First Niagara Bank N.A. v. Mortgage Builder Software, Inc.
Filing
62
DECISION AND ORDER GRANTING in part and DENYING in part Plaintiff's 37 Motion for Summary Judgment; GRANTING in part and DENYING in part Defendant's 38 Motion for Summary Judgment. Signed by William M. Skretny, United States District Judge on 5/22/2016. (MEAL)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK
FIRST NIAGARA BANK N.A.,
Plaintiff,
v.
DECISION AND ORDER
13-CV-592S
MORTGAGE BUILDER SOFTWARE, INC.,
Defendant.
I. INTRODUCTION
Plaintiff First Niagara Bank N.A. (“First Niagara”) initially commenced this breachof-contract action against Mortgage Builder Software, Inc. (“MBSI”) in New York State
Supreme Court, Erie County. MBSI properly removed the matter to this Court on June
6, 2013, on the basis of diversity jurisdiction pursuant to 28 U.S.C. § 1332.
First
Niagara filed an amended complaint on July 3, 2013, and MBSI filed an answer and
counter-claim on July 19, 2013. (Docket Nos. 12, 14.) Currently pending before this
Court are the parties’ cross-motions for summary judgment. (Docket Nos. 37, 38.) For
the following reasons, both motions are granted in part and denied in part.
II. BACKGROUND 1
Execution of the Service Agreement
On February 24, 2011, First Niagara and MBSI entered into a Service Agreement
whereby MBSI agreed to provide a software program, which MBSI calls “software as a
service,” implementing a new mortgage origination system at First Niagara. (Docket
No. 45-2 (MBSI’s Rule 56.1 Statement of Undisputed Material Facts (“MBSI’s
1
Facts are undisputed unless otherwise noted.
1
Statement”) at ¶ 1).)2 MBSI agreed to provide software that would ensure “end-to-end
mortgage loan origination services,” as well as hosting services, for First Niagara’s
mortgage lending business. (Docket No. 37-2 (First Niagara’s Rule 56.1 Statement of
Undisputed Material Facts (“First Niagara’s Statement”) at ¶ 6).) Specifically, MBSI
agreed to provide certain “Services,” as defined in the Service Agreement, including the
development of two software interfaces: an interface between MBSI’s software and
First Niagara’s “loan servicing system (MISER) utilizing Cohesion Middleware,” and an
interface with a third-party document provider to allow for the printing of pre-filled forms.
(Docket No. 12 (Am. Compl. Exh. A (the “Service Agreement”) at 14).) In exchange for
MBSI’s performance, First Niagara agreed to make an $82,000 initial payment and,
once the Services were operational, a monthly fixed payment of $20,000, plus $20 for
each loan closed in excess of 500 per month. (Service Agreement at 14.) In addition to
making payments, First Niagara had certain “collaborative” duties as part of the
implementation, including testing the software. (See Docket No. 50-2, MBSI’s Counter
Statement of Material Facts (“MBSI’s Counter Statement”) at ¶ 42; MBSI’s Statement at
¶ 72.)
The Service Agreement states, and the parties do not dispute, that the contract is
governed by New York law. (Service Agreement at ¶ 20.) The Service Agreement also
contains a waiver clause, 3 as well as a clause limiting liability and damages. 4
2
Certain filings in this matter, including MBSI’s Statement, have been filed under seal in their entirety.
This Court cites to those portions of the sealed filings as to which there is no basis for sealing.
3
The waiver clause reads: “One or more waivers by either party of a breach of any term, provision or
condition hereof shall neither constitute nor be construed as a waiver by said party of any subsequent or
continuing breach of such term, provision and/or condition. The consent or approval of either party to or
of any act by the other party requiring such consent and/or approval shall not be deemed a waiver, or
render unnecessary consent to and/or approval of any subsequent and/or similar act.” (Service
Agreement at ¶ 19.)
4
The limitation of liability clause reads: “LIMITATION OF LIABILITY AND DAMAGES. EXCEPT AS TO
2
Delays in Implementation
The “kick-off meeting” for the project occurred on March 25, 2011, approximately
six weeks after the Service Agreement was signed. (First Niagara’s Counter Statement
at ¶ 54.) By the time of that meeting, the implementation date for the project had been
pushed back to July 2011.
(MBSI’s Statement at ¶ 63.)
In May 2011, the
implementation date was delayed again, and tentatively scheduled for October 2011.
(MBSI’s Statement at ¶ 73.) That date was delayed once more when, on November 3,
2011, First Niagara proposed a new implementation date of February 27, 2012.
(MBSI’s Statement at ¶ 118; see also First Niagara’s Statement at ¶¶ 19-21.) Although
both parties agreed to the delays, it appears that First Niagara set each of the dates.
(See MBSI’s Statement at ¶¶ 63, 73.)
