Daily Decisions: No Restitution for the Weary

Kofmehl v. Baseline Lake, LLC (Division 3, April 12, 2012), is a very interesting case involving contracts for the sale of real estate, the statute of frauds, restitution, rescission, and burdens of proof. Really, it’s got a little bit of something for everyone!

Under Washington law, “[w]hen a purchase and sale agreement is determined to be void under the statute of frauds, the court may grant rescission and award restitution, restoring the parties to their precontractual positions. But a purchaser who relies on the statute of frauds to avoid the contract may not obtain restitution if the vendor is ready, willing, and able to perform as agreed.”

That’s the well-established rule in Washington. What is not so well established, however, is who bears the burden of proof of establishing whether the seller is ready, willing, and able to perform as agreed. The Court of Appeals addresses that question — and more — in this opinion.

Patrick Kofmehl (who I’m going to call “K” because for some reason his name is hard to type — think The Trial, not Men in Black) and Baseline Lake (“Baseline”) entered in a purchase and sale agreement pursuant to which K agreed to buy certain described property from Baseline for $1.65 million (the “Agreement”). However, as the closing date approached, K and Baseline began to dispute what property was actually covered by the Agreement and the Agreement’s terms regarding sewer access.

K then refuses to close — purportedly because of Baseline’s breach of the Agreement. Both sides then sue each other, with K seeking return of his $50,000 deposit and Baseline seeking specific performance of the Agreement. (Aside: The Agreement was signed in April 2007, while the closing was scheduled for July 2008. One can imagine that K might want to trump up some reason to get out of a contract to purchase real estate he signed before the market crash.)

The Agreement was unenforceable under Washington’s statute of frauds. Washington statutes require all conveyances of land to be by deed, which must meet certain specific requirements. As the Court of Appeals explained:

It is the unusually strict but well-settled rule in Washington that to comply with these statutes, real estate subject to a conveyance must be described in sufficient detail that the court is not compelled to resort to extrinsic evidence in order to find out what was in the minds of the contracting parties.

Here, the Court determined that the description of the land in the Agreement itself was not sufficiently specific to satisfy Washington’s requirements. Accordingly, the Agreement was unenforceable under the statute of frauds. Baseline was therefore unable to obtain specific enforcement of the Agreement.

But K still wanted his $50,000 back, especially since the Agreement was void. In other words, K wants restitution. In discussing K’s claim, the Court provided a lengthy and extremely helpful analysis of restitution and rescission under Washington law. A sampling:

While Mr. Kofmehl suggests on appeal that the claims are distinct, Washington decisions generally treat rescission and restitution as operating in tandem to produce the remedy that Mr. Kofmehl seeks: an unwinding of the contract together with an award of whatever damages are required to restore the parties to their prior positions.

There really is a lot more to say on the interplay of restitution and rescission, and this is a topic that is often muddled and confused, so it is worth reading the whole thing.

Recall, however, the Washington rule that K is not entitled to restitution of his $50K if Baseline is ready, willing, and able to perform the Agreement. But what is “the Agreement”? It is void! What does Baseline need to be “ready, willing, and able” to perform?

The Court of Appeals deftly handles this question. It distinguishes between (a) purported agreements where there is no meeting of the minds regarding the description of the property, and (b) purported agreements where there may be a meeting of the minds on the description but extrinsic evidence is required to determine the property at issue. Under (b) there is an agreement, but it is just unenforceable under the statute of frauds. Under (a) there is no agreement because there is no meeting of the minds. The Washington bar against restitution in cases where the seller is “ready, willing, and able” only applies to the case in (b), where the statute of frauds voids the contract. It does not apply in case (a) where there is no contract!  (The Court observes in a footnote, with reliance on the Restatement, that case (b) is considered a restitution for benefits conferred by mistake.)

Therefore, for K to win on his claim for restitution, he would either have to prove (1) that there was no meeting of the minds, and therefore no contract at all, or (2) that there was a meeting of the minds, that a contract was therefore formed, but that Baseline was unwilling to perform the agreed-upon contract.  Here, K did not argue that there was no meeting of the minds, so (1) is out. As for (2), K did argue that Baseline was unable to perform. And while K established that Baseline was unwilling to perform K’s proffered reading of the Agreement, K did not establish that his proffered reading was the correct/only reading. To succeed on his restitution claim, K must establish both the terms of the Agreement and that Baseline was unwilling to perform those terms. But questions of fact remained on those questions.

As for the burden of proof, after noting the lack of a settled holding on the question, the Court of Appeals offered the following:

The allocation of the burden of proof follows naturally from the fact that [K] is the party seeking restitution and must therefore prove that Baseline is unjustly enriched by retaining the earnest money.  Establishing that Baseline was not ready, willing, and able to perform as agreed is a necessary element of [K’s] claim.

That is really the extent of the analysis. It seems that the Court bases its allocation of the burden on who is the party asserting the claim. But I wonder if the analysis would be the same if, for example, the earnest money was kept in escrow pending the closing, the closing failed, and the escrow agent (wrongfully?) returned the earnest money to K. Then Baseline would have to sue K for “return” of the earnest money, claiming that it was ready, willing, and able to perform the closing. In that situation, would Baseline have the burden to establish it’s willingness? Or would K still have the burden? I don’t think it’s clear from the opinion.

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One thought on “Daily Decisions: No Restitution for the Weary

  1. Pingback: Monday Morning-ish Mash-up: April 16, 2012 | Ziff Blog

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