1

13‐384‐cv

Security Plans v. CUNA Mutual

1 UNITED STATES COURT OF APPEALS

2 FOR THE SECOND CIRCUIT

3 August Term, 2013

4 (Argued:  Nov. 7, 2013 Decided:  October 17, 2014)

5 Docket No. 13‐384

6

7 Security Plans, Inc., f/k/a Creditor Services, Inc.,

8 Plaintiff–Appellant,

9 v.

10 CUNA Mutual Insurance Society,

11 Defendant–Appellee.

12

13 Before: SACK, HALL, and LIVINGSTON, Circuit Judges.

14 Appeal from a judgment of the United States District Court for the

15 Western District of New York (David G. Larimer, Judge), granting

16 summary judgment to the defendant as to the plaintiffʹs claims alleging

17 breach of contract and violation of the implied covenant of good faith and

18 fair dealing.  The district court, in granting summary judgment as to the

19 breach of contract claim, properly refused to admit parol evidence to alter

20 the meaning of an unambiguous contractual provision.  But we conclude

21 that the district court erred in granting summary judgment to the

22 defendant on the implied covenant claim without determining whether, in
2

1 calculating payments owed to the plaintiff, the defendant exercised its

2 discretion arbitrarily or irrationally.  Because we conclude that the record

3 at the summary judgment stage presents a material dispute on this

4 question, the judgment of the district court is

5 AFFIRMED in part, VACATED in part, and REMANDED.

6 JERAULD E. BRYDGES (Fred G.

7 Aten Jr., on the brief), Harter, Secrest

8 & Emery LLP, Rochester, New York,

9 for Plaintiff–Appellant.

10 DREW J. COCHRANE (Jon Evenson,

11 on the brief), Stafford Rosenbaum

12 LLP, Madison, Wisconsin, and

13 Jeffrey Harradine, Ward Greenberg

14 Heller & Reidy LLP, Rochester, New

15 York, for Defendant–Appellee.

16 SACK, Circuit Judge:

17 This appeal from a judgment of the United States District Court for

18 the Western District of New York (David G. Larimer, Judge) concerns the

19 scope and effect of the implied covenant of good faith and fair dealing

20 that, as a matter of law, accompanies contracts concluded under New York

21 law.   Security Plans, a credit insurer, sold its business to CUNA Mutual in

22 exchange for an upfront sum and a performance‐based payment, which

23 would be calculated using three years of returns on Security Plansʹ former
3

1 business.  After the requisite time period, CUNA Mutual determined that

2 Security Plans was not entitled to any performance‐based payment.  

3 Security Plans argues that CUNA Mutual committed a company‐wide

4 error in managing its insurance policies, which substantially reduced the

5 payment calculation.  CUNA Mutualʹs failure to control for this error,

6 Security Plans argues, constituted an arbitrary and irrational exercise of

7 contractually conferred discretion, violating the implied covenant of good

8 faith and fair dealing.

9 Under New York law, all contracts that confer discretion include an

10 implied promise that neither party will ʺact arbitrarily or irrationallyʺ in

11 exercising that discretion.  Dalton v. Educ. Testing Serv., 87 N.Y.2d 384, 389,

12 663 N.E.2d 289, 291 (1995).  The district court acknowledged this principle.  

13 But the court rejected the plaintiffʹs implied covenant claim, concluding

14 that the record at the summary judgment stage reflected no evidence that

15 CUNA Mutual acted in bad faith or with wrongful intent.  We conclude

16 that, on the facts of this case, a question of fact remains as to whether the

17 defendant acted arbitrarily in calculating the earnout amount.  We

18 therefore vacate the portion of the district courtʹs decision concerning the
4

1 implied covenant and remand for further proceedings.  For the reasons set

2 forth below, we affirm the portion of the district courtʹs judgment that

3 granted summary judgment to the defendant on a separate breach of

4 contract claim.  

5 BACKGROUND

6 Security Plans, Inc., formerly known as Creditor Services, Inc., is a

7 corporation based in Mendon, New York, which until 2002 specialized in

8 the sale of credit‐related insurance products, primarily to credit unions.  

9 Security Plansʹ primary products were credit life and credit disability

10 insurance, which promise to pay the outstanding balance on a loan in the

11 event the borrower dies or becomes disabled.  In 2002, Security Plans

12 agreed to sell substantially all of its assets to CUNA Mutual Insurance

13 Society, a company incorporated in Iowa, with its principal office in

14 Madison, Wisconsin.  The parties set in motion a plan to transfer Security

15 Plansʹ insurance clients (its ʺbook of businessʺ) to CUNA Mutual.  The

16 merger was completed on January 2, 2003.  

17 The Merger Agreement and Earnout Formula

18 An Asset Purchase Agreement, dated May 31, 2002, set forth the

19 terms of this merger.  CUNA Mutual agreed to pay $3 million immediately
5

1 plus an additional performance‐based payment to be made three years

2 after the merger was concluded for Security Plansʹ property and book of

3 business.  The deferred‐payment component of this compensation package

is commonly referred to as an ʺearnout.ʺ1 4   Under this contract, the

5 maximum possible earnout was $2.2 million.  

6 CUNA Mutual also executed three‐year employment agreements

7 with each of the three Security Plans shareholders, in which the

8 shareholders agreed to assist in transitioning the book of business.  Each

9 former Security Plans client would have to decide individually whether to

10 accept CUNA Mutual as its new insurer, and the earnout was therefore

11 designed to encourage the shareholders to convert as many clients as

12 possible.   

