Northwest Fixture Co. v. Kilbourne & Clark Co.

In April, 1902, the appellant, Kil-bourne & Clark Company, a. corporation created under títé laws of the *261state of Washington, entered into an agreement with the Northwest Fixture Company, a corporation also created under the laws of that state, whereby it was agreed that the latter company should immediately cease purchasing goods and begin to sell and as rapidly as possible dispose of sufficient of its present stock of merchandise to' pay off its liabilities, and should then turn over to the appellant the remainder thereof, together with its good will in business, receiving in exchange therefor fully paid-up shares of capital stock of the appellant company at par value equal to the value of .the merchandise so transferred, the value whereof was to be fixed by appraisers. The agreement contained the following provision: “It is further agreed that, in the event either party hereto fails to keep its agreement, the party thus in default, their successors and assigns, shall pay to the other party the sum of ten thousand dollars as liquidated damages for the breach thereof.” The sale of the property under the agreement referred to was .never carried out. About two months after the execution of the agreement an involuntary petition in bankruptcy was filed against the Northwest Fixture Company, and thereupon it was adjudged a bankrupt. The appellant filed its claim against the bankrupt’s estate for the sum of $io,ooo, claiming that the same was due it as the liquidated damages provided for in the agreement. Exceptions were filed to the claim, and a hearing was had thereon before the referee in bankruptcy, who sustained the exceptions. From that ruling an appeal was taken to- the district judge, and by his decision the ruling of the referee was affirmed, the court holding that no damages were recoverable by the appellant under the agreement for the reason that it was not shown that there was a surplus of merchandise belonging to the bankrupt after the payment of its debts. This ruling is assigned as error.

It is clear that no damages were recoverable by the appellant for the breach — if breach there were — of th'e contract. Conceding the rule to he that, in order to recover a sum as liquidated damages, it is unnecessary to prove actual damage, it is also true that no provision in a contract for the payment of a fixed sum as damages, whether stipulated fór as a penalty or as liquidated damages, will be enforced in a case where the court can see that no damages have been sustained. It is the general rule that, where the sum named in the contract to be paid on a breach thereof is evidently wholly disproportionate to the damage actually sustained, or where it is shown that no' actual^damage has been sustained by the breach, the courts will deem the parties to have intended to stipulate for a mere penalty to secure performance. 19 Am. & Eng. Enc. of Law (2d Ed.) 410; Gay Manufacturing Company v. Camp, 65 Fed. 794, 13 C. C. A. 137; Wilcus v. Kling, 87 Ill., 107. In this case it is apparent that the appellant has sustained no-damage. The adjudication of bankruptcy creates- the presumption that the Northwest Fixture Company was insolvent. No proof is offered to show that that presumption is not sustained by the facts. If. bankruptcy had not intervened, and the corporation had proceeded to carry out the terms of its agreement, it is evident that its assets would have been no more than sufficient to pay its debts, and that it would have had nothing left to turn over- to' the appellant. In that event not only would the appellant have suffered no damage, but the North-; *262west Fixture Company would have had no funds out of which to pay its claim for liquidated damages. In short, to permit the appellant now to share in the bankrupt’s estate, pro rata with the creditors of the bankrupt, to the full extent of its claim for damages, would be to violate the spirit, if not the letter, of the agreement, for by the terms of the agreement the assets of the Northwest Fixture Company were to he devoted first to the payment of its creditors.

' The order of the District Court is affirmed.