Opinion
2-3-1954
BIRD v. KENWORTHY. * Civ. 8326.
John G. Evans, San Francisco, for appellant. Rutherford, Jacobs, Cavalero & Dietrich, Stockton, for respondent.
BIRD
v.
KENWORTHY. *
Feb. 3, 1954.
Hearing Granted March 31, 1954.
John G. Evans, San Francisco, for appellant.
Rutherford, Jacobs, Cavalero & Dietrich, Stockton, for respondent.
SCHOTTKEY, Justice.
On June 17, 1948, appellant and respondent entered into a conditional sale contract under which appellant purchased certain construction equipment from respondent for $29,412.78 and was credited with a down payment thereon of $5,207.78. The balance, with interest, was payable in monthly installments of $2,017.08 each, the first of which was due July 17, 1948, and the last on June 17, 1949. The contract contained the usual 'time is of the essence' clause and further provided: 'Should I fail to make any monthly payment above specified when the same is due, * * * then the entire unpaid balance of purchase price shall at your option become immediately due and payable and shall bear interest thereafter at the highest lawful rate, and I agree to make full payment of such balance. Should I return said chattels to you or if you repossess said chattels, then you may retain all payments previously made as compensation for use of said chattels, and you may, at your option, sell said chattels at public or private sale, with or without notice, and credit the net proceeds, after expenses, on the amounts unpaid hereunder. Any balance over the said amounts unpaid hereunder shall be paid to me on demand. If the net proceeds of such sale are insufficient to cover the amount unpaid hereunder, I agree to pay any deficiency on demand.'
However, no provision was made as to what notice, if any, was to be given in the event that the vendor exercised either of the foregoing options.
It is admitted that appellant was continually delinquent in his payments and, in fact, at one time made none for almost five months. However, respondent accepted eight overdue payments and took no steps to declare the appellant in default nor did he advise appellant that acceptance of the overdue payments would not constitute a waiver of the right to prompt payments in the future.
The last payment made by appellant was on August 23, 1949, receipt of which was acknowledged by letter of respondent's agent, but no demand was made therein for the remaining three monthly installments which were then, respectively, more than two, three and four months overdue. However, respondent testified that oral demands for payment were made and that sometime in the latter part of October he advised appellant over the telephone that unless payment in full were made, he would repossess the equipment. However, nothing further was done until November 22, 1949, when respondent retook the property. A week later appellant tendered the balance due on the principal and interest in the amount of $6,525.57 but respondent refused to accept same. Thereupon appellant served notice of rescission and demanded repayment to him of the sum of $22,979.43, and thereafter instituted the present action to rescind the conditional sale contract, to be relieved of forfeiture under the contract, and to recover the payments made thereunder.
The trial court found that the purchase price of the equipment, with interest, was $29,412.78, that $22,832.67 was paid on account of the principal thereof, and that the reasonable value of the use of the equipment while in appellant's possession from June 17, 1948 to November 22, 1949 was $2,200 per month or a total of $37,400. At the time of repossession the balance due on principal and interest, exclusive of additional interest for delinquency, was $6,051.24.
The court also found that 'at no time did defendant Kenworthy or his agent, Union Safe Deposit Bank, or anyone else, waive prompt payment of future installments, or waive the right to repossess the equipment,' and 'that plaintiff Bird's failure promptly to pay the installments to defendant Kenworthy under the conditional sale contract was grossly negligent and willful.'
The trial court did not make a finding as to the reasonable value of the equipment at the time of its repossession, but respondent accepts appellant's statement that the uncontradicted evidence shows that it was $28,000 as he states in his brief: 'The uncontradicted value of the equipment when repossessed was $28,000.00.'
In accordance with said findings the court rendered judgment denying appellant any relief and this appeal is from said judgment.
Appellant first contends that the court's findings that there was no waiver by respondent of prompt payment of future installments or of the right to repossess the equipment, and that appellant's failure to make payments promptly was grossly negligent and willful, are not supported by the evidence. However, it is clear from the record that there is sufficient evidence to support these findings, although it must be stated that such evidence is far from strong.
Appellant next contends that he was entitled to relief under the provisions of section 3275 of the Civil Code which reads as follows: '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.'
But as pointed out by the Supreme Court in the recent cases of Barkis v. Scott, 34 Cal.2d 116, 208 P.2d 367, and Baffa v. Johnson, 35 Cal.2d 36, 216 P.2d 13, a plaintiff is only entitled to relief under said section 3275 if his breach was neither willful, fraudulent nor grossly negligent, and in the instant case the trial court has found upon sufficient evidence that appellant's failure to pay the installments when due was grossly negligent and willful.
Appellant contends further that even if his default must be considered willful, where, as here, the forfeiture results in the vendor receiving more than a fair compensation for the injury he sustained, he is still entitled to equitable relief from forfeiture under the rule laid down by the Supreme Court in Freedman v. Rector, Wardens & Vestrymen, 37 Cal.2d 16, 230 P.2d 629, 31 A.L.R.2d 1, and by this court in Crofoot v. Weger, 109 Cal.App.2d 839, 241 P.2d 1017. We believe that these authorities sustain this contention of appellant.