                                                            

1 An earnout permits parties to conclude a merger without first agreeing as to the

proper valuation of the target company:

From the point of view of the buyer and seller, the goal of the

earnout is to overcome significant valuation differences that may

come between the parties during negotiations and prevent them

from reaching agreement.  Through a contingent payment

structure, the parties agree to disagree and defer the ultimate

valuation question until a later point in time when the uncertainties

with respect to valuation have been resolved.  

Brian J.M. Quinn, Putting Your Money Where Your Mouth Is: The Performance of

Earnouts in Corporate Acquisitions, 81 U. Cin. L. Rev. 127, 133 (2012).
6

1 The basic formula for calculating the earnout is not in dispute.  The

2 performance of Security Plansʹ book of business would be calculated

3 annually for three years after closing, and then another three years of

4 performance would be projected based on the data from the third year.  

5 Two variables would largely determine the size of the earnout: a weighted

6 average of total written premiums brought in by the acquired business,

and a weighted average of the businessʹs combined loss ratios.2 7   These two

8 amounts would be used to calculate a preliminary total earnout, which

9 would then be reduced by service fees and other reimbursements paid to

10 credit unions.  This reduced figure would represent the final payment.

11 The Asset Purchase Agreement also provided:

12 [Security Plans] acknowledges that [CUNA Mutual] is under

13 no obligation to operate its business after Closing in a manner

14 focused on maximizing the Earn‐Out . . . and may operate the

15 business in accordance with its best business judgment.

16 Asset Purchase Agreement ¶ 2.9(e).  

17 This dispute concerns two factors that affected the calculation of the

18 earnout.  First, Security Plans contends, CUNA Mutual used incorrect

                                                            

2 A ʺloss ratioʺ is the total incurred claims on the written insurance policy

divided by the earned premium; it may be affected by a number of variables,

including claim reserves.    
7

1 figures to calculate loss ratios for these accounts, thereby leading to a

2 lower earnout than that to which Security Plans was entitled.  Second,

3 Security Plans argues, CUNA Mutual imposed an excessive deduction

4 relating to service fees paid to credit unions.

5 Loss Ratios and the Claim Reserves Issue

6 Insurers are required by accounting rules and by statute to carry

7 claim reserves, which are kept in anticipation of future liabilities.  Claim

8 reserves are, for accounting purposes, considered to be a component of

9 incurred claims.  Increases in incurred claims ordinarily will, all other

10 things being equal, increase a companyʹs loss ratio.  Higher loss ratios

11 would reduce Security Plansʹ earnout.   

12 The parties agree that the loss ratios recorded for Security Plansʹ 

13 book of business for 2003 through 2005—the relevant reporting period for

14 the earnout—were ʺatypically high.ʺ  Def.ʹs Statement of Facts Pursuant to

15 Local R. 56.1, ¶ 30; accord Pl.ʹs Resp. Pursuant to Loc. R. 56.1(B), ¶ 30.  Their

16 unusually high loss ratios were largely attributable to the fact that, during

17 the same period, CUNA Mutual was carrying abnormally high claim

18 reserves on all of its business, including the Security Plans policies.   
8

1 CUNA Mutual began to release claim reserves in 2006 to compensate for

2 the problem, but it did not correct the reserves concerning Security Plansʹ 

3 book of business in time to affect the earnout.     

4 The reason for the magnitude of the claim reserves is not entirely

5 clear.  CUNA Mutual has asserted that, although the reserve levels were

6 later revised downward, their size during the 2003 to 2005 time period

7 resulted from ʺthe exercise of business judgment by CUNA Mutualʹs

8 actuaries.ʺ  Def.ʹs Statement of Facts Pursuant to Loc. R. 56.1, ¶ 31.  The

9 plaintiff disputes that, characterizing the reserve levels as a systemic,

10 company‐wide error, which CUNA Mutual sought to correct in 2006 by

11 releasing what ultimately amounted to millions of dollars in excess

12 reserves.  In other words, the plaintiff suggests that rather than

13 deliberately keeping high claim reserves as a strategic or actuarial decision,

14 CUNA Mutual failed to correct aberrations that distorted the performance

15 data until 2006.

16 The record contains some evidence supporting the plaintiffʹs

17 position.  Rich Fischer, a CUNA Mutual manager who dealt frequently

18 with the Security Plans merger, testified that he could not explain the high
9

1 loss ratios associated with the book of business, and agreed that he was

2 unsure that the earnout calculation was accurate in light of the

3 unexpectedly high loss ratios.  Dep. Rich Fischer, June 8, 2010, at 139–41.  

