Creighton v. Milbauer
594 N.Y.S.2d 185, 191 A.D.2d 162 (1993)
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Rule of Law:
When a real estate contract is conditioned on the buyer obtaining mortgage financing, the seller seeking to retain the down payment after the buyer's mortgage commitment is revoked bears the burden of proving that the buyer acted in bad faith to frustrate the condition precedent.
Facts:
- On April 3, 1991, plaintiff Creighton entered into a contract to purchase a condominium from defendant Karen Milbauer, paying an $11,500 down payment.
- The contract contained a mortgage contingency clause requiring Creighton to provide notice of a mortgage commitment by May 15, 1991.
- On May 1, 1991, Creighton's attorney sent a copy of a mortgage commitment letter from Citibank to Milbauer's attorney, satisfying the notice requirement.
- Creighton alleges she lost her job around May 10, 1991, because her employer closed its office.
- On June 3, 1991, Citibank notified Creighton that it had revoked its mortgage commitment, citing an inability to verify employment and income and referencing missing documentation.
- On June 5, 1991, Creighton's attorney informed Milbauer's counsel of the revocation and requested the return of the down payment.
- Milbauer's attorney scheduled a 'time-of-the-essence' closing for July 3, 1991, which Creighton did not attend.
Procedural Posture:
- Plaintiff Creighton sued defendant Karen Milbauer and her escrow agents in the Supreme Court, New York County (a trial-level court), to recover an $11,500 down payment.
- After pleadings were filed, defendants moved for summary judgment, asking the court to declare that Milbauer was entitled to retain the down payment.
- The Supreme Court denied the defendants' motion for summary judgment, finding that a triable issue of fact existed regarding the plaintiff's good faith.
- Defendants, as appellants, appealed the trial court's denial of their motion to the Supreme Court, Appellate Division, First Department (an intermediate appellate court).
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Issue:
Is a seller entitled to retain a buyer's down payment as liquidated damages when the buyer's mortgage commitment is revoked post-approval, and the contract is silent on revocation, and the seller alleges the buyer frustrated the financing condition by acting in bad faith?
Opinions:
Majority - Memorandum Opinion
No. A seller is not entitled to retain a buyer's down payment as liquidated damages where the seller fails to meet the burden of proving the buyer acted in bad faith to cause the revocation of a mortgage commitment. The mortgage contingency clause creates a condition precedent, protecting the buyer if financing cannot be obtained through good faith efforts. While the contract specified procedures for failing to obtain a commitment, it was silent on the event of a commitment being revoked after it was secured. The burden rests on the seller, as the party seeking to enforce the contract, to establish that the buyer frustrated the condition precedent. Here, the seller's only evidence of bad faith was a generic, computer-generated letter from the lender, which is insufficient for summary judgment. The buyer's sworn affidavit denying bad faith and offering a plausible explanation for the revocation (job loss due to her employer's office closing) creates a triable issue of fact, precluding summary judgment.
Analysis:
This decision clarifies the allocation of the burden of proof in disputes arising from mortgage contingency clauses where a loan commitment is revoked. It reinforces the principle that the party seeking to enforce a contract by claiming the other party frustrated a condition precedent must provide concrete evidence of bad faith. The ruling protects buyers from forfeiture of their down payment due to circumstances beyond their control, such as sudden job loss, and prevents sellers from winning on summary judgment with only conclusory allegations. It underscores that a court's function on a summary judgment motion is issue-finding, not issue-determination, especially when a party's good faith is a central, disputed fact.
