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contractplaintiffdefendantburden of proofleasecorporationnovation
contractplaintiffdefendantburden of proofwillcorporationnovation

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Charles Kahn & Co. v. Sobery, 355 F.Supp. 156

Facts

Plaintiff Charles Kahn & Co. entered into an agreement with defendant Carl W. Sobery to obtain a $2,175,000 loan for property development. Sobery paid a non-refundable commitment fee and executed a promissory note. However, the loan did not close due to issues related to the title company's requirements and Sobery's health concerns. Sobery later transferred the property to a corporation he controlled, S & M Builders, Inc., which led to the dispute over whether this constituted a novation of his obligations.

Defendant, Carl W. Sobery, filed an Answer and Counterclaim herein admitting the execution of the contract but alleging that plaintiff failed to perform under its terms in that plaintiff failed to deliver to defendant the construction loan of $2,175,000.

Issue

Did the transfer of property to S & M Builders, Inc. result in a novation relieving Sobery of his obligations, and did Kahn & Co. produce a construction loan?

Did defendant's transfer of the property to S & M Builders, Inc., which he controlled, result in a novation whereby defendant was relieved of his obligations under his agreements with plaintiff, and instead the corporation became liable for such obligations?

Rule

A novation requires a mutual agreement to discharge an existing obligation by substituting a new valid obligation, and the burden of proof lies on the party claiming a novation.

A novation, as understood in modern law, is a mutual agreement, between all parties concerned, for the discharge of a valid existing obligation by the substitution of a new valid obligation on the part of the debtor or another, or a like agreement for the discharge of a debtor to his creditor by the substitution of a new creditor.

Analysis

The court found that there was no written provision indicating that Sobery was released from his obligations when S & M Builders, Inc. became the borrower. The evidence showed that the corporation was created to avoid potential usury issues, and Sobery continued to have obligations under the original agreement. The court concluded that a novation did not occur, as Sobery never claimed it and continued to act as if he was bound by the original contract.

The evidence instead reveals that S & M Builders, Inc. only became the borrower to obviate any possible usury problem.

Conclusion

The court ruled that Sobery was not relieved of his obligations and that Kahn & Co. was not entitled to recover the commission due to the failure to close the loan.

The Court concludes that defendant has failed to carry his burden of proof that a novation occurred and, in fact, the Court concludes from the foregoing that a novation did not occur.

Who won?

Carl W. Sobery prevailed in the case because the court found that he remained bound by his obligations and that the plaintiff was not entitled to the commission.

The court further finds that the procuring cause of the failure to close was defendant's unwillingness or inability to deposit in escrow the interest on the construction loans for which the title company would have been responsible under the escrow and guarantee agreements called for by the commitment agreement.

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