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PNC Bank National Assn. v. Wolters Kluwer Financial Services, Inc.

United States District Court, S.D. New York

December 15, 2014

PNC BANK, NATIONAL ASS'N, successor by merger to NATIONAL CITY BANK, Plaintiff,

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[Copyrighted Material Omitted]

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For PNC Bank National Association, successor by merger to National City Bank, Plaintiff: Allen Molnar, PRO HAC VICE, Harris Beach PLLC, New York, NY; Brian Andrew Bender, Harris Beach, PLLC (NYC), New York, NY; Peri Avishai Berger, Brown Rudnick LLP (NYC), New York, NY; Ross B Hofherr, Jaffe & Asher LLP, New York, NY.

For Wolters Kluwer Financial Services, Inc., Defendant: Craig C. Martin, Matt D. Basil, PRO HAC VICE, Jenner & Block LLP, Chicago, IL; Paul B Rietema, Jenner & Block LLP (Chicago), Chicago, IL; Stephen Louis Ascher, Jenner & Block LLP (NYC), New York, NY.

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Paul A. Engelmayer, United States District Judge

In this diversity action, PNC Bank, National Association (" PNC" ) sues Wolters Kluwer Financial Services, Inc. (" WKFS" ) for, inter alia, breach of contract, based on the claim that PNC was harmed by the " misperformance" of a Secure Document Exchange (" SDX" ) system that PNC had licensed from WKFS. PNC alleges that in December 2010, it learned that SDX had failed to timely transmit copies of consumer loan disclosures that PNC was legally mandated to deliver to customers, that WKFS was responsible for this malfunction, which persisted until February 2011, and that, as a result, PNC's mortgage-related disclosures to more than 2,000 PNC customers were delayed.

Before the Court now are the parties' cross-motions for summary judgment. For the reasons that follow, the Court (1) denies PNC's motion for summary judgment on its breach of contract and breach of warranty claims, (2) grants WKFS's motion for summary judgment on all of PNC's other claims, i.e., its quasi-contract and non-contract claims, and (3) grants WKFS's motion for summary judgment as to the damages sought by PNC, on the grounds that the damages PNC has pursued to date are all consequential damages barred under the parties' agreements. The Court, however, grants PNC's motion to amend its Complaint to add a claim for general damages, seeking recoupment of the money that PNC paid WKFS under the parties' agreements, while granting WKFS's motion to re-open discovery to enable it to probe PNC's newly-added theory

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of such damages. In light of PNC's failure to seek such damages until after the close of the original discovery period, the Court further orders that WKFS's costs in pursuing this new avenue of discovery be shifted, in part, to PNC, on the terms specified herein.

I. Background[1]

A. The Parties

PNC is a federally chartered national banking association with its principal place of business in Pittsburgh, Pennsylvania. Joint 56.1 ¶ 1. In January 2010, PNC acquired National City Bank (" NCB" ), a federally chartered national banking association with its principal place of business in Cleveland, Ohio. Id. ¶ 2, 6. WKFS is a Delaware corporation, engaged in the business of providing information products and services, with its principal place of business in Minneapolis, Minnesota. Id. ¶ 3.

B. The MLSA and the SDX Schedule

This case involves a pair of agreements under which WKFS licensed a computer system to NCB (later PNC) to manage the bank's dissemination of legally required disclosures to persons who had applied for mortgages with the bank.

First, on September 25, 2009, WKFS and NCB entered into the Master License and Services Agreement (" MLSA" ), which contains the " sole and exclusive terms and conditions that . . . govern the rights, responsibilities, and obligations" of WKFS and NCB regarding the licensing of WKFS's services. Id. ¶ 4; MLSA 1, 5. Second, on December 29, 2009, WKFS and NCB entered into a related agreement, the " Secure Document Exchange with Paper Fulfillment Schedule" (" SDX Schedule" ), under which WKFS agreed to furnish NCB with " Secure Document Exchange (SDX) with Paper Fulfillment," a computer system that WKFS produces and licenses and which NCB would use to securely

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deliver loan documents to mortgage applicants. Joint 56.1 ¶ ¶ 5, 7, 44; SDX Schedule 1. On February 22, 2010, after PNC had acquired NCB, NCB assigned its interests in the two agreements to PNC. Joint 56.1 ¶ ¶ 4, 5. Because PNC succeeded to NCB's rights and obligations under the agreements, in describing their terms and operation, the Court henceforth refers to PNC where the agreements refer to NCB.

