Opinion ID: 2570747
Heading Depth: 1
Heading Rank: 1

Heading: mutual mistake of the law

Text: The University and the Foundation argue that the district court erred in determining that the settlement agreement should be rescinded on the basis of the mutual mistake of law doctrine. The University and the Foundation argue that the standard of review is solely de novo. De novo review is warranted, they assert, because analysis of this case involves interpretation of the settlement agreement, which is a contract. Krantz argues, on the other hand, that the standard of review in this case is whether the district court's findings of fact are supported by substantial competent evidence. Krantz further asserts that the district court's determination of whether there was a mutual mistake of law is a question of fact. Krantz also argues that the case turns, partially, on the issue of intent and that the parties' intent is also a question of fact which should not be disturbed on appeal if the finding of fact is supported by substantial competent evidence. Although this case centers on a settlement agreement, which is a contract, the issue we must resolve does not require interpretation of the contract. The issue we are called upon to determine is whether the subsequent decision by the Supreme Court in Schleier concerning the taxability of money damages derived from a claim under the ADEA amounted to a mutual mistake of the law requiring rescission of the settlement agreement made over a year prior. This is a question of law over which we have unlimited review. It is an elemental rule that the law favors compromise and settlement of disputes, and generally, in the absence of bad faith or fraud, when parties enter into an agreement settling and adjusting a dispute, neither party is permitted to repudiate it. However, as an exception to the rule, it is well settled that a compromise settlement may be set aside on the ground of mutual mistake of the parties. In re Estate of Thompson, 226 Kan. 437, 440, 601 P.2d 1105 (1979). Krantz argues that the parties intended for the settlement to be nontaxable. He asserts that the parties were mutually mistaken about the tax consequences of the settlement, thereby requiring rescission of the settlement contract. In order for a party to claim mutual mistake of the law, the parties must both be mistaken as to the law at the time the contract is entered into. In the present case, there was no mistake regarding the law at the time the settlement contract was agreed upon. The mistake was in the parties' ability to predict how the Supreme Court would decide a future case concerning taxation of settlement proceeds. A subsequent change in the law will not justify rescission of a settlement agreement or contract on the basis of mistake of the law. In Sheet Metal Workers Local 137 v. Vic Const., 825 F. Supp. 463 (E.D. N.Y. 1993), the court addressed this issue. In Vic Const., the parties orally entered into a settlement agreement arising from a suit brought over the failure of the defendant to make payments to the Union's Insurance, Annuity, and Apprenticeship Training Funds in violation of a collective bargaining agreement and § 515 of the Employee Retirement Income Security Act of 1974 (EISA). The settlement agreement stipulated that the debts owed to the plaintiff were owed by Vic Construction Company but that Charles Nalbone, the sole corporate officer, would be personally liable for payment. Vic Construction refused to sign the memorialized settlement agreement, citing to a Second Circuit court opinion which had been released after the oral agreement had been entered into which held that individuals could not be liable for corporate ERISA obligations solely by virtue of their role as the only officer, director, and shareholder. Vic Construction argued that the agreement should be rescinded based on mutual mistake of the law because the oral agreement was entered into based on law which was subsequently reversed. The federal district court disagreed, stating: Under limited circumstances a court may decline to enforce a contract due to a unilateral or mutual mistake at the time of the agreement. While some courts have declined to apply the doctrine when the mistake was one of law rather than fact, `the modern view is that the existing law is part of the state of facts at the time of the agreement.' [Citations omitted.] But a `poor prediction of events that are expected to occur' is not a mistake of fact. [Citation omitted.] The court declines to apply the doctrine of mistake in this instance. This case involves not so much a mistake of settled law as a failure to determine or predict a controlling interpretation of a statute. When negotiating an agreement, the attorneys representing the parties are expected to understand the relevant rights and obligations imposed by law. When deciding whether to accept a settlement offer, they