Title: McMurry Oil Co. v. Deucalion Research, Inc.

State: wyoming

Issuer: Wyoming Supreme Court

Document:

McMurry Oil Co. v. Deucalion Research, Inc.1992 WY 165842 P.2d 584Case Number: 92-46, 92-47Decided: 12/03/1992Supreme Court of Wyoming
McMURRY OIL 
COMPANY, a Wyoming Corporation; John W. Martin; J.J. Meier; Fort Collins 
Consolidated Royalties, Inc., a Colorado Corporation; Hurley Oil Properties, a 
Wyoming Corporation; W.N. McMurry; Mountain States Exploration, Inc., a Colorado 
Corporation; Martin Properties, Ltd., an Alabama Domestic Partnership; Enervest 
of America, Inc., a New York Corporation; Rissler & McMurry Company, a 
Wyoming Corporation; Marion H. Rochelle; Weeks, Brewer & Associates, a 
California Corporation; and High Horizons, Phase II, a Washington Corporation, 
Appellants (Defendants),

v.

DEUCALION 
RESEARCH, INC., a North Dakota Corporation, Appellee (Plaintiff). DEUCALION 
RESEARCH, INC., a North Dakota Corporation, Appellant 
(Plaintiff),

v.

McMURRY 
OIL COMPANY, a Wyoming Corporation; John W. Martin; J.J. Meier; Fort Collins 
Consolidated Royalties, Inc., a Colorado Corporation; Hurley Oil Properties, a 
Wyoming Corporation; W.N. McMurry; Mountain States Exploration, Inc., a Colorado 
Corporation; Martin Properties, Ltd., an Alabama Domestic Partnership; Enervest 
of America, Inc., a New York Corporation; Rissler & McMurry Company, a 
Wyoming Corporation; Marion H. Rochelle; Weeks, Brewer & Associates, a 
California Corporation; and High Horizons, Phase II, a Washington Corporation, 
Appellees (Defendants).

Appeal from DistrictCourtofNatronaCounty, Dan Spangler, 
J.

 Neil J. 
Short, Casper, 
for appellants in Case 

No. 
92-46 and for appellees in Case No. 92-47.

 Stephenson 
D. Emery of Williams, Porter, Day & Neville, Casper, for appellee in Case No. 92-46 and 
appellant in Case No. 92-47.

 Before MACY, C.J., and THOMAS, CARDINE, URBIGKIT 
and GOLDEN, JJ.

URBIGKIT, 
Justice.

 [¶1.]     McMurry Oil Company and 
associates (Sellers) entered into a written agreement to sell a collection of 
oil and gas properties to Deucalion Research, Inc. (Buyer). When the sale fell 
through, cross-suits followed seeking possession of $50,000 earnest money in 
addition to contesting fault in the sale agreement termination. The trial court 
found retention of the $50,000 an unjustified penalty and granted the return of 
the earnest money to the prospective Buyer while determining that the Sellers 
had not been in default. We reverse the liquidated damage decision and otherwise 
affirm the trial court through an analysis which enforces the contractual terms 
of the parties' sales agreement.

 [¶2.]     Sellers address for 
their concept of the issues on appeal:

1. 
Whether the district court erred in ruling that Paragraph 10 termination of the subject contract 
provided for a forfeiture.

2. In 
the alternative, whether the district court erred in ordering a return of the 
earnest money even in the face of finding a forfeiture.

(Emphasis 
in original.)

 [¶3.]     Buyer 
restates:

Whether 
the Trial Court correctly found that the amount of earnest money deposit was 
neither consistent with actual damages nor based upon any forecast of 
compensation for the harm done, and therefore properly concluded that the 
liquidated damages provision constituted a penalty or 
forfeiture.

 [¶4.]     In the Buyer's appeal, 
they contend:

I. 
Whether the Trial Court erred as a matter of law in finding that title was 
marketable.

II. 
Whether the Trial Court erred as a matter of law in concluding that Plaintiff 
breached the contract by failing to proceed with the 
purchase.

