BREACH OF AN EARNEST MONEY AGREEMENT /
FAILURE TO PAY A PROMISSORY NOTE
to purchase a vacant lot from the plaintiffs, and then failed to close the
transaction. Under typical Oregon real estate sales agreements, the
purchaser forfeits the earnest money. The earnest money was a promissory
note, for which the purchaser had not deposited cash.
The buyer was an Oregon corporation. It did not
have an attorney. Sellers started the lawsuit by filing a claim in
small claims court, where corporations are not required to have attorneys.
Actually, in small claims court, attorneys are generally not even allowed,
and, because attorneys are not allowed, the court does not award attorney
fees to the winner even if there is a contract provision requiring the loser
to pay the winner's attorneys fees. Buyer, perhaps to be obstructive,
requested that the sellers file their claim in circuit court. Sellers
hired a lawyer and did so. In Oregon, corporations are required to appear
with an attorney outside of small claims court. Now Buyer had to hire
a lawyer and risked having to pay the Seller's attorney fees. Perhaps
Buyer's shot itself in the foot by testing Seller's resolve to pursue the
This matter came before at 9:00 a.m.
for hearing in accordance with a previous scheduling order. Sellers
appeared in person with their attorney. Buyer did not appear.
Sellers moved to strike Buyer’s answer because Buyer
is a corporation which must appear by attorney in a circuit court action.
I granted the motion.
However, I required Sellers to present testimony, which
was unrebutted, so it would not have mattered if the Buyer’s answer was stricken
All witnesses were sworn. Broker and one of the
Sellers testified regarding the transaction. The earnest money agreement
and promissory note were received as exhibits. Sellers' lawyer was
sworn as a witness. The letter from Sellers' lawyer to Buyer offering
to mediate was received as an exhibit.
Sellers rested and moved for judgment on the pleadings.
I choose to resolve this case in the following way,
based on the evidence that I heard, rather than based on orders of default
or striking pleadings or in response to the motion for judgment on the pleadings.
I prefer to decide cases based on the evidence.
Buyer to appear despite being fully aware of the time
and place for the hearing. Buyer's president was present in my office
at the previous hearing. He personally consented to a hearing date
of today. When I spoke with him last week to find out whether Buyer
would hire an attorney and appear, he was clear that he knew of the hearing
and he stated he might hire someone from [ABC law firm], which he had also
stated when previously at my office.
I find that Sellers and Buyer entered into the Exhibit
1 agreement and Buyer executed the Exhibit 3 promissory note. Fax transmission
of the note is effective and is a common practice in the real estate community.
The earnest money agreement provided at lines 53 to 60 in substance that
Buyer had 21 days to do due diligence; that Buyer would provide Sellers written
notice regarding due diligence findings and of its intention to go forwards
with the transaction; that if it chose to go forward, the earnest money
would become nonrefundable and that the deal would close within thirty
Buyer had the right to waive written notice; the requirement
of a writing was for the benefit of Buyer. Buyer did not give written
notice, but, Buyer did give oral notice to Sellers and to Broker that Buyer
had no objections to the transaction and intended to go forward. There
was no financing contingency other than Buyer’s open-ended right to back
out of the deal in the first 21 days. Buyer then signed the closing
documents in Broker’s presence at the title company. Buyer's president's
son signed the closing documents but Buyer's president (father) was present
and confirmed that son had the authority to do so.
The only problem was that funds were never tendered
Buyer's president later stated to Sellers or their
representatives that he intended to go through with the transaction, and,
while it is not evidence, Buyer's president even stated to me within the
last week, when I discussed how long the hearing would take, that he hoped
to complete financing so that the Sellers could get paid and the hearing
could be obviated.
Therefore, I find that Buyer breached the Exhibit 1
contract and owes Sellers $5,000, together with pre-judgment interest.
Because according to Exhibit 1, payment of the $5,000 was due in the form
of a note to be paid at closing; pre-judgment interest runs in accordance
with the note.
While the note itself is made payable to Broker, it
states that it is due on [date]. Paragraph 3 states that if not paid
when due, it bears interest at 10% per year. Paragraph 4 of the note
provides that if the real estate firm is named as payee in the Note, and
the Note is not paid when due, Buyer consents to Broker assigning the note
and transferring it to the Sellers for all purposes including collection.
While I was not provided a formal written assignment, from the fact that
Broker was involved in the transaction on behalf of the Sellers and that
he was also a witness for Sellers, it is apparent that the rights under the
note have been assigned (whether at law or in equity) from Broker to Sellers.
Further, paragraph 6 of the note states in substance that Seller instructs
Broker to assign the note to Buyers if it is not paid when due.
Buyer owes Sellers interest on the $5,000 at 10% per
year from [date].
Sellers request an award of attorney fees. The
earnest money agreement provides that for claims filed in small claims court,
there will be no award of attorney fees. Sellers filed this action
in small claims court. Had Buyer not removed the case to circuit court,
Buyer could have proceeded without an attorney and there would have been
no award of attorney fees. However, Buyer removed the case to circuit
court. At that point, the attorney fee provision of lines 228 to 230
of the earnest money agreement kicked in, as well as the obligation for Buyer
to proceed by attorney. I observe that Buyer shot itself in the foot,
so to speak, with both barrels.
In order to recover attorney fees, Sellers must give
notice of a willingness to mediate prior to or promptly upon the filing
in court. The circuit court case was filed on [date], and their lawyer’s
letter offering to mediate was also dated and sent the same day. Their
lawyer's testimony satisfies the requirement that the letter was both sent
and received. This letter satisfies the requirement of offering to
mediate. Sellers are entitled to an award of reasonable attorney fees
and costs and disbursements. Sellers have been directed to submit an
attorney fee petition as soon as possible, and to serve it upon Buyer.
As soon as I have the petition, I will prepare a formal
award. Because I choose to decide this case as if Buyer had been allowed
to appear and defend, it may contest the award of attorney fees as to amount,
but not entitlement. I grant Buyer seven calendar days to object from
the date of service of the attorney fee petition, with additional time added
for service by mail or fax in accordance with the Oregon Rules of Civil Procedure.
If Buyer does not intend to object, please let me know so this case can
Upon resolution of the attorney fee award, I will prepare
a formal award for submission to the court with ‘money judgment’ provisions.
I will serve that award upon the parties. The court will give other
When my work is complete, I will render an accounting
of the moneys you have deposited with me for my work as arbitrator.
I will pay myself from the money on deposit and return the balance.
Assuming there is a cost bill submitted including the arbitrator’s fee, I
assume at present that I would include that in the award in favor of Sellers.
I believe I have authority to allocate the expense of the arbitration unequally.
Based on the above outcome, my present intention would be to charge my expenses
first to the deposit made by Buyer and second to the deposit made on behalf
of Buyer. If Buyer questions my authority to make an unequal
allocation, it should explain why I do not have that authority at the time
it objects to Sellers’ attorney fee petition.
As always, you may still settle your case between yourselves.
considers the attorney fee petition
and cost bill in the same case