Court Opinion

ID: 9585795
Source: CourtListenerOpinion
Date Created: 2023-08-21 23:03:56.675854+00
Date Added: 2024-06-11T17:24:14.897932
License: Public Domain

WORKE, Judge
(dissenting).
While I agree with the majority’s conclusion as to the appropriate standard of review and that rescission on the ground of lack of mutual assent is unavailable here, I respectfully disagree with the conclusion *876that appellants are not entitled to reformation.
The first element appellants must show, by clear and convincing evidence, is a valid agreement expressing the real intention of the parties. Theisen’s, 309 Minn. at 65, 243 N.W.2d at 148. The record contains clear and convincing evidence that when the parties contracted for the sale of Crystal Lake, they intended to transfer only the three cemeteries owned and operated by Crystal Lake. As the district court found, the parties agreed to transfer the three cemeteries, but desired to do so in a manner that avoided implicating Minn. Stat. § 306.88, subd. 1. It was for this reason that the parties agreed to execute this transfer through the sale of stock. The stock sale agreements included a detailed list of the assets that the parties intended to transfer in the sale of the business, including equipment, furniture, and fixtures, but contained no mention of the two vacant parcels. While the agreements purported to include legal descriptions of all real property owned by the business, they listed only the three cemeteries. Because the representatives negotiating for the parties were unaware that Crystal Lake owned the additional two vacant parcels, the value of the vacant parcels was not accounted for in the price of the business. Indeed, the vacant parcels were worth twice what respondent paid for the business integrating three cemeteries.
Both the district court and the majority note that there was no provision in any of the agreements excluding the two parcels from the sale of Crystal Lake. But it is impossible to discern, from this fact alone, whether the parties specifically intended to exclude the parcels from the sale because the parties were admittedly unaware that the parcels even existed. It is apparent that SCI attempted to avoid the unintended transfer of assets in the sale: SCI specifically itemized the assets it intended to sell as part of Crystal Lake, and also included a provision in the agreements allowing SCI to remove assets that it did not intend to sell. The absence of any specific intent to exclude the parcels does not evidence intent to include them.
Appellants must also show that the written agreement failed to express the parties’ intent because of a mutual mistake. Id. at 66, 243 N.W.2d at 148. The district court erroneously concluded that there was no mutual mistake on the ground that “[t]he mistake was one made solely by SCI.” SCI’s failure to discover that the two parcels were titled to Crystal Lake’s business was undoubtedly unilateral. But the word “mistake” does not refer “as it is sometimes used in common speech, ... to an improvident act.” Restatement (Second) of Contracts § 151 cmt. a (1981). Rather, “mistake” refers to an erroneous belief, id., and mutual mistake exists when both parties share an erroneous belief relating to the facts. Winter v. Skoglund, 404 N.W.2d 786, 793 (Minn.1987). Here it is undisputed that both parties believed that the extent of the real property owned by Crystal Lake was limited to the three cemeteries. Because of this mutual mistake, the parties did not express their true intent when they reduced their agreement to transfer the three cemeteries into writing in the stock sale agreements.
SCI concedes that it was at fault for failing to discover that the Crystal Lake business owned the two vacant parcels. And one would reasonably suspect that sophisticated businesspeople, aided by counsel and arranging the sale of a business, would conduct a more thorough investigation than an average seller. But “[a] mistaken party’s fault in failing to know or discover the facts before making the contract does not bar him from avoidance or reformation ... unless his fault *877amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.” Restatement (Second) of Contracts, § 157 (1981). If this was not the case, the availability of relief on the ground of mutual mistake would be “severely circumscribed,” because a party to a contract could often avoid a mistake by the exercise of reasonable care. Id. cmt. a; see also Gartner v. Eikill, 319 N.W.2d 397, 399 (Minn.1982) (stating that the “failure of a party to investigate ... will not always preclude rescission”). In Fritz v. Fritz, the supreme court opined that reformation should be available only to those “who have not by their own conduct (as laches, negligence, or otherwise) put themselves in such a position as to render it unjust to change the situation.” 94 Minn. 264, 266, 102 N.W. 705, 706 (1905) (determining that the appellant’s willful ignorance precluded reformation). While SCI should have discovered that Crystal Lake owned the two parcels, its error does not render reformation unjust given its attempts to limit the assets transferred in the sale. Reforming the stock sale agreements would impose no injustice upon respondent, who was likewise unaware of the existence of the additional parcels and neither bargained for nor paid for these properties.
The majority relies on Costello in holding that because the nature of the Crystal Lake sale was a stock transaction, the parties must bear the risk that all of Crystal Lake’s assets and liabilities, known or unknown, would transfer with the business. As the Clayburg court recognized, a distinction should be made between the sale of corporate stock and the sale of a closely-held corporation, even though the latter transaction necessarily involves the sale of stock. 171 N.W.2d at 626. Costello, in which the appellant bought ten shares of a bank’s outstanding stock exemplifies the former situation, and is therefore not on point. 143 Minn. at 110, 172 N.W. at 908. When the subject of a sale is a small portion of the outstanding stock in a business, the business’s assets and liabilities contribute to the book value of the business, and hence the value of the stock. Relief on the ground of mutual mistake is not available when the mistake pertains merely to the value of the item sold. Gartner, 319 N.W.2d at 398-99.
But when the business itself is the subject of the sale and, as here, the assets and liabilities are considered in striking the bargain, the business’s assets and liabilities go to the very nature of the business. Clayburg, 171 N.W.2d at 626-27 (ruling that, even where the purchaser contracted to buy 85 percent of the stock, questions about the existence of corporate assets justified mutual-mistake analysis); see also Gartner, 319 N.W.2d at 399-400 (ruling in favor of rescission on the ground of mutual mistake when the mistake “went to the very nature” of the property); Sherwood v. Walker, 66 Mich. 568, 33 N.W. 919, 923 (1887) (concluding that the parties’ mistaken belief that a cow was barren “went to the very nature of the thing”). I find convincing the Clayburg court’s ruling that in circumstances where the transaction involves the sale of a corporate business, it is proper to “look beyond the form of the asset transferred (corporate stock) to the substance of the transfer (corporate assets and liabilities).” 171 N.W.2d at 626.
As the Clayburg court recognized, looking beyond the form of a stock transaction does not justify “complete disregard of the corporate nature” of the transaction. Id. For example, in Beasley, this court denied rescission to purchasers of two-thirds of a corporation’s stock, in part because the mistake went to the financial condition of the corporation. 479 N.W.2d at 98. This court also found the buyers’ reliance on a one-page tax return and the seller’s representations unreasonable because they had *878an opportunity to question the corporation’s accountant and neither requested nor were denied access to the corporation’s financial records. Id. But if form is always put over substance, any remedy available for mutual mistake would be placed out of the reach of those who would otherwise be entitled to one. A court should not abstain from applying mutual-mistake analysis simply because the underlying transaction was for corporate stock rather than another kind of asset. On the facts of this case, I would reverse and remand to the district court with instructions to grant summary judgment to appellants on the ground that they are entitled to reformation based on mutual mistake.