Opinion
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
Santa Clara County Super. Ct. No. CV040598
Premo, J.
Plaintiff Rodney W. Jessen and defendant Oie Lian Yeh entered into an agreement settling Jessen’s personal injury claim against Yeh for $25,000. Shortly thereafter, Jessen attempted to rescind the agreement when he learned that he did not also have a claim against his mother’s under insured motorist policy. Yeh refused to accept the rescission and filed a motion to enforce the settlement. (Code Civ. Proc., § 664.6.) Jessen opposed, raising his mistake of fact as a defense. The trial court rejected the defense and enforced the agreement.
Jessen argues on appeal that, given the undisputed facts of this case, he is entitled to rescission as a matter of law. We disagree and affirm the judgment.
I. Factual and Procedural Background
Jessen sued Yeh for injuries he sustained in an April 7, 2004, motor vehicle accident. At a mediation conducted on November 15, 2005, Jessen agreed to dismiss his complaint and release all claims against Yeh in exchange for $25,000, the limits of coverage under Yeh’s insurance policy. Jessen knew his case was worth more than $25,000 but his attorneys had advised him that “collection of any amounts recovered by jury verdict above Ms. Yeh’s insurance policy limits would be problematic; and there would be costs associated with trial.” Jessen understood that, although he might prevail at trial, he “might actually not end up with any more money as a result of trying the case.” Jessen’s mother, Linda Jessen, with whom Jessen had been living, had an underinsured motorist policy that Jessen believed had a coverage limit of $100,000. Jessen thought that this policy would provide him with an additional $75,000. Thus, when Yeh offered the $25,000 at the mediation, Jessen accepted, believing his mother’s coverage would be available to augment the settlement.
The limits of Linda Jessen’s insurance coverage were set forth in a document she had passed on to counsel at the beginning of the case. Linda Jessen had been interacting with counsel on behalf of her son and had supplied counsel with the document, which showed that she had an underinsured motorist policy with Allstate Insurance Company (Allstate) commencing January 24, 2004. The document showed the coverage to be $100,000 each accident. Counsel sent a letter to Allstate on December 30, 2004, alerting Allstate to Jessen’s claim against the “$100,000.00 UIM coverage” and asking that an adjuster contact him. Allstate never responded to that letter.
On November 16, 2005, the day after the mediation, Jessen’s counsel telephoned Allstate seeking to set up a claims file. When counsel actually spoke to an adjuster on November 16, 2005, counsel learned for the first time that Allstate denied that the $100,000 limit applied to the April 7, 2004 accident. According to Allstate, the coverage was $15,000 at the time of the accident; Linda Jessen had raised it to $100,000 afterward, on or about April 20, 2004. Upon re-examination of the document Linda Jessen had given him at the start of the case, counsel saw, in very small print at the bottom of the page, the notation: “Information as of April 19, 2004.” Linda Jessen insisted that she had increased her coverage before the April 7 accident, prompting Jessen’s attorney to challenge Allstate’s coverage determination. Counsel also notified Yeh’s attorney of the mistake and sought to rescind the settlement agreement. Yeh refused and, on February 17, 2006, Yeh filed the motion to enforce the agreement and enter judgment according to its terms.
Jessen opposed Yeh’s motion, asking the court to find the agreement was rescinded based upon Jessen’s unilateral mistake of fact. Jessen stated that had he known his mother’s policy would not provide additional coverage he would not have agreed to the settlement “as it would simply have made no sense to do so without at least attempting to get Ms. Yeh to contribute some personal funds as well.” Linda Jessen explained that her coverage limits had been $15,000 but that in late March 2004, she received correspondence from her insurance agent alerting her to the risks of inadequate coverage. “Right around April 1, 2005 [sic], and no later than a couple of days after that, I called my agent’s office, spoke to the assistant who answered the phone, and said I wanted to raise both my liability and uninsured motorist policy limits to $100,000, which was a figure the agent and assistant recommended, both in the brochure and in the phone conversation.” She hung up the phone assuming the new limits would go into immediate effect. Thereafter, Linda Jessen received the document she later passed on to counsel. Linda Jessen was “positive” she had called Allstate and raised her coverage limits “before the accident.”
