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Oral Modification of Mortgage Documents Insufficient to Support Breach of Contract Claim

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  • Posted on: Jul 18 2018

Last year, this Blog wrote about the basic principles of contract interpretation under New York law. (Here.) Much of that legal discussion sets the table for today’s article.

When parties enter into a contract, each assumes that the language in their agreement accurately memorializes their understandings and intentions. For this reason, when a dispute arises, the courts in New York look to the intent of the parties as expressed by the language they chose to put into their writing. Ashwood Capital, Inc. v. OTG Mgt., Inc., 99 A.D.3d 1 (1st Dept. 2012). A clear, complete document will be enforced according to its terms. Id. at 7.

When the parties have a dispute over the meaning of their contract, the court first asks if the contract contains any ambiguity. Id.  Since New York is a textual jurisdiction (where the courts look to the agreement itself to determine the meaning of the agreement), whether there is ambiguity “is determined by looking within the four corners of the document, not to outside sources.” Kass v. Kass, 91 N.Y.2d 554, 566 (1998). Thus, courts will examine the parties’ intentions as set forth in the agreement and seek to afford the language an interpretation that is sensible, practical, fair, and reasonable. Riverside S. Planning Corp. v. CRP/Extell Riverside, L.P., 13 N.Y.3d 398, 404 (2009); Abiele Contr. v. New York City School Constr. Auth., 91 N.Y.2d 1, 9-10 (1997); Brown Bros. Elec. Contr. v. Beam Constr. Corp., 41 N.Y.2d 397, 400 (1977).

A contract is not ambiguous if, on its face, it is definite and precise and reasonably susceptible to only one meaning. White v. Continental Cas. Co., 9 N.Y.3d 264, 267 (2007). The “parties cannot create ambiguity from whole cloth where none exists, because provisions are not ambiguous merely because the parties interpret them differently.” Universal Am. Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 25 N.Y.3d 675, 680 (2015) (citation and internal quotation marks omitted).

“Whether or not a writing is ambiguous is a question of law to be resolved by the courts.” WWW Assocs., Inc. v Giancontieri, 77 N.Y.2d 157, 162 (1990). “[E]xtrinsic and parol evidence is not admissible to create an ambiguity in a written agreement which is complete and clear and unambiguous upon its face.” Id. at 163. This rule is especially applicable where the parties are commercially sophisticated, and their contract contains a merger clause. Schron v. Troutman Sanders LLP, 20 N.Y.3d 430, 436 (2013) (“where a contract contains a merger clause, a court is obliged to require full application of the parol evidence rule in order to bar the introduction of extrinsic evidence to vary or contradict the terms of the writing.”) (citation and quotation marks omitted).

Since a “contractual provision that is clear on its face must be enforced according to the plain meaning of its terms,” Bank of N.Y. Mellon v. WMC Mortg., LLC, 136 A.D.3d 1, 6 (1st Dept. 2015) (citation omitted), courts may not “add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing.” Id. (citations omitted). This is especially so “in commercial contracts negotiated at arm’s length by sophisticated, counseled business people.” Id.

These principles, along with those governing the enforceability of an oral agreement, were at play in Israel v. Signature Bank, 2018 N.Y. Slip Op. 31370 (Sup. Ct., N.Y. County June 26, 2018) (here). There, Justice Saliann Scarpulla ruled that the contract before her was clear, complete and unambiguous and, therefore, should have been enforced according to its terms.

Israel v. Signature Bank


The case arose from three loan agreements, whereby the Defendant, Signature Bank (“Signature”), agreed to loan the Plaintiff, Mosdot Shuva Israel (“MSI”), $23,000,000. The first loan was for $3,000,000, which was secured by MSI’s money market account with Signature (“$3 Million Loan”). The remaining two loans were for $15,000,000 (“$15 Million Note”) and $5,000,000 (“$5 Million Note”), which were memorialized in separate notes (collectively, “Notes”) and secured by separate mortgages (collectively, the “Mortgages”) (the Notes and Mortgages are collectively referred to as the “Mortgage Loans”). The Notes had a per annum interest rate of 6.5% and matured on March 17, 2014 (“Maturity Date”).

