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Troubled Asset Solutions, LLC v. Wilcher

Supreme Court of Oregon, En Banc

August 1, 2019

TROUBLED ASSET SOLUTIONS, LLC, in its capacity as Receiver for The Mortgage Exchange, Inc., pending in Washington County Circuit Court, Petitioner on Review,
v.
Eddie WILCHER, AND ALL OCCUPANTS, Respondent on Review. Eddie WILCHER, Respondent on Review,
v.
TROUBLED ASSET SOLUTIONS, LLC, in its capacity as Receiver for The Mortgage Exchange, Inc., pending in Washington County Circuit Court Petitioner on Review.

          Argued and submitted March 5, 2019

          On review from the Court of Appeals CC C142009EV, C145657CV, CA A158440. [*]

          Jonathan M. Radmacher, McEwen Gisvold LLP, Portland, argued the case and fled the brief for petitioner on review.

          Terrance Slominski, Slominski & Associates, Tigard, argued the cause and fled the brief for respondent on review. Also on the brief was David W. Venables.

         [365 Or. 398] Case Summary: Troubled Asset Solutions (TAS) sought reformation of a trust deed, arguing that the deed, prepared by TAS's predecessor in interest, had erroneously failed to list Wilcher as a grantor in his individual capacity, as the parties had agreed on, with the result that the trust deed did not reach certain property owned by Wilcher. The trial court granted reformation. The Court of Appeals reversed, holding that TAS had failed to prove that its predecessor in interest had not been grossly negligent in drafting the trust deed. Held: (1) The trial court properly found that there had been an antecedent agreement and a mutual mistake; (2) the gross negligence standard in reformation incorporates equitable considerations, including the degree of prejudice to the other party; (3) under that standard, and in light of the trial court's factual findings, TAS had shown an absence of gross negligence; (4) the Court would not abandon the term "gross negligence" in favor of the "good faith" standard employed in the Restatement (Second) of Contracts.

         [365 Or. 399]BALMER, J.

         This case requires us to consider and apply the legal standard for the reformation of a contract to include a term that all parties had intended, but that one of the parties, by mistake, had failed to include in the written agreement. The trial court reformed the contract to include the term, finding that the mistake "was easily missed," and that the "evidence is clear that all parties intended" the term to be included. The Court of Appeals reversed, concluding that reformation is permissible only if the party seeking the remedy demonstrates that it was not "grossly negligent," and holding that the facts in this case did not meet that standard. Troubled Asset Solutions v. Wilcher, 291 Or.App. 522, 422 P.3d 314 (2018). For the reasons explained below, we conclude that the trial court did not err in reforming the contract to express the parties' agreement. Accordingly, we reverse in part the decision of the Court of Appeals and remand the case to that court for further proceedings.

         I. FACTUAL AND PROCEDURAL HISTORY

         We take the facts from the pleadings and the trial court record.[1] Sierra Development, LLC (Sierra), a real estate development company in which both Wilcher and his son were involved, borrowed approximately $5 million from The Mortgage Exchange (MEX), the predecessor in interest of plaintiff Troubled Asset Solutions, LLC (TAS). Wilcher and his son signed a promissory note for the loan as members of Sierra; Wilcher, his son, and his son's wife also signed the promissory note as "individual guarantors)." The promissory note stated that it was secured by a trust deed on Sierra Heights, the property owned by Sierra that was to be developed with the loan proceeds, and also by "[a]dditional security" that was "required on this loan." The promissory note identified as that "additional security" three other properties owned personally by Wilcher, one of which was described as "15 () acres including [365 Or. 400] residence, Tax Lot 700, Klamath County, Oregon valued at $450, 000."[2]

