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District Court of Appeal, First District, Division 1, California.

BARKIS v. SCOTT et ux.

Civ. 13801.

Decided: January 18, 1949

Eugene Elerding and Albert M. Hardie, both of Berkeley, for appellants. Ralph Nathanson and Marshall Rutherford, both of Oakland, for respondent.

Plaintiff is the vendor of real property. Defendants are the vendees. Defendants paid the plaintiff a $700 down payment, and paid $42.50 per month for 57 months, or a total of over $3,100, made improvements of over $3,100, and paid all taxes and insurance premiums on the property and then, under circumstances hereafter discussed, defaulted in making the payments due in June and August of 1946. Plaintiff immediately declared a forfeiture, and brought this action to quiet his title. When defendants discovered their defaults they immediately tendered to plaintiff the two payments, which were refused, and, before suit was brought deposited such payments in the bank to the order of plaintiff. Since that date each monthly payment has been deposited in a bank to the order of plaintiff, and all taxes on the property have likewise been so deposited. Nevertheless, the trial court quieted plaintiff's title, declared that the contract of purchase was null and void, and entered its judgment accordingly. From that judgment defendants appeal.

The facts are not substantially in dispute. The property involved is a house and lot in Oakland. Defendant Mr. Scott has been employed in San Francisco for twenty-eight years as a postal employee. On August 16, 1941, plaintiff contracted to sell, and defendants agreed to buy, the property, $700 down, which was paid, the balance of $5,450 to be paid off at the rate of $42.50 a month, with 6% interest on the unpaid balance. Payments were to be made on the 15th day of each month. The contract expressly provided that:

“If default should be made in the payment of any of the said sums of principal, interest or installments at maturity thereof, all moneys theretofore paid in the premises by said parties of the second part shall, at the option of said party of the first part, become absolutely forfeited to and be retained by said party of the first part, as and for liquidated and agreed damages for breach of this agreement; and this agreement shall then become and be absolutely void and of no effect. *

“It being expressly agreed that time is the essence of this contract *.”

Two months after the contract was executed defendants took possession and ever since have occupied the premises. The trial court found that defendants have improved the property with permanent improvements, for which they have paid $3,114.47. Admittedly, every monthly payment of $42.50 from September 15, 1941, to May 15, 1946, was made. The receipt book for such payments, kept in the handwriting of plaintiff, shows each payment having been made on the 15th day of each month. Plaintiff testified, however, that prior to November 8, 1944, the payments were “more or less irregular,” but he did not elaborate on this testimony. Defendants testified that only two payments had been made late, and that these had been made on the 16th of the months involved. Plaintiff testified that he wrote to defendants under date of November 8, 1944, informing them that he intended to hold them strictly to the terms of their contract. Thereafter, he testified, all payments up to and including May 15, 1946, were paid on or before the 15th of each month. In March of 1945, defendants wrote to plaintiff offering to pay the entire balance then due in cash, but plaintiff refused this offer stating that the loan draws “good interest and yields a fair return on the investment. I have therefore decided to let the contract run as specified.”

The check for the June, 1946, payment was sent to the plaintiff before June 15th. He testified that when he received the check he entered the payment in the receipt book and returned the book to defendants; that he then endorsed the check and delivered it to his wife. His wife testified that she cashed the check at a grocery store; that sometime after July 15, 1946, the proprietor of the store brought the check back to her because it had been dishonored; that she thereupon reimbursed him and kept the check. The check was never sent back through the bank. Admittedly, neither plaintiff nor his wife informed defendants that the June check had been noted “Refer to Maker” until plaintiff attempted to cancel the contract on August 26, 1946.

