Cutler v. Sugarman Organization, Ltd.

BISHOP, Judge. Appellee, The Sugarman Organization, Ltd., (“Sugar-man”) filed suit for specific performance in the Circuit Court for Baltimore County to require appellants Sadye Weinstein Cutler, David Weinstein and Edith Weinstein Brener (“Weinsteins”) to convey approximately 24 acres owned by the Weinsteins to Sugarman pursuant to an August 22, 1985 Contract of Sale. Thereafter, Fairbrook-Johnny Cake Associates Joint Venture (“Associates”), the assignee of Sugarman’s contract with the Weinsteins, filed suit against The Sugarman Organization, Ltd., David Sugarman, President of The Sugarman Organization, Ltd. and the Weinsteins seeking, inter alia, specific performance of its contract with Sugarman, or damages if Sugarman was unable to convey the property. Associates’ motion to consolidate its case with Sugarman’s suit was granted.

At a hearing on open motions, The Artery Organization, Inc. (“Artery”), who entered into a contract with Associates to purchase the subdivided lots Associates was to receive from Sugarman, was ordered to join the ongoing litigation, pursuant to the Weinsteins’ motion. Artery then filed a specific performance action against the Weinsteins, Sugar-man and Associates. Artery entered into a settlement agreement with the Weinsteins and Associates on January 29, 1990 and, as a result, Artery’s Motion for Voluntary Dismissal of its complaint was granted. Prior to trial, Sugarman dismissed all of its damage counts, and proceeded only on the specific performance count.

The Weinsteins and Associates waived their rights to a jury trial, and the case was tried without a jury before Judge Joseph Murphy. ⁵⁷¹ At the conclusion of trial, the trial court found that the Weinsteins, in January 1988, knew that Sugarman had an option in his contract with Associates to repurchase a seven acre parcel of the property and could have, at that time, voided the agreement but did not do so. In addition, the trial court found that the Weinsteins, Sugarman, Associates, and Artery reached a new agreement at a settlement meeting on September 20, 1988, whereby they would close pursuant to the terms of the August 1985 contract, as modified on September 20, 1988. The trial court found that the Weinsteins, having ratified the August 1985 contract, as modified on September 20, and having agreed to go to closing on September 27, 1988, had waived their defense of fraud and could not now void the contract or prevent specific performance. The trial court also found that Sugarman had not been forthright with respect to the seven acre parcel.

Thus, the trial court granted in part and denied in part specific performance of the August 1985 contract as modified by the September agreement. Sugarman received specific performance of the contract, excluding the seven acre parcel which the Weinsteins were permitted to retain. The trial court denied Associates’ request for specific performance by Sugarman of the Associates contract, after finding that Sugarman offered Associates the opportunity to close on September 27, 1988 but Associates was not in a position to do so. The trial court found that Associates was not misled about the contract Sugarman had with the Weinsteins and that Sugarman was not in any way responsible for the failure of the parties to close on September 27, 1988.

Issues Presented Appellants Weinsteins present the following issues: I. As a matter of law, may the fact that a party to litigation attempted to reach an out of court settlement agreement constitute a waiver of that party’s defenses to a suit for specific performance? ⁵⁷² Cross-Appellant Sugarman Organization, Ltd. asks: II. Did the trial court err in finding that the Weinsteins had a right, at any time, to void the August 1985 contract?

III

Did the trial court err in finding that, although Weinsteins had a right to void the August 1985 contract, such right was lost by application of the doctrines of waiver and estoppel?

IV

Was the trial court clearly erroneous in denying partial specific performance to Sugarman whereby the Weinsteins were permitted to retain the seven acre parcel? Appellant Associates raises the following issues: V. Was the lower court clearly erroneous in denying Associates’ motion for judgment and, clearly erroneous, in denying specific performance to Associates?

