Liberty Bay Credit Union v. Open Solutions, Inc.
Liberty Bay Credit Union v. Open Solutions, Inc.
Opinion of the Court
MEMORANDUM AND ORDER ON THE PARTIES’ CROSS-MOTIONS FOR SUMMARY JUDGMENT
In February of 2007, Liberty Bay Credit Union (Liberty Bay), a Massachusetts chartered lending institution, hired I.A. Systems (IAS) to create a software interface that would allow it to import client member information into automated loan origination software. In February of 2011, Liberty Bay brought this lawsuit against Open Solutions, Inc. (Open Solutions), IAS’s successor-in-interest, alleging, inter alia,
The following material facts are not in dispute, or, where disputed, are taken in the light most favorable to the nonmoving party.. In 2006, Liberty Bay decided to automate its loan origination process to permit its customers to apply for and receive loan approvals online, and to allow it to price these loans using a risk-based pricing model.
Liberty Bay and IAS entered into an End User Product License Agreement (the Agreement) on February 16, 2007. The Agreement granted to Liberty Bay “a nonexclusive, non-transferable license to use the Product and any Enhancements to which End User is entitled.... ” Agreement § 2.1(i). “Product” was defined to mean “StreamLend Velocity loan origination software programs in machine readable code, together with the options and modules set forth in Schedule I.” Id. § 1.1(d). Schedule I identified the software features to be licensed and, under the heading “Interfaces,” listed the “XP Host Interface,” the bidirectional interface that was to import data from XP2 into Velocity and then upload data from Velocity to XP2. Id. Schedule I. The Agreement provided that
[i]n the event that [IAS] fails to make an interface that performs all of the functions contemplated [by the Agreement] on or before January 1, 2008, through no fault of End User or any Third Party that is engaged by End User to perform services or provide products, [End User] will have the option to cancel the project and receive a full refund or continue to move forward with the implementation of StreamLend Velocity.
Id. (Refund provision). IAS further warranted that “the product ... is free from any defects and will perform in accordance with the Documentation ... and will not fail or cease to operate or provide erroneous results.” Id. § 8.1.
The Agreement laid out specific obligations of the parties with regard to the development of the XP Interface. It stated that “IAS is responsible for developing, testing and implementing software program^) according to specifications provided by End User within the schedule mutually agreed to by IAS and End User.” Id. Schedule III, Section C; see also id. § 6.5(b). Liberty Bay, for its part, was to provide “facilities, specifications, support and testing to allow IAS to develop the required interfaces,” id. § 6.5(a), including
Upon execution of the Agreement, Liberty Bay paid an initial deposit of $113,733.00, equal to 50% of the “Lending Solution Total.”
On December 26, 2007, Open Solutions sent to an email to Liberty Bay listing the tasks that Liberty Bay needed to complete in January and February if Velocity was to be up and running by the April go-live date. As of the end of February, Liberty Bay had failed to complete the scheduled tasks. Open Solutions also sent Liberty Bay a questionnaire in January seeking the specifications required to build the XP Interface. When in March, Open Solutions had not been provided the specifications, it sent Liberty Bay a revised project plan with a deferred go-live date of July 1, 2008.
For reasons that are unclear (and disputed by the parties), the July go-live date was subsequently pushed back to December of 2008. Open Solutions meanwhile proceeded with the building of the XP Interface. To perform acceptance testing, Open Solutions required access to the APEX license keys that permitted the Liberty Bay server hosting Velocity to communicate with the server hosting Liberty Bay’s XP2 software. XP Systems, however, balked at providing Open Solutions with the APEX license keys before (and unless) Liberty Bay entered into a new sales quote agreement (which did not happen until October 3, 2008).