4 In an internal e‐mail, Fischer described the claim reserve levels as ʺsuspect

5 numbers.ʺ  E‐mail from Rich A. Fischer to Gary E. Young (Feb. 22, 2007,

6 6:19 AM).  In another e‐mail, Fischer noted that ʺ[t]he reserve looks too

7 high for these accounts.ʺ  E‐mail from Rich A. Fischer to Barry J. Owens et

8 al. (Sept. 15, 2006, 3:43 PM).  Barry Owens, another CUNA Mutual

9 manager who worked on the issue, agreed that the claim reserves were too

10 high.  In an internal e‐mail, he appeared to stress the need to correct the

11 claim reserves calculation, telling Fischer, ʺyou could either correct this,ʺ 

12 meaning, adjust the numbers in the earnout calculation, ʺor not use meʺ in

13 discussions with the Security Plans principals.  E‐mail from Barry J. Owens

14 to Rich A. Fischer et al. (July 7, 2006, 1:44 PM).  ʺIf you ask me to help,ʺ 

15 Owens wrote, ʺI am going to be forthcoming.ʺ  Id.  
10

1 In light of the claim reserves problem, both parties initially set about

discussing ways to adjust the earnout calculation.3 2   At the time, it appeared

3 clear to all concerned that Security Plansʹ book of business was actually

4 performing better than the uncorrected loss ratios would indicate.  See, e.g.,

5 E‐mail from Rich A. Fischer to Barry J. Owens et al. (Sept. 15, 2006, 3:43

6 PM) (ʺOur desire to release the reserve slowly should not impact the fact

7 that the results of [the Security Plans accounting] really are better early

8 than we are showing[.]ʺ).  Accordingly, Fischer suggested that CUNA

9 Mutual recalculate the Security Plans loss ratio to take the abnormally high

10 claim reserves into account.  He was skeptical that the corrections would

11 result in a positive earnout, but he told a colleague that the revised

12 calculations ʺwill give me comfort that I have reviewed this with an open

13 eye—I would assume if you were John [OʹKipney, a founder of Security

14 Plans,] you would expect the same.ʺ  Id.   

                                                            

3 One method of addressing the problem, never adopted, entailed delaying the

earnout calculation until 2009, so that it could be based on six years of actual

performance data, rather than three years of historical data and three years of

projections.  This approach would have required amending or deviating from the

Asset Purchase Agreement.  CUNA Mutual declined to do so.   
11

1 The plaintiff contends that CUNA Mutual never conducted these

2 revisions.  Fischer later testified that he did perform revised calculations,

3 but that they did not result in a positive earnout because other deductions

4 made pursuant to the Asset Purchase Agreement reduced the earnout

5 below zero, even using the more favorable loss ratios.  CUNA Mutual has

6 not, however, provided a revised calculation that would support this

7 conclusion.   

8 Service Fees

9 A credit insurer may pay an administrative service fee to a credit

10 union if the union enrolls insured debtors, processes claims, and performs

11 other services on behalf of the insurer.  See N.Y. Comp. Codes R. & Regs.

12 tit. 11, § 185.9.  State regulations set an upper limit for these service fees,

13 which, barring some exceptions not relevant to this appeal, is expressed as

14 a maximum dollar amount per $1,000 of insured indebtedness.  See id. §

15 185.9(f).   Therefore, so long as the amount of insured indebtedness stayed

16 constant, the maximum dollar amount of allowable fees would remain the

17 same regardless of any change in the premiums charged on an insurance

18 policy.   
12

1 For the purposes of calculating Security Plansʹ earnout, the Asset

2 Purchase Agreement also imposed an upper limit on service fees paid to

3 credit unions pursuant to any of the Security Plans policies.  This limit did

4 not, strictly speaking, prevent the payment of service fees at any amount

5 permitted by law.  It did, however, provide that any fees paid above the

6 contractual limitation would be deducted from Security Plansʹ earnout,

7 whereas fees paid below that limit would not be deducted.  This cap,

8 unlike the limit imposed by law, was expressed as a percentage of the

9 written premium assessed on any credit life or credit disability insurance

10 policy.  Thus, under the framework imposed by the contract, any increase

11 or decrease in the premium charged on an insurance policy would entail a

12 corresponding change in the maximum dollar amount of allowable service

13 fees on that policy.   

14 The upshot of all this was that service fees pegged to the maximum

15 allowable fee under state law might exceed the caps set by the contract,

16 especially if insured indebtedness is relatively high and premiums are low.  

17 If this happened, the fees paid in excess of the contractual cap would be

18 deducted from Security Plansʹ earnout.  
13

1 At the time of the merger, Security Plansʹ underwriter was paying

2 the maximum service fee allowable under New York law, while CUNA

3 Mutual was not.  In a letter dated March 13, 2002, John OʹKipney, one of

4 the Security Plans founders, requested that CUNA Mutual confirm its

5 willingness to continue paying credit unions the maximum service fee

6 once the Security Plans polices were transferred.  In the discussion of

7 service fees, OʹKipney did not mention the earnout payment or the

8 percentage caps in the earnout calculation.  OʹKipneyʹs letter also

9 addressed a variety of other items not relevant to the present dispute.  

10 OʹKipney stated that ʺ[i]n all likelihood, weʹll want to incorporate the

11 companyʹs response to many of these items into the Definitive

12 Agreement.ʺ  Letter of John OʹKipney to Gary E. Young (Mar. 13, 2002).  

13 Margaret Immerfall, a CUNA Mutual vice president, responded that

14 the company did not wish to revise the Asset Purchase Agreement at that

15 late stage of negotiations.  OʹKipney Decl. ¶ 33.  OʹKipney recalls,

16 however, that he and Immerfall agreed to address the issue in a ʺletter of

17 understanding.ʺ  Id.  Then, on April 10, 2002, Immerfall  replied by letter to

18 OʹKipneyʹs correspondence of March 13, confirming CUNA Mutualʹs
14

1 ʺwillingness to pay identical service fees to those currently being paidʺ to

2 Security Plansʹ clients.  Letter of Margaret Immerfall to John OʹKipney

3 (Mar. 13, 2002).  That letter stated only that CUNA Mutual would continue

4 paying the fees.  It did not mention that, under the terms of the Asset

5 Purchase Agreement, any fees charged in excess of the contractual cap

6 would be deducted from the earnout calculation.   

7 When the Asset Purchase Agreement was finalized at the end of

8 May 2002, the earnout provision remained unchanged – it continued to

9 impose a cap on service fees for purposes of calculating the earnout

10 payment and did not acknowledge that the letter of April 10, 2002, would

11 allow service fees to be charged above this cap.  OʹKipney has stated that

12 he nonetheless understood the letter of April 10, 2002, to ʺsupersedeʺ the

13 relevant provisions of the Asset Purchase Agreement, such that fees

14 charged above the cap pursuant to the letter would not be deducted from

15 the earnout.  OʹKipney Decl. ¶ 36.   

