Tuesday, April 2, 2013

Failed Foreclosure by Fiat



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?

1 comment:

  1. Great summary, Dan - thank you!

    ReplyDelete