In order to allow Allstate to complete its coverage investigation, Jessen requested and received several continuances of the hearing on Yeh’s motion. If Allstate determined that coverage was available, he would drop his opposition. Ultimately, Allstate produced a document showing that Linda Jessen had requested an increase in her coverage on April 19, 2004, precisely as reflected in the small print at the bottom of the document she had given to counsel. In a subsequent declaration submitted with Jessen’s amended opposition to Yeh’s motion, Linda Jessen acknowledged that her recollection of the date upon which she had called to increase her coverage was wrong. “Only recently did I learn that Allstate’s written file, which my attorney recently obtained, shows that I made this call April 19, 2004--after Rodney’s April 7, 2004 accident, not before as I have always thought.” She went on to state that, when she gave counsel the document reflecting the $100,000 coverage, she did so “believing in good faith that this document set forth the policy limits I actually had in effect on the date of Rodney’s accident (which, the Allstate file now shows me, was not a correct representation to [counsel]).”
The hearing on Yeh’s motion to enforce the settlement was finally held on September 11, 2007. Yeh argued that the settlement agreement was enforceable pursuant to Code of Civil Procedure section 664.6 and should not be avoided because Jessen’s mistake of fact was not material to the agreement and because Yeh had no reason to know of the mistake. The trial court commented that Yeh did not have even a “ ‘taint of fault’ ” and that if it set aside the agreement, Yeh would have personal exposure, which is something she thought she “bought off” when she settled the case. The court asked, “who bears the risk of failing to see some little notation on the bottom that says as of April 19?” Neither party responded directly to the question. The trial court took the matter under submission and two days later signed an order granting the motion to enforce the settlement agreement. The court’s order did not contain any express findings. The October 16, 2007 judgment states that the motion to enforce the settlement agreement is granted and judgment is entered in favor of Jessen and against Yeh in the amount of $25,000. Jessen has timely appealed from the judgment.
II. Discussion
A. Issue and Standard of Review
The sole issue before us is whether the trial court erred in enforcing the settlement agreement and refusing to deem it rescinded. Before proceeding to our analysis of that issue we must determine the proper standard of review. Jessen maintains that we review the decision under the de novo standard. (Timney v. Lin (2003) 106 Cal.App.4th 1121, 1126.) He claims that since the facts are undisputed, the question is a legal one, namely, “whether or not, under these facts, [Jessen] was entitled to application of the legal defense of rescission.” Yeh does not expressly address the standard of review but she argues that the trial court correctly decided that it was reasonable to allocate the risk of mistake to Jessen. This argument presumes application of the abuse of discretion standard, which is the appropriate standard in this case.
The standard for review of disputed facts found by trial courts on motions to enforce a settlement is the substantial evidence standard. (Timney v. Lin, supra, 106 Cal.App.4th at p. 1126.) Where the facts are undisputed and reasonable minds could draw no conflicting inferences, the question usually becomes one of law to which we apply a de novo standard of review. (Ibid.) In the present case, the facts presented to the trial court in the form of several declarations are not disputed. But, contrary to Jessen’s assertion, the question did not automatically become one of law. As we shall make clear in the following discussion, it was incumbent upon the trial court to determine, among other things, whether Jessen had negotiated in good faith and whether it was reasonable under the circumstances to allocate the risk of mistake to him. These are not questions of law. Rather, these are the types of questions that are left to the trial court’s discretion. (See e.g., Fireman’s Fund Ins. Co. v. Maryland Casualty Co. (1998) 65 Cal.App.4th 1279, 1308 [trial court’s allocation of contribution “is a matter of distributive justice and equity” subject to trial court’s equitable discretion]; Health Maintenance Network v. Blue Cross of So. California (1988) 202 Cal.App.3d 1043, 1061 [application of unclean hands defense is discretionary consideration]; Fassberg Construction Co. v. Housing Authority of City of Los Angeles (2007) 152 Cal.App.4th 720, 762 [“Whether a setoff is appropriate in equity is a question within the trial court’s discretion”]; Tech-Bilt, Inc. v. Woodward-Clyde & Associates (1985) 38 Cal.3d 488, 502 [determination of good faith of settlement left to discretion of trial court].) Where a trial court grants or denies a motion on the basis of its determination of a question as to which the exercise of judicial discretion is proper, the standard of review on appeal necessarily is whether the trial court’s decision amounted to an abuse of discretion. (Cf. Centennial Ins. Co. v. United States Fire Ins. Co. (2001) 88 Cal.App.4th 105, 110-111.)
