Settlement Based on Mutual Mistake Must be Rescinded

Barry Zalma
Jun 29, 2023

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People with a claim against an estate entered into a settlement agreement to resolve a claim against the estate regarding life insurance coverage that the decedent was required under a divorce decree to maintain for the benefit of the children of the broken marriage. Subsequently, the parties jointly petitioned the county court for Douglas County, Nebraska, for a declaration of their rights and obligations under the agreement. The county court reformed the agreement to be fair to all. The ex-wife appealed.

In In re Estate of Jordon R. Wiggins, deceased et a., No. S-22-543, 314 Neb. 565, Supreme Court of Nebraska (June 23, 2023) the Supreme Court of Nebraska resolved the dispute in a Solomon-like fashion.

BACKGROUND

Jordon R. Wiggins died on August 28, 2019. Prior to his death, Jordon executed a will, which established the Jordon R. Wiggins Family Trust (the Trust) for his children’s benefit. Jordon’s father, Robert Wiggins, was appointed personal representative of Jordon’s estate on October 17, 2019.

Jordon was previously married to Allison Hardy, and two minor children, Elizabeth Wiggins and Leah Wiggins, were born to them during the marriage. The divorce decree required Jordon and Allison each to “maintain a life insurance policy” of at least $250,000 “to provide for the minor children” if Jordon or Allison died.

On December 20, 2019, Allison brought a claim for $250,000 plus interest against the estate on the children’s behalf, alleging that the personal representative had not yet identified any life insurance policy maintained by Jordon for the children’s benefit. However, after the claim was brought, Jordon’s former employer informed Jordon’s brother, Jason Wiggins, that Jason was the sole beneficiary of Jordon’s two employer-provided life insurance policies, valued at $360,000 total.

The Settlement

Subsequently, Jason, as an interested party; Allison, on behalf of the minor children; and Robert, as personal representative, agreed to settle Allison’s claim against the estate. The settlement agreement began by acknowledging that “to the best of the [p]arties’ knowledge,” Jordon had not designated the children as beneficiaries of a life insurance policy of at least $250,000. The agreement then called for Jason to “gift” $250,000 of the insurance proceeds that he received to the Trust, whereupon Allison would withdraw the claim.

However, after they entered the settlement agreement, the parties learned that Jordon’s daughter Elizabeth was actually the beneficiary of one of Jordon’s life insurance policies, while Jason was the beneficiary of the other policy. Thereafter, the insurer paid $120,000 “directly” to Elizabeth; this money was not placed in the Trust. The insurer also paid $240,000 to Jason, who then paid $130,000 into the Trust and retained $110,000. Allison took issue with Jason’s action, arguing that he was required under the divorce decree, the settlement agreement, and Nebraska law to pay the entire $240,000 into the Trust for the children.

The Validity of the Settlement

At the hearing on the motion for declaratory judgment, Jason argued that the settlement agreement should be rescinded on various grounds, including the parties’ mutual mistake as to Jordon’s life insurance coverage. Alternatively, Jason argued that the agreement should be reformed due to this mutual mistake. Allison countered that there was no basis for reformation or rescission because the agreement in its written form correctly expressed the parties’ intent at the time they entered the agreement and Jason assumed the risk of mistake.

The county court ruled in Jason’s favor. The county court ordered that the $130,000 that Jason paid into the Trust satisfied his obligation under the settlement agreement, because he was entitled to a credit of $120,000 for the life insurance proceeds that Elizabeth received. Believing that this $120,000 had been placed in the Trust, the county court also ordered that the $250,000 received into the Trust for the children’s benefit satisfied the claim against the estate. It ordered that the settlement agreement be reformed accordingly.

ANALYSIS

Allison argued that the settlement agreement should be enforced against Jason because the agreement as written accurately reflects the parties’ intent at the time they signed the agreement.

A settlement agreement is subject to the general principles of contract law.

Rescission, in contrast to reformation, may be granted where the parties have apparently entered into a contract evidenced by a writing, but owing to a mistake, their minds did not meet as to all the essential elements of the transaction, so that no real contract was made by them. Generally, grounds for cancellation or rescission of a contract include fraud, duress, unilateral or mutual mistake, and inadequacy of consideration.

When used in reference to rescission, however, the term “mutual mistake” is not limited to a mistake in drafting the instrument. Specifically, for purposes of rescission, a mutual mistake of fact must relate to either a present or past fact or facts that are material to the contract, and not to an opinion as to future conditions as the result of present known facts.

The situation is different as to rescission. Here, the evidence clearly and convincingly showed that the parties were mutually mistaken as to a fact which was a material inducement for the contract. Specifically, their mutual mistake of fact was their belief that Jordon failed to maintain any life insurance for the benefit of the children and instead named Jason as the sole beneficiary.

On its face, the settlement agreement calls for Jason to pay money that he did not receive from the life insurance proceeds. It does not seem just and fair to require Jason to pay an additional $110,000-which would result in a total of $360,000 in life insurance proceeds’ being available to the children-where the divorce decree contemplated a minimum of $250,000 in life insurance proceeds, Elizabeth received $120,000 of life insurance proceeds directly from the insurer, and Jason has already paid $130,000 into the Trust, which is available to both Elizabeth and Leah.

The purpose of rescission is to place the parties in a status quo, that is, return the parties to their position which existed before the rescinded contract.

A mutual mistake as to the existence of a fact that was a material inducement to the contract is not ground for reformation, although it may be ground for rescission. Accordingly, the Supreme Court reversed the judgment of the county court and remand the cause with directions for the county court to rescind the settlement agreement and conduct further proceedings not inconsistent with this opinion.

ZALMA OPINION

The most difficult problem raised by the need for life insurance after a divorce is what to do when the spouse required to carry life insurance for the benefit of the children of the broken marriage is how to enforce the agreement. It would be simple to buy the insurance, name the children as beneficiaries and provide copies of the policy to the divorced spouse and/or the children. In this case, communications failed and the parties tried to be fair with to little information. Rescission was the appropriate resolution because the settlement was reached based on false information resulting in an unfair result.

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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Barry Zalma, Esq., CFE, is available at http://www.zalma.com and [email protected]

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