In Freedman v. Rector, supra, plaintiff vendee entered into a contract to buy two lots from defendant vendor. Plaintiff paid $2,000 down and agreed to pay $16,000 into escrow within thirty days. Plaintiff did not pay the $16,000, repudiated the contract, and demanded that the $2,000 be returned. Shortly thereafter, defendant sold the lots to a third person for $20,000. Plaintiff then brought suit for restitution of his down payment. The trial court rendered judgment for defendant but the Supreme Court reversed the judgment and held that even a wilfully defaulting vendee may recover that portion of the down payment which is in excess of the vendor's damage. The Supreme Court said, 37 Cal.2d at pages 20-23, 230 P.2d at page 631: 'As was pointed out in the Baffa case, if the right to restitution rests solely on the provisions of section 3275, a vendee who has been guilty of a wilful default must be denied relief. We have concluded, however, that the damage provisions of the Civil Code together with the policy of the law against penalties and forfeitures provide an alternative basis for relief independent of section 3275. * * * * * * 'In adopting a rule allowing restitution to the defaulting vendee the Supreme Court of Utah stated: 'The vital question to be determined is: What is the correct measure of damages in a case of this kind? Shall we apply the rule of compensatory damages, or is it a case in which punitive damages should be allowed? Upon what principle can punitive damages or damages in excess of compensation for the injury done be justified in the case at bar? These are questions that appeal both to the judgment and conscience of the court. * * * "The rule contended for by respondent, carried to its logical sequence, would forfeit every dollar paid by appellant and still leave respondent in possession of the land even if appellants had paid the last installment but one, and then defaulted. In answer to this, it may be said that such is not the case at bar. But where are we going to draw the line?' Malmberg v. Baugh, 62 Utah 331, 340, 345, 218 P. 975, 978; see also, McCormick on Damages, § 153, p. 616; Corbin, The Right of a Defaulting Vendee to the Restitution of Installments Paid, 40 Yale L.J. 1013. 'The failure of courts adopting a contrary viewpoint to recognize that they are permitting unjustifiable penalties for breach of contract has led to the comment that 'The law, while looking with righteous abhorrence on forfeitures, and washing its hands of their enforcement, after the manner of Pontius Pilate, yet has been reluctant to intervene with affirmative relief or to formulate any consistent principle condemning the validity of cut-throat provisions which in their essence involve forfeitures. Although the law will not assist in the vivisection of the victim, it will often permit the creditor to keep his pound of flesh if he can carve it for himself.' (Ballantine, Forfeiture for Breach of Contract, 5 Minn.L.Rev. 329, 341.) 'To permit what are in effect punitive damages merely because a party has partially performed his contract before his breach is inconsistent both with section 3294 of the Civil Code limiting the right to exemplary damages and sections 1670 and 1671 dealing with liquidated damages. 'A penalty need not take the form of a stipulated fixed sum; any provision by which money or property would be forfeited without regard to the actual damage suffered would be an unenforceable penalty.' Ebbert v. Mercantile Trust Co., 213 Cal. 496, 499, 2 P.2d 776, 777. Such penalties cannot reasonably be justified as punishment for one who wilfully breaches his contract. Not only does section 3294 of the Civil Code express the policy of the law against the allowance of exemplary damages for breach of contract regardless of the nature of the breach, Chelini v. Nieri, 32 Cal.2d 480, 486, 196 P.2d 915, but if a penalty were to be imposed it should bear some rational relationship to its purpose. A penalty equal to the net benefits conferred by part performance bears no such relationship. It not only fails to take into consideration the degree of culpability, but its severity increases as the seriousness of the breach decreases. Thus a vendee who breaches his contract before he has benefited the vendor by part performance suffers no penalty, whereas one who has almost completely performed his contract suffers the maximum penalty. 'Moreover, to deny the remedy of restitution because a breach is wilful would create an anomalous situation when considered with section 3369 of the Civil Code. That section provides that 'Neither specific nor preventive relief can be granted to enforce a penalty or forfeiture in any case * * *', and precludes the court from quieting the vendor's title unless he refunds the excess of the part payments over the damage caused by the vendee's breach. Baffa v. Johnson, 35 Cal.2d 36, 39, 216 P.2d 13; Barkis v. Scott, 34 Cal.2d 116, 121, 208 P.2d 367, and cases cited. Unless the same rule is adopted when the vendee seeks restitution, the rights of the parties under identical fact situations will turn on the chance of which one first seeks the aid of the court.'
