Would-be buyers sue over lost deposit

Law of the Land

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Jul. 21, 2010

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Law of the Land

Tara-Nicholle Nelson
Inman News

James Carpenter signed an agreement to buy undeveloped land in Austin, Texas, in 2004, and obtained investment funds to finance the purchase from Sandra McBeth and James Reynolds, a married couple.

Carpenter informed McBeth and Reynolds that the buyer who had planned to buy the property previously had been unable to close the transaction because of an issue with the city of Austin around the ability to run water utilities to the property, but told the couple that the water issue had been resolved.

Carpenter entered into a limited partnership agreement with McBeth and Reynolds for purposes of acquiring the property. Carpenter signed the agreement not only on behalf of the general partnership, but also as the signor for two other limited partners participating in the transaction: Texas Water Solutions and Texas Water Management.

Under the agreement, McBeth and Reynolds deposited $800,000 in various earnest money deposit payments into escrow to activate the purchase agreement and extend the closing deadline five different times. Without notifying McBeth and Reynolds, Carpenter instructed the escrow holder to release the deposit funds to the seller.

Excluding McBeth and Reynolds, Carpenter then teamed up with a new set of investors and purchased the property via another partnership, then resold it at a profit of $140,000.

McBeth and Reynolds filed suit against Carpenter, alleging fraud, misrepresentation, conversion, and breach of contract against Carpenter, Texas Water Solutions and Texas Water Management. The jury verdict was in McBeth's and Reynolds' favor, awarding them more than $4 million in compensatory damages (including their out-of-pocket expenses and lost profits) and interest.

When the plaintiffs requested the court finalize the jury verdict into a judgment, the trial court ruled that the jury's award of lost profits was based on insufficient evidence, but upheld the fraud and breach of fiduciary duty verdicts and entered a judgment awarding the couple $875,000 for their out-of-pocket expenses and interest.

All parties appealed, and the Fifth Circuit Court of Appeals affirmed the lower court's ruling.

The appellate court explained that McBeth and Reynolds were not entitled to lost profits because they were unable to provide evidence establishing what their lost profits would have been "with reasonable certainty."

Because the second transaction was much less lucrative than the jury's lost-profit award, and because there was no evidence presented as to what amount, if any, the limited partnership's profit would have been, the district court's refusal to honor the jury's lost-profit award was correct, according to the Court of Appeals.

The court also rejected the arguments of Carpenter and his two limited partnerships that they neither owed nor breached any fiduciary duty to McBeth and Reynolds, citing the well-established rule of Texas law that limited partners owe each other the same level of fiduciary duties as general partners.

At trial, McBeth and Reynolds provided ample witness testimony to support the jury's verdict that Carpenter and his two entities breached their fiduciary duties to the couple and committed fraud against them by virtue of intentionally misrepresenting both the status of the property's water rights vis-a-vis the City of Austin and the city's negotiability on the same.

Accordingly, the Fifth Circuit Court of Appeals affirmed the trial court's entry of judgment awarding McBeth and Reynolds their out-of-pocket expenses plus pre- and post-judgment interest.

Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.

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