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Schmeck v. Krall

A-4710-07T3 (N.J. Super. App. Div. 2009) (Unpublished)

CONTRACTS; DEEDS — An escrow agreement executed at a closing is an enforceable modification of an original contract of sale even if a party to the escrow agreement did not read it before signing.

Buyers entered into a contract to purchase a condominium unit. The agreement provided that the sellers would put money into an escrow account toward a bulkhead replacement being contemplated by the condominium association. It also provided that if the bulkhead was not scheduled to be replaced within six months of the settlement date, the money was to go back to the sellers. On the day of the closing, the parties appeared without counsel. The title agent conducting the closing agreed to serve as escrow agent and prepared an escrow agreement that each of the parties. The agreement provided that if the bulkhead replacement was not scheduled within 180 days, the escrowed funds would be released to the buyers to make the repairs. More than a year later, the sellers sued, claiming that the buyers failed to release the escrow money over to them. They sought relief under theories of breach of contract, quasi-contract/unjust enrichment, and promissory estoppel. The buyers counterclaimed, alleging breach of contract, violation of the covenant of good faith and fair dealing, and legal and equitable fraud. They claimed that, shortly after closing, a series of special assessments were made by the condominium association for necessary repairs. The buyers alleged the sellers had knowledge of these assessments prior to closing and had knowledge of the building defects that led to these assessments.

The lower court ruled that the escrow agreement amended the original purchase contract and thus dismissed the sellers’ claim for the return of the escrow money. It also found that the sellers breached the implied covenant of good faith and fair dealing with respect to entering into the contract because the sellers never disclosed certain engineering reports to the buyers before the closing. The lower court held that, if the information had been disclosed, the buyers may have decided not to go forward with the transaction. The sellers appealed.

The Appellate Division affirmed in part and reversed in part. First, the Court, agreeing with the lower court, held that the escrow agreement was an enforceable modification of the original contract. Therefore, the Court affirmed the lower court’s dismissal of the sellers’ claims. It held that the modification was not imposed upon the sellers without their knowledge since they signed the amendment at closing after it was briefly discussed with them by the title agent. It also noted that there was no evidence that would support a finding that the sellers were misled about the escrow agreement’s contents. Although the sellers contended that they never read the escrow agreement, the Court opined that if someone chooses not to read a contract before signing it, absent a showing of fraud, he or she cannot later relieve himself or herself of its burdens. It further held that the escrow agreement was not ambiguous.

The Court declined to consider the argument that the modification lacked consideration because this issue was not raised in the proceedings before the lower court. It agreed with the sellers, however, that the engineering reports were hearsay, prejudicial, and should not have been admissible to prove the truth of its contents. The Court, thus, vacated the judgment against them. It found that the sellers had been prevented from cross-examining the author of the report and thus were unable to impeach the buyers’ proofs on a critical issue. Further, the Court noted that the lower court never found that the sellers acted with the requisite “bad motive or intention” in failing to disclose the existence of the engineering report to the buyers. The Court also ruled that the buyers had presented insufficient proof that the sellers violated the implied covenant of good faith and fair dealing, especially in light of the fact that: (a) the property was sold “as is”; and (b) the contract gave the buyers the right to inspect the property, which the buyers eschewed.

Finally, as to the equitable fraud claim, the Court held that the buyers’ only proof as to the existence of defects at the property was the engineering report, the substance of which was hearsay. In addition, the Court noted that one of the buyers testified that he actually observed the condition of the exterior of the buildings and therefore, it found that the sellers did not conceal any “latent defect” from the buyer. Further, the Court stated that there was no proof to indicate that the sellers were aware of any planned assessments prior to closing. Therefore, the essential elements of equitable fraud were not proven, according to the Court.

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