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OZ Holding LCC v. ELM Court Realty LLC

July 8, 2010


The opinion of the court was delivered by: Paul G. Gardephe, U.S.D.J.


Plaintiff Oz Holding LCC ("Oz") alleges that Defendant Elm Court Realty LLC ("Elm Court") breached a written purchase and sale agreement for real property (the "Agreement") by failing to disclose information about the functionality of the property's septic system and its compliance with local health codes. The Complaint pleads causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, fraud and negligent misrepresentation related to Defendant's alleged omissions of material information concerning the property sold to Plaintiff, and promissory estoppel. (Cmplt. ¶ 1) Plaintiff seeks recovery of $500,000 in earnest money. (Cmplt. ¶¶ 11-12, 20-21)

Defendant has moved to dismiss, arguing that Oz was fully aware of the need to replace the septic system, was aware that it was a "failed system" under local law, was aware that "local authorities had provided notice to Elm Court of possible action with respect to the septic system," and "had every opportunity to investigate issues related to the septic system during its due diligence period." (Def Br. 1) (emphasis in original). For the reasons stated below, Defendant's motion to dismiss will be denied.


The parties entered into the Agreement on July 20, 2007. Under the Agreement, Defendant agreed to sell the property located at 310 Old Stockbridge Road, Lenox, Massachusetts (the "Property") to Plaintiff for $11,250,000. (Cmplt. ¶¶ 8-9, Ex. A). The Property was used as a bed and breakfast and as a reception facility for large groups. (Id. ¶ 30) The Agreement specified that Plaintiff would deposit $150,000 in earnest money with Defendant's Escrow Agent by July 27, 2007, and would deposit an additional $350,000 in earnest money by August 20, 2007, if Plaintiff had not terminated the Agreement by that date. (Id. ¶¶10-11) The $500,000 in earnest money was to be applied to the total purchase price. (Id. ¶ 12)

Plaintiff made the required earnest money payments. (Cmplt. ¶¶ 19, 37) Under the default provision of the Agreement, Plaintiff would forfeit its earnest money in the event that it refused to close the transaction as scheduled in the Agreement. (Id. ¶ 18) The Agreement set a closing date of September 19, 2007, but that date was later extended by written amendment to October 19, 2007. (Id. ¶¶ 13-14)

The Agreement contains a number of provisions relating to the Property's septic system. For example, the Agreement recites that the Property is "not connected to a municipal sewer system and, to the best of Seller's knowledge, is served by a septic system containing a so called 'tight tank' which is located within the boundaries of the Premises." (Id. ¶ 15, Ex. A ¶ 5(e)) The Agreement further provides that Buyer acknowledges that due to its containment of a tight tank, the Septic System is a "failed system" as defined by Title 5 of the State Environmental Code (310 CMR 15.301) and Buyer has taken the same into account in its decision to enter this Agreement. Buyer shall have the right to engage a licensed Septic Inspector to perform a system inspection during the Inspection Period.

(Cmplt., Ex. A ¶ 5(e)) Title 5 states that the owner or operator of a "failed system" shall upgrade the system within two years of discovery unless (a) a shorter period of time is set by the local Approving Authority or the Department [of Health] based upon the existence of an imminent health hazard; or

(b) the continued use of the system is permitted by the local Approving Authority in accordance with the provisions of an enforceable schedule for upgrade. . . . 310 CMR § 15.305(1).

The Defendant also makes a number of representations and warranties in the Agreement, including the following:

Except as otherwise set forth in this Agreement, including without limitation notice with respect to the Septic System, Seller hereby represents and warrants that Seller has not received written notice with respect to any actions, suits, claims, demands or proceedings of any kind or nature, legal or equitable, pending against Seller of the Premises or any portion thereof which would materially affect the Premises or create a lien on the Premises; and that to the best of Seller's actual knowledge, that there are no liens, leases, conveyances, easements, reservations, restrictions, covenants or encumbrances other than matters of public record affecting the Improvements. . . . (Id. ¶ 16, Ex. A ¶ 26(b))

To the best of Seller's knowledge, there are no actions, suits or proceedings pending or threatened against the Improvements or Seller which, if determined adversely to Seller, would adversely affect its ability to perform its obligations under this Agreement. . . . (Id. ¶17, Ex. A ¶ 26(e))

There are no pending, or to the Seller's knowledge, threatened, judicial, administrative, condemnation or eminent domain proceedings relating to the improvements, and Seller is not operating under or subject to, and Seller is not in default with respect to, any order, writ, injunction or decree that relates to Seller or the Improvements or any part thereof. . . . (Id. ¶ 18, Ex. A ¶ 26(g))

Prior to execution of the Agreement, Defendant did not disclose to Plaintiff that it had received -- in December 2005 and April 2006 -- two letters from the local Health Department complaining about the Property's septic system.*fn1 (Id. ¶ 20) The letters reveal that in April 2003 the Health Department approved a "temporary tight tank" for use at the Property and that use of this "tank was approved for use for two years." The December 2005 letter directs Defendant to "complete the installation of [a new] system by June 1, 2006." (Id. ¶ 20, Ex. B) The April 2006 letter reminds Defendant of its obligation to install a new system by June 1, 2006, and threatens legal action in the event of non-compliance: "Failure to comply with this order may result in action filed against you in Southern Berkshire District Court." (Id.)

Plaintiff alleges that because of Defendant's failure to disclose these letters Plaintiff was not on notice that "an enforcement action was threatened by the Tri-Town Health Department" and that "Plaintiff could be subject to immediate enforcement in a criminal proceeding upon taking title to the Locus." (Cmplt. ¶¶ 23-27) The Complaint further alleges that Defendant promised the Town's Board of Selectmen in 2003 that a septic upgrade would be implemented, and that the Board granted Defendant a special permit to use the Property as a bed and breakfast establishment based on that representation. (Id. ¶¶ 28-29) The Board of Health subsequently "ordered Defendant to discontinue use of the main house, and any other areas of the Locus, as a bed and breakfast." (Id. ¶ ...

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