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Moran v. Erk

November 25, 2008

JAMES J. MORAN AND KATHLEEN D. MORAN, RESPONDENTS,
v.
MEHMET ERK AND SUSAN ERK, APPELLANTS.



The opinion of the court was delivered by: Read, J.

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and subject to revision before publication in the Official Reports.

On December 13, 1995, defendants Mehmet and Susan Erk signed a real estate contract to purchase the home of plaintiffs James J. and Kathleen D. Moran, a 5,000-square-foot ranch-style house located in Clarence, New York. The contract, which was executed by the Morans on December 22, 1995, provided for a purchase price of $505,000, and contained a rider with an "attorney approval contingency" stating as follows:

"This Contract is contingent upon approval by attorneys for Seller and Purchaser by the third business day following each party's attorney's receipt of a copy of the fully executed Contract (the "Approval Period").... If either party's attorney disapproves this Contract before the end of the Approval Period, it is void and the entire deposit shall be returned."

Both the contract and the rider were form documents copyrighted and approved by the Greater Buffalo Association of Realtors, Inc. and the Bar Association of Erie County.*fn1

After signing the contract, the Erks developed qualms about purchasing the Morans' house. They discussed their misgivings with each other and with friends and family, and ultimately decided to buy a different residence. As a result, they instructed their attorney to disapprove the contract, and she did so on December 28, 1995, which was within the three-day period for invoking the attorney approval contingency.

The Morans who had moved out of their Clarence residence in September 1995 kept the house on the market until it was eventually sold for $385,000 in late 1998. Shortly thereafter, they sued the Erks in Supreme Court, alleging breach of contract. They sought to recover as damages the difference between the contract price of $505,000 and the eventual sale price of $385,000, as well as "carrying costs" for marketing the Clarence property for almost three years beyond the date of the 1995 contract with the Erks.

After a bench trial, Supreme Court found in the Morans' favor, and entered a judgment against the Erks for $234,065.75, which represented the difference between the contract price and the eventual sale price, plus statutory interest. Citing McKenna v Case (123 AD2d 517 [4th Dept 1986]) and Ulrich v Daly (225 AD2d 229 [3d Dept 1996]), Supreme Court opined that "[i]t is well settled law that where a Buyer acts in bad faith by instructing his attorney to disapprove a real estate contract, the condition that the contract be approved by an attorney is deemed waived and a contract is formed." Likewise relying on McKenna, the Appellate Division affirmed in a short memorandum opinion. We subsequently granted the Erks' motion for leave to appeal, and now reverse.

Attorney approval contingencies are routinely included in real estate contracts in upstate New York (see e.g. Dorothy H. Ferguson, Subject to the Approval of My Attorney Clauses, 35 NY Real Prop LJ 35 [Spr/Sum 2007]; Alice M. Noble-Allgire, Attorney Approval Clauses in Residential Real Estate Contracts: Is Half a Loaf Better than None? 48 U Kan L Rev 339, 342 [2000]). Requiring a real estate contract to be "subject to" or "contingent upon" the approval of attorneys for both contracting parties ensures that real estate brokers avoid the unauthorized practice of law (see Matter of Duncan & Hill Realty v Department of State of State of N.Y., 62 AD2d 690, 701 [4th Dept 1978], lv denied 45 NY2d 709 and 45 NY2d 821 [1978]; 1996 Ops Atty Gen No. 96-F11), and allows both contracting parties to have agents representing their respective legal interests (see generally Real Property Law § 443 et seq.; Rivkin v Century 21 Teran Realty LLC, 10 NY3d 344, 352-56 [2008] [discussing brokers' agency relationships and duties in real estate transactions, and emphasizing that, absent express disclosure to the contrary, a real estate broker does not represent the interests of both parties to a transaction]). Where a real estate contract states that it is "subject to" or "contingent upon" the approval of each party's attorney, this language means what is says: no vested rights are created by the contract prior to the expiration of the contingency period (see Black's Law Dictionary 828 [8th ed 2004], contingent interest ["An interest that the holder may enjoy only upon the occurrence of a condition precedent"] [emphasis added]).

Here, as previously noted, the contract between the Erks and the Morans explicitly stated that "[t]his Contract is contingent upon approval by attorneys for Seller and Purchaser by the third business day following each party's attorney's receipt of a copy of the fully executed Contract," and further provided that "[i]f either party's attorney disapproves this contract before the end of the Approval Period, it is void" (emphases added). The Morans argue that the contract nonetheless created an implied limitation upon an attorney's discretion to approve or disapprove the contract. We do not ordinarily read implied limitations into unambiguously worded contractual provisions designed to protect contracting parties. The Morans, however, contend and the lower courts apparently agreed that the implied covenant of good faith and fair dealing implicitly limits an attorney's ability to approve or disapprove a real estate contract pursuant to an attorney approval contingency. This argument misconstrues the implied covenant of good faith and fair dealing under New York law.

The implied covenant of good faith and fair dealing between parties to a contract embraces a pledge that "neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract" (511 W. 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144, 153 [2002], quoting Dalton v Educational Testing Serv., 87 NY2d 384, 389 [1995] [additional citation omitted]). Yet the plain language of the contract in this case makes clear that any "fruits" of the contract were contingent on attorney approval, as any reasonable person in the Morans' position should have understood (see 511 W. 232nd Owners Corp., 98 NY2d at 153 [implied covenant of good faith and fair dealing encompasses "promises which a reasonable person in the position of the promisee would be justified in understanding were included"] [citations omitted]).

Further, considerations of clarity, predictability, and professional responsibility weigh against reading an implied limitation into the attorney approval contingency. Clarity and predictability are particularly important in the interpretation of contracts (see Maxton Bldrs. v Lo Galbo, 68 NY2d 373, 381 [1986] ["when contractual rights are at issue, where it can be reasonably be assumed that settled rules are necessary and necessarily relied upon, stability and adherence to precedent are generally more important than a better or even a'correct' rule of law"] [quotation marks and citation omitted]), and "[t]his is perhaps true in real property more than any other area of the law" (Holy Props. v Cole Prods., 87 NY2d 130, 134 [1995] [citation omitted]). But the bad faith rule advocated by the Morans, which derives from the McKenna decision, advances none of those objectives.

In McKenna, a short memorandum opinion, the Appellate Division held that an attorney's disapproval pursuant to an attorney approval contingency "would terminate plaintiff's rights under the contract, unless said disapproval is occasioned by bad faith" (123 AD2d 517, 517 [internal citations omitted; emphasis added]). The court further stated,

"[w]hile the issue of'bad faith' usually raises a question of fact precluding summary judgment, the uncontradicted proof demonstrates conclusively that defendant acted in bad faith by instructing his attorney to disapprove the contract. Defendant, by interfering and preventing his attorney from considering the contract, acted in bad faith and, therefore, the condition that the contract be ...


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