Beynon Bldg. Corp. v. National Guardian Life Ins. Co.

• Decision Date: 05 October 1983
• Docket Number: No. 82-852,82-852
• Citation: 455 N.E.2d 246,118 Ill.App.3d 754,74 Ill.Dec. 216
• Parties: , 74 Ill.Dec. 216 BEYNON BUILDING CORPORATION, Plaintiff-Appellant, v. NATIONAL GUARDIAN LIFE INSURANCE CO., a corporation, and Rockford Mortgage Co., a corporation, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

Page 246

455 N.E.2d 246

118 Ill.App.3d 754, 74 Ill.Dec. 216

BEYNON BUILDING CORPORATION, Plaintiff-Appellant, v. NATIONAL GUARDIAN LIFE INSURANCE CO., a corporation, and Rockford Mortgage Co., a corporation, Defendant-Appellee.

No. 82-852.

Appellate Court of Illinois Second District.

Oct. 5, 1983.

Rehearing Denied Nov. 10, 1983.

Victor, LaFayette, Russell & Fuenty, Gerald LaFayette, Rockford, for plaintiff-appellant.

Nordquist Law Offices, Ltd., Steven L. Nordquist, Rockford, for defendant-appellee.

UNVERZAGT, Justice:

The plaintiff, Beynon Building Corporation, appeals a judgment denying its complaint for a release from a mortgage held consecutively by the defendants, Rockford Mortgage Co. (hereafter, "Rockford") and National Guardian Life Insurance Co. (hereafter, "National"), and reforming the mortgage and note secured by the mortgage. Although Rockford was named as a defendant, it was no longer in business and did not participate in the lawsuit. The following issues are presented for review:

(1) Whether the trial court erred in denying the plaintiff's motion to strike National's affirmative defenses.

(2) Whether the affirmative defense of mistake and the prayer for reformation were barred by the statute of limitations or by laches.

(3) Whether the affirmative defense of mistake and the prayer for reformation were barred by the statute of frauds.

(4) Whether National met its burden of proving that a mistake was in fact made on the mortgage and note.

On October 23, 1964, the plaintiff executed a mortgage and note with Rockford. The mortgage document provided that the plaintiff would pay:

"the principal sum of Eighty-Five Thousand and no/100 Dollars ($85,000.00) as evidenced by a principal promissory note of even date herewith, payable in 180 equal monthly installments of Six Hundred Forty-Nine and 60/100 Dollars ($649.60) beginning December 15, 1964 and with a final payment November 15, 1979."

The installment note provided that the plaintiff would pay Rockford $85,000 as follows:

"Six Hundred Forty-Nine and 60/100 Dollars on the Fifteenth day of December A.D. 1964; Six Hundred Forty-nine and 60/100 Dollars on the Fifteenth day of each and every month beginning on the Fifteenth day of January A.D. 1965 for 178 months succeeding, and a final payment of Six Hundred Forty-nine and 60/100 Dollars on the Fifteenth day of November A.D., 1979, with interest at the rate of 5 1/2 per cent. per annum, payable Monthly * * *."

Rockford assigned the mortgage and note to National by a document also dated October 23, 1964.

The plaintiff made 178 monthly payments of $649.60. In September 1979, the plaintiff sent National a check for $1,299.20, with an accompanying letter explaining that it was to cover the final two payments and requesting a release of the mortgage. National refused to accept the check as the final payment and sent a reply letter explaining that an error had been made in drafting the original promissory note in that the correct monthly payments should have been $694.60 rather than $649.60.

When further attempts to obtain a release from the mortgage based on the 180th payment failed, the plaintiff filed a complaint for release from the mortgage on January 9, 1980. National filed an answer denying that the payments tendered by the plaintiff were in full payment of the mortgage. National also asserted as an affirmative defense that there was an inadvertent mistake in the amount of monthly payments shown on the note, that the mistake was discovered and in 1965 a new amortization schedule was sent to the plaintiff showing that amortization would take 200 rather than 180 months, and that the plaintiff's former president acknowledged the longer loan term in a letter written to National in 1973. The loan amortization schedule was dated November 18, 1965, and showed that payments of $649.60 at 5 1/2% interest would take 200 months, with the final payment due on August 15, 1981. The letter written by the plaintiff's former president in 1973 was a request for additional financing from National and stated, "The present mortgage balance is $51,695.06 and calls for payments of $649.60 through August of 1981 at 5 1/2% interest."

A hearing was held before the court. The general counsel for National testified that, according to an amortization booklet, the monthly payments necessary to amortize an $85,000 loan at 5 1/2% interest over 15 years (or 180 months) was $694.60. He concluded that a mistake had been made in the monthly payment figures but stated that National's records did not indicate that the discrepancy was discovered until 1979 when the "final payment" was tendered. No one from Rockford who was involved in the loan transaction was available to testify.

