Opinion
No. 651268/2011.
2012-06-11
CROSSROADS ABL, LLC and Crossroads Financial Services, LLC, Plaintiffs, v. CANARAS CAPITAL MANAGEMENT, LLC, Saranac ABL, LLC, Canaras Management Limited, Richard Levinson, Anthony Clemente, Simon Airey, Shiloh Bates, Belfar Securities, Richard Bentley, C. Clemente, Peter Clemente, S. Clemente, Peter Kroon, Fred Kulikowski, J.C. Levinson, J.B. Levinson, Ryan Mingo, C. Phair, Sage Group, Ben Steger, and Quad–C Funding, LLC, Defendants.
Kennedy Berg LLP, New York, By: Gabriel Berg, Esq. Andrew Smith, Esq., for the Plaintiffs. Herrick Feinstein LLP, New York, By:David T. Feuerstein, Esq., Michael Berengarten, Esq., for the Defendants.
Kennedy Berg LLP, New York, By: Gabriel Berg, Esq. Andrew Smith, Esq., for the Plaintiffs. Herrick Feinstein LLP, New York, By:David T. Feuerstein, Esq., Michael Berengarten, Esq., for the Defendants.
BERNARD J. FRIED, J.
By this motion, Plaintiff, Crossroads Financial Services, LLC (“Crossroads”) seeks summary judgment on its claim for advancement of litigation expenses, pursuant to the indemnification provision of the parties' Origination and Administrative Services Agreement (the “Servicing Agreement”). By cross-motion, Defendant, Quad–C Funding, LLC (“Quad–C” or the “Company”) seeks to dismiss Crossroads' claim for indemnification and advancement.
Familiarity with this action, and with all prior proceedings, is presumed.
Section 8(b) of the Servicing Agreement provides as follows:
(i) Each of Crossroads and any affiliate thereof (each, an [sic] “Crossroads Indemnified Party”, and collectively, the “Crossroads Indemnified Parties”) shall, in accordance with this Section 8(b), be indemnified and held harmless by the Company from and against any and all losses, claims, damages, liabilities, expenses (including reasonable legal and other professional fees and disbursements), judgments, fines, settlements and other amounts incurred (collectively, “Indemnifiable Losses”) in connection with any and all claims, demands, actions, suits or proceedings (civil, criminal, administrative or investigative), actual or threatened (collectively, “Claims”), in which such Crossroads Indemnified Party may be involved, as a party or otherwise, by reason of such Crossroads Indemnified Party's service to, or on behalf of, or management of the affairs of, the Company, or rendering of advice or consultation with respect thereto, whether or not Crossroads Indemnified Party continues to be serving in the above-described capacity at the time any such Indemnifiable Loss is paid or incurred; provided, however, that no Crossroads Indemnified Party shall be entitled to indemnification under this Section 8(b) to extent it is finally determined by a court of competent jurisdiction that such Crossroads Indemnified Party's acts or omissions constituted gross negligence or willful misconduct.
(ii) The Company shall advance expenses incurred by such Crossroads Indemnified Party upon receipt by the Company of a signed statement of an [sic] Crossroads Indemnified Party agreeing to reimburse the Company for such advance in the event it is ultimately determined by a court of competent jurisdiction that such Crossroads Indemnified Party is not entitled to be indemnified by the Company for such expenses.
Servicing Agreement § 8(b).
A copy of the Servicing Agreement is annexed to the February 9, 2012 Affidavit of Lee Haskin, at Exhibit 3.
By letter dated August 1, 2011, Crossroads made a demand upon Quad–C, through its counsel, for advancement of the legal fees incurred from April through May of that year. (Haskin Aff. Ex. 2 at 3.) In that letter, Crossroads agreed, pursuant to Section 8(b)(ii), above, “to reimburse the Company for such advance in the event it is ultimately determined by a court of competent jurisdiction that such Crossroads Indemnified Party is not entitled to be indemnified by the Company for such expenses.” ( Id.) Similarly, by letter dated December 21, 2012, Crossroads demanded additional funds in advanced litigation expenses and agreed to reimburse the Company in the event that it is ultimately decided that Crossroads is not entitled to indemnification. (Haskin Aff. Ex. 6.)
Crossroads asserts that, having thus submitted the signed statement required by Section 8(b)(ii), it is entitled to advancement of the litigation expenses it has incurred so far, pursuant to the plain language of the Servicing Agreement.
