Caseflicks

Indiana Court of Appeals • 1979

Billman v. Hensel

391 N.E.2d 671 | 181 Ind. App. 272 | 1979 Ind. App. LEXIS 1234

Full access

Unlock the video and quiz

The written brief is free to read below. Subscribe to watch the video explainer and take the quiz.

Create an account Log in

Takeaway

In short, a buyer relying on a financing contingency must genuinely and reasonably try to obtain the specified loan; a buyer who does not cannot invoke failed financing to avoid the contract.

Background

The Hensels agreed to sell their home to the Billmans for $54,000 cash. The contract required a $1,000 earnest-money deposit and made the purchase conditional on the Billmans' ability to obtain a conventional mortgage of at least $35,000 within thirty days.

The day after signing, Mr. Billman spoke with one bank representative but made no formal loan application. The bank told him he would need to demonstrate that he had the remaining $19,000 of the purchase price. Counting the anticipated proceeds from selling his existing home, Billman was $6,500 short. After Billman's parents declined to lend him $5,000, he told the Hensels the deal was off. Although the Hensels offered to reduce the price by $5,000, Billman declined, saying he still needed another $1,500. The Billmans made no effort to contact another lender, did not fund their earnest-money check, and stopped payment on it.

The Hensels sued to recover the $1,000 earnest-money deposit as liquidated damages. The trial court entered judgment for the Hensels. The Billmans appealed, arguing that their failure to obtain financing excused their performance under the contract's financing condition.

Issues

Issue #1

Whether a buyer may invoke a financing condition precedent to avoid a real-estate purchase contract without making a reasonable and good-faith effort to obtain the specified financing.

Holding

No. A clause making the purchase subject to the buyers' ability to obtain financing carries an implied duty to make a reasonable and good-faith effort to satisfy that condition.

Reasoning

The court agreed that the financing provision was a condition precedent: the Billmans' duty to complete the purchase depended on their ability to secure a conventional mortgage of at least $35,000 within thirty days. But treating the clause as a condition precedent did not permit the buyers to passively allow the condition to fail and then use that failure as an excuse.

The implied duty of reasonable and good-faith effort reflects the parties' reasonable expectations. A seller who accepts a financing contingency expects the buyer to genuinely seek the stated loan, not to retain an unrestricted option to withdraw from the transaction without pursuing financing.

The rule also follows the established contract principle that a promisor may not rely on the nonoccurrence of a condition when that promisor prevented the condition from occurring. The court distinguished Blakley v. Currence, which had declined to impose such a duty under differently worded language, and indicated that Blakley should be confined to its facts.

Issue #2

Whether the evidence supported the trial court's conclusion that the Billmans failed to make a reasonable and good-faith effort to obtain the required mortgage.

Holding

Yes. The evidence permitted the trial court to find that the Billmans did not reasonably and in good faith pursue financing and therefore could not rely on the failed condition to escape performance.

Reasoning

The Billmans contacted only one financial institution, discussed only a $35,000 loan, and never submitted a formal mortgage application. Those limited efforts supported the conclusion that they had not made a meaningful attempt to obtain the financing required by the contract.

Billman's stated reasons for withdrawing also undermined his claim that financing was genuinely unavailable. He initially said that his parents would not supply $5,000, despite having previously assured the Hensels that the buyers had the money needed to close. When the Hensels offered to lower the purchase price by that same amount, Billman said he needed an additional $1,500 instead.

Because the Hensels established the buyers' lack of reasonable and good-faith effort, the Billmans could not use the unfulfilled financing condition as a defense. The trial court's judgment awarding the Hensels the $1,000 earnest-money deposit was therefore affirmed.