A local banker testified that he calculated the interest rate based on the amortization of an $85,000 loan over 180 payments at $649.60 to be about 4 1/2%. He also testified that the prevailing prime rate in October 1964 was 4 1/2%, according to the records of a local bank in existence at that time. The president of the plaintiff at the time the loan and mortgage were obtained acknowledged receiving the amortization schedule in 1965 and referring to its terms in his 1973 letter to National.

The court entered its judgment denying the plaintiff's complaint for release of mortgage and granting National's request for reformation of the mortgage and note so that the monthly payment would be $694.60 rather than $649.60, based on the parties' intentions that the loan be for $85,000 at 5 1/2% interest for 15 years. The court found, based on testimony presented by National, that the balance due was $13,106.07, plus interest of $1,814 as of the date of trial, and the per diem interest was $2 per day.

It is undisputed that, given an $85,000 loan to be paid in 180 monthly payments, a 5 1/2% interest rate and $649.60 payments do not compute. It is also clear that the interest rate was specified only in the note, as 5 1/2%, and that the mortgage did not specify an interest rate. The other three terms--$85,000 for 180 months at $649.60 per month--were listed on both documents.

The first issue is whether the trial court erred in denying the plaintiff's motion to strike National's affirmative defense. In its motion to strike, the plaintiff stated that the mortgage spoke for itself and that the note referred to in the affirmative defense did not relate to the issue at hand, i.e., whether the terms of the mortgage had been fulfilled. The plaintiff argues that the mortgage and note are two separate, independent documents and that only the terms contained in the mortgage document itself control whether its obligation has been fulfilled.

The plaintiff cites Conerty v. Richtsteig (1942), 379 Ill. 360, 365, 41 N.E.2d 476, for the principle that a note and mortgage are separate undertakings and the note wholly independent of the mortgage. The defendant in turn cites Schultz v. Plankinton Bank (1892), 141 Ill. 116, 121, 30 N.E. 346, for the rule that a mortgage and note must be considered together and treated as one instrument. However, Conerty dealt with the rights and obligations of successive owners of mortgaged property, where the later owners assumed the mortgage and obtained extensions on the note, and Schultz dealt with whether a parol agreement entered into when a mortgage was executed was admissible to vary the contract as to payment of the notes. Neither case discussed the relationship of a mortgage and note where, as here, a mutual mistake of fact that would justify reformation was claimed.

Such a mistake results in the drawing of the contract itself. It is not a fundamental mistake relating to an essential element of the contract, which would prevent a meeting of the minds of the parties; rather, it occurs when an actual good-faith agreement is reached but, due to error, is not expressed in the written reduction of the agreement. (Friedman v. Development Management Group, Inc. (1980), 82 Ill.App.3d 949, 954, 38 Ill.Dec. 379, 403 N.E.2d 610.) Thus, the mistake must have existed at the time of the execution of the instrument, must have been mutual and common to all parties, and must have been such that the parties intended to say one thing but by the written instrument expressed another. (Sedlacek v. Sedlacek (1969), 107 Ill.App.2d 334, 337, 246 N.E.2d 6.) A mutual mistake exists when the contract has been written in terms that violate the understanding of both parties. (Biren v. Kluver (1976), 35 Ill.App.3d 692, 696, 342 N.E.2d 325.) It is well settled that the parol evidence rule is no bar to the admission of evidence on the question of mutual mistake, and this is so even when the instrument to be reformed is clear and unambiguous on its face. (Ballard v. Granby (1980), 90 Ill.App.3d 13, 16, 45 Ill.Dec. 485, 412 N.E.2d 1067.) Thus parol evidence may be used to show the real agreement between the parties when a mistake has been made and the evidence is for the purpose of making the contract conform to the original intent of the parties. (Stoerger v. Ivesdale Co-op Grain Co. (1973), 15 Ill.App.3d 313, 317, 304 N.E.2d 300.) Since National alleged that a mutual mistake was made on the mortgage document as to the correct amount of the monthly payments, the note was admissible as extrinsic evidence to establish the real intention of the parties.

In addition, section 2 of "AN ACT relating to mortgages of property of public utilities" (Ill.Rev.Stat.1981, ch. 95, par. 52) provides that a mortgagee shall release a mortgage, if so requested, upon receipt "of all such sum or sums of money as are really due to him from the mortgagor." (Emphasis added.) National's assertion that there was indeed more money owing and that a mistake had been made on the document was sufficiently pleaded under section 2-613(d) of the Code of Civil Procedure (Ill.Rev.Stat.1981, ch. 110, par. 2-613(d)) to raise that affirmative matter. Thus the trial court properly denied...