Beard v. S/E JOINT VENTURE

RODOWSKY, Judge. This case involves the measure of damages for the breach by vendors of a contract to construct a residence and then to convey the improved realty. The real estate market for the subject property was escalating during the potentially ¹²⁹ relevant period. Purchasers sought specific performance or damages.

Specific performance became unavailable when the vendors rejected the contract in bankruptcy. We shall hold that the purchasers’ damages are not limited to certain out-of-pocket losses, as held by the courts below, but that the purchasers may also recover damages for loss of the benefit of their bargain. In computing damages the property may be valued as if improved as promised, and it may be valued as of the date when specific performance became unavailable, in contrast with valuation as of an earlier date when the vendors anticipatorially repudiated the contract. The purchasers are the petitioners, DeLawrence and Lillian M. Beard (the Beards), who were plaintiffs in the circuit court.

The vendors, respondents here and defendants in the circuit court, are Diana C. Etheridge (Etheridge) and Gene Stull (Stull), joint venturers in S/E Joint Venture. Etheridge is a licensed real estate agent and Stull is a home builder. S/E Joint Venture had acquired an unimproved lot in Piney Glen Farms subdivision in the Potomac section of Montgomery County for the purpose of building a home for speculation. Protracted negotiations between the Beards and S/E Joint Venture led to a contract formed on March 17, 1986, under which S/E Joint Venture would construct a house on the lot and convey the improved premises to the Beards for $785,000.

The contract in part provided “that the PURCHASER is purchasing a completed dwelling [and] that the SELLER is not acting as a contractor for the PURCHASER in the construction of the dwelling[.]” The contract recited that “the approximate date of completion of the improvements now scheduled by the SELLER is November 30, 1986.” For a period of ninety days the contract was contingent on the sale of two residences, one the then residence of the Beards and the other that of Mrs. Beard’s mother, who also was to occupy the home to be built. Matters did not proceed smoothly. On March 16, 1987, the vendors, through counsel, terminated the contract. The ¹³⁰ letter declaring the contract terminated invoked a provision under which “the SELLER shall have the right to return the PURCHASER’S deposit and to declare this Contract null and void if, in the SELLER’S sole discretion, it determines that ... performance within 365 days from the date hereof will not be possible.” In May 1987 the Beards filed a two count complaint against respondents.

It sought specific performance under count I and, in the alternative, damages for breach of contract in count II. During the pendency of the action by the Beards, S/E Joint Venture sought the protection of Chapter 11 of the Bankruptcy Act. The Bankruptcy Court on April 8, 1988, ruled that it would approve rejection by S/E Joint Venture of its contract with the Beards. The order of the Bankruptcy Court that effected that ruling, was passed on June 17, 1988, the last business day prior to the commencement of the nonjury trial of the subject action in the Circuit Court for Montgomery County.

In a written opinion the circuit judge found, on conflicting evidence, that the vendors had breached the contract by the purported termination of March 16, 1987. The trial judge concluded “that it is implicit that before the right of termination can be exercised the defendants must have acted in good faith to try to complete construction of the house within the stated time period; this, in the court’s judgment, they did not do.” The circuit court found that Stull “knew some two months after the inception of the contract that he would be unable to meet the time deadline.” This was found to be “significant because defendants were aware that the plaintiffs and [Mrs. Beard’s mother] had to sell their homes in order to meet their financial commitment[.]” The trial court also found undue delay in the performance of plumbing work, ¹³¹ which “had a ripple effect on the subsequent course of construction.” The trial judge did not address the specific performance claim, saying in a footnote: “As to count one Plaintiffs make no argument in their written argument, or otherwise, and the court treats the count as abandoned.” Itemizing claimed damages in their post trial memorandum, the Beards included $100,000 for “loss of bargain.” Factually, the $100,000 figure is said to represent the excess of the value of the property, with the home completed in accordance with the contract, as of March 16, 1987, over the contract price. The plaintiffs undertook to prove the value of the property by calling Etheridge as their own witness. Plaintiffs’ conclusion that $100,000 represents the difference between market value and contract price requires interpreting Etheridge’s testimony.

At times she seems to refer to the value of the house which S/E Joint Venture originally planned, and at times to the value of the house called for by the Beards’ contract. The circuit court never reached this issue because it disposed of the Beards’ contention on legal grounds. Legally to support their loss of the bargain claim, the plaintiffs relied on Horner v. Beasley, 105 Md. 193 , 65 A. 820 (1907). Horner was a purchaser’s action against a vendor for breach of a contract to convey, for $1,200, improved realty worth $1,800.

