Southface Condominium Owners Assn. v. Southface Condominium Assoc.
Annotate this Case
Southface Condominium Owners Assn. v. Southface Condominium Assn. (97-374);
169 Vt. 243; 733 A.2d 55
[Filed 14-May-1999]
NOTICE: This opinion is subject to motions for reargument under
V.R.A.P. 40 as well as formal revision before publication in the Vermont
Reports. Readers are requested to notify the Reporter of Decisions,
Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
any errors in order that corrections may be made before this opinion goes
to press.
No. 97-374
Southface Condominium Owners Supreme Court
Association, Inc. and Kenneth
David Burrows
On Appeal from
v. Washington Superior Court
Southface Condominium Association, November Term, 1998
Inc., A. Judson Babcock, and Chittenden
Realty Credit Corporation and Chittenden
Trust Company d/b/a Chittenden Bank
Alan W. Cheever, J.
J. Scott Cameron and Bernard D. Lambek of Paterson & Walke, P.C.,
Montpelier, for Plaintiffs-Appellees.
Andrew D. Bouffard and Eric A. Peohlmann of Downs Rachlin & Martin
PLLC, Burlington, for Defendant-Appellant.
Cynthia L. Amara and Loretta Smith, New England Legal Foundation,
Boston, Massachusetts, for Amicus Curiae Vermont Bankers Association, Inc.
PRESENT: Amestoy, C.J., Morse, Johnson and Skoglund, JJ, and Norton, Supr. J.,
(Specially Assigned).
MORSE, J. Defendants Chittenden Realty Credit Corporation (CRCC) and
Chittenden Trust Company (CTC) (FN1) appeal following a jury verdict in
favor of plaintiffs, Southface Condominium Owners Association and Kenneth
Burrows, on a claim that defendants breached an implied covenant of good
faith and fair dealing with plaintiffs. Challenging the exclusion of
certain evidence under V.R.E. 403, plaintiffs cross-appeal from the jury's
verdict for defendants on plaintiffs' claim that CRCC established a
joint-venture with Southface Condominium Associates (SCA) and was thus
equally liable with SCA. We reverse on both issues and remand for a new
trial on plaintiffs' joint-venture claim.
This action arises out of a proposed maintenance building that was
never constructed at Southface Condominiums. Southface consists of forty
residential units located at the base of the Sugarbush ski area in Warren,
Vermont. The project was developed by SCA whose sole shareholder and
president was defendant Babcock.] (FN2) The project was financed by CRCC
pursuant to a loan agreement reached in 1983 between CRCC and SCA.
The terms of the loan designated SCA as the "Borrower" and CRCC as the
"Lender." Provisions in the loan agreement included the interest rate on
the loaned money, payment terms, security for the loan and action to be
taken in the event of default. The loan contained an "initial loan" of
$50,000, the purpose of which was to fund Babcock's initial investment in
SCA. The loan also contained a "construction loan" in an amount
sufficient to allow SCA to purchase the land on which the project was to
be built and to fund the construction of the condominiums.
The loan called for CRCC to be repaid as the individual condominium
units were sold. CRCC held the mortgage. When a unit was sold, CRCC was
to receive the money from the sales to repay its loan to SCA, and in
return, CRCC would release its mortgage interest in that unit. The loan
was to be paid back according to the following terms:
[The money received from the unit sales] shall be applied first to
the payment of any unpaid charges, then to interest and then to the
unpaid principal amount of the Loan, until the Construction Loan
and all interest and all charges related thereto are paid in full and
the Initial Loan has an unpaid principal balance of $50,000.
