England v. Eugene Horbach

This opinion is subject to revision before final publication in the Pacific Reporter.

IN THE SUPREME COURT OF THE STATE OF UTAH

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Third District, Salt Lake Div. I

The Honorable J. Dennis Frederick

Attorneys: Samuel D. McVey, Randy T. Austin, Salt Lake City,

for plaintiff

Steven G. Crockett, Steven E. McCowin, Wesley D.

Felix, Steven L. Taylor, Salt Lake City, for

defendants

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On Certiorari to the Utah Court of Appeals

DURHAM, Justice:

This case comes to us on a writ of certiorari to the court of appeals, which held that the parties

had reached an accord and satisfaction of their dispute. We reverse.

In 1989, defendant Eugene Horbach orally agreed to buy 258,363 shares of Medicode stock from

plaintiff Lan England at $2.75 per share, for a total purchase price of $710,498.25. Over the

course of the next ten months, Horbach made several payments to England totaling $859,599.35.

Taking into account a reimbursement of $4,599.35 for certain additional expenses that England

had incurred on Horbach's behalf, by September 14, 1990, Horbach had in fact overpaid England

by $144,501.75.

Nevertheless, when the parties met again eight months later, on May 23, 1991, both were

apparently under the mistaken impression that more money was owed on the original contract.

Horbach, because of errors he attributes to his accounting department, was uncertain of the

amount then due. England testified that he thought Horbach owed him an amount between

$25,000 and $75,000. But England also testified that he told Horbach that the amount owed was

$25,000. Horbach believed England, and the trial court found that "at the May 23rd meeting

both the Plaintiff and the Defendant mistakenly believed that $25,000 remained owing under the

1989 stock purchase agreement."

Consequently, on May 23, 1991, the parties came to an agreement (the "May 23 agreement")

whereby England delivered the 258,363 shares to Horbach and Horbach gave England a post-dated check for $25,000 along with a note promising to "hold 2% of Medicode stock in trust for

you [England] forever unless I have different instructions by you on disposition of that stock."

But when England later asked Horbach to reconvey the promised two percent of Medicode stock,

Horbach refused. Horbach argued at trial that he meant to deliver only a security interest in the

two percent to secure payment of the post-dated check and that the language of the agreement

was merely "an unfortunate choice of language," possibly resulting from the fact that "we had a

few drinks at lunch." England brought an action in the Third District Court to recover the

proceeds of the shares, which by stipulation of the parties had been sold for $369,140.60.

Horbach raised a counterclaim at the trial for recovery of $169,501.75, the amount that he had

overpaid on the original contract.

The trial court found that the May 23 agreement was executed under a mutual mistake of fact and

was therefore unenforceable. Because Horbach had already overpaid England by the time of the

May 23 agreement, the court found that England had a preexisting duty to deliver the shares to

Horbach. The court therefore concluded that Horbach's promise to give England an interest in

two percent of the Medicode stock was without consideration. The court also granted Horbach's

motion for a counterclaim and awarded him a judgment against England in the amount of

$169,501.75 for overpayments under the original contract.

The court of appeals reversed the trial court. England v. Horbach, 905 P.2d 301 (Utah Ct. App.

1995). The court of appeals found that the May 23 agreement constituted an accord and

satisfaction and found consideration for the agreement in the bargained-for settlement of the

parties' uncertain claims. Id. at 304. The court stated that "if the parties in good faith believe

there is a disputed or uncertain claim, mere settlement of the amount due and acceptance of that

amount constitutes the consideration necessary to support the contract." Id. (citations omitted).

As for the trial court's finding of mutual mistake, the court of appeals recognized that "the parties

were indeed mistaken that additional money was owed under the original agreement. However,"

the court continued, "this mistake did not go to the terms of the parties' accord; rather it merely

demonstrates their accord was indeed a compromise of a bona fide dispute which was not

necessarily well-founded, but was in good faith." Id. at 305 (citations omitted). This court

granted Horbach's petition for certiorari. 913 P.2d 749 (Utah 1996).

