NE Educ. Training Serv. v. Silver St. Partner

NOTICE:  This opinion is subject to motions for reargument under V.R.A.P. 40
as well as formal revision before publication in the Vermont Reports.
Readers are requested to notify the Reporter of Decisions, Vermont Supreme
Court, 111 State Street, Montpelier, Vermont 05602 of any errors in order
that corrections may be made before this opinion goes to press.


                                No. 88-513


New England Educational Training             Supreme Court
Service, Inc. and John S. Burgess
                                             On Appeal from
     v.                                      Bennington Superior Court

Silver Street Partnership and                May Term, 1990
The National Mortgage Company


Arthur J. O'Dea, J.

Thomas F. Heilmann of Thomas F. Heilmann & Associates, Burlington, for
  plaintiffs-appellants

Peter W. Hall of Abell, Kenlan, Schwiebert & Hall, Rutland, for defendant-
  appellee


PRESENT:  Allen, C.J., Peck, Dooley and Morse, JJ., and Martin, Super. J.,
          Specially Assigned


     DOOLEY, J.   Plaintiffs New England Educational Training Service
Corporation (NEETS) and John Burgess appeal from the trial court's
dismissal of their mortgage foreclosure action.  We affirm.
     Although the facts behind this dispute are somewhat complicated, we can
reduce them to their essentials as follows.  The property involved in the
foreclosure is located on Silver Street in Bennington ("the Silver Street
property") and is apparently owned by defendant Silver Street Partnership,
pursuant to a quitclaim deed from defendant Snowfall, Inc.  How these
parties acquired the property is irrelevant.  It is only relevant that the
property was once owned by James Donahue (Donahue) and that he gave a
mortgage deed on the property to plaintiffs.
     The center of the dispute is a different piece of property, the former
facilities of Mark Hopkins College ("the college property").  The college
property was the subject of a foreclosure action by Vermont National Bank.
Through a complex series of transactions connected with the failure of this
college, title to this property came into the hands of John S. Burgess, a
trustee, treasurer, and attorney for the college.  NEETS, a creditor of the
college, also had an interest in the property.  They attempted to sell the
property to Donahue, apparently with the understanding that he would take
over the operation of the college and put it back on its feet.  Donahue
proved to be a reluctant purchaser.  Although he would sign purchase and
sales agreements, he would not go through with them.  It is Donahue's
failure to go through with the purchase of the college property that gives
rise to this action.
     The initial purchase agreement was dated December 31, 1976.  Donahue
agreed to buy the property from plaintiff NEETS and pay $4,000 for a down
payment, $50,000 in escrow, and $110,000 on closing.  The agreement
provided for a March 3, 1977 closing, and was contingent upon NEETS
acquiring title to the premises through the then-pending foreclosure
proceedings.   Section C(4) of the agreement contained the following
language:  "[i]n the event BUYER shall fail to pay the balance of the
purchase price or complete said purchase as herein provided, all amounts
paid hereinunder shall, at the option of NEETS, be retained as liquidated
damages."  Donahue failed to complete the purchase.  On March 19, 1977, the
agreement was extended for thirty days, but Donahue again failed to complete
the purchase.
     On July 5, 1977, with both NEETS and Burgess involved, the agreement
to purchase was extended by another thirty days.  The extension agreement
provided that the terms of the December 31 contract would remain in force.
Donahue concurrently executed a mortgage deed covering the Silver Street
property to NEETS and Burgess.  The mortgage deed stated that Donahue had
received $160,000 from NEETS and Burgess as consideration for the conveyance
and that the property was conveyed free of encumbrances except for a first
mortgage to a prior owner.  According to its terms, the deed secured a
promissory note for $160,000 to plaintiffs.  Donahue executed such a
promissory note, payable thirty days later.  Neither the mortgage deed nor
note indicated that these instruments were intended to secure Donahue's
performance on the purchase and sale agreement for the college property.  It
is undisputed, however, that Donahue never received $160,000 from
plaintiffs.
     The mortgage was recorded on July 6, 1977, in the Town of Bennington
land records.  Donahue again failed to purchase the college property and,
