Com. Tr. Co. Mtge. Invest. Fund Case , 357 Pa. 349 ( 1947 )

I concur in the opinion filed by Justice PATTERSON because of my respect for the realities of the situation. Before the legislature passed the Act of May 24, 1945, P. L. 944, it was an obligation of a fiduciary to accept a higher offer for the sale of trust property after the court's approval of the first sale provided the sale had not been consummated. When after H. J. Shapiro on February 6, 1946 made the "highest bid" of $61,000 and the court accepted his bid and authorized the fiduciary to execute a deed for the property upon certain terms and conditions, both vendor and vendee believed (as theagreement of sale stated) that "the Vendor in its fiduciary capacity is legally obliged to accept any higher or better offer which it receives prior to the approval of the within sales agreement by the Orphans' Court of Allegheny County, Pa." This agreement was signed by the Commonwealth Trust Company and its seal attached and also by H. J. Shapiro. After Shapiro's name appeared the word "(Seal)". This agreement also set forth that the Vendor "has the right to revoke the within Agreement at any time prior to the consummation of the within sale and to refund the payment made on account of the purchase price without further liability to the Vendee."

On March 12, 1946, the Commonwealth Trust Company received an offer $1,000 greater than the price it agreed to accept from Shapiro. On March 22, 1946, the Orphans' Court over the objections of Shapiro again took competitive bids for the sale of the real estate and on that day entered an order revoking the previous order of February 6 (which had authorized the sale of the property to Shapiro) and accepting the bid of George Schwartz in the sum of $66,000, and authorizing the Commonwealth Trust Company to execute a deed for the property to the said George Schwartz or his nominees.

Shapiro made prompt objections to all these proceedings which he alleges were taken in violation of his rights under the agreement of sale which he and the Trust Company had entered into on February 6, 1946.

Under the provisions of the Act of May 24, 1945, P. L. 944, Shapiro is entitled to the property and the fiduciary is not relieved of his obligation to perform his contract "except as otherwise agreed by the parties." Appellee says that Shapiro did "otherwise agree" by a contract in writing which bore the word "(Seal)" after his signature. Appellee contends (and the dissenting opinion upholds this view) that since Shapiro's agreement is under seal he cannot avail himself of the plea that he received no consideration for his agreement to a conditional promise, when under the Act of 1945 he had a clear right to the purchase of the property.

The legal significance of a seal to a signature has often been stated by this court. See Piper v. Queeney, 282 Pa. 135,127 A. 474. Failure of consideration is a defense to an action on a sealed instrument; want of consideration is not.

But there is another principle of law which in my judgment rules this case. This principle is well stated by Chancellor Kent in Gillespie v. Moon, 2 Johnson's, N.Y. Chan. 585, where he said: "I have looked into most, if not all, of the cases on this branch of equity jurisdiction, and it appears to me to be established, and on great and essential grounds of justice, that relief can be had against any deed or contract, in writing, founded in mistake or fraud. The mistake may be shown by parol proof, and the relief granted to the injured party, whether he sets up the mistake affirmatively, by bill, or as a defense. . . . it appears to be the steady language of the English chancery, for the last seventy years, and of all the compilers of the doctrines of that court, that a party may be admitted to show, by parol proof, a mistake, as well as fraud, in the execution of a deed or other writing."

That this "contract in writing" was founded on a mistake is evident in the very language of the contract itself, as quoted in the first paragraph of this opinion, because the partiesstated that they understood it was the obligation of the fiduciary "to accept any higher or better offer", etc. Under the Act of 1945 the vendor had no such legal obligation and no such "right to revoke the within agreement". Both the vendor and vendee, however, honestly believed in the existence of that right. So did the Orphans' Court of Allegheny County, thereby becoming the fountain head of the mistake which is the foundation of this contract; this mistake gives Shapiro the right to interpose an equitable defense to its enforcement. President Judge TRIMBLE, speaking for the Allegheny County Orphans' Court, said in his opinion filed on March 28, 1946: "Our position has been that the Act of May 24, 1945 (No. 374), which, if valid, prevents setting aside a sale for an inadequate price, is unconstitutional and cannot be given effect in this court."

