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EH Investment Co., LLC v. Chappo LLC

Court of Appeals of Connecticut

July 4, 2017


          Argued March 7, 2017.

         Appeal from Superior Court, judicial district of Fairfield, Hon. Michael Hartmere, judge trial referee.

         Procedural History

         Action to recover damages for, inter alia, breach of contract, and for other relief, brought to the Superior Court in the judicial district of Fairfield, where the defendants filed a counterclaim; thereafter, the matter was tried to the court, Hon. Michael Hartmere, judge trial referee; judgment in part for the plaintiff on the complaint and judgment for the plaintiff on the counterclaim; subsequently, the court denied the defendants' motion to reargue, and the defendants appealed to this court; thereafter, this court denied the plaintiff's motion to dismiss the appeal. Reversed in part; judgment directed.

          Scott D. Brenner, for the appellants (defendants).

          Robert R. Lewis, for the appellee (plaintiff).

          Prescott, Beach and Bishop, Js.


         The plaintiff real estate development company sought return of a deposit it had paid to the defendant company and its principal, claiming that the defendant company had breached an agreement to find a lender willing to make a commercial loan to the plaintiff for purposes of redeeming a foreclosed commercial office property that it owned. The plaintiff had been leasing the foreclosed property to H Co. and informed the defendants that H Co. was considering whether to renew or extend its lease. The plaintiff sent the defendants a memorandum containing the specifics of the proposed lease with H Co., which was subject to the approval of H Co.'s senior management. The defendants prepared an engagement letter detailing that they would procure a lender that would provide financing for the plaintiff in accordance with the loan terms that were detailed in the engagement letter. The plaintiff agreed to pay the defendants a placement fee of 1 percent of the principal loan amount from the proceeds of the closing and, upon execution of the engagement letter, the plaintiff would wire the defendants one half of the placement fee as an engagement deposit. With respect to that deposit, the letter stated that, in the event the defendants were unable to provide a lender commitment, the deposit would be returned to the plaintiff, but the defendants would retain the deposit if the plaintiff failed to complete financing after they had provided a lender commitment. Furthermore, the letter concluded with a merger clause that provided that the terms of the letter superseded all of the parties' prior understandings. The plaintiff wired the deposit to the defendants and returned the executed engagement letter. The defendants found a lender that would supply a loan according to the terms in the engagement letter and sent the plaintiff a loan application that would become the lender commitment letter after being returned and signed by the lender. The plaintiff, however, failed to sign and return the loan application because it had not secured a lease extension with H Co. After the defendants refused to return the deposit, the plaintiff commenced its action for, inter alia, breach of contract premised on the defendants' alleged wrongful retention of the deposit. The trial court rendered judgment in part for the plaintiff, concluding that the lease renewal with H Co. was a condition precedent to the parties' contract, and that because the condition precedent was not met, the plaintiff had no duty to perform and, therefore, the defendants breached the parties' contract by failing to return the deposit. The court also found that the defendants had exercised ownership over the plaintiff's property to the plaintiff's detriment and, therefore, the retention of the deposit also constituted a conversion. On appeal, the defendants claimed, inter alia, that the trial court improperly found that they had breached the contract because the lease renewal with H Co. was not a condition precedent, the absence of which mandated a return of the deposit, and the only obligation they undertook pursuant to the contract's plain and unambiguous terms was to find a lender that was willing to fund a loan according to the terms of the engagement letter. Held that the trial court improperly construed the parties' contract as including the H Co. lease extension as a condition precedent to the parties' obligations that required the defendants to return the deposit: there was no indication that the trial court gave proper deference to the language of the parties' fully integrated contract, which clearly and unambiguously provided that the defendants were entitled to keep the deposit if they obtained a loan commitment in accordance with the plaintiff's proposed terms and the loan failed to close; moreover, it was undisputed that, at the time the parties entered into their agreement, the plaintiff had not yet secured a lease extension with H Co. and, therefore, this was not a situation where the parties failed to fully contemplate the occurrence or nonoccurrence of the lease extension, and, if the plaintiff had viewed its lease with H Co. as an indispensable part of its agreement with the defendants, the plaintiff could have insisted that obtaining the lease extension be made a clear and express condition on its duty to compensate the defendants, or that the defendants would return the deposit in the event that the lease extension never materialized; furthermore, because the plaintiff was the party that had assumed the risk of engaging a loan broker before it had obtained the necessary lease commitment from H Co. to secure the loan, it was improper for the trial court to shift that risk from the plaintiff to the defendants by rewriting the parties' contract.


