Scott E. Mollen

Development—Counterclaims for Breach of Contract, Anticipatory Repudiation, Fraud in the Inducement and Breach of the Implied Covenant of Good Faith and Fair Dealing Dismissed

A plaintiff seller (seller) had moved to dismiss counterclaims asserted by a defendant purchaser. The court granted seller's motion.

In July 2015, the seller agreed to sell to the purchaser approximately 22 acres of land, for a residential development project "consisting in not less than thirty-five units (project)." The contract provided for a due diligence period of 90 days and an "approvals contingency date" (ACD), by which the purchaser had to obtain required governmental approvals necessary to construct the project. The purchaser could extend the ACD for 6 months on written notice before its expiration. If the purchaser failed to obtain the necessary approvals by the ACD, either party could terminate the contract.

If termination occurred, neither party was to have any "further liability or obligation to each other except for those that expressly survive termination of the agreement." The seller was required to "[r]easonably cooperate with the application for the government approvals." If the transaction failed to close as a result of the seller's default, the purchaser would be entitled to

such remedies for breach of contract as may be available at law and in equity, including without limitation, the remedy of specific performance.…If this transaction fails to close due to the default of (purchaser), then (seller's) sole remedy…shall be to terminate this agreement and to retain the Deposit plus interest earned thereon as liquidated damages, (seller) waving all other rights or remedies in the event of such default by (purchaser).

In December of 2015, the parties amended the contract to extend the due diligence period. The seller thereafter signed a letter authorizing the purchaser to submit necessary land use applications (authorization letter). The purchaser moved forward with the project and paid the seller a deposit.

However, in November 2016, the seller advised the purchaser that the seller wanted the purchaser "to withdraw its proposal for the project." In January 2017, the seller offered to reimburse the purchaser for costs it had incurred. The following day, the seller rescinded such offer and again urged the purchaser "walk away from the deal." The seller thereafter accused the purchaser and individual defendant ("A") of having "engaged in improper conduct regarding the project." The seller threatened to sue the purchaser and "A" and send a copy of the complaint "to the press." The seller also stated that it may contact the "Department of Environmental Conservation" to "preserve a watershed on the land to 'exclude (purchaser's) development in any form.'"

In March 2017, the seller again threatened to file a lawsuit and "go to the press." The purchaser alleged that seller sought to disparage the purchaser so that the town would not approve the project. In June 2017, the seller sent the purchaser a proposed complaint and also advised the town that the seller intended to sue the purchaser. The seller explained, inter alia, that the parties' contract contemplated a 35-unit residential development and the purchaser "now sought to build a high-density multi-family residential development." The town advised the seller that "A" had never proposed a low-density project of 35 units, the project was to include at least 120 units, and the town had "never encouraged an increase in density."

In June 2017, the purchaser advised the seller that the seller's attorneys stated that the seller did "not intend to honor the terms of the contract" and planned to file suit to invalidate the agreement." The purchaser stated that it preferred to move forward with the agreement.

In June 2017, the seller filed the subject complaint, alleging that the contract and the Dec. 30 amendment were "fraudulently induced" and that the contract and amendment were unenforceable. The purchaser alleged that the seller had notified the media and articles were published relating to the lawsuit. The purchaser further alleged that the complaint was filed before the purchaser was obligated to perform its contractual obligations and at time when the purchaser was "ready, willing and able to fulfill its contractual obligations" and still…desired to develop the project…and was engaged in doing so."

In March 2018, the seller sent a letter stating that the seller was "terminating the contract because the ACD had expired." However, the town listed the purchaser's proposed development in a "comprehensive plan that the town released in April 2018."

The seller essentially claimed that "never would have agreed to a high-density project because it would be incompatible with its mission as a residential facility for autistic children." The complaint sought a declaratory judgment that (a) no contract had been formed because there was no "meeting of the minds" between the parties, and the contract, if formed, was unenforceable because, inter alia, it had fraudulently induced, (b) the Dec. 30 amendment had been fraudulently induced, (c) the Dec. 30 amendment lacked consideration, and (d) the authorization letter did not modify the contract, and if it did, it was unenforceable under the statute of frauds and because of a lack of apparent authority of the seller's signatory. The complaint did not ask for rescission of the contract or the Dec. 30 amendment and stated that the seller will do "whatever, if anything, the court determines it must do."

