Rosenberg v. Dwyer, CV-053496-10, NYLJ 1202646902368 (March 11, 2014)
First Issue: Whether the escrow agreement for termite damage is binding upon the Sellers and requires payment for repair and abatement of termite damage exceeding the funded escrow account amount of $3,000.00?
Plaintiffs entered into a Residential Contract with Defendants on November 18, 2004. Per the terms of the Contract, the Plaintiffs obtained a termite inspection of the premises which revealed termite damage estimated at $2,600.00. In response, Defendants obtained an independent termite inspection which estimated the repair cost to be $650.00. Unable to resolve the discrepancy between the two reports, but wishing to close, Plaintiffs and Defendants executed an escrow agreement for the purpose of addressing the termite damage, post-closing.
The Escrow Agreement, executed at the closing on December 30, 2004, provided: Sellers agree to obtain, at Sellers’ expense, within ten business days of this date, a third Termite Inspection by a duly licensed and insured pest control operator who shall be agreeable to Purchasers (herein "Independent Termite Inspector") and the determination of the Independent Termite Inspector as to the treatment and repair shall be binding upon the Sellers and Purchasers. Purchasers hereby authorize their attorney to bind them in this matter. The cost of the treatment and repair shall be paid by the Escrow Agent (Sellers’ Attorney) from the Escrow Fund and proof of the treatment, repair and payment shall be promptly sent to Purchasers whereupon the Escrow Agent is authorized to pay over the remaining monies to the Sellers. As per the terms of the escrow agreement, Defendants deposited $3,000.00 into the escrow account with their Attorney, as Escrow Agent, to be used for termite treatment and repair. Additional terms of the agreement required that a third, independent inspection be obtained by the Defendants at their expense and that the findings of said inspection would serve as the final determination of any and all required termite treatment and repair. The third inspection, conducted on January 3, 2005, revealed damage and repairs amounting to $2,090.00. A follow-up inspection on January 6, 2005 of previously inaccessible portions of the premises revealed further damage requiring additional treatment and repair at an added cost of $3,800.00. Following submission of the third report, Defendants informed the Plaintiffs that a check in the amount of $2,090.00 would be issued to cover the cost of termite abatement and repair in accordance with the initial third report and that no additional liability was warranted as the damage discovered in the previously inaccessible areas of the premises occurred post-closing. The Plaintiffs contend that the terms of the escrow agreement are clear on their face and that by entering into said agreement Defendants agreed to be bound by its terms and, therefore, are responsible for the additional $3,800.00 in treatment and repairs.
The Court held that it is well settled law that the provisions of a Residential Sale Contract are merged in the Deed and, therefore, terminate upon closing of the title. An exception to the doctrine of merger is found when parties to the Contract have demonstrated a clear intent that a particular provision of the Contract survives delivery of the Deed, such as language which reads "this provision of the Contract shall survive delivery of the Deed." In the case at bar, the parties entered into an escrow agreement at closing for the purpose of remedying a termite condition on the premises. Specifically, the escrow agreement required the Sellers to deposit funds in escrow and obtain an independent inspection. Both parties agreed to be bound by the findings of the report and specified course of action for treatment and repair. Here, the plain language of the agreement, "the determination of the independent termite inspection shall be binding upon Sellers and Purchasers" evidenced a clear intent by the Plaintiffs and Defendants that the terms of the escrow agreement would survive the closing. The Court rejects Defendants' contentions that its liability would be limited to $3,000.00. Plaintiffs and Defendants both agreed that they would be bound by the determination of All County Pest Control. All County found additional damage to the premises in the sum of $3,800.00. which was described in their report addressed prior herein. In Pleasant Hill Developers v. Foxwood Enterprises, LLC, 65 AD3d 1203, 885 NYS2d 531 (2nd Dept 2009), the Court found that Defendants failed to make a prima facie showing that the $15,000.00 escrow deposit provided for by agreement was intended as a general limitation on their liability. In the case at bar, there is no clear indication that Defendants' liability was limited to $3,000.00. Therefore, Plaintiffs are awarded judgment in the sum of $3,800.00.
Second Issue: Is the Plaintiffs' second cause of action, whether based upon Contract or Fraud, barred by the statute of limitations? Does the merger doctrine bar the second cause of action?
The Rider to the aforementioned Residential Contract contained a provision representing the premises as being connected to a municipal sewer system. In 2006, during the installation of a patio, the Plaintiffs discovered that a septic rather than sewer system connection existed. Plaintiffs contend that Defendants breached the Contract representation and claim damages in the amount of $6,200.00. Defendants argue that the cause of action is barred by the statute of limitations and further that the Plaintiffs had an opportunity to inspect the premises before the sale was finalized and agreed to accept the property "As Is". Defendants further argue that the merger doctrine applies to bar any claim for the failure of the premises to be connected to the sewer system.
