Opinion ID: 1726225
Heading Depth: 1
Heading Rank: 4

Heading: Forfeiture of real estate contract.

Text: On June 12, 1970, the parties entered into a real estate contract under which Randolph agreed to convey to the Schrecks 280 acres of land in Guthrie County for a total price of $56,000. A down payment of $1000 was made on the contract date, and an additional payment of $15,000 was to be made on or before March 1, 1971. This payment was not made and on March 17, 1971, the buyers were served with a notice of forfeiture under chapter 656, The Code, reciting the payment failure and stating that unless the default was cured by payment of the amount due within 30 days the contract would be forfeited. The default was not cured, and on April 4, 1971, a three-day notice to quit was served on the Schrecks. On April 17, 1971, Randolph sold the farm to Merle D. Jensen for the same price and under the same terms as under the Schreck contract. (Jensen was the successor to Schreck in the joint venture enterprise with Randolph.) Schrecks contend on appeal that the forfeiture proceedings were invalid in that they denied them due process and equal protection under the constitutions of the United States and Iowa. The trial court held the Schrecks had waived any constitutional challenge by signing the sales contract, which contained a forfeiture clause as follows: Forfeiture and foreclosure. If Buyers fail to perform this agreement in any respect, time being made the essence of this agreement, then Sellers may forfeit this contract as provided in Chapter 656 of the Iowa Code and all payments made and improvements made on said premises shall be forfeited; or Sellers may declare the full balance owing due and payable and proceed by suit at law or in equity to foreclose this contract, in which event Buyers agree to pay costs and attorney fees and any other expenses incurred by Seller. Schrecks raised the issue of deprivation of due process, but did not raise the issue of equal protection in their pleadings. The trial court did not decide the issue of constitutionality in its decree, holding only that the Schrecks had waived any constitutional argument by signing the contract. The issue of claimed denial of equal protection was, therefore, not raised nor decided by the trial court, and as to this issue Schrecks have preserved nothing for review. We limit our consideration of constitutionality to their due process argument. See Chicago Title Ins. Co. v. Huff, 256 N.W.2d 17, 20-1 (Iowa 1977). Schrecks do not contend they were not in default nor that Randolph did not comply with the statutory requirements for forfeiture. They contend only that the contract provision for forfeiture was invalid and unconscionable. The claim of invalidity is based upon constitutional considerations; the claim of unconscionability is based upon the fact they had paid $1000 down on the contract and had made $1914.79 worth of improvements upon the property. They claim they could not be deemed to have waived the defenses as the trial court held. We do not decide the issue of waiver. Statutory proceedings for forfeiture of a real estate contract provide the only means for a vendor to enforce its provisions, according to § 656.1, The Code (1971). Section 656.2 provided the method in the following language: Such forfeiture and cancellation shall be initiated by the vendor where by the successor in interest, by serving or causing to be served on vendee or successor in interest, if known to the vendor or his successor in interest, and on the party in possession of said real estate, a written notice which shall: 1. Reasonably identify said contract and accurately describe the real estate covered thereby. 2. Specify the terms and conditions of said contract which have not been complied with. 3. Notify said party that said contract will stand forfeited and cancelled unless said party within 30 days after the completed service of said notice performed the terms and conditions in default, and, in addition, pays the reasonable costs of serving the notice. Section 656.3 provided that this notice shall be served personally, or by publication, in the same manner as is provided for service of original notice (at that time governed by Rule of Civil Procedure 56(a)). The purpose of this chapter is to limit the rights of a forfeiting vendor who might otherwise summarily remove a vendee upon default. It is designed to extend a little grace to a party in default who may be staggering under the load of his undertaking. Hampton Farmers Co-op. Co. v. Fehd, 257 Iowa 555, 560, 133 N.W.2d 872, 875 (1965), quoting from Waters v. Pearson, 163 Iowa 391, 397, 144 N.W. 1026, 1029 (1914). It is, therefore, a statute enacted to limit the forfeiture rights of a contract vendor, not to grant any powers of the vendor, or the state, to deprive a vendee of a property interest. Schrecks contend, however, that: [t]his statutory method which enables private claimants to deprive a person of property interest without any opportunity for a hearing is in direct conflict with the due process of the 14th Amendment to the Constitution of the United States of America. It should be noted that the Fourteenth Amendment provides that nor shall any State deprive any person of . . . property, without due process of law . .. (Emphasis added.) Article 1, § 9 of the Iowa Constitution provides that no person shall be deprived of . . . property, without due process of law. This provision is a limitation only on state action; it does not refer to individual activity. See 16 Am.Jur.2d Constitutional Law §§ 17, 542; Davenport Water Co. v. Iowa State Commerce Commission, 190 N.W.2d 583, 593 (Iowa 