Indiana Real Estate Contract Law: Earnest Money in Terminated Agreements

Indiana Real Estate Contract Law: Earnest Money in Terminated Agreements

Indiana real estate contract law is governed by various sections of the Indiana Code and relevant court decisions. In Song v. Iatorola, 76 N.E.3d 926 (Ind. Ct. App. 2017), the Court of Appeals of Indiana issued an opinion on rehearing that reaffirmed its prior opinion concerning a contractual and real estate dispute arising out of the purchase of 16 acres of real property next to the Porter County Airport in northern Indiana. The decision illustrates which facts can be used to support actual and constructive fraud claims.

A Case Study in Indiana Real Estate Contract Law

After purchasing and mortgaging 34 acres of land in Porter County, Indiana, a husband and wife (the “sellers”) listed for sale part of their land, which was zoned for agricultural use, to reduce or repay their bank debt.

The sellers’ listing incorrectly stated that the property was zoned for industrial use instead of agricultural use. A New Jersey buyer contracted to purchase a 16-acre parcel of the land, intending to use it for industrial use, and paid $150,000 in earnest money.

This transaction was subject to the applicable rules of the Porter County municipal code, Indiana real estate contract law, and federal regulations.

Breach of Real Estate Contract, Actual and Constructive Fraud in Indiana

Before closing on the deal, the buyer learned that the property was zoned for agricultural use and could not be used for industrial warehousing as had been represented in the sellers’ listing. The buyer advised the sellers that he did not wish to proceed with the transaction unless the sellers secured I-2 industrial zoning and reduced the purchase price to account for the increase in real estate tax that would result from the change.

After the sellers refused to obtain the industrial zoning or consider a price reduction, the buyer terminated the purchase agreement and requested the return of his $150,000 in earnest money. The sellers refused to return the buyer’s earnest money, which had been deposited in escrow.

The buyer filed a lawsuit alleging constructive and actual fraud and breach of the real estate contract, and seeking rescission under Indiana real estate contract law. The sellers counterclaimed against the buyer, also alleging actual and constructive fraud. After the trial court denied both parties’ motions for summary judgment, the jury returned a verdict for the buyer for $150,000.

Pursuing Additional Real Estate Breach of Contract Damages in Indiana

The buyer next moved for payment of attorney’s fees and prejudgment and postjudgment interest by the sellers, while the sellers filed a motion to correct error. Both parties’ motions were denied. The buyer then filed an appeal and the sellers filed a cross-appeal.

The appellate court found that the trial court had erred in not awarding attorney fees, prejudgment interest, and postjudgment interest to the buyer but that it had ruled correctly in denying the sellers’ motion for summary judgment.

In so doing, the court set forth numerous important and relevant statements of law concerning the parties’ various claims and defenses. As noted by the court, contract interpretation is generally a question of law as opposed to a question of fact, and evidence from outside the contract cannot be considered unless the language of the contract is ambiguous. Where the contract is ambiguous, evidence outside the contract can be considered and any ambiguity in the contract language is construed against the drafter of the contract.

The court found, and reaffirmed on rehearing, that the parties’ purchase agreement, which was drafted by the sellers, was ambiguous as to the inclusion of a due diligence period during which the buyer could terminate the agreement. Thus, a reasonable judge or jury could find for the buyer on this issue.

Indiana Real Estate Contract Law: Elements of Actual and Constructive Fraud in Indiana

The appellate court held that the buyers’ claims of fraud were issues of fact for a judge or jury and that the buyer could prove that the facts alleged by the seller demonstrated the following elements of actual fraud in Indiana:

  • A material fact represented by the sellers was false.
  • The false statement was made either with knowledge or disregard for actual facts.
  • The buyer relied on the false statements.
  • The buyer suffered injury as a result of reliance on the false statement.

The false statement at issue was the listing of the parcel as zoned for industrial use when that was not the case.

The court also held that the buyer could prove the following elements of constructive fraud in Indiana:

  • The sellers owed a duty to the buyer based on their relationship.
  • The sellers violated that duty by falsely representing the nature of the property for sale or by remaining silent when there was a duty to speak.
  • The buyer relied on the misrepresentation.
  • The buyer suffered damages as a result of reliance on the misrepresentation.
  • The buyer received an advantage at the expense of the seller.

Significantly, the court held that a party may be justified in relying on statements made for a fraudulent purpose even if such facts are a matter of public record.

The sellers also argued on appeal that the constructive fraud claim failed because the parties did not have a fiduciary relationship. The court did not address the issue directly because the argument was first raised on appeal. However, the court did note that, with respect to constructive fraud claims, a fiduciary relationship is not required, but a duty may exist if one party has knowledge the other party does not and, as a result, the first party may enjoy a position of superiority over the party.

In finding for the buyer on the issue of attorney fees, the court noted that Indiana real estate contract disputes are subject to the American rule. Under that rule, the parties involved in litigation pay their respective attorney fees barring an agreement between them, a statute, or another rule to the contrary. Here, the parties’ purchase agreement included a fee-shifting provision that the prevailing party in any suit could recover attorney’s fees from the non-prevailing party. Thus, the buyer was entitled to attorney’s fees, which he did not have to request from the jury or petition the trial court for prior to the jury verdict.

As for prejudgment interest, the court also found in favor of the buyer, noting the buyer received a money judgment, the amount of the prejudgment interest could be determined, and the buyer was entitled to the statutory rate of prejudgment interest despite the earnest money having earned interest during the proceedings and despite any contrary interest rate stated in the parties’ escrow agreement.

Need Help with an Indiana Real Estate Contract Law Issue?

Indiana real estate contract disputes can be complex. It is wise to seek legal assistance in drafting and executing real estate agreements in accordance with the law and to obtain experienced counsel when dealing with breach of real estate contracts or potential claims of actual or constructive fraud in Indiana.

An attorney who is knowledgeable in Indiana real estate contract law can assist you in these matters. Corey Meridew is a partner at Camden & Meridew, P.C. who practices in the areas of real estate, appellate law, business litigation, consumer protection, and utility law. Contact the attorneys of Camden and Meridew today by calling 317-770-0000 or by completing the online contact form here.

This website supplies general information about the law but it is provided for informational purposes only. This content does not create an attorney-client relationship and more importantly is not meant to constitute legal advice. You should not act on any of the information contained herein without first consulting an attorney.

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