Cady v. Burton

No. 92-200

IN THE SUPREME COURT OF THE STATE OF MONTANA
1993

SHAWN CADY,
Plaintiff, Counter-Defendant
and Respondent,

WILLIAM D. BURTON and
DEBRA A. BURTON,
Defendants, Counter-Claimants
and Appellants.

APPEAL FROM: District Court of the Eleventh Judicial District,
In and for the County of Flathead,
The Honorable Leif B. Erickson, Judge presiding.

COUNSEL OF RECORD:
For Appellants:
Alan J. Lerner, Attorney at Law, Kalispell, Montana
For Respondent:
Robert B. Allison, Attorney at Law, Kalispell,
Montana

APR 1 3 1993
D Submitted on Briefs:
Decided:
December 22, 1992
April 13, 1993

CLERK OF SUPREliEE C(BURT
STATE OF MONTANA
. ..
, ..,
Cqerk
Justice Karla M. Gray delivered the Opinion of the Court.

William and Debra Burton appeal from the findings of fact,
conclusions of law, and judgment entered by the Eleventh Judicial
District Court, Flathead County, rescinding two contracts for the
sale and purchase of real property. We affirm in part and reverse
in part.
We restate the issues on appeal as follows:
1. Did the District Court err in concluding that the
contracts prohibited the Burtons from spending the earnest money?
2. Did the District Court err in rescinding the contracts on
the basis of material breach?
While on vacation in the Flathead Valley in May of 1988, Shawn
Cady (Cady), a resident of California, decided to purchase property
in the area. Cady asked Linda Adams (Adams) and Caren Kastner
(Kastner), owners of the Pine Cone Kitchen in Bigfork, if the
restaurant was for sale and if they knew of other property for sale
in the area. Adams and Kastner expressed interest in selling the
restaurant and referred Cady to William Burton (Burton), their
cousin. Burton and his wife, Debra Burton, were interested in
selling a residence (the Echo Lake Residence) and a shopping
complex (the Burton Complex).
Over the next several weeks, the parties executed a number of
documents relating to the purchase and sale of the Echo Lake
Residence, the Burton Complex, and the Pine Cone Kitchen. On May
18, Cady signed a document entitled Receipt and Agreement to Sell
and Purchase with Adams and Kastner pertaining to the Pine Cone
Kitchen. The agreement required Cady to pay $5,000 as earnest
money. Additionally, the agreement provided that Cady could extend
the closing for 90 days by paying an additional $5,000 earnest
money.
On May 19, Cady and the Burtons executed two documents

entitled Receipt and Agreement to Sell and Purchase: one for the
Echo Lake Residence and the other for the Burton Complex. By their
terms, the agreements were not effective until Cady paid earnest
money in an unspecified amount. The agreements contained no other
provisions regarding earnest money.
Cady and the Burtons subsequently executed documents entitled
Exhibit "A", Addendum to Purchase and Sale Agreement, and Addendum,
Part Two. The exhibit and addenda expressly clarified the terms of
the two earlier agreements for the sale and purchase of the Echo
Lake Residence and the Burton Complex. Under the terms of Exhibit
"A", dated May 28, Cady was required to pay $5,000 as earnest money
for each property. The first addendum, dated June 6, provided that
the closing on both properties would take place on August 1; it
permitted Cady to extend the closing on both properties by paying
an additional $10,000 earnest money on August 1. The terms
lldeposit,""depositingn and "held on deposit" were used in the
first addendum in reference to the earnest money. The second
addendum, dated June 8, also included the term lldepositsll
in
reference to the earnest money.
Although the addenda did not clarify the agreement relating to
the Pine Cone Kitchen, the addenda did refer to the Burtons'
receipt of initial earnest money in the amount of $15,000, and
directed the Burtons to allocate $5,000 of the earnest money to
each of the three properties. Accordingly, Cady sent a check to
William Burton in the amount of $15,000. Burton gave $5,000 of the
earnest money to Adams and Kastner.
In mid-July, Burton requested that Cady send additional
earnest money even though it was not due until August 1. At that
time, Burton informed Cady that he had spent the initial earnest
money and that he needed the additional earnest money for personal
expenses, possibly to avoid bankruptcy. Cady refused to send
additional earnest money unless it was deposited in escrow or
otherwise withheld from the Burtons' personal use; Burton refused
any arrangement that would prevent him from having immediate use of
the money. The parties did not close on the properties on August
1, nor did Cady send the additional earnest money required to
extend the closing date.
On September 20, Cady filed suit against the Burtons for
rescission of the contracts relating to the Echo Lake Residence and
the Burton Complex. In addition, Cady alleged that Burton had
acted as an agent of Adams and Kastner and, on that basis, sought
rescission of the contract regarding the Pine Cone Kitchen. Cady
also sought a $15,000 judgment against the Burtons to recoup the
earnest money paid on the three properties. The Burtons
counterclaimed, seeking specific performance of the Echo Lake
Residence and Burton Complex contracts and damages for Cady's
alleged breach of the contracts and the implied covenant of good
faith and fair dealing. The Burtons subsequently dropped their

