Kelley v. Leucadia Financial Corp.

• Decision Date: 31 December 1992
• Docket Number: No. 900187,900187
• Citation: 846 P.2d 1238
• Parties: William R. KELLEY, Jr., Plaintiff and Petitioner, v. LEUCADIA FINANCIAL CORPORATION, a Delaware corporation, Defendant and Respondent.
• Court: Utah Supreme Court

Page 1238

846 P.2d 1238

William R. KELLEY, Jr., Plaintiff and Petitioner, v. LEUCADIA FINANCIAL CORPORATION, a Delaware corporation,

Defendant and Respondent.

No. 900187.

Supreme Court of Utah.

Dec. 31, 1992.

Rehearing Denied Feb. 10, 1993.

David R. Olsen, Charles P. Sampson, and Paul M. Simmons, Salt Lake City, for plaintiff.

John A. Snow and Kathryn H. Snedaker, Salt Lake City, for Leucadia Financial Corp.

R. Paul Van Dam and David W. Lund, Salt Lake City, for Dept. of Commerce.

D. Frank Wilkins, Salt Lake City and David W. Johnson, Park City, for amicus Utah Ass'n of Realtors.

STEWART, Justice:

This case presents the issue of whether a buyer of real estate can obtain specific performance of a standard Utah Earnest Money Sales Agreement against a defaulting seller.

First Security Bank (FSB) agreed to sell real property to William R. Kelley pursuant to a standard Earnest Money Sales Agreement. ¹ FSB could not provide marketable and insurable title because of a boundary dispute. Kelley filed an action for a declaratory judgment and for specific performance of the agreement. The trial court entered an order directing FSB to convey the property to Kelley.

The court of appeals reversed the trial court, holding in an unpublished opinion that the terms of the standard Earnest Money Sales Agreement preclude a buyer from obtaining specific performance against a breaching seller. The court held that when a seller fails to provide a marketable and insurable title, the standard agreement limits the buyer to one of two remedies: (1) enforcement of the agreement, but only after the buyer tenders full payment of the contract price; or (2) rescission of the contract with a refund of the earnest money. We granted certiorari because of the potential effect of that ruling on real estate transactions using the standard Utah Earnest Money Sales Agreement.

On March 2, 1987, Kelley and FSB executed an earnest money sales agreement by which FSB agreed to sell residential property in Park City, Utah, to Kelley. Kelley paid $10,000 in earnest money to FSB and began liquidating some of his assets to obtain the balance due. The closing was set for April 20, 1987.

The agreement, written on a standard form, included the following general provisions: (1) The seller would furnish good and marketable title, subject to encumbrances and exceptions provided in the contract, "evidenced by a current policy of title insurance"; (2) if title insurance was unobtainable due to title defects, the buyer could elect to waive the defects or to terminate the agreement and have the earnest money refunded; and (3) time was of the essence. The seller added a handwritten provision stating that the property was sold " 'as is,' without warranty. Title conveyed by special warranty deed."

FSB acquired the property by quitclaim deed from the former owners, who had defaulted on loans secured by the property. The property, consisting of approximately thirteen acres, included a residence, a stream, and a spring. The stream fed a trout pond located in front of the house and provided irrigation water for the property.

After execution of the agreement, a survey revealed that FSB's quitclaim deed contained an erroneous property description, which misplaced a boundary line by 15.22 feet, thereby excluding the stream and spring. In an attempt to cure the defect, FSB asked the adjoining property owners, the Armstrongs, to convey the disputed property. The Armstrongs refused and cut off the water to the pond, causing it to dry up.

On April 22, 1987, two days after the specified closing date, FSB and Kelley agreed to extend the date to June 1, 1987, so that FSB could clear up the boundary problem. Thereafter, the parties agreed to extend the closing date to July 1, 1987, and then to August 31, 1987.

In July 1987, FSB filed a complaint against the Armstrongs to quiet title to the disputed portion of the property and to recover damages caused by vandalism. FSB informed Kelley that he need not retain an attorney because the bank would handle the litigation.

On September 4, 1987, four days after the last agreed upon closing date, FSB's attorney sent a letter to Kelley, demanding that he close the transaction by September 15, 1987. The letter stated that FSB would consider the agreement terminated if the closing was not consummated by the 15th and that FSB was ready and able to sell the property " 'as is' without warranty in accordance with the terms of the earnest money agreement." FSB also stated that it would not proceed with the Armstrong litigation and that it had only pursued the lawsuit because it was interested in closing the deal with Kelley and not because it had a legal obligation to deliver clear title. FSB offered to assign its rights in the Armstrong litigation to Kelley and recommended that Kelley obtain counsel. FSB also offered to refund Kelley's earnest money should he choose to "walk away from the deal."

