CHAPMAN COLLEGE v. WAGENER (1954)

Plaintiff appeals from a judgment of rescission after it had sued to reform a contract for the purchase of land. The cross complaint raised the issue of no contract, alleging that there had been no agreement upon the same thing.

June 15, 1949, appellant by written contract agreed to purchase from respondents 934 acres of land for $1,500,000, of which $150,000 was paid in cash. The balance was evidenced by three promissory notes aggregating $1,350,000 payable to the three sellers, each bearing interest at two per cent per annum on the unpaid principal. The contract provided that (1) the land should be conveyed to a subdivision trust, subdivided and sold; (2) the balance of $1,350,000 was to be paid by the trustee from a percentage of the proceeds received from the sale of the land; (3) the notes were to provide that all payments thereon shall first be credited on interest and balance on principal.

The conveyance of the land to appellant through escrow was simultaneous with the execution and delivery of the promissory notes and deed of trust securing them. The notes as executed did not contain the term above italicized. However, certain sales were made of the subdivided land and the proceeds were apportioned to respondents¹ and appellant. After operations had continued for nine months, a dispute arose. The college claimed that the sums received by it should be applied first toward the payment of interest then toward principal, according to the contract. As the dispute continued, appellant paid to respondents the percentages from sales of parcels as provided by paragraphs (a), (b) and (d) of the contract which payments were to be applied on the purchase price. As they received such moneys, respondents executed requests for reconveyances which effected releases of the parcels from the lien of the deed of trust.

But respondents contended that such sums paid to them should be applied exclusively on the principal of the indebtedness. Also, they insisted that, in addition to such payments of principal, the college should be required to pay interest. After respondents had threatened to declare a default under the three promissory notes and deed of trust, the instant action was commenced.

By its complaint, appellant demanded a reformation of the notes and trust deed on the grounds of mutual mistake (count 1) and a declaration of the rights of the parties under the contract (count 2). By their cross complaint, respondents demanded a rescission of the entire transaction. The court found that there had been no meeting of the minds of the parties on the question of the division and application of the proceeds of the sales. The judgment cancelled the contract, the notes and deed of trust.

Appellant now contends that ‘the effect of the judgment * * * is to hold that the written contract which was entered into by the parties with the advice and assistance of their attorneys after protracted negotiations, the deed and other written instruments between the contending parties were of no effect whatsoever because the sellers believed that moneys from the subsequent sales of lots should be applied only toward principal of the notes and trust deed owing by the buyer and the buyer believed that the moneys to be paid the sellers should be applied first toward interest and then toward principal.’ Still another statement of appellant's contention is that ‘the court held that a misunderstanding as to the application of moneys from sales invalidated the entire agreement and all the written documents between the parties * * * and refused to declare the rights of the parties under the contract or notes * * * refused to interpret the meaning of the written instrument but instead set them all aside in their entirety.’

It may serve to clarify and classify certain factual statements hereinafter occurring to interject more of the background. Respondents are the devisees of one H. C. Fryman, deceased. His estate was probated in Los Angeles County. The estate was in need of founds to pay its indebtedness. For that purpose respondents borrowed $150,000 from the college for the purpose of paying the federal estate tax of the estate and other necessary expenses. The payment of that sum as a loan to the Fryman heirs turned out to be the down payment on the purchase price of 934 acres. The balance of $1,350,000 was to be paid from sales of the lands which were to be subdivided and sold. Until the college should receive back the $150,000 advanced, it was to pay respondents only 30 per cent of the gross sales price on the tenth day of each month from escrows closed in the preceding month. Thereafter, respondents were to receive monthly the first $7,500 net resulting from the sale of the real property, and in addition thereto, 30 per cent of the gross proceeds from sales above the $7,500.

The Findings.

The court found the sale had been made on the terms above recited (second paragraph) and that three notes aggregating $1,350,000 were executed in favor of respondents. They were secured by a trust deed conveying the land to the Title Insurance and Trust Company as trustee, and were to be paid as follows:

‘(a) Until the Buyer shall have received from sales made by it of the real property herein purchased the sum of One Hundred and Fifty Thousand Dollars ($150,000.00), the Buyer agrees to pay to the Sellers, on the tenth day of each month, thirty per cent (30%) of the gross sales price of said real property for sales fully completed, through escrows closed, in the preceding month.