specific performance claim.
A bench trial was held on November 12, 1991. During the
trial, the District Court granted partial summary judgment in favor
of the Burtons, dismissing Cadyqs claim relating to the pine Cone
Kitchen. At the conclusion of the trial, the District Court orally
issued its findings and judgment. The court stated that its
summary adjudication of the Pine Cone Kitchen contract was premised
on its finding that Kastner and Adams were the real. parties in
interest. The court also found that the terms of the contracts
regarding the Echo Lake Residence and the Burton Complex prohibited
the Burtons from spending the earnest money prior to closing and,
therefore, that the Burtons had breached the contracts.
Furthermore, the District Court found the breach to be material.
The District Court apparently dismissed the Burtonst counterclaim
on the basis that they had committed a material breach that excused
Cadyls performance under the contract. The court awarded Cady
$10,000 plus interest, representing a refund of the earnest money
paid by Cady on the Echo Lake Residence and the Burton Complex.
On December 31, 1991, the court filed findings of fact,
conclusions of law and judgment consistent with its bench ruling.
The court concluded that Cady was 'lentitled to withdrawvtfrom the
contract and to "request refundw of the earnest money relating to
the Echo Lake Residence and the Burton Complex. The court denied
the Burtonsq post-trial motions and the Burtons appealed.
 Did the District Court err in concluding that the contracts
prohibited the Burtons from spending the earnest money?
The District Court found that the original buy-sell
agreements, together with Exhibit "A" and the two addenda,
constituted the contracts relating to the sale and purchase of the
Echo Lake Residence and the Burton Complex. The court also found
that while the initial buy-sell agreements did not address the
disposition of the earnest money, the addenda included the terms
" and "held on deposit. " The District Court
"deposit, "depositingt1
concluded that the payment of the earnest money was a deposit to be
held by the Burtons and that the earnest money was not available to
spend at their discretion until closing.
The Burtons contend that the District Court erred in
determining that the terms "deposit,l* *ldepositing"and "held on
depositvgapplied to the initial earnest money. They assert that
the court relied almost exclusively on the following provision in
the first addendum to conclude that they were prohibited from
spending the earnest money:
4. If buyer agrees to drop the contingency of the
sale of buyer's residence in California, then interest on
the remaining principal due on the Pine Cone Kitchen and
the Echo Lake Residence will commence on January 1, 1989.
Interest will be at 10 1/2 percent and will be added
monthly to the remaining balance. The principal balance
shall be reduced by earnest money payments held on
deposit.
According to the Burtons, this provision prevents them from
spending additional earnest monies received, but not the initial
earnest money, if Cady dropped a contingency provision relating to
the sale of his California residence. Nothing in the quoted
6
language, however, creates differing obligations on the Burtons'
part with regard to initial versus subsequent earnest money
payments.
The Burtons also assert that the referenced provision applies
by its terms only to earnest money relating to the Pine Cone
Kitchen and Echo Lake Residence and, therefore, does not prevent
them from spending the earnest money relating to the Burton
Complex. This contention ignores the recurrence of the terms
"deposit," "depositingw and "held on deposit1'in the two addenda.
The following provisions of the first addendum, which are
applicable to the contracts for both the Echo Lake Residence and
the Burton Complex, are particularly relevant:
3 . This sale is contingent upon the sale of Buyer's
home in California. If seller receives an offer to sell
either the Echo Lake Residence or the Burton's Complex,
or both, then buyer shall have 72 hours notice to drop
this contingency. If buyer declines to drop the
contingency, then seller may sell any or all of the
properties to a new purchaser. Upon the closing of the
sale to the new purchaser, buyer shall receive a full
refund of all earnest money paid to date. Until the sale
to the new purchaser closes, the purchase agreements
between buyer and seller remain in full force and seller
shall continue to hold earnest money.

