Opinion
No. 15/9845.
07-20-2016
Ted E. HOSMER, Plaintiff, v. Khamfong HOSMER, Defendant.
Anjan Ganguly, Esq., Rochester, Attorneys for Plaintiff. Joan de R. O'Byrne, Esq., Rochester, Attorney for Defendant.
Anjan Ganguly, Esq., Rochester, Attorneys for Plaintiff.
Joan de R. O'Byrne, Esq., Rochester, Attorney for Defendant.
RICHARD A. DOLLINGER, J.
Mutual mistake is a concept whose “intentions are good,” but as Eric Burton and the Animals once chanted in a warning to sympathetic trial judges inclined to use their inherent interpretative powers to modify contractual obligations, “please don't let them be misunderstood.” In this case, a party argues that the agreed upon value for a residence in a prenuptial agreement was a “mutual mistake,” and that, as a result, it should not snuff out a wife's marital claim to a share of the equity in the home.
“Don't Let Me be Misunderstood,” Eric Burton and the Animals, Columbia Records, 1965.
Three years before he married the defendant, the plaintiff husband bought a home. The purchase price was $446,200. The husband put $150,000 down and then made significant improvements in the property—before he was married. The future wife made no contribution to the down payment or the improvements. Prior to their marriage, the couple signed a prenuptial agreement. In the agreement:
(A)the wife acknowledged that she had not contributed to the purchase of the home or the improvements;
(B)the property, at the time of the agreement, had “a current fair market value” of “approximately $750,000;” and,
(C)the current outstanding mortgage at the time of the agreement was approximately $300,000, resulting in a net equity of $450,000.
In the next sentence, the agreement states that “this sum”—an apparent reference to the “net equity” in the amount of $450,000—“shall remain the husband's separate property under all circumstances.” The remainder of the agreement further clarifies the parties' intentions, as it states:
The parties have agreed, in the case of a separation event ... and only if the fair market value of the property at the time is at least $750,000 then the prospective wife she'll be entitled to 25% of the fair market value over $750,000. The prospective wife waives any interest whatsoever in the property if the fair market value at the time of the separation event is less than $750,000.
The exact same language is repeated at the end of a subsequent paragraph in the prenuptial agreement which deals with the consequences if the husband sold the property and invested the net proceeds in another property. The couple agreed that the same limitation on the wife's marital interest would govern, and the agreement repeats the earlier language: “the perspective wife waives any interest whatsoever in the property if the fair market value at the time of separation event is less than $750,000 ...”
When the divorce was commenced, the parties had the property appraised. The date of commencement value, according to the appraisal formula contained in the agreement, was $542,000. The mortgage balance was $259,342. The remaining equity equals $282,658. Because the current equity amount is less than the $450,000, the husband claims that the prenuptial agreement extinguishes the wife's claim to any marital interest in the house. The wife, in contrast, claims that there was a “mutual mistake” in the agreement—that the residence was only worth $450,000 at the time of the agreement. When the $300,000 mortgage, in place at the time of the execution of the agreement was subtracted from the fair market value, the husband's equity in the property, at the time of the prenuptial agreement, was only $150,000 and the wife was entitled to an equitable share of any excess over that amount. In the wife's view, when the date of commencement equity—$282,658—is reduced by the husband's separate property of $150,000, there remains $132,658 as a marital asset subject to equitable distribution.
Relying on the language in the prenuptial agreement, the husband moved for judgment, confirming the terms of the agreement and denying the wife any equitable distribution in the marital residence because the residence was not valued, at the time of commencement, at more than $750,000 and the equity did not exceed $450,000. The wife opposed the motion, arguing the valuation, set forth in the agreement, was a “mutual mistake” that allowed this court to reform the agreement and substitute the estimated fair market value at the time of the agreement—a number much lower than $750,000 and which she pegs at $450,000—as the husband's separate property contribution to the marriage and any excess equity would be subject to equitable distribution to the wife.
The Court of Appeals has stated that reformation based on mutual mistake is an exceptional remedy:
The mutual mistake must exist at the time the contract is entered into and must be substantial. Put differently, the mistake must be so material that it goes to the foundation of the agreement. Court-ordered relief is therefore reserved only for exceptional situations. The premise underlying the doctrine of mutual mistake is that the agreement as expressed, in some material respect, does not represent the meeting of the minds of the parties.
