Illinois Central Gulf Railroad Company, Plaintiff-appellee, v. R.r. Land, Inc. and Richard S. Blossman Family Revocabletrust, Defendants-appellants.r.r. Land, Inc. and Ruhl, Inc., Plaintiffs-appellants, v. Illinois Central Railroad Company, Defendant-appellee, 988 F.2d 1397 (5th Cir. 1993)

The pivotal issue before us concerns the district court's grant of reformation in favor of Illinois Central Gulf Railroad Company (IC). Because we conclude that the contractual negligence defense does not bar reformation where mutual mistake has been pleaded and proved, and that the district court did not clearly err in finding both clear proof of an antecedent agreement and clear and convincing evidence of mutual mistake in reducing that agreement to writing, we AFFIRM the grant of reformation. We also AFFIRM the district court's rejection of claims for damages by R.R. Land, Inc. (Land), and Ruhl, Inc.

In 1983, T. Eugene Timm, real estate sales representative for IC, and Richard S. Blossman, president of Ruhl and agent for Land¹ , entered negotiations for the sale of IC's Shore Line Branch property, a 200-foot wide tract to the north of Lake Pontchartrain, running approximately 31 miles from Slidell to Covington, Louisiana. The railroad operated on the 50-foot center strip of the property.

During negotiations, IC discussed its obligations, under federal and state grants, to continue operation of the railroad line.²  IC stated that it intended to abandon the line, but could not attempt to do so until its commitment expired in 1986. It further explained that abandonment of the line required Interstate Commerce Commission approval, pursuant to 49 U.S.C. § 10905, and that IC could not guarantee that the ICC would grant it.³ 

In part because of the above limitations, IC and Blossman arranged for the acquisition of the tract through four separate sales. The following procedures governed. For each sale, IC prepared a Real Estate Sale Contract (Contract)⁴ , which was then executed by the purchaser (either Ruhl or Land). The purchaser retained a yellow copy of the Contract and made an offer to IC by returning the original and remaining copies to IC. Before accepting the offer, IC submitted the Contract to multiple departments within IC for approval. If accepted, the Vice President of the Real Estate Department, then R.A. Irvine, executed the Contract. IC retained a copy coded in green and an original for its files. The buyer also retained an original. An Act of Cash Sale (ACS) followed.⁵ 

The first three sales (first two to Ruhl, third to Land) took place between July 1984 and January 1985, and conveyed the land on each side of the 50-foot center strip of trackage. These sales followed the above described procedure and are not in dispute.⁶  As discussed in note 6, supra, with slight exception, the terms and conditions in each Contract coincide with its corresponding ACS. The fourth sale, transferring the remaining portion (middle 50 feet) of the 31 mile long tract to Land, is the subject of IC's reformation action. At trial, in connection with that fourth sale, the parties introduced four Contracts.

Blossman executed the first two Contracts on April 23, 1985⁷ ; IC rejected both. On August 2, 1985, Blossom executed a third Contract, reflecting--as did the first two--a purchase price of $160,000 and a deposit of $32,000. Preprinted paragraph three specifically excludes the seller's tracks, appurtenances, buildings or other improvements from the sale.⁸  The third Contract (for the final/fourth sale) incorporates all of the provisions contained in Rider A, which--similar to Rider A for the Contract for the third sale, see note 6, supra--reserves the trackage and an easement⁹  in IC's favor until the tracks are abandoned or removed, and prohibits the buyer from interfering with IC's easement.¹⁰  Rider A also provides notice that, should IC seek an abandonment order from the appropriate regulatory body, a third party or rail carrier may have the right to acquire the track and continue railroad operations.¹¹  In addition, Rider A contains an atypical provision requiring IC to pay five percent of the purchase price as a real estate commission. The final provision of the third Contract is an omnibus description of the property, included to assure that the four sales conveyed all of the Shore Line Branch property without gaps.

In addition, on August 19, 1985, IC requested by letter that the Contract be amended to extend IC's time for removal of the tracks from one year to 18 months. Blossman signed the letter; and, on September 3, 1985, Irvine executed the third Contract for IC.

