Cady v. Burton, 92-200

• Decision Date: 06 May 1993
• Docket Number: No. 92-200,92-200
• Citation: 257 Mont. 529,851 P.2d 1047
• Parties: Shawn CADY, Plaintiff, Counter-Defendant and Respondent, v. William D. BURTON and Debra A. Burton, Defendants, Counter-Claimants and Appellants.
• Court: Montana Supreme Court

Page 1047

851 P.2d 1047

257 Mont. 529

Shawn CADY, Plaintiff, Counter-Defendant and Respondent, v. William D. BURTON and Debra A. Burton, Defendants,

Counter-Claimants and Appellants.

No. 92-200.

Supreme Court of Montana.

Submitted on Briefs Dec. 22, 1992.

Decided April 13, 1993.

Rehearing Denied May 6, 1993.

Alan J. Lerner, Kalispell, for defendants, counter-claimants and appellants.

Robert B. Allison, Kalispell, for plaintiff, counter-defendant and respondent.

GRAY, Justice.

William and Debra Burton appeal from the findings of fact, conclusions of law, and judgment entered by the Eleventh Judicial District Court, Flathead County, rescinding two contracts for the sale and purchase of real property. We affirm in part and reverse in part.

We restate the issues on appeal as follows:

1. Did the District Court err in concluding that the contracts prohibited the Burtons from spending the earnest money?

2. Did the District Court err in rescinding the contracts on the basis of material breach?

While on vacation in the Flathead Valley in May of 1988, Shawn Cady (Cady), a resident of California, decided to purchase property in the area. Cady asked Linda Adams (Adams) and Caren Kastner (Kastner), owners of the Pine Cone Kitchen in Bigfork, if the restaurant was for sale and if they knew of other property for sale in the area. Adams and Kastner expressed interest in selling the restaurant and referred Cady to William Burton (Burton), their cousin. Burton and his wife, Debra Burton, were interested in selling a residence (the Echo Lake Residence) and a shopping complex (the Burton Complex).

Over the next several weeks, the parties executed a number of documents relating to the purchase and sale of the Echo Lake Residence, the Burton Complex, and the Pine Cone Kitchen. On May 18, Cady signed a document entitled Receipt and Agreement to Sell and Purchase with Adams and Kastner pertaining to the Pine Cone Kitchen. The agreement required Cady to pay $5,000 as earnest money. Additionally, the agreement provided that Cady could extend the closing for 90 days by paying an additional $5,000 earnest money.

On May 19, Cady and the Burtons executed two documents entitled Receipt and Agreement to Sell and Purchase: one for the Echo Lake Residence and the other for the Burton Complex. By their terms, the agreements were not effective until Cady paid earnest money in an unspecified amount. The agreements contained no other provisions regarding earnest money.

Cady and the Burtons subsequently executed documents entitled Exhibit "A", Addendum to Purchase and Sale Agreement, and Addendum, Part Two. The exhibit and addenda expressly clarified the terms of the two earlier agreements for the sale and purchase of the Echo Lake Residence and the Burton Complex. Under the terms of Exhibit "A", dated May 28, Cady was required to pay $5,000 as earnest money for each property. The first addendum, dated June 6, provided that the closing on both properties would take place on August 1; it permitted Cady to extend the closing on both properties by paying an additional $10,000 earnest money on August 1. The terms "deposit," "depositing" and "held on deposit" were used in the first addendum in reference to the earnest money. The second addendum, dated June 8, also included the term "deposits" in reference to the earnest money.

Although the addenda did not clarify the agreement relating to the Pine Cone Kitchen, the addenda did refer to the Burtons' receipt of initial earnest money in the amount of $15,000, and directed the Burtons to allocate $5,000 of the earnest money to each of the three properties. Accordingly, Cady sent a check to William Burton in the amount of $15,000. Burton gave $5,000 of the earnest money to Adams and Kastner.

In mid-July, Burton requested that Cady send additional earnest money even though it was not due until August 1. At that time, Burton informed Cady that he had spent the initial earnest money and that he needed the additional earnest money for personal expenses, possibly to avoid bankruptcy. Cady refused to send additional earnest money unless it was deposited in escrow or otherwise withheld from the Burtons' personal use; Burton refused any arrangement that would prevent him from having immediate use of the money. The parties did not close on the properties on August 1, nor did Cady send the additional earnest money required to extend the closing date.

