Can a claim for equitable or common-law indemnification co-exist with a claim for express or contractual indemnification?

In Live Invest, Inc. v. Morgan Justice Emerson says “no”, when the claim seeks to recover for the defendant’s wrongdoing (e.g., breach of contract) as opposed to simply trying to hold a defendant liable based on vicarious liability.

In Live Invest, the court was faced with a motion to dismiss  a third-party action brought by Jericho Capital Corp. (“Jericho”) against Gamma Enterprises, LLC (“Gamma”).  The main action alleged claims seeking to pierce the corporate veil against an individual and several entities, including Jericho.  On motions to dismiss the main action, the court dismissed all but Jericho, see Order, and Order 2, Live Invest v. Morgan (Jan. 13, 2017).   Jericho then pursued the third-party action against Gamma, asserting three causes of action, all premised on variations of indemnification.   The first claim, for express or contractual, based liability on a clause in the Purchase Agreement between Jericho and Gamma, stating that Gamma, “agrees to indemnity and hold harmless [Jericho]. . . from. . . any and all manner of loss, suits, claims,or causes of action. . . arising out of. . . Delta.”  The latter two claims were based on equitable and common-law indemnification.

Noting that equitable or common-law indemnification generally applies when one is held responsible by operation of law due to the relationship of the parties, such as vicarious liability, the dismissed the two equitable claims since the contract itself is claimed to have been breached.  Therefore, the court reasoned, the claim is properly premised for the breach, not by reason of the relationship of the parties.

Interestingly, as to the express or contractual indemnification claim, Gamma raised the threshold issues of whether that claim was “premature” and if the claim for indemnification was incompatible with plaintiff’s veil-piercing claim, see Gamma’s Memorandum of Law.  The Court rejected both arguments.  Finding first that although public policy will render unenforceable contracts that purport to indemnify one for conduct that involves an “intent to harm”, the court here found that nothing precludes indemnification for damages flowing from a mere “volitional act” where no finding of intent to harm has been made.  As to the incompatibility argument, Justice Emerson found that the indemnification and veil-piercing actions could co-exist.  The court reasoned that a claim based on an alter-ego theory is a “procedural device”, not a substantive remedy.  It “merely furnishes a means for a complainant to reach a second corporation or individual”.

 

CPLR 3211(a)(1) allows a defendant to seek dismissal of a complaint when the defense is “founded upon documentary evidence.” “Documentary evidence”, however, is not defined by the CPLR – leaving many practitioners in the dark as to what qualifies as a sufficient “document” under this paragraph.  Indeed, in a recent blog, we highlighted a case involving whether a termination letter sent by the lawyer was sufficient.

By its plain meaning, “documentary evidence” seems to suggest that any type of evidence that has been reduced to writing could qualify. In reality, however, “documentary evidence” only encompasses certain types of documents, making CPLR 3211(a)(1) a narrow, and sometimes risky, ground upon which to seek dismissal.

That begs the question – what qualifies as documentary evidence under CPLR 3211(a)(1)? New York courts have held that judicial records and documents such as notes, mortgages, and deeds rise to the level of “documentary.” But what about contracts? In Hoeg Corp. v Peebles Corp., the Second Department recently affirmed that contracts can indeed attain the rank of “documentary evidence” under certain circumstances.

In Hoeg, plaintiff and defendant entered into a joint venture and memorialized the terms of their relationship in a written retainer agreement. Specifically, the retainer agreement provided, among other things, that plaintiff would act as a consultant in order to facilitate defendant’s acquisition and development of real property in New York City. The retainer agreement also set forth varying commission structures for work performed by plaintiff in facilitating the defendant’s acquisition of such properties. Notwithstanding the written retainer agreement, plaintiff alleged that it had entered into a prior oral agreement with defendant whereby the parties agreed that plaintiff would retain 25% of the equity in the joint venture.

The plaintiff ultimately commenced an action against the defendant for breach of the oral agreement, alleging that the defendant had failed to honor the terms of the oral agreement after the defendant had sold development rights to a parcel of property in a multimillion dollar deal. The Kings County Supreme Court denied the defendant’s motion to dismiss, but the Second Department reversed, finding that the written retainer agreement qualified as documentary evidence under CPLR 3211(a)(1).

