Estate Finance Notes
We left off talking about part performance. We mentioned the three traditional elements listed as part performance. But only the first one is really performance. The part performance in Roundy v. Waner was that the Waners had made improvements to the property, made some payments, and perhaps taken possession. Did the Roundys ever really intend to sell the property? Why do we give specific performance? That’s kind of an anomaly, at least if the intent is to prevent unjust enrichment. Also, did Mr. Roundy agree to any of this stuff? It seems like only Mrs. Roundy was in on it. How does the husband lose his interest in the house, unless Mrs. Roundy is his agent?
Braunstein has two problems with this case: (1) where you have a family or neighbor relationship, it may seem inappropriate to demand a writing in the way you would in a commercial transaction. That may justify some exceptions to the statute of frauds in those kinds of transactions, although that’s not what the court talks about. (2) The judges seem confident that there was a contract made, but was there one really? Did the parties contemplate the consequences of a contract? Wherever you have an exception to the statute of frauds based on acts, you must remember that acts are inherently ambiguous. You never really know exactly why people do what they do.
Can a vendor use the part performance doctrine to enforce an oral contract against a purchaser? The Waners paid some money and made some improvements. Is that enough to set up an estoppel against them? If they’re willing to walk away from the deal, is there any sense in which they’ve been unjustly enriched? Not really. There’s no basis for equitably estopping the Waners from denying the contract. If they want to deny it, you can argue that they should be able to. Could you prove acts of reliance on behalf of the vendor? In this particular case, it looks like it only goes one way. What if you use the evidentiary theory of part performance? Wouldn’t you have to say yes? Aren’t the Waners’ acts pretty good evidence that there was a contract? Isn’t it evidence that’s as good as a writing? So it depends on which theory you hang your hat on. We ask: “Do we have evidence that’s as good as a writing?” If the answer is yes, we enforce the contract.
are also other acts that could potentially constitute part performance, but
they’re just not mentioned as often.
Lots of acts could satisfy either the evidentiary or unjust enrichment
rationale that would lead you to conclude that there’s a contract. Braunstein is persuaded by these three acts
In the end, Braunstein thinks we should get rid of the statute of frauds. When we enforce it, we’re frustrating the intention of the parties. We if say there was a contract but it’s not enforceable because it doesn’t meet the formal requirement of a writing, then we frustrate the parties’ intentions because we think it’s very important for the parties to put their agreement in writing. Braunstein thinks that there are enough reasons to put agreements in writing such that we won’t cause any contracts that were previously written to be oral. It’s debatable whether the statute of frauds adds anything; but we know it subtracts. If you’re going to have the statute of frauds, why have the part performance exception at all, then? If you’re going to have it, why not just say “we have the statute of frauds and will enforce it”? The law is of two minds on the statute of frauds.
Buyer’s remedies and seller’s remedies are basically mirror images of each other. That seems logical: in the event of a breach they should have essentially the same remedies. The buyer’s first remedy is specific performance, which means requiring the parties to do whatever they agreed to do. The essential requirement for specific performance is that the buyer cannot be in breach of the contract. As long as the buyer has performed all the buyer’s obligations under the contract and as long as the seller is capable of conveying the property under the contract, specific performance will be awarded. But what if the seller has sold to someone else who is a good faith purchaser for value without notice? At that point, the seller no longer owns the property and can’t convey it. The person who owes the seller isn’t obligated to convey it. If the seller says: “I promise to sell you my 100-acre farm”, and it turns out that the farm is only 47 acres, then there’s no specific performance (except specific performance with abatement, about which more later) because they can’t legally convey what they promised to.
The next remedy is damages: the benefit of the bargain. That means, for the buyer, the market price (on the date the closing should have occurred) minus the contract price. That usually won’t yield much money because fair market value is just what a willing buyer and seller will agree to when reasonably well informed and not under compulsion. Compensatory damages are unlikely to lead to a large recovery except in exception circumstances. When we’re talking about marketing contracts, it’s unlikely that there will be a big fluctuation in the value of the property during the short life of the contract. These damages are also difficult to ascertain. The market price and date of breach will require expert testimony because you must bring in an appraiser to say that the buyer had a really good deal. Opinion testimony is less reliable than evidence from an actual market transaction.
