No. 92-200 IN THE SUPREME COURT OF THE STATE OF MONTANA 1993

SHAWN CADY, Plaintiff, Counter-Defendant and Respondent,

WILLIAM D. BURTON and DEBRA A. BURTON, Defendants, Counter-Claimants and Appellants.

APPEAL FROM: District Court of the Eleventh Judicial District, In and for the County of Flathead, The Honorable Leif B. Erickson, Judge presiding.

COUNSEL OF RECORD: For Appellants: Alan J. Lerner,Attorney at Law,Kalispell,Montana For Respondent: Robert B. Allison,Attorney at Law, Kalispell, Montana 

# D Submitted on Briefs: December 22, 1992 

### APR

### 13 

### 1993 Decided: April 13, 1993

CLERKOFSUPREliEEC(BURT STATEOFMONTANA

. ..

, .., CqerkJustice Karla M. Gray delivered the Opinion of the Court.

William and Debra Burton appeal from the findings of fact, conclusions of law, and judgment entered by the Eleventh Judicial District Court, Flathead County, rescinding two contracts for the sale and purchase of real property. We affirm in part and reverse in part. We restate the issues on appeal as follows: 1. Did the District Court err in concluding that the contracts prohibited the Burtons from spending the earnestmoney? 2. Did the District Court err inrescindingthe contractson the basis of material breach? While on vacation inthe Flathead Valley in May of 1988,Shawn Cady (Cady)

## ,a resident of California,decided topurchaseproperty in the area. Cady asked Linda Adams (Adams) and Caren Kastner (Kastner), owners of the Pine Cone Kitchen in Bigfork, if the restaurant was for saleand if theyknewof otherproperty for sale in the area. Adams and Kastner expressed interest in selling the restaurant and referred Cady to William Burton (Burton), their cousin. Burton and his wife, Debra Burton, were interested in selling a residence (the Echo Lake Residence) and a shopping complex (theBurton Complex). Over the next several weeks, theparties executed a number of documents relating to the purchase and sale of the Echo Lake Residence, the Burton Complex, and the Pine Cone Kitchen. On May 18,Cady signed a document entitled Receipt and Agreement to Selland Purchase with Adams and Kastner pertaining to the Pine Cone Kitchen. The agreement required Cady to pay $5,000 as earnest money. Additionally, theagreement provided thatCady could extend the closing for 90 days by paying an additional $5,000 earnest money. On May 19, Cady and the Burtons executed two documents entitled Receipt and Agreement to Sell and Purchase: one for the Echo LakeResidence and the other for the Burton Complex. By their terms, the agreements were not effective until Cady paid earnest money in an unspecified amount. The agreements contained no other provisions regarding earnest money. Cady and the Burtons subsequently executed documents entitled Exhibit "A",Addendum toPurchaseand Sale Agreement,andAddendum, PartTwo. The exhibit and addenda expresslyclarifiedthe terms of the two earlier agreements for the sale and purchase of the Echo Lake Residence and the Burton Complex. Under the terms of Exhibit "A",datedMay 28, Cadywas required topay $5,000 as earnest money for eachproperty. The first addendum, dated June 6,provided that the closing on both properties would take place on August 1; it permitted Cady to extend the closing on both properties by paying

an additional $10,000 earnest money on August 1. The terms lldeposit,""depositingn and "held on deposit" were used in the first addendum in reference to the earnest money. The second addendum, dated June 8, also included the term lldepositsll in reference to the earnest money. Although theaddendadid not clarifythe agreement relating tothe Pine Cone Kitchen, the addenda did refer to the Burtons' receipt of initial earnest money in the amount of $15,000, and directed the Burtons to allocate $5,000 of the earnest money to each of the three properties. Accordingly, Cady sent a check to William Burton in the amount of $15,000. Burton gave $5,000of the earnestmoney to Adams and Kastner. In mid-July, Burton requested that Cady send additional earnest money even though it was not due until August 1. At that time, Burton informed Cady that he had spent the initial earnest money and that he needed the additional earnestmoney for personal expenses, possibly to avoid bankruptcy. Cady refused to send additional earnest money unless it was deposited in escrow or otherwise withheld from the Burtons' personal use; Burton refused any arrangement thatwould preventhim fromhaving immediate use of the money. The parties did not close on the properties on August 1, nor did Cady send the additional earnest money required to extend the closing date. On September 20, Cady filed suit against the Burtons for rescissionof the contracts relatingto the Echo LakeResidenceand the Burton Complex. In addition, Cady alleged that Burton had acted as an agent of Adams and Kastner and, on that basis, sought rescission of the contract regarding the Pine Cone Kitchen. Cady also sought a $15,000 judgment against the Burtons to recoup the earnest money paid on the three properties. The Burtons counterclaimed, seeking specific performance of the Echo Lake Residence and Burton Complex contracts and damages for Cady'salleged breach of 

