First Party's Failure to Perform "On Behalf of" Second Party, As Required By Contract, Is Not a Default By Second Party

On February 23, 2023, Justice Andrew Borrok issued a decision in Citibank, N.A. v. N/A, 2-23 NY Slip Op 30559(U), holding that a party to a contract (Party B) does not breach that contract when a different party (Party A), which is obligated to perform "on behalf of" the former party (Party B), fails to perform, explaining:

In relevant part, the Indenture (NYSCEF Doc. No. 2) provides:

Section 4.1 Reports and Instructions to Trustee.

. . .

(h) Iconix Financial Statements. The Manager on behalf of Brand Holdings II shall provide to the Trustee, the Servicer, the Back-Up Manager and the Rating Agencies with respect to each Series of Notes Outstanding the following financial statements:

. . .

OWS argues that it is entitled to summary judgment because it is undisputed that Brand Holdings II did not provide the financial statements required by Section 4.1(h) and thus a default occurred under Section 9.2 of the Indenture. The argument fails.

Although OWS is correct that the language in Section 4.1(h) does not terminate the obligations set forth in Section 4.1(h) if Iconix were to go private (as it did) and merely provides that the delivery of the financial statements required by Section 4.1 were as soon as they were available but in no event later than the date Iconix was required to file its financial statements with the SEC (i.e., that this is an expression of when the financial statements required under Section 4.1 had to be delivered), they are simply not correct that this was an obligation of Brand Holdings II. Section 4.1 carefully delineates responsibilities between [*8] Brand Holdings II and the Manager and provides where Brand Holdings II obligated itself to make certain deliveries, or cause certain deliveries to be made. Unlike the other sections in Section 4.1, the obligations in Section 4.1(h) [**5] are not those of Brand Holdings II. They did not agree to provide this information or to cause the Manager to provide it. The Manager agreed to provide it.

. . .

The Court must give full meaning to the entire contract and can not reform it to provide that Brand Holdings II was to deliver or cause to deliver the items in Section 4.1(h) because the parties did not agree as such (Riverside South Planning Corp. v CRP/Extell Riverside, L.P., 60 AD3d 61, 66, 869 N.Y.S.2d 511 [1st Dept 2008] ["[a] court may not, in the guise of interpreting a contract, add or excise terms or distort the meaning of those used to make a new contract for the parties"]). And, if the Manager breached this obligation, presumably it could or should have been terminated by the Trustee. This however is not the predicate default that is the subject of this motion or the petition. Thus, the motion must be denied and the crossmotion granted.

As this case shows, when drafting a contract, especially one with more than two parties, it is important to identify which specific parties have which specific obligations.Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning obligations under a multi-party contract.