The July payment was duly and properly made by check, and the check was cashed by plaintiff and honored by the bank. The check for the August payment is dated August 12, 1946. Again the plaintiff noted the payment in the receipt book and returned the book to defendants. This check was returned to plaintiff by the bank with the notation “Refer to Maker.” Defendants testified that their bank book showed that they had enough money to cover both checks, and that they believed that both checks had been paid. Mr. Scott testified that he had been home on vacation and was ill when the June check was issued, and that he was home sick when he drew the August check. Mr. Scott's account was in a San Francisco bank, so that deposits were not made as they would have been had Scott been at work. Both defendants testified that they had sufficient money in cash or in other banks to have covered the two checks had they known that they had been dishonored, and would have done so had that fact been called to their attention. When Scott received his canceled checks in July there was a notation of a charge of fifty cents because he had overdrawn his account, but there was no indication what check, if any, had been dishonored. At the end of both June and August he had a credit balance in his account sufficient to cover the checks, and both checks would have been honored had they been returned to the bank.

Plaintiff admitted that the did not inform defendants that either check had been dishonored until August 26, 1946, and that at no time did he inform them that the entries made in the payment book should be canceled. When the August check was dishonored plaintiff immediately consulted his lawyer, who, on August 26th, wrote to defendants informing them that the June and August checks had been dishonored and stating: “This constitutes a breach of your contract and in accordance with the terms of your contract, William E. Barkis does hereby declare said contract absolutely void and of no effect, and does hereby demand immediate possession of said property.”

It is undisputed, and the record evidence shows, that, immediately upon learning of the fact that the checks had been dishonored, the defendants attempted to remedy their default. They tendered certified checks for the June, August and September payments, which were returned to them on September 10th. On September 12th they deposited amounts to cover the three payments in a Berkeley bank to the credit of plaintiff, and notified plaintiff of that fact. It is admitted that every month since September, 1946, defendants have deposited the monthly payments in the bank to the credit of plaintiff. They also have attempted to pay the taxes on the property, but plaintiff secured the tax bill and paid the taxes. The amount of such taxes has been deposited by defendants to the credit of plaintiff.

On these undisputed facts the trial court found that “defendants' failure to meet said obligation by issuing checks drawn upon a Bank in which he [they] had not sufficient funds was grossly negligent and a wilful breach of duty,” and concluded that, since time was of the essence of such contract, “defendants' failure to make the payments in accordance with the terms thereof forfeited all their right, title, interest and estate in and to the provisions of said contract and in and to said real property.”

The first contention of defendants is that by receiving and keeping the July 15, 1946, payment the plaintiff waived the June 15th default, and that this waiver temporarily suspended the right of forfeiture for later defaults until restored by proper notice. Plaintiff points out that he did not know of the June default when he accepted the July payment. That is true, but the indisputable fact remains that, after he knew of the June default, he thereafter retained the July payment and then sought to forfeit defendants' rights under the contract partially because of the June default. We have no doubt that, if the June default were the only default involved, we could work out a satisfactory theory that the retention of the July payment, as a matter of law, amounted to a waiver of the default. The courts, when forced with a strict doctrine of forfeiture, have quite uniformly held that liberal rules as to waiver should be applied. But there is also involved the August default. It is not the law, as contended by defendants, that the waiver of one default, as a matter of law, amounts to a waiver of future defaults unless the vendor notifies the vendee that he is going to insist on strict compliance. Whether a waiver of past defaults constitutes a waiver as to future defaults, is a question of fact (Kerr v. Reed, 187 Cal. 409, 202 P. 142; Lowe v. Copeland, 125 Cal.App. 315, 13 P.2d 522), and here the trial court has found that there was no waiver. Unless there has been repeated acceptances of overdue payments so as to create a reasonable inference that the “time is of the essence” clause has been waived, the courts have generally refused to find, as a matter of law, that there has been a waiver as to future payments. Boone v. Templeman, 158 Cal. 290, 110 P. 947, 139 Am.St.Rep. 126; opinion of Supreme Court in denying a hearing in De Bairos v. Barlin, 46 Cal.App. 665, 673, 190 P. 188; see cases collected and discussed 9 A.L.R. 996, particularly at p. 1002. We, therefore, conclude that, insofar as the court has found a forfeiture based on the August default, we cannot hold, as a matter of law, that such August default was waived by the retention of the July payment.