First Niagara attributes the delays in implementation, in part, to time needed for
negotiation with Wolters Kluwer, a third-party document provider engaged by First
Niagara. (First Niagara’s Statement at ¶ 21.) First Niagara chose Wolters Kluwer in
May or June 2011 to provide the forms necessary for the new system (MBSI’s
Statement at ¶ 73), and both First Niagara and MBSI worked with Wolters Kluwer
through the fall of 2011 to develop the necessary interface and to identify the
documents that First Niagara needed to originate its mortgage loans. (First Niagara’s
Statement at ¶ 22.) First Niagara also contends that the project was delayed because
MBSI had only one developer working on both the Cohesion and Wolters Kluwer
CLAIMS OTHERWISE PROVIDED FOR IN THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO
ANY WARRANTY CLAIMS, EXPRESS OR IMPLIED, AND/OR CLAIMS SUBJECT TO THE
INDEMNIFICATION PROVISIONS, NEITHER PARTY SHALL HAVE LIABILITY TO THE OTHER PARTY
FOR ANY INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL, OR INCIDENTAL DAMAGES,
WHETHER BASED ON CONTRACT, NEGLIGENCE, STRICT LIABILITY, OR OTHER TORT,
INDEMNITY OR CONTRIBUTION, OR OTHERWISE, EVEN IF ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES.” (Service Agreement at ¶ 13 (capitalization in original).)
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interfaces, despite their complexity. (First Niagara’s Statement at ¶¶ 37-46; 53-54.)
MBSI does not dispute that there was a single developer working on the two interfaces,
but notes that he was the “top developer” at the company and chosen for this project
based on his expertise. (MBSI’s Counter Statement at ¶¶ 45, 53-54.)
Both parties also point to customization requests from First Niagara as a reason
for delays.
Beginning shortly after the kick-off of the project and continuing into
February 2012, personnel at First Niagara sent numerous customization requests to
MBSI, seeking to meet the needs of the banks internal constituents and regulatory
requirements. (MBSI’s Statement at ¶¶ 79-93, 133; First Niagara’s Counter Statement
at ¶ 79; First Niagara’s Statement at ¶ 20.)
MBSI attributes the high volume of
customization requests to an “internal disagreement within First Niagara as to the scope
of the project.” (MBSI’s Counter Statement at ¶ 20.) It is undisputed that a number of
First Niagara personnel who later had a role in the implementation were not significantly
involved with the decision to use MBSI’s software, nor did they participate in drafting the
terms of the Service Agreement. (MBSI’s Statement at ¶¶ 43-44.) MBSI contends (and
First Niagara disputes) that from early on in the process, the expectations of these
individuals were inconsistent with the time and budgetary limitations of the project.
(MBSI’s Statement at ¶ 47; Docket No. 56-2 (First Niagara’s Counter Statement of
Material Facts (“First Niagara’s Counter Statement”) at ¶ 47).) MBSI further contends
(and First Niagara disputes) that certain First Niagara personnel wanted a “Cadillac” or
a “Lexus” (as opposed to “out-of-the-box” or “generic” software) and that there was a
“disconnect between those who wanted functionality without regard to time and cost . . .
and those who were focused on having a system implemented within a specific time
4
frame and budget.” (MBSI’s Statement at ¶ 49; First Niagara’s Counter Statement at ¶
49.) First Niagara does not dispute that MBSI could not complete the project until the
customizations were prioritized. (MBSI’s Statement at ¶ 54; First Niagara’s Counter
Statement at ¶ 54.) However, the Service Agreement does expressly anticipate such
customization requests, sets no deadline on them, and First Niagara pre-paid $20,000
for customizations. (First Niagara’s Counter Statement at ¶¶ 154-156.)
As noted further below, MBSI also attributes the implementation delays to First
Niagara’s employees not being sufficiently engaged in the implementation process, and
the diversion of First Niagara’s resources to other projects. (MBSI’s Statement at ¶¶ 6,
43-46, 47-49, 50-54; 74.) For instance, MBSI contends the initial kick-off meeting was
delayed for six weeks after the execution of the Service Agreement due to First Niagara
personnel being “redeployed” to work on other projects within the bank.
(MBSI’s
Statement at ¶ 54.) First Niagara disputes this. (First Niagara’s Counter Statement at ¶
54.)
February 2012 Attempted Implementation
In September 2011, First Niagara informed MBSI that the Office of the
Comptroller of the Currency (the “OCC”), First Niagara’s regulatory authority, had
prohibited it from closing on the purchase of approximately 200 HSBC branches at any
point too close in time to the implementation of the MBSI software. (First Niagara’s
Statement at ¶¶ 25-26.) First Niagara contends that, in January 2012, its management
became concerned that delays in the MBSI project might have an impact on the HSBC
transaction. (First Niagara’s Statement at ¶¶ 25-26.)
