Lockhart Co. v. B.F.K., Ltd.

• Decision Date: 19 November 1984
• Docket Number: No. 14148,14148
• Citation: 691 P.2d 1248,107 Idaho 633
• Parties: The LOCKHART COMPANY, a Utah corporation, Plaintiff-Appellant, v. B.F.K., LTD., a Utah corporation, and Eldon Mattson and Dayle B. Mattson, husband and wife, Defendants-Respondents.
• Court: Idaho Court of Appeals

Page 1248

691 P.2d 1248

107 Idaho 633

The LOCKHART COMPANY, a Utah corporation, Plaintiff-Appellant, v. B.F.K., LTD., a Utah corporation, and Eldon Mattson and Dayle B. Mattson, husband and wife, Defendants-Respondents.

No. 14148.

Court of Appeals of Idaho.

Nov. 19, 1984.

Jay A. Kohler, Idaho Falls, for plaintiff-appellant.

A. Bruce Larson, Soda Springs, for defendants-respondents.

BURNETT, Judge.

This appeal presents an issue of first impression in Idaho. The question is whether sellers of real property under an installment contract, having been notified that the buyer assigned his interest to a third party, must notify the third party if the buyer defaults and the sellers decide to invoke their contract remedies. For reasons explained below, we hold that the third party is entitled to such notice.

The sellers in this case, Eldon and Dayle Mattson, entered an installment land sale contract with a buyer known as B.F.K., Ltd. The contract provided that title to the property would remain in the sellers until all installments were paid. While the contract was still outstanding, the buyer borrowed money from a third-party lender, The Lockhart Company. As security the lender obtained and recorded an assignment of the buyer's interest under the contract. The assignment recited that the buyer would continue making the contract payments. However, the buyer subsequently defaulted on both the loan and the contract. The sellers sent the buyer, but not the lender, a notice of default that triggered a contractual period for cure. When the buyer failed to cure the default, the sellers terminated the contract, forfeiting the buyer's interest and retaining all prior payments as liquidated damages. The lender ultimately learned of the default and belatedly tendered a cure, but the tender was rejected.

The lender then sued to determine its rights under the contract as the buyer's assignee. The lender claimed that recording the assignment had given the sellers constructive notice of the lender's interest in the contract and that the sellers also had received actual notice from one of the lender's employees. The sellers denied actual notice and argued that recording the assignment did not give them constructive notice. In a summary judgment, the district court bypassed this controversy and ruled, as a matter of law, that even if the sellers had been informed of the assignment, they were not required to furnish the lender notice of the buyer's default. Accordingly, the judge upheld the sellers' cancellation of the contract. In a supplementary ruling the judge further determined that the resultant forfeiture did not represent a penalty for which the buyer or its assignee were entitled to any restitution. This appeal followed.

The relationship between a contract seller of real estate and the buyer's assignee has received surprisingly little attention in reported decisions or in the literature. A few western states have addressed the subject, reaching different conclusions as to whether the seller must inform a known assignee of the buyer's default. A majority have declared that notice must be given, even if the assignment is given only as security for a loan. Credit Finance, Inc. v. Bateman, 135 Ariz. 268, 660 P.2d 869 (App.1983); Kendrick v. Davis, 75 Wash.2d 456, 452 P.2d 222 (1969). See also Shindledecker v. Savage, 96 N.M. 42, 627 P.2d 1241 (1981) (applying rule to mortgage of buyer's contract interest); cf. Sanders v. Ulrich, 250 Or. 414, 443 P.2d 231 (Or.1968) (no duty to notify assignee when seller not informed of assignment). A minority, seemingly limited to Utah, holds that the seller is not required to notify the assignee. See Jeffs v. Citizens Finance Company, 7 Utah 2d 106, 319 P.2d 858 (1958); but cf. Hadlock v. Showcase Real Estate, Inc., 680 P.2d 395 (Utah 1984) (narrowing the rule announced in Jeffs to assignments for security).

Cogent arguments can be made on both sides of the issue. However, we find the majority view more persuasive. It better comports with underlying principles of contract law. When one party to a contract is notified that the other has assigned part or all of his interest in the contract, the first party owes the assignee whatever performance the assignor was entitled to receive, within the scope of the assignment. See generally Bonanza Motors, Inc. v. Webb, 104 Idaho 234, 657 P.2d 1102 (Ct.App.1983); 3 S. WILLISTON, A TREATISE ON THE LAW OF CONTRACTS § 433 (Jaeger 3d ed. 1960). Of course, no such assignment may "materially increase the burden" imposed by the contract upon the first party. RESTATEMENT (SECOND) OF CONTRACTS § 317 (1979).

In the present case, the sellers were obliged under the land sale contract not only to convey title when all installments had been paid but also to provide notice of default, and to allow a specified opportunity for cure, before terminating the contract. We hold that the sellers, if notified of the assignment, owed the lender a parallel duty to provide notice of a default. Concededly, our holding adds to the sellers' burden by requiring them to notify an additional party. However, this requirement applies only with respect to a known assignee and we deem the increased burden not to be "material." We now must address an issue avoided by the district court--whether the sellers did in fact receive notice of the...