Khabbaz v. Swartz, 66065

• Decision Date: 19 May 1982
• Docket Number: No. 66065,66065
• Citation: 319 N.W.2d 279
• Parties: Nabil A. KHABBAZ, Appellee, v. Lowell E. SWARTZ and Twila D. Swartz, Appellants. Lowell E. SWARTZ and Twila D. Swartz, Appellants, v. IOWA STATE BANK & TRUST COMPANY, Third-Party Defendant-Appellee.
• Court: Iowa Supreme Court

Page 279

319 N.W.2d 279

30 A.L.R.4th 461

Nabil A. KHABBAZ, Appellee, v. Lowell E. SWARTZ and Twila D. Swartz, Appellants.

Lowell E. SWARTZ and Twila D. Swartz, Appellants, v. IOWA STATE BANK & TRUST COMPANY, Third-Party Defendant-Appellee.

No. 66065.

Supreme Court of Iowa.

May 19, 1982.

Gary J. Streit, of Shuttleworth & Ingersoll, Cedar Rapids, for appellants.

John W. Hayek, of Hayek, Hayek & Hayek, Iowa City, for appellee.

L. Jay Stein, of Stein & Hibbs, Iowa City, for third-party defendant-appellee.

Considered by UHLENHOPP, P. J., and ALLBEE, McGIVERIN, LARSON, and SCHULTZ, JJ.

McGIVERIN, Justice.

Defendants Lowell E. and Twila D. Swartz, husband and wife, appeal from judgment rescinding an "Offer to Buy Real Estate and Acceptance," concerning sale of their personal residence entered into between themselves and plaintiff Nabil A. Khabbaz. The judgment also dismissed defendants' counterclaim seeking money damages, specific performance or forfeiture and their third-party petition for money damages against Iowa State Bank & Trust Company (ISB). The appeal raises three issues: 1) whether trial court erred in rescinding the contract; 2) whether defendants' counterclaim was properly dismissed; and 3) whether trial court properly dismissed the third-party petition which sought money damages from ISB due to the bank's withdrawal of a loan commitment to plaintiff. We find no error and therefore affirm.

The genesis of this contract dispute was the happenstance meeting of Lowell Swartz and Khabbaz on August 19, 1979.

Plaintiff had been offered a position as an associate professor at the University of Iowa. He was interested in buying a residential dwelling in Iowa City. He inquired at defendants' home concerning a vacant house for sale next door. After answering questions about the house next door, Swartz showed Khabbaz his own home and plaintiff became interested in purchasing the Swartz property. The parties could not agree on a price for the house.

The following evening, a sale price of $100,000 was orally agreed upon, subject to some conditions. Although Swartz was willing to finance the purchase himself, plaintiff was unsure of his financial capacity to meet payments for the property and conditioned his willingness to purchase upon his ability to qualify for and obtain a conventional institutional real estate loan. He felt that if a bank found him credit-worthy and would lend him money for the home, his income must be sufficient to pay for the house. On Tuesday, August 21, Khabbaz and Lowell Swartz met with a real estate mortgage loan officer of ISB. Plaintiff made a written application for a loan. The bank subsequently gave him an oral commitment for a $65,000 loan, contingent upon the property being appraised at $100,000 or more.

On Wednesday, August 22, defendants had Thomas J. Cilek, an Iowa City attorney, draft the offer to buy contract at issue. The clause most important to our resolution of this case was paragraph 23, which provided:

SUBJECT TO FINANCING. This Offer to Buy is subject to Buyer obtaining a conventional real estate mortgage loan equal to 65% of the appraised value of the above described real estate with payments to be based upon a 20 year amortization with a Promissory Note which will become due and payable in five (5) years. If said financing is not obtained by September 5, 1979, this Offer to Buy shall be cancelled and all sums paid hereunder shall be refunded to Buyers.

Swartz delivered a copy of the proposed contract to plaintiff. The property was appraised at $106,000 on August 22.

On August 23, Lowell Swartz and plaintiff met at ISB and proceeded to the office of attorney Daniel W. Boyle who had agreed to counsel plaintiff. Boyle made several changes in the proposed contract, and advised plaintiff on the legal effect of the various clauses. After the parties mutually approved the changes, the contract, dated August 23, 1979, was signed by defendants and plaintiff. The closing and possession date was December 28, 1979.

On August 27, plaintiff received a written loan commitment from ISB for $65,000 at a 20 year amortization with a 5 year maturity. He accepted the commitment on August 29.

Before the transaction could be closed, it ran into difficulties. On October 22, 1979, ISB withdrew its loan commitment to Khabbaz after it was apprised that his gross income was not $3,000 each month, as it previously believed and as reflected by the loan application, ¹ but $3,000 per month for nine months, or $2,250 per month on a twelve-month basis. On October 25, plaintiff advised defendants that because of the withdrawn loan commitment paragraph 23 had not been complied with, and that he therefore considered the contract cancelled and requested the return of sums paid under the contract. Defendants refused to release $8,000 that plaintiff had paid into an escrow fund to be held by ISB under the offer to buy until closing.

