Bernstein v. Nemeyer

Supreme Court of Connecticut · 1990 · Contracts

213 Conn. 665 (1990)

Updated July 26, 2026

Contractsmaterial breachrescissionrestitutionunjust enrichmentlimited partnershipnegative cash flow guarantyRestatement § 241

Facts

The defendants solicited the plaintiffs to become Class B limited partners in a Houston real estate partnership and, in documents they drafted, agreed to a negative cash flow guaranty under which they would lend the partnership amounts needed to cover operating deficits. The plaintiffs invested $1,050,000, and the defendants later lent about $3,000,000 to the partnership, but in November 1985 they stopped making mortgage payments in an unsuccessful attempt to renegotiate the loans. The properties were foreclosed in 1987, and both plaintiffs and defendants lost their investments. The trial court found that the defendants had breached the guaranty but denied rescission and restitution.

Issue

Whether the defendants' breach of the negative cash flow guaranty entitled the plaintiffs to rescission and restitution of their partnership investment. More specifically, whether the breach was material and, if so, whether restitution was nonetheless unavailable absent proof of unjust enrichment and restoration of the status quo.

Rule

An uncured material failure of performance discharges the other party's remaining duties under a contract, and materiality is assessed under the Restatement (Second) of Contracts § 241 factors. But rescission does not automatically entitle the injured party to restitution; restitution for breach depends on what justice requires, including proof that the breaching party was unjustly enriched by a benefit conferred and that the claimant can, as nearly as possible, restore the other party to the precontract position.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Phoenix, Dana Ortiz invested in a warehouse redevelopment partnership after the general partner, Mesa Harbor Development, promised in the written agreement to advance funds monthly to cover any operating shortfalls for four years. Two years later, Mesa Harbor stopped making the required advances, the project defaulted, and the properties were lost in foreclosure.

Dana sues for rescission, arguing that the funding promise was materially breached. Which fact most strongly supports Dana's position that the breach was material?

Explanation. A breach is material when, among other things, it deprives the injured party of a substantial benefit for which she clearly bargained and reasonably expected. The strongest evidence of materiality is that Dana specifically required the promise as a central inducement to invest and would not have invested without it. Good faith does not by itself make an otherwise substantial, incurable breach immaterial, and the existence of other contractual provisions does not diminish the centrality of this one.