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Current Developments in the Commercial Divisions of the
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Posted: February 23, 2014

Complaint to Reform Contract Dismissed for Failure to Join All Parties to Contract

On February 5, 2014, New York County Commercial Division Justice Bransten issued a decision in Oppenheimerfunds, Inc. v. TD Bank, N.A., 2014 NY Slip Op. 30379(U), granting a motion to dismiss for failure to join necessary parties.

Oppenheimerfunds arose from a liquidation relating to an ethanol plant, of which plaintiffs were subordinate bondholders. The plaintiffs alleged that when they purchased their bonds, they relied upon drafts of a Senior Intercreditor Agreement pursuant to which they would share pari passu with the defendants—the senior lenders—in available collateral security. However, when the Senior Intercreditor Agreement was ultimately signed, the pari passu provision had been removed and the Agreement now provided that the plaintiffs’ claim to the security would be subordinate to the defendants’.

The plaintiffs sued to have the Senior Intercreditor Agreement reformed or rescinded to comply with their understanding of what its provisions were intended to be or should have been. The defendants moved to dismiss on several grounds, among which was the plaintiffs’ failure to join necessary parties, namely Wells Fargo and its successor, U.S. Bank, because Wells Fargo also was a signatory of the Senior Intercreditor Agreement, as well as the Bond Trustee for the plaintiffs’ bonds, and the priority rank to which the plaintiffs objected was assigned to Wells Fargo in its capacity as Trustee, rather than to the plaintiffs.

The Court dismissed the action for failure to join Wells Fargo and U.S. Bank as necessary parties under CPLR 1003, explaining:

A necessary party is one whose interests may be adversely affected or prejudiced by a judgment in the action. New York courts have long held that in an action seeking rescission, cancellation or avoidance of an agreement, the parties to the agreement are indispensable . . . . Contrary to plaintiffs’ arguments, Wells Fargo and U.S. Bank are not mere ‘nominal participants.’ Rather, Wells Fargo was intimately involved in the relevant events at issue in this litigation. It was a party to the agreement in dispute here . . . and was the link between [plaintiffs] and the defendants . . . . Indeed, plaintiffs allege that Wells Fargo, and thus U.S. Bank, represented and protected plaintiffs’ interests by signing the Senior Intercreditor Agreement on their behalf. Therefore, the Senior Intercreditor Agreement cannot be reformed or rescinded without joining Wells Fargo and U.S. Bank as parties.

From this opinion, we can see that, if a contract is to be reformed or declared unenforceable, all parties to the contract must be joined. Even if the plaintiffs claim to stand in the shoes of the missing parties, or believe that the missing parties are merely “nominal” and have no substantial interest in the outcome of the action, this rule of pleading should not be overlooked.

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