R/S Associates v. New York Job Development Authority, 98 N.Y.2d 32 (2002)

When the language of a contract is clear and unambiguous, it must be interpreted according to its plain meaning, without resort to extrinsic evidence.

Summary

R/S Associates sued the New York Job Development Authority (JDA), alleging breach of contract for improperly calculating the “effective cost of funds” in their loan agreement by including the cost of defaults by other borrowers. The New York Court of Appeals held that the term was unambiguous and included all costs associated with securing the funds, including borrower defaults. The court reasoned that the term’s ordinary usage encompassed all actual costs and that excluding default costs would ignore the word “effective.” This case reinforces the principle that unambiguous contract language should be enforced as written, without considering external evidence.

Facts

R/S Associates obtained a loan from the JDA to purchase land and construct a facility. The loan agreement stipulated that the interest rate charged by the JDA would not exceed 1.5% over the JDA’s “effective cost of funds.” The JDA funded the loan through the issuance of a variable rate, tax-exempt bond. R/S made regular payments for over a decade before alleging that the JDA was improperly including the cost of defaults by other borrowers in its calculation of the “effective cost of funds.”

Procedural History

R/S filed a class action lawsuit against the JDA for breach of contract and fraud. The Supreme Court dismissed the complaint, holding that the JDA properly included operating costs and borrower defaults in its calculation. The Appellate Division affirmed, stating the term “effective cost of funds” was unambiguous. The New York Court of Appeals then reviewed the case.

Issue(s)

Whether the term “effective cost of funds” in the loan agreement is ambiguous, and whether it properly includes the cost of defaults by other borrowers in the JDA’s calculation.

Holding

No, the term “effective cost of funds” is not ambiguous because under its ordinary usage, it means the actual cost of securing funds for a specific loan, which necessarily includes the cost of defaults by other borrowers.

Court’s Reasoning

The Court of Appeals held that the term “effective cost of funds” was unambiguous. The court relied on the principle that when contract language is clear, unequivocal, and unambiguous, it should be interpreted by its own language. The court defined “effective” as “actual” or “existing in fact.” It reasoned that regardless of borrower defaults, the JDA’s funding mechanism required it to repay the underlying bond. Therefore, the “actual” or “effective” cost of the funds loaned by the JDA included the interest paid to bondholders, the cost of issuing the bond, and the cost of defaults by borrowers who received loans from bond proceeds. The court quoted B & R Children’s Overalls Co. v New York Job Dev. Auth., stating that “[l]oss engendered by defaulting borrowers is a readily perceivable risk for any lender, which [the JDA] was entitled to consider in calculating the interest rate charged to [R/S].” Because the contract term was unambiguous, the court did not consider extrinsic evidence. The court emphasized that such evidence is inadmissible to create ambiguity in a clear and unambiguous agreement, citing W.W.W. Assoc. v Giancontieri: “ ‘[E]xtrinsic and parol evidence is not admissible to create an ambiguity in a written agreement which is complete and clear and unambiguous upon its face’”.