Cal SD, LLC v. Interwest Leasing, LLC

2024 S.D. 76

• Court: South Dakota Supreme Court
• Decided: December 11, 2024
• Docket: 30621
• Status: Published

Opinion

#30621-a-SRJ 2024 S.D. 76

IN THE SUPREME COURT OF THE STATE OF SOUTH DAKOTA

****

CAL SD, LLC, Plaintiff and Appellee,

v.

INTERWEST LEASING, LLC, Defendant and Appellant.

APPEAL FROM THE CIRCUIT COURT OF THE SEVENTH JUDICIAL CIRCUIT PENNINGTON COUNTY, SOUTH DAKOTA

THE HONORABLE CRAIG A. PFEIFLE Retired Judge

JOHN W. BURKE of Thomas Braun Bernard & Burke, LLP Rapid City, South Dakota Attorneys for defendant and appellant.

ROBERT J. GALBRAITH of Nooney & Solay, LLP Rapid City, South Dakota Attorneys for plaintiff and appellee.

ARGUED NOVEMBER 6, 2024 OPINION FILED 12/11/24 #30621

JENSEN, Chief Justice

[¶1.] Chris Welsh, on behalf of CAL SD, LLC, entered into a purchase

agreement with Interwest Leasing, LLC to buy commercial real estate. CAL SD

made an earnest money deposit of $30,000 per the terms of the purchase

agreement. Prior to closing, Welsh passed away and CAL SD refused to close.

Interwest found another buyer and sold the property for the same price but refused

to return the earnest money deposit. Subsequently, CAL SD filed a declaratory

judgment action seeking return of the $30,000, claiming the purchase agreement

was cancelled because of CAL SD’s inability to obtain financing. The circuit court

determined the declaratory judgment was a breach of contract action at law and set

the claim for jury trial, over the objection of Interwest. A jury found for CAL SD

and the circuit court entered a judgment directing the earnest money deposit be

returned to CAL SD. Interwest appeals, arguing the action was equitable and the

circuit court erred in submitting the claim for a binding jury determination.

Interwest also claims the court submitted erroneous instructions to the jury. We

affirm.

Factual and Procedural Background

[¶2.] Welsh entered into a commercial real estate purchase agreement

(Purchase Agreement) with Interwest on February 6, 2021. The Purchase

Agreement provided for “Chris A. Welsh or Assigns” to purchase a commercial

building located at 1810 Rand Road in Rapid City, South Dakota, for $500,000 with

an earnest money deposit of $30,000. A 1031 exchange company holding funds for

CAL SD deposited the earnest money with Keller Williams Realty, the listing agent

-1- #30621

for Interwest. The Purchase Agreement was subject to contingencies, including the

purchaser obtaining financing.

[¶3.] On February 9, 2021, Welsh and Interwest executed an addendum to

the Purchase Agreement, changing the purchaser from Welsh to CAL SD, a

company managed by Welsh. CAL SD was wholly owned by CAL Heavenly, LLC,

which in turn was owned by three trusts, one of which was Welsh’s. On March 10,

2021, CAL SD and Interwest executed a second addendum agreeing that the closing

agent, First American Title Company, would hold the escrow funds deposit.

[¶4.] Welsh unexpectedly passed away on March 15, 2021, less than a

month from the closing date of April 6, 2021. Subsequently, Welsh’s long-time

companion, Tina Roberts, began communicating with Chris Long, the real estate

agent handling the transaction for Interwest. Unaware of the details of the

proposed sale, Roberts requested the closing date be extended and sought

information regarding the purchase of the subject property. Interwest provided

Roberts with all the information pertaining to the transaction and offered a 12-day

extension of the closing date, changing it from April 6 to April 19, 2021. Roberts

agreed to the extension and did not request additional time to close. Although

Roberts was not, at the time, authorized to act on behalf of CAL SD, she executed

the addendum to the Purchase Agreement extending the closing date to April 19.

[¶5.] On April 9, 2021, Long received a phone call from Welsh’s attorney

stating CAL SD was unable to close. There was no discussion during this call about

CAL SD’s ability to secure financing or extending the closing date beyond April 19.

Based upon this phone call, Long forwarded a cancellation agreement to CAL SD,

-2- #30621

which included a provision directing the $30,000 earnest money deposit to be paid

to Interwest. CAL SD declined to sign the cancellation agreement and sent a letter

to Long on April 21, 2021, stating that the Purchase Agreement was cancelled

because CAL SD had been unable to obtain financing. Interwest subsequently sold

the property to a third party, 412 Investment Group, LLC, for the same price.

