CHICAGO TITLE INSURANCE CO V EAST ARM LLC
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STATE OF MICHIGAN
COURT OF APPEALS
CHICAGO TITLE INSURANCE COMPANY,
UNPUBLISHED
November 25, 2003
Plaintiff-Appellee,
v
No. 242372
Ingham Circuit Court
LC No. 01-093518-CK
EAST ARM, L.L.C.,
Defendant-Appellant.
Before: Sawyer, P.J., and Griffin and Smolenski, JJ.
PER CURIAM.
In this appeal, we asked to determine whether a document signed at a closing by the
parties to a real estate transaction, which states that the amount of tax proration is a stated sum,
which accepts the stated property tax proration figures as satisfactory and which holds harmless
the title company which calculated the figures and prepared the document, constitutes an
“agreement to the contrary” under MCL 211.2(4) to remove the transaction from the statutory
method of calculating the property tax proration. We hold the document in this case does reflect
an agreement between the parties and, therefore, the tax proration contained in those documents
controls.
Defendant purchased the Hampton Inn hotel in Traverse City from Equity Inns
Partnership. The transaction closed on December 16, 1999. Although the parties were
represented by counsel, there was no real estate broker involved. The closing itself was handled
by The Title Office in Big Rapids.
The purchase agreement provided for the proration of various items, including property
taxes. However, it did not specify how the property taxes were to be pro rated. Amy Johnston
was the manager of the Big Rapids’ branch of The Title Office and handled this transaction. She
testified that she inquired of the parties how they wished to handle the proration of the taxes and
they instructed her to contact the township and determine how they do it. Johnston testified that
she contacted East Bay Township was told that they used the calendar year in arrears method in
that area and so Johnston used that method in preparing the settlement statement for closing.
After closing, the seller questioned the method used in determining the proration of the property
taxes. Plaintiff, which had purchased The Title Office, agreed that the proration had been
incorrectly calculated and paid the seller approximately $41,000 to reimburse the seller for
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overpaid taxes. Plaintiff then commenced this suit, as the seller’s subrogee, against defendant to
recover the amount plaintiff believes that defendant underpaid towards taxes.
Plaintiff maintains that, because there was no agreement to the contrary, the statutory
method of pro rating taxes found in MCL 211.2(4) should have been employed. Defendant
maintains that the tax proration sheets signed as closing constitutes an agreement to the contrary
and, therefore, there should be no adjustment to the taxes from how they were in fact pro rated in
the closing of this transaction. The trial court concluded that there was a mutual mistake of fact
and that there was no agreement to the contrary. The trial court therefore applied the statutory
method, granting summary disposition to plaintiff and denying defendant’s motion for summary
disposition.
We review a grant or denial of summary disposition de novo.1 In considering a motion
under MCR 2.116(C)(10), the trial court considers affidavits, pleadings, depositions, admissions,
and other evidence offered by the parties in the light most favorable to the nonmoving party.2
Where the proffered evidence fails to establish a genuine issue regarding any material fact, the
moving party is entitled to judgment as a matter of law.3
This dispute has its genesis in the fact that the method by which real estate taxes are
prorated varies from community to community within the state. Among the methods that are
employed are the following:
1) Calendar year method (the method employed at closing in this case). Here, taxes,
summer and winter, are treated as covering the calendar year in which they are billed. Thus, in
the case at bar, with a closing date of December 16, 1999, the seller was responsible for
approximately 11-1/2 months of the taxes billed in 1999, while the buyer (defendant) was
responsible for only ½ month of the taxes billed in 1999.
2) Due Date in advance method. Under this method, the taxes are deemed to cover the
twelve method period beginning with the date they are billed. Thus, in communities with two
tax bills per year (summer and winter), there may have to be two prorations. If this method were
applied to the case at bar, the seller would be responsible for approximately 5-1/2 months of the
summer taxes billed in 1999 (July 1 to December 16) and ½ month of the winter taxes billed in
1999 (December 1 to December 16). Defendant would thus be responsible for 7-1/2 months of
the summer taxes and 11-1/2 months of the winter taxes.