That brings us to the pivotal point on this appeal, and that is, whether, in view of the obvious equities in favor of defendants, the trial court abused its discretion in refusing to grant them equitable relief under § 3275 of the Civil Code. That section provides: “Whenever, by the terms of an obligation, a party thereto incurs a forfeiture, or a loss in the nature of a forfeiture, by reason of his failure to comply with its provisions, he may be relieved therefrom, upon making full compensation to the other party, except in case of a grossly negligent, willful, or fraudulent breach of duty.” Should or can this section be applied to a land purchase contract where time is made of the essence? This question would be easy to answer if the problem were a simple one of interpreting the code section. On its face, the section clearly applies to any contract expressly providing for a forfeiture. The difficulty is not with interpreting the code section, but with the case law. While equity has been most zealous in protecting the rights of a purchaser in a mortgagor-mortgagee situation, and in such cases has refused to permit the defaulting purchaser's rights to be forfeited, it has shown no such solicitude for the purchaser where the seller retains title and merely enters into a contract to sell. Where the purchaser enters into possession, there are no material practical distinctions between the two situations. In both cases they are security transactions. But, although a forfeiture is never permitted in the mortgage situation, there are cases holding, in land contract cases, that, where time is of the essence, any default, not waived, results in a complete forfeiture of the purchaser's interests. The down payment, all payments made on the balance of the purchase price, and all improvements paid for by the purchaser are, under this theory, forfeited to the seller, who thus, in many cases, receives back his property and also large sums of money far in excess of any damages suffered. The leading case expounding this theory is Glock v. Howard & Wilson Colony Co., 123 Cal. 1, 55 P. 713, 43 L.R.A. 199, 69 Am.St.Rep. 17. In that case the purchaser paid two installments and then defaulted. He was never in possession. Three years later he tendered the balance due and demanded a conveyance. When this was refused he brought suit for the return of his payments. He was refused any relief. In so holding the Court discussed the problem at length and concluded that, where time was of the essence, the vendor may declare all rights of the vendee forfeited. That even that case did not intend to hold that the rigid rule thus announced was not without exceptions, is made clear by the following appearing 123 Cal. on page 16, 55 P. on page 718, 43 L.R.A. 199, 69 Am.St.Rep. 17: “The contract is made to depend upon a condition precedent. By its terms no right is to vest in the vendee until certain acts of payment have been done by him, and a court of equity no more than a court of law will relieve a vendee, under such circumstances, from the penalties arising from the breach of such condition, in the absence of an equitable showing to excuse his default. None is here even attempted to be made.” (Italics added.)

There are several things to be noted about the Glock case. In the first place, the facts were not such that any great injustice was done to the vendee by forfeiting his rights. In the second place, the Court recognized that an equitable showing might be made to excuse the default. In the third place, the opinion does not consider, nor even mention, § 3275 of the Civil Code. A decision overlooking or not considering a statute cannot be interpreted as holding that the statute is inapplicable. See cases collected 27 Cal.L.Rev. 583 at p. 593, fn. 50.

There were cases before the Glock case that had announced the rigid rule adopted in that opinion (Grey v. Tubbs, 43 Cal. 359; Parsons v. Smilie, 97 Cal. 647, 32 P. 702; Martin v. Morgan, 87 Cal. 203, 25 P. 350, 22 Am.St.Rep. 240), and there have been cases since the date of that decision that have also ignored § 3275 of the Civil Code, and that have approved the rule announced in the Glock case. See cases discussed 27 Cal.L.Rev. 583, at p. 587, et seq.; see, also, Pomeroy's Equity Jurisprudence, 5th Ed., p. 696, § 301; discussion in 55 Am.Jur. p. 587, § 111.

The adoption of such a strict rule early led to modifications. Very liberal rules of waiver and estoppel have been developed. (See Boone v. Templeman, 158 Cal. 290, 110 P. 947, 139 Am.St.Rep. 126; Stevinson v. Joy, 164 Cal. 279, 128 P. 751; Myers v. Williams, 173 Cal. 301, 159 P. 982; Butte Creek Consolidated Dredging Co. v. Olney, 173 Cal. 697, 161 P. 260; Newell v. E.B. & A.L. Stone Co., 181 Cal. 385, 184 P. 659, 9 A.L.R. 993; Hoppin v. Munsey, 185 Cal. 678, 198 P. 398; see notes 1 Cal.L.Rev. 300; 8 Cal.L.Rev. 60; 11 Cal.L.Rev. 286; 12 Cal.L.Rev. 438; see, also, discussion 27 Cal.L.Rev. 583 at p. 587, et seq.)

