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No. 99-079
IN THE SUPREME COURT OF THE STATE OF MONTANA
2000 MT 251
301 mont. 447
11 P.3d 1192
LYLE K. OPHUS and BARBARA M. OPHUS,
Plaintiffs and Respondents,
v.
ROBERT FRITZ and NORMA FRITZ,
Defendants and Appellants.
APPEAL FROM: District Court of the Seventeenth Judicial District,
In and for the County of Blaine,
The Honorable John C. McKeon, Judge presiding.
COUNSEL OF RECORD:
For Appellants:
William M. Solem, Burns, Solem & MacKenzie, Chinook, Montana
For Respondents:
Thomas J. Sheehy, Sheehy & Gannon, Big Sandy, Montana
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Submitted on Briefs: November 4, 1999
Decided: September 21, 2000
Filed:
__________________________________________
Clerk
Justice James C. Nelson delivered the Opinion of the Court.
¶1 Lyle K. and Barbara M. Ophus (the Ophuses) brought this action in the District Court
for the Seventeenth Judicial District, Blaine County, to recover monies they argue are
owed them under a 1989 Contract for Deed in which they sold certain real property to
Robert and Norma Fritz (the Fritzes). The District Court found in favor of the Ophuses.
Both parties appeal the District Court's judgment. We reverse and remand.
¶2 The Fritzes raise the following issues on appeal:
¶3 1. Whether the District Court erred in concluding that the term "PURCHASER'S profit"
as used in paragraph 19 of the 1989 contract is ambiguous.
¶4 2. Whether the District Court erred in concluding that a special meaning had been given
to the term "PURCHASER'S profit" to exclude deductions for sales costs and
improvements.
¶5 The Ophuses raise the following issues:
¶6 3. Whether the District Court erred in determining the sum the Fritzes should be
allowed to deduct as their purchase price in calculating the "PURCHASER'S profit."
¶7 4. Whether the District Court erred in determining that the Ophuses owe the Fritzes
interest to the present rather than to March 31, 1995, on the Federal Land Bank payment
the Fritzes made on January 5, 1990.
Factual and Procedural Background
¶8 The Ophuses sold their farm and ranch located in Blaine County to the Fritzes pursuant
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to a Contract for Deed dated June 1, 1981. Under this contract, the Fritzes agreed to pay
$50,000 down and $350,000 to be paid in annual installments beginning January 5, 1983.
In addition, the property was subject to a $150,000 mortgage payable to the Federal Land
Bank of Spokane (the FLB). The Fritzes were to make the annual payments to the FLB as
part of the total purchase price of $550,000, and, at the end of the contract term, the
Fritzes were to pay the Ophuses for the FLB stock.
¶9 The Fritzes failed to make the January 5, 1989 payment thereby defaulting on the
contract. Negotiations ensued between the Ophuses and the Fritzes as a result of this
default. On October 16, 1989, the Ophuses and the Fritzes entered into an agreement
whereby the property was reconveyed to the Ophuses. A quit claim deed from the Fritzes
to the Ophuses was signed the same day. On November 7, 1989, the Ophuses and the
Fritzes executed another Contract for Deed wherein the Ophuses agreed to sell the same
property back to the Fritzes at a reduced price. The purchase price under this 1989 contract
was $410,080.41 and consisted of $145,580.41 payable to the FLB and $264,500 payable
to the Ophuses.
¶10 Because the selling price under the 1989 contract was less than the balance due under
the 1981 contract at the time of the Fritzes' default and because the Ophuses wanted a
chance to recoup that difference plus some of the interest they lost, the parties included the
following provision in the contract:
19. SALE OF PROPERTY: If the property is sold during the term of this agreement
or sold within 5 years thereafter to a person who was farming the property at the
termination of this agreement, SELLER shall be entitled to one-half of
PURCHASER'S profit on the resale, limited, however, to the reduction in purchase
price between this contract and the remaining balance on the June 1, 1981 contract.