3) Due Date in arrears method. This is the same as due date in advance, except that
taxes are treated as covering the twelve-month period before they are billed. Had this method
1
Maiden v Rozwood, 461 Mich 109, 118; 597 NW2d 817 (1999).
2
Id. at 120.
3
Id.
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been applied to this case, the seller would have been obligated to reimburse defendant for 5-1/2
months of the summer taxes billed in 2000 and ½ month of the winter taxes billed in 2000.
4) Fiscal year method. This method is similar to the calendar year method, except that
taxes are deemed to cover the services provided for the fiscal year in which they are levied. This
method is complicated by the fact that different taxing authorities (school district, county,
township, etc.) may have different fiscal years. Thus, different prorations not only apply to
winter and summer taxes, but also to each taxing authority. (Indeed, because of different fiscal
year starts, it may even be necessary to look at the previous tax bill for one taxing authority and a
future tax bill for a different taxing authority.)
Given that there is no single accepted method for prorating property taxes, the Legislature
has provided a default method to be employed in the absence of an agreement to the contrary.
MCL 211.2(4) provides as follows:
In a real estate transaction between private parties in the absence of an
agreement to the contrary, the seller is responsible for that portion of the annual
taxes levied during the 12 months immediately preceding, but not including, the
day title passes, from the levy date or dates to, but not including, the day title
passes and the buyer is responsible for the remainder of the annual taxes. A used
in this subsection, “levy date” means the day on which a general property tax
becomes due and payable.
The purported “agreement to the contrary” that defendant looks to in this case are the tax
proration sheets prepared by The Title Office in connection with the closing. There are a number
of these sheets, which collectively pro rate all of the property taxes and are signed by agents of
both the seller and defendant. Each of the sheets contain the following statement:
We, the undersigned buyers and sellers of the above-captioned property,
hereby agree that the prorated taxes charged to the seller/buyer and credited to the
seller/buyer at closing are $ ______”
A number appears following the dollar sign on each of the sheets, followed by the calculations.
After the calculations and before the signature, the following statement appears:
We agree that the above calculations are satisfactory and we hold THE
TITLE OFFICE, INC, and EMPIRE NATIONAL BANK harmless from any loss
or damage resulting from a variance in the tax figures once the actual tax bills are
received.
Defendant argues that it is lawful under the statute for a proration agreement to simply be
an agreement for a party to pay a fixed sum of money to the other to settle the tax proration and
that such an agreement may be signed at any time, including at closing. That is, that a tax
proration agreement does not necessarily have to be part of the purchase agreement or otherwise
executed before closing. We agree with defendant. The statute does not limit the parties to a
real estate transaction to picking from a limited list of proration methods. Thus, the statute does
not preclude an “agreement to the contrary” as simply being an agreement for one party to the
transaction to pay the other party a fixed amount in consideration of the tax liability. Similarly,
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the statute does specify when such an agreement must be executed. Accordingly, there is no
basis for rejecting the purported agreement in this case merely because it was signed separately
from the purchase agreement or because the proration method is establishing a fixed number
rather than explicitly identifying one of the recognized methods of tax proration.
Thus, the question becomes whether the above quoted language from the tax proration
sheets represents an agreement on the proration method. We believe that the clear and
unambiguous language of the contracts does establish such an agreement. The first part of the
language quoted states that the buyer and seller “hereby agree that the prorated taxes” are the
amount filled into the blank. We can think of no clearer method to reflect that an agreement
exists than to say “we hereby agree.”
The trial court rejected defendant’s argument, concluding that the parties signed the tax
proration sheets under a mutual mistake of fact that the numbers contained in the sheets were
accurate. The trial court opined as follows:
Well, I’m going to deny the Defendant’s motion for summary disposition.