Interwest did not make any claim for damages or loss associated with the

subsequent sale to 412 Investment. However, the earnest money deposit was not

returned to CAL SD.

[¶6.] CAL SD filed a complaint for declaratory judgment against Interwest

and 412 Investment on October 15, 2021. CAL SD’s complaint sought cancellation

of the Purchase Agreement with Interwest and return of the earnest money deposit.

The complaint included a jury demand. Interwest and 412 Investment filed

separate answers. In its answer, Interwest asserted affirmative defenses of waiver,

estoppel, and unclean hands, but did not request a jury trial. Sometime later,

Interwest filed a third-party complaint against Roberts for fraud, amongst other

claims, arising from her representations and actions on behalf of CAL SD without

authority. The claims against 412 Investment and Roberts were later dismissed by

the parties.

[¶7.] Interwest moved for partial summary judgment seeking a

determination “that, as a matter of law, the plain language of the [P]urchase

[A]greement entitles Defendant Interwest Leasing to retain the $30,000 earnest

money deposit.” CAL SD filed a cross-motion for summary judgment arguing that

Interwest’s efforts to retain the earnest money deposit, even if CAL SD had

-3- #30621

breached the Purchase Agreement, would amount to an unlawful penalty or

forfeiture under South Dakota law. The circuit court denied CAL SD’s motion and

granted Interwest’s motion, in part, determining that “the earnest money provision

in the [Purchase Agreement] is a valid liquidated damages clause.” The court

denied the remainder of Interwest’s motion, determining that genuine issues of

material fact remained concerning the contract contingencies and CAL SD’s request

for the return of the earnest money deposit.

[¶8.] Before the scheduled pretrial conference, the parties submitted

proposed jury instructions. Amongst the instructions Interwest proposed, one of

them requested the jury to determine “[w]hether Plaintiff [CAL] SD, LLC acted in

good faith and used its best efforts to secure financing but was unable to do so.”

The instruction included the evidentiary standard of greater convincing force of the

evidence. Interwest’s proposed jury instructions also included breach of contract

language and contained a jury verdict form.

[¶9.] CAL SD argued at the pretrial conference that the jury must consider

the question of whether there was a breach of contract. Interwest asserted the

question was narrower, whether CAL SD made a good faith effort to secure

financing, permitting them to cancel the Purchase Agreement. Interwest claimed

these issues, and the relief sought, were equitable and therefore no jury instructions

would be necessary or appropriate. CAL SD responded, “[t]he issue before the jury

in the dec[laratory] action is whether or not my client breached the contract[]” and

that determination “is a fact question for the jury.” The circuit court agreed with

CAL SD, determining the question for the jury was “whether or not there’s a

-4- #30621

breach.” Counsel for Interwest replied, “Okay. I thought I should ask because of it

being a dec[laratory] action and I didn’t know if it was more in the form of an

advisory jury or not.”

[¶10.] Prior to the commencement of trial, Interwest made the following

objection:

Just so that the issue is not waived, given that it’s a declaratory judgment action and the relief is almost equitable in nature to sort of like rescind the contract or have it void, I would simply object to it being a jury trial as opposed to a court trial.

The circuit court overruled the objection. The claim for declaratory relief was

presented to the jury for a binding verdict and the jury returned a verdict finding in

favor of CAL SD. Based upon the jury verdict, the circuit court entered a judgment

“that [CAL SD] shall be entitled to the earnest money held under the [Purchase

Agreement.]” The court did not enter separate findings of fact and conclusions of

law.

[¶11.] Interwest appeals, arguing that the circuit court erred in concluding

that the declaratory judgment action was a claim at law rather than an equitable

claim. 1

1. Interwest also argues because CAL SD was seeking equitable relief, the circuit court erred by submitting the claim for a binding verdict. Interwest also claims that the court erred in failing to instruct on the higher burden of proof for an equitable claim and in refusing to instruct on its equitable defenses of estoppel and unclean hands. Based upon our determination that CAL SD’s claim was a claim at law, it is unnecessary to address the remaining issues. -5- #30621

Analysis

[¶12.] The determination of whether the declaratory action was legal or

equitable is a question of law. “This Court reviews questions of law under the de

novo standard with no deference afforded the circuit court’s decision.” Lewis &

Clark Rural Water Sys., Inc. v. Seeba, 2006 S.D. 7, ¶ 12, 709 N.W.2d 824, 830 (citing

Block v. Drake, 2004 S.D. 72, ¶ 8, 681 N.W.2d 460, 463).

