First Department Reminds Practitioners that “proofreading is an essential, indispensable tool in the drafting of contracts”

Print Article

Posted on: Mar 6 2024

It should go without saying that people make mistakes. After all, people are human, and humans make mistakes.

When people draft a document, especially a lengthy or complex one, it is not uncommon for a mistake to be made. Lawyers who draft contracts and other written instruments are not immune from this phenomenon. Given the steps a lawyer must take to draft and finalize an agreement or other written instrument there are numerous opportunities for unintentional mistakes to be made. These unintentional mistakes are often referred to as a scrivener’s error. Examples of a scrivener’s error include incorrectly typing a number or omitting a word or words in the document.

When a contract fails to conform to the agreement between the parties due to the mutual mistake of the parties, or of the mistake of one party and fraud of the other, a court will reform the contract so as to make it conform to the actual agreement between the parties.¹ The mistake or error must be material (i.e., it must involve a “fundamental assumption” of the contract).² However, it does not mean that the mistake would have caused the parties not to enter into the contract had they known of it.³ Rather, a material mistake is one which “vitally” affects a fact or facts on the basis of which the parties contracted.⁴

In circumstances of a mistake, one or more of the parties may seek to reform the agreement. Reformation is an equitable form of relief. The purpose of reformation is not to “alleviat[e] a hard or oppressive bargain, but rather to restate the intended terms of an agreement when the writing that memorializes that agreement is at variance with the intent of both parties.”⁵

The burden is high to obtain contract reformation. The party demanding it “‘must establish his right to such relief by clear, positive and convincing evidence.’”⁶ Therefore, the party seeking reformation must “show in no uncertain terms, not only that mistake or fraud exists, but exactly what was really agreed upon between the parties.”⁷ Only by satisfying this burden can the party seeking reformation “overcome the heavy presumption” that the contract embodies the parties’ true intent.⁸

Sometimes reformation is based upon a scrivener’s error. When a scrivener’s error is the basis for reformation, the party demanding reformation must prove “a prior agreement between [the] parties, which when subsequently reduced to writing fails to accurately reflect the prior agreement.”⁹ The parties’ course of performance under the contract, or their practical interpretation of a contract for any considerable period of time, is considered to be the most persuasive evidence of the intention of the parties.¹⁰

A claim for reformation, including reformation based on a scrivener’s error, is governed by the six-year statute of limitations, which begins to run on the date that the mistake is made.¹¹ Nevertheless, a court may correct a scrivener’s error outside of a claim for reformation of a contract in “those limited instances where some absurdity has been identified or the contract would otherwise be unenforceable either in whole or in part.”¹² In other words, a court is not “constrained to adopt an absurd phrasing in the contract merely because the statute of limitations for reformation had passed, when the error is obvious and the drafters’ intention clear.”¹³ Absent such an absurdity or unenforceability, “clear, complete writings should generally be enforced according to their terms” to impart “stability to commercial transactions by safeguarding against fraudulent claims, perjury, death of witnesses . . . [and] infirmity of memory.”¹⁴ A party seeking reformation based on a scrivener’s error, like a party claiming mutual mistake, for example, has the burden of showing an obvious error by clear and convincing evidence.¹⁵

In NCCMI, Inc. v. Bersin Props., LLC, 2024 N.Y. Slip Op. 01161 (1st Dept. Mar. 5, 2024) (here), the Appellate Division, First Department addressed the law concerning the impact of a scrivener’s error on the parties to a contract or other written instrument.

NCCMI concerned a purported $44 million scrivener’s error in a guaranty that exposed Bersin Properties’ principal and co-defendant (“defendant”), an indemnitor under the guaranty, to personal liability.

[Eds. Note: the factual discussion below is taken from the First Department’s decision and order.]

Defendant Bersin Properties, LLC (“Bersin Properties”) entered into a $135 million Amended and Restated Loan Agreement dated January 29, 2007 (the “Loan Agreement”), as borrower, with Nomura Credit & Capital, Inc. (“Nomura”), plaintiff’s predecessor, as lender, for the purpose of renovating and re-leasing the Medley Centre, a shopping mall located in Monroe County, New York (the “Property”). The Loan Agreement provided that the loan would mature on February 9, 2009, but permitted Bersin Properties to extend the maturity date by up to three successive one-year periods. The Loan Agreement also provided for three loans, each of which was secured by a mortgage encumbering the Property. Although the loan was nonrecourse, which limited Nomura’s remedies for nonpayment to possession of the Property by bringing a “foreclosure action, an action for specific performance or any other appropriate action or proceeding,” the Loan Agreement provided for two carve-outs that would permit Nomura to have recourse against Bersin Properties — recourse for losses resulting from specific bad acts (loss recourse indemnity) and recourse for repayment of the entire debt upon occurrence of certain triggering events (full debt recourse liability). Defendant was designated as the guarantor in the Loan Agreement.

