Kadner v. Shields

• Decision Date: 24 September 1971
• Citation: 97 Cal.Rptr. 742,20 Cal.App.3d 251
• Court: California Court of Appeals Court of Appeals
• Parties: Marshall KADNER and Rosemary Kadner, Plaintiffs, Cross-Defendants and Respondents, v. Larry R. SHIELDS, Defendant, Cross-Complainant and Appellant. Civ. 36318.

Page 742

97 Cal.Rptr. 742

20 Cal.App.3d 251

Marshall KADNER and Rosemary Kadner, Plaintiffs, Cross-Defendants and Respondents, v. Larry R. SHIELDS, Defendant, Cross-Complainant and Appellant.

Civ. 36318.

Court of Appeal, Second District, Division 5, California.

Sept. 24, 1971.

As Modified on Denial of Rehearing Oct. 14, 1971.

Hearing Denied Nov. 18, 1971.

Simon Taub, and Daniel J. Jaffee, Beverly Hills, for plaintiffs, cross-defendants and respondents.

Arnold J. Stone and Marvin Gross, Los Angeles, for defendant, cross-complainant and appellant.

REPPY, Associate Justice.

This is an appeal from a judgment in favor of the buyers of a luxury tract home in Beverly Hills deciding that the buyers had the right to determine by their purely personal considerations whether they were satisfied with the terms and conditions of an encumbrance which they were to assume, that the buyers did disapprove of certain provisions thereof in good faith, that they thereupon had the right to, and did, rescind the agreement to buy, that they were entitled to the return of a partial down payment placed in escrow, that the seller had wrongfully instructed the escrow agent not to return the down payment, thereby entitling the buyers to interest on the down payment from that date, and that the seller had no right to recover damages from the buyers for alleged breach of contract.

On May 5, 1966, by means of the execution of escrow instructions, respondents Dr. and Mrs. Kadner (the Kadners), as purchasers, and appellant Larry R. Shields (Shields) as seller, entered into a contract to buy and sell a new home on Cole Place in Beverly Hills, part of a luxury tract development, for a purchase price of $225,000. The home had been constructed and encumbered with a $124,000 first trust deed by Shields several months earlier. Home Savings and Loan Association (Home) was the beneficiary of the trust deed. It was recognized that, as of the assumption date, the $124,000 note secured by the first trust deed would have been reduced to some extent (what representations were made in this regard became subject to dispute). The escrow agreement provided that the lesser balance of principal would be adjusted in cash through the escrow. United California Bank (the Bank) was escrow agent for the sale.

The Kadners deposited $10,000 of a called-for approximate $71,000 cash down payment. The first trust deed was to be assumed by the Kadners. The promissory note it secured was payable at the rate of $851 per month. There was to be a $30,000 note from the Kadners to Shields secured by a second trust deed. Part of the escrow agreement was a 'satisfaction clause' drawn by the attorney for the Kadners, added at the last, reading as follows:

'ADDITIONAL ESCROW INSTRUCTIONS:

'The terms and conditions of the existing first encumbrance are subject to the written approval of the buyer within seven days after a copy thereof is delivered to the buyer.' ¹

After receiving a copy of the Home promissory note, the first deed of trust securing it, and a beneficiary statement showing the amount of principal remaining due, the Kadners sent a letter to the bank, with a copy to Shields, stating that they disapproved of two provisions in the Home promissory note (quoting them), ² additionally that the state $122,795.70 balance of the Home note was considerably less than had been represented (thus requiring a commensurately higher down payment), and finally that, for those reasons, the escrow was cancelled and a return of the deposit demanded.

The two disapproved provisions in the Home promissory note were (paraphrasing): (a) an acceleration clause: should default be made in performance, at the option of Home, the whole sum should be immediately due and payable ³ and, also at the option of Home, bear interest during default at 2 percent higher than the regular amount (which was 7.2 percent); (b) a prepayment clause: if, in any calendar quarter, payments should exceed 20 percent of the original amount of the note, Home would require 130 days' interest on the original amount. ⁴

Shields did not accede to the attempted cancellation of escrow and instructed the Bank not to return the deposit.

The Kadners purchased a different house on Challette Drive, under terms in which the price was $165,000, the down payment was $40,000 to $45,000, and the monthly payments were $747. A promissory note and first trust deed therefor, also with Home, were dated July 12, 1966. The documents contained default-acceleration and prepayment-penalty interest clauses identical to those involved in the Cole Place residence. The promissory note was for $110,000. There is no specific showing in the record that there was a second deed of trust, but the inference is, of course, that there was in an amount between $10,000 and $15,000.

