Meadows v. Lee

175 Cal. App. 3d 475, 221 Cal. Rptr. 22, 1985 Cal. App. LEXIS 2850

Opinions

Opinion

SCHWAB (H. J.), J.

Footnotes

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—This is an appeal from a judgment denying declaratory relief as to specific performance relative to a “so-called” backup agreement. On November 19, 1977, respondents J. Robert Grimsgaard and Lillie A. Grimsgaard (hereinafter referred to as Grimsgaards) accepted a counteroffer of respondent Dr. Richard Lee (hereinafter referred to as Lee) for the purchase of real property at 2503 El Venado Drive, Hacienda Heights, California (hereinafter referred to as the El Venado property). In this contract between Lee and the Grimsgaards, Lee was to transfer the El Venado property to the Grimsgaards free from any claims, liens or encumbrances. The Grimsgaards were to purchase the El Venado property for $200,000. They were to pay $80,000 cash to Lee and were to deliver a promissory note for $120,000 to him with interest thereon, secured by a first deed of trust against the El Venado property.

It was further agreed that the Grimsgaards would have until January 21, 1978, to sell the certain real property then owned by them, known as the Garden Terrace property. Escrow in connection with the El Venado property was to close within 60 days thereafter. The escrow was to be handled by Comet Escrow, Inc.

The problem arises that on November 22, 1977, appellants J. Robert Meadows and Elizabeth L. Meadows (hereinafter referred to as Meadows), entered into a written contract with Lee for the purchase of the El Venado property for the same sum of money, $200,000. The contract between the Meadows and Lee contained the following pertinent language: “This is a back-up offer to any prior offers which may have been accepted.”

By stipulation of the parties, it was further agreed, relative to the “backup” offer:

“The Meadows’ ‘back-up’ offer is a contract just as the prior accepted offer of the Grimsgaards’ is a contract.

“The Meadows’ contract contains a condition precedent. That condition precedent is the failure, termination, cancellation, or novation of the Grims-gaards’ contract. If the condition occurs, the Meadows contract becomes the primary contract.”

In January of'1978, Mrs. Grimsgaard was advised that there was another party who had contracted to purchase the El Venado property, which was a “back-up” agreement in the event that the purchase of the El Venado property by the Grimsgaards was not consummated.

On January 11, 1978, Lee and the Grimsgaards removed the contingency which required the sale of the Garden Terrace house as a condition relative to the escrow instructions.

On January 12, 1978, a Dr. Giordano and a Sandra Bunde (also spelled as Giadino and Bundy in the transcripts) filed a notice of pendency of an action or “lis pendens” wherein they claimed an interest in the El Venado property pursuant to an alleged lease and option which they had allegedly exercised. By March 21, 1978, the date for the escrow to close as to the sale of the El Venado property from Lee to the Grimsgaards, the lis pendens had not been removed and the Grimsgaards had not placed money in the escrow. In fact the lis pendens was not dismissed until October 6, 1978.

On April 10, 1978, Lee and the Grimsgaards entered into a “hold harmless” agreement whereby they agreed to hold each other harmless “in all matters relating to the purchase and sale” of the El Venado property and further “held harmless” one John E. Dorius, realtor, from liability in connection with the contract between Lee and the Grimsgaards. This document further provided for allocation of profits or losses between Lee and the Grimsgaards if the lis pendens had not been removed before April 1, 1984.

On April 20, 1978, Lee and the Grimsgaards executed a document whereby Lee continued to remain obligated to convey the El Venado property to the Grimsgaards and the Grimsgaards were to convey their Garden Terrace property to Lee and to deliver to Lee an all-inclusive note and deed of trust.

In a letter dated April 28, 1978, the Grimsgaards wrote to Comet Escrow, which had been holding escrow between the Grimsgaards and Lee, directing the escrow holder to hold it open until Lee could deliver clear title or until the escrow holder was otherwise instructed by the Grimsgaards. On May 1, 1978, Lee gave the Grimsgaards notice to perform the original purchase agreement per the escrow instructions dated November 21 or cancel the escrow. On May 5, 1978, the attorneys for Lee wrote to Comet Escrow stating that he “hereby cancels” said escrow since the Grimsgaards had failed to perform within the allotted time.