Jessen cites Timney v. Lin, supra,106 Cal.App.4th 1121, in support of his argument that the de novo standard applies. The case is distinguishable. As in this case, Timney v. Lin involved the enforcement of a settlement agreement, but the only disputes were whether one paragraph of the written agreement was illegal and whether the parties had met the statutory conditions of Code of Civil Procedure section 664.6. (Timney v. Lin, supra,at p. 1126.) Since the interpretation of a writing and the construction and application of a statute are both pure question of law, the appellate court reviewed the questions de novo. (Ibid.) Here, however, we are not required to construe a statute or determine the meaning of a writing. The trial court’s decision turned upon the court’s exercise of discretion under all the circumstances. Therefore, our task is to determine whether the court abused its discretion.
Our review is guided by well-settled principles. “ ‘A judgment or order of the lower court is presumed correct. All intendments and presumptions are indulged to support it on matters as to which the record is silent, and error must be affirmatively shown.’ ” (Denham v. Superior Court (1970) 2 Cal.3d 557, 564.) When we review a decision under the abuse of discretion standard, we do not disturb the trial court’s exercise of discretion unless it appears that there has been a miscarriage of justice. (Id. at p. 566.) “Discretion is abused whenever, in its exercise, the court exceeds the bounds of reason, all of the circumstances before it being considered. The burden is on the party complaining to establish an abuse of discretion, and unless a clear case of abuse is shown and unless there has been a miscarriage of justice a reviewing court will not substitute its opinion and thereby divest the trial court of its discretionary power.” (Loomis v. Loomis (1960) 181 Cal.App.2d 345, 348-349.)
B. Legal Framework
We now turn to the question presented: Did the trial court abuse its discretion by rejecting Jessen’s defense of rescission and enforcing the settlement agreement?
Code of Civil Procedure section 664.6 provides in pertinent part: “If parties to pending litigation stipulate, in a writing signed by the parties outside the presence of the court . . . for settlement of the case, . . . the court, upon motion, may enter judgment pursuant to the terms of the settlement.” Naturally, the writing must embody an enforceable contract between the parties. (Weddington Productions, Inc. v. Flick (1998) 60 Cal.App.4th 793, 815.) It follows that a settlement agreement must conform to the legal principles that apply to contracts generally. (Id. at pp. 810-811.) General contract law allows a party to rescind a contract if “the consent of the party rescinding . . . was given by mistake . . . .” (Civ. Code, § 1689, subd. (b)(1).) “The type of ‘mistake’ that will support rescission is defined in Civil Code section 1577 (‘mistake of fact’) and Civil Code section 1578 (‘mistake of law’).” (Hedging Concepts, Inc. v. First Alliance Mortgage Co. (1996) 41 Cal.App.4th 1410, 1421.) Jessen’s mistake was a mistake of fact. A mistake of fact is “a mistake, not caused by the neglect of a legal duty on the part of the person making the mistake.” (Civ. Code, § 1577.)
