[FINANCE] DD 11/2/06 Surprise!! Land sale assignee stuck with assignor's debt and personal service obligations.

Daily Development for Thursday, November 2, 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
dirt@umkc.edu

VENDOR/PURCHASER; ASSIGNMENT OF BUYER’S RIGHTS: Assignment of contract to purchase real estate need not satisfy Statute of Frauds, and conduct of assignee in carrying out closing may indicate assignee’s assent to the assignment and all terms of the assigned contract, even though assignee has never read the original contract.

DeVenney v. Hill, 914 So. 2d 106 (Ala. 2006)

Eason contracted with Sellers to buy certain land for $250,000.  As additional consideration, Eason verbally agreed that he would perform some extensive excavation on certain land retained by Sellers.  Prior to closing, Eason sought to work out a financing deal with Hill (and a partner).  After some negotiation over the financing, Eason and Hill agreed that Hill would buy the property directly from the Seller for $200,000 and that Eason later would acquire the property from Hill for $275,000. 

It is not clear whether Hill understood that Eason had agreed to pay $250,000 for the property, but, since the parties had negotiated over financing the purchase, it is likely that Hill did so understand.  Subsequent events suggest also that Hill understood that there was a contract with Sellers for a total price higher than Hill was paying.  (The fact that the later “buy out” deal with Eason likely was a disguised mortgage transaction is not relevant to the outcome here, but may cause Hill problems later.)  Hill had financed Eason’s project before, and perhaps they customarily undertook bizarre informal arrangements such as this.  In real estate, nothing is all that strange.

After Eason made the deal with Hill, Eason returned to the Sellers and renegotiated the deal, offering to pay $50,000 extra - for a total of $300,000, if he would be permitted to pay $150,000 of the price a month following the closing.  Sellers agreed, but apparently the contract never was revised to reflect the new price or terms.

The closing must have been an event to behold.  There was a closing agent, who, it appears, scrupulously explained to all parties the events that were taking place, and delivered financial summaries that made them clear as well.  The closing was attended by Hill and his partner, Eason, and the Sellers.  Hill brought the $200,000, Eason brought two checks - one for $50,000 and one for $150,000.  Both of Eason’s checks were postdated a month. 

While all parties were in the room, Sellers noted that the contract did not reflect the fact that Eason (as buyer) had agreed to excavate certain retained land for Sellers.  Eason wrote  at the bottom of the contract that “David Eason agrees to excavate [setting forth details of the work.],” and Sellers and Eason signed below this addition.  Then Eason wrote on the side of the contract “Contract assigned to . . . Hill.”  Hill and his partner, although present, claimed that they never saw the contract until later.

The closing agent produced a statement that showed that the total contract price was $250,000.  Sellers did not object that this misstated the price that they had recently revised with Eason.  The Sellers’ closing statement showed that Eason paid $150,000 in earnest money (through the post dated check) and that Sellers were making a purchase money loan of $150,000 and were taking away $100,000 in cash.  The closing agent agreed to hold the two post dated checks and to deliver them to Sellers in one month.  Note that the closing agent did not account in the statements for the additional $50,000 check from Eason, although he was aware of it and did hold it along with the $150,000 check..

Hill, as buyer, received a statement that showed that buyer paid a total of $350,000 (Hill’s $200,000 cash and Eason’s $150,000 check).  The statement also reflected that Eason was walking out the door with $100,000 in cash - the difference between the $100,000 received by Sellers and Hill’s $200,000 and that there was a “loan” of $200,000 to someone, presumably reflected the two postdated checks.  The statement was not identify the borrower or the lender of this “loan.”

In addition to the statements, the closing agent expressly told everyone that Eason, a non-party to the closing, was walking away with $100,000, and no one objected.

The closing agent delivered the checks a month later, and, of course, they bounced right through the roof.   Eason never did the promised excavation either, and apparently was not in a position to return any money to anyone.  He was a defendant in the lawsuit, and judgments were awarded against him.  But the significant battle was that between Sellers and Hill (and his partner). 