However, on May 22, 1978, by means of an amendment to the escrow instructions with Comet Escrow, Inc., as authorized by both Lee and the Grimsgaards, Comet was instructed to cancel the subject escrow and ordered to disburse the funds on deposit in the escrow in the amount of $2,000 to Vera’s Escrow Company.

On May 24, 1978, the escrow at Vera’s Escrow closed, Lee received title to the Garden Terrace property and the Grimsgaards received title to the El Venado property, delivering to Lee the all inclusive note and deed of trust.

On September 13, 1978, the Meadows filed a complaint in the instant action requesting the specific performance of the backup agreement and declaratory relief as against the Grimsgaards. In the court trial, where there was extensive testimony, Mrs. Grimsgaard testified that relative to the ex change agreement, she never at any time ever intended to “cancel out the original deal.”

James Dorius, a real estate agent involved in certain of the negotiations, testified that he believed that the transactions were ongoing.

Judgment was entered in favor of respondents Lee and the Grimsgaards.

The Meadows allege that their backup agreement should have been enforced because they contend that (1) the contract between the Grimsgaards and Lee expired when the escrow had not closed by March 21, 1978, and (2) that the execution of the hold harmless agreement of April 10, 1978, and the real estate purchase agreement of April 20, 1978, constituted no-vations as a matter of law.¹

On the other hand, respondents Grimsgaards and Lee aver that there was only one contract between themselves which was merely modified from time to time until the final consummation of the real estate transaction.

As the matter was submitted before the trial court on the basis of stipulations, documentary evidence and live testimony which involved serious questions of credibility, this court should not independently interpret the instruments but instead is bound by the substantial evidence rule in evaluating the trial court’s interpretation. (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865-866 [44 Cal.Rptr. 767, 402 P.2d 839]. Davies Machinery Co. v. Pine Mountain Club, Inc., supra, 39 Cal.App.3d at p. 23; Service Employees Internat. Union, Local 18 v. American Building Maintenance Co. (1972) 29 Cal.App.3d 356, 359 [105 Cal.Rptr. 564].)

In resolving the issues of the sufficiency of the evidence, an appellate court is bound by the established rules of review and all factual matters will be viewed most favorably to the prevailing party and in support of the judgment. Issues of credibility are likewise in the province of the trier of fact. As such, an appellate court will ordinarily look only at the evidence supporting the prevailing party and disregard any contrary showing. All conflicts, therefore, are to be resolved in favor of the respondent. (Nestle v. City of Santa Monica (1972) 6 Cal.3d 920, 925-926 [101 Cal.Rptr. 568, 496 P.2d 480]; Estate of Bristol (1943) 23 Cal.2d 221, 223 [143 P.2d 689]; Crawford v. Southern Pacific Co. (1935) 3 Cal.2d 427, 429 [45 P.2d 183].)

The issue presented to the trial court was primarily one of intent; namely, did the Grimsgaards and Lee really intend to cause to fail, terminate, cancel and/or novate the original contract, or was their intention merely to modify the original agreement? (Hunt v. Smyth (1972) 25 Cal.App.3d 807, 817-818 [101 Cal.Rptr. 4]; Klepper v. Hoover (1971) 21 Cal.App.3d 460, 463 [98 Cal.Rptr. 482]; Eluschuk v. Chemical Engineers Termite Control, Inc. (1966) 246 Cal.App.2d 463, 469 [54 Cal.Rptr. 711]; San Gabriel Val. Ready-Mixt v. Casillas (1956) 142 Cal.App.2d 137, 140-141 [298 P.2d 76].)

What makes this case so unusual is that the original parties, the seller Lee and the buyers Grimsgaards, are not contesting the transaction. Both the buyers and the seller, according to the record, seem quite happy with the sale. Therefore the usual scenario of the seller and buyer each disputing their respective intents is not involved herein. Instead, a third party is attempting to assert its “back-up” agreement by challenging the state of mind of the seller and buyers, alleging that they intended to cause to fail, terminate, cancel and/or novate, instead of merely modifying the original contract. Thus the burden of the Meadows attempting to set aside the contractual relationship between the Grimsgaards and Lee, to which they seem to be satisfied, is indeed a heavy one.

