Tri-State Hotel Co. v. Sphinx Investment Co.

Tri-State Hotel Company (Tri-State) (plaintiff) owned a hotel and several other adjacent pieces of properties. Tri-State entered into a series of contracts with Sphinx Investment Company (Sphinx) (defendant) for the sale of the hotel and land. The contracts all included a marketable-title provision, which provided that Sphinx had the option to cancel the contract if Tri-State failed to deliver a marketable title or could in the alternative choose to waive the title defect and continue with the agreement based upon whatever title Tri-State could deliver. Tri-State and Sphinx were both represented by the same attorney, John Eberhardt, in the matter. During the title-search process, Eberhardt eventually discovered that title to one narrow strip of land under the hotel was in fact held by a defunct corporation. Eberhardt informed Tri-State and Sphinx of this defect. Eberhardt assured Sphinx that although the defect technically amounted to a merchantable defect, Tri-State had undoubtedly acquired title to the land through adverse possession. Eberhardt admitted, however, that any effort to quiet title by Tri-State would not be able to be completed by the date required in the contract. Sphinx, concerned about the potential risks of continuing with the contract under this defect, informed Tri-State and Eberhardt that it was electing to cancel the contract and demanded the return of its deposit money. Tri-State sued Sphinx to retain the deposit, alleging that the title defect did not amount to a merchantable defect sufficient to trigger a right to cancel for Sphinx. The trial court entered judgment for Sphinx, and Tri-State appealed.