Differentiating Installment Contracts from Earnest Money Contracts: Property & Contract Im, Study notes of Law

Download Differentiating Installment Contracts from Earnest Money Contracts: Property & Contract Im and more Study notes Law in PDF only on Docsity! Real Estate Contracts and the Doctrine of Equitable Conversion in Washington: Dispelling the Ashford Cloud Linda S. Hume* I. INTRODUCTION The installment real estate contract is often called the "poor man's mortgage."' Historically, it was used by sellers to finance land sales when there was no institutional funding avail- able or when the buyer could not meet institutional lender crite- ria for funding. Once again, due to high interest rates and the unavailability of institutional funds, sellers are financing prop- erty sales with the poor man's mortgage. Given the long history and recent increased use of the installment real estate contract (hereinafter referred to as the "installment contract"), it might be expected that the underly- ing doctrine was well-understood and furnished a high degree of certainty and predictability to the parties. Sadly, this is not so. Much confusion exists in Washington law about the nature of the respective interests of the buyer and seller in property that is subject to an installment land contract. Most of the confusion results from one line of decisions that held that the buyer had no interest, legal or equitable, in property being purchased under an installment contract containing a forfeiture clause.' This line, of course, includes the infamous Ashford v. Reese.3 Ashford was overruled after fifty years of making mischief. The Ashford legacy, however, still causes confusion about whether Washington courts apply the doctrine of equitable conversion. It is also still unclear which legal principles Washington courts * Visiting Professor of Law, University of Puget Sound School of Law, 1983-84. Pro- fessor of Law, University of Washington School of Law. California State College at Los Angeles, B.A., 1967; U.C.L.A., J.D., 1970. 1. The installment contract is a seller-financing device with seller retaining legal title as security for payment of the purchase price. 2. See infra text accompanying notes 8-13. 3. 132 Wash. 649, 233 P. 29 (1925), overruled, Cascade Sec. Bank v. Butler, 88 Wash. 2d 777, 567 P.2d 631 (1977). 233 234 University of Puget Sound Law Review should use to solve real estate contract problems. In addition to the confusion created by Ashford, further confusion results from the failure to distinguish between the installment contract, wherein seller retains legal title as security for performance, and the marketing or earnest money contract, wherein the parties intend that title will be transferred to the buyer after a short closing period. The installment contract resembles a mortgage because it divides the incidents associated with property ownership between the parties to the contract.4 Typically, however, the earnest money contract does not give any incidents of ownership to the buyer. Yet, in cases involving both kinds of contracts, courts often decide cases by applying property labels without considering relevant contract doctrine. It is the principal thesis of this article that property and contract questions should not be solved independently and are most usefully approached in a distinct order. Because the installment contract divides the incidents of property ownership usually associated with legal title between the parties to the con- tract, it should be treated differently than the earnest money contract in which the incidents of ownership are not divided. In addition, it is important to first answer some remedial questions before proceeding to make decisions about the property interest of each party to the contract. To support this thesis, this article will explain in detail how the Ash ford legacy has affected the treatment of real estate contracts in Washington. It will then compare the Washington approach with the doctrine of equita- ble conversion. Finally, it will suggest an analysis for real estate contract problems and apply that analysis to some remaining problem areas. II. THE FORFEITURE CLAUSE AND EQUITABLE CONVERSION Prior to the appearance of the Ashford line of cases, the Washington Supreme Court had developed a consistent approach to real estate contracts. The decisions recognized that both parties to the contract had equitable interests with respect to the property.5 Moreover, legal and equitable remedies attend- 4. See infra text accompanying notes 48-69. 