Daily Development for Friday, February 21, 2003

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

VENDOR/PURCHASER; MERGER BY DEED: Under merger by deed doctrine, purchase agreement for sale of residential home merged into general warranty deed at closing; therefore, purchasers could not, pursuant to the purchase agreement, seek recovery of insurance proceeds from vendor's insurer due to hail damage that occurred before offer to purchase was made.

Warner v. Estate of Allen, 776 N.E.2d 422 (Ind.App. 2002).

On May 18, 2000, a hailstorm caused extensive damage to the slate roof of a house that Elaine Fuller ("Fuller") inherited from her mother, Virginia Allen ("Allen"). On June 10, 2000, Fuller sold the house to the Warners and the sale closed on June 30, 2000. The purchase agreement provided that risk of loss by damage or destruction to the property prior to the closing would be borne by Seller. In addition, in the event any damage or destruction was not repaired prior to closing, Buyer had the option to terminate the agreement or elect to close the transaction and recover Seller's insurance proceeds from such damage or destruction through an assignment.

The purchase agreement also provided that Seller would maintain the property in its same condition until delivered to Buyer, and Buyer had the right to inspect the property prior to closing.

After the closing, the Warners noticed the roof damage and contacted both Fuller and United Farm Family Mutual Insurance Company ("United"). On the day of the hailstorm, the house was insured by United under a policy originally purchased by Allen. Fuller terminated the policy after the sale of the house closed. United determined that the damage was covered by the policy and issued a check to both the Warners and Fuller. On November 17, 2000, the Warners filed a claim against Allen's Estate for damage to their residence and/or the proceeds of the insurance check.

The Estate denied the claim and filed a motion for summary judgment in 2001 against the Warners and United. The trial court granted the motion. The trial court determined there was no dispute of material fact. On May 18, 2000, the date of the storm, the Warners had no insurable interest in the property. The United insurance policy was a contract with the insured person, not a policy on the property itself. The insured person after Allen's death was Fuller. Therefore, the Warners had no interest in the insurance proceeds. The damage to the property occurred before they purchased it and before they had signed the agreement to purchase the property.

On appeal: held: Affirmed: . The Court of Appeal's decision was based on a different theory than that of the trial court. The appellate court noted that the Warners contended that they were entitled to the proceeds of the insurance policy pursuant to the purchase agreement. The Court held that the purchase agreement had no legal effect under the doctrine of merger by deed. Under this doctrine, any existing contracts between the parties, if not carried forward into the deed, are extinguished and no action can lie on such contracts. In this case, the evidence showed that the Estate presented a general warranty deed to the Warners at closing. Consequently, the purchase agreement merged into the deed at closing. As a matter of law, the Court held that the Warners were not entitled to seek recovery of the insurance proceeds under the purchase agreement.

Comment 1: The editor has railed before about the overly mechanical application of the concept of merger. This seems to be Exhibit A.

Properly applied, merger is no more than the logical notion that a buyer who knows about certain defects in the property and closes anyway without raising a fuss is deemed to have waived any objection. The concept applies only to those items that are central to the contract. Normally, "ancillary" agreements are not affected by the merger doctrine because it is logical that a buyer would close even if the buyer still had some claim on the basis of such agreements. Finally, the agreement should be one that normally would not "survive the closing." Of course, cautious lawyers often stipulate that certain parts of the contract expressly survive the closing, but logically those elements of the contract that likely will be performed after closing certainly would not be deemed waived if not performed at time of closing.

The most common application of merger is to title defects. It is appropriate in such cases because minor title defects often arise upon inspection after the contract is signed, and when a buyer closes with knowledge of these defects it is proper to assume that the buyer doesn't deem the title problem to be worth haggling over.

Comment 2 There are two critical elements missing from this case that are critical to the proper application of merger. First, it was stipulated that neither the buyer nor the seller knew of the damages to the roof prior to the closing. As the property was in an estate, chances are that it was not occupied. Of course, one could conclude that a buyer has a duty to fully and completely examine a property prior to closing, but this is both an impractical rule and one that ought not to be applied in a case like this, where the consequence of the ruling is that the seller gets a windfall and the buyer gets a non-conforming house.

A second missing element is the existence of an agreement that must be performed prior to closing. Although it might be concluded that the buyer had waived any right to rescind if it closed without objecting to a faulty condition, there is no reason to assume that the buyer would not still be entitled to the insurance assignment. The rights to the insurance would arise when the insurance was later paid, and the seller was not in breach of the obligation to pay the proceeds over to the buyer prior to that time. Consequently, if the provision had not been breached, it was not waived, and there was no merger.

Comment 3: One might also consider whether the agreement concerning assignment of insurance proceeds should be regarded as "ancillary" to the central purpose of the contract. Even though the buyer might be barred from asking to rescind, it might still be appropriate to permit the buyer to get the insurance proceeds. The editor shies away from concluding that the insurance agreement is ancillary because the language of the agreement could apply to really substantial insurance recoveries when, for instance, the building had burned down.

Comment 4: The mechanical application of the merger doctrine has caused many problems in the past by judges who, after much effort, finally mastered the "rule of law" merger applied in the common law estates part of their property class, and have difficulty differentiating that concept from modern merger principles, which are directed much more at the proper interpretation of the parties' intent. That's why the editor has proposed that we pick another name for the concept so that the judges won't be so confused. The editor has suggested "Bubba," but other names might also do as well, since Bubba now sounds sort of ex-presidential.

Comment 5: Even renaming the concept would have helped the Indiana court here, however. It just got everything wrong. A terrible decision, since it not only misapplies the law but does it to carry out a patent injustice (albeit only about money.)