MBSI contends that these delays were, again, due to issues internal to First
5
Niagara, and the “scope creep” of the project. (See MBSI’s Statement at ¶¶ 127-28;
MBSI’s Counter Statement at ¶ 34.) MBSI points to a January 13, 2012 email from the
First Niagara project leader to the MBSI project leader stating that “everyone keeps
putting things off and not focusing and it is really biting us in the butt now,” and an
internal email where the First Niagara project leader told a colleague that the First
Niagara testers were “doing little more than going through the motions.”
(MBSI’s
Statement at ¶¶ 127-28.) First Niagara was still sending customization requests to
MBSI through February 9, 2012. (MBSI’s Statement at ¶¶ 129, 133.) In addition, the
head of mortgage compliance at First Niagara, who was tasked with identifying the
documents First Niagara needed from third-party document provider Wolters Kluwer
(MBSI’s Statement at ¶ 73; First Niagara’s Counter Statement at ¶ 73), did not specify
certain documents until December 2011, resulting in those documents not being
available for MBSI to incorporate into the project until February 2012.
(MBSI’s
Statement at ¶ 132.) First Niagara does not dispute these facts, but maintains that the
delays were instead due to MBSI’s failure to complete the interfaces on schedule. (See
First Niagara’s Statement at ¶¶ 29-34.)
On February 9 or 10, 2012, First Niagara sent a letter to MBSI requiring that
certain project milestones be met by February 20, 2012, including the Cohesion
interface and the Wolters Kluwer interface. (First Niagara’s Statement at ¶¶ 30-31;
MBSI’s Statement at ¶ 8.) On February 21, 2012, MBSI wrote to First Niagara and
stated that it believed it had completed the critical projects as required by First Niagara.
(First Niagara’s Statement at ¶ 32.) The next day, MBSI’s project manager wrote First
Niagara, stating that: “it is certainly true that the a [sic] large percentage of loans are
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receiving errors.” (First Niagara’s Statement at ¶ 47.) MBSI continued testing the
software and sending error reports to First Niagara until the termination of the Service
Agreement. (MBSI’s Counter Statement at ¶ 34.)
Pointing to a February 28, 2012 email from Diane DiLaura, a system
administrator in First Niagara’s mortgage department, to Lisa Black, First Niagara’s
project manager, MBSI contends that First Niagara’s employees knew that it would be
impossible for MBSI to meet the February 2012 deadline. (MBSI’s Statement at ¶ 136.)
First Niagara contends that MBSI mischaracterizes the email. (First Niagara’s Counter
Statement at ¶ 136.) The email, in which DiLaura responds to a question from Black
regarding how much testing First Niagara has completed on the new loan origination
software, reads:
I would say [we are] 10% [finished with testing the new system] at best.
We’re constantly going back and forth with defects and retesting the same
thing over and over just to set one loan to go through properly let alone
trying to test all of the different loan program and scenarios. . . [MBSI]
was obviously in a rush to deliver the product to us and aren’t sending half
the stuff they should be. I thought it would be more of a dual effort when
they were building [the interface between MBSI and Miser]. . . . They just
slammed it in so they could meet the deadline of [February 20, 2012] and
figured they would take 30 days to cure all the effects assuming we are
even able to identify all of the defects within that time frame. They 100%
knew they did not deliver a completed product because if they were
testing the transactions they would have been receiving all of the same
errors we are receiving.
(Docket No. 45-14, Exh. 64 to O’Brien Decl.; see also First Niagara’s Counter
Statement at ¶ 136.) Several hours later, DiLaura followed up with Black in the same
email thread, stating:
I feel bad because I really like Melissa [Kozicki, MBSI’s project manager]
and Dan [Perttula, MBSI’s developer on the project] - they have gone
above and beyond and worked an enormous amount of overtime to
attempt to get us something. They were put in a very precarious position
7
and asked to do something that wasn’t physically possible - at least not to
do it right. I’m sure they wouldn’t typically deliver a product like that but
the whole document piece was far above what their existing resources
were capable of handling in the time frame allotted. They couldn’t have
possibly anticipated the amount of coding/mapping necessary for the docs
coupled with all of our custom requests. They have really worked their
butts off for us. Really ashame [sic] it’s probably going to end so badly.
(Docket No. 45-2, Exh. 64 to O’Brien Decl.; see also MBSI’s Statement at ¶ 136.)
Termination of the Service Agreement
On March 6, 2012, First Niagara sent a letter to MBSI terminating the Service
Agreement pursuant to Section 11(B) of the Service Agreement.
(First Niagara’s
Statement at ¶ 35; MBSI’s Statement at ¶ 9.) That section reads:
For Failure to Become Operational. Provided [First Niagara] reasonably
cooperates in good faith, [MBSI] shall provide [First Niagara] with a written
implementation plan which shall include an implementation date, which
date shall be no more than 120 days after the Effective Date, on which the
Services shall be Fully Operational. In the event that the Services are not
Fully Operational within thirty (30) days after said implementation date,
[First Niagara] shall have the right to terminate this Agreement
immediately upon written notice to [MBSI] and without any further
obligation to [MBSI].