PNC and WKFS agree that the MLSA and SDX Schedule are valid and enforceable. Id. ¶ 32. Under the agreements, the parties defined SDX as " an outsourced electronic delivery system for initial disclosures and closing loan packages that will assist [PNC] in complying with federal and state laws and regulations concerning such electronic delivery of compliance documents." SDX Schedule 1. WKFS warranted that the SDX system would be " Operative at all times" while the agreements were in place, MLSA 19, with " Operative" defined to mean that the SDX system, in PNC's reasonable judgment, would perform in accordance with the specifications set out in the agreements and their attachments. Id. at 3. WKFS also warranted that the SDX system would meet or exceed " the performance levels and technical specifications" set out in the attached schedules. Id. at 7. Further, WKFS agreed to implement updates to SDX " as they [became] commercially available." SDX Schedule 10.

PNC, for its part, was to compensate WKFS for licensing SDX with Paper Fulfillment. Specifically, PNC was to pay for this service on a per-package basis. The cost of each electronic package that PNC uploaded to SDX for transmittal to a mortgage applicant would range from $0.04 to $4.50, depending on the package's size; the cost of each package that was to be transmitted in printed (hard-copy) form was to range from $0.89 to $4.55, depending on the number of pages. Id. at 3-4. WKFS was to invoice PNC at least monthly, and to set out the " [u]nit cost per item . . . for [SDX]." MLSA 14.

As to indemnification, the MLSA provided that:

WKFS will defend, indemnify, and hold harmless [PNC] . . . against all costs and expenses . . . arising from or in connection with a claim, suit, action, proceeding, or demand . . . brought against [PNC] by a third party . . . for . . . gross negligence or willful misconduct by WKFS or WKFS Personnel. [PNC] shall provide WKFS: (a) reasonably prompt written notice of the existence of such Claim or Expenses; [and] (b) control over the defense or settlement of any such Claim.

Id. at 22. But, the MLSA provided, in terms highly relevant here, that neither party would be liable for consequential damages:


Id. at 23 (capitalization and boldface in original).

C. Mechanics of SDX's Operation

SDX allowed WKFS's customers, such as PNC, to upload documents or " packages" to SDX electronically; these documents were encrypted, held on a secure server, and made available for online retrieval by third parties designated by

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WKFS's customer. Joint 56.1 ¶ 8. Here, the third parties were PNC's mortgage applicants. Through SDX with Paper Fulfillment, PNC transmitted various types of mortgage documents to applicants. Id. ¶ ¶ 41, 42, 43; see also SDX Schedule 1 (agreeing to provide SDX for delivery of " initial disclosures and closing loan packages that will assist [PNC] in complying with federal and state laws and regulations concerning such electronic delivery of compliance documents" ). For each package, PNC sent metadata to SDX containing document-specific delivery instructions, including, critically, how many days a package would be available electronically before being printed and mailed (the " day count" or " paper count" ). Joint 56.1 ¶ 21. PNC delivered this metadata to SDX through an IBM loan origination system that it licensed and used, known as " imPACT." Id. ¶ 26. imPACT, which maintained data related to mortgage applications and loans, generated and communicated to SDX the day count for each of PNC's timed packages. Id. ¶ ¶ 20, 21, 26, 27.

Mortgage applicant customers were able to retrieve packages online. However, such " [t]imed packages" or " eDisclosures" were retrievable online by customers for only a defined period of time; if they were not electronically retrieved by the end of that period, the package would " expire," or cease to be available electronically. Id. ¶ ¶ 10, 11. At that point, the document was " papered out," meaning that it was " forwarded to [WKFS]'s paper fulfillment center for printing and mailing." Id. ¶ 11; see also SDX Schedule 1 (" [I]f a borrower fail[ed] to open an eDisclosure delivered via SDX within the required timeframes, SDX [would] recall such eDisclosures at a selected daily cut-off time for SDX Paper Fulfillment processing." ).

