Note: Corona Summit, LLC (Buyer/Applicant) and SPUSO5 Corona Summit, L.P. (Seller/ Beneficiary) executed a purchase and sale agreement (PSA) for real estate. Pursuant to the PSA, Buyer made a USD 13m deposit.

Section 11(g) of the PSA stated that Seller must "promptly notify Buyer in writing of any change in any aspect of the physical condition of the Property (or any portion thereof) or of any event or circumstance of which Seller has actual knowledge subsequent to the date of this Agreement which (i) adversely affects the Property (or any portion thereof) or the use, operation or value of the Property (or any portion thereof), or (ii) makes any representation or warranty of Seller to Buyer under this Agreement untrue or misleading in any material respect. . . . Buyer shall have the right within fifteen (15) business days after receipt of Seller's written notice pursuant to this Section 11(g) to elect to terminate this Agreement, whereupon the Deposit shall be returned to Buyer, and Buyer and Seller shall each be released from all liability hereunder".

The PSA contained a liquidated damages provision which provided that "the amount of the deposit is a reasonable estimate of seller's damages and that seller shall be entitled to said sum as liquidated damages". Furthermore the provision provided that "[i]n such event [Seller's entitlement to liquidated damages], the escrow holder shall, upon written notice from the Seller and Buyer, immediately deliver the deposit to the Seller [in cash or other immediately available funds if the deposit is a cash deposit] and in the event the deposit is a letter of credit deposit, escrow holder shall promptly draw upon such letter of credit and deliver the proceeds thereof to Seller."

Buyer had tendered a letter of credit to the escrow holder as a deposit, but advised the escrow holder not to deliver it to Seller. While Seller was constructing office buildings on the property to Buyer's specifications, Buyer sent a termination letter to Seller, citing the financial crisis as an adverse circumstance under which it was entitled to unilaterally terminate the PSA under Section 11(g). Seller claimed that Buyer had committed an anticipatory breach because Section 11(g) pertained only to discovery of physical conditions related to the property during construction which affected its value.

"This litigation commenced after Buyer and Seller made competing demands on the escrow holder to release the deposit. The escrow holder interpleaded the deposit with the superior court, which consolidated the respective complaints of Buyer, Seller, and Bank in a single action." The Superior Court of Los Angeles County, California, Fruin, J., entered a USD 79 million judgment against Buyer. Buyer appealed, arguing that the liquidated damages provision limited its liability to the amount of the deposit, USD 13 million. The Court of Appeal of California, Second Appellate District, Division Four, Suzukawa, J. affirmed the trial court's finding of Buyer's liability, but directed the trial court to mmodify the judgment to the amount of the deposit on remand.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.