‘(b) Subsequent to the Buyer's recovery of the said sum of One Hundred and Fifty Thousand Dollars ($150,000.00) in the preceding paragraph (a) referred to, the Buyer shall pay monthly to the Sellers the first Seventy-Five Hundred Dollars ($7500.00) net received from the sales of said real property so completed by the Buyer, and in addition thereto, the Buyer shall pay to the Sellers, monthly, thirty per cent (30%) of the gross sales price of said real property; provided, however, that said thirty per cent (30%) shall not be paid upon said sum of Seventy-five Hundred Dollars ($7500.00) net. The said payment of Seventy-five Hundred Dollars ($7,500.00) and said thirty per cent (30%) of the gross sales price shall be paid to the Sellers on the tenth day of each month on sales completed, through escrows closed, by the Buyer in the preceding month. ‘Net’ or ‘net received from sales' as herein used is defined to be the gross sales price, less usual and customary real estate brokers' commission paid, escrow fees, and charges and cost of Policy of Title Insurance.

‘(c) Notwithstanding the provisions of said paragraphs (a) and (b), all moneys due and payable under said trust deed notes shall become due and payable within fifteen (15) years from the date of said notes.

‘(d) Notwithstanding the provisions of (a), (b), and (c) last stated, the Sellers shall receive a minimum of Twenty-Five Hundred Dollars ($2500.00) per acre for each acre of the said real property sold by the Buyer, herein called ‘minimum release price’, and the Buyer shall not be entitled to the release of any of the said real property sold by it from the lien of the deed of trust, except on payment to the Sellers of not less than Twenty-five Hundred Dollars ($2500.00) for each acre of said property sold by the Buyer, except as provided in paragraph 5(b) hereof.'

It was further found that the contract provided for the creation of a subdivision trust with the Title Insurance and Trust Company as trustee to provide a method of payment to the sellers of the principal and interest and to relieve both parties of bookkeeping and to assure proper distribution to sellers of the amounts due them; the trust to continue until all sums due sellers shall have been paid; ‘said trust shall provide that whenever the trustee shall have available funds in said trust resulting from sales made by the buyer, the trustee shall pay interest on said trust deed notes on the first day of each month * * * and if said funds are inadequate to pay in full the interest due on all of said trust deed notes, then such interest as is paid shall be prorated and credited * * * in proportion to the face amount of each note.’

The court further found (VII) it to be the contention of plaintiff that the provision of Paragraph 4, subparagraph II of the contract, reading: ‘Said notes shall provide that all payments made thereon shall first be credited on interest and the balance on principal’ means and was understood by plaintiff to mean and should be interpreted to mean that all payments agreed to be made by plaintiff to sellers should be credited first on interest and then on principal.

‘That it is and was at all times herein mentioned the contention and understanding of the said sellers * * * that the said quoted provision of said contract did not apply to the balance of the purchase price of $1,350,000.00 to be paid * * * as provided in subdivisions (a), (b) and (d) of Paragraph 4, Subdivision II of said contract, and that all moneys to be paid to Sellers on the 10th day of each and every month based upon and being a percentage of the gross or net sales prices of said real property for sales fully completed through escrows closed, and the minimum release price moneys to be paid to Sellers, all as provided in subdivisions (a), (b) and (d) of said Paragraph 4, Subdivision II, of said Exhibit ‘1’, were payments solely upon the purchase price of said $1,350,000.00, that said purchase price was principal and that all moneys paid to Sellers on said purchase price, as provided in said subdivisions (a), (b) and (d), were to be credited and applied solely upon said principal purchase price and none thereof upon interest; * * * that interest at the rate of two percent per annum was to be paid annually by plaintiff to Sellers whether there were or were not sales of real property, and that interest would be paid monthly to said Sellers by the subdivision Trustee to be designated in accordance with Paragraph 9 of said contract, payable on the first day of each month if the said subdivision Trustee had in its possession funds available from the plaintiff's share of the proceeds derived from said sales available therefor, said monthly interest payments to be made after the payment to said Sellers of the release price moneys to be paid to them on the purchase price as provided in said subdivisions (a), (b) and (d) * * * that the above quoted language relied upon by plaintiff refers and applies only to payments of moneys to be made by Buyer to Sellers on the anniversary date of the said notes, or to voluntary payments which plaintiff might make but was not required to make from proceeds of sales, and that such payments only were to be first credited on interest and then on principal * * *

‘The Court finds that the above referred to provisions of said contract * * * are inconsistent and make the said contract uncertain and ambiguous, and that the provisions respecting the application of payments made were material provisions of said contract.

