Lumbermans Mutual v. Midland National ( 1996 )


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  • UNPUBLISHED
    
    UNITED STATES COURT OF APPEALS
    
    FOR THE FOURTH CIRCUIT
    
    LUMBERMENS MUTUAL CASUALTY
    COMPANY,
    Plaintiff-Appellant,
    
    v.
    
    MIDLAND NATIONAL LIFE INSURANCE
    COMPANY; MANGELSDORF, LEWIS AND
                                                           No. 94-2206
    DAVIDSON, INCORPORATED; ELENA
    CASTELLON, a/k/a Elena Lozano,
    Defendants-Appellees,
    
    and
    
    ESTATE OF EDDY CASTELLON,
    Defendant.
    
    LUMBERMENS MUTUAL CASUALTY
    COMPANY,
    Plaintiff,
    
    v.
    
    ESTATE OF EDDY CASTELLON,
    Defendant-Appellant,
                                                           No. 94-2240
    and
    
    MIDLAND NATIONAL LIFE INSURANCE
    COMPANY; MANGELSDORF, LEWIS AND
    DAVIDSON, INCORPORATED; ELENA
    CASTELLON, a/k/a Elena Lozano,
    Defendants-Appelles.
    
    Appeals from the United States District Court
    for the Eastern District of Virginia, at Alexandria.
    T. S. Ellis, III, District Judge.
    (CA-93-1417-A)
    Argued: December 4, 1995
    
    Decided: March 6, 1996
    
    Before WILKINSON, Chief Judge, RUSSELL, Circuit Judge, and
    THORNBURG, United States District Judge for the Western
    District of North Carolina, sitting by designation.
    
    _________________________________________________________________
    
    Reversed and remanded by unpublished per curiam opinion.
    
    _________________________________________________________________
    
    COUNSEL
    
    ARGUED: Kevin Joseph O'Connell, O'CONNELL &
    O'CONNELL, Rockville, Maryland, for Appellants. Brian Charles
    Riopelle, MCGUIRE, WOODS, BATTLE & BOOTHE, Richmond,
    Virginia, for Appellee Midland National Life; Valerie Lisabeth Tetro,
    JOSEPH F. CUNNINGHAM & ASSOCIATES, Washington, D.C.,
    for Appellee Mangelsdorf, Lewis & Davidson; Michael Earl Barns-
    back, DIMURO, GINSBERG & LIEBERMAN, P.C., Alexandria,
    Virginia, for Appellee Lozano. ON BRIEF: Timothy C. O'Connell,
    O'CONNELL & O'CONNELL, Rockville, Maryland; Michael
    Doherty, RADIGAN, ROSENBERG & HOLMES, Arlington, Vir-
    ginia, for Appellants. C. Torrence Armstrong, MCGUIRE, WOODS,
    BATTLE & BOOTHE, Richmond, Virginia, for Appellee Midland
    National Life; Joseph F. Cunningham, JOSEPH F. CUNNINGHAM
    & ASSOCIATES, Washington, D.C., for Appellee Mangelsdorf,
    Lewis & Davidson; Bernard J. DiMuro, DIMURO, GINSBERG &
    LIEBERMAN, P.C., Alexandria, Virginia, for Appellee Lozano.
    
    _________________________________________________________________
    
    Unpublished opinions are not binding precedent in this circuit. See
    Local Rule 36(c).
    
    _________________________________________________________________
    
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    OPINION
    
    PER CURIAM:
    
    In this diversity case we must decide whether to allow reformation
    of an annuity contract that was designed to satisfy the financial obli-
    gations assumed in a settlement agreement. In the annuity contract,
    appellant Lumbermens Mutual Casualty Co. mistakenly named a dif-
    ferent beneficiary than that specified in the settlement agreement. We
    find that prospective reformation of the contract to reflect the correct
    beneficiary accords with the intentions of the parties without causing
    prejudice to either party. We thus reverse the judgment of the district
    court and remand with instructions to reform the contract on a pro-
    spective basis.
    
    I.
    
    Eddy Castellon was injured in 1979 while working for a construc-
    tion company. The company's insurer, appellant Lumbermens Mutual
    Casualty Co., settled Castellon's workers compensation claim, agree-
    ing to pay him a lump sum of $5,000 followed by monthly installment
    payments of $1,048.49 for a period of twenty years. The settlement
    agreement stipulated that, in the event of Eddy's death, the payments
    would be made to Eddy's estate.
    
    To finance its obligations, Lumbermens executed a single premium
    annuity contract with appellee Midland National Life Insurance Co.,
    under which Midland would make the appropriate payments. Appel-
    lee Mangelsdorf, Lewis and Davidson, Inc., a specialist in arranging
    annuity contracts for funding settlement obligations, acted as Mid-
    land's broker-agent in effecting the agreement with Lumbermens. In
    the annuity contract application, Lumbermens inadvertently desig-
    nated Elena Castellon (Eddy's wife at the time) as the beneficiary,
    instead of naming Eddy's estate as was specified in the settlement
    agreement. That mistake was memorialized in the contract, and lies
    at the source of this dispute.
    
    The annuity contract was purchased and issued in September,
    1982, and Eddy received installment payments for several years. On
    
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    April 14, 1989, Elena Castellon divorced Eddy. Eddy remarried soon
    thereafter, to Martha Ramirez, on October 8, 1989. Ten days after his
    wedding to Martha, Eddy died. Martha Ramirez then wrote a letter to
    Mangelsdorf asserting her claim to the annuity payments as the heir
    of Eddy's estate.
    