In determining this reduction, the purchase price herein of $410,080.41 (paragraph
one purchase price of $264,500 plus paragraph two mortgage of $145,580.41) shall
be reduced by interest for one year at 7% on the 1981 contract ($332,343.74 times
remaining balance at 7 % = $23,264.06) and the payment of $16,710.90 that
SELLER will make on January 5, 1990 on the Federal Land Bank mortgage. Thus,
the balance on the 1981 contract is $477,924.15 (principal balance on 1981 contract
of $332,343.74 plus principal on mortgage of $145,580.41) and the purchase price
on this Contract for Deed is $370,105.45 for a difference of $107,818.70. Thus, if
the property is sold for $1,000,000 and there is $50,000 principal remaining due on
the Federal Lank Bank mortgage, the purchase price shall be $950,000.00 and the
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profit on the sale will be $579,894.55. One-half of this amount is $289,947.28 so
SELLER shall be entitled to receive only his total loss of $107,818.70. In the event
of a deferred payment, SELLER'S payment shall be in the same ratio as his payment
bears to the total payment. Any additional loans by the Federal Land Bank (now
Farm Credit Service) shall be ignored in these computations.
This provision was drafted by the Ophuses' attorney. The stricken material in the first
sentence was initialed by the Fritzes.
¶11 On March 31, 1995, the Fritzes sold the property for $650,000. The Fritzes incurred
$47,784.17 in closing costs in connection with the sale including $39,000 in Realtor's
commissions, $2,088 in title insurance, and $6,696.17 in attorney's fees. From the
proceeds of the sale, the Fritzes paid the balance owed the FLB and the balance owed the
Ophuses under the 1989 contract.
¶12 On April 12, 1995, the Fritzes sent the Ophuses a check for $22,657.28, claiming that
amount to be the Ophuses' share of the profits from the sale according to the Fritzes'
interpretation of the provisions of paragraph 19 of the 1989 contract. In determining this
amount, the Fritzes deducted the $47,784.17 in closing costs as well as $52,344.68 in
improvements they claimed to have made to the property during the 14 years it was under
their control. However, the Ophuses refused to cash the check claiming that the Fritzes
improperly deducted the closing costs and the cost of the improvements in determining the
profit. The Ophuses claimed that the Fritzes actually owed them $103,909.35 plus interest
from March 31, 1995. When negotiations between the parties failed to produce a
settlement, the Ophuses brought suit against the Fritzes to recover damages for breach of
the 1989 contract.
¶13 In the course of discovery, the parties determined that the Fritzes made a payment to
the FLB on January 5, 1990, in the amount of $16,710.90. The District Court later
determined that under the terms of the 1989 contract, the Ophuses should have made this
payment and that, accordingly, the Ophuses owed that amount to the Fritzes along with
interest at the rate of 7% per annum from January 5, 1990, until paid. While the Ophuses
do not now contest the obligation to repay the Fritzes the amount of the January 5, 1990
FLB payment, they do dispute the court's decision as to the interest.
¶14 In addition, the Fritzes conceded at trial that they owe the Ophuses for the FLB stock
in the amount of $5,750, but they argue that payment of that amount is not due until
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November 1, 2009. Nevertheless, the District Court ordered that the Fritzes pay the
Ophuses the $5,750 together with interest thereon at the rate of 7% per annum from March
31, 1995.
¶15 In its September 15, 1998 Findings of Fact, Conclusions of Law and Judgment, the
District Court determined that the language defining the parties' rights and obligations
under paragraph 19 of the 1989 contract is ambiguous as it fails to define
"PURCHASER'S profit," a term that is material to the Fritzes' promise to share portions of
their profit on resale with the Ophuses. The court concluded that to interpret the meaning
of this term, the court must determine the sense in which the Fritzes believed that the
Ophuses understood the term as of the date of the 1989 contract.
¶16 Based on the language contained in paragraph 19, the District Court determined that
the term "PURCHASER'S profit" has a special meaning and does not provide for a
deduction of the Fritzes' sales costs and the cost of improvements. Thus, the court
determined that the Fritzes owe the Ophuses $72,232.66 plus interest. Moreover, the
District Court concluded that the Ophuses are entitled to recover their reasonable attorney
fees incurred in this action.
