Six-year Delay in Asking For Earnest Money Back Too Long – IL Court Applies Laches Defense

Earlier this year, an Illinois appeal court examined the equitable defense of laches in an earnest money dispute between two contracting parties and former friends.  Derived from an archaic French word – laschesse – meaning “dilatory,” laches applies where a plaintiff sits on his legal rights to the point where it’s unfair to make a defendant mount a defense to the delayed claim.

The 2005 real estate contract at issue in Gardner v. Dolak, 2016 IL App (3d) 140848-U fell through and at different points in 2009 and 2011, the plaintiff buyer asked for her $55,000 deposit back.  The seller’s exclusive remedy for a buyer breach was retention of the buyer’s earnest money.

The contract also set specific deadlines for the plaintiff to complete a flood plain study and topographical survey.  When the plaintiff failed to meet the deadlines, the sale fell through.  Plaintiff sued when the Defendant refused to refund the earnest money deposit.

After a bench trial, the trial court entered judgment for the seller defendant on the basis that the plaintiff waited too long to sue and the delay in suing prejudiced the defendant.

The appeals court affirmed and sketched the contours of the laches doctrine:

  • Laches is an equitable doctrine that prevents a party from asserting a claim where he unreasonably delayed pursuing the claim and the delay misled or prejudiced his opponent;
  • Laches is based on the principle that courts will not aid a party who has knowingly sat on his rights that could have been asserted earlier;
  • To win a laches defense, the defendant must show (1) plaintiff lacked diligence in presenting his claim, and (2) the plaintiff’s delay resulted in prejudice;
  • The mere passage of time is not enough though; the defendant must show prejudice or hardship on top of the chronological delay;
  • In the context of real estate, wide property value fluctuations that harm the party claiming laches is evidence of prejudice that will support a finding of laches;
  • A party can successfully assert laches where the plaintiff remains passive and the defendant incurs risk, enters into obligations, or makes monetary expenditures.

Agreeing that the evidence supported the laches finding, the appeals court pointed out that plaintiff didn’t notify the defendant she wasn’t going through with the purchase until 6 years after the contract was signed.  During this six years, the value of the property declined markedly and the seller defendant spent considerable funds to maintain the property.

Taken together, the passage of time between contract execution (2005) and plaintiff’s lawsuit (2011) and measurable prejudice (based on the property’s drop in value) to the seller defendant was enough to support the trial court’s laches judgment.

Afterwords:

This case presents a straightforward summary of laches in the real estate context.  The party claiming laches must show more than mere passage of time between the claimed injury and the lawsuit filing date.  He must also demonstrate changed financial position as a result of the lapse of time.

Here, the property’s precipitous drop in value in the six years between contract’s execution and termination was a key factor cementing the court’s laches finding.  The question I had after reading this was what if the value of the property doubled or tripled in the interim 5 years?  Would the defendant still be able to prove laches?  Maybe so but that would be a harder sell.  The defendant would need to show the amount he spent maintaining the property over the six years exceeded the increase in property value.

 

Published by

PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.