         The same three individuals that signed the promissory note also executed the critical document in this case: a deed of trust identifying more than a dozen separate parcels of land as collateral for the loan. The trust deed described the properties that would be subject to the trust and security for the loan as "SIERRA HEIGHTS, Klamath Falls, OR plus additional collateral in Keno, OR," and the record makes clear that the "Keno" property included Wilcher's residence, which he owned personally. The trust deed then listed the various lots that comprised the Sierra Heights development and also listed as "additional security" the properties owned personally by Wilcher, including the 15-acre property with his residence. Exhibit A to the trust deed contained metes and bounds descriptions of the properties that were collateral for the loan, including a legal description of the property with the residence. Other documents and testimony at trial confirm that the parties clearly intended that the loan be secured not only by the properties owned by Sierra, but also by properties owned individually by Wilcher, including the property with his residence. The signature block of the trust deed identifies, under the designation "Corporate or Partnership Grantors," "SIERRA DEVELOPMENT, LLC." Wilcher and his son signed on signature lines that set out their names and the designation "Member." Wilcher's son's wife also signed the deed of trust. Both the trust deed and the promissory note had been prepared by MEX.

         The dispute in this case arises because, although the trust deed identifies the collateral as including the properties owned personally by Wilcher and contains legal descriptions of those properties, the only name that appears in the space labeled "GRANTOR" on the first page of the trust deed is Sierra. Wilcher, individually, is not identified as a "grantor" in the trust deed. After the loan went into default, TAS initiated foreclosure proceedings against one of the properties owned personally by Wilcher ("the property").

         [365 Or. 401] Following unsuccessful settlement efforts, Wilcher brought a quiet title action in Klamath County Circuit Court seeking a declaration that the trust deed did not grant any interest in the property to TAS. That action was later dismissed for improper venue. TAS then filed an action for forcible entry and detainer against Wilcher in Washington County Circuit Court, seeking to remove him from the property. Wilcher renewed his quiet title claim in a separate action in that court, and TAS filed a counterclaim seeking to reform the trust deed to add Wilcher, individually, as a grantor.

         The two actions in Washington County were consolidated for trial, and the trial court ultimately entered a judgment granting TAS's claim for reformation and related relief. The trial court found that the parties to the loan transaction knew and intended that Wilcher's individually owned property, including his residence, would be subject to the trust deed and collateral for the loan. That property was listed as collateral in the trust deed and also in the promissory note, which, as noted, Wilcher had signed both individually and as a member of Sierra. The trial court also found that the error in the trust deed in failing to list Wilcher individually as a "grantor" was "easily missed." The trial court further observed that, because some of the claims before it were equitable in nature, it was required to do what was "fair." It also found that, since signing the deed, and prior to the present litigation, Wilcher had consistently behaved as though the property was encumbered. The trial court ordered reformation of the trust deed to include Wilcher, individually, as a grantor of the property.[3]

         On appeal, Wilcher asked the Court of Appeals to review the record de novo and argued that the trial court had erred in reforming the trust deed, because TAS had [365 Or. 402] failed to prove any of the elements necessary for reformation. He also raised several other assignments of error. The Court of Appeals denied the request for de novo review, but nevertheless agreed with Wilcher that the trial court had erred in reforming the trust deed. Troubled Asset Solutions, 291 Or.App. at 525, 535. The Court of Appeals took its test for when a court can reform a written agreement from this court's opinion in A&T Siding, Inc. v. Capitol Specialty Ins. Corp., 358 Or. 32, 43, 359 P.3d 1178 (2015) (citing Jensen v. Miller, 280 Or. 225, 228-29, 570 P.2d 375 (1977)). That test identifies three requirements: (1) "an antecedent agreement to which the contract can be reformed;" (2) a mutual mistake in the contract (or a unilateral mistake by one party with inequitable conduct by the other party); and (3) the absence of "gross negligence" by the party seeking reformation. A&T Siding, Inc., 358 Or at 43.[4] The Court of Appeals considered only the third requirement, determining that it was dispositive. Troubled Asset Solutions, 291 Or.App. at 532. It held that TAS had failed to prove "lack of gross negligence" on the part of MEX and therefore was not entitled to reformation of the trust deed to express the parties' agreement that the property was subject to that contract. Id. at 533-35. The court concluded: "[N]o factfinder could conclude that failing to name Wilcher as a grantor was 'mere oversight, inadvertence, or mistake.'" Id. at 534 (quoting Foster v. Gibbons, 111 Or App 45, 54, 33 P.3d 329 (2001)). We allowed review to consider the meaning and application of the "gross negligence" requirement when a court is asked to exercise its equitable powers to reform a contract.