Hill claimed, of course, that all he did was pay $200,000 to Sellers and receive a deed, and had not relationship to all the other promises made by Eason.  He pointed out that he never saw the contract until it appeared attached to Seller’s lawsuit.  And he argued that the Statute of Frauds requires a writing for an assignment of a real estate contract to be valid.

The court here ruled, however, that Alabama law does not require a writing for an valid assignment of a written contract.  Further, even if Hill never read the the contract between Eason and Sellers,  Hill had knowledge of, and that it was this contract that brought the Sellers to the table.  Further, the economics of the deal were disclosed, more or less, in the closing statement that Hill received.  At least Hill had constructive knowledge of the contents of the agreement.  Thus, Hill’s conduct in carrying out the closing and accepting the deed constituted Hill’s agreement to the assignment and the delegation of duties contained in the contract.   These duties including the obligation to pay $250,000 for the land and to carry out the excavation. 

The court concluded that the agreement to pay an additional $50,000 for a one month deferral of a $150,000 of the original price was required to be in writing under the Statute of Frauds, and that Sellers had not shown that Hill otherwise was bound by that agreement.  Thus, Hill’s obligation was $250,000, not $300,000. 

As to the excavation obligation, Hill had argued that this clearly was a personal undertaking by Eason, as the contract indicated that Eason would do the excavation.  But the court said that Eason was identified elsewhere in the agreement as the buyer and assignor, and that excavation of this sort did not require any exceptional skill.  Personal service contracts that do not involve unique skills are assignable.  (The excavation obligation in fact, was a substantial economic burden.)

Hill argued that he paid $200,000 to the Sellers and that, if any “loan” was made, it was made by the Sellers to Eason.   Note that the postdated checks were made out to the Sellers.  But the court relied upon the buyer’s closing statement, which showed the money paid to Eason.  There was no parallel entry on the seller’s closing statement.  Thus, the court concluded Hill loaned the $100,000 to Eason, and not the Sellers.  And Sellers permitted a deferral of $150,000 of the purchase price to Hill, and he was obligated to pay it now, despite his payment of $200,000 at the closing.

Hill had borrowed the original $200,000 he brought to the closing, and had given a mortgage to Bank on the acquired property to secure that loan.  Sellers argued that the Hill’s obligation to pay the $150,000 balance of the purchase price was secured by a vendor’s lien that took priority over the Bank’s mortgage.  They lost on this one.

The court acknowledged that an implied vendor’s lien arises when there is a sale of real property and an unsecured portion of the purchase money remains unpaid.  But the purchaser may show that any such implied lien was waived.  Waiver can be shown by (1) the seller’s affirmative intention; (2) by seller’s reliance, not on land, but on substituted, independent security; (3) by reliance on the personal responsibility of the buyer.

In this case, it was clear that the sellers knew that they were extending $150,000 of the purchase obligation for a month, and that they were relying upon Eason to pay that money.  Other authority supported the notion that a seller’s acceptance of third party checks constitutes a waiver of an implied vendor’s lien.  Consequently, although, if Eason should fail to pay, Hill was obligated to perform, there was reliance on Eason personally, and no expectation of a lien against the land in Hill’s hands. The court never got to the argument that the Bank likely was a bona fide purchaser for value, thus priming any vendor’s lien in any event.

Comment 1: Of course, the case is complex, and the editor apologizes for the headache caused by plowing through the facts.  But the lessons here are useful.  Assignments need not be in writing, and acceptance of the benefit of the contract binds the assignee to terms of the contract of which he may have no actual knowledge, including some personal service items.  The waiver of the vendor’s lien is also an important discussion, although it is not likely to do Hill and his partner much good in the end, unless the costs of this litigation have exhausted all their other resources and they are judgment proof.

Comment 2: The editor acknowledges that it seems odd that the court found that the $150,000 deferred price represented on the one hand a loan from Hill to Eason, so that Hill was still obligated to Sellers to pay that amount, while at the same time the court concluded that Seller “relied” upon Eason’s credit as to that amount, thus waiving a vendor’s lien.  But these do appear  appear to be the court’s conclusions.

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