Downing v. Stiles, 5503

• Decision Date: 05 November 1981
• Docket Number: No. 5503,5503
• Citation: 635 P.2d 808
• Parties: 32 UCC Rep.Serv. 995 Charles DOWNING and Christine Downing, Appellants (Plaintiffs), v. Janice STILES and Security State Bank of Basin, Appellees (Defendants).
• Court: Wyoming Supreme Court

Page 808

635 P.2d 808

32 UCC Rep.Serv. 995

Charles DOWNING and Christine Downing, Appellants (Plaintiffs), v. Janice STILES and Security State Bank of Basin, Appellees (Defendants).

No. 5503.

Supreme Court of Wyoming.

Nov. 5, 1981.

R. B. Bowman and Mark Reynolds, of Bowman & Reynolds, Lovell, for appellants.

Nancy G. Hinckley and Robert A. Gish, Basin, for appellees.

Before ROSE, C. J., and RAPER, THOMAS, ROONEY and BROWN, JJ.

ROONEY, Justice.

Appellants-plaintiffs carried on a retail liquor business (hereinafter referred to as Rustler Bar) in a building owned by them in Basin, Wyoming. They were also partners with appellee-defendant Stiles (hereinafter referred to as Stiles) in a restaurant business styled Maverick Recreation Center (hereinafter referred to as Maverick), which was carried on in the basement of the same building. Much of Maverick's business resulted from patronage by Rustler Bar's customers.

Appellants sold Rustler Bar and the building to Dennis D. Morris, the person who had been managing Rustler Bar for appellants. Subsequently, on June 12, 1976, appellants sold their half interest in Maverick to Stiles. The terms of this sale were set forth in a purchase agreement. The purchase price was $25,000.00 to be paid in semi-annual installments. Stiles was to maintain "adequate" casualty insurance on the fixtures and inventory, with the proceeds of insurance to be paid as interest shall appear. A schedule of fixtures and inventory was attached to the agreement, listing the value thereof at $7,824.60. Stiles insured the fixtures and inventory for $25,000.00 ¹ with Firemen's Insurance Company of Newark, New Jersey (hereinafter referred to as insurance company). The policy did not contain a loss payable clause to anyone other than Stiles. Stiles gave appellants a chattel mortgage on the fixtures and inventory, but it was not recorded. Stiles also gave appellants a promissory note dated June 12, 1976 for $25,000.00 payable in semi-annual installments and with interest at 10% per annum. With appellants' help, Stiles obtained a five-year lease from Rustler Bar for the basement of the building.

Thereafter, the business of Rustler Bar decreased, and the bar finally ceased doing business in June 1978. On January 21, 1979, a fire destroyed the building and its contents. Stiles stopped making payments on the note on December 12, 1978.

On April 17, 1978, Stiles gave a promissory note for $6,625.00 to appellee-defendant Security State Bank of Basin (hereinafter referred to as bank). It drew interest at the rate of 10%. A security agreement and financing statement covering the equipment of Maverick to secure payment of the note was recorded. The note has not been paid.

Appellants set forth two claims for relief in their amended complaint. The first claim was against Stiles on the June 12, 1976 note for the balance due of $19,612.00 with interest. The second claim was against Stiles, the bank and the insurance company. It alleged that the insurance company had issued a draft payable to appellants, to Stiles and to the bank in the amount of $25,000.00 and that the proceeds thereof should be used first to pay appellants' claim.

The parties then stipulated that the proceeds of the draft be deposited through the court in an interest-bearing account in the names of the attorneys of appellants, Stiles and bank, subject to disbursement in accordance with the judgment of the court or on mutual agreement of the parties, and that the insurance company be dismissed as a defendant. ²

In its amended answer and crossclaim, bank requested judgment against Stiles for the amount of her note dated April 17, 1978 with interest, attorney fees and costs. ³

After a trial to the court, the court found that Stiles should be relieved of further payment on her note to appellants under the "doctrine of commercial frustration," inasmuch as Maverick "was dependent on the business with the Rustler Bar" and "the value of performance was destroyed" by the failure of Rustler Bar. It found, however, that appellants were entitled to a judgment against Stiles for $3,065.12 to be paid from the insurance proceeds. ⁴ It also gave bank a judgment against Stiles on the note dated April 17, 1978, the same to be in the amount of the note, $6,625.00 with interest and with attorney fees in the amount of $2,500.00, all to be paid from the insurance proceeds. It found that Stiles should have the remainder of the insurance proceeds.

Appellants word the issues on appeal as follows:

1. "Did the trial court err in permitting Defendant Security State Bank of Basin to share in the fire insurance proceeds, even though the bank was not a party to the fire insurance contract?"