 [¶5.]     Again, Sellers, 
restate:

1. 
Whether the district court erred in ruling that title was 
marketable.

2. 
Whether appellant/plaintiff Deucalion Oil Company breached the contract in 
question and is denied any recovery.

3. 
Whether the claims of appellant/plaintiff Deucalion Oil Company are barred by 
its failure to mitigate damages and by the doctrine of 
laches.

 [¶6.]     The Sellers, entered 
into a rather normal executory contract to sell extensive oil interest property 
holdings to Deucalion Research, Inc. The purchase price was $950,000, with 
$50,000 "earnest money to bind" and the balance payable by cashier's check or 
wire transfer at closing. Execution of the agreement was attended by a cash down 
payment received by Sellers from Buyer of $50,000. The established closing date, 
as extended, came and went. Buyer, about three weeks after the initially 
established time, provided a written notice of contract rescission based on 
claimed title defects. This litigation followed to determine who receives the 
initial $50,000. The trial court found retention of the earnest money payment by 
Sellers would create an impermissible penalty and ordered repayment to the 
Buyer, while also determining that the Sellers were not in breach of the 
agreement by failure to tender merchantable title for the properties to be 
sold.

 [¶7.]     Specific title 
provisions included:

It is 
the intent of this instrument to deliver to Buyer 100% of the working interest 
ownership in the properties at an 80% Net Revenue Interest to the 
Buyer.

* * * * 
* *

3. Representation of Seller. Seller 
represents to Buyer as follows: 

(a) 
That Seller is the owner of the properties described in Exhibit "A", but does 
not warrant title thereto.

(b) At 
Closing, Seller will have and will convey to Buyer all Seller's working interest 
in the Properties.

(c) 
Until closing, Seller will not take any action with respect to the Properties 
which would create any material liabilities or which would create any 
commitments other than those created in the ordinary course of business without 
Buyer's written consent.

(d) 
Seller has the right to sell and transfer the Properties to Buyer and all 
requisite corporate or other legal authorization to the execution and delivery 
of this Purchase and Sale Agreement hereunder have been duly obtained and do not 
conflict with any instrument to which it is a party or by which it is 
bound.

(e) The 
representations of Seller set forth herein shall be true on and as of Closing 
and on and as of the Effective Date with the same force and effect as though 
made on each of said dates.

4. Title Examination. Buyer shall be 
entitled to perform, or cause to be performed, at Buyer's sole expense, any such 
title examination as Buyer deems necessary or appropriate. In the event Buyer 
determines that any title defects exist, Buyer shall notify Seller, in writing, 
on or before closing of Buyer's title objections; provided, however, Buyer shall 
notify Seller promptly of any title defects discovered by Buyer. As used in this 
paragraph, the term "title defect", shall include the failure of any working 
interest. Seller shall furnish to Buyer on or before closing such curative data 
as may be necessary to satisfy Buyer that such defects have been resolved. If 
Seller is unable to provide Buyer such curative data prior to closing, and Buyer 
is unwilling to waive any such defects, Buyer may so notify Seller and terminate 
this agreement.

5. Effective Date, Expenses and Accounting. 
The Effective Date of the sale of the properties shall be as of 7:00 A.M., 
Mountain Daylight Time, on January 1, 1990. Seller shall be responsible for, and 
pay, all expenses accrued or incurred in connection with the Properties prior to 
the Effective Date and shall be entitled to receive the proceeds of production 
lawfully produced from the Properties prior to the Effective Date, including oil 
in stock tanks and Seller's proportionate share of all production on hand from 
each well on each respective property as of the Effective Date. Tanks shall be 
gauged at 9:00 A.M. on January 1, 1990 and all saleable oil be credited to 
Seller's account. Buyer shall bear all reasonable expenses incurred and accrued 
in connection with the operation of the Properties in the ordinary course of 
business effective from the Effective Date and thereafter, and shall be entitled 
to the proceeds of production lawfully produced from or attributable to the 
Properties from the Effective Date, and thereafter.

6. Closing. Closing shall take place on or 
before January 1, 1990, unless extended by mutual agreement of the parties * * 
*[.]

