FOX III v. ACED (1957)

On July 2, 1954, plaintiffs George and Virginia Fox and defendants James and Bertha Aced entered into an exchange agreement whereby the plaintiffs were to convey a certain house and lot to defendants in exchange for certain industrial property, which latter was subject to a lease and purchase agreement between defendants as lessor-vendor and Sequoia Metalcraft Co. and others as lessee-vendees. An addendum to the exchange agreement provided as follows:

‘In the event either First Party [plaintiffs] or Second Party [defendants] is unable to deliver his property within ninety (90) days from the date of this contract, upon the terms specified, then this contract shal be null and void and each party, in that event, shall hereby release the other of and from all liability hereunder.

‘First Party agrees to pay Fourteen Thousand & No/100 ($14,000.00) Dollars cash on closing of this transaction. Rents to be prorated thirty (30) days from date of execution of this contract and payable on closing. Taxes, insurance, utilities and all other expenses relative to the upkeep of the subject properties are to be prorated as of the date of closing, which is to be no later than ninety (90) days from the date of this contract. Each party will pay expenses on property now owned by him until actual closing. Second Party agrees to complete all obligations now owing to lessee and to hold First Party harmless for any and all claims made by lessee thereunder.’

In this action for damages the trial court found that the defendants breached the agreement. Damages were assessed in the amount of $2,950.

(1) Did defendants breach the exchange agreement? Yes.

Defendants claim they were unable, within the 90 days, to ‘deliver’ the industrial property ‘upon the terms specified’ and thereby were released from all liability under the agreement by the provisions of the first sentence of the addendum.

They predicate such inability upon the further claim that the construction of a certain building had not been completed, a building which in their lease-purchase agreement with Sequoia Metalcraft Co. they had agreed to erect upon the industrial property.

This poses the question whether the completion of such construction was among the ‘terms specified’ in the exchange agreement. It was not expressly so specified in that clause of the agreement whereby defendants promised to convey the industrial property ‘free and clear of all encumbrances excepting easements, restrictions and rights of way of record and said Lease Agreement and said purchase agreement [between defendants and Sequoia Metalcraft Co.] and any tax liens which are the responsibility of the tenant [Sequoia Metalcraft Co.]’. Indeed, an intent not to include such completion among the ‘terms specified’ seems indicated by defendants' promise (expressed in the last sentence of the addendum) ‘to complete all obligations now owing to lessee [Sequoia Metalcraft Co.] and to hold First Party [plaintiffs] harmless for any and all claims made by lessee thereunder.’ Such a promise seems well calculated to meet the situation which would obtain if when this sale is consummated the seller has not yet completely performed all his obligations toward the tenant, including completion of the building: the sale may proceed regardless of such completion.

Moreover, the final draft of the addendum was written by defendants. The ambiguity, if any, should be resolved against them. In addition, the realtor through whom the parties negotiated (they did not deal directly with each other) testified that defendant James Aced explained to him that a lien filed against the property by one of the building contractors (Marshall Electric Co.) was in litigation and that Mr. Aced explained that he thought he could have this lien released quickly, but that he wanted 90 days to get rid of it. ‘That is why we set up the 90 day closing.’

We concur, therefore, in the opinion of the trial judge, expressed in his memorandum directing the preparation of findings and judgment, that ‘[p]erformance of defendant's obligation to Sequoia to complete the building was not a condition to his delivery of the property.'¹

The Marshall Electric Co. lien was paid off nearly 30 days before the expiration of the 90 day period. The only other lien involved was that of the general building contractor (Carlray Co.) in the amount of $10,000, only $1,400 of which defendant disputed as being for extras ordered by the tenant. About two weeks before the expiration of the 90 days plaintiffs paid the $1,400 on behalf of the tenant, so that the only lien remaining on the 90th day was one which defendant James Aced testified he did not question. He conceded the lien could have been liquidated by use of a portion of the money which plaintiffs had already put in escrow to defendants' credit. He was agreeable to paying it and insisted only upon completion of the building or a release from the tenant.²

Defendants failed and refused to convey. The finding that they breached the exchange agreement is amply supported by the record.

(2) Was defendants' breach committed in ‘bad faith’ within the meaning of that term as used in section 3306 of the Civil Code? Yes.