The purchaser asserted counterclaims, alleging that the seller anticipatorily repudiated the contract by urging the purchaser to "walk away from the deal," and sending negative communications to the town and the press, and filing the lawsuit. The purchaser also claimed that the seller breached the contract provision which limited the seller's remedy, in the event of a default by the purchaser, to termination of the contract and retention of the deposit—by filing a lawsuit and that the "(seller) breached the implied covenant of good faith and fair dealing by impeding,…and preventing (purchaser) from fulfilling its contractual obligation." The purchaser sought specific performance or alternatively, return of the deposit paid and compensatory damages and fees and costs. The seller had moved to dismiss the counterclaims.

The court explained:

"anticipatory repudiation occurs when, before the time for performance has arisen, a party to a contract declares his intention not to fulfill a contractual duty."…."Repudiation must be clear and unequivocal to constitute an anticipatory breach of contract." "When confronted with an anticipatory repudiation, the non-repudiating party had two mutually exclusive options."…."The non-repudiating party 'may (a) elect to treat the repudiation as an anticipatory breach and seek damages for breach of contract, thereby terminating the contractual relation between the parties, or (b) it may continue to treat the contract as valid and await the designated time for performance before bringing suit.'"…."It 'cannot at the same time treat the contract as broken and as subsisting', as 'one course of action excludes the other.'''…."Moreover, a non-repudiating party cannot 'exercise two alternative or inconsistent remedies,' and 'once a party has elected a remedy for a particular breach, its choice is binding with respect to that breach and cannot be changes.'"

The seller argued that the purchaser had failed to plead an anticipatory repudiation claim since it did not elect, and did not allege that it had elected, to treat the seller's allege repudiation as a breach of contract. The seller also asserted that the counterclaims are inconsistent in that they included a claim for anticipatory repudiation and sought specific performance, i.e. the purchaser is "impermissibly attempting to simultaneously treat the contract as breached and still in effect" when in need. The seller further argued that the "filing a rescission action is not a clear and unequivocal repudiation."

The purchaser asserted that it may plead claims in the alternative and thus claims for anticipatory breach and breach of contract are not impermissible. The purchaser contended that the filing of the action was a "clear and unequivocal statement of repudiation, and even if it is not, (the seller's) other acts of interference with the contract were clear statements of repudiation" and (the purchaser's) counterclaims were not brought at a reasonable time after the (the seller's) repudiation, and therefore there is no election of remedies issue."

The court found that the purchaser failed to "plausibly allege that (seller) repudiated." With respect to the seller's lawsuit, that "action seeking a judicial determination as to the terms of the contract, and the mere act of asking for judicial approval to avoid a performance obligation is not the same as establishing that one will not perform that obligation absent of such approval… and therefore an action for rescission would not amount to a clear and unequivocal repudiation." It further stated that publicizing the complaint, notifying the town of possible litigation and attempting to convince the purchaser to "back out of the deal did not amount to a clear and unequivocal statement" that the seller "would not perform if it had the obligation to do so." Even if the seller had repudiated, the court found that the purchaser had "failed to treat (seller's) alleged repudiation as a breach and instead elected to treat the contract as valid. (purchaser) therefore had to wait until (seller) in fact breached before bringing a claim."

Since no breach had occurred, the purchaser did not have an anticipatory repudiation claim. There was only a claim for breach of contract and in the context of anticipatory repudiation, "the promisee gets to choose whether the breach occurs at the time of the anticipatory repudiation, or at the time for performance." Moreover, "a repudiation by one party may constitute a breach of the contract, excusing the non-repudiating party from further performance and entitling it to claim damages for total breach; but repudiation constitutes a breach only if the non-repudiating party elects to treat it as such…." The court emphasized that "[w]hat the non-repudiating party cannot do, and what (purchaser) is attempting to do here, is ignore the allege repudiation and treat the contract as valid but then elect to terminate at an arbitrary time before any breach occurs."

The seller had attempted to terminate the deal in November 2016. However, the purchaser treated the contract as valid until after the seller terminated it in March 2018. In June 2017, the purchaser advised the seller that notwithstanding "the impending lawsuit, (the purchaser) preferred to move forward with the agreement…." In a letter dated Aug. 1, 2017, after the seller commenced the action and after it allegedly had "leaked" the litigation to the press and advised the town of the lawsuit, the purchaser had advised the court that it was "moving forward pursuant to the contract to obtain the necessary approvals."

