Harbor Ins. Co. v. Stokes

• Decision Date: 03 February 1995
• Docket Number: No. 93-7128,93-7128
• Citation: 45 F.3d 499
• Parties: HARBOR INSURANCE COMPANY, a California Corporation; Continental Insurance Company, a New Hampshire Corporation, Appellees, v. John David STOKES; Carolyn Ramsey Stokes, Appellants.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 499

45 F.3d 499

310 U.S.App.D.C. 198

HARBOR INSURANCE COMPANY, a California Corporation;

Continental Insurance Company, a New Hampshire

Corporation, Appellees, v. John David STOKES; Carolyn Ramsey Stokes, Appellants.

No. 93-7128.

United States Court of Appeals, District of Columbia Circuit.

Argued Oct. 17, 1994.

Decided Feb. 3, 1995.

Appeal from the United States District Court for the District of Columbia (92cv01858).

Barry C. Hansen, Washington, DC, argued the cause for appellants. With him on the briefs was Michael J. Pangia, Washington, DC.

Robert E. Heggestad, Washington, DC, argued the cause and filed the brief for appellees.

Before: WILLIAMS, GINSBURG and HENDERSON, Circuit Judges.

Opinion for the Court filed by Circuit Judge WILLIAMS.

STEPHEN F. WILLIAMS, Circuit Judge:

The parties in an earlier litigation entered into a compromise settlement late one Friday afternoon. The following Monday morning they learned that this court, on the day before the settlement, had decided that lawsuit in favor of the plaintiffs. Those plaintiffs, John and Carolyn Stokes, who are defendants here, understandably resisted implementation of the settlement, which deprived them of over $170,000 (about 5% of the total judgment) that they would otherwise have secured by their total victory in this court. (For simplicity's sake, the rest of the opinion will refer just to the injured husband, "Stokes"). Harbor and Continental (collectively "Harbor"), the original defendant's insurers, sued Stokes in district court for breach of contract. The district court granted judgment for Harbor, rejecting Stokes's defense of mutual mistake of fact. Because Stokes and Harbor acted in conscious ignorance of the uncertainties about both the outcome of the case and its timing, we too reject that defense and affirm the judgment of the district court.

* * *

Stokes sued George Hyman Construction Company for damages as a result of injuries sustained in 1984. At trial he won jury verdicts totalling $3,287,057, and on July 22, 1991 the district court entered judgment in his favor in that amount, with provision for "costs" as well. Interest on the judgment accrued as a matter of law. D.C.Code Sec. 15-109 (1981).

Hyman filed a timely appeal to this court, and both parties filed motions for summary disposition. Stokes's counsel, Michael Pangia (whose testimony controls for purposes of evaluating the district court's grant of summary judgment), testified that he created his motion out of whole cloth, filing it without any knowledge that a motion for summary affirmance existed or was ever granted. ¹ Pangia thus did not expect a summary outcome rather, he thought that "by the time we got a briefing schedule, an argument scheduled and a decision, ... it would very likely be another year if we were lucky." According to Pangia, counsel for Harbor expected the same and said so to Pangia repeatedly.

By the time these motions were filed, John Stokes had been out of work for eight years. He and his family were, in Pangia's words, "literally starving and living on borrowed money." Stokes had begun to consider advice on filing personal bankruptcy. Destitute, he was generally frustrated "about how long the Court of Appeals was taking with these matters." Thus, despite Pangia's asserted confidence that Stokes would eventually prevail in court, he began settlement negotiations in March 1992, so that he could get his money as soon as possible.

By the beginning of June 1992 the parties had come very close to settlement, but could not bridge a final gap. Harbor offered $3.2 million and would go no higher; Stokes was willing to take the face value of the verdict, $3.287 million, without interest and costs (which then aggregated $170,000-$200,000), but would go no lower.

After several weeks at this impasse, Harbor changed negotiators. The new negotiator, Robert Masterson, contacted Pangia on Friday, June 26 and said that Harbor had instructed him to settle immediately. Pangia was also apparently eager to settle the matter quickly, because he was leaving the next Tuesday on a trip to Russia. Pangia reiterated his demand for the full $3.287 million. After confirming his authority to settle for this amount, Masterson called Pangia back and offered to settle on Pangia's terms. Pangia immediately faxed his acceptance of Masterson's offer, concluding a settlement contract at about 5 PM on the 26th.

Unbeknownst to both parties, this court had entered an order on Thursday, June 25, granting Stokes's Motion for Summary Affirmance and denying Hyman's Motion for Summary Reversal. On Monday, June 29, both parties received notice of the decision in the mail. Pangia contacted Masterson and repudiated the settlement contract.

Harbor sued for breach of contract in the district court. Stokes raised the defense of mutual mistake of fact and also counterclaimed, asserting that Harbor knew of this court's order before the settlement and fraudulently failed to alert Stokes. The trial court dismissed the counterclaim, on the ground (among others) that Stokes had offered no evidence whatsoever that Harbor had learned of the order before the settlement. The district court then granted Harbor's motion for summary judgment, holding that there was no mutual mistake of fact because Stokes failed to show the alleged mistake had a material effect on the agreed exchange of performances. Stokes appeals the judgment, but here he neither claims error in dismissal of the counterclaim nor asserts that Harbor had any pre-settlement knowledge of this court's summary affirmance.

* * *

Because we are reviewing the district court's grant of a motion for summary judgment, our review is de novo. Shields v. Eli Lilly & Co., 895 F.2d 1463, 1466 (D.C.Cir.1990). Moreover, we may affirm the judgment of the district court on the basis of a different legal theory. Larson v. Northrop Corp., 21 F.3d 1164 (D.C.Cir.1994). As it turns out, we do not reach the materiality issue.

Under the doctrine of mutual mistake, "a contract may be rescinded if the contracting parties entertained a material mistake of fact that went to the heart of their bargain." Bituminous Coal Operators' Ass'n v. Connors, 867 F.2d 625, 635 (D.C.Cir.1989). We assume arguendo that the parties' mistake--as to whether this court had made a final disposition of the underlying action--was mutual, material, and "went to the heart of the bargain." But as the doctrine essentially allows a party to avoid a contract--and thus the risk of a particular mistake, it is necessarily inapplicable if the court finds that that party bore the risk. Restatement (Second) of Contracts Secs. 152, 154 (1981); see Flippo Construction Co., Inc. v. Mike Parks Diving Corp., 531 A.2d 263, 272 (D.C.1987). In Flippo, the D.C. Court of Appeals specifically adopted Sec. 154 of the Restatement, which reads as follows:

Sec. 154. When a Party Bears the Risk of a Mistake.

A party bears the risk of a mistake when

(a) the risk is allocated to him by agreement of the parties, or

(b) he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or

(c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.

In the comments to Sec. 154(b), the Restatement reformulates treating "limited knowledge as sufficient" as "conscious ignorance":

c. Conscious ignorance. Even though the mistaken party did not agree to bear the risk, he may have been aware when he made the contract that his knowledge with respect to the facts to which the mistake relates was limited. If he was not only so aware that his knowledge was limited but undertook to perform in the face of that awareness, he bears the risk of the mistake. It is sometimes said in such a situation that, in a sense, there was not mistake but "conscious ignorance."

Restatement (Second) of Contracts Sec. 154 cmt. c. (1981).

The Restatement has quite logically set "conscious ignorance" in a section explicitly addressing risk allocation. Every time parties enter a contract, they act with incomplete information. They make judgments about the desirability of acquiring (and waiting for) additional information, and of creating specific contractual provisions to handle...