Richmond v. Ogden Street Ry. Co.

Mr. Justice Bean, after stating the facts as above, delivered the opinion of the court. 1. The motion to strike out was properly allowed. The question in this suit is whether the notes executed by the plaintiffs in favor of the defendant and its assignor express the true contract and agreement of the parties, and, if not, whether a court of equity will, as a matter of law, afford relief. A liability of the plaintiffs for a misapplication of the trust funds or for neglect of duty is no defense in this case, nor do the facts stated constitute an estoppel. 2. The oral testimony leaves no reasonable doubt of plaintiffs’ contention that the notes do not truly express the terms of the contract and agreement of the parties. The agreement was made by Starr, acting for the trustees, and Eakin, for the defendant and its-assignor. They both testify positively and unequivocally that it was understood — 52 — and agreed between them, and was a part of the contract, that the trustees should incur no personal liability, and that they thought, as a legal proposition, that the words “as trustee of Nodine,” after the signatures, were sufficient to carry out that intention. The notes were drawn by Starr in Portland, and forwarded to Eakin, at Union, for the signature of the plaintiff Wright. When they were presented to Wright he refused to sign them until assured by Eakin that in doing so he would incur no personal liability. The defendant contends, however, that the contract under which the notes were executed is shown by certain letters introduced in evidence, and that these letters do not support the plaintiffs’ theory. After the oral agreement and understanding between Starr and Eakin, the latter requested Starr to reduce his proposition to writing, in order that he might submit it to his clients. Starr thereupon wrote Eakin a letter explaining in some detail the condition of the Nodine estate^and the necessity of taking care of certain mortgage liens, and saying: “We are able, however, to pay a third of the principal on all these small judgments and to pay you a reasonable proportion of your attorney’s fees and costs, and in full settlement of these judgments we will give you notes secured by the property in the hands of the Trustees, payable in the order in which judgments are liens upon the property. * * Upon payment of this one-third and the amount to be arranged for with yourself, and the issuance of these notes under the agreement that they were to be paid out of the Nodine property, we would expect a release of these judgments so as to free the land.” Upon receipt of this letter, Eakin prepared and forwarded letters to the defendant and its assignor, the Utah Loan & Trust Company, and other of his clients holding judgments against Nodine, wherein he explained that Nodine had made arrangements with Starr under which he had deeded his land and transferred all his personal property — 53 — to Wright and Richmond in trust for the payment of his debts; that no money had yet been realized on the property, but there was a prospect of its sale in small tracts ; that he (Starr) “cannot pay the whole of the judgments at this time, but proposes to pay us now in cash one-third of the judgments and the balance as soon as it can be made out of the land, then they want to give the note of the trustees for the balance of the judgment, payable out of the land as soon as the same is realized upon, the property of course standing in the hands of the trustees as security for the notes”; that he had talked the matter over with Starr, had his proposition in writing, and thought it was the best that could be done under the circumstances, but did not want to close the transaction without the consent of his clients. Eakin was advised by the defendant company that his explanation of the matter had been reviewed, and that it agreed “to the same with the understanding that you will remit a third cash and two-thirds in notes of Nodine’s trustees.” The Utah Loan & Trust Company asked for further information, which was given by Eakin at some length, whereupon it also advised the acceptance of Starr’s proposition. Now, as we read and interpret this correspondence, it does not conflict with the oral agreement between Starr and Eakin. It is nowhere said or intimated that the notes to he given by the trustees were to be their personal obligations, but it is expressly stated in Starr’s letter to Eakin that they were to be secured by, and payable out of, the property. Eakin so explained the matter to the defendant and its assignor, and so we conclude that the allegations of the complaint and the contention of the plaintiffs are supported by the testimony, and that there is and was a mistake made by the parties in reducing their contract to writing. It only remains to be seen whether a court of equity will reform the instruments so as to conform to the actual contract. — 54 — 3. One of the well-recognized and firmly established jurisdictions of a court of equity is to reform written contracts when there has been an innocent omission or insertion of a material stipulation, contrary to the intention of both parties, and under a mutual mistake. If, therefore, a promissory note or other written agreement omits or contains terms or stipulations contrary to the agreement and intention of the parties, a court of equity will, upon a proper showing, reform it so as to make it conform to the actual contract. It is sometimes said that a mistake of law is no ground for equitable relief, but this rule only applies to cases where the contract, as entered into, speaks the true agreement of the parties. In such a case equity will not ordinarily reform the contract merely because one or both of the parties were mistaken as to its legal consequence, but where, through a mistake of the parties or the draftsman, there is a failure to express the actual contract of the parties as contemplated, owing to the use of inapt words, or where the legal effect of the terms employed by the parties in putting their contract in writing results in an agreement