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Israel v. Chabra

March 26, 2009


The opinion of the court was delivered by: Graffeo, J.

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and subject to revision before publication in the Official Reports.

In this certified question case from the United States Court of Appeals for the Second Circuit, we are asked to determine whether General Obligations Law § 15-301(1) affects the interpretation and enforcement of a contract. We begin with the facts underlying the contract dispute.

Plaintiffs Michael and Steven Israel were formerly employed by AMC Computer Corporation. In the spring of 2000, AMC was in the process of merging with a third-party investor. Because plaintiffs a father and son were key employees, the investor sought assurances that they would remain with AMC for at least three years after the merger. On May 1, 2000, plaintiffs entered into separate but virtually identical three-year employment agreements with AMC. Defendant Surinder "Sonny" Chabra, the president of AMC, executed the contracts in his corporate capacity. In addition, Chabra signed a "Letter of Intent" agreeing that, if the merger went forward, "Steven and Michael Israel each will be entitled to a $2 million bonus payment, for past services rendered, to be paid by Sonny Chabra." The payments were to be made in equal monthly installments over the period covered by the employment contracts.

The employment agreements and the letter of intent were modified on July 31, 2000 in documents known as "Amendment No. 1 to Employment Agreement" and "Amendment No. 1 to Letter of Intent." The amendments reduced plaintiffs' bonuses to $1.75 million and transferred the obligation to make the payments from Sonny Chabra, in his personal capacity, to AMC. In the amended letter of intent, the parties further agreed that Chabra would personally guarantee the bonus payments and, about a month later, Chabra executed personal guarantees requiring him to cover any default upon 60 days notice of AMC's failure to make an installment payment to either of the Israels. The guarantees stated that Chabra's liability was "absolute and unconditional" regardless of "any change in the time, manner or place of payment" (a provision referred to as the "advance consent clause") or of "any rescission, waiver, or modification of any of the terms or provisions of the Employment Agreement." The last sentence of the guarantees (referred to as "the writing requirement") provided: "References to the Employment Agreement shall mean the Employment Agreement immediately after the execution of Amendment No. 1 and shall not be affected by subsequent amendments to the Employment Agreement unless Guarantor has agreed in writing to such amendments."

The merger occurred on August 30, 2000 and, under the amended agreements, plaintiffs began to receive bonus payments later that year. Over the next two and a half years, AMC failed to make certain installment payments, causing plaintiffs to issue default notices to AMC and Chabra. To resolve the disputes over the missed payments, AMC entered into a "Second Amendment to Employment Agreement" with each plaintiff that included a new payment schedule for the balances due on the bonuses. The parties also agreed that Chabra's personal guarantees would remain in effect. Chabra signed these amendments as President of AMC but not in his personal capacity.

AMC made some payments under the new schedule but ultimately ceased making any payments, prompting plaintiffs to forward default notices to AMC and Chabra. After an unsuccessful effort to arbitrate, plaintiffs pursued this action in the United States District Court for the Southern District of New York seeking enforcement of the Chabra guarantees. The parties cross-moved for summary judgment and the District Court granted judgment in favor of plaintiffs, holding that Chabra was personally obligated to pay the remaining balances on the bonus payments.

On appeal, the Second Circuit disagreed with the District Court's analysis in several respects (Israel v Chabra, 537 F3d 86 [2d Cir 2008]). Relevant to this appeal, since Chabra had signed the second amendment documents only in his capacity as President of AMC, the Second Circuit rejected the District Court's finding that he was personally bound by the new payment schedule. The Court further reasoned that plaintiffs' failure to send default notices when payments were not made under the prior schedule might preclude recovery of some installments.

Focusing on the language in the Guaranty documents, the Second Circuit viewed the advance consent clause as an agreement by Chabra to be bound by subsequent changes in the "time, manner or place of payment." But the Court found this provision irreconcilable with the writing requirement, construing the latter to preclude the enforcement of unsigned modifications of the employment agreement which, in light of Chabra's failure to sign in his personal capacity, included the revised payment schedule. The Court interpreted New York law to require that when two provisions in a contract conflict, the provision that appears earliest in the contract should be given effect. In this case, that would mean that the advance consent clause would govern. But the Second Circuit was concerned that New York General Obligations Law § 15-301(1) a statute that provides for the enforcement of "no oral modification" clauses in contracts might require that the writing requirement supersede the advance consent clause. Thus, the Second Circuit certified the following question to us:

"Does New York General Obligations Law § 15-301(1) abrogate, in the case of a contract where the second of two irreconcilable provisions requires that any modifications to the agreement be made in writing, the common law rule that where two contractual provisions are irreconcilable, the one appearing first in the contract is to be given effect rather than the one appearing subsequent?" (id. at 102).

The Second Circuit authorized our Court "to expand, reformulate, or modify this question" (id.) and we have accepted both the certification and the invitation to reframe the inquiry. We now reformulate the question to read:

Where the second of two conflicting provisions in a Guaranty requires that any modification to the agreement underlying the Guaranty be made in writing and signed by the guarantor, does New York General Obligations Law § 15-301(1) abrogate the common-law rules of contract interpretation that are traditionally used to determine which clause governs?

We answer this question in the ...

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