 [¶8.]     Buyer obtained a title 
opinion dated December 15, 1989. That opinion found title satisfactory for 
acquisition purposes subject to certain normal transfer requirements, and then 
stated:

The 
records in the office of the Clerk of the District Court in Converse County, Wyoming 
reveal Civil Action No. 10,915 filed by McMurry Oil Company against Enervest of 
America, Inc., d.b.a. Independence 1986 Drilling 
Program and Independence 1987 Drilling Program. The action 
was filed November 22, 1989, seeking foreclosure of an oil and gas lien claimed 
by McMurry Oil Company on the South Cole Creek Dakota Sand Unit # 61 and # 62 
wells and Campbell fee well. The action also seeks a 
judgment for unpaid operating expenses in the amount of $78,348.03. No answer 
has been filed to date. While Enervest does not own an interest of record in the 
subject lease, or in other leases in the South Cole Creek Dakota Sand Unit, it 
is entitled to certain revenues from these unit wells by virtue of an agreement 
with the working interest owners in the unit.

Requirement: None, but you should be 
aware that Enervest of America has a claim to certain unit revenues from these 
wells.

 [¶9.]     Buyer, in a 
communication dated January 17, 1990 and received by Sellers on January 26, 
1990, gave notice of title rejection and sale agreement termination. The parties 
agree that the closing date was extended from January 1, 1990 to January 5, 1990 
and then to January 12, 1990, but not thereafter. Factually, the record also 
establishes that the Buyer had been unable to adequately merchandize the project 
in order to obtain access to required funds to close by the date set in the last 
extension of January 12, 1990.

 [¶10.]  This court will apply a realistic 
standard to enforce the agreement of the parties as negotiated and settled. 
Rather than attempting, at this stage, to rewrite Buyer's "acceptable title 
opinion," we recognize that any rejection of title came too late and only 
constituted a subterfuge to attempt to reclaim the earnest deposit when funds 
had not been raised to complete the purchase. Notice of defect was required 
under the agreement by the established closing date or, at the latest, by any 
mutually agreed extension and when given at a time thereafter, it was too late 
to provide the right of rescission to the prospective Buyer.1 We will follow the rule stated in 
Maxton Builders, Inc. v. Lo Galbo, 68 N.Y.2d 373, 509 N.Y.S.2d 507, 509, 502 N.E.2d 184, 186 (1986):

In 
short, the defendants bargained for and obtained a limited right to cancel which 
they failed to exercise within the time agreed upon. The cancellation was, 
therefore, ineffective and the defendants' refusal to perform constituted a 
breach * * *.

 [¶11.]  This agreement was a forfeit penalty 
agreement, Cliff & Co., Ltd. v. Anderson, 777 P.2d 595 (Wyo. 1989), and, 
consequently, the only damage claimable by Sellers, if Buyer refused to close, 
was retention of the $50,000 earnest money deposit. See, however, Metropolitan 
Mortg. & Securities Co., Inc. v. Belgarde, 816 P.2d 868 (Wyo. 1991) and Walters v. Michel, 745 P.2d 913 (Wyo. 1987) (alternative 
remedies stated). The only real issue consequently remaining after our decision 
that the January 17, 1990 claimed title defect was not a legal justification for 
rescission is whether legal rules would void the liquidated damage agreement of 
the parties.

 [¶12.]  We differ from the trial court and 
require enforcement of the agreement. Consequently, when the Buyer was unable to 
perform by tendering payment, we leave the earnest money deposit within the 
agreement to be retained by the Sellers. Marcam Mortg. Corp. v. Black, 686 P.2d 575 (Wyo. 1984); James O. 
Pearson, Jr., Annotation, Modern Status of Defaulting Vendee's Right to Recover 
Contractual Payments Withheld by Vendor as Forfeited, 4 A.L.R.4th 993 (1981 
& Supp. 1992).

