Daily Development for Tuesday, February 21, 2006
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

VENDOR/PURCHASER; MERGER; POST CLOSING ESCROW: A post closing escrow, whereby seller deposits a sum that may be forfeited to buyer if seller does not complete certain contractual obligations, does not substitute for the original contract obligation of the seller to perform those activities, as the sale agreement does not “merge” into the escrow agreement.

Wallace v. Bock, 620 S.E. 2d 820 (Ga. 2005).

Bock Homes contracted to sell a new home to Wallace.  At closing on October 3, 1994, Wallace contended that a number of construction items were not completed, and Bock agreed to leave in escrow $10,000, which would be paid to Bock only if Bock completed these items and submitted a “clear inspection” into escrow by October 14, 1994. 

Bock never submitted the clear inspection, but buyers later learned (in early November)  that the escrow agent erroneously paid the money over to Bock anyway.  They demanded that Bock complete the work, but Bock never did.

Six years and a day follow the original closing (on October 4, 2000) Wallace sued Bock for damages for failure to complete the construction items in question.  The applicable statute of limitations was six years. 

Bock contended first that the escrow agreement constituted a modification of the sale agreement and that, through the doctrine of merger, replaced the sale agreement with respect to the question of its obligation to complete the construction.  Since Bock had no duties under the escrow agreement other than to agree to the deposit of the $10,000, it had not breached the escrow.  (There was a separate claim against the escrow agent, not contested on this appeal.)  The Court of Appeals liked this argument, and found for Bock. 

On Wallace’s appeal: Held: Reversed. 

The Georgia Supreme Court held that the escrow agreement was merely supplemental to the original agreement.  It was not a complete agreement, and there was no evidence that the parties intended that it displace the terms of the original agreement. 

As to the statute of limitations (the alternate basis for a finding for Bock in the trial court), the Supreme Court held that the statute had not run on the contract breach because the contract had been extended by the escrow agreement until October 14.  Bock was not entitled to final payment as required in the contract until that date and, as indicated, the original agreement remained in place except for this extension and the method of supporting final payment. 

Comment 1: Talk about a long grudge - six years of waiting and then two appeals to get satisfaction on what appears to have been a $10,000 claim.  It is probable that the contract provided for attorney’s fees, so that the buyer, once having sued,  elected to keep appealing in order to avoid an attorney’s fee judgment for Bock.

Comment 2: Although the editor understands the notion that the escrow did not displace the whole contract, didn’t it amount to a liquidation of the damages claim based upon the construction items?  If Bock fails to complete, buyers get $10,000 back from the closing.  They didn’t get the $10,000 back, but that is a matter for them to sue the escrow agent (there was a settlement).  Do they really have a right to general damages now?  The court doesn’t tell us for sure, but it does appear that this is the case.  That seems to discredit the parties’ actions in creating the escrow agreement as the means of resolving their dispute. 

Comment 3: Further, isn’t there more to Court of Appeals’ opinion than the Supreme Court credits?  The Court of Appeals admits that other actions might have been appropriate against Bock, such as conversion of the $10,000, but it concluded that the parties had intentionally created the escrow agreement as a final resolution of the question of Bock’s liability for failure to complete.  In fact, it is unlikely that Bock would have agreed to close if the buyers were holding out the possibility that they would sue for general damages based on the incomplete items.

Comment 4: Here are the comments of University of Georgia law prof Jim Smith, who is the current author of the Friedman on Contracts and Conveyances of Real Property treatise:

I agree with you (comment 2) that according to the supreme court’s  opinion the buyers appear to have a right to "general damages" which, as far as we can tell, is not offset by either 10k or the amount the buyers received in settlement from the escrow agent (which may equal 10k but who knows?).  The supreme court is wrong here as a general matter -- the buyers would be overcompensated.  If the escrow agent were still in the litigation as a defendant, its liability and Bock's liability have to be considered together to figure how much the buyers may collect (just like defendants who are jointly and severally liable for a wrong).  I know nothing about special rules of procedure/damages that apply when one defendant settles (is this covered by the settlement agreement?), so maybe the court is right due to the fact of settlement.

It's hard to tell whether the parties intended the 10k as the limit to Bock's duty to complete the house (what you describe in comment 2 as "liquidated damages" approach), or whether they intended that the retention of the 10k merely secured Bock's obligation to finish (what the supreme court believes).  The parts of the escrow agreement quoted by the Court of Appeals suggests the former (this is your slant), but without the whole agreement to read, it's hard to tell.  If I had to justify the supreme court opinion, my argument is that in case of doubt or ambiguity, an escrow agreement for repairs/completion should be interpreted as security and not on a cap.  It's too hard for homebuyers to know whether they've picked a realistic sum. 

For a complicated transaction, you'd have to hire an independent expert to decide what is will really cost to fix the problems.

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