Rolph v. McGowan

• Court: Washington Court of Appeals
• Writing for the Court: GREEN; MUNSON, C. J., and ROE
• Citation: Rolph v. McGowan, 579 P.2d 1011, 20 Wn.App. 251 (Wash. App. 1978)
• Decision Date: 30 May 1978
• Docket Number: No. 2362-III
• Parties: Harold ROLPH, Respondent, v. Odessa M. McGOWAN, Max T. Lyons and Joy A. Lyons, his wife, Respondents, and Dennis B. Swartout and Patricia A. Swartout, his wife, Appellants.

Page 251

20 Wn.App. 251

579 P.2d 1011

Harold ROLPH, Respondent, v. Odessa M. McGOWAN, Max T. Lyons and Joy A. Lyons, his wife Respondents and Dennis B. Swartout and Patricia A. Swartout, his wife, Appellants.

No. 2362-III.

Court of Appeals of Washington,Division 3, Panel Two.

May 30, 1978.

Nancy E. Horgan, Randall & Danskin, Spokane, for appellants.

C. E. Huppin, Huppin, Ewing, Anderson & Hergert, Spokane, for respondent Rolph.

George Young, Spokane, for respondent McGowan.

Carl Diana, Spokane, for respondents Lyons.

GREEN, Judge.

Harold Rolph sued to foreclose his security interest in an equipment contract. The trial court allowed foreclosure and granted Mr. Rolph a deficiency judgment against one of the original obligors on the contract, Odessa McGowan, and against Max and Joy Lyons and Dennis and Patricia Swartout. The court further entered judgment on Mrs. McGowan's behalf against the Lyonses and the Swartouts, and on the Lyonses' behalf against the Swartouts. The Swartouts appeal.

Two issues are presented: (1) Was Mr. Rolph barred from claiming a deficiency by his failure to file a creditor's claim in the estate of Mickey McGowan, Odessa's deceased husband, who, with his wife, was an original obligor on the equipment contract? and (2) Was there clear, cogent, and convincing proof to support the trial court's reformation of the Lyons/Swartout agreement to show that the Swartouts had assumed the equipment contract?

In April 1974, Harold Rolph sold a restaurant business, including certain restaurant equipment, to Mickey and Odessa McGowan. The sale was by security agreement. Subsequently, McGowan entered into a partnership with Max Lyons to operate the restaurant. Upon dissolution of this partnership in January 1975, Mr. Lyons assumed its obligations, including the equipment contract.

In February 1975, Mr. Lyons and his wife, Joy, decided to sell the restaurant because he was in ill health. Mrs. Lyons testified that she talked to Mr. Swartout on the telephone regarding the prospective sale and stated to him that she and her husband wanted "out" of the business. Mr. Swartout was an experienced real estate broker and the owner of a closing company. He decided to purchase the restaurant and because of his experience offered to draft the documents for the sale, telling the Lyonses that an attorney would not be necessary. However, he testified that prior to the closing, he contacted his own attorney for guidance in drawing up the contract in order to avoid assuming certain obligations. As drafted, the contract provided that the Swartouts were to:

(1) Pay according to the terms thereof that certain promissory note dated January 2, 1975, in the amount of $10,000 wherein Mickey or Odessa M. McGowan are the payees and Max T. and Joy A. Lyons are the makers.

(3) Take the property and equipment subject to, and only subject to, the following items:

A. Scarpelli-McGowan contract of $78,333.38.

B. Rolph equipment contract of approximately $36,800.

C. Delinquent property taxes for 1971, 1972, 1973, 1974.

D. Washington Water Power air conditioning contract of approximately $3,500.00.

The parties negotiated and closed the transaction within a 2-day period.

Swartout made five payments on the equipment contract and then dealt directly with Mr. Rolph to secure a modification of that agreement with respect to the payments. Soon thereafter, Swartout ceased making payments altogether, and Rolph instituted this action.

First, the Swartouts contend that Mr. Rolph's claim is barred because he failed to file a creditor's claim in the estate of Mickey McGowan within the time required by law. They base their argument on Graham v. Radford, 71 Wash.2d 752, 431 P.2d 193 (1967). There, the plaintiff brought an action for personal injuries against a woman who, with her husband, owned and managed the apartment building where the accident causing the injuries occurred. The husband died subsequent to the accident and the plaintiff did not file a creditor's claim in his estate. In denying recovery against the wife because of the plaintiff's failure to file a creditor's claim, the court stated:

It is the rule in this state that the creditor must exhaust the primary fund before he can resort to the secondary fund. In the case of In re Schoenfeld's Estate (56 Wash.2d 197, 351 P.2d 935 (1960)), supra, this court held that community debts of a deceased husband and surviving wife could not be charged against the separate property of the deceased before the community property was exhausted.

Graham v. Radford, supra at 756, 431 P.2d at 195. Since the community property, all of which is subject to administration in the decedent's estate, would be primarily liable, and inasmuch as it was not liable, no claim having been filed, the court held that the secondary liability of the surviving spouse did not arise. We have considered this decision, but do not find it controlling.

Rolph's security agreement with the McGowans contained the following language in the preamble:

This agreement executed . . . by and between Rolph Restaurant Corporation, a Washington corporation, hereinafter known as "Seller", and Mickey J. McGowan and Odessa M. McGowan, husband and wife, hereinafter known as "Buyers" . . .

It was signed by the McGowans as follows:

/s/ Mickey J. McGowan

/s/ Odessa M. McGowan,

/s/ Purchasers.

The preamble to the security agreement refers to the fact that the buyers are husband and wife, but there is no language in the agreement stating that the buyers are purchasing the property "as husband and wife." Therefore, Odessa McGowan's signature on the security agreement created a separate obligation in her, as well as a presumptively community obligation. Since separate debts are primarily payable from separate property, Mrs. McGowan's separate property was primarily liable and the failure to file a creditor's claim in Mr. McGowan's estate would not bar recovery by Mr. Rolph. See Lind v. Frick, 15 Wash.App. 614, 550 P.2d 709 (1976).

Second, the Swartouts contend that the trial court erred in permitting reformation of the Lyons/Swartout agreement to show assumption of the equipment contract by the Swartouts. Specifically, they assign error to the trial court's finding that it was the intent of all the parties that the Swartouts would assume the Rolph obligation.

The contract provided that the Swartouts would take the property and equipment "subject to" the Rolph contract. Generally, the term "subject to" means that the grantee is taking without personal liability to either his own vendor or to the holder of the security interest. See Osborne, Mortgages § 252 at 507 (1970). The Swartouts assert that this contractual provision is binding upon the parties.

The court may reform a contract so that it expresses the real intention of the parties if it finds that the parties were mutually mistaken in their understanding of a material term or that one of the parties was mistaken and the other party acted fraudulently or inequitably. J. J. Welcome & Sons Constr. Co. v. State, 6 Wash.App. 985, 988, 497 P.2d 953 (1972). The evidence of the mistake of fact must be clear, cogent and convincing. Kessinger v. Anderson...