hence, never made payments on the mortgage note.  Burgess eventually sold
the property to another party for $220,000.
     On September 6, 1984, plaintiffs brought this action to foreclose their
mortgage on the Silver Street property.  On September 18, 1984, defendants
brought suit against their predecessor in title, Donald and Gloria
Humphreys, for breach of warranty of title, and against plaintiffs for their
failure to discharge the mortgage.  The Humphreys cross-claimed against
plaintiffs for failure to discharge the mortgage and mortgage note,
alleging that plaintiffs had received full payment for the indebtedness that
the mortgage purportedly secured. (FN1) These actions were consolidated on March
29, 1985.
     Following an appeal and remand on issues unrelated to the present
appeal, New England Educ. Training Serv., Inc. v. Silver Street
Partnership, 148 Vt. 99, 528 A.2d 1117 (1987), the case was tried by court
on August 10th through 12th, 1988.  Plaintiffs advanced two theories of
recovery.  First, they claimed that since Donahue made no payment on the
$160,000 mortgage note, the mortgage was in default and plaintiffs were
entitled to foreclosure as a matter of law.  Alternatively, they claimed
that they were entitled to foreclose because, on the underlying purchase
and sale agreement, $160,000 was due as liquidated damages, a sum which was
secured by the mortgage note and deed.
     The trial court granted judgment for defendants at the close of
plaintiffs' case and made oral findings and conclusions on the record.  In a
September 8, 1988 judgment order, the court declared the mortgage "of no
force and effect."  Plaintiffs appeal from that order, arguing that:  (1)
since the mortgage deed and note were unambiguous, the court improperly
considered parol evidence in determining the effect of the documents; (2)
the trial court erred in making certain factual findings; and (3) the trial
court erred in granting the motion for dismissal and in discharging a valid,
enforceable mortgage.
                                    I.
     Plaintiff's first argument is that the trial court improperly
considered parol evidence in determining the enforceability of the
mortgage deed and note.  Plaintiffs contend that absent a finding that the
deed and mortgage were ambiguous, the court was not permitted to consider
evidence of an underlying agreement between plaintiff and defendant.  The
trial court relied on various items of evidence that would be excluded under
plaintiffs' parol evidence argument, including the purchase and sale
agreement, the extension of the time for closing which was signed
contemporaneously with the note and mortgage, testimony that Donahue never
received the $160,000, and Burgess's testimony that the mortgage would have
been cancelled if Donahue had purchased the college property.
     The parol evidence rule is applicable to exclude evidence of a prior or
contemporaneous oral agreement offered to vary or contradict the terms of a
written agreement.  Tilley v. Green Mountain Power Corp., ___ Vt. ___, ___,
587 A.2d 412, 414 (1991); Big G. Corp. v. Henry, 148 Vt. 589, 592-93, 536 A.2d 559, 560-61 (1987).  For a number of interrelated reasons, it is not
applicable here.
     First, the only part of the mortgage or note that was contradicted by
the court's finding was the statement in the deed that Donahue had received
$160,000 from the plaintiffs.  A statement of consideration is not a term of
any agreement; hence, the parol evidence rule does not preclude evidence
that the statement of consideration is inaccurate.  See Citizens Sav. Bank
& Trust Co., 102 Vt. 114, 118, 146 A. 3, 4 (1929); White v. Miller, 22 Vt.
380, 384 (1850).
     Second, although the parol evidence rule is applicable to a mortgage or
note, these instruments are employed for special purposes.  The primary
purpose of the mortgage is to give the creditor a security interest in the
property based on a specific promise to pay contained in the note.  The
note, in turn, is drafted to be a negotiable instrument.  These special-
purpose documents seldom embody a complete statement of the agreement
between the parties.  See 3 A. Corbin, Corbin on Contracts { 587 (1960).  In
the terminology of the Restatement of Contracts, they form only a partially
integrated agreement.  See Restatement (Second) of Contracts { 210(2)
(1979).  The court could look beyond these documents to determine the
complete agreement of the parties.  Thus, it was proper for the court to
consider the purchase and sale agreement and its extensions, as well as the
surrounding circumstances of the parties.
     Third, the evidence was not used in this case to contradict or vary the
