Tri-state Hotel Co., Inc. v. Sphinx Investment Co., Inc.
212 Kan. 234, 510 P.2d 1223 (1973)
Rule of Law:
A title is not merchantable if it exposes the buyer to the hazards of litigation. A contract requiring an abstract showing merchantable title is not satisfied by offering a title based on a claim of adverse possession that must be perfected through a quiet title action.
Facts:
- Tri-State Hotel Company, Inc. (Tri-State) and Sphinx Investment Co., Inc. (Sphinx) entered into option to purchase contracts for several properties, including the Broadview Hotel.
- The parties jointly retained attorney John F. Eberhardt to draft the contracts, examine the titles, and act as an escrow agent for Sphinx's $100,000 deposit.
- The contracts required Tri-State to deliver abstracts showing 'good and marketable title' by May 1, 1970.
- The contracts gave Sphinx the right, at its discretion, to cancel the agreement and recover its deposit if any merchantable defects were not remedied by May 1. Sphinx had until May 15 to exercise this cancellation right.
- Eberhardt's title examination revealed that record title to a small, wedge-shaped strip of land underneath the hotel building was held by a defunct corporation, The Arkansas Valley Improvement Company.
- Eberhardt advised the parties that this was a 'merchantable title defect' and that although Tri-State had almost certainly acquired the strip by adverse possession, the defect could only be formally cured by a quiet title lawsuit.
- Eberhardt stated that a quiet title action would take a minimum of 60 days, well beyond the May 1 contractual deadline for remedying defects.
- On May 7, 1970, before the May 15 deadline, Sphinx's board of directors voted to exercise its right to cancel the contracts due to the uncured title defect and demanded the return of its $100,000 deposit.
Procedural Posture:
- Tri-State Hotel Company, Inc. and other property owners sued Sphinx Investment Co., Inc. in Kansas district court (the trial court) to recover the $100,000 option deposit.
- The trial court conducted a bench trial.
- The trial court found in favor of the defendant, Sphinx, concluding that the title defect was merchantable and gave Sphinx the right to cancel the contracts.
- The plaintiffs, Tri-State et al., appealed the trial court's judgment to the Supreme Court of Kansas, making them the appellants.
- Sphinx is the appellee in the appeal to the Supreme Court of Kansas.
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Issue:
Does an outstanding fee title to a portion of land, which can likely be cured only by a quiet title action based on adverse possession, render the vendor's title unmerchantable, thereby allowing the purchaser to cancel the contract and recover their deposit under a clause permitting cancellation for nonmerchantability of title?
Opinions:
Majority - Kaul, J.
No, a title with an outstanding defect that requires a quiet title action to resolve is not a merchantable title. The court held that a marketable title is one which is free from reasonable doubt and will not expose the party who holds it to the hazards of litigation. The contract obligated Tri-State to furnish an abstract showing a marketable record title, and a title based on an unproven claim of adverse possession does not satisfy this requirement. It is undisputed that fee title to the small strip of land was outstanding in a defunct corporation. While Tri-State could likely prove ownership through adverse possession, Sphinx was not obligated to accept a title that required litigation to perfect. Citing precedent like Beeler v. Sims, the court affirmed the principle that a contract to furnish an abstract showing a marketable title is not fulfilled by presenting a title that rests on adverse possession. The explicit deadlines in the contract (May 1 to cure, May 15 to cancel) were clear and binding, and the court refused to substitute a 'reasonable time' standard. Therefore, because Tri-State failed to provide a marketable title by the deadline, Sphinx was within its contractual rights to cancel the agreement and demand the return of its deposit.
Analysis:
This decision reinforces the strict definition of 'marketable title' in Kansas as a title free from the risk of litigation. It clarifies that when a contract calls for an abstract showing marketable title, the buyer is entitled to a clean 'record title' and cannot be forced to accept a title based on an unproven claim of adverse possession. The ruling underscores the importance of adhering to specific contractual deadlines, refusing to imply a 'reasonable time' to cure defects when the agreement sets forth explicit dates. This precedent protects purchasers from being forced to 'buy a lawsuit' and solidifies the vendor's responsibility to deliver a title that is clear on its face, not one that requires future legal action to perfect.
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