Guthrie v. Times-Mirror Co.

• Citation: 124 Cal.Rptr. 577,51 Cal.App.3d 879
• Decision Date: 01 October 1975
• Docket Number: TIMES-MIRROR
• Court: California Court of Appeals
• Parties: James K. GUTHRIE et al., Plaintiffs and Appellants, v. TheCOMPANY, Defendant and Respondent. Civ. 13725.

Page 577

124 Cal.Rptr. 577

51 Cal.App.3d 879

James K. GUTHRIE et al., Plaintiffs and Appellants, v. The TIMES-MIRROR COMPANY, Defendant and Respondent.

Civ. 13725.

Court of Appeal, Fourth District, Division 2, California.

Oct. 1, 1975.

Hearing Denied Dec. 17, 1975.

Kaplan, Livingston, Goodwin, Berkowitz & Selvin, Herman F. Selvin and Peter C. Smoot, Beverly Hills, for plaintiffs and appellants

[51 Cal.App.3d 882] Gibson, Dunn & Crutcher, Julian O. von Kalinowski and Arthur L. Sherwood, Los Angeles, for defendant and respondent.

OPINION

TAMURA, Associate Justice.

This action arises out of the sale of The Sun Company of San Bernardino (Sun), a newspaper publishing company, to The Times-Mirror Company (Times). ¹ Plaintiffs (former Sun shareholders) in their own behalf and on behalf of other former Sun shareholders, seek to recover the profits and gains allegedly realized by the Times by virtue of its acquisition and subsequent resale of the Sun. The trial court sustained, without leave to amend, a general demurrer to the third amended complaint. Plaintiffs appeal from the ensuing judgment of dismissal.

The pertinent allegations of the third amended complaint are as follows:

In June 1964, plaintiffs and other Sun shareholders sold all of the capital stock in Sun to the Times for $15,000,000 cash. Shortly after the sale, the United States brought an antitrust suit against the Times. In October 1967, the United States District Court rendered its judgment decreeing that the Times' control of the Sun properties through stock ownership violated section 7 of the Clayton Act. (United States v. Times Mirror Company, D.C., 274 F.Supp. 606.) The judgment was affirmed by the United States Supreme Court and became final in June 1968. In January 1969, pursuant to the final judgment and with approval of the United States District Court, the Times sold the Sun to the Gannett Corporation for $17,700,000. The Times retained for itself other property and assets of the Sun worth $1,800,000.

Plaintiffs alleged that at the time the contract was entered into 'all parties to said contract believed and were under the apprehension that the contract was not in violation of Federal antitrust laws'; the Times so represented to plaintiffs, stating it had received legal advice to that effect from competent legal counsel whose identity was disclosed to plaintiffs; in reliance on said representation and because of the belief induced thereby, plaintiffs executed the contract; the parties were 'mistaken and under a misapprehension as to the law applicable to said contract, in that said contract, in fact, but unknown to the parties, was an unlawful one and in violation of the Federal antitrust laws.'

It is further alleged that plaintiffs contemplated and expected that the Times would conduct the Sun 'in accordance with social, political and economic policies coinciding with plaintiffs' own views'; but for that expectation and the mistake and misapprehension alleged, plaintiffs would not have executed the contract; plaintiffs' expectations and purposes have been 'frustrated' because the Sun has not been conducted by the Times since January 1969.

Plaintiffs alleged that before the sale the Sun had always shown a profit and had paid its shareholders annual dividends of $100 per share; that plaintiffs no longer receive these dividends; and that they have lost the benefit of the enhancement in the market value of their shares. The prayer was for rescission and for recovery of the sum of four and a half million dollars (the $2,700,000 alleged profit on the resale of the newspaper plus $1,800,000 as the value of the Sun's assets retained by the Times).

The Times demurred on the following grounds: (1) Failure to state facts sufficient to constitute a cause of action; (2) lack of jurisdiction of the subject matter or action; (3) defect and misjoinder of parties plaintiff; and (4) uncertainty. The court sustained the demurrer without leave to amend on the ground the complaint failed to state facts sufficient to constitute a cause of action.

Plaintiffs urge they have alleged facts entitling them to the relief sought on one or more of the following theories: Mutual mistake of law, constructive fraud, or innocent misrepresentation. We have concluded that plaintiffs have failed to plead a cause of action based on any of the proffered theories and that the judgment of dismissal must be affirmed.

I

The principal theory on which plaintiffs predicate their right to rescind and to have the Times adjudged to be an involuntary trustee of the alleged profits and gains from the resale of the Sun is mutual mistake of law. The substance of the allegations upon which they rely is that both parties contracted under the mistaken belief that the contract was not in violation of the federal antitrust laws when, in fact, unbeknownst to them it was.

