Billman v. Hensel
391 N.E.2d 671 (1979)
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Rule of Law:
A 'subject to financing' clause in a real estate contract imposes an implied obligation on the buyer to make a reasonable and good-faith effort to obtain the requisite financing. A buyer cannot rely on the failure of this condition to excuse performance if the buyer's own lack of effort prevented it from being met.
Facts:
- The Hensels and the Billmans entered into a contract for the sale of a house for $54,000.
- The contract was conditioned on the Billmans' ability to secure a conventional mortgage for not less than $35,000 within thirty days.
- Mr. Billman had one informal conversation with a bank agent and was told he was $6,500 short of the required down payment.
- The Billmans never submitted a formal loan application to any financial institution.
- After Mr. Billman's father expressed disapproval of the house, Mr. Billman informed the Hensels the deal was off, claiming his parents would not loan him a necessary $5,000.
- The Hensels then offered to reduce the home's purchase price by $5,000 to resolve the stated issue.
- Mr. Billman rejected the offer, stating he still needed an additional $1,500.
- Mrs. Billman stopped payment on the $1,000 earnest money check they had provided to the Hensels.
Procedural Posture:
- The Hensels (sellers) initiated a lawsuit in a state trial court against the Billmans (buyers) to recover a $1,000 earnest money deposit.
- The Billmans defended on the grounds that their performance was excused due to the failure of the financing condition precedent.
- The trial court, sitting without a jury, entered a judgment in favor of the Hensels.
- The Billmans (appellants) appealed the trial court's decision to the Court of Appeals of Indiana (an intermediate appellate court), where the Hensels are the appellees.
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Issue:
Does a buyer's failure to make a reasonable and good-faith effort to obtain financing, as required by a 'subject to financing' clause, prevent the buyer from being excused from performance under the contract?
Opinions:
Majority - Garrard, Presiding Judge
Yes. A buyer's failure to make a reasonable and good-faith effort to obtain financing prevents the buyer from being excused from performance when the contract contains a 'subject to financing' clause. Such clauses impose an implied obligation on the buyer to make a genuine attempt to satisfy the condition. The court reasoned that a promisor cannot rely on the non-occurrence of a condition precedent to excuse performance where the promisor's own actions or inaction prevent the condition from being fulfilled. In this case, the Billmans' conduct—contacting only one bank informally, never submitting a formal loan application, and providing shifting excuses for cancellation—demonstrated a lack of a reasonable and good-faith effort to secure the mortgage. Therefore, they could not rely on the financing condition to excuse their duty to perform under the contract.
Analysis:
This decision establishes that a 'subject to financing' clause is not a unilateral escape option for a buyer. It imposes an affirmative, implied duty of good faith and fair dealing, requiring the buyer to actively and reasonably pursue financing. This precedent protects sellers from buyers who may experience 'buyer's remorse' and use the financing clause as a pretext to exit a binding contract without making a genuine effort to fulfill its terms. The ruling reinforces the contract law principle that a party cannot take advantage of a condition's failure if that party is responsible for it.
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