Honey v. Henry's Franchise Leasing Corp. of America

• Decision Date: 05 July 1966
• Docket Number: S.F. 21908
• Citation: 64 Cal.2d 801,52 Cal.Rptr. 18,415 P.2d 833
• Parties: , 415 P.2d 833 Clarence HONEY, Plaintiff, Cross-Defendant and Respondent, v. HENRY'S FRANCHISE LEASING CORPORATION OF AMERICA, Defendant, Cross-Complainant and Appellant. In Bank
• Court: California Supreme Court

Page 18

52 Cal.Rptr. 18

64 Cal.2d 801, 415 P.2d 833

Clarence HONEY, Plaintiff, Cross-Defendant and Respondent, v. HENRY'S FRANCHISE LEASING CORPORATION OF AMERICA, Defendant, Cross-Complainant and Appellant.

S.F. 21908.

Supreme Court of California,

In Bank.

July 5, 1966.

Rehearing Denied Aug. 17, 1966.

Heller, Ehrman, White & McAuliffe, John P. Borgwardt and M. Laurence Popofsky, San Francisco, for defendant, cross-complainant and appellant.

McCloskey, Wilson, Mosher & Martin and Theodore C. Carlstrom, Palo Alto, for plaintiff, cross-defendant and respondent.

John R. Hetland, Berkeley, as amicus curiae.

TRAYNOR, Chief Justice.

In March 1962 plaintiff contracted to purchase real and personal property from defendant for $135,000. He paid $25,000 down and agreed to pay $845 per month until the total price was paid. Plaintiff made the monthly payments until February 1963. He then brought this action to rescind the contract for material misrepresentation of fact and to recover what he had paid. Defendant answered and cross-complained. It denied that plaintiff was entitled to rescission and sought to establish and foreclose a vendor's lien, to recover damages, and to quiet title. The trial court found that there was no basis for rescission and that plaintiff was in default. It entered judgment quieting title in defendant on condition that it pay to plaintiff $16,575, the sum found to be the difference between the $33,450 plaintiff paid under the contract and the rental value of the property while it was in plaintiff's possession. Defendant appeals, contending that the trial court erred in requiring it to refund any of the payments.

Even a wilfully defaulting vendee may recover the excess of his part payments over the damages caused by his breach. (Freedman v. Rector, Wardens and Vestrymen etc., 37 Cal.2d 16, 22--23, 230 P.2d 629, 31 A.L.R.2d 1; see also Caplan v. Schroeder, 56 Cal.2d 515, 519, 15 Cal.Rptr. 145, 364 P.2d 321, and cases cited.) We agree with defendant's contention that the trial court erred in measuring its damages under this rule by the rental value of the property while plaintiff was in possession instead of by the loss of the benefit of defendant's bargain. (See Civ.Code, § 3307.) ¹ Since the trial court found that the fair market value of the property at the time of the trial was $90,000, defendant contends that the difference between the contract price of $135,000 and the fair market value of the property exceeded plaintiff's part payments of $33,450.

The rule of the Freedman case precludes penalties and forfeitures by denying the vendor the right on the vendee's default to retain both the property and any payments that have been made in excess of the actual damages caused by the default. The Freedman case, however, did not restrict the right of a vendor to realize the benefit of his bargain. (See Baffa v. Johnson, 35 Cal.2d 36, 39, 216 P.2d 13; Barkis v. Scott, 34 Cal.2d 116, 120--121, 208 P.2d 367.) Instead, it invoked the provisions of the Civil Code governing damages to determine the amount of the vendee's recovery. (37 Cal.2d at pp. 21--22, 230 P.2d 629.) Since section 3307 affords the vendor the benefit of his bargain on the vendee's default, defendant properly invokes it in this case.

By seeking to quiet title, defendant has not elected to rescind the contract. (Barkis v. Scott, 34 Cal.2d 116, 120--121, 208 P.2d 367, and cases cited.) When a contract is rescinded or declared unenforceable because of the statute of frauds, the purpose of damages is to put the parties in the position they were in before the contract rather than to give either party the benefit of his bargain. (Heintzsch v. La France, 3 Cal.2d 180, 182--183, 44 P.2d 358; Roberts v. Lebrain, 113 Cal.App.2d 712, 716--717, 248 P.2d 810.) When a vendee has materially breached his contract, the vendor has an election to rescind or to enforce the contract. (See Bird v. Kenworthy, 45 Cal.2d 656, 660, 277 P.2d 1; Luz v. Lopes, 55 Cal.2d 54, 61, 10 Cal.Rptr. 161, 358 P.2d 289; Behrendt v. Abraham, 64 A.C. 189, 195, 49 Cal.Rptr. 292, 410 P.2d 828.) The defaulting vendee, however, has no such election. Otherwise, the contract of sale would in effect be a lease with an option to purchase. The vendee would receive the benefit of any increase in the value of the property, and the vendor would bear the entire risk of any decrease in its value. Such protection to a defaulting vendee would go beyond that provided by anti-deficiency legislation, which places the risk of depreciation in value on the vendor only to the extent that the value of the property may decrease below the amount still owing on the contract. (Code Civ.Proc., § 580b; see Roseleaf Corp. v. Chierighino, 59 Cal.2d 35, 42, 27 Cal.Rptr. 873, 378 P.2d 97.)

Amicus curiae urges that the remedies for breaches of land-sale contracts should be reconsidered in the light of the distinct purposes such contracts serve. He points out that remedies that are appropriate for the breach of a buy-sell or marketing contract may not be appropriate for the breach of an installment contract entered into primarily as a security device. Since rules precluding forfeitures and anti-deficiency legislation have put the latter type of contracts substantially on a par in many respects with mortgages and deeds of trust, amicus curiae suggests that the law governing those security devices should be adopted with appropriate modifications in determining the remedies for breaches of installment contracts. On the vendee's breach, neither the vendee nor the vendor would have an election to rescind the contract, on the ground that rescission in effect converts a debt secured by the property into a lease of the property, a result not contemplated by either of the parties. In his view, the appropriate remedy is a judicial...