IC contends that this third Contract and amending letter evidence the mutual intent of the parties. Blossom counters that the parties modified their agreement, both orally and in writing. According to Blossman, IC agreed to seek approval to abandon its operations immediately after its commitment to the federal government expired in 1986, agreed to lease the property from Land for operating the railroad until abandonment, and agreed to transfer the trackage to Land. Blossman testified that the fourth Contract for this final/fourth sale, which deleted any reference to Rider A, was executed by his son, as President of Land, on September 1, 1985, and purportedly executed by Irvine ten days later on September 11.¹² 

Joyce Lucas, a notary public employed by IC, prepared the ACS for the fourth sale; and Irvine executed it for IC on September 18, 1985. The ACS conveys to Land " [a]ll that portion of the remaining right-of-way and property of Illinois Central Gulf Railroad Company's Shore Line Branch...." It does not include any of the reservations contained in Rider A, nor does it obligate IC to all of the affirmative commitments Blossman contends IC agreed to following execution of the third Contract.

According to Lucas, approximately three months later, she reread the ACS and discovered that she failed to include the two page Rider A reserving the tracks, ties, and an easement. Blossman refused, however, to change the ACS. Therefore, in January 1986, IC filed suit in federal court to reform the ACS; but in mid-1987, the case was removed from the active docket while the parties attempted to settle.¹³  Five years later, Land and Ruhl sued IC in state court, claiming breach of contract and detrimental reliance, arising from IC's alleged failure to apply for abandonment; unjust enrichment and trespass, arising from IC's use of the property; slander of title, caused by an alleged illegal notice of lis pendens filed in bad faith by IC; and reimbursement for maintenance costs, including expenses incurred in maintaining sight zones. IC removed the action to federal court; the two cases were consolidated; and a two day bench trial was held in December 1991.

In most detailed, comprehensive, and insightful findings of fact and conclusions of law, the district court carefully reviewed the evidence and held that the ACS did not reflect the mutual intent of the parties. It found Blossman's version of the agreement, as reflected in the fourth Contract, implausible, and therefore ordered the ACS reformed to comply with the third Contract. And, it dismissed all claims against IC.

Land and Ruhl contest the district court's grant of reformation, its denial of damages for IC's alleged failure to diligently apply for abandonment, and its denial of reimbursement for maintenance of sight zones.¹⁴  Going for broke, in the hope that they can keep the clearly erroneous standard of review out of play, they boldly and confidently state in their Reply Brief that they are "not asking this Court to review or overturn a single factual finding made by the district court." But, as discussed infra, that standard of review is central to this case.

Land contends that the district court erred in reforming the ACS to reflect the third Contract. We apply Louisiana law in this diversity action, and cannot give deference to the district court's interpretation of it. Salve Regina College v. Russell, --- U.S. ----, ----, 111 S. Ct. 1217, 1221, 113 L. Ed. 2d 190 (1991). Under Louisiana law, a party may reform a written instrument that does not reflect the true intent of the contracting parties. Valhi Inc. v. Zapata Corp., 365 So. 2d 867, 870 (La.App. 4th Cir. 1978). Reformation is an equitable remedy designed to correct an error in the contract. Id. The error "must be mutual", see, e.g., Pat S. Todd Oil Co. v. Wall, 581 So. 2d 333, 336 (La.App. 3d Cir.), writ denied, 585 So. 2d 569 (La.1991); and it must be "in the drafting of the instrument ... and not in making the contract which it evidences". Phillips Oil Co. v. O.K.C. Corp., 812 F.2d 265, 275 (5th Cir.) (internal quotation omitted), cert. denied, 484 U.S. 851, 108 S. Ct. 152, 98 L. Ed. 2d 107 (1987).