5. Taylor v. Interstate Inv. Co., 75 Wash. 490, 493-94, 135 P. 240, 241-42 (1913). See also Barton v. Tombari, 120 Wash. 331, 207 P. 239 (1922), afl'd, 124 Wash. 696, 213 P. 1119 (1923); Conelly v. Malloy, 106 Wash. 464, 180 P. 469 (1919); Jackson v. White, 104 Wash. 643, 177 P. 667 (1919). [Vol. 7:233 Dispelling the Ashford Cloud will illustrate the difficulty of placing a label on an interest that amounts to less than the full panoply of rights we associate with legal title. The law of property jealously guards the formalities accom- panying the transfer of property, particularly real property, lest that bundle of rights we call "ownership" will not be acquired." Without appropriate transfer, a buyer is left without rights to the property; she has only contract or tort claims. A contract claim can, of course, ultimately lead to a transfer of full legal ownership to the buyer, because specific performance is rou- tinely awarded in cases where the subject matter of the contract is real property.'6 In order to obtain specific performance, how- ever, a buyer must tender her own promised performance and pay the entire purchase price.' 6 This is the typical earnest money situation. There is usually no need to worry about whether a buyer has rights in the property under this agree- ment, because such rights can be acquired as described above. More importantly, a buyer will not usually receive any of the usual incidents of real property ownership under the terms of an earnest money agreement. The installment contract presents a different problem. Because legal title, together with the incidents of ownership it represents, remains in the seller, the formalities of legal transfer have not been observed, and theoretically the buyer can have no legal interest in the property.17 Nonetheless, it is common to transfer such important incidents of property ownership as the right to possession to the installment buyer under the real estate contract itself. The buyer is not, however, in a position to require formal transfer of any property rights associated with the incident of ownership because part of the buyer's own per- formance is still owed to the seller. 8 14. 2 J. POMEROY, supra note 13, § 366. 15. RESTATEMENT (SECOND) OF CONTRACTS § 359 (1979) [hereinafter cited as RESTATEMENT]; 5A A. CORBIN, CORIN ON CONTRACTS § 1143 (1964). 16. Tender is required as a concurrent condition. RESTATEMENT, supra note 15, § 234; 3A A. CORBIN, CORBIN ON CONTRACTS § 689 (1960); Reese v. Westfield, 56 Wash. 415, 419, 105 P. 837, 839 (1909). 17. Without legal title neither the common-law real action nor the "modern" eject- ment action could be maintained. 2 J. POMEROY, supra note 13, § 366. Therefore, equity became the only available forum. 18. A distinction was drawn, therefore, between a seller seeking forfeiture after a default in intermediate installments, and a seller seeking forfeiture after a default in the last installment. The latter was required to tender the deed representing her perform- ance as a condition to forfeiture. Reard v. Ephrata Orchards, 78 Wash. 180, 185, 138 P. 1984] 238 University of Puget Sound Law Review [Vol. 7:233 If the parties to the contract agree to divide the incidents of ownership between the seller and the buyer over a period of time, it is incorrect to think of the seller as the "owner" of the property; some of the most important attributes of that owner- ship have been transferred to someone else. It is similarly inap- propriate in property terms to think of the purchaser as the "owner," because the purchaser has only some of the rights asso- ciated with ownership, not the full panoply of rights the law rec- ognizes as legal ownership. The real problem then with the installment contract is that the property concepts associated with it do not work well. The parties have contractually divided the usual incidents of property ownership between themselves; yet property concepts appear to demand that we apply the label "owner" to one or the other, but not to both. The question of who shall be treated as the owner of prop- erty subject to a real estate contract is compounded by the pres- ence of a forfeiture clause. The attributes of ownership that have been transferred to the buyer may be lost if the seller exer- cises the contractual right to terminate them under the forfei- ture clause.1 e The substantial property rights already transferred are then subject to sudden and complete extinction. Put more 678, 680 (1914). This position has been rigorously criticized as a misapplication of theory. A seller seeking forfeiture is declaring that the contract is at an end and is seeking to keep the contract payments previously made as liquidated damages. Tender should be required only when the seller wants specific performance on the ground that it is inequi- table to permit the seller to have both the land and the purchase price. 3A A. CosmN, supra note 16, § 689 (1964). 19. Where seller keeps legal title as security for performance of an installment con- tract, she has an equitable right, derived from the legal title, to compel the buyer to perform the contract by paying the purchase price or to bar the buyer's rights under the contract. 