 [¶13.]  Enforceability of a liquidated damage 
provision, in particular when used in executory sales transactions, has broad 
application. The decision we are presented regarding Sellers' retention of the 
earnest money deposit is determinable as a question of law. Marcam Mortg. Corp., 
686 P.2d 575. The general 
principle to be applied is that, in the absence of overreaching or 
unconscionability, the parties should be left within the framework of the terms 
of the agreement that they negotiate. Id. See also Wyo. Stat. § 34.1-2-718(a) (1991) 
(Uniform Commercial Code) and Albrecht v. Zwaanshoek Holding En Financiering, 
B.V., 762 P.2d 1174 (Wyo. 1988). In Albrecht, 
762 P.2d  at 1179, this court, in quoting from Marcam Mortg. Corp., 686 P.2d  at 
580, said:

"`If 
there is an express contract in connection with the damages, that contract, of 
course, must govern.'" Studer v. Rasmussen, 80 Wyo. 465, 344 P.2d 990, 998 
(1959).

This 
court went on to say and recognized that:

"[T]he 
supreme court will not rewrite clear contracts. Nor will this court rewrite 
contracts under the guise of interpretation."

Wyoming 
Machinery Company v. United States Fidelity and Guaranty Company, 614 P.2d 716, 720 (Wyo. 1980) (citation 
omitted). See also Wyoming Recreation Commission v. Hagar, 711 P.2d 402 
(Wyo. 1985) (quoting Kuehne v. Samedan Oil 
Corporation, 626 P.2d 1035 
(Wyo. 
1981)).

Albrecht, 
762 P.2d  at 1179.

 [¶14.]  A confusion of theories and an incomplete 
analysis has developed within the numerous cases determining Wyoming sales agreement 
real estate law. The specific question is Sellers' retention of the earnest 
money deposit or partial payment upon sale rescission pursuant to the terms of 
the agreement following Buyer's payment default. Much of the confusion results 
from Walker v. Graham, 706 P.2d 278 (Wyo. 1985) which, in its 
peculiar facts, is not completely consistent with either prior or subsequent 
case law.

 [¶15.]  In simplest concept, within these 
retained deposit or payment cases, the seller enforces the agreement, retains the 
payment, and rescinds the sale. Conversely, the buyer has an affirmative defense 
to either rescind the contract and recapture the payment made as an equitable 
defense of improper forfeiture or to enforce the contract and complete the sale 
by belated payment.

 [¶16.]  In this case, the affirmative defense 
postured by the Buyer was sale rescission and down payment return based on 
default of Sellers resulting from property title failure. The only two defenses 
available to the Buyer were the Sellers' default or contract unconscionability 
and consequent non-enforceability. This is not a classical forfeiture 
case.

 [¶17.]  In the early case of Quinlan v. St. John, 28 Wyo. 91, 201 P. 149 (1921), this court 
recognized the enforceability of the contract as a law action. The decision then 
found that the buyer failed in pleading to state as a defense an equitable right 
regarding partial payment return.

In an 
installment contract, such as the one at bar, for the purchase of realty, where 
time is of the essence, or when the prompt payment of the installments is made a 
condition precedent, as here, and the vendee defaults and without pleading 
sufficient facts to bring his case within recognized rules of equitable 
jurisprudence sues at law to recover payments made, the overwhelming weight of 
American decisions are to the effect that he cannot recover the purchase money 
paid * * *.

Id. at 101-02, 201 P.  at 
151.

 [¶18.]  That stated principle remains our 
constant for subsequent Wyoming law development. Within the many 
accompanying case citations and quotations, this court then adopted the 
"majority rule" in Lawrence v. Demos, 70 Wyo. 56, 76-77, 244 P.2d 793, 801 (1952) (quoting 
55 Am.Jur. 928, 929, § 536):

     "According, however, 
to the majority American doctrine, a vendor who because of the vendee's default 
enforces a forfeiture provision of the contract in accordance with its terms, or 
takes proceedings to foreclose the vendee's rights thereunder, does not render 
himself liable to return money paid on the contract. This is especially true 
where the terms of the contract authorize the vendor to declare a forfeiture of 
the contract and of money paid by the purchaser upon the latter's default, and 
the vendor in so doing acts fairly and within the scope of the power, or where 
the contract provides that the vendor may retain the deposit or part payment as 
a forfeiture in the nature of liquidated damages for the failure of the 
purchaser to complete the contract. In such a case it is said that the vendor in 
putting an end to the contract acts in its affirmance and not in rescission of 
it, by enforcing a remedy expressly reserved."