different from the one really entered into, a court of equity will reform the writing so as to effectuate the intention of the parties, even though the mistake was one of law. “Decisions of undoubted authority,” says the Supreme Court of the United States in Walden v. Skinner, 101 U. S. 577, “hold that where an instrument is drawn and executed that professes or is intended to carry into execution an agreement, which is in writing or by parol, previously made between the parties, but which, by mistake of the draftsman, either as to fact or law, does not fulfill, or which violates the manifest intention of the parties to the agreement, equity will correct the mistake so as to produce a conformity of the instrument to the agreement, the reason of the rule being that the execution of agreements fairly and legally made is one of the particu — 55 — lar brandies of equity jurisdiction, and if the instrument intended to execute the agreement be, from any cause, insufficient for that purpose, the agreement remains as much unexecuted as if the party had refused altogether to comply with his engagement; and a court of equity will, in the exercise of its acknowledged jurisdiction, afford relief in the one case as well as in the other, by compelling the delinquent party to perform his undertaking according to the terms of it and the manifest intention of the parties.” And Mr. Pomeroy says (2 Eq. Jur. § 845): “If an agreement is what it was intended to be, equity would not interfere with it because the parties had mistaken its legal import and effect. If, on the other hand, after making an agreement,in the process of reducing it to a written form, the instrument, by means of a mistake of law, fails to express the contract which the parties actually entered into, equity will interfere, with the appropriate relief, either by way of defense to its enforcement, or by cancellation, or by reformation, to the same extent as if the failure of the writing to express the real contract was caused by a mistake of fact. In this instance there is no mistake as to the legal import of the contract actually made, but the mistake of law prevents the real contract from being embodied in the written instrument. In short, if a written instrument fails to express the intention which the parties had in making the contract which it purports to contain, equity will grant its relief, affirmative or defensive, although the failure may have resulted from a mistake as to the legal meaning and operation of the terms or language employed in the writing.” See, also, to the same purport, Stockbridge Iron Co. v. Hudson Iron Co. 107 Mass. 290; Creen Bay & M. Canal Co. v. Hewitt, 62 Wis. 316 (21 N. W. 216, 22 N. W. 588); Woodbury Sav. Bank v. Charter Oak Ins. Co. 31 Conn. 517; Wisconsin M. & F. Ins. Co. Bank v. Mann, 100 Wis. 596 — 56 — (76 N. W. 777); Williams v. Hamilton, 104 Iowa, 423 (73 N. W. 1029, 65 Am. St. Rep. 475, and note). There are, therefore, two well-defined classes of mistakes common to parties entering into contracts : (1) A mistake in law as to the legal effect of the contract actually made by them ; and (2) a mistake in law in reducing to writing the contract, whereby it does not carry out or effectuate the intention of the parties. In the former the contract actually entered into will seldom, if ever, be relieved against, unless there are other equitable features calling for the interposition of the court. In the second class the mistake is not in the contract, but terms are used or omitted which give the instrument a legal effect not intended by the parties, and different from the contract actually made; and here equity will always grant relief, unless barred on some other ground. 4. Now, in the case at bar, the mistake falls clearly within the latter rule. The contract as made was definite and certain, but a mistake was made in reducing it to writing. The notes for the balance due upon the judgments were, under the contract, to be payable only out of the trust estate, without any personal liability on the part of the trustees. In drawing the notes, Starr thought he was accomplishing this result; but, through a mistake as to the legal effect of the terms used, the notes were drawn so as to render the trustees personally liable thereon, and did not, therefore, carry out or effectuate the contract as made. A part of the contract was by mutual mistake omitted from the writing, and the notes should be reformed accordingly. 5. It is argued that, because the trust funds have been disposed of by the trustees, the court should not now reform the notes to make them conform to the actual contract. If the trustees have violated or been unfaithful to their trust, they may be held liable in a proper proceeding — 57 — therefor, but it would afford no reason why these notes should not be made to conform to the actual agreement. 6. Again, it is said that plaintiffs ought not to prevail in this suit, because they took no steps to reform the contracts until after the trust funds had been disposed of. At the time the notes were executed, and until the rendering of the decision in Ogden St. Ry. Co. v. Wright, 31 Or. 150 (49 Pac. 975), it was supposed that the notes, as drawn, created no personal liability against the trustees, and consequently they saw no reason for attempting to reform them. After it was judicially determined, however, that the notes were, on their face, the personal obligations of the trustees, this suit was immediately commenced for a decree making them conform to the actual agreement. It is also insisted that, under the decree of the court below, the defendant is enjoined from instituting any action or proceeding against plaintiffs on the notes so reformed, because of a misapplication of the trust funds. We do not understand such to be the effect of the decree. It restrains the defendant from prosecuting an action or proceedings on the notes as executed, and does not deprive it of any remedy it may have to recover on the notes as reformed, or against the trustees for neglect of duty. The decree of the court below is affirmed. Affirmed.