1971). A threshold question in a Fourteenth Amendment challenge is whether state action is involved, or whether a person has acted under color of state law in his actions. See Burton v. Wilmington Parking Auth., 365 U.S. 715, 722, 81 S.Ct. 856, 860, 6 L.Ed.2d 45, 50 (1961) (equal protection). Howe v. United Parcel Serv., Inc., 379 F.Supp. 667 (S.D.Iowa 1974) involved the applicability of the Fourteenth Amendment to hair-length rules of the defendant corporation. Five bases for finding state action are discussed. These include: (1) where a state acts directly through its officer or agent; (2) where the state acts in conjunction with business in a profit-making field; (3) where the state by its actions (or inaction) encourages or creates an atmosphere in which private citizens deprive others of their constitutional rights; (4) where the state affirmatively orders or approves the action in the course of its regulatory rule-making; and (5) where functions traditionally performed by the state are delegated to or performed by private interests. 379 F.Supp. at 670. Schrecks' due process argument as to state involvement is that if Randolph followed the statutory forfeiture procedures, § 656.5 provides the Seller with what appears to be marketable title, and that the court's action in enforcement of the contract and completion of the divestiture without a hearing for Buyer is sufficient state action. It is clear that the State of Iowa has not been directly involved in the process even though as Schrecks point out, the sheriff served the notice of forfeiture and subsequent notice to quit. If this constituted state action, every lawsuit commenced by a sheriff-served original notice, and the proceedings following would be state actions. Furthermore, service of notice is not even intended to be state action. Rule of Civil Procedure 52 (in effect at time of service) provided service could be made by any person not a party to the action nor an attorney for the party. It need not be served by a sheriff or any other law enforcement officer. Clearly four of the five tests discussed in Howe are not applicable here to establish state action. The encouragement test, number (3) above, would appear to be a possible basis for concluding state action is involved. Concerning the encouragement test, Howe discusses two cases, Adickes v. S. H. Kress & Co., 398 U.S. 144, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970) and Reitman v. Mulkey, 387 U.S. 369, 87 S.Ct. 1627, 18 L.Ed.2d 830 (1967). Adickes involved a suit by a white woman against a store. She had taken her black students to the restaurant area of the store. The students were served but she was not pursuant to a local custom of refusing service to Caucasian[s] in the company of Negroes. Immediately upon leaving the store, she was arrested by police on a charge of vagrancy. There was no question about the discriminatory arrest. However, in order to sue the restaurant under the federal statutes, it was necessary to find that there was state action in the restaurant's refusing service. The waitress clearly was not a state official. Therefore, the theory was created that the arrest was made in encouragement of the custom of not serving whites and blacks together. It is this encouragement which satisfies the state action requirement. Reitman involved an amendment by referendum to the California constitution. In reaction to state anti-discrimination in housing legislation, Proposition 14 was approved providing: Neither the State nor any subdivision. . . thereof shall deny . . . the right of any person . . . to decline to sell, lease or rent such property to such person or persons as he, in his absolute discretion, chooses. The proponents of the amendment tried to avoid the state action argument by styling the amendment as neutral; it did not itself effectuate racial discrimination but only provided that the state would not interfere with private racial discrimination. The argument was rejected by the court. They determined that in the existing California environment the effect of the amendment would be to encourage and foster racial discrimination. This encouragement served to involve the state in the subsequent racial discrimination, fulfilling the state action requirement. The Adickes and Reitman cases are distinguishable from the contract case involved here. They involve more direct state involvement, i. e., police arrest and a constitutional prohibition of anti-discrimination legislation. Furthermore, they involve matters of racial discrimination as opposed to a property right, and as stated in Howe a double standard exists for determining state involvement. The court said: [R]acial discrimination is so offensive that the government shall in no way be implicated in it and judicial scrutiny of state involvement may not be as strict as [sic] in [a] situation involving less offensive conduct. 379 F.Supp. at 674. The test as stated in Reitman is weighing and sifting in each case. The court there said: This court has never attempted the impossible task of formulating an infallible test for determining whether the State in any of its manifestations has become significantly involved in private discriminations. Only by sifting facts and weighing circumstances on a case-by-case basis can a nonobvious involvement of the State in private conduct be attributed its true significance. 