Washington State Hop Producers, Inc., Liquidation Trust v. Goschie Farms, Inc.

• Decision Date: 25 May 1989
• Docket Number: No. 55255-0,55255-0
• Citation: 773 P.2d 70,112 Wn.2d 694
• Court: Washington Supreme Court
• Parties: WASHINGTON STATE HOP PRODUCERS, INC., LIQUIDATION TRUST, and James W. Butzow, Liquidating Trustee, Petitioners, v. GOSCHIE FARMS, INC.; Gordon Goschie; Back Acre Hop Farms, Inc.; Coleman Farms, Inc.; and Harold Batt and Doug Batt d/b/a Gem Hop Company, Respondents. ADAMS VIEW FARMS, INC., a Washington corporation, Respondent, v. WASHINGTON STATE HOP PRODUCERS, INC., LIQUIDATION TRUST, and James W. Butzow, Liquidating Trustee, Petitioners. PERRAULT FARMS, INC., a Washington corporation, Respondent, v. WASHINGTON STATE HOP PRODUCERS, INC., LIQUIDATION TRUST, and James W. Butzow, Liquidating Trustee, Petitioners. HEFFLINGER RANCHES, INC.; Green Acre Farms, Inc.; L.O. Gannon & Son, Inc.; Wm. Gasseling Ranches, Inc.; Coleman Ranch, Inc.; and Sunny Hop Ranches, Inc., Respondents, v. James W. BUTZOW, Liquidating Trustee, Petitioner.

Page 694

112 Wn.2d 694

773 P.2d 70

WASHINGTON STATE HOP PRODUCERS, INC., LIQUIDATION TRUST, and James W. Butzow, Liquidating Trustee, Petitioners, v. GOSCHIE FARMS, INC.; Gordon Goschie; Back Acre Hop Farms,

Inc.; Coleman Farms, Inc.; and Harold Batt and

Doug Batt d/b/a Gem Hop Company, Respondents.

ADAMS VIEW FARMS, INC., a Washington corporation, Respondent, v. WASHINGTON STATE HOP PRODUCERS, INC., LIQUIDATION TRUST, and James W. Butzow, Liquidating Trustee, Petitioners.

PERRAULT FARMS, INC., a Washington corporation, Respondent, v. WASHINGTON STATE HOP PRODUCERS, INC., LIQUIDATION TRUST, and James W. Butzow, Liquidating Trustee, Petitioners.

HEFFLINGER RANCHES, INC.; Green Acre Farms, Inc.; L.O.

Gannon & Son, Inc.; Wm. Gasseling Ranches, Inc.;

Coleman Ranch, Inc.; and Sunny Hop

Ranches, Inc., Respondents, v. James W. BUTZOW, Liquidating Trustee, Petitioner.

No. 55255-0.

Supreme Court of Washington,

En Banc.

May 25, 1989.

Karr, Tuttle & Campbell Philip E. Cutler, Philip A. Talmadge, Seattle, for petitioners.

Velikanje, Moore & Shore, John S. Moore, Corinna D. Ripfel-Harn, Lyon, Beaulaurier, Weigand, Suko & Gustafson, V.J. Beaulaurier, Yakima, for respondents.

SMITH, Justice.

Appellant Washington State Hop Producers, Inc., Liquidation Trust (Trust) sought enforcement of contracts requiring respondents (Growers) to pay for allotments required by federal regulatory order to market hops ("hop base"). Termination of the order was announced after the Growers submitted their bids, but before the time set by the Trust for its performance. The Yakima County Superior Court entered summary judgment in favor of respondent Growers ordering rescission and restitution. The Court of Appeals, Division III, sustained the order. We affirm.

The issues presented by this case are:

(1) Whether the Court of Appeals correctly applied the doctrine of supervening frustration, Restatement (Second) of Contracts § 265 (1979), ¹ in affirming rescission of contracts notwithstanding that hop base retained at least some value after termination of the federal regulatory order and that termination was arguably foreseeable; and

(2) Whether respondents are entitled to prejudgment interest if rescission is the proper remedy.

For 20 years until July 1985, under 7 C.F.R. 991, hop producers were required to obtain allotments from the United States Department of Agriculture (USDA) in order to market their hops. This was called "hop base." Growers were permitted to transfer their excess allotments to other growers. Because the base requirement represented a barrier to market entry, and because virtually no new base was released, "hop base" became a scarce commodity commanding a high price. A secondary market developed for trading in hop base. Washington State Hop Producers, Inc. is a corporation established for the purpose of acquiring, leasing, and selling federal hop base.

After 1979, various groups of hop growers dissatisfied with the allotment system organized to change the marketing order. This culminated in a lawsuit in Spokane in July 1981. As early as 1983, the USDA announced its intention to phase out all barriers to hop market entry; but through 1984 the agency considered amendments to the existing marketing order. Among those amendments were provisions which would have terminated the marketing order or its effect in limiting hop production. However, as appellant states in its brief "[a]s late as June, 1985 ... it was not anticipated that any substantial change in the Marketing Order would be proposed by the Secretary of Agriculture."