As the February date drew near, the XP Interface was still experiencing importing and uploading errors. Open Solutions spent most of March attempting to correct the flaws in the XP Interface. However, in early April of 2009, when Open Solutions attempted to demonstrate the supposedly perfected XP Interface for Liberty Bay’s president, it again crashed. Liberty Bay responded with a letter stating that because Open Solutions “ha[d] failed to deliver a functional bi-directional interface as contemplated by the Agreement, [Liberty Bay] ha[d] not been able to use the SteamLend Velocity software to perform the functions that [Liberty Bay] entered into the Agreement to achieve.” Pl.’s Ex. 20. Invoking the Agreement’s Refund provision, Liberty Bay demanded the return of its down payment. In reply, Open Solutions contended that the delays in implementation of the XP Interface had been caused “by Liberty Bay and/or XP [Systems], Liberty Bay’s third party.” Def.’s Ex. V. Open Solutions refused to refund the deposit and sought Liberty Bay’s “cooperation so that [Open Solutions] may successfully implement the interface.” Id.
Despite the seeming finality of its April 6, 2009 letter, Liberty Bay continued to collaborate with Open Solutions throughout the remainder of 2009. In September of that year, Open Solutions conducted the End User Training for Liberty Bay employees in anticipation of the system going live. However, the XP Interface continued to operate erratically, if at all. Open Solutions blames the glitches on the XP Systems software, and XP Systems’ failure to make a patch available before October of 2009. But even then, the XP Interface continued to generate errors. (Open Solutions concedes as much, but argues that the errors were not significant or material).
In January of 2010, with the go-live date now postponed until March, the test server at Liberty Bay crashed. The server was beyond repair, and certain data, including the tweaked Velocity, was lost. Liberty Bay did not have a backup of the data, and the only compilation Open Solutions had available was more than a year old and did not include the customizations and enhancements that had been made during 2009.
In May of 2010, Open Solutions sent Liberty Bay a demand letter stating that it would not resume work without payment of some or all of the monies that Open Solutions claimed were due under the Agreement. Open Solutions contends that shortly after the January server crash, Liberty Bay informed its employees that the project was dead, although it did not formally communicate that decision to Open Solutions until November of 2010, when it sent a letter “re-stating and redeliver[ing]” its April 6, 2009 letter terminating the Agreement. Def.’s Ex. DD.
DISCUSSION
Summary judgment is appropriate “if the movant shows that there is no genuine dispute as to any material fact and the
Breach of Contract
Liberty Bay contends that it is entitled to a refund of the monies it paid because Open Solutions failed to provide an integrated product successfully implementing a system of automated loan approval and risk-based mortgage pricing. It also seeks damages for breach of contract based on Open Solutions’ failure to satisfy the Agreement’s express warranty and its concomitant obligation to implement the XP Interface. Opens Solutions counters with its own claim for breach of contract based on Liberty Bay’s refusal to pay the remaining installments under the Agreement. In this regard, Open Solutions argues that: (1) Liberty Bay waived any right that it may have had under the Agreement to demand performance by January 1, 2008; (2) even if the January of 2008 deadline had not been waived by Liberty Bay, the demand for a refund is contractually barred because Liberty Bay and XP Systems were at least partially responsible for the delay; and (3) the Refund provision of the Agreement on which Liberty Bay relies was merely an “option” that Liberty Bay forfeited when it chose to go forward with the project.
Open Solutions’ waiver argument is correct to this extent: by failing to provide the XP System specifications and the transactions instructions within the time frame set out in the Agreement and by tacitly acquiescing in the serial delays of the go-live date, Liberty Bay waived its right to demand performance by the originally agreed date of January 1, 2008.
