Opinion
401388/09.
November 22, 2011.
Plaintiffs Direct Quick Trucking, Inc. ("Direct") and Narinder Pal Singh Chadha ("Chadha") (together, the "Direct Plaintiffs") move for summary judgment against Defendant NY Minute Messenger, Inc. ("NY Minute") (motion seq. no. 003) seeking to recover $180,000 pursuant to the terms of a promissory note. Alternatively, the Direct Plaintiffs move for partial summary judgment seeking $ 180,000, less any offset that NY Minute is able to establish. NY Minute opposes the Direct Plaintiffs' motion and cross moves for further discovery on its counterclaim for breach of warranty and for summary judgment against the Direct Plaintiffs for unpaid attorneys' fees in the sum of $57,088.35.
BACKGROUND
Direct and Ritco International, Inc. ("Ritco"), operated a package delivery service in downtown Manhattan. Chadha is the sole shareholder of both Direct and Ritco. According to the New York State Urban Development Corporation d/b/a Empire State Development Corporation ("UDC"), Direct and Ritco received a series of grant disbursements (the "Grants") pursuant to the WTC Small Firm Attraction and Retention Grant Program (the "SFARG Program") on or about January 22, 2003, and September 22, 2004. The SFARG Program provides grants to eligible entities which enter into or renew an existing lease within a certain designated geographical area in downtown Manhattan (the "Eligible Area"). Recipients of grants under the SFARG Program are required to repay any grants if they relocate a substantial portion of their business from the Eligible Area within five years of the commencement of the new or renewed lease period (the "Five Year Period"). UDC maintains that Direct and Ritco relocated a substantial portion of their business from the Eligible Area during the Five Year Period.
Ritco is a subsidiary of Direct.
On February 1, 2006, Direct, as seller, entered into an asset purchase agreement (the "Purchase Agreement") with NY Minute, as purchaser, under which NY Minute agreed to purchase all of the assets of Direct for $900,000. NY Minute was to pay a sum of $250,000 upon closing and the remaining $650,000 was to be paid under an interest free promissory note (the "Note") in 65 equal monthly installments of $10,000. In Article 4 of the Agreement, Direct warranted that it had no outstanding liabilities which relate to or would affect NY Minute's purchase of Direct's assets and Schedule 4.1.15 of the Purchase Agreement states, "[a]s per Balance Sheet, Buyer will not be responsible for any liabilities what so ever."
Article 7 of the Purchase Agreement contains indemnification and compensation clauses.
Section 7.1 of the Purchase Agreement provides in pertinent part that:
". . . [Direct] and [Chadha] each jointly and severally agree to indemnify and hold harmless [NY Minute], and its officers, directors, shareholders, employees, and agents, from and against, and to reimburse any of them with respect to, any and all liability or obligation whatsoever incurred by any of them by reason of or arising out of or in connection with . . . any liability or obligation of [Direct] not expressly assumed by [NY Minute] pursuant to this Agreement for which [NY Minute] becomes liable, as a result of the transactions contemplated by this Agreement, to pay, perform or discharge."
Section 7.3 provides in pertinent part:
"If any claim or demand is asserted against an indemnified party by third parties with respect to any matter to which the foregoing indemnities relate . . . the indemnifying party shall . . . defend the indemnitee against such claim or demand diligently and in good faith at its own cost and expense and, if unsuccessful in such defense, shall make payment of such claim or demand [and] . . . [t]he indemnitee will cooperate with the indemnifying party in any such defense."
Section 7.5 provides in pertinent part:
In addition to all remedies to which [NY Minute] is entitled pursuant to this Article 7 [of the Purchase Agreement] and as a matter of law, [NY Minute] shall have a right of set off against payments to [the Direct Plaintiffs of the Purchase Price] in the event [the Direct Plaintiffs] ha[ve] any obligation under Section 7.1 [of the Purchase Agreement].
In July 2009, UDC instituted an action under Index No. 401388/09 (the "UDC Action" or the "Underlying Action") against Ritco, Direct and NY Minute, which was assigned to this court. The UDC Action alleged that Ritco and Direct failed to comply with the requirements of the SFARG Program by relocating from the Eligible Area and failing to repay the Grants. UDC asserted eleven causes of action including, among others, that the conveyances pursuant to the Purchase Agreement should be set aside and annulled as fraudulent to Direct and Ritco's creditors (having allegedly been made without fair consideration). With respect to one of its causes of action for fraud, UDC sought punitive damages from Ritco, Direct, and NY Minute. UDC also asserted claims against NY Minute for repayment of the Grants based on allegations that the Purchase transaction constituted a merger and that NY Minute is a mere continuation of Direct and Ritco.