(Service Agreement at ¶ 11(B).)
No loans were funded through the MBSI software. (First Niagara’s Statement at
¶ 35; MBSI’s Statement at ¶ 9.)
First Niagara ultimately implemented an entirely
different mortgage software system provided by FiServ, which it began considering as
an alternative to MBSI’s system no later than January 20, 2012. (MBSI’s Statement at ¶
138.)
Damages
First Niagara contends that MBSI breached the Service Agreement by failing to
complete the Miser/Cohesion interface and the Wolters-Kluwer interface. First Niagara
8
further contends that it acted within its rights by terminating the Service Agreement
pursuant to Section 11(B) and seeks $172,300 in damages, the full amount it paid to
MBSI, plus statutory interest. (See First Niagara’s Statement at ¶ 36.)
MBSI disputes this, and has counter-claimed against First Niagara, alleging that
First Niagara breached the Service Agreement by purporting to terminate when it had
not acted in good faith.
MBSI seeks $5,099,260 in damages, divided into five
categories:
1.
$20,000 per-month for 3 years = $720,000 (the “Monthly Fixed
Service Fee”);
2.
$20.00 for each loan over 500/month, based on an estimate of
2,000 loans/month = $1,440,000;
3.
Loss of vendor transaction fees at $61,274 per-month over 3 years
= $2,205,864;
4.
Loss of revenue from Wolters Kluwer interface – 20% of the
amount WK would have charged First Niagara for document
preparation totaling $52,930 per-month for 36 months =
[$1,905,480] x 20% = $381,096; and
5.
Amount of unpaid and/or unbilled invoices based on expectation of
continuing relationship = $352,300.
(First Niagara’s Statement at ¶ 59 (citing MBSI’s Rule 26 Disclosures).)
III. DISCUSSION
In its motion, First Niagara contends that it is entitled to summary judgment
granting its claims and dismissing MBSI’s counter-claim because: (1) MBSI breached
the Service Agreement; and (2) MBSI seeks damages to which it is not entitled under
the Services Agreement.
MBSI has cross-moved for summary judgment, seeking
dismissal of First Niagara’s claims and a finding that First Niagara is liable for breach of
contract.
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“A motion for summary judgment may properly be granted . . . only where there is
no genuine issue of material fact to be tried, and the facts as to which there is no such
issue warrant the entry of judgment for the moving party as a matter of law.” Kaytor v.
Elec. Boat Corp., 609 F.3d 537, 545 (2d Cir. 2010). A court’s function on a summary
judgment motion “is not to resolve disputed questions of fact but only to determine
whether, as to any material issue, a genuine factual dispute exists.” Kaytor, 609 F.3d at
545 (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50, 106 S.Ct. 2505, 91 L.
Ed. 2d 202 (1986)). “A dispute regarding a material fact is genuine ‘if the evidence is
such that a reasonable jury could return a verdict for the nonmoving party.’” Weinstock
v. Columbia Univ., 224 F.3d 33, 41 (2d Cir. 2003) cert. denied, 540 U.S. 811 (2003)
(quoting Anderson, 477 U.S. at 248). Where, as here, both parties move for summary
judgment, “each party’s motion must be examined on its own merits, and in each case
all reasonable inferences must be drawn against the party whose motion is under
consideration.” Morales v. Quintel Entm’t, 249 F.3d 115, 121 (2d Cir. 2001).
A.
Breach of Contract
Under New York law, a party alleging a breach of contract must establish (1) the
existence of a contract; (2) performance of the contract by one party; (3) breach by the
other party; and (4) resulting damages. Rexnord Holdings, Inc. v. Bidermann, 21 F.3d
522, 525 (2d Cir. 1994). There is no dispute as to the first element (see First Niagara’s
Statement at ¶ 3; MBSI’s Statement at ¶62), but each of the parties contends that it
performed its duties under the Service Agreement while the other party breached. First
Niagara contends that MBSI breached the contract in at least two ways, and that First
Niagara was therefore justified in terminating the Service Agreement under Section
10
11(B). MBSI contends that First Niagara’s termination was improper, and therefore
constitutes a breach of contract. First Niagara also disputes MBSI’s claim to damages.
1. Performance
The parties primarily disagree as to whether First Niagara properly terminated
the Service Agreement (as argued by First Niagara), or improperly terminated and
therefore breached the Service Agreement (as argued by MBSI).
It is well-settled that “‘[u]nder New York law, . . . [w]here the contract specifies
conditions precedent to the right of cancellation, the conditions must be complied with.’”
