Pennie Carroll v. Reo, L.L.C., D/B/A re/max Opportunities, Inc., and Its Successors in Interest, Ds Ventures, L.L.C., D/B/A re/max Opportunities, Inc.
15-0487
| Iowa Ct. App. | Jul 27, 2016Background
- Pennie Carroll was an independent-contractor real estate agent with RE/MAX under a standard Independent Contractor Agreement (ICA) that included a post-termination commission provision: pending closings after termination would be paid on a 50/50 split after a 5% broker fee.
- Carroll gave notice she was terminating the ICA; RE/MAX then terminated her for cause and attempted to apply the 50/50 post-termination commission split to her pending transactions.
- Carroll sued for declaratory relief and injunctive relief seeking a ruling that the liquidated-damages/commission provision was an unenforceable penalty.
- At bench trial the district court found the 50/50 provision was an unenforceable penalty because RE/MAX presented no evidence explaining how the rate was set or showing anticipated or actual losses that justified the amount.
- RE/MAX appealed, arguing (1) the district court improperly shifted the burden of proof to RE/MAX, and (2) the court compared the clause to actual provable loss rather than anticipated loss at formation.
- The Court of Appeals affirmed, finding the district court correctly applied the legal test and there was insufficient evidence that the 50/50 split reasonably approximated anticipated or actual damages or was needed because damages were difficult to prove.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the liquidated-damages/commission clause is an unenforceable penalty | Carroll: 50/50 split is not a reasonable pre-estimate of loss and functions as a penalty | RE/MAX: Clause is a valid liquidated-damages provision to recoup investment and cover uncertain damages | Held: Clause is an unenforceable penalty — no evidence it reasonably approximated anticipated/actual loss or was justified by proof difficulty |
| Burden of proof on penalty claim | Carroll: she has the burden to prove the clause is a penalty and show actual damages | RE/MAX: district court improperly shifted burden to RE/MAX to prove clause was reasonable | Held: No impermissible shift; district court explicitly recognized Carroll’s burden and considered evidence presented (including RE/MAX witnesses) |
| Proper measure for reasonableness (anticipated vs actual loss) | Carroll: Clause must be reasonable in light of anticipated or actual loss; evidence showed no reasonable relation | RE/MAX: Court erred by comparing to provable actual loss instead of anticipated loss at contract formation | Held: Court properly considered both anticipated and actual loss and found insufficient evidence on either measure |
| Whether damages were too uncertain to permit precise proof (justifying broader liquidated amount) | Carroll: Damages were provable and not so uncertain to justify large fixed amount | RE/MAX: Loss is hard to quantify (no hourly rate; shifting of work), so liquidated clause is appropriate | Held: Damages were not shown to be so uncertain as to justify the large 50/50 allocation; record showed work shifted to other agents and RE/MAX still received routine commissions |
Key Cases Cited
- Rohlin Constr. Co. v. City of Hinton, 476 N.W.2d 78 (Iowa 1991) (adopts Restatement test for when liquidated damages are penalties)
- Aurora Bus. Park Assocs., L.P. v. Michael Albert, Inc., 548 N.W.2d 153 (Iowa 1996) (liquidated-damages validity measured by anticipated or actual loss and difficulty of proof)
- City of Davenport v. Shewry Corp., 674 N.W.2d 79 (Iowa 2004) (reinforces Restatement two-factor penalty test)
- Van Sloun v. Agans Bros., Inc., 778 N.W.2d 174 (Iowa 2010) (declaratory judgment grounded in contract law reviewed as an action at law)
- Gordon v. Pfab, 246 N.W.2d 283 (Iowa 1976) (party asserting a clause is a penalty bears burden to plead and prove actual damages)
- Engel v. Vernon, 215 N.W.2d 506 (Iowa 1974) (sum stipulated is a penalty where out of reasonable proportion to loss actually sustained or anticipated)
- Am. Family Mut. Ins. Co. v. Petersen, 679 N.W.2d 571 (Iowa 2004) (appellate review: bound by factual findings supported by the record but review legal conclusions for correction of errors)