         SUPREME COURT OF THE STATE OF NEW YORK
           Appellate Division, Fourth Judicial Department
1287
CA 10-00545
PRESENT: SMITH, J.P., PERADOTTO, CARNI, SCONIERS, AND GORSKI, JJ.


HAHN AUTOMOTIVE WAREHOUSE, INC.,
PLAINTIFF-APPELLANT-RESPONDENT,

                    V                             MEMORANDUM AND ORDER

AMERICAN ZURICH INSURANCE COMPANY AND
ZURICH AMERICAN INSURANCE COMPANY,
DEFENDANTS-RESPONDENTS-APPELLANTS.


THE WOLFORD LAW FIRM LLP, ROCHESTER (MICHAEL R. WOLFORD OF COUNSEL),
FOR PLAINTIFF-APPELLANT-RESPONDENT.

DAMON MOREY LLP, BUFFALO (MICHAEL J. WILLETT OF COUNSEL), FOR
DEFENDANTS-RESPONDENTS-APPELLANTS.


     Appeal and cross appeal from an order of the Supreme Court,
Monroe County (Kenneth R. Fisher, J.), entered June 15, 2009 in a
breach of contract action. The order, among other things, granted
plaintiff’s cross motion for partial summary judgment.

     It is hereby ORDERED that the order so appealed from is modified
on the law by granting those parts of the motion seeking summary
judgment dismissing the second through fourth causes of action and as
modified the order is affirmed without costs.

     Memorandum: Plaintiff commenced this breach of contract action
seeking, inter alia, a determination that bills sent by defendants to
plaintiff pursuant to several insurance contracts issued to plaintiff
by defendants were time-barred and thus that plaintiff had no duty to
pay those bills. In their second amended answer, defendants asserted
19 counterclaims seeking to recover damages for plaintiff’s alleged
breach of those insurance contracts. Defendants moved for, inter
alia, a determination that they were entitled to satisfy any part of
plaintiff’s outstanding debt from a $400,000 letter of credit
previously issued to them by plaintiff, and plaintiff cross-moved for
partial summary judgment determining, inter alia, that any amounts
sought by defendants in the counterclaims were time-barred.
Logically addressing first plaintiff’s cross motion, we note that
Supreme Court granted those parts seeking dismissal of the
counterclaims as time-barred insofar as they sought recovery for debts
arising more than six years prior to the commencement of this action.
The court also, however, granted that part of defendants’ motion
seeking a determination that defendants were entitled to satisfy any
part of plaintiff’s outstanding debt from a $400,000 letter of credit
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                                                         CA 10-00545

previously issued to them by plaintiff, notwithstanding the expiration
of the statute of limitations.

     We reject the contention of plaintiff on its appeal that the
court erred in determining that defendants were entitled to apply the
letter of credit to all debts, including those that were time-barred.
A letter of credit is interpreted in accordance with the same rules
that apply to any other contract (see Venizelos, S.A. v Chase
Manhattan Bank, 425 F2d 461, 465-466), and “[a] familiar and eminently
sensible proposition of law is that, when parties set down their
agreement in a clear, complete document, their writing should as a
rule be enforced according to its terms. Evidence outside the four
corners of the document as to what was really intended but unstated or
misstated is generally inadmissible to add to or vary the writing”
(W.W.W. Assoc. v Giancontieri, 77 NY2d 157, 162). Contrary to
plaintiff’s contention, the letter of credit unequivocally permitted
defendants to apply the letter of credit to any debts that plaintiff
owed to defendants. The letter of credit did not permit plaintiff to
direct the particular debt to which the letter of credit should be
applied, nor did it prohibit defendants from using the letter of
credit to satisfy otherwise time-barred debts. Furthermore, plaintiff
provided the letter of credit well before the current controversy
arose. Thus, because “the payment in question [was] already in the
creditor[s’] possession as security for a debt . . ., the money
already belong[ed] to the creditor[s] and [they were entitled to]
apply it to the obligation in any manner” that they chose (Lines v
Bank of Am. Nat’l Trust & Sav. Assn., 743 F Supp 176, 180 n 2).
Contrary to plaintiff’s further contention, plaintiff could not set
conditions upon the use of the letter of credit after it had been
provided to defendants. As previously noted, “when parties set down
their agreement in a clear, complete document, their writing should as
a rule be enforced according to its terms” (W.W.W. Assoc., 77 NY2d at
162), and the letter of credit at issue specifically stated that it
“cannot be modified or revoked without [defendants’] consent.”

