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A stopped check does not invalidate sale contract.

A common nightmare of a real estate broker or a seller of property is that after a long series of negotiations, a contract is finally made but the purchaser, at the last minute, changes his mind. In most cases, the broker and the seller find themselves with a loss of time and effort and having to start all over again. However, in the case of Korabel v. Natoli, (619 N.Y. 2d 833), the purchaser changed her mind but she was a little too late in doing so.

Jacqueline Natoli entered into a contract to purchase property in Ulster County from Bruce Korabel. The contract contained the usual provision that required the downpayment of ten percent to be made by check subject to collection. The balance of the purchase price was to be paid at closing in the form of cash, certified check or bank check.

Natoli signed the contract and delivered it, together with her personal check in the amount of the required downpayment. The next day however, she stopped payment on the check. The day after that, Korabel, without knowing that payment of the check had been stopped, signed the contract as seller.

Korabel thereafter commenced a lawsuit to recover the full amount of the downpayment, claiming that Natoli breached the contract. Natoli claimed that the contract, which called for a check "subject to collection," never took effect since that condition was not satisfied. Natoli claimed that since she stopped payment on the check, there was really no payment of the downpayment at all. Therefore the condition that required the downpayment was not satisfied. According to her, payment on the check was a condition precedent to her obligation to perform under the contract. The mere delivery of the check was not enough, she said. Thus, according to Natoli, no contract was ever entered into.

The court, however, held otherwise. The Appellate Division ruled that it is clear from the language of the contract that the parties intended to allow for the payment of the downpayment by uncertified personal check. The phrase "subject to collection" was intended to protect the seller so that he would not be required to perform under the contract if the Natoli downpayment was dishonored by a bounced check.

The court ruled that although it is a general rule that a check is not absolute payment until it is paid by the drawee bank, a contract vendee of property cannot use this general rule to withdraw from a contract before her downpayment check is deposited and paid by the bank. Delivery of an uncertified check constitutes conditional payment, which is dependant upon the check being honored. This means that the taking of a check by the seller is a surrender of his right to sue on the underlying contract for which the check was taken, until the check has been dishonored. Upon the dishonor of the check, the seller can then maintain an action either on the bounced check or on the underlying contract obligation.

The mere fact that the uncertified check was conditioned upon the check being honored by the bank did not preclude it from being the downpayment required by the contract. Had the parties required something more than the delivery of a personal check for the downpayment, they would have so specified in the contract, as they did for the payment of the balance upon the closing.

At most, the court stated, Natoli's issuance of the stop payment order constituted an attempted revocation of her purchase offer. The evidence however, established that Korabel had no knowledge of her action until after her offer was accepted by him in the form of the signed contract.

Natoli also contended that Korabel failed to prove damages. (While the decision does not mention this, it may be that Korabel sold the property later on at a higher price.) The court ruled that it has long been the law in New York that a purchaser who defaults on a real estate contract without any lawful excuse cannot recover the downpayment. In such case, the seller need not prove actual damages. The same applies in this case, where Natoli stopped payment on her downpayment check.

The court also stated that actual damages in cases involving real estate transactions will generally be very close to the amount of the traditional ten percent retained as downpayments.

(Edward L. Schiffif the senior partner of the New York City law firm of Schiff, Turek, Kirschenbaum, O'Connell, LLP.)
COPYRIGHT 1996 Hagedorn Publication
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Copyright 1996, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:real estate
Author:Schiff, Edward L.
Publication:Real Estate Weekly
Date:Jan 31, 1996
Words:745
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