In early 2004, Hotels Nevada owned the Alexis Park Hotel andthe American Inn Apartments in Las Vegas. Louis Habash owns and controls HotelsNevada, and he agreed to sell Hotels Nevada to L.A. Pacific Center Inc. for $75million.
Richard Alter and Eddie Chan were L.A. Pacific’s authorizedagents. At their request, Habash agreed to a $5 million holdback from thepurchase price for 12 months after the sale.
Purchase Bob Bruss reports online.
In March 2004, after the sales agreement and memorandumunderwent several drafts, Habash and Alter met at the office of the attorneyfor L.A. Pacific. Alter then told Habash he wanted the holdback period to befor 60 months rather than the agreed 12 months.
Habash refused to agree and walked out. Alter immediatelyapproached Habash in the hallway and told him L.A. Pacific would agree to the12-month holdback after all. Habash returned to the attorney’s office, reviewedcopies of the agreement and memorandum to confirm they both contained a12-month holdback period.
Habash then signed two originals of the multipage agreementand memorandum. The following day, counsel for Hotels Nevada received a copy ofthe documents containing the 12-month holdback period. They were then sent toan escrow agent who recorded the memorandum with the Clark County Recorder inNevada.
The escrow officer mailed a copy of the recorded memorandumto the attorney for Hotels Nevada. But the recorded memorandum contained a60-month holdback provision.
Hotels Nevada learned of the 60-month holdback in April 2005when it wrote L.A. Center with wire transfer instructions for the $5 millionholdback. 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 memorandumcontaining the 60-month $5 million holdback.
Hotels Nevada and Habash had not previously seen any versionof the sales agreement or memorandum containing the 60-month holdback. On May4, 2005, Hotels Nevada filed this lawsuit against buyer L.A. Center, allegingfraud and requesting cancellation of the sale based on illegality andconspiracy.
The seller alleged L.A. Center “manipulated, fabricatedand 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 agreementmade it void from the beginning.
If you were the judge would you order arbitration of thisdispute?
The judge said no.
Before the arbitration issue can be decided, the judgebegan, it must be determined if “grounds exist for revocation of theagreement.”
If the promisor (Habash) knew what he was signing but hisconsent was induced by fraud, then the contract is voidable by him, the judgeexplained.
“Fraud in the execution, on the other hand, occurs whenthe promisor is deceived as to the nature of his act and actually does not knowwhat he is signing, or does not intend to enter into a contract at all, mutualassent is lacking, and it is void,” the judge emphasized.
“Turning to the complaint, we conclude that HotelsNevada sufficiently alleged facts supporting a claim of fraud in the execution,a claim that could constitute grounds for revocation of the agreement ifsubstantiated by evidentiary support,” the judge noted.
In summary, fraud in the inducement of a contract makes thatcontract voidable, but fraud in the execution makes the contract void from thebeginning and, hence, unenforceable, the judge concluded.
Based on the 2006 California Court of Appeal decision in HotelsNevada v. L.A. Pacific Center, 50 Cal.Rptr.3d 700.
(For more information on Bob Bruss publications, visit his Real Estate Center).
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