I’ll grant summary disposition for the Plaintiff. The agreement itself in section
6.6 under any column of expense allocations, and I realize this is not definitive,
but it says real estate, personal property taxes, which shall be prorated between
the seller and the purchaser. Now why do we do that? Because people ordinarily
pay the taxes during the time that they are responsible, that they have an
ownership interest and this is something that’s so commonly – it’s a very
customary common thought of method of allocation and it’s restated even in the
statute. It’s probably been in the statute for a very long period of time.
Counsel for the Defendant didn’t negotiate anything else. There is nothing
underlining this transaction that would suggest that there would be some sound
reason other than something just generating a document that had the wrong
numbers. Those numbers were not negotiated for, they were on the form and the
parties signed for them, but there was no discussion, no negotiation, no
preliminaries, no letter saying we think you guys ought to pay 11 months of taxes
because these negotiations took longer than we thought and we’ve been burdened,
nothing whatsoever of that type. I mean this is a classic in my view mutual
mistake of fact. When they signed the document there is nothing here to indicate
that they understood – what would be the reason? I mean I haven’t heard one
single reason offered on behalf of the Defendant why such a number that the
Defendant insists as the proper number would have been a part of the transaction.
I mean there is no reason. The billing date for that governmental unit is July 1 to
June 30th, so there is just no reason that it’s even been offered on the part of the
Defendant why this particular number, other than the fact that they wrote it down
and somebody signed it. It’s a classic mutual mistake, mutual mistake of fact.
This is not a unilateral fact. It wasn’t negotiated for and the proper proration – the
date is the date that the statute calls for because no other means of proration -- no
means of proration is set forth in any document that I can see. No other number is
set forth.
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I find as a matter of fact in law that there is a no “agreement to the
contract” in this situation. What you had was a closing document that had a
wrong number and they signed it, and they signed it misunderstanding what the
situation was in terms of how these taxes would have been billed.
The issue, however, is not whether the parties mistakenly believed that the calculations were
accurate. Indeed, it does not appear to be disputed that the tax proration sheets represent the
correct proration if the calendar year method is employed.
The trial court erroneously concluded that this case is one of mutual mistake. As the
Supreme Court explained in Lenawee Co Board of Health v Messerly4:
A contractual mistake “is a belief that is not in accord with the facts”. 1
Restatement Contracts, 2d, § 151, p 383. The erroneous belief of one or both of
the parties must relate to a fact in existence at the time the contract is executed.
Richardson Lumber Co v Hoey, 219 Mich 643; 189 NW 923 (1922); Sherwood v
Walker, 66 Mich 568, 580; 33 NW 919 (1887) (Sherwood, J., dissenting).
The Messerly Court goes on to say:
Instead, we think the better-reasoned approach is a case-by-case analysis
whereby rescission is indicated when the mistaken belief relates to a basic
assumption of the parties upon which the contract is made, and which materially
affects the agreed performances of the parties. Denton v Utley, 350 Mich 332; 86
NW2d 537 (1957); Farhat v Rassey, 295 Mich 349; 294 NW 707 (1940);
Richardson Lumber Co v Hoey, 219 Mich 643; 189 NW 923 (1922). 1
Restatement Contracts, 2d, § 152, pp 385-386. [Messerly, supra at 29-30.]
