Bathla v. 913 Market, LLC

IN THE SUPREME COURT OF THE STATE OF DELAWARE
KAMAL BATHLA, §
§ No. 28, 2018
Defendant Below, §
Appellant, § Court Below: Superior Court
§ of the State of Delaware
v. §
§
913 MARKET, LLC, § C.A. No. N16C-11-149-JAP
§
Plaintiff Below, §
Appellee. §
Submitted: November 14, 2018
Decided: December 20, 2018
Before STRINE, Chief Justice; VALIHURA, VAUGHN, SEITZ, and
TRAYNOR, Justices, constituting the Court en Banc.
Upon appeal from the Superior Court. AFFIRMED.
Jeffrey M. Weiner, Esquire, LAW OFFICES OF JEFFREY M. WEINER, P.A.,
Wilmington, Delaware, for Appellant, Kamal Bathla.
Charles J. Brown, II, Esquire, GELLERT, SCALI, BUSENKELL & BROWN, LLC,
Wilmington, Delaware, for Appellee, 913 Market, LLC.
STRINE, Chief Justice, for the Majority:
This appeal concerns a dispute over which party to a failed commercial real
estate sale is entitled to the buyer’s deposit. The seller, 913 Market, LLC, claims
that it is entitled to the deposit because the buyer failed to close the deal on the agreed
date, and it brought this action against the buyer claiming breach of contract and
seeking a declaratory judgment regarding its rights under the purchase agreement.
The buyer, Kamal Bathla, asserts two reasons why the deposit is rightfully his. First,
he contends that 913 Market could not convey title free and clear of all liens and
encumbrances, as required by the purchase agreement, due to potential claims by a
previous potential buyer of the building that had also failed to close. Second, Bathla
argues that one of the conditions precedent was not satisfied because the title
insurance commitment he received contained an exception, relating to litigation risk
from the previous potential buyer, that did not exist in 913 Market’s existing title
insurance policy. In either case, Bathla maintains, he was relieved of any obligation
to close, and therefore has a right to get his money back. Both of Bathla’s theories
center around the notion that the previous failed buyer, who had bid a higher price
than Bathla but then backed out of the deal, might somehow emerge to sue Bathla
over the property.
The Superior Court granted summary judgment for 913 Market. In rejecting
Bathla’s first argument, the court reasoned that potential claims by the previous
failed buyer did not cloud title because the previous buyer “had not perfected (nor
did it seek to perfect) a lis pendens claim.”1 In rejecting Bathla’s second argument,
the court read the purchase agreement as establishing a test based not on “what
exceptions the Purchaser’s title insurance carrier might insist upon,” but rather on
“whether Seller was able to convey satisfactory title, which it did.”2 Bathla appeals
this grant of summary judgment.
We affirm the Superior Court’s decision. Contrary to Bathla’s exhortations,
the mere possibility that a previous potential buyer who failed to close might later
claim an interest in the building does not constitute a lien or encumbrance under the
purchase agreement, and the condition precedent identified by Bathla does not
require that he obtain a title commitment with exceptions that mirror those of 913
Market’s existing policy. And ultimately, the basic premise of Bathla’s case—that
there was a genuine risk that the previous potential buyer would sue Bathla over the
property—is implausible and does not provide a basis under the contract to avoid
the obligation to close.
I.
In June 2016, 913 Market auctioned its eponymous commercial real estate
property, located in downtown Wilmington.3 The highest bidder, InvestUSA, agreed
1
913 Market, LLC v. Bathla, C.A. No. N16C-11-149 JAP, slip op. at 4–5 (Del. Super. Ct. Oct. 31,
2017).
2
Id. at 5.
3
Id. at 2.
2
to pay $1,233,750 with a July 15, 2016 closing, but for unknown reasons, it failed to
close the deal.4 On August 3, 2016, doubting the prospects of a deal with InvestUSA,
913 Market struck an alternative deal to sell the building to Bathla, the second
highest bidder, for $1,125,000.5 The new agreement’s recitals disclosed the previous
agreement’s existence. Specifically, they stated that (1) 913 Market had “previously
contracted to sell the” building under an existing contract, which the previous buyer
had “failed to timely close”; (2) 913 Market “has agreed to enter into a ‘backup’
contract with [Bathla] which shall become a primary contract upon termination of”
that previous contract; and (3) 913 Market had already terminated the existing
contract.6 Thus, the previous deal with InvestUSA was no surprise to Bathla.
As required by the purchase agreement, Bathla deposited $118,125 with the
escrow agent pending the deal’s completion.7 Absent the “wrongful failure” of 913
Market to close the deal, the failure of one of the buyer’s conditions precedent, or
other circumstances not relevant here, the agreement makes this deposit
nonrefundable.8 The agreement further provides for liquidated damages in an
4
Id.; Opening Br. at 20–21; App. to Opening Br. at A-73.
