Title: Skendzel v. Marshall
Citation: 301 N.E.2d 641
Docket Number: 773S145
State: Indiana
Issuer: Indiana Supreme Court
Date: October 4, 1973

301 N.E.2d 641 (1973)
Josephine SKENDZEL et al., Appellants,
v.
Agnes P. MARSHALL et al., Appellees.
No. 773S145.

Supreme Court of Indiana.
October 4, 1973.
Rehearing Denied November 9, 1973.
*642 Richard F. DeTar, Frank E. Spencer, Indianapolis, for appellants.
Le Roy K. Schultess, Howard E. Petersen, LaGrange, for appellees.
HUNTER, Justice.
Petitioners seek transfer to this Court as a result of an adverse ruling by the Court of Appeals. Plaintiff-respondents originally brought suit to obtain possession of certain real estate through the enforcement of a forfeiture clause in a land sale contract. Plaintiff-respondents suffered a negative judgment, from which they appealed. The Court of Appeals reversed, holding that the defendant-petitioners had breached the contract and that the plaintiff-respondents had not waived their right *643 to inforce the forfeiture provisions of the contract.
In December of 1958, Mary Burkowski, as vendor, entered into a land sale contract with Charles P. Marshall and Agnes P. Marshall, as vendees. The contract provided for the sale of certain real estate for the sum of $36,000.00, payable as follows:
The contract also contained a fairly standard section which provided for the treatment of prepayments  but which the Court of Appeals found to be of particular inportance. It provided as follows:
The following is the forfeiture/liquidated damages provision of the land sale contract:
The vendor, Mary Burkowski, died in 1963. The plaintiffs in this action are the assignees (under the vendor's will) of the decedent's interests in the contract. They received their assignment from the executrix of the estate of the vendor on June 27, 1968. One year after this assignment, several of the assignees filed their complaint in this action alleging that the defendants had defaulted through non-payment.
The schedule of payments made under this contract was shown by the evidence to be as follows:
No payments have been made since the last one indicated above  $15,000.00 remains to be paid on the original contract price.
In response to the plaintiff's attempt to enforce the forfeiture provision, the defendants raised the affirmative defense of waiver. The applicable rule is well established and was stated by the Court of Appeals as follows:
It follows that where the vendor has not waived strict compliance by acceptance of late payments, no notice is required to enforce its provisions. (289 N.E.2d  at 771, citing Conner v. Fisher, supra; Clayton v. Fletcher Savings &amp; Trust Co., supra.)
In essence, the Court of Appeals found that there was no waiver because the vendors were obligated to accept prepayment, and, "the payments made, although irregular in time and amount, were prepayments on the unpaid balance through and including the payment due on January 15, 1965." (289 N.E.2d  at 771.) The Court concluded that up to January 15, 1966, "the vendors waived no rights under the contract, because they were obliged to accept prepayment." (Id.) and that, "[t]he vendors could not have insisted on forfeiture prior to January 15, 1966, the date of the first missed payment." (Id.) (We believe the Court of Appeals miscalculated here; the vendors could not have insisted on forfeiture until January 16, 1968.)
If forfeiture is enforced against the defendants, they will forfeit outright the sum of $21,000, or well over one-half the original contract price, as liquidated damages plus possession.
Forfeitures are generally disfavored by the law. Carr v. Troutman (1954), 125 Ind. App. 151, 123 N.E.2d 243, In fact, "... [e]quity abhors forfeitures and beyond any question has jurisdiction, which it will exercise in a proper case to grant relief against their enforcement." 30 C.J.S. Equity § 56 (1965) and cases cited therein. This jurisdiction of equity to intercede is predicated upon the fact that "the loss or injury occasioned by the default must be susceptible of exact compensation." 30 C.J.S., supra.
Pomeroy defines this doctrine of equitable interference to relieve against penalties and forfeitures as follows:
Paragraph 17 of the contract, supra, provides that all prior payments "become forfeited and be taken and retained by the Vendor as liquidated damages." "Reasonable" liquidated damage provisions are permitted by the law. See 22 Am.Jur., 2d Damages § 212 (1965). However, the issue before this Court, is whether a $21,000 forfeiture is a "reasonable" measure of damages. If the damages are unreasonable, i.e., if they are disproportionate to the loss actually suffered, they must be characterized as penal rather then compensatory. See Melfi v. Griscer Industries, Inc. (1967), 141 Ind. App. 607, 231 N.E.2d 54; Czeck v. Van Helsland (1968), 143 Ind. App. 460, 241 N.E.2d 272. Under the facts of this case, a $21,000 forfeiture is clearly excessive.
The authors of American Law Reports have provided an excellent analysis of forfeiture provisions in land contracts:
If we apply the specific equitable principle announced above  namely, that the amount paid be considered in relation to the total contract price  we are compelled *646 to conclude that the $21,000 forfeiture as liquidated damages is inconsistent with generally accepted principles of fairness and equity. The vendee has acquired a substantial interest in the property, which, if forfeited, would result in substantial injustice.
