Bishop Ryan High School v. Lindberg, 10733

• Decision Date: 03 July 1985
• Docket Number: No. 10733,10733
• Parties: BISHOP RYAN HIGH SCHOOL, Plaintiff and Appellee, v. Layne A. LINDBERG and Barbara J. Lindberg, Defendants and Appellants. Civ.
• Court: North Dakota Supreme Court

Page 726

370 N.W.2d 726

BISHOP RYAN HIGH SCHOOL, Plaintiff and Appellee, v. Layne A. LINDBERG and Barbara J. Lindberg, Defendants and Appellants.

Civ. No. 10733.

Supreme Court of North Dakota.

July 3, 1985.

McGee, Hankla, Backes & Wheeler, Minot, for plaintiff and appellee; argued by Orlin W. Backes, Minot.

Barbara J. Lindberg, pro se and for defendants and appellants.

LEVINE, Justice.

Layne A. Lindberg and Barbara J. Lindberg (Lindbergs) appeal from a county court judgment awarding Bishop Ryan High School (Bishop Ryan) $3,149.19 in its action for recovery of earnest money. We reverse.

On September 2, 1983, the parties executed a written contract by which Lindbergs would purchase a home, owned by Bishop Ryan, for $97,000, to be paid in full by January 1, 1984. The contract required the Lindbergs to execute a $5,000 promissory note payable to Bishop Ryan as earnest money. Shortly after signing the contract the Lindbergs occupied the house.

On December 24, 1983, a fire occurred damaging the fireplace and causing smoke damage in the home. In accordance with the terms of the contract Bishop Ryan maintained insurance on the home.

On January 1, 1984, the Lindbergs failed to pay the $97,000 purchase price. Instead, on January 4, 1984, the Lindbergs paid Bishop Ryan $2,000. Bishop Ryan then made a written offer to allow the Lindbergs until January 28, 1984, to pay the remaining $3,000 earnest money and until February 1, 1984, to pay the $92,000 balance of the purchase price.

The Lindbergs responded with a counteroffer to pay the remaining $3,000 earnest money by January 28, 1984, but with no date certain for payment of the $92,000, in order to give Bishop Ryan "ample time to complete the fire and smoke damage repairs." At the time of these negotiations no repairs had been made, although the home had been examined by an insurance adjuster.

Bishop Ryan rejected this counteroffer and on January 20, 1984, served a notice to quit on the Lindbergs, who vacated the home on January 31, 1984. Bishop Ryan then sued to recover the outstanding $3,000 earnest money.

Following a bench trial the county court determined that the Lindbergs had promised to pay Bishop Ryan the $5,000 as consideration for the use and possession of the home, rather than as earnest money. The trial court concluded that the Lindbergs had paid only $2,000 and awarded Bishop Ryan judgment for the remaining $3,000 plus interest and costs. The Lindbergs appealed.

The rationale for the trial court's conclusion is contained in its memorandum opinion. ¹ The trial court stated that by executing the note the Lindbergs "agreed and promised to pay to [Bishop Ryan] for value received. The [Lindbergs] received that value, to-wit: the use and possession of the [home]."

Earnest money is generally defined as a comparatively small down payment made as an assurance that the purchaser is in earnest and good faith and that if he fails to purchase the property the deposit will be forfeited. Mortenson v. Financial Growth, Inc., 23 Utah 2d 54, 456 P.2d 181 (1969); Brigham v. First Nat. Bank of Arizona, 129 Ariz. 160, 629 P.2d 996 (Ariz.App.1981). In effect, earnest money operates as liquidated damages. Vanlandingham v. Jenkins, 207 Miss. 882, 43 So.2d 578 (1949); see also, Eddy v. Lee, 312 N.W.2d 326 (N.D.1981).

