Key Intern. Mfg. Inc. v. Stillman

• Decision Date: 15 October 1984
• Citation: 480 N.Y.S.2d 528,103 A.D.2d 475
• Parties: , 39 UCC Rep.Serv. 1406 KEY INTERNATIONAL MANUFACTURING, INC., Plaintiff-Respondent, v. Irwin STILLMAN, appellant, et al., Defendant-Respondent.
• Court: New York Supreme Court — Appellate Division

Page 528

480 N.Y.S.2d 528

103 A.D.2d 475, 39 UCC Rep.Serv. 1406

KEY INTERNATIONAL MANUFACTURING, INC., Plaintiff-Respondent, v. Irwin STILLMAN, appellant, et al., Defendant-Respondent.

Supreme Court, Appellate Division,

Second Department.

Oct. 15, 1984.

Suozzi, English & Cianciulli, P.C., Mineola (Joseph A. Suozzi, Brian Michael Seltzer Mineola, and Kenneth L. Gartner, New York City, of counsel), for appellant.

Shaw, Goldman, Licitra, Levine & Weinberg, P.C., Garden City (J. Stanley Shaw and Jesse I. Levine, Garden City, of counsel), for plaintiff-respondent.

Before TITONE, J.P., and GIBBONS, O'CONNOR and RUBIN, JJ.

TITONE, Justice Presiding.

This case involves a complex commercial transaction entered into by two sophisticated businessmen. At issue is the enforceability of an acceleration clause contained in the contract. We hold the plaintiff to the consequences of its bargain.

In 1981, appellant Stillman sold certain real property to plaintiff. Two million dollars of the total purchase price was deferred, on terms, until July 31, 1991. Stillman was given four $500,000 notes payable on that date, secured by means of letters of credit, to be drawn on by Stillman in the event of default in payment. Each note was to bear 6% per annum interest, payable on the first of each month.

It appears that while the notes had a 10-year duration, the letters of credit could be obtained for only a single year and would have to be renewed annually. The parties accordingly agreed that the letters of credit would expire on July 31 of each year and that plaintiff would obtain replacements on or before the proceeding June 30th, i.e., a full month before the expiration date. The agreement also provided that plaintiff was to have a 15-day grace period in which to cure any failure to deliver the new letters of credit and, in the event of such a default, Stillman could accelerate the due dates of all of the notes and receive payment of the accelerated debt by drawing on the expiring letters of credit before they lapsed. The notes bore such a legend and there was no requirement that Stillman give notice before he exercised that option.

In 1982, plaintiff failed to deliver the new letters of credit by the end of the contractual grace period. On July 19, therefore, Stillman presented the proper documentation to defendant Manufacturers Hanover Trust Company, the issuing bank, and the next day received four bank checks, each in the sum of $500,000, and endorsed these checks over to his broker in payment for his purchases of Treasury Bills. Before the checks cleared, however, plaintiff obtained an ex parte order preventing the bank from honoring them and commenced this action.

On cross motions, Special Term relieved plaintiff of its default under the contract, finding that Stillman had exploited "a technical breach relating to a pure collateral matter". We disagree and reverse.

Acceleration clauses are quite common and are generally enforced according to their terms (e.g., Fifty States Mgt. Corp. v. Pioneer Auto Parks, 46 N.Y.2d 573, 577, 415 N.Y.S.2d 800, 389 N.E.2d 113; Conditioner Leasing Corp. v. Sternmor Realty Corp., 17 N.Y.2d 1, 266 N.Y.S.2d 801, 213 N.E.2d 884; see Mandel, The Preparation of Commercial Agreements p. 57). It is only "in rare cases" that the clause will be denied enforcement under equitable principles (Fifty States Mgt. Corp. v. Pioneer Auto Parks, supra, 46 N.Y.2d p. 577, 415 N.Y.S.2d 800, 389 N.E.2d 113). As the Court of Appeals has noted, "some element of fraud, exploitive overreaching or unconscionable conduct * * * to exploit a technical breach, there is no warrant, either in law or equity, for a court to refuse enforcement of the agreement of the parties" (Fifty States Mgt. Corp. v. Pioneer Auto Parks, supra, p. 577, 415 N.Y.S.2d 800, 389 N.E.2d 113).

This is not one of those "rare cases". The parties are sophisticated entrepreneurs. Plaintiff does not claim that it was misled by Stillman or that it failed to take any action based upon representations made by him (cf. Abel v. Paterno, 245 App.Div. 285, 291, 281 N.Y.S. 58). Since the contract did not provide for notice, the fact that Stillman did not give notice is irrelevant (see Albertina Realty Co. v. Rosbro Realty Corp., 258 N.Y. 472, 475- 476, 180 N.E. 176). Not having followed a leading commentator's blunt advice "never" to enter into a contract containing an acceleration clause "without adding a provision requiring prior written notice of default and opportunity to cure the default within a stated grace period" lest "an unintentional default * * * prove disastrous" (Mandel, op. cit., p. 57, emphasis supplied), plaintiff is hardly in a position to urge that its absence warrants a modification of the parties' bargained for agreement. This is particularly so here as Stillman made a substantial financial commitment in reliance upon the acceleration provision (see First Nat. Stores v. Yellowstone Shopping Center, 21 N.Y.2d 630, 637-638, 290 N.Y.S.2d 721, 237 N.E.2d 868) and the plaintiff has suffered no forfeiture (Albertina Realty Co. v. Rosbro Realty Corp., supra; see, also, Ferlazzo v. Riley, 278 N.Y. 289, 292, 16 N.E.2d 286).