The Notes provided MSI an opportunity to extend each Maturity Date for one additional five-year term (“Extension Option”), provided that MSI complied with various conditions set forth in the Notes. The Extension Option could only be exercised between November 17, 2013 and January 31, 2014.

In early 2013, MSI allegedly approached Signature’s Chairman and Group Director of Real Estate and Vice President about exercising the Extension Option early and about refinancing the Mortgage Loans by lowering the interest rate.  The Defendants purportedly orally agreed and repeatedly reassured MSI that Signature would extend the terms and lower the interest rate to 4.5% from 6.5% if MSI: (1) made a $1,800,000 balloon payment on the $5 Million Note (“$1.8 Million Payment”); (2) paid the $3 Million Loan in its entirety (“$3 Million Payment”); and (3) made an additional $200,000 payment on the Mortgage Loans (“$200,000 Payment”).  MSI made a $3 Million Payment on March 1, 2013, and the $200,000 Payment on March 13, 2013. MSI also allegedly sold one of its properties in Israel to raise money for the $1.8 Million Payment.

On March 25, 2013, the Defendants sent MSI a term sheet which stated that the Defendants were “willing to consider [MSI’s] request to modify and extend” the terms of the Mortgage Loans based on certain conditions, including a paydown of the Loans’ principal amounts (the “Term Sheet”). The Term Sheet contained a provision that stated: “[i]t is expressly understood between the parties that this letter is not a commitment by [Signature] or an agreement to approve the subject loan.”

The Term Sheet provided that the closing on the Extension Option had to occur by June 30, 2013, and that it was subject to change if the Defendants did not receive the executed Term Sheet and applicable deposits and processing fees by April 22, 2013. A few months later, on or about July 12, 2013, MSI sent the Defendants an executed Term Sheet. The closing on the Extension Option never occurred.

After MSI received the Term Sheet, it made the following three payments to Signature: (1) $500,000 on May 10, 2013; (2) $1,000,000 on May 28, 2013; and (3) $300,000 on July 1, 2013. After these payments were made, the Defendants allegedly orally stated that the agreement to extend the terms of the Mortgage Loans and lower the interest rate to 4.5% was granted and binding and that they would send over loan documents for MSI to sign. The Defendants never sent MSI the loan documents.

Thereafter, Signature sold the Mortgage Loans to non-party 122 East 58th Funding LLC (“58th Funding”).  Because MSI failed to make the required payments under the Notes by the Maturity Date, 58th Funding commenced a commercial foreclosure proceeding against MSI. See 122 E. 58th Funding, LLC v. Mosdot Shuva Israel, Sup. Ct., N.Y. County, Index No. 650973/2014. By order dated December 14, 2017, the court granted the parties’ joint motion for approval of a forbearance agreement and entry of judgment of foreclosure and sale and directed a foreclosure sale by public auction be held, in addition to other, related relief.

Meanwhile, MSI commenced an action in March 2016, asserting causes of action for: (1) fraudulent inducement against all Defendants; (2) promissory estoppel against Signature; (3) equitable estoppel against Signature; and (4) breach of contract and breach of the implied covenant of good faith and fair dealing against Signature.

The Defendants moved to dismiss the complaint in its entirety pursuant to CPLR 3211(a)(1), (5), and (7). Previously, the Court dismissed the fraudulent inducement and estoppel claims.

In moving to dismiss the complaint, the Defendants made the following arguments, among others: the alleged oral modification of the Mortgage Loan agreements is unenforceable under the terms thereof and the Statute of Frauds; and the Term Sheet is not an enforceable contract.

The Court’s Decision

The Court granted the Defendants’ motion.

Noting that the agreements were unambiguous, the Court held that “MSI’s claim for breach of contract [was] not legally cognizable because … MSI [could not] demonstrate the existence of a binding oral contract obligating Signature Bank to extend the Mortgage Loans’ maturity dates and to reduce the interest rates.”  The Court found that the language of the agreements was clear in prohibiting the oral modification of the Mortgage Loans.  Under New York law, “[a] written contract, ‘which contains a provision to the effect that it cannot be changed orally, cannot be changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom enforcement of the change is sought or by his agent.’” Quoting General Obligations Law (“GOL”) § 15-301(1), and citing Centaur Props., LLC v. Farahdian, 29 A.D.3d 468, 469 (1st Dept. 2006).

