Prue v. Royer, 2013 VT
12
Friends don’t let friends run dive bars. Also, listen to your realtor when she tells
you to talk to a lawyer.
The
Prues and Royers were friends. It’s safe
to assume that’s past tense. The Royers
owned a bar called the Brewski Pub. In
’99, the parties began discussing the possibility of the Prues purchasing or
taking over the operation of the bar.
The Prues did take over operation of the bar and the parties signed an
agreement, which was basically a form-purchase-and-sale agreement modified to
the point of no return by the parties and the Royers’ real-estate agent.
The agent encouraged the
parties to have a lawyer draft the proper documents. When the parties did not, the agent wisely
included a hold-harmless clause in the contract. The SCOV explains: “As the events unfolded,
it became clear that the parties should have listened to the real estate
agent.”
As will happen when
using a preprinted form for a transaction it’s not intended for, there were
some problems. That’s what the trial
court struggled with and what the SCOV has to sort out. Here’s a bulleted overview of the entire
situation:
·
The
agreement is titled “Purchase and Sale Contract,” but . . .
o
“Lease-Option
to Purchase” is handwritten below
·
Purchase
price is $190,000, and
·
$4000
is the deposit, but . . .
o
In
the blank for an additional deposit, there’s a “see attached schedule”
·
Closing?
“Proposed 6 years from date of all signatures to this contract”
·
A
“Financing Property Agreement” is attached, valuing the real estate at $175,000
and the equipment at$15,000 (hence the $190,000 purchase price)
·
Then
there’s a schedule of payments. We’ll
definitely need some sub-bullets here
o
Three
down payments, one at signing and one each in April and June 2000.
§ The one at signing is
labeled an “option down payment.”
§ In between these down
payments, the schedule lists twelve monthly “rental” payments of $1000.
§ For each down payment,
“-$4000” is entered below the sale price
o
The
“1/1/01 Balance due is . . . $178,000.”
o
Then
“Buyer/Leasee will pay starting 1/1/01, $1,400 per month for 5 years with an
interest payment of 1 over the nation’s prime rate and a balloon due of all
principle and interest on 1/1/06.”
Look, that’s the way it
was typed. See the quotation marks?
·
Then
there’s an addendum that refers to “Buyers” and “Sellers” throughout
o
Buyers
are responsible for operating licenses, any property or equipment damage,
septic and spring operations, utility payments, and real estate taxes.
o
During
the “lease agreement” Seller’s approval has to be obtained prior to any
renovations.
o
Buyers
must have fire insurance, theft insurance, and proof of one million dollars of
liability insurance “before business opening,” and Seller must be “named as
lien holder[].”
·
And
then there’s the addition
o
In
2004, the parties agreed to add an addition
o
Defendant
paid for the addition
o
The
price was added to the principal balance due from plaintiffs.
o
They
signed an amortization schedule calling for a new balance of $253,549,
amortized over twenty-five years.
o
This
amortization schedule did not address the balloon-payment provision in the
original agreement.
Everything was cool for
several years. Plaintiffs missed some payments, but Defendant either
forgave or put off these payments.
After the
balloon-payment date, Defendant tried to get the deal wrapped up, but Plaintiffs
couldn’t make the payment. So they
switched to a weekly payment arrangement running through 2018.
The Prues renamed the
bar Kingdom’s Playground. It was a
“rowdy place” according to the trial court.
When the Plaintiffs and Defendant got sued under Vermont’s Dram Shop
Act, Defendant found out that not only was the insurance coverage just 10% of
what it was s’posed to be, he wasn’t even named as lienholder. Grr.
Then there were the
gunshots fired at the bar. Another area bar had recently been the scene
of a stabbing. Fun stuff, folks.
As a result, the liquor inspector comes around and wants to know if the
Plaintiffs have a lease. Nobody can find
a copy. The inspector tells the plaintiffs
they’ll have to shut it down if they don’t have an active lease. Plaintiffs stopped making monthly
payments.
They turned over their
liquor license to the state inspector.
And they left. They took stuff
that was there when they took over. They
left a mess.
But they changed their
minds about leaving and wanted back in.
They claimed Defendant had evicted them but the trial court didn’t see
it. Twenty-one days after turning over
the liquor license, they sued for equitable title and money damages. Defendant counterclaimed for breach of
contract and unjust enrichment.
The trial court found
the agreement was a contract for deed—just like Plaintiffs requested. But then the court decided to initiate a
foreclosure. Plaintiffs got 54 days to
redeem for $244,386.86 plus interest; otherwise they would have to pay $8,136
in damages for personal property, cleaning, and repairs.
Both parties appeal.
Plaintiffs argue:
1. Abuse of discretion in the
trial court’s sudden decision to order foreclosure; or
2. In the alternative, that
the court erred in permitting strict foreclosure, and
o
in
giving a short redemption period, and
o
in
placing the redemption amount too high; and also
3. That the trial court
should not have ordered conditional damages for waste.
Defendant argues:
·
The
trial court erred in construing the agreement as a contract for deed;
·
The
two modifications of the agreement in 2004 and 2006 were unenforceable under
the Statute of Frauds;
·
Plaintiffs
abandoned their equitable interest, if any existed, when they quit the
property; or
·
That
Plaintiffs’ appeal is not properly before the SCOV because they didn’t get
permission from the trial court to appeal within ten days of its order; and in
that case
o
Both
the foreclosure remedy and the conditional damages for waste awarded by the
trial court were appropriate.
(I’m overly fond of the
bullets today. I promise that’s the last
of ‘em.)
The SCOV deals with each
issue in substantially more detail than I will here. But you knew that already.
First, the SCOV looks at
the agreement itself, without particular deference to the trial court. Plain terms will control unless the contract
is ambiguous. Is this contract
ambiguous?