3 AMzmcAN LAW Or PROPERTY, supra note 13, § 11.73. The device used to accomplish this was foreclosure of the vendor's lien in equity. Foreclosure resulted in removing the cloud on title represented by the buyer's "equity" or the right to complete performance of the contract. The buyer's interest in an installment contract was fore- closed regularly in early Washington cases. Aylward v. Lally, 147 Wash. 29, 264 P. 983 (1928); Barton v. Tombari, 120 Wash. 331, 207 P. 239 (1922); Roy v. Vaughan, 100 Wash. 345, 170 P. 1019 (1918); Taylor v. Interstate Inv. Co., 75 Wash. 490, 135 P. 240 (1913); St. Paul & Tacoma Lumber Co. v. Bolton, 5 Wash. 763, 32 P. 787 (1893). These cases proceeded either on the theory that the seller's equitable lien was being foreclosed, or that the contract itself was being foreclosed as an "equitable mortgage." Foreclosure by sale was ordered and deficiency judgments were awarded following the sale. See, e.g., Roy v. Vaughan, 100 Wash. 345, 170 P. 1019; Aylward v. Lally, 147 Wash. 29, 264 P. 983. Forfeiture is foreclosure of the vendor's lien by operation of a condition subse- quent-the forfeiture clause-contained in the contract. 3 AMEmCAN LAW OF PROPERTY, supra note 13, § 11.76. See also infra note 94 for a discussion of the way Ashford affected foreclosure of the vendor's lien. Dispelling the Ashford Cloud starkly, we are simply not accustomed to thinking that someone has "property" if it can be lost by the exercise of a "mere" con- tract right. B. A Comparison of the Doctrine of Equitable Conversion and Ashford The doctrines developed by courts of equity and Ashford approached this problem of contractually divided incidents of ownership in diametrically opposed ways. Equity courts, by means of the doctrine of equitable conversion, transferred com- plete ownership rights to the purchaser;'* Ashford transferred none.21 The history and development of the doctrine of equita- ble conversion provide a clue to the reason for equity's approach to the problem of ownership. The doctrine of equitable conversion was a fiction invented by the English courts of Chancery to deal with a problem spe- cific to property.22 If either party to a land sale contract died while the contract was executory, it was necessary to settle the question of whether the decedent had real or personal property. This question required an answer because legal title to real property descended to the party's heirs or devisees upon the party's death. By contrast, personal property passed to the per- sonal representative of the decedent's estate. For example, the seller's heirs or devisees were not parties to the contract and not necessarily bound to perform it. At the same time, the purchaser was an "innocent party" who presumably should not lose the right to continue performance of the contract and receive what had been bargained for-the property. On the other side of the coin, it was necessary to determine who had the right to receive the purchase money if the contract was performed, the heirs or devisees or the personal representative of the deceased seller's estate. 2 20. 3 AMEmcAN LAW OF PROPERTY, supra note 13, § 11.22. 21. "[W]e have consistently held in numerous cases that an executory contract of sale in this state conveys no title or interest, either legal or equitable, to the ven- dee. . . ." Ashford, 132 Wash. at 650, 233 P. at 30. 22. See generally 3 AMERICAN LAW OF PROPERTY, supra note 13, § 11.22. The doc- trine began in the early seventeenth century and "reach[ed] logical symmetry some two hundred years later in the decisions of Lord Eldon. . . ." Id. 23. In equitable conversion states, equitable interests in land devolve as land to the purchaser's heir or devisee. Id. § 11.27. There is a split of authority on the question of whether the heir or devisee is entitled to have the contract balance paid out of the per- sonal assets of the estate. See generally Annot., 4 A.L.R. 3d 1023 (1965). But see In re 19841 242 University of Puget Sound Law Review Washington Supreme Court has refused to adopt the doctrine of equitable conversion, it has consistently described the seller's interest in the property in the same way the interest is described in equitable conversion states.8 0 Therefore, it seems safe to say that neither principle is actually reflected in the cases. Neither the doctrine of equitable conversion nor the refusal to recognize any property interest in the purchaser is a particu- larly satisfactory approach for solution of all real estate contract problems. Both are all-or-nothing solutions to problems that are not all-or-nothing problems. The doctrine of equitable conver- sion was designed to answer questions that required distinctions between real and personal property. It was applied to answer questions other than the real property-personal property