No. 92-623 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1993 

CLIFFORD BROWN, 

Petitioner and Appellant, 

v. 

RICHARD A. MURPHY, INC., 

Employer, 

and 

STATE COMPENSATION MUTUAL 

INSURANCE FUND, 

Defendant and Respondent. 

APPEAL FROM: Workers' Compensation Court of the State of 

Montana, The Honorable Timothy W. Reardon, 

Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

John Houtz, Attorney at Law, Forsyth, Montana 

For Respondent: 

Charles G. Adams, Legal Counsel, State 

Compensation Mutual Insurance Fund, 

Helena, Montana 

Filed: 

Submitted on Briefs: April 30, 1993 

Decided: November 2, 1993 
~ustice Terry N. Trieweiler delivered the opinion of the Court. 

Clifford Brown appeals from a decision of the Workers' 

compensation Court in which his request to rescind a compromise 

settlement that the parties had agreed upon was denied. The court 

c~ncluded that Brown was not entitled to reopen the settlement 

agreement and that the insurer was not required to provide him with 

additional benefits. 

We reverse. 

The dispositive issue on appeal is whether the Workers' 

compensation Court erred when it concluded that there were no 

grounds to allow rescission of the compromise settlement agreement. 

Claimant Clifford Brown was injured during the course of his 

employment on two separate occasions--February 21, 1978, and 

December 2, 1985, while employed by Richard A. Murphy, Inc. The 

State Compensation Mutual Insurance Fund accepted liability and 

paid various benefits. 

Following the 1985 injury, the State Fund notified Brown that 

it elected not to participate in the cost of a possible third-party 

claim for damages, but that, pursuant to 5 39-71-414(2) (c), MCA 

(1983), it retained a 50 percent subrogation interest in any 

recovery. 

Brown did pursue a third-party claim in California and 

subsequently settled that claim for $55,000, which was less than 

policy limits. 

In March 1990, following that settlement, Brown's counsel 

approached the State Fund about settling the workers' compensation 
claims. At this time, Brown's entitlement to permanent partial 

disability benefits had not been determined by either agreement or 

adjudication, and there had been no determination of the State 

Fund's subrogation interest, if any, in the third-party settlement. 

However, based on the settlement amount and the attorney fees and 

costs associated with the settlement, the State Fund determined 

that the maximum subrogation interest it was entitled to was 

$18,666.67. 

The parties eventually compromised Brown's claim, as well as 

tne State Fundrs subrogation interest. Tne State Fund agreed to 

pay to Brown $30,000 of "new moneyw and, as part of the compromise, 

the State Fund waived any subrogation interest in the third-party 

settlement. The petition for full and final compromise settlement 

which was submitted to the Department of Labor and Industry stated 

that Brown agreed to accept $33,662.50, of which $3,662.50 had 

already been paid, as a full and final compromise of his claim. 

Additionally, the State Fund stated that it waived its subrogation 

interest in the amount of $17,382.78. There is no explanation for 

the seventeen thousand dollar figure, as opposed to the $18,666.67 

which the State Fund had previously calculated as its maximum 

subrogation interest. This agreement was signed by Brown on 

April 7, 1990, and the State Fund on May 1, 1990. 

The department approved this compromise agreement on May 10, 

1990, but altered some of the terms. The final order approving the 

compromise settlement stated that Brown was to receive in 

settlement of his claims the amount of $52,329.17, less $18,666.67 

3 
which "is subrogation due the State Fund." After deducting the 

amount previously paid to Brown, he was to receive a net settlement 

of $30,000. The language added by the department, while not 

materially altering the agreement, clarified that the settiement 

agreement took into account the subrogation interest that the State 

Fund believed it was entitled to receive. 

prior to the issuance of this order, however, the State Fund 

initiated a second agreement entitled "Compromise Settlement of 

Insurer's Subrogation Interest" which Brown signed on April 30, 

1990. This agreement purported to settle a controversy regarding 

the State Fund's subrogation interest and stated that the insurer 

agreed to accept as its subrogation interest "the sum of zero 

dollars." This agreement was approved by the Department of Labor 

on June 29, 1990. 

