Court Reforms Guaranty To Correct Clerical Error and Save Lender Millions
5.15.2025
A single-word drafting error in a guaranty agreement nearly rendered a multimillion-dollar obligation meaningless and unenforceable – until the Appellate Division stepped in to correct it. One lender’s inattention to detail in its contract almost cost it millions.[1]A $135 million construction loan was in default, and the lender commenced a foreclosure action. Years of litigation ensued. The lender walked away from its collateral and converted its foreclosure action to a plenary action against the guarantor of the agreement.
Both the lender and the guarantor moved for summary judgment. The guarantor’s primary argument was based on the wording of the guaranty. The guaranty, as written, imposed full recourse liability only on the borrower, not on the guarantor, thereby insulating him from personal liability.
The lender admitted that the agreement so provided but pled that this was a mere scrivener’s error and that the agreement should have provided for full recourse against the guarantor instead of the borrower. The lender explained that this error occurred because it mistakenly lifted the full recourse provision directly from the loan agreement and placed it into the guaranty without changing “borrower” to “guarantor.”
Recognizing this clear mistake, the lender sought reformation to reflect the parties’ true intent and to prevent an illusory result. The lender pointed to other provisions in the guaranty that held the guarantor liable for certain other bad acts.
The lower court found the language ambiguous and declined to correct the mistake, despite the overwhelming uncontroverted evidence of a scrivener’s error.[2]
The Appellate Division reversed, holding that enforcing the contract as written would produce a result that was not only commercially unreasonable but also illogical, in that the borrower would be guaranteeing its own debt, rendering the guaranty meaningless in the context of a single asset borrower. The borrower had no assets other than the property, on which the lender already held a mortgage.
The Appellate Division corrected the language to ensure that the guaranty operated as the parties intended, rather than being rendered meaningless by a simple drafting mistake. It rationalized the decision by stating “a guaranty must be read . . . in a manner that accords the words their fair and reasonable meaning and achieves a practical interpretation of the expressions of the parties.”
Case Summary
A scrivener’s error[3] is an unintentional, inadvertent mistake, like a typo or misspelling, that is made by someone who is writing or copying something. When drafting, parties often – sometimes in haste – copy provisions from other documents.
In January 2007, Bersin Properties borrowed from lender Nomura for funding to renovate and re-lease a shopping mall in Monroe County. The loan, which was later sold to NCCMI, was a $135 million construction loan, of which the lender had advanced $44 million. The loan was a typical non-recourse loan, limiting the lender’s remedies for nonpayment to foreclosure – unless specific triggering events set forth in the guaranty, such as bankruptcy or interference with remedies, occurred. These are called “bad acts.” Should such a bad act take place, there would be guarantor recourse, as spelled out in the guaranty. Congel was Bersin’s principal and stepped in as the “bad acts” guarantor of the loan. His guaranty was called an “indemnity agreement.” He was called an “indemnitor” (same as a guarantor).
The guaranty mirrored the loan agreement, as respects “loss” recourse and “full debt” recourse. In drafting the guaranty, the lender merely lifted provisions from the loan agreement. For the full debt recourse provision, the lender copied the language from the loan agreement, stating: “[T]he Debt shall be fully recourse to Borrower . . . if Borrower defaults hereunder in any way and Borrower or Guarantor contests or in any way interferes with, directly or indirectly, any foreclosure action. . . .”[4]
The borrower defaulted on the loan, and many years of litigation ensued. The lender eventually walked away from the collateral and converted its foreclosure action to a plenary action on the guaranty.
The guarantor and borrower asserted multiple defenses, and both sides moved for summary judgment regarding the guarantor’s personal liability under the guaranty. The lender argued that the borrower triggered full debt recourse liability against then guarantor when the borrower contested the foreclosure action. The lender admitted the scrivener’s error and sought reformation of the contract. The lender explained the guaranty provision should have said “indemnitor” instead of “borrower.” The lender contended that if the provision was enforced as written, it would lead to an absurd result.
The lower court ruled in favor of the guarantor, finding that the language created ambiguity. The court declined to reform the contract. It found that the provision was ambiguous because there was a tension between “fully recourse to borrower” and the remainder of the guaranty.[5] It additionally stated that there was a high burden for identifying absurdity or unenforceability in the guaranty, which the lender did not meet. The court refused to substitute “indemnitor” for “borrower” in the provision.[6]
The First Department reversed. According to the First Department, the lender should prevail under the guaranty by virtue of an obvious scrivener’s error that the lender acknowledged it made. The scrivener’s error rendered the guaranty “absurd” and unenforceable. That would be an unjust, untenable result.
The court explained that allowing a single asset borrower essentially to guarantee its own indebtedness was illogical and “relegated the provisions to meaningless surplusage.”[7] It stated that “[a] contract should not be interpreted to produce a result that is absurd, commercially unreasonable or contrary to the reasonable expectations of the parties.”[8]
The court identified other references in the guaranty to the guarantor’s obligations and liabilities and determined that there was clear and intrinsic proof that the use of the phrase “recourse to borrower” instead of “recourse to indemnitor” was an obvious scrivener’s error. The court explained that the plain words of a contract provision could not be interpreted to produce a result so absurd and contrary to the reasonable expectations of the parties. The court chose to give effect to the parties’ agreement and intent rather than rendering it meaningless due to a typographical mistake.
Takeaways
This case underscores two key principles, one cautionary, one comforting: (1) meticulous contract drafting and proofreading are essential to avoid costly disputes and calamitous, unintended results and (2) courts will intervene to correct an obvious drafting mistake when necessary to uphold the intent of the parties to the agreement.
Drafting professionals must exercise caution when copying provisions from other contracts, as even a minor oversight can lead to years of litigation, damages, embarrassment and risk. They must draft with precision and care, mindful that the adage “measure twice and cut once” applies each time. Proofreading is an indispensable tool in the drafting of contracts.
Imrajdeep Sahota is a 3L student at St. John’s University School of Law. This article appears in an issue of the N.Y. Real Property Law Journal, the publication of the Real Property Law Section. For more information, please visit NYSBA.ORG/RPLS.
Endnotes:
[1] NCCMI, Inc. v. Bersin Properties, LLC, 226 A.D.3d 88 (1st Dep’t 2024).
[2] NCCMI, Inc. v. Bersin Properties, LLC, 74 Misc. 3d 1221(A) (Sup. Ct., N.Y. Co. 2022).
[3] Derived from the term “clerical error,” it is an error resulting from a minor mistake or inadvertence and not from judicial reasoning or determination – especially a drafter’s or typist’s technical error that can be rectified without serious doubt about the correct reading. Error, Black’s Law Dictionary (12th ed. 2024).
[4] Bersin Properties, 74 Misc. 3d 1221(A) at *3.
[5] Id. at *6.
[6] Id.
[7] Bersin Properties, 226 A.D.3d at 96.
[8] Id.