Defendant executed an Indemnity and Guaranty Agreement (the “Guaranty”) in connection with the loan. He was the only one to execute the Guaranty and did so as an “Indemnitor.” The Guaranty sets out Bersin Properties’ and defendant’s respective obligations upon the occurrence of certain events. Specifically, it provided that Bersin Properties, as borrower, and defendant, individually, both collectively referred to as “Indemnitor,” would, jointly and severally, guarantee payment of Bersin Properties’ recourse obligations to Nomura. Similar to the Loan Agreement, the Guaranty provided for a loss recourse indemnity and a full debt recourse liability. The loss recourse indemnity provided that “Indemnitor,” namely Bersin Properties and defendant, assumed liability for certain enumerated bad acts. As to full debt recourse liability, the Guaranty stated, in relevant part:

the Debt shall be fully recourse to Borrower … if Borrower defaults hereunder in any way and Borrower or any Guarantor contests or in any way interferes with, directly or indirectly, any foreclosure action … or with any other enforcement of Lender’s rights, powers or remedies under any of the Loan Documents or under any document evidencing, securing or otherwise relating to all or any portion of the Property (whether by … bringing any counterclaim, claiming any defense ….).

Nomura conveyed its right, title, and interest in the loan to plaintiff on March 25, 2008. Thereafter, plaintiff funded dozens of draw requests under the Loan Agreement, ultimately lending Bersin Properties over $44 million. The loan matured on February 9, 2009. Bersin Properties did not repay any portion of the debt, thereby defaulting under the terms of the Loan Agreement.

On April 25, 2014, more than five years after the loan matured, Bersin Properties and defendant commenced an action against Nomura and plaintiff alleging, among other things, that plaintiff breached the Loan Agreement by refusing to extend the maturity date and by refusing to fund an additional $54 million draw request after that time.

Supreme Court granted Nomura summary judgment dismissing the complaint. In affirming, the First Department held that Bersin Properties had breached the Loan Agreement, which “disqualified it from both extending the loan’s maturity date and receiving further loan advances.”¹⁶

On January 30, 2015, plaintiff commenced the action against Bersin Properties seeking to foreclose on the mortgages on the Property. On March 24, 2015, Bersin Properties answered the complaint, asserting 14 affirmative defenses. In January 2016, Bersin Properties lost title to the Property in a sheriff’s sale that was held to satisfy a junior lienholder’s judgment against it. Plaintiff elected to release its mortgages on the Property to the new owner for $4 million due to the minimal value of the Property, as a consequence of Bersin Properties’ failure to develop the Property, and the costs in maintaining it. In March 2016, plaintiff sought leave to convert its foreclosure action to a plenary action seeking recourse on the underlying promissory notes and the Guaranty for full recovery of the debt, minus the $4 million already received.

Supreme Court granted the motion, and plaintiff served a second supplemental complaint in the converted action. Bersin Properties and defendant filed a joint answer interposing 19 affirmative defenses.

After several years of discovery, plaintiff and defendants moved for summary judgment. Relevant to the appeal, both parties sought summary judgment as to defendant’s personal liability under the Guaranty. In seeking to hold defendant personally liable, plaintiff contended that Bersin Properties and defendant triggered full debt recourse liability when Bersin Properties contested the foreclosure action by filing an answer and interposing affirmative defenses. Plaintiff acknowledged that the Guaranty provided that the debt would be “fully recourse to Borrower” upon the occurrence of a full debt recourse triggering event, and not “fully recourse to Indemnitor,” seemingly insulating defendant from the loan indebtedness. It further noted that the language in this recourse provision was a virtual mirror image of the provision set forth in the Loan Agreement and posited that a scrivener’s error occurred insofar as the term “Borrower” was not deleted and replaced with “Indemnitor” when the Loan Agreement’s provision was inserted into the Guaranty. It argued that the Guaranty plainly contemplated for liability to run to defendant for full debt recourse. For support, plaintiff pointed to the Guaranty’s preamble, and numerous additional terms and provisions within the Guaranty. Thus, plaintiff contended that to make only Bersin Properties liable, as opposed to defendant and Bersin Properties, as Indemnitor, would lead to an absurd result because Bersin Properties, as a single-purpose entity with no assets other than the Property, would then become its own guarantor.

Defendants argued that plaintiff’s claim of scrivener’s error was time-barred under the applicable six-year statute of limitations for reformation of a contract. Defendants also contended that the literal reading of the Guaranty indicated that full debt recourse liability was available only to Bersin Properties, as “Borrower,” and not to defendant, as an “Indemnitor.” In addition to the language of the Guaranty itself, defendants relied on, among other things, defendant’s deposition testimony, wherein he testified that he never understood himself to be personally guaranteeing the full debt, and a July 2008 email from plaintiff’s president, which referred to the parties’ agreement and stated, among other things, that “the payments [were] not guaranteed by anyone in this loan.” Finally, defendants argued that holding defendant personally liable just because Bersin Properties responded to the foreclosure action would be contrary to public policy.

