Unpublished Disposition, 869 F.2d 1497 (9th Cir. 1984)

MEMORANDUM

Neely appeals the district court's entry of summary judgment for Smithey. We have jurisdiction pursuant to 28 U.S.C. § 1291. We affirm in part, reverse and remand in part, and reinstate the counterclaim.

We review the entry of summary judgment independently. We are governed by the same standard used by the trial court under Fed. R. Civ. P. 56(c), and must determine whether there is any issue of material fact and whether the substantive law was correctly applied. Darring v. Kincheloe, 783 F.2d 874, 876 (9th Cir. 1986).

The district court determined that the Mutual Release Agreement (the Release) disposed of Neely and Franklin Engineering's claim as well as Smithey and Tulsa Metal Processing's counterclaim for breach of contract, and granted Smithey's motion for summary judgment. Neely argues that summary judgment must be reversed because the Release is ambiguous in that it references by name only to the Contract for Sale of Corporate Stock and not the five other agreements between the parties.

Choice of law is determined by the forum state, Arizona. Klaxon v. Stentor Electric Manufacturing Co., Inc., 313 U.S. 487, 496 (1941). Arizona follows the Restatement (Second) of Conflict of Laws Sec. 188 in determining choice of law in interpreting a contract. Aries v. Palmer Johnson, Inc., 735 P.2d 1373, 1380-81 (Ariz.App.1987); Taylor v. Security National Bank, 514 P.2d 257, 260 (Ariz.App.1973). Section 188(1) of that restatement provides that the law governing interpretation of a contract is the local law of the state that has "the most significant relationship to the transaction and the parties." Pursuant to that test, see Rest.2d Sec. 188(2), Arizona has the most significant relationship to the transaction and the parties and Arizona law governs.

"The construction of a contract is a question of law where the terms of the agreement are clear and unambiguous." Smith v. Melson, Inc., 659 P.2d 1264, 1266 (Ariz.1983). Under Arizona law, an agreement is ambiguous if its language can reasonably be construed in more than one sense and the choice of construction cannot be determined within the four corners of the instrument. Cecil Lawter Real Estate School, Inc. v. Town & Country Shopping Center Co., 694 P.2d 815, 821 (Ariz.App.1984). Once a contract is determined to be ambiguous, the court may consider extrinsic evidence to ascertain the contract's real meaning. Summary judgment may be appropriate where there is no conflict in the evidence presented to resolve the ambiguity, but is inappropriate where such evidence is in conflict. Id. at 821-22.

Neely's amended complaint sets forth claims against Smithey under the Contract for Sale of Corporate Stock as amended by the Agreement to Retain Funds as follows: (1) failure to account for or release $100,000 held in trust; (2) refusal to pay rental under equipment lease; and (3) refusal to pay Neely a salary of $5,000 per month.

The Release specifically releases Smithey of these obligations under the Contract for Sale of Corporate Stock as follows:

1. Neely relinquished "any interest in the $100,000 presently being retained";

2. Neely specifically agreed to release Mallin Brothers Iron & Metal Company from any and all obligations "with respect to any and all Tri-Continental leases executed by it heretofore and any leases presently owned by Franklin." Additionally, under the Release, Neely reclaimed all forklifts and rolloff boxes which were covered by the leases; and

3. The release specifically provided that Neely would be paid a salary of $5,000 per month for three months as required under the Contract for Sale of Corporate Stock without Neely having to be present on the Mallin foundry site.

The Release thus unambiguously disposes of these three claims.

Neely's amended complaint asserts another claim against Smithey under the December 3, 1984, agreement and the Agreement to Form Corporation. Neely alleges that Smithey failed to form the new corporation and issue 41% of the new corporation's shares to Franklin Engineering. Neely argues that in agreeing to the Release, he thought he was merely being fired as an employee, but that he did not intend to release his rights in the new foundry corporation.