As early as 1911 the district courts of appeal began to apply § 3275 of the Civil Code on behalf of the defaulting vendee. The first case to mention the section in this connection was McDonald v. Kingsbury, 16 Cal.App. 244, 116 P. 380. That, as is the instant case, was an attempt by the vendor to quiet his title against a defaulting vendee, who, as in the instant case, attempted to make a tender after the default. The trial court ordered that, upon the vendee paying all sums due into court, he might be relieved from his default. This was affirmed, the appellate court relying strongly on § 3275. In addition, however, the Court found both a waiver and an estoppel.

The section was also applied in Troughton v. Eakle, 58 Cal.App. 161, 208 P. 161. There a sale of land had been made under an installment contract with a “time is of the essence” clause. The vendees made a tender of payment that had attached thereto an invalid condition. The vendor refused to convey. The vendees brought suit to recover their prior payments. The plaintiffs recovered judgment, which was reversed on grounds not here important. But the Court held that, inasmuch as the vendees had made an honest effort to comply with their obligations, they should be permitted to amend their complaint so that the Court could, under § 3275, allow them equitable relief. At page 173 of 58 Cal.App., at page 166 of 208 P., the Court stated:

“At any rate, the courts are ready upon the slightest equitable consideration to relieve parties, upon such terms as may be just, from the results of a forfeiture. The principle is embodied in section 3275 of the Civil Code as follows: [Quoting Civil Code, 3275.]

“We see no reason why such relief might not be had in the present case, as it does not fall within the exception. The plaintiffs made an effort to comply with their obligation, but, acting probably without legal advice, their effort was ineffective. Their complaint was framed, as we have seen, upon a different theory, and it would be necessary to have it amended to justify the relief that we have suggested. We perceive no valid objection to such procedure, and, if that course be taken, the court can allow whatever is just and equitable in view of all the circumstances.”

The section was also applied in Fickbohm v. Knaust, 103 Cal.App. 443, 284 P. 692. There again was an installment contract, and time was made of the essence. A down payment was made and three monthly installments were made and accepted. Then the vendee wrote to the vendor asking for a statement of the balance due so that it could be paid in a lump sum. No reply was made to this letter, and, after two monthly installments had not been paid, the vendor declared the interests of the vendee forfeited. The following day the vendee tendered the entire amount due under the contract, but it was refused. Plaintiff brought suit to recover payments made; the vendor cross-complained to quiet her title. As in the instant case, the issues of waiver and nature of the plaintiff's negligence were decided against the vendee, and the vendor's title quieted. This was reversed. In reversing the judgment the Court used language peculiarly applicable to the instant case. It stated:

“The facts of this case should appeal strongly to the conscience of a chancellor. Justice would seem to demand that the plaintiff should be relieved from what, at most, appears to have been a slight and technical default, which was harmless to the defendant, beyond the brief delay in the payment of not more than two installments. There is little use in reiterating the maxim that ‘equity abhors forfeitures,’ unless the principle is enforced when the facts warrant its application.” 103 Cal.App. at page 445, 284 P. at page 693.

“* Full compensation for all deferred payments and interest was tendered the following day. No further damage by virtue of the delay is claimed by the defendant. In view of the unanswered letter, which was sent to the defendant, seeking information as to the total amount required to fully pay for her equity in the land, the legitimate question as to just when the installments were due, and the slight delay in two payments at most, the plaintiff should be credited with good faith in the effort to fulfill his contract. This conduct does not amount to gross negligence. Under such circumstances, even if the defendant did not waive prompt payments by her acceptance of deferred installments, the plaintiff should be relieved from a forfeiture under the provisions of section 3275 of the Civil Code”. 103 Cal.App. at page 446, 284 P. at page 693. See, also, Miller v. Modern Motor Co., 107 Cal.App. 38, 290 P. 122—applying § 3275 to a conditional sale of an automobile; Bedell v. Barber, 80 Cal.App.2d 806, 182 P.2d 591. Perhaps the latest case in the appellate courts on the subject is the well-reasoned case of Breitman v. Gattman, 88 Cal.App.2d 124, 198 P.2d 311. There the vendee was in default one day in making an agreed-upon payment. The action of the trial court in relieving the vendee from his default under § 3275 was affirmed. The appellate court distinguished the Glock case and cited a large number of authorities in accord with the views that relief from the forfeiture should, in such cases, be granted.

