Ellis v. Butterfield , 98 Idaho 644 ( 1977 )

BAKES, Justice.

This appeal presents questions concerning the relative rights and interests of a vendor and a defaulting purchaser under an installment land sale contract. Wayne E. and J. Evelyn Ellis, the purchasers, appeal from a judgment of the district court, Twin Falls County, declaring their contract terminated and allowing the vendors, Delwin and Clara Butterfield, to retain all payments made under the contract, and awarding the vendors $1,500.00 attorney fees. Ellises contend that the trial court should have ordered the vendors to accept their tender of the balance owing on the contract. We affirm, except as to the award of attorney fees.

On September 18, 1967, Ellises and Butterfields entered into a land sale contract wherein Ellises would purchase from Butterfields certain commercial property in Buhl. The purchase price was $17,232.00, bearing interest at 7% with payments of $125.00 per month for the first year and $209.00 per month thereafter. The purchasers agreed to pay all property taxes accruing thereafter, to procure a fire insurance policy on the premises, and to deposit a life insurance policy in escrow naming Butterfields as beneficiary. The contract recites that time is of the essence and in the event of the purchasers’ default, the vendors had the option to:

“(a) Declare this agreement terminated and upon the making of such declaration all of the rights of the Buyers to continue said purchase or to continue in possession of said premises shall immediately terminate and Sellers shall retain all money paid to them as purchase price as liquidated damages; or

“(b) Declare all installments of purchase price, which installments include interest, due hereunder to be immediately due and payable, provided, however, that before the termination of this agreement or before the declaration of all installments of purchase price, which installments include interest immediately due and payable, the Sellers must give Buyers thirty (30) days written notice of their intention to terminate this agreement or to declare all installments of purchase price immediately due and payable and said written notice shall contain the grounds upon which such action is based and if within such thirty day period the Buyers shall fully comply with and conform with the provisions hereof for the breach of which the Sellers shall give notice, then and in that event this agreement shall remain and be in full force and effect the same as if such default by Buyers had never been made; . . .”

The contract also provided that if either of the parties engaged the services of an attorney to enforce their rights under the contract, the attorney fees of the prevailing party would be paid by the other party.

Ellises made payments on the contract, although they were frequently delinquent. Butterfields sent Ellises letters in May, 1972, and October, 1972, advising them that they were in default of payments. In addition, the purchasers had not paid the property taxes for the years 1970-1974, and the vendors had received notices in 1969 and in 1970 that the fire insurance on the property had been cancelled.

In the fall of 1973, Ellises again became delinquent on their payments and on December 17, 1973 Butterfields sent a thirty day notice of intent to terminate the agreement for failure to pay the installments when due. The Ellises did not cure their default within thirty days, and by letter dated January 21, 1974, Butterfields’ attorney demanded of the escrow bank a return of the escrow papers based upon the proof of service of Butterfields’ letter of December 17, 1973. On January 23, 1974, Ellises tendered a cashier’s check for $657.00 (presumably the amount in default) to the escrowholder. However, the vendors refused to accept this tender and on January 29, 1974, Ellises were served with a letter from Butterfields demanding that they quit the premises because the contract was terminated. Ellises then negotiated for a loan of the entire contract balance, which was tendered to the vendors along with approximate attorney fees on March 12,1974. Butterfields rejected this tender also, and Ellis-es brought this suit seeking to compel Butterfields to accept the balance due on the contract and to deliver a warranty deed to them. Butterfields counterclaimed for termination of the Ellises’ rights under the contract according to the contract provisions, restitution of possession and attorney fees.

By stipulation of the parties, the matter was submitted to the district court on the basis of uncontradicted facts in the pleadings, some testimony, and numerous exhibits. In its findings of fact and conclusions of law, the trial court found that the thirty day period following Butterfields’ demand letter had expired on January 17, 1974, and therefore the sellers were not obligated to accept the buyers’ tender of the amount in default on January 23, 1974. The court noted that the vendors had paid the taxes on the property for the years 1971 and 1972, and the property taxes for 1973 and 1974 remained unpaid, and also that the vendors had an unsatisfied judgment against the Ellises for attorney fees incurred in previous attempts to enforce the contract against them.

The court concluded that it would not be inequitable or unreasonable to allow the vendors to retain all amounts paid by the purchasers, declared the contract terminated, and awarded sellers restitution of possession and $1,500.00 attorney fees and costs. The Ellises have appealed.¹

The appellants assign as error the ruling of the trial court declaring the contract forfeited and its refusal to compel the vendors to accept their tender of the amounts owing on the contract, as well as their subsequent tender of the balance of the contract. They also assign as error the award of attorney fees to the vendors, and the trial court’s denial of their motion for a new trial.

