In re Ivenux, Inc.

• Citation: 298 B.R. 442
• Decision Date: 21 August 2003
• Docket Number: Bankruptcy No. 03-11694 EEB.,Adversary No. 03-1306 HRT.
• Parties: In re INVENUX, INC., Debtor. Medallion Biomedical, LLC, Plaintiff, v. Joseph Rosania, Defendant.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado

298 B.R. 442

In re INVENUX, INC., Debtor.

Medallion Biomedical, LLC, Plaintiff, v. Joseph Rosania, Defendant.

Bankruptcy No. 03-11694 EEB.

Adversary No. 03-1306 HRT.

United States Bankruptcy Court, D. Colorado.

August 21, 2003.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Brent R. Cohen, Denver, CO, for Debtor.

Bart B. Burnett, Chad S. Caby, Pearson, Horowitz & Poskus, Denver, CO, for Trustee/Defendant.

Richard O. Campbell, Denver, CO, for Plaintiff.

ORDER RE: DEFENDANT'S MOTION TO DISMISS AND PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

HOWARD R. TALLMAN, Bankruptcy Judge.

This case comes before the Court on Defendant/Trustee's Motion to Dismiss Adversary Complaint for Failure to State a Claim Upon Which Relief can be Granted [the "Motion to Dismiss"] and Plaintiff's Cross Motion for Summary Judgment [the "Motion for Summary Judgment"]. The Court, having reviewed the Motions and responses thereto and having reviewed the file in this matter will deny both motions.

Dismissal of a case prior to allowing the parties an opportunity to engage in discovery and develop a more complete understanding of the facts and circumstances surrounding the issues raised in an action is a "harsh remedy which must be cautiously studied, not only to effectuate the spirit of the liberal rules of pleading but also to protect the interests of justice" Morgan v. City of Rawlins, 792 F.2d 975, 978 (10th Cir.1986). In the Court's review of a motion to dismiss under Fed. R. Bankr.P. 7012, it must "accept as true `all well-pleaded factual allegations in the amended complaint,' and those allegations are `viewed in the light most favorable to the nonmoving party.'" County of Santa Fe, N.M. v. Public Service Co. of New Mexico, 311 F.3d 1031, 1034 (10th Cir.2002) (quoting Sutton v. Utah State Sch. for the Deaf & Blind, 173 F.3d 1226, 1236 (10th Cir.1999)). This Court is bound to apply "the accepted rule that a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80, (1957). The Tenth Circuit Court of Appeals has observed that "the Federal Rules of Civil Procedure erect a powerful presumption against rejecting pleadings for failure to state a claim." Maez v. Mountain States Telephone and Telegraph, Inc., 54 F.3d 1488, 1496 (10th Cir.1995) (quoting Auster Oil & Gas, Inc. v. Stream, 764 F.2d 381, 386 (5th Cir.1985)).

Plaintiff in this action seeks to reform its security agreement on the basis of mutual mistake. According to the Plaintiff's Complaint, it was the intention of the parties to the agreement that Plaintiff was to receive a security interest in certain shares of stock in Cropsolutions, Inc. [the "Stock"] which were owned by the Debtor and in which the Chapter 7 Trustee now claims an interest. Although the UCC-1 financing statement which Plaintiff filed to perfect its security interest is worded broadly enough to embrace an interest in the Stock, it does not appear as part of the collateral in the security agreement. Plaintiff claims that a "scrivener's error" resulted in a written security agreement which did not reflect the agreement and intent of the parties.

Under the law of the state of Colorado, an instrument may be reformed when, due to a mutual mistake, the written document fails to reflect the agreement and intent of the parties. See, e.g., Maryland Casualty Co. v. Buckeye Gas Products Co. Inc., 797 P.2d 11, 13 (Colo.1990) (en banc); Woodruff v. O'Dell, 701 P.2d 112, 114 (Colo.Ct.App.1985).

Trustee maintains that such right of reformation is not available where the agreement at issue is a security agreement under the Colorado version of the Uniform Commercial Code. Colo.Rev.Stat. § 4-9-203 sets out the minimum requirements for a security agreement to be valid under the U.C.C. At minimum, the debtor must authenticate "a security agreement that provides a description of the collateral." Colo.Rev.Stat. § 4-9-203(b)(3)(A). There is no disagreement between the parties that the collateral that Plaintiff alleges it intended to take a security interest in is not described in the security agreement. Thus, according to the Trustee's argument, Colo.Rev.Stat. § 4-9-203 is not complied with.

