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Ross v. Bumstead

Arizona Supreme Court
65 Ariz. 61, 173 P.2d 765 (1946)
ELI5:

Rule of Law:

Under the doctrine of equitable conversion, once an unconditional contract for the sale of real property is executed, the vendee is considered the equitable owner and bears the risk of loss if the property is accidentally destroyed before the transfer of legal title.


Facts:

  • On October 21, 1942, a vendor and a vendee entered into a contract for the sale of a property known as the 'Arizona Orchard' for $75,000.
  • The contract provided that all income and charges against the property would be adjusted as of the date of the agreement, even though possession would transfer later.
  • The vendee made an initial deposit of $5,000.
  • On October 29, 1942, eight days after the contract was signed, a packing plant and warehouse on the property were destroyed by fire.
  • At the time of the fire, the vendee had not taken physical possession of the property and was in another state.
  • The vendee requested that the vendor make an adjustment for the loss, but the vendor refused.
  • Following the vendor's refusal, the vendee stopped payment on the deposit check and refused to complete the purchase.

Procedural Posture:

  • The vendor (plaintiff) filed an action in the trial court against the vendee (defendant) to recover damages for breach of contract.
  • The defendant pleaded the defense of partial failure of consideration.
  • The trial court entered a judgment in favor of the plaintiff.
  • The defendant (appellant) appealed the judgment to this court.

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Issue:

Does the risk of loss for property destroyed after an unconditional sales contract is signed, but before possession and legal title are transferred, fall upon the vendor (seller)?


Opinions:

Majority - Farley, Superior Judge

No. The risk of loss falls upon the vendee (buyer), not the vendor (seller). The court determined the contract was unconditional, merely an executory contract with performance suspended to a future time. By reaffirming the majority rule derived from Paine v. Meller, the court held that the doctrine of equitable conversion applies. Under this doctrine, upon execution of an unconditional contract, the vendee becomes the equitable owner of the property, while the vendor holds only bare legal title in trust. The beneficial incidents of ownership, such as the right to income and the responsibility for charges, passed to the vendee as of the contract date, and therefore, the risk of accidental loss also passed to the vendee at that time. The court noted this is the common law rule, which Arizona is bound to follow.



Analysis:

This decision solidifies Arizona's adoption of the majority rule on risk of loss, placing it firmly in the camp of states that follow the doctrine of equitable conversion. The ruling establishes that risk transfers to the buyer upon signing an unconditional contract, not upon the transfer of possession or title. This has significant practical implications, obligating buyers to secure insurance on a property immediately upon contract execution to protect their interest. The decision rejects the minority view that an implied condition of the contract is the continued existence of the property, thereby clarifying for future litigants that the burden of loss lies with the equitable owner.

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