Court of Appeals Provides the Contours of the Notice Requirement Under CPLR § 203(f)Print Article
- Posted on: Oct 31 2022
By: Jeffrey M. Haber
On October 27, 2022, the New York Court of Appeals decided 34-06 73, LLC v. Seneca Ins. Co., 2022 N.Y. Slip Op. 06029 (2022) (here), a case in which the Court determined the contours of CPLR § 203(f). In a unanimous decision, written by Judge Rivera, the Court held that plaintiffs’ initial complaint, alleging that defendant breached the insurance agreement between the parties, did not give defendant notice of a subsequently alleged reformation claim based upon mutual mistake as required under CPLR § 203(f).
Defendant issued plaintiffs a multi-million-dollar, written insurance policy covering several of plaintiffs’ vacant commercial properties. Among other things, the policy included a Protective Safeguards Endorsement (“PSE”) that required plaintiffs to, inter alia, maintain an automatic sprinkler device on the subject property. At the top of the page, the PSE stated: “THIS ENDORSEMENT CHANGES THE POLICY” and advised plaintiffs to “READ IT CAREFULLY”. It further stated that the PSE modified the commercial property coverage of the policy so that defendant would “not pay for loss or damage caused by or resulting from fire if, prior to the fire, the policyholder … [k]new of any suspension or impairment in any protective safeguard … and failed to notify” defendant or otherwise “[f]ailed to maintain any protective safeguard … in complete working order.”
Approximately one month after the policy went into effect, defendant’s agent conducted an inspection of the premises and issued a report to plaintiffs’ principal and sole owner advising him that there was no compliant sprinkler system on the premises and recommending that plaintiffs notify defendant of the system’s non-operability. A little more than four months later, there was a fire on the premises and plaintiffs requested payment under the policy for damages incurred. Defendant notified plaintiffs that it was denying the claim under the PSE because plaintiffs did not maintain a working sprinkler system.
Thereafter, plaintiffs commenced the action against defendant for breach of contract, seeking over $2.4 million in damages based on defendant’s failure to cover the fire loss. In the complaint, plaintiffs made the following factual assertions: (1) defendant issued an insurance policy that provided property damage insurance on the covered property; (2) the fire on the premises “was a peril insured against under the Policy” which occurred “while the Policy was in full force and effect”; (3) plaintiffs complied “with all of the conditions precedent and subsequent pursuant to the terms of the subject policy”; and (4) defendant failed to indemnify plaintiffs for the property damage. In its answer, defendant admitted that it issued the referenced policy and had not made payment thereunder. Defendant raised several affirmative defenses, including one based on the PSE, asserting that, because plaintiffs failed to maintain the sprinkler system as required by the policy, they were not covered for the fire damage.
Following discovery, plaintiffs moved to dismiss the affirmative defense concerning the PSE, arguing that defendant was aware that there was no functioning sprinkler system – as specifically noted in the inspection report – and thus waived its right to disclaim coverage based on the PSE because it neither followed up to confirm whether an operational system was installed nor cancelled the policy. Defendant cross-moved for summary judgment on its PSE-based affirmative defense. The trial court denied the motions, concluding there were triable issues of fact as to waiver and there was conflicting evidence as to whether the sprinkler system was operational at the time of the fire.
At trial, for the first time, plaintiffs argued that the written policy did not reflect the parties’ agreement. Plaintiffs’ owner testified that he told his insurance broker that he did not want the policy to include a protective safeguard endorsement because the properties were vacant buildings or lots, and most did not have sprinklers. However, he admitted that he did not read the insurance policy. Defendant’s Vice President of Underwriting testified that an underwriting file disclosed during discovery did not contain documents referencing the PSE or the sprinkler system, that the premiums quoted for the Policy were for a non-sprinklered building, and that the inclusion of the PSE may have been a mistake.
After plaintiffs rested, they orally moved to amend the complaint to conform the pleadings to the proof by adding a claim for reformation. The trial court reserved decision on the motion. At the charge conference, defendant opposed the proposed amendment, arguing that the reformation claim was time-barred and futile. The trial court granted plaintiffs’ motion, concluding that the claim related back to the complaint because it was “part of the whole thrust of the complaint originally” and the jury should decide whether the PSE’s inclusion resulted from a mutual mistake. Thus, in addition to charging the jury on the question of whether plaintiffs maintained a sprinkler system as required by the policy, the trial court also charged the jury on reformation, waiver, and estoppel.