However, the Release specifically releases Smithey from any present or future obligation "to form any company, ... pay any debt or charge, or issue any shares of stock arising from the execution of the [Contract for Sale of Corporate Stock]." (Emphasized words are a handwritten interlineation initialed by Smithey and Neely.) The terms of the Contract for Sale of Corporate Stock did not provide for Smithey to form any company, pay any debt or charge, or issue any shares of stock. Only the December 3, 1984, Agreement and the Agreement to Form Corporation so provide. Focusing on the words "or issue any shares of stock" which were written by hand onto the typed release by the parties, the district court stated that it "refuse [d] to assume the parties would specifically add meaningless language to a contract." Neely does not offer any explanation for the parties' addition of that language.

Therefore, the language releasing Smithey from forming a corporation, paying any debt or charge, or issuing shares of stock is reasonably susceptible to the following interpretation: that Smithey was relieved of these obligations under the only agreements from which they directly arose, the December 3, 1984, Agreement and the Agreement to Form Corporation.

However, the language is also reasonably susceptible to another interpretation: that Smithey was relieved only from the obligations arising under the Contract for Sale of Corporate Stock because the Release does not mention the other agreements from which the obligations of forming a corporation, paying any debt or charge, or issuing shares of stock arose. This conclusion does not consider information beyond the four corners of the Release: the existence of the December 3, 1984, Agreement and the Agreement to Form Corporation.

The duress issue discussed below may impact on ambiguity analysis because a "contract should be read in light of the parties' intentions as reflected by their language and in view of all the circumstances." " [T]he purpose of an agreement is to be divined from the entire instrument and the surrounding circumstances and not from the label the parties attach to it." Darner Motor Sales v. Universal Underwriters, 682 P.2d 388, 398 (Ariz.1984) (en banc), quoting Smith v. Melson, 659 P.2d 1264, 1266-67 (Ariz.1983). Accordingly, given the close question of alternative interpretations of the Release, the possible impact of any duress upon Neely in the circumstances surrounding its signing, and viewing the facts in a light most favorable to Neely, we reverse the district court on the ambiguity issue.

Neely's opposition to Smithey's motion for summary judgment included four challenges to the validity of the Release, on the basis of lack of consideration, mutual mistake, unilateral mistake and duress. In granting Smithey's motion for summary judgment, the district court found that as a matter of law none of the defenses to the Release were valid.

The terms of the Release set forth as consideration a release of Neely from responsibility for his improper payment of $25,000 (which the parties and district court treat as including a forbearance of litigation against Neely for claims arising therefrom), as well as an award to Neely of certain accounts receivable. But Neely argues that Smithey has no valid claim against Neely for the $25,000 payment and that Smithey knew that he had no valid claim at the time the parties negotiated the Release. Under Arizona law, however, valid consideration consists of any benefit to a promisor or detriment to the promisee, either monetary or nonmonetary. USLife Title Co. of Arizona v. Gutkin, 732 P.2d 579, 584 (Ariz.App.1986). The release of a disputed or doubtful claim is legal consideration "even though the claim, asserted in good faith, may ultimately prove to be groundless." McGrath v. Bill Johnston Golf Properties, Inc., 474 P.2d 56, 59 (Ariz.App.1970).

Neely contends in his opening brief that he "presented evidence to the court that showed Smithey's claim that he had a right to sue Neely for $25,000 was not a valid claim and that Smithey knew that his claim was invalid." However, Neely does not refer to any evidence contradicting the district court's determination that (1) Neely's evidence merely established that one of the legal claims was meritless; (2) there was no evidence that any of the other claims was meritless; and (3) there was no evidence that Smithey believed at the time of negotiating the Mutual Release that the claims were meritless. Absent evidence of bad faith on Smithey's part in releasing claims against Neely, the release of claims is therefore legal consideration under Arizona law. Id.

With regard to assignment of certain accounts receivable as consideration for the Release, Neely conclusorily asserts that "under the Contract for Sale of Corporate Stock, Neely and Franklin Engineering already had a right to an assignment of accounts receivable." However, we have found no provision in that document to substantiate this assertion. At oral argument Neely conceded that this assertion was incorrect, and that he did receive some accounts receivable under the Release to which he was not previously entitled.

