UCC Installment Sale Contracts Seller s retention of title under contract for sale of goods, where Buyer has taken possession, is limited to a security interest If Buyer defaults, Seller cannot simply take back the goods and keep all of Buyer s previous payments Instead, Seller must conduct foreclosure sale of the goods If foreclosure sale price >> unpaid balance of contract, the surplus goes to the Buyer [ 9 610, 9 615, 9 623] Sometimes, an owner of land sells it to buyer by installment land contract or contract for deed Buyer agrees to pay purchase price in installments each month (often for 20, 30, or 40 years) Seller is not obligated to deliver a deed to buyer until buyer has paid all installments (even though the buyer typically takes immediate possession of the land) Contract typically provides that if buyer defaults, seller retains title AND all prior buyer payments! Russell v. Richards Richards sold land to Buyer via ILK Buyer later resold the land to Russell (Russell paid $11,188 in cash, assumed the obligation to pay the balance due on the ILK ($37,938) Russell made payments for next 6 years, reducing ILK balance to $26,504 ($10,782 principal reduction) Russell then defaulted (FMV of land = $82,735). Can Richards declare a forfeiture of ILK, keep the land, and all of Russell s payments? Court: Russell forfeited her interest, forfeiture upheld (not shocking to the conscience ) Result: Russell loses her equity in the land $10,782 in principal payments she made $11,188 down payment she made $34,754 in market appreciation during prior 6 years Why isn t this sufficiently shocking to the conscience? 1
$11,188 down payment? Court says it was not appropriate to consider that payment, b/c it was made to the original Buyer, not Richards [p. 296] Wait! It reflected, at least in part, prior payments made by the original Buyer to Richards in the past! $10,782 in principal payments she made, and $33,746 in market appreciation? Court: this only belonged to Russell if she performed (her equity was contingent), but she didn t perform, so it wasn t hers to lose Vendor (Seller) Contract Vendee (Buyer)! Vendee agrees to pay contract price in installments! Vendor does not deliver deed (title) until Vendee pays final installment The Purchase Money Mortgage Compared Purchase Money Mortgagee (Seller) Deed (Title) Note and Mortgage Purchase Money Mortgagor (Buyer) Contrast: If Deal Had Been Structured as a Purchase Money Mortgage After default, Richards (as purchase money mortgagee) would have had to foreclose the mortgage If land sold for $82,000 at foreclosure: Richards would ve gotten $26,504 (balance of debt), plus any accrued but unpaid interest and costs of collection (e.g., attorneys fees) Balance would have gone to Russell (her equity, not contingent upon her full performance) Sebastian v. Floyd [p. 311] Held: Any attempt to use title to land as security for a debt should have the same legal effect, so ILK should be treated/enforced as a mortgage Cf. Restatement of Mortgages: A contract for deed creates a mortgage. [ 3.4(b)] 2
Should Missouri courts follow the Sebastian approach (and treat ILK as a mortgage), or the Russell approach (and enforce forfeiture of the Buyer s interest after Buyer breaches)? Pro Sebastian view: ILK buyer and purchase money mortgagor are in essentially the same position and should be treated the same Both purchase money mortgagee and ILK Seller are using title to land to secure payment of a debt Pro Russell view: ILK buyers are different Often they can t qualify for mortgage financing ILK Buyers are riskier, so ILK Sellers should be able to bargain for a remedy commensurate with risk posed by riskier Buyers Displacement of contract remedy should be implemented by legislature, not the court Petersen v. Hartell Seller and Buyer enter into ILK Price = $9,162, payable in $50 installments (possible terms: 40 years @ 6%) Buyer makes 58 monthly payments ($2,900 total) but misses 7 payments Buyer tenders $250 for back payments, but Seller refuses to accept it and purports to terminate ILK Buyer then tenders the full balance of the ILK into court, and sues for specific performance Court granted specific performance to Buyer, and required Seller to deed Buyer the land Practically, is this any different from saying that Seller had only a mortgage? If so, how? 3
Petersen Majority Holds: ILK is not a mortgage per se If buyer has not made substantial payments or if the default is nonmonetary, seller can terminate the ILK But, if buyer has made substantial payments or improvements, and default is purely financial, buyer has a right to specific performance, even after default [p. 303] Court calls this a right to redeem [p. 305] Petersen v. Hartell If the majority of the court calls Seller s interest only a security interest [p. 304], and says Petersen has a right to redeem [p. 305], then why not take the last step and say installment K is a mortgage? Chief Justice Rose Bird California Supreme Court Chief Justice 1977 1987 Problem: California Civil Code gives mortgagor not only a right to redeem (to pay off debt in full), but also a statutory right to reinstate (to cure default via back payments) Majority s holding precludes a defaulting ILK buyer from being able to reinstate (instead, buyer can only protect its redemption right by paying off full balance of the debt) Also, court would have discretion to deny specific performance (right to redeem) in appropriate cases While mortgage law has always recognized an equitable right of redemption, it never granted the mortgagor an equitable right to reinstate Defaulting mortgagor can t reinstate unless (a) Applicable statutes grant such a right (see Cal. Civ. Code 2924c), or (b) The mortgage itself expressly creates such a right (see Fannie/Freddie single family mortgage form, 19, page 1215) 4
Petersen and Restitution If the defaulting Buyer has right to redeem, but can t pay off full balance of ILK, then what happens? Seller can cancel ILK, terminate Buyer s equity of redemption (analogous to strict foreclosure) But, Seller must make restitution of Buyer s past payments, to extent they exceeded Seller s actual damages due to Buyer s breach [Freedman v. The Rector, p. 303] This protects against Seller s unjust enrichment Restitution in MO: Long v. Smith Smith had been renting a home from Long @ $450 per month rent; she then signed ILK to buy the home from Long for price of $20,000 ILK had 10% interest rate; payments of $450/month Smith made payments totaling $18,200, reducing balance to $4,117, before defaulting Smith couldn t redeem; her interest was terminated Should she be able to get restitution of all or any portion of the $18,200 she paid? How would we calculate the restitution amount? Restitution Measure Under Freedman v. The Rector [p. 303], measure would be: Total payments made by Buyer Smith, MINUS Actual damages suffered by Seller Long due to Smith s breach How would we calculate those damages? Court in Long v. Smith held: Seller not obligated to make restitution of any amount to Buyer Buyer got benefit of possession of land during contract period; this benefit would be reflected by the land s rental value Seller had collected $450/mo. under ILK ILK stated: Upon default, buyer shall become a tenant... and agrees to pay $450/per month as rent. Thus, payments retained by Seller didn t exceed Seller s damages, so no restitution required! Is this persuasive? 5