Presumably, both vendor and vendee knew from the time they appeared in this case before the Allegheny County Orphans' Court that that court regarded the Act of 1945 as unconstitutional, and therefore, as a law, non-existent. Up to that time, that Orphans' Court was the highest tribunal which had spoken as to the Act's constitutionality. Accepting, as afact, which the vendor and vendee manifestly did, the court's erroneous conclusion that the Act of 1945 had not superseded the old law on the subject, both parties entered into the contract of February 6, 1946 under a mistake of fact as to their respective rights andobligations. That an action for the rescission of a written contract or an equitable defense to its enforcement, may be based upon a mistake of fact made or entertained by the parties when they entered into the contract has been universally recognized. Even if the mistake which was the genesis of the execution of the contract was one of law, equity will relieve the parties if they can be restored to the status quo. Justice MITCHELL said in Fink v. Farmers' Bank et al., 178 Pa. 154,167, 35 A. 636: ". . . equity has so far contented itself with relief in cases of mutual mistake of legal rights where it was possible to restore both parties to status quo." 17 C.J.S. 501, section 145, makes this statement: "To the general rule that mistake of law is no ground for relief there are certain exceptions or apparent exceptions. Mistake as to particular private rights is treated as mistake of fact or as a mixed mistake of law and fact. Private rights of property, although they are the result of rules of law, or depend on rules of law applied to the construction of legal instruments, are usually considered matters of fact." (Citing cases).

In Logan v. Mathews, 6 Pa. 417, it was held that a promise to pay where there is no legal obligation, if made in ignorance of rights, or under surprise, will not bind, In Watts v. Cummins,59 Pa. 84, this court speaking through Justice AGNEW held that where parties have presupposed facts or rights to exist as the basis of their contracts, which did not, such contracts made in mutual mistake will be relieved against. In Moore v. Moore, 255 Fed. 497, the U.S. Circuit Court of Appeals, Third Circuit, said: "A promise made where there is no legal obligation, and made, whether through ignorance of rights or misconception of the law, to avoid something that cannot happen, lacks valid consideration, and is not binding. Logan v. Mathews, 6 Pa. 417; Offutt v. Parrott, 1 Cranch, C.C. 154, 18 Fed. Cas. 606, No. 10,453; Maull v. Vaughn, 45 Ala. 134; Grimes v. Grimes, 89 S.W. 548, 28 Ky. Law Rep. 549."

In 28 L.R.A. (N.S.) 840 appears the following: "The rule that equity will not interfere to cancel a contract made through mistake of law applies to a mistake as to the general law, and not to a case where a party is mistaken as to the effect of existing circumstances in relation to his private rights. Toland v. Corey, 6 Utah, 392, 24 P. 190; Marshall v. Lane,27 App. D.C. 276; Bonney v. Stoughton, 122 Ill. 536, 13 N.E. 833; Cook v. Sumner Spinning Mfg. Co., 1 Sneed, 698; Waggoner v. Waggoner (Va.) 30 L.R.A. (N.S.) 644, 68 S.E. 990; Cooper v. Phibbs, 15 Week. Rep. 1053, 22 Eng. Rul. Cas. 870.

"And a mistake by a party as to his antecedent existing legal rights, as distinct from a mistake as to the legal import of the act done, furnishes a ground for equitable relief from the consequences of the mistake in cases in which the mistake can be rectified without injury to the rights of others. Re McFarlin (Del.) 75 A. 281; Wyche v. Greene, 16 Ga. 57. In suchcase the mistake is really one of fact. Marshall v. Lane,27 App. D.C. 276." (Italics supplied).

