Smart Oil, LLC v. DW Mazel, LLC, 970 F.3d 856

Background:

Smart Oil and DWM executed a Purchase and Sale Agreement for 30 gas-station parcels for $67 million; the contract (negotiated with counsel) required $300,000 initial escrow and $450,000 later—$750,000 total earnest money (~1% of price).
DWM never paid either deposit and did not provide the written notice of disapproval required at the end of the due-diligence period; DWM continued negotiating but failed to close.
Smart Oil had contracted with individual property owners to "flip" their parcels to DWM; Smart Oil produced sworn declarations from owners of 21 properties stating they were ready to sell.
Smart Oil sued for breach and sought the $750,000 as liquidated damages under a clause stating the earnest money is "complete liquidated damages" and that damages would be "extremely difficult or impossible to ascertain." DWM counterclaimed for breach and fraudulent inducement.
The district court granted summary judgment to Smart Oil, finding Smart Oil satisfied conditions precedent, DWM breached by not paying earnest money, and the liquidated-damages clause enforceable; the court denied DWM’s counterclaims and awarded fees to Smart Oil.
On appeal the Seventh Circuit affirmed and remanded for submission of attorneys’ fees/costs on appeal.

Issues:

Issue	Plaintiff's Argument (Smart Oil)	Defendant's Argument (DWM)	Held
Whether Smart Oil satisfied contract conditions precedent so DWM’s payment obligation matured	Smart Oil performed conditions: had authority to flip properties and satisfied due diligence (or DWM approved by silence)	Smart Oil lacked authority to convey all 30 properties and failed to furnish required due-diligence materials	Smart Oil satisfied conditions: owner declarations and DWM’s failure to give written disapproval meant approval; DWM breached by not paying earnest money
Whether the liquidated-damages clause is enforceable	Clause is valid: parties agreed, damages hard to ascertain, $750,000 (~1%) reasonable at contracting	Clause is an unenforceable penalty and disproportionate; or Smart Oil incurred no actual damages	Clause enforceable under Illinois law: parties intended it, damages were uncertain, and the amount (~1% of price) was reasonable
Whether Smart Oil can recover the earnest-money amount when DWM never deposited it into escrow	Agreement’s mandatory language (“shall receive the entire Earnest Money Deposit”) obligates DWM to pay liquidated damages despite non-deposit	Nothing was deposited, so Smart Oil cannot recover that amount	"Shall" interpreted as mandatory; DWM cannot avoid liability by failing to pay — Smart Oil entitled to the agreed earnest-money amount
Whether DWM’s fraudulent inducement claim survives summary judgment	N/A (Smart Oil denies fraud)	Smart Oil knowingly misrepresented authority and due-diligence materials to induce DWM	Fraud claim fails: record lacks clear-and-convincing evidence of knowingly false statements; owner declarations rebut fraud allegation

Key Cases Cited

Life Plans, Inc. v. Sec. Life of Denver Ins. Co., 800 F.3d 343 (7th Cir. 2014) (choice-of-law and contract interpretation principles)
DeliverMed Holdings, LLC v. Schaltenbrand, 734 F.3d 616 (7th Cir. 2013) (elements required to prove breach of contract under Illinois law)
XCO Int’l, Inc. v. Pac. Sci. Co., 369 F.3d 998 (7th Cir. 2003) (standard for assessing whether liquidated damages are disproportionate)
Paper Express, Ltd. v. Pfankuch Maschinen GmbH, 972 F.2d 753 (7th Cir. 1992) (use of "shall" as mandatory contractual language)
Hoseman v. Weinschneider, 322 F.3d 468 (7th Cir. 2003) (fraud elements and clear-and-convincing-evidence requirement)
Siegel v. Levy Org. Dev. Co., 182 Ill. App. 3d 859 (Ill. App. Ct. 1989) (earnest-money percentages in real-estate liquidated-damages cases)
Kensington Rock Island Ltd. P’ship v. Am. Eagle Historic Partners, 921 F.2d 122 (7th Cir. 1990) (earnest-money recoverable without proof of actual damages)
Mullaney v. Wilbur, 421 U.S. 684 (1975) (federal courts defer to state courts as ultimate expositors of state law)