Bausch & Lomb Inc. v. Bressler, 977 F.2d 720, 727 (2d Cir. 1992) (quoting Consumers
Power Co. v. Nuclear Fuel Servs., Inc., 509 F. Supp. 201, 211 (W.D.N.Y. 1981)). “New
York courts . . . apply the clear New York rule requiring termination of a contract in
accordance with its terms.” Filmline (Cross-Country) Productions, Inc. v. United Artists
Corp., 865 F.2d 513, 519 (2d Cir. 1989); see also Blumberg v. Florence, 143 A.D.2d
380, 381 (2d Dep’t 1988) (“Where the procedures for cancellation provided for by the
contract specify conditions precedent to the right of termination, those procedures must
be followed.”). An attempt to terminate a contract that fails to follow the contractuallymandated termination procedure is ineffective. See New Image Constr., Inc. v. TDR
Enters. Inc., 74 A.D.3d 680, 681 (1st Dep’t 2010) (purported termination ineffective
where terminating party failed to comply with contractual notice provisions).
First
Niagara terminated the Service Agreement under Section 11(B), which allows First
Niagara to terminate if the Services are not fully operational after a certain date 5 and if
5
First Niagara makes note of the waiver provision in the Service Agreement (First Niagara’s Statement at
¶ 1), but neither party briefs the issue of whether First Niagara waived its right to terminate under 11(B)
and, if not, what was the applicable termination date pursuant to 11(B). Because the question of good
faith creates a threshold dispute as to a material fact, this Court need not address waiver at this time.
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First Niagara has “reasonably cooperate[d] in good faith” on the implementation of the
software.
(Service Agreement, Section 11(B).)
Accordingly, whether First Niagara
“reasonably cooperate[d]” with MBSI “in good faith” is a material issue in the
determination of whether either party breached the Service Agreement.
“‘Under New York law, a covenant of good faith and fair dealing is implied in all
contracts.’” State St. Bank & Trust Co. v. Inversiones Errazuriz Limitada, 374 F.3d 158,
169 (2d Cir. 2004) (quoting 1-10 Indus. Assocs., LLC v. Trim Corp. of Am., 297 A.D.2d
630, 631 (2d Dep’t 2002)). Although the duty here arises from an explicit good faith
requirement in the Service Agreement, “because there is no contract provision defining
‘good faith,’ the term may be construed to have the same meaning it does in the implied
covenant context.” See Barbara v. MarineMax, Inc., No. 12-CV-0368 ARR RER, 2013
WL 4507068, at *8 (E.D.N.Y. Aug. 22, 2013), aff’d, 577 F. App’x 49 (2d Cir. 2014)
(Citing 11 Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts
§ 31:1 (4th ed. 1993) (“[T]echnical terms and words of art are to be given their technical
meaning when used in a transaction within their technical field, and by case law to the
effect that when words or terms having a definite legal meaning and effect are
knowingly used in a written contract, the parties will be presumed to have intended the
words or terms to have their proper legal meaning and effect, in the absence of any
contrary intention appearing in the writing.”)). “[S]ince there is a presumption that all
parties act in good faith, the burden of proving a breach of the covenant of good faith
and fair dealing is on the person asserting the absence of good faith.” Tractebel Energy
Mktg., Inc. v. AEP Power Mktg., Inc., 487 F.3d 89, 98 (2d Cir. 2007) (alteration in
original) (internal quotation marks omitted). MBSI thus faces a substantial burden in
12
showing that First Niagara breached its duty to cooperate in good faith. 6
The covenant of good faith may, as here, “require affirmative steps to cooperate
in achieving the contract’s objective.” Id. (internal quotation marks omitted); see also
Lowell v. Twin Disc, Inc., 527 F.2d 767, 770 (2d Cir. 1975) (“It is likewise implied in
every contract that there is a duty of cooperation on the part of both parties.”). MBSI
contends, in essence, that First Niagara breached the Service Agreement by failing to
provide the cooperation necessary for the implementation of the Service Agreement.
See Lowell, 527 F.2d at 770 (“Thus, whenever the cooperation of the promisee is
necessary for the performance of the promise, there is a condition implied that the
cooperation will be given.”). The failures of cooperation alleged by MBSI include the
change in scope of the project through numerous customization requests, the lack of
engagement from First Niagara’s employees, and an unreasonable timeline for
completion that effectively ensured MBSI’s failure. Although many of the facts that
underlie these allegations are generally undisputed, whether those facts constitute bad
faith on the part of First Niagara is in dispute.
“‘In determining whether a party has breached the obligation or covenant of good
faith and fair dealing, a court must examine not only the express language of the
parties’ contract, but also any course of performance or course of dealing that may exist
between the parties.’” Tractebel Energy Mktg., Inc., 487 F.3d at 98 (quoting 23 Williston
on Contracts § 63:22 (4th ed. 2006)). “‘Thus, whether particular conduct violates or is
6
This burden will be particularly difficult as to intent. The evidence does not suggest that First Niagara
had an intent to harm MBSI, but a reasonable fact finder could determine that First Niagara acted with
reckless disregard of MBSI’s rights to cooperation under the Service Agreement. See Paul v. Bank of
Am. Corp., No. 09-CV-1932 (ENV)(JMA), 2011 WL 684083, at *6 (E.D.N.Y. Feb. 16, 2011) (“the implied
covenant of good faith will not be breached without some showing of intent to harm the other contracting
party or a reckless disregard of it”).