5. Seller acknowledges receipt of the initial
earnest money deposit of $15,000.00, with $5,000.00
allocated to the Pine Cone Kitchen, $5,000.00 to the Echo
Lake Residence and $5,000.00 to the Burton's Complex.
Furthermore, the second addendum contains the following provision:
This additional Addendum and the previous Addendum
of June 6, 1988 shall only be valid and will only alter
the previous agreements of the parties if Buyer signs and
returns the June 6th Addendum and this additional
Addendum to Seller by June 11, 1988 AND only if Buyer
deposits $15,000.00 earnest money with Seller ....
Contrary to the Burtons' assertion, the terms "hold earnest money,"
"earnest money deposit" and "deposits" in these provisions clearly
pertain to earnest money paid on both the Echo Lake Residence and
the Burton Complex.
The Burtons also contend that the District Court erred in
defining the term I'deposit . It The District Court relied upon the
following definition from Black's Law Dictionary:
To commit to custody, place in the hands of another to be
held pending an event occurring, pending a permanent or
temporary disposition of the funds, giving possession of
personal property by one person to another with his
consent; to keep for the use and benefit of the first or
of a third person.
The Burtons assert that the District Court should have applied the
Black's Law Dictionary definition of the term "depositw as it is
used in the banking industry:
In Banking Law
The act of placing or lodging money in the custody
of a bank or banker, for safety or convenience, to be
withdrawn at the will of the depositor or under the rules
and regulations agreed on. Also, the money so deposited,
or the credit which the depositor receives for it.
On this basis, the Burtons contend that they were free to spend the
earnest money in the same manner that a bank is able to use the
deposits of its customers. We disagree.
The obvious flaw in this argument is that neither the Burtons
nor Cady are bankers. The Burtons and Cady entered into the
contracts to purchase and sell real estate as private individuals.
It is a well-established principle of contract law, codified in
Montana, that words of a contract are to be understood in their
ordinary sense. Section 28-3-501, MCA: Schultz v. Stevens (1988),
233 Mont. 42, 45, 758 P.2d 287, 288. Under the general definition
of the tern "deposit," and as commonly understood, deposited money
is to be held and kept pending an event--here, the closing of the
sale of real estate.
We hold that the District Court properly concluded that the
contracts prohibited the Burtons from spending the earnest money
relating to the Echo Lake Residence and the Burton Complex.