The petition for certiorari and the briefs of the parties indicate that we must resolve at least three

issues. We must first decide whether the court of appeals applied the correct standard of review

and gave proper deference to the trial court's findings of fact. Next we must determine whether

the May 23 agreement was a compromise of an unsettled claim constituting an accord and

satisfaction or merely the conclusion of the original contract based on mistaken assumptions

about the parties' legal obligations. If the May 23 agreement did in fact constitute an accord and

satisfaction, we must also decide whether the parties' mutual mistake merely goes to the terms of

the original agreement or whether it invalidates any further "accord" the parties may have

reached on May 23. Finally, we must decide whether the trial court erred in granting Horbach's

motion to amend his pleading to conform to the evidence, thus allowing Horbach to counterclaim

for overpayments to England in the amount of $169,501.75.

I. STANDARDS OF REVIEW BEFORE

THE COURT OF APPEALS AND THE SUPREME COURT

The court of appeals reviews the trial court's conclusions of law for correctness, and likewise this

court "accord[s] no particular deference to conclusions of law . . . made by . . . the court of

appeals, but review[s] such conclusions for correctness." Landes v. Capital City Bank, 795 P.2d

1127, 1129 (Utah 1990). The court of appeals may reverse a factual finding of the trial court

only if it determines that the finding is "clearly erroneous," Utah R. Civ. P. 52(a), that is, if the

trial court's "ruling contradicts the great weight of evidence or if a court reviewing the evidence

is left with 'a definite and firm conviction that a mistake has been made.'" Sevy v. Security Title

Co., 902 P.2d 629, 635 (Utah 1995) (quoting State v. Walker, 743 P.2d 191, 193 (Utah 1987)).

This court must determine in its turn "whether the court of appeals correctly decided that the trial

court's ruling on this issue was clearly erroneous." Id.

Horbach argues that the court of appeals improperly set aside the trial court's finding of fact 11,

in which the trial court states, "The Court finds that at the May 23rd meeting both the Plaintiff

and the Defendant mistakenly believed that $25,000 remained owing under the 1989 stock

purchase agreement." In fact, the court of appeals accepted the trial court's finding that "at the

May 1991 meeting, the parties were indeed mistaken that additional money was owed under the

original agreement." England, 905 P.2d at 305. However, the court of appeals also writes that

"both parties were uncertain as to the amount that remained owing on the original contract when

they entered into their agreement." Id. This finding of uncertainty clearly ignores or overrides

the trial court's finding that the parties were certain, though mistaken, that Horbach owed

England $25,000, and the court of appeals' finding can therefore be upheld only if that court

correctly decided that the trial court's finding of fact 11 was clearly erroneous.

However, the court of appeals never explicitly assigns error to the factual findings of the trial

court, but claims to be "[a]ccepting the facts as found by the trial court." Id. Likewise, England

does not argue that the trial court's finding of fact on this issue was clearly erroneous or even that

the court of appeals found it to be clearly erroneous. Instead he argues that the court of appeals'

ruling is consistent with the facts as found by the trial court. We disagree. If one accepts the trial

court's finding that both parties believed $25,000 was owing on the original agreement, one

cannot also accept the court of appeals' finding that the parties were uncertain of the amount

owed. Thus, while the court of appeals claims to be "[a]ccepting the facts as found by the trial

court," it has instead assumed facts contrary to those found by the trial court, implicitly rejecting

the trial court's findings. The court of appeals errs in reversing a trial court's finding of fact

unless such a finding is determined to be clearly erroneous. Sevy, 902 P.2d at 635. The court of

appeals made no such determination, and England has not even argued, much less shown, clear

error in the trial court's finding that Horbach executed the May 23 agreement under the belief

that he owed England $25,000. We therefore conclude that the court of appeals erred insofar as

it relied on the assumption that both parties were uncertain of the amount owed, and we

explicitly adopt the trial court's finding that "at the May 23rd meeting both [England] and

[Horbach] mistakenly believed that $25,000 remained owing under the 1989 stock purchase

agreement."