 [¶19.]  The centrality of the rule in application 
was stated in Younglove v. Graham and Hill, 526 P.2d 689, 692-93 (Wyo. 1974) where this 
court, after first discussing forfeiture, stated:

However, 
after competent parties have solemnly contracted and agreed to certain 
conditions, courts should exercise restraint in nullifying the terms thereof or 
rewriting the contract. It is said that this is "a dangerous jurisdiction which 
should not be extended," * * *. It does not extend so far as to authorize a 
court of equity to disregard and set aside a valid stipulation of the parties 
upon the performance of which their rights are made to depend in the absence of 
some equitable basis. Consistent with this view we find the following statement 
in 2 Warvelle on Venders, § 822, p. 964 (2d. Ed.):

"As has 
been stated, the doctrine is that if, upon the face of a contract, it clearly 
appears to have been the distinct understanding and agreement of the parties 
that if a stipulated act was not performed within a specified time certain 
consequences were to follow; and if default has been made in the performance 
within the time, a court of equity will give no relief unless a strict 
performance was either waived by the party entitled to its benefits or is 
excused on some special ground of equitable cognizance. * * *"[2]

 [¶20.]  Two recent cases have followed the 
nonrepayment, contractual enforceability determinant of Quinlan, 201 P. 149; Lawrence, 244 P.2d 793; 
and Younglove, 526 P.2d 689. 
These include the most broadly concepted installment sales cases of Marcam 
Mortg. Corp., 686 P.2d 575 and 
Greaser v. Williams, 703 P.2d 327 (Wyo. 
1985).

 [¶21.]  Clearly, the sales agreement stated the 
parties' understanding that the earnest money deposit, in essence an option 
payment, would be subject to retention by Sellers if Buyer became unable to 
perform by making the total purchase payment. It would indeed take an unusual 
factual situation for this court to invade the agreement of this Buyer and these 
Sellers to redraft what they defined as the understood result for damages if 
Buyer became unable or refused to perform. Marcam Mortg. Corp., 686 P.2d 575; Warner v. Rasmussen, 
704 P.2d 559 (Utah 1985). See also 
Hooper v. Breneman, 417 So. 2d 315 (Fla. App. 1982) and Hendel v. Scheuer, 150 A.D.2d 431, 541 N.Y.S.2d 40 (1989), where the buyers breached the sales 
agreement without legal excuse and could not recover their down 
payment.

 [¶22.]  Since this was a liquidated-damage 
penalty-only-transaction, the Buyer understood its limit of liability was 
contractually established and could not exceed what had been initially paid as 
the earnest money deposit. Likewise defined in the agreement was the 
understanding that if the total purchase became unavailable to the Buyer for 
sale consummation, the earnest money deposit would be retained by the Sellers. 
If the contingency developed that the Buyer improperly failed to complete the 
sale, the agreement provided an assured result.

 [¶23.]  We reverse the liquidated damage decision 
that required repayment of the earnest money to the Buyer and otherwise 
affirm.

FOOTNOTES

 1 We neither agree nor 
disagree with the trial court that merchantable title existed. The acreage 
involved was a relatively small portion of the entire interest to be sold. 
Clearly, title was correctable and was, in fact, cured if originally 
unmerchantable. Apparently, Sellers were entitled to the "revenue stream" on the 
questioned lands, but there was an outstanding unrecorded working interest. 
Actual resolution was to be achieved by either non-contribution assessment 
foreclosure or a buy-out. The foreclosure litigation was resolved by that 
buy-out settlement.

     The sales agreement 
itself had a "satisfactory to the Buyer" title acceptability provision. Had a 
notice of title defect been timely given, a converse result from what we 
presently decide might have been appropriate or, at least, corrective 
obligations could have been defined. Cf. Bethurem v. Hammett, 736 P.2d 1128 (Wyo. 
1987).

2 This is not a waiver case. Cf. 
Angus Hunt Ranch, Inc. v. Reb, Inc., 577 P.2d 645 (Wyo. 1978). If there is 
any real explanation for Walker, 706 P.2d 278, perhaps it is 
postured in a "waiver." Likewise, with the title defect issue removed, this is 
not a seller default case. Mader v. James, 546 P.2d 190 (Wyo. 
1976).