Kelley, who was then living in Massachusetts, did not receive the letter until September 8, 1987. He immediately replied by telegram to FSB, stating that he would not abandon the deal. Kelley then retained counsel, who contacted FSB and requested copies of all documents relating to the boundary litigation. Kelley's counsel asked for a thirty-day extension of the closing date so that Kelley could evaluate the litigation and its effect on the value of the property. FSB agreed to extend the closing date only one week, to September 22, but stated that it would cooperate fully with respect to the litigation. Kelley's attorney, however, did not receive the necessary documents from FSB's attorney until October 15, 1987. Nevertheless, on September 22, 1987, Kelley's attorney wrote to FSB and tendered Kelley's performance. The letter stated that Kelley was ready, willing, and able to close and that the necessary funds had been transferred to Williamsburg Savings Bank in Salt Lake City to be paid at closing. The letter also stated that the "tender is conditioned only upon First Security honoring its obligations pursuant to the earnest money sales agreement and delivering the property free from those defects which it has undertaken to cure." On the same day, Kelley filed a complaint against FSB for a declaratory judgment, damages for breach of contract, and specific performance. Kelley's funds were subsequently deposited with the Summit County clerk.

On September 24, 1987, FSB executed a release of Kelley's $10,000 earnest money deposit, but Kelley refused to accept it. The next day, Leucadia Financial Corporation formally offered to purchase the property from FSB, and on November 2, 1987, Leucadia and FSB entered into an earnest money sales agreement. Leucadia purchased the property on November 25, 1987.

FSB moved to dismiss Kelley's complaint on the grounds that Kelley's tender was defective and specific performance was not a remedy available under the agreement. Kelley countered with a motion for partial summary judgment, asserting that he was entitled to specific performance and an abatement in the purchase price. The court denied FSB's motion to dismiss and granted Kelley's motion for partial summary judgment, ruling that Kelley was entitled to specific performance. The court reserved for trial Kelley's claim for damages and an abatement in the purchase price. Kelley and FSB subsequently settled the abatement and damages issues, and the trial court entered a decree of specific performance directing FSB to convey the undisputed portion of the property by special warranty deed and the disputed portion by quitclaim deed.

The parties stipulated to substitute Leucadia for FSB and Leucadia appealed to this Court. Pursuant to Rule 42 of the Utah Rules of Appellate Procedure, we transferred the case to the court of appeals. The court of appeals held that Kelley was not entitled to the equitable remedy of specific performance because Kelley's remedies were limited by paragraphs G and H of the agreement. Given that ruling, the court of appeals did not decide whether Kelley's tender was legally sufficient.

I. A BUYER'S RIGHT TO SPECIFIC PERFORMANCE UNDER THE STANDARD EARNEST MONEY SALES AGREEMENT

The terms of the standard Earnest Money Sales Agreement have been approved by the Utah Real Estate Commission and the Attorney General. With some exceptions not relevant here, real estate agents may fill out only those forms approved by the Utah Real Estate Commission and the Attorney General. Utah Code Ann. § 61-2-20 (1989). According to the Utah Association of Realtors, which appeared as amicus curiae, the standard form Earnest Money Sales Agreement is used in the majority of real estate transactions conducted by its members.

Paragraphs G and H, which deal with title inspection and title insurance, were construed by the court of appeals to provide a buyer's exclusive remedies against a breaching seller. Kelley v. Leucadia Financial Corp., No. 880534-CA, slip op. at 3 (Utah Ct.App. Jan. 5, 1990). Paragraph G provides that if there are defects in the title that the seller does not cure, the buyer may declare the agreement null and have all monies returned. The last sentence of paragraph G states:

If said defect(s) is not curable through an escrow agreement at closing, this Agreement shall be null and void at the option of the Buyer, and all monies received herewith shall be returned to the respective parties.

The court of appeals held that because Kelley had not declared the agreement null and void under paragraph G, his remedies were limited to those stated in paragraph H.

Paragraph H deals with title insurance and confers on the buyer a right to nonjudicial rescission if the agreed-upon title insurance is not provided. Paragraph H provides:

If title insurance is elected, Seller authorizes the Listing Brokerage to order a preliminary commitment for a standard form ALTA policy of title insurance to be issued by such title insurance company as Seller...