The trial court was greatly impressed by the above set of facts, namely that it was dealing with the original parties relative to the sale of the El Venado property. There is substantial evidence under the unique factual posture of this case to uphold the judgment by reason alone that the sale was consummated between the original contracting parties in the absence of any showing of fraud or collusion as against third parties. Under factual circumstances, such as herein, where (1) neither fraud nor collusion is shown, (2) the original contracting parties contend that their states of mind were such as to uphold the contract between them, (3) a third party attempts to challenge that contract by alleging a state of mind as to the original contracting parties that would defeat said contract, and (4) the issue of intent is ambiguous and subject to interpretation, a trial court may properly rule in favor of the original contracting parties on the ground that they were, in fact, the original contracting parties.

Several policies support this construction. The interpretation of a contract is often shown by the acts and conduct of the parties subsequent to the execution of the contract and prior to its controversy. (Lix v. Edwards (1978) 82 Cal.App.3d 573, 579 [147 Cal.Rptr. 294]; Spott Electrical Co. v. Industrial Indem. Co. (1973) 30 Cal.App.3d 797, 808 [106 Cal.Rptr. 710]; Automobile Salesmen’s Union v. Eastbay Motor Car Dealers, Inc. (1970) 10 Cal.App.3d 419, 424 [89 Cal.Rptr. 20].) If two parties enter into a contract and appear to be satisfied with that agreement, their subsequent happiness with that arrangement, in the absence of fraud or collusion or clear express repudiation, should be a powerful incentive to sustain the continued viability of that contract. In the same regard, contracts should be interpreted whenever possible as being operative. (Civ. Code, § 1643; Advance Medical Diagnostic Laboratories v. County of Los Angeles (1976) 58 Cal.App.3d 263, 269-270 [129 Cal.Rptr. 723].) Furthermore, there is a policy against interfering with contracts by third parties. (See Speegle v. Board of Fire Underwriters (1946) 29 Cal.2d 34, 39-40 [172 P.2d 867].)

There was neither allegation nor evidence of fraud or collusion on the part of Lee and the Grimsgaards relative to the Meadows. The intent of Lee and the Grimsgaards, relative to the contractual relationship between each other, was the sole issue to be decided. Substantial evidence therefore exists under the unique factual scenario to award judgment in favor of the original contracting parties because they were, in fact, the original contracting parties.²

The Meadows allege that the trial court erred in various evidentiary rules and was so oppressive in its handling of the matter that it was guilty of judicial misconduct. To the contrary, the record reflects that the trial court presided in a most fair and equitable manner, attempting to sift through the facts, since it was the trier of fact without a jury. (People v. Carlucci (1979) 23 Cal.3d 249, 256 [152 Cal.Rptr. 439, 590 P.2d 15]; Kurtz v. Kurtz (1961) 189 Cal.App.2d 320, 327 [11 Cal.Rptr. 230]; Gary v. Avery (1960) 178 Cal.App.2d 574, 579 [3 Cal.Rptr. 20]; Martin v. Martin (1947) 79 Cal.App.2d 409, 410-411 [179 P.2d 655].)

It is asserted that the trial court made over liberal use of the “best evidence rule” in sustaining objections. However, the record reflects that in the majority of instances, said grounds were well warranted since the answers sought by counsel were within the bodies of the writings themselves and therefore did not bear being repeated by the live witnesses. (Evid. Code, § 1500; Sublett v. Henry’s etc. Lunch (1942) 21 Cal.2d 273, 275 [131 P.2d 369].) In light of the previous discussion relative to the sufficiency of the evidence in sustaining the judgment, any evidentiary errors complained of on appeal, and discussed in the dissent, pale into insignificance.

The Meadows contend that the trial court erred in repeatedly urging that the issues involved were those of law and not of fact, and that intent was therefore not relevant. The record reflects that when the trial court heard final arguments by counsel in terms of making his ruling, he very definitely believed the issues to be both factual and legal, and that the question of intent was one of prime concern.