16 The following July, CUNA Mutual wrote to the New York State

17 Chief Insurance Policy Examiner requesting permission to take over

18 Security Plansʹ business.  It said that service fees would remain the same.  
15

1 At this point, service fees on the majority of Security Plansʹ programs

2 exceeded the caps set in the Asset Purchase Agreement.  Throughout the

3 time period relevant to the earnout, CUNA Mutual continued to pay

4 service fees at the same level that Security Plans had been paying prior to

5 the merger.  

6 Final Earnout Calculation

7 CUNA Mutual finalized its accounting of the earnout on August 8,

8 2006.  It determined that Security Plansʹ book of business carried a six‐year

9 average written premium of $7.1 million and an average loss ratio of 70.2

10 percent, which would entitle Security Plans to an earnout of $301,000.  

11 That amount was then reduced nearly to zero, though, by $291,752 in

12 excess service fees paid to credit unions.  Any remaining payment was

13 wiped out by an additional $1.5 million deduction for so‐called

ʺexperience refunds.ʺ4 14   The resulting earnout was nil.

15 This Litigation

16 On July 14, 2008, the plaintiff filed a complaint commencing this

17 lawsuit in the United States District Court for the Western District of New

                                                            

4 The plaintiff contested the legal basis for the experience refund deductions in

the district court, but that argument is not a subject of this appeal.  
16

1 York invoking the courtʹs diversity jurisdiction under 28 U.S.C. § 1332(a),

2 and alleging breaches of contract and of the implied covenant of good faith

3 and fair dealing.  The complaint did not specify the amount of damages it

4 was seeking, although it alleged that a fairly and accurately calculated

earnout would have exceeded $75,000.5 5   

6 Arguments in the district court focused on three principal claims.  

7 First, the plaintiff asserted that CUNA Mutualʹs handling of the claim

8 reserves issue constituted a breach of the implied covenant of good faith

9 and fair dealing, and led to a lower earnout calculation than was

10 appropriate.  Second, the plaintiff argued that CUNA Mutualʹs decision to

11 deduct $291,752 in excess service fees violated an understanding, reflected

12 in the letter of April 10, 2002, that no such deductions would be made.  

13 Third, the plaintiff maintained that the deduction of certain so‐called

                                                            

5  This is sufficient to establish subject‐matter jurisdiction:

A party invoking the jurisdiction of the federal court has the burden

of proving that it appears to a reasonable probability that the claim

is in excess of the statutory jurisdictional amount.  This burden is

hardly onerous, however, for we recognize a rebuttable

presumption that the face of the complaint is a good faith

representation of the actual amount in controversy.   

Scherer v. Equitable Life Assurance Socʹy of the U.S., 347 F.3d 394, 397 (2d Cir. 2003)

(citations and internal quotation marks omitted).
17

1 experience refunds from the earnout was impermissible under the Asset

2 Purchase Agreement because those refunds were paid too late to make

3 them deductible under the formula prescribed by the contract.  On March

4 29, 2010, Security Plans moved for partial summary judgment on the

5 experience refunds issue.  On July 1, 2010, CUNA Mutual moved for

6 summary judgment dismissing the complaint in its entirety.  

7 In an order filed November 16, 2012, the district court granted

8 CUNA Mutualʹs motion for summary judgment as it pertained to the claim

9 reserves and the service fee issues, but found a triable issue of fact

concerning the experience refund claim.6 10   Order at 1–19, Security Plans, Inc.

11 v. CUNA Mut. Ins. Socʹy, No. 08‐cv‐6313 (W.D.N.Y. Nov. 16, 2012)

12 (ʺOrderʺ).  Subsequently, the plaintiffʹs counsel moved that the case be

13 dismissed in its entirety, explaining that even if Security Plans were to

14 prevail on the experience refund claim, this would not be sufficient to

15 achieve a positive earnout balance in light of the district courtʹs grant of

16 summary judgment on the remaining arguments.  The district court, by

                                                            

6 CUNA Mutual had also moved to strike portions of the record.  The district

court denied these motions to strike as moot, because the evidence that CUNA

Mutual sought to strike related exclusively to claim reserves.   
18

1 order dated January 18, 2013, granted this motion.  Order at 1, Security

2 Plans, Inc. v. CUNA Mut. Ins. Socʹy, No. 08‐cv‐6313 (W.D.N.Y. Jan. 18,

3 2013).  Final judgment was entered four days later.   

4 The plaintiff appeals, challenging the district courtʹs judgment based

5 on the loss ratio and service fee issues.   

6 DISCUSSION

7 ʺWe review a district courtʹs decision to grant summary judgment de

8 novo, construing the evidence in the light most favorable to the party

9 against which summary judgment was granted and drawing all reasonable

10 inferences in its favor.ʺ  Wachovia Bank, N.A. v. VCG Special Opportunities

11 Master Fund, Ltd., 661 F.3d 164, 171 (2d Cir. 2011), cert. denied, 132 S. Ct.

12 2439 (2012).  We also review de novo ʺquestions as to the plain meaning or

13 ambiguity of the language of a contract.ʺ  Fabozzi v. Lexington Ins. Co., 601

14 F.3d 88, 90 (2d Cir. 2010).   We will affirm a grant of summary judgment

15 only if there is no genuine issue of material fact and the prevailing party

16 was entitled to judgment as a matter of law.  Id.; Fed. R. Civ. P. 56(a).