ques- tion because the "conversion"-the transfer of beneficial owner- ship-was broad enough to permit it. The Ashford approach was similarly inappropriate when in fact some of the incidents of ownership had been transferred to the buyer. Equitable conver- sion and its Ashford mirror image have almost no theoretical connection with the way courts do or ought to solve real estate contract problems where the incidents of ownership have been divided between the parties. Part of the unsuitability of the doctrine of equitable conver- sion may be traced to its theoretical underpinnings. It rests on the equitable maxim that equity "regards that as done which ought to be done," 81 as well as on the presumed intention of the parties. What ought to be done and what the parties likely con- heirs); accord, In re Kuhn's Estate, 132 Wash. 678, 680-81, 233 P. 293, 294 (1925). The broad statements made in Tieton and Kuhn's Estate were disapproved in In re Marriage of Harshman, 18 Wash. App. 116, 124, 567 P.2d 667, 672 (1977). 30. The seller's right to receive contract payments is personal property, and is sepa- rate and distinct from the naked legal title retained as security. Freeborn v. Seattle Trust & Say. Bank, 94 Wash. 2d 336, 340-41, 617 P.2d 424, 426-27 (1980). The decedent seller's interest in property under contract was personal property. In re Estate of Eilermann, 179 Wash. 15, 18, 35 P.2d 763, 765 (1934). Indeed, the court had held, just two years prior to Ashford, that a seller held the land in trust for a buyer whose contract was not in breach. Culmback v. Stevens, 158 Wash. 675, 680-81, 291 P. 705, 707 (1930). The court never repudiated this position, even after overruling Ashford, and has always described the seller's interest in terms identical to the terms used in the doctrine of equitable conversion. See also Meltzer v. Wendell-West, 7 Wash. App. 90, 497 P.2d 1348 (1972); Biehn v. Lyon, 29 Wash. 2d 750, 189 P.2d 482 (1948). Nonetheless, in Cascade Bank, 88 Wash. 2d 777, 567 P.2d 631, the court refused to adopt the doctrine of equita- ble conversion. See also Reed v. Eller, 33 Wash. App. 820, 827, 664 P.2d 515, 518 (1983)(holding that vendees do not become bona fide purchasers until they have paid the contract price, thus acquiring legal title). 31. 2 J. POMEROY, supra note 13, §§ 363-77, at 8. [Vol. 7:233 Dispelling the Ashford Cloud templated when they entered the contract was performance. Therefore, equity would treat any contract that it could order to be specifically performed as if it had been performed.3 2 This idea excluded from the conversion theory any contract that was defective because it had not been properly formed,83 for exam- ple, oral contracts that violate the Statute of Frauds. At the other end of the continuum, it clearly included any contract that was already completely performed.3 4 Equity courts would rarely order specific performance of a defectively formed contract, and would nearly always order specific performance of a contract that had been completely performed by the buyer. The difficulty with the doctrine lay in the stages in between those contracts where neither party had performed (most frequently, the earnest money contract) and contracts where part performance was still owed (the installment contract). Some of these contracts would be performed; some would not. There was no way to tell at the time the court was presented with a problem, other than current default of one of the parties, whether specific performance would ultimately be appropriate. The Washington court simply refused to consider the in- betweens. A purchaser could not have specific performance, and therefore could have no interest in the property, until the pur- chaser's full performance had been tendered.3 5 Jurisdictions fol- lowing the doctrine of equitable conversion had difficulty with the in-betweens as well. Because the doctrine of equitable con- version took effect immediately upon concluding an enforceable contract,3 6 equitable conversion transferred all of the incidents of ownership to the purchaser before the actual transfer, in some instances, of any of the incidents of ownership.37 32. Id. at 14-17. 33. 3 AMERiCAN LAW OF PROPERTY, supra note 13, § 11.24. 34. Because land is unique, a contract for its sale may always be specifically per- formed. See RESTATEMENT, supra note 15, at 126-27. 35. Ashford v. Reese, 132 Wash. 649, 233 P. 29 (1932). 36. 3 AMERICAN LAW OF PROPERTY, supra note 13, §§ 11.22-.24. 37. For example, the risk of loss would shift to the buyer before transfer of posses- sion, or any other incident of ownership. 3 AMEmCAN LAW OF PROPERTY, supra note 13, § 11.30. See also 7 S. WEuLISTON, A TREATISE ON THE LAW OF CONTR cTS §§ 931-43 (W. Jaeger 3d ed. 1963) for an in-depth discussion of risk of loss in installment contracts. 