Justine Moreau, an associate with Bowie & Jensen LLC, provided the following summary of the recent opinion from the Court of Appeals on Pines Plaza Limited Partnership v. Berkley Trace, LLC et al.:
Earlier this year, the Maryland Court of Appeals decided Pines Plaza Limited Partnership v. Berkley Trace, LLC, The Hampton Company, Inc. and James P. Joyce, a case involving a contract to sell a shopping plaza that had been amended several times, adopting the following three rules in connection with real estate contracts:
1. Assignment of obligations: An assignment of a real estate contract follows a “non-delegation presumption” in which an assignment of an interest in a contract for the sale of realty by the purchaser is presumed NOT to include an assumption of the assignor’s obligations. In contrast, other areas of Maryland contract law use the opposite default rule and adhere to a delegation presumption, whereby obligations are presumed to be delegated in the assignment. For example, the UCC adopts delegation presumption for contracts involving the sale of goods: §2-210(5); assignment of contract ordinarily includes assumption of the assignor’s duties “delegation presumption”. (This is a default rule and can always be overridden by contract language).
2. Deadline for closing/ forfeiture of deposit: A failure to complete settlement of the transaction by the date set for closing in the contract does not result in the forfeiture of the purchaser’s deposit if the transaction is completed within a reasonable time after the deadline. The Court stated, “in the ordinary case of contract for the sale of land, even though a certain period of time is stipulated for its consummation, equity treats the provision as formal rather than essential and allows the purchaser who has suffered the period to elapse to make payment after the prescribed date, and to compel performance by the vendor notwithstanding the delay.” The delay must not be willful and must not harm the vendor. (This is merely a default and can always be overridden by contract language, such as a “time is of the essence clause”.)
3. Assignments/ defenses available: A party that asserts a claim as the assignee of a contract right against another party to the contract is generally subject to any defense, including recoupment, which the other party would have against the assignor. (Compare to #1 where the other party to the contract cannot affirmatively prosecute a claim against the assignee because the assignee had not assumed the assignor’s obligations under the contract).
The facts of this case leading to the above-stated rules are as follows:
In 1998, Pines Plaza Limited Partnership (“Pines”) sought to sell a shopping center located in Worcester County. Pines entered into an exclusive listing agreement with Crimmins Associates Real Estate (“Crimmins”). This listing remained in effect until 2002, but the plaza was never sold. In 2002, new owners took over Crimmins and Pines informed Crimmins that, although they would not renew any listings with the firm, Pines will honor the terms and conditions of the original listing should Crimmins find a real buyer.
In 2002, Crimmins told Pines that they found a buyer, Q-C Pines Plaza, LLC (“Q-C”), formed by James Quillen and Eric Chadwick . The initial proposal fell apart, but Quillen and Chadwick again pursued the purchase, and in 2003, Pines entered into a contract to sell the plaza to Q-C. The contract for sale was amended three times, these amendments and delays formed the basis for the litigation:
– Initial contract terms: Purchase price: $6 million; deposit $10,000.00; Closing deadline April 15, 2005; the contract also contained a provision in which Pines and Q-C both represented and warranted that no broker, other than one of the principals of Pines and one of the principals of Q-C was entitled to a commission. The contract also contained an indemnity provision that the purchaser shall indemnify and hold harmless from and against any claim of broker fee from Crimmins.
[An unforeseen issue emerged and Pines terminated the contract within the rescission period prior to the payment of the deposit.]
– First Amendment: To revive the sale, Quillen faxed Pines a First Amendment to Contract of Sale providing for reinstatement of the contract, payment of the non-refundable $10,000 deposit by Q-C and a closing deadline of June 30, 2003.
[The parties executed the First Amendment effective April 1, 2003, but the sale did not close on the appointed day.]
– Second Amendment: The Parties executed a Second Amendment to the Contract of Sale on January 5, 2004, providing that the deposit was forfeited and would not be applied to the purchase price; an additional $200,000 deposit was required from Q-C (to be applied to purchase price); and set a closing deadline of January 12, 2004. It also provided that the $200,000 deposit could be retained by Pines as liquidated damages if closing did not occur as agreed.
[To raise funds for the purchase price, Q-C recruited three investors: Berkley Trace, LLC, The Hampton Company, Inc. and James P. Joyce (collectively, the “Investors”). On January 9, 2004, Q-C assigned each of the Investors a 25% tenant-in-common interest “in and to the Contract for the shopping center” (the assignment also made reference to the 1st and 2nd amendments). Between January 7 and January 15, the Investors funded the $200,000 deposit and paid $3.1 million (via wire to settlement agent) toward the $6 million purchase price.]
– Attempted settlement: On January 12, 2004, Pines and Q-C executed closing documents, including the deed. Three days later, the $3.1 million wire was sent, but Q-C failed to provide the remainder of the purchase price and the closing did not conclude.
– Third Amendment: On January 29, 2004, Quillen, without informing the Investors, prepared a Third Amendment to the Contract of Sale. This amendment acknowledged that the closing documents had been executed, but declared the event a “nullity”, stating that the $200,000 deposit was forfeited and set a new closing date of March 1, 2004. Additionally, the amendment provided for forfeiture of the $3.1 million (paid by the Investors) if the closing not occur on that date.
– Settlement: the sale finally settled on March 1, 2004. The closing documents were re-dated as of March 1, 2004, the $200,000 deposit was not credited to the purchase price, and Crimmins never received their commission.
Crimmins sued Pines for payment of their commission ($196,666.66) and Pines filed a third-party claim seeking indemnification from Investors and Q-C per the indemnity provision in the contract of sale. The Circuit Court entered judgment against Pines and Pine’s third-party claim was dismissed without prejudice. Pines satisfied the judgment and filed suit against Q-C and Investors renewing its claim. Investors defended the suit and filed a counter-claim against Pines, seeking recovery of the $200,000 deposit that was not credited to the purchase price.
Pines argued that: (1) it was entitled to indemnification of the $196,666.66 commission it paid to Crimmins because the assignment of interests in the contract to Investors delegated to Investors Q-C’s obligation to indemnify Pines; (2) Pines was entitled to retain the $200,000 deposit without crediting it to the purchase price because closing did not occur as scheduled (per Second Amendment); and (3) Pines is entitled to recoupment against its liability for the $200,000 deposit because any claim by the Investors against Pines for the deposit is subject to any defenses that Pines would have against the Q-C, as Q-C is Investor’s assignor.
The Court’s holdings are addressed above.