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Death and a Down Payment

When a prospective purchaser of a cooperative apartment dies and the estate cancels the contract, may the seller retain the down payment? Is the estate required to submit its own application to the board for approval? Those were the questions in Warner v. Kaplan.

Kenneth and Diane Kaplan contracted to sell their cooperative, Apartment 2A at 1150 Park Avenue, in Manhattan, to Glen Altman. They entered into a contract of sale for a purchase price of $2.3 million cash. Altman deposited $230,000 as a down payment, which was placed in escrow. Altman submitted her application to the co-op’s board of directors for approval of the sale. She was interviewed and, on August 18, 2005, the board approved the sale.

Before things could move any further, Altman died on September 1. Altman’s estate claimed that Altman never received notification of the board’s approval, while a real estate broker disagreed. It was undisputed that on August 22, 2005, Altman and her stepdaughter visited the apartment to consider whether Altman should purchase any of the Kaplans’ personal property.

In a letter dated September 28, 2005, plaintiffs Tracy Altman Warner and Alan G. Kraut, co-executors of Glen Altman’s estate, demanded that the Kaplans return the contract deposit of $230,000. The Kaplans argued that the contract remained binding on Altman’s heirs and that if Altman’s estate refused to close, it would be in default. Altman’s estate sued for return of the down payment and the Kaplans moved for summary judgment dismissing the complaint.

The court determined that the crux of the matter was in Paragraph 15.2 of the contract of sale, which expressly made the contract binding on the parties’ “heirs, personal and legal representatives and successors in interest.”

The court determined that the inclusion of this provision indicated that the parties explicitly contemplated, and provided for, the possibility of either party’s death before closing by specifying that the death would not terminate the contract, but that the contract would survive, to be performed by the successors or heirs of the deceased party. Accordingly, the provision made the contract binding on Altman’s estate.

The court explained the general rule that, while a contract for personal services is terminated by the death of the servant, a contract of sale is not terminated by the death of the purchaser. Indeed, the court described the general rule recited in other cases: “Where the proposed purchaser dies before the closing of title, his executor or administrator may pay the balance of the purchase price and take the deed in his own name holding it in trust for the heirs at law.”

Altman’s estate argued that Paragraph 1.17 of the contract, entitled “Proposed Occupants,” which had been left blank in the contract, negated Paragraph 15.2. The court found that the purpose of the proposed occupants provision was merely to allow the purchaser to indicate which, if any, individuals would be residing in the apartment with Altman. Whether filled in or left blank, the provision did not invalidate or limit the section binding the parties’ heirs to their predecessors’ contractual obligations. The court determined that, even if Altman had listed proposed occupants, upon her death, the legal issues presented would have remained the same, and its resolution would still have depended on whether Altman’s heirs were contractually obligated to purchase the apartment, regardless of whether the board had approved the proposed occupants.

The court went further, finding that Paragraph 15.2 would have been meaningless if it did not bind Altman’s estate to her contractual obligation to purchase the apartment, citing the well-settled principle that a contract should not be interpreted in a way that would render any clause meaningless. The clause was clear and unambiguous, and the court found that if it inaccurately reflected the parties’ intentions, it could have been rewritten.

The court also considered the estate’s argument that Altman’s death before closing justified nonperformance under the defenses of “impossibility” or “frustration of contract.” The court noted the general rule concerning impossibility of performance: “Impossibility excuses a party’s performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible. Moreover, the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.”

The court determined that Paragraph 15.2 of the contract showed that the theory did not apply. Where performance was possible, albeit unprofitable, the legal excuse of impossibility would not be available.

The court also considered the argument that there was a “frustration of contract purpose.” The defense could not be applied because “the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense.”

The court acknowledged that, since Altman was purchasing the apartment solely for her own residence, her death would have, by this definition, frustrated the purpose of the contract. But the court expanded upon the general rule and found that the doctrine did not apply when “the event which prevented performance was foreseeable and provision could have been made for its occurrence.” Since Paragraph 15.2 of the contract made an explicit provision for the event of either party’s death, the doctrine was not available.

The estate also challenged the contract on the grounds that the contract contingency was not satisfied because Altman had not received notification of board approval before she died. However, the estate had no basis on which to deny the board’s issuance of written approval, and it failed to offer specific facts contradicting the broker’s affidavit that Altman had been informed and that she and her stepdaughter visited the apartment after being notified of the approval.

The estate also claimed that Altman had already satisfied the contract’s requirement that she submit an application for the board’s approval of the sale. It argued that since there was no provision in the contract that required purchaser’s estate or heirs to submit a further application, the estate’s failure to do so could not be treated as a repudiation of the contract. The question became whether Paragraph 6, or any other contract provision, imposed any further obligation regarding board approval, either on Altman’s estate or on the sellers, following Altman’s death.

Paragraph 6.1 of the contract stated that “[t]his sale is subject to the approval of the Corporation.” A rider to the contract made the contract contingent upon the board’s approval of the transaction. Notwithstanding Altman’s compliance with that portion of the contract requiring her to submit an application package, the court found that once Altman’s death made the contract of sale binding on her estate, the board’s initial approval of Altman as buyer and as occupant was no longer sufficient to satisfy Paragraphs 6.1 and the rider.

The court explained that the board had not authorized either the sale to Altman’s estate or residency in the unit by an occupant selected by the estate. It found that since the estate was bound by the obligation to purchase the apartment, the estate was also bound to obtain the board’s approval.

Accordingly, the court determined that, because the contract remained binding, and the board’s approval was required, the estate was required to take steps necessary to obtain the board’s approval. This was the case because only the estate had the information needed by the board to determine whether it should be approved.

In fact, the court explained that the co-op did not have a policy in place which would have precluded the estate from purchasing. The court explained that the board had neither the obligation nor the ability to determine whether the proposed sale should be approved until it received an application package.

Because the estate failed to seek board approval, the court did not have to rule on the estate’s right to reimbursement of the down payment had the board disapproved the sale. The court determined that the $230,000 down payment should be delivered to the seller as liquidated damages under the contract.

Comment: This case raises issues concerning the rights and obligations of an estate when a person dies while a contract is pending. The court first explained that, where a contract – even if merely in its printed form – provides that it shall be binding on the parties’ heirs, that means that if a person dies before the contract is consummated, their estate must complete the contract. The court was very clear that if the parties wanted a different result, they should have negotiated and amended the form contract.

The other aspect concerns the purchaser’s obligations to the co-op under the contract. The court explained that, where an estate is responsible to complete the contract, it must comply with the terms of the contract and submit its own application to the board for approval. Because the estate here did not submit the application, the court did not consider what would have happened in the event that the board – which had approved the purchaser – refused to approve the estate.

While we cannot be certain (particularly because we are neither familiar with the specific terms of the contract nor the assets held by the estate), we believe that if the board did not approve the estate, the estate would have been able to recover the down payment. However, the estate did not submit an application and, as a result, lost the down payment without any opinion as to whether it would have been an acceptable shareholder.

For Plaintiff: Richard A. Kraslow
For Defendants: Victor & Bernstein

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