VI

In the event this Court rules that Sugarman is not entitled to specific performance for the 133 lots, should judgment be entered in favor of Associates against Sugar-man for $100,000? Statement of Facts Appellants, Sadye Weinstein Cutler, her sister, Edith Weinstein Brener and their brother, David Weinstein (“Weinsteins”) together own a 24 acre parcel of property in Baltimore County known as Winsten Estates (“Total Property”). On August 22, 1985, the Weinsteins entered into a Contract of Sale of the Total Property (“August 1985 contract”) with David Sugarman, Mrs. Cutler’s grandson-in-law and a licensed engineer and real estate broker, a developer and President of The Sugarman Organization, Ltd. At the time of the contract the property was undeveloped. The August 1985 contract provided for Sugarman to subdivide the Total Property into the maximum number of residential lots allowed by the governmental authorities ⁵⁷³ under the zoning classification of DR-5.5. 1 Sugarman was to pay the Weinsteins $3,500.00 for each recorded lot, with a minimum price of $300,000.00 for the Total Property.

The contract required that the Total Property be divided into four sections, with closing on the first section to occur by August 22, 1988. The contract provided that Sugarman could assign his interest in the Total Property, after a record plat was filed. If he wished to sell or transfer the Total Property prior to that time, Sugarman was required to get the consent of the Weinsteins. In addition, the contract required that any assignment convey “all of the remaining portion of the Total Property not yet settled and conveyed” and gave the Weinsteins a “right of first refusal.” 2 Prior to signing the August 1985 contract, the Weinsteins received legal advice from William Weinstein, Mrs. Cutler’s son-in-law and David Sugarman’s father-in-law.

Both parties intended this to be an “arm’s length” transaction. Sugarman paid the Weinsteins the required deposit of $1,000. After the contract was signed, Sugarman began to develop the Total Property. He resolved wetland, sewerability, and density transfer problems, which resulted in the subdivision of the Total Property into 133 separate buildable lots, plus lot 134, a seven acre parcel that had no access, water, or sewer. 3 ⁵⁷⁴ On August 1, 1987, prior to the recordation of the plat among the Land Records of Baltimore County, Sugarman entered into an “Agreement to Assign the Contract of Sale” with Associates.

Sugarman did not obtain the consent of the Weinsteins to enter into the Agreement to Assign prior to its execution. The Agreement to Assign the Contract of Sale (“Associates contract”) provided that all of the rights and obligations of Sugarman under the August 1985 contract would be assigned to Associates and that Associates would assume all of Sugarman’s liabilities thereunder. Associates was to pay $9,000 per residential lot, of which Associates was to pay directly to the Weinsteins $3,500 per lot, the amount owed to the Weinsteins under the August 1985 contract. The Associates contract was for the assignment of the Total Property, however, it distinguished between the 17 acres to be developed currently, and the seven-acre parcel which was not to be developed currently.

At closing, Sugarman was to receive a five year option to purchase the seven acre parcel for $1,000. The assignment was to become effective immediately prior to the closing on the Total Property under' the August 1985 contract. Closing under the Associates contract was to be contemporaneous with the closing under the August 1985 contract and was required to occur within ten days after the final plat was recorded. In September 1987, Associates entered an agreement to sell its interest in the Total Property to The Artery Organization.

After the Associates contract was executed, Sugarman informed the Weinsteins of the Associates contract and, on August 3, 1987, requested they execute a waiver of the right of first refusal.' At this point the relationship between the Weinsteins and Sugarman began to deteriorate. Distrust between the parties mounted when the Weinsteins learned of the contents of the Associates contract and then ⁵⁷⁵ sought to increase the purchase price per lot. 4 The Weinsteins insisted that Sugarman not assign the Property but rather retain it and do the building himself. Sugarman insisted he had the right to agree to assign his interest in the Total Property under the August 1985 contract. On August 11, 1987, the Weinsteins signed a waiver of their right of first refusal for increased consideration. 5 By January 1988 both parties had retained counsel.