Crossroads further contends that Quad–C is estopped from refusing to advance litigation expenses, since Quad–C is already advancing the expenses of all other Quad–C unit holders, and has thereby ratified the contractual provision it now disputes. Quad–C, along with the Canaras Defendants
Although co-Plaintiff, Crossroads ABL, LLC (“Crossroads ABL”), does not join in this motion, Crossroads asserts that Crossroads ABL's litigation expenses are also subject to advancement, since Crossroads ABL is an affiliate of Crossroads, and Section 8(b)(i) clearly provides for indemnification of any affiliate of Crossroads.
The “Canaras Defendants” include Canaras Capital Management, Saranac ABL, LLC, Canaras Management Limited, Richard Levinson, Anthony Clemente and Simon Airey. ( See First Amended Compl. p. 1).
(collectively, “Defendants”), argue that Section 8(b) (the “Indemnification Provision”) was intended only to cover third-party claims, as there is no express indication that the parties intended to advance or indemnify Crossroads in an action between it and Quad–C. Defendants therefore assert that they are not obligated to advance funds to Crossroads in connection with its claims for declaratory judgment, judicial dissolution and breach of contract, nor for Crossroads' defense of the counterclaims asserted by Quad–C.
The “Voting Defendants” include Shiloh Bates, Belfar Securities, Richard Bentley, C. Clemente, Peter Clemente, S. Clemente, Peter Kroon, Fred Kulikowski, J.C. Levinson, J.B. Levinson, Ryan Mingo, C. Phair, Sage Group and Ben Steger. ( See First Amended Compl. p. 1.)
Defendants further argue that the claims asserted by Crossroads against the Canaras Defendants and the Voting Defendants fall outside the scope of the Indemnification Provision. Defendants contend that those claims, including bad faith breach of the duty of good faith and fair dealing, fraudulent inducement, and tortious interference with business relations, are not claims in which Crossroads is involved by reason of its “service to, or on behalf of, or management of the affairs of” Quad–C, and are therefore not indemnifiable.
With respect to Plaintiff's estoppel argument, Quad–C argues that there is no basis to apply estoppel here, first, because Crossroads is not similarly situated to the other unit holders, and even if it were, Quad–C does not admit that it is, in fact, indemnifying the other unit holders. Quad–C further asserts that if it did make a business decision to defend its members against Crossroads' claims, such decision is not based on a contractual right and has no bearing on any contractual right asserted by Crossroads.
Upon review of the Indemnification Provision, it is clear that Crossroads is entitled to have certain of its litigation expenses advanced. This provision, negotiated and agreed upon by the two, commercially sophisticated parties, is extremely broad. There are only two phrases which contain any sort of limiting language. The first, which provides the only limitation on the type of action, proceeding, etc. for which Crossroads may be indemnified, is that Crossroads must be “involved” in such action, proceeding, etc., “by reason of” its “service to, or on behalf of, or management of the affairs of, the Company, or rendering of advice or consultation with respect thereto.” (Servicing Agreement § 8(b)(i).) The second limitation is that indemnification will not be ordered in the event that Crossroads (or its affiliate) is found, upon final determination “by a court of competent jurisdiction that [its] acts or omissions constituted gross negligence or willful misconduct.” ( Id.) It is thus clear that Quad–C is obligated to indemnify (ultimately) and advance expenses (at the outset) for Crossroads, to the extent that the action involves Crossroads by reason of its service to Quad–C. It is also clear that Crossroads will be required to reimburse any advanced expenses only to the extent that this court ultimately concludes that Crossroads' actions or omissions rise to the level of gross negligence or willful misconduct. The question I now face is not, therefore, whether Crossroads is entitled to advancement of expenses, but rather, which of the claims asserted in the context of this litigation are subject to advancement.
I am not swayed by Defendants' contention that Hooper Associates v. AGS Computers, 74 N.Y.2d 487 (1989) compels a different result. In that case, the Court of Appeals concluded that the indemnification provision contained within the parties' agreement only applied to claims or actions involving third parties, and did not apply to a suit against the defendant for claims under the contract. Defendants rely on the Hooper Court's statements that, “When a party is under no legal duty to indemnify, a contract assuming that obligation must be strictly construed to avoid reading into it a duty which the parties did not intend to be assumed”, and “the court should not infer a party's intention to waive the benefit of the rule [that each party pays its own attorney's fees in litigation between them] unless the intention to do so is unmistakably clear from the language of the promise.” Hooper, 74 N.Y.2d at 492 (citations omitted). Defendants argue that, since the Indemnification Provision contains no express language indicating the parties' intent to have it apply to intra-party claims, Hooper requires the conclusion that the claims between Crossroads and Quad–C are not covered.