Before an instrument will be reformed, "there must be clear proof of the antecedent agreement as well as an error in committing it to writing". Pat S. Todd Oil Co., 581 So. 2d at 336. The party seeking reformation must prove mutual error by "clear and convincing evidence", and parol evidence is admissible to show "that the writing does not express the true intent or agreement of the parties". First State Bank & Trust Co. v. Seven Gables Inc., 501 So. 2d 280, 285 (La.App. 1st Cir. 1986), writ denied, 502 So. 2d 103 (La.1987). We freely review conclusions of law; but, because the reformation issue turns on a determination of the parties' intent, we review for clear error. National Union Fire Ins. Co. v. Circle, Inc., 915 F.2d 986, 989 (5th Cir. 1990); see also Phillips Oil, 812 F.2d at 275 (stating that the determination of mutual mistake is a fact question).

Land relies on three separate bases to challenge the reformation: (1) the district court erred in concluding that the third Contract reflects the final agreement of the parties; (2) the court improperly evaluated the parties' intentions at the time they signed the ACS; and (3) IC's alleged negligence precludes reformation.

The district court found that the third Contract for the fourth sale represents the antecedent and final agreement between the parties. In so doing, it rejected Blossman's testimony regarding subsequent modifications; it also rejected Blossman's characterization of the third Contract as a non-binding "negotiating tool". We conclude that these findings are amply supported by the evidence; in sum, there is no clear error. Moreover, as noted, appellants state that they are not contesting any findings of fact.

Evidence of IC's review process and prior negotiations between the parties provide adequate support for the district court's characterization of the Contract. With respect to the preceding three sales, all substantial negotiations occurred prior to final execution of the Contract, as evidenced by the fact that in the first three sales, the Contracts, for the most part, mirrored their respective ACS's. See supra note 6.

In addition, given the difficulty of the transaction and the expressed concern about the inclusion of a reservation of rights until abandonment, it is reasonable to conclude that subsequent material modifications, especially those involving IC's legal obligations under ICC jurisdiction, would require the initiation of a new Contract, or, at least, would be subject to a formal review process.¹⁵  Although Land maintains that the parties modified the third Contract both orally and in writing, there is substantial evidence to support the district court's rejection of Blossman's testimony and the fourth Contract.

First, evidence supports the district court's determination that IC did not agree to enter into a lease. According to Blossman, IC employees Timm and Bob Wiley negotiated a lease whereby IC would pay Land $10,000 per month if IC did not abandon the property upon expiration of its grant. However, testimony at trial established that Wiley was no longer employed by IC during the alleged negotiations. Moreover, Blossman testified that he knew that Timm and Wiley lacked authority to bind IC.¹⁶  We also note in passing that, given IC's uncertainty regarding the attainment of abandonment, it is most difficult to believe that IC would agree to such a lease.

In addition, there are significant substantive and procedural inconsistencies throughout the fourth Contract that serve to discredit Blossman's testimony. The fourth Contract includes trackage in the sale; however, the parties did not increase the purchase price to reflect the value of the tracks, estimated to be between $175,000 and $300,000. We agree with the district court that, " [i]t is inconceivable that the parties agreed to include trackage of such significant value without in turn increasing the purchase price, particularly where the trackage value alone exceeds the price agreed to for the purchase of the land alone."¹⁷ 

Moreover, procedural inconsistencies appear throughout the fourth Contract: (1) a typewritten provision conveying all leases and licenses to the buyer (IC had already assigned all of its rights in the leases to Land); (2) execution by Blossman's son (Blossman signed all previous documents); (3) the yellow copy signed by Irvine (for all other sales, the yellow copy contains only Blossman's signature, which is consistent with the earlier described IC procedures); (4) the initials "BW" and "RSB" next to each modification of the standard terms (Bob Wiley ("BW") drafted the first three ACS's, but terminated his employment with IC prior to the alleged execution of the fourth Contract); (5) an execution date of September 1, 1985 (IC did not even accept or execute the third Contract until September 3, 1985); (6) IC's alleged acceptance of the offer in ten days (in prior sales, it took IC one month or more to accept Blossman's offer); and (7) Land's failure to produce a pink or white original (it was standard procedure for IC to send the buyer an original upon final execution).