¶17 The Ophuses filed a Motion to Alter or Amend Judgment claiming that the court erred
by twice deducting the FLB payment made by the Fritzes on March 31, 1995, in the
amount of $135,429.23. Hence, the Ophuses argued that the actual amount owed under
paragraph 19 of the 1989 contract is $107,818.17, rather than the $72,232.66, as specified
in the District Court's order. Because the District Court failed to rule on this motion within
60 days, the motion was deemed denied pursuant to Rule 59(g), M.R.Civ.P.
¶18 The Fritzes filed a Notice of Appeal on December 30, 1998, wherein they appealed
the District Court's September 15, 1998 Findings of Fact, Conclusions of Law and
Judgment. The Ophuses filed their Notice of Appeal on January 14, 1999, wherein they
also appealed the District Court's September 15, 1998 Findings of Fact, Conclusions of
Law and Judgment. In addition, the Ophuses appealed the denial of their October 2, 1998
Motion to Alter or Amend Judgment.
Standard of Review
¶19 The construction and interpretation of a contract is a question of law for the court to
decide. Schwend v. Schwend, 1999 MT 194, ¶ 36, 295 Mont. 384, ¶ 36, 983 P.2d 988, ¶ 36
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(citing Stutzman v. Safeco Ins. Co. of America (1997), 284 Mont. 372, 376, 945 P.2d 32,
34). We review a district court's conclusions of law for correctness. Schwend, ¶ 36 (citing
Carbon County v. Union Reserve Coal Co., Inc. (1995), 271 Mont. 459, 469, 898 P.2d
680, 686).
Issue 1.
¶20 Whether the District Court erred in concluding that the term "PURCHASER'S profit"
as used in paragraph 19 of the 1989 contract is ambiguous.
¶21 The District Court concluded that the language defining the parties' rights and
obligations under paragraph 19 of the 1989 contract is ambiguous. The court also
concluded that, under § 28-3-306, MCA, to interpret the meaning of the term
"PURCHASER'S profit" the court must determine the sense in which the Fritzes believed
that the Ophuses understood the term.
¶22 The Fritzes argue that the District Court erred in finding that the term
"PURCHASER'S profit" is ambiguous. While the phrase "PURCHASER'S profit" is not
defined in the 1989 contract, the Fritzes contend that a definition is not necessary because
that phrase is a simple combination of ordinary words used in an ordinary manner.
¶23 We interpret the language of contractual provisions according to their plain, ordinary
meaning. Schwend, ¶ 39 (citing Morning Star Enterprises v. R.H. Grover (1991), 247
Mont. 105, 111, 805 P.2d 553, 557). When the language of a contract is clear and
unambiguous and, as a result, susceptible to only one interpretation, the duty of the court
is to apply the language as written. Carelli v. Hall (1996), 279 Mont. 202, 209, 926 P.2d
756, 761 (citing Audit Services, Inc. v. Systad (1992), 252 Mont. 62, 65, 826 P.2d 549,
551). An ambiguity exists, however, when the wording of the contract is reasonably
subject to two different interpretations. Schwend, ¶ 39 (citing Carelli, 279 Mont. at 209,
926 P.2d at 761).
¶24 The 1989 Contract for Deed refers to "ROBERT FRITZ and NORMA FRITZ, of
Chinook, Montana, hereinafter referred to as PURCHASER, whether one or more." Thus,
the phrase "PURCHASER'S profit" refers to the Fritzes' "profit." "Profit" is defined in
Black's Law Dictionary as "[t]he excess of revenues over expenditures in a business
transaction." Black's Law Dictionary 1226 (7th ed. 1999). Likewise, Webster's dictionary
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defines "profit" as "the excess of the selling price of goods over their cost." Webster's New
American Dictionary 415 (1995). While the foregoing defines the words in general, it does
not enlighten us as to the interpretation to be given to the phrase as used in paragraph 19
of the 1989 contract.