The Court held that the statute of limitations in New York State bars a cause of action for breach of Contract brought more than six years after the breach occurred. Therefore, the statute of limitations for the alleged breach began to run at signing of the Contract and not from delivery of the deed at closing. Therefore, whether Plaintiffs were cognizant of the alleged breach is immaterial. Applying the law to the facts herein, the breach of Contract with respect to the premises being connected to the sewer system occurred at the time the Contract was signed by the Plaintiffs on November 18, 2004. The cause of action was brought December 29, 2010, thereby, rendering it barred by the six year statute of limitations. Plaintiffs contend that they are not suing the Defendants for fraud, but solely for breach of Contract in the second cause of action. Plaintiffs' attorney writes in his affirmation dated January 16, 2014, submitted in support of the cross motion that the second cause of action is based upon Contract and not fraud. The second cause of action which is also for breach of Contract alleges that Defendants are liable to Plaintiffs for the sum of $6,200.00 representing the cost of connecting the premises to the municipal sewer system (herein "sewer system") which was represented in the Contract of Sale to have been connected to the sewer system and which, in fact, was connected to a septic tank and not to the sewer system contrary to the specific representation of the Defendants set forth in the Contract of Sale.
Defendants' argument that the second cause of action sounds in fraud is mistaken since the operative terms of the Contract of Sale aver that the "Defendants have knowingly breached the representation made by them in the Residential Contract of sale resulting in damages to the Plaintiffs in the sum of $6,200. Even if one would consider the second cause of action to be based upon Fraud, the claim would still be barred by the six year statute of limitation. Plaintiffs had an inspector inspect the premises prior to closing who recommended that the Plaintiffs investigate the status of the premises being connected to a sewer. Plaintiffs contacted the Village of Westbury which told Plaintiffs that the premises was connected to the municipal sewer. Any fraud claim arose before closing of title and is barred by the six year statute of limitations. The closing of title occurred without any provision being made for the survival of the contractual representation that the premises were connected to the sewer. Thus, any claim by Plaintiffs in the second cause of action is barred by the merger doctrine. Lastly, any claim by Plaintiffs based upon fraud would fail because there was no justifiable reliance upon the alleged misrepresentation of Defendants concerning the sewer connection. Plaintiffs had an inspector and consulted with the Village of Westbury about the status of the premises being connected prior to closing.
Plaintiff is granted on the first cause of action the sum of $3,800.00. Plaintiffs' second cause of action is dismissed with prejudice.
1. As to the first cause of action it is important that one look at the big picture. The Contract was signed on November 18, 2004, the inspections were conducted shortly thereafter, the parties could not agree to a figure as to the cost of correction, and then the closing occurred on December 30, 2004, almost 6 weeks later, without resolution. Why the parties and their respective attorneys would ever have allowed for this closing to take place without this relatively simple issue first being fully resolved is incomprehensible. They had 6 weeks to resolve the issue, and on a collateral note, most termite inspections are conducted prior to signing Contracts and are conducted in concert with the home inspection which was had in this instance. The most germane point to be had from this issue is that one should endeavor to avoid escrows at all costs because, as in this instance, the Sellers’ attorney (Escrow Agent) remained “married” to this case as Escrow Agent, Attorney, and as a material fact witness for TEN YEARS. At what cost? Time, money, sleepless nights.
2. As to the second cause of action, the facts are not clear. Was the home inspection conducted prior to Contract, or after Contract. Most Residential Contracts do not contain a home inspection contingency clause and in the case at bar, the decision reads that the Plaintiffs had a home inspector inspect the premises prior to closing who recommended that the Plaintiffs investigate the status of the premises being connected to a municipal sewer. Taking from this is that the home inspection was conducted after the Contract was signed seems to imply that the transaction was contingent on the premises being connected to a municipal sewer. So it appears that the value of the home inspection was virtually nil in this respect if all the home inspector advised the Purchasers to do was to investigate what the inspector failed to personally investigate himself or herself. What did the Plaintiffs do in response? They took the cheap way out by calling upon the Village for an answer, which response carries with it no reliance value, as retrospectively established. The most germane point to be had from this issue is that the “penny wise – pound foolish” concept prompted the Plaintiffs to engage a home inspector who essentially told them nothing, followed by a valueless telephone call to the Village, whose representative gave them wrong information, all of which could had been obviated had they instead engaged a Professional Engineer who either could have provided them with the right answer prior to closing as to the septic/sewer issue, or if not, would have, at the very least, been financially answerable for providing them with the wrong information.