      With respect to plaintiff’s contention that defendants could not
apply the letter of credit to the debts that arose prior to the
expiration of the statute of limitations, we note the well-settled
proposition that “[t]he expiration of the time period prescribed in a
[s]tatute of [l]imitations does not extinguish the underlying right,
but merely bars the remedy . . . Nicely summarized elsewhere, ‘[t]he
theory of the statute of limitations generally followed in New York is
that the passing of the applicable period does not wipe out the
substantive right; it merely suspends the remedy’ ” (Tanges v
Heidelberg N. Am., 93 NY2d 48, 55; see Matter of Paver & Wildfoerster
[Catholic High School Assn.], 38 NY2d 669, 676). Notably, plaintiff
does not contend that the debts at issue are not due and owing. Thus,
despite the expiration of the statute of limitations with respect to
those debts, defendants were entitled to apply the letter of credit to
them.

     Contrary to the contention of defendants on their cross appeal,
however, the court properly concluded that the counterclaims for any
debt that arose more than six years prior to the commencement of this
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                                                         CA 10-00545

action were time-barred. The contention of defendants that the claims
for those debts did not accrue until they made a demand for payment is
without merit. “ ‘Where, as here, the claim is for payment of a sum
of money allegedly owed pursuant to a contract, the cause of action
accrues when the [party making the claim] possesses a legal right to
demand payment’ ” (Minskoff Grant Realty & Mgt. Corp. v 211 Mgr.
Corp., 71 AD3d 843, 845; see Kingsley Arms, Inc. v Copake-Taconic
Hills Cent. School Dist., 9 AD3d 696, 698, lv dismissed 3 NY3d 767;
Albany Specialties v Shenendehowa Cent. School Dist., 307 AD2d 514,
516; Town of Brookhaven v MIC Prop. & Cas. Ins. Corp., 245 AD2d 365,
lv denied 92 NY2d 806). Thus, in such a case, the statute of
limitations “begins to run when the right to make the demand for
payment is complete, and the [party making the claim] will not be
permitted to prolong the [s]tatute of [l]imitations simply by refusing
to make a demand” (State of New York v City of Binghamton, 72 AD2d
870, 871). Here, the court properly determined that the counterclaims
for payment of the debts at issue were time-barred because defendants
had the right to demand payment for those debts more than six years
prior to the commencement of this action. That conclusion does not,
however, prevent defendants from applying the letter of credit, which
plaintiff had previously provided to them, to any debt, including
those debts that are time-barred, inasmuch as the expiration of the
statute of limitations merely bars the remedy but does not extinguish
defendants’ rights.

     We agree with the further contention of defendants on their cross
appeal that those parts of their motion for summary judgment
dismissing the second through fourth causes of action seeking damages
arising from their use of the letter of credit should have been
granted. Indeed, we note that the court properly determined that
those causes of action were without merit, but it did not expressly
dismiss them. We therefore modify the order accordingly.

     We have considered the remaining contentions of the parties and
conclude that they are without merit.

     All concur except PERADOTTO, J., who dissents in part and votes to
modify in accordance with the following Memorandum: I respectfully
dissent in part. I cannot agree with the majority that Supreme Court
properly determined that defendants’ breach of contract counterclaims
for any debt that arose more than six years prior to the commencement
of the action are time-barred. Rather, in my view, those
counterclaims did not accrue until defendants demanded, and plaintiff
refused to pay, premiums and other amounts owed under insurance
contracts issued by defendants. I therefore would further modify the
order by denying plaintiff’s cross motion and granting those parts of
defendants’ motion seeking summary judgment determining that none of
defendants’ counterclaims is barred by the statute of limitations and
by dismissing plaintiff’s third affirmative defense asserting that the
counterclaims in question are time-barred.

