Foster v. Knutson

• Decision Date: 07 November 1974
• Docket Number: No. 43068,43068
• Citation: 527 P.2d 1108,84 Wn.2d 538
• Parties: , 15 UCC Rep.Serv. 1127 Myron S. FOSTER, Jr., et al., Appellants, v. Ronald L. KNUTSON et al., Respondents and Cross-Appellants, Growers Credit Corporation et al., Defendants.
• Court: Washington Supreme Court

Page 538

84 Wn.2d 538

527 P.2d 1108, 15 UCC Rep.Serv. 1127

Myron S. FOSTER, Jr., et al., Appellants, v. Ronald L. KNUTSON et al., Respondents and Cross-Appellants Growers Credit Corporation et al., Defendants.

No. 43068.

Supreme Court of Washington, En Banc.

Nov. 7, 1974.

Dow & Foster, Earl W. Foster, Wenatchee, for appellants.

J. Harold Anderson, Terrence M. McCauley, Cashmere, for appellees.

Keller, Rohrback, Waldo, Moren & Hiscock, Melvin F. Buol, Seattle, Frederick M. Crollard, Jr., Wenatchee, for respondents and cross-appellants.

UTTER, Associate Justice.

The Superior Court, in a nonjury trial, awarded judgment in favor of Myron and Earl Foster and Janet Conrad, appellants for $15,703.35 against Ronald and Jack Knutson and their wives, respondents and cross-appellants.

Appellants claim they are entitled to a deficiency judgment for approximately $115,000 and to foreclose on mortgages given as security after respondents defaulted on a contract to purchase corporate stock. Respondent/cross- appellants claim damages for wrongful rescission of the contract and further ask for refund of all sums paid under the contract of purchase.

We reverse the trial court and hold for appellants and direct that a deficiency judgment be entered and foreclosure against the supplemental mortgages be allowed to proceed.

The primary question we consider is whether or not parties to a contract who deal at arm's length may, themselves, determine what acts are sufficiently serious to constitute a breach of obligation entitling the non-breaching party to the remedies bargained for without alteration of the terms of the agreement by a court.

On September 7, 1968, respondents Knutson and one Herbert Thomas entered into a contract to purchase from appellants Foster all of the outstanding stock of Hesperian Orchards, Inc., a Washington corporation engaged in fruit growing and warehousing in the Wenatchee Valley. The purchase price was $453,500 with a downpayment of $131,585. As security for payment of the purchase price, the total number of shares being purchased were deposited in escrow with the Seattle-First National Bank. The downpayment of $131,585, required by the sellers, was borrowed by respondents from Oneonta Trading Corporation, and respondents gave their promissory note in that amount to the lender.

Oneonta retained the first $131,585 of net proceeds plus interest from the crop produced by Hesperian Orchards as payment of its note by respondents. To avoid the appearance the corporate income had been used to satisfy the individual obligations of respondent purchasers, the amount paid to Oneonta Trading Corporation was entered on the corporate books as salaries and loan to Thomas and respondents Knutson.

In the winter of 1968--69, a disastrous freeze struck the Wenatchee Valley area destroying as much as two-thirds of the older apple trees in the valley. Hesperian Orchards, Inc. was without the financial reserves to meet a disaster of this severity. As a direct result of this freeze, the 1969 apple crop of Hesperian Orchards was severely reduced in value, and the orchard suffered extreme financial loss.

A dispute had also arisen between the parties concerning whether the annual payments called for in the contract between them included or were exclusive of interest to the date of payment. In addition to this dispute, the sellers were of the view that the contract purchasers had failed to maintain proper corporate books and records. The sellers also objected to the salaries and loans made by the corporation to the purchasers, which moneys allowed the purchasers to 'bootstrap' their acquisition of the corporation. For all these reasons, sellers declared a default in the contract, obtained the pledged stock from the bank and gave notice of their intention to sell the stock.

No sale of stock, however, was consummated at that time. Instead, a new agreement was entered into on April 13, 1970 between the parties to this lawsuit, Thomas not being a party to this later agreement. In the new agreement, the effects of the 1968--69 freeze were taken into account and principal payments owing under the original agreement were deferred. Purchasers conceded in the April 13th agreement that they had 'failed to keep proper books and records (and) agree(d) that the future maintenance of such books and records is paramount and that this requirement runs to the inducement for this agreement and modification.'

