• March 31, 2011

The Supreme Court yesterday in  SCI Minnesota Funeral Services, Inc., et al. v. Washburn-McReavy Funeral Corporation, et al. considered the circumstances under which a party is entitled to reformation or rescission of a stock sale transaction. Following the lead of both the District Court and the Court of Appeals, the Court concluded that the sellers were not entitled to reformation or rescission based on mutual mistake.  (Minnesota Litigator previously covered the case here.)

SCI sold Crystal Lake Cemetery Association to Corinthian Enterprises, LLC in 2005 a stock sale agreement for $1 million. Corinthian subsequently sold and assigned Crystal Lake to Washburn-McReavy Funeral Corporation in a share purchase agreement. At the time of the sale, in fact, none of the parties knew that the Crystal Lake stock included the two vacant lots.   Once they learned that the stock sale also included vacant lots in Burnsville and Colorado valued at $2 million, SCI and Corinthian brought this action contending the parties did not intend to include the vacant lots in the sale of Crystal Lake, and seeking equitable relief to remedy this claimed mistake.

Appellants argued that rescission should be allowed on two grounds—mutual mistake and the absence of mutual assent. The Court rejected both grounds.

In regard to mutual mistake, The Court relied on its 1919 Court decision in Costello v. Sykes to find that where a purchaser’s complaint is only about the value of the shares, and in the absence of fraud or inequitable conduct, rescission is not an available remedy.  A Court will not look behind the form of the transaction when the mistake is one of value: “A mistake relating merely to the attributes, quality, or value of the subject of a sale does not warrant rescission.”  (At the same time, the Court cautioned that Costello should not be read to bar rescission in all stock sale transactions, even though it operates to bar rescission in this case.)

Appellants next argued that they were entitled to rescission due to a lack of mutual assent because, when forming the stock sale agreement, there was no “meeting of the minds” to sell, purchase, and transfer the vacant lots.

The Court recognized that the formation of sales contracts requires mutual assent among the parties involved in the transaction, and that this requires a meeting of the minds about the contract’s essentials.  Moreover, the existence of mutual assent if evaluated under an objective standard.  Here, the Court concluded that when viewed under an objective standard, there was mutual assent to sell the Crystal Lake stock.  The fact that the stock also included the vacant lots as part of the assets did not alter the analysis.  Therefore, appellants were not entitled to rescission for lack of mutual assent.

Appellants next urged reformation. Reformation is an equitable remedy that is available when a party seeks to alter or amend language in a contract so that the contract reflects the parties’ true intent when they entered into the contract; it requires a showing that (1) there was a valid agreement between the parties expressing their real intentions; (2) the written instrument failed to express the real intentions of the parties; and (3) this failure was due to a mutual mistake of the parties, or a unilateral mistake accompanied by fraud or inequitable conduct by the other party.  A plaintiff seeking such equitable relief must establish these elements through evidence which is “clear and consistent, unequivocal and convincing.”

Here, the Court concluded, appellants did not demonstrate that the agreements failed to express the parties’ true intentions, the second element, or that any such failure was due to a mutual mistake, the third element.  Under Minnesota law, when a business sells and transfers all of its stock, it is selling all of its assets and liabilities unless the business has expressed otherwise. Because SCI had the right to exclude the vacant lots under the plain terms of the stock sale agreement, as a matter of law appellants cannot prove that the agreement did not reflect the parties’ true intention.  With respect to the third element, appellants did not prove that the stock sale agreement failed to express the parties’ true intentions because of a mutual mistake. Any mistake regarding the vacant lots was SCI’s mistake alone because it was SCI that failed to remove the lots from the transaction.  The fact that SCI could not remove the lots because it was unaware of their existence was immaterial because a corporation is charged with constructive knowledge  of all material facts of which its officer or agent acquires knowledge while acting in the course of employment within the scope of his or her authority.   Consequently, even though those who negotiated the deal for SCI may not have known about the vacant lots, those employees at SCI who purchased the vacant lots and paid the property taxes on them were aware of SCI’s ownership (through its ownership of the Crystal Lake stock) of the vacant lots.  Because someone at SCI was aware of the existence of the vacant lots, Minnesota law imputes this knowledge to the entire company, and SCI could have removed the vacant lots from the sale. SCI failed to do so, and therefore, any mistake was a unilateral mistake; a court cannot reform a contract based on a unilateral mistake unless there was some evidence of fraud or inequitable conduct.

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