Johnston v. State Bank

• Decision Date: 25 February 1972
• Docket Number: No. 54752,54752
• Parties: 10 UCC Rep.Serv. 855 Beryle L. JOHNSTON et al., Appellants, v. The STATE BANK, Appellee.
• Court: Iowa Supreme Court

Page 126

195 N.W.2d 126

10 UCC Rep.Serv. 855

Beryle L. JOHNSTON et al., Appellants, v. The STATE BANK, Appellee.

No. 54752.

Supreme Court of Iowa.

Feb. 25, 1972.

Kersten, Opheim & Estes, Fort Dodge, for appellants.

Hamilton & Schill, Fort Dodge, and Alan Loth, San Jose, Cal., for appellee.

UHLENHOPP, Justice.

This appeal turns on whether a letter from a bank, notifying a contractor that the bank had made a loan commitment to certain customers, constituted a 'letter of credit.'

Mr. and Mrs. Dale G. Trier desired to build a house in Fort Dodge, Iowa. They saw some plans in a magazine for a two-story house. They talked with Beryle L. Johnston, an experienced contractor. He obtained the house plans from the magazine. The plans showed that the ground floor of the house contained 864 square feet.

Triers selected a lot in a housing development and relied on Johnston to comply with building restrictions and permits. Johnston was familiar with such things, having had difficulty with restrictions on a nearby lot in the same development two years before.

Johnston obtained an abstract of title to the lot. The abstract contained an entry showing this restriction on the lots in the development:

In any case no dwelling shall be permitted on any lot described herein, having a ground floor square foot area of less than 1,200 square feet in the case of a one structure (sic), nor less than 1,000 square feet in the case of a one and one-half or two story structure, exclusive of porches, porticos, entrance ways, airways or garages.

Johnston purchased the lot. The deed to him was 'subject to building restrictions, easements and zoning ordinances of record.'

Triers entered into a written contract with Johnston for the purchase of the completed house and the lot. Johnston agreed in the contract to furnish 'abstract showing marketable title.'

Johnston needed a construction loan. He could obtain one through his lumber supplier provided Triers could secure a commitment for a permanent loan. At Johnston's suggestion, Triers sought a loan. They inquired at The State Bank, where they submitted the house plans and their contract with Johnston. The Bank agreed to make them a loan on a first mortgage upon Johnston's completing the house and upon Triers' furnishing the Bank with an abstract showing merchantable title. At the request of Johnston and for his use in obtaining his construction loan, the Bank provided him with a letter stating:

It is our understanding that you are constructing a new home at the above address for Mr. Dale G. Trier.

Please be advised that we have committed to Mr. Trier for real estate mortgage loan in the amount of $22,850.00 subject to our holding a first and paramount lien on this property. The home is to be constructed as per plans and specifications submitted. The house is to be completed and ready for occupancy prior to this bank's placing a mortgage against this property.

Armed with this letter, Johnston obtained the construction loan. He then built the house.

Preparatory to Johnston's conveying to Triers, Triers' mortgaging to the Bank, and the Bank's paying off Johnston's lender, Johnston had the abstract brought up to date. The Bank's title examiner noted the violation of the building restriction relating to a ground floor of 1,000 square feet.

Johnston, Triers, and the Bank tried to obviate the title objection. The Bank offered to lend additional funds so that a room could be added and the square footage thus enlarged, but Triers would not agree because of the change in the appearance of the house. Johnston tried to get the lot owners in the development to waive the violation. The owners of one lot refused and consulted counsel, who wrote a letter demanding compliance with the restriction. In this state of affairs, the Bank refused to make the loan to Triers.

Triers and Johnston thereupon commenced the present action against the Bank, based on the Bank's letter notifying Johnston of the loan commitment to Triers. The trial court held for the Bank, and Triers and Johnston appealed. At some point Triers obtained a loan elsewhere and moved into the house. The action has therefore come down to a claim for damages based on the Bank's letter. Moreover, since the Bank's letter was addressed to Johnston, and since, as will be seen, Triers were unable to provide the Bank with marketable title as their agreement with the Bank provided, the case actually boils down to Johnston's damage claim against the Bank.

We think the appeal requires consideration of two problems: (1) Did the Bank's letter to Johnston create an enforceable obligation? (2) Can Johnston enforce that obligation although the building restriction was violated?

I. The Letter as an Enforceable Obligation. While we are clear as to what the Bank's letter to Johnston is not, we are not so certain as to just what it is. The letter does not fit neatly into any of the familiar categories. It refers to a commitment by the Bank to lend to Triers, but it is not addressed to them. It does not contain a promise to lend to Johnston, yet he is addressee. Clearly, this letter is not a 'take-out agreement' by which a financial institution commits itself to pay off, upon completion of a building, another institution which is providing interim construction financing. See Haggerty, Procedures, Forms and Safeguards in Construction Lending with a Permanent Takeout, 85 Banking L.J. 1035.

We believe, nonetheless, that the letter would create an enforceable obligation had Johnston performed for his part. Thus upon completion of the house, had Johnston tendered deed and abstract showing merchantable title, we think he could have compelled the Bank to make the mortgage loan to Triers, if on no other basis than estoppel. This court, quoting an earlier decision, declared in Hartford Coal Co. v. Helsing, 220 Iowa 1010, 1019, 263 N.W. 269, 274:

'Where a person has, with knowledge of the facts, acted or conducted himself in a particular manner, or asserted a particular claim, title, or right, he can not afterward assume a position inconsistent with such act, claim, or conduct to the prejudice of another who has acted in reliance on such conduct or representations.'

And this was stated in Seymour v. Ames, 218 Iowa 615, 619, 255 N.W. 874, 876:

An estoppel is based upon the idea that one who has made a certain representation or taken a certain position, should not thereafter be permitted to change his position to the prejudice of one who has relied thereon.

See also North Side State Bank of Rock Springs, Wyo. v. Schreiber, 219 Iowa 380, 258 N.W. 690; Monona County v. Gray, 200 Iowa 1133, 206 N.W. 26; 28 Am.Jur.2d Estoppel & Waiver § 68 at 694--695; 31 C.J.S. Estoppel §§ 107, 108 at 547--550.

We conclude that Johnston, upon proper performance, could have enforced the Bank's letter.

II. Effect of Building Restriction Violation. The building restriction was violated as to the size of the ground floor. What was the effect of this on Johnston's rights against the Bank? Three subsidiary questions are involved on this phase of the case: whether breach of the building restriction rendered the title unmarketable, whether Johnston could enforce the letter if he did nor furnish marketable title, and whether the Bank's letter constituted a 'letter of credit.'

(a) Johnston's contract with Triers required him to furnish marketable title. The building restriction was violated and one of the neighbors objected to the violation, took counsel, and demanded compliance with the restriction. Was Johnston's title marketable? We think not.

Restrictions on the use of land in themselves may render a title unmerchantable. Ft. Dodge, D.M. & S. Ry. v. American Community Stores Corp., 256 Iowa 1344, 131 N.W.2d 515; Annot. 57 A.L.R. 1253, 1301. But no objection to the title on that account is made here. The objection is to the breach of the restriction, to the possibility of litigation flowing from that breach, and to the reduced marketability of the title with that cloud hanging over it. We believe these factors rendered the title unmerchantable. As stated in Holliday v. Arthur, 241 Iowa 1193, 1196--1197, 44 N.W.2d 717, 719:

When called upon to determine...