The Weinsteins saw a copy of the Associates contract for the first time on January 27, 1988. It was then they first learned of Sugarman’s option to purchase back the seven acre parcel for $1,000. The Weinsteins insisted that they would not close unless they received more than the contract price. On January 28,1988, Sugarman requested the Weinsteins sign documents required for approval of the record plat.

The Weinsteins refused to sign and, in March 1988, made a settlement demand for an additional $400,000. Sugarman countered with an offer of $100,000. In April 1988, the Weinsteins sent Sugarman a courtesy copy of the Complaint which the Weinsteins intended to file in April, but which was never filed. On May 19, 1988, Sugarman filed a Complaint, seeking specific performance by the Weinsteins of the August 1985 contract.

On August 9, 1988, Associates filed suit against Sugarman and the Weinsteins. 6 The two suits were consol ⁵⁷⁶ idated and Artery was ordered to join the ongoing litigation. The Weinsteins delivered to Sugarman the executed documents needed to record the plat and the plat was recorded on September 8, 1988. On September 20, 1988, the Weinsteins, Sugarman, Associates, and Artery met in Associates’ office and reached an oral agreement. The agreement provided that closing would be held on September 27; funds would be wired, presumably by Artery, to an escrow account so distribution could be made immediately to all the interested parties; the August 1985 contract would be the basis for the closing; the entire Total Property would be transferred to the Sugarman Organization, for consideration stated in the August 1985 contract plus an additional $250,000 from Associates; 7 the seven acre parcel would go to the Sugarman Organization with an option executed at closing giving Associates and the Weinsteins an option to purchase the seven acre parcel for $150,000; and the remaining 17 acres would go to Artery.

On September 27, 1988, the closing did not occur because Artery refused to close. As a result, the Weinsteins refused to tender the deed and Associates refused to close. As previously mentioned, Artery executed a settlement agreement with the Weinsteins and Associates and its complaint was dismissed. We review the trial court’s findings under the clearly erroneous standard.

Md. Rule 8-131 (1991). Clayten v. Proutt, 227 Md. 198, 202 , 175 A.2d 757 (1961); Fran Realty, Inc. v. Thomas, 30 Md.App. 362, 371 , 354 A.2d 196 (1975). This standard requires that we decide only whether there is any competent, material evidence legally sufficient to ⁵⁷⁷ support the trial judge’s findings. In making this determination, we assume the truth of all the evidence and of all the favorable inferences fairly deducible therefrom tending to support the trial court’s factual conclusions.

Maxima Corp. v. Cystic Fibrosis Foundation, 81 Md.App. 602, 610 , 568 A.2d 1170 (1990). Discussion I., II. and III. The appellants Weinsteins contend that the trial court correctly found that the appellants had a right to void their August 1985 contract when they discovered that appellee Sugarman kept an option in his contract with Associates to repurchase the seven acres for a nominal fee. Weinsteins further contend that unless they waived their right to void the August 1985 contract as a matter of law, the trial court’s order of specific performance must be reversed.

We find sufficient evidence to support the trial court’s finding that the Weinsteins had a right to rescind the August 1985 contract when they learned of the option. But we also find ample evidence to support the trial court’s finding that the Weinsteins waived, as a matter of law, their right to rescind the August 1985 contract. Right to Rescind the August 1985 Contract The trial court did not find that Sugarman committed a fraud against the Weinsteins by retaining an option, in his contract with Associates, to buy back the seven acre parcel for a nominal sum. Rather, the trial court found that all the parties before it were “decent people,” not “thie[ves],” facing difficult problems as a result of “misunderstandings.” As appellants note, it was not necessary for the trial court to find fraud in order to give the Weinsteins the right to void the contract.