In California a mutual mistake, whether of fact or law, which affects an essential element of the contract and is harmful to one of the parties is subject to rescission by the party harmed. (Civ.Code, §§ 1689, subd. (b)(1); 1567, subd. (5); 1576; 1578. Hannah v. Steinman, 159 Cal. 142, 112 P. 1094; Hartwig v. Clark, 138 Cal. 668, 72 P. 149; Adams v. Heinsch, 89 Cal.App.2d 300, 200 P.2d 796; Spear v. Farwell, 5 Cal.App.2d 111, 42 P.2d 391; 1 Witkin, Summary of Cal. Law, §§ 293, 302. See Rest., Contracts, § 502; 3 Corbin, Contracts, § 611; Williston, Contracts (3d ed.) § 1593.)

The Times urges that (1) the alleged mistake is not the kind of mistake which the law recognizes as a ground for rescission and (2) plaintiffs have failed to show that they were harmed by the mistake. From the analysis which follows, we have concluded that although the complaint purports to allege a mutual mistake of law as defined in Civil Code section 1578, ² it is fatally defective because it fails to show that plaintiffs were injured by the alleged mistake.

Mistake is said to fall generally into two categories: (1) A person may know the specific facts upon which his rights depend but be ignorant of the rules of law the courts will apply to those facts, ³ or (2) a person may know the applicable legal rules but be mistaken as to the specific facts to which the rules are to be applied. (3 Corbin, Contracts, § 616, pp. 746--748.) The instant case does not fit neatly into either category. The mistake is not alleged to have arisen out of a mistake concerning the existence of any specific operative facts or out of an ignorance of the pertinent legal rules. Plaintiffs' earlier verified complaint alleged that before the parties contracted they received advice of 'competent legal counsel' that the contract was not in violation of the federal antitrust laws. ⁴ The Times therefore urges, in substance, that it must be inferred that the parties contracted, not in ignorance of the applicable legal rules or as to the existence of any operative facts, but rather on the basis of a mistaken judgment as to how a court would apply the legal rules to the facts. It is urged that ordinarily an error in judgment concerning an uncertain future occurrence is not a basis for avoiding a contract for mistake, citing Taylor v. Taylor, 66 Cal.App.2d 390, 397, 152 P.2d 480.

The Times further contends that the complaint reveals that at the time they comtracted the parties were aware that the Times' acquisition and control of the Sun presented a possible or potential federal antitrust problem and that they therefore assumed the risk that their counsel's prophecy as to what a court would do might be wrong.

Where parties are aware at the time the contract is entered into that a doubt exists in regard to a certain matter and contract on that assumption, the risk of the existence of the doubtful matter is assumed as an element of the bargain. (Rest., Contracts, § 502, com. F. See Hannah v. Steinman, supra, 159 Cal. 142, 147, 112 P. 1094; Moreno Mut. Irr. Co. v. Beaumont Irr. Dist., 94 Cal.App.2d 766, 783, 211 P.2d 928.) Otherwise stated, the kind of mistake which renders a contract voidable does not include 'mistakes as to matters which the contracting parties had in mind as possibilities and as to the existence of which they took the risk.' (Williston, Contracts (3d ed.) § 1543. See Raddue v. Le Sage, 138 Cal.App.2d 852, 855, 292 P.2d 522.)

It would be inappropriate, however, at the demurrer stage to determine the validity of the Times' contention that the kind of mistake alleged does not render the contract voidable. It cannot be said as an abstract legal proposition that a mistaken judgment, with knowledge of the law and the facts, concerning the legal effect a court will give to a transaction cannot form the basis for rescission for mutual mistake of law. (See 6 Corbin, pp. 753--754.) To predict what a court will do in a complicated field such as antitrust may be a risky venture even for the most astute lawyer having knowledge of all the pertinent facts, applicable legal rules and apposite judicial precedents, but unless we know the nature of the legal advice on which the parties relied and their state of mind at the time they contracted, we cannot infer solely from the facts alleged that the parties doubted the validity of the transaction and therefore assumed the risk that the contract might be found to be violative of the federal antitrust laws. Although, as the Times suggests, it may be inferred that the parties sought and obtained legal advice Before they contracted because they were concerned about the potential antitrust implications of the transactions, any doubts the parties may have had may have been laid to rest after their consultation with legal counsel.

We therefore conclude that construing the complaint liberally, as we must, it pleaded a mistake of law sufficient to survive a general demurrer.

The complaint, however, is fatally defective because it fails to set forth facts showing that plaintiffs were harmed or injured as a result of the...