Bernstein v. Nemeyer

570 A.2d 164 (1990)

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Nature of the Case

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Facts

P invested as limited partners in a partnership formed to renovate two apartment complexes in Houston. P's objectives were capital appreciation and a tax shelter for assets previously acquired. D made a negative cash flow guaranty: they promised to lend the partnership the amount by which defined operating and financing expenses exceeded the cash receipts from normal business operations. P was informed of the risk of foreclosure from these additional loans in a weak real estate marketplace. D loaned P $3,000,000 and then defaulted under their obligation. The mortgages were foreclosed upon, and P and D lost their entire investments. P sued for rescission of the contract and rescission of their investment. The trial court denied relief based on the fact that the default by D was not material and that P's losses resulted from a bad market rather than D's breach. P appealed.