terms of the instruments.  Although the trial court found from the evidence
that the note and mortgage did not represent the true agreement of the
parties, its conclusion was that they could not be enforced because they
were inequitable or unconscionable.  This use of parol evidence is similar
to what we have authorized in the past.  For example, we have authorized the
use of parol evidence to determine whether there had been any consideration
for a mortgage.  See Quazzo v. Quazzo, 136 Vt. 107, 110, 386 A.2d 638, 640
(1978) ("great latitude" granted with respect to evidence offered in
mortgage foreclosure case to show lack of consideration); LaDam v. Squires,
127 Vt. 95, 97, 241 A.2d 58, 59 (1968) (parol evidence rule does not
preclude proof of lack of consideration as between original parties to an
agreement).  In addition, we have authorized admission of such evidence to
ascertain the true character and purpose of the mortgage, rather than to
vary the terms contained within the instrument.  See Wells v. Foss, 81 Vt.
15, 17, 69 A. 155, 155 (1908) (parol evidence admissible to show that
mortgage and note were actually intended to secure prior debt rather than
other consideration recited in the instruments; "Its tendency was to show
the true character of the mortgage, and it was properly received.").  The
uses made of the evidence in this case were consistent with the parol
evidence rule, and, as discussed below, formed a defense to plaintiffs'
foreclosure complaint.
                                    II.
     Plaintiffs' next argument is that the trial court erred in granting
judgment for defendants at the close of the plaintiffs' case.  V.R.C.P.
41(b)(2) provides that a defendant in a nonjury trial may move for
involuntary dismissal at the close of plaintiff's case, on the ground that
the plaintiff has shown no right to relief on the facts and law.  A rule
41(b)(2) motion for involuntary dismissal "serves the function of a
directed-verdict motion in a jury trial."  Reporter's Notes,  V.R.C.P. 41,
at p. 203.  The court, however, is required to make findings in accordance
with Rule 52(a). V.R.C.P. 41(b)(2).  As opposed to a directed verdict, the
court is not required to take the evidence in the light most favorable to
the nonmoving parties.  Blais v. Blowers, 136 Vt. 488, 489, 394 A.2d 1124,
1124 (1978).  On appeal, the question is whether the court's fact findings
are clearly erroneous, viewing the evidence in the light most favorable to
the prevailing party.  Stevens v. Cohen, 138 Vt. 7, 8-9, 409 A.2d 604, 605
(1979).  Plaintiffs argue that the court's dismissal was erroneous because a
number of its findings were clearly erroneous.
     Plaintiffs first challenge the court's "finding" of a "complete lack of
documentary definition of what in fact this mortgage . . . really is."  The
court made this comment as part of its discussion of whether parol evidence
was admissible and not as a finding of fact.  As plaintiffs admit, the court
actually found that the mortgage was security for Donahue's agreement to buy
the college land, and plaintiffs have not attacked that finding.  Thus,
there is no finding here against which to apply the clearly-erroneous test,
and the argument fails.
     Plaintiffs next attack the court's finding that, if foreclosure was
granted, plaintiffs combined income from the sale of the Brattleboro
property and foreclosure on the Silver Street property would amount to "in
the neighborhood of half a million dollars."   This finding was based on the
testimony of Burgess and reflects an obvious addition of the proceeds of the
sale of the college land to the potential proceeds of this litigation if
plaintiffs prevail.  We can find no basis for plaintiffs' claim that the
court intended it to be a net profit figure, rather an approximation of
gross return on the property.  It is not clearly erroneous.
     Plaintiffs also attack the court's "insinuat[ion]" of impropriety on
Burgess's behalf in obtaining the college property.  We recognize that the
trial court was concerned about how Burgess came to control the college
land, but we see no finding on this point and nothing directly related to
the court's conclusions.
     Finally, plaintiffs attack the court's finding that plaintiffs had only
a "prospective interested buyer" for the college property when they extended
Donahue's right to purchase.  They argue that the undisputed evidence showed
that they had a binding written offer to purchase.  The court's finding is
reasonable in light of plaintiffs' failure to produce the written offer or
to show the offered price.  Further, on the state of the evidence, this
finding is only marginally relevant to the court's conclusions.


