Arnold v. Melvin R. Hall, Inc.

• Decision Date: 07 August 1986
• Docket Number: No. 60S01-8608-CV-720,60S01-8608-CV-720
• Citation: 496 N.E.2d 63
• Parties: Venice L. ARNOLD and Lois M. Arnold, Appellants (Defendants Below), v. MELVIN R. HALL, INC., Appellee (Plaintiff Below).
• Court: Indiana Supreme Court

Page 63

496 N.E.2d 63

Venice L. ARNOLD and Lois M. Arnold, Appellants (Defendants Below), v. MELVIN R. HALL, INC., Appellee (Plaintiff Below).

No. 60S01-8608-CV-720.

Supreme Court of Indiana.

Aug. 7, 1986.

John J. Fuhs, Petri & Fuhs, Spencer, for appellants.

George B. Mathes, Spencer, for appellee.

Thomas W. Dinwiddie, Theresa C. Williams, Wooden McLaughlin & Sterner, Indianapolis, for amicus curiae Indiana Mortgage Bankers.

Stephen A. Claffey, Steven L. Householder, Baker and Daniels, Indianapolis, for amicus curiae The Federal Land Bank of Louisville and The Federal Intermediate Credit Bank of Louisville.

Theodore J. Nowacki, David R. Day, Bose, McKinney and Evans, Indianapolis for amicus curiae Indiana League of Savings Institutions.

Donald F. Elliott, Jr., Ice, Miller, Donadio and Ryan, Indianapolis, for amicus curiae The Indiana Bankers Assn.

SHEPARD, Justice.

The question presented is whether a contract seller who forecloses on his contract can obtain a deficiency judgment if he buys the property at a foreclosure sale for less than the amount still due on the contract without providing the trial court proof that the property is worth less than the amount due at the time of sale.

In December 1981 appellants Venice L. and Lois M. Arnold executed a contract for the sale of real estate and personal property under which they purchased Petroleum Services of Gosport, Indiana, from appellee Melvin R. Hall, Inc. The stated purchase price was $135,000; the parties agreed that $100,000 of this amount was for the real estate and improvements and that $35,000 was compensation for the tools, equipment, fixtures, stock, and inventory. In return, the Arnolds deeded to Hall a 103.5 acre parcel of land and an easement on another parcel which the parties valued at $65,000. The remainder of the consideration was a note for $70,000. The Arnolds also acknowledged a loan from Hall of $14,800 and agreed to make monthly payments on same.

About a year later, the Arnolds ceased payments on the note and Hall sought foreclosure through a complaint in the Owen Circuit Court. The trial court granted foreclosure and entered a deficiency judgment against the Arnolds. The personal property was sold, bringing net proceeds of $15,441.75. The real estate was sold through a sheriff's sale, at which Hall bid $45,000. The net proceeds from the real estate were $53,355.35. The final deficiency was $15,805.31.

The Court of Appeals vacated the deficiency judgment, concluding that equity demanded that Hall provide proof that the real estate he purchased at the sheriff's sale was worth less than the deficiency which remained at the time of the sale. Arnold v. Melvin R. Hall, Inc. (1985), Ind.App., 478 N.E.2d 696; reh. denied with opinion, 481 N.E.2d 409. Judge Ratliff has provided a careful and thorough analysis of the law of foreclosure on contract sales, and it is not without some reluctance that this author announces this Court's different conclusion.

It has been common practice by several generations of drafters to include forfeiture clauses in contracts for the sale of real estate. These provide that in the event of default on the contract, the seller can repossess the property and keep the buyer's payments on the contract as a forfeiture. Recognizing that it was possible for a purchaser to pay for most of the value of a parcel of land and then lose both the land and his money under such clauses, courts of equity have long had jurisdiction to grant relief against their enforcement. 30 C.J.S., Equity, Sec. 56 (1965 ed.).

Confronted by just such a situation, this Court concluded that adequate protection of the interests of contract buyers required that such sales be treated, with some exceptions, in the same manner as mortgage foreclosures. The Court determined that foreclosure of such vendors' liens should be conducted pursuant to Ind.Rules of Trial Procedure, Rule 69(c), and the mortgage foreclosure statute, Ind.Code Sec. 32-8-16-1 et seq. Skendzel v. Marshall (1973), 261 Ind. 226, 301 N.E.2d 641. The contract at issue in Skendzel provided a sale price of $36,000; the original seller's heirs sought forfeiture, including the $21,000 already paid on principal plus repossession of the real estate. This Court found that such "would have led to unconscionable results requiring the intervention of equity." Id., 261 Ind. at 241, 301 N.E.2d at 650.

The Skendzel ruling recognized that there would be situations in which simple forfeiture would be entirely equitable, such as against an absconding vendee or against one who had made minimal payments at the time of the default. Nevertheless, the decision that most contract sales should be treated as though they were mortgage foreclosures gave to the defaulting purchaser substantial rights which he did not have under traditional rules of contract enforcement. Among these were mechanisms for notice, stay of execution, supervision of the sale by a public officer, advertising requirements, and the like, which are a part of the mortgage foreclosure statute. It also tended to insure that damages sought by the seller would bear a relationship to the commercial reality of the transaction.

This is not to say that such procedures guarantee that equity is achieved in every case and it was apparently this concern which led the Court of Appeals to hold that a mortgagee seeking to collect on a deficiency judgment after he has repurchased the mortgaged property at a sheriff's sale should be obligated to present evidence that the property purchased had a fair market value less than the amount owed on the contract at the time of sale. Judge Ratliff noted that it is possible that a vendor could appear at a foreclosure sale (as here, where Hall was the only bidder), purchase the property for a mere percentage of its fair market value and then seek enforcement of his deficiency judgment for the full amount of the remaining debt. "In essence, the vendor/mortgagee would have the absolute right to reap a double recovery in every case." Arnold, 481 N.E.2d at 413.

We agree that equity would demand a remedy for such a wrong, but find ourselves unable to conclude that the best way to assure that such does not occur is to require every...