Louisiana Fourth Circuit Finds Contract Conditioned Upon Financing Voided by Failure of Condition

house-i-1491881-1024x768Sometimes even the best-planned of deals amongst parties may fall through. Parties often turn to the courts to resolve contractual disputes. When a court is interpreting a contract between two parties, it is often as simple as applying the “four corners” rule. I.e. it will not look at anything outside the four corners of the contract. This particular method of interpretation is useful (and under Louisiana law mandatory) where a contract is written clearly and is not ambiguous. In a recent case, the Louisiana Fourth Circuit Court of Appeal upheld this method of interpretation when faced with a contract dispute out of Orleans Parish.

In 1999, Mr. and Mrs. Tubbs made an offer to purchase a house from Mr. and Mrs. Schafer. The Schafers accepted this offer, creating a contract to sell the house. As part of the deal, the Tubbses made a deposit of about $53,000 via a promissory note. Among the terms of this contract was a provision that would cancel the contract should the Tubbses be unable to obtain sufficient financing for the purchase price. If this happened, then the Schafers would have to return the promissory note deposit the Tubbses had paid as part of the arrangement. The Tubbses were unable to get the necessary funding so they did not show up to the closing.

The Schafers sued to collect the note as damages stipulated in the contract. In response, the Tubbses responded that the contract should be considered null and void since they were unable to obtain financing because the financing contract itself required that their home is sold by a specified time. The Tubbses attempted to sell their former home to a family suggested by the Schafers. When the deal fell through due to the bankruptcy of the would-be buyer, they were unable to keep the 7% interest rate they had been promised.

Because the Tubbs-Schafer contract required that they be able to obtain financing at a rate of 7% or lower, the Tubbses argued they were no longer obligated on the contract. As such, they contended that the deposit forfeit term of the contract could not be enforced against them. They also argued that the Schafers’ suggestion of possible buyers led them to rely on this sale and not the market. On this theory, they attempted to prove that the failure to receive a favorable financing rate was not their fault.

At trial, the District Court found that the contract had been made null and void because of the lack of funding and so the promissory note could not be enforced. The District Court also required that the Schafers pay damages of $5,000 as well as attorney fees to the Tubbses.

On appeal, the Schafers argued that either the agreement was valid or that since the basis for the damages was a provision in the agreement itself, they should not be forced to pay if the whole contract was nullified. In response, the Tubbses argued that the contract allowed for damages to be paid in an equal amount to their deposit, thus stating that they were owed the $53,000.

As discussed above, when a contract is simple enough to understand on a plain reading of the text, the court does not have a reason to consider anything outside what is written in the text. What is contained within the four corners of the paper on which the contract is written or printed. La. Civil Code art. 2046. Sometimes a contract can be made conditional on some term or specific event. See Lalla v. Calamar, 5 So.3d 927, 932 (La. Ct. App. 2009). This means that, as the parties agree, whether or not a specified event happens can affect whether the parties will be bound to follow through on the duties created by the contract. La. Civil Code art. 1767.

Viewing the contract itself, the Fourth Circuit Court of Appeal found its language to be clear and unambiguous, invoking the “four corners rule”. The contract between the Tubbses and the Schafers clearly created a condition that for the Tubbses to be obligated to buy they had to have secured a loan at a rate of 7 percent. The contract clearly made itself null and void if this did not happen. Legally, this is the natural conclusion when a contract for a sale is conditioned upon the buyer obtaining funding.

Based on the facts, the Fourth Circuit found that the District Court could have rightfully found in favor of the Tubbs. The record seemed to indicate that the Schafers were very aware the contract required that the Tubbses obtain favorable financing. Further, the record also showed that the Schafers were aware of the bankruptcy of the attempted buyers of the Tubbses’ former house since Mr. Schafer had actually represented them in bankruptcy court. This was not an interpretation of the contract itself, but observing the facts of whether the condition of funding had been met.

Because the decision was reasonably based on solid facts and credible witnesses, the Fourth Circuit agreed with the District Court judge’s ruling as far as the contract becoming null and void thus also canceling the requirement that the deposit payment is forfeited. On this issue, the District Court had reasonably interpreted the facts as well as the contract and so the Fourth Circuit would respect its decision. The appellate courts, when dealing with an issue based on the facts that have been decided by a jury (or a judge if there is no jury) must respect such a decision. Stobart v. State through Dept. of Transp. and Development, 617 So.2d 880, 882 (La. 1993). Thus, they will only overturn where it is clear that the conclusion could not be made by a reasonable person.

However, on the issue of the attorney fees, the Fourth Circuit did not agree with the District Court. Unlike the other major issue, this was an issue of law being challenged. An appellate court is not required to give as much deference to the trial court’s interpretation of the law as it is the facts but is to determine whether the trial court is right or wrong. Goodrich Petroleum Co., LLC v. MRC Energy Co., 137 So.3d 200, 207. (La. Ct. App. 2014). The source of the attorney fee award was a term the contract itself awarding attorney fees to the suing party should one side fail to fulfill their duties. However, as would be logically expected, an entirely void contract cannot be the source of such a legal obligation. Thus, the Fourth Circuit found it wrong to force payment of these fees when the rest of the contract would not be enforceable.

A lesson that can be gathered from this case is to, for the sake of having a simpler time enforcing one’s contracts, make sure that contracts are straightforward and clear. It is also important that an attorney drafting or reviewing a contract be sure of what is contained in it and that clients’ interests be preserved.

Additional Sources: MIGNON ROUSSET VERSUS LEAH SMITH

Written by Berniard Law Firm Blog Writer: Ashley Weaver

Additional Berniard Law Firm Articles on Contract Disputes: Louisiana Lawsuit Moves Forward After Arbitration Provision Deemed Inapplicable