II. WAS THE MAY 23 AGREEMENT AN ACCORD AND SATISFACTION?

We must next determine whether, accepting the facts as found by the trial court, the court of

appeals correctly found that the May 23 agreement constituted an "accord and satisfaction"

agreement enforceable separately from the parties' original 1989 agreement. According to the

rule cited by the court of appeals, "[t]he elements of an accord and satisfaction include[] '(i) a

bona fide dispute [or uncertainty] over an unliquidated amount; (ii) a payment tendered in full

settlement of the entire dispute; and (iii) an acceptance of the payment.'" England, 905 P.2d at

303 (change in original) (quoting Estate Landscape & Snow Removal Specialists, Inc. v.

Mountain States Tel. & Tel. Co., 844 P.2d 322, 325 (Utah 1992) (citing Marton Remodeling v.

Jensen, 706 P.2d 607, 609 (Utah 1985); Neiderhauser Builders & Dev. Corp. v. Campbell, 824

P.2d 1193, 1197 (Utah Ct. App. 1992))). In view of its finding that the parties were uncertain of

the amount owed under the original contract, the court of appeals concluded that their May 23

agreement was the result of a compromise between England and Horbach--a new agreement

constituting an accord and satisfaction. Id. at 304.

The court of appeals then determined that while the parties were both under the mistaken

impression that money was still owed on the contract, this mistake went to the terms of the

original contract but did not affect the terms of the new and separate agreement--the accord and

satisfaction--entered into by the parties on May 23, 1991. Id. at 305. The law of mutual mistake

in this state declares, "'A mutual mistake occurs when both parties, at the time of contracting,

share a misconception about a basic assumption or vital fact upon which they based their

bargain.'" Warner v. Sirstins, 838 P.2d 666, 669 (Utah Ct. App. 1992) (quoting Robert Langston

Ltd. v. McQuarrie, 741 P.2d 554, 557 (Utah Ct. App. 1987)). The court of appeals writes, "In the

instant case, the parties were mistaken as to facts relevant to the original contract--whether

money was then due and owing--not as to a term underlying the accord and satisfaction."

England, 905 P.2d at 305 n.4. While a mutual mistake does invalidate only the agreement

entered into in reliance on the mistaken assumption, we do not decide the correctness of the court

of appeals' legal conclusion that a mistake as to the amount owed does not go to the terms of an

accord in satisfaction of that debt. Instead, we conclude that the court of appeals misapplied this

rule of law to the facts of the present case.

Taking the facts as found by the trial court, there could have been no accord and satisfaction

entered into on May 23, 1991, because the first element of accord and satisfaction--the existence

of a bona fide dispute or uncertainty over an unliquidated amount--was not present. The trial

court's finding that both parties believed Horbach owed England $25,000 precludes the

possibility of a dispute over the amount owing and forces us to conclude that any uncertainty

Horbach may have had was cleared up, before he signed the May 23 agreement, by England's

own statement that Horbach owed him $25,000. Therefore, when Horbach executed the

agreement he was certain, though mistaken, of the amount he owed. If there was no dispute and

no uncertainty, there could have been no compromise and thus no accord. Accepting the facts as

found by the trial court, we must conclude that the May 23 agreement represented merely the

conclusion of the parties' original contract, not a new accord in satisfaction of an uncertain debt.