An installment land sale contract is one of three security devices generally used in credit transactions in real estate and is, in essence, a hybrid composed of property law concepts on the one hand and contract law on the other. While the transaction involves the transfer of ownership of real property, it is governed by the terms of a contract in which vendor and purchaser join. The vendor generally, but not invariably, deposits a deed in escrow, but title does not pass to the purchaser until all installments are paid in accordance with the contract. The contract is frequently called a “poor man’s mortgage” because the vendor, as with a mortgage, finances the purchaser’s acquisition of the property by accepting installment payments on the purchase price over a period of years, but the purchaser does not receive the benefit of those remedial statutes protecting the rights of mortgagors. See I.C. §§ 6-101 et seq. The land secures the purchaser’s performance because in the event of his default, the vendor ordinarily retains the right to terminate the transaction and retake the property. The advantage to the purchaser is that he does not have to procure the expensive (and sometimes unavailable) institutional financing; the advantage to the vendor is the theoretically simple procedure of terminating the purchaser’s interest in the event of default as contrasted with the expensive and time consuming mortgage foreclosure action, with its right of redemption. Comment, Forfeiture: The Anomaly of the Land Sale Contract, 41 Albany L.Rev. 71, 74-76 (1977).

When the purchaser under a land sale contract defaults in his payments, such contracts usually provide that the vendor can terminate either the contract or the purchaser’s interest in it, and the purchaser forfeits his payments and all of his rights in the land. If the purchaser is several years into the contract, this remedy may be unduly harsh. But when the purchaser is in default, what is his interest and what are his rights under the defaulted contract? The parties to the transaction chose the contract as the vehicle by which the transfer of the property would be governed. If they had used a conventional mortgage, the mortgagee would have had to bring statutory foreclosure proceedings against the defaulting mortgagor, I.C. § 6-101 et seq. and the mortgagor would have had six months after the judicial sale (if the property is 20 acres or less) in which to redeem, I.C. §§ 6-101,11-402. Further, the mortgagee would only be entitled to recover the amount due on the mortgage from the proceeds of the judicial sale, although as a practical matter the mortgagee ordinarily bids the property in at the judicial sale for the amount of the balance owing on the debt, and the mortgagor then has the redemption period in which to redeem and protect any “equity” which he may have.

The parties to a sale of land might also have availed themselves of the statutory deed of trust to secure their respective rights. See I.C. § 45-1502 et seq. Under the Trust Deeds statute, the property is conveyed to a trustee for the benefit of the vendor and in the event of the purchaser’s default the trustee can conduct an extra-judicial sale of the property and satisfy the debt. Under this procedure, the defaulting purchaser is given 115 days from the date of the filing of the notice of default within which to cure his default, I.C. § 45-1506. A trustee’s sale is final, and the purchaser has no right to redeem from the person who purchased the property at the trustee’s sale. Roos v. Belcher, 79 Idaho 473, 321 P.2d 210 (1958).

In this case, the Ellises and the Butter-fields did not avail themselves of either the mortgage or deed of trust security devices. Nevertheless, Ellises contend that they should be given protection analogous to a mortgagor, and that the court should allow them to redeem the property from Butter-fields. They allege that they have made improvements on the property worth approximately $5,000.00, and in addition, they have made payments totaling approximately $15,000.00 ($8,124.00 principal) on the contract to date. They use these figures to buttress their argument — that a forfeiture of the contract in this case would be inequitable. However, at no time in these proceedings have they argued that the foregoing amounts are disproportionate to the damages sustained by Butterfields or that the vendors are unjustly enriched by retention of payments and recovery of the property. The trial court specifically found otherwise, and this ruling is not challenged on appeal. Thus, Ellises do not seek restitution of amounts paid on the theory that the liquidated damages were exorbitant and a penalty, see e. g. Graves v. Cupic, 75 Idaho 451, 272 P.2d 1020 (1954), but they seek to retain the property.²

The issues in this case are very similar to those presented in Howard v. Bar Bell Land & Cattle Co., 81 Idaho 189, 340 P.2d 103 (1959). The purchaser’s interest in the land sale contact in that case had been assigned a number of times, and the vendors sought cancellation of the contract based upon the defaults of the purchasers. After the vendor began cancellation and quiet title proceedings, the last assignee tendered payment of the balance due on the contract and asked the court to require the vendors to accept their tender. At trial, the vendors attempted to prove that their damages exceeded the payments made under the contract, but the trial court rejected this proof and instead granted the forfeiture giving the purchasers sixty days to redeem the property (this amount was deposited into court by the purchasers). The vendors appealed.