Simkin v. Blank, 19 NY3d 46, 52–53 (2012) (internal quotation marks and citations omitted), cited in Warberg Opportunistic Trading Fund, L.P. v. Georesource, Inc., 2015 N.Y. Slip Op 32269(U) (Sup.Ct. New York Cty.2015). The alleged mistake, required to serve as a sufficient basis for a rescission/reformation claim, must be “substantial” and “material” and go “to the foundation of the agreement.” Da Silva v. Musso, 53 N.Y.2d 543, 552 (1981) (quoting Belknap v. Sealey, 14 N.Y. 143, 155 (1856). Mutual mistake occurs, for example, when the parties have reached an oral agreement and, unknown to either, the subsequent writing does not express that agreement. Loyalty Life Ins. Co. v. Fredenberg, 214 A.D.2d 297, 299 (3rd Dept.1995). The “mutual mistake must exist at the time the contract is entered into.” Gould v. Bd. of Educ. Of Sewanhaka Cent. High. Sch. Dist., 81 N.Y.2d 446, 453 (1993). There is also high court authority that reforming a written instrument based upon mutual mistake requires clear and convincing evidence, “not only that mistake or fraud exists, but exactly what was really agreed upon between the parties.” George Backer Mgt. Corp. v. Acme Quilting Co., 46 N.Y.2d 211, 219 (1978) ; see also Chimart Assoc. v. Paul, 66 N.Y.2d 570, 574 (1986). Finally, there is authority for the proposition that predictions about a future course—an estimate of future consequences—cannot be the basis for a finding of a mutual mistake. Mangini v. McClurg, 24 N.Y.2d 556, 564 (1969). In short, according to the Court of Appeals, merely arguing that the parties “did not agree” on some portion of a written agreement is not sufficient to justify reformation. A party must prove by clear and convincing evidence that some other term or condition was what was actually agreed on and the written document does not accurately reflect that offer-and-acceptance transaction. See e.g., Lexington Vil. Condominium v. Scottsdale Ins. Co., 136 AD3d 645 (2nd Dept.2016).
The alleged “mutual mistake” in this case is the estimate of the home's value at the time of the prenuptial agreement. But, the argument advanced to substitute a different and lower value for the residence misunderstands the requirements of the mutual mistake doctrine. First, there is no evidence of the actual value of the house at the time of the execution of the agreement. There is no appraisal of the value at the time of the agreement. The wife only speculates on its value at that time: there is no evidence that either party knew the value of the residence at the time of the agreement. The husband argues that the assigned value included a substantial investment and improvements in the home. There is simply no evidence—much less clear and convincing evidence—that the value was a mistake. The wife, in her submission to the court, never suggests that she thought it was worth less than $750,000 at the time of the signing of the agreement. The husband never suggests that he knew it was worth less at the time of the agreement. There is no suggestion that both parties thought the assigned value was less than the fair market value. Hence, there is nothing in the proof before this court to suggest that the alleged mistake was mutual. Finally the wife's counsel, seeking to upset this agreement, repeatedly refers to the assigned value as the husband's “claimed” value. It was not his claim, it was the mutually agreed upon value.
Second, the alleged mutual mistake does not go the “foundation of the agreement.” The prenuptial agreement in this instance, covered numerous aspects of the future husband's assets. The agreement is 35–pages long. The husband has a net worth, (according to his statement of net worth filed in the current divorce action), in excess of $600,000. In the agreement, the wife acknowledged that the husband owned other real estate, either individually or through a corporation and she waived her claim to an interest in those properties. There is no suggestion that the wife, in executing the agreement, was subject to any coercion or undue influence by the husband or anyone else. The agreement was designed to shield the future husband's separate assets from claims in the now-commenced divorce action. In this court's view, the agreed value of the equity in the residence, owned separately by the husband, is not the “foundation for the agreement.”
Third, there is no evidence that the parties, at the time of the execution of the agreement, envisioned any different value for the marital residence. This dispute is not an instance in which the parties agreed on a value at the time of their discussions and later discovered that their agreed value was different from that written into the text of the agreement. The wife, in this instance, cannot point to any prior agreement—oral or otherwise—regarding the value of the property. Therefore, consistent with the directive from the Court of Appeals in George Backer Mgt. Corp. v. Acme Quilting Co., 46 N.Y.2d at 219, there was no mistake—mutual or otherwise—in the value of the residence as documented in the agreement. Finally, in seeking to claim “mutual mistake,” the wife asks too much of this court. If the court reformed the agreement, as the wife asks, it would be required insert a different value into the text of the agreement even though there is no evidence that either party bargained for, agreed to, or even discussed this different value when the agreement was executed. The wife's claim that a corrected agreement would “effectuate the parties' bargain in the light of facts” is unsupported.
