Note that there are two issues in the same case discussed here serially

Daily Development for Tuesday, September 18, 2001

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

INSURANCE, CASUALTY PROCEEDS; SPECIFIC PERFORMANCE OF A REAL ESTATE CONTRACT: When residential property is destroyed during the term of an installment land contract, the burden of the loss is then borne by the purchasers; but purchasers are entitled to a credit against the purchase price in the amount of casualty insurance proceeds received by the seller.

Hillard v. Franklin, 41 S.W.3d 106 (Tenn. App. 2001)

The court styled this as a matter of first impression in Tennessee.

Seller and buyer entered into what was apparently an installment land contract for land and residential improvements, the buyer took possession of the property. Subsequent to transfer of possession, but prior to closing, a fire destroyed the house. The seller received insurance proceeds for the loss. The parties thereafter agreed to substitute a contract for an immediate delivery of the deed, with buyer providing a secured note for the balance of the purchase price. The buyer demanded a credit for the insurance proceeds. The seller demanded that the buyer perform the contract as originally written.

Buyers brought this action for specific performance with abatement and the trial court granted buyers summary judgment. Sellers appealed.

Held: Affirmed.

Seller appealed on numerous grounds, including the fact that one of the buyers did not sign the contract and that no earnest money was ever received by the seller, in addition to the claim that the trial court erred in reducing the purchase price by the amount of insurance proceeds received by the seller attributable to the destroyed dwelling.

As to the earnest money requirement, the appeals court noted that the contract provided that earnest money was to be tendered at the time "closing." The court concludes (perhaps erroneously) that no closing had occurred. This holding is the subject of another entry involving this case.

As to the matter of insurance proceeds, the only Tennessee precedent was in cases brought by insurers litigating the amount of proceeds owed to an insured when the insured had merely the beneficial interest in the property destroyed. A review of insurance treatises by the Court indicated that in many jurisdictions, a seller in situations like that before the court had been required to credit received insurance proceeds to the agreed upon purchase price. It noted that the buyer, as bearer of the casualty loss, should equitably be entitled to such a credit.

Comment 1: Although the court is undoubtedly correct in its conclusion that the buyer bore the burden of risk here, it is very vague about the reason for this. Is it because of equitable conversion, which would apply whether or not buyer had possession? Or is it because of the special fact that possession transferred here prior to closing?

Perhaps the risk shifted to the buyer because the original installment land contract so provided. The court doesn't tell us, but such provisions are quite common, even in residential contracts, and change the common law rule. Most statutes on the point also permit alteration by contract.

In an ordinary executory contract, it is possible that the risk would not have been allocated to the buyer until after closing. In that event, if the buyer elected to close anyway, one would assume that the buyer viewed the price as adequate even in light of the damages, and one would further assume that the buyer would get no credit for seller's insurance payoff.

If the contract had allocated the risk of loss to the buyer, as would be more appropriate in the case of an installment contract in which possession has passed, the contract, rather than the equitable doctrine of equitable conversion, would shift the risk.

Comment 2: Where the basis for allocating the risk to buyer is the doctrine of equitable conversion, then the court was correct in concluding that many common law decisions elsewhere say that the buyer is entitled to a credit on the purchase price if the seller's insurance pays off.

The question gets a little dicey when there is an installment land contract.

Does the seller have an obligation to transfer the proceeds to the buyer immediately, or can the seller hold them as additional security, applying them as a credit only to the last payments made? The court here is able to dodge that question because the parties subsequently decided to have a transfer of the deed, but then got caught up on the terms and the insurance credit. Thus, the suit contemplated a transfer of the deed.

Comment 3: There were many intriguing facts not fully explored by the Court on appeal. Allegedly the seller received additional proceeds for the casualty loss not attributable to the loss of the dwelling and not credited to the purchase price. Then there were the interests of a retarded woman living in a mobile home on a portion of the property, whom the parties agreed by contract should be granted a quasi-life estate in that dwelling after the closing of the transaction

VENDOR/PURCHASER; EARNEST MONEY; TIME FOR PAYMENT: Where an installment land contract provides for payment of earnest money "upon closing," the term "closing will be interpreted to mean the time of transfer of the deed, and not the time that the buyer takes possession.

Hillard v. Franklin, 41 S.W.3d 106 (Tenn. App.2001), discussed further under the Heading: "Insurance, Casualty Proceeds; Specific Performance of a Real Estate Contract."

Comment: The conclusion stated in the caption appears to be the only logical interpretation of the court's opinion, but it is unclear whether the court really appreciates the significance of what it is saying. Since the parties had agreed to go to closing right away, the court didn't have to deal with what would have happened if the deed delivery were to be ten years later.

Although, in most contexts, "closing" means deed delivery, in the context of an installment land contract, it may also mean execution of the contract and delivery of possession, which probably occurred here (note that buyer's spouse never signed.)

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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