Proof of ability to pay needed to enforce real estate contracts, high court rules

Steve Korris Oct. 23, 2008, 4:00am

Alan Waldrop

AUSTIN – Texans can't enforce contracts to buy real estate unless they prove at trial that they could have paid for the real estate, the Texas Supreme Court ruled Oct. 17.

Five justices discarded a Collin County jury verdict in favor of developer Nick DiGiuseppe, finding his testimony about his ability to pay "equivocal and conflicting."

DiGiuseppe told jurors he personally didn't have the money to buy 756 acres from Roger Lawler. He told them three home builders would have closed the deal with him.

In dissent, four justices protested that the decision imposes a burden on buyers to secure firm commitments well in advance of closing and disclose funding sources.

Justice Paul Green warned for the minority that the decision immunized unscrupulous sellers from court orders requiring specific performance of real estate contracts.

He predicted that "disorder will be the order of the day in volatile real estate markets."

DiGiuseppe, doing business as Southbrook Development, signed a contract in 1998 to buy 756 acres of land near Frisco, Texas, from Roger Lawler.

The contract called for DiGiuseppe to deposit $100,000 earnest money on the spot, $100,000 when Lawler applied to the city for rezoning, and $400,000 when the city council approved the rezoning "as applied for."

It provided that if DiGiuseppe failed to close, Lawler would retain the earnest money.

If Lawler failed to close, DiGiuseppe could take his money back or seek to enforce specific performance of the contract.

DiGiuseppe made the first two deposits, and in 2000 the city council rezoned the property, though not exactly as Lawler requested. DiGiuseppe still wanted the land, but he withheld the third deposit.

Lawler sent him a letter canceling the contract. DiGiuseppe demanded that they move toward closing.

Lawler then signed a contract to sell to someone else. DiGiuseppe tried to block the new contract by filing his 1998 purchase contract in county deed records.

Lawler sued in district court to quiet the title and declare the contract terminated. He sought damages for breach of contract.

DiGiuseppe countersued, claiming breach of contract, fraud and breach of good faith.

At trial, DiGiuseppe testified he didn't have the money to close the contract.

"With a piece of property like this I'll put it under contract," he said. "Do the work. Do the zoning."

He said, "Through that process I usually put together parties to be the investors in the deal and they then close on the contract."

When counsel for Lawler asked if he used contracts, DiGiuseppe said, "If somebody tells me they are going to do something, I expect them to do it."

He said, "Three different home builders were going to close the deal with me."

He testified that he wanted to close and was ready and able to close.

Jurors decided that Lawler breached the contract. They set damages at $295,696.63.

On top of that, District Judge Curt Henderson granted specific performance of the contract. He appointed a receiver to take possession of the property and close the sale.

On appeal, Fifth District judges in Dallas overturned the jury's award of damages, finding no evidence to support it.

They overturned specific performance too, holding that Henderson couldn't grant it without establishing that DiGiuseppe was ready, willing and able to perform under the contract.

Finally they ruled that DiGiuseppe couldn't reclaim the $200,000 earnest deposit because he didn't include it in his appeal.

DiGiuseppe petitioned for Supreme Court review, and at first the Court denied it.

DiGiuseppe moved for rehearing. He argued that even if he couldn't obtain specific performance, he should get his $200,000 refund.

The Court held another hearing, granted review and concluded that while DiGiuseppe did not deserve specific performance, he deserved a refund.

A substitute justice, Alan Waldrop of the Third District appeals court in Austin, not only broke a deadlock of four to four but also delivered the opinion.

"We agree with Lawler and the court of appeals that the remedy provision at issue here does not entitle DiGiuseppe to obtain specific performance merely upon a showing of a breach or default by Lawler," Waldrop wrote.

Justices Nathan Hecht, Dale Wainwright, Scott Brister and Don Willett agreed.

"Whether DiGiuseppe complied with the contract or was excused from complying with the contract, he would still be required to prove that he was ready, willing, and able to obtain specific performance," Waldrop wrote.

"A plaintiff's pleading that he is ready, willing and able to perform at the time the lawsuit is filed says nothing about whether he as ready, willing, and able to perform at the time required by the contract," he wrote.

"A plaintiff who could not arrange funding in time for closing may be able to marshal all the funds he needs by the time he files pleadings in a lawsuit for specific performance," he wrote.

In dissent Green asked, "But what if the buyer was able to close on the original contract date and is unable to close on the court appointed date?"

He wrote, "In large transactions, it is doubtful that many non-breaching buyers would be willing to subject themselves and their investors to open discovery of financial portfolios on the question of whether the buyer was sufficiently capable of purchasing the property at the time required by the contract."

Chief Justice Wallace Jefferson and Justices Harriet O'Neill and Phil Johnson agreed.

Justice David Medina took no part in the proceedings. Waldrop replaced him by appointment of Gov. Rick Perry.

Lawrence Friedman represented DiGiuseppe. Hilaree Casada and Julia Pendery represented Lawler.

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