                                   III.
     Plaintiffs' final claim -- indeed the crux of their appeal -- is that
once default of the underlying obligation had been proved, it was an abuse
of discretion for the court to refuse to foreclose the mortgage.   Because
foreclosure actions are by their nature equitable actions, it is proper for
the court to weigh the equities of the circumstances in determining whether
to grant foreclosure.  Retrovest Assoc., Inc. v. Bryant, 153 Vt. 493, 500,
573 A.2d 281, 285 (1990); Merchants Bank v. Lambert, 151 Vt. 204, 206, 559 A.2d 665, 666 (1989).   A weighing of the equities necessarily involves
judicial discretion in evaluating a broad range of relevant considerations.
Thus, in Johnson v. Johnson, 125 Vt. 470, 218 A.2d 43 (1966), we stated:
         The sufficiency of the consideration, the mutuality,
         certainty, and clarity, completeness, and fairness of
         the contract, its capability of proper enforcement by
         decree, and the presence or absence of any showing that
         it is tainted or impeachable, or that its enforcement
         would be unconscionable are elements relevant to the
         exercise of that discretion.  If the chancellor has
         granted or denied relief by the exercise of discretion
         based on such equitable considerations, the result is
         reviewable only upon a clear and affirmative showing of
         abuse.

Id. at 473, 218 A.2d  at 45 (citations omitted).   Although Johnson was a
specific performance case, its itemization of the relevant considerations is
equally applicable in a mortgage foreclosure action.
     When we weigh the equities in this case, the court's decision to
dismiss the foreclosure action must be sustained on appeal.  It is
undisputed that the consideration recited in the mortgage deed, the $160,000
payment from plaintiffs to Donahue, did not exist.  Thus, Donahue's note
obligating him to pay $160,000, and the mortgage that secured it, must have
been given either as part-payment for the college property or as consider-
ation for the thirty-day extension of the purchase and sale agreement.
Either possibility creates a viable defense.  If the former, Donahue never
obtained his interest in the college property, and plaintiffs would achieve
a double recovery in the foreclosure.  Cf. Licursi v. Sweeney, 89-277 (Vt.
May 3, 1991) (holder of equity of redemption as result of foreclosure not
permitted to recover on underlying note where "double recovery" would result
in unjust enrichment).  If the latter, the extension price, which is almost
equal to the purchase price, is so unfair as to be unconscionable.
     Plaintiffs seek to avoid the court's analysis by arguing that the note
amount represented liquidated damages under the specific provision of the
purchase and sale agreement allowing plaintiffs to retain "all amounts paid
hereunder."  Accepting that this is a viable construction of the agreement,
there are limits on the amounts that can be claimed as liquidated damages.
It is well settled that a liquidated damages clause must meet three
criteria to be upheld:  (1) because of the nature or subject matter of the
agreement, damages arising from a breach would be difficult to calculate
accurately; (2) the sum fixed as liquidated damages must reflect a
reasonable estimate of likely damages; and (3) the provision must be
intended solely to compensate the non-breaching party and not as a penalty
for breach or as an incentive to perform.  See Restatement (Second) of
Contracts { 356 (1981); Borley v. McDonald, 69 Vt. 309, 313, 38 A. 60, 61
(1897);  Stevens v. Pillsbury, 57 Vt. 205, 213 (1884).  There is no evidence
that the $160,000 security interest in the mortgaged property was a
reasonable estimate of plaintiffs' likely damages.  Burgess himself
testified that the arrangement was intended as an incentive to secure
Donahue's performance, suggesting that he saw it as a penalty that Donahue
would avoid if possible.  If the mortgage and note were intended to provide
liquidated damages, we find them facially invalid as creating an illegal
penalty instead.
     We note that plaintiffs argue that the result, the dismissal of the
foreclosure action, is too harsh for the circumstances and inappropriately
causes plaintiffs to forfeit their mortgage.  In this argument they rely on
Merchants Bank v. Lambert, 151 Vt. at 207, 559 A.2d  at 667, to the effect
that it is not the nature of equity to work a forfeiture.  In Merchants
Bank, the weighing of the equities showed that it was possible to allow the
creditor to foreclose a mortgage while reducing the amount secured to
reflect damage to defendant caused by failure of the bank to notify her that
the mortgage was in default.  See id.  Here, the trial court found that the
mortgage, viewed in light of the note and underlying purchase and sale
agreement, reflected an invalid, unconscionable arrangement and that
plaintiffs had already received a sufficient profit from the later sale of
the college property.  Simply stated, the equities balance differently here
than in Merchants Bank.
     Affirmed.
                                        FOR THE COURT:




                                        Associate Justice





FN1.    In their cross-claim against NEETS and Burgess, the Humphreys
alleged further that at some time prior to the date they instituted their
1980 foreclosure action against Donahue, someone removed from the Bennington
land records the index cards which showed the mortgage from Donahue to
NEETS and Burgess.  The Humphreys claimed that they had failed to join
NEETS and Burgess as parties to their foreclosure action because there was
no record of plaintiffs' security interest.  Because the trial court in the
present action discharged plaintiffs' mortgage as without force, he
dismissed the Humphreys' cross-claim.