Court Opinion

ID: 9603416
Source: CourtListenerOpinion
Date Created: 2023-08-22 02:05:59.135284+00
Date Added: 2024-06-11T18:02:11.390427
License: Public Domain

SMITH, Judge,
dissenting.
I respectfully dissent.
Because I view this case as one involving negotiable instruments law rather than general contract law, I reach a different conclusion than the majority. The law relating to commercial paper, or negotiable instruments, had its genesis in the “Law Merchant” of ancient England, while contract law was a creature of the common law from its inception. Although the common law ultimately embraced negotiable instruments law, the rules concerning commercial paper have, nevertheless, continued to evolve separately from the common law rules relating to contracts generally.
*283It is true that, in a general sense, negotiable instruments are contracts, and yet, the rules governing their execution, transfer or indorsement, demand, effect, payment, liability, etc. are substantially different than those applied in general contract law. The ready transferability and uniformity of interpretation of commercial paper having been determined to be necessary in a commercial society, rather rigid and detailed rules have evolved and have almost universally been made the subject of statutory enactment. To this end, in 1896, “The Uniform Negotiable Instruments Act” was promulgated and adopted in all states. The current “Uniform Commercial Code” (UCC) extant in Colorado as Title 4 of the Colorado Revised Statutes represents the current state of its evolution. Article 3 of that title governs “Commercial Paper.”
In the instant case, the holder of a promissory note sought, upon dishonor by the maker, to enforce the statutory liability of an indorser. The indorser had agreed, pursuant to § 4-3-414(1) C.R.S., to accept such liability by not including in his indorsement words of disclaimer, such as “without recourse.”
Section 4-3-414(1) provides as follows: “Unless the indorsement otherwise specifies (as by such words as ‘without recourse’), every indorser engages that upon dishonor and any necessary notice of dishonor and protest he will pay the instrument according to its tenor at the time of his indorsement to the holder or to any subsequent indorser who takes it up, even though the indorser who takes it up was not obligated to do so.”
The official comment relative to this section recites the virtually universal rule that the courts have applied in their interpretation of the section. It reads, inter alia:
“1. Subsection (1) states the contract of indorsement — that if the instrument is dishonored and any protest or notice of dishonor which may be necessary under Section 3-501 is given, the indorser will pay the instrument. The indorser’s engagement runs to any holder (whether or not for value) and to any indorser subsequent to him who has taken the instrument up. An indorser may disclaim his liability on the contract of indorsement, but only if the indorsement itself so specifies. Since the disclaimer varies the written contract of indorsement, the disclaimer itself must be written on the instrument and cannot be proved by parol. The customary manner of disclaiming the indorser’s liability under this section is to indorse “without recourse.” Apart from such a disclaimer all indorsers incur this liability, without regard to whether or not the indor-ser transferred the instrument for value or received consideration for his in-dorsement.” (emphasis supplied)
Thus, upon proof of the note, dishonor, and an indorsement without disclaimer, no part of which is disputed here, the indorser is liable as a matter of law and summary judgment in favor of the holder is proper. No asserted fact issues will preclude summary judgment unless their resolution in favor of the indorser will preclude his liability as an indorser.
The majority in its skillfully reasoned and persuasively argued opinion has, in my view, announced a rule that would permit any indorser to escape the indorser’s liability under the statute if he is able to establish that when he indorsed the promissory note, without words of disclaimer, it was in the belief that such disclaimer was not necessary. The implications of such a rule, as applied to commercial paper and its transferability are not only far reaching, but would substantially change the manner in which commercial paper is now used.
No matter how such belief as to the effect of an indorsement happens to come about, it is mistaken. The law in this regard is specific. See § 4-3-414(1), C.R.S.
The mistake as to the legal effect of an indorsement, without disclaimer, is a mistake of law. A mistaken belief as to the law is not generally a defense to liability. It may, however, if fraudulently or negligently induced, provide the basis for a separate action in tort to recover damages for fraud or negligence. However, mere misrepresentations of law, whether negligent *284or fraudulent, even though relied upon, are not, by themselves, actionable. Kunz v. Warren, 725 P.2d 794 (Colo.App.1986).
To escape this problem, the indorser has argued for reformation, asking the court, in the exercise of its equitable powers, to add the words “without recourse” to the indorsement in order to relieve indorser from liability. In this regard, the majority, at least by implication, seems to indicate that reformation is an encouraged means of making commercial paper conform to the parties’ intent.
I read the statutory article relating to commercial paper as much more restrictive.
Repeatedly throughout Article 3 of the UCC there are references to precluding parol evidence to ascertain the intent of parties, or to vary terms of negotiable instruments. See, e.g., § 4-3-414, C.R.S. (including Official Comment). Even § 4-3-118, C.R.S., and the comment appended thereto, which the majority cites for its position, is a section which deals solely with common patent ambiguities found in commercial paper and sets out presumptive rules of interpretation. The statutory language does not mention reformation; however, Official Comment 1 to that section does. Its language is instructive as to the general philosophy of the Code:
“1 The purpose of this section is to protect holders and to encourage the free circulation of negotiable paper by stating rules of law which will preclude a resort to parol evidence for any purpose except reformation of the instrument. Except as to reformation these rules [of interpretation] cannot be varied by any proof that any party intended to the contrary.”
Each of the six rules of interpretation listed in the section deals with obvious mistakes or inconsistencies in language. Such mistakes are patently mutual and are an appropriate subject for reformation. However, reformation to alter the basic effect of an indorsement and to bring it into compliance with the intent of one party is, in my opinion, something entirely different. The indorsement in question is not ambiguous; rather, its meaning and its legal effect are crystal clear under the statute.
Even if it is assumed, arguendo, that reformation of an unqualified indorsement is possible under the UCC, the only bases for reformation would be (1) mutual mistake, or (2) unilateral mistake, if fraudulently induced. Mike Occhiato Merchantile Co. v. Allemannia Fire Insurance Co., 98 F.Supp. 888 (D.Colo.1951). A mistake of law, such as is present here, however, affords no ground for reformation. Edwards v. Edwards, 113 Colo. 390, 157 P.2d 616 (1945). Thus, reformation for mistake, either mutual or, as argued here, unilateral and induced by fraud, is appropriate only where the mistake is one of fact.
The only factual issues indorser raises relate to whether Boyles’ attorneys represented that the effect of the indorsement would be “without recourse” and whether indorser relied, or was entitled to rely, on such representations. Therefore, reformation, in my opinion, was not an available remedy.
The pleadings and arguments indicate that both parties were represented by counsel who drafted the instruments, and the indorsement was executed by Orion upon the advice of its counsel. The indorsers’ remedy, if any, may therefore lie in a separate action for damages. In any event, the legal effect of not including the words “without recourse” in the indorsement was presumed to be known by Orion when its officers executed the same.
Thus, although the majority may be correct in saying that factual issues exist, the resolution of such issues, whether for or against indorser will not affect its liability arising by virtue of the indorsement. The trial court was therefore, in my view, correct in entering summary judgment.
I would affirm.