Supreme Court denied plaintiff’s motion to the extent it sought summary judgment on its claim for personal liability against defendant and denied defendants’ motion for partial summary judgment dismissing the claim. In doing so, the motion court found the language “fully recourse to Borrower” to be ambiguous. The motion court noted that while the literal terms appear to have exempted defendant from personal liability for Bersin Properties’ debt, there was a “clear tension” between the “fully recourse to Borrower” provision and the rest of the Guaranty. The motion court further found that extrinsic evidence did not result in a clear understanding that the inclusion of “Borrower” instead of “Indemnitor” had been intentional. Thus, the motion court declined to substitute “Borrower” for “Indemnitor,” noting that plaintiff did not meet its burden of identifying absurdity or unenforceability in the Guaranty.

On appeal, the First Department modified the motion court’s order to grant plaintiff’s motion for summary judgment on its claim against defendant, and otherwise affirmed.

The Court held that the record established that the Guaranty’s full debt recourse liability was triggered when Bersin Properties filed an answer, with affirmative defenses, in the foreclosure action, and when Bersin Properties and defendant jointly filed an answer, with affirmative defenses, in the plenary action.

The Court noted, however, that the question remained whether defendant, as an Indemnitor, was subject to full debt recourse liability under the Guaranty. The Court found that he was subject to full recourse liability under the Guaranty.

In so holding, the Court relied on PNC Capital Recovery v. Mechanical Parking Sys., 283 A.D.2d 268 (1st Dept. 2001), lv. dismissed, 96 N.Y.2d 937 (2001), appeal dismissed, 98 N.Y.2d 763 (2002), finding the case to be dispositive of the appeal.

In PNC Capital, a corporation’s creditor commenced an action against its president, Shlomo Kadosh, individually, on a guaranty of the corporation’s debt that Kadosh signed. Kadosh argued that the presence of his title “president” immediately below his signature line on the guaranty established that he was not personally liable under the guaranty because he had signed it in his capacity as corporate president. The Court unanimously rejected the argument after reading the guaranty as a whole and in the context of the entire transaction and granted the creditor summary judgment on its claim against Kadosh. Notably, the Court held that to permit a corporation to guarantee its own indebtedness was illogical and rendered meaningless the entire guaranty:

Further, an interpretation that Kadosh signed the Guaranty solely in his capacity as president of the corporation [Mechanical] would compel the illogical conclusion that the purpose of the Guaranty was to provide that in case of Mechanical’s default, the company would guaranty its own indebtedness, rendering the entire Guaranty meaningless.¹⁷

The Court held that “PNC Capital’s logic applie[d] to this case.”¹⁸ The Court reasoned that “[f]or us to accept a literal reading of the Guaranty’s full debt recourse liability to apply to the “Borrower” instead of “Indemnitor” as urged by defendants would countenance an ‘illogical’ result, namely, Bersin Properties, as a single-purpose entity with no assets other than the Property, would be guaranteeing its own debt.”¹⁹ “That result,” said the Court, “renders the Guaranty illusory and meaningless, particularly given that the Property was encumbered at the time of the Guaranty and, notably, already lost in an unrelated foreclosure action when plaintiff sought to enforce the Guaranty.”²⁰

The Court rejected defendants’ argument that PNC Capital was inapplicable. In so doing, the Court rejected defendants’ attempt to compartmentalize the Guaranty into two separate and mutually exclusive components — a loss recourse indemnity versus a full debt recourse liability.²¹ “Compartmentalizing the recourse obligations in this manner fails to read the Guaranty as a whole,” said the Court.²² “The clear and unambiguous purpose of the Guaranty is to guarantee both the losses incurred under the Loan Agreement and Bersin Properties’ loan obligations under that agreement.”²³ “Further,” held the Court, “the literal application of the phrase ‘fully recourse to Borrower’ only to Bersin Properties and not to [defendant], as an Indemnitor, as persisted by defendants would render the full debt recourse liability portion of the Guaranty meaningless and illusory because Bersin Properties is not a signatory to the Guaranty and would not be bound by terms of the Guaranty. Thus, the loan indebtedness would be unguaranteed, undermining the purpose of the Guaranty.”²⁴

Moreover, as a matter of contract interpretation, the Court held that the “guaranty must be read in the context of the loan agreement and in a manner that accords the words their fair and reasonable meaning, and achieves a practical interpretation of the expressions of the parties.”²⁵ “In other words,” said the Court, “a ‘contract should not be interpreted to produce a result that is absurd, commercially unreasonable or contrary to the reasonable expectations of the parties.’”²⁶