The Court in Sommers v. Dukes, 208 Md. 386, 392 , 118 A.2d 660 (1955) stated that “[i]n equity ... rescission may be had for innocent [material] misrepresentations.” The trial court, referring to Sugarman’s fail ⁵⁷⁸ ure to disclose the $1,000 option to repurchase the seven acre parcel contained in the Associates contract, found that Sugarman “should have been more forthright and open with (the Weinsteins)---- He made a mistake.” This finding was sufficient to support the trial court’s conclusion that the Weinsteins could have voided the August 1985 contract. Waiver of the Right to Rescind Regardless of the action giving rise to the right to rescind a contract, whether it be fraud or misrepresentation, the remedy of rescission must be exercised promptly upon discovery of the fraud or misrepresentation. Ellerin v. Fairfax Sav. Ass’n, 78 Md.App. 92 , 552 A.2d 918 (1989).

This is so because “[Rescission is considered to be a radical, remedy; it therefore must be promptly asserted once a party discovers facts which justify it.” Id. at 109 , 552 A.2d 918 . The right to rescind may be waived by not acting promptly on discovery of the facts from which it arises. Bagel Enter., Inc. v. Baskin & Sears, 56 Md.App. 184 , 467 A.2d 533 (1983). The right to waive must be exercised within a reasonable time, which is determined, in large part, by whether the period has been long enough to result in prejudice. 8 Id. at 197-98 , 467 A.2d 533 .

Rescission requires at a minimum that the party exercising a right to rescind notify the other party and demonstrate an unconditional willingness to return to the other party both the consideration that was given and any benefits received. Id. at 201 , 467 A.2d 533 . The evidence supports the trial court’s finding that the Weinsteins did not promptly exercise their right to ⁵⁷⁹ rescind the August 1985 contract and therefore waived their right to seek rescission. On January 27, 1988, the Weinsteins discovered that Sugarman retained an option to purchase the seven acre parcel in the Associates contract.

The trial court found that the Weinsteins did not seek to void the contract. Although the Weinsteins’ attorney notified Sugarman’s attorney that the Weinsteins were prepared to file a Complaint and seek a rescission, the Weinsteins never filed the Complaint. The Weinsteins did not either tender the $1,000 deposit under the August 1985 contract or offer to pay Sugarman, in quantum meruit, for the work he had performed to develop the property. Weinsteins’ attorney testified that he knew the Weinsteins had a cause of action for rescission based on the misrepresentation but he did not file suit and seek to rescind the August 1985 contract because the Weinsteins had instructed him to settle the case for additional compensation.

In addition to sleeping on their right to rescind, the Weinsteins, in March 1988, made a settlement demand for $400,000 over the August 1985 contract price and a counteroffer to settle was made by Sugarman. On August 19, 1988, the Weinsteins executed the necessary documents and Sugarman subsequently filed the plat. The plat was accepted and recorded on September 8, 1988. This of course, added substantial value to the property.

Meanwhile, by its terms the August 1985 contract expired on August 22, 1988. Ratification of the August 1985 Contract The trial court found that the Weinsteins ratified the August 1985 contract, after they knew of the alleged fraud by Sugarman, when they reached an agreement at the meeting on September 20, 1988 to close pursuant to the August 1985 contract, as modified at the September 20th meeting. In Bagel, this Court reasoned: Having the knowledge of the facts, he is not deceived. If he is unwilling to take the benefits accrued or accruing under the contract, he has an opportunity to disavow it, ⁵⁸⁰ get back what he put out, and place himself in approximately the same position in which he would have been had no contract been made.

If he does not do this, but continues receiving the benefits coming to him under the contract, he has affirmed the contract after knowing the facts. He may have been deceived in the first instance, but he is not deceived after he knows. Making his choice after he knows, he must abide by it. Id. at 200 , 467 A.2d 533 (citations omitted).

Even though the mere affirmation of a contract does not imply a waiver of the right to sue 9 for fraudulent misrepresentation, Sommers, 208 Md. at 393 , 118 A.2d 660 , the parties involved in this case went beyond merely affirming the August 1985 contract. A new contract was formed — a novation took place. A novation is the substitution of a new contract or obligation for an existing one, between the same or different parties by mutual agreement. In I. W Berman Properties v. Porter Brothers, Inc., 276 Md. 1 , 344 A.2d 65 (1975), the Court defined novation as a new contractual relation made with intent to extinguish a