It is further urged that the trial court improperly precluded Mrs. Grimsgaard from being asked whether she had arranged with Dr. Giordano to have him file the lis pendens. The Meadows never attempted to bolster this contention by calling any other witnesses to testify regarding this rather flimsy allegation.

The trial court’s rulings were proper on the grounds of relevancy. (Evid. Code, § 210; Brokopp v. Ford Motor Co. (1977) 71 Cal.App.3d 841, 853 [139 Cal.Rptr. 888, 93 A.L.R.3d 537].) Mrs. Grimsgaard had already testified that she had never heard the names of the persons who filed the lis pendens before January 1, 1978, and that she had not had any personal contact with them before January 12, 1978, the date the lis pendens was filed. Even if she had encouraged the filing of the lis pendens, such would be relevant only as to her desire to keep the original contract alive, so to prevent default for not performing, and not as to any issue involved with the Meadows.

As to the other evidentiary issues raised on appeal, they were for the most part correctly ruled upon. Those rulings which were questionable would in no way have been prejudicial to the Meadows. (Smith v. Lewis (1975) 13 Cal.3d 349, 365 [118 Cal.Rptr. 621, 530 P.2d 589, 78 A.L.R.3d 231], overruled on another ground in In re Marriage of Brown (1976) 15 Cal.3d 838, 851, fn. 14 [126 Cal.Rptr. 633, 544 P.2d 561, 94 A.L.R.3d 164]; Kalfus v. Fraze (1955) 136 Cal.App.2d 415, 434 [288 P.2d 967].)

The Meadows finally argue that the trial court erred in awarding attorneys’ fees. At the end of the proceeding after judgment had been entered, the trial court granted respondents Grimsgaards and Lee leave to amend the pleadings to ask for attorneys’ fees. In the backup agreement between Lee and the Meadows it was stated in pertinent part: “In the event that either party shall be required to institute legal action to enforce the terms of this Agreement or rights arising out of this Agreement, the prevailing party shall be entitled to receive from the other party reasonable attorney’s costs and fees in an amount to be determined by the court having jurisdiction of such action.”

The trial court ruled that it would “allow the costs as requested in the memo of costs and disbursements, except that I believe the attorney fees should be a separate item in the judgment.” As such, attorneys’ fees were properly awardable under the bilateral provision aforecited as special damages or costs. (Civ. Code, § 1717; Christensen v. Dewor Developments (1983) 33 Cal.3d 778, 786-787 [191 Cal.Rptr. 8, 661 P.2d 1088]; Sain v. Silvestre (1978) 78 Cal.App.3d 461, 475-476 [144 Cal.Rptr. 478]; Beneficial Standard Properties, Inc. v. Scharps (1977) 67 Cal.App.3d 227, 231-232 [136 Cal.Rptr. 549]; T.E.D. Bearing Co. v. Walter E. Heller & Co. (1974) 38 Cal.App.3d 59, 63-64 [112 Cal.Rptr. 910].)

Respondents shall recover costs on appeal to be determined in the superior court. The judgment is affirmed.

Thompson, Acting P. J., concurred.

Assigned by the Chairperson of the Judicial Council.

1

“A novation is a substitution by agreement of a new obligation for an existing one with the intent to extinguish the latter.” (Civ. Code, §§ 1530-1532; Davies Machinery Co. v. Pine Mountain Club, Inc. (1974) 39 Cal.App.3d 18, 24 [113 Cal.Rptr. 784].)

2

We are not saying as a matter of law that persons making a “back-up” offer, in the absence of fraud or collusion, are always precluded from attacking the viability of the contract between the original contracting parties. What we are holding is that whenever a third party attempts to assert its backup offer against the original contracting parties he or she has an extremely heavy burden and that under the facts of this particular case there was substantial evidence to sustain the judgment by reason of respondents’ status as the original contracting parties.

The importance of the “back-up” offer in this particular case was that if the transaction between the Grimsgaards and Lee had fallen through, the Meadows would have had a right to purchase the El Venado property over any other third parties desiring to obtain said property. With all due respect to the scholarly dissent, a backup contract does have a practical viable effect under our ruling. Persons will still engage in “back-up” agreements, knowing that their contractual rights to obtain properties over other third parties will be upheld if the transaction between the original contracting parties should truly fail.