Borsheim v. O & J Properties

• Decision Date: 28 February 1992
• Docket Number: No. 910258,910258
• Court: North Dakota Supreme Court
• Parties: Violet O. BORSHEIM and George R. Borsheim, Plaintiffs and Appellees, v. O & J PROPERTIES, a partnership, consisting of R.E. Jacobsen, Charles Owan, Jr., Vernon Owan and Mitchell Owan, partners, and R.E. Jacobsen, individually, Charles Owan, Jr., individually, Vernon Owan, individually, and Mitchell Owan, individually, Defendants and Appellants. Civ

Page 590

481 N.W.2d 590

Violet O. BORSHEIM and George R. Borsheim, Plaintiffs and Appellees, v. O & J PROPERTIES, a partnership, consisting of R.E Jacobsen, Charles Owan, Jr., Vernon Owan and Mitchell Owan partners, and R.E. Jacobsen, individually, Charles Owan Jr., individually, Vernon Owan, individually, and Mitchell Owan, individually, Defendants and Appellants.

Civ. No. 910258.

Supreme Court of North Dakota

Feb. 28, 1992.

As Corrected March 19, 1992.

Bjella, Neff, Rathert, Wahl & Eiken, PC, Williston, for plaintiffs and appellees; argued by Charles L. Neff.

Wheeler Wolf Law Firm, Bismarck, for defendants and appellants; argued by Orell D. Schmitz, appearance by Joseph J. Cichy.

ERICKSTAD, Chief Justice.

R.E. Jacobsen, Charles Owan, Jr., Vernon Owan, and Mitchell Owan, individually and as partners of O & J Properties (hereafter Owans) appeal from the judgment of the District Court for Williams County granting Violet and George Borsheim (hereafter Borsheims) summary judgment, rescinding an agreement between the parties. We affirm in part, modify in part and remand.

The Borsheims filed this action on April 22, 1991, seeking rescission of an agreement and reinstatement of a prior judgment released pursuant to the agreement. Each of the named defendants answered separately. On May 15, 1991, the Borsheims filed a motion for summary judgment. On May 21, 1991, the defendant Vernon Owan filed a demand for change of judge. After the case was assigned to the Honorable Bert Wilson on May 22, 1991, the defendant Mitchell Owan made a demand for change of judge, seeking to disqualify Judge Wilson. On May 29, 1991, the defendants filed a motion for an extension of time in which to file a brief in response to the Borsheims' motion for summary judgment. On June 24, 1991, the Owans resisted the Borsheims' motion for summary judgment and moved for summary judgment in their favor. On July 12, 1991, the trial court ruled that the Borsheims were entitled to summary judgment and rescission of the agreement along with reinstatement of the original judgment. Judgment was accordingly entered on July 17, 1991. ¹ This appeal followed.

The facts precipitating this action arose out of a contract for deed between the Borsheims and the Owans. The Owans defaulted on the contract for deed and the Borsheims sued for, and obtained, a judgment holding each defendant jointly and severally liable for specific performance. The judgment was for $47,646.00 plus interest in the amount of $25,120.38 and costs of $968.00. Because the judgment constituted a lien on all of the Owans' real property, the Owans sought an agreement with the Borsheims whereby the judgment would be released. The parties subsequently entered into an agreement where, in exchange for the Borsheims releasing their judgment, the Owans executed a promissory note secured in part by a mortgage covering certain real property, a continuing general guaranty signed by each of the defendants whereby they jointly and severally guaranteed payment of the note and, presumably, payment of $10,000. ²

The foregoing was ostensibly accomplished through the execution of what counsel for the Borsheims termed a master agreement which set forth the parties' intent to negotiate a release of the judgment. Although this so-called master agreement was dated June 1, 1987, it was apparently signed by the individual defendants on September 4, 1987, and by the Borsheims on August 10, 1987. Both parties' statement of facts and George Borsheim's affidavit to the trial court state that on or about June 1, 1987, the Owans signed and delivered to the Borsheims a promissory note for $65,952.88. However, we note that there is no separately executed promissory note in the record before us. The general continuing guaranty was signed by the Owans on September 4, 1987. The mortgage was signed by the Owans on September 4, 1987, and was filed in the office of the register of deeds on September 10, 1987. The release of the judgment was signed by the Borsheims on August 10, 1987.