¶25 The Fritzes argue that the phrase "PURCHASER'S profit" refers to the net profit from
the sale, meaning the selling price minus the purchase price under the 1989 contract as
well as the sales costs and the cost of the improvements. The Ophuses, on the other hand,
argue that "PURCHASER'S profit" refers to the gross profit from the sale, meaning the
selling price minus only the purchase price under the 1989 contract. Since the phrase
"PURCHASER'S profit" could reasonably be subject to either interpretation, an ambiguity
does exist. Schwend, ¶ 39.
¶26 Accordingly we hold that the District Court did not err in finding that the term
"PURCHASER'S profit" as used in paragraph 19 of the 1989 contract is ambiguous.
Issue 2.
¶27 Whether the District Court erred in concluding that a special meaning had been given
to the term "PURCHASER'S profit" to exclude deductions for sales costs and
improvements.
¶28 The District Court determined that the example provided in paragraph 19 of the 1989
contract gives the phrase "PURCHASER'S profit" a special meaning and that this special
meaning does not allow for a deduction for sales costs and the cost of improvements.
¶29 Where an ambiguity in a contract exists, the court may turn to extrinsic evidence to
determine the intent of the parties. Carelli, 279 Mont. at 209, 926 P.2d at 761. Where
parties to a contract of doubtful or ambiguous meaning have placed a particular
interpretation upon it, such interpretation is one of the best indications of their true intent.
Musselshell Valley Farming & Livestock Co. v. Cooley (1929), 86 Mont. 276, 294, 283
P.2d 213, 218 (citations omitted). The practical interpretation of a contract, which the
parties placed upon it by their course of conduct, is entitled to great, if not controlling
influence in ascertaining what they understood by its terms. Smith v. School District
(1943), 115 Mont. 102, 116, 139 P.2d 518, 523 overruled on other grounds by Massey v.
Argenbright (1984), 211 Mont. 331, 683 P.2d 1332. The practical construction of a
contract includes declarations made by the parties. Stensvad v. Miners & Merchants Bank,
Etc. (1982), 196 Mont. 193, 205, 640 P.2d 1303, 1309, cert. denied, 459 U.S. 831, 103 S.
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Ct. 69, 74 L.Ed.2d 69 (citations omitted).
¶30 In this case, the parties' statements made before, during and after the trial, illustrate
that they did not intend for the example in paragraph 19 to be determinative of how to
calculate the profit, but only to show the maximum amount the Fritzes were required to
pay the Ophuses. Moreover, the District Court's finding that the language of paragraph 19
is clear and explicit as to the "special meaning" of the phrase "PURCHASER'S profit"
completely contradicts its holding that the phrase is ambiguous.
¶31 This Court has long upheld the rule that ambiguities in a contract should be construed
against the drafter of the contract. See Mueske v. Piper Jaffray & Hopwood, Inc. (1993),
260 Mont. 207, 216, 859 P.2d 444, 449-50; Shanahan v. Universal Tavern Corp. (1978),
179 Mont. 36, 40, 585 P.2d 1314, 1317; Lauterjung v. Johnson (1977), 175 Mont. 74, 78,
572 P.2d 511, 513. Consequently, since the Ophuses' attorney drafted paragraph 19, it
should be construed against them and in favor of the Fritzes. Thus we find it reasonable to
construe profit in its ordinary meaning and thus allow the Fritzes to deduct those costs
directly associated with the sale of the property, i.e., title insurance, attorney's fees and
Realtors' commissions. Such costs are common, ordinary, and expected expenses
associated with the sale of property.
¶32 Moreover, the Ophuses testified that they knew that these types of costs were
expenses normally incurred in selling farms. They had previously sold property and
incurred both Realtor's fees and attorney's fees. More importantly, the Ophuses reaped just
as much benefit from hiring a Realtor as did the Fritzes because the Realtor was able to
cover a greater geographical area, thus a greater selling price was obtained from the
Realtor's efforts.
