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 1 3 1993 Decided: April 13, 1993 

CLERK OF SUPREliEE C(BURT 

STATE OF MONTANA . .. , .., 

Cqerk 
Justice 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 earnest money? 

2. Did the District Court err in rescinding the contracts on 

the basis of material breach? 

While on vacation in the Flathead Valley in May of 1988, Shawn 

Cady (Cady) , a resident of California, decided to purchase property 

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 sale and if they knew of other property 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 (the Burton Complex). 

Over the next several weeks, the parties 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 Sell 
and Purchase with Adams and Kastner pertaining to the Pine Cone 

Kitchen. The agreement required Cady to pay $5,000 as earnest 

money. Additionally, the agreement provided that Cady 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 Lake Residence 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 to Purchase and Sale Agreement, and Addendum, 

Part Two. The exhibit and addenda expressly clarified the 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", dated May 28, Cady was required to pay $5,000 as earnest money 

for each property. 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 the addenda did not clarify the agreement relating to 
the 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 $5,000 of the 

earnest money 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 earnest money 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 that would prevent him from having 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 

rescission of the contracts relating to the Echo Lake Residence and 

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's 
alleged 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 Cadyqs claim 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 

summary adjudication of the Pine Cone Kitchen contract was premised 

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 Complex prohibited 

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 Burtonst counterclaim 

on the basis that they had committed a material breach that excused 

Cadyls performance 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 refundw of the earnest money relating to 

the Echo Lake Residence and the Burton Complex. The court denied 

the Burtonsq post-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 on deposit. " The District Court 

concluded that the payment of the earnest money was a deposit to be 

held by the Burtons and that the earnest money was not available to 

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 

sale of buyer's residence in California, then interest on 

the remaining principal due on the Pine Cone Kitchen and 

the Echo Lake Residence will commence on January 1, 1989. 

Interest will be at 10 1/2 percent and will be added 

monthly to the remaining balance. 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 

earnest money, if Cady dropped a contingency provision relating to 

the sale of his California residence. Nothing in the quoted 

6 
language, 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," "depositingw and "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 earnest money paid to date. 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 Cone Kitchen, $5,000.00 to the Echo 

Lake Residence and $5,000.00 to the Burton's Complex. 

Furthermore, the second addendum contains the following provision: 

This additional Addendum and the previous Addendum 

of June 6, 1988 shall only be valid and will only alter 

the previous agreements of the parties if Buyer signs and 

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 "hold earnest money," 

"earnest money deposit" and "deposits" in these provisions 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 commit to custody, place in the hands of another to be 

held pending an event occurring, pending a permanent or 

temporary disposition of 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 should have applied the 

Black's Law Dictionary definition of the term "depositw as 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 the will of the depositor or under the rules 

and regulations agreed on. Also, the money so deposited, 

or the credit which the depositor receives for it. 

On this basis, the Burtons 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: Schultz v. Stevens (1988), 
233 Mont. 42, 45, 758 P.2d 287, 288. Under the general definition 

of the tern "deposit," and as commonly understood, deposited money 

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 contracts by 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 supports the 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 breach was material. Relying on Sjoberg v. 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 contract provisions requiring the 
earnest money to be held on deposit were only incidental to the 

purpose of the contracts at issue and, 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 the primary purpose of the contract. In 

Sioberq, plaintiff entered into two contracts to purchase 

properties owned by defendants in order to build a home and develop 

a horse ranch. The primary issue was whether defendants' breach in 

failing to obtain a mortgage release, as required by 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 affirmed the district court's finding of materiality 

because defendants' breach-failuret to obtain the mortgage release- 

-substantially defeated the purpose of the contract. Sioberq, 759 

P.2d at 969. 

In VanUden, plaintiffs filed suit to remove restrictive 

covenants affecting property that they contracted to purchase from 

defendants. Defendants counterclaimed, seeking cancellation ofthe 

contract on the basis of plaintiffs' breach of the covenants. 

Plaintiffs moved for summary judgment on the counterclaim, 

asserting that cancellation was an improper remedy as a matter of 
law; the district court denied the motion. 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 could be 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 first prong 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 material 

set 

the 

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 earnest money and promise 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 

earnest money on deposit was incidental to the main 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, Cady does not allege that the Burtons' failure to hold 

the earnest money on deposit substantially defeated the object of 
the contracts. Cady testified that he would not have entered into 

the contracts had he known that the Burtons would spend the earnest 

money; in addition, he asserts that he was reasonably alarmed when 

he learned that the original earnest money had been spent. Cadyfs 

assertions do not address our test for materiality and, therefore, 

do not provide substantial evidence that the Burtonst breach 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 refundM of 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 

conclusion that the court improperly rescinded the 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 the main 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 the breach consists of the damages he 

has suffered therefrom. A rescission is not warranted by 

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' breach 
provides Cady grounds to seek contract damages, 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 the monies 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 the purchase and sale of the Echo Lake Residence and the Burton 

Complex prohibited the Burtons from spending the earnest money 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 

correctly prohibited the Burtons from spending the earnest money. 

I dissent from the holding on Issue 11, with regard to rescission 

of the contracts on the basis of material breach. 

Of particular significance are 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, with seller, an additional $10,000.00 earnest 

money. Buyer may continue to extend 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. Buyer may, in any event, 

continue to extend the date of closing as agreed herein, 

provided he continues to deposit additional sums of 

$10,000.00 earnest money on August 1 and December 1, 1988 

and every 6 months thereafter. 

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 earnest money paid to date. 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 earnest money and promise to complete the sale. 
The majority further concluded that nothing in the agreement 

suggests any other purpose for the buy-sell agreements. I disagree 

with that conclusion. 

In the above quoted paragraph 3, the parties agreed that each 

of the three sales are "contingent upon the sale of buyerls 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 earnest money in the event he is not able to 

sell his home in California. That is a primary 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 the purchase 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 such deposits are made, under the paragraphs, a primary 

purpose is to allow the deposits to be returned in the event that 

the buyerts property 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, or both, buyer has 72 hours to drop the contingent aspect 
of the sale. If the buyer declines to drop the contingency, then 

the seller may sell to a new purchaser. A key point here is that 

upon the closing of the sale to the new purchaser, the buyer shall 

receive a "full1' refund of all earnest money paid to date. Clearly 

this is a primary purpose in addition to the sale of the property 

in Montana to the buyer. 

In view of the foregoing express contingencies, it is clear to 

me that the spending of the earnest money indicates a very 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 to hold the earnest money 

substantially defeated material objects and provisions of the 

contract. I would affirm the conclusion of the District Court that 

the buyer was entitled to withdraw from the contract and request 

refund of his earnest money. I would 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. A 
April 13, 1993 

CERTIFICATE OF SERVICE 

I hereby certify that the following order was sent by United States mail, prepaid, to the following 

named: 

Alan J. Lerner 

Attorney at Law 

P.O. Box 1158 

Kalispell, MT 59903-1158 

Robert B. Allison 

Attorney at Law 

130 Fifth St. E. 

Kalispell, MT 59901 

ED SMITH 

CLERK OF THE SUPREME COURT