Donovan v. Bachstadt

Brief Fact Summary. The seller of a piece of real property promised to provide marketable and insurable title to the buyer, but breached that promise.

Synopsis of Rule of Law. A buyer can recover benefit of the bargain damages when the seller breaches an executory contract involving the sale of real property.

Facts. The Defendant, Bachstadt (the "Defendant"), purchased a piece of land from Joan Lowden ("Ms. Lowden").  Ms. Lowden received the deed to the land from Middletown Township, but she never recorded it.  The Defendant built a house on the land and entered into a contract to sell it to the Plaintiffs, the Donovans (the "Plaintiffs").  The purchase price was $58,900. The Plaintiffs put down a deposit of $5,890.  On May 1, 1980, the Plaintiffs were to pay an additional $9,010 in cash and take out a 30-year mortgage for the remaining $44,000, at 10% interest.  The seller promised the title would be marketable and insurable.  A title search was conducted and title was found to be with Anthony and Jane Mettrich (the "Mettrichs") and not Middletown Township or Joan Lowden.  Based on these developments, the Plaintiffs filed an action requesting specific performance, and the trial court granted specific performance.  The Defendant could not obtain marketable title, and the Plaintiffs filed this suit for compensatory and punitive damages.  The trial court granted the Plaintiffs motion for summary judgment.  The Plaintiffs' damages, not the Defendant's liability was at issue.  The trial court allowed the Plaintiffs to recover for their costs for the title search and survey.  However, the trial court would not allow them to recover the difference between the percentage of interest they were to pay on their mortgage and the percentage of interest they were to pay on a different house they purchased in the interim.  The trial court concluded "the financing 'was only incidental to the basic concept.' "  The Appellate Division revered and found "the statute intended that the general law of damages for breach of a contract applies and stated that the difference in interest rates could be the basis for a measure of damages depending on whether the plaintiffs 'have entered into a comparable transaction for another home ••• or are likely to do so in the near future ••••' "

Issue. What is the property damage calculation for a buyer, when the seller breaches an executory agreement?

Held. The court first examined whether the Plaintiffs were entitled to compensatory damages.  The court discounted the English rule and adopted the American rule.  The court observed "[t]here is no sound basis why benefit of the bargain damages should not be awarded whether the subject matter of the contract is realty or personalty." Further, "[t]he innocent purchaser should be permitted to recover benefit of the bargain damages irrespective of the good or bad faith of the seller." Moreover, "[w]here, as here, the seller agreed that title would be marketable, the seller's liability should depend upon his breach of that promise."  As such, here, since the Defendant agreed to provide the Plaintiffs with marketable title, and did not do so, the Defendant is responsible for damages due to its lapse. 
•    The court then observed that "[c]ompensatory damages are designed 'to put the injured party in as good a position as he would have had if performance had been rendered as promised.' "  The reasonable expectation of the parties, governs what the position is.  Accordingly, "the defendant is not chargeable for loss that he did not have reason to foresee as a probable result of the breach when the contract was made."  Additionally, "the loss must be a reasonably certain consequence of the breach although the exact amount of the loss need not be certain."  The court found that the financing provision was an integral part of the transaction.  Further, in certain situations "interest rate differentials are an appropriate measure of damages."  For example, "[w]here the buyer has obtained specific performance, but because of the delay has incurred higher mortgage rates, then his loss clearly should include the higher financing cost."  The court recognized "an interest differential occasioned by the seller's default might be a proper factor in fixing damages where the buyer shortly thereafter purchased another property financed at a higher interest rate."  The court found this was not the case here, because the Defendant was not in the business of lending money, but selling a home.  As such, the Plaintiffs "would be entitled to the difference between $58,900 and that fair market value."  Moreover, "[i]f the fair market value was not more than the contract price, the plaintiffs would not have established any damage ascribable to the loss of the bargain."

Dissent. The dissenting judge would have phrased the issue as follows:  "[W]hether out of pocket costs or benefit of the bargain damages are to be awarded for breach of an executory contract for the sale of real estate when the contract does not close because of a defect in title unknown to the seller at the time of execution of the contract."  The dissent advocated that the American rule adopted by the majority, should not be applied where the seller is entirely not at fault, with respect to the defect in title.  The dissent argued that the majority's rule improperly penalizes the unwary.  Instead, the dissent advocated the position adopted by the Commissioners on Uniform State Laws.

Discussion. It is interesting to recognize when damages based on changed interest rates can be awarded and when they are inappropriate.