Although the jury rejected plaintiffs’ waiver and estoppel arguments and found that plaintiffs did not prove due diligence in maintaining an automatic sprinkler system on the premises at the time of the fire, the jury returned a verdict in favor of plaintiffs on the reformation claim, finding that plaintiffs established by clear and convincing evidence that the parties’ true agreement was a policy without a PSE and it was a mutual mistake to include the PSE in the policy.
Defendant moved to set aside the reformation portion of the verdict pursuant to CPLR § 4404(a) and for judgment in defendant’s favor on the grounds that the reformation claim was untimely and, although plaintiffs did not formally move to amend pursuant to CPLR § 3025, the claim did not relate back to the original complaint. Defendant maintained that the complaint alleged only nonperformance and contained no indication that the contract failed to reflect the parties’ intent. Defendant also asserted surprise and prejudice because, had plaintiffs questioned the contract’s terms earlier, defendant would have deposed plaintiffs’ insurance broker and the underwriter (before the underwriter became unavailable years into the litigation).
The trial court denied the motion, reasoning that plaintiffs had relied on the same trial evidence to support the breach of contract and reformation claims, and that “reformation was a variation on the theory of breach of contract.” The trial court also noted that defendant failed to turn over the underwriting file until nearly five years after the complaint was filed and thus had no grounds to complain.
The Appellate Division, First Department affirmed the judgment in the plaintiffs’ favor, holding that the trial court providently granted plaintiffs’ application to conform the pleadings to the trial evidence to assert a claim for reformation.1 The Court concluded that the reformation claim was not barred by the statute of limitations because it related back to the complaint and the waiver and estoppel claims.2 The Court also concluded that the PSE was “at the heart of the litigation from the outset and the same evidence” supporting plaintiffs’ waiver argument supported reformation.3 The Court further concluded that defendant was not prejudiced since it had the underwriting file in its possession and failed to timely produce it.4
The Court granted defendant leave to appeal and reversed the First Department’s order.
The Court’s Holding
As an initial matter, the Court noted that there was no dispute that the statute of limitations on the reformation claim had expired when plaintiffs sought to amend their complaint. Therefore, the resolution of the appeal turned on whether the claim related back to the original pleading.
To decide the relation back issue, the Court explained that to determine whether the reformation “claim asserted in [the] amended pleading [was] deemed to have been interposed at the time the claims in the original pleading were interposed”, it would have to determine whether the original complaint gave defendant “notice of the transactions, occurrences, or series of transactions or occurrences, to be proved pursuant to the amended pleading”.5 Thus, explained the Court, “plaintiffs” reformation claim relate[d] back to the original complaint – and is thus not barred by the statute of limitations – only if the complaint placed defendant on ‘notice of the transactions, occurrences, or series of transactions or occurrences, to be proved’ in support of that claim.”6
In determining the notice issue, the Court held that the lower courts are to focus solely on the four corners of the original pleading:
As a threshold matter, Supreme Court and the Appellate Division should not have looked beyond the four corners of the original pleading to determine whether defendant was on notice of transactions or occurrences underlying plaintiffs’ reformation claim. Section 203 (f) requires the court to determine solely whether a plaintiff’s or a defendant’s original pleading gives notice of the transactions or occurrences underlying the proposed amendment (see CPLR 203 [f]). Whether the same trial evidence supports both the breach of contract and reformation claims or whether defendant here failed to produce the underwriting file in a timely fashion are irrelevant to the notice issue. Similarly, matters unearthed during discovery have no bearing on whether an untimely claim relates back under section 203 (f).7
The Court noted that while “discovery might alert the moving party that it could or must amend the complaint or answer to protect its litigation position or prevent extinguishment of a claim as time-barred, … such discovery does not shed light on whether the original pleading provides notice of transactions or occurrences to be proved in support of a new claim for recovery.”8 “While some of these observations might be relevant to consideration of prejudice under CPLR 3025,” said the Court, “they do not inform the analysis under CPLR 203(f).”9
After discussing the pleading requirements for breach of contract10 and reformation,11 the Court turned its attention to whether plaintiffs’ original complaint gave defendant notice of the reformation claim. It concluded that plaintiffs “failed to give notice to defendant of the transactions or occurrences on which plaintiffs base[d] their reformation claim.”12