Under a typical conditional land contract, the vendor retains legal title until the total contract price is paid by the vendee. Payments are generally made in periodic installments. Legal title does not vest in the vendee until the contract terms are satisfied, but equitable title vests in the vendee at the time the contract is consummated. When the parties enter into the contract, all incidents of ownership accrue to the vendee. Thompson v. Norton (1860), 14 Ind. 187. The vendee assumes the risk of loss and is the recipient of all appreciation in value. Thompson, supra. The vendee, as equitable owner, is responsible for taxes. Stark v. Kreyling (1934), 207 Ind. 128, 188 N.E. 680. The vendee has a sufficient interest in land so that upon sale of that interest, he holds a vendor's lien. Baldwin v. Siddons (1910), 46 Ind. App. 313, 90 N.E. 1055, 92 N.E. 349.
This Court has held, consistent with the above notions of equitable ownership, that a land contract, once consummated constitutes a present sale and purchase. The vendor "`has, in effect, exchanged his property for the unconditional obligation of the vendee, the performance of which is secured by the retention of the legal title.'" Stark v. Kreyling, supra, 207 Ind. at 135, 188 N.E.  at 682. The Court, in effect, views a conditional land contract as a sale with a security interest in the form of legal title reserved by the vendor. Conceptually, therefore, the retention of the title by the vendor is the same as reserving a lien or mortgage. Realistically, vendor-vendee should be viewed as mortgagee-mortgagor. To conceive of the relationship in different terms is to pay homage to form over substance. See Principles of Equity, Clark, 4th edition, Sec. 9, p. 23.
The piercing of the transparent distinction between a land contract and a mortgage is not a phenomenon without precedent. In addition to the Stark case, supra, there is an abundance of case law from other jurisdictions which lends credence to the position that a land sales contract is in essence a mortgage:
See also 77 A.L.R. 270 and cases cited therein.
It is also interesting to note that the drafters of the Uniform Commercial Code abandoned the distinction between a conditional sale and a security interest. Section 1-201 of the UCC (IC 1971, XX-X-X-XXX (Ind. Ann. Stat. § 19-1-201 [1964 Repl.])) defines "security interest" as "an interest in personal property or fixtures which secures *648 payment or performance of an obligation ... retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer is limited in effect to a reservation of `security interest.'" We can conceive of no rational reason why conditional sales of real estate should be treated any differently.[1]
A conditional land contract in effect creates a vendor's lien in the property to secure the unpaid balance owed under the contract. This lien is closely analogous to a mortgage  in fact, the vendor is commonly referred to as an "equitable mortgagee." D.S.B. Johnston Land Co. v. Whipple, supra; Harris v. Halverson, supra. In view of this characterization of the vendor as a lienholder, it is only logical that such a lien be enforced through foreclosure proceedings. Such a lien "[has] all the incidents of a mortgage" (D.S.B. Johnston Land Co. v. Whipple, supra, 234 N.W. at 61), one of which is the right to foreclose.
There is a multitude of cases upholding the vendor's right to foreclose. (See 77 A.L.R. 276, and the cases cited therein.) The remedy is most often referred to as a foreclosure of an executory contract. (A land contract is "executory" until legal title is actually transferred to the vendee.) A 1924 New York case best describes this remedy:
The foreclosure of a land sale contract is undeniably comprehended by our Trial Rules. TR. 69(C) IC 1971, 34-5-1-1, deals with the foreclosure of liens upon real estate:
The vendor's interest clearly constitutes a "lien upon real estate" and should, therefore, be treated as one. The basic foreclosure statute  that is for mortgages executed after July 1, 1957  provides for a six-month period of redemption, commencing with the filing of the complaint. Additionally, it establishes the procedures attendant *649 to the foreclosure sale. The statute reads as follows:
TR 69(C) requires that the procedures outlined in the above statute be applied "without limitation" to the "judicial foreclosure of all liens upon real estate." We believe there to be great wisdom in requiring judicial foreclosure of land contracts pursuant to the mortgage statute. Perhaps the most attractive aspect of judicial foreclosure is the period of redemption, during which time the vendee may redeem his interest, possibly through re-financing.
Forfeiture is closely akin to strict foreclosure  a remedy developed by the English courts which did not contemplate the equity of redemption. American jurisdictions, including Indiana, have, for the most part, rejected strict foreclosure in favor of foreclosure by judicial sale:
55 Am.Jur.2d, Mortgages, § 549 (1971).
Guided by the above principles we are compelled to conclude that judicial foreclosure of a land sale contract is in consonance with the notions of equity developed in American jurisprudence. A forfeiture  like a strict foreclosure at common law  is often offensive to our concepts of justice and inimical to the principles of equity. This is not to suggest that a forfeiture is an inappropriate remedy for the breach of all land contracts. In the case of an abandoning, absconding vendee, forfeiture is a logical and equitable remedy. Forfeiture would also be appropriate where the vendee has paid a minimal amount on the contract at the time of default and seeks to retain possession while the vendor is paying taxes, insurance, and other upkeep in order to preserve the premises. Of course, in this latter situation, the vendee will have acquired very little, if any, equity in the property. However, a court of equity must always approach forfeitures with great caution, being forever aware of the possibility of inequitable dispossession of property and exorbitant monetary loss. We are persuaded that forfeiture may only be appropriate under circumstances in which it is found to be consonant with notions of fairness and justice under the law.