In Gefken v. Graef, 77 Ga. 340, where a husband and wife entered into a marriage settlement by which property belonging to her was conveyed to a trustee for the joint use of herself and husband and such children as she might have, and at her death to go to her children, both of them believing that such deed was necessary to prevent the husband's marital rights from attaching, and both being ignorant of the law then existing, which secured to her all her property, equity has jurisdiction of a bill to set aside and cancel the marriage settlement, and a verdict and judgment canceling and setting it aside is binding on the parties and their privies until set aside in some of the modes provided by law.

In Osincup v. Henthorn, 46 L.R.A. (N.S.) 174, 89 Kan. 58,130 P. 652, it was held the mistake of the wife and mother of a decedent in regard to the law of descents and distributions of a state other than that of their residence, which led to the apportionment and transfer (by agreement) of land owned by the decedent at the time of his death to the mother, when, under the statute, the widow was entitled to all of it, is a mistake of fact against which equity will relieve, unless some principle of equity bars the granting of such relief. In Warder et al. v. Tucker,7 Mass. 449, it was held where one, through a mistake of the law, acknowledges himself under an obligation, which the law will not impose upon him, he shall not be bound thereby. In Hunt v.Rousmanier's Administrators, 21 U.S. 174, Chief Justice MARSHALL, speaking for the United States Supreme Court, said: "Although we do not find the naked principle, that relief may be granted on account of ignorance of law, asserted in the books, we find no case in which it has been decided, that a plain and acknowledged mistake in law is beyond the reach of equity."

In Reggio v. Warren, 207 Mass. 525, 93 N.E. 805, a bill was filed by a beneficiary under a testamentary trust to cancel a release of his claim against the estate in consideration of a note for the sum he was entitled to in cash on the ground of a mutual mistake of the parties as to the validity of the transaction. The Supreme Judicial Court of Massachusetts in entering the decree prayed for said, inter alia: "These defendants also contend that the mistake set forth in the bill was a pure mistake of law, for which no redress can be given. . . . it is now well settled . . . that a mistake as to the title to property or as to the existence of certain particular rights, though caused by an erroneous idea as to the legal effect of a deed or as to the duties or obligations created by an agreement, was really a mistake of fact and not strictly one of law, and so did not constitute an insuperable bar to relief."

Kerr on "Fraud and Mistake", 4th Edition, 467, says: "When therefore a man, through misapprehension or mistake of the law, parts with or gives up a private right of property or assumes obligations upon grounds upon which he would not have acted but for such misapprehension, a court of equity may grant relief if, under the general circumstances of the case, it is satisfied that the party benefited by the mistake cannot in conscience retain the benefit or advantage so acquired."

Williston on Contracts, Revised Edition, Volume 5, pp. 4329-30, section 1540, states: "the term 'mistake' might well be used inclusively to cover all kinds of mental error, however, induced. . . . It is usual, however, to use the term 'mistake' as including only such mistake as is made without misrepresentation by the other party to the transaction; and the word is so used in this treatise."

In section 1544, p. 4333, Williston states: "It is often said that a mistake, in order to justify rescission, must relate to the intrinsic nature of the bargain. . . . It seems a better mode of statement to say that a mistake vitally affecting a fact or facts on the basis of which the parties contracted renders their contract voidable by an injured party. That is, where the parties assumed a certain state of facts to exist, and contracted on the faith of that assumption, they should be relieved from their bargain if the assumption is erroneous. . . . This is a sound principle of justice, and should be applied without any further question as to whether the mistake is intrinsic or extrinsic, or whether it affects identify or qualify."

The Restatement of Contracts, pp. 961-62, section 502, states: ". . . where parties on entering into a transaction that affects their contractural relations are both under a mistake regarding a fact assumed by them as the basis on which they entered into the transaction, it is voidable by either party if enforcement of it would be materially more onerous to him than it would have been had the fact been as the parties believed it to be, except (a) where the welfare of innocent third persons will be unfairly affected, or (b) [not applicable here] (c) [not applicable here]"

Under Comment a appears the following: "Where both parties assume the existence of a certain state of facts as the basis on which they enter into a transaction, the transaction can be avoided by a party who is harmed, if the assumption is erroneous."

