HOB TEA ROOM, Inc. et al.
HOB TEA ROOM, Inc. et al.
[33 Del.Ch. 41] William E. Taylor, Jr., of Wilmington, for plaintiff below.
Edwin D. Steel, Jr., and William S. Megonigal, Jr., of the firm of Morris, Steel, Nichols & Arsht, of Wilmington, for defendants below.
TUNNELL, Justice, RICHARDS, President Judge, and HERRMANN, Judge, sitting.
On the fifth day of October, 1945, Mary M. Miller, the plaintiff, sold to Henry P. Burrows, Jr., one of the defendants, all of the capital stock of a Delaware corporation, Hob Tea Room, Inc. (hereinafter called 'Hob'), the other defendant. The terms of the transaction were set out in a formal written instrument duly executed by plaintiff, by defendant Burrows, and by an escrow agent who is not involved in this litigation.
The general body of the contract caused no difficulty, but problems of some complexity have been raised as to this one paragraph thereof:
'Tenth. Buyer agrees that all receipts, including refundments (sic) of taxes, from any source whatsoever due said corporation at the date of this agreement, shall be paid over to Seller, with adjustment for any increased taxes to the corporation incurred by the receipt thereof.'
Hob had been operated at a loss over that portion of the year 1945 beginning with January 1st and running up to October 5th, and thus, under the applicable provisions of the Internal Revenue Code then in force, the situation on the date of the contract was such that if the loss so far accrued to Hob in 1945 should not be erased by profits between October 5th and December 31st, then Hob would become entitled to refunds of portions of the excess profits taxes it had paid in respect to the years 1943 and 1944. It developed that there was in fact such a loss over the entire year 1945, and claims for the appropriate refunds were filed by Hob in May of 1946.
In due course, on the 24th day of November, 1947, a representative of the Bureau of Internal Revenue advised Hob that its claims for refunds would be 'recommended for payment'. Plaintiff knew that the refunds were a potential source of income to someone but did not keep herself advised as to the progress of the claims, and neither
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In the month of December, 1947, however, defendant Burrows proposed to plaintiff that he be permitted to discharge his obligation by making a lump sum settlement in lieu of the series of installments specified in the contract. There were no oral negotiations looking toward this plan, and the writings were entirely in the form of correspondence.
At the time Burrows broached to plaintiff his proposal for a single payment settlement, he also asserted against her several claims: (1), alleged failure to have on hand at the Hob restaurant premises at the time of the sale an ice cream cabinet, which he valued at $300, and a cash register valued at $600, (2), a claim for reimbursement for $78.69 in Federal Unemployment Tax, and (3), accrued interest in respect to the above two claims in the sum of $109.43.
In due course, after three letters, which we shall later be required to consider in further detail, an accelerated plan of payment or final settlement (depending upon the point of view) was adopted. The release which Burrows took from Mrs. Miller on the 31st day of December, 1947, at the conclusion of these negotiations, was drawn by her attorney, and its language was in part as follows:
'* * *
'Whereas under the terms of the said agreement there is now due as of the Thirty-first day of December, A. D. 1947, on the principal $20,534.72 with [33 Del.Ch. 43] interest at 5% from January 1, 1947 to December 31, 1947, in the sum of $1,026.73 making a total amount of principal and interest due under the said contract of $21,561.45.
'Whereas an offer in full settlement and satisfaction of the said total amount due on the said contract has been made as of this date by the Buyer of $20,561.45, being One Thousand Dollars ($1,000.00) less than the balance of principal and interest due under the said contract which offer has been accepted by the Seller.