After the UDC Action was filed, Direct proposed to NY Minute that its counsel should represent both Direct and NY Minute; however, NY Minute refused this offer on the grounds that there was a conflict of interest between itself and Direct. In a letter dated July 13, 2009, Direct offered to provide independent counsel, at its own expense, to defend NY Minute in the UDC Action. In a letter dated July 15, 2009, NY Minute refused Direct's offer to obtain independent counsel for NY Minute, citing conflict of interest, and expressed that it would represent itself with counsel of its own choosing. NY Minute did not make its July 2009 payment on the Note nor any subsequent payments on the Note through December 2010, asserting a right to set off.
In response to NY Minute's letter dated July 15, 2009, Direct asserted, by letter dated September 15, 2009, that NY Minute violated the terms of the Purchase Agreement by seeking other counsel and had thereby "negated" any right it may have had to seek reimbursement of legal fees from Direct.
On or around October 5, 2009, the Direct Plaintiffs filed suit against NY Minute (the "Second Action") under Index No. 603109/09 and the matter was assigned to Justice Judith J. Gische ("Judge Gische"). The complaint in the Second Action seeks (i) a declaration that the Direct Plaintiffs have no obligation to indemnify NY Minute as the Direct Plaintiffs have the sole right to hire counsel and manage the litigation, (ii) a declaration that NY Minute is obligated to make its monthly payments under the Note pendent lite, and (iii) judgment for the unpaid amounts due to the Direct Plaintiffs under the Note with statutory interest thereon.
On this motion, Plaintiffs do not seek retroactive statutory interest on the amounts they claim to have been wrongfully withheld by NY Minute.
NY Minute answered the complaint and asserted various defenses including that it properly exercised its right of set off as provided for in the Purchase Agreement. NY Minute also asserted counterclaims against the Direct Plaintiffs for contractual and common law indemnification for liabilities incurred in defending against UDC Action and for breach of the Direct Plaintiffs' warranty in Article 4 that it had no liabilities beyond those disclosed in the Purchase Agreement.
NY Minute also asserted a counterclaim for contribution, which is now moot.
The Direct Plaintiffs moved for a preliminary injunction restraining NY Minute from continuing to use counsel of its own choosing in defending UDC Action and deducting the costs of its legal defense from the monthly payments under the Note. In a Decision and Order dated January 5, 2010 (the "Preliminary Injunction Decision"), Judge Gische characterized the Second Action as being an action "for a declaratory judgment that [NY Minute] does not have the right to hire its own attorney to represent NY Minute in separate action against it by [UDC] because of an indemnification provision in [the Purchase Agreement]." Judge Gische denied the Direct Plaintiffs' request for relief, rejecting their argument that NY Minute "does not need, and should not be permitted to have, separate counsel of its own choosing." Preliminary Injunction Decision at 3. In reaching this conclusion, Judge Gische found that Direct and NY Minute were not united in interest and that "the 'cooperation' language in the [Purchase Agreement] is not the same as waiving the right to assert counterclaims." Id.
The Second Action was consolidated with the UDC Action under Index No. 401388/09 (the "Consolidated Action") by Justice Gische in an order dated February 18, 2010, and thereafter assigned to this court.
During mid-2010, UDC filed a motion to strike pleadings, seeking in part the imposition of discovery sanctions against Direct and Ritco. On or around September 16, 2010, NY Minute cross moved for discovery sanctions (the "Discovery Cross Motion") against the Direct Plaintiffs.
The UDC Action was settled pursuant to a stipulation of discontinuance (the "Settlement") filed in the New York County Clerk's Office on January 11, 2011. Under the terms of the Settlement, Direct and Ritco jointly agreed to pay $60,000.00 to UDC, and UDC discontinued with prejudice its claims against Direct, Ritco, Chadha, and NY Minute.