In Heacock et al. v. Fly, 14 Pa. 540, where the contracting parties acted under a misapprehension as to the law, this court held as follows: "Justice requires that the contract should be rescinded. Their mistake was mutual. . . ." We said in that case that "the parties were led into error by the conveyancer." In the instant case it may be said that the parties "were led into error" by the court below in treating the Act of 1945 as invalid.

When this vendor and vendee met, the vendor said in effect, "I am agreeing to sell you this property for $61,000 but thelaw is such that I will be obliged to rescind my agreement if I receive a higher offer before the sale is consummated and I wish to make that fact clear to you so that you will not accuse me of duplicity in not carrying out this agreement." The vendee replied in effect, "It is my understanding that under the law you may be compelled to treat this agreement you just signed as a nullity." The vendee Shapiro then signed and "sealed" the agreement so that the vendor would be assured that he, Shapiro, understood the situation and would not later accuse him of bad faith if the property should be sold to a higher bidder. The contract was really nothing more than a memorandum which parties sometimes make so as to avoid a future misunderstanding as to what their agreement was. In this case both the vendor and vendee acted under a mistake as to their rights and obligations because of the Orphans' Court's treating the Act of 1945 as unconstitutional. That mistake was the genesis of this "contract". For this court to enforce a contract so palably founded on a mutual mistake would be inequitable and would justify the reproach often cast on courts which permit the immolation of justice on the alter of technicalism.

It is true that a seal "imports consideration" but it is equally true that it does not import unchallengeable validity to a contract founded on a mutual mistake. The old common law doctrine that a seal imports consideration has so often worked injustice that more than half the states in the Union have abolished the doctrine and it has also been greatly modified in England¹ and in this country by the allowance of equitable defenses² to actions based on sealed instruments.

In my opinion no court which has the power (as Pennsylvania courts have) to recognize equitable defenses³ would permit the enforcement of a contract so clearly founded on mutual mistake as is the contract now before us. As Chancellor Kent said in Gillespie et ux. v.Moon, supra, "It would be a great defect in what Lord Eldon terms the moral jurisdiction of the court, if there was no relief for such a case."⁴

I concur in the reversal of the decree of the court below.

¹ Under English law if a surety's obligation was under seal, the only mode of resisting the creditor's claim on the ground that the creditor had indulged the primary debtor in the matter of time was by applying to a court of equity for an injunction, for he had no legal defense to the creditor's action. Davey v.Prendergrass, 5 B. Al. 187. The English statute of 1854, introducing pleas on equitable grounds, now gives the surety an equitable defense at law.

² Williston on Contracts, Vol. 1, section 218, lists 27 states in the Union in which the distinction between sealed and unsealed written contracts is in terms abolished. In other states it is enacted only that sealed contracts shall be presumed in the absence of contrary evidence to have been made for sufficient consideration. In 1935, New York specifically abolished this presumption of consideration arising from the fact that an instrument is sealed.

In a scholarly article in the Harvard Law Review, Vol. 22, p. 97, Professor James Barr Ames said, inter alia: "There is a certain analogy between the ethical development of the law and that of the individual. As early law is formal and unmoral, so the child or youth is wont to be technical at the expense of fairness."

He then discusses the "formal and unmoral attitude of the common law in dealing with contracts under seal." He cites the fact that in 1835 "the defendant's defense to an action upon a bond, that it had been obtained from him by fraudulent representations, was not allowed, Lord Abinger saying: 'You may perhaps be relieved in equity, but in a court of law it has always been my opinion that such a defense is unavailing when once it is shown that the party knew perfectly well the nature of the deed which he was executing.' "

After citing other examples of injustices resulting from "the formal and unmoral attitude of the common law in dealing with contracts under seal", Professor Ames said: "In all these cases, however, equity sooner or later gave relief."

In the closing paragraph, Professor Ames said: "It is obvious that the spirit of reform which during the last six hundred years has been bringing our system of law more and more into harmony with moral principles has not yet achieved its perfect work."