          PRESCOTT, J.

         The defendants, Chappo LLC and its principal, Richard J. Chappo, appeal from the judgment of the trial court rendered in favor of the plaintiff, EH Investment Company, LLC, on those counts of the complaint alleging breach of contract by Chappo LLC and conversion by both defendants.[1] The court determined that the defendants, whom the plaintiff had engaged to find a lender willing to make a commercial loan that the plaintiff needed in order to redeem a foreclosed office building it had owned, improperly refused to return the plaintiff's deposit after the plaintiff informed them that it would be unable to proceed with a loan because it had not obtained a lease extension from the building's primary tenant, the proceeds from which were intended to service the debt on the loan. The trial court determined that the existence of an executed lease with the tenant was a condition precedent to the parties' loan procurement contract, the nonoccurrence of which excused the plaintiff's performance and required Chappo LLC to return the plaintiff's deposit. The court awarded the plaintiff total damages of $47, 500, the amount of the deposit.

         The defendants claim on appeal that the trial court improperly determined that the existence of a lease extension was a condition precedent to the parties' contract. According to the defendants, the terms of the parties' contract were memorialized in a written engagement letter drafted by Chappo, and Chappo LLC successfully performed its only duty under the parties' contract by successfully finding a lender willing to make a loan on the terms sought by the plaintiff as set forth in the engagement letter. Further, they contend that because the engagement letter unambiguously set forth express terms governing the disposition of the engagement deposit, which did not include any provision requiring Chappo LLC to return the deposit if the plaintiff was unable to obtain a lease after Chappo LLC procured a commitment from a lender, they were entitled to keep the plaintiff's deposit. For the reasons that follow, we agree with the defendants. Accordingly, we reverse in part the judgment of the trial court and remand the case to that court with direction to render judgment in favor of the defendants on the breach of contract and conversion counts. The remainder of the judgment is affirmed.

         The relevant facts underlying this appeal are set forth by the court in its memorandum of decision and, generally, are not disputed.[2] The plaintiff is a real estate development company. Its principal, Fred Gordon, is a real estate investor and developer who holds a master's degree in business administration, in addition to being a practicing attorney. Gordon conducts his business from Bloomfield Hills, Michigan. Chappo also has an master's degree in business administration and has worked for more than thirty years in financing and real estate. His business, Chappo LLC, is located in Connecticut and specializes in arranging financing for corporate properties. Prior to entering into the business transaction now at issue, Gordon and Chappo were familiar with each other from Chappo's earlier experiences in investment banking, and the two men had communicated on several occasions over a twelve year period about financing opportunities for various properties.

         In November, 2012, Gordon spoke with Chappo by phone regarding a 94, 000 square foot commercial office building located on a twelve acre property in Auburn Hills, Michigan. The plaintiff previously owned that property, but recently had lost title to a bank in foreclosure proceedings after having defaulted on a loan obligation. The plaintiff had leased the building to Huntsman Corporation (Huntsman), which remained the building's primary tenant. Two years remained on the original lease. Gordon informed Chappo that Huntsman was considering whether to renew or extend the lease. Gordon wished to obtain financing in order to redeem the property from the bank, [3] but indicated to Chappo that, due to the distressed state of Michigan's economy, many lenders would not consider financing property there, especially foreclosed property.

         Over the next few weeks, Gordon and Chappo continued to discuss by phone or by e-mail details of a potential financing deal for the property, which included details of the plaintiff's efforts to negotiate a lease extension with Huntsmanas well as general information about the property market in Auburn Hills. In an e-mail dated November 15, 2012, Gordon sent Chappoa memorandum that contained specifics of the proposed Huntsman lease. The proposed lease was to run for a period of fifteen years and have an annual lease rental value of $1, 220, 000. Around the same time, Gordon also sent a memorandum to the executives at Huntsman who were handling lease negotiations with the plaintiff, in which he indicated that the plaintiff hoped to obtain a commitment to a lease extension, subject to Huntsman senior management approval, by early January, 2013, in order to permit the plaintiff to obtain a refinancing commitment from a lender. Gordon informed Chappo that any lease with Huntsman would need the approval of Huntsman senior management. As succinctly explained by the trial court, ‘‘Gordon's plan was to finance the [redemption] price of the property after [the plaintiff] had defaulted on the existing loan at enough savings that, if he could get [Huntsman] to agree to extend the lease under terms similar to those then in existence, the plaintiff would gain a windfall profit of approximately $5 million.''