1. Whether the request for declaratory judgment was a legal or equitable claim.

[¶13.] Interwest argues that CAL SD’s claim for declaratory judgment was a

claim in equity. As a result, Interwest asserts that the circuit court abused its

discretion by submitting the claim to the jury for a binding verdict. Granite Buick

GMC, Inc. v. Ray, 2014 S.D. 78, ¶ 7, 856 N.W.2d 799, 802 (“But unless the parties

agree to a binding jury in an equitable action, the jury verdict is advisory.”).

[¶14.] Interwest cites SDCL chapter 21-12 and SDCL 21-13-1 2 in support of

its argument that CAL SD sought to have the Purchase Agreement declared void or

cancelled, and the earnest money deposit returned, which was an action for

equitable rescission. Interwest maintains that SDCL 21-13-1 is a codification of the

common law and is “declaratory of the jurisdiction which courts of equity exercise

2. SDCL 21-13-1 provides:

A written instrument, in respect to which there is a reasonable apprehension that if left outstanding it may cause serious injury to a person against whom it is void or voidable, may upon his application, be so adjudged and ordered to be delivered up or canceled; but if the invalidity is apparent upon its face or upon the face of another instrument necessary to its use in evidence it is not deemed capable of causing such injury. -6- #30621

upon the principle of quia timet.” 3 Nat’l Benefit Ass’n v. Eidy, 70 S.D. 79, 85, 14

N.W.2d 883, 885 (1944). Interwest further points to Roberts’ testimony at trial,

stating that she was willing to follow through with the property purchase after it

had already been sold, to support its claim that the Purchase Agreement had not

yet been rescinded or cancelled. Interwest cites First Nat’l Bank of Philip v.

Temple, 2002 S.D. 36, ¶ 11, 642 N.W.2d 197, 201, that “declaratory relief per se is

neither legal nor equitable.”

[¶15.] CAL SD responds that it was entitled to a jury trial pursuant to South

Dakota Constitution Article VI, § 6, which guarantees a right to a jury trial in all

“cases at law.” See also SDCL 15-6-38(a) (“The right of trial by jury as declared by

S.D. Const., Art. VI, § 6 or as given by a statute of South Dakota shall be preserved

to the parties inviolate.”). CAL SD argues that the fundamental issue in the case

involved the question of “whether [CAL] SD breached its obligation under the

Purchase Agreement by failing to make a good faith effort to secure financing.”

3. Quia timet is an equitable remedy most often used in the context of surety contracts to prevent future probable harm to the surety. As explained in Williston on Contracts:

Quia timet is the right of a surety to demand that the principal place the surety in funds when there are reasonable grounds to believe that the surety will suffer a loss in the future because the principal is likely to default on its primary obligation to the creditor. . . . The theory of quia timet allows the surety to prevent the principal from dissipating funds that could be used to satisfy the bond if the surety knows it will be called upon to pay the debt or perform the obligation on the bond, suspects that the principal has some or all of the necessary funds to do so, and fears that the principal may abscond with those funds.

23 § 61:63 (4th ed. 2024). -7- #30621

Further, CAL SD asserts that the parties presented a set of agreed jury

instructions, without objection from Interwest, that required the jury to consider

the breach questions and reach a binding verdict.

[¶16.] Whether an action is at law or in equity is the first step to determine

whether a party has a right to a jury trial.

The right to a jury trial is guaranteed both litigants in Article VI, § 6 of the South Dakota Constitution and SDCL 15-6-38(a), (b). This right, however, does not exist in all civil cases. In cases where the pleadings seek equitable relief or where the legal relief is incidental, a jury trial is a matter for the trial court’s discretion. Conversely, when the action is at law, either party has a right to a jury trial.

First Nat’l Bank of Philip, 2002 S.D. 36, ¶ 10, 642 N.W.2d at 201 (citing First W.

Bank, Sturgis v. Livestock Yards, 466 N.W.2d 853, 856 (S.D. 1991)). This Court

“look[s] ‘to the common law’ to determine whether a claim is an action at law . . . or

whether it is an equitable action . . . .” Granite Buick, 2014 S.D. 78, ¶ 9, 856

N.W.2d at 803.

[¶17.] “Although the declaratory judgment procedure largely originated in

equity, declaratory relief per se is neither legal nor equitable.” First Nat’l Bank of

Philip, 2002 S.D. 36, ¶ 11, 642 N.W.2d at 201 (quoting Northgate Homes, Inc. v. City

of Dayton, 126 F.3d 1095, 1099 (8th Cir. 1997)). To determine whether an action is

legal or equitable, “the courts should look beyond the form in which the action is

brought” and “look[] to the ultimate and entire relief sought, as presented by the

pleadings, including the complaint, answer, cross-complaint and prayer for relief.”

