Opinion
Opinion Filed: October 1, 1991.
From the Circuit Court of Shelby County, The Honorable Robert A. Lanier, Judge, SHELBY LAW NO. 02A01-9104-CV-00057
AFFIRMED IN PART AND REVERSED IN PART
Roger A. Stone, Memphis Attorney for Plaintiff/Appellee.
Robert A. Corrington, Memphis Attorney for Defendants/Appellants.
This appeal arises out of an action brought by plaintiff Crye-Leike Realtors, Inc. to recover a brokerage commission allegedly due under the terms of a real estate sales contract. Defendants, Douglas and Ava Hay, answered denying plaintiff was entitled to a commission because the real estate transaction was not closed on or before December 31, 1986, in accordance with the terms of the contract. In a counter claim defendants alleged that plaintiff improperly disposed of the earnest money deposited by the purchasers and that the plaintiff was indebted to them for $1,250, one-half of the earnest money deposited. The trial court, sitting without a jury, held that plaintiff had earned a commission of $2,835 pursuant to the sales contract and the defendants were entitled. to $1,250 from the plaintiff as one-half of the earnest money held in escrow. The trial court then offset the amount due plaintiff by the amount due defendants and rendered judgment in favor of plaintiff for $1,585. Defendants appeal claiming that the trial court erroneously held that plaintiff was entitled to a commission under the contract. We reverse that part of the trial court's judgment holding that plaintiff was entitled to a commission.
I.
On December 1, 1986, the defendants listed their residence for sale with Century 21 American Heritage Realty, with Mrs. Hay's mother, Maxine Lindsey, as the listing agent. The record reveals that the defendants were anxious to have the sale of their home completed by December 31, 1986, so as to enable them to purchase another piece of property as well as to take advantage of the existing tax laws.
On December 3, 1986, Phyllis Pedigo, a Crye-Leike agent, presented to Ms. Lindsey an offer to purchase the property on behalf of Stephen and Julia Maroda. On December 5, 1986, after a couple of days of negotiations, an agreement to purchase the property was reached and executed by the parties. The contract provided for a $2,500 earnest money deposit to be paid by the Marodas and held by Crye-Leike Realtors. The contract further provided that closing was to be held on or before December 31 with Robert Tribble named as the closing attorney.
The Marodas were given the option under the contract to assume the Hays' existing mortgage on the home. Shortly after the contract was executed, the Marodas approached Leader Federal, the mortgage holder, and took the steps necessary to assume the loan. shortly thereafter, Leader Federal indicated to Ms. Pedigo that the Marodas should have no trouble qualifying for the loan and that all the documents should be ready for the December 31 closing.
On the morning of December 31, 1986, the Marodas, along with Phyllis Pedigo ana a home inspector, went to the Hays' home and conducted a final inspection of the premises. A dispute arose as to an alleged roof leak, however, all parties concerned stated that the problem was resolved that morning. Closing attorney, Robert Tribble, testified that throughout the day on December 31 he was in touch with Leader Federal about their completion and delivery of the loan documents to him so that he could close the sale sometime that day. By 5:00 or 6:00 p.m. that day, however, it became apparent that Leader Federal would be unable to complete the loan package in time to close that day. Mr. Tribble informed both Ms. Lindsey and Ms. Pedigo that the closing would be reset for the next week. There was conflicting evidence presented at trial as to whether Ms. Lindsey or the Hays ever agreed to a closing date after December 31.
On January 2, 1987, a second attempt to close was made which also failed because Leader Federal had still not delivered the necessary documents to Robert Tribble. Finally, by January 5, all the documents were in the possession of Tribble and a closing was arranged for 6:00 p.m. Douglas Hay testified that he informed Mr. Tribble prior to closing that as far as he was concerned the deal was off since it had not closed on or before December 31 as specified in the contract.
A closing was held on January 5, at 6:00 p.m. in which neither Mr. or Mrs. Hay attended. After all the documents were signed the plaintiff, acting through Phyllis Pedigo, returned the $2,500 earnest money check to the Marodas.
Subsequently, Crye-Leike brought an action in the Shelby County General, Sessions Court against the Hays seeking to collect a $2,835 commission pursuant to the real estate contract between the Hays and the Marodas. After the General Sessions court rendered a judgment in favor of the defendants, the plaintiff appealed the case to Shelby County Circuit Court. Defendants filed a counter claim in the Circuit Court asserting that the plaintiff had wrongfully returned the earnest money to the Marodas and that under the sales contract they were entitled to one-half of the earnest money as liquidated damages. A bench trial was held in the matter on December 17, 1987. The trial court, in an opinion dated December 19, 1987, held that the language of the sales contract did make the December 31 closing date an essential term of the contract and therefore the Marodas inability to close on that date caused them to be in breach of the contract. Therefore, the trial court held that under the counter claim the Hays were entitled to $1,250 as one-half of the money held in escrow by the plaintiff. The trial court further held that the plaintiff was entitled to $2,835 as a commission because it had procured a purchaser who had executed a valid written contract for sale, upon terms acceptable to the owner, despite the purchaser's inability to perform. The court set off the amount due plaintiff by the amount due defendants and entered judgment on behalf of the plaintiff for $1,585. The defendants appeal from the trial court's judgment claiming that the trial court erred in awarding plaintiff a commission because the Marodas were unable to close by December 31, because there were no proceeds of the sale from which to pay the commission and because plaintiff breached a fiduciary duty owed them by returning the escrow money to the Marodas without their permission. We agree with the defendants' assertion that the plaintiff is not entitled to a commission because it wrongfully returned the earnest money deposit to the Marodas without the sellers' permission and therefore we confine our discussion to this issue.
