Union Realty Company, Ltd. v. Stephen D. Moses and Arnold L. Porath

984 F.2d 715

• Court: Court of Appeals for the Sixth Circuit
• Decided: February 19, 1993
• Docket: 91-6202, 91-6203
• Status: Published

Opinions

DAVID A. NELSON, Circuit Judge.

This lawsuit arises out of a purported contract for the sale of real estate. A written “purchase/sale agreement” that bore the signatures of both seller and buyers called for an earnest money deposit of $165,000, to which sum the agreement said the seller would be entitled if the buyers failed or refused to close the transaction. Although the buyers ultimately failed to close, they maintained they were not liable for the $165,000 because there was no “meeting of minds” on the handling of the earnest money.

On cross-motions for summary judgment, the district court concluded that the buyers were correct; the contract never came into existence, the court held, because a last-minute attempt by the seller to add a new condition regarding the earnest money meant that the seller never gave its unconditional assent to the contract. From a judgment dismissing its action, the seller has appealed.

Upon review we conclude that although the contract may not have become effective as early as the seller claims it did, the contract (or a slightly modified version of it) did become effective. The parties’ conduct, in our view, manifests a mutual understanding that the earnest money would be handled in a manner proposed by the buyers themselves. We shall therefore reverse the judgment of the district court and remand the case for entry of summary judgment in favor of the seller.

I

Plaintiff Union Realty Company, Ltd., a Tennessee partnership, owned several apartment projects in the city of Memphis. The defendants, Stephen D. Moses and Arnold L. Porath — both of whom live in Los Angeles — entered into negotiations with Union Realty for the purchase of the properties.

Proposed contracts¹ were drafted by the defendants in California and were sent to Memphis for review. Union Realty made certain changes and asked its real estate broker to transmit the revisions to the prospective buyers. The broker did so on January 30, 1987, noting in his transmittal letter that “[t]he most important item that they changed was the location of the earnest money.”

The buyers had apparently proposed that the earnest money be held in a Los Angeles financial institution called Brentwood Bank. (One of the buyers, Stephen D. Moses, was chairman of the board of directors of Brentwood Bank.) The seller wanted the earnest money to be deposited instead with Mid-South Title Insurance Company.

In transmitting the seller’s proposed changes to the buyers, the broker noted that he might not have “explain[ed] to [the seller] adequately enough the reason for the earnest money being held in the bank you indicated.” The broker went on to say that “I am certain that a letter from your bank affirming that the money will be dispersed [sic] in accordance with the contract conditions will assure them that this will really happen.”

The contract was revised in California to provide, in ¶ 2(b)(i), that $165,000 would be deposited as earnest money with Brent-wood Bank in Los Angeles. (According to the seller’s general counsel — whose affidavit stands uncontradicted on this point— Mr. Moses requested that the earnest money be held by the bank of which he was chairman because a sale of the bank was impending and a withdrawal of funds by him might have an adverse affect on the sale.) As revised, It 2(b)(i) of the contract went on to provide that “Brentwood Bank shall certify to Seller in writing that it has received the Earnest Money deposit.”

The contract — which specified a $16,450,-000 purchase price, against which the earnest money would be applied at closing— further provided, in 11 2(b)(ii), that the buyers would have 45 days from the date of execution in which to use their best efforts to obtain financing; that the earnest money would be refunded to the buyers if they gave written notice within the 45 days that they were unable to obtain financing; that if the seller had not received such notice at the end of the 45-day period, it would so notify Brentwood Bank in writing; and that “Brentwood Bank shall [thereupon] transfer the Earnest Money previously deposited with it to Mid-South Title Insurance Corporation in Memphis, Tennessee, to be held in escrow until closing.” Other paragraphs provided that the closing would be held on or before the 90th day after execution of the contract, and that the seller would be entitled to retain the earnest money if the buyers failed or refused to close.

A form of contract containing these provisions and signed by the buyers in California was forwarded to Union Realty in Memphis for signature. An authorized official executed the contract for Union Realty on February 11, 1987, and February 11 was specified in the body of the document as the effective date.

Two days later, according to a letter that Stephen Moses sent Union Realty under date of February 13, Mr. Moses made a deposit of $165,000 in his bank pursuant to the contract. The text of Mr. Moses’ letter read as follows:

“Pursuant to Paragraph 2(b)(i) of the Purchase and Sale Agreement made by and between the Union Realty Company, Ltd. and Stephen D. Moses and Arnold L. Porath, I have this day deposited in Brentwood Bank in Los Angeles, California, the sum of $165,000 as earnest money to be applied to the purchase price at closing.

