Zirinsky v. Sheehan

• Citation: 413 F.2d 481
• Decision Date: 11 August 1969
• Docket Number: No. 19353.,19353.
• Parties: Lawrence ZIRINSKY, Appellant, v. James L. SHEEHAN, John D. Sheehan and Brooklyn Center Industrial Park, Inc., Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

413 F.2d 481 (1969)

Lawrence ZIRINSKY, Appellant, v. James L. SHEEHAN, John D. Sheehan and Brooklyn Center Industrial Park, Inc., Appellees.

No. 19353.

United States Court of Appeals Eighth Circuit.

July 14, 1969.

Rehearing Denied August 11, 1969.

Bernard G. Heinzen, of Dorsey, Marquart, Windhorst, West & Halladay, Minneapolis, Minn., for appellant, John W. Windhorst, Jr., and William B. Payne, Minneapolis, Minn., on the brief.

Joe A. Walters, of O'Connor, Green, Thomas, Walters & Kelly, Minneapolis, Minn., for appellees, Harold J. Soderberg and John F. Casey, Jr., Minneapolis, Minn., on the brief.

Before VAN OOSTERHOUT, Chief Judge, and LAY and BRIGHT, Circuit Judges.

LAY, Circuit Judge.

This diversity action¹ arises out of an agreement for the purchase of land whereby plaintiff Lawrence Zirinsky agreed to purchase from defendant Brooklyn Center Industrial Park, Inc. hereafter BCIP 560 acres of real estate called the Earle Brown Farm which is located in Brooklyn Center, Minnesota. Defendants Sheehans, shareholders and officers of BCIP, executed the agreement on its behalf.²

Under the purchase agreement Zirinsky agreed to pay $2,750,000 for the property as follows: (1) a down payment of $50,000 on March 23, 1967, the date of the contract; (2) an installment of $225,000 on April 6, 1967; (3) an additional installment of $225,000 on May 8, 1967; (4) a final cash installment of $850,000 on August 8, 1967; and then (5) $1,400,000 by taking subject to an existing purchase money mortgage in favor of the Regents of the University of Minnesota dated May 20, 1966.³ As the buyer, Zirinsky also agreed to pay all real estate taxes for 1968 and subsequent years, and to pay $339,041 in special assessments against the real estate. In addition, he agreed to pay any 1967 real estate tax which might be determined to be due and owing in a pending litigation. The agreement provided that if Zirinsky defaulted in performance of any of his agreements, BCIP could elect to terminate the contract and to retain all payments made by Zirinsky as liquidated damages. Zirinsky was not to obtain possession and title to the property until payment of the final cash installment on August 8, 1967.

Contemporaneous with the execution of the purchase agreement, defendants Sheehans individually entered into a memorandum agreement with Zirinsky to form a new corporation. It was agreed that a majority of the stock of the proposed corporation would be owned by Zirinsky, with the Sheehans receiving a minority of the shares. This agreement anticipated that the new corporation would be organized to obtain one or more loans, the proceeds of which would be used to purchase the real estate from Zirinsky in the name of the corporation. The parties intended to develop the real estate for industrial, commercial and residential purposes. Zirinsky agreed to obtain the financing.

Zirinsky made the down payment and the first two installments under the purchase agreement totaling $500,000, half of the money being provided by defendants Joseph L. Muscarelle and Jos. L. Muscarelle, Inc. He was, however, unable either to obtain financing under the pre-incorporation agreement or to pay the final installment of $850,000 under the purchase agreement. BCIP therefore notified Zirinsky of its intention to cancel the purchase agreement and to retain the $500,000 he had already paid.

Zirinsky then brought this suit seeking to have the contract reformed, or in the alternative to have the liquidated damages provision declared invalid as a penalty, to have the notice of termination declared ineffective, or in the alternative to rescind the contract because of breach by BCIP, or alternatively damages by reason of the defendants' unjust enrichment. The trial court held for defendants on all issues.

It is urged by plaintiff Zirinsky that the purchase agreement of March 23, 1967, was an equitable mortgage rather than a contract to convey real estate; that all of the surrounding circumstances establish as a matter of law that Zirinsky and his associate, Muscarelle, were merely loaning funds for the payment of expenses by BCIP and the Sheehans in acquiring the property; that the whole operation was a joint venture pending formation of a new corporation and that the property was being purchased not for Zirinsky but in fact for the benefit of all the promoters of the new corporation. Alternatively, it is urged that if the purchase agreement be construed as a contract for purchase, the notice of termination was ineffective, since it was not in compliance with Minnesota Statute § 559.21 requiring notice to be given Zirinsky's co-vendee or assignee, Muscarelle. In addition, it is claimed that the defendants breached their agreement with Zirinsky by concealing possible land sales to third parties; that the defendants were not in good faith; that they made Zirinsky's performance impossible. Finally, it is claimed that the judgment should be set aside since the forfeiture provision of the contract constituted a penalty rather than an enforceable liquidated damage clause under Minnesota law.