Hooper, however, is distinguishable on several grounds. First, in that case, the plaintiff was seeking indemnification, not advancement, as Crossroads seeks here. Perhaps more importantly, the indemnification provision at issue in Hooper specifically set forth five distinct types of actions for which defendant agreed to indemnify plaintiff. These were actions arising out of: defendant's breach of implied warranty, performance of any service to be performed, intellectual property infringement, mechanics' liens, and installation, operation and maintenance of the subject computer system. Id. at 490. The Hooper Court concluded that all of these actions were subject to third-party claims, and that none “are exclusively or unequivocally referable to claims between the parties themselves or support an inference that defendant promised to indemnify plaintiff for counsel fees in an action on the contract.” Id. at 492. The Hooper Court also found support for this interpretation in other provisions in the parties' agreement, relating to third-party claims, which would have been rendered meaningless by an extension of the indemnification provision to intra-party claims. Id. at 492–93.
Here, to the contrary, the Indemnification Provision does not include an exhaustive list of actions for which indemnification is required, nor are there any other provisions in the Servicing Agreement that would be rendered meaningless if the Indemnification Provision is read to include any claims-intra-party or otherwise-that involve Crossroads by reason of its service to, or on behalf of, or management of the affairs of, Quad–C. Rather, this Indemnification Provision is, as noted above, extremely broad, applying to, “any and all claims, demands, actions, suits or proceedings,” provided that Crossroads' involvement therein is by reason of its service, etc. to Quad–C. The parties chose to use highly inclusive language in their Indemnification Provision, which they chose not to limit by listing the types of proceedings for which indemnification would be required. There is therefore no basis by which I can conclude that intra-party actions were not intended to be within the ambit of this provision. Therefore, while the rule set forth in Hooper may, and should, apply in those cases where the parties' intent is not evident from the plain language of the agreement, I do not believe this to be one of those cases. Since the language is unambiguous, clear and complete, it is to be enforced according to its own terms.
Matter of Wallace v. 600 Partners Co., 86 N.Y.2d 543, 548 (1995); see also Collins v.. E–Magine, 291 A.D.2d 350 (1st Dep't 2002).
Furthermore, the rule set forth in Hooper and its progeny is expressly designed to uphold the “American rule” that each side is responsible for bearing its own costs in litigation, and that, absent agreement, statute or court rule, the prevailing party may not collect attorney's fees from the losing one. See, e.g., Hooper, 74 N.Y.2d at 491;Gotham Partners, L.P. v. High River Ltd. Partnership, 76 AD3d 203, 204 (1st Dep't 2010). Permitting the advancement of fees in this case, as unequivocally contemplated by the parties' agreement, would not violate the spirit of the American rule, since the Indemnification Provision requires the advanced fees to be reimbursed if it is ultimately determined that Crossroads acted with gross negligence or willful misconduct. In other words, under the express language of the Servicing Agreement, Crossroads could demonstrate entitlement to advancement of funds in connection with a litigation between it and Quad–C, but then, at the conclusion of the litigation, be required to reimburse those funds. In that scenario, each side would have paid its own litigation costs, and yet Crossroads would still have been entitled to receive the funds in advance, during the pendency of the litigation.
It is thus clear, from the plain language of the parties' Servicing Agreement, that Quad–C is obligated to advance certain litigation expenses to Crossroads. As set forth above, however, Crossroads may only be advanced expenses relating to those claims with which Crossroads is involved by reason of its “service to, or on behalf of, or management of the affairs of, the Company, or rendering of advice or consultation with respect thereto.” (Servicing Agreement § 8(b)(i).) Although Crossroads has already served a demand upon Quad–C for certain expenses, and although it asserts that the Indemnification Provision is broad enough to encompass all of its claims, it is not clear that all of Crossroads' expenses are, in fact, covered by the Indemnification Provision. Indeed, Defendants argue that none of the claims asserted by Plaintiffs against the Canaras Defendants and the Voting Defendants fall within the Indemnification Provision. I must therefore examine each of the claims in order to ascertain whether they involve Crossroads by reason of its service to, management of, etc., Quad–C.
Against both the Canaras Defendants and the Voting Defendants, Plaintiffs assert a claim for breach of the duty of good faith and fair dealing. This claim arises out of the amendment, by the Voting Defendants and Canaras Defendants, of the Operating Agreement, in order to remove a provision permitting Crossroads ABL to dissolve Quad–C upon the occurrence of certain events.
