DIRT DEVELOPMENT for February 5, 2009
Daniel B. Bogart Donley and Marjorie Bollinger Chair in Real Estate Law
Chapman University School of Law,
This is a revised version of the Development distributed on February 8. The author (Danny Bogart) noticed errors in the paragraph describing the procedural disposition of the case, and apologizes for any confusion.
VENDOR/PURCHASER; SPECIFIC PERFORMANCE; REQUIREMENT THAT PURCHASER DEMONSTRATE IT IS "READY, WILLING AND ABLE:" Purchaser is not entitled to specific performance remedy, even where the contract expressly permitted purchaser to "seek to enforce" transaction, where purchaser failed to prove that he was ready, willing and able to close.
DiGiuseppe v. Lawler, 269 S.W. 3d 588 (Texas, 2008)
Lawler owned a large tract of valuable land in Frisco, Texas, and seemed eager to sell it. In October of 1998, Lawler entered into a contract to sell 756 acres at $40,000 an acre to DiGiuseppe. DiGiuseppe intended to develop the parcel. Closing was contingent on successful rezoning of the property to meet DiGiuseppe's development needs, and earnest money was to be deposited in three stages: 1) $100,000 at the signing of the contract, 2) $100,000 when the zoning plan was submitted to the city, and finally 3) $400,000 when the zoning commission approved the developer's plan. The contract limited the parties' remedies upon default. Lawler sole remedy upon purchaser's default was to keep the earnest money as liquidated damages. DiGiuseppe was permitted either to terminate the contract and receive a return of its earnest money or to "seek to enforce" the contract.
The zoning commission ultimately approved new zoning for the property, but to the consternation of all, it did not approve the plan as submitted by the developer.
The case opinion suggests that the approved plan "satisfied" DiGiuseppe, but because the plan was not approved as submitted, DiGiuseppe took the position that the requirement for deposit of the final $400,000 in earnest money was not met. Lawler took the opposite position, and viewed the failure of DiGiuseppe to complete the deposit as a breach of the contract. DiGiuseppe responded that it would move forward towards closing. (In fact, the seller went so far as to enter into a new contract for sale of the property with a third party, but this deal apparently fell through. According to the court, that transaction is also the subject of litigation, although the opinion says little else on the subject.)
Lawler filed suit claiming DiGiuseppe breached the purchase contract, and requesting that the court declare the contract terminated, damages and quiet title. (DiGiuseppe had recorded the purchase contract, necessitating Lawler's request for quiet title.) DiGiuseppe counterclaimed that Lawler was the breaching party. DiGiuseppe alleged that Lawler breached the duty of good faith and that Lawler's actions constituted statutory fraud. DiGiuseppe demanded damages, specific performance, and depending on the findings of the court, quantum meruit.
The parties' claims were submitted as specific questions to the jury, which sided with the purchaser, DiGiuseppe. The jury determined that Lawler breached the contract and that DiGiuseppe complied with the contract. The jury awarded DiGiuseppe $295,696.93 in damages, and the court ordered specific performance.
On appeal, the Court of Appeals held that the purchaser failed to meet the requirements of specific performance, and specifically, that DiGiuseppe's failure to obtain the necessary jury instruction was not cured by a provision in the contract permitting DiGiuseppe to specifically enforce the contract.
The Texas Supreme Court affirmed the District Court's holding on specific performance. (The court reversed the Court of Appeals on a separate issue of whether the purchaser waived a request for a refund of earnest money for appellate review.)
The purchaser suggested at trial that certain unnamed builders were willing to fund its purchase, but purchaser had no written commitment. It is pretty clear from the facts that the purchaser did not really have the money on hand to close the deal. The primary issues in the case therefore concern the requirement that the purchaser be ready, willing and able to close the contract to obtain specific performance. The other primary issue involved the purchaser's demand for return of earnest money deposit. However, the author will focus on specific enforcement of the contract.
The seller's primary task is to deliver title, and the purchaser's is to deliver the purchase price. A seller should not be asked to specifically perform a contract if the purchaser cannot show that, at closing, it attempted to tender the money. The majority in DiGiuseppe correctly notes, however, that this is sometimes a "futile" act of the purchaser. On occasion, the seller will repudiate the contract in advance of closing. In that instance, it is not necessary for the purchaser to actually tender the purchaser price to the seller.
But as the court explains that this does not relieve the purchaser from showing that he would have been in a position to come up with the money, if the seller had in fact closed. As the majority explains, when the seller walks away prior to closing, "a plaintiff seeking specific performance is excused from tendering performance pre suit and may simply plead that performance would have been tendered but for the defendant's breach or repudiation."