5
App. to Opening Br. at A-16.
6
Id.
7
Id. at A-17.
8
Id. (“Absent (w) the wrongful failure of Seller to close hereunder, (x) the failure of a condition
precedent under Section 4.1 below to be timely satisfied, (y) as otherwise expressively provided
in Article 7 below, the Deposit shall not be refundable to Buyer and shall either be paid over to
Seller should this Agreement be terminated for any reason or applied on account of the Purchase
Price as below provided in subsection (c) of this Section 1.3.”).
3
amount equal to the deposit in the event that Bathla breaches the agreement, instructs
the escrow agent to release the deposit to 913 Market upon Bathla’s default,9 and
contains “time is of the essence”10 and integration11 clauses. The parties selected
September 19, 2016 as the closing date.12
Two provisions are plausibly relevant to Bathla’s obligation to close. First,
Section 2.3 of the agreement requires 913 Market to convey title “free and clear of
all liens and encumbrances other than real and personal property taxes not yet due
and payable and the Permitted Exceptions (hereinafter defined).”13 A failure by 913
Market to convey title free and clear would constitute a “wrongful failure” to close,
entitling Bathla to get his deposit back.14 Second, Section 4.1(a) sets forth a
condition precedent that “[t]itle to the Property shall be subject only to the same
exceptions as shown on Seller’s title policy with the exception that the mortgage lien
thereon shall be satisfied at Closing from the proceeds of sale.”15 If the building’s
9
Id. at A-24 (“DAMAGES SHALL BE IN AN AMOUNT EQUAL TO THE AMOUNT OF THE
DEPOSIT . . . AND . . . ESCROW HOLDER IS HEREBY IRREVOCABLY INSTRUCTED TO
DELIVER SUCH DEPOSIT TO SELLER BY ESCROW HOLDER UPON SUCH DEFAULT
BY BUYER, AND THEREAFTER RETAINED BY SELLER AS LIQUIDATED DAMAGES.”).
10
Id. at A-31 (“Time is of the essence of this Agreement, it being understood that each date set
forth herein and the obligations of the parties to be satisfied by such date have been the subject of
specific negotiation by the parties.”).
11
Id. at A-30–A-31 (“This Agreement and the items incorporated herein contain all the agreements
of the parties hereto with respect to the matters contained herein; and no prior agreement or
understanding pertaining to any such matter shall be effective for any purpose.”).
12
Id. at A-18.
13
Id.
14
See id. at A-17 (providing that the deposit “shall not be refundable to Buyer” absent “the
wrongful failure of Seller to close” or certain other circumstances).
15
Id. at A-21.
4
title were subject to an additional exception that did not appear in 913 Market’s
existing policy, then this “failure of a condition precedent” would also entitle Bathla
to a refund of his deposit.16
In the days before closing, things soured. On September 15, 2016, Bathla’s
title insurer, First American Title Insurance Company, issued him a title
commitment containing an exception for any loss or damage resulting from any of
InvestUSA’s “rights, title and interest to the subject property” under its July 15, 2016
contract with 913 Market.17 Then, the day before the scheduled closing, Bathla’s
counsel sent a letter to 913 Market claiming that the InvestUSA exception indicates
that the Section 4.1(a) condition precedent would not be satisfied because “the title
policy [Bathla] would be receiving is now subject to a new exception” that did not
appear in 913 Market’s own title policy.18 The next day, 913 Market’s counsel
informed Bathla that it interpreted the Section 4.1(a) condition precedent as relating
to “the condition of the title of record,” not Bathla’s “proposed title policy,” and that
Bathla’s failure to close that day would constitute a default and allow 913 Market to
demand the deposit and terminate the agreement.19
16
See id. at A-17 (providing that the deposit “shall not be refundable to Buyer” absent “the failure
of a condition precedent under Section 4.1 below to be timely satisfied” or certain other
circumstances).
17
Id. at A-130; Opening Br. at 28.
18
App. to Opening Br. at A-134.
19
Id. at A-135.
5
After Bathla failed to close, 913 Market brought this action in the Superior
Court claiming breach of contract and seeking $118,125 in damages and a
declaratory judgment regarding its rights under the purchase agreement.20 The
Superior Court denied both Bathla’s motion to dismiss21 and later motion for
reargument.22
After discovery,23 both parties moved for summary judgment, which the
Superior Court granted for 913 Market and denied to Bathla.24 In its summary
judgment opinion, the court rejected Bathla’s charge that the possibility of
InvestUSA later claiming an interest in the property made title unmarketable
“because InvestUSA had not perfected (nor did it seek to perfect) a lis pendens
claim.”25 The court also rejected Bathla’s conditions precedent argument, ruling that
the purchase agreement establishes a test based not on “what exceptions the
20
App. to Opening Br. at A-12–A-14.
