In Failed Real Estate Deal, Brooklyn Court Holds Seller Entitled to Keep Down Payment

In Meadus v. Rosenthal, a decision surrounding a failed real estate deal that was handed down on November 5, a Brooklyn judge sitting in the Civil Court made an unusual decision, and allowed the seller to keep the buyer's escrow payment. Here's why: The contract of sale provided that the plaintiff-buyer was going to obtain a bank commitment for a conventional 15-year mortgage at the prevailing interest rate within 30 days in the amount of $190,000. The defendants-sellers became anxious when they didn't hear back from the plaintiff-buyer, as they had a binder on a new house that was contingent on their ability to sell this one. It turned out that the plaintiff was turned down for their mortgage due to assorted credit problems, but they deliberately failed to inform the defendants of this problem; instead, they tried to get an FHA loan for substantially more money - over $300,000. This application also failed; and this time, the defendants learned about it because the second bank sent a copy of its initial commitment (which was later revoked) to the defendants' attorney. Predictably, defendants' attorney rejected the plaintiff's unilateral move to alter the contract, and set closing date with a "time of the essence" for 2 weeks later. After the plaintiff failed to appear at the closing, she brought this action to recover his deposit. In opining that the seller was entitled to retain the down payment as liquidated damages, the Court held as follows: "For several months after the contract price was amended to satisfy [the first bank], plaintiff did not respond to defendants' several inquiries regarding the closing based on [this bank's] mortgage. There is nothing in the record that remotely satisfies the contractual requirement to "promptly furnish all reports, documents, in connection [with the mortgage commitment]" to seller. [In addition], plaintiff faults defendants for cooperating with her mortgage company and paints it as a tacit acceptance of her FHA loan application. The "cooperation" was a result of defendants' own investigation of plaintiff's mortgage situation that was prompted by plaintiff's non-responsiveness on the issue." While the Court's decision is clearly limited to the specific facts of this case - rather than announcing a general rule for broad application - it does provide valuable guidance as to the type of circumstances where a seller may be able to retain the down payment when the deal falls through.