The Supreme Court applied § 3275 in Ebbert v. Mercantile Trust Co., 213 Cal. 496, 2 P.2d 776, in granting relief under the section to a defaulting assignee of a vendor. In that case the note given by the vendee stated that its payment was conditioned upon the vendor performing certain conditions, and that, upon failure to so perform and after ninety days' notice of default, the note was to become void as to the balance of the payments. The conditions were not performed and the vendee sued to cancel the note. A judgment for the vendee was reversed, the Court stating 213 Cal. at page 500, 2 P.2d at page 778: “Glock v. Howard [& Wilson Colony Co.], 123 Cal. 1, 55 P. 713, 43 L.R.A. 199, 69 Am.St.Rep. 17, upon which plaintiffs place great reliance, is not controlling. The holding there was that in a contract of sale of real property, where time was of the essence, the vendor might, upon default by the vendee, stand upon his contract, retain title, and forfeit prior installments of the purchase price. In that case payment of the whole of the purchase price was a condition precedent to the right to receive a deed. While this decision undoubtedly permits a forfeiture in violation of the spirit and perhaps the language of section 3275 (see 18 Cal.L.Rev. 681), its conclusion was reached without any consideration of the statute, and it deals only with express conditions precedent. It cannot be deemed to apply to a case involving facts which are wholly dissimilar. Defendants here are not defaulting purchasers claiming a deed, and plaintiffs are not standing upon their contract, but are seeking the aid of the court to escape from its obligations. Moreover, the instant case does not involve a condition precedent to performance by the purchasers. * The penal provision is in the nature of a condition subsequent, setting forth a contingency upon the happening of which the forfeiture takes place.” See, also, Henck v. Lake Hemet Water Co., 9 Cal.2d 136, 69 P.2d 849, and Leslie v. Federal Finance Co., Inc., 14 Cal.2d 73, 92 P.2d 906. The latest Supreme Court case on the subject is Gonzales v. Hirose, 1948, 33 Cal.2d 213, 200 P.2d 793, where many of the cases above-referred to are cited. In that case § 3275 was applied on behalf of a defaulting vendee without mention of the rule of the Glock case. The factual situation there presented, however, also involved a waiver of the time clause in the contract.

The statement appearing in several cases that § 3275 of the Civil Code is qualified by § 1492 of that Code (Collins v. Eksoozian, 61 Cal.App. 184, 196, 214 P. 670; Henck v. Lake Hemet Water Co., 9 Cal.2d 136, 69 P.2d 849) was clearly dicta and is clearly wrong dicta. Section 1492 provides: “Where delay in performance is capable of exact and entire compensation, and time has not been expressly declared to be of the essence of the obligation” an offer of compensation may be made at any time after it is due. The section, by its very terms, has no application to transactions where time is of the essence. See 27 Cal.L.Rev. 583 at p. 597, et seq.