13
consistent with the duty of good faith and fair dealing necessarily depends upon the
facts of the particular case, and is ordinarily a question of fact to be determined by the
jury or other finder of fact.’” Id. The record in the present case is heavily fact-laden,
with disputes arising over numerous individual pieces of evidence and their import, each
contributing to this genuine issue of material fact. Because First Niagara and MBSI
each offer reasonable alternative and conflicting arguments as to whether termination
was proper, neither party is entitled to summary judgment on its breach of contract
claim, nor is either party entitled to summary judgment dismissing the claim against it.
2. Damages
First Niagara also challenges MBSI’s damages, which MBSI has divided into five
categories: (1) Monthly Fixed Service Fee (as set forth in the Service Agreement); (2)
the $20 per loan fee for loans over 500 each month (as set forth in the Service
Agreement); (3) vendor transaction fees; (4) revenue from third-party document provider
Wolters Kluwer; and (5) unpaid and/or unbilled invoices based on expectation of
continuing relationship.
(First Niagara’s Statement at ¶ 59 (citing MBSI’s Rule 26
Disclosures).)
a. General vs. Consequential Damages
First Niagara challenges the category three and four damages as consequential,
which it contends are not permitted under the Service Agreement. 7 Under New York
law, two types of damages may generally be pled in contract cases:
damages and (2) consequential damages.
7
(1) general
“A plaintiff is seeking general damages
First Niagara also challenges certain portions of the fifth category of damages that represent unbilled
work for which MBSI has stated it would not have charged First Niagara had their relationship continued.
(First Niagara’s Statement at ¶ 63.) First Niagara does not make a cogent argument as to how these
constitute consequential damages, and this portion of First Niagara’s motion is therefore denied.
14
when he tries to recover the value of the very performance promised.” Schonfeld v.
Hilliard, 218 F.3d 164, 175 (2d Cir. 2000) (internal quotation omitted). Consequential
damages “seek to compensate a [non-breaching party] for additional losses (other than
the value of the promised performance) that are incurred as a result of the [breaching
party]’s breach.” Id. at 175 (citation omitted).
Under the Service Agreement, both
parties explicitly waived certain categories of damages, including “indirect, special,
punitive, consequential, or incidental damages.” (Service Agreement at ¶ 13.) Such a
provision is generally enforceable under New York law, provided it is not a contract of
adhesion or otherwise in contravention of public policy. See Metro. Life Ins. Co. v.
Noble Lowndes Int’l, Inc., 84 N.Y.2d 430, 436, 643 N.E.2d 504, 507 (N.Y. 1994)).
Because MBSI makes no argument that the liability limitation is not enforceable, the
question is whether the damages that MBSI seeks are permitted under the limited terms
of the Service Agreement.
New York State’s highest court has delineated the issue of what constitutes
consequential damages as follows:
“The distinction at the heart of these cases is
whether the lost profits flowed directly from the contract itself or were, instead, the result
of a separate agreement with a nonparty.” Biotronik A.G. v. Conor Medsystems Ireland,
Ltd., 22 N.Y.3d 799, 808, 11 N.E.3d 676, 681 (N.Y. 2014).
The Second Circuit,
applying New York law, has similarly stated:
Lost profits are consequential damages when, as a result of the breach,
the non-breaching party suffers loss of profits on collateral business
arrangements. In the typical case, the ability of the non-breaching party to
operate his business, and thereby generate profits on collateral
transactions, is contingent on the performance of the primary contract.
When the breaching party does not perform, the non-breaching party’s
business is in some way hindered, and the profits from potential collateral
exchanges are “lost.”
15
Tractebel Energy Mktg., Inc., 487 F.3d at 109.
Put another way, “‘consequential
damages do not arise within the scope of the immediate buyer-seller transaction, but
rather stem from losses incurred by the non-breaching party in its dealings, often with
third parties . . .’” Roneker v. Kenworth Truck Co., 977 F. Supp. 237, 240 (W.D.N.Y.
1997) (quoting Petroleo Brasileiro, S. A., Petrobras v. Ameropan Oil Corp., 372 F. Supp.
503, 508 (E.D.N.Y. 1974)); see also Carco Grp., Inc. v. Maconachy, 383 F. App’x 73, 75
(2d Cir. 2010) (consequential damages “result when the non-breaching party’s ability to
profit from related transactions is hindered by the breach”).
The category three damages (vendor fees) and the category four damages
(Wolters Kluwer revenue) both arise from third-party transactions.
