Daily Development for Wednesday, October 22, 2008
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

OPTIONS; REFUSAL RIGHTS; GIFTS: While a transfer of property for less than fair market value is not a gift, and can be a “sale” triggering a refusal right, the offer to carry out such a purchase will not satisfy the “bona fide offer” test typically appearing in such agreements if the offeror is aware that he is paying less than fair market value.

Schroeder v. Duenke, ___ S.W.3d ___, 2008 Westlaw 3844741 (Mo. App.  8/19/08). 

In August 1980, certain individuals (“Sellers”) conveyed title to a five-acre parcel of land to Harold and Eleanor Duenke by general warranty deeds.  That parcel was carved out of and contiguous with land retained by the appellants.  Eight days after the conveyance, the Duenkes granted the Sellers the right of first refusal to purchase the tract, which was recorded along with the warranty deeds in September 1980.  The Duenkes lived on the property until 1996, at which time they conveyed the property to their son (“Son”) for $85,000 ($60,000 of which was borrowed).  An appraisal completed in 1996 valued the property at $125,000. 

Several years later, Son listed the property on the open market for $250,000.  One of the Sellers noticed a “for sale” sign, which prompted him to check the public records and discover the conveyance between the Duenkes and Son.  During the trial, the Sellers contended they “would have been able and willing to purchase the Property on the same terms,” had they been aware of the 1996 transfer to Son.  The Sellers sued for specific performance of the right of first refusal and quiet title.  At trial, the court found that the 1996 transfer to Son did not trigger the right of first refusal because it was “an “intra-familial transfer” akin to a gift, and [] was not based on a ‘bona fide offer’ and ‘sale’ because (1) the Property was not listed for sale on the open market; (2) [the Duenkes] accepted whatever [Son] could afford; and (3) they accepted a price that was below fair market value so as to keep the Property in the family.”  Sellers appealed.

On the issue of whether the transfer was akin to a gift, the Missouri Court of Appeals first noted the Missouri principle that “a transfer of property by gift from one family member to another does not trigger a right of first refusal.”  However, the Missouri Supreme Court has defined an inter vivos gift as “a voluntary transfer of property by the owner to another, without any consideration or compensation as an incentive or motive for the transaction,” and “a voluntary and gratuitous assignment of something by one without compensation to another who takes it without valuable consideration.”  In light of that cited case law, the court held that the 1996 transfer to Son was not a gift, because (1) Son financed $60,000 of the purchase price, (2) Son paid $85,000 in consideration for the property to the Duenkes, and (3) the warranty deed executed in conjunction with the 1996 transfer to Son specifically stated it was in exchange for valuable consideration.  The court also distinguish
ed the case relied upon by the trial court in which a transferee received property from her mother by way of gift, with no consideration paid.

But this analysis did not get the optionees to where they wanted to be - the court did not conclude that the trial court should have granted optionees’ motion for summary judgment.  Rather, the court concluded that genuine issues of material fact remained regarding whether Son’s offer to pay the Duenkes $85,000 for the property was a “bona fide offer.”  With respect to this issue, the court noted that Missouri law does not require the property in question to be placed on the open market, and the fact that the parties intended to keep the property in the family has no bearing on the question.  But the court cited another element:  a bona fide offer must be based on fair market value, which is a determination ordinarily made by the finder of fact.  Here, the fact that the 1996 transfer to Son was at a price $40,000 less than the appraised value was not enough to establish that the price was not based on fair market value.  Accordingly, the case was remanded for submission of the que
stion of “bona fide” offer to the jury.

Comment 1: Typically the refusal right is triggered by a “sale” of the property, and a number of cases have dealt with the definition of “sale” to require that a price actually be paid.  But, like the instant case, these cases do not appear to contemplate that the “sale” in question be for fair value, only that value transfer as part of the bargain.  Cottrell v. Beard, 9 S.W.3d 568 (Ark. Ct. App. 2000) (the DD for 9/27/00) Note that in this case the court dealt primarily with whether the transfer could be excluded from the definition of sale because it was a “gift,” without really spending much time defining what was a “sale.” 

Compare (1) Park Station Limited Partnership, LLLP v Bosse, 378 Md. 122,  835 A. 2d 646 (Md. 2003) (The DIRT DD for 1/ 20/04) (Donation of property to a nonprofit foundation does not trigger refusal right even though a motivating factor might be the tax write-offs to be obtained from such donation, because transfer is not a “sale.”  (Citing other cases involving gifts from other jurisdictions also finding that the refusal right is not triggered) (2) Hartzheim v. Valley Land & Cattle Co., 62 Cal. Rptr. 3d 815 92007)  (The DIRT DD for 7/27/07) (A probate planning exchange of property, structured as a for value exchange, in which grandchildren of principles of LLC landlord/optionor trade their interests in other property for interests in property owned by LLC, does not trigger right of first refusal held by tenant of LLC in the property in which grandchildren have acquired their interest, but the refusal right is not destroyed and remains applicable to land in hands of grandchildren.

Comment 2: If the transfer was a “sale,” then how could the son’s agreement to purchase the property for $85,000 not be a “bona fide offer” as intended by the parties to the original agreement?  It certainly was appropriate to reverse summary judgment for the optionors, but was it really appropriate to conclude that there was a “genuine issue of material fact” requiring submission to the jury?  The problem may lie in the precedent, which the court concluded required that any offer be “based upon the fair market value.”  The court concluded that the son could afford to pay what he paid, and had an awareness of the value of the property, but may have paid less than the appraised value of the property, and that therefore his offer did not satisfy the “bona fide offer” test. 

The consequence of such an analysis is that optioners subject to rights of refusal phrased so as to require bona fide offers (which is very common language) can circumvent the right of refusal by selling for a lesser amount to persons to whom they owe some moral obligation or non-monetary consideration.  One assumes that the right of refusal remains in effect.  In this case, however, the optionees argued that they couldn’t afford to match the latest offer - $250,000 - and should have had a chance to match the son’s offer. 

Certainly an offer for more than the fair market value might not be bona fide, if the sole purpose is to force the optionees to either exercise their right or forfeit it.  But can the same be said for an under market right?  Perhaps it depends upon what the parties intended, or, better, how their counsel phrased their intent.

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