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N.Y. High Court Upholds Rule Permitting Attorneys to Cancel Home Sales
New York Law Journal
December 01, 2008
Lawyers may back out of a home purchase agreement on behalf of their clients for any reason, or for no reason at all, under the "attorney approval contingency" clause common to most residential sales contracts written in upstate New York, the New York Court of Appeals ruled Tuesday.
As long as attorneys cancel sales agreements within the prescribed time period, usually within three days of the signing of a contract, and the contract otherwise does not explicitly prevent them from doing so, attorneys and their clients would not be acting in bad faith by withdrawing from the sales agreement under the attorney approval contingency, a unanimous court decided.
Judge Susan Phillips Read wrote for the court that ruling otherwise would inject doubt in an area of contracts -- the sale of real estate -- where "clarity and predictability are particularly important." Reading a bad-faith exception into the contingency clauses could prompt litigation "by a disappointed would-be seller or buyer any time an attorney disapproved a real estate contract pursuant to an attorney approval contingency," Read wrote.
Equally as troubling is the prospect of attorney-client privilege being at risk as lawyers for disgruntled sellers or purchasers seek to discern whether their clients had communicated bad-faith motives while directing their lawyers to exercise the clause, according to the court.
"The threat to attorney-client confidentiality under a bad faith regime could harm the attorney-client relationship itself in the context of real estate transactions," Read wrote in Moran v. Erk, 176. "A diligent attorney, cognizant of the risk of being subpoenaed to testify as to the basis for a disapproval, would face a perverse incentive to avoid candid communications with his or her client regarding a transaction in which the attorney is supposed to represent the client's legal interest."
According to the New York State Association of Realtors, which filed an amicus curiae brief in the case urging the court to reject the bad-faith exception, residential sales contracts are drawn differently in different areas of New York.
The "upstate" version is typically a form developed by realty groups and local bar associations that contains an array of contingency clauses, including the attorney approval contingency. The "downstate" practice is to have realtors work out the outlines of a proposed contract with the parties, and then submit the agreement to the parties' attorneys for the preparation of a contract.
The court's ruling voided a $505,000 home sales contract that James J. and Kathleen D. Moran had tried to enforce against Mehmet and Susan Erk for the Moran's house in Clarence, Erie County.
Erk directed the Erks' attorney, Amy L. Stromberg, to disapprove the agreement, which the attorney did in December 1995 within the stipulated time period under the contract. The contingency provision provided, in part, that, "If either party's attorney disapproves this Contract before the end of the Approval Period, it is void and the entire deposit shall be returned."
According to the Erks' brief, the couple had a change of heart about buying the four-bedroom, three-bathroom home because of its rural location, potentially noisy neighbors and the additional driving time it would have taken the Erks to get to the Buffalo hospitals where both practiced obstetrics/gynecology.
Three years later, when the Morans finally sold their home for $385,000, the Morans sued the Erks for breach of contract.
Supreme Court Justice Joseph P. Glownia of Erie County found after a bench trial that the Erks had acted in bad faith by instructing Stromberg to disapprove the sales contract and awarded the Morans $234,065, the difference in the contract price and the sales price, plus interest.
An Appellate Division, 4th Department, panel affirmed Glownia's ruling in Moran v. Erk, 45 AD3d 1329 (2007). That panel cited McKenna v. Case, 123 AD2d 517 (1986), a 4th Department ruling in which the court held that a lawyer's disapproval of a contract pursuant to an attorney approval contingency would not be valid if it is "occasioned by bad faith."
The Court of Appeals concluded Tuesday that the bad-faith rule in McKenna does nothing to advance the objectives of "clarity and predictability" in interpreting real estate contracts.
Read wrote that the history of the Erks' case illustrates the point perfectly. Three years after the couple bought another home "and continued on with their lives," they found themselves sued for breaching a contract that should have been declared void when their attorney disapproved it, the court held.
"Now -- 10 years after their attorney disapproved the contract within a three-day disapproval period -- the Erks are fighting a six-figure judgment for putatively breaching an unwritten covenant because of something Mrs. Erk may have said or neglected to say in a single conversation with her attorney," Read wrote.
The Erks' attorney, John G. Horn of Harter Secrest & Emery in Buffalo, N.Y., said the ruling represents a "tremendous vindication for the Erks' right to exercise their contractual rights."
"It's an important case because it affects real estate practitioners and everyday average people across the state," Horn said in an interview. "This is, for any of us, generally speaking, the most important transaction that we enter into."
Scott D. Cannon of Geneseo, N.Y., represented the Morans. He had no immediate comment.