21
913 Market, LLC v. Bathla, 2017 WL 1507539, at *3 (Del. Super. Ct. Apr. 26, 2017).
22
913 Market, LLC v. Bathla, C.A. No. N16C-11-149 JAP, slip op. at 7 (Del. Super. Ct. May 10,
2017).
23
In its summary judgment opinion, the Superior Court noted that Bathla had argued that 913
Market’s “motion for summary judgment was premature because discovery has not yet been
completed.” 913 Market, LLC v. Bathla, C.A. No. N16C-11-149 JAP, slip op. at 6 (Del. Super.
Ct. Oct. 31, 2017). The Superior Court denied this request to delay summary judgment because
(1) Bathla had not filed an affidavit explaining his need for additional discovery, as required by
Civil Rule 56; (2) Bathla’s response to 913 Market’s motion for summary judgment did not
“explain precisely what discovery he needs”; and (3) “in light of the court’s conclusion that the
terms of the sales agreement are unambiguous, any extrinsic evidence divulged by further
discovery would likely be inadmissible.” Id. at 6–7. Bathla does not challenge this ruling on
appeal. See Opening Br.; Reply Br.
24
913 Market, LLC v. Bathla, C.A. No. N16C-11-149 JAP, slip op. at 1 (Del. Super. Ct. Oct. 31,
2017).
25
Id. at 4–5.
6
Purchaser’s title insurance carrier might insist upon,” but rather on “whether Seller
was able to convey satisfactory title, which it did.”26 An implementing final
judgment followed, from which Bathla timely appealed.
II.
This Court reviews the Superior Court’s grant of summary judgment,
including questions of contract interpretation, de novo.27 In doing so, the Court must
“determine whether, viewing the facts in the light most favorable to the nonmoving
party, the moving party has demonstrated that there are no material issues of fact in
dispute and that the moving party is entitled to judgment as a matter of law.”28
In interpreting a contract, the Court must “give priority to the parties’
intentions as reflected in the four corners of the agreement.”29 The Court must
“interpret clear and unambiguous terms according to their ordinary meaning,”30 and
in an “unambiguous, integrated written contract,” the Court may not use extrinsic
evidence to “vary[] or contradict[] the terms of that contract.”31 The test for
ambiguity is whether “the provisions in controversy are fairly susceptible of
different interpretations or may have two or more different meanings.”32 Thus, “[a]
26
Id. at 5.
27
See GMG Capital Invs., LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776, 779 (Del. 2012).
28
Estate of Rae v. Murphy, 956 A.2d 1266, 1269–70 (Del. 2008) (quoting Green v. Weiner, 766
A.2d 492, 494 (Del.2001)) (internal quotation marks omitted).
29
GMG Capital, 36 A.3d at 779.
30
Id. at 780.
31
Galatino v. Baffone, 46 A.3d 1076, 1081 (Del. 2012).
32
Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997).
7
contract is not rendered ambiguous simply because the parties do not agree upon its
proper construction.”33
Bathla’s arguments on appeal center around the notion that he was excused
from closing because of potential litigation risk from InvestUSA, the previous
potential buyer that backed out. He bases this theory on two different provisions in
the purchase agreement: Section 2.3, which requires 913 Market to convey good
title; and Section 4.1(a), which sets a title-related condition precedent to Bathla’s
obligation to close.34 At bottom, Bathla claims he can avoid his contractual
obligations because a party who had itself failed to close after signing an agreement
to buy the property might reemerge and claim title.
First, Bathla argues that he was not required to close because 913 Market
breached Section 2.3 by failing to convey title “free and clear of all liens and
encumbrances other than real and personal property taxes not yet due and payable
and the permitted exceptions [sic].”35 Although his briefing is confusing on this
33
Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del. 1992).
34
Bathla has not always been clear about which of these two provisions he is relying on. At times,
he seems to suggest that he is only making a conditions precedent argument. See, e.g., Hearing
Transcript, App. to Opening Br. at A-573 (Bathla’s counsel stating “[t]his is not a title question”
and referring solely to the conditions precedent provision). At other times, he seems to argue that
913 Market breached the title conveyance provision, which would be a distinct basis for avoiding
his closing obligations. See, e.g., Reply Br. at 2, 6–11 (citing the title conveyance provisions of
the contract, claiming that “[t]he Superior Court erred by holding that there could be no cloud on
the title,” and collecting citations as to the definition of “marketable title”). We address both
claims because, in any event, Bathla is not entitled to relief under either provision.
35
Opening Br. at 18 (emphasis omitted).
8
point, Bathla seems to view the phrase “Permitted Exceptions” as expanding the
range of title defects to include any exception contained in his own title commitment
that was not “permitted” under the purchase agreement, with the term “Permitted
Exception” including only those exceptions that appeared in 913 Market’s title
policy.36 Under this theory, the InvestUSA litigation risk is a title defect simply
because it was not in 913 Market’s title policy. And in any event, Bathla charges,
the specter of a potential claim by InvestUSA “in and of itself rendered title
unmarketable.”37 Here, Bathla relies on a general theory that the threat of litigation
creates a cloud on title that, irrespective of the “Permitted Exception” language,
allows the buyer to back out.