Following the execution of the loan agreement, Babcock, acting as the
agent for SCA, signed a unilateral declaration of condominium for the
Southface project. The declaration described the property, the
condominiums, permitted uses, and extended certain rights to SCA and the
individual unit owners. Article IV of the declaration contained the
following language: "Phase II (if added) shall also include a management
building to be constructed on Phase I property, and to include office and
storage space and one dwelling unit." (Emphasis added.) Neither CRCC nor
CTC were mentioned in the declaration; however, CRCC executed a "Consent
to Declaration of Condominium" on February 21, 1984, which provided that
CRCC "[s]pecifically consented to . . . the condominiumization . . . in
accordance with the terms of a Declaration of Condominium." The
construction of condominium units twenty-one to forty of Phase II was
completed but the management building was never built. The failure to
construct the building prompted this suit.
I.
The first issue we address is whether the trial court erred in
submitting to the jury plaintiffs' claim that CRCC breached an implied
covenant of good faith and fair dealing to them as third-party
beneficiaries. Plaintiffs contend that CRCC breached the implied covenant
in the loan and the declaration by failing to ensure that sufficient funds
were either budgeted or set aside to construct the building.
Defendants attack the breach of good faith claim on several fronts.
First, defendants claim that that theory was not raised in the pleadings,
nor was it tried by the express or implied agreement of the parties.
Second, they argue that the trial court erred in determining that
plaintiffs could be third-party beneficiaries of the construction loan
contract between CRCC and SCA. Finally, defendants contend that even if
the jury could find that plaintiffs were third-party beneficiaries, the
evidence was insufficient to support a breach of the covenant of good faith
with SCA.
Plaintiffs' contended that CRCC acted in bad faith by using the money
from the sale of
the last two condominiums to pay down the loans instead of using it to
construct the building. We conclude that the evidence did not support the
verdict for unfair dealing. We therefore need not address whether the
owners were third-party beneficiaries or if the claim was properly raised
in the pleadings.
In Carmichael v. Adirondack Bottled Gas Corp. of Vermont, we defined
the implied covenant of good faith and fair dealing broadly. Each party
to a contract makes the implied promise that each will not do anything "to
undermine or destroy the other's rights to receive the benefits of the
agreement." 161 Vt. 200, 208, 635 A.2d 1211, 1216 (1993). The purpose of
the implied covenant of good faith and fair dealing is to ensure that
parties act with "faithfulness to an agreed common purpose and consistency
with the justified expectations of the other party." Id. (citation
omitted). Conduct involving "bad faith" is characterized as violating
"community standards of decency, fairness or reasonableness." Id. at
208-09, 635 A.2d at 1216 (citation omitted). We address the construction
loan contract and the declaration of condominium separately.
Regarding the construction loan, the factual question is whether CRCC
adhered to the agreed common purpose of the contract consistent with the
justified expectations of SCA, the other party to the construction loan
contract. The loan agreement between CRCC and SCA called for CRCC to be
repaid from monies received through the sale of the condominium units.
There was nothing unusual about this type of repayment plan. CRCC was to
release its mortgage interest on the units as it received the proceeds
from the sale of the units. As long as a loan balance was outstanding,
SCA had corresponding monthly interest payments due on the money it
borrowed from CRCC. Furthermore, SCA's ability to repay its loan to CRCC
was directly related to its ability to sell the individual units. The
units sold well early, but sales slowed dramatically towards the end of
the project. The inability to sell the remaining few units in a timely
manner caused SCA to carry its debt with CRCC longer than anticipated, and
the interest payments tied to this debt caused SCA to run out of money
before the project was
completed. In fact, with the sale of the last condominium, SCA owed CRCC
over $90,000. At that point, SCA was unable to borrow more funds under
the existing loan agreement because of the outstanding debt to CRCC.
Thus, the maintenance building was not built.
The loan agreement is devoid of any language to support plaintiffs'
claim that CRCC owed a duty to plaintiffs to ensure that sufficient funds
were either budgeted or set aside for the construction of the building.