On June 7, 1990, one month after the Department of tabor's 

approval of the settlement agreement, but prior to its approval of 

the subrogation "waiver," this Court issued its decision in Zrrcilcr 

v. Arneticatl ilwurutzce Conzputly (1990) , 243 Mont. 226, 794 P. 2d 335. .%tiler 

construed the 1983 subrogation provision of the Workers' 

Compensation Act, which the parties agree is the controlling 

statute in this case. Applying the theory of equitable limitation 

on legal subrogation, this Court held that an insurer has no 

subrogation rights until a claimant has been made whole for his 

entire loss and any costs of recovery, including attorney fees. 

Zacher, 794 P.2d at 338. 
Approximately a year later, on April 10, 1991, Larry Thomas, 

the supervising claims examiner for the State Fund, responded to an 

inquiry from Brown's attorney in which the terms of the settlement 

agreement were clarified. Thomas explained that Brownis case had 

been settled for $52,329.17, and from this the State Fund deducted 

its subrogation interest of $18,666.67, and the amounts already 

paid out in partial benefits. This left a net settlement of 

$30,000 which had been paid to Brown. 

On September 3, 1991, Brown submitted a claim to the State 

Fund to recoup the $18,666.67 subrogation interest which Brown 

claimed was deducted and withheld by the State Fund in the 

compromise settlement. He asserted that he had to pay his attorney 

fees from the third-party recovery, and therefore, had not been 

made whole, which is a prerequisite for subrogation according to 

the decision in Zacizer. 

The State Fund denied Brown's claim on the basis that it had 

expressly waived any subrogation interest in Brown's third-party 

settlement and that there was nothing for it to refund. 

Brown then petitioned the Workers' Compensation Court in 

December 1991, alleging that a subrogation interest in the amount 

of $18,666.67 had been "deductedw from the compromise settlement, 

and that, pursuant to the Zacher decision, this amount should be 

returned to him. Brown contended that the settlement agreement 

should be set aside on the basis that the parties were mutually 

mistaken regarding the State Fund's right to a subrogation interest 
in Brown's third-party recovery when they entered into the 

agreement. Brown also added a claim for attorney fees alleging 

that the State Fund had acted unreasonably when it refused to pay 

his claim. 

The Workers' Compensation Court entered its judgment on 

December 11, 1992, in which the court accepted the hearing 

examiner's findings of fact, conclusions of law, and proposed 

judgment. The court determined that Brown was not entitled to 

reopen the May 10, 1990, settlement agreement and was not entitled 

to further compensatlon or attorney fees. From this judgment, 

Brown appeals. 

Did the Workers1 Compensation Court err when it concluded that 

there were no grounds to allow rescission of the compromise 

settlement agreement? 

Brown contends that the Workers' Compensation Court erred when 

it did not allow rescission of the settlement agreement and did not 

order the State Fund to reimburse Brown for the subrogation 

interest it retained. He argues on appeal that the Zacher decision 

controls the issue of whether the State Fund was entitled to a 

subrogation interest. He claims that he was not made whole in the 

third-party settlement, and therefore, the State Fund had no 

subrogation rights. However, based on the language contained in 

the settlement agreement, he asserts that money was deducted from 

the amount for which his claim was settled based on the State 

Fund's subrogation claim. 
The arguments raised before this Court focus on two grounds 

for rescission--mutual mistake of fact and unilateral mistake of 

law. Brown contends that he is entitled to rescind the settlement 

agreement on the grounds of unilateral mistake of law because he 

was operating under a misapprehension of the law regarding the 

right to subrogation, and the State Fund was aware of his 

misapprehension. He claims that the State Fund knew of the 

impending decision in Zacher which would forbid a subrogation 

interest in this instance, and that is why the second agreement, 

which purported to waive any interest in the third-party 

settlement, was proffered by the State Fund. He also claims there 

was a mutual mistake of fact because, at the time the agreement was 

made, both parties were mistaken about the State Fund's right to 

subrogat ion. 

