Security Plans, Inc. v. Cuna Mutual Insurance Society
769 F.3d 807
2d Cir.2014Background
- This appeal concerns the implied covenant of good faith and fair dealing accompanying New York–law contracts in a corporate earnout dispute.
- Security Plans sold its book of business to CUNA Mutual in 2003 for $3 million upfront plus a potential earnout up to $2.2 million.
- Earnout calculations depended on three years of performance data and projected three more years, using premiums written and loss ratios.
- Two disputed factors lowered the earnout: (i) allegedly incorrect loss ratios due to reserve accounting; (ii) deductions of service fees paid to credit unions.
- The Asset Purchase Agreement capped service fees and granted CUNA Mutual broad discretion to operate the business and calculate the earnout; the district court granted summary judgment on some claims but not all, leading to this appeal.
- The district court ultimately granted summary judgment on the service-fee issue but held a triable question about the earnout calculation under the implied covenant; the court remanded for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Implied covenant breach from claim reserves. | Security Plans argues reserves were system‑wide errors distorting earnout. | CUNA Mutual asserts negligence, not arbitrariness; no arbitrary denial shown. | Triable issue; record supports potential arbitrariness in calculation. |
| Validity of excess service-fee deduction under contract. | Letter of April 10, 2002 promised not to deduct excess fees. | Final Asset Purchase Agreement controls; parol evidence barred; no promissory estoppel. | Summary judgment for defendant; parol evidence and promissory estoppel doctrines rejected. |
| Implied covenant scope with best-business-judgment clause. | Discretion to use best business judgment did not authorize arbitrary denial of revisions. | Business judgment rule ordinarily protects decisions absent arbitrariness; dispute over revisions remains. | Remand appropriate; triable issue whether failure to revise was arbitrary. |
Key Cases Cited
- Dalton v. Educ. Testing Serv., 87 N.Y.2d 384 (N.Y. 1995) (implied covenant applies to non-arbitrary exercise of discretion under contract)
- W.W.W. Assocs., Inc. v. Giancontieri, 77 N.Y.2d 157 (N.Y. 1990) (parol evidence rule; extrinsic evidence cannot alter clear written terms)
- Schron v. Troutman Sanders LLP, 20 N.Y.3d 430 (N.Y. 2013) (parol evidence and ambiguity considerations in contract interpretation)
- In re AMR Corp., 730 F.3d 88 (2d Cir. 2013) (application of contract interpretation and related evidentiary rules in bankruptcy context)
- Times Mirror Magazines, Inc. v. Field & Stream Licenses Co., 294 F.3d 383 (2d Cir. 2002) (contractual terms govern; cannot evade by covenant through implied terms)