A Manager’s Dilemma: Putting It into Practice
General Electric Capital Corporation and the Multi-Million Dollar Typo Bagley p.184.
Issue: As the GECC manager in charge of the USL account, what would you have done once the typo was discovered? Is Prudential legally entitled to a $92,885,000 first mortgage? What would be the ethical thing to do? Discuss.
While typing the closing documents, a secretary working on “Amendment No. 1 to the First Preferred Ship Mortgage” wrongly typed Prudential’s first mortgage as “$92,855.00” instead of “$92,885,000.00”. This was not noticed by any one. But when United States Lines defaulted on the notes secured by the amended mortgage, Prudential tried to foreclose its $92,885,000 first mortgage. USL’s bankruptcy trustee objected, arguing that the mortgage should be limited to $92,885 as typed in the amendment 1. GECC held USL notes secured by a second mortgage. GECC brought suit for a declaration that Prudential’s first mortgage was valid only for $92,855. Both in the Southern District of New York and on appeal to the Second Circuit, GECC lost. As explained in the text under 7-9d Mistake of Fact (Chapter 7 Contracts – Page 173 – Managers and the Legal Environment by Constance E. Bagley), a unilateral mistake of fact by one party does not make a contract voidable. As the manager of GECC, I wouldn’t have brought the suit against Prudential. Every party in this transaction knew that the first mortgage is for “$92,855,000”. Once the typo was discovered and brought to my attention, I would have informed all the parties involved in this transaction and made an amendment reflecting the correct amount of first mortgage. Even though, as a manager of GECC, it is not legally necessary to let every party know about this mistake. Knowing about everybody’s original intention on the amount of first mortgage, it would be unethical if I didn’t let all the parties know about this typo error. Further it wouldn’t stand legally in the court....
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