It is a settled principle of law that the time for performance required by a contract may be extended by subsequent agreement of the parties or may be implied from their acts. See Fundamental Portfolio Advisors v. Tocqueville Asset Mgmt., 7 N.Y.3d 96, 817 N.Y.S.2d 606, 850 N.E.2d 653, 658 (2006). Liberty Bay’s decision to continue working with Open Solutions after the January 1, 2008 deadline expired constituted an election by Liberty Bay to extend the time for Open Solutions to perform. But while the length of that extension was not specified, it was not indefinite. Liberty Bay’s April 9, 2009 termination letter effectively served notice that its waiver of the deadline was being withdrawn. See Island Estates Mgmt., Inc. v. MBA-Manorhaven, LLC, 21 Misc.3d 1121(A), 2008 WL 4700416, at *8 (N.Y.Sup.Ct. Oct. 10, 2008). From that point forward, Liberty Bay was obligated to allow Open Solutions a reasonable amount of time, and no more, for completion of performance under the remaining terms of the Agreement. Id.; see also Nassau Trust Co. v. Montrose Concrete Prods. Corp., 56 N.Y.2d 175, 451 N.Y.S.2d 663, 436 N.E.2d 1265, 1270 (1982) (“A waiver ... can ... be withdrawn, provided the party whose performance has been waived is given notice of the withdrawal and a reasonable time after notice within which to perform.” (citation omitted)).
The court concludes as a matter of law that Open Solutions exceeded any reason^ able allowance of additional time to perform when it failed to meet the final go-live date in March of 2010. Open Solutions had agreed to that date, indicating its commitment to have the interface ready no later than March. It was not to be.
Nor is the court persuaded that Liberty Bay forever forfeited its right to seek a refund by attempting to salvage the project despite the lapse of the January 1,
Responding to Liberty Bay’s claim that Open Solutions breached the terms of the express warranty and its obligation to implement the XP Interface, Open Solutions first objects that these claims are not properly before the court because Liberty Bay failed to include them in the Complaint. It argues that the only portion of the Agreement that is referenced in the Complaint is the Refund provision. See Compl. ¶ 9. Open Solutions’ reading of the Complaint, however, is unduly selective. The Complaint more broadly alleges that Open Solutions failed to provide a functioning integrated product and that this failure justified the demand for a refund. See Compl. ¶¶ 6, 11, 14, 15, 23. Moreover, in its prayer for relief, the Complaint expressly states that Liberty Bay is seeking both “a full refund ... [and] compensation for its damages.” Compl. ¶ 18. To perfect its breach of contract claim, Liberty Bay was not obligated to incant the word “warranty” or regurgitate the exact wording of the breached provision of the Agreement.
Open Solutions next argues that even if properly pled, Liberty Bay’s breach of contract claims fail because any nonperformance on its part was excused by Liberty Bay’s failure to pay the more than $430,000 in annual maintenance, support, and other services that Open Solutions claims is due, and that it should have summary judgment on this issue. To this extent Open Solutions is correct: Liberty Bay’s argument that it was excused from making additional installments because the project never went live is not supported by the plain language of the Agreement. It clearly contemplated that payments would come due prior to the go-live date. Be that as it may, Open Solutions, like Liberty Bay, gave its tacit approval to the ex
Open Solutions finally asserts that excuse or not, “Liberty Bay has no basis to claim that Open Solutions ever breached any of its contractual obligations.” Def.’s Opp’n at 2. What Open Solutions has in mind is an elaborate argument that the warranty applies only to “the product,” Agreement § 8.1, the definition of which does not include the XP Interface, see Agreement Schedule I.A (separately listing “Licensing” and “Interfaces”); that even if the warranty was construed to include the XP Interface, errors occurring during its testing cannot logically amount to a breach of that warranty; and that “errors” occurring during the testing phase do not amount to “defects” as that term is ordinarily understood (it is not clear by whom).
