After a proposed sale of the debtor’s real estate failed to close, the debtor declared a default and retained the buyer’s deposit as liquidated damages. The buyer sued to recover its deposit. The complaint included claims for breach of contract, unjust enrichment and fraud. In response the debtor moved to dismiss.
The debtor negotiated a purchase and sale agreement (PSA) with the buyer to sell certain real estate (together with an adjacent parcel) for $3.8 million:
- The bankruptcy schedules filed by the debtor listed an “Option to Purchase” the property, stating that the debtor had an equitable interest and the property was owned by Brooklyn Theatrical, an affiliate.
- The motion to sell filed with the bankruptcy court stated that the property “was conveyed to the Debtor by the prior owner and the Debtor’s affiliate, Brooklyn Theatrical LLC.”
- The deed conveying the property to the debtor could not be recorded because it was not acknowledged.
Under the PSA the buyer had a right to terminate and obtain a refund of its deposit if the debtor was “unable to close within 180 days after the Effective Date, provided that such inability to close is due in no part to the actions of [the buyer].” One of the buyer’s closing conditions was that “its title company” deliver “a Standard 2006 ALTA Owner’s Policy of title Insurance with New York Endorsement.”
The PSA included an acknowledgment of the parties that (1) the property had been deeded to the debtor, (2) the deed had not been recorded, but (3) the deed would be recorded prior to closing. The buyer chose First American Title Insurance Company, which eventually declined to issue the required title policy. The debtor then obtained a commitment from Stewart Title Insurance Company. It sent a letter to the buyer that Stewart was prepared to issue the title policy, although the buyer had already sent a letter objecting to Stewart.
The debtor also sent the buyer a letter setting a closing date. The buyer rejected proceeding to closing on the grounds that its title company (First American) was not prepared to issue the title policy, and thus a closing condition had not been met. However, the buyer showed up on the scheduled closing date. After the debtor confirmed that it had not resolved First American’s title issues, the buyer declined to close.
The parties then engaged in a predictable exchange of letters in which the debtor declared a default stating that it would retain the deposit, the buyer demanded return of the book deposit, and the debtor informed the buyer that it would be retaining the deposit as liquidated damages. At this point the buyer sued the debtor seeking return of the deposit.
The debtor asserted the following causes of action:
- The debtor breached the PSA by failing to deliver a title policy from First American.
- The debtor’s failure to deliver a deed to the property constituted a breach and allowing the debtor to retain the deposit would result in unjust enrichment.
- The debtor breached by failing to deliver the First American title policy within 180 days.
- The debtor committed fraud by misrepresenting the state of title to the property.
Under state law the first and third claims for breach of the PSA required allegations that an agreement existed, the plaintiff adequately performed, the defendant breached, and damages. In this case the elements of performance by the plaintiff and breach by the defendant turned on the meaning of “its title company” (in the context of requiring issuance of a title policy as a condition of closing). The buyer argued that this phrase meant the title company the buyer selected – namely First American. The debtor contended that it just meant any title company issuing a title policy insuring the buyer’s title.
The court rejected the debtor’s interpretation since it would render the word “its” meaningless. “‘Purchaser’s title company’ does not mean the same thing as ‘any title company the seller can find to issue the Title Policy in favor of the purchaser.'” The debtor’s argument that the PSA could have spelled out the buyer’s interpretation applied equally to the debtor’s interpretation. The court concluded that at a minimum the PSA was ambiguous.
As for the unjust enrichment claim, state law required allegations that the defendant benefited at the plaintiff’s expense and that “equity and good conscience require restitution.” However, an unjust enrichment claim is generally precluded when a valid contract exists and unjust enrichment and breach of contract claims would arise from the same facts and result in the same damages. In this case since retention of the deposit was covered by the PSA, the court dismissed the unjust enrichment claim.
The fraud claim failed in the first instance because the complaint did not meet the heightened pleading requirements for fraud claims. The buyer “does not specify what statements were false, who made the false statements, or when the statements were made. Plaintiff merely states ‘defendant at all times prior to the signing of the PSA represented to the Plaintiff that the defendant had legal title to the [property].'” However, the PSA disclosed that the property had been deeded to the debtor but the deed had not yet been recorded. Further, the only representations and warranties made by the debtor in the PSA did not include any representations regarding legal title.
The fraud claim also failed because a breach of contract cannot be converted into a fraud claim merely because there is an allegation of fraudulent intent. Rather assertion of breach of a legal duty independent of the contract is required.
Consequently the court dismissed the unjust enrichment and fraud claims, but denied the motion to dismiss with respect to the first and third contract breach claims.
In the heat of the moment a transactional lawyer may be inclined to view an agreement as “good enough” once the main points have been addressed, and sometimes it is better to leave ambiguity since you may lose ground making things more precise if the other side has leverage. However, as this case illustrates, there can be a price to pay when things go wrong if you left a little room for the other side to wiggle.
Vicki R Harding, Esq.