The Court rejected MSI’s argument that “the repayment of the $3 Million Loan and partial payment of the $5 Million” was “sufficient to show unequivocal part performance of an alleged oral agreement to refinance and extend the terms of the Mortgage Loans.” Although “part performance by one party of an alleged oral modification to a written agreement may be sufficient to demonstrate an enforceable oral modification, even where the original written agreement contains an express prohibition against such modification,” the Court found that MSI’s alleged part performance was not “unequivocally referable to the alleged newly modified agreement.” See Rose v. Spa Realty Assoc., 42 N.Y.2d 338, 343-44 (1977); F. Garofalo Elec. Co. v. New York Univ., 270 A.D.2d 76, 80 (1st Dept. 2000). See also Anostario v. Vicinanzo, 59 N.Y.2d 662, 664 (1983) (“It is not sufficient . . . that the oral agreement gives significance to plaintiff’s actions. Rather, the actions alone must be unintelligible or at least extraordinary, explainable only with reference to the oral agreement.”) (internal quotation marks and citations omitted).  Rather, said the Court, the payments were readily “explainable as preparatory steps taken with a view toward consummation of an agreement in the future” (internal quotations omitted):

Here, MSI’s tender and Signature’s acceptance of the payments of money indisputably owed by MSI under the Mortgage Loans demonstrate, at most, that MSI chose to early pay down the principal amount of the Mortgage Loans to induce MSI to agree to the possible future modification of the Mortgage Loans.  Indeed, the Term Sheet, which was executed by both Signature and MSI, provides that “Signature Bank is willing to consider your request . . . to modify and extend its above referenced credit facilities on the following terms,” including, among other, numerous conditions, a paydown of the loans’ principal amounts. See Term Sheet at 1, 3 (emphasis added). As expressly stated in the Term Sheet, the payments are readily “‘explainable as preparatory steps taken with a view toward consummation of an agreement in the future,’ [such] that performance is not ‘unequivocally referable’ to the new contract.” Nassau Beekman LLC v. Ann/Nassau Realty LLC, 105 A.D.3d 33, 39 (1st Dept. 2013), quoting Anostario, 59 N.Y.2d at 664.

Finally, the Court rejected the Plaintiff’s argument that the Term Sheet was a binding agreement because it required further negotiation. The Court found that:

[T]he Term Sheet does not require Signature to extend the repayment periods and reduce the mortgage interest rates, but, by its terms, is simply an agreement to continue negotiating.

* * *

MSI’s contention that the parties agreed to be bound by an oral agreement prior to issuance and execution of the Term Sheet is unavailing and conclusively belied by the documentary evidence. While the Term Sheet does not include a merger clause, its express terms demonstrate that any discussions prior to its execution constituted nothing more than preliminary negotiations regarding the maturity dates and interest rates, rather than a meeting of the minds and an agreement to be bound.

See StarVest Partners II, L.P. v. Emportal, Inc., 101 A.D.3d 610, 613 (1st Dept. 2012) (“Where a term sheet . . . explicitly requires the execution of a further written agreement before any party is contractually bound, it is unreasonable as a matter of law for a party to rely upon the other party’s promises to proceed with the transaction in the absence of that further written agreement.”).

(This Blog previously wrote about the enforceability of a term sheet and similar documents here and here.)


Most commercial contracts require amendments and modifications to be in writing. This requirement is often found in the “No Oral Modification” clause, or NOM clause. While such clauses are often included in commercial contracts as boilerplate, courts will nevertheless enforce them, as the court did in Israel, when the parties clearly and unambiguously require such a result.

The takeaway of Israel, therefore, centers on basic contract interpretation. Where, as in Israel, the terms of the contract are clear and unambiguous, “the provisions of the contract delineating the rights of the parties prevail over” the parties’ arguments and allegations.

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