It’s rare that a party to a contract can breach it but not be liable for a remedy. Yet that’s precisely what happened last week in Southern Financial Group, LLC v. McFarland State Bank, No. 13-3378 (7th Cir. Aug. 15, 2014), a Wisconsin-law decision from the Seventh Circuit (written by Chief Judge Wood) that has much in common with a case that we wrote about yesterday involving the Seventh Circuit’s determination that Wisconsin law has a heightened discovery-rule standard for corporate plaintiffs pursuing fraud claims.
Only Southern Financial didn’t involve a tort or a statute of limitations. It concerned the right of two sophisticated parties to bargain, to reach an agreement, and, as part of that agreement, to limit (entirely, as it turned out) the remedies available in the event of a breach. The stories’ moral is the same, however: Courts treat sophisticated parties (often corporations) differently, whether that means holding them to a higher standard under a discovery rule or binding them to their contract’s terms, even when that means that there is no remedy for a breach.
The case’s facts come from the world of distressed-asset investing. Southern Financial was engaged in that business, purchasing loan portfolios filled with lousy real-estate loans for cents on the dollar. In this case, it paid 28.8% of the debt, or $1.27 million, to McFarland State Bank for a portfolio secured by 19 properties in Wisconsin. Southern Financial planned to turn a buck by selling the collateral individually in the hope that its receipts would exceed the bargain-basement price that it paid for the entire lot. So the liens that secured the collateral were key, and Southern Financial required McFarland to represent in its sale agreement that “no material portion of the Collateral was released from the lien . . . and no instrument of release, cancellation or satisfaction was executed.”
That turned out not to be true. Southern Financial discovered shortly after the sale that the liens had been released on three of the 19 loans, leaving it with only 16 parcels to hawk. Nevertheless, it still managed to make money, netting $1.31 million from the sale of 13 of its 16 properties by the time that it filed a lawsuit against McFarland for breach of contract.
What’s noteworthy about this case, however, is the limitation that the parties placed on the remedies available to them in the event of a breach. If McFarland breached a non-monetary obligation, and failed to cure it within 30 days, there was only one remedy available. McFarland had the choice to repurchase at the “repurchase price” or to pay the breach’s actual damages, up to an mount not exceeding the “repurchase price.” The “repurchase price” was defined as an amount equal to the purchase price, minus “all amounts . . . collected by [Southern Financial] in respect of the loans.”
In other words, the repurchase price was a negative number here. Southern Financial already had recovered more from the sale of the 13 than its outlay for the entire 19. The result, the Seventh Circuit held, was that it was entitled to recover nothing for the seller’s breach of contract.
The court emphasized specifically that Southern Financial was “a sophisticated, repeat player in the distressed-assets business” and that both parties, represented by counsel, had agreed to “establish exclusive remedies for breach of non-monetary obligations.” It felt bound to enforce the agreement as written and rejected any suggestion that doing so under these circumstances created an unconscionable result or enforced a remedy that had failed of its essential purpose.
“Except in the most extraordinary circumstances, we hold sophisticated parties to the terms of their bargains.” Indeed.