Tri-Town Constr. Co. v. Commerce Park Assocs. 12, LLC - 139 A.3d 467 (R.I. 2016)

Rule:

The main thrust behind the frustration of purpose doctrine is to excuse a party from performing under a contract on the occurrence of an intervening or supervening condition that substantially frustrates the main purpose for which the parties entered into the contract in the first place. For the doctrine to apply, the parties, in making the contract, must have been operating under a basic assumption that the intervening or supervening event would not take place. To succeed on a theory of frustration based upon the occurrence of a supervening event, a party must show that: (1) the contract is partially executory, (2) a supervening event occurred after the contract was made, (3) the nonoccurrence of the event was a basic assumption on which the contract was made, (4) the occurrence frustrated the parties' principal purpose for the contract, (5) the frustration was substantial.

Facts:

In 2004, Commerce Park Associates 12, LLC (CPA) and Nicholas E. Cambio agreed to purchase property in West Greenwich from Tri-Town Construction Company, Inc. in hopes of developing a 140-unit "over 55" residential condominium. The parties entered into a purchase and sale agreement pursuant to which Tri-Town conveyed the unimproved wooded lot located on the New London Turnpike to CPA, and Cambio signed a promissory note (the note), "individually, as guarantor," for $4,500,000. In August 2006, the transactions closed. CPA paid $136,000 and executed the promissory note that is at the heart of this dispute. The note obligated CPA to pay the principal sum of $4,363,000 plus 7 percent annual interest to Tri-Town. Under the note, principal-only payments of $6,000 per month were to be paid until January 2007, at which time interest began to accrue in the amount of $25,316.67 per month. Despite that accrual, however, the note called for interest-only payments of $10,000 per month until the "first Homebuyer closing." At that time, and at each closing thereafter, the payment due to Tri-Town included accrued interest and a portion of the principal. However, there was no deadline set forth in the note specifying when the first "[h]omebuyer closing" was to occur. The note, which was set to mature on July 31, 2016, was secured by a mortgage on the property. For two years after the closing and the execution of the documents, CPA satisfied all its obligations and also invested a significant sum of money into developing the property. Those expenditures included engineering fees, legal expenses to obtain needed zoning and regulatory relief, and expenses related to developing the land for the project. According to CPA, in the midst of its efforts, the national economy collapsed and the "Great Recession" ensued. This, CPA maintained, created an environment wherein it could no longer obtain financing, because "[t]he era of easy money ended." By September 2008, CPA had ceased making payments under the note. In early 2012, Tri-Town initiated foreclosure proceedings. After Tri-Town issued a notice to CPA of the impending foreclosure, CPA filed a petition for Bankruptcy in the United States Bankruptcy Court under Chapter 11 of the United States Bankruptcy Code. Undeterred, Tri-Town sought and secured relief from the automatic stay that accompanied the bankruptcy filing. Eventually, the Bankruptcy Court dismissed the case and in April 2013, Tri-Town purchased the property at a public auction for $2,250,000. CPA and Cambio appealed arguing that the judgment of the Superior Court in favor of Tri-Town was infected with four errors. They argued that the trial justice erred when he granted summary judgment in favor of Tri-Town’s claims for (1) breach of a promissory note and (2) breach of a guaranty of the note. CPA also challenged (3) the trial justice's dismissal of its counterclaim pursuant to Rule 12(b)(6) of the Superior Court Rules of Civil Procedure for payments made to Tri-Town and for various expenses it incurred. Finally, they contended that the trial justice erred by (4) granting Tri-Town’s motion for attorney's fees.

Issue:

Did the frustration of purpose doctrine excuse CPA and Cambio’s nonpayment?

Answer:

No.

Conclusion:

The court held that the trial justice did not err in granting summary judgment on a breach of promissory note claim as there was no indication that Tri-Town shared in the assumption that an age-restricted condominium would be developed, and thus frustration of purpose did not excuse CPA and Cambio’s nonpayment. Summary judgment on a breach of guaranty claim was affirmed as there was no requirement that the guaranty be in a separate writing apart from the note, the guaranty language was clear and unambiguous as to the guaranty, the guarantor had signed the document, and Tri-Town’s promise to grant the buyer a loan in exchange for the guarantor's promise to pay was sufficient consideration. An award of attorney's fees to Tri-Town was vacated and remanded for consideration of testimony or affidavit of an independent attorney regarding the reasonableness and necessity of Tri-Town’s fees.