Second, Bathla argues that his obligations were excused by a failure in the
condition precedent in Section 4.1(a) that “[t]itle to the Property shall be subject only
to the same exceptions as shown on Seller’s title policy.” Specifically, he claims
that his title insurer’s “insertion of Exception 17 [relating to InvestUSA] into its title
commitment made it objectively impossible for title to the property to be subject to
the same exceptions as shown in 913 Market’s title commitment,” so “title to the
Property could not ‘be subject only to the same exceptions as shown on Seller’s title
policy (commitment).’”38
36
See id. at 19–24.
37
Reply Br. at 10.
38
Id. at 2–4; see also Opening Br. at 24–30.
9
Neither of these arguments has a viable basis in the contract. As to Bathla’s
first argument, Section 2.3 does not support Bathla’s capacious understanding of
what constitutes a title defect. To the extent that Bathla interprets the “Permitted
Exceptions” language to expand the range of title defects, he misunderstands this
provision. Section 2.3 requires 913 Market to convey title “free and clear of all liens
and encumbrances other than real and personal property taxes not yet due and
payable and the Permitted Exceptions (hereinafter defined).”39 In other words, 913
Market must convey title without any liens or encumbrances on the property, except
for certain liens and encumbrances that the parties have decided are acceptable:
(1) property taxes that are not yet due and (2) “Permitted Exceptions” that the parties
have enumerated. Thus, the “Permitted Exceptions” language limits, not expands,
the range of issues that cloud the property’s title. Bathla’s reading flips this construct
on its head.
As for the notion that litigation risk related to InvestUSA “in and of itself
rendered title unmarketable,” the mere possibility that InvestUSA might later claim
an interest in the building does not constitute a “lien” or “encumbrance” under
Section 2.3. To be sure, 913 Market did indicate it might sue InvestUSA for its
failure to close to recover its deposit. Of course, that theory does not suggest that
39
App. to Opening Br. at A-18 (emphasis added). In an apparent drafting error, the contract does
not define the term “Permitted Exceptions.”
10
InvestUSA could claim any right in the 913 Market property. It suggests the
opposite: that InvestUSA had walked away and refused to buy the property, despite
a possible contractual obligation to do so. But in any event, under Delaware’s “pure
race statute,” any potential claim that InvestUSA might have on the property would
have been extinguished had Bathla closed and recorded his deed.40 It is irrelevant
that Bathla had notice of the prior InvestUSA contract.41 The fact that there was
40
See Eastern Savings Bank, FSB v. Cach, LLC, 124 A.3d 585, 497 (Del. 2015) (Seitz, J.,
dissenting) (“Delaware has a ‘pure race recording statute.’ The statute provides that ‘[a] deed
concerning lands or tenements shall have priority from the time it is recorded in the proper office
. . . .’” (citing 25 Del. C. § 153)); N&W Dev. Co. v. Carey, 1983 WL 17997, at *3 (Del. Ch. Jan.
27, 1983), aff’d, 474 A.2d 138 (Del. 1983) (TABLE) (“The statute . . . is a ‘pure race to the
recorder’s office’ statute, that is, the first to file a valid deed gains priority in title.”); Mehaffey v.
Raley, 2002 WL 31112196, at *3 (Del. Ch. Aug. 29, 2002) (“Delaware is . . . a ‘pure race to the
recorder’s office’ state which gives priority in title to the first grantee to file a valid deed . . . .”
(internal quotation marks omitted); In re Unclaimed Proceeds from the Execution of Sale by the
Sheriff of Kent Cty., 2013 WL 3482206, at *2 (Del. Super. Ct. July 3, 2013) (“Delaware has a pure
race recording statute, meaning that priority is granted to the promisee who first records his
interest.”); cf. First Mortg. Co. of Pa. v. Fed. Leasing Corp., 456 A.2d 794, 795 (Del. 1982)
(Ҥ 2106 is a pure race statute and as such the time of recording is determinative. The rule is first
in time, first in right. In the instant case Federal recorded its mortgages in September, 1976, a full
six months before FMCP, and, therefore, had priority.”); Guarantee Bank v. Magness Constr. Co.,
462 A.2d 405 (1983) (citing Federal Leasing for the same proposition); Handler Constr., Inc. v.
CoreStates Bank, N.A., 633 A.2d 356, 366–67 (Del. 1993) (“Delaware’s mortgage recording
statute for ‘lands or tenements’ is a pure race statute. As such, the time of recording is
determinative of priority.” (internal citations omitted)); Eastern Savings Bank, 124 A.3d at 589
(“Section 2106 is a pure race statute, providing that the time of recording is determinative of the
priority of competing creditors. The rule is first in time, first in right.” (internal citations and
quotation marks omitted)).