I enclose herewith the evidence of that deposit.”

The letter was accompanied by a photocopy of a Brentwood Bank certificate of deposit dated February 13, 1987, evidencing the deposit of $165,000 by Stephen Moses.

Given the facts related so far, one might think that there could be no question as to who should get the $165,000 if the buyers failed to give a 45-day notice of inability to obtain financing. The buyers gave no such notice, as we shall see, but because of what happened after the contract was executed, there is a serious question as to the proper disposition of the earnest money.

What happened was this. On February 16, 1987 — three days after the earnest money was deposited in Brentwood Bank by Mr. Moses pursuant to the signed contract — Union Realty’s general counsel, Keith Novick, sent Mr. Moses a letter enclosing two executed copies of the contract. The letter stated the seller was in the process of obtaining the title commitments and documentation required for the buyers’ review, and it referred to the required statement from Brentwood Bank. In the latter connection, Mr. Novick made the following “request:”

“I would request that you provide an affirmative statement from Brentwood Bank that the deposits for both contracts are held in escrow, subject to the terms of the Contracts and an acknowledgment that these sums shall be delivered to the Sellers, respectively, in the event that Sellers advise the bank that the notice[s] pursuant to Sections 2(b)(i) and (ii) are not received. Execution and delivery of the Contracts are conditioned upn [sic] receipt of this statement from Brent-wood Bank within five days of this date.” (Emphasis supplied.)

A carbon copy of Keith Novick’s February 16 letter went to Jack Belz, a general partner of the seller. On March 8, 1987, Mr. Belz flagged the letter’s reference to the “affirmative statement from Brent-wood Bank” and wrote the following note above it: “Keith — I assume you received this — did you?”

In point of fact, no affirmative statement had been received from Brentwood Bank. It appears that although Mr. Moses asked the bank to write Union Realty a letter confirming that Moses had established a $165,000 certificate of deposit relating to the purchase and sale agreement, the bank’s president sent Mr. Moses a letter declining to do so. The letter, which was dated March 23, 1987, cited “ever-increasing problems with lender’s liability” and an unwillingness to “do anything that might cause the bank to become involved in litigation or that might interfere with the pending sale of the bank to Westlake Thrift & Loan Association.”

On April 6, 1987, Keith Novick sent defendant Moses a letter reading as follows:

“I have yet to receive the affirmative statement from Brentwood Bank that the deposits for both contracts are held in escrow subject to the terms of the contracts and acknowledgment that these sums would be delivered to the sellers in the event the bank is advised that the notice [sic] pursuant to Section 2(b)(i) and (ii) were not received.

This is probably an oversight and I would request that you provide me with this letter as soon as possible.”

Under date of April 10, 1987, Mr. Moses replied as follows:

“In response to your letter of April 6, 1987, I enclose herewith a letter that Brentwood Bank wrote me some time ago and which I thought I had forwarded to you.

While it is not what you wanted, I hope that by implication, it accomplishes what you want.”²

In the meantime, both sides appeared to be moving expeditiously toward a consummation of the sale in accordance with the contract. Under cover of a letter dated February 23, 1987 — a letter beginning “[pjursuant to the requirements of the contracts relative to the Union Realty Co., Ltd. apartments” — Keith Novick sent Stephen Moses certain operating statements, tenant lists, title insurance commitments, property reports, warranties, tax receipts, inventory lists, surveys, and other documents. This material was supplemented in a similar letter — also sent “[pjursuant to the requirements of the contracts” — dated February 27, 1987. It is undisputed that Keith No-vick and others spent substantial time and effort compiling the data in question, and that the seller incurred obligations to an engineering firm and a title insurance company in this connection.

The buyers, for their part, submitted separate applications to the Health, Educational and Housing Facility Board of the City of Memphis for the issuance of industrial revenue bonds to finance five of the seven apartment projects identified in the February 11 contract. The applications, each of which was signed by Mr. Porath, were prepared on Facility Board forms. Item 2(d)(ix) of the form asked about “[ojptions, contracts or other indicia of Applicants [sic] ownership of property.” Each of the forms signed by Mr. Porath contained this sentence in response to item 2(d)(ix): “the property is under contract.” A copy of the February 11 contract was attached.

Moses and Porath filed their applications with the Facility Board on or about March 3, 1987. The applications were accompanied by a $10,000 application fee in the form of a check, payable to the Board, drawn on Brentwood Bank.