“You betcha” says the
SCOV.
A contract for a deed to
land, according to the SCOV, is a bilateral (obligations on both sides)
contract that has two important characteristics: (1) the prospective purchaser
occupies and makes payments to the seller or lender until the delivery of the
deed and execution of the mortgage; and (2) payments are applied to the
purchase obligation. As they accumulate,
they build equity (ownership).
A lease option to
purchase, however, is a unilateral agreement that binds only the seller to keep
the option open. The potential purchaser
can take it or leave it. Lease option
payments are not applied to the purchase and thus no equity is created.
Do you get the
difference? A contract to buy land is
what it looks like—an exchange of money for property that may take time but
always ends with the buyer in control of the land with deed in hand. An option agreement is simply a right to
enter a contract. In that case, buyer pays
for, and seller agrees to give buyer, exclusive rights to purchase the property
during a set period of time. If buyer
chooses to act on this right, then the parties still have to execute a contract. But if buyer does not, then the parties go
their separate ways. Either way seller
keeps the money from the option agreement as payment for agreeing to give buyer
the right to enter into the agreement for a period of time.
The SCOV concludes that
the parties’ agreement is bilateral because more of the language in the
agreement suggests mutuality of obligation than does not. Because the down payments are applied to the
purchase price, the SCOV concludes that the agreement was a contract for deed,
rather than a lease-option agreement. And so, Defendant becomes an
equitable mortgagee, which, to make a long story short, means he needs to
foreclose.
The SCOV then considers
Defendant’s argument that the 2004 and 2006 modifications are unenforceable
under the Statute of Frauds because there’s no property description and there’s
no closing date. Here, the SCOV reasons
that there is “no doubt” the modifications were intended to refer to and modify
the earlier agreement—the parties are the same and the refinance amount comes
from the previous contract. As far as
the closing date being a material term, the SCOV notes that there was no
evidence that either modification was intended to change the closing date and
that the modifications did not modify the entire
contract, just certain terms.
While the SCOV holds
that the modifications are valid under the Statute of Frauds, it notes that the
holding is largely academic as Defendant’s objection is based on the
modifications’ tendency to show a contract for deed as opposed to an argument
that the agreement as modified is unenforceable. And there you have it.
Defendant’s next
argument is that Plaintiffs abandoned any equitable interest they may have had
in the property. It’s not something the
SCOV has considered before and so we go on a tour of other states’ decisions as
to what constitutes abandonment of an equitable interest.
The SCOV concludes that
the Plaintiffs did not abandon their interest for a few reasons. First, the Plaintiffs did not demonstrate
sufficient intent to abandon their rights to the property. They left the
property because they thought the liquor inspector was shutting them down. They almost immediately contacted a lawyer in
order to ascertain what their rights were. While the Plaintiffs did miss
payments, there was a history that allowed for this. And so the SCOV concludes that there was not
a clear abandonment of the property.
And so we get to whether
the court-initiated foreclosure was proper.
Well, almost. First the SCOV has
to deal with the procedural issue raised by Defendant. A judgment for foreclosure of a mortgage
requires trial court permission to appeal.
Plaintiffs never sought permission.
But there’s an old case that addresses the issue. The bottom line, more or less, is that these
types of cases present a unique situation—when, as a factual issue, the trial
court must determine whether there is
a mortgage. And so, while the statute
might require permission when there’s a genuine mortgage at issue, you get a
pass when it’s a court-created equitable mortgage.
Now we move on to the
was-it-a-proper-foreclosure question.
And this part is interesting—in a very, very geeky sort of way—because
of its procedural nuances. First, the
SCOV notes that there was no counterclaim for foreclosure, and that Defendant’s
entire case was based on an “it’s-a-lease-option-not-a-mortgage” argument. Defendant nonetheless argues that the trial
court, in exercising its power to award relief beyond that requested in
pleadings under Rule 54(c), properly foreclosed.
The SCOV doesn’t
agree. While the trial courts have broad
power to order equitable relief, that power is tempered by what is actually
litigated. Remedies must be within the
“ambit of the controversy being litigated.”
In this case, the foreclosure came “out of the blue”—the Plaintiffs
couldn’t defend against a remedy they didn’t know about. Due process, in this context, requires an
opportunity to defend.
The SCOV concludes,
therefore, that the Plaintiffs were prejudiced by the court’s decision to order
foreclosure because the Plaintiffs were prevented from exercising rights. First, the standard time for redemption is
six months unless shortened for good cause after opportunity to be heard. Here, without any notice or testimony, the
court simply decided that the redemption period would be under two months. Plaintiffs were also prejudiced because they
were denied the opportunity to request foreclosure by sale. There was also no accounting, though the SCOV
does not find the lack of accounting fatal in this case.
The SCOV concludes that “Plaintiffs
were prejudiced by the court’s sua sponte introduction of foreclosure into the
case, and Rule 54(c) does not in this case allow consideration of this remedy.”
The final issue is the
award of damages for waste. The SCOV
finds that this award was proper because waste is a recognized concept in the mortgagor-mortgagee
relationship. Defendant testified as to missing equipment and liquor and
to costs of cleaning and repair.
Plaintiffs contend that
waste damages only include diminution in value of the property. The SCOV considers this and there’s a
discussion exploring the definition of waste and its measure of damages. Importantly, the SCOV holds: “[W]e explicitly
define waste to include repairable damage to property.” And while waste
was not specifically pled, the SCOV concludes that the remedy was appropriate
here.
The case gets sent back
for a new foreclosure proceeding; the remainder of the trial court’s opinion is
affirmed.
Whew! Who else needs a drink?
Great summary, Dan - thank you!
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