     The facts of this case are largely undisputed, although I note
that the underlying insurance contracts are somewhat complex.
Plaintiff and defendants entered into several contracts for workers’
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                                                         CA 10-00545

compensation insurance, general liability insurance, and business
automobile insurance from 1992 through 2003. Beginning in 1997,
defendants also began providing claim services in connection with
automobile physical damage claims for which plaintiff was self-
insured. Plaintiff purchased four types of policies that are relevant
to this matter: (1) retrospective premium policies, (2) adjustable
deductible policies, (3) deductible policies, and (4) claim services
contracts. Each of the policies provided for the payment of an
initial premium, deductible or fee that was subsequently adjusted
based upon actual losses or expenses. Several of the policies were
subject to a Retrospective Premium Agreement, pursuant to which
plaintiff’s initial premiums were based upon estimated exposures and
losses under the policies. The premiums were recalculated 18 months
after the inception of the policy and annually thereafter, based upon
audited exposures and actual claims experience. Plaintiff was
required to pay an additional premium if the recalculated premium
exceeded the estimated amount, while plaintiff was entitled to a
refund if the recalculated premium was below the estimated amount. Of
particular relevance to the instant matter, the Retrospective Premium
Agreement provided that “the Insured shall pay to the Company within
ten (10) days of receipt of its demand therefor[], Earned
Retrospective Premium based upon Incurred Losses valued as [o]f a date
six (6) months after the expiration of each such period, as soon as
practicable after such valuation. Additional Earned Retrospective
Premium Adjustments shall be computed by the Company based upon
Incurred Losses valued annually thereafter as soon as practicable
after such valuation dates, payable within ten (10) days of receipt of
its demand therefor[]” (emphases added).

     The deductible policies were subject to a Deductible Agreement,
pursuant to which plaintiff was required to pay a deductible of
$250,000 per occurrence or accident, as well as allocated loss
adjustment expenses and a variable fee factor. The Deductible
Agreement similarly provided for an initial adjustment 18 months after
the inception of the policies and then at yearly intervals thereafter.
With respect to payment, the Deductible Agreement provided that “[t]he
Insured shall pay to the Company within twenty (20) days of its demand
in the manner set forth in this Agreement: a) All paid losses and all
reserves as determined and established by the Company plus an
allowance for losses incurred but not reported, within the Deductible
Amounts, and b) All payments for Allocated Loss Adjustment Expense
made by the Company and all reserves for Allocated Loss Adjustment
Expense plus an allowance for expenses incurred but not reported, as
established and determined by the Company . . ., and c) All other
insurance related expenses, assessments, taxes, fines or penalties
which are charged or assessed by any administrative, regulatory or
governmental authority or court of competent jurisdiction as a direct
liability against any policy listed” in another portion of the
Agreement. The Claim Services Contracts likewise provided for the
payment of estimated fees during the terms of the agreements, with a
final reconciliation to be performed 12 months after the expiration of
each agreement. Under those contracts, “[plaintiff]’s payment was
then due within [30] days of receipt of the invoice from
[defendants].”
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                                                         CA 10-00545

     In 2005, defendants initiated a “deductible reconciliation
program,” pursuant to which they reviewed all of their deductible
programs and their general ledger to determine whether there were any
discrepancies. During the course of that reconciliation, defendants
discovered that they had neglected to bill plaintiff for losses,
expenses or fees for which plaintiff was responsible under its
business automobile and general liability coverage policies for the
policy year from September 30, 1995 through September 30, 1996. On
April 25, 2005, defendants issued an invoice to plaintiff in the
amount of $1,123,874.27 based upon loss and expense payments made by
defendant beginning September 30, 1995, when the policies in question
went into effect. In early 2006, defendants further discovered that
they had failed to bill plaintiff for any of the amounts for which
plaintiff was responsible under the Claim Services Contracts. They
thus issued an invoice to plaintiff on March 27, 2006 in the amount of
$71,615.71, representing amounts due under those contracts from March
1997 until February 2006. Plaintiff did not pay either of the
invoices.

