Boyles Bros. Drilling Co. v. Orion Industries, Ltd.

• Decision Date: 18 August 1988
• Docket Number: No. 85CA1259,85CA1259
• Parties: 6 UCC Rep.Serv.2d 1164 BOYLES BROTHERS DRILLING COMPANY, a Utah corporation, Plaintiff-Appellee, v. ORION INDUSTRIES, LTD., a Colorado corporation, Defendant-Appellant. . II
• Court: Colorado Court of Appeals

Page 278

761 P.2d 278

6 UCC Rep.Serv.2d 1164

BOYLES BROTHERS DRILLING COMPANY, a Utah corporation, Plaintiff-Appellee, v. ORION INDUSTRIES, LTD., a Colorado corporation, Defendant-Appellant.

No. 85CA1259.

Colorado Court of Appeals,

Div. II.

Aug. 18, 1988.

John E. Myles, Englewood, for plaintiff-appellee.

Hart & Trinen (on the briefs), Donald T. Trinen, Theodore W. Brin, Denver, Downey & Murray, P.C., Thomas E. Downey, Jr., Theodore W. Brin, Englewood, for defendant-appellant.

KELLY, Chief Judge.

This appeal arises out of an action to collect on a promissory note. Defendant, Orion Industries, Ltd., argues that the trial court erred in entering summary judgment for plaintiff, Boyles Brothers Drilling Company, and in dismissing Orion's counter-claim for reformation of the indorsement. The trial court ruled that, because the written indorsement did not specify it was to be "without recourse" and any alleged disclaimer of Orion's liability could not be proved by parol evidence, there existed no genuine issues of fact concerning Orion's liability; thus, Boyles was entitled to judgment as a matter of law. We conclude that the trial court erred in applying the parol evidence rule to the circumstances here, and therefore, we reverse.

In satisfaction of a $71,400 debt, Orion indorsed to the order of Boyles a promissory note, which Orion had received from a third party, having a face value and principal balance of approximately $87,300. Contemporaneously, Orion executed an "Assignment of Promissory Note and Security Interest" which was attached to the note. The assignment stated, in part, that the assignments therein (of the note and a pledge agreement in certain stocks) were "in full and complete satisfaction of all claims" Boyles had against Orion on the underlying debt.

When the makers of the note defaulted, Boyles sued Orion as the indorser. Orion's answer included the affirmative defenses of mistake and fraudulent or negligent misrepresentation. In its counterclaim based on fraud in the inducement, Orion sought reformation of the contract of indorsement to reflect what Orion alleged was the agreement of the parties that assignment of the note was to be without recourse.

Boyles moved for summary judgment. It admitted that, pursuant to § 4-3-119(1), C.R.S., the assignment, as an allonge to the note, must be construed together with the indorsement. It argued, however, that nothing in the assignment operated as a disclaimer of liability on the indorsement, and that any such disclaimer could not be proved by parol evidence. See § 4-3-414(1), C.R.S. (including Official Comment 1).

Orion's memorandum in opposition to summary judgment was accompanied by two affidavits of its officers which alleged that the attorney and agent for Boyles, Timothy J. Flynn, had represented to Orion that the assignment, which he had drafted, would relieve Orion from "any future liability" to Boyles. Orion argued, in effect, that Flynn induced Orion to execute the indorsement and assignment by fraudulently or negligently misrepresenting that the words "in full and complete satisfaction of all claims" had the same legal effect as the words "without recourse." The affidavit of Orion's president stated:

"[Flynn] assured me ... that from that time on, Boyles would look exclusively to the maker ... and not to Orion.... Based on these affirmative representations, and the negotiations throughout ... it was my understanding that the Assignment terminated all of Orion's ... liability to Boyles and Boyles was assuming the risks of collection.... I would not have executed the Assignment on behalf of Orion had I known or understood that the Assignment could be interpreted to be with recourse or that Orion ... would be held liable on the Note if the makers defaulted."

Citing § 4-3-414(1), C.R.S., the trial court concluded that parol evidence to this effect would not be admissible at trial to prove Orion's disclaimer of liability or to reform the indorsement to read "without recourse." Accordingly, the trial court ruled that there existed no genuine issues of fact concerning Orion's liability, entered judgment in favor of Boyles on its complaint, and dismissed Orion's counterclaim for reformation.

Orion contends that parol evidence is admissible to show that execution of a contract was procured by fraud or mistake. Further, Orion argues that the facts alleged in its affidavits give rise to a legally cognizable fraud or mistake defense to liability on the contract of indorsement for which reformation is an appropriate remedy. We agree.

The official comment to § 4-3-414, C.R.S., relied upon by the trial court, states:

"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 indorsement and cannot be proved by parol. The customary manner of disclaiming the indorser's liability under this section is to indorse 'without recourse'."

We conclude, however, that this comment states only the general rule. There are exceptions.

