## Facts

- The Looneys sold 260 acres in Indiana to the McCords under a conditional land sales contract for $250,000, amortized over 20 years at 7% interest, with annual payments and obligations for taxes, insurance, and maintenance.
- After several years, the McCords obtained an emergency agricultural loan from the Farmers Home Administration (FmHA) of about $183,800 and granted FmHA a mortgage on the property, subordinate to the land contract; the Looneys knew of and consented to the mortgage.
- The McCords paid $123,280 to the Looneys before defaulting under the land contract.
- In the ensuing litigation, the district court calculated that only $640 of the payments reduced principal, found the buyers’ equity negligible, granted contractual forfeiture to the Looneys, awarded FmHA $640, and extinguished FmHA’s mortgage.
- FmHA appealed, arguing that forfeiture was inequitable and that foreclosure with sale was the proper remedy, particularly given evidence that the property had substantially increased in value.

## Issues

1. Whether, after default under a conditional land sales contract, a court sitting in equity should enforce forfeiture when that remedy would effectively eliminate a mortgagee’s security interest acquired with the vendor’s consent.
2. Whether foreclosure, rather than forfeiture, is the appropriate remedy when forfeiture would be disproportionately harsh and risk a windfall to the vendor.

## Decision

- The Seventh Circuit reversed the district court.
- The court held that foreclosure, not forfeiture, was the appropriate remedy under the circumstances.
- The case was remanded for proceedings consistent with a foreclosure remedy.

## Legal Principles

- Forfeiture is a harsh remedy that equity disfavors when a less drastic alternative can address the parties’ interests.
- The choice between forfeiture and foreclosure in land contract default cases must be made based on the totality of circumstances, not a mechanical focus on principal reduction alone.
- When a third-party mortgagee has obtained a security interest with the vendor’s knowledge and consent, equity weighs against using forfeiture to destroy that security interest.
- Foreclosure is generally the preferred remedy where it permits sale of the property and distribution of proceeds according to priorities, avoiding unjust windfalls and disproportionate hardship.

## Conclusion

The Seventh Circuit required foreclosure rather than forfeiture because forfeiture would have allowed the vendors to retain prior payments and recover the property while effectively wiping out a federal mortgage interest that the vendors had permitted, producing an inequitable result in light of all circumstances.


Looney v. Farmers Home Admin., 794 F.2d 310 (7th Cir. 1986)