     Defendants also issued two “adjustment” invoices to plaintiff.
When a new senior underwriter for defendants assumed responsibility
for plaintiff’s account in 2005, she learned that plaintiff had not
paid any of the 1998, 1999 or 2003 adjustment invoices prepared by
defendants. Plaintiff’s insurance agent indicated that plaintiff had
not paid any of those adjustments because plaintiff did not understand
them. Defendants’ underwriter then voided those three invoices and
performed a new adjustment, taking into account losses and expenses
incurred from March 31, 1995, the date of the prior undisputed
adjustment, through March 31, 2005. The result was a March 2, 2006
adjustment invoice in the amount of $751,514. Plaintiff responded to
that adjustment invoice by letter, asserting that, “[a]lthough there
may be no dispute as to the amounts that have been invoiced by
[defendants], it is also evident that these amounts would appear to be
uncollectible and that any attempt to collect these amounts through
legal proceedings would be barred by the statute of limitations.
Therefore, we do not believe that there is any basis for [defendants]
to claim that the invoiced amounts are owed by [plaintiff].”
Defendants then issued a second adjustment invoice to plaintiff dated
June 2, 2006, which reflected adjustments to policies subject to
retrospective premium agreements and adjustable deductible policies as
of March 31, 2006. Although the March 31, 2006 adjustment resulted in
a refund to plaintiff of $262,480, defendants did not remit that
amount to plaintiff inasmuch as plaintiff’s outstanding obligations
exceeded the amount of its refund.

     Plaintiff commenced this breach of contract action seeking, inter
alia, a determination that it had no duty to pay the invoices issued
by defendants because any claim for the amounts owed was time-barred.
In their second amended answer, defendants asserted 19 counterclaims
seeking to recover damages for plaintiff’s alleged breach of the
insurance contracts. In its reply to the counterclaims, plaintiff
asserted various affirmative defenses, including that defendants’
counterclaims, in whole or in part, were barred by the statute of
limitations.
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                                                         CA 10-00545

     Thereafter, defendants moved for, inter alia, a determination
that plaintiff owed them the amounts set forth in the four invoices
and that the statute of limitations did not bar any of their
counterclaims. Defendants also sought dismissal of plaintiff’s third
affirmative defense, in which plaintiff asserted that the
counterclaims “are barred, in whole or in part, by the applicable
statute of limitations.” Plaintiff cross-moved for partial summary
judgment determining, inter alia, that any amounts sought by
defendants in the counterclaims were time-barred to the extent that
they could have been billed to plaintiff more than six years before
the commencement of this action. The court granted plaintiff’s cross
motion, concluding that “the statute of limitations has run as to all
claims for which [defendants] had the right to demand payment more
than six years prior to the commencement of this action.” In my view,
that was error.

     It is well settled that “[t]he [s]tatute of [l]imitations begins
to run once a cause of action accrues (CPLR 203 [a]), that is, when
all of the facts necessary to the cause of action have occurred so
that the party would be entitled to obtain relief in court” (Aetna
Life & Cas. Co. v Nelson, 67 NY2d 169, 175). Thus, “[i]n contract
cases, the cause of action accrues and the [s]tatute of [l]imitations
begins to run from the time of the breach” (John J. Kassner & Co. v
City of New York, 46 NY2d 544, 550; see LaGreca v City of Niagara
Falls, 244 AD2d 862, lv denied 91 NY2d 813; Micha v Merchants Mut.
Ins. Co., 94 AD2d 835, 835-836).

     Supreme Court and the majority herein rely on a line of cases
holding that a breach of contract action accrues when the party making
the claim possesses a legal right to demand payment (see e.g. Kingsley
Arms, Inc. v Copake-Taconic Hills Cent. School Dist., 9 AD3d 696, 698,
lv dismissed 3 NY3d 767; Albany Specialties v Shenendehowa Cent.
School Dist., 307 AD2d 514, 516). However, those cases are inapposite
inasmuch as they involve contracts pursuant to which the plaintiff
contractors were entitled to payment upon completion or substantial
completion of the work. In Kingsley Arms (9 AD3d at 698), for
example, the court held that the plaintiff’s breach of contract cause
of action accrued when the plaintiff “requested and was refused a
certificate of substantial completion and was told that it would ‘not
be paid the balance of the money owed on the project.’ ” At that
point, or shortly thereafter, “the breach of contract had occurred and
plaintiff’s damages were clearly ascertainable . . . .” (id.).

