Prue v. Royer

• Decision Date: 15 February 2013
• Docket Number: No. 11–417.,11–417.
• Citation: 2013 VT 12,67 A.3d 895
• Parties: David PRUE and Barbara Prue v. Larry C. ROYER, Sr. and Department of Liquor Control.
• Court: Vermont Supreme Court

67 A.3d 895
2013 VT 12

David PRUE and Barbara Prue
v.
Larry C. ROYER, Sr. and Department of Liquor Control.

No. 11–417.

Supreme Court of Vermont.

Feb. 15, 2013.

[67 A.3d 899]

Paul R. Morwood, South Burlington, for Plaintiffs–Appellants.

Jennifer E. Nelson of Law Office of Jennifer E. Nelson, P.C., Newport, for Defendant–Appellee/Cross–Appellant.

Present: REIBER, C.J., DOOLEY, SKOGLUND, BURGESS and ROBINSON, JJ.

DOOLEY, J.

¶ 1. The parties in this case entered into a real estate agreement nearly thirteen years ago, and this case requires us to determine its repercussions. The trial court concluded that the agreement constituted a contract for deed and that the purchasers had therefore acquired an equitable interest in the property in question. The court initiated a foreclosure on that interest, even though it had not been pled. Plaintiffs, the purchasers as found by the superior court—David and Barbara Prue, appeal from the foreclosure. Defendant, the seller as found by the court—Larry Royer, appeals from the court's conclusions that the contract was an enforceable contract for deed. We affirm the court's conclusion that the parties entered into a contract for deed, and that it was enforceable, but reverse the foreclosure decree as premature.

¶ 2. Plaintiffs, Barbara and David Prue, were friends with Larry Royer, defendant, and his now-deceased wife. The Royers owned a bar in Irasburg known as the Brewski Pub. In 1999, plaintiffs, along with a friend,¹ began discussing with the Royers the possibility of purchasing or taking over the operation of the bar.

¶ 3. In January 2000, these discussions produced an agreement, which was memorialized in a document drafted by the Royers' real estate agent. At the time, the real estate agent encouraged the parties to hire an attorney to draft the proper documents. When they did not follow that advice, the agent included a provision that she would be held harmless for any disputes that might arise. As the events unfolded, it became clear that the parties should have listened to the real estate agent.

[67 A.3d 900]

¶ 4. This case arises out of the lack of clarity in the parties' agreements. The primary agreement is completed on a realtor preprinted contract entitled “Purchase and Sale Contract,” but “Lease–Option to Purchase” is handwritten below that title. On this form contract, the purchase price is listed as $190,000, and $4000 is entered as the deposit. In the blank for an additional deposit, an annotation is entered to see the attached schedule. In the blank for a closing date is written: “proposed 6 years from date of all signatures to this contract.”

¶ 5. The preprinted terms of the contract are those for the sale of property. The first section is headed “Agreement of Sale and Purchase” and states, “Purchaser hereby offers and agrees to purchase from Seller and Seller agrees to sell and convey to Purchaser the Property described herein at the price and on the terms and conditions stated in this Contract.”

¶ 6. A separate page entitled “Financing Property Agreement” is attached. This agreement states that the price of the real estate is $175,000, plus $15,000 for equipment, for a total price of $190,000. Beneath this is listed a schedule of payments. The schedule lists three down payments, one at signing and one each in April and June 2000. The one at signing is labeled an “option down payment.” In between these down payments, the schedule lists twelve monthly “rental” payments of $1000. For each down payment, “-$4000” is entered below the sale price. The bottom of the schedule reads “1/1/01 Balance due is ... $178,000.” Following this, the financing agreement reads “Buyer/Leasee will pay starting 1/1/01, $1,400 per month for 5 years with an interest payment of 1 over the nation's prime rate and a balloon due of all principle and interest on 1/1/06.”

¶ 7. Also attached is an addendum, referring to “Buyers” and “Sellers” throughout. The addendum specifies that plaintiffs are responsible for operating licenses, any property or equipment damage, septic and spring operations, utility payments, and real estate taxes. The addendum also requires that “during lease agreement” defendant's approval be obtained prior to any renovations. Finally, the addendum requires that plaintiffs have fire insurance, theft insurance, and proof of one million dollars of liability insurance “before business opening,” and that defendant be “named as lien holder[ ].”