‘The Court finds that by virtue of the foregoing all parties did not agree upon the same thing in the same sense with respect to the application of payments to be made to the Sellers from sales of said parcels of real property as provided in Paragraph 4, Subparagraph II, subdivisions (a), (b) and (d) of said contract, and that there was therefore no meeting of the minds of the parties as to said provisions and no mutual consent of the parties thereto, and that there was no contract between the parties for lack of such mutuality of consent.

‘VIII

‘That it was the intention, understanding, and belief of the plaintiff in executing said contract, Exhibit ‘1’, that all payments to be made by plaintiff to Sellers on said notes would be first credited to interest and then to principal irrespective of the source from which said funds were derived.

‘That it was the intention, understanding and belief of Russell H. Wagener, Louise Wessel and Anna Armstrong that all payments of money to be made to them upon the said principal balance of the purchase price of $1,350,000.00 as release price moneys to secure the release from the lien of the deed of trust of parcels of said real property so sold as provided in said subdivisions (a), (b) and (d) of Paragraph 4 of Subparagraph II of said Exhibit ‘1’ were to be credited solely on principal * * *'

Findings X and XI declare the parties agreed to the elimination of the provision for the formation of a subdivision trust for the sale of the lands; finding XII recites an agreement to delete from the promissory notes the provisions that payment be credited on interest and the balance on principal and that plaintiff's contention to the effect that the notes and trust deed were all parts of the same transaction were untrue.

Finding XIII declares the promissory notes were drawn by the attorneys of both parties acting together and were approved by both plaintiff and defendants and their attorneys and that the deed of conveyance and the deed of trust were duly executed and deposited with the Title Insurance and Trust Company.

By finding XIV the court determines that the notes and trust deed were not the result of a mutual mistake of plaintiff and the payees not as a result of a mistake of one of the parties which the other at the time knew or suspected. ‘There was no meeting of the minds of the parties with respect to the application of the payments to be made as provided in paragraphs (a), (b) and (d) of said promissory notes, and the said promissory notes and deed of trust executed by plaintiff, and the said deeds * * * conveying title to said property to the plaintiff, are void for lack of mutuality of consent of the parties in that the parties did not all agree upon the same thing in the same sense.’

The findings then recite the number of sales of the land made, showing 62 were completed prior to October 9, 1952, for the total amount of $415,671.13. After finding the contract of June 15, 1949, the grant deed to appellant, respondents' quitclaim deed to appellant, the three promissory notes and the trust deed void for lack of mutuality of consent, the findings recite that, after demand and threat served upon plaintiff to pay interest in accordance with the contentions of defendants or the latter would take legal action, appellant instituted the instant action to determine the rights of the parties.

By finding XXV the court determined that defendants gave no notice of rescission of any document, and were not required to do so.

Finally, the court found that except as specifically declared, ‘it cannot grant plaintiff any relief’ under the count for declaratory relief. From such findings the court concluded that all documents relating to the transaction between the parties should be cancelled and the transaction to be void on the ground of mutual mistake.

Rescission Not Justified.

To hold that a dispute between parties to an agreement as to the meaning of some of its terms constitutes ground for adjudging that the agreement is void because the minds of the contracting parties did not meet is a definite retrogression of the law. For what purpose did an enlightened bar through weary years strive for the enactment of the statute providing for declaratory relief? If a genuine controversy exists between the two parties over a contract they made with serious purpose, why should either party surrender valuable rights he holds by virtue of such contract? Merely because contracting parties disagree as to the meaning of one clause in a writing of many covenants, should a court snatch from one signatory all the gains available? To say that a contract should, under the circumstances, become only a ‘scrap of paper’ and the owner thereof penalized by a deprivation of all his rights thereunder is an abuse of the ramparts of equity.