The vendor’s defense was that title to the property was involved in litigation. Judgment for the plaintiff was reversed because of an error in the admission of evidence of value. This Court, however, approved a jury instruction that if “the defendant acted in good faith in failing to perform the contract of sale, the plaintiff was entitled to recover only the amount of his deposit with interest and the expense if any incurred in the investigation of the title; but if they found that the defendant did not act in good faith then in addition to the amounts aforesaid the plaintiff could recover the excess, if any, of the market value ¹³² of the property, at the time of the sale, over the contract price.” Id. at 198 , 65 A. at 822 . The Beards, also citing Charles County Broadcasting Co. v. Meares, 270 Md. 321 , 311 A.2d 27 (1973), argued that, because the respondents were able to perform, their breach was in “bad faith,” so that benefit of the bargain damages should be awarded.

The trial court did not accept this contention, explaining that it did “not award any damages for loss of the benefit of the bargain[,] finding no evidence of bad faith in the sense that the termination was activated by malice, fraud or the like.” The circuit court awarded the plaintiffs $124,594 in damages, representing the deposit on the property ($75,000), a deposit for a security system ($2,000), a deposit for telephones and intercoms ($1,000), rental payments for substitute housing ($32,000), mortgage commitment fee ($4,250) and storage costs ($10,344). All parties appealed to the Court of Special Appeals which, in an unreported opinion, modified the judgment and affirmed it as modified. 1 The intermediate appellate court, approving the trial court’s analysis of the loss of bargain claim, reasoned that “[o]nce [the trial judge] found a breach on the Sellers’ part but failed to find any evidence of fraud, malice or the like, [the trial judge] could not award damages in accordance with Charles County Broadcasting based on either good faith or bad faith.” We granted certiorari as to the following questions from the Beards’ petition. “1. Whether a seller of real estate who fails to exercise good faith in the performance of the sales contract is liable for the purchasers’ loss of bargain? ¹³³ “2. Whether the measure of damages for loss of bargain is based on the value of the property at the time the seller improperly gave notice of termination or at the time it precluded specific performance of the contract by rejecting it in bankruptcy?” I Damages for breach of a contract ordinarily are that sum which would place the plaintiff in as good a position as that in which the plaintiff would have been, had the contract been performed.

These expectation interest damages embrace both losses incurred and gains prevented. See Restatement (Second) of Contracts § 347 (1981); Restatement, Contracts § 329 (1932). Here the circuit court undertook to apply an exception to the ordinary rule. The exception traces to Flureau v. Thornhill, 2 W. Black. 1078, 96 Eng.Rep. 635 (K.B.1776).

In England, and in the diminishing number of American states that recognize Flureau, the exception applies only where, due to no fault on the part of the seller, there is an inability to convey good title. In the case at hand respondents’ breach had nothing to do with title to the property. Further, under the trial court’s findings, the inability timely to deliver a completed house, which motivated the wrongful termination of March 16, 1987, is not a “good faith” failure to perform within the meaning of the Flureau exception. In any event, “good faith,” per the Flureau rule, is not so all inclusive as to embrace any breach which was not “activated by malice, fraud or the like,” as the trial judge said.

Thus, the trial court applied an erroneous legal standard when it refused to consider benefit of the bargain damages. In Flureau, the plaintiff had purchased at auction a property that paid an advantageous rent in relation to the purchase price. The seller, however, could not produce good title. In the ensuing suit the court’s instructions limited the jury to awarding the return of the deposit paid, plus interest; but the jury allowed an additional twenty ¹³⁴ pounds.

A new trial was ordered. The report of the judgment of De Grey, C.J., reads in full: “I think the verdict wrong in point of law. Upon a contract for a purchase, if the title proves bad, and the vendor is (without fraud) incapable of making a good one, I do not think that the purchaser can be entitled to any damages for the fancied goodness of the bargain, which he supposes he has lost.” Flureau, 2 W. Black. 1078, 96 Eng.Rep. 635. The judgment of Blackstone, J., explained that “[t]hese contracts are merely upon condition, frequently expressed, but always implied, that the vendor has a good title.” Id. at 1078-79, 96 Eng.Rep. at 635.

