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Autauga Quality Cotton Ass'n v. Crosby - 893 F.3d 1276 (11th Cir. 2018)

Rule:

Under longstanding Alabama law, a provision that is intended to serve as a disincentive to breach or a security for performance is void as a penalty.

Facts:

Autauga Quality Cotton Association, a cooperative that pools and markets farmers' cotton, claimed that the individual owners of one of its former member entities—together, the Crosbys—breached an agreement, and "betrayed" the organization when they failed to deliver their promised cotton for the 2010 crop year. After the cotton is harvested and ginned, Autauga delivers to the buyers and remits the sale proceeds (minus its own operating expenses) to its members. This arrangement is memorialized in a marketing agreement between Autauga and each association member. Most significantly, Autauga contends that as a remedy for the Crosbys' breach it is entitled to liquidated damages pursuant to the marketing agreement's terms. 

Issue:

Was plaintiff-appellant entitled to liquidated damages when defendants-appellees failed to their deliver their pledged cotton for the 2010 crop year?

Answer:

No

Conclusion:

There was no merit to the association's claim that a liquidated damages clause in the parties' agreement was enforceable under Ala. Code § 2-10-65 because that section applied only to associations that were organized under Chapter 10, Article 3 of Alabama's Agricultural Act, and the association was organized under Chapter 10, Article 4 of the Act, and the liquidated damages clause in the parties' agreement was unenforceable under Alabama law because it was a penalty clause. The evidence thus strongly indicates that the agreement's liquidated-damages provision was designed to deter breaches, not to estimate and compensate losses.  Under longstanding Alabama law, a provision that is intended to serve as a disincentive to breach or a security for performance is void as a penalty. neither Autauga's "liberal-enforcement" argument nor its statutory argument allows it to evade application of Alabama's common law rules. And under those rules, Autauga's liquidated-damages provision is plainly a penalty—rather than a reasonable estimate of probable loss—and is therefore void and unenforceable.

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