Donovan v. Bachstadt
91 N.J. 434, 453 A.2d 160 (1982) (1982)
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Rule of Law:
A buyer of real estate is entitled to recover benefit-of-the-bargain damages when the seller breaches an executory contract by failing to provide marketable title, regardless of whether the seller's breach was in good or bad faith.
Facts:
- Carl Bachstadt constructed a house on property for which he held an unrecorded deed from Joan Lowden, who had acquired it from Middletown Township.
- On January 19, 1980, Bachstadt entered into a contract to sell the house and land to Edward and Donna Donovan for $58,900.
- The contract required Bachstadt to provide marketable title and included a provision for Bachstadt to give the Donovans a 30-year purchase money mortgage for $44,000 at a 13% interest rate.
- A title search conducted by the Donovans revealed that Middletown Township had inadvertently failed to foreclose on the property, and legal title was still held by the prior owners, Anthony and Jane Mettrich.
- Due to this title defect, Bachstadt was unable to convey the marketable title to the Donovans as required by the contract.
Procedural Posture:
- The Donovans first sued Bachstadt in Superior Court, Middlesex County, for specific performance and reformation of the contract's interest rate.
- The trial court in that action reformed the mortgage interest rate to 10.5% and granted specific performance to the Donovans.
- When Bachstadt could not perform due to the title defect, the Donovans instituted a second lawsuit in Superior Court, Monmouth County, seeking compensatory and punitive damages.
- In the damages action, the trial court granted the Donovans' motion for summary judgment, but only awarded them their out-of-pocket expenses for a survey and title search ($287.85), denying their claim for benefit-of-the-bargain damages.
- The Donovans, as appellants, appealed to the Appellate Division, which reversed the trial court's denial of compensatory damages and remanded for a trial on that issue.
- Bachstadt, as petitioner, was granted certification to appeal to the Supreme Court of New Jersey.
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Issue:
Is a buyer entitled to recover benefit-of-the-bargain damages when a seller breaches an executory contract to convey real property because of a title defect?
Opinions:
Majority - Schreiber, J.
Yes, a buyer is entitled to recover benefit-of-the-bargain damages. The court abandons the old English rule, which limited recovery to out-of-pocket expenses for good-faith breaches, in favor of the modern American rule. The historical justification for the English rule—the difficulty and uncertainty of establishing good title—is no longer valid due to modern title recording systems. There is no sound basis to treat contracts for realty differently than contracts for personalty, and an innocent purchaser should be compensated for the loss of their bargain, regardless of the seller's good or bad faith. Compensatory damages should put the injured party in as good a position as if performance had been rendered as promised.
Dissenting - O'Hern, J.
No, benefit-of-the-bargain damages should not be awarded in these circumstances. The majority's rule unnecessarily penalizes unwary residential sellers who are wholly without fault for an unknown title defect. Many people enter into real estate transactions without counsel and should not be subjected to such harsh consequences for unforeseen issues. A more just rule, like that proposed by the Uniform Land Transactions Act, would limit the buyer's recovery to restitution and incidental damages when the seller was unaware of the title defect at the time of contracting. A flexible rule that considers the facts of the particular case is preferable to the majority's rigid application of the American rule.
Analysis:
This decision marks a significant shift in New Jersey jurisprudence by explicitly abandoning the traditional English rule and adopting the American rule for damages in real estate contract breaches involving title defects. The court modernized its approach by recognizing that the historical justifications for limiting damages are obsolete in an era of reliable public records. This holding aligns real estate contract law with general contract principles that award expectation damages, thereby providing greater protection to innocent buyers. Future sellers, particularly in a non-commercial context, must be more diligent in ensuring their title is marketable before entering a contract to avoid liability for the buyer's full loss of the bargain.
