Title: Marriott Financial Services v. Capitol Funds
Citation: 217 S.E.2d 551, 288 N.C. 122
Docket Number: 97
State: north-carolina
Issuer: north-carolina Supreme Court
Date: August 27, 1975

217 S.E.2d 551 (1975)
288 N.C. 122
MARRIOTT FINANCIAL SERVICES, INC.
v.
CAPITOL FUNDS, INC. and Lawyers Title Insurance Corporation.
No. 97.

Supreme Court of North Carolina.
August 27, 1975.
*555 Manning, Fulton &amp; Skinner by Howard E. Manning and John B. McMillan, Raleigh, for plaintiff-appellant Marriott Financial Services, Inc.
Maupin, Taylor &amp; Ellis by Armistead J. Maupin and Thomas W. H. Alexander, Raleigh, for defendant-appellee Capitol Funds, Inc.
Poyner, Geraghty, Hartsfield &amp; Townsend by John L. Shaw and Cecil W. Harrison, Jr., Raleigh, for defendant-appellee Lawyers Title Ins. Corp.
BRANCH, Justice.
Marriott assigns as error the holding of the Court of Appeals that the trial judge correctly refused to conclude that rescission should be allowed on grounds that the conveyance was illegal because Capitol had not complied with Section 20-5(a) of the Subdivision Standards Ordinance of the City of Raleigh, which provides:
Section 20-11 provides that the Register of Deeds shall not file or record a plat of a subdivision of land within the territorial jurisdiction of the City without the approval of the city council and makes the filing or recording of a non-approved plat void. Chapter 921 of the 1955 Session Laws is the enabling act pursuant to which the City Ordinance was adopted. Section 4 of that Act provides:
The general rule is that an agreement which violates a constitutional statute or municipal ordinance is illegal and void. *556 Cauble v. Trexler, 227 N.C. 307, 42 S.E.2d 77; Phosphate Co. v. Johnson, 188 N.C. 419, 124 S.E. 859; 17 Am.Jur.2d Contracts § 165 at 521; Restatement of Contracts § 580(1). However, there is also ample authority that the statutory imposition of a penalty, without more, will not invariably avoid a contract which contravenes a statute or ordinance when the agreement or contract is not immoral or criminal in itself. In such cases the Courts may examine the language and purposes of the statute, as well as the effects of avoiding contracts in violation thereof, and restrict the penalty for violation solely to that expressed within the statute itself. Price v. Edwards, 178 N.C. 493, 101 S.E. 33; Hines v. Norcott, 176 N.C. 123, 96 S.E. 899; Courtney v. Parker, 173 N.C. 479, 92 S.E. 324; Ober v. Katzenstein, 160 N.C. 439, 76 S.E. 476; 17 Am.Jur.2d Contracts § 166 at 523. See generally Annot., 55 A.L.R.2d 481, for cases applying these principles.
The holdings of this Court demonstrate a remarkable divergence in results in cases presenting the question of illegality of contracts because of violation of statutory provisions. The cases generally follow the rule that where certain acts are expressly made illegal, contracts based on such acts are void. See, e. g., Kessing v. Mortgage Corp., 278 N.C. 523, 180 S.E.2d 823 (limited partnership agreement formed as a part of a usurious loan transaction declared void); Glover v. Insurance Co., 228 N.C. 195, 45 S.E.2d 45 (insurance company not allowed to vary the statutory requirements for a standard fire insurance policy); Courtney v. Parker, supra (One who violates a statute prohibiting the conduct of business under an assumed name may not enforce against a third party a contract made in the course of such business.); Sharp, Administrator v. Farmer, 20 N.C. 255 (No action can be based upon an agreement among heirs to pay debts of the decedent and distribute the shares of personal property without taking out letters of administration as required by statute.).
On the other hand, the Court has refused to extend the terms of a penal statute to avoid a contract unless such a result is within the intent of the legislative body. See, e. g., Price v. Edwards, supra, (A statutory provision requiring filing of a certificate with the Clerk of Superior Court showing names and addresses of all partners of a partnership operated under an assumed name does not apply between parties who are presumed to possess this information, the purpose of the statute being to prevent fraud upon those who ignorantly deal with the partnership.); Hines v. Norcott, supra; Annuity Co. v. Costner, 149 N.C. 293, 63 S.E. 304 (The plaintiff executed notes for payment of premiums for life insurance policies and defended his refusal to pay the notes upon a contemporaneous execution of a rebate contract which was made illegal by statute. The Court allowed recovery.).