The purchase contract explicitly designated the $5,000 note as earnest money, allowing Bishop Ryan to retain this sum as liquidated damages if the Lindbergs refused or failed to complete the purchase. ² Furthermore, the purchase contract expressly stated that Bishop Ryan would not collect any rent for the Lindbergs' occupancy of the home. Therefore, the trial court's conclusion that the note was the consideration for occupancy of the home was in error.

Consequently, because the $5,000 note was earnest money, and not rent, Bishop Ryan's recovery of the $3,000 balance of the earnest money was proper only if the Lindbergs had not complied with the purchase contract. The record does not contain the Lindbergs' answer to Bishop Ryan's complaint, but it appears the Lindbergs defended on the ground that their obligation to pay the earnest money was conditioned upon Bishop Ryan's conveying the home on January 1, 1984, in its same condition as when the contract was signed. In effect the Lindbergs claimed that because Bishop Ryan did not fulfill a condition precedent they were not obligated to pay the earnest money. ³

The Lindbergs and Bishop Ryan were freely entitled to place conditions precedent on the performance of their respective contractual obligations. See, North Dakota Century Code Secs. 9-01-10 through 9-01-16; E.E.E., Inc. v. Hanson, 318 N.W.2d 101 (N.D.1982); Krueger v. Soreide, 246 N.W.2d 764 (N.D.1976). A condition precedent is a condition which is to be performed before some right dependent thereon occurs or some act dependent thereon is performed. NDCC Sec. 9-01-11; Evenson v. Hlebechuk, 305 N.W.2d 13 (N.D.1981). In this case the purchase contract conditioned the Lindbergs' payment of the purchase price, which included the earnest money, upon Bishop Ryan's conveying the home in the same condition it was in when the contract was signed.

Before a party can enforce conditional contract obligations, he must follow those requisite conditions for which he is responsible. NDCC Sec. 9-01-16 provides in pertinent part:

"Before any party to an obligation can require another party to perform any act under it, he must fulfill all conditions precedent thereto imposed upon himself and must be able, and must offer, to fulfill all conditions concurrent so imposed upon him on the like fulfillment by the other party...."

Because of the fire damage Bishop Ryan was unable to comply with the condition to convey the home in the same condition it was in when the contract was signed. Consequently, Bishop Ryan could not require that the Lindbergs pay the earnest money until it had complied with the condition by repairing the home. NDCC Sec. 9-01-16; Kennedy v. Dennstadt, 31 N.D. 422, 154 N.W. 271 (1915); Henderson v. Morton, 109 Fla. 300, 147 So. 456 (1933); Smith v. Keating, 52 Wash.2d 391, 326 P.2d 60 (1958); Williston, Contracts, Sec. 932 (3 ed.).

Bishop Ryan argues that its inability to convey the home undamaged on January 1, 1984, was not an adequate excuse for failure to pay the earnest money because the Lindbergs bore the risk of loss to the property. Woodward v. McCollum, 16 N.D. 42, 101 N.W. 623 (1907); see generally, 77 Am.Jur.2d, Vendor and Purchaser, Sec. 356; 92 C.J.S., Vendor & Purchaser, Sec. 295; Annot. 27 A.L.R.2d 444 (1953). However, risk of preconveyance loss may be otherwise allocated by the terms of the purchase contract. Rector v. Alcorn, 241 N.W.2d 196 (Iowa 1976); Utah State Medical Ass'n v. Utah State Employees Credit Union, 655 P.2d 643 (Utah 1982).

In this case the risk of loss was cast upon Bishop Ryan by language in the purchase contract that the Lindbergs would purchase the home "in its present condition." See, 77 Am.Jur.2d, Vendor and Purchaser, Sec. 363; 92 C.J.S., Vendor & Purchaser, Sec. 295(b)(2); Alcorn, supra, Utah State Medical Ass'n, supra. Here, interpreting the purchase contract in a reasonable manner, NDCC Sec. 9-07-08, to effectuate the parties' intentions, NDCC Sec. 9-07-03, we conclude that the contract language that the Lindbergs "purchase the...