Opinion
44445-2003.
Decided May 8, 2006.
Anthony M. Bramante, Esq., Brooklyn, New York, Attorney for Plaintiff.
Michael D. Solomon, Esq., Levittown, New York, Attorney for Defendant.
This action was commenced by the plaintiffs, William and Marie Vecchione, and Theodore and Debra Colon ("plaintiff-sellers") seeking to retain the down payment ($54,700) tendered by the defendants, Tinh Quan Ly and Stephanie Diep ("defendant-buyers") for the purchase of real property located at 19 Bay 38th Street, Brooklyn, New York ("subject property").
The plaintiff-sellers claim the defendant-buyers breached the contract of sale by failing to accept a mortgage commitment from HSBC and by failing to close as demanded in the plaintiff-sellers' "time of the essence" letter. The defendant-buyers assert that they acted in good faith and diligence in attempting to secure mortgage financing and the plaintiff sellers' "time of the essence" notice was unreasonable. They also claim that the plaintiff-sellers were not ready, willing and able to close on the Law Day. The court conducted a three-day trial on these issues.
Background
On August 12, 2003, defendant-buyers entered into a sales contract with the plaintiff-sellers for the purchase of the subject property. The agreed purchase price was $547,000 and defendant-buyers tendered the contract down payment in the amount of $54,700. The contract contained a mortgage contingency clause which provided, in relevant part, as follows:
"This contract is conditioned upon Purchaser securing a mortgage loan commitment covering the premises in the amount of $410,000 for a period of 15/30 years, with interest at the prevailing fixed rate at the time of closing. In the event a commitment for such loan is not secured from a lending institution within 45 days from the date purchaser's attorney receives copy of a fully signed contract of sale then and in such event, either party to this agreement may cancel this agreement upon written notice to the other party, whereupon the Contract shall be deemed null and void and all sums paid hereunder by Purchaser shall be returned and each party shall have no claim against the other. Purchaser agrees to make diligent effort to procure such mortgage loan commitment and to sign all documents necessary for obtaining of same . . ." "If the mortgage to which the contract is subject . . . is not approved in the amount set forth herein, but is approved for a lesser amount, Seller, at her option, shall have the right to reduce the purchase price by an amount equal to the difference between the mortgage application amount and the amount approved . . ."
(Pl. Ex. 2 — Contract Rider, para. 5) [highlighted sections were handwritten into contract]
Pursuant to the terms of the contract, defendant-buyers had until October 11, 2003 to secure a conforming mortgage commitment and the contract closing date was on October 27, 2003. However, time was not made of the essence in the contract. The contract further provided that, "[i]f Purchaser willfully failed to close title . . ., then and in such event, all sums of money paid or deposited, on account of the purchase price shall be retained as liquidated damages." (Pl. Ex. 2 — Contract Rider, para. 3, emphasis added).
The defendant-buyers submitted applications for a mortgage to two banks — HSBC and Washington Mutual ("WAMU"). The HSBC application was submitted on September 4, 2003 (Pl. Ex. 4) with an interest rate lock-in of 6.25%. On September 18, 2003, HSBC issued a mortgage commitment letter (Pl. Ex. 18). On September 19, 2003, the defendant-buyers withdrew their HSBC application via a facsimile letter to Nora Chung, HSBC's loan officer who was handling their loan application (Def. Ex. N). Ly testified that he never received, nor was he aware that HSBC has issued a letter of commitment before he withdrew his application. That same day, the defendant-buyers submitted their mortgage application to WAMU and were promised a lower interest rate of 5.875% (Def. Ex P).
On October 1, 2003, WAMU issued a mortgage commitment for less than the application amount because WAMU appraised the subject property for $81,000 less than the contract purchase price. By letter dated October 3, 2003, defendant-buyers' attorney, David Moy, informed Anthony Bramante, plaintiff-sellers' attorney, of the short appraisal and asked if his clients were willing to reduce the purchase price by $30,000. Moy further wrote that if "this is not acceptable, our clients would have to cancel [the] contract because bank would not approve his mortgage amount." (Def. Ex. A). Bramante informed Moy in a letter dated October 13, 2003, that the plaintiff-sellers were not willing to reduce the purchase price because defendant-buyers had obtained a conforming mortgage commitment from HSBC and asked Moy to verify same (Def. Ex B). By letter dated October 20, 2003, Bramante also informed Moy that if the closing did not occur by the contract date he would declare time of the essence for November 10, 2003 and hold defendant-buyers in default in the event they failed to close on that date (Def. Ex. D). Moy wrote back to Bramante that his clients had not received a mortgage commitment from HSBC and offered to purchase the subject property for $537,000 in light of WAMU's short appraisal (Def. Ex. C). Bramante refused Moy's offer and declared a "time of the essence" closing date (Law Day) for November 10, 2003 (Def. Ex. G). Moy immediately rejected Bramante's "time of the essence" letter and asked Bramante to continue to hold the down payment in escrow (Def. Ex. H).