Nor can plaintiff's breach be viewed as trival or inconsequential. The obligation to make timely replacement of the letters of credit was an essential component of the agreement and the acceleration provision was the subject of extensive give and take negotiations. It was obviously designed to protect Stillman by giving him a sufficient period of time to draw on the expiring letters of credit in the event of a default. Furthermore, it has been held that the doctrine of insubstantial or de minimis default has no application in measuring performance of the terms of commercial paper (Stream v. CBK Agronomics, 79 Misc.2d 607, 609, 361 N.Y.S.2d 110, mod. on other grounds 48 A.D.2d 637, 368 N.Y.S.2d 20).

We simply cannot accept Special Term's suggestion that holding the plaintiff to the consequences of its bargain constitutes an "oppressive result". Payment in accordance with contractual terms, in and of itself, does not constitute an injustice (Brainerd Mfg. Co. v. Dewey Garden Lanes, 78 A.D.2d 365, 367, 435 N.Y.S.2d 417, app. dsmd. 53 N.Y.2d 701, 439 N.Y.S.2d 109, 421 N.E.2d 504). As we noted in McVey v. Simone, 73 A.D.2d 959, 960, 424 N.Y.S.2d 265, equity may not "reach out to find that a party has substantially complied with the terms of an option clause when he has not, or to rewrite the clause to suit one of the parties. A failure of the magnitude of this plaintiff's is only venial if the other party to the contract is willing to forgive it. While, by its nature, equitable right must always depend upon the facts of a particular case, under the circumstances here prevailing the power of equity should not intervene. Substantial noncompliance with the terms of an option clause cannot be rewarded by a judicial forgiveness that redounds to the detriment of the other party to the contract".

That the result may be harsh to plaintiff is of no moment. "court of equity may not relieve a defaulting debtor from the consequences of his act merely because the results are harsh" (Shell Oil Co. v. McGraw, 48 A.D.2d 220, 222, 368 N.Y.S.2d 610 app. dsmd. 40 N.Y.2d 918 ). Sympathy cannot be permitted to undermine the stability of contractual obligations (First Nat. Stores v. Yellowstone Shopping Center, 21 N.Y.2d 630, 637-638, 290 N.Y.S.2d 721, 237 N.E.2d 868, supra; Jamaica Sav. Bank v. Cohan, 36 A.D.2d 743, 744, 320 N.Y.S.2d 471).

Moreover, it would appear that plaintiff's efforts to obtain equitable relief came too late (cf. Naum v. Naum Bros., 90 A.D.2d 960, 456 N.Y.S.2d 551, mot. for lv. to app. den. 58 N.Y.2d 606, 460 N.Y.S.2d 1025, 447 N.E.2d 85; Colonie Block & Supply Co. v. Overmyer Co., 35 A.D.2d 897, 315 N.Y.S.2d 713; General Acceptance Corp. v. Masmo, Inc., 33 A.D.2d 57, 304 N.Y.S.2d 822). Stillman had already exercised his right to accelerate and, therefore, "absent a showing of fraud, mutual mistake or other acceptable basis of reformation" Special Term was without power to read into the agreement that plaintiff had additional time to cure its default and rescind Stillman's option to accelerate (First Nat. Stores v. Yellowstone Shopping Center, 21 N.Y.2d 630, 637, 290 N.Y.S.2d 721, 237 N.E.2d 868, supra; see First Commercial Bank v. Gotham Originals, 101 A.D.2d 790, 791, 476 N.Y.S.2d 835; Mann Theatres Corp. of Cal. v. Mid-Island Shopping Plaza Co., 94 A.D.2d 466, 475-477, 464 N.Y.S.2d 793, affd 62 N.Y.2d 930, 479 N.Y.S.2d 913, 468 N.E.2d 51).

Finally, we would also note that it was improper for Special Term to have restrained the bank from paying the proceeds of its cashier's checks. Such a check is the primary obligation of the bank and is accepted upon its issuance (Dziurak v. Chase Manhattan Bank, 44 N.Y.2d 776, 777, 406 N.Y.S.2d 30, 377 N.E.2d 474). Thus, pursuant to section 4-303 (subd. par. ) of the Uniform Commercial Code, legal process cannot terminate a bank's duty to pay such an instrument (Florida Frozen Foods v. National Bank & Trust Co., 81 A.D.2d 978, 979, 439 N.Y.S.2d 771, mot. for lv. to app. den. 55 N.Y.2d 601, 446 N.Y.S.2d 1024, 431 N.E.2d 309; Kaufman v. Chase Manhattan Bank, Nat. Assoc., 370 F.Supp. 276, 278; see, also, First Commercial Bank v. Gotham Originals, 101 A.D.2d 790, 476 N.Y.S.2d 835, supra ). Indeed, we cannot perceive why the bank has failed to object to the imposition of restraint.

Similarly, inasmuch as the only damage to the plaintiff was monetary and no fraud was involved, there would have been no basis to enjoin payment of the letters of credit (Uniform Commercial Code, § 5-114; Sperry Int. Trade v. Government of Israel, 670 F.2d 8 (2 Cir.1982); KMW Int. v. Chase Manhattan Bank, N.A., 606 F.2d 10 (2 Cir.1979); Fertico Belgium, S.A. v. Phosphate Chems. Export Assn., 100 A.D.2d 165, 473 N.Y.S.2d 403; Mount Carmel Energy Corp. v. Marine Midland Bank, 82 A.D.2d 729, 439...