Whether the District Court erred in rescinding the contracts
on the basis of material breach?
Ruling from the bench, the District Court found that the
Burtons had breached the contracts by spending the earnest money.
Furthermore, the court found that the breach was material.
Findings of fact made by a district court, sitting without a
jury, must be affirmed unless the findings are clearly erroneous.
Rule 52 (a), M.R.Civ.P. We have adopted a three prong test to
determine whether a finding is clearly erroneous: the first prong
is whether substantial evidence supports the findings. Interstate
Prod. Credit Ass'n v. DeSaye (1991), 250 Mont. 320, 323, 820 P.2d
1285, 1287.
The Burtons contend that the District Court erred in finding
that the alleged breach was material. Relying on Sjoberg v. Kravik
(1988), 233 Mont. 33, 759 P.2d 966, and VanUden v. Hendricksen
(1980), 189 Mont. 164, 615 P.2d 220, they contend that a breach is
material only if it substantially defeats the object of the
contract. They assert that the contract provisions requiring the
earnest money to be held on deposit were only incidental to the
purpose of the contracts at issue and, therefore, that even if they
breached the provisions, the breach was not material. We agree.
Sioberq and VanUden reflect our consistent approach to the
question of materiality of a contract breach: a breach is not
material unless it defeats the primary purpose of the contract. In
Sioberq, plaintiff entered into two contracts to purchase
properties owned by defendants in order to build a home and develop
a horse ranch. The primary issue was whether defendants' breach in
failing to obtain a mortgage release, as required by the contracts,
was material so as to support plaintiff's suspension of
performance. The district court found that the purpose of the
mortgage release provisions was to enable plaintiff to obtain
financing to develop the horse ranch. On that basis, the court
determined that defendants' breach was material and, therefore,
that plaintiff was entitled to suspend his payments under the
contracts. We affirmed the district court's finding of materiality
because defendants' breach-failuret to obtain the mortgage release-
-substantially defeated the purpose of the contract. Sioberq, 759
P.2d at 969.
In VanUden, plaintiffs filed suit to remove restrictive
covenants affecting property that they contracted to purchase from
defendants. Defendants counterclaimed, seeking cancellation ofthe
contract on the basis of plaintiffs' breach of the covenants.
Plaintiffs moved for summary judgment on the counterclaim,
asserting that cancellation was an improper remedy as a matter of
law; the district court denied the motion. We reversed, concluding
that the covenants were only incidental to the main purpose of the
contract for deed--delivery of the deed in exchange for payment of
the purchase price. We opined that where the alleged breach of
covenants was not so substantial and fundamental as to defeat the
main object or purpose of the contract, and could be compensated in
damages, a breach of the covenants did not warrant cancellation.
VanUden, 615 P.2d at 224.
Our review of the District Court's finding of materiality in
the case before us need not progress beyond the first prong of the
DeSave clearly erroneous test. Given the materiality test set
forth above, no substantial evidence in the record supports the
District Court's finding that the Burtons' breach was material
The primary purpose of a buy-sell agreement is a restriction
on the seller's ability to market the property for a specified time
in exchange for the buyer's payment of earnest money and promise to
complete the sale. See Payne Realty v. First Sec. Bank (Mont.
1992), 844 P.2d, 90, 94, 49 St.Rep. 1098, 1100. Nothing of record
here suggests any other purpose for the buy-sell agreements at
issue. The contract provision requiring the Burtons to hold the
earnest money on deposit was incidental to the main purpose of the
buy-sell agreements and breach of that provision did not
substantially defeat, or even impact, the primary purpose of the
contracts.
Indeed, Cady does not allege that the Burtons' failure to hold
the earnest money on deposit substantially defeated the object of
the contracts. Cady testified that he would not have entered into
the contracts had he known that the Burtons would spend the earnest
money; in addition, he asserts that he was reasonably alarmed when
he learned that the original earnest money had been spent. Cadyfs
assertions do not address our test for materiality and, therefore,
do not provide substantial evidence that the Burtonst breach was
material in that it defeated the primary purpose of the contracts.
We conclude that the District Court's finding that the Burtonst
failure to keep the earnest money on deposit until closing
constituted a material breach is clearly erroneous.
Based on its finding of material breach, the District Court
concluded that Cady was entitled to from the contrac
and to "request refundM of the earnest money. Thus, the District
Court effectively rescinded the contracts regarding the Echo Lake
Residence and the Burton Complex.
Our determination that the District Court's finding of
material breach is clearly erroneous necessarily leads to our
conclusion that the court improperly rescinded the contracts. Only
a material breach can serve as a basis for rescinding a contract.
A breach which goes to only a part of the consideration,
is incidental and subordinate to the main purpose of the
contract, and may be compensated in damages does not
warrant a rescission of the contract; the injured party
is still bound to perform his part of the agreement, and
his only remedy for the breach consists of the damages he
has suffered therefrom. A rescission is not warranted by
a mere breach of contract not so substantial and
fundamental as to defeat the object of the parties in
making the agreement.
Reinke v. Biegel (1979), 185 Mont. 31, 35-36, 604 P.2d 3 1 5 , 317
(citations omitted). Pursuant to ~einke, the Burtons' breach
provides Cady grounds to seek contract damages, but not rescission.
Accordingly, we hold that the court erred in rescinding the
contracts on the basis of material breach.
The District Court's award of $10,000 plus interest,
reflecting the earnest money paid on the Echo Lake Residence and
the Burton Complex, appears to be a component of the rescission.
The objective of rescission is to return the parties to the same
position they would have occupied had they not entered into the
contract. Brunner v. LaCasse (1988), 234 Mont. 368, 371, 763 P.2d
662, 664. As a general rule, a party lawfully rescinding a
contract is entitled to recover the monies paid under the contract,
with interest from the date of the breach. Brunner, 763 P.2d at
664. Based on our determination that the District Court erred in
rescinding the contracts, we conclude that the award of $10,000
plus interest, which is part and parcel of the rescission, is in
error as well.
We affirm the District Court's conclusion that the contracts
for the purchase and sale of the Echo Lake Residence and the Burton
Complex prohibited the Burtons from spending the earnest money and
its finding, on that basis, that the Burtons breached the
contracts. We reverse the District Court's finding that the
Burtons' breach was material and, consequently, its rescission of
the contracts. Furthermore, because the District Court's dismissal
of the Burtons' counterclaim appears to have been premised on the
erroneous finding of a material breach, we reverse the court's
dismissal of the counterclaim.
 Affirmed in part, reversed in part and remanded for further

proceedings consistent with this opinion.