( See First Amended Compl. ¶¶ 111–18.) This amendment served to eradicate a contractual right for which Crossroads had bargained in exchange for providing its services to Quad–C, and Crossroads is thus involved with this claim by reason of its service to Quad–C. This claim (the Second Cause of Action) falls within the Indemnification Provision.
The “Operating Agreement” refers to the Quad–C Limited Liability Operating Agreement. See Crossroads ABL, LLC v. Canaras Capital Management, LLC, 33 Misc.3d 1218(A) (N.Y. Sup.2011), for a thorough discussion of the amendment and its effect on Crossroads ABL's membership interest in Quad–C.
Against the Canaras Defendants, Plaintiffs assert a claim for fraudulent inducement. This cause of action arises out of the alleged misrepresentations that the Canaras Defendants made in order to induce Crossroads ABL to enter into the Operating Agreement. Crossroads alleges that it justifiably relied on these misrepresentations. ( See id. ¶¶ 119–25.) This alleged reliance gives rise to the inference that Crossroads would not have entered into the Operating Agreement, and thus would not have provided any services to Quad–C, in the absence of these misrepresentations. Therefore, this claim (the Third Cause of Action), too, involves Crossroads by reason of its service to Quad–C, and this claim, too falls within the Indemnification Provision.
Plaintiffs also assert, against the Canaras Defendants, a claim for tortious interference with business relations. This claim arises out of the alleged statements made, by the Canaras Defendants, to certain businesses with which Crossroads had, or expected to have, relationships. Plaintiffs allege that these statements prevented Crossroads from engaging in certain opportunities with these businesses. ( See id. ¶¶ 139–46.) These prospective business relationships were for the benefit of Crossroads, and had nothing to do with Crossroads' service to, or management of, Quad–C. This claim (the Sixth Cause of Action), therefore, is not covered by the Indemnification Provision.
The other claims asserted by Plaintiffs are for declaratory judgment, judicial dissolution, and breach of contract. The declaratory judgment claim (the First Cause of Action) relates to the amendments to the Operating Agreement, discussed above, and is thus similarly covered by the Indemnification Provision. (See First Amended Compl. ¶¶ 105–10.) The judicial dissolution claim (the Fourth Cause of Action), is based on Plaintiffs' allegation that the “oppressive actions taken by the Canaras Defendants and Voting Defendants in purportedly stripping Plaintiffs of their rights,” have rendered it “no longer reasonably practicable to carry on the business of Quad–C. ( Id. ¶ 127.) These “oppressive actions” refer to the amendments to the Operating Agreement, and so this claim falls within the Indemnification Provision as well.
I recognize that in my Decision and Order dated November 2, 2011, I concluded that Plaintiffs did not demonstrate a likelihood of success on their declaratory judgment claim, and that they were not entitled to a preliminary injunction that would act to dissolve Quad–C. ( See November 2, 2011 Decision and Order at 18–20.) Nonetheless, this type of preliminary finding does not constitute a final determination, and these claims are still very much alive. See, e.g., Bingham v. Struve, 184 A.D.2d 85, 88 (1st Dep't 1992) (”A judicial determination regarding likelihood of success on the merits does not ... amount to a predetermination of the issues.) Since both of these claims involve Crossroads by reason of its service to Quad–C, it is appropriate for Quad–C to advance expenses relating thereto.
The breach of contract claim (the Fifth Cause of Action), asserted against Richard Levinson and the Canaras Defendants, arises out of the failure of those Defendants to pay a minimum of $60,000 per month to Crossroads, as allegedly provided for by the Operating Agreement, as well as the failure to advance the litigation expenses already demanded. ( See id. ¶¶ 130–38.) With respect to the failure to make monthly payments to Crossroads, it is clear that this claim falls within the Indemnification Provision.
Defendants argue that the obligation to make payment is owed by Quad–C, and not by the Canaras Defendants. Whether or not this is so, this claim still involves Crossroads by reason of its service to Quad–C, and this portion of the claim is within the Indemnification Provision.