41
See Carey, 1983 WL 17997, at *1 (reasoning that the defendant’s “arguments concerning the
plaintiff’s prior notice of his claims of title and the plaintiff’s arguments about its status as a bona
fide purchaser . . . need not be considered” because the defendant “lost the race to the to the
recorder’s office,” and “questions of notice” are “irrelevant” under “a pure race statute”);
Mehaffey, 2002 WL 31112196, at *3 (“Delaware is . . . a ‘pure race to the recorder’s office’ state
. . . . As a consequence, ‘as between two grantees, both of whom gave a valuable consideration, a
subsequent purchaser possessing knowledge of an unrecorded interest in the property would still
take a superior interest in the property if he recorded his deed first.’” (quoting Carey, 1983 WL
17997, at *3); THOMAS W. MERRILL & HENRY E. SMITH, PROPERTY: PRINCIPLES AND POLICIES 921
11
eventually a lawsuit between 913 Market and InvestUSA is also irrelevant; 913
Market filed its lawsuit against InvestUSA after the scheduled closing with Bathla.42
Turning to Bathla’s second argument, Bathla incorrectly interprets the
condition precedent language in Section 4.1(a) as qualifying his closing obligations
based on the exceptions contained in his title insurance policy or commitment.
Section 4.1(a) provides that “[t]itle to the Property shall be subject only to the same
exceptions as shown on Seller’s title policy with the exception that the mortgage lien
thereon shall be satisfied at Closing from the proceeds of the sale.”43 By requiring
(2d ed. 2012) (“Race statutes create an exception to the nemo dat principle [i.e., “one cannot give
that which one does not have”] and a partial exception to the good faith purchaser doctrine, insofar
as the first party to record wins even if she has actual notice of a prior conveyance.”); 14 POWELL
ON REAL PROPERTY § 82.02[1][c][i], LexisNexis (Michael Allan Wolf ed., 2015) (“Any notice
received . . . concerning the prior interest is irrelevant.”); cf. Gaurantee Bank, 462 A.2d at 407–08
(holding that the prior mortgage holder’s notice-based argument “misconstrues the Delaware
statute governing priority of mortgages” and that “the fact that [the subsequent mortgage holder]
had notice of a potential mortgage is irrelevant”). See also Dep’t of Transp. v. Humphries, 496
S.E.2d 563, 567 (N.C. 1998) (“[A] ‘pure race’ statute protects any purchaser for value who records
first, regardless of notice.”); Blevins v. Barker, 75 N.C. 436, 438 (N.C. 1876) (“No such
encumbrance, by whatever name called, can be created so as to operate against creditors, and
subsequent purchasers for value, until registered. . . . [N]o notice to the purchaser . . . , however
full and formal, will supply the place of registration . . . .”); McDuffie v. Walker, 51 So. 100, 102–
05 (La. 1909) (holding that, under Louisiana’s race statute, a subsequent purchaser who records
first has priority even with actual knowledge of a prior purchase); Soniat v. Whitmer, 74 So. 916,
917 (La. 1916) (“[B]y the decision in [McDuffie], and many subsequent decisions, the once
vexatious question of whether the purchaser of real estate can be affected by unrecorded claims
against the property, even though at the time of the purchase he had actual knowledge of them, has
been settled in the negative—let us hope forever.”).
42
Compl., 913 Market, LLC v. Investusa Holding Enterprises, LLC, C.A. No. N16C-09-240 CLS
(Del. Super. Ct. June 12, 2018) (listing a September 27, 2016 filing date). Because there was no
pending lawsuit at the time of the scheduled closing, we need not consider whether it is necessary
for a claimant to follow the procedures set forth in Delaware’s lis pendens statute, 25 Del. C.
§§ 1601 et seq., when there is actual notice of a pending lawsuit.
43
App. to Opening Br. at A-21.
12
that title “be subject only to” those exceptions that appeared in 913 Market’s title
policy, this provision does not condition Bathla’s closing obligations on whatever
exceptions happen to be present in the title commitment that he obtains. To be sure,
a real estate purchase agreement may condition the buyer’s closing obligations on
obtaining satisfactory title insurance.44 But this provision does not refer to Bathla’s
title insurance. Instead, it simply refers to “[t]itle to the Property.” This exclusive
reference to the property’s title, and not Bathla’s title insurance, ensures that Bathla
can get out of the deal if the property’s actual title, viewed objectively, is subject to
new exceptions that did not appear in 913 Market’s policy. 45 Bathla’s preferred
interpretation, by contrast, would allow him to shirk his closing obligations without
making a genuine effort to get his title insurance from another company.46
When viewed objectively, there was no exception to the property’s title that
would excuse Bathla from closing under Section 4.1(a). As discussed above, the
supposed “hazard of litigation” that Bathla identifies could not affect Bathla’s title
44
See, e.g., 1 ALVIN ARNOLD & MYRON KOVE, MODERN REAL ESTATE PRACTICE FORMS § 19:3,
Westlaw (last updated Nov. 2017) (“Seller shall convey to Buyer a good and marketable title and
such as will be insured by a reputable title company at regular rates . . . .”).