This Court observed first that the action invoked the equity jurisdiction of the court and quoted the rule articulated by the Court in Graves v. Cupic, supra, that where the forfeiture or damage fixed by a contract is arbitrary and bears no relation to the actual damages, it is regarded as a penalty and is void and unenforceable. The Court then stated:

“It is the lawful privilege of the parties to a contract for the sale of real property to make time of performance of the essence of their agreement. It is also their privilege to agree in advance upon the damages to be recompensed in case of breach. The courts, both at law and in equity, must respect the provisions of a contract lawfully agreed to. [Citations omitted]. But, where the facts make the damage agreed to an unconscionable penalty, equity will intercede to grant relief. Graves v. Cupic, supra.” 81 Idaho at 197, 340 P.2d at 107.

The Court then noted:

“On the trial the defendants [purchasers] offered no evidence to show that the damages provided by their contract did not bear a reasonable relation to plaintiffs’ [vendors] actual damages, or that they were exorbitant and unconscionable. In seeking relief from the forfeiture the burden of proving such facts rested upon defendants. [Citations omitted].” 81 Idaho at 197, 340 P.2d at 107.

The Court' then held that the trial court erred in granting the purchasers a right of redemption without first considering whether the damages stipulated in the contract amounted to an unconscionable penalty or whether they bore a reasonable relation to the actual damages sustained. The Court stated:

“This is an issue which must be determined in favor of the purchasers as a condition precedent to their asserted right to relief from the forfeiture. The order and judgment of the court granting the defendants the right to redeem was, therefore, premature and unsupported by a finding that the damages provided by the contract were in fact a penalty.” 81 Idaho at 198, 340 P.2d at 107.

The Court further held that in order to obtain relief from forfeiture of the property, the purchasers must prove not only that the stipulated damages amounted to a penalty but, in addition, that restitutionary relief would be inadequate. 81 Idaho at 198. The Court observed that the judgment of the trial court in effect granted the defaulting purchasers specific performance of the contract which they had breached. The Court noted that it was the vendors who were entitled to equitable relief, not the vendees, stating:

“Being without fault and having strictly performed the contract on their part, and having accorded to defendants more than the grace period contracted for, plaintiffs are entitled to the benefit of the forfeiture provision, except to the extent that it might constitute a penalty. They may not be compelled to perform specifically in favor of the parties who have breached the contract, when such parties can be adequately protected by way of restitution. Hall v. Yaryan, 25 Idaho 470, 138 P. 339; Hinsch v. Mothorn, 44 Idaho 539, 258 P. 540” 81 Idaho at 198, 340 P.2d at 108.

The Howard case is the only prior case in this jurisdiction in which a defaulting purchaser asserted a right to relief from a forfeiture of the property under a land sale contract rather than recovery of a portion of the payments. As we have noted, this Court did not preclude the possibility of giving the purchasers the right to redeem, but only if the purchasers could demonstrate both that the stipulated damages amounted to a penalty and also that a restitutionary remedy was inadequate.³ However, the Court held that in the absence of a finding that the forfeiture constituted an unconscionable penalty, the contractual forfeiture and the vendor’s right to terminate the defaulting purchaser’s interest and retain the payments made were proper remedies for the vendor.

Ellises rely on this Court’s opinion in Walker v. Nunnenkamp, 84 Idaho 485, 373 P.2d 559 (1962). In Walker, the defaulting purchasers appealed from a judgment which rejected their claim for recission of the contract and granted to the vendors forfeiture of the contract. This Court held that the purchasers could be entitled to restitution of some of the amounts paid under the rule of Graves v. Cupic, supra. It remanded the case for further proceeding on the issue of damages. The respondent-vendors sought a rehearing on the ground that the action was for strict foreclosure of the contract, under which remedy restitution of amounts paid would not be available to the purchaser. After an extended discussion of the remedy of strict foreclosure, the Court further held:

“Since this case is not governed by statute, but is one that is controlled entirely by equitable principles, the [trial] court in its wisdom may deem it proper and equitable to direct a judicial sale of the property involved.” 84 Idaho at 499, 373 P.2d at 568.

It is important to note that the context of this statement of the Court was with reference to the vendor’s protest at the prospect of a judgment in favor of the purchaser for restitution of a portion of the amounts paid on the contract. It may well be the case that a vendor seeking to terminate a contract because the purchaser is in default would prefer not to recover the land and perhaps have to make restitution of payments to the purchaser and would therefore prefer the remedy of the judicial sale in terminating the purchaser’s rights. This holding was not inconsistent with the holdings of the Court in Walsh v. Coghlan, 33 Idaho 115, 190 P. 252 (1920), and Mochel v. Cleveland, 51 Idaho 468, 5 P.2d 549 (1930), that a vendor under a land sale contract can elect between the contractual remedy of forfeiture and repossession and the statutory remedy of foreclosure and sale. However, we do not read Walker v. Nunnenkamp, supra, as giving the defaulting purchaser a right to have the contract terminated by way of judicial sale, nor do we read the Walker decision as otherwise affecting the holding of this Court in Howard v. Bar Bell Land & Cattle Co., supra.

