A New York State trial court has granted summary judgment to New York Commercial Bank (successor to Atlantic Bank of New York) (“NYCB”), dismissing the counterclaim in its suit to enforce the terms of a line of credit and a term note. New York Commercial Bank v. Sato Construction Co. Inc., 2012 NY Slip Op 31465(U) (2012). Defendant’s counterclaim sought to hold the bank liable for profits lost as a result of the bank’s decision to deny further credit. According to the defendant Sato Construction Co., Inc. (“Sato”), the parties had developed a course of conduct of oral contract modifications that, over years, left Sato with a clear expectation that the oral modifications would be honored. The court rejected Sato’s counterclaim that NYCB’s failure to honor its oral promises had cost Sato $1 million in lost profits.


Sato allegedly had a long term relationship with NYCB, dating from 1988 and continuing to 2009. Over those years, NYCB provided Sato with numerous revolving lines of credit and issued term loans to Sato in various amounts and according to various repayment schedules. The two sides allegedly developed a course of business conduct that, after 2006, developed into a regular pattern of oral modifications. Sato alleged that from 2006 to 2009 it repaid each liability that it had to NYCB but, when needed, an NYCB loan officer would orally agree to modify or extend repayment terms. Once Sato had an oral modification, it would conform with the new terms, making payments when due, despite the absence of any written schedule. In this alleged ongoing course of conduct, months would pass after the parties agreed to their oral modification, during which no papers defining the loan terms existed. After several months, NYCB would send new written loan documents to Sato.

According to NYCB, there were four instances in 2007 and 2008 when the bank orally agreed to extend the terms of Sato’s various revolving lines of credit, allowing coverage gaps in the written documents to persist for months. These acknowledged gaps included two months from June to July 2007 for one revolving line of credit, three months from July to September 2008 for another, two months from November to December 2008 for another, and five months from July to December 2008 for yet another line of credit. After each gap, the oral agreements were resolved with executed, written documentation. In each case, according to NYCB, the original written terms of the revolving lines of credit had set forth clear and certain maturity dates and had granted to NYCB the right, in its sole discretion, to grant extensions. According to NYCB, it was entitled to grant the extensions regardless of whether Sato was in default under the terms of the revolving lines of credit.

Sato claimed that it relied on this relationship to maintain available credit terms that are essential to its ability to book new business. Without a valid, existing line of credit, Sato claimed a construction company could not qualify for performance bonds. Such bonds are frequently required by prospective clients, who may believe that performance bonds protect them from the danger that a contractor may become insolvent in the course of completing a project and be unable to finish. According to Sato, NYCB employees who dealt with Sato over the course of years in setting up the various lines of credit and term notes were well aware of the crucial importance that these sources of credit played in Sato’s business.

The Line of Credit Note

On September 30, 2008, NYCB extended to Sato a Line of Credit Promissory Note (the “LOC Note”) in the principle amount of $600,000. In the LOC Note, Sato covenanted to repay all amounts due by July 3, 2009, and agreed that NYCB had no obligation to extend the LOC Note beyond that date.

Even if Sato repaid the LOC Note in full by the due date, NYCB could choose not to extend additional credit, according to the LOC Note’s terms. The LOC Note also contained a strong “no waiver” clause. According to this express provision, NYCB’s failure to exercise its rights under the LOC Note, or delay in exercising those rights, did not operate as a waiver of those rights. The LOC Note also contained an express merger clause under which Sato and NYCB agreed that the LOC Note constituted the entire agreement between them regarding the line of credit. They further agreed that there could be no amendment or modification to the express terms of the LOC Note, and no waiver of any of the rights or obligations that it established for either party, without a writing that was signed by the bank. Even then, any waiver would be limited in its effect to only the specific instance and the specific purpose for which it was drafted.

The Business Installment Loan Promissory Note

Sato and NYCB also entered into a Business Installment Loan Promissory Note (the “Term Note”) in a principal amount of $400,000. The parties agreed in the Term Note that any failure by Sato to make a payment when due under the LOC Note would constitute a default under the Term Note and interest would accrue thereafter at a rate 5% higher than the initial rate. Also, if Sato were 5 days late with any payment, it would be required to pay a 5% penalty on the amount of the late payment. Like the LOC Note, the Term Note contained both an express merger clause indicating that the Term Note represented the entire agreement between the parties regarding its subject matter, and a non-waiver clause, indicating that any failure by NYCB to enforce any right would not serve as a waiver of that right or any other right that it had under the Term Note.

