Time Of Essence Clauses and Installment Payments: How Late Is Too Late?

In Handler v. Johnson, 2015 WL  4506712 (N.D.Ill. 2015), a bankrupt debtor’s adversary moved to reopen a case after the debtor was late on two installment payments under a settlement agreement.

The creditor, a lawyer who previously represented the debtors in unrelated litigation, sued to recover about $21K in attorneys’ fees owed from the prior representation.  The debtors previously agreed to pay the lawyer $7,500 in monthly installments of $100, payable on the 15th of each month.  When the debtors missed the deadline, the attorney creditor moved to reopen the bankruptcy and enter judgment for the full amount of his claim.

The court denied the motion on the basis that the breach was immaterial.  The creditor appealed.

Affirming, the Northern District provides a useful discussion of contractual time is of the essence clauses and the level of breach required to void a settlement agreement calling for payments over time.

Only a material breach will excuse the non-breaching party’s performance under a contract.  A technical or immaterial breach usually doesn’t merit the wholesale undoing of a contract.   If the contract would not have been made absent the disputed provision, then the breach is considered material.  While a party can recover damages in some situations for only a minor breach, he must prove how those damages flowed specifically from the minor breach.

Timely performance of a contract can be considered a material term, especially if the parties say so in the contract.  But even where parties have a time is of the essence provision and a party technically breaches, a court can still inquire into the circumstances underlying the delay in performance to determine whether the delay equals a material breach.  If timely performance is viewed as a material term, a court can still refuse to enforce the contract when to do so would work an unfairness to breaching party or provide a windfall to the non-breaching one.  (*3).

To determine whether a given contract term is material, the court considers several factors including (i) whether the breach defeats the bargained-for objective of the parties, (ii) whether the non-breaching party suffered disproportionate prejudice; (iii) whether economic inefficiency or waste will result by enforcing the subject contract term; and (iv) whether the non-breaching party would receive an inflated, unfair advantage if the court found a material breach.

Here, the equities pointed in the debtors’ favor.  While they did miss the payment deadline by a few days, the breach was tempered by the fact that one of the debtors was hospitalized around the time the payment was due.  Moreover, the lawyer adversary failed to establish any prejudice by having to wait a few days for payment.  Considered in their totality, the circumstances weighed in favor of finding that the tardy payment was not a material breach.  As a result, the District Court affirmed the bankruptcy court’s denial of the plaintiff’s motion to reopen the case.

Afterwords:

(1) Only a material breach will justify abandonment of a contract;

(2) Materiality in the breach context is a fact-specific inquiry that focuses on whether a contract would be made if the breached provision was excised;

(3) A court won’t undo an installment payment contract if payment is made a few days late and no prejudice is shown resulting from the late payment.

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PaulP

Litigation attorney at Kanaris Stubenvoll & Heiss, P.C. representing businesses and individuals in post-judgment enforcement, collections and real estate litigation.