Proximate cause is a necessary element in tort law, but also applies to claims of breach of commercial contract.  In a recent decision by Justice Barry R. Ostrager in MUFG Union Bank, N.A. v. Axos Bank et al., No. 652474/2019, 2020 N.Y. Slip Op. 51101(U) (Sup. Ct., New York County Sept. 25, 2020), the Commercial Division of the Supreme Court, New York County addressed, among other things, the issue of whether a defendant’s breach was a proximate cause of plaintiff’s damages in denying one defendant’s motion for summary judgment seeking to dismiss plaintiff’s breach of contract claim.

The parties to the action are MUFG Union Bank, N.A. (“Union”), Epiq Systems, Inc. (“Epiq”), and Axos Bank, Axos Fiduciary Services, Axos Nevada, LLC, and Seller Sub, LLC (collectively, “Axos”).

On or about September 27, 2012, Union and Epiq entered into a Joint Services Agreement (“JSA”), effective October 1, 2012, as amended. Pursuant to the JSA, Union and Epiq agreed, among other things, “to jointly promote their products and services to bankruptcy and insolvency professionals and also fiduciary types as may be agreed upon by the parties on a case-by-case basis,” which professional and fiduciary types were deemed “Joint Clients”. Specifically, Union provided deposit services to bankruptcy trustee customers and Epiq provided software services to bankruptcy trustee customers. The JSA expressly restricted Union and Epiq’s ability to assign the JSA or transfer Joint Client relationships or accounts without the other’s prior written consent. Notwithstanding this restriction, Epiq, without consent of Union, decided to sell its software business to Axos. In order to circumvent the anti-assignment provision in the JSA, Epiq established Seller Sub, LLC (“Seller Sub”), identified as “a special purpose entity wholly owned by Epiq and allegedly created for the sole purpose of effectuating the transfer of the JSA to Axos without Union’s consent.” Epiq formed Seller Sub one day before entering into a fifh amendment of the JSA with Union. Epiq then transferred the JSA to Seller Sub. Axos then acquired Seller Sub with the JSA. But Epiq directly transferred its software business to Axos. Thereafter, Axos terminated the JSA with Union and the action ensued.

Union brought the action, inter alia, for damages for breach of the JSA stemming from Epiq and Axos’s alleged “scheme designed . . . to allow the transfer of the JSA to a third-party competitor bank in contravention of the anti-assignment provisions in the JSA.” See Second Amended Complaint, ¶¶ 37-67 and 103-110. Epiq and Axos denied Union’s claims. But in an earlier decision, the Court granted partial summary judgment on Union’s First Cause of Action in Union’s First Amended Complaint alleging breach of contract against Epiq, determining that Epiq’s transfer and assignment of its software business to Seller Sub–its wholly owned subsidiary–and its subsequent sale of Seller Sub to Axos Nevada constituted breaches of the JSA. See June 4, 2020 Decision. Thereafter, Union filed its Second Amended Complaint, in which Union mirrored the First Cause of Action from the First Amended Complaint. Epiq and Axos both moved for summary judgment. Only the Court’s decision on Epiq’s motion is addressed below.

According to the Court, Epiq sought dismissal of of Union’s breach of contract claims on the grounds that the breach was not the proximate cause of any compensable damages;” and claimed that Axos’s conduct subsequent to the transfer of the JSA “constituted an intervening act so extraordinary that it breaks the causal connection and relieves Epiq of any liability for damages” to Union. MUFG Union Bank, N.A., supra, at 5-7.

In essence, Union seeks, inter alia, damages in the form of lost profits from bankruptcy trustee deposits as a result of Epiq’s transfer of the JSA and Axos’s subsequent termination of the JSA. Epiq contends that these damages are “consequential damages” which Union is not entitled to under the JSA. Id. at 7. Generally, consequential damages–“damages that do not directly flow from a breach of contract”–“are designed to compensate a party for reasonably foreseeable damages” “proximately caused by the breach.” Lola Roberts Beauty Salon, Inc. v. Leading Ins. Group Ins. Co., Ltd., 160 A.D.3d 824, 825 (2d Dep’t 2018) (citation omitted).

Essential to any claim of breach of contract is the element of proximate cause. MUFG Union Bank, N.A., supra, at 5 citing Lola Roberts Beauty Salon, Inc., supra, 160 A.D.3d at 825; see also Prudential Ins. Co. of America v. Dewey Ballantine, Bushby, Palmer & Wood, 170 A.D.2d 108, 116-117 (1st Dep’t 1991) (on motion to dismiss, breach of contract action survived dismissal where plaintiff sufficiently alleged that defendant’s breach was the proximate cause of damages claimed). “Generally, it is for the trier of fact to determine the issue of proximate cause [and] the issue of proximate cause may be decided as a matter of law where only one conclusion may be drawn from the established facts.” Id. at 6 citing Lola Roberts Beauty Salon, Inc., supra, at 826.

In applying the principle of proximate cause and intervening cause to a contract case, the Court relied on the Court of Appeal’s decision in Hain v Jamison, 28 NY3d 524 [2016] (a tort case) for the rule:

“When a question of proximate cause involves an intervening act, liability turns upon whether the intervening act is a normal or foreseeable consequence of the situation created by the defendant’s negligence. Thus where the acts of a third person intervene between the defendant’s conduct and the plaintiff’s injury, the causal connection is not automatically severed. Rather, the mere fact that other persons share some responsibility for plaintiff’s harm does not absolve defendant from liability because there may be more than one proximate cause of an injury. It is only where the intervening act is extraordinary under the circumstances, not foreseeable in the normal course of events, or independent of or far removed from the defendant’s conduct, that it may possibly break the causal nexus. To state the inverse of this rule, liability subsists when the intervening act is a natural and foreseeable consequence of a circumstance created by defendant.” (internal quotation, citation and emphasis omitted)]).

MUFG Union Bank, N.A., supra, at 6; see also Bi-Economy Mkt., Inc. v. Harleysville Ins. Co. of N.Y., 10 N.Y.3d 187, 193 (N.Y. Ct. App. 2008) (“It is not necessary for the breaching party to have foreseen the breach itself or the particular way the loss occurred, rather, ‘it is only necessary that loss from a breach is foreseeable and probable'” (citation omitted)).

In support of summary judgment, Epiq attempted to rely on Union’s witnesses’ prior testimony made in connection with Union’s application for preliminary injunctive relief or in depositions “to argue that Epiq’s breach caused no damages at all, or that the conduct of Axos or some other event was an intervening, superseding cause that broke the required causal connection.” Union disputed. The Court determined that Epiq did not establish as a matter of law that “the only conclusion one could draw from the evidence is a lack of proximate cause;” that “if the Court were to search the record . . ., the Court could . . . identify substantial evidence to support a determination by the trier of fact in favor of Union on the proximate cause issue.” MUFG Union Bank, N.A., supra, at 6. Moreover, the Court determined that “[a] jury could well find . . . that Epiq and Axos share responsibility for Union’s loss and that the conduct of Axos was ‘a natural and foreseeable consequence of a circumstance created by defendant’ Epiq.” Id.

Ultimately, the Court denied Epiq’s motion for summary judgment on the ground of proximate cause. Essentially, issues of fact remained for determination by the trier of fact, concerning, inter alia, whether Union’s loss was a foreseeable consequence of Epiq’s actions in breaching the JSA.