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VAN SCHOUWEN v. CONNAUGHT CORP.

October 10, 1991

NEAL VAN SCHOUWEN, Plaintiff,
v.
THE CONNAUGHT CORPORATION, Defendant



The opinion of the court was delivered by: DUFF

 I. Introduction

 A. Background

 Plaintiff, Neal Van Schouwen, has moved this court to dismiss under Rule 12(b)(6) the counterclaim brought by the defendant, The Connaught Corporation ("Connaught"). He has also moved under Rule 12(f) to strike many of the numerous affirmative defenses that Connaught has pleaded in its answer.

 Van Schouwen is a former shareholder, officer and director of Connaught. In his five-count complaint, Van Schouwen invoked this court's diversity jurisdiction and sued Connaught over its alleged breach of a contract titled "Agreement to Sell Shares of Stock" (the "Stock Agreement") and also over its alleged breach of certain oral agreements. The Stock Agreement was a contract under which Van Schouwen was to sell his entire interest in Connaught (12.5 shares) to the company, thereby entirely disassociating himself from Connaught.

 Count I of Van Schouwen's complaint alleges that Connaught breached a provision of the Stock Agreement requiring Connaught to pay Van Schouwen $ 150,000.00 for his 12.5 shares of Connaught. The complaint alleges that Connaught has so far paid only $ 30,000 towards the $ 150,000 purchase price and has missed the first of five scheduled annual installment payments of $ 24,000. Count II alleges that Connaught breached another provision of the Stock Agreement under which Connaught was obligated to pay Van Schouwen $ 17,300 for commissions owed to Van Schouwen by Governor's Capital, a corporation described in the complaint as "affiliated with Connaught." In Count III, Van Schouwen alleges that Connaught breached a subsequent oral agreement to apply the $ 17,300 mentioned in Count II to Van Schouwen's 1989 federal and state withholding and FICA taxes. Count IV alleges that Connaught breached an oral settlement agreement regarding the disputed $ 17,300 that the parties allegedly reached after Connaught failed to apply the $ 17,300 towards Van Schouwen's taxes. Finally, in Count V, Van Schouwen alleges that Connaught breached an obligation to indemnify Van Schouwen for liability he incurred in a civil suit brought against Van Schouwen and others in a Wisconsin state court. Van Schouwen alleges that the obligation to indemnify was a part of the Stock Agreement.

 In its answer, Connaught denied liability under each of the five counts and also raised a host of affirmative defenses. Connaught also brought a counterclaim, simply styled "Counterclaim," seeking rescission of the Stock Agreement. In the alternative, the counterclaim seeks to reform the written contract. The counterclaim's two demands require a showing of different claims and should have been drafted as two separate counterclaims. Accordingly, this court will evaluate the merits of Van Schouwen's 12(b)(6) motion with respect to the request for rescission separately from its merits with respect to the request for reformation.

 B. Connaught's Factual Allegations

 To support its counterclaim for rescission, or in the alternative for reformation, Connaught alleges certain facts which this court must take as true for the purposes of the motion to dismiss. See Gregory v. Nunn, 895 F.2d 413 (7th Cir. 1990). Connaught alleges that prior to executing the Stock Agreement, "Connaught represented to David Wabick, president of Connaught, that Connaught had a book value of approximately $ 1,200,000." (Counterclaim Par. 5). Connaught alleges further that Van Schouwen's 12.5 shares represented one-eighth of the outstanding shares of Connaught at the time of the execution of the Stock Agreement and that the parties arrived at the $ 150,000 purchase price based upon a belief that $ 150,000 was one-eighth of the corporation's book value. In addition, Connaught alleges that sometime after the execution of the Stock Agreement Connaught discovered that its books and records had been kept inaccurately and that therefore its book value at the time of the Stock Agreement was improperly inflated. It had been among Van Schouwen's duty as chief financial officer to keep Connaught's records and books.

 Connaught does not allege intentional misrepresentation on Van Schouwen's part. Instead, Connaught grounds its request for rescission or reformation based on mutual mistake. In its brief in opposition to plaintiff's motion to dismiss, Connaught states:

 Here, Connaught does not allege that Van Schouwen, the bookkeeper of Connaught at the relevant time, intentionally misrepresented the value of the corporation to anyone. It is coincidence that the person in charge of the books and records was the very same person who desired to sell his stock to the corporation. The result that Connaught seeks to obtain would be the same if any other shareholder sought to redeem his or her stock. If the value of the corporation was based upon incorrect figures, and both parties relied upon those incorrect figures, then there exists a mutual mistake.

 Def./Counterclaimant Br. at 2.

