Defendants appeal from an order of the Supreme Court, New York County (Bernard J. Fried, J.), entered December 12, 2008, which granted plaintiffs' motion for summary judgment.
The opinion of the court was delivered by: Moskowitz, J.
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
David B. Saxe, J.P. John W. Sweeny, Jr. Karla Moskowitz Rolando Acosta Rosalyn H. Richter, JJ.
This case involves what defendants euphemistically describe as a "mutual mistake," but was instead defendants' unilateral error. On October 27, 2006, plaintiff RSN Acquisition Inc. (RSN Acquisition), plaintiff Resort Sports Network Inc. (RSN) and RSN Merger Sub, Inc. (Merger Sub) entered into a merger agreement to purchase all of RSN's stock. Advent International Corporation (Advent), defendants' general partner, signed as "Stockholder Representative" on behalf of defendants, three investment funds that the merger agreement defines as "Significant Stockholders" of RSN.
The merger agreement provided that, upon closing, RSN Acquisition would pay $4.65 million, adjusted pursuant to Section 2.4. Section 2.4(a) provided for closing adjustments related to an outstanding bank loan. Section 2.4(b) provided for a working capital adjustment:
"(b) Working Capital Adjustment "(i) Target Net Working Capital. The Parties acknowledge and agree that the Merger Consideration has been determined based upon an estimated Net Working Capital (as such term is defined below) of the Company equal to $324,359 if the Closing occurs on or before November 30, 2006, $730,259 if the Closing occurs on or before December 31, 2006, $948,659 if the Closing occurs on or before January 31, 2007, $1,437,059 if the Closing occurs on or before February 28, 2007 and $1,640,459 if the Closing occurs on or before March 31, 2007 (collectively, the Target Net Working Capital'). For the purpose hereof, Net Working Capital' as of any date shall be equal to the adjusted cash working capital value calculated as set forth on Exhibit B hereto for the month on which the Closing Date occurs.*fn1 "(ii) Adjustment. The Parties agree that there shall be a reduction to the Merger Consideration equal to the amount by which the Net Working Capital of the Company as of the close of business on the last calendar day of the month prior to the Closing Date is less than the Target Net Working Capital, and any such deficiency shall be paid to Buyer by the Significant Stockholders (the Net Working Capital Adjustment'). . ." (emphasis added). Section 2.4(b)(iii) provides procedures for review and resolution of the adjustments. Section 2.1(b) provides that the closing will take place "on the first business day of the month following the month in which all of the conditions set forth in Article VIII have been satisfied or waived."
Thus, the merger agreement provides that the Significant Shareholders would have to reimburse the Buyer for any deficiencies between the pre-determined Target Working Capital and the actual level of working capital "as of the close of business on the last calendar day of the month prior to the Closing Date" (emphasis added). Advent proposed this language on October 16, 2006, although now defendants contend this was a mistake because of confusion that a change in a different part of the merger agreement engendered. The agreement also contains clauses providing that it is the "entire agreement of the parties . . . and supersedes all prior agreements and undertakings, both written and oral . . ." (Section 11.7), and "may not be amended or modified except by an instrument in writing" signed by the parties (Section 11.10).
The closing took place on February 5, 2007. After making a bank loan adjustment that Section 2.4(a) required, and deducting $3.8 million that the buyers paid to satisfy RSN's outstanding bank loan and certain closing costs of sellers, the remaining adjusted merger consideration was $463,260. Of the total net consideration, $433,737 was payable to defendants as Significant Shareholders.
On February 16, 2007, RSN provided Advent with a Closing Date Working Capital Schedule. The Schedule showed adjusted working capital of $962,761 as of January 31, 2007. RSN asserted that the amount due to RSN from the Significant Stockholders as a net working capital adjustment was $474,298. As the merger agreement called for, RSN calculated the working capital adjustment by comparing the actual net working capital as of the close of the last day of business of the month prior to the closing date, January 2007 ($962,761), to the target net working capital for a closing occurring in the month of February ($1,437,059) (Section 2.4[b][i]). When Advent refused to pay, plaintiffs commenced this action. The motion court granted summary judgment to plaintiffs and enforced the merger agreement according to its terms. Defendants appealed.
Defendants do not claim that the merger agreement is in any way ambiguous. Rather, defendants claim that they should not have to pay because the proposed reduction in consideration under Section 2.4 of the merger agreement is the result of mutual mistake. What the parties really intended, according to defendants, was to calculate the actual working capital using figures from the same month as the closing (February 2007), not the month prior to the closing as the merger agreement states (January 2007).
In a case of mutual mistake, the parties have reached an oral agreement and, unknown to either, the signed writing does not express that agreement" (Chimart Assoc. v Paul, 66 NY2d 570, 573 ). The Court of Appeals has strongly cautioned, however, that allowing parol and oral evidence "obviously recreates the very danger against which the parol evidence rule and Statute of Frauds were supposed to protect - the danger that a party, having agreed to a written contract that turns out to be disadvantageous, will falsely claim the existence of a different, oral contract" (id.). Therefore, there is a "heavy presumption that a deliberately prepared and executed written instrument manifest[s] the true intention of the parties" and a "correspondingly high order of evidence is required to overcome that presumption" (id. at 574, quoting George Backer Mgt. Corp. v Acme Quilting Co., 46 NY2d 211, 219 ). Thus, "[t]he proponent of reformation must show in no uncertain terms, not only that mistake or fraud exists, but exactly what was really agreed upon between the parties'" (Chimart Assoc., 66 NY2d at 574, quoting Backer, 46 NY2d at 219).
Here, defendants do not show what the parties really agreed to "in no uncertain terms." First and foremost, to have reformation based on mutual mistake, the mistake must be just that -- mutual. Here, all defendants can point to is a unilateral mistake of Advent's. There is no showing that RSN misunderstood Section 2.4 of the merger agreement, a provision that defendants (through Advent) drafted. Indeed, that RSN ...