It has been recognized in England that the Flureau exception was an “anomalous rule” brought about by the difficulties in that country, as late as 1899 (if not later), “in shewing a good title to real property” and that the exception “ought not be extended to cases in which the reasons on which it is based do not apply.” Day v. Singleton, [1899] 2 Ch. 320, 329 (C.A.). 2 Although English courts have struggled over the scope of the Flureau exception, the English cases considering Flureau have all concerned some aspect of title. See Hopkins v. Grazebrook, 6 B. & C. 31 (K.B.1826) (vendor who knows he has no title, but expects to be able to procure it prior to sale cannot rely on Flureau exception); Engell v. Fitch, [1869] L.R. 4 Q.B. 659 (Ex.Ch.) (Flureau limitation on ¹³⁵ damages not available where failure to convey results from vendor’s refusal to oust a tenant); Bain v. Fothergill, [1874] L.R. 7 H.L. 158 (1873-74) (overruling Hopkins v. Grazebrook; Flureau applies when inability to convey interest in mining royalty results from inability to get permission from lessor); Day v. Singleton, [1899] 2 Ch. 320 (C.A.) (Flureau limitation on damages unavailable in sale of leasehold, where vendor fails to use best efforts to obtain lessor’s consent to sale); In re Daniel, [1917] 2 Ch. 405 (Flureau not applicable where difficulty in conveyance results from inability to obtain partial release of mortgage); Braybrooks v. Whaley, [1919] 1 K.B. 435 (Flureau not applicable where failure to convey relates to noncompliance with Emergency Powers Act, rather than title defect). More recently, Flureau has been given a very narrow reading in England. In Malhotra v. Choudhury, [1979] 1 All E.R. 186 (C.A.), a partner in a medical practice, Malhotra, conveyed the medical office to the junior partner, Choudhury, and the latter’s wife.

The partnership agreement provided that, if Choudhury left the practice, Malhotra would have the option to buy back the property at fair market value. The next year Malhotra gave notice of dissolution of the partnership, exercised the option, and later brought an action for specific performance, which was denied. Two years later Malhotra sought damages. The trial court found that Choudhury could not convey good title because of his wife’s refusal to join and, applying Flureau, limited the recovery to reliance damages.

The Court of Appeal reversed, holding that the Flureau rule was an exception to be applied only where the vendor showed best efforts to make a good title. Id. at 199-201. The court reasoned that the origin of the exception virtually required that bad faith be defined as a failure to make best efforts, with no requirement for fraud, and that failure of the vendor to demonstrate good faith precluded the Flureau exception. Id.

With respect to this country, Professor Corbin summarizes: ¹³⁶ “A great many courts in the United States have not been inclined to follow the English courts or to differentiate land contracts from other contracts. The rule they adopt is that, if the seller fails to convey the title that he contracted to convey, the buyer has a right to damages measured by the value of the land at the time it should have been conveyed, less the contract price as yet unpaid.” 5 A. Corbin, Corbin on Contracts § 1098, at 525 (1964) (footnote omitted). “Some of the courts, however, have recognized the English rule____” Id. at 525-28 (footnote omitted). But even among American courts applying Flureau, “[i]f the seller in fact has title and refuses to perform his contract without excuse, the buyer has a right to damages.” Id. at 529 (footnote omitted). Other treatises and commentators agree.

See 3 American Law of Property § 11.67.a, at 168-69 (1952); J. Calamari & J. Perillo, The Law of Contracts § 14-30 (2d ed. 1977); D. Dobbs, Law of Remedies § 12.8 (1973); M. Friedman, Contracts & Conveyances of Real Property § 12.2(a)2 (4th ed. 1984); 8A G. Thompson, Real Property § 4478, at 451-52 (1963); 11 S. Williston, Law of Contracts § 1399 (Jaeger 3d ed. 1968). The first mention of Flureau in the reports of this Court is in Baltimore Permanent Bldg. & Land Soc’y v. Smith, 54 Md. 187 (1880). 3 The land was Solomon’s Island, de ¹³⁷ scribed in the contract as about “sixty-five acres.” The vendor’s retained land, however, surveyed at thirty-six acres. In the purchaser’s damage action the trial court instructed that return of the deposit plus interest and expenses of title examination could be awarded together with benefit of the bargain damages. This Court reversed and remanded for a new trial.

The “different rule” in England under Flureau was noted. Id. at 206 . This Court traced the rule through commentators and noted that it had been followed in a great number of cases in England. Citing 2 Addison on Contracts § 529, the rule limiting recovery to reliance damages was said to apply where the vendor had “ ‘reasonable ground for believing that he was the owner of the property, and had the right to sell at the time he agreed to sell, but is prevented by an unexpected defect of title____’” Id. at 207.