387 U.S. at 378, 87 S.Ct. at 1632-3. The facts and circumstances to be considered here, in applying this test would include these: (1) The statute protects the buyer. When it was enacted in 1897 it had the effect of limiting an otherwise valid contractual right; it did not create or expand the rights of forfeiture. See Hampton Farmers Co-op. Co. v. Fehd, 257 Iowa 555, 560, 133 N.W.2d 872, 875 (1965). (2) The chapter is construed strictly as against the forfeiture, and with liberality towards those opposing it. One seeking [a forfeiture as to land contracts must] fully and strictly follow the procedure required therein. Kilpatrick v. Smith, 236 Iowa 584, 593, 19 N.W.2d 699, 703 (1945). (3) It might be argued that failure to outlaw forfeiture provisions would supply state action. However, a land sale contract with a forfeiture provision is a viable alternative to a mortgage. As stated in the Hampton Farmers Co-op. case, 257 Iowa at 560, 133 N.W.2d at 874-5: From the vendors' standpoint forfeiture presents a swift and inexpensive remedy in the event of a default. A vendee can live with such remedy to obtain the advantages of an installment contract and the usual low down payments when other financing could not be obtained. Therefore, it is reasonable for the legislature to retain the use of a forfeiture clause, and by placing some limits upon a vendor's use of it, as had been done in chapter 656, The Code, the vendee is given reasonable protection. The state, in this balancing process has not affirmatively caused or even encouraged forfeitures. It has merely said that certain protections must be provided a vendee if forfeiture is sought. It has neither mandated nor prohibited forfeitures, but has assumed a neutral role. As stated in Howe [n]eutrality is permissible. 379 F.Supp. at 672. We conclude that under the facts and circumstances in this case, there was not state action sufficient to raise issues of due process. Schrecks rely upon Fuentes v. Shevin, 407 U.S. 67, 92 S.Ct. 1983, 32 L.Ed.2d 556 (1972) and Thorp Credit, Inc. v. Barr, 200 N.W.2d 535 (Iowa 1972) as authority for their claim that chapter 656 violates their 14th Amendment rights because no hearing was afforded prior to forfeiture. We need not consider the authority of these cases, however, because of our holding of no state action. In any event, we perceive significant distinctions between the state statutes in Fuentes and Thorp, providing for summary repossession of personal property without notice or hearing, and the provisions of chapter 656 which grant a 30-day notice to a defaulting vendee and the opportunity to cure the default. The vendees here, in an apparent claim of unjust enrichment, also claim the court's action in enforcing the forfeiture provisions is unconscionable for two reasons: (1) it results in the loss of their contract rights, as well as their $1000 down-payment and $1914.79 in improvements; and (2) the reason they had not paid the $15,000 installment was that Randolph had wrongfully withheld an accounting and distribution to them, and they were therefore unable to pay it. As to the first ground of unconscionability, this court has permitted retention of liquidated damages if they are not out of reasonable proportion to the loss or injury actually sustained or reasonably anticipated. See Engel v. Vernon, 215 N.W.2d 506, 516 (Iowa 1974) (liquidated damages provision of covenant not to compete). The Indiana case of Skendzel v. Marshall, 261 Ind. 226, 233, 301 N.E.2d 641, 645 (1973) concerned a real estate forfeiture provision similar to Iowa's. The court approved the following quotation from 6 A.L.R.2d 1401, 1405 (1949): On the other hand, if the amount of the payments received by the vendor at the time the purchase was abandoned represents but a small percentage of the total purchase price, and if the purchaser's breach occurred soon after the execution of the agreement (and particularly if the circumstances indicate that a purchase is made for speculative purposes or the breach represented an effort . . . to escape an unfortunate turn in the market), the courts tend to hold that the forfeiture clause was one for liquidated damages, with the result that the purchaser cannot recover back the payments made. Of the total purchase price of $56,000, Schrecks had paid only $1000 down on it, and provided improvements worth $1914.79. The amount forfeited is not unreasonable under the circumstances nor so out of proportion to losses reasonably anticipated to constitute a penalty. Engel v. Vernon, supra, 215 N.W.2d at p. 516. See also Miller v. American Wonderlands, Inc., 275 N.W.2d 399 (Iowa 1979) (opinion filed February 21, 1979). Schrecks contend Randolph withheld joint venture distributions, and this is the reason they were unable to make the payment due March 1, 1971. However, the contract was not executed until June 12, 1970, after they had orally notified Randolph of their intention to terminate the venture as of December 31, 1970. They knew as of that time that the venture was unsuccessful financially and they had drawn no money from it except Randolph's advances to them, then in the total amount of $8000. There is no evidence that any serious attempts had been made to force an accounting or distribution of venture earnings within the 30-day period provided for curing the default, or at any time after execution of the contract. Schrecks implied that Randolph forced the default in this manner so as to retain ownership and sell it again at a profit. The record shows, however, that it was resold upon default for the same price and under the same terms as in the Schreck contract. The only financial gain to Randolph in the exchange of buyers was the $2914.79 retained from Schrecks, and it is doubtful that this was all profit. We conclude the contract forfeiture was not invalid upon grounds of due process denial nor of unconscionability. We therefore affirm the decree of the trial court as to this matter.