### the contracts and the implied covenant of good faith and fair dealing. The Burtons subsequently dropped their specific performance claim. A bench trial was held on November 12, 1991. During the trial, the District Court granted partial summary judgment in favor of the Burtons, dismissing Cadyqsclaim relating to the pine Cone Kitchen. At the conclusion of the trial, the District Court orally issued its findings and judgment. The court stated that its summaryadjudicationof the Pine ConeKitchen contract waspremised

on its finding that Kastner and Adams were the real. parties in interest. The court also found that the terms of the contracts regarding the Echo Lake Residence and the Burton Complexprohibited the Burtons from spending the earnest money prior to closing and, therefore, that the Burtons had breached the contracts. Furthermore, the District Court found the breach to be material. The District Court apparently dismissed the Burtonstcounterclaim

on thebasis that theyhad committed amaterial breach that excused Cadylsperformance under the contract. The court awarded Cady $10,000 

### plus interest, representing 

### a 

### refund of the earnest money 

### paid by Cady on the Echo Lake Residence and the Burton Complex. On December 31, 1991, the court filed findings of fact, conclusions of law and judgment consistent with its bench ruling. The court concluded that 

### Cady was 'lentitled to withdrawvt from the contract and to "request refundwof the earnest money relating to the Echo Lake Residence and the Burton Complex. The court denied the Burtonsqpost-trial motions and the Burtons appealed.Did the District Court err in concluding that the contracts prohibited the Burtons from spending the earnest money? The District Court found that the original buy-sell agreements, together with Exhibit "A" and the two addenda, constituted the contracts relating to the sale and purchase of the Echo Lake Residence and the Burton Complex. The court also found that while the initial buy-sell agreements did not address the disposition of the earnest money, the addenda included the terms "deposit, 

## " "depositingt1 and "held ondeposit.

## " The District Court concluded that thepayment of the earnestmoneywas a deposit to be held by the Burtons and that the earnestmoney was not availableto spend at their discretion until closing. The Burtons contend that the District Court erred in determining that the terms "deposit,l**ldepositing" and "held on depositvg applied to the initial earnest money. They assert that the court relied almost exclusively on the following provision in the first addendum to conclude that they were prohibited from spending the earnest money: 4. If buyer agrees to drop the contingency of the saleofbuyer's residence inCalifornia, then interest on the remaining principal due on the Pine Cone Kitchen and theEcho Lake Residencewill commence onJanuary 1,1989. Interest will be at 10 1/2 percent and will be added monthly to the remainingbalance. The principal balance shall be reduced by earnest money payments held on deposit. According to the Burtons, this provision prevents them from spending additional earnest monies received, but not the initial earnestmoney, if Cady dropped a contingency provision relating to the sale of his California residence. Nothing in the quoted 6language, however, creates differing obligations on the Burtons' part with regard to initial versus subsequent earnest money payments. The Burtons also assert that the referenced provision applies by its terms only to earnest money relating to the Pine Cone Kitchen and Echo Lake Residence and, therefore, does not prevent them from spending the earnest money relating to the Burton Complex. This contention ignores the recurrence of the terms "deposit," "depositingwand "held on deposit1'in the two addenda. The following provisions of the first addendum, which are applicable to the contracts for both the Echo Lake Residence and the Burton Complex,are particularly relevant: 3. This sale is contingent upon the sale of Buyer's home in California. If seller receives an offer to sell either the Echo Lake Residence or the Burton's Complex, or both, then buyer shall have 72 hours notice to drop this contingency. If buyer declines to drop the contingency, then seller may sell any or all of the properties to a new purchaser. Upon the closing of the sale to the new purchaser, buyer shall receive a full refund of all earnestmoneypaid todate. Until the sale to the new purchaser closes, the purchase agreements between buyer and seller remain in full force and seller shall continue to hold earnest money.