The Facility Board considered the applications at a hearing held on March 9, 1987, at which time the Board adopted an “Inducement Resolution” with respect to each of the five projects. On April 13, 1987, the Board held a statutorily required public hearing on the issuance and sale of bonds for the purpose of financing the acquisition and renovation of the five projects, offering members of the public an opportunity to comment. The minutes of the meeting record that “[t]here were no questions or comments from the public.” Nothing in the minutes of either meeting reflects any question about the binding nature of the February 11 contract that Moses and Po-rath had filed with the Board.

Shortly before March 28, 1987, which was the scheduled expiration date for the 45-day period prescribed in ¶ 2(b)(ii) for the giving of notice of inability to obtain financing, the seller received word from the broker that the buyers were requesting an extension. The seller agreed to extend the time period to April 10.

Under date of March 30, 1987, an investment banking firm in Knoxville sent Mr. Moses a letter confirming an offer to purchase the bonds that the Facility Board was to issue. On April 3, 1987, a different investment banking firm gave Mr. Moses a “firm commitment” to purchase up to $21 million of such bonds.

Not surprisingly, April 10 came and went without Messrs. Moses and Porath having given Union Realty notice that they were unable to obtain financing. As far as the certification or “affirmative statement” from Brentwood Bank was concerned, the seller received nothing more than the March 23 letter forwarded by Mr. Moses with the expression of “hope that by implication, it accomplishes what you want.”

The record does not indicate that the seller challenged the sufficiency of the letter from the bank. Proceeding as if the contract signed on February 11 were in full force and effect, the seller’s general counsel, Mr. Novick, sent Brentwood Bank the following letter on April 15, 1987:

“According to the contracts dated February 11, 1987 between Moses and Po-rath as Buyers and Baron Hirsch Congregation and Union Realty Co., Ltd, as Sellers, you are holding a deposit [sic] in the amount of $10,000.00 and $165,-000.00, respectively, as earnest money under the contracts. As counsel to the Sellers, I hereby certify that the Buyers have not received the notification required pursuant to Section 2(b)(ii).

Kindly forward the earnest money deposits to Charles Meyer, Mid South Title Insurance Corporation, One Commerce Square, Suite 1200, Memphis, TN 38103.”

In a follow-up letter to Brentwood Bank dated April 24, 1987, Mr. Novick said this:

“I have yet to receive confirmation from Mid South Title that the earnest money deposit has been forwarded to the title company pursuant to the requirements of our contract.

Please contact me immediately in order to advise as to when you anticipate that this requirement of the contract will be satisfied.”

This “requirement of the contract,” if there was a contract, was never satisfied. By letter dated April 23, 1987, a lawyer with the firm of Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey, acting as outside counsel to Brentwood Bank and at the “specific request and instruction” of the bank, advised Mr. Novick “that the Bank held no deposits that were identified to it as earnest money under any contracts of any kind ... ³ [and] that the Bank will forward no money of any kind to or for the benefit of your clients.”

Brentwood Bank advised Mr. Moses of Mr. Novick’s letter concerning the earnest money deposit, and under date of April 24, 1987, Mr. Moses wrote Union Realty as follows:

“We understand that the agreement [of February 11, 1987] was never actually effective since we declined to make a deposit in form acceptable to you. We had several such conversations with Mr. Keith Novik [sic].”

Mr. Moses professed to be “surprised” at learning from Brentwood Bank of Mr. No-vick’s attempt to obtain the earnest money, and he said “I ... reject and deny such a claim.”

Mr. Novick then sent Mr. Moses a letter insisting that the contract was indeed effective and demanding payment of the $165,000. Novick’s letter denied that he had ever had any “conversations” of the sort claimed by Moses; stated that the use of Brentwood Bank as a depository during the 45-day review period had been agreeable to Union Realty “in view of the fact that you [Moses] represented yourself to be President [sic], a major shareholder of this Bank and were acting as agent for the Bank in agreeing that it would act as escrow agent;” and noted that Moses and Porath had specifically requested and received an extension of the 45-day review period prescribed by the contract.

A few weeks later Union Realty brought suit against Moses and Porath in the Chancery Court of Shelby County, Tennessee. The defendants removed the action to federal court on diversity grounds, and the defendants’ motion for summary-judgment was granted in September of 1991. This appeal followed.

II

Citing Tennessee’s “mirror image rule,” under which “[a]n acceptance, to be effectual, must be identical with the offer and unconditional,” Canton Cotton Mills v. Bowman Overall Co., 149 Tenn. 18, 31, 257 S.W. 398 (1924), the district court reasoned that because Mr. Novick’s letter of February 16 purported to condition the execution and delivery of the contract upon receipt within five days of a statement from Brentwood Bank differing somewhat from the requirements of the contract, the letter represented a counter-offer that prevented the contract from going into effect; ⁴ that a counter-offer has the effect of a rejection and terminates the offeree’s power to accept the original offer; and that because the buyers never accepted the counter-offer, the contract never came into existence.