The modification agreement of April 13th further provided that (1) 'As part of the inducement given by Purchasers to Sellers for modification of this contract, the Purchasers have executed and delivered to the Sellers certain mortgages of assets, which mortgages shall be supplemental security'; (2) In the event of default sellers may 'elect to declare all payments due and delinquent and bring suit to recover the same as so accelerated or may pursue any remedies provided under the Uniform Commercial Code of the State of Washington'; (3) 'The Purchasers agree to provide the Sellers with balance sheets and operating statements showing the condition of the corporation at two-month intervals beginning June 1, 1970 . . .'; (4) 'Purchasers shall cause the corporation to carry (adequate fire and liability) insurance . . .'; and (5) 'The corporation shall at all times keep all taxes and assessments paid upon the properties.'

On December 1, 1970, appellants gave notice to respondents that respondents were in default of the April 13th agreement, and that unless the defaults were cured within 30 days appellants would elect to declare the full purchase price due and seek all remedies available to them according to law and the terms of the contract as modified between the parties. Among the items of default listed by appellants were (1) respondents' failure to make a $13,000 contract payment due November 30, 1970, (2) failure to maintain adequate records sufficient to determine the financial position of the corporation, (3) failure to timely pay debts, taxes and leases of the corporation, and (4) failure to keep payment of insurance premiums current.

Respondents made their $13,000 contract payment December 24, 1970, but did not cure their other defaults within the allotted 30 days. On January 6, 1971, appellants notified respondents that Hesperian Orchards corporate stock which was being purchased by respondents, and which was then held as security for payment of its full purchase price, would be disposed of at a public auction sale on February 9, 1971. Respondents made no objection to the February 9th sale. At the public auction, appellant-sellers bid for the stock against other independent private parties and ultimately purchased the stock for $120,000.

A deficiency of $115,000 plus interest was yet owing by respondents on the stock purchase contract. Sellers then went into Superior Court seeking two remedies. They sought a deficiency judgment of $115,000 plus interest pursuant to the express terms of the April 13th agreement between the parties and as provided for in RCW 62A.9--504(2) ¹ and a judicial foreclosure of respondents' supplemental real estate mortgage given to appellants pursuant to the terms of the April 13th modification agreement.

The trial court found that (1) sellers held the Hesperian Orchards stock as security for payment of the purchase price of the stock; (2) the mortgage on purchasers' real estate was given to sellers as additional security for the stock purchase; (3) sellers gave purchasers adequate notice to cure defaults or sellers would accelerate the purchase obligation; (4) purchasers had actual knowledge of the public auction and sale of the stock; and (5) at the time of the public auction the purchasers were in default on their purchase agreement. The trial court also made conclusions of law that (1) the manner in which the stock was publicly auctioned, the foreclosure of the purchasers' interest in it, and the manner of giving notice of sale were reasonable; and (2) the purchasers, by their inaction prior to the stock auction, waived their right to object to the sale.

The record discloses ample evidence in support of these findings of fact.

The trial court, however, also held that 'equity' would not allow sellers a deficiency judgment against respondent-purchasers on the stock purchase contract, and foreclosure of respondents' real estate mortgage was held in abeyance for 6 months. The stated grounds were:

Because of the absence of testimony of Substantial default, the harsh prayer for deficiency judgment will not be granted . . . To grant such a prayer on the basis of the entire evidence herein would be unjust and inequitable.

(Italics ours.)

The trial court's error derives principally from its misapprehension of the role lawfully allocated to it in its administration of justice to disputing contracting parties before it. Because of the way a court exercises its powers, it cannot escape assuming a role in the litigation. Courts are constantly engaged in recognizing and defining competences and asserting managerial competences of their own. Each such decision bears a dual aspect: (1) that of defining the court's own role and, by necessary implication, that of the parties, and (2) that of playing the role which the court has assigned to itself. This is a question of allocation of competences fundamental to our state law. Although the question of competences most frequently arises when courts are called upon to resolve conflicts between levels or branches of government, the issue is no less relevant when the conflict is between private and public authority. See Jaffe, Law Making by Private Groups, 51 Harv.L.Rev. 201 (1937). Recently the United States Supreme Court addressed itself to a similar role-allocation issue in Columbia Broadcasting System, Inc. v. Democratic National Comm., 412 U.S. 94, 93 S.Ct. 2080, 36 L.Ed.2d 772 (1973). There the court described the question for decision as...