Judson v. Terry Morgan Const., Inc.

• Decision Date: 28 November 1975
• Citation: 273 Or. 666,542 P.2d 1010
• Parties: Leonard B. JUDSON et al., Plaintiffs, v. TERRY MORGAN CONSTRUCTION, INC., an Oregon Corporation, Defendant-Respondent, Archie W. Hovey et al., Defendants, Ronald L. Marek, Trustee in Bankruptcy for Terry John Morgan and Linda SueMorgan, Defendant-Respondent, William E. Brickey, Trustee for First Federal Savings and Loan Association ofWillamette Valley, Defendant-Appellant.
• Court: Oregon Supreme Court

Page 1010

542 P.2d 1010

273 Or. 666

Leonard B. JUDSON et al., Plaintiffs, v. TERRY MORGAN CONSTRUCTION, INC., an Oregon Corporation,

Defendant-Respondent,

Archie W. Hovey et al., Defendants,

Ronald L. Marek, Trustee in Bankruptcy for Terry John Morgan

and Linda SueMorgan, Defendant-Respondent,

William E. Brickey, Trustee for First Federal Savings and

Loan Association ofWillamette Valley, Defendant-Appellant.

Supreme Court of Oregon.

Argued and Submitted Oct. 30, 1975.

Decided Nov. 28, 1975.

James N. Westwood, Portland, argued the cause for appellant, William E. Brickey, Trustee for First Federal Savings and Loan Association of Willamette Valley. With him on the briefs were Miller, Anderson, Nash, Yerke & Wiener and John R. Bakkensen, Portland.

Todd G. Brown, Corvallis, argued the cause for respondent, Ronald L. Marek, Trustee in bankruptcy for Terry John Morgan, Linda Sue Morgan and Terry Morgan Construction, Inc. With him on the brief were McClain & Brown, Corvallis.

James Eickelberg, Corvallis, filed a brief for respondents Hovey and Benson.

Before McALLISTER, P.J., and DENECKE, HOLMAN, TONGUE, HOWELL and BRYSON, JJ.

TONGUE, Justice.

This is a suit to foreclose a mechanic's lien against real property owned by Terry Morgan Construction, Inc., a bankrupt corporation. Among the defendants was Home Federal Savings and Loan Association, which filed an answer and cross-complaint to foreclose a deed of trust executed by Terry Morgan and Linda Morgan as security for a $30,000 loan. ¹ Home Federal appeals from a decree declaring that it has no interest in the property. ²

Home Federal contends on this appeal that the trial court erred in excluding evidence to support reformation of the trust deed signed by Terry Morgan and Linda Morgan into a trust deed of the bankrupt corporation; in denying its motion to amend its cross-complaint to allege and pray for such a reformation of the trust deed; and in finding that it has no interest in the real property. In resolving the issues arising from these contentions the pleadings and the record of the proceedings at the trial are of controlling importance.

The pleadings and the trial record.

The cross-complaint of Home Federal alleged that Terry Morgan Construction, Inc., was the owner of the property; that Home Federal made a loan of $30,000 to the corporation secured by a trust deed on the property; that Terry Morgan and Linda Morgan were officers of that corporation 'and executed said note and mortgage with the full and complete intention of and were acting on behalf of the Defendant, TERRY MORGAN CONSTRUCTION INC., in the scope of their employment,' and that payments on the note were delinquent.

In his opening statement counsel for Home Federal stated that one of the 'matters to resolve' was 'a reformation proceeding'; that 'the allegations are' that there was either a mutual mistake or a unilateral mistake by Home Federal and 'inequitable conduct' of Terry Morgan Construction and that Home Federal 'proceeded on the understanding that the note and the first trust deed would secure property that Mr. Morgan was purchasing' and that 'there will be a fact dispute as to whether we can show with clear and convincing evidence (that) reformation is to be entitled.' In response, the attorney for the bankruptcy Trustee stated his position to be that 'defendant is not entitled to reformation either under the law or under the pleadings of the case. * * * He's not pleaded the elements of reformation * * *.'

The first witness called by Home Federal, one of its employees, identified the note signed by Terry Morgan and Linda Morgan. The note and trust deed were then received in evidence. The branch manager for Home Federal was then called as a witness. He testified that he received an application from Terry Morgan for a loan for building a 'spec house.' He was then asked '(W)hat was your understanding when the loan application was made with regard to whom the loan was to be made.'

The Trustee then objected on the ground that the deed of trust was unambiguous and that such evidence was both inadmissible under the parol evidence rule and irrelevant under the pleadings. Counsel for Home Federal responded by contending that 'the parol evidence rule does not apply to this proceeding because this is a suit to reform.' The Trustee then pointed out that Home Federal's pleading did not allege the elements required for reformation.