17 I. Breach of Contract Claim: Determination of Service Fees

18 The parties do not dispute that, under the terms of the Asset

19 Purchase Agreement finalized on May 31, 2002, CUNA Mutual was
19

1 entitled to deduct $291,752 in excess service fees from the earnout payment

2 to Security Plans.  Security Plans argues, however, that CUNA Mutualʹs

3 letter of April 10, 2002, in which CUNA Mutual expressed its willingness

4 to continue paying service fees that were higher than the caps imposed by

5 the Asset Purchase Agreement, constituted an implicit promise that excess

6 fees would not be deducted from the earnout payment.  This letter was

7 sent by CUNA Mutual and received by the plaintiff more than a month

8 before the agreement was finalized.  The plaintiff nonetheless argues that

9 CUNA Mutual was bound by the terms of this letter to refrain from

10 deducting service fees when calculating the earnout.

11 The district court correctly observed that such a result would

12 ʺplainly run[ ] afoul of the parol evidence rule.ʺ  Order at 17.  In New York,

13 ʺ[i]t is well settled that extrinsic and parol evidence is not admissible to

14 create an ambiguity in a written agreement which is complete and clear

15 and unambiguous upon its face.ʺ  W.W.W. Assocs., Inc. v. Giancontieri, 77

16 N.Y.2d 157, 163, 566 N.E.2d 639, 642 (1990) (citations and internal

17 quotation marks omitted); accord U.S. Bank Trust Natʹl Assʹn v. AMR Corp.

18 (In re AMR Corp.), 730 F.3d 88, 98 (2d Cir. 2013), cert. denied, 134 S. Ct. 1888
20

1 (2014).  ʺEvidence outside the four corners of the document as to what was

2 really intended but unstated or misstated is generally inadmissible to add

3 to or vary the writing.ʺ  W.W.W. Assocs., 77 N.Y.2d at 162, 566 N.E.2d at

4 642.  Parol evidence ʺis admissible only if a court finds an ambiguity in the

5 contract.ʺ  Schron v. Troutman Sanders LLP, 20 N.Y.3d 430, 436, 986 N.E.2d

6 430, 433 (2013).

7 The letter of April 10, 2002, upon which the plaintiff relies, falls

8 beyond the borders of the partiesʹ written agreement, and therefore

9 constitutes parol evidence.  The Asset Purchase Agreement contains a

10 merger clause, which states that the contract is an integrated document

11 reflecting a complete statement of the bargain between the parties.  Asset

12 Purchase Agreement ¶ 13.7.  The merger clause does not incorporate by

13 reference the letter of April 10, 2002.  See id. (incorporating specified

14 documents, including exhibits, but not the April letter).  We deem the

15 parties, by defining the scope of their agreement in a merger clause, to

16 have intended ʺto require the full application of the parol evidence rule in

17 order to bar the introduction of extrinsic evidence to alter, vary or
21

1 contradict the terms of the writing.ʺ  Jarecki v. Shung Moo Louie, 95 N.Y.2d

2 665, 669, 745 N.E.2d 1006, 1009 (2001).

3 We might consider extrinsic evidence to illuminate an ambiguous

4 contractual term.  See, e.g., Schron, 20 N.Y.3d at 436, 986 N.E.2d at 433.  But

we find no such ambiguity here.7 5   The Asset Purchase Agreement provides

6 specific limits for service fees paid to credit unions and states that, if fees

7 are paid in excess of those limits, the overage will be deducted from the

8 earnout.  Asset Purchase Agreement ¶ 2.9(b)(iii).  The plaintiff has not

9 called into question the clarity of this provision.  The contract is therefore

10 unambiguous with respect to the deduction of excess service fees.  We

11 conclude that the district court properly declined to rely on parol evidence

12 to reinterpret the contract.

13 We also reject the plaintiffʹs argument that the doctrine of

14 promissory estoppel bars CUNA Mutual from deducting excess service

15 fees.  To demonstrate promissory estoppel under New York law, a party

16 must show reasonable and detrimental reliance upon a clear and

17 unambiguous promise.  Kaye v. Grossman, 202 F.3d 611, 615 (2d Cir. 2000).   

                                                            

7 ʺWhether or not a writing is ambiguous is a question of law to be resolved by

the courts.ʺ  W.W.W. Assocs., 77 N.Y.2d at 162, 566 N.E.2d at 642.
22

1 As a general matter, ʺa party may not maintain a promissory estoppel

2 claim where the promises on which the claim is based are expressly

3 contradicted by a later written agreement covering the same subject

4 matter.ʺ  Underdog Trucking, LLC v. Verizon Servs. Corp., No. 09‐Civ.‐8918,

5 2010 WL 2900048, at *6, 2010 U.S. Dist. LEXIS 72642, at *18–*19 (S.D.N.Y.

6 July 20, 2010); see also Fariello v. Checkmate Holdings, LLC, 82 A.D.3d 437,

7 438, 918 N.Y.S.2d 408, 409 (1st Depʹt 2011) (holding that promissory

8 estoppel claim is barred by merger clause in subsequent agreement

9 between the parties); Capricorn Invs. III, L.P. v. Coolbrands Intʹl, Inc., 66

10 A.D.3d 409, 410, 886 N.Y.S.2d 158, 159 (1st Depʹt 2009) (rejecting claim

11 where asserted promise was ʺflatly contradicted by the partiesʹ written

12 agreement which covered the same subject matter and expressly

13 superseded all other prior agreements and understandingsʺ).