5. Seller acknowledges receipt of the initial earnest money deposit of $15,000.00, with $5,000.00 allocated to the Pine ConeKitchen, $5,000.00to the Echo Lake Residence and $5,000.00 to the Burton's Complex. Furthermore, the second addendum contains the followingprovision: This additionalAddendum and the previous Addendum of June 6, 1988 shall only be valid and will only alter theprevious agreements of theparties if Buyer signsand returns the June 6th Addendum and this additional Addendum to Seller by June 11, 1988 

### AND only if Buyer deposits $15,000.00 earnest money with Seller 

# . . . .Contrary to the Burtons' assertion,the terms "holdearnestmoney," "earnestmoney deposit" and "deposits" in theseprovisions clearly pertain to earnest money paid on both the Echo Lake Residence and the Burton Complex. The Burtons also contend that the District Court erred in defining the term I'deposit

# .It The District Court relied upon the following definition from Black's Law Dictionary: To committo custody,place in thehands of another tobe held pending an event occurring, pending a permanent or temporary dispositionof the funds,giving possession of personal property by one person to another with his consent; to keep for the use and benefit of the first or of a third person. The Burtons assert that the District Court shouldhave applied the Black's Law Dictionary definition of the term "depositwas it is used in the banking industry: In Banking Law The act of placing or lodging money in the custody of a bank or banker, for safety or convenience, to be withdrawn at thewill of thedepositor orunder the rules and regulationsagreed on. Also,themoney sodeposited, or the credit which the depositor receives for it. On this basis, theBurtons contend that they were free to spend the earnest money in the same manner that a bank is able to use the deposits of its customers. We disagree. The obvious flaw in this argument is that neither the Burtons nor Cady are bankers. The Burtons and Cady entered into the contracts to purchase and sell real estate as private individuals. It is a well-established principle of contract law, codified in Montana, that words 

### of a contract are to be understood in their ordinary sense. Section 28-3-501, MCA: Schultzv. Stevens (1988),233 Mont. 42, 45, 758 P.2d 287, 288. Under the general definition of the tern "deposit," and as commonlyunderstood,depositedmoney is to be held and kept pending an event--here, the closing of the sale of real estate. We hold that the District Court properly concluded that the contracts prohibited the Burtons from spending the earnest money relating to the Echo Lake Residence and the Burton Complex.

Whether the District Court erred in rescinding the contracts

on the basis of material breach? Ruling from the bench, the District Court found that the Burtons had breached the contractsby spending the earnest money. Furthermore, the court found that the breach was material. Findings of fact made by a district court, sitting without a jury, must be affirmed unless the findings are clearly erroneous. Rule 52(a), M.R.Civ.P. We have adopted a three prong test to determine whether a finding is clearly erroneous: the first prong is whether substantial evidence supportsthe findings. Interstate Prod. Credit Ass'n v. DeSaye (1991), 250 Mont. 320, 323, 820 P.2d 1285, 1287. The Burtons contend that the District Court erred in finding that the alleged breachwasmaterial. Relying on Sjobergv. Kravik

(1988), 233 Mont. 33, 759 P.2d 966, and VanUden v. Hendricksen (1980), 189 Mont. 164, 615 P.2d 220, they contend that a breach is material only if it substantially defeats the object of the contract. They assert that the contractprovisions requiring theearnest money to be held on deposit were only incidental to the purpose of the contractsat issueand,therefore, that even if they breached the provisions, the breach was not material. We agree. Sioberq and VanUden reflect our consistent approach to the question of materiality of a contract breach: a breach is not material unless it defeats theprimary purpose of the contract. In Sioberq, plaintiff entered into two contracts to purchase properties ownedby defendants in order tobuild ahome and develop

ahorse ranch. Theprimary issuewaswhether defendants'breach in failingto obtainamortgage release,as requiredby the contracts, was material so as to support plaintiff's suspension of performance. The district court found that the purpose of the mortgage release provisions was to enable plaintiff to obtain financing to develop the horse ranch. On that basis, the court determined that defendants' breach was material and, therefore, that plaintiff was entitled to suspend his payments under the contracts. We affirmedthedistrict court's findingofmateriality becausedefendants' 

### breach-failuret to obtainthemortgage release- -substantially defeated the purpose of the contract. Sioberq, 759 P.2d at 969. In VanUden, plaintiffs filed suit to remove restrictive covenantsaffectingproperty that they contracted to purchase from defendants. Defendants counterclaimed,seekingcancellationofthe contract on the basis of plaintiffs' breach of the covenants. Plaintiffs moved for summary judgment on the counterclaim, asserting that cancellationwas an improper remedy as a matter of

