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Individuals with a claim against an estate entered into a settlement agreement to settle a claim against the estate regarding life insurance coverage that the decedent was obligated under a divorce to maintain for the benefit of the children of the broken marriage. Thereafter, 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 everyone. The ex-wife appealed.
IN In re Estate of Jordon R. Wiggins, Deceased et al.No. S-22-543, 314 Neb. 565, Supreme Court of Nebraska (June 23, 2023), the Supreme Court of Nebraska resolved the dispute in a Salomon-like manner.
Jordon R. Wiggins died on August 28, 2019. Prior to his death, Jordon executed a will that established the Jordon R. Wiggins Family Trust (the Trust) for the benefit of his children. 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 to each “maintain a life insurance policy” of at least $250,000 “to support the minor children” if Jordon or Allison died.
On December 20, 2019, Allison filed a claim for $250,000 plus interest against the estate on behalf of the children, claiming that the personal representative had not yet identified any life insurance maintained by Jordon for the benefit of the children. However, after the claim was filed, 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 a total of $360,000.
Next, 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]artie’s knowledge,” Jordon had not named the children as beneficiaries of a life insurance policy of at least $250,000. The agreement then required Jason to “gift” $250,000 of the insurance proceeds he received to the Trust, whereupon Allison would withdraw the claim.
However, after they entered into 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. Subsequently, the insurer paid $120,000 “directly” to Elizabeth; this money was not placed in the foundation. The insurer also paid $240,000 to Jason, who then paid $130,000 to the Trust and kept $110,000. Allison took issue with Jason’s action, arguing that under the divorce decree, the settlement agreement and Nebraska law, he was obligated to pay the full $240,000 to the Trust for the children.
The validity of the settlement
At the hearing on the declaratory judgment motion, Jason argued that the settlement agreement should be set aside on various grounds, including the parties’ mutual mistake regarding Jordon’s life insurance coverage. Alternatively, Jason argued that the agreement should be reformed because of this mutual mistake. Allison countered that there was no basis for reformation or rescission because the agreement in its written form accurately expressed the intent of the parties when they entered into the agreement and Jason assumed the risk of error.
The county court ruled in Jason’s favor. The county court ordered that the $130,000 Jason paid into the Trust satisfied his obligation under the settlement agreement, as he was entitled to a $120,000 credit for the life insurance proceeds received by Elizabeth. 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 benefit of the children satisfied the claim against the estate. It ordered that the settlement agreement be reformed accordingly.
Allison argued that the settlement agreement should be enforced against Jason because the agreement as written accurately reflects the intent of the parties when they signed the agreement.
A settlement agreement is covered by the general principles of contract law.
Rescission, unlike reformation, may be granted when the parties have apparently entered into an agreement evidenced by a writing, but through a mistake their minds did not meet on all the essentials of the transaction, so that no real contract was made by them. Generally, grounds for termination or rescission of a contract include fraud, duress, unilateral or mutual mistake, and lack of consideration.
When used with reference to rescission, however, the term “mutual mistake” is not limited to a mistake in the drafting of the instrument. Specifically, for rescission purposes, a mutual mistake of fact must relate to either a present or past fact or facts material to the contract, and not to an opinion of future conditions as a result of currently known facts.
The situation is different when it comes to cancellation. Here, the evidence clearly and convincingly established the parties’ mutual mistake as to a fact which was a material inducement to the agreement. Specifically, their mutual mistake of fact was that they believed Jordon failed to maintain any life insurance for the benefit of the children and instead named Jason as the sole beneficiary.
The settlement agreement requires Jason to pay money he did not receive from the life insurance proceeds. It does not seem fair and equitable 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 provided for at least $250,000 in life insurance proceeds, Elizabeth received $120,000 in life insurance proceeds directly from the insurance company and Jason has already paid $130,000 into the Trust, which is available to both Elizabeth and Leah.
The purpose of the cancellation is to put the parties in a status quo, that is, to return the parties to their position that existed before the terminated agreement.
A mutual mistake as to the existence of a fact which was a material inducement to the contract is not a ground for reformation, although it may be a ground for rescission. Accordingly, the Supreme Court vacated the county court’s judgment and remanded the cause with orders for the county court to vacate the settlement agreement and conduct further proceedings not inconsistent with this opinion.
The most difficult problem that arises because of the need for life insurance after a divorce is what to do when the spouse who must have life insurance for the benefit of the children of the broken marriage is how to enforce the agreement. It would be easy to purchase the policy, name the children as beneficiaries and give copies of the policy to the divorced spouse and/or children. In this case, communication failed and the parties tried to be fair with too little information. Withdrawal was the appropriate remedy because the settlement was reached based on false information that resulted in an unfair result.
(c) 2023 Barry Zalma & ClaimSchool, Inc.
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