14 Even if the letter of April 10, 2002, did constitute a promise not to

deduct the service fees,8 15 that promise was flatly contradicted by the final

                                                            

8 The so‐called letter agreement only ʺconfirm[s]ʺ CUNA Mutualʹs ʺwillingness

to pay identical service fees to those currently being paid to [Security Plans]

clients.ʺ  Letter of Margaret Immerfall to John OʹKipney (Apr. 10, 2002).  This

expressed willingness to continue paying the excess service fees is not necessarily

inconsistent with a requirement that such excesses later be deducted from

Security Plansʹ earnout.
23

1 Asset Purchase Agreement, which was concluded more than a month later.  

2 Security Plans, therefore, cannot be said to have reasonably relied upon

3 this earlier promise in light of the clear terms of its contract.  For these

4 reasons, we affirm the district courtʹs grant of summary judgment on the

5 plaintiffʹs service fee claim.

6 II. Implied Covenant of Good Faith Claim: Determination of

7 Claim Reserves

8 The plaintiff also contends that the defendantʹs handling of the claim

9 reserves and the resultant earnout calculation violated the implied

10 covenant of good faith and fair dealing.  New York law implies such a

11 covenant in all contracts.  Fishoff v. Coty Inc., 634 F.3d 647, 653 (2d Cir.

12 2011); 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 153,

13 773 N.E.2d 496, 500 (2002); see also Restatement (2d) of Contracts § 205

14 (1981).   Pursuant to this principle, ʺneither party shall do anything which

15 will have the effect of destroying or injuring the right of the other party to

16 receive the fruits of the contract.ʺ  Moran v. Erk, 11 N.Y.3d 452, 456, 901

17 N.E.2d 187, 190 (2008) (internal quotation marks omitted).  A breach of the

18 covenant is considered a breach of the underlying contract.  Natʹl Mkt.

19 Share, Inc. v. Sterling Natʹl Bank, 392 F.3d 520, 525 (2d Cir. 2004).
24

1 The implied covenant does not ʺundermine a partyʹs ʹgeneral right to

2 act on its own interests in a way that may incidentally lessenʹʺ the other

3 partyʹs expected benefit.  M/A‐COM Sec. Corp. v. Galesi, 904 F.2d 134, 136

4 (2d Cir. 1990) (per curiam) (quoting Van Valkenburgh, Nooger & Neville, Inc.

5 v. Hayden Publʹg Co., 30 N.Y.2d 34, 46, 281 N.E.2d 142, 145, cert. denied, 409

6 U.S. 875 (1972)).  The covenant will be breached only in a narrow range of

7 cases.  A plaintiff must show substantially more than evidence that the

8 defendantʹs actions were negligent or inept.  See Behren v. Warren Gorham &

9 Lamont, Inc., 24 A.D.3d 132, 133, 808 N.Y.S.2d 157, 158 (1st Depʹt 2005)

10 (noting, in affirming summary judgment, that the plaintiff had admitted

11 that the ʺdefendantʹs alleged mismanagement was due to ineptitudeʺ);

12 Wagner v. JP Morgan Chase Bank, No. 06‐Civ‐3216(RJS), 2011 WL 856262, at

13 *4, 2011 U.S. Dist. LEXIS 2456, at *11–*12 (S.D.N.Y. Mar. 9, 2011) (stating

14 that the plaintiff must show something more than that the defendant was

15 ʺmisguided or ignorant or even merely negligentʺ (citation omitted)); cf.

16 United Steelworkers of Am., AFL‐CIO‐CLC v. Rawson, 495 U.S. 362, 372–73

17 (1990) (observing that ʺmere negligenceʺ is insufficient to constitute

18 arbitrary conduct that breaches unionʹs statutory duty of fair
25

1 representation); McClary v. Civil Serv. Emps. Assʹn, Inc., 133 A.D.2d 522,

2 522, 520 N.Y.S.2d 88, 89 (4th Depʹt 1987) (same).  The plaintiff must instead

3 demonstrate something more, such as that the defendant ʺact[ed]

4 arbitrarily or irrationally in exercising [the] discretionʺ afforded to it under

5 the contract.  Dalton, 87 N.Y.2d at 389, 663 N.E.2d at 291; see also Behren, 24

6 A.D.3d at 133, 808 N.Y.S.2d at 158 (affirming summary judgment because

7 there was no ʺissue of fact as to whether defendantʹs alleged

8 mismanagement of those assets was arbitrary or irrationalʺ).  

9 The plaintiff alleges two violations of the implied covenant of good

10 faith and fair dealing.  Only one of them, we think, has merit based on the

record at summary judgment.9 11   First, the plaintiff argues, the defendant

12 acted irrationally or arbitrarily in setting (or failing to correct) the excessive

13 claim reserves, thus causing the higher loss ratios and the lower earnout

14 calculation of which the plaintiff complains.  We agree with the district

                                                            

9 In addition to what follows, the plaintiff argues that its book of business

received disparate treatment when compared with CUNA Mutualʹs business

overall, even without taking into account the system‐wide problems concerning

claim reserves.  This argument would require the factfinder to engage in a chain

of speculations and inferences, in which a trial judge is not required to indulge

even at summary judgment.  See, e.g., Kulak v. City of New York, 88 F.3d 63, 71 (2d

Cir. 1996) (ʺ[C]onclusory statements, conjecture, or speculation by the party

resisting the motion will not defeat summary judgment.ʺ).  Therefore, insofar as

the plaintiffʹs claims turn on these factual allegations, we reject them.
26

1 court that this aspect of the claim cannot withstand the defendantʹs motion

2 for summary judgment inasmuch as the record contains nothing to suggest

3 anything more than negligence in CUNA Mutualʹs handling of the claim

4 reserves.  Negligence in operating a business, as we have explained, is

5 insufficient to support a claim under the implied covenant.  See, e.g.,

6 Behren, 24 A.D.3d at 133, 808 N.Y.S.2d at 158.  We therefore focus, as the

7 plaintiff does in its briefs, on its second argument: that CUNA Mutual

8 acted arbitrarily when it refused to provide a revised earnout calculation

9 in light of an alleged system‐wide error concerning claim reserves.   