Further, in Dingeman v Reffitt,5 this Court considered the remedy of reformation of the contract
in light of a mistake:
Plaintiffs alternatively sought reformation of the land contract. The
burden of proof is upon the party seeking reformation to present clear and
convincing evidence that the contract should be reformed in order to carry out the
true agreement of the parties. E R Brenner Co v Brooker Engineering Co, 301
Mich 719, 724; 4 NW2d 71 (1942). In order to decree the reformation of a
written instrument on the ground of mistake, the mistake must be mutual and
common to both parties to the instrument. Stevenson v Aalto, 333 Mich 582, 589;
53 NW2d 382 (1952). If the asserted mutual mistake is with respect to an
extrinsic fact, reformation is not allowed, even though the fact is one which would
have caused the parties to make a different contract, because courts cannot make a
4
417 Mich 17, 24; 331 NW2d 203 (1982).
5
152 Mich App 350, 358; 393 NW2d 632 (1986).
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new contract for the parties. Brenner, supra, p 724; Marshall v Marshall, 135
Mich App 702, 710-711, n 3; 355 NW2d 661 (1984).
In the case at bar, there is simply no basis for concluding that there was a mutual mistake
by the parties regarding the proration of taxes. At best, there was mutual confusion or ignorance
as to the method to be applied. The original purchase agreement itself provides that the taxes
shall be prorated, but does not provide for which method of proration is to be applied. Further,
the closing agent, Amy Johnston, testified in her deposition that when she contacted the parties
for instructions on how to calculate the proration, both instructed her to determine how it is done
in Grand Traverse County and apply that method. Johnston further testified that she spoke with
someone in the East Bay Township treasurer’s office and determined that the local practice was
to apply the calendar year in arrears method, which Johnston proceeded to do. Ultimately, the
parties signed the proration sheets which reflected that they agreed that the sums stated in the
sheets were the proper proration amounts. Nothing in the facts of this case reflects a mistake
made by the parties. Rather, the parties delegated to Johnston the responsibility of determining
the appropriate proration method, she determined that the method which should be applied was
calendar year in arrears, and then the parties confirmed in writing their agreement to follow that
method. In fact, defendant’s president stated in his affidavit that no particular method of tax
proration had been discussed in advance, that the proration proposed by Johnston was agreeable
to him and he signed the proration sheets intending, without mistake, to accept that as the
proration method.
Furthermore, the only “mistake” identified by the trial court was that the number
contained in the proration sheets was not the correct number when employing the statutory
method. While that is true, that presupposes that the parties were both consciously intending to
apply the statutory method and both mistakenly believed that the proration amount calculated by
Johnston reflected the statutory method when it did not. Indeed, the trial court’s opinion reflects
a belief by the trial court that the statutory method is the prevailing method unless there some
unique circumstance to agree otherwise. But that assumption by the trial court is not supported
by the facts. In her deposition, Johnston testified that there are several different methods of tax
proration and, in fact, the calendar year in arrears method is the prevailing method in Big Rapids,
where her office is located. Further, Johnston determined upon inquiry that that is also the
prevailing method in East Bay Township in Grand Traverse County. Thus, the trial court’s
belief that there had to have been a mistake was based upon an unjustified assumption.
As to this latter point, plaintiff also argues that Johnston incorrectly determined that the
calendar year method is the prevailing method in East Bay Township. But plaintiff points to no
evidence that contradicts Johnston’s determination. At best, plaintiff shows that the means
employed by Johnston to determine the prevailing local method does not create a great deal of
confidence in the accuracy of her determination. Plaintiff, however, produces no evidence to
establish that that determination is, in fact, inaccurate. But ultimately the point which plaintiff is
unable to contradict is that the parties agreed to follow the results obtained by plaintiff, without
regard to how she obtained them or whether the results were correct.
In sum, there is no genuine issue of material fact that the parties shared a belief as to the
method which was mistakenly applied, nor is there a genuine issue of material fact that the
parties agreed in writing to the proration method applied by Johnston. Therefore, the trial court
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erred in determining that the statutory method should have been applied in this case.
Accordingly, rather than granting summary disposition to plaintiff, the trial court should have
granted summary disposition to defendant.
Reversed and remanded to the trial court with instructions to enter summary disposition
in favor of defendant. We do not retain jurisdiction. Defendant may tax costs.
/s/ David H. Sawyer
/s/ Richard Allen Griffin
/s/ Michael R. Smolenski
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