Missouri State Contract Cases 2012 (Part 03): Merger and the Law of the Case

by Brian Rogers on April 16, 2012

in Missouri Contract Cases

C-H Building Associates, LLC v. Duffey

C-H Building Associates entered into a contract to purchase real estate from Joe and Mary Jane Duffey. At the time of the sale Liberty Homes, a third of which was owned by Joe Duffey, was renting the property. The sale contract contained the following clause relating to the lease:

[The Duffeys] agree[ ] to sell to [C-H] and [C-H] agrees to purchase from [the Duffeys] the real estate described in Exhibit A . . . together with any buildings and improvements thereon, and all personal property used in the operation of the buildings and improvements . . . and including the following: LEASE WITH LIBERTY HOMES TO BE 3 YEARS AT $3,000.00 PER MONTH TRIPLE NET ON THE NORTH APPROXIMATELY 2500 SQ FT OF BUILDING AT 100 CLAYVIEW DRIVE.

After the sale, Liberty Homes began paying rent to C-H instead of the Duffeys, and C-H negotiated lease terms with Liberty Homes. Those negotiations broke down, however, and Liberty Homes vacated the property. C-H sued the Duffeys, claiming that the absence of a lease with Liberty Homes under the terms described under the contract constituted a breach by the Duffeys.

The trial court granted C-H’s motion for summary judgment and the Duffeys appealed. The Missouri Court of Appeals Western District reversed and remanded the case to the trial court. On remand, the trial court granted summary judgment to the Duffeys and C-H appealed, claiming that the trial court incorrectly interpreted the opinion of the court of appeals to hold that C-H could not prove that the Duffeys had breached the real estate contract when in fact the opinion merely held that C-H had not alleged a breach sufficiently to support C-H’s own motion for summary judgment.

The law of the case doctrine

Considering the Duffeys’ original appeal of the grant of C-H’s summary judgment motion, the Missouri Court of Appeals had stated:

The quoted contractual language did not constitute an allegation of an obligation the Duffeys had to C-H concerning Liberty Homes’ performance under the purported lease. Moreover, the absence of material facts depicting a breach by the Duffeys precludes an inference of any obligation. Nor can a breach be inferred from reading the allegations together. Because C-H did not allege an obligation or allege undisputed material facts depicting a breach by the Duffeys, it failed to make a prima facie showing entitling it to a summary judgment. Because C-H failed to make a prima facie showing, the trial court improperly granted the summary judgment.

309 S.W.3d 897, 900 (Mo. App. W.D. 2010).

The Duffeys argued in a motion for summary judgment on remand that under the law of the case doctrine, it was entitled to judgment as a matter of law on C-H’s breach of contract claim in that the appeals court had held that the relevant contract language did not create an obligation for the Duffeys to procure the lease or otherwise assure its existence.

Under the law of the case doctrine a previous holding in a case is “the law of the case” and bars relitigation of issues that are raised and decided on appeal, as well as those that could have been raised but were not.

C-H had alleged that a lease between the Duffeys and Liberty Homes existed when there was no lease. In its original opinion the court of appeals noted that there was no lease and held that C-H had not sufficiently alleged that the Duffeys had an obligation to broker a lease between C-H and Liberty Homes. Considering the case on appeal a second time, the court of appeals stated:

C-H acknowledged that its assertion in the summary judgment motion that a lease existed was erroneous but maintains that the language in the contract evidences an obligation on the part of the Duffeys to effect a lease between C-H and Liberty Homes. C-H alleges that the Duffeys’ obligation to broker the lease between C-H and Liberty Homes constituted part of the consideration of the purchase price for the property. Our previous opinion did not decide this issue; it held only that C-H did not make sufficient allegations to support the trial court’s grant of summary judgment in favor of C-H.

The appeals court thus held that granting the Duffeys’ motion for summary judgment based on the law of the case doctrine was in error.

Merger

C-H also argued on appeal that the Duffeys had an obligation under the sale contract to broker a lease between C-H and Liberty Homes. The Duffeys countered that, even if they did have an obligation to effect a lease, the obligation was extinguished by virtue of the doctrine of merger. The doctrine of merger provides that “when parties have performed their respective obligations of delivery and acceptance of a deed, and title to the property passes, the contractual obligations of the parties are discharged and merged into the deed.” The Duffeys argued that, because the deed that they delivered to C-H didn’t contain an obligation relating to the lease with Liberty Homes, any such obligation in the sales contract was extinguished when the deed was delivered.

There are exceptions to the doctrine of merger, however, including fraud, accident, and mistake. In addition, provisions in a sale contract relating to the consideration to be paid by the purchaser are generally not merged into the deed. C-H argued that the duty to effect a lease constituted consideration under the sale contract between C-H and the Duffeys, albeit consideration of the seller rather than of the purchaser.

In addition, C-H claimed that the Duffeys had represented that a lease with Liberty Homes existed when it in fact didn’t, and that allegation was in the nature of mistake or fraud, either of which would give rise to an exception to the doctrine of merger. The appeals court concluded that “[t]his is precisely the type of case where merger does not apply, and the trial court’s grant of summary judgment to the Duffeys cannot be sustained on this basis.”

It’s not over

There’s still a lot of heavy lifting to be done by the trial court, because the court of appeals ruled that the contract is ambiguous as to whether the Duffeys had an obligation to broker a lease between C-H and Liberty Homes. The appeals court stated, “We now hold that the intent of the parties cannot be sufficiently determined based solely upon the quoted language from the real estate contract. Thus, on remand, the trial court should determine the Duffeys’ obligations under the contract, if any, taking such additional evidence, including parol evidence, as is necessary.” Not only will the case not be disposed of at the summary judgment stage, evidence of the intent of the parties will not be limited to the four corners of the document, which could add a lot of complexity and expense.

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{ 5 comments… read them below or add one }

Ken Adams April 16, 2012 at 9:36 pm

Brian: But what about the all-important question: What should the drafter have done? Ken

Reply

Brian Rogers April 22, 2012 at 4:32 pm

Ken: In a perfect world, the lease would have been negotiated before closing, with delivery of a signed lease being a condition to closing the real estate sale. Anything short of that would leave a morass to be waded through by the courts if the negotiations fell through, as in fact happened.

At a minimum the sale contract should have clearly stated that the Liberty Homes lease was essential to the contract, but I can’t think of a good way to express it. Since Duffey owned a minority interest in Liberty Homes, he couldn’t be required to “cause” Liberty Homes to enter into a lease, or really even to negotiate the lease in good faith.

Perhaps a simple indemnity agreement whereby the Duffeys would pay lost rent to C-H if the lease weren’t finalized would be the most straightforward solution.

Do you have any ideas?

Reply

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