Opinion
CIVIL ACTION H-03-2248.
September 27, 2004
Opinion on Summary Judgment
1. Introduction.
A real estate contract was not closed. The buyer sued, and a court determined that the buyer had breached the contract. In a later action, the seller has sued for the earnest money, and the buyer has counterclaimed for it. The money reverts to the buyer in equity because both parties' claims to the money under the contract are barred by limitations and preclusion.
2. Background.
In 1990, B-F Investments and Sunbelt Savings entered a real-estate purchase contract. The agreement called for B-F to deposit $50,000 as earnest money with the title company. The deal never closed, and B-F sued to compel performance. Sunbelt Savings failed, and the FDIC succeeded to it as receiver. This was the first suit. (H-95-H-4500)
The FDIC did not say in its answer — original or amended — that it was owed the earnest money, and it did not counterclaim for it. It did not counterclaim for other remedies under the contract.
In May 1996, Judge Norman W. Black ruled that B-F breached the contract; the judgment denied all of B-F's claims, but it awarded neither the FDIC or B-F the earnest money. B-F appealed the conclusion that it had breached the contract. The FDIC did not appeal. The court of appeals affirmed.
The title company deposited the earnest money with the court, disclaiming any interest in it. In the spring of 1999, the FDIC moved for release of the funds held in escrow — almost three years after the original judgment. Because Judge Black had died in the meantime, the case was reassigned. This court reopened the case and awarded the money to the FDIC.
On appeal, the court of appeals said that awarding the FDIC the money on the basis of the judgment did not afford B-F an opportunity to show why it was owed the money. It held that, because the claim for the escrow deposit was not grounds for reopening the case, the FDIC must bring an independent action to recover it. In response, both sides moved for the money. This court ruled that the motions were not new actions; the court of appeals affirmed.
In June 2003, the FDIC sued to quiet title to the escrow deposit; B-F counterclaimed.
3. Statute of Limitations.
The FDIC has six years to bring a claim on a contract. 12 U.S.C. 1821 (d)(14); 28 U.S.C. 2415(a). B-F had only four years for its claim. Tex. Civ. Prac. Rem. Code Ann. § 16.051 (Vernon 2004); Stine v. Stewart, 80 S.W.3d 586, 592 (Tex. 2002).
Both parties had claims under the sales contract in 1991. This action came eight years after the original case was decided and twelve years after a claim to the deposit ripened. B-F must have breached the contract by the start of 1991 under the findings of the court in the first suit. Both party's contract claim is barred by the passage of time.
The parties say that the running of limitations was tolled by the first case. The passage of time may have been suspended during the pendency of the case to allow this claim to be added en route, but once that case was decided without the issue of the deposit having been added in the trial court, the time is calculated from the event generating the claim. Fed.R.Civ.P. 15(c).
During the first suit, neither party sought to include the title company and its deposit directly in the case. When the first suit was erroneously reopened, the title company deposited the funds with the court's registry, where they rest.
4. Res Judicata.
The decision of the court of appeals closed the first action permanently. Whatever it said about the opportunity to litigate B-F's claims in a new action, it held that the suit on the contract was closed, having been impermissibly reopened by the trial court. If the first action is closed, all of both parties' claims arising under the contract are precluded.
In this action, the FDIC has the benefit — and problem — of collateral estoppel. The benefit to the FDIC is that B-F may not re-litigate whether it breached the contract. The problem to the FDIC, however, is that the earlier judgment in its favor limits its recovery to what it was actually awarded. The judgment in the first suit precludes re-litigation of the claims that were brought in it or that could have been brought in it.
These were the four plaintiffs in the original case:
• B-F Investments, a joint venture;
• B-F Investment, a general partnership;
• Marla Matz, a partner in B-F Investment and a co-venturer in B-F Investments; and
• Stewart Feldman — Marla Matz's husband — a partner in B-F Investment and a co-venturer in B-F Investments.
Those four plaintiffs sued these six defendants in nine capacities:
• Resolution Trust Corporation directly and as a receiver of Sunbelt Federal Savings, FSB;
• O-M Management Group, Inc.;
• Jaynes, Reitmeier, Boyd Therrell, P.C.;
• Thomas Wageman;
• FDIC directly and as a receiver of Sunbelt and as manager of the Federal Savings and Loan Insurance Corporation Resolution Fund; and
• United States through it "agent," the FDIC.
For similar reasons, B-F's counterclaim for the earnest money is also barred. It had the opportunity in the first case to ask for the return of the earnest money. It chose not to assert that claim directly but instead sought specific performance of the contract. It also sued on the basis of conversion, conspiracy, many forms of fraud, negligence, and interference.
5. Equity.
Because the passage of time and the entry of judgment preclude all claims under the contract and related activities and because the fund must be disbursed by the court, equity is obliged to supply the answer.
The parties have confused the type of escrow involved. In one type of escrow, money or a document is deposited with a third party to show ability to perform by the buyer — in effect to guarantee performance. This is similar to using a letter of credit as assurance of prompt payment. In some states, it is common to effect a species of mortgage by the seller depositing the deed in escrow until all installments have been paid; the escrow agreement serves the same function as the common-law mortgage or deed of trust. See Lynn v. McCoy, 200 S.W. 885 (Tex.Civ.App. 1917).
In the second type, common for real estate transactions in Texas, the contract for sale requires the buyer to deposit money in escrow until the transaction closes. When the contract closes — the transfer occurs — the deposit is credited against the sales price. This deposit is a means of making the seller confident that the buyer will reliably perform the steps precedent to the closing. Having to deposit cash screens potential buyers, eliminating those who are not in earnest, making the deposit "earnest money."
When the deed is deposited to secure its ultimate delivery, equitable title to the land passes. When money is deposited in escrow — paid really — no title passes, not to the land or fund. The contract may pass equitable title to the land in Texas. Since the terms of the contract cannot now be used in this case, the situation is analogous to a dispute over an earnest deposit where the contract did not say who got it when a breach occurred. In the absence of specification, the earnest money reverts to the depositor, even when the depositor has breached the contract. See Barber v. First State Bank of Hereford, 37 S.W.2d 808 (Tex.Civ.App. 1931); Ossinsky v. Nance, 118 So.2d 47 (Fla.Dist.Ct.App. 1960).
Equity aside, in the absence of a legal claim by a third party, a deposit of personalty remains owned by its depositor. This is true where the deposit is construed as personalty — a chattel — or, more properly, a debt. Bandy v. First State Bank, Overton, Texas, 835 S.W.2d 609, 618 (Tex. 1992); Nelson v. King, 25 Tex. 655 (Tex. 1860); Joseph Story, Law of Bailments § 2, § 102 (2d ed. 1840).
Although equity has developed principles nearly as complex as the common-law forms of action, it is still possible properly to look for a solution that is simply fair. Neither party has demonstrated a reason to depart from the conventions of property law and practices of equity. Both parties have had counsel, have sued and counter-sued, and have had ample, unfettered opportunity to enforce the contract before it was legally too late. The FDIC had the additional benefits of extraordinary time limits, unavailable to mere citizens.
5. Conclusion.
Law and equity require that the earnest money revert to the buyer. Simple justice requires that these parties find a new way to amuse themselves.