The general rule in other jurisdictions is contrary to that announced in the Glock case. In Williston on Contracts, Rev.Ed., vol. 3, p. 2229, it is stated: “Where the transaction is in its essence a mortgage, agreements for forfeiture and provisions that time is of the essence should be given no more weight than similar provisions in a mortgage. Such a principle is not, however, always recognized. Not only is a defaulting purchaser in such a case generally denied the right to recover what he has paid, but he has also not infrequently been denied the right to pay with interest what is due and enforce the contract specifically. In a few instances extreme forfeitures have been permitted where the contract made time of the essence. In a majority of cases, however, equitable relief has been given a purchaser in possession against provisions making time essential, the situation being rightly treated as substantially the same as that of mortgagor and mortgagee, and the provision for forfeiture as ineffectual as in a mortgage.” See, also, cases collected and commented upon 40 A.L.R. 182, particularly at page 184. The United States Supreme Court is in accord with this view. In Cheney v. Libby, 134 U.S. 68, 78, 10 S.Ct. 498, 502, 33 L.Ed. 818, it is stated: “Even where time is made material, by express stipulation, the failure of one of the parties to perform a condition within the particular time limited will not in every case defeat his right to specific performance, if the condition be subsequently performed, without unreasonable delay, and no circumstances have intervened that would render it unjust or inequitable to give such relief.”

The rule of the Glock case has been uniformly condemned by the legal writers. See 18 Cal.L.Rev. 681; 27 Cal.L.Rev. 583, 587; 52 Harvard L.Rev. 129, 131; 5 Minn.L.Rev. 329, 345.

Many other cases could be cited discussing the problem involved. Most of these cases will be found in the articles above-mentioned. The following conclusions can be derived from the cases: That the strict rule of the Glock case has been so whittled down by subsequent cases that it no longer can be considered to state the existing rule; that that case completely overlooked § 3275 of the Civil Code; that that section is clearly and directly applicable to the case of a defaulting vendee under a land contract where time has been made of the essence; that most of the cases since the Glock case have found some equitable grounds to grant relief to the defaulting vendee where he has not been seriously in default; that the granting of relief to the defaulting vendee where he has not deliberately violated his contract is in accord not only with § 3275 but with the weight of authority elsewhere; that such rule is sound and equitable.

In the present case, keeping in mind that the trial court has decided against the vendees and that all reasonable inferences must be indulged in in favor of the trial court's determination, nevertheless, all of the substantial equities favor defendants. They have made a substantial down payment and have made over 57 monthly payments. They have expended over $3,100 in improving the premises. The only damage suffered by the plaintiff was a two-month default. The plaintiff had receipted for those two payments and had returned the receipt book to defendants, and defendants believed the payments had been made. The uncontradicted evidence shows that defendants were acting in good faith in that they were honestly unaware of their default. They apparently made a mistake in computing the balance in the checking account. At most, that account was but a few dollars overdrawn. The defendant Mr. Scott worked in San Francisco and lived in Oakland. In both June and August when the checks were issued he was home sick and did not make deposits that he otherwise would have made. Defendants did not know they were in default until they received the letter of August 26, 1946. Immediately they tendered the amount due, and, upon refusal of the tender, deposited the payments in the bank to the credit of plaintiff. They have made deposits of every payment due since September, 1946, and have likewise tendered and deposited all tax moneys due. Under such circumstances, the finding that defendants were “grossly negligent” and that their failure to make the two payments was “a wilful breach of duty” is totally unsupported by the evidence. The defendants were probably only guilty of making an innocent mistake, but, at most, were guilty of simple negligence. In 19 Cal.Jur. p. 553, 554, § 7, “gross” negligence is defined as follows: “Where the distinction is important, gross negligence has been defined ‘the want of slight diligence,’ as ‘an entire failure to exercise care, or the exercise of so slight a degree of care as to justify the belief that there was an indifference to the things and welfare of others,’ and as ‘that want of care which would raise a presumption of the conscious indifference to consequences.’ ” See, also, Krause v. Rarity, 210 Cal. 644, 293 P. 62, 77 A.L.R. 1327; Walker v. Bacon, 132 Cal.App. 625, 23 P.2d 520; Nelson v. Westergaard, 130 Cal.App. 79, 19 P.2d 867. It must at least constitute an “extreme degree of negligence.” Cobb v. Lawrence, 54 Cal.App.2d 630, 634, 129 P.2d 462, 464. The facts here fail to support a finding that defendants were guilty of an extreme degree of negligence, or that they were consciously indifferent to consequences.

The judgment appealed from is reversed.

PETERS, Presiding Justice.

WARD and BRAY, JJ., concur.