As noted earlier, the loan called for repayment of funds in the following
order: 1) unpaid charges related to the loan; 2) interest due on the loan;
and 3) unpaid principal amount, until the construction loan, all interest,
and all charges applicable thereto, were paid in full and the initial loan
had an unpaid principal balance of $50,000. SCA followed this repayment
order. No evidence was introduced at trial of any wrongdoing that resulted
in plaintiffs' damages. Bad faith cannot be inferred from the expected
course of business. See Killington, Ltd. v. Richards, 160 Vt. 641, 643,
641 A.2d 340, 342 (1993) (mem.) (citing Badgett v. Security State Bank,
807 P.2d 356, 360 (Wash. 1991) (finding no breach of contract when party
simply requires performance of contract in accordance with agreement's
terms)). If bad faith infiltrated the transaction, it must appear that
SCA and CRCC acted beyond merely observing the terms of the loan
agreement.
Plaintiffs' argument that CRCC acted in bad faith hinges on language
extracted from paragraph 9(b) of the loan; "[a]ny outstanding [p]roject
bills shall be paid, or appropriate reserves established, prior to
calculating the additional interest due Lender." (Emphasis added.) We are
unpersuaded that "appropriate reserves established" could translate into a
requirement under the loan agreement that CRCC ensure that sufficient
funds were reserved to construct the management building.
SCA, as project developer, was responsible for the construction of all
facets of the project, including the management building. Unanticipated
circumstances surrounding the project during its latter stages resulted in
SCA's inability to sell the remaining units. SCA needed the money from
these final sales to construct the building. That money didn't materialize
in time, and CRCC simply followed the repayment terms of the loan agreement
by using the money to pay down its loans.
We next address the declaration of condominium. Defendants contend
that they were not a party to the declaration and therefore are not bound
by the obligations entered into unilaterally by SCA with the future owners
of Southface condominiums. Even if defendants were determined to be
parties to the declaration of condominium, there is no evidence of bad
faith to support plaintiffs' claim of a breach of the implied covenant of
good faith and fair dealing. While the declaration of condominium
unequivocally states the intent to construct a management building as part
of Phase II, it is silent on the method of payment for construction.
Nowhere could it be implied from the language of the declaration that CRCC
was responsible for ensuring funds were available.
The trial court erred by denying defendant's renewed motion for a
judgment as a matter of law on plaintiffs' implied covenant of good faith
and fair dealing claim. Viewing the evidence in the light most favorable
to plaintiffs as the non-moving party, we find the record lacking any
evidence indicating defendant took action contrary to its agreement with
SCA. See Haynes v. Golub Corp., 166 Vt. 228, 233, 692 A.2d 377, 380
(1997) (review of Rule 50 motions asks whether the result reached is sound
in law on the evidence produced).
II.
We next address plaintiffs' cross-appeal. Plaintiffs contend that
CRCC entered into a joint-venture with SCA to develop the project, and
that CRCC was equally liable with SCA and Babcock on the terms of the
declaration of condominium. Plaintiffs' claim hinges on the promise to
build the management building specified in the declaration. If SCA and
CRCC were joint-venturers, CRCC would be liable for failing to fulfill
SCA's promise in the declaration to construct the building for plaintiffs.
Evidence admitted at trial supporting plaintiffs' joint-venture claim
included provisions in the loan agreement that allowed CRCC to share in
profits from the sale of condominium units
and extra payments to CRCC, above the interest earned on the construction
loan, which could equal forty to fifty percent of the net sales price of
the units. CRCC also retained the right to: disapprove of the sales price
for each unit, approve the general contractor for the project, receive
copies of the construction plans and contract from which SCA could not
materially deviate without CRCC's permission, and erect a sign on the
premises advertising its financial involvement and soliciting mortgage
business from prospective buyers. The jury found that CRCC's relationship
with SCA was that of "lender-borrower" and returned a verdict for CRCC on
the joint-venture claim.
Plaintiffs contend that the trial court abused its discretion in
excluding evidence related to the joint-venture claim under V.R.E. 403
(permitting exclusion of otherwise relevant evidence if probative value
substantially outweighed by unfair prejudice, confusion, or waste of time).