The issue for this Court is whether Colo.Rev.Stat. § 4-9-203 displaces Colorado's common law such that the right of reformation due to mutual mistake — a common law right available to contracting parties generally — is not available to parties intending to create a security agreement under Article 9 of the U.C.C. If that is the case, then Trustee's Motion to Dismiss must be granted because Plaintiff has not pleaded facts that would allow it to recover the relief it seeks.

Plaintiff's belief is that Colo.Rev.Stat. § 4-1-103 addresses that issue in its favor. That section provides that "[u]nless displaced by the particular provisions of this title, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause shall supplement its provisions." Colo.Rev.Stat. § 4-1-103. Consequently, the common law relating to fraud, mistake, duress, coercion, etc. still applies to agreements under the U.C.C., and that body of law applies to the instant agreement, unless it is apparent that § 4-9-203 has displaced those common law principles with respect to security agreements.

This Court believes that the requirements of Colo.Rev.Stat. § 4-9-203 do not displace state law with respect to mutual mistake. The bedrock upon which contract law is built is the determination and enforcement of the intent of the parties. George v. Tate, 102 U.S. 564, 570, 26 L.Ed. 232 (1880) ("The intent of the parties is the contract, and whenever that is ascertained, however inartificially [sic] expressed, it is the duty of courts to give it effect."); Chesapeake & Ohio Canal Co. v. Hill, 15 Wall. 94, 82 U.S. 94, 100, 21 L.Ed. 64 (1872) (To "ascertain the substantial intent of the parties" is the "fundamental rule in the construction of all agreements."); Echo Acceptance Corp. v. Household Retail Services, Inc., 267 F.3d 1068, 1080 (10th Cir.2001) ("A fundamental rule of contract law is that the court should strive to ascertain and give effect to the mutual intent of the parties.") (quoting Pepcol Mfg. Co. v. Denver Union Corp., 687 P.2d 1310, 1313 (Colo.1984)). Mutual mistake, like fraud, duress, coercion, capacity to contract, etc. goes to that question of intent which is the very heart of contract formation.

There is no question that § 4-9-203 is in the nature of a statute of frauds because it requires a security agreement to be in writing. Colo.Rev.Stat. § 4-9-203 comment 3. But the fact that an agreement must be in writing to satisfy a statute of frauds is not inconsistent with reformation of that written agreement if, by reason of mutual mistake, the true agreement of the parties is not expressed in the writing. See, e.g., 4 White & Summers, Uniform Commercial Code § 32-2 (4th ed.) (Even though security is enforceable as against the debtor under Article 9, it still may be unenforceable even against the debtor under other state law. Thus it is elementary that one party to a consensual transaction may rescind for fraud, for mutual mistake, for duress or for undue influence); Moon v. Bank of America (In re Schutz), 241 B.R. 646 (Bankr.W.D.Mo.1999) (The court reformed a security agreement that contained incorrect collateral description on basis of mutual mistake.).

There is no allegation that the agreement currently before the Court is anything but crystal clear in its terms and that it simply does not grant a security interest in the Stock. Trustee argues that, when a written agreement is clear and unambiguous on its face, the parol evidence rule operates such that evidence extrinsic to the document itself is not admissible to vary the terms of the agreement.

In the case of Mitchell v. Shepherd Mall State Bank, 458 F.2d 700 (10th Cir.1972), the Tenth Circuit properly held that parol evidence was not admissible to vary the terms of an unambiguous security agreement. The section of the SBA's uniform security agreement which calls for a description of collateral did not include inventory, accounts receivable or contract rights. In a separate section of the security agreement that called for classification of the collateral, boxes were checked indicating that the collateral did include inventory, accounts receivable and contract rights. In addition, a UCC-1 financing statement was properly filed which listed inventory, accounts receivable and contract rights among the collateral. The bankruptcy referee held that the security agreement was ambiguous and admitted testimony from a bank vice president that participated in the loan transaction. He testified that it was the bank's intention to take a security interest in the items missing from the collateral list. On, appeal the district court reversed the referee's determination and the Tenth Circuit affirmed. The court held "that parol evidence as to the parties' intentions was inadmissible." Id. at 704. "It is a familiar rule that extrinsic evidence is not admissible, either to contradict, add to, subtract from, or vary the terms of a written instrument." Randolph v. Helps, 9 Colo. 29, 10 P. 245, 247 (1886); see also Magnetic Copy Services, Inc. v. Seismic Specialists, Inc. 805 P.2d 1161, 1164 (Colo.Ct.App.1990) ("Although parol evidence may be considered by the trial court to determine if a contract is ambiguous, if, as here, after hearing the evidence the contract remains unambiguous the parol evidence should be stricken."); D.C. Concrete Management, Inc. v. Mid-Century Ins. Co., 39 P.3d 1205, 1207 (Colo.Ct.App.2001) ("If a document...