Hines v. Norcutt, supra, is analogous to instant case. There, plaintiff sued for rent under a lease executed on 13 November 1913 for certain commercial buildings. Defendant denied liability on the ground that the lease was rendered illegal by the adoption in April, 1914, of the following city ordinance:
At trial the judge instructed the jury that the question of the plaintiff's violation *557 of the ordinance was "a question between him and the town authorities" and had no bearing upon the lawsuit between the plaintiff and the defendant. This Court also rejected the defendant's contention that there could be no recovery because the lease was rendered illegal by failure to comply with the ordinance. The Court treated the question as one depending upon determination of legislative intent, I. e., "whether it was the purpose to avoid the contract alleged to be contrary to its provisions, or whether it was intended that the penalty alone should be a sufficient punishment." We quote a portion of that opinion:
In reaching its decision, the Court relied heavily on the landmark case of Harris v. Runnels, 53 U.S. (12 How.) 79, 13 L. Ed. 901. There, the action was based on a promissory note given for slaves brought into Mississippi and there sold in violation of a statute regulating the importation of slaves into the state and prescribing a one-hundred-dollar penalty for each violation thereof. The Supreme Court of the United States, rejecting the defendant's defense of illegality, noted that prior decisions on point had been "fluctuating and counteracting," observed that the purpose of the statute was to exclude from Mississippi all slaves who were tainted with crime, and, inter alia, stated:
We think that the well reasoned opinion of Price v. Edwards, supra, also correctly states the law pertinent to our decision of the question presented. There the administrator of the estate of S. J. Edwards instituted a proceeding seeking final settlement of the estate. His brother, J. H. Edwards, claimed to be a partner in the business and to own a one-third interest therein. The *558 defendants, who, with J. H. Edwards, were the distributees of the estate of S. J. Edwards, filed answers in which they denied that J. H. Edwards was a partner in the business. They also pleaded in bar of J. H. Edwards's right to recover as a partner the assumed name statute, which required that the names and addresses of all partners be filed with the Clerk of Superior Court. The trial judge entered an order which declared that J. H. Edwards was a partner and entitled to a one-third interest in the business conducted by S. J. Edwards at the time of his death and that he had one third of the proceeds of the partnership business before final distribution. The defendants appealed.
On appeal, the defendants contended that J. H. Edwards could not recover his interest as a member of the partnership because the business was transacted under an assumed name and there had been no compliance with the provisions of the assumed name act. The Court declined to apply the statute to deny recovery in this action wherein `the rights of third parties were not affected and declared:
Cases from other jurisdictions have considered questions virtually identical to the question presented in instant case. In Pangborn v. Westlake, 36 Iowa 546, the plaintiff brought an action to foreclose a mortgage given by the defendant and his wife to the plaintiff. The note which was the basis for the mortgage was given on 13 March 1871, and the mortgage was duly recorded on 20 March 1871. The note was given as payment for six lots in the plaintiff's contemplated addition to the City of Maquoketa, Iowa, which addition was not at the time of the note and mortgage as yet recorded. The plat of the subdivision was duly recorded on 7 October 1871. The defendant admitted the due execution of the note and mortgage but contended that the sale and conveyance of the real estate made by the plaintiff to him was illegal and contrary to an Iowa statute which provided as follows:
The trial court sustained a demurrer to the defense of illegality, and the defendant appealed. In upholding the action of the trial court and rejecting the defendant's contention that the contract was void, the Court adopted the reasoning of Harris v. Runnels, supra, and squarely held that the statute did not avoid the note sued upon.
Likewise, in De Mers v. Daniels, 39 Minn. 158, 39 N.W. 98, the plaintiffs brought suit to recover on two promissory notes executed by the defendant to them, and the defendant set up as a defense illegality of the contract for failure to comply with the requirement that the plats be recorded prior to conveyance of the property. In rejecting the defense of illegality, the Court set forth a particularly helpful analysis:
Accord: Watrous &amp; Anouffer v. Blair, 32 Iowa 58; Bemis v. Becker, 1 Kan. 226; Strong v. Darling &amp; Walcott, 9 Ohio 201; Kern v. Feller, 70 Or. 140, 140 P. 735; but cf. Bronson v. Moonen, Or., 528 P.2d 82. See also State ex rel. Craven v. Tacoma, 63 Wash. 2d 23, 385 P.2d 372.
