In an appeal heard by the Appellate Division of the Supreme Court[1] in the First Judicial Department of New York, the Court recently ruled that a court may reform a guaranty after the statute of limitations for a reformation of contract claim has passed when a scrivener’s error would result in an absurd or illogical result.[2] The relevant provision in the guaranty states, “the Debt shall be fully recourse to Borrower” rather than the “Indemnitor” who executed the guaranty.

The Borrower and lender entered into a $135 million nonrecourse loan agreement in 2007. However, pursuant to the loan agreement, the debt would be fully recourse to Borrower upon certain triggering events. Additionally, the Indemnitor executed a guaranty agreement for similar full recourse upon these same triggering events. The original lender then sold the loans to the plaintiff. The Borrower failed to repay the debt when the loan matured in 2009 and went into default.

The Borrower and the Indemnitor brought suit in 2014 under a breach of contract claim against the original lender and plaintiff because they refused to extend the maturity date. That court dismissed the Borrower and Indemnitor’s complaint and further found the Borrower and Indemnitor had breached the loan agreement and granted summary judgment in favor of the plaintiff. In 2015, the plaintiff commenced action to foreclose on the mortgage, and the Borrower and Indemnitor filed affirmative defenses. In 2016, the Borrower lost title to the property following a foreclosure sale by a junior lienholder. The plaintiff then released its mortgage to the new owner (i.e., a discounted payoff) in exchange for $4 million due to the minimal value of the property and high maintenance costs. In addition, the plaintiff took leave to assert that a triggering event had occurred when the Borrower and Indemnitor filed affirmative defenses against plaintiff, as a provision in the guaranty prohibited them from contesting or interfering with the enforcement of the lender’s rights. Further, the plaintiff converted the foreclosure action to an action seeking recourse on the promissory notes of the Borrower and the guaranty signed by the Indemnitor.

The Indemnitor argued that the plaintiff’s claim that the exact language in the guaranty (i.e., that the loan was fully recourse to Borrower upon filing an affirmative defense, thereby interfering with the enforcement of the lender’s rights, constituting a triggering event) was a scrivener’s error and meant to read “the Debt shall be fully recourse to Indemnitor” was outside the six-year statute of limitations for reformation of a contract in New York, which is measured from the date of the mistake. Further, the Indemnitor asserted that the relevant language in the guaranty, “the Debt shall be fully recourse to Borrower,” was both clear and intentional.

The lower court denied motions for summary judgment from both the plaintiff and the Indemnitor as it found the language in the guaranty to be ambiguous.

The principal question before the Appellate Division of the Supreme Court is whether the language in the guaranty subjects the Indemnitor to full debt recourse liability.

The Court held the lower court’s order to deny the defendants’ motion to dismiss the claim should be affirmed. The Court acknowledged that a claim for reformation of a contract is governed by a six-year New York statute of limitations. However, the Court held that a court may correct an obvious scrivener’s error after the statute of limitations has run for a claim of reformation of a contract when the intention was clear, and permitting the contract to remain as is would render it illogical.

Here, the Court found the Indemnitor’s argument that the language was intentional to be unconvincing as it would cause the Borrower’s loan to be guaranteed by themselves, undermining the purpose of the Indemnitor executing the guaranty. The court found that additional language in the guaranty supported the plaintiff’s claim of scrivener’s error as other provisions in the guaranty, such as “[t]he liability of the Indemnitor under this Agreement shall be direct and immediate,” provided clear and convincing evidence it was an error.

Accordingly, the Court’s holding allows a court to correct an obvious error in a contract outside the relevant statute of limitations.

[1] Appellate Division of the Supreme Court are four courts of intermediate appellate jurisdiction corresponding with the four Judicial Departments in the New York State Court system.

[2] NCCMI, Inc. v. Bersin Props., 2024 N.Y. Slip Op. 1161 (N.Y. App. Div. 2024).

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