The matter was then argued, with both attorneys citing cases and submitting previously prepared trial memoranda on the question of the requirements for reformation. The court then sustained the objection to the previous question and also sustained an objection to the offer in evidence of the loan application, signed by Terry Morgan, when offered to show that he was 'acting on behalf of the corporation.'

The attorney for Home Federal then moved, in the alternative, for leave to file an amended complaint or for a voluntary nonsuit. Both motions were denied.

At the end of the trial an offer of proof was made by Home Federal at which time the testimony of six witnesses was taken, presumably 'under the rule' of ORS 17.045(2). The testimony of these witnesses, which is contended by Home Federal to be sufficient to support its claim for reformation, is summarized below in discussing that contention.

Upon completion of the offer of proof counsel for Home Federal moved 'to amend the pleading to reflect the transaction as the court has heard it under the offer of proof' and contended that 'the facts clearly show that the mistake was made either in equity or inequitable conduct on behalf of one party and mutual mistake or unilateral mistake and inequitable conduct.' ³ The trial court then denied that further motion of Home Federal for leave to amend.

The denial of Home Federal's motion to amend its cross-complaint was not an abuse of discretion by the trial court because its offer of proof was insufficient.

The principal assignment of error by Home Federal is that the trial court erred in denying its motion for leave to amend. In support of that assignment Home Federal relies upon ORS 16.390. ⁴

Home Federal first contends that the discretion granted to trial courts under this statute should be exercised liberally in the furtherance of justice, rather than to defeat justice, and that motions under this statute to amend pleadings to conform to the facts proved should be allowed unless to do so would surprise the other party or put him at a disadvantage, citing Morrill v. Rountree, 242 Or. 320, 325, 408 P.2d 932 (1965). Home Federal also contends that after coming to court armed with a trial memorandum on the subject of reformation of instruments the Trustee in bankruptcy could not properly claim that he would be prejudiced by the allowance of amendments to more properly allege the elements required for reformation of this trust deed.

The Trustee contends, however, that before the trial court can properly allow a motion made during the course of a trial under ORS 16.390 to conform pleadings 'to the facts proved' it must appear that the facts have been proved by the evidence received without objection, citing Tracy and Baker v. City of Astoria, 193 Or. 118, 129, 237 P.2d 954 (1951). ⁵

In reply, Home Federal contends that in the subsequent case of Furrer v. Talent Irrigation District, 258 Or. 494, 505, 466 P.2d 605, 611 (1971), we said, with reference to Tracy, that:

'If evidence is introduced which goes beyond the pleadings in the sense that it relates to a cause of action or defense not pleaded, and objection is made to it, an amendment to the pleadings cannot be allowed. But if the evidence is within the scope of the pleadings, an amendment is permissible. * * *'

See also Bramwell v. Rowland, 123 Or. 33, 42--43, 261 P. 57 (1927).

In view of the allegations of the cross-complaint of Home Federal that when Terry Morgan and Linda Morgan executed the note and trust deed they did so 'with the full and complete intention of and were acting on behalf of the defendant, Terry Morgan Construction, Inc., in the scope of their employment' and in view of apparent understanding by the attorney for the Trustee in bankruptcy that Home Federal would seek a reformation of the trust deed under these allegations, we believe that in this case the evidence offered by Home Federal did not 'go beyond the pleadings in the sense that it relate(d) to a cause of action or defense not pleaded.' Cf. Beard v. Beard, 232 Or. 552, 557, 376 P.2d 404 (1962), and Elliott v. Mosgrove, 162 Or. 507, 543, 91 P.2d 852, 93 P.2d 1070 (1939). See also Clark on Code Pleading 726, § 117 (1947).

It follows, under the rule of Furrer, that an amendment to the pleading to conform to such facts would have been proper even though an objection had been made to such evidence; provided, of course, that the offered evidence was sufficient to establish sufficient 'facts' to which the cross-complaint could be amended so as to 'conform * * * the pleading * * * to the facts proved,' as provided by ORS 16.390. Indeed, it is conceded by Home Federal that in order to provide a proper basis for the amendment of a pleading during trial to conform to 'the facts proved,' as provided by ORS 16.390, 'a party must put forth proof of his facts.'

The more serious question is whether in this case Home Federal, by its offer of proof, 'put forth proof' of sufficient facts to entitle it to a reformation of the note and trust deed, as necessary to provide a proper basis for the amendment of its cross-complaint under ORS 16.390 to conform to such facts. ⁶

Home Federal contends on this point that 'testimony adduced in Home Federal's offer of proof established that Home Federal thought it was entering into a note and trust deed with Terry Morgan Construction, Inc. * * *.' This is not entirely clear, however, because the written report of the Home Federal loan committee was that the loan application was 'submitted by Terry...