If the Service
Agreement had not been terminated, these fees would have been paid directly to MBSI
by the vendors and by Wolters Kluwer, not by First Niagara. (First Niagara’s Statement
at ¶ 60-61.) The Service Agreement does acknowledge that third-party vendors may be
necessary to performance of the contract. (See Service Agreement at 14 (“[MBSI]
agrees to have the following capabilities available . . . pursuant to the respective
responsibilities to be performed by [First Niagara] and by any third party vendor systems
[First Niagara] has requested [MBSI] to interface with.”).) However, neither the vendors
nor Wolters Kluwer are party to the Service Agreement, nor are the fees to be paid by
third parties specified by the Service Agreement or even referred to in it.
Although there is no bright-line rule stating that fees flowing from a third party
cannot constitute general or compensatory damages, such cases are rare. In Biotronik,
the New York Court of Appeals held that, because the plaintiff had paid the defendant
for a product at a price calculated as a percentage of the plaintiff’s net sales of the
16
product, the plaintiff’s lost profits resulting from the breach were general damages. Id.
at 808-10, 988 N.Y.S.2d 527, 11 N.E.3d 676. Thus, the court held, lost profits were
“clearly contemplated” under the parties’ contract. Id. at 808, 988 N.Y.S.2d 527, 11
N.E.3d 676.
But, unlike in Biotronik, the agreement here was not akin to a “joint
venture,” and there was no link between the payments First Niagara had agreed to pay
and any third-party payments. Instead, First Niagara stood to benefit from its customers
who originated loans, while MBSI would benefit from First Niagara (through the fees
identified as damage categories one and two) and separately from third parties through
collateral agreements.
The Service Agreement here is more akin to that in Compania Embotelladora Del
Pacifico, S.A. v. Pepsi Cola Co., where the plaintiff sought “to recover lost profits from
lost sales to third-parties that [were] not governed” by the parties’ contract. 650 F.
Supp. 2d 314, 322 (S.D.N.Y. 2009).
The court there held that the damages were
“properly characterized as consequential damages, because, as a result of [the
defendant]’s alleged breach, [plaintiff] suffered lost profits on collateral business
arrangements.” Id. See also In re Vivaro Corp., No. 12-13810, 2014 WL 486288 at *4
(Bankr. S.D.N.Y. Feb. 6, 2014) (characterizing as consequential damages plaintiff’s “lost
profits from unmade sales to third-parties in collateral transactions, none of which would
have been governed by the contract between” the parties). In the category three and
four damages, MBSI, like the plaintiffs in Compania Embotelladora and Vivaro Corp., is
essentially seeking lost profits on collateral business arrangements.
Under these circumstances, the loss of profits from third parties is not a “natural
and probable consequence” of the alleged breach of contract by First Niagara,
17
Biotronik, 22 N.Y.3d at 808, 988 N.Y.S.2d 527, but instead a form of consequential
damages, because it is “one step removed from the naked performance promised by
the defendant,” Schonfeld, 218 F.3d at 177. Because the Service Agreement precludes
indirect and consequential damages, First Niagara is entitled to judgment as a matter of
law on MBSI’s claims for damages arising from loss of vendor transaction fees and loss
of Wolters Kluwer revenue.
Accordingly, MBSI’s category three and four damage
claims are dismissed.
b. Avoided Costs
First Niagara further challenges MBSI’s damage calculation, contending that
because MBSI has failed to provide an exact amount of the costs it avoided due to the
termination of the Service Agreement, MBSI’s damages should be denied in their
entirety as speculative.
It is true that damages “must be not merely speculative,
possible, and imaginary,” and instead “must be reasonably certain and such only as
actually follow or may follow from the breach of the contract.” Tractebel Energy Mktg.,
Inc., 487 F.3d at 110 (emphasis in original, internal quotation omitted). But if MBSI is
able to prove a breach of contract with certainty, “and the only uncertainty is as to [the
amount of damages], there can rarely be good reason for refusing, on account of such
uncertainty, any damages whatever for the breach.”
omitted).
Id. at 110 (internal quotation
While acknowledging the leeway given to parties proving damages in a
breach of contract action, the Court also recognizes that “New York law does not
countenance damage awards based on speculation or conjecture.” Wolff & Munier, Inc.
v. Whiting-Turner Contracting Co., 946 F.2d 1003, 1010 (2d Cir. 1991) (internal
quotation and punctuation omitted).
18
In support of its argument, First Niagara points to Projects Management Co. v.
DynCorp International LLC, 584 F. App’x 121, 123 (4th Cir. 2014), in which the Fourth
Circuit affirmed the district court’s dismissal because plaintiff had “failed to prove its
damages to a reasonable certainty” and “[t]he only evidence that [plaintiff] produced
regarding the amount of [damages] was a conclusory affidavit.” 584 F. App’x 121, 123
(4th Cir. 2014). That is not the case here. Although First Niagara may not be satisfied
with the amount of evidence MBSI has provided as to damages, that information is not
so lacking as to require dismissal of all MBSI’s damages, and therefore of MBSI’s
counter-claim. MBSI has provided answers to interrogatories setting forth three areas
of avoided costs including bandwidth and software licensing and fees. (Docket No. 501, Exh. 4 to O’Brien Opp. Decl.) One of MBSI’s employees has also testified, during a
30(b)(6) deposition, that the exact amount of those fees is difficult to calculate because
First Niagara terminated the Service Agreement before final decisions were made as to
how the necessary software would be licensed. (Docket No. 50-1, Exh. 3 to O’Brien
Opp. Decl. at 61-63.) Based on this evidence, a reasonable jury could find in MBSI’s
favor.
