Mountain Classic Real Estate, as Buyer,
entered into a contract with Rocky Mountain Hospitality, Seller, to purchase a 65-room
Super 8 motel for $3.4 million. Buyer deposited $30,000 as earnest money with an
independent title company, in escrow. Presumably the title agency was not owned
or controlled by Buyer or Seller.
If Buyer defaulted, a contract provision
allowed Seller to either receive and retain the earnest money as liquidated
damages, or forego the EM and instead pursue litigation for specific
performance or damages.
Buyer defaulted. Seller eventually
sold the motel to another purchaser for $2.75 million - $650,000 less than what
Buyer had agreed to pay, as COVID destroyed hotel and motel pricing when travel
across the USA was severely curtailed.
Seller sued Buyer seeking damages of
$780,000 +. When Seller filed the lawsuit, it had not instructed the title
company to return the earnest money to Buyer.
Buyer defended by arguing that since
Seller did not release its interest in the EM before filing the complaint,
Seller had elected to keep the deposit as liquidated damages. And in that
event, Seller could not pursue other remedies.
11 days after Seller received Buyer’s
motion to dismiss, Seller released its interest in the EM. Buyer refused to
accept the delivery of the earnest monies.
The district court granted Buyer’s motion
to dismiss, finding that Seller had failed to return the EM before filing the
litigation. Due to such failure, Seller had elected to retain the EM as
liquidated damages and could not pursue other remedies.
The Appellate Court found that
Seller maintained “constructive control” over the earnest money for 36
days after Seller filed its lawsuit. And in doing so, Seller effectively
attempted to elect all contractual remedies simultaneously, which is inconsistent
with the contract provision allowing Seller to only elect one remedy to the
exclusion of all others.
By retaining control over the
deposit Seller chose to relinquish the opportunity to seek other remedies, even
if Seller did so inadvertently. So says this Court.
Buyer wins, again. Seller loses, again.
See Rocky Mountain Hospitality v. Mountain Classic Real Estate; Supreme
Court of Utah, Case No. 20210798, December 22, 2022: https://scholar.google.com/scholar_case?case=10498530107806036099&q=rocky+mountain+hospitality+v.+mountain+classic+real+estate&hl=en&as_sdt=6,44&as_vis=1.
Questions / Issues:
- Am I the only one surprised by this outcome? This Supreme Court draws the conclusion that Seller had control over the earnest money, when the reality is that the only party truly in control of the EM is the title agent. Regardless of instructions received from Seller or Buyer, the title agent may have refused to release the EM and instead retained it until a satisfactory Release Agreement was signed, a Court Order issued, or otherwise the title agent could have deposited the EM into the registry of the Court.
- Is it really that simple for a party to elect remedies, with land mines for those are neither wary nor experienced? And, once Seller realized Buyer’s position but before the trial court had dismissed the claim, couldn’t Seller have released its complaint, instructed the title agent to refund the EM to Buyer, then refiled its lawsuit before anything was concluded?
3. At least in Utah, default provisions must be carefully worded to avoid the result in this case. I wonder how many other States follow this same unusual path traversed by the Supreme Court of Utah.
Stuart A. Lautin, Esq.*
* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization
Licensed in the States of Texas and New York
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.