Eaton Corp. v. Easton Associates, Inc.

• Decision Date: 20 February 1984
• Docket Number: 82-1519,Nos. 82-1253,s. 82-1253
• Citation: 728 F.2d 285
• Parties: EATON CORPORATION, an Ohio corporation, Plaintiff/Counter-Defendant-Appellee, v. EASTON ASSOCIATES, INC., a Michigan corporation, Defendant/Counter-Plaintiff, Eugene SLOAN, Defendant/Counter-Plaintiff-Appellant, v. MANUFACTURERS HANOVER MORTGAGE CORPORATION, Additional Counter-Claim Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 285

728 F.2d 285

EATON CORPORATION, an Ohio corporation, Plaintiff/Counter-Defendant-Appellee, v. EASTON ASSOCIATES, INC., a Michigan corporation, Defendant/Counter-Plaintiff, Eugene SLOAN, Defendant/Counter-Plaintiff-Appellant, v. MANUFACTURERS HANOVER MORTGAGE CORPORATION, Additional

Counter-Claim Defendant-Appellee.

Nos. 82-1253, 82-1519.

United States Court of Appeals, Sixth Circuit.

Argued Oct. 6, 1983.

Decided Feb. 20, 1984.

Herschel P. Fink, argued, Honigman, Miller, Schwartz & Cohn, Detroit, Mich., Albert L. Lieberman, Southfield, Mich., for Sloan.

Wilfred A. Steiner, Jr., Jeff Lipshaw, argued, Detroit, Mich., Gordon A. Becker, argued, Birmingham, Mich., for Eaton Corp. and Mfrs. Hanover.

Before MERRITT and KENNEDY, Circuit Judges, and BERTELSMAN, District Judge. ^*

CORNELIA G. KENNEDY, Circuit Judge.

Eugene Sloan appeals a summary judgment dismissing his counterclaim for damages and specific performance for Eaton's alleged default on an option agreement to purchase real property. Sloan also appeals a similar judgment of a fraud claim against Eaton arising out of the same transaction. We affirm the District Court's summary judgment for appellee Eaton Corporation denying Sloan's contract claim. With respect to Sloan's fraud claim we affirm in part, and reverse in part, and remand for further proceedings.

I.

Appellee Eaton Corporation (Eaton) had acquired the Five-acre parcel of property in Farmington Hills, Michigan at issue in this action from Jack Peltz and Jerome Kornheiser, who are not parties in this action. Under the sales contract between Eaton, and Peltz and Kornheiser the latter parties retained a right to repurchase the property from Eaton in the event that Eaton had not effected "substantial construction" on the property within two years of the sale. ¹ Eaton informed Peltz and Kornheiser on March 12, 1979 of its intention to try to sell the property, and told Peltz and Kornheiser that they must exercise their repurchase right by March 30, 1979, or waive it. Eaton had not begun any construction at this time. Peltz and Kornheiser notified Eaton on March 21, 1979 that they disagreed with Eaton's interpretation of their repurchase right under the contract and maintained that although they declined to repurchase at that time they continued to have a right to do so until the expiration of the two-year period. Doan wrote back on March 26, 1979 disagreeing with Peltz' and Kornheiser's interpretation of the repurchase right, and reiterating that Eaton would sell the property to a third party unless Peltz and Kornheiser exercised their right to repurchase by March 30, 1979.

Appellant Sloan entered into an option agreement with Eaton on August 13, 1979 for purchase by Sloan of the five acres. At the time of this agreement Sloan deposited $10,000 into escrow with Easton Associates (Easton) as consideration for the option. The agreement required that Sloan exercise his option within 150 days of its execution. Under paragraph 2.3(b) of the agreement Sloan was required to tender $30,000 within the 150-day period of the agreement in order to exercise the option:

At the time of exercise of the Option, Seller shall deliver to Escrow Agent a deposit of Thirty Thousand Dollars ($30,000.00) (the "Deposit"), to be applied against the purchase price and Escrow Agent shall deliver a portion of the Option Payment to Seller and a portion of the Option Payment to Purchaser as indicated in the schedule set forth in Section 2.3(c) below. Should Purchaser exercise the Option at any time after 120 days from the date hereof, the entire Option Payment shall be paid to Seller.

Under paragraph 2.2(b) of the agreement, Eaton agreed to provide Sloan with copies of all agreements in its possession relating to the subject property within three days of the execution of the option agreement, and Sloan had the right to terminate the agreement if he found any such agreement unsatisfactory:

Within three (3) days of the date hereof, Seller shall deliver to Purchaser copies of all easements, surveys engineering plans for utilities, paving, etc., and all agreements whatsoever in Seller's possession, relating to the Property. If Purchaser determines, in his sole discretion, that any of the foregoing items are unsatisfactory to him and gives Seller notice thereof within five (5) days after receipt of all such items, Escrow Agent shall return the entire Option Payment to Purchaser, in full and complete termination of this Agreement.