The Court explained that the initial complaint only referenced a breach of contract claim, which, the Court said, was evidenced by plaintiffs’ allegation that they complied “with all of the conditions precedent and subsequent pursuant to the terms of the subject policy.”13
In their original complaint, plaintiffs reference a specific written policy which they identified as the parties’ agreement and which they allege defendant breached. The complaint further alleges that plaintiffs complied “with all of the conditions precedent and subsequent pursuant to the terms of the subject policy.” This latter allegation is fatal to plaintiffs’ assertion that the complaint provides notice of the transactions or occurrences to be proved in support of a reformation claim. In fact, if anything, it suggests the opposite because, by asserting total compliance, plaintiffs necessarily disclaimed any challenge to the policy’s terms, specifically the PSE.14
The Court further explained that the timing of the claimed mistake did not support the reformation claim because the alleged mistake preceded the policy’s formation:
Moreover, plaintiffs based their allegation that the parties included the PSE by “mistake” on assertions at trial that Malik instructed his broker to exclude the sprinkler requirement before the parties finalized the written policy, and the lack of documentation for a PSE in the underwriting file. Therefore, the reformation claim, as advanced by plaintiffs, was based on a purported oral agreement negotiated by Malik with the broker that preceded the contract’s formation, whereas the breach of contract claim in the original complaint was based on the written policy which includes the PSE and with which plaintiffs alleged full compliance.15
The Court concluded that “nothing in the stand-alone breach of contract claim put defendant on notice that there was a prior oral agreement that excluded the PSE and that the PSE’s inclusion in the written policy was a mistake.”16 “Simply put,” said the Court, “‘the transactions or occurrences, or series of transactions or occurrences, to be proved pursuant to the amended pleading’ did not give notice of reformation because they are factually distinct and discordant from plaintiffs’ allegation of a breach of the written policy (CPLR 203 [f]).”17
Finally, the Court cautioned the lower courts that determining the contours of CPLR 203(f) should be consistent with the Court’s liberal pleading standards: “To be clear, the transactions and occurrences underlying a breach of contract claim do not perforce give notice of the transactions or occurrences underlying a claim of reformation based on mutual mistake, and vice versa.”18 Indeed, noted the Court, “an original pleading alleging that a party failed to perform in accordance with the written agreement might supply sufficient notice of the transactions or occurrences to be proved in support of reformation.”19 However, said the Court, “[t]hat is not the case here, where plaintiffs’ complaint foreclosed a factual or inferential basis for such notice by unqualifiedly alleging that they ‘complied with all of the conditions precedent and subsequent pursuant to the terms of the subject policy,’ which the complaint referenced explicitly as the written policy.”20 In the end, observed the Court, “[t]he complaint contained no alternate theory of recovery or factual allegations based on pre-formation transactions or occurrences. The complaint therefore put defendant on notice of transactions or occurrences related solely to the written policy and plaintiffs’ total compliance with that agreement’s terms, which include the PSE’s sprinkler requirement.”
Accordingly, the Court reversed the First Department’s order, denied plaintiffs’ motion to amend the complaint to include a reformation cause of action, and remitted the case to the trial court for entry of a judgment in accordance with its opinion.
- 190 A.D.3d 628, 629 (1st Dept. 2021) (citing, CPLR § 3025(c)).
- Id. at 630.
- Slip Op. at *3.
- Id., noting that to plead a cause of action for breach of contract, a plaintiff must allege that: (1) a contract exists (see, e.g., Mandarin Trading Ltd. V. Wildenstein, 16 N.Y.3d 173, 181-182 (2011); (2) plaintiff performed in accordance with the contract (see, e.g., Pope v. Terre Haute Car & Mfg. Co., 107 N.Y. 61, 65-66 (1887); (3) defendant breached its contractual obligations (see Barker v. Time Warner Cable, Inc., 83 AD3d 750, 751 (2d Dept. 2011); and (4) defendant’s breach resulted in damages (see Biotronik A.G. v Conor Medsystems Ireland, Ltd., 22 N.Y.3d 799, 805-806 (2014) (compensatory damages); Kronos, Inc. v. AVX Corp., 81 N.Y.2d 90, 95 (1993) (nominal damages); Milan Music, Inc. v. Emmel Communications Booking, Inc., 37 A.D.3d 206, 206 (1st Dept. 2007).
- Id., noting that to plead reformation, a plaintiff must allege sufficient facts supporting a claim of mutual mistake, meaning that “the parties have reached an oral agreement and, unknown to either, the signed writing does not express that agreement”. Chimart Assoc. v. Paul, 66 N.Y.2d 570, 573 (1986). Given the “heavy presumption that a deliberately prepared and executed written instrument manifests the true intention of the parties, … [t]he proponent of reformation must show in no uncertain terms, not only that mistake or fraud exists, but exactly what was really agreed upon between the parties”. Chimart, 66 N.Y.2d at 574 (cleaned up).
- Id. (internal quotation marks omitted).
Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.
This article is for informational purposes and is not intended to be and should not be taken as legal advice.