In reaching its conclusion, the Court examined the parties’ written retainer agreement and found that the agreement was “comprehensive in its scope and coverage” that constituted a complete written instrument. Accordingly, the Court held that the parol evidence rule bars any evidence concerning the alleged prior oral agreement. For this reason, the Court ruled that the parties’ contract “conclusively disposed of the plaintiff’s claim alleging breach of the purported oral joint venture agreement.”

This does not necessarily mean that every contract will qualify as documentary evidence under CPLR 3211(a)(1). A document will be considered “documentary evidence” within the meaning of CPLR 3211(a)(1) if it “utterly refutes the plaintiff’s allegations, conclusively establishing a defense as a matter of law” (see, e.g., Eisner v Cusumano Corp.) .  In addition, the documentary evidence must be “unambiguous, authentic, and essentially undeniable” (id.).  

The careful practitioner should be aware of the limited utility of CPLR 3211(a)(1) and be armed with the right evidence before relying solely on the “documentary evidence” ground. Otherwise, it might be wise for a practitioner to invoke CPLR 3211(a)(7) as a ground for dismissal as well.

 

In an action brought against a title company for losses in connection with a property sale, Justice Elizabeth H. Emerson, in JBGR LLC v. Chicago Title Ins. Co., denied the title insurer’s motion to amend its answer to add defenses, but also denied plaintiffs’ motion for a protective order concerning a withheld memorandum prepared by plaintiffs’ “expediter”.

This is the latest suit involving a 286-acre parcel of property for the development of homes surrounding a golf course on Long Island.  In an earlier suit, the court awarded $2.97 million in damages against the plaintiffs in the current action based upon a promissory note default.  In turn, plaintiffs sued Chicago Title, title insurer of the sale.  In short, plaintiffs allege they were unaware of a 1997 declaration that restricted development to 140 homes, of which the title insurer failed to advise.  Plaintiffs intended to build another 55 homes on the property, but couldn’t.

After years of discovery and motion practice, the case was certified trial ready, and note of issue filed in December 2016.  Post note of issue motions were then filed.  Defendant filed a motion to amend its answer to withdraw certain defenses, modify others and add six more.  Plaintiffs cross-moved for a protective order, seeking to prevent disclosure of a memorandum produced to defendant, based upon attorney client privilege and work product doctrines.

As to the proposed amendments, the court concluded that the delay, coupled with prejudice, warranted denial.  In considering the prejudice, the court applied the same elements used in the laches context, and noted that once certified as “trial ready”, the court’s discretion “should be discrete, circumspect, prudent, and cautious”.  In this case, the court focused particularly on how long defendant was aware of the facts, which had been since June 2015.

An even more significant ruling, however, was the denial of the motion for a protective order.  The memorandum in question was a memo generated by Joseph Dempsey, an attorney, summarizing a meeting held in 2010, at which the municipal applications for the development were discussed.  Defendant obtained the document through a third-party subpoena served upon one of the participants to the meeting, Victor Prusinowski.  Mr. Prusinowski described in his deposition that he was an expediter or “land-use consultant”.  The court held that the memo was not protected from disclosure on three grounds.  First, Prusinowski’s advice, as a non-lawyer service provider, while “important” to the legal advice given to the clients, was not “given to facilitate such legal advice”, and therefore the agency principle did not apply here and his presence waived any privilege.  Second, even if it were privileged, the court concluded that there was a waiver, since “plaintiffs’ took no concrete steps to obtain a ruling” or seek a claw-back for nearly two years.   Finally, the court concluded that the memo prepared by Dempsey was not considered “work product”, since he wasn’t acting as counsel when prepared.  The memo did not contain “language uniquely reflecting a lawyer’s learning an [sic] professional skills, including legal research, analysis, conclusions, legal theory or strategy”.

And all this means what?  As to amendments, consider amending or seeking leave soon after the new facts arise.  Although there may be strategy in waiting to amend, the courts will focus on how long you knew, and whether you had a reasonable excuse for the delay.  As to privilege, when working with non-lawyer service providers, courts will carefully scrutinize their retention, scope of services and their “necessity” for the rendering or facilitation of legal advice.  Consider whether counsel — and not the client — should retain the provider, and whether a Kovel agreement is needed.

 

 

 

The doctrine of equitable recoupment, which is codified in CPLR 203(d) permits a defendant to assert an otherwise untimely defense or counterclaim. The Appellate Division, First Department recently applied the doctrine in California Capital Equity, LLC v. IJKG, LLC, and highlighted a few caveats that a litigator should bear in mind when relying upon the doctrine.   Importantly, one must keep in mind that the doctrine of equitable recoupment is to be used as a shield, not a sword.