In other words, we are holding a conditional land sales contract to be in the nature of a secured transaction, the provisions of which are subject to all proper and just remedies at law and in equity.
Turning our attention to the case at hand, we find that the vendor-assignees were seeking forfeiture, including $21,000 already paid on said contract as liquidated damages and immediate possession. They were, in fact, asking for strict application of the contract terms at law which we believe would have led to unconscionable results requiring the intervention of equity. "Equity delights in justice, but that not by halves." (Story, Eq.Pl. § 72.) On the facts of this case, we are of the opinion that the trial court correctly refused the remedy sought by the vendor-assignees, but in so refusing it denied all remedial relief to the plaintiffs. Equity will "look upon that as done which ought to have been done." (Story, Eq.Jur. § 64(g)). Applying the foregoing maxims to the case at bar, where such parties seek unconscionable results in such an action, equity will treat the subject matter as if the final acts and relief contemplated by the parties were accomplished exactly as they should have been in the first instance. Where discretionary power is not exercised by a trial court, under the mistaken belief that it was without this power, a remand and direction by a court of review is necessary and proper. 5 Am.Jur.2d § 773, p. 216, n. 3 (cases cited therein). This is not an unwarranted interference with the trial court's function. Upon appeal to this Court, we have the judicial duty to sua sponte direct the trial court to apply appropriate equitable principles in such a case. 5 Am.Jur.2d, § 656, p. 107, citing: Mark v. Kahn (1956), 333 Mass. 517, 131 N.E.2d 758, 53 A.L.R.2d 908. Consistent with such abovestated rules, this Court has the undeniable authority to remand with guidelines which will give substantial relief to plaintiffs under their secured interests and will prevent the sacrifice of the vendees' equitable lien in the property.
For all of the foregoing reasons, transfer is granted and the cause is reversed and remanded with instructions to enter a judgment of foreclosure on the vendors' lien, pursuant to Trial Rule 69(C) and the mortgage foreclosure statute (IC 1971, XX-X-XX-X (Ind. Stat. Ann., § 3-1801 [1968 Repl.])) as modified by Trial Rule 69(C). *651 Said judgment shall include an order for the payment of the unpaid principal balance due on said contract, together with interest at 8% per annum from the date of judgment. The order may also embrace any and all other proper and equitable relief that the court deems to be just, including the discretion to issue a stay of the judicial sale of the property, all pursuant to the provisions of Trial Rule 69(C). Such order shall be consistent with the principles and holdings developed within this opinion.
Reversed and remanded with instructions.
ARTERBURN, C.J., and DeBRULER and PRENTICE, JJ., concur in this opinion on the merits.
PRENTICE, J., filing an additional statement.
GIVAN, J., dissents.
PRENTICE, Justice (concurring).
I have some concern that our opinion herein might be viewed by some as indicating an attitude of indifference towards the rights of contract vendors. Such a view would not be a true reflection.
Because the installment sales contract, with forfeiture provisions, is a widely employed and generally accepted method of commerce in real estate in this state, it is appropriate that a vendee seeking to avoid the forfeiture, to which he agreed, be required to make a clear showing of the inequity of enforcement. In any given transaction anything short of enforcing the forfeiture provision may be a denial of equity to the vendor. It has been set forth in the majority opinion that if the vendee has little or no real equity in the premises, the court should have no hesitancy in declaring a forfeiture. It follows that if the vendee has indicated his willingness to forego his equity, if any, whether by mere abandonment of the premises, by release or deed or by a failure to make a timely assertion of his claim, he should be barred from thereafter claiming an equity.
If the court finds that forfeiture, although provided for by the terms of the contract, would be unjust, it should nevertheless grant the vendor the maximum relief consistent with equity against a defaulting vendee. In so doing, it should consider that, had the parties known that the forfeiture provision would not be enforceable, other provisions for the protection of the vendor doubtlessly would have been incorporated into the agreement. Generally, this would require that the transaction be treated as a note and mortgage with such provisions as are generally included in such documents customarily employed in the community by prudent investors. Terms customarily included in such notes and mortgages but frequently omitted from contracts include provisions for increased interest during periods of default, provision for the acceleration of the due date of the entire unpaid principal and interest upon a default continuing beyond a reasonable grace period, provisions for attorneys' fees and other expenses incidental to foreclosure, for the waiver of relief from valuation and appraisement laws and for receivers.
[1]  In fact, the Commissioners on Uniform State Laws have recognized the transparency of any such distinctions. Section 3-102 of the Uniform Land Transactions Code (working draft of first tentative draft) reads as follows:

"This Article applies to security interests created by contract, including mortgage ... land sales contract ... and any other lien or title retention contract intended as security."
We believe this position is entirely consistent with the evolving case law in the area.