In Marioni v Roxy Garments Delivery Co., Inc. (N.J. Super. Ct. App. Div., No. A-1492-09T3, December 9, 2010), a late 2010 ruling that exhibits the breadth of the equitable powers conferred upon the courts, New Jersey’s Superior Court, Appellate Division, confirmed that a contract purchaser of real property is entitled to specific performance under a purchase and sale agreement even though a third party had purchased the subject property and made substantial improvements to it.

In 1998, plaintiff Joseph Marioni entered into a contract to purchase real property in Jersey City from Roxy Garments Delivery Co., Inc. The property remained under contract for over two years, during which time Roxy attempted to evict its tenant. The tenant was successfully evicted in October 2000 and Roxy unilaterally chose November 7, 2000, as a closing date. However, over the course of the next few weeks, the parties squabbled over the condition that the property was required to be in at the time of closing. On November 17, 2000, Roxy went so far as to return the earnest money to Marioni, claiming that Marioni breached the contract by failing to take title to the property in “as is” condition on November 7, 2000. On December 1, 2000, over a week after Marioni had returned the earnest money to Roxy, the parties agreed to credit Marioni at closing for the cost to remove debris from the property and scheduled closing for January 3, 2001. Marioni recorded a notice of settlement on December 13, 2000.

Commencing on November 17, 2000, the date that it returned the earnest money to Marioni, Roxy began to negotiate a contract with John Lindner. Evidence at trial showed that Lindner was provided with a copy of the Marioni-Roxy contract and a copy of the letter to Marioni returning the earnest money. In addition, Lindner was aware of the Marioni-Roxy contract before November 2000 because Marioni had contacted Lindner in July 2000 regarding the potential performance of restoration work at the property and Lindner had inspected the property with Marioni in October 2000. On December 8, 2000, Roxy and 94 Broadway, Inc., a corporation controlled by Lindner, entered into an agreement for the purchase and sale of the property. 94 Broadway recorded a notice of settlement on December 11, 2000.

On December 18, 2000, Roxy breached its agreement with Marioni and conveyed the property to 94 Broadway; the deed was recorded the following day. Marioni did not become aware of the conveyance until he arrived for his closing on January 3, 2001. Over the ensuing seven years, 94 Broadway made roughly $400,000 worth of improvements to the property and subsequently leased the property to a tenant.

Marioni originally filed a complaint in the Chancery Division seeking specific performance of his contract with Roxy as well as damages. In light of Roxy’s sale of the property to 94 Broadway, the Chancery Division dismissed Marioni’s specific performance claim and transferred his damages claim to the Law Division. After final judgment on his damages claim was rendered, Marioni appealed to the Appellate Division to review the dismissal of his specific performance claim. The Appellate Division found that, despite Roxy’s sale of the property to 94 Broadway, (i) the contract between Marioni and Roxy was still enforceable; (ii) Roxy acted wrongfully in attempting to terminate its contract with Roxy and in conveying the property to 94 Broadway; (iii) 94 Broadway was not a bona fide purchaser for value because it had actual and constructive knowledge of the Marioni-Roxy contract when it acquired the property; and (iv) because 94 Broadway had such knowledge, 94 Broadway was deemed to have acquired the property as constructive trustee for the benefit of Marioni (See Haughwout v. Murphy, 22 N.J. Eq. 531, 1871; Pomeroy, Specific Performance of Contracts § 465 (3d ed., 1926)). The Appellate Division then remanded the case to the Chancery Division with the directive that, absent undue hardship in light of specific facts of the case, the Chancery Division “reassemble Humpty Dumpty.” The transfer of Marioni’s damages claim to the Law Division was vacated.

In implementing the specific performance remedy, the Chancery Division sought to equitably adjust the original Marioni-Roxy contract purchase price of $170,000 in order to put the parties in the position they would have been in had the Marioni- Roxy contract been performed as required. Using his equitable powers, the Chancery judge increased the purchase price to $579,135.69 based on the following calculation: (i) $170,000 contract price; plus (ii) interest at 6% per annum over the ensuing seven years ($85,617.13); plus (iii) the increase in market value of the property due to market conditions and renovations made by 94 Broadway ($790,000); plus (iv) the cost of insurance premiums, property taxes and mortgage interest payments for the property that Marioni would have also been required to pay ($71,018.56); minus (v) the cost of alterations to be made by Marioni for his intended use required as a result of 94 Broadway’s renovation of the property ($50,000); minus (vi) rents collected by 94 Broadway from its tenants ($487,500). The Chancery judge denied Marioni’s request to deduct the storage fees for his artwork that were incurred during the interim period.

On appeal, Marioni argued that the Chancery judge erred by including the increase in market value of the property in his calculation of the adjusted purchase price as well as by excluding Marioni’s storage fees as a deduction to the adjusted purchase price. In determining whether the Chancery Division judge abused his discretion or made conclusions inconsistent with his own findings of fact, the Appellate Division determined that the monetary elements of the adjusted purchase price were supported by the evidence and that, in adjusting the purchase price, the chancery judge had correctly applied the equitable principle that 94 Broadway, as a constructive trustee, could not profit as a result of its wrongful interim possession of the property. However, the Appellate Division determined that the inclusion of the increase in the property’s market value due to 94 Broadway’s renovations as part of the adjusted purchase price calculation constituted the award of entrepreneurial profit to 94 Broadway and therefore constituted an error in the judge’s exercise of his discretion. The Appellate Division stated that 94 Broadway was therefore entitled to reimbursement only for the cost of its renovation expenditures in the amount of $395,883 (replacing the $790,000 in the above calculation). The question as to whether Marioni’s storage fees should be deducted from the adjusted purchase price was remanded to the Chancery Division.

The decision in Marioni v. Roxy Garments Delivery Co., Inc., is instructive. It serves to remind us that the remedy of specific performance remains available to a contract purchaser even if the seller breaches the contract by selling the underlying asset to a third party. It also magnifies the importance of a notice of settlement because in order to avail itself of the specific performance remedy, a contract purchaser must make certain that the existence of its contract is known to third parties who are potential purchasers of the property. In a similar vein, a contract purchaser must perform updated title searches prior to closing to ensure that no intervening notice of settlement between its seller and a third party has been filed, in order to avoid being put in the position of a constructive trustee. Unlike the king’s men, the equitable powers of the New Jersey Chancery Division and Appellate Division sometimes allow Humpty Dumpty to be put back together again.