“When an issue of fact as to the existence of recoverable damages is raised, a
[party seeking damages] must be given the opportunity to prove the amount of such
damages at trial in accordance with the requirements of New York law . . . .” V.S. Int’l,
S.A. v. Boyden World Corp., No. 90 CIV. 4091 (PKL), 1993 WL 59399, at *7 (S.D.N.Y.
Mar. 4, 1993). Because a genuine dispute as to the amount of MBSI’s damages exists,
summary judgment on damages is inappropriate.
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c. Incorrect Calculation of Damages
Finally, First Niagara argues that MBSI incorrectly calculated the category one
and two damages based on the terms of the Service Agreement. In accordance with
the terms of the Service Agreement, certain fees, including the damages that MBSI
claims in these categories, would not commence until “the first day of the month after
the first loan is closed and funded through the Mortgage Builder system.” (Service
Agreement at 14.) Because no loans were closed and funded through the software
prior to termination, First Niagara contends that the earliest date from which these
damages could be assessed is March 2012, after the termination. MBSI disputes this
and argues that, had First Niagara cooperated in good faith, the software could have
gone into use in September 2011. This dispute, again, presents a genuine issue of
material fact and cannot be resolved on a motion for summary judgment.
B.
Declaratory Judgment
MBSI has also moved for dismissal of First Niagara’s claim seeking a declaratory
judgment. The Declaratory Judgment Act (“DJA”) provides that “any court of the United
States . . . may declare the rights and other legal relations of any interested party
seeking such declaration, whether or not further relief is or could be sought.” 28 U.S.C.
§ 2201(a). “Courts have consistently interpreted this permissive language as a broad
grant of discretion to district courts to refuse to exercise jurisdiction over a declaratory
action that they would otherwise be empowered to hear.” Dow Jones & Co., Inc. v.
Harrods Ltd., 346 F.3d 357, 359 (2d Cir. 2003). “Declaratory relief is appropriate where
an actual controversy exists and a declaration would serve a useful purpose in clarifying
or settling the legal issues involved.” Am. Auto. Ins. Co. v. Advest, Inc., No. 08 CIV.
20
6488 (LAK), 2009 WL 3490060, at *1 (S.D.N.Y. Oct. 28, 2009) (internal quotation
omitted).
“However, where a declaratory judgment claim is redundant of a primary claim
raised by a party to a lawsuit, it is properly dismissed as duplicative,” including “claims
that simply mirror another party’s claims.” Gorfinkel v. Ralf Vayntrub, Invar Consulting
Ltd., No. 11-CV-5802, 2014 WL 4175914, at *6 (E.D.N.Y. Aug. 20, 2014); see also
Apple Records, Inc. v. Capitol Records, Inc., 137 A.D.2d 50, 54, 529 N.Y.S.2d 279 (1st
Dep’t 1988) (“A cause of action for a declaratory judgment is unnecessary and
inappropriate when the plaintiff has an adequate, alternative remedy in another form of
action, such as breach of contract.”). Moreover, declaratory judgment is inappropriate
where a party has already invoked its right to a coercive remedy. See Am. Auto. Ins.
Co., 2009 WL 3490060, at *1 (“Where, however, the dispute may be resolved in a direct
action for coercive relief, courts may dismiss the declaratory judgment complaint.”).
Accordingly, this Court dismisses First Niagara’s declaratory-judgment claim because it
is “unnecessary and inappropriate” in light of the fact that First Niagara has an adequate
alternative remedy in its breach-of-contract claim.
IV. CONCLUSION
For the foregoing reasons, First Niagara’s motion for summary judgment is
granted only as to the limitation of consequential damages. MBSI’s motion for summary
judgment is granted only as to the dismissal of First Niagara’s claim for declaratory
judgment.
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V. ORDERS
IT HEREBY IS ORDERED that Plaintiff’s Motion for Summary Judgment (Docket
No. 37) is GRANTED as to the limitation of Defendant’s damages and is otherwise
DENIED;
FURTHER, that Defendant’s Motion for Summary Judgment (Docket No. 38) is
GRANTED as to the dismissal of Plaintiff’s claim for declaratory judgment and is
otherwise DENIED.
SO ORDERED.
Dated: May 22, 2016
Buffalo, New York
/s/William M. Skretny
WILLIAM M. SKRETNY
United States District Judge
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