For support of his mutual mistake argument, Neely relies on Renner v. Kehl, 722 P.2d 262 (Ariz.1986). In Renner, the Arizona Supreme Court stated that " [i]n Arizona, a contract may be rescinded when there is a mutual mistake of material fact which constitutes 'an essential part and condition of the contract.' " Id. at 265. Neely does not assert on appeal, however, that he and Smithey were of the same mistaken opinion as to the scope of the Release, and therefore does not make out a case of mutual mistake under Renner. Neely argues rather that the scope of the Release beyond that of the obligations specified in the Contract for Sale of Corporate Stock was not discussed; that therefore "the agreements whereby Smithey had documented his promises to spin off the foundry corporation" were not included in the Release; and that Neely was not told that his rights in the new foundry were being released. Neely contends that he did not intend to release his claims to the foundry, but Smithey intended the release to cover those claims.

However, both parties here knew of the existence of Smithey's obligation to spin off the foundry. At least one party (Smithey) intended to release his obligations to Neely to do so. Both parties specifically wrote into the typed contract and initialed the provision releasing Smithey from the responsibility of issuing any shares of stock. However, as held earlier, the district court improperly concluded that this language unambiguously included within the Release Smithey's obligations under the Agreement to Form Corporation. Nonetheless, when mutual mistake is asserted to set aside a release or other contract, the party attacking the contract must establish the mistake by clear and convincing evidence. Melvin v. Stevens, 458 P.2d 977, 980 (Ariz.App.1969). The ambiguity question is a very close call made in a light most favorable to Neely. Therefore, Neely has not alleged facts constituting a defense of mutual mistake under Arizona law.

Under Arizona law " [a] unilateral mistake induced by misrepresentations or contractual ambiguity may constitute grounds for avoiding a release." Hendricks v. Simper, 539 P.2d 529, 533 (Ariz.App.1975). In analyzing a claim of unilateral mistake, the court in Hendricks examined to the wording of the release, the opportunity for the parties to read the release before signing it, and differences between the terms of the release and the oral representations made to the parties. The court refused to set aside the contract based on one party's mistaken belief where there was an absence of evidence of misrepresentation or ambiguity, and where the plain wording of the release itself made it clear that the party's belief was misplaced. Id. at 533-34.

Again, there is a close question concerning ambiguous language in the Release. Neely's argument that Smithey failed to disclose the fact that the Release included within it the relinquishment of Neely's rights under the Agreement to Form Corporation is validated by our reversal on the ambiguity issue. Accordingly, we reverse the district court's ruling on the issue of unilateral mistake.

A difficult argument is presented in Neely's defense of duress. Arizona has adopted the Restatements of the Law of Contracts' Sec. 492 definition of duress as follows:

(a) any wrongful act of one person that compels a manifestation of apparent assent by another to a transaction without his volition, or

(b) any wrongful threat of one person by words or other conduct that induces another to enter a transaction under the influence of such fear as precludes him from exercising free will and judgment, if the threat was intended or should reasonably have been expected to operate as an inducement.

Dunbar v. Dunbar, 429 P.2d 949, 952 (Ariz.1967).

The district court sets forth several factors by which it was convinced that "no reasonable trier of fact could find that Neely was under duress when he signed the Mutual Release." However, no Arizona case establishes that these factors as a matter of law compel the conclusion that no duress existed. In Dunbar, the Arizona Supreme Court looked to the facts and surrounding circumstances of an agreement to determine whether it was entered into under duress. In the present case, the material facts surrounding the negotiation and signing of the Release are in dispute. The district court erred in disposing of this issue by summary judgment.

Moreover, while a good faith threat to bring a civil lawsuit does not constitute duress, id. at 953, threats of criminal prosecution may constitute duress. Ingalls v. Neidlinger, 216 P.2d 387, 390-92 (Ariz.1950). Construing the facts in the light most favorable to the nonmoving party, Neely, we must accept Neely's allegation that Smithey threatened him with criminal prosecution.

