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Sunday, May 22, 2005

Cases: Liquidated damages subsumed in fraud

California_flag_4 An unpublished California decision shows some offbeat damages calculations in a case involving a liquidated damages clause in a fraud situation.

Two men, Tumanjan and Capazzola, owned Dante's Inferno, a sports bar, and Dante's Italian Cuisine, a family-style restaurant.  These two businesses shared the same address and the same liquor license.  When Dante's Italian Cuisine went under, Tumanjan and Capazzola leased the property to RiLoRo, Inc.  Under the deal, RiLoRo would open a new restaurant, Cucina Paradiso.  The contract contained the following clause:

Lessor shall be responsible for providing Lessee with use of Lessor's liquor/wine/beer license. If Lessee does not have full use of a type 47 bona fide liquor license, Lessee shall have the right to terminate the lease and all funds paid by Lessee ($ 103,750.00) shall be returned within thirty (30) days upon return of all personal property.

Turns out that there were, however, problems with the liquor license.  First, Dante’s had no right to let someone else use the liquor license, and second, the license was already under investigation because Capazzola was a convicted felon and ineligible for a license.  Three years after Cucina Paradiso started operating, the ever-vigilant state ABC authorities finally got around to noticing the problems and suspending the license.  RiLoRo sued, claiming fraud.

The trial court, no piker when it comes to damages, managed to award liquidated damages ($103,750), reliance damages ($450,000) and “benefit of the bargain” damages ($300,000).   This was too much for the court of appeals, which tossed the liquidated damages award as duplicative, found the evidence insufficient for the expectation measure, and stuck with the $450,000 as damages for the fraud.

RiLoRo, Inc. v. Tumanjan, 2005 Cal. App. Unpub. LEXIS 4221 (Cal. Ct. App. May 12, 2005).

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