### law;thedistrict courtdenied themotion. We reversed,concluding that the covenants were only incidental to the main purpose of the contract for deed--delivery of the deed in exchange for payment of the purchase price. We opined that where the alleged breach of covenants was not so substantial and fundamental as to defeat the main object or purpose of the contract,and couldbe compensated in damages, a breach of the covenants did not warrant cancellation. VanUden, 615 P.2d at 224. Our review of the District Court's finding of materiality in the case before us need not progress beyond the firstprong of the DeSave clearly erroneous test. Given the materiality test forth above, no substantial evidence in the record supports District Court's finding that the Burtons' breach was materialset the

The primary purpose of a buy-sell agreement is a restriction

on the seller's ability tomarket theproperty for a specified time in exchange for thebuyer's payment of earnest money andpromise to complete the sale. See 

### Payne Realty v. First Sec. Bank (Mont. 1992), 844 P.2d, 90,94, 49 St.Rep. 1098, 1100. Nothing of record here suggests any other purpose for the buy-sell agreements at issue. The contract provision requiring the Burtons to hold the earnestmoney on depositwas incidental to themain purpose of the buy-sell agreements and breach of that provision did not substantially defeat, or even impact, the primary purpose of the contracts. Indeed,Cadydoes not allege that the Burtons' failuretohold the earnest money on deposit substantially defeated the object ofthe contracts. Cady testified that 

### he would not have entered into the contractshad he knownthat the Burtonswould spend the earnest money; 

### in addition,

### he asserts that

### he was reasonably alarmedwhen he learned that the original earnest money had been spent. Cadyfs assertions do not address our test formateriality and, therefore, do not provide substantial evidence that 

### the Burtonstbreach was material in that it defeated the primary purpose of the contracts. We conclude that the District Court's finding that the Burtonst failure to keep the earnest money on deposit until closing constituted a material breach 

### is clearly erroneous. Based on its finding of material breach, the District Court concluded that Cady was entitled to from the contrac and to "request refundMof the earnest money. Thus, the District Court effectively rescinded the contracts regarding the Echo Lake Residence and the Burton Complex. Our determination that the District Court's finding of material breach is clearly erroneous necessarily leads to 

### our conclusionthat the court improperlyrescindedthe contracts. Only



### a material breach can serve as a basis for rescinding a contract. A breach which goes to only a part of the consideration, is incidental and subordinate to themain purpose of the contract, and may be compensated 

### in damages does not warrant a rescission of the contract; the injured party is still bound to perform his part 

### of the agreement, and his only remedy for thebreach consists of the damageshe has suffered therefrom. 

### A rescission 

### is not warrantedby a mere breach of contract not so substantial and fundamental as to defeat the object of the parties in making the agreement. Reinke 

### v. Biegel (1979), 185 Mont. 31, 35-36, 604 P.2d 315, 317

(citations omitted). Pursuant to ~einke,the Burtons' breachprovides Cadygrounds to seek contractdamages,but not rescission. Accordingly, we hold that the court erred in rescinding the contracts on the basis of material breach. The District Court's award of $10,000 plus interest, reflecting the earnest money paid on the Echo Lake Residence and the Burton Complex, appears to be a component of the rescission. The objective of rescission is to return the parties to the same position they would have occupied had they not entered into the contract. Brunner v. LaCasse (1988), 234 Mont. 368, 371, 763 P.2d 662, 664. As a general rule, a party lawfully rescinding a contract is entitled to recover themonies paid under the contract, with interest from the date of the breach. Brunner, 763 P.2d at 664. Based on our determination that the District Court erred in rescinding the contracts, we conclude that the award of $10,000 plus interest,which is part and parcel of the rescission, is in

error as well. We affirm the District Court's conclusion that the contracts for thepurchase and sale of the Echo LakeResidence and the Burton Complexprohibited the Burtons from spending the earnestmoney and its finding, on that basis, that the Burtons breached the contracts. We reverse the District Court's finding that the Burtons' breach was material and, consequently, its rescission of the contracts. Furthermore, because the District Court's dismissal of the Burtons' counterclaim appears to have been premised on the erroneous finding of a material breach, we reverse the court's dismissal of the counterclaim.Affirmed in part, reversed in part and remanded for further proceedings consistent with this opinion.