19841 243 244 University of Puget Sound Law Review Scholars such as Langdel 8 and Stone 9 demonstrated that the property theory underlying equitable conversion did not work well when a court could not determine whether a specifi- cally enforceable contract would result at the time of suit."' It often produced inequitable results in cases where none of the incidents of ownership had been transferred to the buyer.41 Con- versely, Washington courts quickly discovered that the doctrine, or at least the notion behind it, separating real and personal property where required, had some real utility.4 2 As the years passed, the decisions in fact treated the seller's interest as per- sonal property and recognized that a buyer who had some of the incidents of ownership indeed had an interest in the property. 43 Jurisdictions following the doctrine of equitable conversion made similar retreats from strict application of the doctrine and recognized exceptions to deal with the in-between problems. 4' In Cascade Security Bank v. Butler," the decision overrul- ing Ashford, the court refused to adopt the doctrine of equitable conversion as a rule of decision or even as a rule for guidance in resolving future questions that might arise in the vendor-pur- chaser relationship. This author believes that that was a wise course of action, because neither approach faces the problem of divided incidents of ownership present in the installment con- tract setting. In addition, adopting the doctrine would have thrown into question over fifty years of prior decisions that had eroded the extreme statements in Ashford and had delineated the rights and liabilities of buyer and seller in specific situations, both as between themselves and between each of them and third parties." 38. "Langdell's elaboration of the doctrine of equitable conversion, which is the clas- sic American exposition from a theoretical standpoint, is as much legal geometry as is Fearne's famous Essay." 3 AMERICAN LAW OF PROPERTY, supra note 13, § 11.22, at 64 (quoting C. LANGDELL, A BRIEF SURVEY OF EQUITY JURISDICTION (2d ed. 1908)). 39. Stone, Equitable Conversion by Contract, 13 COLUM. L. REV. 369 (1913). 40. An option setting is one example. Id. at 375-80. 41. An example is the typical earnest money situation where risk of loss is trans- ferred to the buyer from the moment a binding agreement to purchase is entered into. See S. WILLISTON, supra note 37, § 931. 42. For example, the doctrine is useful in deciding the nature of a decedent's inter- est at death. In re Estate of Eilerman, 179 Wash. 15, 35 P.2d 763 (1934). 43. See supra notes 29-30. 44. For example, at least five different views have developed on how to allocate for- tuitous losses between the parties. 3 AMERICAN LAW OF PROPERTY, supra note 13, § 11.30. 45. 88 Wash. 2d 777, 567 P.2d 631 (1977). 46. Hume, Incidents of the Vendor-Purchaser Relationship (Equitable Conver- sion), 2 WASHINGTON REAL PROPERTY DESKBOOK ch. 36 (1980). Reasonable minds do dif- [Vol. 7:233 Dispelling the Ashford Cloud including possession, because the seller holds legal title.59 Equity gradually relieved common-law mortgagors from the harshness of losing their land for delays in meeting the payment called for by the mortgage contract.60 Courts frequently granted a grace period within which the borrower could pay the debt and recover or "redeem" the land. At first, the right was granted only in cases where other equitable grounds for relief were shown by the borrower.0 " Finally, however, the grant of a grace period was so common that the mortgagor was described as hav- ing an "equity of redemption." The equity of redemption was in theory full equitable ownership of the property securing the debt.62 The idea that the incidents of ownership normally associ- ated with legal title were not held solely by the lender-mortga- gee but rather had been divided between the lender and the bor- rower developed along with the equity of redemption. Central to this recognition was equity's insistence that the land was only security. It did not, therefore, seem appropriate that the lender who held legal title to the property only as security should have all of the associated incidents of ownership. Increasingly, equity found that the borrower-mortgagor rather than the lender-mort- gagee had the right to important incidents of ownership such as possession." Washington courts also began to relieve installment con- tract buyers from forfeiture by granting them a grace period within which to bring payments current, or to pay the entire purchase price and receive the land.' Also apparent from the cases is a steady trend increasing the property rights of install- ment contract buyers." Although only one case characterizes the 59. See Welch v. Hover-Schiffner Co., 75 Wash. 130, 134 P. 526 (1913). See gener- ally 3 AmmucAN LAW OF PROPERTY, supra note 13, § 11.25. 60. 