Against this background, in February 1985 Washington State Hop Producers, Inc. filed a petition for court supervised liquidation, giving rise to the Trust. On May 31, 1985, the Trust mailed Invitations to Bid, offering two "pools" of hop base for sale. Pool "A" consisted of 633,500 pounds of hop base available for use in 1985. Pool "B" consisted of 432,639 pounds of hop base subject to rental commitments for the 1985 crop year, but available for use in 1986.

By June 16, 1985, bids were received ranging from 10 1/2 cents ($0.105) per pound to 76 cents ($0.76) per pound. Successful bids were for 50 cents ($0.50) to 76 cents ($0.76) per pound. The annual rental rate for hop base was 6 cents ($0.06) per pound.

The bid of 10 1/2 cents ($0.105) per pound came from unsuccessful bidder Victor W. Belaire. In his declaration, he stated his bid was based on his knowledge that hop base might become valueless. He also offered his opinion that all prospective purchasers of hop base knew this might happen. There is no further indication in the record that other bids in this range were received by the Trust in response to its May 1985 invitations.

On June 21, 1985, the Trust mailed Notices of Award to the highest bidders, including all respondent Growers in this case. Payments were received from some of the growers through June 27, 1985, and from one grower on July 1, 1985. Coleman Farms, Goschie Farms and Gem Hop did not forward payment. Back Acre Hop Farms, Inc., forwarded a check, but stopped payment on it.

The USDA terminated the marketing order on June 27, 1985, effective December 31, 1985. The Termination Order was published in the Federal Register on July 1, 1985. 50 Fed.Reg. 26,977 (1985).

During the period July 21 to July 23, 1985, the Trust notified respondent Growers that the base would be transferred on July 26, 1985, and requested them to appear on that date and receive it. They did not appear.

Although transactions with Growers were not completed, the Trust subsequently did sell 208,192 pounds of Pool "B" hop base for a total of $1,470.48, or an average price of about 7/10 cent ($0.007) per pound. Bids accepted were 5 cents ($0.05) and 1/4 cent ($0.0025), compared with earlier successful bids of respondent Growers of as much as 60 cents ($0.60) per pound. The "Sale Agreement" forms supplied by the Trust after issuance of the termination order contained the following language:

4. Disclaimer of Warranties. Buyer acknowledges that Buyer is aware of the provisions of the "Termination Order" published in 50 Fed.Reg. 26977-78 (No. 126; Monday, July 1, 1985), which terminates the Federal Marketing Order for domestically produced hops effective December 31, 1985. The Seller gives no warranty, express or implied, as to description, quality, merchantability, fitness for any particular purpose, productiveness, or any other matter, or the hop allotment base, and the Buyer hereby waives all rights of refusal and return of the goods.

On August 6 and August 8, 1985, Growers filed three suits against the Trust in Yakima County Superior Court. On November 4, 1985, the Trust also filed suit against respondent Goschie Farms and other named defendants in the same court.

All parties filed motions for summary judgment. On July 24, 1986, appellant Trust's motions were denied and respondent Growers' motions were granted. The court stated:

[T]he court finds and determines that there are no genuine issues of material fact and that [Growers] are entitled to summary judgment in their favor, as a matter of law, on the grounds of (1) failure of consideration, (2) mutual mistake of material fact, (3) supervening impossibility of performance and/or commercial frustration, and (4) non-existence of specific thing purchased and necessary for performance by [Trust] in 1986.

The USDA terminated remaining provisions of the Hop Marketing Order effective October 31, 1986.

The Court of Appeals, Division III, in a published opinion sustained the trial court's ruling. Washington State Hop Producers, Inc. Liquidation Trust v. Goschie Farms, Inc., 51 Wash.App. 484, 754 P.2d 139 (1988). The Court of Appeals noted that the "Trust attacks every basis of the court's order. While several may have merit, we find that one ground supports the court order, namely, supervening impracticability." 51 Wash.App. 484, 487, 754 P.2d 139. The court cited Restatement (Second) of Contracts § 265 (1979) which states the rule for supervening frustration. We conclude that the appeal was denied on the basis of supervening frustration, although referred to as "supervening impracticability" by the court.

The Trust appealed to this court. We granted review on October 6, 1988.

Perhaps the earliest case clearly recognizing frustration of purpose as a defense in a breach of contract action is Krell v. Henry, 2 K.B. 740 (C.A.1903). There, a lease was made to rent use of a window overlooking the route for the coronation parade of Albert Edward when he succeeded his mother, Queen Victoria. After the agreement, Edward became ill, the parade was canceled, and the purpose of renting the window was frustrated. The lessee refused to pay the agreed rent. The court held that his duty was discharged and that he was therefore not liable for breach. Both parties were capable of performing the terms of their contracts, and there was arguably still some market value in the vendor's performance. But the lessee's ultimate purpose was frustrated and he was released from his contract nonetheless.

The doctrine of "Discharge by Supervening Frustration" is recited in Restatement (Second) of Contracts § 265 (1979):

Where, after a contract is made, a party's principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.

Comment (a) to the section further explains:

This Section deals with the problem that arises when a change in circumstances makes one party's performance virtually worthless to the other, frustrating his purpose in making the contract ... First, the purpose that is frustrated must have been a principal purpose of that party in making the contract ... The object must be so completely the basis of the contract that, as...