The traditional rule was that a unilateral mistake would warrant rescission only if the party opposing rescission knew of or caused the mistake. Our Supreme Court rejected the traditional rule in Donovan v. RRL Corp. (2001) 26 Cal.4th 261, 280-281 (Donovan), and applied, instead, the rule embodied by section 153 of the Restatement Second of Contracts. Section 153 allows rescission for unilateral mistake where the other party knows of or caused the mistake or where enforcement would be unconscionable. Distilling section 153 to its four elements, Donovan held that, where the other party had no reason to know of the mistake, the party seeking rescission based upon his unilateral mistake has the burden to prove that: “(1) [he] made a mistake regarding a basic assumption upon which [he] made the contract; (2) the mistake has a material effect upon the agreed exchange of performances that is adverse to [him]; (3) [he] does not bear the risk of the mistake; and (4) the effect of the mistake is such that enforcement of the contract would be unconscionable.” (Donovan, supra,26 Cal.4th at p. 282.)
Hereafter, all unspecified section references are to the Restatement Second of Contracts.
Section 153 provides: “Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under the rule stated in [section] 154, and [¶] (a) the effect of the mistake is such that enforcement of the contract would be unconscionable, or [¶] (b) the other party had reason to know of the mistake or his fault caused the mistake.”
C. Analysis
Jessen focuses his argument on the first step in our analysis, which is to determine whether his mistake was the type for which rescission is allowed. According to Jessen, his mistake was in overlooking the small print at the bottom of the page documenting his mother’s uninsured motorist coverage. That mistake, he argues, was simple negligence, not the neglect of a legal duty such as would bar rescission under Civil Code section 1577. He maintains that only gross negligence bars rescission and, therefore, that the trial court should have found the agreement rescinded. The argument is unavailing for two reasons. First, the trial court may have found that Jessen’s having proceeded to mediation without first confirming the availability of the additional coverage amounted to the neglect of a legal duty. Second, even if Jessen was no more than ordinarily negligent, the trial court had discretion to allocate the risk of mistake to him.
1. Neglect of a Legal Duty
A mistake of fact may warrant rescission unless the mistake was caused by the neglect of a legal duty on the part of the person seeking rescission. (Civ. Code, § 1577.) Jessen is correct that ordinary negligence does not constitute the neglect of a legal duty. That is because barring relief from mistakes based on ordinary negligence would virtually destroy the equitable remedies for relief from mistake. “There is an element of carelessness in nearly every case of mistake.” (Van Meter v. Bent Construction Co. (1956) 46 Cal.2d 588, 594.) Thus, “[t]o bar rescission, the party seeking to rescind must be guilty of gross negligence--‘the want of even scant care or an extreme departure from the ordinary standard of conduct.’ ” (Harris v. Rudin, Richman & Appel (2002) 95 Cal.App.4th 1332, 1342.) That said, the gross negligence concept is not one that lends itself to measurable standards.
Section 157, which Donovan expressly noted as embodying a “concept similar to the neglect of a legal duty” (Donovan, supra,26 Cal.4th at p. 283), eschews the phrase “ ‘gross’ negligence” and adopts, instead, a standard of good faith and fair dealing. The comments to that section explain: “Although the critical degree of fault is sometimes described as ‘gross’ negligence, that term is not well defined and is avoided in this Section . . . .” (§ 157, com. a, p. 416.) Thus, section 157 states: “A mistaken party’s fault in failing to know or discover the facts before making the contract does not bar him from avoidance or reformation under the rules stated in this Chapter, unless his fault amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.” This means that failure to negotiate in accordance with reasonable standards of fair dealing “bars a mistaken party from relief based on a mistake that otherwise would not have been made. During the negotiation stage each party is held to a degree of responsibility appropriate to the justifiable expectations of the other.” (Id. at. pp. 416-417.) Thus, in order to show that he had made the type of mistake that would permit rescission, Jessen had to prove that the mistake was not the result of his gross negligence or, as the Restatement puts it, that the mistake was not the result of his failure to act in accordance with reasonable standards of fair dealing.
