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Arnhold v. Ocean Atlantic Woodland Corp.

March 21, 2002


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 99 C 7953--Arlander Keys, Magistrate Judge.

Before Flaum, Chief Judge, and Coffey and Manion, Circuit Judges.

The opinion of the court was delivered by: Coffey, Circuit Judge.

Argued SEPTEMBER 26, 2001

Ocean Atlantic Woodland Corporation ("the Buyers" or "Ocean Atlantic") entered into a final settlement agreement with Elda Arnhold and Byzantio, L.L.C. ("the Sellers") concerning the sale of farmland in Will County, Illinois. The agreement contained a "time-essence" clause that required the parties to close on the property no later than January 25, 2001.*fn1 Ocean Atlantic failed to meet the closing deadline but nevertheless moved to enforce the agreement and obtain specific performance of the contract. After a two-day evidentiary hearing, the magistrate judge denied the motion, finding that Ocean Atlantic had lost its rights to the property and declaring the contract terminated. 132 F. Supp.2d 662. We affirm.


"What a diff'rence a day makes . . . twenty-four little hours."*fn2

This case concerns Ocean Atlantic's inability to close on a real estate transaction until one day after the deadline imposed by a clear and unambiguous "time-essence" clause that was thoroughly negotiated and viewed by the parties as a material term of their contract. At the heart of this controversy is paragraph 15 of the contract, which contains what the parties typically refer to as "the drop-dead clause." The clause provides as follows:

It is intended by Sellers and Purchasers that January 25, 2001 shall be the absolute final date for closing . . . . If closing has not occurred on or before January 25, 2001, for any reason other than Sellers' default . . . Purchaser shall have no right to purchase or otherwise encumber the Property or Homestead parcel, the Contract shall be terminated, and Purchaser shall have no rights with respect to the Property or Homestead Parcel.

Based upon our review of the record, we agree with the district court's finding that the parties clearly intended to end their acrimonious three-year relationship--which had resulted in two previous federal lawsuits and three extensions in the closing date--one way or another, no later than January 25, 2001. The magistrate judge properly found that Ocean Atlantic assumed the risk of losing title to the property if it failed to close, for any reason, by that specific date. Thus, the Sellers were entitled to terminate the contract on January 26, 2001--one day after their offer to sell the property expired.


A. August 6, 1997 to October 26, 2000

The Sellers, Edith Arnhold and John Argoudelis, are lifelong farmers who own 280 acres of land near Plainfield, Ill., a far southwestern suburb of Chicago that is presently regarded as one of the fastest growing areas in the state. In exchange for $7.56 million payable over three years, the Sellers agreed on August 6, 1997 to sell their farm to Ocean Atlantic, a sophisticated development corporation that planned to transform the land into a residential subdivision with more than 700 homes. The parties scheduled the initial closing on November 15, 1997 and agreed to cooperate and ensure that all the conditions precedent to initial closing--such as the rezoning and annexation of the land by the Plainfield Village Board--would be met in a timely manner.

Despite their best efforts, however, the parties realized that they were in no position to meet the November 15, 1997 deadline, for they had neither executed the necessary documents nor obtained the Board's approval of the annexation. At this juncture, the Sellers granted Ocean Atlantic's request to extend the initial closing to January 15, 1999. Thereafter, during the next twelve months, several events occurred that laid the seeds for this present civil action.

1. The Buyers' federal lawsuit

Throughout the spring and summer of 1998, Ocean Atlantic met with local planning officials to discuss their proposed development involving the Sellers' land. However, by the fall, Ocean Atlantic still had not presented the Board with a petition for annexation of the property. The Sellers accused Ocean Atlantic of dragging its feet by refusing to draft a final engineering plan, which, upon approval by the Board, would have triggered a mandatory closing date within thirty days. The Sellers also expressed frustration over Ocean Atlantic's repeated proposals to renegotiate the purchase price of the land. The Sellers, therefore, retaliated by refusing to execute any annexation petition unless Ocean Atlantic accelerated the first closing date to December 31, 1998. The parties continued to meet regularly in the hopes of resolving this standoff, but with neither side budging, it appeared unlikely that the property would be sold on time.

In the midst of these bargaining sessions, unbeknownst to the Sellers, Ocean Atlantic filed a federal lawsuit in November 1998, asking the court to order the Sellers to sign the requisite annexation petition. The Sellers, on their own accord, did execute the document on December 1, 1998, thereby providing Ocean Atlantic with the relief it sought in its lawsuit and thus removing the final impediment to the property's annexation over which the Sellers had any control. Nevertheless, for reasons not explained in the record, Ocean Atlantic proceeded to serve the Sellers in January 1999 with their now moot lawsuit for specific performance. Three months later, Ocean Atlantic voluntarily dismissed its suit and dropped its demand for a price reduction. The parties subsequently agreed to a second extension of the contract, which pushed back the initial date of closing to November 30, 1999. Significantly, the Sellers thereafter notified Ocean Atlantic on numerous occasions that they would consider the contract terminated if the closing failed to occur by that date. According to one of the sellers, John Argoudelis, "We made the decision, probably in 1998 or 1999, after we got sued for the first time, that we were not enamored with Ocean Atlantic and it was not our intention to have any more relationship with them than what we were contractually obligated to have."