In the instant matter, the parties negotiated for some weeks to effect the transaction in which both took some pride. They had retained honorable and able counsel to advise them. The attorneys collaborated in ironing out the details that were agreed upon. Neither is either party nor any lawyer in their employ suspected of overreaching. Respondents had land to sell and appellant desired to own it. They reached terms in the normal, usual way and operations under their writing proceeded for a number of months. Appellant made no attempt to obviate its obligations. It affirmed the contract in all its provisions. Unable to prevail upon its contractees it presents to the court a straightforward declaration of its claim and of the positions taken by both in their negotiations. If appellant's contention that certain words should be inserted by the court to express the mutual agreement of the parties, plaintiff was not in default. On the other hand, if the position taken by respondents had appealed to the court as correct, plaintiff should have been directed to comply with a judgment declaring the true terms thereof. If either party had refused to comply with the judgment, the remedy prescribed by the contract, the notes and the trust deeds could have been applied. Respondents had every right protected by their right of foreclosure. Prior to the filing of the cross complaint, rescission had not been suggested. All parties interested considered the documents to be valid and in full force and effect. The dispute did not bring into question the validity or the wisdom of the contract. They differed merely on the manner or order of the application of payments. Instead of advising plaintiff as to a reasonable interpretation of the writings by a declaratory judgment the court declared a forfeiture of all plaintiff's rights in the contract. Equity abhors a forfeiture. But instead of abhorrence, the judgment raises the standard on behalf of forfeiture and condemns the suppliant to ‘walk the night.’ If the plaintiff here involved, under the circumstances here outlined, with a valuable contract in operation can be tossed into limbo on so slight an excuse as is presented, what security has any person in the possession of rights gained by contract?

The entire law of rescission contemplates the concept that one party has by unfair advantage wronged the other; that the injured party may be saved from loss by notice of his potential damage to his contractee; that pursuant to such notice, the latter may restore the contractor to statu quo and avoid loss to himself. Not a feature of the contract of sale herein was objectionable. Though they did mutually revise it by eliminating the subdivision trust, that change was made without detriment or shock. The details agreed upon were first considered by wise and sagacious counsel. The plan of acquiring the funds with which to make payment for the land was orthodox. But because appellant's construction of the clause relating to the application of the payments, without even a threat, respondents sue to rescind the entire transaction. There was neither undue influence, fraud, mutual mistake, mistake of fact nor any other occurrence cognizable in equity upon which to base an action for rescission and no opportunity to save itself from total loss of its contract was allowed appellant. No mistake in the preparation of the document was made that went to the vitals of the contract: but only a failure to understand how moneys contracted for, and which were actually paid, should be applied.

Such a disagreement with respect to a mere detail is not sufficient cause for avoiding a contract involving property worth in the raw one and a half million dollars. But on finding two parties, honorable and in good faith, zealously attempting to perform their agreement, the chancellor should have construed the writing by which both parties would then abide. The law abhors the destruction of contracts because of uncertainty in some inferior particular but requires an interpretation that will effect the reasonable intention of the parties. Bettancourt v. Gilroy Theatre Co. Inc., 120 Cal.App.2d 364, 367, 261 P.2d 351. If a step in the process of performance of an agreement is indefinite, but is capable of being rendered definite and certain either by internal evidence or by proof aliunde, the contract is enforceable. Ibidem; see Vierra v. Shaffer, 113 Cal.App.2d 768, 772, 248 P.2d 992.

When the clear, unambiguous language of a contract permits a complete fulfillment of the covenants assumed by the contracting parties and promotes the purposes of the agreement, that construction is preferable rather than a destruction of the contract or a rewriting of its terms into a new document. It is not the function of a court to rewrite the clear terms of a lawful contract. Nourse v. Kovacevich, 42 Cal.App.2d 769, 772, 109 P.2d 999; Mitchel v. Brown, 43 Cal.App.2d 217, 221, 110 P.2d 456; Vierra v. Shaffer, supra; 12 Cal.Jur. 2, 325. When an appeal depends solely upon the construction of the language of a contract, the reviewing court determines its meaning as a matter of law. Civ.Code, sec. 1639; Sass v. Hank, 108 Cal.App.2d 207, 211, 238 P.2d 652; Cousins Investment Company v. Hastings Clothing Company, 45 Cal.App.2d 141, 147, 113 P.2d 878.