The court of appeals' ultimate conclusion that the parties' mistake went to the underlying

agreement, not to their May 23, 1991, accord and satisfaction, is based on a mischaracterization

of the trial court's findings of fact. If we accept the facts as actually found by the trial court,

there could have been no accord and satisfaction. The parties agreed that Horbach would pay

England $25,000 based on their mutual mistaken belief that Horbach owed England $25,000, not

as a compromise to satisfy an uncertain debt. The trial court therefore correctly concluded that

"the May 23rd agreement was made under a mutual mistake of fact which went to its essence

and, therefore, the putative agreement is unenforceable." Horbach's additional promise to give

England two percent of the Medicode stock must therefore be treated either as a gratuitous

promise unsupported by consideration or, as Horbach suggests, as a promise to hold the stock as

security for payment on Horbach's post-dated $25,000 check. In either case, we may uphold the

trial court's conclusion that "[a]ny concession extracted from [Horbach] by [England] in the

May 23rd alleged agreement lacks consideration and the agreement, therefore, is unenforceable."

On appeal, England does not argue that the trial court's factual finding was in error, only that the

common mistake of the parties constitutes an "uncertainty" within the meaning of the rule of

accord and satisfaction. By blurring the distinction between mistake and uncertainty, England

tries to make the trial court's facts fit within the court of appeals' theory of the case. A mistake,

however, is clearly different from an uncertainty. In fact, one might argue that making a mistake

requires some degree of certainty or at least some confidence that one's assumptions are correct.

England's argument that the parties' mutual mistake should constitute an uncertainty within the

rule of accord and satisfaction would effectively eliminate the doctrine of mutual mistake from

contract law because any mutual mistake could be called merely an uncertainty. Such a broad

definition of "uncertainty" is unwarranted by logic or precedent and would require courts to

enforce contracts in ways that the parties could never foresee at the time of contracting and that

might even be contrary to the intent of both parties.

Because there was no dispute between the parties and no uncertainty in the parties' minds at the

time of the May 23 agreement, that agreement cannot be characterized as an "accord and

satisfaction" but merely as the conclusion of their original 1989 stock sales agreement. As such,

the May 23 agreement was premised on a mutual mistake of material fact and is unenforceable.

The court of appeals' decision to enforce that agreement must therefore be reversed.

IV. DID THE TRIAL COURT ERR IN ALLOWING

HORBACH'S COUNTERCLAIM FOR OVERPAYMENTS?

England argues finally that the trial judge abused his discretion in allowing Horbach to amend his

pleading to conform to the evidence at trial, thereby permitting Horbach's counterclaim for

overpayments. Rule 15(b) of the Utah Rules of Civil Procedure provides:

If evidence is objected to at the trial on the ground that it is not within the issues made by the

pleadings, the court may allow the pleadings to be amended when the presentation of the merits

of the action will be subserved thereby and the objecting party fails to satisfy the court that the

admission of such evidence would prejudice him in maintaining his action or defense upon the

merits.

Utah R. Civ. P. 15(b).

The decision to permit amendment under rule 15(b) of the Utah Rules of Civil Procedure is

subject to what we have called conditional discretionary review. See Langeland v. Monarch

Motors, Inc., 307 Utah Adv. Rep. 3, 4 (Dec. 31, 1996) (applying conditional discretionary review

to Utah R. Civ. P. 36(b)). The trial court's discretion to grant amendment of the pleadings is

conditioned on the satisfaction of two preliminary requirements: a finding that the presentation

of the merits of the action will be subserved by amendment and a finding that the admission of

such evidence would not prejudice the adverse party in maintaining his action or defense on the

merits. The trial court has only limited discretion in making these preliminary findings, but once

these prerequisites are met, the trial court has full discretion to allow an amendment of the

pleadings; that is, it may grant or deny a party's motion for amendment upon any reasonable

basis, and the court's decision can be reversed only if abuse of discretion appears. Cf. id.

In this case, England argues convincingly that he was prejudiced in maintaining his defense

against Horbach's counterclaim because of the lateness of the amendment. In Langeland, this

court held that "the factors most important to our finding of prejudice . . . include (i) the temporal

proximity of the amendment to the date of trial, and (ii) whether the party opposing amendment

relied on the [pleadings] in such a way as to detrimentally affect its ability to prepare its case."