Based on our review of the record, and as reflected in part by the inconsistencies of the fourth Contract and the questions surrounding the formation of an oral lease, the district court did not clearly err in rejecting Land's version of the agreement and, thus, reaching the conclusion that the third Contract represents the final agreement of the parties.

Even assuming the parties did not agree to modify the third Contract, Land asserts that the reformation order was improper. According to Land, the evidence reflects, at most, a unilateral mistake, as the ACS (deed) correctly reflected Blossman's stated desire to purchase the tracks and the land. Land contends that the district court erred by failing to make a factual finding regarding Land's intention at the time it executed the ACS. Additionally, Land maintains that our decision in Phillips Oil precludes a finding of mistake on the part of IC.

First, we disagree with Land's interpretation of the district court's findings of fact and conclusions of law. Although the district court did not make an express finding regarding Land's intent on execution of the ACS, it concluded that Blossman's version of the agreement was "implausible", and went into great detail in support of that conclusion. The court also explained the bases for its reliance on the third Contract. Accordingly, we can easily infer that the court implicitly found that, at the time of signing the ACS, Land intended the ACS to include Rider A (as reflected in the third Contract).

We recognize, of course, that Land vehemently asserts that it intended for the ACS to exclude Rider A; however, at the same time, we are most cognizant of "the paradoxical truism that every defendant in a case alleging mutual error denies the error; otherwise he would have consented to an extrajudicial act of correction and there would have been no lawsuit". Collins v. Whittington, 322 So. 2d 847, 850 (La.App. 4th Cir.) (internal quotation omitted), writ denied, 323 So. 2d 480 (La.1975). As is often the case when resolving reformation disputes based on alleged mutual error, the trial court is left with a credibility determination.¹⁸  The district court considered two days of testimony and resolved this issue against Land. Given the evidence in the record that calls Blossman's credibility into question, we do not find clear error.

We also hold that the district court did not err in concluding that IC did not intend to execute the ACS as written for the fourth sale. We agree with it that our decision in Phillips Oil is distinguishable. There, officials experienced in oil and gas transactions reviewed the proposed agreement over a period of almost five weeks, focusing their attention and giving their approval to the very provision at issue. 812 F.2d at 276. References to the disputed language, which was central to the agreement, continued throughout the eight-page document. Id. at 277. In the light of this evidence, this court refused to find that a mistake had been made, stating that it was "inconceivable, particularly in view of the review process employed here and the expertise of those involved in that process, that a 'mistake' as clear and significant as the one alleged by OKC could have 'slipped by' ". Id. at 277.

IC's review of the ACS was significantly less thorough. As the district court noted, IC reviews purchase agreements (Real Estate Sale Contracts) with great detail, whereas the ACS receives a far more cursory review. Lucas, the in-house notary who prepared the ACS, is not an attorney, and according to testimony, received little training. Lucas initialed the form approved signature line and the document approved line on the assumption that she had incorporated the terms contained in the third Contract approved by the legal department and by the engineering department. Robert Fowler, manager of the law department, who was actively involved in the approval of the third Contract, did not prepare or review the ACS prior to execution. Although the document was also signed by Irvine, W.H. Sanders (assistant secretary), and two witnesses (Schilling and Arthur Spiros), Lucas, the notary who obtained the signatures, testified that Irvine did not read the ACS before signing it, and, likewise, Irvine and Schilling testified that they did not recall reading it before signing.

In addition, we, like the district court, place significance on the fact that the error here is simply an omission of terms, rather than choice of language that repeatedly appears throughout the document. In preparing the ACS, Lucas followed the usual property description language, yet failed to add the special terms contained in Rider A. Based on these facts, it was not clear error for the district court to conclude that IC did not intend to execute the ACS as written.

In sum, we are not left with a "definite and firm conviction" that the district court erred in concluding that there was clear and convincing evidence of an antecedent agreement (third Contract) and mistake in reducing that agreement to writing (ACS). The parties agreed to the terms of the third Contract; and there is strong evidence indicating both that they did not reach a subsequent agreement, and that neither Blossman nor IC intended to execute the ACS as written. Accordingly, the district court did not clearly err in finding mutual mistake. See Lynal, Inc. v. Patrick Petroleum Co., 593 F. Supp. 1325, 1327 (W.D. La. 1984) (holding that evidence that parties originally intended to delete provision, that they never negotiated a change from that position, and that the provision did not appear in table of contents, is clear and convincing evidence that the inclusion of the provision does not reflect the true intent of the parties).