This reasoning may be correct as far as it goes, but it does not go far enough. If Mr. Novick’s letter of February 16 was a counter-offer (i.e., if the contract had not already become effective by February 16), it is clear that the counter-offer was renewed — without any five-day limitation— on April 6, 1987, when Novick again requested Moses to provide the “affirmative statement” from Brentwood Bank. And if the April 6 letter represented a renewed counter-offer, it is equally clear that it evoked a counter-counter-offer from Mr. Moses on April 10.⁵ The letter that Moses sent Novick on that date invited Novick to accept Brentwood Bank’s March 23 letter as “accomplishing by implication] what you want” (Emphasis supplied.) Mr. Moses was proposing, in other words; that the parties stick to the February 11 contract as signed, with Union Realty either waiving the bank certification requirement or accepting the bank’s March 23 letter as complying with it “by implication.”

Mr. Novick responded affirmatively: he gave Brentwood Bank the written notification called for by ¶ 2(b)(i) of the contract, and he asked the bank to forward the earnest money not to the seller, as proposed in the “counter-offer,” but to the escrow agent (Mid-South), as required under ¶ 2(b)(ii) of the contract.⁶ The bank promptly advised Mr. Moses of this development, and it was only after Moses had learned that Union Realty was adhering to the contract that he told Union Realty of his “understanding” that the contract was never actually effective. This “understanding” came too late; we think that Moses and Porath were clearly bound, just as Union Realty was.

Our disposition of the appeal on this ground makes it unnecessary for us to decide the numerous other issues raised by the parties. The judgment of the district court is REVERSED, and the case is REMANDED with instructions to enter judgment in favor of Union Realty in the amount of $165,000 plus interest and costs.

1 . There were two separate transactions, one of which. — a deal concerning Baron Hirsch Congregation property — is not involved in this appeal.

2 . The version of this letter included in the record is marked "PROPOSED DRAFT." The parties stipulated, however, that this is a true and correct copy of Mr. Moses’ April 10 letter, and that Moses provided Union Realty a copy of the letter from Brentwood Bank.

3 . The Finley, Kumble letter made no reference to Brentwood Bank's letter of March 23, 1987, in which its president expressly acknowledged that Mr. Moses had asked that the bank "write a letter to Union Realty confirming that on February 13, [Moses] established in this bank a $165,-000 certificate of deposit that related to a purchase and sale agreement with Union Realty."

4 . Although Union Realty may have communicated its acceptance of the contract to Mr. Moses prior to Novick’s letter, as is suggested by the fact that on February 13, 1987, two days after the contract was fully executed, Moses wrote Union Realty a letter stating that he had deposited $165,000 in Brentwood Bank "[pjursu-ant to Paragraph 2(b)(i) of the Purchase and Sale Agreement,” Union Realty does not press the argument that it was too late for Mr. Novick to make a "counter-offer," the contract already having gone into effect. We intimate no opinion as to the merits of such an argument.

5 . Possibly because of our use of the word "if” here, the dissent asserts that the conclusion that Mr. Moses made a counter-counter-offer on April 10 rests on "creative conjectures” and "sheer speculation.” In the context of the dealings between the parties, however, and accepting the dissent's assumption that no contract had come into being by February 16, we see nothing conjectural or speculative about the April 10 letter. Assuming arguendo (as we do for the reason explained in footnote 4) that there had not already been a complete meeting of minds, there is only one logical interpretation of what Mr. Moses meant when he expressed the hope that Mr. Novick would find Brentwood Bank’s letter acceptable: Moses was saying that the bank’s letter was the best he could do, and he hoped that it would accomplish by implication what Novick wanted even though it was not what Novick had asked for. It goes without saying, we should have thought, that the remaining terms of the contract would stand as written if Novick yielded on the point under discussion.

In construing the Moses letter of April 10 as a counter-counter-offer, it does not seem, to us that we are making a credibility determination, or weighing the evidence, or otherwise invading the province of the jury. Citing the Supreme Court’s Anderson, Celotex, Matsushita trilogy, the dissent suggests that our interpretation of the Moses letter "reflects an overreaching of Supreme Court direction limiting lower court evidentiary considerations in summary judgment dispositions_” But determining the legal effect of documents such as the Moses letter has always been a matter for the court. See Industrial Equipment Co. v. Emerson Electric Co., 554 F.2d 276, 284 (6th Cir.1977) ("The decision on the existence of a contract and the decision on the construction of a contract are both ultimate questions of law"). And far from diminishing the role of the lower courts in summary judgment dispositions, the Celotex trilogy expanded it. See Street v. J.C. Bradford & Co., 886 F.2d 1472, 1476 (6th Cir.1989) ("Scholars and courts are in agreement that a 'new era' in summary judgments dawned by virtue of the Court’s opinions in these cases").