Id. ¶ 10 (citing Arlt v. Langley, 56 S.D. 79, 227 N.W. 469, 473 (1929)).

-8- #30621

[¶18.] In its complaint, CAL SD alleged that because of Welsh’s untimely

death it “was not able to obtain the necessary approvals for the financing or

purchase of the Property by the closing date.” The complaint further alleged that

Interwest improperly refused CAL SD’s demand to return the earnest money

deposit. CAL SD prayed for the following relief:

1. For a declaratory judgment determining the rights and responsibilities of the parties under the purchase agreement, including but not limited to the cancellation, or lack thereof, of the purchase agreement, as well as [CAL SD’s] right to the recovery of [CAL SD’s] earnest money payment; 2. For the recovery of [CAL SD’s] damages, including, but not limited to [CAL SD’s] costs and interest accrued in an amount to be determined at the time of trial; 3. For the recovery of [CAL SD’s] reasonable costs and disbursements associated with this action, including attorney’s fees as permitted by South Dakota law; 4. For such other and further relief that the Court deems just and equitable.

[¶19.] In sum, the declaratory relief sought by CAL SD included a

determination of the parties’ rights and obligations under the Purchase Agreement

and the return of the earnest money deposit, after CAL SD claimed it was unable to

obtain financing. In seeking return of the earnest money deposit, CAL SD relied

upon the subject to financing provision of the Purchase Agreement, which provided:

“[I]f purchaser is unable to secure financing, if so contingent, . . . this agreement is

void and [CAL SD’s] earnest money shall be returned in full, less any expenses

incurred on [CAL SD’s] behalf[.]” 4

4. Interwest’s equitable affirmative defenses, raised in its answer, were not presented at trial. The plain terms of the Purchase Agreement and question of breach were the only issues before the court. -9- #30621

[¶20.] The validity and enforcement of the Purchase Agreement was

expressly conditioned upon CAL SD obtaining financing to purchase the subject

property. If CAL SD was unable to obtain financing, the Purchase Agreement, by

its own terms, was “void” and the “earnest money shall be returned in full, less any

expenses incurred on [CAL SD’s] behalf[.]” The issue presented at trial was

whether CAL SD was unable to obtain financing and made a good faith effort to do

so.

[¶21.] Contrary to Interwest’s premise, this was not an equitable action to

rescind the Purchase Agreement under SDCL chapter 21-12. 5 Rather, CAL SD’s

action was solely to declare and enforce its contractual rights and obligations under

the Purchase Agreement based upon its claim it was unable to obtain financing.

Once the jury determined CAL SD was unable to obtain financing, the Purchase

Agreement was void or rescinded per its own terms, without further action, and the

earnest money deposit was to be returned to CAL SD. The judicial declaration

sought by CAL SD was not equitable relief to rescind the Purchase Agreement, but

a legal determination that the Purchase Agreement was already “void” by the

5. “An action for rescission may be brought as a legal action pursuant to SDCL ch. 53-11, or as an equitable action pursuant to SDCL ch. 21-12.” Knudsen v. Jensen, 521 N.W.2d 415, 417 (S.D. 1994). The grounds for legal rescission are set forth in SDCL 53-11-2 and these same grounds are the basis for equitable rescission under SDCL 21-12-1. The difference between the two types of rescission is in the relief sought. “If the action is in equity, the rescission is accomplished by court decree.” Id. (citation omitted). “Rescission is equitable if the complaint asks the court to order rescission of a contract. It is legal, if the court is asked to enforce a completed rescission.” Skoglund v. Staab, 312 N.W.2d 29, 31 (S.D. 1981). -10- #30621

inability of CAL SD to obtain financing. 6 As such, the declaratory relief sought by

CAL SD was legal in nature and the circuit court properly submitted the case to the

jury for a binding verdict.

[¶22.] We affirm.

[¶23.] KERN, SALTER, DEVANEY, and MYREN, Justices, concur.

6. In Granite Buick, 2014 S.D. 78, ¶ 14, 856 N.W.2d at 804, the remedy sought was equitable relief, specifically an injunction. This Court held the circuit court erred by not preparing findings of fact and conclusions of law. Id. ¶ 16. Unlike Granite Buick, the claim sought here was for legal relief. -11-