Freedman v. Continental Service Corp., 10-40-3436-0

• Decision Date: 19 August 1980
• Docket Number: No. 1,CA-CIV,No. 10-40-3436-0,D,10-40-3436-0,1
• Parties: Stewart S. FREEDMAN and George Guckenberger, III, Plaintiffs-Appellees and Cross-Appellants, v. CONTINENTAL SERVICE CORPORATION, an Arizona Corporation; and The First National Bank of Arizona, a National Banking Association as Trustee under its Trustefendants-Appellants and Cross-Appellees. 4573.
• Court: Arizona Court of Appeals

Page 487

622 P.2d 487

127 Ariz. 540

Stewart S. FREEDMAN and George Guckenberger, III, Plaintiffs-Appellees and Cross-Appellants, v. CONTINENTAL SERVICE CORPORATION, an Arizona Corporation; and The First National Bank of Arizona, a National Banking Association as Trustee under its Trust No. 10-40-3436-0, Defendants-Appellants and Cross-Appellees.

No. 1 CA-CIV 4573.

Court of Appeals of Arizona, Division 1, Department A.

Aug. 19, 1980.

Rehearing Denied Oct. 20, 1980.

Review Denied Nov. 4, 1980.

Kaplan, Kaplan, Jacobowitz & Hendricks, P. A. by Henry Jacobowitz, Phoenix, for plaintiffs-appellees and cross-appellants

Jennings, Strouss & Salmon by Thomas J. Trimble, Phoenix, for defendant-appellant and cross-appellee Continental Service Corp.

Fennemore, Craig, von Ammon & Udall by Francis J. Slavin, Jr. and Patrick Wm. Paterson, Phoenix, for defendant-appellant and cross-appellee First Nat. Bank of Arizona.

OPINION

FROEB, Presiding Judge.

This case involves a forfeiture of the buyer's interest in a land contract referred to as a subdivision trust agreement. The main issue is whether the trial court can exercise its equitable power to invalidate a forfeiture which complied with all applicable legal requirements. A related question is whether notices mailed to but not received by the buyer are sufficient to sustain the forfeiture.

The contract involved is what is generally known in Arizona as a "subdivision trust agreement." In it, the seller of land, referred to as the "first beneficiary," transfers title to a trustee under provisions of a trust. Upon payment of specified amounts, the buyer of the land, referred to as the "second beneficiary," is entitled to have designated portions of the land released and conveyed at various times. Usually a subdivision trust is entered into for the purpose of allowing the buyer to obtain ownership of portions of land over a period of time in order to develop it for resale.

The agreement in this case was made in 1961 when William and Viola Shafer sold certain real property in Maricopa County to Stewart S. Freedman and established a subdivision trust with Phoenix Title and Trust Company as trustee. In 1962, William and Viola Shafer created a personal family trust with Phoenix Title as trustee and transferred their interest as first beneficiary of the subdivision trust to Phoenix Title as trustee under the subdivision trust. In 1973, Phoenix Title discontinued its personal trust operations and the Shafer personal trust (which included their interest as first beneficiary of the subdivision trust) was transferred to First National Bank of Arizona as trustee. The subdivision trust itself remained under the administration of Phoenix Title. In another change, Continental Service Corporation (hereafter referred to as Continental) became the successor to Phoenix Title as trustee under the subdivision trust.

The subdivision trust required that the second beneficiary make, on or before May 30 of each year, annual payment of principal and interest in specified amounts. The first five annual installments (1962 through 1966) were regularly paid by Freedman. However, the payments due for the next five years (1967 through 1971) were not paid until May 1972. The evidence indicates that this was due to Freedman's desire to divert the money due on the contract at six percent interest into other investments for a higher rate of return.

In May of 1972, Freedman found a purchaser for a portion of the trust property and paid $55,276.96 to Continental in order to obtain release of the land from the trust. The amount was first applied to pay delinquent payments of 1967 through 1971 and the then due 1972 payment. The remainder was applied as a prepayment of the part of the outstanding principal balance. No further annual payments were made by Freedman, although he received notices of payment due from Continental. Freedman had instructed his bookkeeper, Hal Perrine, not to make any payments when a "notice of payment due" was received, but rather to wait until a notice of default was given.