Looking at the agreements, the Court noted that “[c]ertain provisions of the Guaranty confirm that the full debt recourse liability runs to [defendant], as an Indemnitor, rather than to ‘Borrower.’”²⁷ “Specifically,” said the Court, “the paragraph immediately following the full debt recourse liability provision declares that ‘[t]he liability of Indemnitor under this Agreement shall be direct and immediate’; that ‘Indemnitor waives any right to require that an action be brought against Borrower [Bersin Properties] or any other person or to require that resort be had to any collateral for the Loan’; that ‘Indemnitor shall nevertheless be fully liable’ for the debt even if Borrower’s liability is relieved by bankruptcy or other debtor relief law; and that ‘Indemnitor shall remain liable for all remaining indebtedness and obligations guaranteed hereby’ even if the loan is partially repaid from other sources or by foreclosure.”²⁸ Further, explained the Court, “section 4 of the Guaranty, which provides for the waiver of defenses by the Indemnitor, would be rendered meaningless if the Indemnitor were not personally liable for repayment of the debt.”²⁹ “Additionally,” said the Court, “section 5(b) of the Guaranty states that ‘Lender would not make the Loan but for the unsecured personal liability undertaken by Indemnitor herein.’”³⁰ “If [defendant], as an Indemnitor, [was] not, under any circumstances, personally liable for the loan, these provisions would be relegated to meaningless surplusage,” concluded the Court.³¹ In sum, the Court held that the terms of the Guaranty “all provide clear and convincing intrinsic proof that the use of the phrase ‘recourse to Borrower’ instead of ‘recourse to Indemnitor’ in the Guaranty was an obvious scrivener’s error.”³²

Takeaway

The Court’s “reminder” at the outset of the decision sums up the takeaway of NCCMI: “proofreading is an essential, indispensable tool in the drafting of contracts.”³³

Footnotes

Janowitz v. 25-30 120th St., 75 A.D.2d 203, 214 (2d Dept. 1980).
Id. (quoting 13 Williston, Contracts [3d ed], § 1544).
Id.
Id. (citing 13 Williston, Contracts [3d ed], § 1544, at 96).
George Backer Mgt. Corp. v. Acme Quilting Co., 46 N.Y.2d 211, 219 (1978).
Schultz v. 400 Coop. Corp., 292 A.D.2d 16, 19 (1st Dept. 2002) (quoting, Amend v. Hurley, 293 N.Y. 587, 595 (1944)).
Id.
Id.
US Bank N.A. v. Lieberman, 98 A.D.3d 422, 424 (1st Dept. 2012).
Gulf Ins. Co. v. Transatlantic Reins. Co., 69 A.D.3d 71, 85 (1st Dept. 2009).
CPLR § 213(6); 1414 APF, LLC v. Deer Stags, Inc., 39 A.D.3d 329, 330 (1st Dept. 2007).
Matter of Wallace v. 600 Partners Co., 86 N.Y.2d 543, 547-548 (1995); see also Jade Realty LLC v. Citicorp Commercial Mtge. Trust 2005-EMG, 20 N.Y.3d 881, 883-884 (2012).
Slifka v. Slifka, 177 A.D.3d 418, 419 (1st Dept. 2019).
W.W.W. Assoc. v. Giancontieri, 77 N.Y.2d 157, 160, 162 (1990) (internal quotation marks omitted).
Warberg Opportunistic Trading Fund, L.P. v. Georesources, Inc., 112 A.D.3d 78, 84-85 (1st Dept. 2013).
Bersin Props., LLC v. Nomura Credit & Capital, Inc., 213 A.D.3d 431, 431 (1st Dept. 2023).
Id. at 270-271.
Slip Op. at *5.
Id.
Id.
Slip Op. at *5.
Id. (citing Greenwich Capital Fin. Prods., Inc. v. Negrin, 74 A.D.3d 413, 415 (1st Dept. 2010)).
Id.
Id. at *6.
Id. (citing Greenwich Capital, 74 A.D.3d at 415) (quoting Duane Reade, Inc. v. Cardtronics, LP, 54 A.D.3d 137, 140 (1st Dept 2008) (internal quotation marks omitted)).
Id. (citing (Greenwich Capital, 74 A.D.3d at 415) (quoting Matter of Lipper Holdings v. Trident Holdings, 1 A.D.3d 170, 171 (1st Dept. 2003)).
Id.
Id.
Id.
Id.
Id. (citing Greenwich Capital, 74 A.D.3d at 415 (rejecting interpretation that relies on “formalistic literalism,” ignores common sense, and could lead to absurd results)).
Id.
Id. at *2.

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.