The arguments on these points, whether interesting or not, are academic because however many were the provisions of the Agreement breached by Open Solutions, Liberty Bay’s recovery is limited to a refund of monies paid. Liberty Bay’s claim for “lost profits” and “lost employee time” fails under the longstanding rule that limits contract recovery to direct damages save in those instances in which liability for consequential damages is contemplated by the parties (or should reasonably have been so) at the time the contract was entered. See Hadley v. Baxendale, 9 Ex. 341, 354, 156 Eng. Rep. 145, 151 (1854). In this case, consequential damages are
The Agreement contains an express provision providing that Liberty Bay’s “exclusive remedy for material breach of the limited warranty ... shall be the total amount of fees paid by [Liberty Bay] pursuant to this agreement.” Agreement § 9.1 (“End User Remedies”). The Agreement also provides that Open Solutions cannot be held liable to Liberty Bay for “incidental or consequential or any other damages whatsoever ... arising out of the use of the Product,” including “damages for loss of business ... or other pecuniary loss.” Id. § 9.2 (“Consequential Damages”). To be sure, the End User Remedies provision does not apply to damages arising from the separately alleged breach of the obligation to implement the interface. Nor would the Consequential Damages provision limiting Open Solutions’ liability related to the functioning or “use” of the product appear to insulate it from damages claims based on its failure to initially furnish the product. See PRO Net, LLC v. ACC TeleCom Corp., 294 A.D.2d 857, 741 N.Y.S.2d 795, 796 (N.Y.App.Div. 2002) (holding that “[a] provision limiting defendant’s liability for interruption or failure of service does not unambiguously apply to the alleged failure in the first instance to deliver the [telecommunications service] facilities within a commercially reasonable period”). The Refund provision, however, clearly does apply to the exclusion of all other remedies. See Matter of Westmoreland Coal Co. v. Entech, Inc., 100 N.Y.2d 352, 358, 763 N.Y.S.2d 525, 794 N.E.2d 667 (2003) (“A written contract will be read as a whole, and every part will be interpreted with reference to the whole .... ” (internal quotation marks and citation omitted)); see also DynCorp. v. GTE Corp., 215 F.Supp.2d 308, 317 (S.D.N.Y. 2002) (“Under New York law, sophisticated parties with equal bargaining power can agree to limit the liability that the other may recover from a breach of contract.”).
Moreover, it is highly doubtful that Liberty Bay would be able to recover damages for lost profits and lost employee time even if it was not contractually barred from doing so. “Lost profits” (as Liberty defines them) is the difference between the mortgage interest rates it actually charged its customers and the higher rates it claims it could have charged its less creditworthy members during the period when the risk-based pricing system was to have been in effect. Putting aside a jury’s likely revulsion at a demand for damages based on Liberty Bay’s loss of the opportunity to fleece the hardest pressed of its customers, that the strategy would have worked is speculative at best (it is not clear how Liberty Bay would propose to prove that its less affluent customers are as gullible as the argument supposes).
Breach of the Implied Covenant of Good Faith and Fair Dealing
Liberty Bay’s claim for breach of the implied covenant of good faith and fair dealing is precluded by the controlling law.
ORDER
For the foregoing reasons, Open Solutions’ motion for summary judgment on its breach of contract claim is DENIED. Open Solutions’ motion for partial summary judgment on the issue of damages is ALLOWED. Liberty Bay’s motion for summary judgment is ALLOWED with respect to its breach of contract claim based on Open Solutions’ refusal to refund the monies paid. The motion is otherwise DENIED. The parties will jointly file a proposed form of final judgment within ten (10) days of the date of this Order.
SO ORDERED.
. Liberty Bay's Complaint also contained claims for unjust enrichment and violations of Mass. Gen. Laws ch. 93A, § 11. Those claims were dismissed by order of the court on September 7, 2011. Dkt. # 26.
. Risk-based pricing is a methodology used in the mortgage lending industry to set interest rates by integrating the time value of money with factors predicting the probability of a borrower's default.
. The XP2 software manages Liberty Bay’s general ledger. It facilitates customer account activities, such as the opening and closing of accounts, the processing of deposits and withdrawals, tracking of balances, and servicing loans.