With respect to the breach relating to the Indemnification Provision, there can be no doubt that this claim involves Crossroads by reason of its service to Quad–C. Defendants argue that Crossroads is not entitled to recover “fees and expenses incurred to establish [its] right against the indemnitor.” (Opp. Mem. at 18, quoting Peter Fabrics, Inc. v. S.S. Hermes, 765 F.2d 306, 315 (2d Cir.1985).) However, the cases that Defendants cite for this proposition are inapposite, as they both involve plenary actions for indemnification, brought by the indemnitee after the conclusion of the action for which indemnification was required. ( See Peter Fabrics, 765 F.2d 306;Chapel v. Mitchell, 84 N.Y.2d 345 (1994).) Moreover, in Chapel, the Court of Appeals expressly concluded that, “in the absence of any pertinent contractual or statutory provision with respect to the recovery of amounts expended in the successful prosecution or defense of an action, each party is responsible for its own legal fees.” Chapel, 84 N.Y.2d at 349. Here, quite to the contrary, Crossroads' claim for breach of contract includes allegations that Levinson and the Canaras Defendants failed to advance litigation expenses, in accordance with the parties' agreement. Under the Indemnification Provision, as set forth above, the only limitation is that Crossroads must be involved with the claim by reason of its service to Quad–C. There can be no dispute that this claim arises out of such service, and the entire breach claim is thus within the Indemnification Provision.
Finally, Quad–C also asserts counterclaims of conversion, tortious interference with contract, breach of the Servicing Agreement, attachment, and declaratory judgment against one or both of the Plaintiffs. Upon review of each of these counterclaims, there can be no dispute that they involve Crossroads by reason of its service to, or on behalf of, or management of the affairs of, Quad–C. They therefore fall within the Indemnification Provision.
I have considered Quad–C's argument that its purported right to set-off warrants denial of Crossroads' motion, and I find it to be without merit.
Accordingly, it is
ORDERED that the motion of Plaintiff, Crossroads Financial, for partial summary judgment on its Fifth Cause of Action for breach of the Servicing Agreement by failing to advance litigation expenses is GRANTED; and it is further
ORDERED that Quad–C shall advance expenses relating to Plaintiffs' prosecution of Plaintiffs' First through Fifth Causes of Action, and relating to Plaintiffs' defense against the counterclaims; and it is further
ORDERED that the issues of the reasonableness of the expenses demanded thus far, and the factual inquiry into which of the invoices already submitted apply to the covered causes of action and counterclaims, are hereby referred to a Special Referee to hear and report with recommendations, except that, in the event of and upon the filing of a stipulation of the parties, as permitted by C.P.L.R. § 4317, the Special Referee, or another person designated by the parties to serve as referee, shall determine the aforesaid issue; and it is further
ORDERED that the cross-motion of Defendant, Quad–C, for partial summary judgment, is DENIED; and it is further
ORDERED that, following the Special Referee's initial determination, the parties shall adhere to the following protocol:
This is the protocol established in my Memorandum Decision entered April 24, 2008, in Ficus v. Private Capital Management, Index No. 600926/2007, and affirmed at Ficus Investments, Inc. v. Private Capital Management, LLC, 61 AD3d 1 (1st Dep't 2009). This protocol was informed by the language of Weaver v. Zenimax Media, Inc., 2004 WL 243163 (Del. Ch. Ct. Jan. 30, 2004).
(1)Sixty (60) days after the Special Referee has heard and reported on the questions set forth above, Crossroads shall submit a demand for advancement, along with relevant supporting documentation, which shall include the amount of expenses sought to be advanced/reimbursed and the statement required by Section 8(b)(ii) of the Servicing Agreement, as well as other relevant information, such as the name of the attorney performing the work, the rate at which such attorney bills, the number of hours expended on the particular project, and a general description of the work performed.
(2)Along with the demand and supporting documentation, Crossroads shall also submit an affidavit, sworn to and signed by counsel, certifying that, to the best of counsel's informed and good-faith belief, the expenses set forth in the demand are (i) reasonable, and (ii) relate only to the covered claims and counterclaims, as set forth in this Decision. Quad–C shall then have ten (10) days to advance the funds or to refuse to advance, on the basis that the demand is unreasonable or is for funds that are not properly covered expenses.
(3)In the event that Quad–C refuses the demand, its counsel shall submit to opposing counsel, with a copy to the Court, a letter explaining the basis for refusal, along with an affidavit certifying its good-faith belief that the amount demanded is not reasonable, or was not incurred in connection with the covered claims or counterclaims.
(4)The question of the reasonableness of any demand refused shall then be referred to the same Special Referee who is designated to hear and report on the initial question of reasonableness, as set forth above. The Special Referee shall be authorized to hear and report on each subsequent question of reasonableness.
(5)Upon receipt of a letter of refusal and affidavit from counsel to Defendants, counsel for Crossroads shall contact the same Special Referee, in order to schedule a hearing; and it is further
ORDERED that counsel for the Plaintiffs shall, within 30 days from the date of this Order, serve a copy of this Order with notice of entry, together with a completed Information Sheet, upon the Special Referee Clerk in the Motion Support Office (Room 119M).