The court excluded evidence that CRCC admitted that it was not a licensed
lender and evidence that CRCC violated provisions of Vermont's licensed
lender statute. See 8 V.S.A. §§ 2201-2235 (requiring licenses for loan
businesses and limiting interest rates lenders may charge), amended by
1995, No. 162 (Adj. Sess.), §§ 1-36. Plaintiffs sought to introduce
evidence to show that CRCC never obtained a license and failed to adhere
to the statutory provisions limiting interest rates for licensed lenders.
While the court found the evidence "slightly" probative of whether
CRCC had entered into a joint-venture with SCA and relevant to that fact,
the court excluded it under V.R.E. 403. The court was primarily concerned
with the "cry to passion" that could prejudice the jury against CRCC
because it had violated the licensed lender laws. The court also noted the
dangers of "distraction and consumption of time," but ultimately excluded
evidence of CRCC's non-compliance with the licensed lender provisions
because the potential for "hostility" toward CRCC substantially outweighed
any probative value on the joint-venture issue.
Trial courts have broad discretion in ruling on the relevance and
admissibility of evidence, reversible only for abuse of that discretion.
See Haynes, 166 Vt. at 236, 692 A.2d
at 382 (1997). We find reversible error here.
Evidence that CRCC loaned money to SCA to finance the condominium
project without complying with Vermont's licensed lender statute was more
than "slightly" probative of whether a joint-venture existed between the
parties to the loan agreement. How CRCC conducted its loan business in
the context of Vermont's statutory regulations bore directly on plaintiff's
claim that this was not merely a "lender-borrower" arrangement, but that
CRCC had instead entered into a joint-venture with SCA to build the
condominiums. Moreover, any danger that the jury might have interpreted a
statutory violation too broadly and harbored prejudice against CRCC could
have been addressed with appropriate limiting instructions. See Haynes,
166 Vt. at 236, 692 A.2d at 382 (noting that limiting instruction may
reduce risk of juror misuse of evidence). CRCC's failure to comply with
Vermont's licensed lender statute supplemented the evidence that was
admitted and served to rebut CRCC's assertion that they were a mere lender
in the deal. It was error to prevent the evidence from reaching the jury.
Plaintiffs also maintain that the trial court erred by excluding
documents that pre-dated the loan agreement between CRCC and SCA. These
documents, identified as plaintiffs' exhibits numbered 2, 5, 6, & 7,
related to negotiations conducted between Babcock and CRCC in anticipation
of the 1983 loan agreement, which explicitly used the term "joint-venture."
The executed agreement had deleted "joint-venture" and instead described
the deal as a "loan."
Exhibit 2 was a letter from Babcock to Charles Black, president of
CRCC, in which Babcock "propose[d] a joint-venture with [Black's] bank for
the development of the [project site] on the Sugarbush Access Road."
Exhibit 5 was a memorandum on CTC letterhead outlining a "general
partnership" between CRCC and Babcock "for the purpose of constructing a
forty unit condominium development in Warren, Vermont." Exhibit 5 also
indicated that CTC would "get title to the land and ownership of two model
units." Exhibit 6 was an option to purchase development rights for the
"Southface Condominium Project," signed only by Babcock, which denoted
both Babcock and CRCC together as "buyers." The final exhibit, 7, was the
second
page of another letter from Babcock to Black stating that Babcock was
"particularly pleased to know that the Chittenden had chosen [SCA] as its
first joint-venture partner." The first page of this letter was not
produced in discovery and is presumed missing. The court excluded these
exhibits under V.R.E. 403 because it found that their probative value on
the joint-venture claim was substantially outweighed by the potential for
confusing the jury and wasting court time. We disagree.
Exhibit 2 was found to have "minimal relevance" since it was written
to CRCC's president almost a year before the agreement was signed, and the
court excluded it because "it's going to need to have an explanation which
is going to be wasting court time." Exhibit 5 was excluded because of
"needless consumption of time" even though plaintiffs' counsel sought to
introduce it to show the jury the "true nature of the [1983] agreement"
and that every element discussed in exhibit 5 was eventually embodied in
the final agreement. Exhibit 6 was also excluded because of "confusion to
the jury, [and] time consumption in order to have this explained and dealt
with." The court found that these considerations substantially outweighed
exhibit 6's relevance because the document was signed only by Babcock and
raised "side issues" that would waste court time. Finally, the court
excluded exhibit 7 based on a "403 ruling" and reasoned only that the first
page of the letter was missing, and that "we assume it's to Mr. Black . .