We have thoroughly examined the record and are satisfied that there exists sufficient evidence to sustain the trial court's findings (1) that the March 23, 1967, instrument is unambiguous and clearly purports to be and is a purchase agreement by Zirinsky to purchase the real estate in question;⁴ (2) that the defendants were not put on notice that Muscarelle in fact had an interest as a co-vendee or assignee at the time of the termination notice, and that the notice given by the defendants was in full compliance with Minnesota law (see Larson v. Johnson, 175 Minn. 502, 221 N.W. 871 (1928)); and (3) that plaintiff was not entitled to rescind and recover his payments by reason of any conduct by BCIP or Sheehans.

We turn now to the difficult issues relating to damages. The trial court found that the liquidated damages clause was valid and alternatively that defendant had failed to prove unjust enrichment. We find that in view of the cancellation notice served and the belated claim by the vendor of statutory forfeiture, it is unnecessary to reach the question of the validity of the liquidated damages clause.⁵ Section 559.21 of the Minnesota statutes provides:

"When default is made in the conditions of any contract for the conveyance of real estate or any interest therein, whereby the vendor has a right to terminate the same, he may do so by serving upon the purchaser, his personal representatives or assigns, either within or without the state, a notice specifying the conditions in which default has been made, and stating that such contract will terminate 30 days after the service of such notice unless prior thereto the purchaser shall comply with such conditions and pay the costs of service. Such notice must be given notwithstanding any provisions in the contract to the contrary * * *."

The Minnesota cases dealing with forfeiture of monies by defaulting vendees cover more than half a century. These cases can be generally categorized:

(1) Forfeitures of down payments or earnest monies, see, e.g., Miller v. Snedeker, 257 Minn. 204, 101 N.W.2d 213 (1960) (a vendee who defaults in the payments due under an executory land contract is not entitled "to a return of a payment made when the contract was entered into"); Monahan v. Addy, 176 Minn. 50, 222 N.W. 288 (1928); Nelson Real Estate Agency v. Seeman, 147 Minn. 354, 180 N.W. 227 (1920); Grant v. Munch, 54 Minn. 111, 55 N.W. 902 (1893); Johnston v. Johnson, 43 Minn. 5, 44 N.W. 668 (1890). Forfeiture of down payments by a defaulting vendee is generally recognized throughout the common law of vendor-purchaser relationships. See Restatement, Contracts § 357; see also Corbin, "The Right of a Defaulting Vendee to the Restitution of Installments Paid," 40 Yale L.J. 1013 at 1028.

(2) Cases involving forfeiture of both down payment and installment payments over a period of time are found in:

(a) Actions seeking damages or set off against the purchase price arising out of the alleged fraud of the vendor, see, e.g., West v. Walker, 181 Minn. 169, 231 N.W. 826, 74 A.L.R. 165 (1930); Follingstad v. Syverson, 160 Minn. 307, 200 N.W. 90 (1924); Olson v. Northern Pac. Ry., 126 Minn. 229, 148 N.W. 67 (1914); International Realty & Securities Corp. v. Vanderpoel, 127 Minn. 89, 148 N.W. 895 (1914); and

(b) Suits for rescission arising from alleged fraud of the vendor where all monies paid in are attempted to be recovered, see, e.g., Miller v. Snedeker, supra; Northwest Hotel Corp. v. Henderson, 257 Minn. 87, 100 N.W.2d 493 (1960); Cady v. Bush, 166 N.W.2d 358 (Minn. 1969).

The cases are clear that once statutory notice has been served and cancellation effected, all rights under the contract are terminated.⁶ Under Minnesota law this cuts off the vendor's right to seek specific performance, Olson v. Northern Pac. Ry., 126 Minn. 229, 148 N.W. 67, 68 (1914) (dictum); his right to obtain judgment for installments due, Smith v. Dristig, 176 Minn. 601, 224 N. W. 157 (1929); and his right to enforce an unsatisfied pre-cancellation judgment against the vendee for unpaid installments, Des Moines Joint-Stock Land Bank v. Wyffels, 185 Minn. 476, 241 N. W. 592, 593 (1932); Warren v. Ward, 91 Minn. 254, 97 N.W. 886 (1904).

Of course, the cancellation also affects the vendee's rights. After the thirty-day period the vendee can no longer redeem, International Realty & Securities Corp. v. Vanderpoel, 127 Minn. 89, 148 N.W. 895 (1914); nor can he attempt to affirm the contract and sue for damages based upon fraud, West v. Walker, 181 Minn. 169, 231 N.W. 826, 74 A.L.R. 165 (1930); Olson v. Northern Pac. Ry., 126 Minn. 229, 148 N.W. 67 (1914).

The rationale behind these rules is that the contract is no longer in existence and that any cause of action based upon the contract itself has been terminated. 148 N.W. at 68. Thus, vendees have sought injunctive relief to prevent...