In advancing her claim for mutual mistake, the wife cites True v. True, 63 AD3d 1145 (2nd Dept.). In that case, the Second Department granted reformation for a mutual mistake when the parties failed to make their agreement clear that a division of stock would involve an after-tax distribution. The court held that the equitable distribution of shares—in which the couple listed the number of actual shares to be distributed—should be reformed to provide equal distribution of the post-tax shares available. True v. True creates a false impression when applied to this case. First, the shares at stake in True were indisputably marital property and the court had latitude in equitably dividing that property. In contrast, the residence in this case was, by agreement, separate property. Second, the appeals court held in True v. True that neither party anticipated the tax consequences. It was undisputed that neither party had anticipated the tax consequences when the agreement was struck. In this instance, there is no evidence that parties failed to anticipate the impact of the agreed value of the residence on future equitable distribution. Here, the husband and wife knew that the wife would get a share of the house equity if it exceeded the stated amount of $450,000. In addition, the True court held “proof of mistake must be of the highest order' [and] must show clearly and beyond doubt that there has been a mistake' and ... it 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.” Id. at 1147 ; Hackett v. Hackett, 115 AD3d 800 (2nd Dept.2014). The proof in this instance falls far short of what even True v. True acknowledges. There is no clear and certain evidence that what the husband and wife understood at the time of the signing of the agreement differed from what was written in the document. Importantly, the True court also found that the language of the agreement, when reasonably interpreted, supported a conclusion that the husband and wife in that instance intended that only the net—after-tax—shares would be available for distribution. In reaching this conclusion, the Second Department followed the path of the Court of Appeals. The court could interpret the language, in a reasonable fashion, to determine the intention of the parties and enforce the agreement with the mistake “corrected” to express and effectuate what was really intended by the parties. Id. at 802.
In this case, there is no reasonable “correction” suggested by the wife. She simply seeks to jettison the “agreed equity” provision of the agreement and substitute a new value—the original purchase price or the current value—into the agreement. There is no evidence that either party intended to include such a value into the agreement. There is no “correction” which could be reasonably read into this agreement. The wife adds an argument that the assignment of the equity value in the agreement was “arbitrary,” as neither party had obtained an appraisal for the property prior to signing the agreement. However, the wife's counsel can cite no authority for the proposition that an arbitrary valuation of a separate property asset in a prenuptial agreement is sufficient to justify vacating the agreement under a theory of “mutual mistake.” The court cannot find any such authority either. Arbitrariness—the selection of an estimate value that both sides assented to insert in the agreement—may not be fair or just in a subsequent divorce action, but it does not, in and of itself, constitute a “mutual mistake.”
Lastly, the husband relies on a dog-eared opinion from the Second Department in which a court enforced an agreed valuation of a residence in a prenuptial agreement. Lynch v. King, 284 A.D.2d 309 (2nd Dept.2001). However, in that case there was no dispute about the valuation in the agreement and the court never considered the “mutual mistake” doctrine. To the extent that Lynch v. King supports judicial recognition that parties can set their own valuation of a spouse's admittedly separate property in a prenuptial agreement and that value will be later be binding on the litigants when divorce occurs, this court accepts and applies that rationale here. But, the opinion provides no guidance on dealing with what one party alleges is a mutual mistake in pre-marital valuation process and the court confines it guidance to the earlier stated proposition.
Lynch v. King does provide guidance to resolve a spin-off issue before the court. In this case, the husband, during the term of the marriage, refinanced the property and, as part of that process, deeded the property to himself and his wife. The wife suggests that that transfer changes the nature of the property and creates a marital property interest, which is valued at approximately $150,000, However, as Lynch v. King decrees, the husband would get credit for his contribution to improvements ($150,000) and any equity extant at the time of transfer. There is no evidence of the property's value at the time of the refinancing, and therefore, it is impossible to calculate the value of the husband's separate property interest at the transfer and concomitantly, no way to calculate whether either appreciation of the property or pay down of the mortgage after the transfer gave the wife some marital interest in the property. Ceravolo v. DeSantis, 125 AD3d 113 (3rd Dept.2015). Regardless of that analysis, this court concludes that the mere convenience transfer of the title from the husband, to the husband and wife, for refinancing purposes does not moot the language of the agreement, which restricts the wife's marital claim to any equity in excess of the $450,000. There is no evidence that the husband, in refinancing the residence, intended to negate the terms of the prenuptial agreement.
For all these reasons, the husband's motion for judgment, declaring the agreement to be valid, is granted. The husband's interest in the residence is separate property not subject to equitable distribution
SUBMIT ORDER ON NOTICE.