On September 20, Cady filed suit against the Burtons for rescission of the contracts relating to the Echo Lake Residence and the Burton Complex. In addition, Cady alleged that Burton had acted as an agent of Adams and Kastner and, on that basis, sought rescission of the contract regarding the Pine Cone Kitchen. Cady also sought a $15,000 judgment against the Burtons to recoup the earnest money paid on the three properties. The Burtons counterclaimed, seeking specific performance of the Echo Lake Residence and Burton Complex contracts and damages for Cady's alleged breach of the contracts and the implied covenant of good faith and fair dealing. The Burtons subsequently dropped their specific performance claim.

A bench trial was held on November 12, 1991. During the trial, the District Court granted partial summary judgment in favor of the Burtons, dismissing Cady's claim relating to the Pine Cone Kitchen. At the conclusion of the trial, the District Court orally issued its findings and judgment. The court stated that its summary adjudication of the Pine Cone Kitchen contract was premised on its finding that Kastner and Adams were the real parties in interest. The court also found that the terms of the contracts regarding the Echo Lake Residence and the Burton Complex prohibited the Burtons from spending the earnest money prior to closing and, therefore, that the Burtons had breached the contracts. Furthermore, the District Court found the breach to be material. The District Court apparently dismissed the Burtons' counterclaim on the basis that they had committed a material breach that excused Cady's performance under the contract. The court awarded Cady $10,000 plus interest, representing a refund of the earnest money paid by Cady on the Echo Lake Residence and the Burton Complex.

On December 31, 1991, the court filed findings of fact, conclusions of law and judgment consistent with its bench ruling. The court concluded that Cady was "entitled to withdraw" from the contract and to "request refund" of the earnest money relating to the Echo Lake Residence and the Burton Complex. The court denied the Burtons' post-trial motions and the Burtons appealed.

Did the District Court err in concluding that the contracts prohibited the Burtons from spending the earnest money?

The District Court found that the original buy-sell agreements, together with Exhibit "A" and the two addenda, constituted the contracts relating to the sale and purchase of the Echo Lake Residence and the Burton Complex. The court also found that while the initial buy-sell agreements did not address the disposition of the earnest money, the addenda included the terms "deposit," "depositing" and "held on deposit." The District Court concluded that the payment of the earnest money was a deposit to be held by the Burtons and that the earnest money was not available to spend at their discretion until closing.

The Burtons contend that the District Court erred in determining that the terms "deposit," "depositing" and "held on deposit" applied to the initial earnest money. They assert that the court relied almost exclusively on the following provision in the first addendum to conclude that they were prohibited from spending the earnest money:

4. If buyer agrees to drop the contingency of the sale of buyer's residence in California, then interest on the remaining principal due on the Pine Cone Kitchen and the Echo Lake Residence will commence on January 1, 1989. Interest will be at 10 1/2 percent and will be added monthly to the remaining balance. The principal balance shall be reduced by earnest money payments held on deposit.

According to the Burtons, this provision prevents them from spending additional earnest monies received, but not the initial earnest money, if Cady dropped a contingency provision relating to the sale of his California residence. Nothing in the quoted language, however, creates differing obligations on the Burtons' part with regard to initial versus subsequent earnest money payments.

The Burtons also assert that the referenced provision applies by its terms only to earnest money relating to the Pine Cone Kitchen and Echo Lake Residence and, therefore, does not prevent them from spending the earnest money relating to the Burton Complex. This contention ignores the recurrence of the terms "deposit," "depositing" and "held on deposit" in the two addenda. The following provisions of the first addendum, which are applicable to the contracts for both the Echo Lake Residence and the Burton Complex, are particularly relevant:

3. This sale is contingent upon the sale of Buyer's home in California. If seller receives an offer to sell either the Echo Lake Residence or the Burton's Complex, or both, then buyer shall have 72 hours notice to drop this contingency. If buyer declines to drop the contingency, then seller may sell any or all of the properties to a new purchaser. Upon the closing of the sale to the new purchaser, buyer shall receive a full refund of all earnest money paid to date. Until the sale to the new purchaser closes, the purchase agreements between buyer and seller remain in full force and seller shall continue to hold earnest money.

. . . . .

5. Seller acknowledges receipt of the initial earnest money deposit of $15,000.00, with $5,000.00 allocated to the Pine Cone Kitchen, $5,000.00 to the Echo Lake Residence and $5,000.00 to the Burton's Complex.

Furthermore, the second addendum contains the following provision:

This additional Addendum and the previous...