Meanwhile, the defendant-buyers continued to pursue a more favorable mortgage commitment from WAMU. Ly requested a reappraisal, and when WAMU retained their appraised value, he offered on October 24, 2003 to modify the October 1, 2003 mortgage commitment to include P.M.I. in order to secure a conforming mortgage commitment (Def. Ex. P). WAMU accepted those terms and issued an amended mortgage commitment on November 10, 2003 (Def. Ex. P). That same day, plaintiff-sellers appeared in Bramante's office for the closing but defendant-buyers failed to attend. Bramante immediately issued a default letter indicating plaintiff-seller were retaining the down payment as liquidated damages (Def. Ex I). Moy rejected the default letter, and on November 14, 2003 informed Bramante that defendant-buyers were now ready, willing and able to close (Def. Exs. J and K). Plaintiff-sellers refused to set a new closing date and commenced this proceeding. They also resold the subject property to another purchaser for $100,000 more than the contract price.
Analysis
The contract in this case was contingent on the defendant-buyers exercising good-faith and diligence in obtaining a conforming mortgage agreement. If they " willfully" breached those terms, they would forfeit the down payment as liquidated damages (Pl. Ex 2). As long as purchasers exert a genuine effort to secure mortgage financing and act in good faith, they are entitled to recover their down payment if they are unable to secure a conforming mortgage commitment through no fault of their own (see, Long v. Legg III, 264 AD2d 718; Berholtz v. Georgiou, 184 AD2d 677). In this case, the defendant-buyers acted diligently and in good faith to secure a conforming mortgage commitment pursuant to the terms of the contract and therefore did not willfully fail to close title.
The gravamen of plaintiff-sellers' position is that defendant-buyers acted in bad faith and breached the contract when they rejected HSBC's mortgage commitment which was issued on September 18, 2003. The court finds there is inadequate proof that HSBC's letter of commitment was received by the defendant-buyers before they withdrew their application. Chung testified that she had no knowledge whether defendant-buyers knew of HSBC's commitment letter before they withdrew their application. Nor was Chung able to state when they mailed the commitment letter to the defendant-buyers. They withdrew their application the day after HSBC issued the letter of commitment. It is inconceivable that defendant-buyers would have received the commitment letter the following day before they cancelled their application.
Additionally, the contract did not limit defendant-buyers to any specific lender and clearly allowed for applications to more than one institutional lender. It was reasonable for the defendant-buyers to pursue another lender which was offering a more favorable interest rate. Having opted to pursue a mortgage loan through WAMU, it is undeniable that they diligently completed all the necessary documents and completely cooperated with the application process. Through no fault of their own, WAMU initially could not offer defendant-buyers a sufficient mortgage because of WAMU's internal appraisal which fell well short of the contract price. Even then, the defendant-buyers did not give up. They continued to pursue a more favorable mortgage from WAMU by asking for a reappraisal then agreeing to include P.M.I. in order to be approved for a conforming mortgage commitment. It can hardly be said under these circumstances that the defendant-buyers acted "willfully" in failing to close title (see, International Baptist Church, Inc. V. Fortini, 20 AD3d 507).
Significantly, this contract did not specify that time was of the essence. As such, defendant-buyers were entitled to a reasonable adjournment of the closing date (see, 3M Holding Corp. v. Wagner, 166 AD2d 580; Baltic v. Rossi, 289 AD2d 430). Real estate transactions which involve signing of the contract followed by a period in which both parties prepare for closing by clearing title and arranging financing generally take more time than was accorded to the defendant-buyer to tender performance (where time was not of the essence). In this case, it was unreasonable of the plaintiff-sellers to set a time of the essence closing date just two weeks after the contract closing date knowing that defendant-buyers were in the process of attempting to obtain sufficient financing from WAMU. Plaintiff-sellers could have reasonably anticipated that WAMU would ultimately approve the defendant-buyers for a sufficient amount since they were aware that HSBC had also approved them for a sufficient amount. Additionally, Moy continuously kept Bramante apprised of each development and requested that the contract be cancelled when the defendant-buyers first failed to obtain sufficient financing from WAMU. This was within their rights pursuant to the mortgage contingency clause of the contract and the plaintiff-sellers' options at that point were to allow defendant-buyers to cancel the contract, reduce the purchase price, or extend the time to allow defendant-buyers to procure a conforming mortgage commitment. Instead, plaintiff-sellers opted to declare a technical (and erroneous) default in order to retain the down payment.
Finally, the court notes that WAMU issued a proper mortgage commitment four days after plaintiff-seller's Law Day and defendant-buyers were ready, willing and able to close by November 14, 2003. It would be grossly unfair to declare a default and allow the plaintiff-sellers to retain the down payment under these circumstances, especially given the fact that they ultimately resold the property for $100,000 more than the defendant-buyers were obligated to pay for the subject property. Since the court finds that the defendant-buyers did not breach the contract, the court does not need to decide if the plaintiff-sellers were actually ready, willing, and able to tender clear title on November 10, 2003.
Based upon the foregoing, it is hereby ordered that plaintiff-sellers' complaint is dismissed and the defendant-buyers are granted a money judgment in the amount of $54,700 plus interest from the date of commencement of this action.
This constitutes the Decision and Order of the Court. Settle judgment within sixty (60) days of the date of this decision or the cause of action will be deemed abandoned.