10 The implied covenantʹs prohibition on arbitrary or irrational

11 exercises of discretion may apply to this second claim.   The Asset

12 Purchase Agreement expressly confers on the defendant broad discretion

13 to ʺoperate the business in accordance with its best business judgment.ʺ  

14 Asset Purchase Agreement, ¶ 2.9(e).  And the contract places on the

15 defendant the responsibility for calculating the earnout, thereby conferring

16 a limited discretion in selecting the values—such as loss ratios and written

17 premium—that enter into the calculation in the first place.  See id.

18 ¶ 2.9(b)(vii).  This latter form of limited discretion is indeed the subject of
27

the plaintiffʹs claim in this case,10 1 and the plaintiff may therefore argue that

2 the defendant acted arbitrarily or irrationally in handling the earnout

3 calculation.  See Dalton, 87 N.Y.2d at 392, 663 N.E.2d at 293.

4 Furthermore, the provision in the Asset Purchase Agreement

5 entitling CUNA Mutual to exercise its ʺbest business judgmentʺ in the

6 operation of the merged business, Asset Purchase Agreement, ¶ 2.9(e),

7 does not displace Daltonʹs requirement that discretion be exercised in a

8 non‐arbitrary manner.  While New York courts generally will not disturb

9 actions taken pursuant to a partyʹs business judgment, see Nikitovich v.

10 OʹNeal, 40 A.D.3d 300, 301, 836 N.Y.S.2d 34, 35 (1st Depʹt 2007) (ʺ[T]his

11 Court may not substitute its business judgment for that of the employer.ʺ);

12 Ins. Co. of Greater N.Y. v. Glen Haven Residential Health Care Facility, 253

13 A.D.2d 378, 379, 676 N.Y.S.2d 176, 177 (1st Depʹt 1998) (similar), the New

14 York Court of Appeals has explained in a related context that arbitrary

                                                            

10 This claim does not, by contrast, arise from the defendantʹs ʺinterpolationʺ of

the exhibits attached to the Asset Purchase Agreement, which are meant to guide

the calculation of the earnout.  See Asset Purchase Agreement, ¶ 2.9(b)(vii).  

Because the plaintiff expressly agreed in the contract to abide by the defendantʹs

interpolations, see id., such a claim would likely be barred by that agreement.  See

Times Mirror Magazines, Inc. v. Field & Stream Licenses Co., 294 F.3d 383, 395 (2d

Cir. 2002) (observing that the plaintiff ʺcannot avoid the express terms of the

contract by relying on the implied covenant of good faith and fair dealingʺ).  
28

1 decision‐making is incompatible with the exercise of legitimate business

2 judgment, 40 W. 67th St. v. Pullman, 100 N.Y.2d 147, 157, 790 N.E.2d 1174,

3 1182 (2003); see also Fletcher v. The Dakota, Inc., 99 A.D.3d 43, 48, 948

4 N.Y.S.2d 263, 267 (1st Depʹt 2012) (explaining that arbitrariness ʺis not

5 protected by the business judgment ruleʺ).  Therefore, a provision entitling

6 the defendant to act in its best business judgment does not alter the scope

7 of our inquiry, which is already limited to arbitrary or irrational exercises

of discretion.11 8    

9 The record on appeal, moreover, presents sufficient evidence to

10 create a triable issue of fact as to the defendantʹs handling of the earnout

11 calculation.  The parties understood that the earnout would be based on

12 the ʺperformanceʺ of Security Plansʹ former book of business.  Asset

                                                            

11 We need not and do not decide whether and to what extent a different

contractual provision may constrict or obviate the protections of the implied

covenant.  Compare State St. Bank & Trust Co. v. Inversiones Errazuriz Limitada, 374

F.3d 158, 170 (2d Cir. 2004) (finding that the covenant does not prevent a bank

from arbitrarily withholding consent to particular conduct when a contract

confers an absolute right to withhold consent), cert. denied, 543 U.S. 1177 (2005),

with Travellers Intʹl, A.G. v. Trans World Airlines, Inc., 41 F.3d 1570, 1575 (2d Cir.

1994) (ʺEven when a contract confers decision‐making power on a single party,

the resulting discretion is nevertheless subject to an obligation that it be exercised

in good faith.ʺ).  See also In Touch Concepts, Inc. v. Cellco Pʹship, 949 F. Supp. 2d

447, 466–67 (S.D.N.Y. 2013) (declining to decide whether a provision expressly

waiving the implied covenant of good faith is enforceable).
29

1 Purchase Agreement, ¶ 2.9(a).  Although Security Plansʹ business appeared

2 to perform poorly during the relevant period, it was understood by CUNA

3 Mutual managers that a system‐wide problem with excessive claim

4 reserves had distorted the performance data.  This realization led several

5 of the managers to consider the relevant loss ratio numbers with suspicion,

6 thinking they were too high and thus not entirely accurate.  These

7 managers apparently took initial steps to recalculate the earnout using

8 more accurate figures that would have benefited the plaintiff, but

9 appeared to abandon that effort before any revised calculation was

10 completed and supplied.  

11 Making all inferences in the plaintiffʹs favor, a rational trier of fact

12 could properly conclude that it was arbitrary for the defendant to refuse to

13 revise the earnout calculation in order to correct for the suspect numbers.  