    Either Lumbermens or Midland (or both) concluded that Elena
    Castellon was the proper beneficiary, and Midland began making the
    installment payments to Elena. In April, 1993, Martha Ramirez's
    attorney wrote a letter to Lumbermens asking that the payments be
    made instead to Eddy's estate as was envisioned in the settlement
    agreement. Lumbermens then requested that Midland change the ben-
    eficiary in the annuity contract to Eddy's estate and thereafter make
    payments to Martha, Eddy's heir. Midland refused, asserting that the
    terms of the annuity contract prevented Lumbermens from changing
    the beneficiary after Eddy's death.
    
    On November 12, 1993, Lumbermens initiated several causes of
    action against Midland and Mangelsdorf, alleging breach of contract,
    negligence, breach of warranty, and breach of fiduciary duty. Lum-
    bermens also sought to reform the annuity contract to name Eddy's
    estate as the beneficiary. Midland's answer interpled Elena and
    Eddy's estate. In its answer to the interpleader, the estate asked for
    reformation of the annuity contract. The district court rejected all of
    Lumbermens' claims on summary judgment, but held a bench trial to
    consider the estate's claim for reformation. Following trial, the court
    concluded that the estate had failed to establish mutual mistake of the
    parties or sufficient equities warranting reformation. This appeal fol-
    lowed.
    
    II.
    
    Before allowing reformation, courts normally require that both par-
    ties to a contract be mutually mistaken as to whether the written
    agreement expresses their intent; a unilateral mistake generally is
    insufficient. E.g., Langman v. Alumni Ass'n, 
    442 S.E.2d 669
    , 677 (Va.
    1994); Ward v. Ward, 
    387 S.E.2d 460
    , 462 (Va. 1990). Here, the dis-
    trict court concluded that any mistake was unilateral, not mutual.
    According to the court, Lumbermens plainly erred in naming Elena
    as the beneficiary instead of Eddy's estate. But Midland and Mangels-
    
                        4
    dorf, the court found, had no specific intention regarding the identity
    of the beneficiary, and thus "did not and could not have known that
    there was an error."
    
    Such an inflexible application of the mutual mistake principle is
    uncalled for in the circumstances of this case. There is no question
    that the settlement agreement names Eddy's estate as beneficiary, and
    the undisputed purpose of the annuity contract was to fund the settle-
    ment agreement. Lumbermens of course had this objective in mind.
    And even assuming that Midland was unaware of this general pur-
    pose, Mangelsdorf, who acted as Midland's broker-agent, certainly
    shared Lumbermens' intent -- indeed, Mangelsdorf's specialty is
    arranging annuity mechanisms to finance settlement obligations. Mid-
    land, of course, would not have voiced any objection if Lumbermens
    had designated Eddy's estate as beneficiary in the annuity contract.
    That the general aim of the annuity contract was to fund the settle-
    ment agreement is sufficient for reformation; the parties need not
    have shared a specific intent to name a particular beneficiary. See 13
    Samuel Williston, A Treatise on the Law of Contracts§ 1535 (3d ed.
    1961).
    
    Moreover, the rules governing contractual mistakes"have tradition-
    ally been marked by flexibility," Restatement (Second) of Contracts,
    Ch. 6 Intr. Note (1981), and courts generally retain discretion to fash-
    ion relief as justice may require, id.,§ 158(2). Here, the equities
    plainly favor prospective reformation of the annuity contract. Without
    reformation, Lumbermens will continue to incur double liability (both
    to Elena and Martha) throughout the term of the annuity. Meanwhile,
    there are no persuasive countervailing arguments weighing against
    reformation. Neither party to the annuity would be prejudiced by pro-
    spectively reforming the contract to designate Eddy's estate as benefi-
    ciary. Lumbermens of course would welcome such relief, and it
    represented as much in oral argument before this court. Midland,
    meanwhile, expressed in argument that it would have no objection to
    redirecting the annuity payments on a prospective basis.
    
    The district court identified two factors which it viewed as weigh-
    ing against reformation, neither of which ultimately is compelling.
    First, the court suggested that Elena Castellon had an equitable inter-
    est in preventing reformation. Elena, however, was not a party to the
    
                        5
    annuity contract (or, for that matter, to the settlement agreement).
    Any stake she has in preventing reformation stems solely from Lum-
    bermens' mistaken designation of her as beneficiary of the annuity.
    Her interest is thus only by way of a windfall, the sort of interest that
    equity regards lightly. E.g., Prudential Ins. Co. of America v. S.S.
    American Lancer, 
    870 F.2d 867
    , 871 (2d Cir. 1989). And at any rate,
    prospective reformation of the annuity contract would allow Elena to
    retain any payments she has received thus far.
    
    The district court also suggested that Lumbermens' lack of care in
    erroneously completing the annuity application presented an equitable
    basis for denying reformation. In the court's view, Lumbermens
    "knew or should have known" of its mistake and its "lack of diligence
    and care is what led to this whole dispute." It is well established, how-
    ever, that the "mere fact that a mistaken party could have avoided the
    mistake by the exercise of reasonable care does not preclude . . . ref-
    ormation." Restatement (Second) of Contracts§ 157 cmt. a (1981). In
    light of the lack of prejudice to the parties from prospective reforma-
    tion, we believe that such relief is warranted.
    
    III.
    
    For the foregoing reasons, we reverse the judgment of the district
    court, and remand with instructions to reform the annuity contract on
    a prospective basis to name Eddy's estate as beneficiary, effective as
    of the date of this decision.
    
    REVERSED AND REMANDED
    
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