Court Refuses to Reform Contract Failing to Find a Scrivener’s Error
By: Scott E. Waxman and Douglas A. Logan
In, In re 11 West Partners, LLC, the Delaware Court of Chancery (the “Court”) refused to reform a contract with clear language, finding the argument of a scrivener’s error unconvincing. While the Court noted that it found all of the parties’ testimony believable, the Court did not find clear and convincing evidence that a mistake was made in drafting the contract in question.
Three business partners, Gonzalez, Eisenstat, and Goldenberg (each individually a “Party” and together the “Parties”) entered into a real estate business together, where Gonzalez would handle business operations, Eisenstat would locate investors and funds, and Goldenberg would locate the properties and opportunities. With respect to each property the Parties created similar investment structures. Each property was owned by a distinct partnership of investor-limited partners controlled by a general partner. That general partner was a unique Delaware LLC for each property. Each Delaware LLC was then in turn owned by the Parties. Each Party held a one third interest in each of the Delaware LLCs.
In 2016 the relationship among the Parties started to sour, and eventually Goldenberg attempted to remove Gonzalez from any authority with respect to three ventures. The particular LLC Agreements (the “LPAs”) in dispute were created based off a model that was created for the Parties’ first LLC and gave Goldenberg the power unilaterally to make major decisions because the Parties were worried about losing out on the initial opportunity if they did not act swiftly. However, in the LPAs in dispute, a new form was used that gave all the Parties equal authority. Goldenberg and Eisenstat did not review the LPAs prior to executing them. Gonzalez did review the agreement and thought that the Parties had agreed on a new arrangement giving them all equal authority with respect to major decisions. Goldenberg and Eisenstat (the “Majority Members”) claim that the LPAs were executed in error and argued that the Court should reform the LPAs to give Goldenberg unilateral authority. The Court held a one-day trial to determine if reformation was proper in this circumstance.
Under Delaware law, the Court has the power to reform a contract in order to express the true agreement of the parties involved. A party seeking reformation must clearly and convincingly prove three elements: (1) that the party was mistaken about the final written agreement; (2) that either the counterparty was also mistaken or that the counterparty knew of the mistake but remained silent so as to take advantage of the mistake; and (3) that there was a meeting of the minds about a term that was not accurately reflected in the final written agreement. In order for the Court to find as the Majority Members requested, the Court would have had to find (a) that each Party intended that Goldenberg have unilateral control, and mistakenly thought the LPAs so provided, or (b) that only Gonzalez (i) knew that the LPAs did not contain the correct language, (ii) executed the LPAs and then (iii) failed to inform the other Parties. The Court found neither, and thus denied the request for reformation.