Barber v. Jacobs

Brief Fact Summary.

Plaintiff paid a $327,000 deposit for Defendants’ property. Plaintiff secured a mortgage before learning that the property was in violation of agency regulations for wetlands. The Bank then denied the mortgage and Plaintiff requested his deposit back. Defendant refused and Plaintiff filed an action for interpleader, seeking a determination of the rights to the deposit. The trial court ruled in favor of Plaintiff.

Synopsis of Rule of Law.

A mortgage contingency clause requiring the buyer to make reasonable efforts to secure a suitable mortgage does not require the buyer to apply to more than one bank where such application would be futile.

Facts.

Barber (Plaintiff) and his family planned to move from Toronto, Canada to Connecticut. Plaintiff and his wife viewed property owned by Robert and Linda Jacobs (Defendants) on April 19, 1994. They offered to purchase the property on May 25, 1994, and requested a wetlands inspection on the property. The parties entered into a purchase contract with a closing date of August 8, 1994. The contract included a mortgage contingency clause, which conditioned the transaction upon Plaintiff’s ability to secure a mortgage on the property. Plaintiff also paid a ten percent deposit in the amount of $327,000, which was held in escrow by Irwin K. Liu, Defendants’ attorney. Plaintiff applied for a mortgage from the Putnam Trust Company of Greenwich (Bank). The bank initially approved the loan but did not give Plaintiff a formal mortgage commitment. Subsequently, Robert Hartch, attorney to both Plaintiff and the bank, reviewed the property’s inland wetlands file and found that the property was in violation of agency regulations. Hartch found that the issue would be a serious obstacle to obtaining a loan, and disclosed this information to both Plaintiff and the bank. The bank reversed its loan approval and issued a denial. Hartch requested that Defendants return Plaintiff’s deposit. Defendants refused. Plaintiff filed an action for interpleader, seeking a determination of the rights to the deposit. The trial court found that Plaintiff made sufficient reasonable efforts to secure a mortgage.

Issue.

Whether a mortgage contingency clause requiring the buyer to make reasonable efforts to secure a suitable mortgage requires the buyer to apply to more than one bank where such application would be futile.

Held.

No. The trial court’s ruling is affirmed. A mortgage contingency clause requiring the buyer to make reasonable efforts to secure a suitable mortgage does not require the buyer to apply to more than one bank where such application would be futile. 

Discussion.

A mortgage contingency clause in a real estate agreement requires the buyer to make reasonable efforts to secure a suitable mortgage. However, this does not require the buyer to perform futile acts. In Luttinger v. Rosen, 164 Conn. 45 (1972), the parties to a real estate agreement made the agreement contingent upon the buyers’ ability to obtain a mortgage of no more than 8.5 percent. The buyers had an experienced attorney who knew that only one institution would lend the type of mortgage needed by the buyer. This institution offered a mortgage at an 8.75 percent interest rate. When the buyers asked the sellers to return the deposit, the sellers refused, arguing that the buyers had not made reasonable efforts to secure a mortgage by applying to only one institution. The Supreme Court of Connecticut noted that the buyers’ decision to apply to only one institution, based on their attorney’s expertise on the matter, satisfied the due diligence required by the mortgage contingency clause. Similarly, Plaintiff had an experienced lawyer, Hartch, who was aware that the wetlands problem was a serious obstacle to obtaining a loan approval. It was reasonable for Hartch to assume that other lending institutions would not agree to finance the mortgage in light of the serious nature of the wetlands issue. Since the law does not require a buyer to perform futile acts in order to satisfy a mortgage contingency clause, this court affirms the trial court’s finding that the plaintiff used reasonable efforts to secure a suitable mortgage, even though he only applied to one bank. Defendants note, however, that they offered to finance the required amount themselves, and argue that Plaintiff was required to accept. But in Luttinger, where the seller agreed to pay the difference between the 8.75 percent interest rate offered by the bank and the 8.5 percent interest rate stipulated under the contract, the court held that the buyer was under no obligation to accept. Similarly, Plaintiff was not required to accept Defendants offer to finance the transaction themselves.