The trial court found that ‘defendants' failure and refusal to perform said agreement on their part was deliberate, willful, capricious and without just cause and excuse, and without just or lawful reason therefor.’ This finding, if supported by the evidence, spells ‘bad faith’ within the meaning of that term as used in section 3306.³

Defendants contend, first, that there could be no bad faith because, they say, they were not obligated to convey if unable to complete the building within the 90 days. That is but a repetition of their contention that there was no breach, which we have found erroneous.

Next, they argue that, if erroneous, defendants' interpretation of the 90 day clause was in the utmost good faith especially in view of the fact that Mr. Aced in so doing relied upon the advice of his attorney. But a mistake of law is not a ground for avoidance of a contract (Gardner v. Watson, 170 Cal. 570, 577, 150 p. 994) nor does mistaken advice as to a person's legal obligation excuse his complete failure to perform his contract (Montgomery v. Pacific Coast Land Bureau, 94 Cal. 284, 290–291, 29 p. 640). Such ignorance of one party to a contract does not entitle him deliberately to defeat the other party of his rights under the contract.

Significantly, there was substantial evidence that James Aced did nothing constructive toward settling the several problems which he claimed prevented his performance. Indeed, there is evidence that he sought to impose new terms and conditions, demanded additional consideration to that specified in the agreement, and expressed unwillingness to consummate the transaction because of a personal dislike for Mr. Fox.

Finally, say the defendants, there was no evidence of bad faith upon the part of Mrs. Aced because she took no part in the negotiations or in the subsequent dealings. Her husband testified: ‘She knows nothing about any of these things. She has signed documents when I asked her to sign, * * * but she knows nothing about what has happened.’ She did sign this agreement and thereby made the promises expressed in it. Her failure to perform those promises (awaiting instructions from her husband to perform) should be and is deemed a breach which was as deliberate as that of her husband.

(3) Were the damages correctly computed? Yes.

Defendants question the allowance of $750 for services rendered plaintiffs by their attorney in this transaction, which the trial court in its findings characterized as ‘expenses properly incurred by the plaintiffs in examining title to the defendants' property and preparing the necessary papers in connection with the said exchange agreement.’

Defendants do not question the reasonableness of the fee for the services rendered. Their criticism is that it is a lump sum allowance for some services that were chargeable and for other services that were not chargeable to them as expenses included in the measure of damages prescribed by section 3306 of the Civil Code. They especially challenge any allowance for services which plaintiffs' attorney rendered during the negotiation of the exchange agreement itself. Such services included the examination of the lease-purchase agreement between the defendants and their tenant Sequoia Metalcraft Company and the rendition of an opinion concerning its meaning and effect; the consideration of and an opinion concerning the two building contractors' liens on defendants' property which a preliminary title report disclosed, the the work of writing and rewriting the exchange agreement itself.

We think such inclusions were proper. The applicable statute draws no line between expenses of this character incurred before and those incurred after the execution of an agreement to convey real property: ‘The detriment caused by the breach of an agreement to convey an estate in real property, is deemed to be the price paid, and the expenses properly incurred in examining the title and preparing the necessary papers, with interest thereon; but adding thereto, in case of bad faith, the difference between the price agreed to be paid and the value of the estate agreed to be conveyed, at the time of the breach, and the expenses properly incurred in preparing to enter upon the land.’ Civil Code, § 3306.

The expression ‘expenses properly incurred in examining the title and preparing the necessary papers' is coupled with a provision for recoupment of ‘the price paid’ which clearly indicates a legislative intent that the purchaser be reimbursed for his out-of-pocket money, expenditures reasonably made or incurred in connection with the sale, whether made or incurred before or after the signing of the agreement to convey.

Defendants argue, in effect, that when in a bad faith case a statute gives a purchaser the benefit of his bargain (the difference between the price agreed to be paid and the value of the estate to be conveyed) it is inequitable to allow him any expenses that were incurred prior to the signing of the agreement. That is a question for legislative not judicial consideration. This statute gives the purchaser his expenses ‘incurred in examining the title and preparing the necessary papers' in any event. In a bad faith case it merely adds the expenses, if any, ‘incurred in preparing to enter upon the land.’ Section 3306, ‘being a special provision, prevails over general provisions relating to damages' (Vineland Homes, Inc., v. Barish, 138 Cal.App.2d 747, 760, 292 P.2d 941, 951) and, naturally, is not governed or modified by other special provisions such as section 3307 of the Civil Code which prescribes the measure of damages when a purchaser defaults, is silent as to ‘expenses' and has been so construed as to allow the seller expenses caused by the purchaser's breach but not expenses that would have been incurred had the contract been performed (Royer v. Carter, 37 Cal.2d 544, 550, 233 P.2d 539).

