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REFORMATION OF CONTRACTS

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  • Posted on: Oct 16 2020

In order for the conduct of business to proceed in an orderly fashion, folks need to be confident that, in general, the contracts that they enter into, particularly when “the parties set down their agreements in a clear, complete document” will “be enforced according to [their] terms”.  159 MP Corp. v. Redbridge Bedford, LLC, 33 N.Y.3d 353, 358 (2019) (citations and internal quotation marks omitted).  This is consistent with the notion that “[i]n New York, agreements negotiated at arm’s length by sophisticated, counseled parties are generally enforced according to their plain language pursuant to our strong public policy favoring freedom of contract.”  159 MP Corp., 33 N.Y.3d at 356.  Rules regarding the certainty of contracts have “special import in the context of real property transactions, where commercial certainty is a paramount concern….”  159 MP Corp., 33 N.Y.3d at 360 (citation omitted).

One of the several exceptions to the general rule regarding the strict enforcement of contracts is reformation, a cause of action by which a party seeks to alter the terms of a written contract based on “mutual mistake or fraud.”  Chimart Assoc. v. Paul, 66 N.Y.2d 570, 573 (1986).  As the Chimart Court stated:

In the proper circumstances, mutual mistake or fraud may furnish the basis for reforming a written agreement. Indeed, the concepts are closely related. In a case of mutual mistake, the parties have reached an oral agreement and, unknown to either, the signed writing does not express that agreement  In a case of fraud, the parties have reached agreement and, unknown to one party but known to the other (who has misled the first), the subsequent writing does not properly express that agreement.

Chimart, 66 N.Y.2d at 573 (citations omitted).  “Reformation is not granted for the purpose of alleviating 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.”  George Baker Management Corp. v. Acme Quilting Co., Inc., 46 N.Y.2d 211, 219 (1978) (citations omitted).  The equitable “doctrine” of reformation was necessary “because an action at law afforded no real relief against an instrument secured by fraud or as a result of mutual mistake.”  George Baker, 46 N.Y.2d at 219 (citations omitted).

In order to overcome the presumption of the enforceability of a contract as written, “proof of mutual mistake must be of the highest order, and must show clearly and beyond doubt that there has been a mutual mistake and must show with equal clarity and certainty the exact and precise form and import that the instrument ought to be made to assume, in order that it may express and effectuate what was really intended by the parties.”  Asset Management & Capital Co., Inc. v. Nugent, 85 A.D. 3d 947, 948 (2nd Dep’t 2011) (citations, internal quotation marks, brackets and ellipses omitted).  Put another way, the party seeking reformation “has to show in no uncertain terms, not only that mistake or fraud exists, but exactly what was really agreed upon between the parties.”  George Baker, 46 N.Y.2d at 219 (citations omitted). 

On October 14, 2020, the Appellate Division, Second Department, decided Investors Savings Bank v. Cover, a mortgage foreclosure action.  The mortgagors in Investors executed a promissory note and mortgage on certain real property, which was described in the mortgage in two different ways – by lot and block number on a filed map and by a metes and bounds description.  Plaintiff, lender, asserted two causes of action.  The first cause of action sounded in mortgage foreclosure and the second sought to reform the mortgage “to correct an alleged error in the metes and bounds description of the property.”  Supreme court granted lender’s motion for summary judgment and appointed a referee to compute.  The borrowers appealed.  

On appeal, the Second Department found that plaintiff was entitled to summary judgment on foreclosure cause of action in the complaint.  The Court, however, dismissed the reformation cause of action as time-barred.  The Court held that a “cause of action seeking reformation of an instrument on the ground of mistake is governed by the six-year statute of limitations pursuant to CPLR 213(6), which begins to run on the date the mistake was made.  (Citation omitted; hyperlink added.)  Since the mortgage with the erroneous metes and bounds description was executed in 2008, more than six years prior to the commencement of the action, it was time-barred.  The Court also found that the lender, “does not claim that the [reformation] cause of action was commenced within two years of discovery of the alleged error and, therefore, was timely under CPLR 203(g)(1)” (citations omitted; hyperlink added), which provides:

Time computed from actual or imputed discovery of facts.  Except as provided in article two of the uniform commercial code or in section two hundred fourteen-a of this chapter, where the time within which an action must be commenced is computed from the time when facts were discovered or from the time when facts could with reasonable diligence have been discovered, or from either of such times, the action must be commenced within two years after such actual or imputed discovery or within the period otherwise provided, computed from the time the cause of action accrued, whichever is longer.

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