The court explained that such statement "cannot be reconciled with an election to treat (seller's) actions, virtually all of which took place well before August 1, 2017, as a repudiation." The purchaser, in June 2018, brought its counterclaims alleging anticipatory repudiation, for the first time. Since the purchaser had not "'elected to treat the repudiation as an anticipated breach,' its only option was to 'continue to treat the contract as valid and await the designated time for performance before bringing suit.'" The purchaser did not claim anticipatory repudiation until after the seller terminated the contract, which the court found was not a breach.

The purchaser argued that there was "no specific time limit within which to make its election" and a non-repudiating party may wait a "reasonable time after learning of the breach" and what is reasonable "depends on the nature of the performance to be rendered under the contract," and that is a question in fact for a jury, unless the facts were "undisputed, in which case the question becomes one appropriate for judgment as matter of law."

Although courts may be "flexible in determining what constituted the 'reasonable time' by which a party must elect its remedy…," no prior case provided that a non-repudiating party "can wait nearly a year after a year after the alleged repudiation to elect to treat it as a breach. The 'critical factor' in determining the reasonableness of the timing of (purchaser's) election 'is not the passage of time but whether the non-breaching party had taken an action (or failed to take an action) that indicated to the breaching party that it had made an election."

Here, the purchaser had not "plausibly alleged that it [had] reasonably indicated to (the seller) that it elected to treat the proposed repudiation as a breach." The purchaser indicated "that it intended to treat the contract as valid" and by treating the contract as valid, the purchaser "lost its option to later treat the contract as broken." The court found that the purchaser's "attempt to treat the alleged repudiation as a breach nearly a year later is unreasonable" and the purchaser had failed "to plead an anticipatory repudiation claim."

Rather than dismiss the purchaser's anticipatory repudiation claim because it was inconsistent with the breach of contract claim, that claim was dismissed because the purchaser failed to plead "an unequivocal repudiation or that it elected to treat any such repudiation as a breach." Although under certain circumstances, parties may plead allegations in the alternative, in the subject context, a party "cannot have it both ways. It cannot at the same time treat the contract as broken and subsisting, for one course of action excludes the other and the law…does not permit a party to exercise two alternative or inconsistent remedies."

The purchaser also claimed the seller breached the contract when it filed the subject action. The purchaser argued that if it defaulted, the seller's "sole remedy in such event shall be to terminate this agreement and to retain the deposit plus interest earned thereon as liquidated damages, (seller) waiving all other rights or remedies in the event of such default by (purchaser)."

However, the seller never alleged that the purchaser defaulted. The purchaser attempted to have the contract deemed unenforceable based on the circumstances under which the parties had entered into it and the purchaser had failed to plead any facts that suggested it defaulted before the seller filed the complaint. Thus, seller did not breach the foregoing provision, the court dismissed the breach of contract counterclaim.

The purchaser also alleged that the seller breached the implied covenant of good faith and fair dealing by "impeding,…preventing (purchaser) from fulfilling its contractual obligations." However, the court found that the purchaser failed to "plausibly allege that (purchaser was) prevented from performing—i.e., it was unable to obtain government approvals"—because of seller's conduct. The allegations did not show that the seller's "lack of cooperation… contributed materially to (purchaser's) inability to perform."

The purchaser's allegations about the seller attempting to "poison" the town against the purchaser, were "conclusory." The allegations did not "suggest that the…approvals would have been forthcoming but for (seller's) actions." The seller's efforts to "poison the town" appeared to be unsuccessful. The project was included in the town's comprehensive plan in April 2018 and the purchaser "had to option to extend the ("ACD"), which would have prevented (seller) from terminating the contract, but (purchaser) failed to exercise it."

Since the purchaser had failed to "plausibly allege" that the seller "contributed materially" to the purchaser's failure to meet the condition precedent, the seller's termination of the contract did not constitute a breach. Since "the termination was appropriate and because 'no further liability or obligation… survives termination,'…(seller) cannot be liable for a breach of the contract."

Thus, even if the seller had not successfully terminated the contract, the breach of the implied covenant of good faith and fair dealing claim should be dismissed because the purchaser failed to plead causation. Causation is a "crucial" element of a plaintiff's prima facie case for breach of contract and the purchaser had not plausibly alleged that the seller's breach "directly and proximately caused its damages." The purchaser only pleaded in "conclusory fashion" that the seller prevented it from performing. Accordingly, the court granted the seller's motion to dismiss the purchaser's counterclaims.

St. Christopher's Inc. v. Forgione, U.S. District Court, S.D.N.Y., Case No. 17-CV-4757, decided July 11, 2019, Seibel, J.

Scott E. Mollen is a partner at Herrick, Feinstein.