. because I see his name at the top of the page, along with a date."
These documents were more than marginally relevant to the issue of
whether or not a joint-venture existed between SCA and CRCC, particularly
because they provided tenor and context to the agreement that eventually
arose, and were further evidence of a joint-venture arrangement. See
Winey v. William E. Dailey, Inc. 161 Vt. 129, 139, 636 A.2d 744, 751 (1993)
(elements of joint-venture include agreement to share in profits and
losses, joint control or right to control, a joint proprietary interest in
subject matter, and community of interest in performance of common
purpose).
We recognize that trial courts are vested with broad discretion when
ruling on evidence
and that a showing of abuse is a stringent test. See Quiron v. Forcier,
161 Vt. 15, 21, 632 A.2d 365, 369 (1993) (burden of showing of abuse of
discretion is heavy one). While the trial court understated the relevance
of the document evidence, it overstated the potential problems of
confusion and waste of time. The excluded exhibits were directly related
to negotiations that culminated in the 1983 agreement and would not have
raised a side issue that would have led the jury away from the subject
matter of the dispute. Cf. In re Letourneau, ___ Vt. ___, ___, 726 A.2d 31, 41 (1998) (no error to exclude marginally relevant evidence that
threatened to create a side show of unrelated issues). The court could
have qualified its concerns with the documents with limiting instructions
to guide the jury to consider them in the proper context. We find that it
was an abuse of discretion to exclude plaintiff's exhibits numbered 2, 5,
6, & 7.
Defendants urge that the court should have excluded the documents as
inadmissible parol evidence. We disagree. That rule "bars the admission
of evidence of a prior or contemporaneous oral agreement that varies or
contradicts the terms of a written agreement." Housing Vermont v.
Goldsmith & Morris, 165 Vt. 428, 431, 685 A.2d 1086, 1088 (1996). Without
addressing the trial court's ruling, we note that plaintiffs did not offer
these documents to alter the terms of the 1983 agreement. Rather,
plaintiffs offered them to provide the jury with evidence concerning the
nature of the contract, and to assist it in determining whether the
agreement was a strict lender-borrower deal or a joint-venture. See New
England Educ. Training Serv., Inc. v. Silver Street Partnership, 156 Vt.
604, 610, 595 A.2d 1341, 1344 (1991) (noting evidence to ascertain true
character of mortgage agreement rather than to vary terms not barred by
parol evidence rule). Thus, the documents were not rendered inadmissible
by the parol evidence rule.
Accordingly, we reverse and remand solely on the issue of liability on
plaintiffs' joint-venture claim. Plaintiffs' claim regarding CRCC's
alleged breach of the implied covenant of good faith and fair dealing is
not revived by virtue of our remand of the joint-venture claim.
Because we have determined that the evidence does not support a breach of
that duty even if CRCC were bound to the terms of the declaration of
condominium, plaintiffs' good faith and fair dealing claim is dismissed.
Damages need not be retried because the award reflecting the total cost of
constructing the management building has been determined and no issue on
damages was raised in this appeal.
Reversed and remanded.
FOR THE COURT:
___________________________________
Associate Justice
------------------------------------------------------------------------------
Footnotes
FN1. CTC was a sister corporation to CRCC, with both entities being wholly-owned
subsidiaries of Chittenden Corporation. In March 1986, CRCC assigned all of
its rights in the SCA loan agreement to CTC, also referred to as Chittenden
Bank.
FN2. Both SCA and Babcock were named as defendants in the superior court but
did not appear at trial and are not parties to this appeal. SCA filed for
Chapter 7 bankruptcy and is now a defunct corporation.
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