45
See BLACK’S LAW DICTIONARY, Westlaw (10th ed. 2014) (defining “title” as “[t]he union of all
elements (as ownership, possession, and custody) constituting the legal right to control and dispose
of property; the legal link between a person who owns property and the property itself,” or,
alternatively, “[l]egal evidence of a person’s ownership rights in property; an instrument (such as
a deed) that constitutes such evidence”); 63C AMERICAN JURISPRUDENCE 2D PROPERTY § 28,
Westlaw (last updated Sept. 2018) (“‘Title’ means the right to, or ownership in, a thing.”).
46
The contract does not impose a “best efforts” or “commercially reasonable efforts” requirement
on Bathla to obtain title insurance.
13
to the property. As a matter of law, had Bathla closed and recorded his deed, this
would have foreclosed any claim by InvestUSA under Delaware’s pure race statute.
As a matter of reality, Bathla’s theory makes no commercial sense. His theory rests
on the notion that there was a plausible chance that InvestUSA, which had bid a
higher price than Bathla but then backed out of the deal and failed to close, could
and would sue Bathla if he closed and contend that it had a right to the property. On
what basis? InvestUSA did not want the property; it backed out of the deal. Nothing
changed between Bathla signing the contract and the scheduled closing, other than
Bathla deciding that he did not want to close.
The provisions of the contract between Bathla and 913 Market that explicitly
refer to the prior contract that went South underscore just how strained it is for Bathla
to try to use the InvestUSA deal as an excuse not to close. If, as Bathla contends,
the mere prospect for a dispute between 913 Market and InvestUSA was enough to
justify his own failure to close, there were contractual tools to address that easily.
Bathla knew or should have known, from the recitals in the contract he signed, that
he was paying less than InvestUSA had promised, and he should have assumed that
913 Market might wish to recover the difference from InvestUSA for its failure to
buy as it allegedly promised. If Bathla had wanted to close only if there was no
dispute between InvestUSA and 913 Market, he could have insisted on making the
absence of litigation between them or the receipt of a waiver from InvestUSA a
14
closing condition, or he could have insisted on an indemnification right. Bathla did
not do so, and he has failed to articulate a rational interpretation of Section 2.3 or
Section 4.1(a) that acts as a substitute for straightforward protections of that kind.
III.
The Superior Court correctly concluded that 913 Market did not breach its
obligation to convey title free and clear, and that the condition precedent related to
the property’s title was satisfied. As a result, Bathla’s failure to timely close
constituted a breach of the purchase agreement, and 913 Market is entitled to the
buyer’s deposit. The Superior Court was therefore correct in granting summary
judgment for 913 Market, and we affirm its implementing final order.
15
VAUGHN, Justice, dissenting:
The Superior Court granted summary judgment on a theory that InvestUSA
had not perfected a claim on title by filing a notice of pendency. As the Superior
Court put it, “there was no cloud on title because of a potential claim from
InvestUSA because InvestUSA had not perfected (nor did it seek to perfect) a lis
pendens lien.”1 On this reasoning, the fact that First American Title Insurance
Company proposed to include an exception for the InvestUSA contract in Mr.
Bathla’s owner’s title insurance policy did not defeat 913 Market’s ability to deliver
good title because the InvestUSA contract was never a cloud on title.
I think the Superior Court erred by allowing its decision to be influenced by
the doctrine of lis pendens. The law of lis pendens establishes a method by which a
party asserting a claim on title to real property in a pending civil action may give
constructive notice of that claim to persons acquiring an interest in the property. 2
Where a party has actual notice of the claim from an independent source, however,
the giving or lack of giving of constructive notice through the filing or non-filing of
a notice of pendency is irrelevant. Notice is notice, whether it is actual or
constructive. In this case, Bathla had actual notice of InvestUSA’s contract when
he signed his contract. Since Bathla had actual notice of the InvestUSA contract,
1
913 Market, LLC v. Bathla, C.A. No. N16C-11-149 JAP, slip op. at 4-5 (Del. Super. Oct. 31,
2017).
2
See 25 Del. C. §§ 1601, 1603.
the filing of a notice of pendency would be superfluous, and the non-filing of a notice
of pendency has no bearing on the rights and liabilities of the parties.
The majority’s decision is that the mere possibility that InvestUSA might
assert a claim against the property does not constitute an encumbrance, and, in any
event, Delaware’s race recording statute would have extinguished any such claim if
Bathla had simply gone to settlement and recorded his deed.