14 On this record, a trier of fact could, but would not necessarily be required

15 to, conclude that: (i) the initial decision that set high claim reserves for the

16 earnout period was made by mistake, and not as a result of actuarial

17 judgment; (ii) this mistake caused Security Plansʹ performance data to be

18 distorted in ways that negatively affected the earnout; (iii) this mistake
30

1 was noticed in time to revise the earnout calculation accordingly, and such

2 revision was possible; (iv) the mistake was acknowledged by all parties

3 concerned; and (v) CUNA Mutual, for no valid business reason, decided

4 not to adjust the earnout calculation.  In making this second decision not to

5 revise the calculation, CUNA Mutual was exercising its contractually

6 conferred authority as the party charged with calculating the earnout, but

7 a trier of fact could find it exercised this discretion arbitrarily.

8 In other words, this is not a case in which the plaintiff alleges only

9 that that the defendantʹs mismanagement or ineptitude in running the

10 business post‐merger damaged its ultimate payment.  See, e.g., Wagner,

11 2011 WL 856262, at *4‐*5, 2011 U.S. Dist. LEXIS 24518, at *11–*12 (rejecting

12 a claim on this basis under New York law); Fireman v. News Am. Mktg. In‐

13 Store, Inc., No. 05‐11740, 2009 WL 3080716, at *10, 2009 U.S. Dist. LEXIS

14 91236, at *27–*29 (D. Mass. Sept. 26, 2009) (same); Tagare v. Nynex Network

15 Sys. Co., 994 F. Supp. 149, 159–60 (S.D.N.Y. 1997) (same).  Although

16 nothing in the record indicates that the initial decision to set abnormally

17 high claim reserves was anything more serious than negligence, the

18 plaintiff also has presented evidence suggesting that CUNAʹs managers
31

1 recognized their error and understood that the numbers used to calculate

2 the earnout calculation were faulty insofar as they did not reflect the

3 businessʹs performance.  Despite this awareness, CUNA Mutual declined

4 to provide the plaintiff with a revised calculation, and their reasons for

5 doing so are unclear from the record developed at the time of the motion

6 for summary judgment.  A trier of fact could conclude that the decision

7 was arbitrary.

8 On remand, the plaintiffʹs claim based on the implied covenant will

9 depend, in large measure, on the defendantʹs reasons for not revising the

10 calculation.  If CUNA Mutual can convince the trier of fact that it had a

11 genuine and colorable business justification for its decision, then its actions

12 will not have been arbitrary, and thus will not have violated the implied

13 covenant.  Cf. Levandusky, 75 N.Y.2d at 541 n.*, 553 N.E.2d at 1323 n.*.  For

14 example, CUNA Mutual manager Rich Fischer testified that he did, in fact,

15 conduct a revised calculation with more appropriate numbers, but that any

16 earnout was nonetheless wiped out by other contractually permitted

17 deductions.  This testimony might provide one possible convincing

18 explanation for CUNA Mutualʹs behavior.  But because the defendant has
32

1 not produced any documentary evidence of a revised calculation, see id.,

this justification hinges largely on the credibility of Fischerʹs testimony.12 2   

3 Credibility determinations are inappropriate at the summary judgment

4 stage.  See Donnelly v. Greenburgh Cent. Sch. Dist. No. 7, 691 F.3d 134, 146

5 (2d Cir. 2012).  This testimony is therefore not conclusive on appeal.

6 Alternatively, further proceedings may challenge the premise that

7 CUNA Mutualʹs high claim reserves from 2003 to 2005 were kept as a

8 result of a company‐wide error.  We have relied, in this opinion, on

9 evidence in the summary judgment record that treats the high claim

10 reserves as erroneous and the resulting loss ratios as suspicious and

11 unreliable.  If the high reserves were kept as a result of a consciously risk‐

12 averse business strategy, as the defendant appears to suggest, then the

13 numbers used to calculate the earnout may seem less dubious, and the

14 decision to use them in the calculation may not have been arbitrary.   

15 We are required on this appeal to accept all factual inferences in the

16 plaintiffʹs favor, Wachovia, 661 F.3d at 171, and we therefore express no

                                                            

12 Fischer did give the same justification in an internal e‐mail dated February

2007, but no calculations are included in that correspondence.  See E‐mail from

Rich A. Fischer to Gary E. Young (Feb. 22, 2007, 6:19 AM).  
33

1 view on the ultimate consequences of adopting these alternative

2 characterizations of the facts.  We raise these issues only to illustrate the

3 possibility that the defendantʹs earnout calculation may, after further

4 proceedings, be characterized as a non‐arbitrary exercise of business

judgment.13 5   Of course, it may not be.

6 CONCLUSION

7 For the foregoing reasons, we conclude that the defendant was

8 entitled to summary judgment on the service fee claim, but that the record

9 presents a triable issue concerning the defendantʹs handling of the earnout

10 calculation.  On remand, the parties and the district court may wish to

11 determine whether, in light of our partial affirmance, the plaintiffʹs

12 remaining claim is capable of generating a positive damages award – an

13 issue that we cannot conclusively determine based on the record and

14 arguments before us – before proceeding to address the issue upon which

15 this remand is based.  The defendant also may wish to renew its motions,

16 rendered moot by the district courtʹs earlier decision, to strike certain

                                                            

13  We repeat that, for the reasons explained above, our remand is not an

invitation for the plaintiff to renew its claims that CUNA Mutual violated the

implied covenant by setting high claim reserves in the first place.
34

1 evidence from the summary judgment record.  The district court may then

2 determine – in light of this opinion, of course – whether the remaining

3 evidence creates a triable issue of fact on the plaintiffʹs claims invoking the

4 implied covenant of good faith and fair dealing.

5 Accordingly, the judgment of the district court is AFFIRMED in part

6 and VACATED in part.  The case is REMANDED for further proceedings.