The State Fund counters by claiming that the settlement 

agreement was an enforceable contract resulting from a compromise 

by both parties and the court correctly found no grounds for 

rescission. The State Fund insists that it waived its right to 

subrogation in the final agreement and this agreement, therefore, 

is not in conflict with Zacher. Furthermore, it contends that 

because Brown settled his third-party lawsuit for less than policy 

limits he was Itmade whole" and Brown has not demonstrated that 

Zuchcr would have changed the outcome of the compromise settlement. 

The State Fund contends that since Brown failed to prove the 

requirements for unilateral mistake of law or mistake of fact, the 
court had substantial evidence to conclude that Brown was not 

entitled to reopen the settlement and its conclusions should not be 

disturbed. 

Factual findings by the Workers' Compensation Court are 

reviewed to determine whether they are supported by substantial 

evidence. Frarm[iclz E: St. Comp. Mut. Ins. Fund (1992) , 252 Mont. 215, 827 

P.2d 1279. In this instance, the Workersp Compensation Court did 

not directly address the allegations of mistake of fact, but found 

that Brown had failed to submit evidence of a unilateral mistake of 

law to justify reopening the agreement. With respect to an alleged 

unilateral mistake of law, we agree with the court's findings that 

there was no evidence of fraud, nor that Brown was unilaterally 

operating under a misapprehension of the law and the State Fund was 

aware of his misapprehension. There is no evidence that the State 

Fund knew of the outcome of the Zacher decision prior to the time 

that it was issued by this Court, and then allowed Brown to proceed 

with negotiations knowing that he misunderstood the status of the 

law with respect to subrogation rights. 

Also, after considering Brown's arguments regarding mistake of 

fact, we conclude the evidence is similarly lacking on this point. 

Brown argues that the parties were mistaken about who had the right 

to the $18,666.67 subrogation interest. This was not a mistake of 

fact, however. Whether or not the State Fund was entitled to a 

subrogation interest in that amount is a question of law which, 
pursuant to Zudzer, depends on the claimant's status after a 

third-party settlement. 

We conclude that the controlling issue in this case, which 

Brown raised before the Worker's Compensation Court, is whether the 

parties consented to the compromise agreement while laboring under 

a mutual mistake of law. 

This Court has made clear that the law of contracts applies in 

construing and determining the validity and enforceability of a 

settlement agreement. WolJie v. St. Comp. Mut. Ins. Frcrzd (1992) , 2 51 ~ont . 

217, 824 P.2d 240. Section 28-2-1711, MCA, provides that a party 

to a contract may rescind the contract if "the consent of the party 

rescinding or of any party jointly contracting with him was given 

by mistake," and 5 28-2-408, MCA, clarifies that "[mlistake may be 

either of fact or law." Section 28-2-410, MCA, defines "mistake of 

law" and provides that a mutual mistake of law arises from: 

(1) a misapprehension of the law by all parties, all 

supposing that they knew and understood it and all making 

substantially the same mistake as to the law. 

It is evident from the record before us that both parties to 

the contract were mistaken about the law regarding subrogation, 

each supposing that they knew and understood it and substantially 

making the same mistake. Because Brown, as the party seeking to 

rescind the agreement, consented to the agreement based on a mutual 

mistake of law, we hold that he is entitled to rescind the 

settlement agreement. 
The Workers' Compensation Court did not directly address the 

allegation of mutual mistake of law in its findings and 

conclusions, other than to say that neither party had submitted 

authority for reopening a contract based on a mistake of law. It 

did conclude, however, "that at the time of negotiations and 

approval, two experienced counsel were both aware of the law in 

affect and negotiated the agreement based on their correct and 

mutual understanding of the law at that time." We agree that the 

parties entered into the settlement agreement based on a mutual 

understanding of the law in existence. We disagree that the 

parties' mutual understanding of the law was correct. 

The evidence demonstrates that the bargaining process was 

based on the parties' belief that the State Fund had a subrogation 

right, even though the extent of that right had not been finally 

determined. From the face of the various documents, it is apparent 

that the $30,000 settlement amount was arrived at after considering 

the State Fund's maximum subrogation interest in the amount of 

$18,666.67. Furthermore, even though the final document purports 

to state that a subrogation interest was waived, the clarification 

memo from the State Fund's claims examiner a year later makes clear 

that the agreement was premised on an offset for the maximum 

subrogation interest against a settlement figure of $52,329.17. 