I think the principle that should govern this case is that one who takes title to
property with notice of an equity takes subject to that equity. An early case
discussing this principle is Cieniewicz v. Sliwka.3 In that case, Mr. and Mrs. Sliwka
owned real property, and they entered into an agreement to sell that property to Mr.
and Mrs. Cieniewicz.4 The Sliwkas, however, then conveyed the premises by deed
to a couple named Kopanski, who in turn conveyed the premises to a couple named
Boc.5 The Cieniewiczs filed an action for specific performance against the Sliwkas
and the Bocs, seeking to have the Bocs honor the Cieniewiczs’ contract with the
Sliwkas.6 The Chancellor reasoned that in order for the Bocs to defend successfully
against the Cieniewiczs’ claim, the burden was on the Bocs to establish that either
they or the Kopanskis were bona fide purchasers for valuable consideration without
3
133 A. 695 (Del. Ch. 1926).
4
Id. at 695.
5
Id.
6
Id.
2
notice of the Cieniewiczs’ claim.7 The Chancellor concluded on the facts that both
the Kopanskis and the Bocs were bona fide purchasers for value without notice of
the Cieniewiczs’ claim.8 The Cieniewiczs’ claim for specific performance was
therefore denied.9
Another example of a case applying this principle is Marsh v. Marsh.10 In that
case, Franklin and Theresa Marsh entered into an agreement of sale with Double ‘S’
Construction Co. to purchase a dwelling to be erected on a lot.11 While the house
was under construction, Franklin and Theresa separated.12 Upon completion of the
house, Double ‘S’ wished to proceed with settlement.13 Franklin told Double ‘S’
that he and Theresa were getting a divorce, but that his son Wayne, and his wife
Mary, would proceed with settlement.14 Without notice to Theresa, Wayne and
Mary completed settlement, and the property was deeded to them. 15 Franklin paid
part of the purchase price from his funds, and the balance was paid through a
mortgage.16 Franklin, Wayne and Mary agreed that they would jointly occupy the
7
Id.
8
Id. at 695-96.
9
Id. at 696.
10
261 A.2d 540 (Del. Ch. 1970).
11
Id. at 541.
12
Id.
13
Id.
14
Id. at 541-42.
15
Id. at 542.
16
Id.
3
house and Franklin would bear all costs including the mortgage payments.17 After
settlement, however, Franklin and Theresa reconciled temporarily and moved into
the property. The Court of Chancery, citing Cieniewicz, found that Theresa had an
equitable interest in the property as a vendee in the agreement of sale with Double
‘S’ and that Wayne and Mary had notice of that interest. Applying the principle that
one taking title to property with notice of an outstanding equity takes subject to that
equity, the court impressed an equitable lien in Theresa’s favor on the property for
one half of the amount of that portion of the purchase price which Franklin had paid
from his funds.18
Cieniewicz predates our pure race recording statute. The deed involved in
Marsh was recorded in 1967. Our pure race recoding statute was adopted in 1968.
But in the 1993 case of Handler Construction, Inc. v. CoreStates Bank, N.A., this
Court stated, “The foregoing fundamental rule of equity, long recognized by
Delaware courts, is that ‘a party taking title with notice of an equity takes subject to
that equity.’”19 That case involved a dispute between two mortgagees. The first
mortgage lacked a seal and, for that reason, was deemed an equitable mortgage
only.20 The second mortgage holder (Handler Construction) had both constructive
17
Id.
18
Id. at 542-43.
19
633 A.2d 356, 364 (Del. 1993) (quoting John Adams, The Doctrine of Equity 151 (Robert
Ralston, ed., 8th ed. 1890)).
20
Id. at 363.
4
and actual knowledge of the first mortgage.21 One of Handler Construction’s
contentions was that an equitable mortgage was enforceable only between the parties
to the equitable mortgage and foreclosure of that mortgage did not discharge a
subsequently recorded mortgage. This Court applied the principle that a party taking
with notice of an equity takes subject to that equity in rejecting that contention. 22
Handler is distinguishable from this case in that it involved a dispute between the
holders of two recorded mortgages.23 This Court’s assertion of the principle that a
party taking with notice of an equity takes subject to that equity is, nonetheless, a
forceful restatement of the rule, and the majority has not cited any case from this
Court that has overruled the rule or found that the pure race recording statute has
overruled it.24
The title agent for First American was well aware of the rule that one taking
title to property with notice of an equity takes subject to that equity, as appears from
the following email he wrote to counsel for 913 Market on September 14, 2016:
“Rich – we still have the issue of the open 1st contract. We can not close on the 2nd
21
Id. at 366.
22
Id. at 364-65.
23
See id. at 358.
24
See, e.g., E. Sav. Bank, FSB v. Cach, LLC, 124 A.3d 585, 592 (Del. 2015) (finding, under the
circumstances, “no equitable reason to set aside the provisions of Delaware’s pure race recording
statute”). Moreover, the North Carolina and Louisiana cases are inapplicable here because, among
other reasons, the recording statutes in those states expressly apply to (and thus set the priority of)
contracts to convey land. See La. Civ. Code Ann. art. 3338(3); N.C. Gen. Stat. Ann. § 47-18(a).