Next up, we have unilateral rescission with restitution. This isn’t mutual rescission. Instead, the breach gives the buyer the choice to declare the contract at an end. The buyer would be entitled to recover whatever earnest money deposit had been made, with interest, and out-of-pocket costs specifically related to the transaction. But the damages are always limited by Hadley v. Baxendale. But costs reasonably within the contemplation of the parties and that are site-specific should be recoverable as a result of rescission.
The hardest and least important remedy is foreclosure of the vendee’s lien. This exists only in some states. The vendee has parted with money. In the meantime, the vendor not only breaches, but goes bankrupt. How does the vendee get the money back from the vendor? The vendee’s lien is a way to get the deposit back by having the property sold. The only time this has any relevance is when you have bankruptcy or insolvency. Otherwise, you just get a judgment against the vendor and go through the usual process to have the judgment enforced.
Sellers are traditionally also entitled to specific performance under certain circumstances. For the buyer, money damages are exactly the opposite. We assume a rising market and subtract the contract price minus the market price. The seller can also unilaterally rescind and retain the deposit. When we talk about these remedies as being comparable, is it really true that this is similar to the rescission right that the buyer has? Who ends up better off as a result of rescission? What does the buyer get? They only get back their own earnest money. But if the seller rescinds, the seller gets the buyer’s earnest money! The seller’s right of rescission is actually much better than the buyer’s right.
What if the deposit is greater than actual damages or there are no damages? What if the value of the property has increased, but for some reason the buyer has decided not to go through with the deal anyway? Does the seller still get to keep the deposit? It wouldn’t seem fair for them to, but they get to keep the deposit anyway. This does strike Braunstein as unfair. He would try to write the contract to change the remedies if possible to put the buyer and seller on an equal footing. He also thinks that the seller shouldn’t get to keep the buyer’s deposit if the seller wasn’t injured. The only potential benefit is that you don’t have to go through a whole trial if the seller just wants to keep the deposit. That doesn’t necessarily mean that if you’re a buyer with a small deposit that you can walk away from the deal for cheap: you must check your contract.
The seller also has a vendor lien. This may have no practical importance, though it has some theoretical importance, especially when it comes to equitable conversion. When you enter a deal, the seller has legal and equitable title. But once you enter into a contract, the buyer has equitable title and the seller has only “bare” legal title. When the buyer breaches, you have a situation where the equitable title is still in the buyer and there needs to be some way to reclaim it and get it back to the seller. The foreclosure of the vendor’s lien is the way that it’s done. Braunstein doesn’t know of any circumstance where this would actually come up.
Donovan v. Bachstadt
What is the measure of damages when the vendor is unable to convey because his title is not marketable? Was this an intentional or unintentional breach of contract? Braunstein says that it’s irrelevant. The English rule, followed by about half of American jurisdictions, is that even though you’re entitled to benefit of the bargain damages generally, you’re not entitled to such damages in this one area. How come? How do we justify this? You might have a bad title for reasons you don’t appreciate. Maybe you gave someone an easement, servitude, or real covenant that rendered your title unmarketable, but you didn’t really understand that this was happening. The idea is that if people don’t get it, you shouldn’t punish them for it.
The court points out that this is a default rule only, meaning that the parties can contract around it. There’s no public policy here; it’s just a matter of how the court will interpret the agreement if the parties don’t specific otherwise. Who has the burden of brining up the issue in negotiations? The court says that the seller has this burden if the seller wants to be protected in the event that he doesn’t have marketable title. Since the seller knows best about his own title, you can make a strong argument that this is where the burden ought to be.
What about compensatory damages for the vendee? It’s usually the difference between the market price and contract price on the date of breach. With respect to the buyer, that rule makes sense. But when it comes to the seller, the rule about the date on which you fix damages is more problematic. The court says that it may not always be measured that way. When you have a buyer who has turned around and resold the property, the damages may be measured by actual lost profits. The damages may also include lost opportunities, particularly improvements made by the vendee while in possession. That’s a pretty open-ended contingent liability for the vendor as well. What does the court do with the interest rate here? Rates were high and rising rapidly when this case was decided. It was 1982. It was expensive to borrow because lenders pay out uninflated dollars and get inflated dollars back.
The last paragraph of this case says that what you have to do is not look at just the value of the house, but also the value of the house with the added benefit of a low-interest mortgage attached to it. Then you subtract from that the purchase price specified in the contract.