It’s not unusual for contracts to have small mistakes. Often, the parties are stuck with the error but there are exceptions as seen in a recent case decided by the New York Appellate Division, First Department. The case involved a scrivener’s error (essentially, a typo or clerical error) in a Guaranty of a loan, which was signed at the time the Borrower signed the loan documents with the plaintiff. While the Court corrected the error, these types of cases are very fact specific. Accordingly, anyone signing a contract should carefully review every word to avoid potential litigation.

In NCMMI, Inc. v. Bersin Properties LLC, et al, Plaintiff gave a loan to Defendant, Bersin Properties (the “Borrower”), to renovate a shopping mall in Rochester, New York. The loan provided for funding of up to $135,000,000.00 of which the plaintiff authorized the Borrower to draw down approximately $44,000,000.00 prior to abandoning the renovation project. Subsequently, Plaintiff sought to recover the full indebtedness against the individual “Indemnitor” who was a principal of the Borrower and signed the Guaranty. Defendants sought a dismissal of Plaintiff’s claims on the ground that Plaintiff failed to honor various requests for payment under the loan agreement. They also argued that the Guaranty stated that the “Borrower” was liable, not the “Indemnitor” and the statute of limitations to correct that error had passed. Thus, the claim against the principal of the Borrower should be dismissed.

The lower court granted Plaintiff’s motion for judgment against the Borrower for $44,020,365.25 but denied the request for a judgment against the Indemnitor and denied Defendants’ motion to dismiss Plaintiff’s claims. Plaintiff appealed the denial of the request for a judgment against the Indemnitor and Defendants appealed the denial of their request that the case be dismissed against the Indemnitor.  

The Appellate Division confirmed that Plaintiff’s position was that there was a scrivener’s error in the utilization of the word “Borrower” instead of “Indemnitor” and that the six-year statute of limitations with respect to a request for reformation of a contract based upon a scrivener’s error had already expired. The Court nonetheless determined that it had the authority to cure the scrivener’s error in limited circumstances where some “absurdity has been identified or the contract would be otherwise unenforceable either in whole or in part.” (citations omitted) The Court went on to say that it was 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. In reaching this conclusion, the Court specifically relied upon a section in the Guaranty which stated that “the Lender would not make the loan but for the unsecured personal liability undertaken by the Indemnitor herein”.

The Court stated that to permit a corporation to guarantee its own indebtedness was illogical and rendered the entire Guarantee meaningless. To accept the literal reading of the Guaranty’s full debt recourse liability to apply only to the Borrower rather than to the Indemnitor would countenance an illogical result namely, that the corporation would be guaranteeing its own debt for which it was already liable. The Court also cited other provisions in the documents which made it clear that it was the Indemnitor (not the Borrower) who was undertaking to guarantee the Borrower’s indebtedness and that to permit the scrivener’s error to stand would render portions of the Guaranty meaningless.  

The lesson to be learned here is that errors can occur and may be curable but only in limited circumstances. While it was interesting that the Court disregarded an expired statute of limitations in order to reach what the Court believed to be the correct result, it is always best to avoid problems with careful drafting and review.  

Please contact one of our business litigation attorneys if you find yourself in a situation involving the enforcement or interpretation of a document which you have entered.