Maxton Builders, Inc. v. Lo Galbo
502 N.E.2d 184, 68 N.Y.2d 373, 509 N.Y.S.2d 507 (1986)
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Rule of Law:
A seller of real property is entitled to retain the down payment made by a buyer who willfully defaults on the contract, without being required to prove actual damages, thereby reaffirming the long-standing common law rule.
Facts:
- In August 1983, the Lo Galbos contracted to purchase a newly constructed house from Maxton Builders, Inc. for $210,000.
- The Lo Galbos provided a check for $21,000, representing a 10% down payment.
- The contract contained a rider allowing the Lo Galbos to cancel if annual real estate taxes were estimated to exceed $3,500, contingent upon giving written notice to the seller within three days.
- The day after signing, the parties confirmed that the tax estimate exceeded $3,500.
- The Lo Galbos' attorney provided oral notice of cancellation within the three-day window but the required written notice was not received by Maxton Builders until after the period had expired.
- The Lo Galbos subsequently stopped payment on the $21,000 down payment check.
- Maxton Builders later sold the house to another party for the same price but incurred a $12,000 brokerage fee for that sale.
Procedural Posture:
- Maxton Builders, Inc. (plaintiff) sued the Lo Galbos (defendants) in the New York Supreme Court, Special Term (trial court) to recover the $21,000 down payment.
- Both parties moved for summary judgment.
- The trial court found that the Lo Galbos had breached the contract but denied Maxton's motion for summary judgment on damages, ruling that a question of fact existed as to whether retaining the deposit constituted a penalty.
- Maxton Builders appealed the denial of summary judgment on damages to the Appellate Division of the New York Supreme Court.
- The Appellate Division modified the trial court's order and granted summary judgment to Maxton Builders for the full amount of the down payment.
- The Lo Galbos (appellants) appealed that decision to the Court of Appeals of New York, the state's highest court.
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Issue:
Does a seller of real property have the right to retain the entire down payment from a buyer who defaults on the contract, even if the seller's actual damages are less than the amount of the down payment?
Opinions:
Majority - Chief Judge Wachtler
Yes. A seller of real estate has the right to retain the entire down payment from a buyer who defaults on the contract. The court upheld the traditional rule from Lawrence v. Miller, which states that a vendee who defaults on a real estate contract without a lawful excuse cannot recover their down payment. The court emphasized the importance of stability and precedent in contract law, noting that parties rely on such settled rules during negotiations. It reasoned that real estate contracts are arm's-length transactions and that the traditional 10% down payment is widely accepted as a reasonable amount. Overturning this long-standing rule would create uncertainty and likely lead to more litigation, as the burden would be on the defaulting buyer to prove the seller's actual damages were less than the deposit, a difficult burden to meet.
Analysis:
This decision reaffirms a century-old common law rule in New York, solidifying the principle that a defaulting real estate buyer forfeits their down payment. By rejecting the 'modern rule' that would limit recovery to actual damages, the court prioritized stare decisis and predictability in contractual relations. The ruling firmly places the risk of breach on the buyer and signals that parties who wish to alter this default rule must do so explicitly in their contract. This case reinforces the idea that courts are reluctant to interfere with the terms of an arm's-length agreement or relieve a party from the consequences of their own default.
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