Unfortunately for the purchaser, his testimony at trial indicated that he did not personally have the money to close the contract, did not have investors or buyers for the property who could close, had no written agreement or commitment with builders or investors to take the property. In fact, DiGiuseppe indicated in his testimony that he actually avoided contracts, stating "That's not the way I do business." Instead, the purchaser relied on oral promises. In another exchange with opposing counsel at trial, Mr. DiGiuseppe was asked "When you sent the letter that said you were ready, willing and able to close the contract, you, individually, couldn't close that contract could you?" Mr. DiGiuseppe answered that he "individually, never intended to close the contract" and did not have the personal funds to do so.
As a result, the court concluded that the ability of DiGiuseppe to close was a contested fact, and should have been submitted specifically to the jury.
In response, DiGiuseppe argued that the language in the contract permitting him to seek to enforce the contract if the Lawler breached trumped the failure to obtain a specific finding from the jury. In other words, DiGiuseppe argued that both parties agreed in advance that the purchaser would be entitled to specific performance.
The majority and dissent each cite Burford v. Pounders, 145 Tex. 460, 199 S.W. 2d 141 (1947), but each sees the case differently. In Burford, Burford leased land from Beaird with an option to purchase for $1000 less rent paid. Beaird, the landlord ignored the option and sold the land prior to expiration of the lease. At the time of the sale to the third person, Burford did not have the money necessary to buy the property. Buford did not know about the sale to the third person. However, the third person to whom Beaird sold the property knew about Burford and his lease.
Two months before expiration of the lease, and operating on the assumption that he could buy the optioned property, Burford tendered the correct amount of money to Beaird. Beaird then told Burford that the property was sold. The court held for Burford and specifically enforced the contract. (The fact that the property had been sold was not an issue; the court held in Buford that the third party had notice of the lease and the tenant's possession and therefore was not an innocent purchaser.)
According to the majority in the instant case, Burford "makes two things clear: (1) pleading an offer to perform is in lieu of tender; and (2) adducing proof that a plaintiff was ready, willing and able to perform, as required by the pertinent authorities constitutes an entirely separate requirement from tender." The dissent sees things quite differently. Citing Burford, the dissent states "But it has likewise been a long-standing Texas rule that a non-breaching plaintiff seeking specific performance need only make such a showing by offering to perform in his pleadings." According to the dissent, in DiGiuseppe the majority departs from a 100 year Texas rule that has not "required a non breaching buyer to make the "useless and idle" showing of proof of ability to complete a transaction when the seller's repudiation of the contract excused the buyer from tendering the purchase price."
The dissent argued that the non breaching purchaser, DiGiuseppe, met its responsibility by offering to perform in his trial pleadings rather that affirmatively proving its financial capability at the time set for closing. The dissent's primary argument is that whether the "buyer is ready, willing and able to perform at the closing time is irrelevant. Although the Court does not say what the trial court is supposed to do with such a finding, presumably it would order a date for the transaction to close within a reasonable time. But what if the buyer was able to close on the original contract date and is unable to close on the court appointed date? The whole exercise is rendered meaningless. The only thing that makes sense is to do precisely what the trial court did in this case, which is to set a closing date within a reasonable period of time after a finding that the seller breached."
Comment 1: This is a case of two parties behaving badly. The seller wants a $600,000 windfall. True, the purchaser did not prove at trial that it was ready, willing and able. But what would have happened if the transaction went to closing, and the purchaser was not able to tender the remaining purchases price? Seller would still have a breach of contract claim, and it would then retain the liquidated damages. The seller declared the breach precisely because it could take the deposit, then resell. The last thing seller wanted was for the purchaser to ruin the windfall by actually buying the property. Similarly, the purchaser is unsympathetic. Purchaser signed a contract with only a glimmer of finding the resources to close the deal. Yet here it stands at the door of equity demanding entrance.
Comment 2: The contract provides that, as a remedy, purchaser may "seek to enforce" the contract. The majority is correct that this is not the language one associates with an automatic right. A purchaser can always seek to enforce a contract, unless the contract specifies otherwise. The term "seeks to enforce" suggests that the purchaser must demonstrate that it fully meets the elements of the remedy. One seeks enlightenment; one does not have enlightenment handed to him. It is the same with this equitable remedy. A purchaser seeks to enforce, but the court chooses not hand it to the purchaser without proving the elements.
Comment 3: It seems to the author that the majority opinion is not so much a departure from Texas law as it is a careful parsing of precedent. And it seems to accord with conventional wisdom. James C. Smith, Friedman on Contracts and Conveyances in Real Property (7th ed.), Section 7:2.2, which states "Tender by purchaser is excused after seller has repudiated the contract but the purchaser, suing for specific performance, must nevertheless prove he was ready, willing, and able to perform under the contract. A New York court, however, has applied the rule that if time is not of the essence, the purchaser must make time of the essence by notifying the seller of a new closing date prior to commencing an action for specific performance."
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