We concur:

chief Justice

Justices
Justice Fred J. Weber concurs and dissents as follows:
I concur in the majority holding that the District Court
correctly prohibited the Burtons from spending the earnest money.
I dissent from the holding on Issue 11, with regard to rescission
of the contracts on the basis of material breach.
Of particular significance are the following provisions of the
addendum of June 6, 1988, referred to in the majority opinion:
PROVISIONS APPLICABLE TO EACH CON!CRACT
1. Closing shall be on August 1, 1988. Buyer may
extend the closing date to December 1, 1988 by
depositing, with seller, an additional $10,000.00 earnest
money. Buyer may continue to extend closing indefinitely
by continuing to deposit an additional $10,000.00 sum as
earnest money every six months thereafter.
2. If, under the existing terms of the Buy-Sell
Agreements, the parties agree that they will close the
purchase of the Echo Lake residence or the Burton's
Complex, but not both, then in this event, Buyer shall
have refunded the earnest money attributable to the
agreement which will not close. Buyer may, in any event,
continue to extend the date of closing as agreed herein,
provided he continues to deposit additional sums of
$10,000.00 earnest money on August 1 and December 1, 1988
and every 6 months thereafter.
3 . This sale is contingent upon the sale of Buyer's
home in California. If seller receives an offer to sell
either the Echo Lake residence, or the Burton's Complex,
or both, then buyer shall have 72 hours notice to drop
this contingency. If buyer declines to drop the
contingency, then seller may sell any or all of the
properties to a new purchaser. Upon the closing of the
sale to the new purchaser, buyer shall receive a full
refund of all earnest money paid to date. Until the sale
to the new purchaser closes, the purchase agreements
between buyer and seller shall remain in full force and
seller shall continue to hold earnest money.
The majority opinion concluded that the primary purpose of a
buy-sell agreement is a restriction on the seller's ability to
market the property for a specified time in exchange for the
buyer's payment of earnest money and promise to complete the sale.
The majority further concluded that nothing in the agreement
suggests any other purpose for t h e buy-sell agreements. I disagree
with that conclusion.
In the above quoted paragraph 3, the parties agreed that each
of the three sales are "contingent upon the sale of buyerls home in
~alifornia." That is a significant factor not addressed in the
majority opinion. That provision gives the right to the buyer to
demand a return of the earnest money in the event he is not able to
sell his home in California. That is a primary purpose in addition
to the marketing and sale of the property in Montana.
We emphasize that the above provisions establish this is not
an ordinary buy-sell agreement in which there is an agreement to
buy and to sell. Under paragraph 2, the parties in the future
could agree that they would close the purchase of either Echo Lake
residence or Burton's Complex, but not both. In that event the
buyer was required to refund the earnest money attributable to the
agreement which did not close. This again is a primary purpose or
reason in addition to the marketing and sale.
In addition, under these paragraphs, buyer may continue to
extend the date of closing by making additional $10,000 deposits.
Even though such deposits are made, under the paragraphs, a primary
purpose is to allow the deposits to be returned in the event that
the buyerts property in California is not sold.
Last, I point out that under paragraph 3, if the seller
receives an offer to sell either Echo Lake residence or Burton's
Complex, or both, buyer has 72 hours to drop the contingent aspect
of the sale. If the buyer declines to drop the contingency, then
the seller may sell to a new purchaser. A key point here is that
upon the closing of the sale to the new purchaser, the buyer shall
receive a "full1'refund of all earnest money paid to date. Clearly
this is a primary purpose in addition to the sale of the property
in Montana to the buyer.
In view of the foregoing express contingencies, it is clear to
me that the spending of the earnest money indicates a very material
problem with return of the earnest money if the sale is not
completed. The deposit referred to in the first issue of the
majority opinion becomes of little significance if it is spent and
no longer constitutes such a deposit.
I conclude that the seller's failure to hold the earnest money
substantially defeated material objects and provisions of the
contract. I would affirm the conclusion of the District Court that
the buyer was entitled to withdraw from the contract and request
refund of his earnest money. I would affirm the District Court's
award of $10,000 plus interest to the buyer.

Chief Justice J. A. Turnage concurs in the foregointg concurrence
and dissent. A
 April 13, 1993

CERTIFICATE OF SERVICE

I hereby certify that the following order was sent by United States mail, prepaid, to the following
named:

Alan J. Lerner
Attorney at Law
P.O. Box 1158
Kalispell, MT 59903-1158

Robert B. Allison
Attorney at Law
130 Fifth St. E.
Kalispell, MT 59901

ED SMITH
CLERK OF THE SUPREME COURT