Under the circumstances of this case, the trial court might reasonably have concluded that Jessen had not acted in accordance with reasonable standards of fair dealing. Yeh would have been justified in expecting Jessen to have confirmed the existence of the collateral source upon which he relied when he negotiated the settlement with her. Yet Jessen went to mediation without ever having spoken to an adjuster at Allstate and without having received any response to the letter his counsel sent to the insurance company in December 2004. Alternatively, the trial court might have rejected Linda Jessen’s assertion that she had misremembered the date upon which she had increased her coverage limit. If so, the court reasonably could have concluded that the mistake was not the type of good faith error that would support rescission. But even if Jessen’s conduct was only ordinary negligence, the trial court was entitled to deny rescission on other grounds.
2. Allocation of the Risk of Mistake
Jessen seems to argue that if he was not grossly negligent then the trial court was bound to find the agreement was rescinded. This is incorrect. It is true that the four Donovan elements are interrelated. For example, a party’s neglect of a legal duty necessarily means that the risk of mistake will be allocated to that party. (Civ. Code, § 1577; Donovan, supra,26 Cal.4th at p. 283.) But the four Donovan elements are expressed in the conjunctive. The party seeking rescission must prove all four. Even if Jessen’s mistake was the result of ordinary negligence, which does not bar rescission, the trial court was entitled to deny rescission if, as Yeh maintains, the court allocated the risk of mistake to Jessen for reasons other than his neglect of a legal duty.
Under section 153, a party may rescind an agreement for unilateral mistake if, among the other elements listed, he does not bear the risk of the mistake under the rule stated in section 154. Section 154 provides: “A party bears the risk of a mistake when [¶] (a) the risk is allocated to him by agreement of the parties, or [¶] (b) he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or [¶] (c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.” (§ 154; Donovan, supra,26 Cal.4th at p. 283.)
In the present case, the trial court’s question to the parties at the hearing--who is to bear the risk of the mistake?--plainly implied that the court considered this element in determining whether rescission should be allowed. In refusing to allow the defense, the court undoubtedly allocated the risk of mistake to Jessen. Indeed, Jessen concedes in his reply brief that the trial court may well have allocated the risk to him but that the trial court’s determination is “of no import” under the de novo standard of review. As we have explained, however, we review the decision for abuse of discretion. Applying the abuse of discretion standard, we must decide whether it was reasonable under the circumstances for the trial court to assign the risk to Jessen. (Donovan, supra,26 Cal.4th at p. 283.)
The record amply supports the trial court’s decision. The availability of the $100,000 coverage limit was an existing circumstance, information about which was entirely within Jessen’s control. Nevertheless, Jessen entered into the settlement, relying upon the existence of the coverage, but having taken no steps to confirm that the coverage was actually available. There is no reasonable basis upon which to allocate the risk to Yeh, who knew nothing of the mistake or of Jessen’s supposed reliance upon the existence of the collateral source.
Under the Restatement Second of Contracts, parties are often allocated the risk of mistake about existing circumstances “even though they upset basic assumptions and unexpectedly affect the agreed exchange of performances. For example, it is commonly understood that the seller of farm land generally cannot avoid the contract of sale upon later discovery by both parties that the land contains valuable mineral deposits, even though the price was negotiated on the basic assumption that the land was suitable only for farming and the effect on the agreed exchange of performances is material. In such a case a court will ordinarily allocate the risk of the mistake to the seller, so that he is under a duty to perform regardless of the mistake.” (§ 154, com. a, p. 403.) This case fits the example. Like the farmer who sold his land for less than he would have had he known what it contained, Jessen sold his right to proceed against Yeh for less than he would have had he known there was no other policy of insurance covering his claim. It was reasonable to allocate the risk of mistake to him in these circumstances.