4 J. POMEROY, supra note 13, § 1180. 61. G. OSBORNE, supra note 47, § 6. 62. 4 J. POMEROY, supra note 13, §§ 1180-81. 63. Id. § 1181. 64. The theory is that the seller has waived the right to insist on strict performance in accordance with the "time is of the essence" clause if the seller has accepted late payments. The seller must then give the buyer notice of intention to insist on strict performance and an opportunity to cure defaults. Douglas v. Hanbury, 56 Wash. 63, 66, 104 P. 1110, 1112 (1909). See also Bulmon v. Bailey, 22 Wash. 2d 372, 377, 156 P.2d 231, 233 (1945), and Shaw v. Morrison, 145 Wash. 420, 424-25, 260 P. 266, 266-67 (1927). A buyer is not automatically entitled to the grace period within which to cure, but the cases granting an opportunity to cure on waiver grounds are legion. 65. See supra note 29. 1984] 248 University of Puget Sound Law Review buyer's interest as full equitable ownership," others describe the buyer's property as "the beneficial interest and real ownership of land. ' '" 7 Recent cases also note the security function served by the installment contract." Equity courts' recognition of rights in a borrower whose lender held legal title to the property securing repayment of the debt had, of course, absolutely nothing to do with the doctrine of equitable conversion." Washington courts, also totally with- out use of the doctrine, recognized that installment contract buyers have rights associated with real property in much the same way the equity courts increased those of the mortgagor.70 This author suggests, therefore, that judicial recognition of the installment contract buyer's rights in Washington is due to tacit recognition that the installment contract buyer, like the com- mon-law mortgagor, is intended to enjoy the beneficial use of the property during the life of the contract. It is not due to the coin- cidence that the doctrine of equitable conversion also trans- ferred beneficial ownership of the property under contract to the buyer. The mortgage analogy, particularly its security underpin- ning, should not be carried too far. The installment real estate contract has unique features that must be recognized for mean- ingful problem-solving. First, there are different kinds of con- tracts, and all contracts, in some sense, function as security for buyer's promises. The contracts may be distinguished, however, because some, principally installment contracts, divide incidents of ownership associated with real property between the parties. Others, such as the typical earnest money contract, do not. Whether the buyer has one of these incidents of ownership should be significant in deciding whether the buyer has the 66. Snuffin v. Mayo, 6 Wash. App. 525, 528, 494 P.2d 497, 499 (1972). 67. Committee of Protesting Citizens v. Val Vue Sewer Dist., 14 Wash. App. 838, 842, 545 P.2d 42, 44 (1976). See also Pratt v. Rhodes, 142 Wash. 411, 416, 253 P. 640, 641 (1927), where the purchaser's interest was characterized as an "equitable interest," and Freeborn v. Seattle Trust, 94 Wash. 2d 336, 340, 617 P.2d 424, 427 (1980), where the court states that in Cascade Bank it characterized the purchaser's interest as "real property." 68. Freeborn v. Seattle Trust, 94 Wash. 2d 336, 617 P.2d 424 (1980); Terry v. Born, 24 Wash. App. 652, 604 P.2d 504 (1979). 69. The equitable maxim supporting intervention in the common-law mortgage was that equity "regarded form rather than substance." This was a specialized application of the equitable maxim that underlay equitable conversion, "equity regards that as done which ought to be done." 2 J. POMEROy, supra note 13, § 376. 70. See supra note 29. [Vol. 7:233 Dispelling the Ashford Cloud property right or duty associated with it. Second, breach of a real estate contract entitles the nonbreaching party to a remedy that may affect the initial contractual division of incidents of ownership. IV. SEPARATING CONTRACT QUESTIONS FROM PROPERTY QUESTIONS Both the doctrine of equitable conversion and its Ashford mirror image failed to consider the actual contractual provisions when attempting to decide which party had a right or duty asso- ciated with the real property that was the subject of the con- tract. However, there is no particular need to recognize property rights in a purchaser unless the contract itself allocates to the purchaser some incident of ownership associated with the prop- erty right. Consequently, the first inquiry should be the terms of the contract itself. If the contract has transferred an incident of ownership, such as possession, to the buyer, any property right attendant upon possession should likewise be transferred. Next, a court must consider the status of the contract. If the contract has been breached and the remedy for that breach terminates the contract, the contract allocation of incidents of ownership should be disregarded. Finally, the