On November 24, 2010, the Direct Plaintiffs filed this motion for summary judgment in which they assert that NY Minute failed to make required monthly payments under the terms of the Note for the period from July 2009 through December 2010 and seek to recover $180,000, the amount which they contend was wrongfully withheld. Alternatively, the Direct Plaintiffs seek summary judgment for $180,000 less any offset that NY Minute is able to establish.
At oral argument, the court was informed that NY Minute had resumed making payments under the Note.
The Direct Plaintiffs assert that NY Minute was not entitled to stop making payments on the Note based on any right of set off, and that they were not required to indemnify NY Minute for attorneys' fees and expenses as NY Minute refused the Direct Plaintiffs' offer to obtain independent counsel for it and proceeded with counsel of NY Minute's own choosing. The Direct Plaintiffs, citing Waverly Mews Corp. v. Waverly Stores Assoc, 294 A.D.2d 130 (1st Dep't 2002) and City Lbr., Inc. v. Central Parking Sys. of NY. Inc., 15 Misc.3d 1112(A) (Sup. Ct. N.Y. County 2006), also assert that Section 7.1 of the Purchase Agreement does not entitle NY Minute to attorneys' fees and expenses since the indemnification language of that provision is broad and does not refer specifically to attorneys' fees and expenses.
The Direct Plaintiffs further assert that, under the circumstances here, Section 7.3 does not obligate them to indemnify NY Minute for attorneys' fees and expenses incurred in the Underlying Action as Section 7.3 does not specify who has the right to select counsel. Citing In re WorldCom, Inc. Securities Litigation, 354 F.Supp.2d 455 (S.D.N.Y. 2005) (holding that an indemnitor customarily has the right to choose counsel for an indemnitee). As such, the Direct Plaintiffs argue that they satisfied any obligations they had to indemnify NY Minute by offering to procure independent counsel for NY Minute.
The Direct Plaintiffs also argue that by declining their offer to procure counsel and proceeding with counsel of its own choosing, NY Minute waived any right it may have had to be indemnified for attorneys' fees and expenses incurred in connection with the Underlying Action. See Goll v. American Broadcasting Cos., Inc., 73 A.D.3d 694 (2nd Dep't 2010);Atlantic Mut. Ins. Co. v. Struve, 210 A.D.2d 112 (1st Dep't 1994), lv denied, 85 NY2d 803 (1995).
The Direct Plaintiffs further assert that NY Minute suffered no loss from the Underlying Action other than attorneys' fees incurred in defending that action and, since the Direct Plaintiffs have no liability for payment of these attorneys' fees, they are entitled to judgment for $180,000 pursuant to the terms of the Note.
In opposition, NY Minute argues that it is entitled to indemnification of its attorneys' fees and other costs incurred with respect to the Underlying Action. NY Minute, citing multiple cases including Public Serv. Mut. Ins. Co. v. Goldfarb, 53 N.Y.2d 392 (1981), maintains that in New York when there is a conflict of interest between an indemnitee and an indemnitor with a duty to defend the indemnitee, the indemnitee is entitled to select its own counsel. NY Minute asserts that it had such a conflict of interest with the Direct Plaintiffs since the Direct Plaintiffs had an incentive to shift any punitive damages away from themselves and onto NY Minute. NY Minute further asserts that Judge Gische already determined on the merits of the Preliminary Injunction Motion that NY Minute and the Direct Plaintiffs are not united in interest. NY Minute argues that the cases the Direct Plaintiffs' cite in support of their argument that NY Minute waived its claim for attorneys' fees are not on point as they either contain no discussion of a conflict of interest or hold that a conflict of interest did not exist.
NY Minute also argues that it properly exercised its right of set off under Section 7.5 of the Purchase Agreement by withholding the installment payments due to the Direct Plaintiffs that UDC claimed were due to it.
NY Minute further asserts that, despite the settlement with UDC, the Direct Plaintiffs are not entitled to receive any of the amounts withheld by NY Minute since NY Minute has outstanding counterclaims against the Direct Plaintiffs, the Direct Plaintiffs have failed to produce any discovery with respect to these counterclaims, and NY Minute has, in response to a motion made by UDC prior to the stipulation of settlement, cross-moved for discovery sanctions against the Direct Plaintiffs. With regard to its counterclaim for breach of warranty, NY Minute asserts that it is entitled to take discovery to determine if any more creditors exist as the breach of warranty it alleges was the Direct Plaintiffs' failure to disclose the existence of certain creditors.