 II. Motion to Dismiss

 A. Standard of Review

 This court now must analyze whether the facts alleged by Connaught state a claim for relief (rescission or reformation). A motion to dismiss may only be granted if "it appears beyond doubt that the [counterclaimant] can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). Only if the allegations of the complaint, and all reasonable inferences drawn therefrom, could not support any cause of action may this court grant a motion to dismiss. See generally Charles Wright & Arthur Miller, 5A Federal Practice and Procedure : Civil 2d ยง 1357 (West Publishing, 2d ed. 1990). Accordingly, all facts set forth in this opinion are taken from the well-pleaded allegations of the complaint. See Yeksigian v. Nappi, 900 F.2d 101, 102 (7th Cir. 1990).

 B. Counterclaim For Rescission

 This court concludes that Connaught has not alleged a set of facts that would entitle it to the relief of rescission based on mutual mistake. The elements of a claim for rescission under Illinois law (which the parties agree governs) were provided in Diedrich v. Northern Illinois Pub. Co., 39 Ill. App. 3d 851, 857, 350 N.E.2d 857, 861-62 (2d Dist. 1976):

 Before [a] contract can be rescinded [the party seeking rescission] must prove that the parties were both mistaken as to a material matter; that this matter is of such grave consequence that enforcement of the contract would be unconscionable; that the mistake [of the person seeking rescission] occurred despite the exercise of reasonable care; and that the other party can be placed in status quo.

 Connaught has failed to plead facts sufficient to support the conclusion that the parties were mistaken as to a material matter, let alone a matter "of such grave consequence that enforcement of the contract would be unconscionable." At most, Connaught can show that a mutual mistake led to its signing a contract calling for it to pay a bit more than one-eighth of the "true" book value of Connaught's stock. That does not rise to the level of a mistake as to a material matter. See id., 39 Ill. App. 3d at 857-58 ("[A] contract fairly entered into for an adequate consideration cannot be avoided or disregarded by one of the parties to it because he discovers that the contract is less profitable to him than he anticipated when he entered into it").

 The Stock Agreement between the parties is a relatively complex contract involving more than merely the redemption of 12.5 shares in exchange for cash. It also includes non-competition provisions, indemnification provisions and a provision under which Van Schouwen is also to transfer his stock in another company, Governor's Capital, Inc. In light of the relative complexity of the contract, the alleged mistake in calculating the purchase price is not sufficiently "material" to warrant the rescission of all terms of the contract. The alleged mistake did not go to the purpose of the contract but merely to one particular term.

 In addition, Connaught has pleaded no facts to support a holding that it would be unconscionable to enforce the Stock Agreement, an element required by Illinois law. See id. Even if Connaught is correct that it paid more than one-eighth of its book value for Van Schouwen's 12.5 shares, the mere pleading of an overpayment is not enough to support a finding of unconscionability. Connaught will not be able to prove any set of facts showing that the Stock Agreement was "improvident, totally one-sided or oppressive" or that Connaught lacked a meaningful choice in the terms it could bargain for. See In re Marriage of Carlson, 101 Ill. App. 3d 924, 930, 428 N.E.2d 1005, 57 Ill. Dec. 325 (1st Dist. 1981).

 C. Counterclaim for Reformation

 This court now turns to whether Van Schouwen has stated a claim for relief of reformation under Illinois law. Reformation is a remedy by which a party has a contract rewritten so that it will conform to the agreement actually reached between the parties. See Briarcliffe Lakeside Townhouse Owners Association v. Wheaton, 170 Ill.App.3d 244, 524 N.E.2d 230, 120 Ill. Dec. 465 (2d Dist. 1988). Reformation is an available remedy if it is based on a claim of mutual mistake, as Connaught argues in the instant case. See Aetna Screw Products Co. v. Borg, 116 Ill. App. 3d 206, 451 N.E.2d 1260, 1264, 71 Ill. Dec. 893 (1st Dist. 1983).

 Connaught argues that the mutual mistake originated with the parties' inaccurate understanding of Connaught's book value due to faulty corporate record-keeping. According to a liberal reading of Connaught's allegations, the parties agreed that Van Schouwen would be paid one-eighth of the book value of the company in exchange for his 12.5 shares of stock (one-eighth of the outstanding stock). The written contract's recitation of a payment of $ 150,000 was allegedly merely the parties' estimate of one-eighth of Connaught's book value. Connaught argues that the parties "true" agreement was that Connaught would pay one-eighth of the book value and not that it would pay the figure of $ 150,000. The $ 150,000 figure therefore is a false representation of the parties' true agreement, Connaught alleges.


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