Frank Felix Associates, Ltd. v. Austin Drugs, Inc.

• Decision Date: 10 April 1997
• Docket Number: No. 630,D,630
• Parties: FRANK FELIX ASSOCIATES, LTD., Plaintiff-Appellant, v. AUSTIN DRUGS, INC., Defendant-Appellee. ocket 96-7604.
• Court: U.S. Court of Appeals — Second Circuit

Page 284

111 F.3d 284

FRANK FELIX ASSOCIATES, LTD., Plaintiff-Appellant, v. AUSTIN DRUGS, INC., Defendant-Appellee.

No. 630, Docket 96-7604.

United States Court of Appeals Second Circuit.

Argued Dec. 12, 1996.

Decided April 10, 1997.

Stephen R. Sugrue, New York City (Herriot, Coti & Sugrue, New York City, of counsel), for Plaintiff-Appellant.

James H. Allyn, New York City (Allyn & Fortuna, New York City, of counsel), for Defendant-Appellee.

Before CARDAMONE and PARKER, Circuit Judges, and WEXLER, Judge. ^*

PARKER, Circuit Judge:

Frank Felix Associates ("Felix") appeals from the judgment of the United States District Court for the Eastern District of New York (Thomas C. Platt, Judge ) awarding Felix damages of $10,250 for breach of a settlement agreement. Felix contends that upon breach of the settlement agreement by Austin Drugs, Inc. ("Austin"), Felix was entitled under New York General Obligations Law § 15-501(3) (McKinney 1989) to assert its pre-settlement claims. Finding no error, we affirm.

I. BACKGROUND

In the mid-1980s, Felix entered into an oral agreement with Interstate Cigar Company ("ICC"), the predecessor of Austin, to install computer systems on ICC's property. Unfortunately for Felix, ICC went bankrupt. In May of 1991, several investors, some of whom were formerly associated with ICC, bought Austin in the ICC bankruptcy proceedings. Austin was a subsidiary of ICC at the time of the purchase. Subsequent to the purchase of Austin, Austin had Felix install computer systems in Austin stores like those Felix previously installed in stores owned by ICC.

On May 20, 1992, one year after the bankruptcy proceedings, Felix sent Austin a memorandum claiming that Austin owed Felix $70,000 in arrearages under the ICC account incurred prior to the bankruptcy sale and $75,000 in arrearages incurred by Austin after May of 1991. After Felix learned that Austin planned to replace the computer system, Felix sent another memorandum to Austin on June 22, 1992, claiming an outstanding balance of over $462,000. Then the parties entered into settlement discussions.

Felix and Austin thereafter executed a written settlement agreement, wherein Austin agreed to pay Felix $50,000 as the amount owed for Austin's past use of the computer system, and agreed to return a tape drive and a high-speed printer. The settlement agreement provided that Austin had to meet these obligations by October 1, 1992, or Felix would renew its prior claims. Austin made the $50,000 payment and returned the printer promptly. However, it did not return the tape drive. When Austin failed to return the tape drive, Felix sent a renewed demand letter on October 22, 1992, claiming an outstanding balance of $412,000.

Austin requested that Felix send someone to remove the tape drive on or about the time Austin received Felix's October 22 letter. Austin indicated that it needed Felix's technical assistance to remove the device. However, Felix agreed to remove the tape drive only if Austin promised to pay Felix $250. Austin refused to pay Felix, but made clear that Felix could come by and pick up the device. Felix never attempted to retrieve it. Months later, after Consumer Value Stores ("CVS") bought out Austin, CVS scrapped the tape drive when it installed a new computer system in the former Austin stores.

Felix then brought this suit, asserting all of its pre-settlement demands. Claiming that the settlement agreement was no longer binding due to Austin's breach, Felix sought in excess of $800,000. After a bench trial, the district court concluded that Austin breached the settlement agreement but that the breach was not material. The court awarded Felix $10,000 in damages for Austin's use of the computer system one month beyond the date when it was supposed to return the tape drive under the settlement agreement, concluding that the tape drive allowed Austin to use the rest of the proprietary software provided in the pre-settlement leasing agreement between Felix and Austin. The court also awarded $250 in damages for the cost Felix would have incurred in retrieving the device. The court did not award any damages for Austin's use of the tape drive beyond the date when Austin asked Felix to remove the system. The court also did not award damages for the destruction of the tape drive, reasoning that the tape drive would not have been destroyed had Felix removed it from Austin's property when given the opportunity.

II. DISCUSSION

We agree with the district court that Austin plainly breached the settlement agreement by not returning the tape drive on or before October 1. We also agree that, in light of Austin's payment to Felix of $50,000 under the settlement agreement, Austin's return of the high-speed printer, and Austin's request that Felix remove the tape drive at the end of October, Austin's failure to return the tape drive on October 1 was not a material breach. Assuming, as appears appropriate, that the settlement agreement was an executory accord, we hold that New York law requires that an executory accord be materially breached before a party may sue based on its pre-settlement claims. Accordingly, Felix was not entitled to assert its pre-settlement claims.