NY Minute also cross moves for summary judgment against the Direct Plaintiffs seeking judgment for $57,088.35 in attorneys' fees and costs and attaches supporting invoices.
In reply and opposition, the Direct Plaintiffs assert that NY Minute's counterclaim for breach of warranty does not provide a basis for denying its summary judgment motion.
DISCUSSION
Absent a showing that there is a conflict of interest between an indemnitor and an indemnitee, an indemnitor generally has the right to control the defense of an action brought against the indemnitee. Ottaviano v Genex Coop., Inc., 15 A.D.3d 924 (4th Dep't 2005); Desriusseaux v Val-Roc Truck Corp., 230 A.D.2d 704 (2nd Dep't 1996). However, where "a conflict of interest exists between an [indemnitee] and [an indemnitor], the remedy is to permit the [indemnitee] to select defense counsel, with the reasonable cost of the defense borne by the [indemnitor]." Ladner v. American Home Assur. Co., 201 A.D.2d 302, 304 (1st Dep't 1994); see also Public Serv. Mut. Ins. Co. v. Goldfarb, 53 N.Y.2d 392 (1981); City of New York v Clarendon Natl. Ins. Co., 309 A.D.2d 779 (2nd Dep't 2003).
Contrary to the Direct Plaintiffs' position contention in its reply papers, the principles established in insurance cases concerning indemnification provisions are instructive in the context of this dispute. Notably, the Direct Plaintiffs cite In re WorldCom. Inc. Securities Litigation in their motion papers and argue that the principles established therein are applicable here, even though In re WorldCom. Inc. Securities Litigation involved indemnification in an insurance context. See Plaintiffs' Motion Papers at ¶ 15.
Here, a conflict of interest existed that required the Direct Plaintiffs to permit NY Minute to hire its own counsel and to be reimbursed for reasonable costs, including attorneys' fees. The conflict arose based on allegations by UDC in the Underlying Action that Direct committed various torts for which NY Minute was vicariously liable. See Preliminary Injunction Decision at 3. The assertion of the four counterclaims by NY Minute against Direct in this action further supports a finding of a conflict.
While the court agrees with Judge Gische's findings, her determination on a preliminary injunction motion lacks preclusive effect and does not constitute the law of the case. See BFP 245 Park Co., LLC v. GMAC Commercial Mtge. Corp., 12 A.D 3d 330 (1st Dept 2004).
The circumstances here are thus distinguishable from the precedents relied on by the Direct Plaintiffs in which an insured declined the insurer's offer to procure counsel when there was no conflict of interest, and/or when the insured failed to cooperate with appointed counsel. See e.g. Goll v. American Broadcasting Co., Inc., 73 AD3d at 697;Atlantic Mut. Ins. v. Struve, 210 AD2d at 114, In fact, when, as here, there is a conflict, an insured's assertion of its right to be defended by counsel of its own choosing cannot constitute a failure to cooperate as a matter of law. City of New York v. Clarendon Natl. Ins. Co., 309 AD2d 779 (2d Dept 2003).
Furthermore, while a provision entitling a party to recover "costs and expenses" incurred as a result of the other party's default has been interpreted as encompassing the right to recover attorneys' fees (see e.g. Waverly Mews Corp v. Waverly Stores Assoc., 294 AD2d 130, supra), in this case, NY Minute is entitled to such recovery based on the Direct Plaintiffs' promise to defend NY Minute in section 7.3 of the Purchase Agreement and its inability to do so based on the conflict described above. Accordingly, NY Minute is entitled to summary judgment as to liability on its first and second counterclaims for contractual and common law indemnification to the extent these counterclaims seek reasonable attorneys' fees and expenses.
The next issue concerns the viability of NY Minute's fourth counterclaim for breach of warranty and whether the Direct Plaintiffs should be denied summary judgment on their claim seeking payment under the Note in view of this counterclaim. The counterclaim alleges that
"[b]y failing to disclose [Direct's] potential liability to the UDC, [the Direct Plaintiffs] breached their express warranties set forth in Article 4, paragraph 4.1 of the [Purchase Agreement], that provide among other things, that [Direct] had no liabilities beyond those disclosed in the [Purchase Agreement]."