must compare the benefit of a certain settlement with the risks and costs of continued litigation. These risks include the chance that laws (including the judicial construction of statutes) may change. .... If parties can avoid contracts whenever courts clarify or change their interpretation of statutes, thereby altering material assumptions of the parties when accepting a settlement offer, every settlement would be susceptible to rescission due to facts entirely beyond the control of the settling parties. A central purpose of a settlement agreementto eliminate all such risks while bringing finality to a disputewould be undermined were courts to rescind agreements under such circumstances. This court sees no reason to decline to enforce the agreement simply because defendants' counsel relied upon a judicial opinion that was subsequently reversed. (Emphasis added.) 825 F. Supp. at 467-68. In Wilson v. New York City Transit Authority, 115 Misc.2d 1017, 454 N.Y.S.2d 962 (1982), the issue was resolved in the same manner as in Vic Construction. In Wilson, the parties had entered into a settlement agreement after the plaintiff had filed a personal injury suit against the defendant. In the settlement agreement the defendant agreed to pay the plaintiff $800 a month for lost earnings due to his injury even though a recent Court of Appeals opinion had held that a covered person could receive up to $1,000 a month in lost earnings from an insurance carrier. Subsequent to the settlement, the Court of Appeals held in another opinion that the $1,000 a month limit was retroactive in effect. The plaintiff thereafter demanded that the settlement be rescinded on the basis of a mutual mistake of the law. The Wilson court disagreed and stated: The Court holds that the agreement between the parties is binding and plaintiff cannot use a subsequent change in law to set aside a written agreement evidenced by the executed release.... In the instant case there has not been a mutual mistake of law. The Transit Authority was fully aware of the state of the law at the time it entered into settlement, as indicated earlier, it was this awareness which induced the Authority to settle the case. The Plaintiff's attorney was aware or should have been aware of the transient status of the law regarding payments. Absent a specific provision in the release reserving plaintiff's right to pursue his action, the release represents the final agreement between the parties and plaintiff cannot now seek to relitigate the issue. (Emphasis added.) 115 Misc.2d at 1018-19. Other courts have similarly held. See Holland v. Virginia Lee Co., Inc., 188 F.R.D. 241, 251 (1999) (noting that a mutual mistake of the law is distinguishable from a subsequent change in the law and holding that the settlement agreement entered into by the parties would be not invalidated on the basis of a subsequent change in the law); Anita Foundations v. ILGWU Nat. Retirement Fund, 902 F.2d 185, 189-90 (2nd Cir. 1990) (holding that settlement was not subject to rescission under the doctrine of mistake of the law as settlements reached when the law is uncertain cannot be successfully attacked on the basis of any subsequent resolution of the uncertainty); and New Jersey Mfrs. v. O'Connell, 300 N.J. Super. 1, 7, 692 A.2d 51 (1997) (holding that settlement contract should not be disturbed by subsequent changes in the law as contracts are based on the law as it exists at the time of execution). Indeed, this court has previously recognized that in order for a party to be successful in a claim of mutual mistake, the mistake must be as to a past or present fact material to the contract and not a mere mistake in prophecy, opinion or in belief relative to an uncertain event.... McMillin v. Farmers & Bankers Life Ins. Co., 167 Kan. 502, 507, 206 P.2d 1061 (1949). In the present case, there was no mutual mistake of the law. There was no mistake at all. A mutual mistake of the law is distinguishable from a subsequent change in the law. The parties, at the time of the execution of the settlement agreement, were not mistaken as to the state of the law. They were, however, unable to predict the subsequent decision by the Supreme Court in Schleier and the subsequent attempt by the IRS to collect taxes from the lump sum settlement payment. A subsequent change in the law or a subsequent court decision concerning the law will not support rescission of a previously made contract or settlement agreement. If parties were to use a subsequent change in the law as a basis for rescission of settlement agreements, the agreements would never represent a final resolution of the matter. Only when the parties are mutually mistaken about the law at the time the contract is executed will rescission be considered by the court. The trial court erred in holding otherwise. The trial court is reversed, and the case remanded to enter judgment for the appellants.