There's No Such Thing as a Free Restaurant

June 18, 2015 | Kristine A. Tidgren

Mistakes happen. Sometimes mistakes lead to legal liability, as in the case of negligence. But sometimes, where it’s apparent that a mistake in an instrument was a mutual one, equity steps in to “reform” the mistake. No harm. No foul. The document is reformed to reflect the true intent of the parties. A recent case from the Iowa Court of Appeals demonstrates the application of this doctrine. It also shows that trying to take advantage of such a mistake in a court proceeding can lead to costly sanctions.

The Facts

The case involved a “horizontal property regime,” which the court explained as a type of cooperative association. Under such a regime, the property comprises one lot, but the lot is subdivided into “buildings,” which are then divided into units.

The owner in this case had created the regime at issue, which included Building 2. Building 2 was subdivided into Units 2A and 2B. In 1999, a plat showed Units 2A and 2B oriented in an east-west configuration with Unit A placed to the west of Unit B. The plat was amended in 2007 to reorient Building 2 to a north-south configuration with Unit 2A south of Unit 2B. All of the other Buildings in the regime were aligned with the A unit north of the B unit.

Before 2007, an investor loaned the owner money for the cooperative project and received a second mortgage on the unsold buildings, including Building 2. The first mortgage was held by a bank.

In 2008, the investor signed a partial release to allow a restaurant developer to purchase “Unit 2B.” This document, which referenced the 1999 plat, instead of the 2007 plat, released “Unit 2B” from the second mortgage. The restaurant developer then purchased the “southern lot” of Building 2 from the owner and obtained a deed to “Unit 2B,” which also referenced the 1999 plat. The developer built a restaurant on the southern unit of Building 2, which—as the astute reader now realizes—was actually labeled as Unit 2A in the 2007 plat.

In 2010, the land surveyors who had prepared and filed the 2007 plat filed an affidavit stating that a scrivener’s error had been detected. The surveyors stated that a correction should be made swapping the locations of Units 2A and 2B on the plat.

The investor then filed a slander of title action against the land surveyors, alleging damages stemming from  disparagement of title. The surveyors withdrew their affidavit, and the investor dismissed the lawsuit.

One year later, the restaurant developer and its lender filed a petition to quiet title and reform the mortgage and deeds to the property upon which the restaurant now sat. The investor filed counterclaims alleging that the developer had interfered with a prospective business advantage by building upon land it did not own. The investor also asserted claims of misrepresentation against the owner.

At trial, the owner and the developer testified that they intended to convey the south lot, which was labeled as Unit 2A in the 2007 plat, to the developer. They stated that they were not aware of the mistake in the 2007 plat when they completed the transaction. The restaurant developer wanted the south lot, which was near the highway, for “visibility purposes.”

The investor testified that the owner told him that the developer wanted to build the restaurant on the north lot. The owner denied that assertion. The investor also testified that he saw the developer building the restaurant on the south lot, but said nothing because, “It was not [his] business. If they wanted to improve [his] equity, that was none of [his] business.”

The trial court found the testimony of the owner and developer credible and quieted title to the restaurant site in favor of the developer. The court did award the investor $2,101.45 in damages because the restaurant had also encroached slightly upon the north lot.

The court then struck hard, awarding attorney fees to the plaintiffs in the amount of $135,697, plus expenses, as a sanction against the investor. The court found that the investor was liable for the sanction under Iowa R. Civ. P. 1.413, which prevents frivolous claims used for an improper purpose. The trial court found that there was a high likelihood that the investor saw the mistake as an “opportunity to get a free restaurant.” This, the court found, was the type of claim Rule 1.413 was intended to address.

The Appeal

On appeal, the Iowa Court of Appeals affirmed the reformation of the legal documents required to quiet title to the restaurant property. The court stated that a court sitting in equity has the power to grant reformation of an instrument based upon the “true situation." The court found that the plaintiffs had proven by clear and satisfactory evidence that there had been a mutual mistake of fact in the expression of the documents. As such, equity could step in to reform them to conform to the intent of the parties.

The court noted that the investor himself testified that it was his intent to take advantage of the mistake to his own financial gain. The court noted that the investor was thus not an innocent party to the matter. Both units had approximately the same value, and the investor had watched as the developer built a $1.1 million restaurant on the southern lot. The investor was not, the court found, entitled to a windfall.

The court did reframe the damages granted to the investor for the encroachment as given for the conveyance of an easement, rather than for a forced sale of the strip.

Although the court found that the trial court did not abuse its discretion in awarding sanctions, it did find that the trial court had failed to make necessary factual findings to support the amount. On remand, the trial court was to make  findings as to the minimum sanctions required to deter future conduct and the parties’ ability to pay the sanctions. The court also instructed the trial court to reconsider the amount of attorney fees awarded, given that some of the fees would have to have been expended even if the investor had not made the frivolous claims.

The court did not address the investor's assertion that only the attorney* should have been sanctioned. The conduct sanctioned under Iowa R. Civ. P. 1.413 is the signing of a frivolous pleading. The rule allows sanctions against the attorney or the represented party or both. This relief is quite rare. It will be interesting to see what happens on remand.

First American Bank v. Fobian Farm, Inc., No. 14--3-9 (Iowa Ct. App. June 10, 2015).



*It is not clear from the opinion whether the attorney was sanctioned as well. The actual award was made against the "Fobian Parties," which included "three sanctioned parties."