He learned that the broker and seller were going to be in Monterey that August, so he made arrangements to serve them both at The Quail About two years ago, a Los Angeles SCMer contacted “Legal Files” hoping for advice about how to get his money back after a long-distance Ferrari deal went bad, very bad. “Ed” thought he had done everything right. He had become seriously interested in a 1953 Ferrari 212 Vignale located in Japan. The Japanese seller, represented by a California broker, described the top-condition Ferrari as “a rush deal that wouldn’t last.” Ed would have to post […]
He learned that the broker and seller were going to be in Monterey that
August, so he made arrangements to serve them both at The Quail
He learned that the broker and seller were going to be in Monterey that
August, so he made arrangements to serve them both at The Quail
August, so he made arrangements to serve them both at The Quail
About two years ago, a Los Angeles SCMer contacted “Legal Files” hoping for advice about how to get his money back after a long-distance Ferrari deal went bad, very bad.
“Ed” thought he had done everything right. He had become seriously interested in a 1953 Ferrari 212 Vignale located in Japan. The Japanese seller, represented by a California broker, described the top-condition Ferrari as “a rush deal that wouldn’t last.” Ed would have to post a $25,000 deposit against a $575,000 purchase price to hold the car. An experienced businessman, Ed made sure he had a written agreement with key provisions:
. Ed, the broker, and the seller all signed as parties to the contract.
. The deposit would be held by the broker as escrow agent.
. Ed would have an opportunity to inspect the Ferrari in Japan before committing to buy.
. If Ed rejected the car, he would get his deposit back.
. If he accepted the car, title would transfer by notarized bill of sale.
. If litigation resulted, the prevailing party would recover his attorney fees.
Ed flew to Japan to inspect the Ferrari. It was not so good: extensive rust, frame damage, vibration in the drivetrain, a “rebuilt” transmission that popped out of first gear, and a rat’s nest of wiring under the dashboard. The seller had the notarized bill of sale, which he gave to Ed. Ed said he would think about the purchase once he returned home.
Once home, Ed promptly let the broker know he wanted out. The broker didn’t like that, claiming that since Ed had accepted the bill of sale, it was now his Vignale. And he should immediately pay the remaining $550,000.
Ed, with a written contract, had little doubt that he would get his $25,000 back. Most important, the contract provided that he could recover legal fees if litigation was filed. With such a strong legal position, and with so little effort from broker and seller to solve the problem, Ed filed suit in his home state, California, for breach of contract and fraud.
Catch me if you can
However, the process server couldn’t find the broker. Given the uncertainties of mail or equivalent delivery, the law insists that a process server personally serve the defendant with a copy of the lawsuit. Trouble ensues if the defendant is good at hiding.
Fortunately, Ed is a clever guy and the collector car community is a pretty small universe. Ed learned the broker and the seller were both going to be in Monterey that August, so he made arrangements to serve each of them at The Quail. “Legal Files” is kicking itself for having missed The Gathering that year!
Not there, here
Undaunted, the broker chose to play games. California law provides that a fraud claim would have to be brought in the defendant’s county of residence, which was Monterey County. Unwilling to give up his fraud claim, Ed had to move the lawsuit from Los Angeles to Monterey and hire a local lawyer.
More legal niceties
Still undaunted, the broker then filed a motion to be dismissed from the lawsuit on the basis that he wasn’t really a party to the contract. Surprisingly, he persuaded the judge to agree (sorry, judges don’t always get things right), and Ed had to undertake damage control. He chose to revise his complaint to assert that the broker was acting as an escrow agent, and breached his legal duties to Ed by refusing to return the deposit. That stuck, and they went to trial. The case was tried to a judge, not a jury, and required two full days of trial.
My word against his
As the plaintiff, Ed had the burden of proof, meaning that he had to prove by a greater-than-50% likelihood that he was entitled to win. In a close case, the burden of proof makes a huge difference. If the judge can’t decide who is right-a 50-50 toss-up-the defendant wins. The broker thought he had that wired. It was just his word against Ed’s, with sure-fire 50-50 odds.
That sounds pretty good on paper, but it didn’t work in the courtroom. On all major points, the judge ruled that Ed’s testimony was credible; the broker’s was not. That is legalese for “I believe him, and I don’t believe you.”
The judge didn’t think much of the broker’s claim that acceptance of the bill of sale made it a done deal. If that were true, the judge pointed out, Ed would have owned the Vignale after paying only $25,000. The judge decided the contract was quite clear, and that Ed was entitled to get his $25,000 back, with interest.
The judge also ruled that Ed should recover his attorney fees of $90,845-yes, Ed was out of pocket over $90,000 trying to get his $25,000 deposit back-and was unsympathetic to the broker’s complaint that the amount was excessive. After all, it was the broker who tried to make everything as hard as possible. (Note to defendants, that is usually not an effective strategy.)
The judgment was given against the broker, the seller, and both of their corporations, with liability being joint and several, meaning that Ed could collect any or all of the money from any one or more of the defendants. Given the joint and several provision, it is likely that Ed will be able to collect the entire amount of the judgement.
Avoiding the nightmare
What can we learn from this case study? Ed did much more right than wrong-he had a written contract, an inspection right, a right to get his money back, and an attorney fee provision that made all the practical difference. Still, there is a little room for improvement.
First, never let the broker hold the deposit. “Legal Files” does not suggest that all brokers are dishonest, but only points out that the broker is not a neutral party. Rather, he is the seller’s agent. When the deal falters and the seller instructs the broker to give him the deposit, the broker is caught in a tight spot. He has obligations to the seller he works for, plus there is commission in it for him.
It is far better to have a truly neutral party hold the funds. If that is impractical, then at least have the funds held by your, or even the seller’s, attorney. Attorneys are subject to strict ethical rules, and an improper distribution of the deposit can lead to professional discipline as well as legal liability. That makes it likely that the money won’t just disappear.
Ed’s contract also lacked a venue provision. You should always be clear about the location where a dispute has to get resolved-it can often determine the practical outcome. Ed might also have considered an arbitration provision to minimize the cost of the litigation. Arbitrators can be efficient and practical, and the arbitration process is usually a good option. That said, in some instances they can be careless, unprepared, or biased. Their decisions are final, with no right of appeal, so if your arbitrator ignores the law and shoots from the hip, there isn’t much you can do about it. But usually, arbitration works well.
In spite of all the cost, delay, and hassle, Ed feels good that he stood up for his rights when the most practical thing would have been to take his lumps and move on. However, we should all heed his sage advice: “A contract is only as good as the honesty of the people who sign it.” A tightly written contract is a very good thing to have, and we should always have one. But in the end, our best protection is to be sure we are dealing with honorable people.