'Now This Indenture Witnesseth: For and in consideration of the sum of Twenty Thousand Five Hundred Sixty-One Dollars And Forty-Five Cents ($20,561.45), paid by the Buyer to the Seller, the receipt of which is hereby acknowledged as payment in full settlement and satisfaction under the above mentioned contract, thus terminating and ending the said agreement, the said Seller hereby instructs the said escrow agent to deliver and release forever unto the said Buyer the said Judgment Bond executed by the Buyer to the Seller in the sum of Twenty-five Thousand Dollars ($25,000.00) the said Judgment Bond executed by the said Hob Tea Room, Inc. to the Seller in the sum of Twenty-five Thousand Dollars ($25,000.00) and the One Hundred (100) shares of capital stock of Hob Tea Room, Inc., represented by two (2) certificates, one for forty-nine (49) shares and one for fifty-one (51) shares registered in the name of the Buyer, receipt of which is hereby acknowledged by the Buyer.
'And the said Buyer and Seller hereby forever release the said Escrow Agent from any further claim hereof pertaining to this agreement.
'The Buyer and the Seller hereby agree to forever release and discharge each other, their Heirs, Executors, Administrators and Assigns from any further claim or demand whatsoever pertaining to the above recited agreement bearing date the Fifth day of October, A. D. 1945.
In Witness Whereof, * * *.'
Upon these facts plaintiff first contends that the tenth paragraph of the 1945 contract, as written, required defendants to surrender the tax refunds above described to plaintiff. She argues that these monies were 'due' on the date of the contract, provided that the word 'due' is understood as it ought to be in the light of the circumstances which had surrounded the execution of the contract. That is the theory upon which the original complaint filed in the cause was designed. Upon a change of counsel for the plaintiff, however, this original theory was abandoned, and an amended complaint was filed seeking relief on the theory that although the contract as drawn did not provide that plaintiff should receive the [33 Del.Ch. 44] refunds, the oral agreement which had led up to the drafting of the contract had so provided, and since the written contract thus failed accurately to describe the ground upon which the minds of the contracting parties had met, the contract should, therefore, be reformed to correspond with the actual agreement.
The case was tried upon this last-mentioned theory, and throughout the trial defendants made objections and consistently confined the scope of the trial, so far as they were able, to the reformation theory set out in the amended complaint.
Some three months after the trial, but before a decision had been rendered in respect to it, plaintiff requested leave again to amend, seeking to pick up for a second time the theory of the original complaint that the contract, as written, would entitle the plaintiff to relief. Since the plaintiff had once adopted this theory, then 'consciously' abandoned it, and subsequently had tried the case upon her second theory, and since counsel for defendants at the trial had not expressly or by implication consented  to enlargement of the issues as set out in the amended pleadings, the Chancellor declined to permit the amendment at that late stage.
The plaintiff, therefore, has appealed to this court upon two grounds, first, that the court erred in not finding that the contract of 1945 should be reformed, and secondly, that the trial court abused its discretion under the circumstances in declining to permit the above-mentioned amendment.
Then there is an issue in the case concerning the 1947 release. Defendants contended in the Court of Chancery that this release is a bar to the entire action. Plaintiff, on the other hand, contended that a fair interpretation of the language of the release, in the light of all attending circumstances, does not even touch upon the question of tax refunds and, therefore, does not bar the action.
The Chancellor, however, found that the 1947 release, as drawn, did bar plaintiff's action. The theory that there was ground for reformation of the release was not advanced in the first instance by plaintiff, but by the Chancellor, sua sponte, in his letter opinion [33 Del.Ch. 45] of the 21st day of June, 1950. In due course the plaintiff amended her complaint to pray for the reformation which the Chancellor had indicated he would order. After some involved procedural maneuvers which it is not necessary for us to describe,  reformation of the 1947 release was ordered. From that portion
of the judgment ordering reformation of the release the defendants have appealed.
The lower court considered this question of the 1947 release in advance of all other issues in the case, because if it should be decided in favor of the defendants, the entire controversy would be settled at a single stroke. The same reason induces us to do likewise.
In order that we may approach the problem of this 1947 release in proper perspective, it seems desirable at the outset to note certain rules of law which ...