labels "real" and "personal" property should be avoided unless there is a willingness to acknowledge that these labels may change along with changes in the status of the contract. A. Contract Allocation of the Incident of Ownership Some of the post-Ashford courts struggled with the question of whether to permit contract purchasers to exercise a right nor- mally dependent upon the legal ownership of real property, such as the right to sue a trespasser.7 1 In these cases, defendants uni- formly cited the broad statements in Ash ford and argued that purchasers did not have a property interest sufficient to support the suit.72 Although not explicit in the opinions, in each case the court looked to the manner in which the contract allocated the incident of ownership in question and permitted the party to whom the critical incident was given to maintain suit. 71. Kateiva v. Snyder, 143 Wash. 172, 254 P. 857 (1927). 72. See supra note 29. See generally Hume, Incidents of the Vendor-Purchaser Relationship (Equitable Conversion), 2 WASHMGTON REAL PROPERTY DESK BOOK ch. 36 (1980). 1984] 249 252 University of Puget Sound Law Review of the doctrine of equitable conversion in some states.88 The fact that Mrs. Reese had the risk of loss under the sug- gested analysis does not necessarily mean that she could not have the relief she sought. If the loss caused a breach of con- tract, Mrs. Reese was entitled to an appropriate remedy. The remedy might affect who ultimately would bear the risk of loss, but it would do so for reasons other than the formalistic applica- tion of property labels. In addition, the remedy requested in a particular case can and should affect the ultimate allocation of benefits and burdens between the parties to the contract, as well as the rights of third parties vis-a-vis the parties to the contract. B. The Status of the Contract or "The Remedial Connection" The status of the contract is very important. Most cases are presented to courts in the context of a breach for which a rem- edy is sought. If a court determines that the appropriate reme- dial award terminates the contract, all of the incidents of owner- ship may be reassociated with legal title. This may extinguish any property interest in the buyer and change the characteriza- tion of the nature of the seller's interest from personal to real property.8 9 Because the property labels may change with changes in the status of the contract, it is important to decide the remedial question first. Again, the Ashford facts can be used to test the analysis. Mr. Ashford could no longer deliver his promised performance because of the destruction of part of the subject matter of the contract. Leaving aside property labels, he would either be excused from performing his obligation on grounds of impracti- cability of performance, 0 or be in breach. If his duties were excused, Mrs. Reese was entitled to suspend her own perform- ance.9 If in breach, Mrs. Reese could suspend her performance if the breach was material, and seek restitution of payments pre- 88. 3 AMERICAN LAW OF PROPERTY, supra note 13, § 11.30. 89. A similar process, called "reconversion," existed in conjunction with the doctrine of equitable conversion. When an equitable conversion had been effected by instructions in a will to sell real property and distribute the money, the beneficiaries could, under appropriate circumstances, elect to take the property in its unconverted form. This elec- tion resulted in a reconversion of the property into its original form. 4 J. POMEROY, supra note 13, §§ 1175-78; Annot., 130 A.L.R. 1379 (1941); see, e.g., Estate of Morgan, 568 P.2d 892 (Wyo. 1977). 90. RESTATEMENT, supra note 15, § 263. 91. Id. §§ 267-68. [Vol. 7:233 Dispelling the Ashford Cloud viously made on the contract.2 If restitution was awarded, Mr. Ashford would suffer the loss because of the status of the con- tract, not because he held legal title. If, however, the breach was not material, the contract was still in effect. Mrs. Reese would have the risk of loss because she had possession. She might be entitled to damages for the loss, such as an abatement of the purchase price, but this would be because of the breach of the contract and not because Mr. Ashford had the risk of loss. 93 It is especially important to determine the status of the con- tract when exercise of a forfeiture remedy is claimed. Proper exercise of the forfeiture clause terminates the buyer's right to continue performance and ends the contract.9 4 Once the contract is ended, all incidents of ownership are reassociated with legal title. It is then inappropriate after forfeiture to recognize a prop- erty interest in the buyer or any interest in any third party that was dependent upon the buyer's property interest. Cascade Security Bank v. Butler95 serves as an example of the difficulty that could be encountered unless a determination of the propriety of forfeiture is made before deciding the nature and extent of property interests. The Cascade Bank court held that a purchaser under a partly performed installment contract had "real estate" within the meaning of the judgment lien stat- ute.9 6 This is appropriate because if the contract is completed the buyer will have full legal ownership of the property involved. The buyer's creditor should be able to establish its priority on 92. Id. §§ 237, 241. 