In early 2004, Hotels Nevada owned the Alexis Park Hotel and the American Inn Apartments in Las Vegas. Louis Habash owns and controls Hotels Nevada, and he agreed to sell Hotels Nevada to L.A. Pacific Center Inc. for $75 million.
Richard Alter and Eddie Chan were L.A. Pacific’s authorized agents. At their request, Habash agreed to a $5 million holdback from the purchase price for 12 months after the sale.
Purchase Bob Bruss reports online.
In March 2004, after the sales agreement and memorandum underwent several drafts, Habash and Alter met at the office of the attorney for L.A. Pacific. Alter then told Habash he wanted the holdback period to be for 60 months rather than the agreed 12 months.
Habash refused to agree and walked out. Alter immediately approached Habash in the hallway and told him L.A. Pacific would agree to the 12-month holdback after all. Habash returned to the attorney’s office, reviewed copies of the agreement and memorandum to confirm they both contained a 12-month holdback period.
Habash then signed two originals of the multipage agreement and memorandum. The following day, counsel for Hotels Nevada received a copy of the documents containing the 12-month holdback period. They were then sent to an escrow agent who recorded the memorandum with the Clark County Recorder in Nevada.
The escrow officer mailed a copy of the recorded memorandum to the attorney for Hotels Nevada. But the recorded memorandum contained a 60-month holdback provision.
Hotels Nevada learned of the 60-month holdback in April 2005 when it wrote L.A. Center with wire transfer instructions for the $5 million holdback. L.A. Center then denied the $5 million was due. At an April 22, 2005, meeting, Alter presented Habash with a copy of the recorded memorandum containing the 60-month $5 million holdback.
Hotels Nevada and Habash had not previously seen any version of the sales agreement or memorandum containing the 60-month holdback. On May 4, 2005, Hotels Nevada filed this lawsuit against buyer L.A. Center, alleging fraud and requesting cancellation of the sale based on illegality and conspiracy.
The seller alleged L.A. Center “manipulated, fabricated and manufactured” the version with the 60-month holdback. Defendant L.A. Center moved to compel arbitration under the agreement’s arbitration clause. But Hotels Nevada objected, arguing the fraud in the execution of the agreement made it void from the beginning.
If you were the judge would you order arbitration of this dispute?
The judge said no.
Before the arbitration issue can be decided, the judge began, it must be determined if “grounds exist for revocation of the agreement.”
If the promisor (Habash) knew what he was signing but his consent was induced by fraud, then the contract is voidable by him, the judge explained.
“Fraud in the execution, on the other hand, occurs when the promisor is deceived as to the nature of his act and actually does not know what he is signing, or does not intend to enter into a contract at all, mutual assent is lacking, and it is void,” the judge emphasized.
“Turning to the complaint, we conclude that Hotels Nevada sufficiently alleged facts supporting a claim of fraud in the execution, a claim that could constitute grounds for revocation of the agreement if substantiated by evidentiary support,” the judge noted.
In summary, fraud in the inducement of a contract makes that contract voidable, but fraud in the execution makes the contract void from the beginning and, hence, unenforceable, the judge concluded.
Based on the 2006 California Court of Appeal decision in Hotels Nevada v. L.A. Pacific Center, 50 Cal.Rptr.3d 700.
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