On November 11, 1979, plaintiff filed a petition at equity for rescission, declaratory judgment and injunctive relief. ² Defendants counterclaimed for specific performance of the contract or money damages. Iowa R.Civ.P. 32. The counterclaim was subsequently amended to request forfeiture of plaintiff's interest in the contract. Defendants also filed a third-party petition for money damages against ISB on third-party beneficiary and estoppel grounds. Iowa R.Civ.P. 34.

After trial to the court, judgment was entered. Trial court found, inter alia: 1) Financing, a condition precedent pursuant to paragraph 23, was not obtained; 2) the withdrawal of the loan commitment was not done at plaintiff's request; and 3) defendants were not third-party beneficiaries of the loan commitment and therefore had no standing to complain about its withdrawal or obtain damages resulting therefrom. The judgment: 1) rescinded the August 23, 1979, offer to buy contract; 2) ordered $8,000 in escrow returned to plaintiff; 3) dismissed defendants' counterclaim; and 4) dismissed the third-party petition against ISB. Defendants appealed.

I. Rescission of contract. Defendants contend trial court erred in "declaring the purchase contract entered into ... on August 23, 1979, null and void." The crux of their theory is that the condition precedent contained in paragraph 23 had been fulfilled, and that both parties had a right to performance of the contract as soon as the other conditions of the contract were satisfied. We find that, although part of the condition precedent contained in paragraph 23 was met, part of it was not and that trial court properly declared the contract null and void.

Several principles apply in our review of an equitable rescission. Our scope of review is de novo. Iowa R.App.P. 4. We give weight to the fact findings of trial court, especially when considering the credibility of witnesses, but we are not bound by them. Iowa R.App.P. 14(f)(7). Evidence to cancel or rescind a written instrument affecting real estate must be clear, satisfactory, and convincing. R. Hillman, Contract Remedies, Equity, and Restitution in Iowa, § 3.3(F) at 76 (1979); see Novak Equipment, Inc. v. Hartl, 168 N.W.2d 924, 927 (Iowa 1969) (conduct establishing rescission by mutual consent must be clear and unequivocal and be inconsistent with the existence of the contract); cf. Poulsen v. Russell, 300 N.W.2d 289, 299 (Iowa 1981) (party seeking reformation of written document must establish grounds for reformation by clear, satisfactory and convincing evidence); Iowa R.App.P. 14(f)(12) ("written instruments affecting real estate may be set aside only upon evidence that is clear, satisfactory and convincing.").

"A petition for the cancellation of a contract by a court of equity is directed to the sound discretion of that court exercised in the light of general equitable principles." Binkholder v. Carpenter, 260 Iowa 1297, 1304, 152 N.W.2d 593, 598 (1967). The maxim that one who seeks equity must do equity applies in actions for rescission and is reflected in the requirement that the plaintiff, as a condition of obtaining a rescission, must ordinarily restore the defendant to the position he occupied before the transaction. Id. at 1306, 152 N.W.2d at 598-99; 13 Am.Jur.2d Cancellation of Instruments, § 2 at 498 (1964); Hillman, § 3.3(F) at 75. We find that plaintiff in fact has done equity and that defendants' status quo has been restored. ³ Defendants remained in possession of and occupied the realty at all material times. Upon our de novo review we find clear, satisfactory and convincing evidence supporting trial court's conclusion that the purchase contract was null and void.

Defendants maintain that paragraph 23 was satisfied when plaintiff accepted the loan commitment from ISB on August 29, 1979, notwithstanding the withdrawal of the commitment by ISB on October 22. Plaintiff's position, which trial court adopted, was that paragraph 23 required plaintiff to obtain a conventional mortgage loan. As drafted, paragraph 23 is ambiguous. Therefore trial court could and we, in our de novo review, can use parol evidence in interpreting the contract. Snider v. Fisk, 218 N.W.2d 652, 654 (Iowa 1974) ("parol evidence is competent to show that the written instrument was delivered upon certain conditions"); Iowa R.App.P. 14(f)(14).

Paragraph 23 actually established two conditions precedent. "Conditions precedent are ... those facts and events, occurring subsequently to the making of a valid contract, that must exist or occur before there is a right to immediate performance, before there is a breach of contract duty, before the usual judicial remedies are available." Mosebach v. Blythe, 282 N.W.2d 755, 759 (Iowa App. 1979); 3A Corbin on Contracts, § 628 at 16 (1960); see 5 S. Williston, A Treatise on the Law of Contracts, § 666A at 141-44 (Jaeger ed. 1961). "A determination that a condition precedent exists depends not on the particular form of words used, but upon the intention of the parties gathered from...