Daily Development forWednesday, December 1, 1999

Daily Development for Friday, December 2, 1999

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

Thanks again to H.E. Peterson for this one. DIRT rarely reports trial court proceedings other than Bankruptcy or Tax Court matters, but this case struck the editor as provocative enough (on a slow news day) for a posting. Note that there are two reports of two equally interesting parts of the case.

STATUTE OF FRAUDS; EXECUTION: Execution by agent of party to be bound is not sufficient to satisfy the Statute of Frauds when the identity of the party to be bound is not disclosed, even though the fact of agency is disclosed..

Raj Acquisition Corp. v. Atamanu, Sup. Ct. N.Y. QDS:22701821 (12/1/99) http://www.nylj.com/decisions/99/12/120199b4.htm (Also discussed under the heading: "Statute of Frauds; Part Performance."

The agreement in question consisted of a one page letter. The letter stated that Mr. Kaplan (in fact the owner's lawyer) has agreed to sell the Premises for a purchase price of $2,250,000, all cash, with a "quick closing," and a real estate commission "to be negotiated." These are the only terms specifically referred to in the letter. The letter further states that the purchaser, who is not identified, is "ready, willing and able to proceed to contract immediately." Finally, the letter is signed by the Seller (not the Seller's lawyer) and Raphael, a real estate broker, on behalf of an unidentified purchaser. Although the court does not say so specifically, apparently the property was adequately identified, as no issue was raised relating to that.

Seller later reneged and Buyers sought specific performance. The court noted that on its face the agreement stated that the parties would "proceed to contract," and therefore the contract was not intended to be the final statement of the parties' agreement. Further, it cited case law that the quality of the title, the exact date of closing, and the status of the tenants are all essential terms that must be put in writing in order to satisfy the Statute of Frauds in New York.

But the court went further, perhaps because it was aware that a number of cases elsewhere have held letters of intent to be binding contracts when other terms can be filled in as "industry standards." Even so, the statement that the parties would close "quickly" probably was not enough, in any event, to warrant specific performance. But the court elected to hold further that that even if the letter was construed as a final and complete agreement, it would not be binding because the identity of the Buyer was not disclosed.

Note that the New York Statute of Frauds requires only that an instrument be executed by "the party to be charged or by his lawful agent thereunto authorized by writing." Because the party being charged in this case was the Seller in any event, and the Seller did sign the agreement, the court did not complain that the Buyer did not actually execute the agreement. The problem was that the agreement did not say who the Buyer was. New York case law gloss of the Statute states that the identity of the parties to the agreement is an essential element.

Comment: It is not an unusual practice for parties to contract to acquire property through "straw parties," in order to keep confidential the plans of the try buyer, such as where properties are being accumulated to form a larger parcel. Of course, with a cash sale agreement, a contract buyer presumably could always transfer the rights under the agreement to another party anyway. But the difference between the "straw party" situation and the instant case is that here the broker indicated that it specifically was not bound to perform and still did not disclose the principal. There would be no way for the Seller to be aware, at least on the basis of the writing, to whom to tender performance or who to sue if performance was not tendered. The case is correct, and a caution to parties who become too loose in making deals for others.

STATUTE OF FRAUDS; PART PERFORMANCE: Monies spent on mortgage loan application do not constitute "part performance" to take a real estate sale agreement out of the Statute of Frauds because the expenses are not "specifically referrable" to the transaction.

Raj Acquisition Corp. v. Atamanu, Sup. Ct. N.Y. QDS:22701821 (12/1/99) http://www.nylj.com/decisions/99/12/120199b4.htm (Also discussed under the heading: "Statute of Frauds; Execution."

The case involved a commercial premises that was the subject of a memorandum letter of intent for a $2.25 million sale. The court held that the memorandum did not satisfy the Statute of Frauds, but the Buyers arged that it nevertheless had relied upon the Seller's agreement to sell and had undertaken part performance of the agreement. The Buyers paid a nonrefundable $18,000 deposit to secure a mortgage loan to acquire the premises and also became liable for costs of a title search. Buyers claimed that these expenses were done in reliance upon Seller's express agreement to sell, albeit a verbal agreement, and that therefore the Seller should be estopped from denying its obligation.

The court held that New York authority was to the effect that estoppel cannot arise on the basis of expenditures that are not " unequivocally referrable to an agreement." It noted that courts have held that title and loan application expenses can be characterized as expenses undertaken in preparation to make a deal, and not in reliance upon a deal that has been made. Consequently, these expenditures were insufficient to take the contract out of the Statute.

Comment 1: Many jurisdictions recognize two separate concepts in this area: equitable estoppel and the doctrine of "part performance." Although related, there are important differences. Equitable estoppel is reliance upon a party's assertions to the detriment of the relying party. The remedy may include granting enforcement of an agreement, but may simply be some lesser remedy, such as reimbursement of the expenses. It all depends upon the equities.

It would seem that a Buyer ought to be permitted to demonstrate that it expended monies to obtain a loan committment specifically because of the promise of a Seller to sell, and if the Buyer shows this, and also shows that the Seller reneged on the agreement, the Buyer should have some remedy.

Comment 2: In this case, however, the Buyer was seeking specific performance of the contract, and was attempting to show that there had been part performance of the contract. Although "part performance" within the meaning of this doctrine indeed must be in reliance upon the understanding that a contract exists, it must be "contractual conduct." The contract did not require the Buyer to obtain a mortgage. Nor, presumably, did it require Buyer to expend monies on a title search. Even if we assume that the Buyer chose to do these things because Buyer thought it had a contract, it was not partially performing the contract. The authorities cited by the New York court are correct in refusing to recognize this kind of performance as the kind of conduct that satisfies the part performance agreement, but this is so because the conduct is not the carrying out of the contract, not because it is not done in reliance upon a good faith belief that a deal has been struck.

Conduct could be done in reliance on a good faith understanding that a contract exists, and still not constitute the type of "part performance" that justifies courts in concluding that there is sufficient evidence that the parties really intended a contract to set aside the normal requirement of a writing.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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