Langeland at 8. In this case, Horbach first mentioned his counterclaim in his trial memorandum

and moved for permission to amend his pleadings at the end of the presentation of evidence.

Prejudice might be found in the fact that England had no opportunity to prepare a response to the

counterclaim and no time to brief and argue legal defenses such as waiver and estoppel, and also

in the fact that England waived his right to a jury trial or rejected settlement offers in reliance on

his understanding that no counterclaim would be pursued.

However, the rule requires the trial court to consider prejudice only "[i]f evidence is objected to

at the trial." Utah R. Civ. P. 15(b). As his own brief states, "England acknowledges that no

objection was raised at trial." Because England failed to object, the trial court had full discretion

to grant or deny Horbach's motion to amend the pleadings and can be reversed only upon a

finding of abuse of discretion, that is, if "no reasonable basis" for the trial court's decision can be

found. Considering the trial court's finding that Horbach had overpaid England by $169,501.75,

the court's decision to allow Horbach's claim for that amount is reasonable and does not

constitute an abuse of its discretion.

England suggests that the counterclaim for overpayments that Horbach introduced at trial was

intentionally kept hidden until the day of trial and that allowing Horbach to amend his pleadings

at that late date will encourage other litigants to keep counterclaims hidden until the eve of trial.

However, the trial court's decision is not likely to have the precedential effect England fears.

First, any real advantage a party might gain by such surprise would constitute prejudice within

the meaning of rule 15(b), and if objected to at trial, the court would not have discretion to allow

the amendment. See Utah R. Civ. P. 15(b). Second, even in the absence of prejudice the trial

court's decision to permit a rule 15(b) amendment is within the discretion of the trial court and

any such "secret claims" would be lost if the trial judge found any reasonable basis for denying

the motion.

Litigants are adequately discouraged from keeping their claims secret until the eve of trial by the

fact that the trial judge has full discretion to deny late motions to amend for any reason and the

knowledge that most courts look on such motions with disfavor and are not easily persuaded to

grant them. Girard v. Appleby, 660 P.2d 245, 248 (Utah 1983). Even the most calculating

litigants are unlikely to risk losing their claim merely in the hope of gaining some kind of

advantage through the element of surprise. This is especially true when the potential advantage

to be gained could be eliminated by opposing counsel through an objection to the introduction of

the evidence at trial and a showing that the amendment would prejudice them in the presentation

of the merits of their action. The Rules of Civil Procedure are sufficient to discourage litigants

from intentionally concealing counterclaims until the eve of trial. We are not willing to further

constrict the discretion of trial judges by second-guessing their judgment every time an

amendment to a party's pleadings is permitted.

Because England failed to object to the presentation of evidence of Horbach's counterclaim at

trial, we conclude that the trial court was within its discretion to permit Horbach to amend his

pleadings to conform to the evidence introduced at trial.

Taking the facts as the trial court found them, we conclude that the court of appeals erred in

reversing the district court. If on May 23, 1991, the parties were convinced that Horbach owed

England $25,000, there could have been no accord and satisfaction, because there was no

uncertainty or dispute about the amount owed. Although the facts on the record are somewhat

ambiguous, England does not urge us to reexamine the trial court's findings of fact but merely

tries to make the trial court's facts fit within the court of appeals' theory of the case. This is an

awkward fit at best and would require the court to define "uncertainty" so as to include

"mistakes." This is not just a broad definition, it is a misdefinition, and by conflating the two

terms, the court would also conflate two doctrines, effectively subsuming the doctrine of mutual

mistake within the theory of accord and satisfaction. Such a change in the common law is not

justified by logic or by equity, particularly considering that the result in this case would be to

permit one party to retain what appears to be an unjust enrichment of $169,501.75.

The judgment of the court of appeals is reversed, and the trial court judgment reinstated.

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Chief Justice Zimmerman, Associate Chief Justice Stewart, Justice Howe, and Justice Russon

concur in Justice Durham's opinion.