McKinley v. Holleman

Citations: 243 Ark. 814; 422 S.W.2d 665; 1967 Ark. LEXIS 1192Docket: 5-4429

Court: Supreme Court of Arkansas; January 8, 1967; Arkansas; State Supreme Court

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Georgea Black McKinley sold a large tract of land in Jefferson County to M. H Farms, Inc. in February 1964 for $850,000, with $150,000 paid in cash and a $700,000 promissory note for the remaining balance. The note stipulated annual interest payments of $14,000 at a 2% rate from 1965 to 1969, followed by 2% of the principal plus accrued interest at a 5% rate from 1970 until the principal and accrued interest were due by March 1, 1990. Unpaid amounts would incur a 10% interest rate after 60 days of default. Payment amounts were to be adjusted based on the Consumer Price Index, with increases or decreases reflecting changes in living costs. In May 1965, M. H Farms, Inc. sold the land to Jack Osborn et al. for over twice its purchase price, but the company was later dissolved, transferring the title to its stockholders. A dispute arose over the total amount owed to McKinley; she claimed an additional $47,402.59 for the increase in the consumer price index, while the appellees contended only the $700,000 plus accrued interest was owed. This amount was placed in escrow pending judicial interpretation of the note's terms. The chancellor ruled that the cost of living adjustment provision did not apply to the prepayment of the entire purchase price and would not take effect until March 1, 1970.

The chancellor determined that the Cost of Living Index provision was not meant to alter the total purchase price of the property but solely to dictate the payment method for installment principal payments due starting in March 1970. As the provision was deemed inapplicable to the case's facts, the chancellor did not rule on its validity. The chancellor ordered the First National Bank of DeWitt to release the escrow fund to the Plaintiffs and mandated that each party bear their own costs. It was concluded that the promissory note had been fully paid, and the bank was directed to disburse the escrow account to the appellees.

On appeal, Mrs. McKinley challenged the chancellor's interpretation, arguing that the Cost of Living Index provision should have applied to the entire purchase price rather than just the method of payment for installments. The case centers on interpreting the contract language in the offer, acceptance, promissory note, and deed. The appellate court found the language was clearly understood as the chancellor had interpreted it and affirmed the decree.

The property was under a five-year lease when sold to M. H. Farms, Inc., which assumed the lease. The note specified an initial interest rate of 2% on a $700,000 principal for the first five years, transitioning to 5% on the unpaid balance thereafter, with payments on principal beginning on or before March 1, 1970. The structure aimed to ensure payments maintained equivalent purchasing power to the original $14,000, with the seller required to adjust installment payments based on changes in the Cost of Living Index. If the index decreased, the installment amounts would also decrease. Thus, except for potential adjustments based on the consumer price index, the annual principal payments would remain constant at $14,000 for the twenty-year period until 1990, when the remaining balance and interest would be due.

In the twenty-year payment period for a principal indebtedness of $700,000, annual payments, initially set at 2% ($14,000), are subject to adjustment based on fluctuations in the consumer price index (CPI). This adjustment ensures that the purchasing power of the payments remains consistent with their value at the time the note was executed. The interest rate of 5% on the remaining balance is fixed and independent of the CPI changes. The note clearly delineates two components of the installment payments: the adjusted principal payment and the accrued interest. Testimony indicates that Mr. McKinley aimed to maintain the purchasing power of these payments throughout the loan's term. Additionally, discussions between the parties acknowledged the potential for the land's sale to exceed one million dollars. If the note had been paid as agreed, the interest accrued could have totaled over half a million dollars over its duration. The appellees exercised their right to pay off the full principal before the first installment was due, leading to the affirmation of the chancellor's decree. Judge Eyed disqualified from participation.