II.
The courts of this state have long recognized that a broker who acts as an intermediary between a seller and purchaser is under a duty to deal fairly and honestly with both parties. Hughey v. Rainwater Partners, 661 S.W.2d 690 (Tenn. App. 1983); Bell v. Strauch, 292 S.W.2d 59 (Tenn. App. 1954). Furthermore, our courts have held that where a broker's action in a sales transaction; amounts to bad faith or misconduct, the broker is not entitled to a commission on the sale. Hughey v. Rainwater Partners, supra; Christians v. Town of East Ridge, 12 Tenn. App. 101 (1928).
Numerous jurisdictions have extended this rule and held that "where an agreement of purchase and sale gives the seller the right to declare a forfeiture of the purchaser's deposit upon the purchaser's failure to consummate the sale, a broker who returns such deposit to a defaulting purchaser without seller's authorization, . . . may not recover a commission from the seller." 69 A.L.R.2d 1244, 1246 (1960) (and cases therein cited). United Investors Inc. v. Tsotsos, 477 N.E.2d 40 (Ill.App. 1985); United Farm Agency, Inc. v. Murphy, 596 S.W.2d 730 (Mo. App. 1980); Prince George's Properties, Inc. v. Rogers, 341 A.2d 804 (Md. App. 1975); Crabtree v. Board of Trustees of Immanuel Baptist Church, 512 S.W.2d 311 (Ky. App. 1974); Lake Company v. Molan, 131 N.W.2d 734 (Minn. 1964). While there appears to be no Tennessee case addressing this precise issue, we believe the reasoning of these courts is consistent with our cases recognizing the fiduciary duty a real estate broker owes to the parties to a real estate transaction. Therefore, we hold that where an agreement for the sale of land gives the seller the right to declare a forfeiture of the purchaser's deposit upon the latter's :failure to consummate the sale, a broker who returns such deposit to a defaulting purchaser without the seller's authorization may not recover a commission from the seller.
The contract in the instant case provided that
[I]f the title is good and Purchaser shall fail to pay for Property as specified herein, Seller shall have the right to elect to declare this contract cancelled and upon such election, the earnest money shall be retained by and divided equally between the Seller and Agent, as liquidated damages and commission respectively . .
Under this language, the defendants had the right to declare a forfeiture of the earnest money deposit held by Crye-Leike if the Marodas breached the contract. Furthermore, it is not disputed that the Crye-Leike agent, Phyllis Pedigo, returned the earnest money deposited to the Marodas, after the sale failed to close without the defendants' authorization. Therefore, if the Marodas' inability to close the sale on or before December 31 as specified in the contract was a material breach of the contract, plaintiff was not entitled to a commission under the contract.
Ordinarily, the inability of a party to close a real estate sales contract on a particular date is not considered to be a material breach of the contract since the general rule is that time is not of the essence in a real estate sales contract, unless otherwise specified in the contract. Richmond v. Rone, Tenn. App. W.S. (Feb. 27, 1991); Thompson v. Menefee, 6 Tenn. App. 118 (1927). In the present case the trial court specifically found that the parties to this contract had made time of the essence with regard to the December 31 closing date. In coming to this conclusion, the trial court relied on the language of the contract which states not only that the contract was to be closed on or before December 31, but also that the failure of the purchaser to pay for the property "as specified" in the contract shall give the seller the right to declare the contract cancelled.
Based on our examination of the record in this case, we agree with the finding of the trial court that the language of the contract makes the December 31 closing date an essential term of the contract. Therefore, we affirm the trial court's holding that the Marodas' inability to close the contract on or before December 31 was a material breach of the contract entitling the Hays to declare a forfeiture of the earnest money held by Crye-Leike. Under these circumstances, since Crye-Leike returned the earnest money to the Marodas without the Hays' authorization, Crye-Leike is not entitled to a commission and the trial court's judgment awarding Crye-Leike a $2,835 commission is reversed. Since we .find that Crye-Leike was not entitled to a commission because they wrongfully returned it to the Marodas, our review of the other issues raised by the Hays is pretermitted.
For the reasons herein stated, we affirm the trial court's ruling that the Hays are entitled to $1,250 from Crye-Leike, representing one-half of the money held in escrow which was. wrongfully returned to the Marodas, and reverse the trial court's ruling that Crye-Leike was entitled to a commission under the real estate contract. Costs are taxed to Crye-Leike.