In May 1976, William Shafer received an accounting from First National Bank which showed the balance due for the subdivision trust had not been reduced since 1972. At Shafer's request, the First National Bank, holding the seller's interest as first beneficiary of the subdivision trust, instructed Continental by letter to commence a "default action" pursuant to the terms of the trust. Continental did so by mailing to Freedman, at the address he provided, a "Notice of Default and Insistence of Time of the Essence Clause," hereafter referred to as the "notice of default." The notice provided, in substance, that all amounts due and owing were to be paid to Continental within thirty days. The notice was sent June 25, 1976, by mail as provided by the terms of the trust and the customary procedures used by Continental. No payment being received, Continental mailed to Freedman a "Notice and Declaration of Forfeiture and Acceleration," hereafter referred to as the "notice of forfeiture."

After the grace period allowed by A.R.S. § 33-741 expired without redemption by Freedman, Continental conveyed title to the subdivision trust property to First National Bank, as first beneficiary, by special warranty deed dated June 13, 1977. The trust file was then closed by Continental.

On June 22, 1977, Freedman, through his attorney, sent a letter to Continental and offered to pay the entire unpaid principal balance and accrued interest due under the trust agreement in exchange for title to the trust property. This was followed, on July 5, 1977, by a tender of personal checks for $72,000.00, which were returned.

The complaint in this action was thereafter filed on August 19, 1977, praying that the conveyance of the trust property to First National Bank and the underlying trust forfeiture be declared void. First National Bank and Continental thereafter filed motions for summary judgment on the ground that the forfeiture had been completed in strict compliance with the terms of the trust agreement and in accordance with Arizona law and should not be set aside. Freedman filed a cross-motion for summary judgment on the ground that notice of the default and insistence on time of the essence clause had not been personally served upon him, nor did he receive actual notice thereof and that to deny the requested relief would be inequitable. The trial court denied summary judgment in favor of First National Bank and Continental and granted Freedman's motion. In a post-judgment hearing, the trial court explained that its ruling was based upon application of equitable principles.

The issues on appeal are narrow. Freedman argues that the subdivision trust agreement, properly construed, does not alter what he argues is a legal requirement that he actually receive notice of the first beneficiary's intent to require strict performance and to insist upon the "time-of-the-essence" provision. Since he avers he did not receive the notice, he contends that the forfeiture must be set aside on this ground. Other than this, there is no argument that the procedures for forfeiture expressed in the agreement were not followed correctly. There is no contention that the grace period for forfeiture set forth in A.R.S. § 33-741 was not fully allowed. Alternatively, Freedman argues that even if notice of strict compliance need only have been mailed but not necessarily received, the court may exercise its equitable power to set aside the forfeiture.

Appellants Continental and First National Bank contend that the agreement requires only a correct mailing of both the notice requiring strict compliance and the notice of forfeiture and not actual receipt. They argue alternatively that if actual receipt is required there is a genuine issue of fact as to whether it was received, justifying reversal of the summary judgment and a trial on that question. They also argue that if receipt of notice is not required, the correct mailing of the required notices is undisputed and they were entitled to summary judgment upholding the forfeiture. They contend that the court may not exercise its equitable powers to set aside a forfeiture made in strict compliance with Arizona law and the written agreement of the parties.

With respect to enforcement of the forfeiture provisions of land contracts generally, Arizona law is well settled as to what is required of the seller. When he has waived strict performance of the provisions of the agreement concerning payment of installments, he cannot forfeit for subsequent failure to pay until the buyer is notified of the seller's intention to insist upon strict performance and given a reasonable opportunity to bring payments to date. Arizona Title Guarantee & Trust Company v. Modern Homes, Inc., 84 Ariz. 399, 330 P.2d 113 (1958); Onekama Realty Company v. Carothers, 59 Ariz. 416, 129 P.2d 918 (1942); Jahnke v. Palomar Financial Corporation, 22 Ariz.App. 369, 527 P.2d 771 (1974). Having done so, if the buyer thereafter defaults, the seller may forfeit the interest of the buyer and cancel the agreement in accordance with its terms. Freedman does not contend that appellants failed to follow these steps.

We turn first to the question of notice. Both sides agree with the basic rule that where notice is involved, actual notice is required, except where otherwise provided by contract or statute. Goodman v. Jones, 102 Ariz. 532, 433 P.2d 980 (1967).

Paragraph VIII of the subdivision trust agreement deals with notice and, in relevant part, reads as follows: ¹

Time is of the essence of this agreement and of each and every term and condition herein, and full performance by the Second Beneficiaries of all of their obligations hereunder is and shall be a condition precedent to their right to have a conveyance of the lots held hereunder and their right to have performance hereof.

If default be made in the payment of principal or interest of...