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Current Developments in the Commercial Divisions of the
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Posted: May 8, 2014

Minor Amendment to a Complaint Proves Fatal to Plaintiff’s Case

On May 6, 2014, the First Department issued a decision in Healthcare I.Q., LLC v. Tsai Chung Chao, 2014 NY Slip Op. 03216, reversing a decision of the New York County Commercial Division and granting summary judgment to the defendant on a previsously-waived affirmative defense that the defendant had asserted in response to an amended complaint.

In Healthcare I.Q., the plaintiff contracted to provide the defendant, a doctor, with coding and billing services, pursuant to which the defendant’s patient and billing records were uploaded into the plaintiff’s proprietary management software program. The contract provided for an initial 36-month term, followed by automatic renewals for 18-month periods, unless either party provided written notice of non-renewal at least ninety days before the end of a renewal period.

After the expiration of the original 36-month period, the defendant ceased making payments. Although he and his staff continued to use the software to review previously-uploaded patient files, they did not upload any additional files. Neither party provided written notice of termination.

The plaintiff sued, alleging that the defendant’s failure to provide notice of termination, as well as his ongoing use of the software, entitled it to payment for two additional 18-month terms.

The defendant moved for summary judgment under General Obligations Law § 5-903(2), which provides that in any contract “for service, maintenance or repair to or for any real or personal property,” automatic renewal provisions may not be enforced by the service provider unless he or she provides the service recipient “written notice, served personally or by certified mail, calling the attention of that person to the existence of such provision in the contract” within a specified time period prior to the automatic renewal. The Supreme Court denied the defendant’s motion on the ground that GOL § 5-903 was an affirmative defense that had not been pled in the answer and had thereby been waived.

When the plaintiff later amended the complaint to increase the ad damnum clause, the defendant included GOL § 5-903 in his amended answer and moved for summary judgment a second time. The trial court both denied the motion and sanctioned the defendant for making a second motion on the same legal ground.

The First Department first vacated the award of sanctions, holding that:

the second summary judgment motion, brought after the pleadings were amended on a substantive issue not previously decided by the court, was procedurally proper. Once plaintiff served the amended complaint, the original complaint was superseded, and the amended complaint became the only complaint in the action. The action was then required to proceed as though the original pleading had never been served. Thus, defendant’s appeal from the prior order denying summary judgment became moot and sufficient cause existed for his motion for summary judgment dismissing the amended complaint.

(Internal quotations and citations omitted) (emphasis added).

On the merits of GOL § 5-903, the First Department rejected the plaintiff’s argument that the services provided were not “for . . . personal property,” but were instead of a merely “consulting, analytical or administrative nature,” which would take them outside the statute:

The services provided were directly and inextricably related to the billing and medical records of the practice, which are personal property . . . . Here the agreement provided for [plaintiff] to take dominion over the records, and to maintain and organize them on an ongoing basis for billing and reimbursement purposes. This was not merely incidental access to the records in the context of administrative or consulting services.

Accordingly, the plaintiff’s failure to provide timely written notice of the automatic renewal made the renewal provision unenforceable. The defendant’s continuing access to the previously-stored files was justified by necessity and by the plaintiff’s failure to return the files as requested.

This opinion is of interest both because it reminds practitioners that even a minor alteration to a complaint can open the door to new affirmative defenses—here, the plaintiff lost its entire case because of an increase in the ad damnum clause—and also because it calls attention to a little-known section of the GOL that is applicable to a great many contracts with automatic renewal provisions.

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