We have discovered cases in two States which appear to take somewhat different positions. An early Missouri case declared void a note given for the purchase of land sold in violation of a platting ordinance and denied recovery by the vendor's assignee. Downing v. Ringer, 7 Mo. 585. However, later cases, noting that such statutes impose no penalty upon the purchaser, have held that the violation of the platting requirement does not render the deed void and prevent the passing of title. Sharp v. Richardson, 353 Mo. 138, 182 S.W.2d 151; Rollins v. McIntire, 87 Mo. 496; Mason v. Pitt, 21 Mo. 391. Similarly, the California cases have held such contracts void. See, e. g., Hartzell v. Doolittle, 205 Cal. 17, 269 P. 527; Smith v. Bach, 183 Cal. 259, 191 P. 14. At least some later cases, however, have indicated that the contract may not be absolutely void, but merely voidable at the election of the purchaser. See City of Tiburon v. Northwestern Pacific R. R., 4 Cal. App. 3d 160, 84 Cal. Rptr. 469; Munns v. Stenman, 152 Cal. App. 2d 543, 314 P.2d 67. We do not think it profitable to enter into a detailed discussion of these cases. We merely note that, insofar as they hold that such contracts are void, we decline to follow them.
We look to the language of the enabling act and the city ordinance to ascertain the intent of the legislative bodies. The preamble to Chapter 921 of the 1955 Session Laws indicates that the purposes of the legislation are to prevent urban blight; to discourage the inefficient and inappropriate uses of lands; to deter the creation of conditions which require excessive expenditures for municipal facilities, services, and maintenance; to promote the efficient and wise use of land and the orderly growth of cities and towns by requiring that new subdivisions "be designed in accordance with reasonable standards and comprehensive plans for the growth of the urban areas"; and to provide an adequate means by which the City of Raleigh may effectuate these aims. Such protective legislation must be construed "so that it does not become just another hazard for the unwary." In re Estate of Peterson, 230 Minn. 478, 42 N.W.2d 59. Pursuant to the ordinance, anyone who describes any land in a deed by reference to a subdivision plat which has not been properly approved and recorded is guilty of a crime, punishable as a misdemeanor. The offense is expressly designated, and punishment for its violation clearly stated. The General Assembly has carefully designated the offense, the offender, and the penalty and has made specific provisions *560 to insure enforcement. The inference is "that the legislature has dealt with the subject completely and did not intend, in addition thereto, that the drastic consequences of invalidity should be visited upon the victim of the offender by mere implication." To hold that the enactment, either expressly or by plain implication, indicates a legislative intent to invalidate the sale of property absent compliance with the subdivision ordinance would visit upon the unfortunate purchasers "a penalty far greater than, and out of all proportion to, the penalty imposed upon the wrongdoer himself." In re Estate of Peterson, supra.
In our opinion, and we so hold, the legislative bodies dealt with the matter completely and did not intend to invalidate conveyances of real property because of failure to follow the provisions of this penal legislation. The Court of Appeals correctly decided that the trial judge properly ruled that the sale was not illegal because of statutory provisions of the Raleigh City Code.
Marriott contends that the Court of Appeals erred in reversing the determination of the trial court that it was entitled to rescission on grounds of mutual mistake.
All parties to this appeal apparently concede, and we think correctly so, that plaintiff succeeded to all the rights and obligations formerly held by its assignor, Walter L. Pippin, so as to establish privity of contract between plaintiff and defendant. Sills v. Ford, 171 N.C. 733, 88 S.E. 636; Moore v. Moore, 151 N.C. 555, 66 S.E. 598.
It is a well-recognized principle that equity will grant relief from the consequences of mistake, "some unintentional omission, or error, arising from ignorance, surprise, imposition or misplaced confidence." 27 Am.Jur.2d Equity § 28. It is not every mistake, however, which will justify the equitable remedy of rescission. The rule is well stated as follows:
17 Am.Jur.2d Contracts § 143; MacKay v. McIntosh, 270 N.C. 69, 153 S.E.2d 800.
In order for the remedy of rescission to be operable because of mistake of fact, there must be mutual mistake of fact. A unilateral mistake, unaccompanied by fraud, imposition, undue influence, or like oppressive circumstances, is not sufficient to avoid a contract or conveyance. Tarlton v. Keith, 250 N.C. 298, 108 S.E.2d 621; Cheek v. R. R., 214 N.C. 152, 198 S.E. 626. The following pertinent statement aptly summarizes the requirement of mutuality:
77 Am.Jur.2d Vendor and Purchaser § 51 at 237.
*561 Marriott points to MacKay v. McIntosh, supra, as authority supporting its position. In that case the defendant signed a contract to purchase property from the plaintiff in reliance upon the statement of the plaintiff's real estate agent that the subject property was zoned for business, and both the defendant and the plaintiff's agent acted under the mistaken belief that the property was so zoned. This Court held that the evidence supported rescission of the contract because of mutual mistake. MacKay is distinguishable from instant case in two respects: (1) the evidence in that case showed that the plaintiff's agents had innocently but erroneously represented to the defendant that the subject property was zoned for business use, which was the sole use contemplated for the subject premises, and (2) the contract for the sale of real property in that case was executory rather than executed.