¶33 While we find it reasonable for the Fritzes to deduct their sales costs, we do not find it
reasonable for them to deduct the cost of improvements they claim to have made to the
property since they purchased it in 1981. As the Ophuses pointed out in their brief on
appeal, the improvements which the Fritzes claimed they should be able to deduct consist
mainly of fences and water lines. These improvements were, for the most part, already in
place by the time the Fritzes defaulted on the 1981 contract. Thus, when the Fritzes
reconveyed the property to the Ophuses, these improvements became the Ophuses'
property. The October 16, 1989 Quit Claim Deed executed by the Fritzes contains
language conveying to the Ophuses all "tenements, hereditaments and appurtenances." No
mention was made of any additional sums to be paid to acquire the improvements.
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¶34 In addition, while the 1989 contract reselling the property to the Fritzes does not
contain a list of improvements, it does include language similar to the Quit Claim Deed.
And once again no mention was made of any additional sums to be paid to acquire these
improvements.
¶35 The original 1981 contract selling the property to the Fritzes contained a list of
improvements and allocated the purchase price among those improvements and the real
property. If it was the parties' intention to later treat any further improvements separately
from the real property, they would have done so.
¶36 Furthermore, construing the phrase "PURCHASER'S profit" to not allow a deduction
for improvements is consistent with the circumstances under which paragraph 19 in the
1989 contract was made. The parties agree that the 1989 contract included paragraph 19 to
give the Ophuses the opportunity to recover the amount of the write-down if the value of
the land subsequently increased and the Fritzes sold the property. In other words, the
Ophuses were attempting to get back the full amount that they had been entitled to under
the original contract. Since paragraph 19 was included to put the Ophuses in the same
position they would have been in if the Fritzes had fulfilled the 1981 contract, it would not
make sense to allow the Fritzes to deduct from the "PURCHASER'S profit" the cost of the
improvements they incurred after the inception of the 1981 contract.
To that end, Robert Fritz testified as follows:
Q. Now, what's your understanding of that paragraph [19]?
A. My understanding of the paragraph is a way of giving back to Ophus some of
their write-down and how to define and arrive at that number.
...
Q. When you were negotiating, basically, or talking about this paragraph 19, isn't it
true that you understood that what Mr. Ophus was trying to do with this paragraph
19 was to get all of his money as if he'd sold it to you for $550,000 and you never
missed a payment?
A. Yeah.
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Moreover, Robert Fritz admitted that he had allocated no portion of his 1995 sale proceeds
to the improvements and that he purchased title insurance on the real estate for the full
$650,000 sale price.
¶37 Accordingly, we hold that the District Court erred in concluding that a special
meaning had been given to the term "PURCHASER'S profit" to exclude deductions for
sales costs and improvements. We further hold that while the sales costs must be deducted
from the selling price to arrive at the "PURCHASER'S profit," the cost of the
improvements may not be deducted.
Issue 3.
¶38 Whether the District Court erred in determining the sum the Fritzes should be
allowed to deduct as their purchase price in calculating the "PURCHASER'S profit."
¶39 The District Court calculated the "PURCHASER'S profit" by deducting from the 1995
selling price of $650,000, the payment to the FLB in the amount of $135,429.93, and a
"reduced" purchase price of $370,105.45. Both parties argue that this calculation is
incorrect because it effectively deducts the FLB payment twice. Using this reduced
purchase price of $370,105.45 as the Fritzes' cost in calculating the profit would allow the
Ophuses to recover even if the property continued to decline in value. This produces an
absurd result and is not what the parties intended. Language that produces absurd results
and is inconsistent with the parties' intent is to be disregarded. See § 28-3-401, MCA.
Moreover, using this figure does not reflect what the Fritzes actually paid for the property.
¶40 Accordingly, we hold that the District Court erred in determining the sum the Fritzes
should be allowed to deduct as their purchase price in calculating the "PURCHASER'S
profit."