There is nothing in the record to justify the conclusion that there was no binding contract. It was not unlawful and the public interest would not have been prejudiced by it. Civ.Code, secs. 3406–3408. It was capable of performance. No doubt existed as to the moneys payable or as to the times of payment. The share due each respondent was clearly ascertainable. The means and method of foreclosure for delinquency were not unknown. It is an elaborate contract worthy of the stupendous subject involved. Moreover, the contracting parties chose their own method of enforcing performance by the buyer of the land, to wit, foreclosure of the trust deed, in event of default in payments due on the notes. By adopting such process, which has been in use from time immemorial, they arranged it so that in the event a payment should become delinquent, several steps were made necessary before the obligor on the notes could be deprived of ownership of the land: (1) demand for performance; (2) declaration of default to the trustee; (3) publication of notice of default and intention to sell the land for the purpose of enforcing payment of the notes; (4) sale by the trustee. At any time prior to the sale, the payor on the notes could have defeated the loss of its title by paying either the disputed items or the entire indebtedness. Notwithstanding the choice by the parties of such arrangement in the trust deed, out of a clear sky respondents demand a judgment rescinding the contract, the notes and the trust deed and the court found that ‘under the circumstances of this case defendants were not required to give any notice of rescission or to restore or offer to restore to plaintiff anything they had received.’ By what facts or law was the court guided to make such finding? No proof was made of respondents' inability to give notice or of appellant's inability to receive and understand its contents. As to the law, the Civil Code provides an elaborate scheme for the extinction of contracts. Secs. 1688–1691. Section 1689 prescribes six conditions, under any one of which ‘a party to a contract may rescind.'² Not only was no notice given by respondents, but no ground for rescission is found in the record. If one existed, still the scheme which the trust deed provided for the benefit of its beneficiaries would prevail over any statutory procedure for the reason it had been adopted by the contracting parties as the means by which the payees of the promissory notes could enforce payment.

If appellant's conclusion at the time of filing its action was correct, namely, that it did not owe anything and that all payments due under the notes were fully paid, surely no action could have prevailed against it; if it had been in error, the court could have so decreed without loss to any one. Appellant might have paid respondents if it had been in error and if it had been correct, respondents would have continued to take their payments in the future, as contended at all times by appellant during the 29 months prior to the filing of the action.

From the facts found, the conclusions made did not necessarily follow. From an interpretation of the contract with or without the aid of evidence aliunde, it was competent for the court to determine the covenants agreed upon. The parties agreed, one way or the other: either as appellant contends or as respondents affirm. If upon another trial, the court should determine that the interpretation of the agreement is in accordance with appellant's thesis, it will so adjudge and the payments made will be applied in accordance with the terms of the contract. If, on the other hand, the court should find the true interpretation of the contract accords with contention of respondents, it will so adjudge and specify a time within which the college shall make any delinquent payments and upon its failure to comply therewith, it will be subject to the foreclosure provisions of the trust deed.

It is therefore ordered that the judgment is reversed and the court below is directed to try the issue of the proper interpretation of the contract and make appropriate orders in accordance with the views herein expressed.

FOOTNOTES

1.  The notes held by respondents for the $1,350,000 were as follows: Wagener, $900,000; Armstrong, $225,000; Wessel, $225,000.

2.  Section 1689, Civil Code.‘A party to a contract may rescind the same in the following cases only:1. If the consent of the party rescinding, or of any party jointly contracting with him, was given by mistake, or obtained through duress, menace, fraud, or undue influence, exercised by or with the connivance of the party as to whom he rescinds, or of any other party to the contract jointly interested with such party;2. If, through the fault of the party as to whom he rescinds, the consideration for his obligation fails, in whole or in part;3. If such consideration becomes entirely void from any cause;4. If such consideration, before it is rendered to him, fails in a material respect, for any cause;5. By consent of all the other parties; or,6. Under the circumstances provided for in sections 1785 and 1789 of this code.'

MOORE, Presiding Justice.

McCOMB and FOX, JJ., concur.