As between the immediate parties, a negotiable instrument or an indorsement thereof is merely a contract. See § 4-3-119, C.R.S. (including Official Comment 3). While parol evidence is not admissible to vary or contradict the terms of a promissory note or a blank indorsement of the note, Interstate Trust Co. v. U.S. National Bank, 67 Colo. 6, 185 P. 260 (1919); Metro National Bank v. Roe, 675 P.2d 331 (Colo.App.1983), nevertheless, parol evidence of a contemporaneous oral agreement or transaction may be admissible if its effect is to prove a defense to payment of the instrument according to its terms. McCaffrey v. Mitchell, 98 Colo. 467, 56 P.2d 926 (1936); Metro National Bank v. Roe, supra. Thus, in an action to reform an instrument that does not reflect the intent of the parties because of fraud or mistake, parol evidence is admissible. Chilson v. Reed, 154 Colo. 149, 389 P.2d 87 (1964); St. Regis Paper Co. v. Wicklund, 93 Wash.2d 497, 610 P.2d 903 (1980); Wyoming Discount Corp. v. Lamar, 444 P.2d 620 (Wyo.1968).

Indeed, the official comment to § 4-3-118, C.R.S., states that the rules of construction "preclude a resort to parol evidence for any purpose except reformation of the instrument." (emphasis added) Moreover, unless explicitly displaced by the particular provisions of the U.C.C., all supplemental bodies of law, including the principles of fraud, misrepresentation, and mistake, apply to commercial contracts. Section 4-1-103, C.R.S. The traditional exception to the parol evidence rule applies when the "evidence is offered to establish fraud or mutual mistake or mistake of law." Light v. Rogers, 125 Colo. 209, 242 P.2d 234 (1952); see Martin v. Cole, 3 Colo. 113 (1876); Johnson v. Cummings, 12 Colo.App. 17, 55 P. 269 (1898).

The U.C.C. does not eliminate, it expressly acknowledges, the equitable remedy of reformation. See § 4-3-118, C.R.S. (including Official Comment 1). Orion seeks to establish that execution of the contract of indorsement was induced by the fraudulent or negligent misrepresentations of the indorsee, thus warranting reformation. To this end, parol evidence is admissible.

Boyles argues that, in any event, the facts alleged by Orion constitute a mistake of law only, and that a mistake of law does not afford the basis for reformation. We disagree with this interpretation of the facts alleged.

Reformation is an appropriate remedy when the evidence clearly and unequivocally shows that an instrument does not express the true intent or agreement of the parties. Atchison v. Englewood, 193 Colo. 367, 568 P.2d 13 (1977). Thus, reformation is generally permitted when it is found that the parties have made a mutual mistake, or that there has been a mistake by one of the parties and fraud or inequitable conduct on the part of the other. Mike Occhiato Mercantile Co. v. Allemannia Fire Insurance Co., 98 F.Supp. 888 (D.Colo.1951); Johnson v. First National Bank, 24 Colo.App. 23, 131 P. 284 (1913); accord Kimberly, Inc. v. Hays, 88 N.M. 140, 537 P.2d 1402 (1975).

A representation of law, however, is only an expression of opinion on which the party to whom it is made has no right to rely. Chacon v. Scavo, 145 Colo. 222, 358 P.2d 614 (1960); Kunz v. Warren, 725 P.2d 794 (Colo.App.1986). Therefore, a mistake of law induced by the other party's misrepresentation is ordinarily not a ground for relief. Ryan v. Vickers, 158 Colo. 274, 406 P.2d 794 (1965). This rule is typically applied in cases in which the alleged misrepresentation was as to the existence or effect of an ordinance or statute. See, e.g., Metzger v. Baker, 93 Colo. 165, 24 P.2d 748 (1933).

Naturally, there are also exceptions to this general rule:

"Mistake as to particular private rights may be treated as a mistake of fact, or as a mixed mistake of law and fact. Private rights, ... although they are the result of rules of law, or depend on rules of law applied to the construction of legal instruments, are usually considered matters of fact."

Ryan v. Vickers, supra (emphasis added); see also Atchison v. Englewood, supra (mistake as to private rights); Metzger v. Baker, supra (noting exceptions for representations by one with special knowledge, in a fiduciary relationship, or as to laws of foreign states).

Moreover, any strict distinction that may have existed between "mistake of fact" and "mistake of law" has been eroded in recent years in a number of jurisdictions. See 13 S. Williston, Contracts § 1583 (W. Jaeger 3rd ed. 1970); see also D. Dobbs, Remedies § 11.8 (1973) (mistake as to private rights or as to legal effect of an instrument may be treated as mistake of fact justifying relief). Thus, even though there is no misapprehension as to what words have been used in a contract, mistake as to the legal effect of those words, or of the absence of them, is subject to reformation...