         II. ANALYSIS

         On review, TAS makes two related arguments. First TAS asserts that the Court of Appeals erred in articulating and applying the "gross negligence" requirement to the facts here by failing to consider, as part of that determination, whether the balance of equities, including prejudice to either party, favors reformation. TAS argues that this [365 Or. 403] court's cases always have interpreted the gross negligence element of the reformation test to include consideration of broader equitable principles, and that Court of Appeals erred by departing from those cases here, as well as by failing to credit the trial court's express and implicit findings that demonstrated the absence of gross negligence on the part of MEX. Second, TAS argues that this court should clarify and restate (if not rename) the "gross negligence" standard, consistent with this court's cases on contract reformation and the Restatement (Second) of Contracts, to emphasize underlying equitable principles, including the presence or absence of prejudice, good faith, and unjust enrichment.

         Wilcher responds that "gross negligence" has been adequately defined by the Oregon courts to mean "heightened negligence" and that it does not incorporate other equitable principles. Wilcher asserts that while a party to a transaction is not grossly negligent for failing to read a document, "a party is grossly negligent and reformation will be barred if it fails to obtain information readily available; thus, a party must take reasonable measures to be informed." (Emphasis in Wilcher's brief in this court.) He argues that the Court of Appeals correctly applied the "gross negligence" standard to the facts of this case. He also argues that the trial court found neither an antecedent agreement or a mutual mistake, and that the record would not support such findings.

         As we will explain, although Wilcher is not necessarily inaccurate in quoting some of the formulations of the "gross negligence" requirement, he advances a cramped and abstract interpretation of that requirement that is inconsistent with our case law. We conclude that the Court of Appeals erred as a matter of law in its application of that standard by focusing only on the conduct of MEX and its agents and by failing to consider the equities of the case, notably whether anyone would be prejudiced by reformation of the contract. We also agree with TAS that it is appropriate to reconsider the utility of the "gross negligence" standard, which we do below.[5]

         [365 Or. 404] A. Preliminary Matters

         We begin by revisiting the Court of Appeals' decision and the applicable standard of review. As the Court of Appeals noted, having declined Wilcher's request for de novo review, the court was left to review the trial court's factual findings "to determine whether there is any evidence in the record to support them, and its legal conclusions for legal error." Troubled Asset Solutions, 291 Or.App. at 525. Here, the Court of Appeals did not identify any specific misunderstanding of the relevant law on the part of the trial court. Rather, it based its decision solely on its view that the evidence at trial was insufficient to support the trial court's conclusion that the mistake was excusable and therefore could be the basis for reformation. Id. at 533 ("there was insufficient evidence in the record for the court to find that the mistake was excusable under the circumstances."). Yet under the applicable standard of review, the Court of Appeals was obligated to "view the evidence in the light most favorable to the [trial] court's disposition to determine if it supports the court's legal conclusions." Dept. of Human Services v. S.J.M., 364 Or. 37, 40, 430 P.3d 1021 (2018) (citing, inter alia, ORS 19.415). As this court recently stated in reviewing a trial court's legal conclusion based on that court's assessment of facts presented at trial:

"[W]e are bound by the court's factual findings as long as the record contains evidence that supports those findings. To the extent that the trial court did not explicitly state its factual findings, we assume that it found facts consistent with its conclusion (assuming, again, ...

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