93. E.g., Capital Say. & Loan Ass'n v. Convey, 175 Wash. 224, 27 P.2d 136 (1933). The author does not suggest by this analysis that the applicable contract doctrine is "better," or more likely to produce certainty. What is suggested, however, is that use of these rules, rather than property labels, is more likely to take account of the actual cir- cumstances of the parties and therefore, is more likely to produce fair results. . 94. 3 AMERICAN LAW OF PROPERTY, supra note 13, § 11.76, at 191. In theory, forfei- ture is foreclosure of the vendor's lien by operation of a condition subsequent contained in the contract. The vendor's lien, in the retained title situation, is an equitable right, derived from legal title to compel the buyer to perform the contract by paying the purchase price or bar the buyer's rights under the contract. Id. This should be distin- guished from the vendor's lien sometimes claimed after legal title has been transferred in order to give the unpaid seller priority over others by means of a lien on the property transferred. The latter has been disapproved of in Washington because it is a "secret" lien and because the seller has the remedy of execution against the land after securing a judgment for the purchase price. Smith v. Allen, 18 Wash. 1, 50 P. 783 (1897). See also Shelton v. Jones, 4 Wash. 692, 30 P. 1061 (1892) for a good discussion of the distinction between the vendor's lien and the equitable lien arising from a title retention contract. 95. See supra note 45 and accompanying text. 96. 88 Wash. 2d 777, 567 P.2d 631. 25319841 254 University of Puget Sound Law Review this asset at the time of judgment and recover its judgment against the buyer's equity in the event that the buyer sells her interest prior to completion of the contract. If, however, the buyer's rights are extinguished by appropriate forfeiture, the judgment creditor's lien should also be extinguished." C. Application of the Analysis A recent decision contains facts permitting application of all of the elements of analysis previously discussed. It is also an excellent example of the confusion that lingers despite the over- ruling of Ashford. In Reed v. Eller," the parties entered into a real estate purchase agreement that was called an "earnest money." This agreement provided that a standard installment contract would be entered into by the parties when the contract balance had been reduced to a specific amount. 9 Although this agreement was called an "earnest money" contract, it gave pos- session to the buyer, permitted payment of the purchase price in installments through an escrow agent, and contained a forfeiture clause. When the buyer fell behind in payments, the sellers attempted to exercise their rights under the forfeiture clause and resold the property, again on an installment contract, to other buyers. The Washington Court of Appeals applied the waiver and estoppel rules normally applied to forfeiture of standard install- ment contracts, despite the fact that the parties had called their agreement an "earnest money." The court was clearly correct in so holding. It recognized that the parties had allocated the inci- dents of ownership between themselves in a manner more like the standard installment contract than the typical earnest money. The court then ruled that the sellers had improperly 97. This follows from the general principle that a creditor acquires no greater right in an asset than is possessed by its debtor. Vandin v. McCleary Timber Co., 157 Wash. 635, 289 P. 1016 (1930). Any attempt to decide the creditor's interest in the property without first determining the status of the contract could result in giving the creditor greater rights in the property than its debtor possesses. For example, the lien of the creditor on the real estate of the seller disappears when the contract is performed, and apparently will not attach at all if the contract has been fully performed prior to the docketing of the judgment or execution under the statute. Heath v. Dodson, 7 Wash. 2d 667, 110 P.2d 845 (1941) (dicta). The statute construed in Cascade Bank has been amended to provide that the vendor's interest is not real estate within the meaning of the statute. 1983 Wash. Legis. Serv. ch. 45, 1st Ex. Sess. (West). 98. 33 Wash. App. 820, 664 P.2d 515 (1983). 99. Id. at 821-22, 664 P.2d at 516. [Vol. 7:233