Our conclusion that the settlement agreement was premised on an 

understanding that the law entitled the State Fund to a subrogation 

interest in the third-party settlement is further confirmed by the 

testimony of both the claims examiner for the State Fund and the 

10 
attorney representing Brown in the settlement negotiations. Even 

though the State Fund claims that it "waived" its interest because 

it did not receive a portion of the third-party settlement, it is 

clear from the evidence presented that the subrogation interest was 

considered in the negotiation process. 

When this Court decided Zacher in 1990, that decision did not 

change the law regarding subrogation rights. That decision 

construed the 1983 statute, which is the statute the parties 

considered during settlement negotiations. The applicable 

provision of the 1983 Workers' Compensation Act provides that an 

insurer is entitled to subrogation for all compensation and 

benefits paid to an injured worker if a third-party action results 

in a judgment in the claimant's favor. Section 39-71-414, MCA 

(1983). However, the statute is silent on the issue of whether 

this subrogation right can be asserted even if a claimant is not 

fully compensated for his injuries. In Zacher, 794 P.2d at 338, we 

addressed that question, and held that an insurer has no right to 

subrogation until a claimant has been made whole for his entire 

loss and any costs of recovery, including attorney fees. This 

decision did not change the law; it merely clarified that, pursuant 

to the 1983 law, the right to subrogation was subject to the theory 

of epitable limitation on legal subrogation. When Brown and the 

State Fund were negotiating a settlement agreement, they were 

mutually mistaken regarding the law. Neither party understood that 
the State Fund's right to subrogation was limited as described by 

our decision in Zacher. 

In AfcFarlundv. Stil~waterCoutzly (1940), 109 Mont. 544, 98 P.2d 321, 

this Court recognized that a mutual mistake of law entitled a 

plaintiff to recovery. ~lso, in Hicks v. Stillwater Conniy (1929) , 84 

Mont. 38, 274 P. 296, we held that a plaintiff was entitled to 

relief and that rescission of a contract was warranted because 

there had been a mutual mistake of law with regard to the 

compensation due a county employee. In this case, we similarly 

conclude that Brown is entitled to relief because the parties' 

consent to the settlement contract was based on a mutual mistake of 

law regarding subrogation rights. Therefore, we conclude that the 

court erred in holding that there were no grounds which would allow 

Brown to rescind the contract. 

Brown urges this Court, as he did the Workers' Compensation 

Court, to order the State Fund to refund to him $18,666.67 because 

that was the amount "withheld" in the settlement agreement as its 

subrogation interest. Brown is entitled to rescind the settlement 

agreement on the basis that consent to this agreement was based on 

a mutual mistake of law. However, he is not entitled to the 

reimbursement of a subrogation interest that has not been finally 

determined. If the contract is rescinded, it is rescinded in its 

entirety, leaving the issues of Brown's entitlement to benefits and 

the State Fund's subrogation interest, if any, to be determined. 
Brown also appealed from the court's denial of his request for 

attorney fees. Whether or not he is entitled to attorney fees 

under § 39-71-611, MCA (1983), depends on a determination by the 

Workers' Compensation Court of the benefits to which Brown is 

entitled following rescission of his settlement agreement. That 

issue will have to be resolved by further proceedings. 

We reverse the judgment of the Workers* Compensation Court in 

regard to its conclusion that Brown was not entitled to rescind the 

contract, and remand for further proceedings consistent with this 

opinion. 

We concur: 
November 2, 1993 

CERTIFICATE OF SERVICE 

I hereby certify that the following order was sent by United States mail, prepaid, to the following 

named: 

JOHN HOUTZ 

Attorney at Law 

P.O. Box 1230 

Forsyth, MT 59327 

CHARLES G. ADAMS, Legal Counsel 

State Compensation Mutual Insurance Fund 

P.O. Box 4759 

Helena, MT 59604-4759 

ED SMITH 

CLERK OF THE SUPREME COURT 

STATE OF MONTANA