The trial court’s decision to allocate the risk to Jessen is further supported by evidence showing that the existence of the coverage was not actually material to the exchange of performances between Jessen and Yeh. According to the comments to section 152, a party cannot prove that a mistake was material to the agreed exchange of performances merely by stating that he would not have made the contract had it not been for the mistake. (§ 152, com. c, pp. 387-388.) “He must show that the resulting imbalance in the agreed exchange is so severe that he can not fairly be required to carry it out. Ordinarily he will be able to do this by showing that the exchange is not only less desirable to him but is also more advantageous to the other party.” (Id. at p. 388.) “The standard of materiality here . . . is a flexible one to be applied in the light of all the circumstances.” (Ibid.)
In this case, the mistake did not alter the relative values exchanged. It is true that enforcing the agreement prevented Jessen from proceeding against Yeh personally, but that was not the result of the mistake; that was the consideration Jessen gave in exchange for Yeh’s $25,000 policy limits. The situation is distinguishable from that described in Schultz v. County of Contra Costa (1984) 157 Cal.App.3d 242, in which the appellate court upheld a trial court decision allowing the plaintiff to rescind. In that case,a carpenter purchased land at a tax sale, planning to build a residence for himself. Prior to the purchase he made an on-site inspection of the parcel, had the title searched, and made reasonable efforts to contact the governmental bodies involved, receiving no adverse information. (Id. at p. 248.) Nevertheless, after the sale was complete, he learned that the lot was unbuildable and worth less than half what he had paid the county for it. (Id. at p. 250.)
In contrast to the situation in Schultz, Jessen’s mistake did not result in his getting something less from the exchange than he believed he was getting--he got the $25,000 he bargained for. Nor did the mistake result in an especially unfair benefit to the other party. Jessen admits that he had agreed to the $25,000 settlement because he believed that enforcing a judgment against Yeh personally would be “problematic.” The absence of coverage under Linda Jessen’s policy did not alter the potential for recovery from Yeh. Thus, although the exchange was arguably less desirable to Jessen than it would have been without the mistake, the trial court reasonably might have concluded that it was not such a windfall to Yeh that rescission was warranted. Furthermore, unlike the appellate court in Schultz, which affirmed the trial court’s decision allowing rescission, we are reviewing the trial court’s determination that the party is not entitled to rescind. Testing that decision by the appropriate standard of review, we find no abuse of discretion. It was reasonable under all the circumstances for the trial court to allocate the risk of mistake to Jessen and to enforce the settlement agreement.
3. Unconscionability
Jessen finally argues that enforcement of the settlement would be unconscionable because he is limited to the $25,000 settlement amount and is foreclosed from recovering against Yeh’s personal assets. There is no merit to the argument.
We question whether it is necessary to reach the point since unconscionability is an additional requirement that the party seeking rescission must prove when the other party does not know of or did not cause the mistake. (§ 153, com. c, p. 395; Donovan, supra,26 Cal.4th at p. 282.) In obtaining rescission for any mistake, whether bilateral or unilateral, the party seeking rescission must always prove the first three elements recited by Donovan. (See §§ 152, 153; Donovan, supra,at p. 282.) Only where the mistake is unilateral must the party seeking rescission also prove either that the other party knew of or caused the mistake or that enforcement would be unconscionable. (§ 153;cf. Donovan, supra,at p. 282.) The trial court’s implied conclusion that Jessen bore the risk of mistake eliminates the need for further analysis because it means that Jessen did not establish all three of the preliminary elements necessary for rescission. (§ 153;cf. Donovan, supra,at p. 282.) In substance, however, the trial court’s decision also implies that enforcement would not be unconscionable. That conclusion is supported by the record.
In the case of rescission for unilateral mistake of fact, unconscionability is often assessed by determining whether the party seeking rescission was surprised by the mistake and, regardless of the parties’ relative bargaining positions, whether enforcement would result in “overly harsh or one-sided results.” (Donovan, supra,26 Cal.4th at p. 292.) For the reasons we described in the preceding section, it was reasonable for the trial court to conclude that the results of enforcement would not be overly harsh or one-sided.
III. Disposition
The judgment is affirmed.
WE CONCUR: Rushing, P.J., Elia, J.