We concur:

chief Justice

Justices

### Justice Fred J. Weber concurs and dissents as follows: I concur in the majority holding that the District Court correctlyprohibited the Burtons from spending the earnestmoney. I dissent from the holding on Issue 11,with regard to rescission of the contracts on the basis of material breach. Ofparticular significanceare the following provisions of the addendum of June 6, 1988, 

### referred to in the majority opinion: PROVISIONS APPLICABLE TO EACH CON!CRACT 1. 

### Closing shall be on August 1, 1988. 

### Buyer may extend the closing date to December 1, 1988 

### by depositing,withseller,an additional $10,000.00 

### earnest money. Buyermay continuetoextend closing indefinitely by continuing to deposit an additional $10,000.00 

### sum as earnest money every six months thereafter. 2. 

### If, under the existing terms of the Buy-Sell Agreements, the parties agree that they will close the purchase of the Echo Lake residence or the Burton's Complex, but not both, then in this event, Buyer shall have refunded the earnest money attributable to the agreement which will not close. Buyermay, inany event, continue to extend the date of closing as agreedherein, provided he continues to deposit additional sums of $10,000.00 

### earnestmoney onAugust 1

### andDecember 1, 1988 

### and every 6

### months thereafter. 3. 

### This sale is contingentupon the saleof Buyer's home in California. If sellerreceives an offer to sell either theEcho Lake residence, or the Burton's Complex, or both, then buyer shall have 72 

### hours notice to drop this contingency. If buyer declines to drop the contingency, then seller may sell any or all of the properties to a new purchaser. Upon the closing of the sale to the new purchaser, buyer shall receive a full refund of all earnestmoneypaid todate. Until the sale to the new purchaser closes, the purchase agreements between buyer and seller shall remain in full force and seller shall continue to hold earnest money. The majority opinion concluded that the primary purpose of a buy-sell agreement is a restriction on the seller's ability to market the property for a specified time in exchange for the buyer's payment of earnestmoney and promise to complete the sale.The majority further concluded that nothing 

### in the agreement suggestsany other purpose for thebuy-sell agreements. Idisagree with that conclusion. In the above quoted paragraph 3, theparties agreed that each of the three salesare "contingentupon the sale ofbuyerls home 

### in ~alifornia." That is 

### a significant factor not addressed in the majority opinion. That provision gives the right to the buyer to demand a return of the earnestmoney in the event he isnot able to sellhishome inCalifornia. That is aprimary purpose in addition to the marketing and sale of the property in Montana. We emphasize 

### that the above provisions establish this is not

an ordinary buy-sell agreement in which there is an agreement to buy and 

### to sell. Under paragraph 2, the parties 

### in the future could agree that they would close thepurchase of either Echo Lake residence or Burton's Complex, but not both. 

### In that event the buyer was required to refund the earnest money attributable to the agreement which did not close. This again is a primary purpose 

### or

reason in addition to the marketing and sale. 

### In addition, under these paragraphs, buyer may continue to extend the date of closing by making additional $10,000 deposits. Even though suchdeposits aremade,under the paragraphs,

### a primary purpose is to allow the deposits to be returned in the event that the buyertsproperty in California is not sold. Last, I point out that under paragraph 3, if the seller receives an offer to sell either Echo Lake residence or Burton's Complex, orboth,buyer has 72hours to drop the contingent aspectof the sale. If the buyer declines to drop the contingency,then the sellermay sell to a new purchaser. 

### A key point here is that upon the closing of the sale to the newpurchaser, thebuyer shall receivea "full1' refund of all earnestmoney paid todate. Clearly this is a primary purpose in addition to the sale of the property inMontana to the buyer. Inview of the foregoing express contingencies, it is clear to

me that the spending of the earnestmoney indicates avery material problem with return of the earnest money if the sale is not completed. The deposit referred to in the first issue of the majority opinion becomes of little significance if it is spent and

no longer constitutes such a deposit. I conclude that the seller's failure tohold the earnestmoney substantially defeated material objects and provisions of the contract. Iwould affirm the conclusion of theDistrictCourt that the buyer was entitled to withdraw from the contract and request refund of his earnest money. 

### Iwould affirm the District Court's award of $10,000 plus interest to the buyer.

Chief Justice J. A. Turnage concurs in the foregointg concurrence and dissent. 

### AApril 13, 1993 CERTIFICATEOFSERVICE I hereby certify thatthefollowingorderwas sentbyUnited States mail,prepaid,tothe following named:

AlanJ.Lerner AttorneyatLaw P.O. Box 1158 Kalispell,MT 59903-1158 RobertB. Allison Attorney at Law 130FifthSt.E. Kalispell,MT 59901 EDSMITH CLERKOF

### THESUPREME COURT