. The Agreement contained the following payment schedule:
Amount Value
$113,733 50% of the Lending Solution Total
$ 43,274 100% 1st Year Maintenance Fees
$ 90,986 40% of Lending Solution Total
$ 22,746 10% Balance
Agreement Schedule I. Each subsequent annual maintenance fee was to be “paid annually thirty (30) days prior to the maintenance effective date.” Id. Schedule II. The Agreement further provided that "any additional hardware, software, or service that is not included in the original agreement cost will require an 80% deposit prior to ordering
Due
Upon Signing of End User Product License Agreement
Upon Installation of Servers at Client Site
Upon Completion of Super User Training
Upon Completion of End User Training
and/or implementing, with the balance due upon delivery.” Id. Schedule I.
. Liberty Bay mildly disputes Open Solutions’ contention that access to the APEX license keys was somehow contingent on the execution of the sales quote agreement, but argues that, in any event, Open Solutions was un
. Open Solutions does not dispute the faulty performance of the XP Interface, but blames it on XP Systems' failure to provide it with all the information it needed to satisfactorily complete the coding.
. The Agreement by its express terms is governed by New York law.
. Liberty Bay denies that its own failure to perform could be found to have contributed to the delay. The court disagrees.
. Open Solutions' contention that it was fully prepared to go live as early as January of 2010 is not supported by the undisputed record of subsequent events and is contradicted by Open Solutions' argument that Liberty Bay was itself at least partially at fault for the system’s continuing failures.
. Open Solutions’ reliance on Brady v. Lynes, 2008 WL 2276518 (S.D.N.Y. June 2, 2008), in support of its argument that the breach of warranty claim was insufficiently pled is unavailing. In Brady, the court dismissed a breach of warranty claim where the complaint failed to plead the existence of any agreement or duty that could form the basis of a warranty. See id. at *3, *11-12. Brady has no application here, where the Complaint is based on an Agreement that contains an express warranty provision.
. Open Solutions also contends that Liberty Bay failed to provide adequate notice of the alleged breach of warranty as required by the New York Uniform Commercial Code, N.Y. U.C.C. § 2-607(3)(a). Even assuming that the U.C.C. applies (I do not believe that it does, see Triangle Underwriters, Inc. v. Honeywell, Inc., 604 F.2d 737, 742-743 (2d Cir. 1979) ("A contract is for services rather than sale when service predominates and the sale of items is incidental.” (internal quotation marks and citation omitted))), Open Solutions cannot credibly claim that it was unaware that Liberty Bay found the work unsatisfactory when it repeatedly put Open Solutions back to the task of correcting the errors uncovered during the testing.
. It would seem self-evident that Liberty Bay did not have need of Velocity to charge borrowers higher interest rates, as all the software did was mechanically apply decision variables supplied by the bank to loan applications, something that could have been done (although perhaps not as quickly) by employees armed with pencils and hand calculators.
. Liberty Bay's “lost employee time” damages claim merits even shorter shrift. Liberty Bay calculates this "loss” as an estimate of the time that six of its employees spent working on the Velocity project. Liberty Bay admits, however, that it would have paid these employees’ salaries whatever assignment they were given during the relevant period.
. Open Solutions agrees in its opposition to Liberty Bay’s claim. Def.’s Mot. at 18. Under the well-established legal principle that what is good for the gander is good for the goose, Open Solutions’ reciprocal good faith claim against Liberty Bay will also be dismissed.
. In its response to Open Solutions’ motion for summary judgment on this count, Liberty Bay asserts that Open Solutions’ "attempt to collect interest on a good faith dispute between the parties” provides an independent basis for the implied covenant claim. PL's Opp’n at 18. This allegation is nowhere found in Liberty Bay's Complaint and will not be supplied by the court.
Reference
- Full Case Name
- LIBERTY BAY CREDIT UNION, and Counterclaim v. OPEN SOLUTIONS, INC., and Counterclaimant
- Status
- Published