5
contract w/o taking an exception (unless there is a formal release of the 1 st
contract).”25 The title agent explained the issue further in a later email:
Rich – a couple of things to think about and give me a call:
1. It is my opinion no title company will insure this deal
without the exception we are taking. Any other title
company would know about the first contract from the
Seller[’s] Title Affidavit.
2. To reiterate, if first buyer ‘believes’ Seller defaulted,
he could sue for specific performance under the contract
(which would result in the full purchase price/property
being awarded if successful) – this is why we need the
exception.26
The title agent’s legal analysis is consistent with what I have always understood to
be the law.
The attorney for 913 Market responded to the title agent’s first email this way:
Over 60 days have elapsed since closing was to have
occurred under the initial contract. The potential risk of a
successful claim from a buyer that has been silent for over
60 days (even if time was not of the essence which is not
the case here) cannot be substantial. This is a situation
involving a client that has done multiple closings with
your firm, and we are sincerely disappointed that you feel
as stated below. Given the silence from the initial buyer
our client will be proceeding against it to obtain payment
of the deposit in accordance with its rights under the
terminated contract.27
25
App. to Appellant’s Opening Br. at A-295.
26
Id. at A-296.
27
Id. The majority refers to First American as Bathla’s title insurer, which is true. But it is also
true that First American was brought into the transaction by 913 Market, and there are references
in the record to a substantial business relationship between 913 Market and First American.
6
The attorney for 913 Market did not argue that there was no need for the new
exception because the recording of Bathla’s deed would cut off any possible claim
from InvestUSA under the recording statute. Instead, he argued that there was no
need for the exception because 913 Market had terminated the InvestUSA contract
and the risk of InvestUSA asserting a claim against Bathla could not be substantial.
The title agent was unpersuaded by the argument of 913 Market’s attorney
and still considered the InvestUSA contract an encumbrance requiring an exception
in the title policy. The record indicates that Bathla and his attorney learned that First
American would be taking an exception for the InvestUSA contract on September
15, 2016, four days before the contractual settlement date. On September 18,
Bathla’s attorney wrote to the attorney for 913 Market and stated, “This new
exception indicates that the Seller is unable to meet the condition precedent in
Section 4.1(a) of the Agreement to convey the title subject only to the same
exceptions as those listed in Seller’s original title policy.” 28 He also noted that his
“client is still interested in purchasing the Property on the same terms and conditions
contained in the Agreement” and requested “a short extension to resolve this
issue.”29 It should come as no surprise to anyone that Bathla and his attorney would
be alarmed to learn that First American planned on taking an exception for the
28
Id. at A-134.
29
Id.
7
InvestUSA contract. The attorney for 913 Market rebuffed the request for a short
extension and took the position that if Bathla did not settle on September 19, he
would be in default.
The recitals in Bathla’s contract, although not entirely consistent with each
other, describe Bathla’s contract as a “backup” contract, to become a “primary
contract” upon termination of the InvestUSA agreement.30 Nothing in the record
indicates that 913 Market provided Bathla with information showing a satisfactory
termination of the InvestUSA contract or the circumstances explaining why that
contract had failed to settle. The trial court’s only comment on the status of the
InvestUSA contract was: “for reasons not apparent here, InvestUSA failed to close
on the property.”31 The exchange of correspondence by the attorneys on September
15 and 18 apparently resulted in a standoff that led to this litigation.
If an agreement of sale is executed and acknowledged with the intent that it
be recorded in the Office of the Recorder of Deeds, as is often done with long-term
installment sales agreements, I would agree that the priority of the agreement is
subject to Delaware’s pure race recording statute. In this case, the InvestUSA
contract was un-recordable because it did not contain an acknowledgement. It is
30
Id. at A-16.
31
913 Market, LLC v. Bathla, 2017 WL 1507539, at *1 (Del. Super. Apr. 26, 2017). The trial
court made no findings of fact concerning why the settlement between 913 Market and InvestUSA
fell through. There are allegations in the record that Bathla did not settle because he could not get
financing, but there are no findings of fact on that allegation.
8
common for agreements of sale which are expected to go to settlement in a relatively
short period of time to lack an acknowledgement. I would find that a party taking
title with notice of the outstanding equitable interest of a vendee in such an
agreement takes title subject to that interest.
The issue in this case, as I see it, is whether the InvestUSA contract, which
became an encumbrance when signed on June 15, 2016, was an encumbrance when
the time came for settlement on the Bathla contract in September or whether, by
then, the risk of litigation it presented had become so remote and improbable that it
was no longer an encumbrance. I would reverse the judgment of the Superior Court
and remand the case for further proceedings to include findings on this issue.
9