In Crofoot v. Weger, supra, plaintiff contracted to buy timber off defendant's land, and to make certain installment payments as the timber was removed. The contract provided that upon a breach by plaintiff, all his rights under the contract would be terminated, and all his payments forfeited. After plaintiff failed to make a payment, defendant terminated the contract under this provision. Plaintiff then brought an action alleging certain wrongful conduct by defendant, and also that termination of the contract would impose a forfeiture upon him. Plaintiff then asked for either equitable relief or damages, and offered to pay whatever amount the court should require as a condition to equitable relief. The trial court held for defendant. On appeal, this decision was reversed and remanded for a determination on the issues of whether the plaintiff's breach was willful and whether, in any event, termination of the contract would impose a penalty upon him. It was this court's view that if plaintiff's breach was not willful, either a reinstatement of the contract upon equitable conditions or a recovery by plaintiff of the amount of payments constituting a forfeiture would be proper under Civil Code section 3275. And even if plaintiff's breach was willful, the court continued, if the termination of the contract would result in the unjust enrichment of the defendant, plaintiff could recover the amount of payments constituting unjust enrichment under the rule of the Freedman case.
Respondent concedes the force of these decisions but contends that both section 3275 and these decisions are inapplicable to the sales of personal property but apply only to realty transactions. The trial court evidently was of the same opinion and so indicated in its memorandum opinion. However, Rayfield v. Van Meter, 120 Cal. 416, 52 P. 666, upon which respondent relies, merely held that the facts in that case did not justify the interposition of equity, and Bray v. Lowery, 163 Cal. 256, 124 P. 1004, which he likewise cites, did not even mention this statutory provision.
We do not believe that there is any good reason why an 'obligation' under section 3275 of the Civil Code or under the foregoing rule announced in Freedman v. Rector, should not include one arising under a conditional sale of personalty as well as realty. 40 Cal.Law Rev. 593, 598; Miller v. Modern Motor Co., 107 Cal.App. 38, 44, 290 P. 122. The primary consideration underlying the rule in the Freedman case, and in fact the reason for Civil Code section 3275, is the avoidance of unjust enrichment at the expense of the breaching party. We do not believe that where unjust enrichment can be proved, courts should draw technical distinctions as to the types of contracts or property involved in order to obtain different results, but rather that the rule in all these classes of cases should be the same.
In the instant case the purchase price was $29,412.78. Appellant made payments totaling the sum of $23,440.74, $22,832.67 being applied upon principal and $608.07 being applied on interest. The last payment accepted by respondent was a payment of $2,017.08 on August 23, 1949, and this left unpaid three overdue installments of $2,017.08 each. In October, 1949, respondent made a demand upon appellant to either pay up the balance or respondent would repossess the equipment. No payment was made, and on November 22, 1949, appellant repossessed the equipment. On November 29, 1949, appellant tendered to respondent $6,525.57, being the balance of principal and interest due under the contract but respondent refused to accept it.
It thus appears that respondent, after receiving $22,832.67 on account of the principal amount of $29,412.78, repossessed the equipment which, while there is no finding as to its then value, both parties appear to agree was of a value of $28,000.
Applying the principles laid down in the Freedman and Crofoot cases to this factual situation it is difficult to understand how the judgment that appellant was entitled to no relief whatever can be sustained, as it certainly appears that here is a case of unjust enrichment if it is possible to have one. The following quotation from Crofoot v. Weger, supra, 109 Cal.App.2d at pages 842, 843, 241 P.2d at page 1019, is quite applicable here: 'In addition to the foregoing, if the court had found that the breach was willful or grossly negligent so as to prevent equitable relief under Section 3275 of the Civil Code there was still the duty of the court to go further and find whether or not the termination of the contract by the respondents for the appellants' default resulted in the unjust enrichment of the respondents. If such were the result then it would have been the duty of the court to give judgment for so much of the funds paid in as constituted unjust enrichment. Freedman v. Rector, [W. & V. of St. Matthias Parish,] supra. * * * It is apparent that a situation was portrayed by the evidence which would have justified findings of unjust enrichment if relief could not be given through reinstatement of the contract, and it was therefore the duty of the court to proceed and find upon these matters and if it found unjust enrichment had resulted to give judgment for the amount thereof.'
We conclude, therefore, that the judgment must be reversed in so far as it fails to adjudicate the issues of forfeiture, unjust enrichment and relief therefrom. Upon a further trial the court should determine what damage respondent has sustained by reason of appellant's delay in making payments, including legal and other expenses, reasonably made necessary by said default, and should determine the reasonable rental value of the equipment during the time it was in appellant's possession. Appellant should be given credit upon the contract price for the amount of payments made under the contract, and should also be given credit for the reasonable value of the equipment at the time it was repossessed, said value to be determined upon the evidence taken or such additional evidence as the parties may see fit to offer. From these and any other factors relevant upon the issues of forfeiture, unjust enrichment and relief therefrom, the court should determine to what extent, if any, respondent has been unjustly enriched and render judgment in accordance with such determination.
The judgment is reversed and the cause remanded for further proceedings in accordance with the views herein expressed.
PEEK, J., and PAULSEN, J. pro tem., concur. --------------- * Subsequent opinion 277 P.2d 1.