the tactical mistake of cross-claiming against the selling agent, All American Homes, Inc., claiming negligence. Predictably, this stimulated All American Homes, which had received a commission on the ultimate

sale, to cross-claim in turn against the Muellers for a commission on the Johnson transaction, and the Muellers, again quite understandably, sought indemnity against the Johnsons for All American's claim.

When the smoke of trial cleared, All American Homes had a judgment against the Muellers for a commission on the Johnson transaction together with attorneys fees, and the Muellers had a judgment over against the Johnsons for the commission, All American's attorneys fees, and the Muellers' own actual damages, consisting of the difference in purchase price plus mortgage interest, utilities costs and property taxes for the interval between transactions. The Muellers also were awarded their own attorneys fees.

The Johnsons do not dispute any of the amounts, nor do they question All American's right to a commission on each transaction.*fn1 Rather, they contend that the Muellers' recovery upon default under an earnest money agreement is limited to the difference between the agreed price and the amount received on the ultimate sale. They rely particularly on Reiter v. Bailey, 180 Wash. 230, 39 P.2d 370, 97 A.L.R. 1489 (1934) and Mahoney v. Tingley, 10 Wash. App. 814, 520 P.2d 628 (1974), reversed on other grounds, 85 Wash. 2d 95, 529 P.2d 1068 (1975). We disagree.

As with any opinion, Reiter and Mahoney must be read in the context of the facts and issues involved. Reiter did not involve an earnest money agreement, but a partially performed real estate contract that contained a liquidated damages clause. The sole issue considered was whether, on

default, the seller's recovery was limited to liquidated damages. Reiter, 180 Wash. at 231. The court held that the seller nevertheless had the right to seek specific performance or damages actually suffered. It went on to award the sellers the difference between the unpaid balance of the contract and the market value of the property, which was all they requested.

Dicta in Mahoney arguably supports the Johnsons' argument, but the Mahoney issue was only whether a liquidated damages clause in the earnest money agreement represented a valid forecast of actual damages. Mahoney, 10 Wash. App. at 815. The earnest money agreement in question did not allow for the recovery of actual damages as such. The court held only that a trial was necessary to resolve the issue.

[1, 2] The earnest money agreement here was, quite simply, a contract. Because it allowed for the recovery of the seller's actual damages, general principles governing contract damages apply. The injured party is entitled (1) to all damages that accrue naturally from the breach; and (2) to be put in as good a pecuniary position as he would have had if the contract had been performed. Eastlake Constr. Co. v. Hess, 102 Wash. 2d 30, 39, 686 ...


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