We conclude therefore that these defaulting purchasers had no right to specific performance of the contract after the thirty day period had run and the vendors had terminated the contract, nor did they have an equitable right of redemption.⁴ The rights of these parties were defined by the contract, Howard v. Bar Bell Land & Cattle Co., supra. In the absence of a determination that the amounts paid by the purchaser and retained by the vendor constituted a penalty, the purchasers were not entitled to relief from the remedy provision of their contract.⁵

The appellants assign as error the failure of the trial court to grant their motion for a new trial. In an affidavit attached to his motion for a new trial, Wayne Ellis alleged that his mother died on the morning of the day set for trial and thus he was unable to appear. If he had been able to appear and testify, Ellis alleged that he would have testified that Butterfields represented to him that they would waive the purchaser’s default. However, the record of the proceedings before the trial court indicates that the attorney for the Ellises, who was present at trial, did not request a delay, nor did he in any way indicate to the court the reasons why Wayne Ellis could not appear or what the substance of his testimony would have been. Most of the evidence was stipulated to by the parties. Under the circumstances, the trial court did not abuse its discretion in denying the motion. I.R.C.P. 59, Isaguirre v. Echevarria, 96 Idaho 641, 534 P.2d 471 (1975).

Appellant Ellises have objected to the award of attorney fees to respondents, and have themselves moved in this Court for attorney fees on appeal. Their objection to the award of attorney fees is well taken. Respondents’ defense to Ellises’ effort to compel them to accept the tender was based upon their claim that after the thirty day notice of default was given they terminated the contract. Having terminated the contract, they cannot later assert the attorney fee clause⁶ in it while defending successfully against appellants’ action to reinstate the contract. By parity of reasoning, appellants’ motion for attorney fees is likewise denied.

The judgment is affirmed. Costs to respondents.

McFADDEN, C. J., and DONALDSON, J., concur. SHEPARD, J., concurs in result.

1 . The Ellises’ counsel on appeal did not try the case before the district court.

2 . This case is also distinguishable from those in which the Court has refused to grant the vendor a forfeiture because the vendor is himself in default: Fajen v. Powlus, 98 Idaho 246, 561 P.2d 388 (1977); Blinzler v. Andrews, 94 Idaho 215, 485 P.2d 957 (1971); Dohrman v. Tomlinson, 88 Idaho 313, 399 P.2d 255 (1965); Associated Developers Co. v. Infanger, 85 Idaho 158, 376 P.2d 496 (1962); Huggins v. Green Top Dairy Farms, 75 Idaho 436, 273 P.2d 399 (1954); or because the vendor has effectively waived the vendee’s defaults: Heisel v. Cunningham, 94 Idaho 461, 491 P.2d 178 (1971); Stockmen’s Supply Co. v. Jenne, 72 Idaho 57, 237 P.2d 613 (1951); Stringer v. Swanstrum, 66 Idaho 752, 168 P.2d 826 (1946); Sullivan v. Burcaw, 35 Idaho 755, 208 P. 841 (1922); Haas v. Coburn, 22 Idaho 47, 124 P. 476 (1912).

3 . Judicial sale of property may be appropriate relief where, for instance, the purchaser had made substantial improvements on the property prior to his default. In such a case, the purchaser would show (1) that it would be an unconscionable penalty to allow the vendor to recover the improved property and also retain all payments made, see Graves v. Cupic, supra; and in addition (2) that the vendor would still be unjustly enriched by recovering the improved property even if the purchaser was allowed restitution of amounts paid on the contract. The solution of judicial sale would probably be preferable to both parties in such a situation because the vendor could recover the amount of the debt rather than the property heavily encumbered with the purchaser’s improvement liens.

4 . “[CONCLUSION OF LAW] IX. That the Agreement provided that time was of the essence and no evidence exists for excusing Plaintiffs for the breach of their Agreement.” Clk. Tr„ p. 32.

5 . “[CONCLUSION OF LAW] X. That based upon the evidence before the Court, retention of all Monies paid by the Plaintiffs to the Defendants as liquidated damages is neither inequitable nor unreasonable.” Clk. Tr., p. 32.

6 . “In the event either party hereto shall engage the services of an attorney to enforce any of their rights under this agreement the prevailing party shall be paid by the other party as attorney fees a reasonable sum.”