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Bernstein v. Nemeyer - 213 Conn. 665, 570 A.2d 164 (1990)

Rule:

It is a condition of rescission and restitution that the plaintiff offer, as nearly as possible, to place the other party in the same situation that existed prior to the execution of the contract. 

When a court grants the remedy of restitution for breach of contract, the party in breach is required to account for a benefit that has been conferred on him by the injured party. In contrast to cases in which the court grants specific performance or awards damages as a remedy for breach, the effort is not to enforce the promise by protecting the injured party's expectation or reliance interest, but to prevent unjust enrichment of the party in breach by protecting the injured party's restitution interest. The objective is not to put the injured party in as good a position as he would have been in if the contract had been performed, nor even to put the injured party back in the position he would have been in if the contract had not been made; it is, rather, to put the party in breach back in the position he would have been in if the contract had not been made.

Facts:

In 1983, Ronald J. Nemeyer and Cheshire Management Company, Inc. (hereinafter, “defendants”) and a group of investors known as the Class A limited partners formed the CMC-Southwest Limited Partnership (the partnership) to purchase and renovate two apartment complexes in Houston, Texas. During the summer of the following year, the defendants solicited the present plaintiffs, the Class B limited partners, to join the partnership. The plaintiffs were seeking an investment that would provide them with a source of capital growth as well as a tax deferral for sums generated by a takeover of the firm where they had been employed. The defendants then gave a negative cash flow guaranty to the partnership, under which it lent the partnership $ 3,000,000. Eventually the defendants discontinued mortgage payments, the properties were foreclosed on, and the defendants and plaintiffs lost their entire investments. Thereafter, plaintiffs filed suit against defendants for breach of contract, willful misconduct, and violation of the Connecticut Unfair Trade Practices Act, specifically Conn. Gen. Stat. § 42-110b. The plaintiffs claimed that they had a right to rescission and restitution for the defendants’ breach of the guaranty. On the other hand, the defendants claimed that their breach was not material and that their losses precluded unjust enrichment. The trial court denied the plaintiffs' request for rescission and restitution of their investment. The court found that the plaintiffs had bargained for the negative cash flow guaranty and that the defendants' failure to make mortgage payments in 1985 was a breach of that guaranty. However, the court determined that the plaintiffs could not recover because the guaranty was an incidental rather than a central term of the contract as a whole, and the defendants' nonperformance therefore was not a material breach warranting rescission. Furthermore, the trial court held that the losses suffered by the plaintiffs resulted not from the defendants' breach but from the continued failure of the Houston real estate market, and despite the defendants' breach, the plaintiffs had realized the tax benefits that were a central part of their bargain. The plaintiffs appealed.

Issue:

In a speculative real estate venture, were investors entitled to rescission and restitution of their investments upon breach of a "negative cash flow guaranty" contained in the partnership agreement?

Answer:

No.

Conclusion:

While the court acknowledged that the defendants' nonperformance of the negative cash flow guaranty was a material breach of the partnership agreement, it held that it did not automatically and unconditionally entitle the plaintiffs to recover their investment in the partnership. According to the court, the award of a restitutionary remedy for breach of contract would depend upon a showing of what justice required in the particular circumstances. The court determined that the plaintiffs had failed to establish their right to the return of their investments. The court found that the plaintiffs could not place the other party in the same situation as prior to the execution of the contract, a condition for restitution, and did not prove that the general partners were unjustly enriched.

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