The summary judgment is reversed and remanded to ascertain (1) the Release's full meaning in light of extrinsic evidence; (2) whether Neely entered into the Release under the unilateral mistaken belief that he was not relinquishing his rights under the Agreement to Form Corporation; and (3) whether the Release was entered into under duress and is therefore unenforceable.

Both parties agree that reversal of the judgment for summary judgment requires reinstatement of Smithey's counterclaim. See Markel v. Transamerica Title Insurance Co., 442 P.2d 97, 106 (Ariz.), cert. denied, 393 U.S. 999 (1968), overruled on other grounds, Burch & Cracchiolo, P.A. v. Pugliani, 697 P.2d 674, 676 (Ariz.1985) (reversal of a judgment restores the parties to their positions as if judgment has never been rendered). We agree.

Smithey appeals from the order denying his motion for attorneys' fees. Smithey concedes that an award of attorneys' fees under Arizona Revised Statutes Sec. 12-341.01(A) is discretionary. However, Smithey argues that in denying its motion, the district court failed to consider the factors set forth by the Arizona Supreme Court in Wagenseller v. Scottsdale Memorial Hospital, 710 P.2d 1025, 1049 (Ariz.1985). The Arizona Supreme Court has not stated that consideration of the Wagenseller factors is mandatory. Because the district court denied attorneys' fees on the reasonable bases that Neely's claim was meritorious and the effect of the release was enthusiastically litigated, the district court's judgment denying attorneys' fees should not be disturbed. See Associated Indemnity Corp. v. Warner, 694 P.2d 1181, 1184-85 (Ariz.1985).

AFFIRMED IN PART; REVERSED AND REMANDED IN PART.

WALLACE, Circuit Judge, concurring and dissenting:

I cannot agree that the Mutual Release is ambiguous as to whether it releases Smithey from his obligation to form a new corporation and issue shares of stock to Franklin Engineering. The Mutual Release releases Smithey from any obligation "to form any company, ... pay any debt or charge, or issue any shares of stock arising from the execution of the above mentioned document." (Emphasis added to indicate handwritten interlineation.) The "above mentioned document" is the Contract for Sale of Corporate Stock. However, that document does not provide for Smithey to form any company, pay any debt or charge, or issue any shares of stock. Only the December 3 Agreement and the Agreement to Form Corporation so provide. Therefore, I believe that the only reasonable interpretation of the Mutual Release is that it releases Smithey from these obligations under the only documents that confer such obligations. Thus, consideration of extrinsic evidence is unnecessary.

The majority suggests that since the document on its face refers only to the "above mentioned contract," the Contract for Sale of Corporate Stock, it is also reasonable to construe the Mutual Release as relieving only obligations under that contract. I could accept this argument except for the handwritten interlineation which relieves an obligation nonexistent under the Contract for Sale of Corporate Stock.

I would not reverse the district court's ruling on the issue of unilateral mistake. Under Arizona law " [a] unilateral mistake induced by misrepresentations or contractual ambiguity may constitute grounds for avoiding a release." Hendricks v. Simper, 539 P.2d 529, 533 (Ariz.App.1975). No contractual ambiguity exists in the language of the Mutual Release. Nor does Neely argue that Smithey misrepresented any provision included in the Mutual Release. Rather, he argues, Smithey failed to disclose the fact that the Mutual Release included within it the relinquishment of Neely's rights under the Agreement to Form Corporation. Neely further contends that Smithey and Neely had a fiduciary relationship as business partners. But even if there were a fiduciary relationship, and even if the element of "misrepresentation" in unilateral mistake cases involving fiduciaries could be satisfied by a showing of "failure fully to disclose material facts," the handwritten addition to the typed contract unambiguously including the Agreement to Form Corporation within the Mutual Release indicates that full disclosure was made to Neely. No unilateral mistake could have occurred.

I would reverse and remand the summary judgment against Neely only to determine whether, under Arizona law, the Mutual Release was entered into under duress and is therefore unenforceable. I agree with the majority that reversal of the summary judgment requires reinstatement of Smithey's counterclaim.