6 . It is well established that a counter-offer (or counter-counter-offer) may be accepted by conduct: see Ismert and Assoc. v. New England Mut. Life Ins. Co., 801 F.2d 536, 541 (1st Cir.1986); Kurio v. United States, 429 F.Supp. 42, 64 (S.D.Tex.1970); Hoffman v. Ralston Purina Co., 86 Wis.2d 445, 273 N.W.2d 214, 217 (1979); Selig v. Philadelphia Title Ins. Co., 380 Pa. 264, 111 A.2d 147 (1955); Wilkinson v. Lanterman, 314 Mich. 568, 22 N.W.2d 827 (1946). Such acceptance does no violence to the “mirror image” rule of Canton Cotton Mills v. Bowman Overall Co., 149 Tenn. 18, 257 S.W. 398 (1924).

The form of contract drafted and signed by the defendants contained provisions with which the defendants failed to comply, of course, and the dissent argues that the defendants’ tender of alternate performance could not be accepted because of ¶ 18, which purports to bar any amendment not in writing and signed by the party to be bound thereby. This argument presupposes that the contract had already become effective by February 16—see n. 4, supra,—because ¶ 18 could hardly prevent the amendment of an agreement that had not yet become effective. And if the agreement had become effective by February 16, the defendants unquestionably violated it whether or not it was subsequently amended.

The dissent goes on to argue that ¶ (2)(b)(i), which provided for the $165,000 earnest money deposit and the certification by Brentwood Bank, was a "condition precedent which was of the essence of consummating any formal agreement between the parties.” But ¶ (2)(b)(i) did not purport to be a condition precedent to the formation of a contract. Unless this paragraph was modified before the contract came into existence, in which event the modified version defined the defendants’ obligation, ¶ (2)(b)(i) was nothing more or less than a contractual undertaking which the defendants had commit- , ted themselves to perform.

The dissent maintains that because (1) the defendants never honored their contractual undertaking to deposit $165,000 in earnest money with Brentwood Bank, and (2) the bank never certified that it had received the earnest money deposit, there was “a total failure of consideration to consummate the agreement.” With respect, we do not find this analysis persuasive.

In the first place, Mr. Moses would be hard pressed to deny that he deposited $165,000 as earnest money pursuant to the agreement, given the February 13 letter in which he explicitly told the seller that “[p]ursuant to [the agreement] I have this day deposited in Brentwood Bank ... the sum of $165,000 as earnest money_” We are not prepared to say that Mr. Moses was practicing sleight of hand here, trying to trick the seller into thinking it was bound to convey the property but secretly planning to take the earnest money back if he ultimately decided, notwithstanding the availability of financing, that he preferred not to honor his commitment to purchase the property or let the seller have the earnest money. It is true that Mr. Moses failed to get his bank to provide the agreed certificate, but it is also true that he tendered an explanatory letter from the bank and that he expressed the hope that the seller would accept the letter in lieu of a proper certificate. The seller, as we have seen, did so.

In the second place, the notion that there could be no consideration for the purchase/sale agreement if the seller accepted Moses’ proposal is difficult to reconcile with universally accepted principles of contract law. The seller's waiver of any earnest money certification requirement could not have resulted in a failure of consideration, because Moses and Porath were promising to pay an agreed purchase price of $16,450,000 (of which $165,000 would be earnest money on deposit with Moses’ bank), and the seller was promising to convey the real estate. In Tennessee, as elsewhere, mutual promises in an executory contract constitute sufficient consideration to make the contract enforceable. Rodgers v. Southern Newspapers, Inc., 214 Tenn. 335, 379 S.W.2d 797 (1964).

In a final revision of the dissent, questions have been raised as to the manner and date of the seller’s acceptance of the April 10 counter-counter-offer. The manner was acceptance by conduct; the date was April 15, 1987. It is true that the letter Keith Novick sent Brentwood Bank on that day did not reflect the mailing of a separate copy to the bank’s chairman, Mr. Moses, but it is undisputed that the contents of the letter were communicated to Mr. Moses by the bank, as Mr. Novick was surely entitled to expect that they would be.