The LOC Note came due in July 2009, and Sato did not repay the obligation in full. According to Sato, in July 2009 NYCB orally agreed to extend both the LOC Note and the Term Note, as it had done many times in the past. In reliance on NYCB’s promise to extend, Sato claimed that it continued to make payments and to rely on the notes as a source of credit for performance bonds. However, in November of 2009, according to Sato, NYCB orally informed Sato that it was calling both the LOC Note and the Term Note due and that they would not be extended. In December 2009, NYCB gave Sato written notice that the notes would not be extended.

The Lawsuit

NYCB brought suit against Sato, raising two claims for breach of contract, one for the LOC Note and one for the Term Note. NYCB alleged that Sato defaulted under the LOC Note on July 3, 2009, the due date. NYCB sought recovery of $600,000 for the full principal amount of the LOC Note, as well as interest from November 6, 2009 at a rate of 5.25%, and with interest after March 6, 2010 of 8.25%. NYCB’s second cause of action alleged that when Sato failed to make payment on the LOC Note on July 3, 2009, it also defaulted under the Term Note. NYCB sought $324,553 on the Term Note plus interest at the standard rate from February 1, 2010 to March 5, 2010, and at the higher penalty interest rate thereafter.

Sato responded to NYCB’s suit by answering and counterclaiming. According to Sato’s counterclaim, Sato was entitled to rely on the parties’ course of conduct of making oral modifications and extensions to the terms of their notes and revolving lines of credit. Sato alleged that NYCB had no right to promise to extend the LOC Note and the Term Note and then change its mind. NYCB, Sato further alleged, was well aware of the damage that the loss of credit would do to Sato’s ability to book new business. Sato alleged that NYCB waited four months before deciding not to extend the LOC Note and the Term Note, a period during which Sato could have been looking for a new source of credit. As a result of NYCB’s alleged delay, Sato claimed that it was unable to acquire the credit that it needed for its performance bonds, and was therefore unable to book new business. Sato claimed that it suffered a 40% drop in gross revenue, and lost profits of at least $1,000,000, that it sought to recover from NYCB.

The Court’s Decision on Summary Judgment

NYCB moved for summary judgment on Sato’s counterclaim. According to NYCB, the counterclaim presented no justiciable issue of fact requiring trial, and was without legal merit.

In deciding the motion, the court first noted that a party seeking summary judgment must provide sufficient evidence to eliminate all issues of fact surrounding the claim. The court then explored New York public policy regarding contract claims, observing that lines of credit are subject to the same general principles as other kinds of written contracts and found several legal principles that prevented consideration of Sato’s course of conduct claim.

First, under New York law, a party who has signed an instrument that is in form a binding obligation and that is made for the accommodation of a bank, is estopped from enforcing an alleged oral agreement not to enforce the written contract. The court found that the Term Note and the LOC Note were such instruments, binding in form and made for the accommodation of a bank. Sato was therefore estopped from enforcing the alleged oral modifications.

Second, a contract that is complete, clear and unambiguous on its face must be enforced according to its written terms. Parol evidence — evidence that comes from outside the written contract and includes oral modifications and courses of conduct — generally is not admissible to vary a contact’s written terms. Parol evidence is only admissible if the party alleging the oral modification demonstrates that the contract is incomplete, unclear or ambiguous on its face. Sato had not alleged any ambiguity in the written contract. It had alleged only oral modifications that contradicted the written terms. Sato was therefore subject to the parol evidence rule, and evidence of a course of conduct or oral modifications was not admissible.

The court also looked to the terms of the contracts, and considered the express merger clauses and non-waiver clauses. The parties had executed the LOC Note and the Term Note after the last of their “gap” periods — when they operated outside of their written documentation — ended in December of 2008. The court found that the non-waiver clause specifically guaranteed NYCB’s right not to extend the LOC Note and the Term Note, even though it had not done so until November 2009, and denied Sato the right to rely on the parties’ previous course of conduct. The merger clauses prevented Sato from claiming that there was an oral extension of the credit terms.

The court concluded that Sato’s counterclaim contravened the express terms of the LOC Note and Term Note and the long-established contract interpretation principles of New York. The court granted NYCB’s motion and dismissed Sato’s counterclaim. Any party that relies on oral modifications that contradict the written terms of a contact takes a significant risk. Sato took that risk in this case, and would not be heard to complain of the consequences.