Here defendant asserts no equitable defense. For the purpose of our consideration of this question, we assume, without deciding, that plaintiff has established the purchase of the subject property under a mistaken assumption that an effective driveway permit had been obtained by Pippin and that plaintiff would not have purchased the property without such permit. Even so, there is a complete absence of evidence tending to show that this mistaken assumption was induced by any misrepresentation, deceitful action, or misleading silence on the part of Capitol. Neither is there evidence that Capitol knew of the specific purpose for which plaintiff intended to use the property. Under these circumstances, in the absence of an express contrary understanding, the purchaser must assume the responsibility for obtaining the permits necessary for his particular use of the property. Further, there is nothing in the record to indicate that at the time of the conveyance Capitol knew or should have known that Marriott mistakenly believed that the driveway permit had been obtained. See Rabin, A Proposed Black-Letter Rule Concerning Mistaken Assumptions in Bargain Transactions, 45 Tex.L.Rev. 1273.
These reasons, standing alone, are sufficient to sustain the decision of the Court of Appeals denying relief on the ground of mutual mistake. Nevertheless, the correctness of the decision of the Court of Appeals as to this assignment of error is further sustained by a line of North Carolina cases beginning with Crowder v. Langdon, 38 N.C. 476.
In Crowder, the plaintiff and the defendant were partners in a mercantile business which had been actively operated by the defendant and one Thomas Whitaker. The plaintiff, being without knowledge of the business, proposed a dissolution of the partnership. The defendant Langdon objected but offered to sell his interest in the business to the plaintiff on the basis of a statement of value made to him by the defendant and assertedly based on the books and information furnished by Whitaker. It was later discovered that the statements as to value of the business were erroneous, and the plaintiff thereupon instituted an action based on fraud and mutual mistake. The Court, in deciding against the plaintiff, made the following statement concerning mutual mistake:
In Wilson v. Land Co., 77 N.C. 445, the plaintiff sought cancellation of a deed on the grounds of fraud and mutual mistake. In denying relief the Court, inter alia, stated:
Accord: Cedar Works v. Lumber Co., 168 N.C. 391, 84 S.E. 521; Anderson v. Rainey, 100 N.C. 321, 5 S.E. 182; Capehart v. Mhoon, 58 N.C. 178.
Although this Court will readily grant equitable relief in the nature of reformation or rescission on grounds of mutual mistake when the circumstances justify such relief, we jealously guard the stability of real estate transactions and require clear and convincing proof to support the granting of this equitable relief in cases involving executed conveyances of land. Maxwell v. Bank, 175 N.C. 180, 95 S.E. 147. In the recent case of Hinson v. Jefferson, 287 N.C. 422, 215 S.E.2d 102, we said:
In instant case it is clear that Pippin assumed the sole risk of error in obtaining the desired driveway permit. Further the record does not disclose that Marriott made any investigation or inquiry concerning access to the property and therefore chose to proceed on its limited knowledge or to assume the sole risk of error. The means of information was equally open to all parties to the transaction. Neither Pippin nor Marriott required a contractual provision in the written instruments avoiding the transaction in case a driveway permit was not obtained.
The lack of diligence on the part of Marriott and Pippin also precludes the intervention of equity to avoid this completed sale and transfer of real property.
For the reasons stated, we hold that the Court of Appeals correctly sustained Capitol's assignments of error directed to the trial judge's findings and conclusion that the sale of the subject property was closed under a mutual mistake of fact.
Plaintiff's argument that the trial court erred in failing to conclude that defendant's conduct amounted to fraud is without merit.
In Davis v. Davis, 256 N.C. 468, 124 S.E.2d 130, this Court stated:
Here there is not a scintilla of evidence tending to show that Capitol, with fraudulent intent, made a false representation of a material fact which plaintiff relied upon to its injury.
Plaintiff contends that the issuance of a valid driveway permit was a condition precedent to the contract of sale.
The correspondence between Capitol and Pippin took place while the option to convey the property was in effect. This correspondence indicated that Pippin would exercise the option upon obtaining a driveway permit. Pippin thereafter exercised the option by directing that a deed be made to plaintiff. Capitol thereupon executed a deed to plaintiff conveying a fee simple title without reciting conditions which might defeat the conveyance.
77 Am.Jur.2d, Vendor and Purchaser § 290 at 448; 26 C.J.S. Deeds § 91c. See Willetts v. Willetts, 254 N.C. 136, 118 S.E.2d 548; Conner v. Ridley, 248 N.C. 714, 104 S.E.2d 845.