¶ 8. This arrangement went forward apparently without difficulty for several years. The record suggests that, at points after the first year of the agreement, plaintiffs missed some payments, but that defendant either forgave or put off these payments. In 2004, the parties agreed that an addition would be built. Defendant paid for the addition, and the price was added to the principal balance due from plaintiffs. In June 2004, the parties signed an amortization schedule calling for a new balance of $253,549, amortized over twenty-five years. This amortization schedule did not address the balloon payment provision in the original agreement.

¶ 9. In 2006, after the contemplated balloon payment date had come and gone, defendant sought to complete the transfer, but plaintiffs informed defendant that they would be unable to do so. The trial court found that plaintiffs probably were not sufficiently creditworthy to qualify for a bank loan at that time. Nevertheless, plaintiffs remained in possession of the bar and continued to make monthly payments. In August 2006, the parties drew up and signed a new payment schedule, shifting to weekly payments that would run through 2018.

¶ 10. The arrangement began to really unravel as the result of issues with the insurance coverage. The bar, renamed

[67 A.3d 901]

Kingdom's Playground by plaintiffs, was described by the trial court as a “rowdy place.” In 2004, both plaintiffs and defendant were named as defendants in a lawsuit under Vermont's Dram Shop Act, 7 V.S.A. § 501. As a result, defendant learned that he had not been named as the lienholder on plaintiffs' liability insurance. He also learned that the policy provided plaintiffs only $100,000 in liability coverage. Both of these inadequacies in the policy appeared to contravene the addendum to the parties' original contract, and defendant pressed plaintiffs to correct them.

¶ 11. The insurance issues came to a head in early 2007 when gunshots were fired at the bar. Another area bar had recently been the scene of a stabbing. The gunshots attracted the attention of the state liquor inspector, who began inquiring whether plaintiffs had an active lease as required by state law. See 7 V.S.A. § 222. Neither plaintiffs nor defendant were able to find a copy of their original agreement. The inspector told plaintiffs that they would have to stop operating the bar if they did not have a lease. Plaintiffs' last monthly payment was made in mid-January 2007.

¶ 12. On March 8, 2007, plaintiffs tendered their liquor license to the state inspector and started removing property from the bar. The trial court found that plaintiffs took some equipment that was present when they took possession of the premises and liquor that was part of the original inventory. The trial court also found that the property was left damaged and messy, requiring defendant to expend repair and clean-up costs.

¶ 13. Although plaintiffs testified that they were under the impression that defendant was shutting them down, the trial court found that defendant did not do anything to evict them. The court found that plaintiffs voluntarily surrendered possession out of frustration with the state liquor control issues, their poor income, and defendant's demand that they provide more liability coverage.

¶ 14. Not long thereafter, however, plaintiffs sought to be restored to possession. After consulting an attorney, plaintiffs learned that their rights in the premises might not be merely those of lessees. On March 29, 2007, they initiated this action, seeking a declaration that they hold equitable title to the property as well as money damages. Defendant counterclaimed for breach of contract and unjust enrichment, seeking back rent and damages based on the missing items and the clean-up costs.

¶ 15. The central question before the trial court was how to characterize the contractual arrangement between plaintiffs and defendant. Plaintiffs characterized the agreement as a contract for deed, such that they acquired equitable title subject to a mortgage. Defendant, in contrast, characterized the agreement as a lease-option contract, such that plaintiffs were only leaseholders until they paid the purchase price.

¶ 16. The trial court accepted plaintiffs' interpretation, holding that the agreement was a contract for deed. As a result, the court concluded that plaintiffs held an equitable interest in the property, and treated the contract as embodying a mortgage. The consequence of this legal classification was that plaintiffs held an equity of redemption, such that the only means to extinguish plaintiffs' interest was foreclosure. On its own initiative, the court commenced such a foreclosure. The court explained, “Although [defendant] has not sought to ‘foreclose,’ [plaintiffs] have sufficiently pled the issue for the court to enter a foreclosure order if it becomes necessary.” Plaintiffs were given fifty-four

[67 A.3d 902]

days—slightly under eight weeks—in which to pay $244,386.86 plus interest to redeem. In the event of nonredemption, plaintiffs were ordered to pay $8136 in damages for personal property, cleaning, and repairs.

¶ 17. Both parties appeal. Plaintiffs argue that the trial court abused its discretion in sua sponte ordering a foreclosure; in the alternative, they argue that the court erred in permitting strict foreclosure, in giving a short redemption period, and in placing the redemption amount too high; and further argue that the trial court should not have ordered conditional damages...