¶41 Under paragraph 19, the Ophuses were to receive one-half of the Fritzes' profit on
resale limited to the reduction in purchase price between the 1989 contract and the balance
remaining on the 1981 contract. To determine that reduction, the purchase price in the
1989 contract of $410,080.41 was to be reduced by three separate items: one year's interest
on the balance owing under the 1981 contract at the time of default amounting to
$23,264.06; the 1990 FLB payment of $16,710.90; and the reduction in principal between
the 1981 contract and the 1989 contract amounting to $67,843.74.
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¶42 We hold that the total of these three deductions, $107,818.70, should then be deducted
from the original 1981 purchase price of $550,000 to arrive at the purchase price of
$442,181.30. This amount should then be deducted from the $650,000 sale price to leave a
gross purchaser's profit of $207,818.70. From that amount the Fritzes must be allowed to
deduct the sales costs in the amount of $47,784.17. Hence, we hold that the
"PURCHASER'S profit" is $160,034.53, of which the Ophuses' share is $80,017.27.
Issue 4.
¶43 Whether the District Court erred in determining that the Ophuses owe the Fritzes
interest to the present rather than to March 31, 1995, on the Federal Land Bank payment
the Fritzes made on January 5, 1990.
¶44 The District Court ruled that the Fritzes are entitled to recoup the January 5, 1990
FLB payment mistakenly paid by them "plus interest thereon at the rate of 7% per annum
from January 5, 1990." The Ophuses argue that they should not be required to pay interest
beyond March 31, 1995, because their delay in paying the Fritzes is the result of the
Fritzes' delay in paying them. For this argument the Ophuses rely on Hughes v. Melby
(1961), 139 Mont. 308, 362 P.2d 1014, and its application of § 58-429, RCM (1947), now
§ 28-1-1301, MCA.
¶45 Section 28-1-1301, MCA, provides:
When delay or failure to perform or offer to perform excused. The want of
performance of an obligation or of an offer of performance, in whole or in part, or
any delay therein is excused by the following causes, to the extent to which they
operate:
(1) when such performance or offer is prevented or delayed by the act of the creditor
or by the operation of law, even though there may have been a stipulation that this
shall not be an excuse;
(2) when it is prevented or delayed by an irresistible, superhuman cause or by the
act of public enemies of this state or of the United States, unless the parties have
expressly agreed to the contrary; or
(3) when the debtor is induced not to make it by any act of the creditor intended or
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naturally tending to have that effect, done at or before the time at which such
performance or offer may be made, and not rescinded before that time.
Thus, the Ophuses cannot be excused from their obligation to pay interest on the January
5, 1990 FLB payment unless the Fritzes caused the Ophuses to delay repaying them.
However, that is not the case here. The Fritzes did not cause any delay in the Ophuses'
repayment of the $16,710.90. Indeed, the Fritzes were not even aware that they mistakenly
made this payment until 1998.
¶46 Accordingly, we hold that the District Court did not err in determining that the
Ophuses owe the Fritzes interest to the present rather than to March 31, 1995, on the FLB
payment the Fritzes made on January 5, 1990.
Conclusion
¶47 To sum up, we hold that the Fritzes must pay the Ophuses $80,017.27 together with
interest thereon at the rate of 7% per annum from March 31, 1995, as the Ophuses' share
of the "PURCHASER'S profit." From this amount, the Fritzes are entitled to deduct
$16,710.90 together with interest thereon at the rate of 7% per annum from January 5,
1990, until paid, for the 1990 payment to the FLB mistakenly made by the Fritzes. In
addition, the Fritzes must pay the Ophuses $5,750 together with interest thereon at the rate
of 7% per annum from March 31, 1995, for the FLB stock.
¶48 Reversed and remanded for further proceedings consistent with this opinion.
/S/ JAMES C. NELSON
We Concur:
/S/ WILLIAM E. HUNT, SR.
/S/ W. WILLIAM LEAPHART
/S/ JIM REGNIER
/S/ TERRY N. TRIEWEILER
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