Upon default, the Borsheims initiated two separate actions, one seeking to foreclose on the mortgage and the other to enforce the personal guarantees. In the action to foreclose the mortgage, the Borsheims did not pursue a deficiency judgment as provided by statute. A final decree of foreclosure was entered in this action on or about August 3, 1989. However, a sheriff's sale has apparently not been held pending the outcome of this action. In the action to enforce the personal guarantees, the continuing guaranty provided that each guarantor "specifically waives and releases his right to rely upon or seek protection against a deficiency judgment by virtue of any statutes or Supreme Court decisions." The district court dismissed the action to enforce the personal guarantees and, in Borsheim v. Owan, 467 N.W.2d 95 (N.D.1991), we affirmed the district court's dismissal, holding "that 'because of the public policy against deficiency judgments, the procedural rights granted mortgagors and vendees under the anti-deficiency judgment law cannot be contractually waived in advance of default.' " Id. at 98 (quoting Brunsoman v. Scarlett, 465 N.W.2d 162, 167 (N.D.1991)). Subsequently, the Borsheims brought this action for rescission.

Sections 9-09-01 through 9-09-04, N.D.C.C., provide for when and how a party can rescind a contract. ³ "These rules are largely codifications of the common-law rules, and are founded upon elementary principles of justice." Swan v. Great Northern Ry. Co., 40 N.D. 258, 168 N.W. 657, 658 (1918). Under section 9-09-04, N.D.C.C., a person must use reasonable diligence to rescind promptly and to restore, or offer to restore to the other party everything of value he or she has received from him or her under the contract. ⁴ Generally, "[r]estoration of the preceding status quo is a requirement for rescission." West v. Carlson, 454 N.W.2d 307, 309 (N.D.1990). This requirement is founded upon the equitable principle that he who seeks equity must do equity. Blair v. Boulger, 358 N.W.2d 522, 523 (N.D.1984). As the Court in Swan v. Great Northern Ry. Co., quoting Home Ins. Co. v. Howard, 111 Ind. 544, 13 N.E. 103 (1887), put it:

"One who has been led into a contract upon which he has received something of value cannot ignore the contract, however induced, and proceed in a court of law as if the relations of the parties were wholly unaffected thereby. He cannot, while retaining its benefits, and thus affirming the contract, treat it as though it did not exist. 'He cannot treat it as good in part and void in part, but must affirm or avoid it as a whole.' "

168 N.W. at 658 (citation omitted). Also, "[a] party seeking rescission is not allowed to place conditions on his restoration or offer to make restoration ... except as permitted by Section 9-09-04, N.D.C.C." Blair v. Boulger, 358 N.W.2d at 523; see also Alton's, Inc. v. Long, 352 N.W.2d 198, 200 (N.D.1984). We have said that "compliance with these rules is a condition precedent to the maintenance of an action to rescind." Blair v. Boulger, 358 N.W.2d at 524. ⁵

Section 32-04-21, N.D.C.C., sets forth the statutory basis for rescission of a written contract by adjudication. ⁶ See Hovden v. Lind, 301 N.W.2d 374, 377 (N.D.1981). "This court has often stated that rescission of a contract, whether the object of a suit in equity or an action at law, is governed by equitable principles." Heinsohn v. William Clairmont, Inc., 364 N.W.2d 511, 513 (N.D.1985). Although section 9-09-04, N.D.C.C., does not expressly apply to adjudicated rescission (see section 32-04-21, N.D.C.C.), we have said it "must be complied with if such compliance is necessary to do equity." Volk v. Volk, 121 N.W.2d 701, 706 (N.D.1963). Also, we have said that compliance with these statutory rules is a condition precedent to the maintenance of an action to rescind in equity. Id. The Owans interpret this to mean that a person must restore, or offer to restore, prior to, or at the time of, commencing the action. In light of our resolution of this case, we need not decide whether or not an offer to restore must in all cases occur prior to the commencement of an action to rescind whether it be based in law or in equity. ⁷

Additionally, we note that many exceptions to the rule that one must restore or offer to restore before one can maintain an action at law have developed. See Restatement (First) of Contracts Sec. 349 (1932); Restatement (Second) of Contracts Sec. 384 (1979); 17A Am.Jur.2d Contracts Sec. 593 et seq. (1991). Presumably, these exceptions would have even more significance in an action based in equity where the general rule was that no prior restoration or offer to restore was necessary. See 12A C.J.S. Cancellation of Instruments Sec. 55 (1980) ("[a]s a general rule, a restoration of, or offer to restore, the consideration or benefits is not a condition precedent to the institution of a suit for rescission or cancellation of an instrument"). In the early case of Swan v. Great Northern Ry. Co., this Court noted the following:

"Some courts, while recognizing the correctness of the general rule that, in order to effect rescission, the rescinding party must place the other party in status quo by returning or tendering a return of whatever consideration he has received under the agreement, and the applicability of this rule to compromises and releases, have also recognized certain exceptions to the rule.

"Thus, it has been held that the consideration need not be returned in order to effect a rescission and entitle the defrauded party to maintain an action upon the original claim: (1) Where a tender would have been useless, or where the thing is utterly worthless; (2) where there may be a severance of one part of the contract, in which event a partial rescission is sometimes allowed in the interests of justice; (3) where the plaintiff was entitled to receive the consideration irrespective of the assent...