The legal services rendered after the signing of the exchange agreement included some negotiations between the parties concerning methods of consummating the transaction in view of the questions raised by defendants concerning certain liens, their claim that the building had not been completed and their desire for an acquittance of some sort in that regard from the plaintiffs. Defendants say that such services do not pertain to ‘examining the title and preparing the necessary papers.’ That is too narrow a view of the statute. Those services were rendered in an endeavor by plaintiffs to collaborate with the defendants in the solution of problems with which the latter said they were confronted, stemming from the condition of the title to their land. We see no basis for a reviewing court to undertake to reverse the finding of the trial court under such circumstances.

The other item which defendants challenge is the sum of $1,200 which represented the amount of rentals which accrued from the defendants' property between the 30th and the 90th days after the execution of the agreement. The trial court allowed this sum as a credit against the price which plaintiffs had agreed to pay for defendants' property, based upon a clause of the agreement which declared that ‘rents' would be ‘prorated thirty (30) days from date of execution of this contract and payable on closing’ and a clause which stated that the ‘date of closing’ would be ‘no later than ninety (90) days from the date of this contract.'⁴ In view of the latter clause, the expiration of the 90 days marked the date of defendants' breach of their obligation to convey.

This allowance seems entirely proper under the added measure of damages (‘the difference between the price agreed to be paid and the value of the estate agreed to be conveyed’) prescribed by section 3306 of the code ‘in case of bad faith.’ The rentals from defendants' property began accruing to plaintiffs' credit on the 30th day and continued to accrue until the 90th day, the closing date and the date of defendants' breach. They represented a matured credit of $1,200 at the time of defendants' breach and to that extent reduced the ‘price agreed to be paid’ by the plaintiffs (§ 3306) when they signed the exchange agreement.

Defendants invoke a quite separate and distinct proration clause of the agreement and illogically seek to apply to it the rental proration clause. They refer to the clause which said that ‘[t]axes, insurance, utilities and all other expenses relative to the upkeep of the subject properties are to be prorated as of the date of closing which is to be no later than ninety (90) days from the date of this contract. Each party will pay expenses on property now owned by him until actual closing.’ This clause obviously dealt with a different subject (expenses, not rentals) and by its very terms had not begun to operate at the time of the breach of defendants' obligation to convey.

The judgment is affirmed.

FOOTNOTES

1.  We note in passing that within the 90 days the tenant, Sequoia Metalcraft Co. executed a release and acceptance of the building.

2.  Upon this appeal, defendants advance the argument that the Carlray lien was not ripe to be paid and canceled because the building was not completed within the 90 days. They should have presented that question to the trial court. They did not do so. James Aced's testimony clearly conveyed the idea that he was ready to pay that lien after Mr. Fox paid the $1,400. He did not suggest that completion or noncompletion of the building affected his obligation to pay that lien one way or the other.

3.  ‘Bad faith is shown where there is a ‘deliberate refusal to perform’ (Nelson v. Fernando Nelson & Sons, 5 Cal.2d 511, 518, 55 P.2d 859, 863) or a refusal to convey, ‘where through his own negligence he has put it out of his power to fulfill the obligations of his contract’ (Johnson v. Schimpf, 197 Cal. 43, 48, 239 P. 401, 402) or ‘without just cause or excuse, he refuses to perform’. Engasser v. Jones, 88 Cal.App.2d 171, 177, 198 P.2d 546, 549.' Pixley v. First Federal Sav. & Loan Ass'n, 110 Cal.App.2d 427, 432, 243 P.2d 100, 103–104. See also Johnson v. Goldberg, 130 Cal.App.2d 571, 578, 279 P.2d 131, deliberate refusal to perform constitutes bad faith, question of bad faith one of fact; Rasmussen v. Moe, 138 Cal.App.2d 499, 503, 292 P.2d 226, not necessary to show fraud but only a deliberate refusal to perform without just cause or excuse.

4.  It happended that no rents accrued in respect to plaintiffs' property during that period, to use as an offset against the item under discussion.

FRED B. WOOD, Justice.

PETERS, P. J., and BRAY, J., concur.