When a timed package became available electronically, SDX sent an email to the intended recipient notifying him or her that the documents were available, with instructions on how to access them. Joint 56.1 ¶ 17. SDX also sent the recipient a series of reminder emails if he or she had failed to retrieve the documents; these were sent 24, 48, and/or 56 hours after the documents became available. Id. ¶ 18. SDX sent a final notification email to the recipient when a package had expired and was no longer available electronically. Id. ¶ 19. At this point, the package was forwarded to WKFS's fulfillment center for paper printing and mailing. Id. ¶ 11.

D. The Updates in 2010 to imPACT and SDX

On the night of October 17, 2010, IBM applied an update to imPACT entitled R14 (" R14 Update" ). Id. ¶ 31. This update did not affect how imPACT had previously calculated day counts; imPACT retained its prior methodology of calculating how many days a package would be electronically available prior to being papered out. Berger Decl., Ex. O, at 2; id, Ex. P, at 3.

WKFS, for its part, provided several updates to SDX, including one on July 26, 2010 (" Q2 Update" ). Id., Ex. U, at 4. After the release of the Q2 Update, SDX experienced " inconsistent performance," id. at 3, as it did not properly calculate holidays and weekends in its day count for package expiration. Basil Decl., Ex. 23, at 2. On October 18, 2010, WKFS, to address this situation, implemented the October 18, 2010 update (" Q3 Update" ), which excluded weekends and holidays in SDX's day count. Id.

E. Discovery of a Disclosure Delivery Defect

On December 23, 2010, PNC received a complaint from a borrower indicating that the borrower had received an expiration notification for a SDX package after the

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borrower's loan had already closed. Joint 56.1 ¶ 54. PNC had been required to provide that package of documents to the borrower before the loan had closed. Id. On February 23, 2011, PNC received a second, similar customer complaint, this time indicating that a disclosure package had been delivered later than required by federal and state laws and regulations. Id. ¶ 59.

PNC ultimately determined that more than 10,000 loans had been similarly affected. Berger Decl., Ex. Z, at 3. It ultimately issued refunds of residential mortgage settlement costs to 2,038 customers, including waivers of fees made at the time of closing. Joint 56.1 ¶ 64; Pl. 56.1 Response ¶ 81; Basil Decl., Ex. 10, at 5; Berger Decl., Ex. Z, at 3.

After receiving the December 23, 2010 complaint, PNC asked IBM to research why the documents had not been timely delivered (the " disclosure delivery defect" ) and thereafter to fix the problem. Joint 56.1 ¶ ¶ 55, 56. On January 7, 2011, IBM made a first attempt to implement a software patch to fix the defect. Basil Decl., Ex. 18, at 8. On February 15, 2011, after four prior failed attempts, IBM successfully implemented a fix to the defect. Id. at 3-4, 8. This patch changed the way that imPACT calculated day counts. Id. at 4; Pl. 56.1 Response ¶ 52. WKFS was not involved in implementing the patch. Basil Decl., Ex. 41, at 3. WKFS, however, was aware of the existence of a problem with respect to calculating day counts, Pl. 56.1 ¶ ¶ 20, 21, 22; Berger Decl., Ex. K, at 11-12, and on February 25, 2011, IBM informed WKFS that it had fixed the issue. Basil Decl., Ex. 20, at 1.

PNC, following investigation into the disclosure delivery defect, ultimately concluded that the coinciding software updates by IBM and WKFS on October 18, 2010 had together resulted in incompatible calculations of holidays and weekends for day counts. IBM's imPACT system included weekends and holidays in the day-count metadata, and then provided that day count to SDX, the WKFS product. Def. 56.1 ¶ 47; Berger Decl., Ex. P, at 3 (" IBM was including weekends and holidays in the days out calculation." ). But SDX's Q3 Update excluded weekends and holidays in its day-count calculation. Id. (" WKFS was not" including weekends and holidays in the day count.). This incongruity as to the calculation of day counts[2] meant that although PNC's documents were being uploaded to SDX, they were not expiring to be printed and mailed to PNC's customers in time to comply with PNC's regulatory requirements. Basil Decl., Ex. 16, at 3.

On March 10, 2011, PNC reported by email to IBM and WKFS its conclusion that the disclosure delivery defect had begun on October 18, 2010, that the problem resulted from a " mismatch" between IBM's and WKFS's day-count calculations, and that it did not result from IBM's R14 Update to imPACT, as PNC had previously believed. Berger Decl., Ex. P, at 3. PNC disputed that ...

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