Bernstein v. Nemeyer
1990 Conn. LEXIS 44, 213 Conn. 665, 570 A.2d 164 (1990)
Rule of Law:
Even where a party commits a material breach of contract, the injured party is not automatically entitled to the equitable remedy of rescission and restitution unless they can demonstrate that the breaching party was unjustly enriched and that they offered to restore the breaching party to the pre-contract position.
Facts:
- In 1983, Ronald J. Nemeyer and Cheshire Management Company, Inc. (general partners), formed CMC-Southwest Limited Partnership with Class A limited partners to purchase and renovate two apartment complexes in Houston, Texas.
- During the summer of 1984, Nemeyer and Cheshire Management Company solicited the plaintiffs (Class B limited partners) to join the partnership, offering capital growth and tax deferral as investment objectives.
- In August 1984, Nemeyer and Cheshire Management Company drafted three documents (First Amendment, letter to partners, Subscription Agreement) containing a "negative cash flow guaranty" through at least December 31, 1988, promising to lend funds to the partnership if operating expenses, debt service, and capital expenditures exceeded cash receipts.
- The plaintiffs invested $1,050,000 in the partnership.
- Nemeyer and Cheshire Management Company lent $3,000,000 to the partnership under the guaranty but discontinued mortgage payments in November 1985.
- In the summer of 1987, the mortgagees foreclosed on the properties, resulting in both the plaintiffs and Nemeyer and Cheshire Management Company losing their entire investments.
Procedural Posture:
- The plaintiffs (Class B limited partners) brought an action against Ronald J. Nemeyer and Cheshire Management Company, Inc. (general partners) in the trial court.
- The complaint charged the defendants with breach of contract, willful misconduct, and violation of the Connecticut Unfair Trade Practices Act.
- The defendants filed special defenses and a counterclaim for indemnification.
- The trial court ruled in the defendants’ favor on the complaint and in the plaintiffs’ favor on the counterclaim.
- The plaintiffs appealed the trial court’s decision regarding their claim for rescission and restitution on the breach of contract to the Supreme Court of Connecticut.
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Issue:
Are investors in a limited partnership, upon a general partner's material breach of a negative cash flow guaranty, automatically entitled to rescission and restitution of their investments without demonstrating unjust enrichment of the breaching party or offering to restore the breaching party to the pre-contract position?
Opinions:
Majority - Peters, C. J.
No, investors are not automatically entitled to rescission and restitution for a material breach of contract without proving unjust enrichment of the breaching party or offering to restore the breaching party to their original position. The court first determined that the trial court erred in finding the defendants' breach of the negative cash flow guaranty to be merely 'incidental,' concluding instead that it was a material breach. This was because the guaranty was a crucially important term for which the plaintiffs had clearly bargained, given their concerns about the Houston real estate market and the properties' vulnerability. The guaranty's purpose was to ensure the partnership's long-term viability, essential for both tax deferral and capital appreciation, and its breach deprived the plaintiffs of a substantial expected benefit, rendering the breach incurable. The court cited Randall v. Loftsgaarden for the principle that tax benefits do not preclude rescission. However, the court affirmed the trial court's ultimate judgment on the alternate ground that the plaintiffs failed to prove a right to restitution. While a material breach discharges the injured party from further performance, it does not automatically confer a right to restitution. Restitution is an equitable remedy aimed at preventing the unjust enrichment of the breaching party, not at compensating the injured party for their losses or putting them back in their pre-contract position. To obtain restitution, the injured party generally must offer to restore the breaching party, as nearly as possible, to their pre-contract situation. The record was unclear regarding the plaintiffs' efforts to tender back their partnership interests, and crucially, the trial court found that the defendants themselves suffered a 'great loss of their own, about three million dollars,' in attempting to fulfill their obligations. This unchallenged finding demonstrated that the defendants were not unjustly enriched and their property interests were not advanced, thus defeating the plaintiffs' claim for restitution.
Analysis:
This case significantly clarifies the distinction between a material breach of contract and the availability of restitution as a remedy. It establishes that simply proving a material breach is a necessary but insufficient condition for restitution. The core takeaway is that restitution is an equitable remedy focused on preventing unjust enrichment of the breaching party, rather than compensating the injured party's losses. This limits the instances where restitution can be successfully sought, particularly when the breaching party has also suffered substantial losses and has not, in fact, been enriched. Future litigants seeking restitution must be prepared to demonstrate not only the other party's material breach but also that the breaching party actually received a benefit that would be unjust for them to retain, and that the injured party is able to tender back any benefits received.