     Here, by contrast, each of the insurance contracts explicitly
provided that plaintiff’s obligation to pay was contingent upon
“notice” or a “demand” by defendants. “[A]s a general rule, when the
right to final payment is subject to a condition, the obligation to
pay arises and the cause of action accrues[] only when the condition
has been fulfilled” (John J. Kassner & Co., 46 NY2d at 550). Under
the express language of the contracts at issue in this case,
plaintiff’s obligation to pay the retrospective premiums, adjustable
deductibles and other fees arose – and defendants’ breach of contract
counterclaims accrued – only after defendants demanded payment thereof
and plaintiff refused to pay (see generally Russack v Weinstein, 291
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                                                         CA 10-00545

AD2d 439, 440-441). Although the insurance policies required
defendants to make periodic adjustments, plaintiff’s payment
obligation was not triggered until defendants provided plaintiff with
an invoice or other demand for reimbursement. Thus, the contracts at
issue were not breached, and defendants’ counterclaims did not accrue,
until defendants calculated the necessary adjustments, sent an invoice
to plaintiff, and plaintiff refused to pay the amounts due.

     Indeed, numerous federal and state courts confronting
retrospective premium and adjustable deductible policies similar to
those at issue here have concluded that the relevant date, for statute
of limitations purposes, is when the invoices were sent and the
recipient failed or refused to pay (see e.g. National Union Fire Ins.
Co. of Pittsburgh, Pa. v LSB Indus., Inc., 296 F3d 940; Continental
Ins. Co. v Coyne Intl. Enter. Corp., 700 F Supp 2d 207, 212-213;
Potomac Ins. Co. of Ill. v Richmond Home Needs Servs., Inc., 2006 WL
2521283, *2; Liberty Mut. Ins. Co. v Precision Valve Corp., 402 F Supp
2d 481; Brookshire Grocery Co. v Bomer, 959 SW2d 673; Commissioners of
State Ins. Fund v SM Transp. Ltd., 11 Misc 3d 1083[A], 2006 NY Slip Op
50677[U]). As the court in SM Trans. Ltd. (2006 NY Slip Op 50677[U],
*2) reasoned, “The [s]tatute of [l]imitations did not begin to run at
the end of each policy period, but rather began to run at a point
after contemplated adjustments to the premium were made pursuant to
the audit . . . CPLR 213 began to run when the plaintiff’s cause of
action accrued . . ., and the plaintiff’s cause of action accrued when
the defendant breached the terms of its policies by failing to pay
premiums demanded after the audit” (emphasis added).

     The majority cites State of New York v City of Binghamton (72
AD2d 870, 871) for the proposition that a party “will not be permitted
to prolong the [s]tatute of [l]imitations simply by refusing to make a
demand.” That case, however, did not involve a breach of contract;
rather, it involved a statutory provision requiring the State to
notify the City when a highway project was completed and requiring the
City to pay any amount owed within 60 days thereafter (id. at 871).
Thus, the Court concluded that, “[w]hile the required statutory notice
was not given here until April 11, 1977, the cause of action accrued
on April 19, 1971, 60 days after the conceded date of completion when
there first existed the legal right to be paid” (id.).

     Here, because the insurance contracts explicitly conditioned
plaintiff’s obligation to pay upon notice or a demand by defendants,
defendants’ breach of contract counterclaims did not accrue until
plaintiff failed or refused to pay in accordance with defendants’
demands (see Russack, 291 AD2d at 440-441; Henry Boeckmann, Jr. &
Assoc. v Board of Educ., Hempstead Union Free School Dist. No. 1, 207
AD2d 773, 775; see also Continental Cas. Co. v Stronghold Ins. Co.,
Ltd., 77 F3d 16, 21). Notably, in both Continental (77 F3d 16) and
Russack (291 AD2d 439), the plaintiffs had a right to demand payment
several years before they actually did so. Nevertheless, both the
United States Court of Appeals for the Second Circuit and the Second
Department held that this was of no moment for statute of limitations
purposes inasmuch as the plaintiffs’ causes of action did not accrue
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                                                         CA 10-00545

until they provided notice to and/or demanded payment from the
defendants.




Entered:   February 10, 2011                    Patricia L. Morgan
                                                Clerk of the Court