The Kadners filed suit on July 18, 1966, alleging the contract of May 5, the escrow deposit pursuant thereto, the circumstance that two clauses in the Home note proved to be unsatisfactory to them, the fact of having given notice thereof, the existence of a controversy over whether the contract was rescinded, and their desire for a judicial declaration that it was. They prayed for such a declaration, for a return of the deposit, and for other relief. Shields filed an answer and in due course a fourth amended cross-complaint alleging the execution of the contract, performance on his part, the Kadners' breach of the agreement by their 'notice,' and his sufferance of damages consisting of the difference between the contract price and the amount for which the residence could be resold plus interest on the down payment and on the $30,000 note to him plus various stated expenses. Before the trial of the action, a stipulation was entered into that the Bank could be dismissed and would be later instructed on the method for disbursal of the deposit. As indicated, judgment was in favor of the Kadners, and Shields has brought this appeal.

Shields contends that the approval clause in the agreement did not create a condition precedent, that the trial court applied the improper test for satisfaction as to the terms of the Home promissory note (personal judgment instead of reasonable man standard), that in any event there was no substantial evidence to support the finding of the trial court that the Kadners exercised their personal judgment in good faith, and that, assuming an adverse consideration of these claims, the trial court improperly awarded interest on the $10,000 deposit.

Before proceeding to a discussion of these contentions, we note that both sides now agree ⁵ that the approval clause set up a so-called 'satisfaction' feature.

Shields' contention that the approval provision was not a condition precedent clause is based on the concept that properly interpreted the phrase simply gave to the Kadners the election of assuming the Home encumbrance if they were satisfied with it or of securing new financing if they were not, and not the right to withdraw from the transaction. However, we believe that a condition precedent was created. Although the wording was drawn by the Kadners (bringing into play the rule of construction against the drafter) (5 Williston on Contracts (3d ed.--Jaeger 1961) § 675, pp. 188--189; 4 Williston on Contracts, § 621, p. 760) and does not state that the entire agreement is contingent upon the Kadners' approval (see Rodriguez v. Barnett, 52 Cal.2d 154, 157, 338 P.2d 907), the surrounding circumstances and overall tenor of the agreement militate for a condition precedent. ⁶ (See 5 Williston on Contracts, Supra, § 663, p. 127.)

Firstly, the way the provision for the Kadners' assumption of the Home encumbrance is set out indicates that it was for the benefit of Shields. What would make it so would be an understanding, which it must be assumed the trial court determined existed, that lacking such an assumption of the Home note Shields would have had to defray the prepayment interest penalty to Home which would have been involved in refinancing. ⁷ Thus, in effect, the Kadners had to assume the Home encumbrance unless Shields decided otherwise, and it was proper to afford the Kadners the right to approve the terms of the Home promissory note.

Secondly, coupled with this approval clause was another one involving covenants, conditions and restrictions, and so forth, ⁸ which obviously were not open to an alternate arrangement which could be substituted with the main contract remaining intact.

It perhaps is debatable whether the precedent condition, which we believe the satisfaction clause set out, was as to the existence of the contract or as to the duty of immediate performance by the Kadners of the balance of their obligations, to wit, completing the down payment, assuming the Home note and deed of trust, and executing the $30,000 promissory note to Shields and the second deed of trust securing it. However, most generally, condition precedent clauses relate to the duty of immediate performance, and we feel that that is the reasonable interpretation in this case. (See Rest., Contracts, § 250, p. 359; § 254, p. 365; 5 Williston on Contracts, Supra, § 666, pp. 138--140; § 666 A, pp. 141--142. Generally, for what words create a condition precedent and for aids to interpretation see 5 Williston on Contracts, Supra, § 671, p. 160, and § 672, p. 165.) If the condition is not fulfilled, the right to enforce the contract does not evolve. (5 Williston on Contracts, Supra, § 663, p. 127.)

One of the most significant issues before us is whether the Kadners' approval of (satisfaction or dissatisfaction with) the terms of the Home note was to be measured strictly by good faith discernment of the individual person or by the objective considerations of the reasonable man. Two tests are recognized when satisfaction as to performance or as to the status of something involved in the negotiations (the latter is our case) is afforded to one party to an agreement: (1)...