Buyer Sufficiently Alleged That Purchase Agreement Provision Calling for Nonrefundable Deposit Was Unenforceable – K. Nina Reynolds
Buyer contracted to buy a mobile home park in Sunnyvale, California. Buyer delivered a $3 million deposit directly to seller, which the contract provided was nonrefundable unless seller materially breached the purchase agreement or failed or refused to close. The parties twice agreed to extend the closing date, and buyer inquired about seller financing. Just prior to close, seller advised that it would receive a better tax benefit if it was not in contract to sell and could pay taxes based on the original value rather than the higher sales price. Seller promised that if buyer let the closing date pass, it would sell the property to buyer after filing its tax returns. In reliance, buyer did not tender the full purchase price on the closing date. Some months later, seller advised that the agreement was no longer in place and that buyer had lost the deposit.
Buyer sued seller to recover the deposit under various theories of recovery. The trial court sustained seller’s demurrer and dismissed the action. The Court of Appeal reversed the judgment and allowed buyer to proceed on several causes of action commonly used in real estate cases.
The court observed that in a contract for the sale of real estate, the delivery of the deed and the payment of the purchase price are dependent and concurrent conditions. As such, neither party is in default until one party performs or tenders performance. Here, since both sides failed to perform, buyer could not argue that seller “material breach[ed]” the contract by failing to tender the deed. However, buyer’s claim that seller’s “failure or refusal to close” was a separate basis for breach was reasonably susceptible to such interpretation and thus could proceed, even if this theory of recovery later proved invalid.
Similarly, buyer was permitted to proceed with a claim for “money had and received”. Such claim can be made in the real estate context if seller receives money for the use and benefit of buyer and gives nothing of value in return. Where there is a total failure of consideration, the law implies a promise to repay those funds. The court acknowledged seller’s argument that a party in default cannot sue for failure of consideration, but held there was no default here because neither party performed under the contract.
The court also held that buyer properly stated a quasi-contract claim for restitution based on unjust enrichment. Normally, where there is an express contract, a party must sue for breach and cannot seek restitution based on an implied-in-fact or quasi-contract theory. However, restitution may be awarded in lieu of contract damages when a contract was procured by fraud or is otherwise unenforceable or ineffective for some reason. Here, buyer alleged the contract provision making the deposit nonrefundable regardless of breach was an unlawful penalty or forfeiture contrary to public policy and the court allowed the claim to proceed.
The court affirmed the dismissal of buyer’s claims for conversion and promissory fraud. Because the deposit here was paid directly to seller and not held in escrow, title to the deposit vested in seller when it accepted the contract, and buyer did not retain the ownership or right to possession necessary to claim conversion. As to fraud, buyer properly alleged misrepresentations with the intent to defraud, but did not sufficiently allege “justifiable reliance” upon the misrepresentations because it failed to allege facts showing it could have obtained the necessary financing to close escrow from a source other than seller.
It is important to note that the court did not rule in agreement with any of buyer’s theories of recovery, but allowed buyer to proceed based on the liberal pleadings rules which allow a plaintiff to pursue claims if there are any possible theories for recovery, even if they are not properly alleged. The plaintiff still must prove its case at the evidence stage, which is a much higher burden.
Rutherford Holdings v. Plaza Del Rey (2014) 223 Cal.App.4th 221