We have decided that there was not such mistake or fraud as would permit rescission. We find no evidence of a collateral agreement, not intended to be merged in the deed, which amounts to a condition precedent defeating the conveyance. We hold that the Court of Appeals correctly decided that the trial judge did not err in failing to conclude that the issuance of a driveway permit was a condition precedent of the contract of sale.
Marriott assigns as error the holding of the Court of Appeals that the trial court correctly granted the motion of Lawyers Title to dismiss under Rule 41(b). Marriott's position seems to be (1) that the lack of vehicular access to the subject property rendered the title unmarketable and (2) that even if the title is not unmarketable as a matter of law, Lawyers Title nevertheless insured against lack of access to the property, and plaintiff does not have such access.
The relevant parts of the driveway ordinance provide:
The conditions and stipulations provide, inter alia:
The Court of Appeals disposed of this assignment of error by holding that the policy provisions insuring against lack of access apply only "when the insured landowner has no right of access to and from his land." The Court reasoned that even pedestrian access to the subject property was sufficient to preclude liability under the title insurance policy. We do not agree.
The intention of the parties to an ambiguous policy is to be ascertained by the facts and circumstances surrounding the making of the contract as well as by the language of the contract. The test in construing the language of the contract is not what the insurer intended the words to mean, but what a reasonable person in the position of the insured would have understood them to mean. 43 Am.Jur.2d Insurance § 261 at 320.
This record shows that the subject property lies adjacent to a heavily traveled street in the City of Raleigh and is located in a commercial area heavily populated with restaurants, stores, and automobile dealerships. Under these circumstances, it would strain credulity beyond reasonable limits to hold that the parties to this contract understood that the insurance as to access could be satisfied by pedestrian access. To the contrary, the insured must have contemplated insurance protection against lack of vehicular access. It is of interest that § 19-26 of the Raleigh City Code defines a commercial driveway as a driveway providing vehicular ingress and egress to and from property used for purposes other than residential.
We hold that when an insurer contracts to insure against lack of access to property, it must be deemed to have insured against the absence of access which, given the nature and location of the property, is reasonable access under the circumstances. In instant case mere pedestrian access cannot be deemed to be reasonable access.
However, we reach the same result as did the Court of Appeals. We do not think that the question of whether access has been denied to Marriott properly arises from the facts before us. After Marriott obtained a deed conveying the subject land in fee simple, it applied for subdivision approval pursuant to Sections 20-5 and 206 of the Raleigh City Code. The procedures for obtaining driveway permits are contained in Section 19-26 of the Raleigh City Code. There is no evidence that Marriott has applied for a driveway permit under this section or any other section of the Raleigh City Code. There is no showing that the proper authorities of the City of Raleigh have refused to issue such permit. Thus, plaintiff fails to show breach of policy provisions insuring access. Refining Co. v. Board of Aldermen, 284 N.C. 458, 202 S.E.2d 129. However, in all probability, it would be an exercise of futility for Marriott to now apply for a driveway permit under the proper provisions of the Raleigh City Code.
It is well recognized in this jurisdiction that exclusions from coverage are construed strictly so as to provide coverage which would otherwise be afforded by the policy. Trust Co. v. Insurance Co., 276 N.C. 348, 172 S.E.2d 518; Insurance Co. v. Insurance Co., 269 N.C. 341, 152 S.E.2d 436. Even so, if the language of the policy is plain and unambiguous, the Court must give effect to the policy as written. Trust Co. v. Insurance Co., supra; Walsh v. United Insurance Co., 265 N.C. 634, 144 S.E.2d 817; 43 Am.Jur.2d Insurance § 279 at 340.
The City Council's 18 August 1969 resolution rejecting Marriott's application for subdivision approval, in part, stated that "it would be contrary to the public peace, safety and welfare of the inhabitants of the City of Raleigh to approve any subdivision allowing access to Wake Forest Road within *566 200 feet of Crabtree Creek Bridge.. . . " This unequivocal language makes it clear that the City Council would exercise its police power to deny any application for a driveway permit from Wake Forest Road to the Marriott property, or any other property within 200 feet of Crabtree Creek Bridge.
The provisions of Subsection (b) of the exclusions from coverage in subject policy in plain and unambiguous language exclude from coverage any loss or damage by reason of exercise of governmental police power unless notice of the exercise of such police power appears in the public records on 29 March 1969, the effective date of the policy. According to this record, such notice could not appear in the public records on the effective date of the policy.
For reasons stated the decision of the Court of Appeals is
Affirmed.