         The defendants subsequently began working on obtaining the financing sought by the plaintiff. To that end, Chappo prepared an engagement letter dated November 20, 2012, that ‘‘included all the terms of the loan and indicated that [Chappo LLC] had an exclusive engagement to procure a lender which would then provide financing for a single tenant property occupied by [Huntsman] in accordance with the terms outlined in the engagement letter.'' Those terms, as the trial court indicated, included ‘‘that the tenant would be [Huntsman] and that the lender would be an institutional lender, that the term of the loan would be ten years, that the principal amount would be $9, 500, 000 at an interest rate of 5.25 percent, and that debt service would be based on a twenty year amortization.'' Lease payments would be made by Huntsman directly to the lender to service the debt, with any excess returned to the plaintiff. The engagement letter also contained a detailed description of the property, set forth basic terms of the as yet unrealized Huntsman lease extension, [4] and indicated that the lender would receive a first mortgage security interest in the property. The closing and funding of the loan were to occur approximately thirty days from the date of the lender commitment.

         Pursuant to the engagement letter, the plaintiff agreed to pay Chappo LLC a ‘‘[p]lacement [f]ee'' equal to $95, 000, 1 percent of the principal amount of the note, to be paid out of the proceeds when the loan closed. The plaintiff also agreed that, upon executing the engagement letter, it would wire Chappo LLC an ‘‘[e]ngagement [d]eposit'' equal to one half of 1 percent of the principal amount of the proposed $9, 500, 000 note, or $47, 500. The engagement letter contained the following language directly pertaining to the return or retention of the engagement deposit: ‘‘In the event Chappo LLC is unable to provide a [l]ender commitment as stipulated above and such time frame is not extended, the [e]ngagement [d]eposit will be returned to the [b]or-rower. Chappo LLC will retain the deposit if the [b]or-rower fails to provide requested information in a timely manner or fails to complete the financing after Chappo LLC had provided a [l]ender commitment.'' Importantly, the penultimate paragraph of the engagement letter provided as follows: ‘‘It is understood and agreed that the terms of this [e]ngagement shall supersede any and all prior [e]ngagements, arrangements or understandings among the parties with respect to the subject matter discussed above.''

         On January 4, 2013, the plaintiff executed the engagement letter and delivered it to the defendants. Attached to the executed engagement letter was a memorandum from Gordon that stated as follows: ‘‘Enclosed is an executed copy of the engagement letter for the Huntsman property. The deposit of $47, 500 will be wire transferred. The deposit will be returned within five days of the time at which it appears a loan pursuant to the application is not probable of funding by February 28, 2013, or an agreed later funding date. Looking forward to the expedited loan closing.''

         Gordon later wire transferred $47, 500 to Chappo LLC.[5] As previously noted, Gordon also made changes directly on the engagement letter because he was still in the process of negotiating the exact terms of the lease extension with Huntsman. See footnote 4 of this opinion. The defendants did not respond or object to the changes made by Gordon on the executed engagement letter or to the language in the accompanying memorandum.

         On January 10, 2013, the defendants e-mailed the plaintiff portions of a loan application from a lender, American National Insurance Company (American National). Gordon, finding the terms acceptable, completed the relevant pages and returned them to the defendants within hours. After receiving the returned pages of the application, an investment officer from American National ‘‘circulated the complete application/commitment letter to [the] investment committee and the senior vice president with authority to commit to the loan. The final version of the mortgage loan application was e-mailed to Gordon on January 22, 2015, with a hard copy [sent] direct from American National . . . the following morning. On the formal application was a signature block for Gordon and for the senior vice president of American National, Scott F. Brast. As soon as Gordon signed and returned the original, Brast would countersign, and the document ...

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