The opinion by Judge Cooley in Hammond v. Hannin, 21 Mich. 374 (1870), citing many cases in this country applying the English rule, was reviewed. This Court held that the jury should have been instructed that damages were limited to return of the deposit, interest and cost of investigating the title if the jury found “that after [the vendor] had entered into said contract, the said defendant discovered that there was a large deficiency in the quantity of land ... and shall further believe that the non-execution [i.e. non-performance] of ¹³⁸ said agreement on the part of the defendant, was occasioned simply by its honest inability to make title to about sixty-five acres of land____” 54 Md. at 209 (referring to passage, quoted here, at 193). Hartsock v. Mort, 76 Md. 281 , 25 A. 303 (1892), and Horner v. Beasley, 105 Md. 193 , 65 A. 820 (1907), both involving vendor’s breaches, recognized that expectation interest damages were appropriate and the Flureau exception was not applied. In the former action the vendor refused to accept a take back purchase money mortgage that conformed to the contract.

In the latter case the jury apparently rejected the vendor’s explanation that the title was in litigation, where the contract price at the time of contracting was about two-thirds of the value. Thereafter this Court did not have occasion again to consider Flureau until the 1973 decision in Charles County Broadcasting, 270 Md. 321 , 311 A.2d 27 , discussed, infra. The Court of Special Appeals has approved expectation interest damages for the vendor’s breach of a contract to build a home and then to convey the improved premises. See Fran Realty, Inc. v. Thomas, 30 Md.App. 362 , 354 A.2d 196 (1976) (holding vendor breached by attempted, unilateral rescission based on previously discoverable, subsurface conditions).

Respondents have no basis for invoking the Flureau exception because they do not even assert that inability to convey title produced their breach of the contract to convey. Respondents deny, however, that the Flureau rule applies so narrowly, and they cite Charles County Broadcasting in support. That case involved breach óf a contract to sell the license of an FM radio station, subject to Federal Communication Commission (FCC) approval of the transfer of ownership and of a relocation of the transmitter. The subjects of the sale were the stock of a subsidiary corporation of the seller, certain equipment, goodwill, contracts and insurance policies, and a lease of realty to be assumed by the buyer.

See Appellant Charles County Broadcasting Co.’s Record Extract at 62-69. The seller agreed to cooperate fully in ¹³⁹ obtaining all needed approvals from the FCC, and it is that covenant which the seller breached. The buyer initially sought specific performance, to require the seller to sign a document needed for FCC approval, but, by the time of trial, the buyer elected damages under the prayer for further relief. The trial court awarded benefit of the bargain damages.

On appeal the seller challenged that award, advancing a variety of reasons, none of which was that Flureau applied. This Court affirmed loss of the bargain damages. The opinion in Charles County Broadcasting opened with a general discussion of specific performance law and of the award of damages in equity. It quoted Hartsock v. Mort, 76 Md. at 288-89 , 25 A. 303 , in turn quoting Hammond v. Hannin, 21 Mich. at 387 , for the rule as to the measure of damages: “ ‘If the vendor acts in bad faith, — as, if having title he refuses to convey, or disables himself from conveying,— the proper measure of damages is the value of the land at the time of the breach; the rule, in such case, being the same in relation to real as to personal property.

But, on the other hand, if the contract of sale was made in good faith, and the vendor for any reason is unable to perform it, and is guilty of no fraud, the clear weight of authority is that the vendee is limited in his recovery to the consideration money (paid) and interest, with perhaps in addition, the costs of investigating the title.’ ” 270 Md. at 326 , 311 A.2d at 31 . After concluding that there was sufficient evidence of value to support loss of the bargain damages, the Court said that “in breach of a contract to sell, damages are based on value at the time the transfer was to be made, and not on contract price____” 270 Md. at 332 , 311 A.2d at 34 . Charles County Broadcasting concluded by saying: “As we pointed out earlier, loss of bargain damages are available when a vendor acts in bad faith, Hartsock v. Mort, supra, and may be recovered in a specific performance suit under a prayer for general relief....” 270 Md. at 334 , 311 A.2d at 35 . ¹⁴⁰ Respondents’ position necessarily has two steps, (1) that Charles County Broadcasting expands Flureau beyond problems of title, and (2) that respondents breached the subject contract in good faith. But we do not read Charles County Broadcasting to hold that loss of the bargain damages are not recoverable for a good faith breach of contract, other than where the breach results from certain problems involving title to realty.

No party in Charles County Broadcasting argued that realty was involved there. This Court’s quote of the damage rule from Hart-sock v. Mort was appropriate. Part of that rule is that damages for breach of a contract to sell personalty are the same as those for a “bad faith” breach of a contract to convey realty. 4 But, even if respondents were correct in their first step, Charles County Broadcasting refutes their second step. If the sellers’