Finally, Land contends that Louisiana law precludes reformation where there was negligence on the part of the party claiming mutual error, and that, accordingly, even if the district court did not err in finding mutual mistake, it erred by not imposing IC's alleged negligence as a bar to reformation.¹⁹  We reject this contention, because we conclude that the contractual negligence defense (bar) does not apply to reformation actions where mutual mistake has been pleaded and proved.

The contractual negligence defense is grounded in rescission actions based on unilateral error. Louisiana civil law allows unilateral error to vitiate consent "when it concerns a cause without which the obligation would not have been incurred and that cause was known or should have been known to the other party". LSA-C.C. art. 1949. But, on the other hand, the contractual negligence defense provides that "unilateral error does not vitiate consent if the cause of the error was the complaining party's inexcusable neglect in discovering the error". Woods v. Morgan City Lions Club, 588 So. 2d 1196, 1201 (La.App. 1st Cir. 1991).²⁰  Most often, this defense bars rescission for error resulting from a party's failure to read the document in issue. See, e.g., First Financial Bank, FSB v. Austin, 514 So. 2d 281 (La.App. 5th Cir.), writ denied, 515 So. 2d 1112 (La.1987).

The contractual negligence defense has largely been developed by the courts, and is only tangentially incorporated into the comments to the Louisiana Civil Code. The commentary to article 1952 provides: "In determining whether to grant rescission or, when rescission is granted, whether to allow any recovery to the party not in error, the court may consider whether the error is excusable or inexcusable, a distinction received by modern civilian doctrine." LSA-C.C. art. 1952 (comment d). As an example of an "inexcusable" error, the drafters cite Watson v. Planters Bank of Tennessee, 22 La.Ann. 14 (1870), in which the court applied the contractual negligence bar to a party who had signed a written contract without either reading it or knowing its contents.

Despite the entrenchment of the contractual negligence defense in actions for rescission based on unilateral error, there is no indication that the defense also applies to reformation actions based on mutual error. The above-cited code commentary refers only to rescission. Similarly, we have not found Louisiana case law that applies contractual negligence as a bar to reformation where mutual mistake has been pleaded and proved. Land cites many cases that refer to contractual negligence, including cases involving reformation that refer to the defense in dicta, but none stand for this proposition.²¹  By contrast, in Myers v. College Manor, 587 So. 2d 820 (La.App. 3d Cir. 1991), the court refused to apply the defense to preclude reformation for mutual mistake.²² 

Without clear direction from the Louisiana legislature or courts, we refrain from applying the defense to cases where, as here, mutual mistake has been pleaded and proved. As the district court noted, to do so would be inconsistent with the creation of a remedy for documents signed in error. See RESTATEMENT (SECOND) OF CONTRACTS § 157 (comment b) (stating that "a party's negligence in failing to read the writing does not preclude reformation if the writing does not correctly express the prior agreement"). Because the district court properly concluded that IC proved mutual mistake, the contractual negligence defense is inapplicable. Therefore, we uphold the grant of reformation.²³ 

Land contends next that the district court erred in refusing to award damages for IC's failure to diligently pursue abandonment. In negotiating the sale of the Shore Line Branch, IC and Blossman contemplated that IC would attempt to abandon the property. IC representatives understood that abandonment was necessary for Land and Ruhl to obtain full benefit from their purchase.²⁴  At the same time, Blossman understood that abandonment required ICC approval, which could not be guaranteed. He was advised of the possibility that a third party might be asked to take over the line, and that the railroad might have a servitude in perpetuity. On September 19, 1986, one year after the fourth and final sale, IC filed for abandonment; this application was withdrawn on November 12, 1986. IC reapplied for abandonment in January 1991 (almost a year before trial), which the ICC subsequently granted.