There is some dispute as to what occurred thereafter but in many respects there is agreement. Where there is disagreement, those facts most favorable to Sloan will be assumed to be true.

Eaton had sent Sloan's attorney, Jeffrey Kott, a copy of the Peltz and Kornheiser-Eaton sales contract containing the Peltz and Kornheiser repurchase clause on July 26, 1979 and Kott sent a copy to Sloan on August 15, 1979. Under paragraph 2.2(b) of the agreement Sloan had a right to rescind the transaction within five days of receipt of the copy of the Peltz and Kornheiser agreement, but he did not do so. Instead Mr. Kott phoned Eaton's attorney, James Doan, on August 16, 1979, regarding the repurchase provision. Kott said that Doan told him that there was "no problem." In a letter dated the same day Kott wrote Doan that he understood that "Eaton Corporation will make arrangements to eliminate this apparent inconsistency prior to closing of the sale pursuant to the Option Agreement." On August 24, 1979, Doan wrote Kott and enclosed a copy of Doan's March 12 letter to Peltz and Kornheiser giving them until March 30 to exercise their repurchase option. In his letter Doan stated:

The reason I hesitated to send these along at all is because they do not completely reflect the status of this matter. I later had two phone conversations with [Peltz and Kornheiser's attorney]. In one we agreed not to debate the issues, but I informed him I needed to know what their intentions were. [In the other he stated that] his clients did not think that the price ... was fair, and that they wouldn't pay that much.

Doan closed his letter saying "Suffice it to say that the title report will be clean, and our representations and warranties should cover your client under any circumstances."

Kott replied to Doan in a letter of September 5, 1979:

Please be advised that we are proceeding with the Option Agreement based upon your assurances that Eaton Corporation will resolve the apparent problem with the prior owners of the property, that seller's representations and warranties contained in the Option Agreement will adequately protect the purchaser and that the title policy to be issued to purchaser at the closing will be "clean". In connection with the development of the property, our client is proceeding toward obtaining a building permit and site plan approval, and has engaged architects, engineers, etc.

In his deposition Kott also stated that Doan made additional oral representations to him, assuring him that there was or would be no problem with title.

Under paragraph 4.1 of the option agreement Eaton was to provide Sloan with an owner's title insurance commitment within 15 days of the option agreement which was to guarantee title to the property to be in "good and marketable condition." On August 30, 1979 Eaton provided Sloan with a title insurance commitment effective August 16, 1979. The policy provided:

This commitment is delivered and accepted upon the understanding that the party to be insured has no personal knowledge or intimation of any defect, objection, lien or encumbrance affecting subject land other than those set forth herein....

The Peltz and Kornheiser repurchase option was not referred to in the insurance commitment. Sloan had constructive, if not actual, knowledge of this problem with the title through his attorney Kott. Consequently, the insurance commitment did not cover this deficiency and the commitment did not therefore guarantee title to be in good and marketable condition. The parties are in agreement on this point.

The parties had contracted in anticipation of such a situation. The option contract provided, at paragraph 4.2:

If objection is made by written notice from Purchaser to Seller that title is not in the condition required within fifteen (15) days after receipt of such commitment by Purchaser, Seller shall have twenty (20) days from the time it is notified in writing of the particular defects claimed to remedy the title or to obtain endorsements to the title insurance commitment which guarantee that Lawyers Title shall insure against such defects. If Seller is unable to remedy the title or obtain the endorsements within said twenty (20) day period, Purchaser shall have the option to proceed with this Agreement (in which event, the warranty deed to the property will be delivered subject to any such title defects) or to cancel this Option Agreement and receive back from Seller the Option Payment. Notwithstanding the foregoing, should any liens or encumbrances upon the Property appear which arose because of any action or failure to act on the part of Seller, then Purchaser shall have the right to apply that portion of the purchase price as may be required to discharge any such liens and/or encumbrances and to deduct the amount thereof from the purchase price, or to take title subject to such defects (emphasis added).

Sloan chose not to exercise his right to cancel the option contract after receiving the insurance commitment which did not insure against the Peltz and Kornheiser claim. Sloan instead went ahead to make arrangements for construction which he planned for the land. He hired engineers and architects and sought approval from the City of Farmington Hills to build an office building. Sloan states that his expenses for these purposes came to more than $50,000.

On January 9, 1980 Sloan deposited an additional $2,500 into escrow with Easton in order to extend the period of the...