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October 13, 2004

The Dewey Ballantine Contract Typo Case

At the Midwest Law and Economics conference this weekend I learned about "the Dewey Ballantine Case", Prudential Ins. Co. of Am. v. Dewey Ballantine, Bushby, Palmer & Wood, 80 N.Y.2d 377 (1992). It is an example of a serious typo-- or boobytrap-- in a large commercial contract, one that I might have used in my article, "Explaining Incomplete Contracts as the Result of Contract-Reading Costs." Here is what happened. Mr. Gilmartin, a lawyer from the Dewey Ballantine law firm representing U.S. Lines, wrote a letter for Prudential to assure Prudential that the documents were all in order.

... Gilmartin, at the specific direction of U.S. Lines, thereafter drafted and delivered an opinion letter to Prudential. The opinion letter contained an assurance that the mortgage documents that were to be recorded in connection with the debt restructuring, and which, incidentally, had been prepared by other counsel, represented "legal, valid and binding" obligations of U.S. Lines. Moreover, according to Gilmartin's letter, neither federal nor state law would interfere "with the practical realization of the benefits of the security intended to be provided" by those documents. Prudential ultimately accepted Gilmartin's opinion letter as satisfactory, and permitted the recording of those mortgage documents. Prudential later learned that one of the recorded documents erroneously stated the outstanding balance of the first preferred fleet mortgage securing the debt as $92,885, rather than the correct sum of $92,885,000. As a result, Prudential suffered significant losses when U.S. Lines subsequently filed for bankruptcy.

Leaving out the 000 looks to me like an unintentional mistake rather than a trick. Notice that in the end, Prudential lost out not to U.S. Lines,but to its other creditors-- though U.S. Lines would have benefited if it had pointed out to later creditors that it didn't owe much to Prudential.

At any rate, Prudential couldn't collect much from U.S. Lines, and went after Gilmartin instead, on the theory that he had misled them. The law gets complicated at that point (Gilmartin wasn't Prudential's lawyer!). Here's what the court decided:

In sum, a duty of care was owed to Prudential in these circumstances, and the facts do not prove a breach of that duty. In preparing the opinion letter, Gilmartin represented that it took the particular procedural measures, as discussed above, in investigating and substantiating the mortgage documents in question. After taking those measures, Gilmartin made certain general assurances to Prudential in the opinion letter. Those assurances did not set forth a specific dollar amount as securing the debt. It was agreed that the letter was to be in a form satisfactory to Prudential, which condition was satisfied when Prudential accepted the letter containing no more than general assurances.

That seems reasonable. Gilmartin missed something in the documents, but the court decided it was not so sloppy a job he did as to justify holding him liable for his mistake.

Posted by erasmuse at October 13, 2004 12:30 PM

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