Downing v. Stiles
635 P.2d 808, 1981 Wyo. LEXIS 385, 32 U.C.C. Rep. Serv. (West) 995 (1981)
Rule of Law:
The doctrine of commercial frustration applies to discharge a party from contractual duties only if a supervening event, whose non-occurrence was a basic assumption of the contract, substantially frustrates the party's principal purpose for the contract, and the risk was not expressly or impliedly assumed. Furthermore, attorney fees, even when contractually provided for, must be supported by evidentiary proof of their reasonableness.
Facts:
- Charles and Christine Downing (Appellants) owned a retail liquor business, Rustler Bar, and were partners with Janice Stiles (Appellee-defendant) in a restaurant business, Maverick Recreation Center, located in the basement of the Downings' building.
- Much of Maverick's business resulted from patronage by Rustler Bar's customers.
- The Downings sold Rustler Bar and the building to Dennis D. Morris.
- On June 12, 1976, the Downings sold their half interest in Maverick, including fixtures and inventory, to Stiles for $25,000, to be paid in semi-annual installments.
- As part of the sale, Stiles executed a promissory note for $25,000 at 10% interest and an unrecorded chattel mortgage on the fixtures and inventory to the Downings, and agreed to maintain "adequate" casualty insurance on the fixtures and inventory with proceeds payable as interests appeared.
- Stiles obtained a five-year lease for the basement space from Rustler Bar and insured the fixtures and inventory for $25,000, but the policy did not name the Downings as a loss payee.
- On April 17, 1978, Stiles gave a promissory note for $6,625 at 10% interest to Security State Bank of Basin (Bank) and recorded a security agreement covering Maverick's equipment.
- Rustler Bar's business declined and ceased operations in June 1978.
- Stiles stopped making payments on her note to the Downings on December 12, 1978.
- On January 21, 1979, a fire destroyed the building and its contents.
Procedural Posture:
- Charles and Christine Downing filed an amended complaint against Janice Stiles for the balance due on her promissory note and against Stiles, Security State Bank, and Firemen's Insurance Company of Newark, New Jersey (insurance company) to claim the proceeds of the fire insurance draft.
- The parties stipulated to deposit the insurance proceeds draft into an interest-bearing court account, subject to court judgment or mutual agreement, and the insurance company was dismissed as a defendant.
- Security State Bank filed an amended answer and crossclaim, seeking judgment against Stiles for the amount of her note, interest, attorney fees, and costs.
- After a trial to the court, the trial court found that Stiles should be relieved of further payment on her note to the Downings under the doctrine of "commercial frustration," finding that Maverick was dependent on Rustler Bar and the value of performance was destroyed by Rustler Bar's failure.
- The trial court awarded the Downings a judgment against Stiles for $3,065.12 from the insurance proceeds.
- The trial court awarded Security State Bank a judgment against Stiles for $6,625 plus interest and $2,500 in attorney fees, all to be paid from the insurance proceeds.
- The trial court determined Stiles should receive the remainder of the insurance proceeds.
- Charles and Christine Downing appealed the trial court's judgment to the Supreme Court of Wyoming.
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Issue:
1. Did the trial court err in applying the doctrine of commercial frustration to excuse Janice Stiles from further payments on her promissory note to Charles and Christine Downing when the value of her restaurant business was allegedly destroyed by the failure of an adjacent bar? 2. Did the trial court err in allowing Security State Bank to recover attorney fees from Janice Stiles without evidentiary foundation to support the amount or reasonableness of those fees?
Opinions:
Majority - Rooney, Justice
No, the trial court erred in applying the doctrine of commercial frustration because the cessation of the Rustler Bar's business did not substantially frustrate the principal purpose of Janice Stiles' contract to purchase the restaurant, nor was the risk unforeseeable or unassumed. The court also held that the trial court erred in allowing Security State Bank to recover attorney fees without any evidentiary foundation to support their reasonableness. The Supreme Court defined the doctrine of commercial frustration as a situation where the expected value of performance is destroyed by a fortuitous event, causing an actual but not literal failure of consideration, akin to impossibility but distinct in that performance remains possible. The court adopted a six-part test for applying commercial frustration, emphasizing that the non-occurrence of the supervening event must be a basic assumption of the contract, that the event frustrated the party's principal purpose, and that the frustration must be substantial—meaning not merely making the transaction less profitable or causing a loss. If a risk was reasonably foreseeable, the promisor is generally deemed to have assumed it. Applying this test, the court found that while the contract was executory and a supervening event (Rustler Bar's cessation) occurred, and the Downings had not agreed to perform despite it, the evidence did not establish the continuation of Rustler Bar's business as Stiles' principal purpose for the contract. The restaurant continued operating for several months after the bar closed, indicating that the decline in business was a risk Stiles assumed, especially since she did not secure a contractual provision binding Rustler Bar to use Maverick's food service. The court found the frustration was not "total or nearly total" and was comparable to a business becoming less profitable, which is insufficient for commercial frustration. Regarding the insurance proceeds, the court held that while the Bank's lien claim on proceeds was valid under the UCC, and the Downings had an equitable lien on proceeds for the value of the fixtures and inventory due to Stiles' agreement to insure for their benefit, the parties' stipulation made all insurance proceeds subject to the court's disbursement based on the validity of claims. Therefore, the proceeds were subject to both the Bank's and the Downings' claims. On attorney fees, the court reiterated that fees are generally not recoverable without a statutory or contractual right. While Stiles' note to the Bank provided a contractual right, the trial court erred in awarding $2,500 without any evidence of the reasonableness of the fees. The court emphasized that damages, including attorney fees, must be proven during trial and it would be improper to provide a party with "another bite of the apple" to prove a missing element of their case on appeal.
Analysis:
This case provides critical clarification of the commercial frustration doctrine in Wyoming, specifically distinguishing it from mere economic hardship or diminished profitability. By establishing a rigorous six-factor test, the court emphasizes the high bar for proving "substantial" frustration of a "principal purpose," and underscores the importance of foreseeing and allocating business risks in contracts. Future litigants seeking to invoke commercial frustration will need to demonstrate that the frustrating event was not reasonably foreseeable and that the contract's fundamental foundation, rather than just profitability, was destroyed. The ruling also reinforces the procedural requirement for parties to present evidentiary support for attorney fee awards, even when a contractual basis for recovery exists.