2. "Did the trial court err in applying the doctrine of 'Commercial Frustration' to the business failure of the 'Rustler Bar', or was this an ordinary business risk which was foreseeable by the parties?"

3. "Did the trial court err in computing the insurable interest of plaintiffs Charles Downing and Christine Downing in the proceeds of the insurance, to be only $3,065.12, rather than the unpaid balance owed by Defendant Janice Stiles to Plaintiffs under the purchase agreement and promissory note, which amounted to $19,613.00 (sic) principal and $4,364.85 interest, or a total of $23,976.85?"

4. "Did the trial court err in allowing Defendant Security State Bank of Basin to recover the sum of $2,500.00 in attorney fees although no evidence was presented showing any such amount was paid by said Defendant, or billed by its attorney?"

We find that the trial court erred in applying the doctrine of "commercial frustration" and in allowing the bank to recover attorney fees without foundation evidence to support the amount thereof. Although the lien interests of the bank and appellants were less than the total amount of the insurance proceeds, all of such proceeds are subject to the claims of the parties pursuant to their stipulation. Accordingly, we reverse and remand the case for the purpose of entering an appropriate judgment.

FRUSTRATION

With reference to "frustration," the trial court made the following two findings upon which Stiles was "relieved of any further obligation under the purchase agreement * * * and the note * * * ":

"5. That the evidence shows that the Maverick Recreation Center, owned by the Defendant, Stiles, was dependent on the business with the Rustler Bar, and that without it, the center was not a viable operation. That the value of performance was destroyed by the frustrating event, which was the failure of the Rustler Bar.

"6. That under the doctrine of commercial frustration, the Defendant, Stiles, should be relieved from any further payments under and by virtue of her Contract with the Plaintiffs."

The doctrine of "commercial frustration" or "frustration of the venture" or "discharge of commercial contract by supervening frustration" in the law of contracts "has been said to be a relatively modern one." 17A C.J.S. Contracts § 463(2)b. See Calamari & Perillo, Contracts 2d ed. § 13-1. It grew out of the so-called coronation cases initiated in Krell v. Henry, 2 K.B. 740 (1903) wherein a defendant was excused from payment for use of an apartment from which to view the coronation proceedings of King Edward VII because the proceedings were cancelled when the king became ill. Calamari & Perillo, supra, § 13-10; Howard v. Nicholson, Mo.App., 556 S.W.2d 477, 481 (1977). It is akin to the doctrine of impossibility of performance of a contract, and the two doctrines are often treated under the same heading in encyclopedias and textbooks, e. g., 18 Williston on Contracts (3rd ed.) § 1946, et seq.; 6 Corbin on Contracts, § 1353, et seq.; Calamari & Perillo, supra, § 13-1; 17A C.J.S. Contracts § 462(2); 17 Am.Jur.2d Contracts § 400, et seq. However, the generally recognized distinction between the two doctrines lies in the inability to literally perform (impossibility) and the impracticability to perform (commercial frustration). 17 Am.Jur.2d Contracts § 401; 17A C.J.S. Contracts § 463.

" * * * The doctrine of commercial frustration is close to but distinct from the doctrine of impossibility of performance. Both concern the effect of supervening circumstances upon the rights and duties of the parties but in cases of commercial frustration '(p)erformance remains possible but the expected value of performance to the party seeking to be excused has been destroyed by a fortuitous event, which supervenes to cause an actual but not literal failure of consideration.' Lloyd v. Murphy, 25 Cal.2d 48, 153 P.2d 47, 50 (Cal. en banc 1944)." Howard v. Nicholson, supra, 556 S.W.2d at 482.

More than one rationale has been advanced for the doctrine of commercial frustration:

"In construing contracts, the doctrine reads into them, in the absence of repellent circumstances, an implied condition that the promisor shall be absolved from performance if, through a supervening circumstance for which neither party is responsible, a thing, event, or condition which was essential so that performance would yield to the promisor the result which the parties intended him to receive, fails. The general principle underlying the doctrine of commercial frustration is that where the purpose of a contract is completely frustrated and rendered impossible of performance by a supervening event or circumstance, the contract will be discharged. The doctrine is predicated on the premise of giving relief in a situation where the parties could not provide themselves, by the terms of the contract, against the happening of subsequent events, so, if the intervening or supervening event was reasonably foreseeable, or was controllable by the parties, they may not invoke the principles of the doctrine as a defense to escape their obligations. It applies to executory contracts alone." (Emphasis added.) 17A C.J.S. Contracts § 463(2)b, pp. 620-621.

"Changed conditions supervening during the term of a contract...