Land and Ruhl sued for reliance damages, based on IC's delay in applying for abandonment. In issue at trial was whether IC made representations as to when it would seek abandonment. Land argued that IC representatives told Blossman that IC would seek abandonment immediately after its commitment expired in 1986, and as assurance, agreed to enter into a lease of the property.

The district court simply did not believe Blossman and found that IC employees "did not make any representations as to when Illinois Central would seek ICC approval of its abandonment". Given the support for the court's credibility assessment discussed supra, and its unique role in making credibility choices, and based upon our independent review of the record, we do not find the district court's finding to be clearly erroneous.

Based on the finding that IC did not make representations as to when it would seek abandonment, we reject the claim for reliance damages on the basis of IC's delay in applying for abandonment. See LSA-C.C. art. 1967.²⁵ 

Of course, to say that IC did not make any representations as to when it would apply for abandonment is not to say that IC was free from the obligation to apply for abandonment. Under Louisiana law, IC had a good faith obligation to carry out the purposes of its contract. See National Safe Corp. v. Benedict & Myrick, Inc., 371 So. 2d 792 (La.1979);²⁶  see also LSA-C.C. art. 1768 (stating contractual conditions may be implied). The parties were well aware that abandonment was necessary for Land and Ruhl to fulfill their purpose for purchasing the real estate; therefore, IC was obligated to attempt to abandon the property within a reasonable period of time. Whether IC adhered to its obligation is not a question we will address on appeal, because Land did not raise this issue before the district court; we therefore consider it waived. See Independent Fire Ins., 979 F.2d at 379.²⁷ 

We turn now to the final contention--that the district court erred in denying Land and Ruhl reimbursement for expenses they incurred in maintaining IC's sight zones. The language at issue is contained in the ACS for the third sale, dated January 30, 1985, which transferred the outer 75 feet for most of the line, see supra note 6:

VENDEE shall not do, or allow to be done, any act or omission that will, from and after the date of this Conveyance, create an obstruction of the sight zones, over and across all portions of the premises herein above conveyed that are situated adjacent to all public and private grade crossings.... Such sight zones are to provide a clear view between rail, pedestrian and vehicular traffic approaching the above mentioned existing grade crossings.

(Emphasis added.) The district court held that appellants are not entitled to recoup expenses from IC, because this provision obligates Land to clear and maintain the sight zones.²⁸ 

Land asserts that the district court erred by reading the language to mean that Land has an affirmative obligation to maintain unobstructed sight zones: " [t]he proper reading of this section is that R.R. Land agreed not to do anything 'that would create an obstruction of the sight zones.' Any obstruction that occurred as a result of factors not of its creation are not the subject of the clause". Alternatively, it contends that the phrase is ambiguous and therefore justifies a further search for the parties' intent. See LSA-C.C. art. 2053 ("A doubtful provision must be interpreted in light of the nature of the contract, equity, usages, the conduct of the parties before and after the formation of the contract, and of other contracts of a like nature between the same parties").

We agree with the district court that the language unambiguously imposes an affirmative obligation on Land to maintain unobstructed sight zones. Although the provision may be poorly worded, this does not constitute ambiguity or render the provision unclear. The language includes active language ("shall not do ... any act ... that will ... create an obstruction of the sight zones"), as well as passive language ("shall not ... allow to be done, any ... omission that will ... create an obstruction of the sight zone"), and therefore includes in clear and explicit terms both an obligation to refrain from obstructing the sight zones, as well as an obligation to prevent external factors that result in obstruction of the zones. Accordingly, we conclude that the district court did not err in its interpretation of the provision.

Nor did the district court err in failing to consider extrinsic evidence. Pursuant to LSA-C.C. art. 2046, " [w]hen the words of a contract are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties' intent". Because we conclude that the language of the provision is clear and explicit and does not lead to absurd consequences, we, like the district court, may not consider extrinsic evidence to discern intent. The district court did not err in rejecting this claim for damages.

For the foregoing reasons, the judgment of the district court is

AFFIRMED.