The Direct Plaintiffs argue that the counterclaim should be dismissed as now that the UDC claims have been discontinued, there is no further basis for the breach of warranty counterclaim or any justification for withholding payments it owes under the Purchase Agreement. They also argue that this counterclaim is not viable as the UDC action was not commenced until after the parties entered into the Purchase Agreement.
In response, NY Minute argues that there may be creditors beyond UDC that will show that the representations under paragraph 4.1 of the Purchase Agreement were untrue and that it is entitled to discovery to determine if such creditors exist. NY Minute also argues that the counterclaim is "inextricably interwoven" and "inseparable" from the issues relating to its liability to make payment under the Note thus precluding a grant of summary judgment in favor of the Plaintiffs.
NY Minute's position is unavailing. Contrary to NY Minute's argument, summary judgment is appropriate even though discovery has not been completed and NY Minute has sought discovery sanctions. Summary judgment is not premature where there is no evidentiary basis to show that discovery may lead to additional relevant evidence. Cavitch v. Mateo, 58 A.D.3d 592 (2nd Dept 2009). Here, NY Minute's contention that there are potential creditors of Direct, other than UDC, is based completely on speculation. In fact, the only creditor specified in the counterclaim is UDC. Under these circumstances, and as the UDC Action has been resolved and NY Minute's only liability in connection with that action is for attorneys' fees and expenses to which the court has found it is entitled, the breach of warranty counterclaim does not preclude a grant of summary judgment in favor of the Direct Plaintiffs on their claim seeking payment under the Note.
That being said, however, any amount due and owing to the Direct Plaintiffs must be offset by reasonable attorneys' fees incurred by NY Minute in defending the Underlying Action. The amount due and owing to the Direct Plaintiffs' under the Note and the amount of reasonable attorneys' fees to be paid to offset such amount shall be determined at a hearing before a Special Referee as directed below.
CONCLUSION
In view of the above, it is
ORDERED that the Direct Plaintiffs' motion for summary judgment is granted to the extent of granting them summary judgment as to liability on their third cause of action seeking to recover moneys due and owing by NY Minute under the Note and is otherwise denied; and it is further
ORDERED that NY Minute's cross motion is granted to the extent of granting summary judgment as to liability on its counterclaims for common law and contractual indemnification to the extent these counterclaims seek reasonable attorneys' fees and expenses incurred by NY Minute in defending the claims against it in the Underlying Action; and it is further
ORDERED that NY Minute's cross motion for discovery is denied; and it is further
ORDERED that the issue of the amount due and owing to the Direct Plaintiffs under the Note and the amount of reasonable attorneys' fees to which NY Minute is entitled with respect to the Underlying Action is referred to a Special Referee to hear and report with recommendations; and it is further
ORDERED that the powers of the Special Referee shall not be limited further than as set forth in the CPLR; and it is further
ORDERED that this matter is hereby referred to the Special Referee Clerk (Room 119M, 646-386-3028 or spref@court.state.ny.us) for placement at the earliest possible date on calendar of the Special Referee Part (which are posted on the website of this court atwww.nycourts.gov/supctmanh at the References link under Courthouse procedures); and it is further
ORDERED that counsel for the Direct Plaintiffs shall, within 15 days of this decision and order submit to the Special Referee Clerk by fax (212-401-9186) or email an Information Sheet (which can be accessed at the References link of the Court website) containing all the information called for therein and that, as soon as practical thereafter, the Special Referee Clerk shall advise counsel of the date fixed for the appearance on the matter upon the calendar of the Special Referee Part; and it is further
ORDERED that the parties shall appear at the hearing, including with all witnesses and evidence they seek to present, and shall be ready to proceed on the date fixed by the Special Referee Clerk subject only to any adjournment that may be authorized by the Special Referee Part in accordance with the rules of that Part; and it is further
ORDERED that the hearing shall be conducted in the same manner as a trial before a Justice without a jury (CPLR 4320(a)) (the proceeding will be recorded by a court reporter, the rules of evidence apply, etc) and, except as otherwise directed by the assigned Special Referee for good cause shown, the trial of the issues specified above shall proceed from day to day until completed; and it is further
ORDERED that the motion to confirm or reject the Report of the Special Referee shall be made within the time specified in CPLR 4403 and Section 202.44 of the Uniform Rules for the Trial Courts.
A copy of this decision and order is being mailed by my chambers to counsel for the parties.