Plaintiff California Capital Equity, LLC (“CalCap”) commenced an action against defendants IJKG, LLC (“IJKG”) and Vivek Garipalli (“Garipalli”)¹ (collectively, “Defendants”) asserting claims of breach of contract, fraud, and breaches of fiduciary duty arising out of, among other things, Defendants’ failure to make interest payments to CalCap pursuant to a Note Agreement.   In response, IJKG asserted counterclaims for tortious interference with contract, breach of implied covenant of good faith and fair dealing, and unjust enrichment.

CalCap moved to dismiss IJKG’s counterclaims for tortious interference with contract and unjust enrichment on the ground that these counterclaims were barred by New York’s three-year statute of limitations.   Justice Ramos of the New York County Commercial Division denied CalCap’s motion, finding that the doctrine of equitable recoupment permitted IJKG to assert its otherwise time-barred counterclaims.

The First Department affirmed Justice Ramos’ ruling. The Court explained that the doctrine of equitable recoupment, which is codified in CPLR 203(d), permits a defendant to seek equitable recoupment in an otherwise untimely defense or counterclaim.   However, there are two main caveats with respect to the doctrine: (1) the defense or counterclaim must arise from the same transaction, occurrence, or series of transactions or occurrences as alleged in the complaint; and (2) the doctrine may only be asserted to offset any damage award or deficiency judgment that a plaintiff may obtain in its favor against a defendant.   In other words, the doctrine of equitable recoupment may only be used defensively as a shield for recoupment purposes, and not as a sword for a defendant to obtain affirmative relief on an otherwise stale counterclaim.

Applying these principles, the First Department concluded that IJKG’s tortious interference of with contract counterclaim, if proved, could be used defensively for recoupment purposes, but that IJKG could not obtain any relief from the counterclaims, such as disgorgement. Accordingly, the Court permitted IJKG to assert its counterclaim for tortious interference with contract solely to offset any damage award or deficiency that CalCap may obtain in its favor.

¹  Although Garipalli was named as a defendant in the lawsuit, all claims against him have been dismissed.

The Second Department recently handed down a harsh reminder of the importance of obtaining an executed broker’s agreement.  Oral agreements for broker fees are apt to run afoul of the statute of frauds, and personal jurisdiction cannot be conferred by the mere insertion of a forum selection clause in the brokered sale agreement.

In Ausch v Sutton, the plaintiff alleged he was owed a broker’s fee pursuant to an oral agreement with the defendants for arranging the sale of the first defendant’s (Defendant 1) interest in a company to Defendant 2. Defendant 3 co-owned the company with Defendant 1 and resided outside New York. Aside from the purchase agreement, which contained a forum selection clause designating New York for the resolution of any disputes arising from the purchase agreement, Defendant 3 had no contacts with New York.

Defendant 3’s motion to dismiss pursuant to CPLR 3211(a)(8) was denied by the Kings County Supreme Court (Knipel, J.) on the ground that the forum selection clause in the purchase agreement conferred jurisdiction over all disputes arising from the purchase agreement, which included alleged oral agreements for related broker fees. But the Appellate Division reversed, citing Magdalena v Lins,  which held that a forum selection clause among defendants was insufficient to confer personal jurisdiction in a suit brought by the plaintiff, where the plaintiff was neither a party to the agreement containing the forum selection clause nor a third party beneficiary. In essence, the Appellate Division distinguished between the purchase agreement and the alleged oral agreement for a broker’s commission–the forum selection clause in the former was insufficient to confer personal jurisdiction with respect to the latter.

If the lack of personal jurisdiction over Defendant 3 were not enough, then the statute of frauds ultimately would have proved fatal to the plaintiff’s causes of action against all three defendants. General Obligations Law § 5-701[a][10] states that an agreement to pay a commission for arranging a sale transaction is void unless in writing. As held by the Court of Appeals, a claim for unjust enrichment or quasi-contract in connection with a brokered transaction cannot be used to get around the statute of frauds (see Snyder v Bronfman).

The bottom line for brokers of sale transactions is that they cannot rely on protections contained within the sale documents unless they are parties to those documents. To ensure that the dispute will be heard in New York and not dismissed out of hand under the statute of frauds, a broker would be well advised to obtain a signed agreement declaring the terms of her commission before engaging in any work to consummate a potential business opportunity.