2. The Sellers' federal lawsuit

Seemingly oblivious to the November 30 deadline looming overhead, Ocean Atlantic sought to delay the initial closing for a third time. In early November, Ocean Atlantic claimed that it was entitled to another extension, based on a clause in the contract allowing for a minimum 45-day postponement of the closing date if the Board failed to issue sewer permits for the property. Ocean Atlantic asserted that the village had imposed a moratorium on such permits because its sewer plant was operating at total capacity. The Sellers, however, obtained information from village officials leading them to believe that permits were available but that Ocean Atlantic deliberately failed to obtain them. The Sellers further contended that Ocean Atlantic invoked the moratorium clause merely as a pretext for delay, in order to capitalize on the Sellers' desire to close quickly and, once again, attempt to force them to agree to a price reduction. It appears that Ocean Atlantic's lenders agreed to finance the deal on the assumption that other developers would be building expensive homes in the surrounding area. When these developments were scaled back, Ocean Atlantic and its lenders became concerned that the value of the Sellers' property also would decline; this caused the lenders to insist on more costly guarantees that were eating into Ocean Atlantic's anticipated profit margin. The Sellers believed that Ocean Atlantic's president, Michael Ferraguto, was trying to defray his added costs by forcing the Sellers to accept less for their property. Specifically, by threatening to hold up the closing and bring a second lawsuit, Ferraguto hoped to pressure the Sellers into accepting a $1 million price reduction instead of walking away from the contract, inviting litigation, and running the risk of paying damages if they were saddled with a judgment against them.*fn3

In response to Ocean Atlantic's vexatious conduct, the Sellers filed a federal lawsuit November 22, 1999, seeking a declaratory judgment that the contract would be terminated if the closing did not occur by November 30, 1999. The lawsuit--which was now the second civil action involving the property--moved rather slowly. It was not until September 26, 2000 that the district judge ruled on the Sellers' motion for summary judgment. The court denied the motion and set the trial for October 30, 2000, finding that there were genuine factual disputes concerningwhether the Village of Plainfield had, in fact, imposed a moratorium on sewer permits and thereby extended the closing date. Rather than proceed to trial, the Sellers and Ocean Atlantic entered into serious negotiations, and on October 26, 2000, they signed the settlement agreement containing the time-essence clause that is the basis of this lawsuit. The Sellers thereafter dismissed their lawsuit with prejudice and agreed for the third time to postpone the closing. The new date was scheduled for January 25, 2001.

B. October 26, 2000 to January 25, 2001

1. Final negotiations and material terms

Throughout the negotiations preceding the settlement agreement, the Sellers insisted upon a rigid, absolute closing date. Indeed, three days before Ocean Atlantic signed the agreement, the Sellers' attorneys stressed that an essential and material part of the bargain had to be that, "If Ocean Atlantic, for any reason whatsoever, fails to close on the property within 90 days from the execution of [the] settlement document, it shall forfeit any and all rights it may have to purchase the property." Ocean Atlantic's attorney acknowledged that negotiations would fail unless his client agreed to: (1) "a closing date or dates without the possibility of extensions or delays"; and (2) "the absolute right of [the Sellers] to terminate the contract in the event of a failure to close on the set closing date(s)." Ocean Atlantic further emphasized its understanding of the importance of these terms in the same signed letter, stating, "Ocean Atlantic will agree that failure to close . . . shall result in Plaintiff's unequivocal right to terminate the contract." After reviewing this and other evidence in the record before him, the trial judge found that "a final 'drop-dead' closing date [was] an integral part of any final settlement agreement."

The district court specifically concluded that there were three material provisions in the settlement agreement. First, the parties unequivocally agreed to close and transfer the funds and the property on one fixed date, January 25, 2001, rather than on three separate dates, as they had originally planned. Second, the parties agreed that January 25, 2001 would be an absolute, final date for closing. Third, the Sellers agreed to waive any future litigation over the sewer moratorium. With respect to the time-essence clause, the trial judge found that "[the Sellers] wanted the certainty that by one particular date (in this case, January 25, 2001) either a closing would occur, or the contract would be terminated." 132 F. Supp.2d at 665-66. Underscoring the importance of the drop-dead closing clause, the trial court found that the Sellers ...

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