³ In another article by Professor Ames on the subject "Specialty Contracts and Equitable Defences", 9 Harvard Law Review 49, this learned law writer states: "By statute or judicial innovation, as we have seen, the jurisdiction of the common-law courts has been greatly extended, except in the Federal Courts of this country, in the matter of defences to actions on formal contracts. In all cases, where, formerly, a defendant was obliged to apply to equity for relief against an unconscionable plaintiff, he may now defeat his adversary at law."

He points out that the common law in England "prior to 1767, did not permit the obligor to defeat the obligee by showing that the instrument [sealed] was in fact given for an illegal or immoral purpose. The only remedy of the obligor was a bill in equity for an injunction against the action at law. Such bills were very common. But the common-law rule was changed in 1767 by Collins v. Blantern, 2 Wils. 341, which sanctioned the legal defence of illegality. The opinion of the court delivered by WILMOT, C. J., bears the unmistakable signs of an innovation. 'We are all of opinion that the bond is void abinitio by the common law, by the civil law, moral law, and all law whatever.' And yet the learned judge was unable to cite a single authority. 'I should have been extremely sorry if this case had been without remedy at common law. Est boni judicis ampliare jurisdictionem.' "

Professor Ames adds: "As fraud and illegality were not legal defences to an action upon a specialty, no one will be surprised to find that the rule was the same as to failure of consideration . . . How completely ethical considerations were ignored by the common-law judges in dealing with formal contracts, is shown by the numerous cases deciding that a covenantor who had paid the full amount due, but without taking a release, must, nevertheless, pay a second time, if the obligee was unconscionable enough to bring an action on the speciality."

He also states that at common law accord and satisfaction was not a defense to an action on a covenant. In his article he cites many other examples of justice being denied at common law by a rigid adherence to the doctrine that if an instrument in writing had been "formally executed" by the parties attaching seals to it, no defense to it could be recognized except duress and as to that defense Professor Ames says: "It is quite possible that the anomalous allowance of the defence of duress at common law may be due to some forgotten statute."

Blackstone, Lewis's Ed., Book 2, section 306, refers to the fact that "the Normans, a brave but illiterate nation, at their first settlement in France, used the practice of sealing only, without writing their names, which custom continued when learning made its way among them, though the reason for doing it had ceased . . . At the conquest, the Norman lords brought over into this kingdom their own fashions; and introduced waxen seals only, instead of the English method of writing their names and signing with the sign of the cross."

In a footnote under section 305 appears this quotation from Mechem on Agency, 68: "While this rule (of sealing) is firmly established it is highly technical in its nature and confessedly stands upon very narrow ground. The whole theory of the solemnity of a seal is totally unsuited to the business methods of the present day, and the constant tendency of courts and legislatures is to ignore the distinctions formerly founded upon its use."

⁴ In Snell v. Insurance Co., 98 U.S. 85, 91, the United States Supreme Court, quoting from 1 Story, Eq. Jur., section 138 e and f, said, "the rule that an admitted or clearly established misapprehension of the law does create a basis for the interference of courts of equity, resting on discretion, and to be exercised only in the most unquestionable and flagrant cases, is certainly more in consonance with the best considered and best reasoned cases upon the point, both English and American." See also Griswold v. Hazard, 141 U.S. 260.

10 R. C. L., p. 311, section 53, says: "it has been held that if one, through mistake as to his legal rights, acknowledges himself under an obligation, which the law does not impose, he is not bound thereby." Citing Warder v. Tucker, 7 Mass. 449; 5 Am. Dec. 62, in which case the highest court in Massachusetts stated: "although the defendant, when he first received notice from the plaintiffs of the protest of the bill, considered himself as liable by law to pay the plaintiffs the amount of it; yet his ignorance of the law shall not bind him to fulfill an engagement made through mistake of the law." 23 R. C. L., p. 325, section 18, declares: "A study of the adjudged cases justifies the statement that the distinction between errors of law and errors of fact is of much less importance in the reformation of contracts than is commonly supposed; that it has had very little practical effect upon the decisions of the courts."