A. Whether a Material Breach of the Accord Is Required

Assuming, as Felix argues, that the settlement agreement was an executory accord, under New York law an aggrieved party may elect to sue on the original obligation that is the subject of the accord in cases where the accord has not been performed. See Ellenbogen & Goldstein, P.C. v. Brandes, 226 A.D.2d 237, 641 N.Y.S.2d 28, 29 (1st Dep't 1996) (citing Denburg v. Parker Chapin Flattau & Klimpl, 82 N.Y.2d 375, 383, 604 N.Y.S.2d 900, 905, 624 N.E.2d 995, 1000 (1993)); Plant City Steel Corp. v. National Machinery Exch., Inc., 23 N.Y.2d 472, 478, 297 N.Y.S.2d 559, 562, 245 N.E.2d 213, 215 (1969). ¹ Under New York General Obligations Law § 15-501(3), "[i]f an executory accord is not performed according to its terms by one party, the other party shall be entitled either to assert his rights under the claim, cause of action, contract, [or] obligation ... which is the subject of the accord, or to assert his right under the accord."

New York law requires, as appellant stresses, that an executory accord be performed "according to its terms" if the obligee wishes to avoid the creditor's original claims. Id.; see also Albee Truck Inc. v. Halpin Fire Equip. Inc., 206 A.D.2d 789, 791, 615 N.Y.S.2d 118, 120 (3d Dep't 1994) (citing Denburg, 82 N.Y.2d at 383, 604 N.Y.S.2d at 905, 624 N.E.2d at 1000); American Bank & Trust Co. v. Koplik, 87 A.D.2d 351, 354, 451 N.Y.S.2d 426, 428 (1st Dep't 1982); Loblaw v. Wylie, 50 A.D.2d 4, 8, 375 N.Y.S.2d 706, 709-10 (4th Dep't 1975). However, the New York Court of Appeals has not addressed whether a non-material failure to perform an executory accord fully will allow a plaintiff to reinstate his prior claims, as neither Denburg nor Plant City Steel were confronted with the issue. While New York cases suggest that nothing less than full performance of an executory accord will bar suit on a creditor's original claims, each has involved substantial and material nonperformance by the obligee under the accord. See, e.g., Albee Truck Inc., 206 A.D.2d at 789, 615 N.Y.S.2d at 119 ("[t]he agreement was not implemented"); Koplik, 87 A.D.2d at 352-53, 451 N.Y.S.2d at 427 (defendant agreed to pay $50,000 but only paid $7,000); Loblaw, 50 A.D.2d at 6-8, 375 N.Y.S.2d at 708-09 (defendant did not attempt to satisfy $125,000 accord and allegedly transferred assets to defeat creditors).

Because no New York court has specifically addressed whether the breach of an executory accord must be material before a party to the accord can elect to sue on its original claims, it falls to this Court to predict how the New York Court of Appeals would interpret New York law on this point. See In re Joint Eastern & Southern Dist. New York Asbestos Lit., 897 F.2d 626, 636 (2d Cir.1990); Calvin Klein Ltd. v. Trylon Trucking Corp., 892 F.2d 191, 195 (2d Cir.1989). In this endeavor, we must consider "all the resources the highest court could use, including decisions reached in other jurisdictions." Francis v. INA Life Ins. Co., 809 F.2d 183, 185 (2d Cir.1987) (citations omitted).

Although New York General Obligations Law § 15-501(3) provides that an executory accord must be "performed according to its terms," not every breach, however insubstantial, will allow a plaintiff to disregard an executory accord and sue on its original claims. Such an interpretation could lead to absurd and inequitable results where, despite a debtor's substantial performance in reliance on an executory accord, the most trivial breach could revive a creditor's original claims. The creditor could obtain payment of a contested debt and, due to a minor breach of the accord, receive the windfall entitlement to reassert its pre-settlement claims. We do not believe New York courts would adopt such a view, especially in light of the difference in the treatment of executory accords under New York's General Obligations law and the treatment of executory accords under prior New York common law. Under modern New York law, executory accords, if in writing, are enforceable contracts. Therefore, based on ordinary contract principles, a non-material breach does not justify nonperformance by the other party.

Under New York common law, an executory accord was not an enforceable contract. Only full performance constituted satisfaction of the accord and extinguished the pre-existing debt. Denburg, 82 N.Y.2d at 384, 604 N.Y.S.2d at 906, 624 N.E.2d at 1001. In 1937, the New York legislature made executory accords binding contracts, provided that the promise is in writing and signed by the parties to be bound. Id.; General Obligations Law § 15-501(2). Accordingly, it seems appropriate to apply general contract principles to enforceable executory accords under modern New York law,...