Liberty Mutual Fire Insurance Company v. BRG Sports, Inc. et al

Filing 23

MEMORANDUM and ORDER: Defendants motion 19 to dismiss is denied in its entirety. See attached Memorandum and Order for details. Ordered by Judge Frederic Block on 6/21/2018. (Innelli, Michael)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
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LIBERTY MUTUAL FIRE INSURANCE
COMPANY,
Plaintiff,
-against-

MEMORANDUM AND ORDER
1:17-cv-2290(FB)(LB)

BRG SPORTS, INC., BELL SPORTS,
INC., and VISTA OUTDOOR,
Defendants.
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Appearances:
For the Plaintiff
MARSHALL T. POTASHNER
DAVID SHYER
GLENN P. BERGER
Jaffe & Asher LLP
600 Third Avenue
New York, NY 10016

For the Defendants
JAMES C. UGHETTA
JASON SCHMITZ
Littleton Joyce Ughetta Park & Kelly
LLP
4 Manhattanville Road, Ste. 202
Purchase, NY 10577

BLOCK, Senior District Judge:
Plaintiff Liberty Mutual Fire Insurance Co. (“Liberty”) brings this action as
a subrogee of Bollinger Sports LLC (“Bollinger”), claiming breach of warranty and
contractual indemnification. Defendants BRG Sports, Inc., Bell Sports, Inc., and
Vista Outdoor (collectively, “defendants”) move to dismiss pursuant to Federal
Rule of Civil Procedure 12(b)(6), arguing Liberty failed to state its claims and is
barred from bringing them by an anti-assignment provision. Defendants’ motion is
denied.

I
This lawsuit stems from a dispute over an April 9, 2012 Asset Purchase
Agreement (“APA”) between Bollinger and defendants.1 Pursuant to the APA,
Bollinger purchased a set of assets from Bell Sports, Inc. (“Bell Sports”), including
the design of defendants’ Embark Resistance Band (the “Embark Band”) exercise
equipment.2 Bollinger then began selling its own product line (the “Bollinger
Band”) based on the design of the Embark Band.
On April 1, 2014, Bollinger was sued for products liability by a purchaser of
the Bollinger Band, who claimed it malfunctioned and struck him in the eye (the
“Underlying Action”). Bollinger then discovered that in 2011, the Embark Band
had been recalled in cooperation with the Consumer Product Safety Commission

The APA was signed by Bell Sports; plaintiff alleges that the other two
defendant entities, BRG Sports, Inc. and Vista Outdoor, are its successors in
interest.
1

Defendants argue in passing that the Embark product line was excluded in
the assets transferred by the APA. Paragraph 1.2(e) excludes “[t]hat portion of
Seller’s Fitness Business represented by its account with Target for its Embark . . .
product[].” APA ¶ 1.2(e). Liberty alleges this excludes the trade name “Embark”
but that the underlying product design for the band was sold as part of the Fitness
Business. “On a motion to dismiss, the Court . . . must resolve all ambiguities in
the contract in [the plaintiff’s] favor.” Serdarevic v. Centex Homes, LLC, 760 F.
Supp. 2d 322, 328 (S.D.N.Y. 2010). The phrase “represented by its account with
Target for its Embark ... product” is ambiguous as applied to the disputed product
design. APA ¶ 1.3(e). Therefore, it is inappropriate for resolution on a 12(b)(6)
motion.
2

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(“CPSC”) for the same defect. Bell Sports did not disclose this recall or product
defect to Bollinger when it entered into the APA.
Liberty, who insured Bollinger for the relevant time period, stepped into
Bollinger’s shoes and defended the Underlying Action as Bollinger’s subrogee.
Liberty settled the Underlying Action for $650,000 and incurred $155,000 in costs
for the defense. Liberty then brought the present action, again as Bollinger’s
subrogee, against defendants to recover this money.
II
Under Federal Rule of Civil Procedure 12(b)(6), a party may move to
dismiss a complaint that “fail[s] to state a claim upon which relief can be granted.”
Fed. R. Civ. P. 12(b)(6). To survive, the complaint must plead “enough facts to
state a claim to relief that is plausible on its face,” Bell Atl. Corp. v. Twombly, 550
U.S. 544, 570 (2007), and “allow[] the court to draw the reasonable inference that
the defendant is liable for the misconduct alleged,” Ashcroft v. Iqbal, 556 U.S. 662,
678 (2009).
The parties agree that Texas substantive law controls under the APA’s
choice of law provision.
A.

Express Negligence
First, defendants argue that Texas’s “express negligence test” bars Liberty’s

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claims. Under this test, a party that seeks “to indemnify the indemnitee from the
consequences of its own negligence must express that intent in specific terms.”
Ethyl Corp. v. Daniel Construction Co., 725 S.W.2d 705, 708-09 (Tex. 1987).
Defendants argue that what Liberty is seeking is indemnification for Bollinger’s
negligence in selling the defective exercise band.
This argument mischaracterizes Liberty’s complaint. Liberty claims that
defendants should indemnify it for Bell Sports’s failure to disclose the design flaws
and recall, not Bollinger’s own negligence in selling the product. Therefore, the
express negligence test does not apply.3
Man GHH Logistics GMBH v. Emscor, Inc., 858 S.W.2d 41 (Tex. App.
1993) is not to the contrary. The court there held that the “express negligence rule
[did] not apply . . . because appellants [were] not seeking to recover for their own
negligence.” 858 S.W.2d at 43 (emphasis added).4 The same is true here.
The contract expressly provides indemnification for this scenario under two
provisions: paragraphs 3.3(a) and 3.3(c) which provide, “Seller shall indemnify,

To the extent defendants argue that, as a factual matter, Bollinger’s
negligence caused the accident and lawsuit and not Bell Sports’s, such argument
goes to the merits and is not appropriate for resolution on a 12(b)(6) motion.
3

Instead, the court affirmed the district court’s dismissal on summary
judgment because appellants sought contribution, which the contract did not
provide. Man GHH Logistics, 858 S.W.2d at 43. Here, Liberty is seeking
indemnification, not contribution.
4

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defend and hold harmless Purchaser from and against any and all damages, arising
out of, relating to or resulting from: (a) Any breach of a representation or warranty
of Seller contained in this Agreement . . . and (c) Any Excluded Asset or Excluded
Liability.” APA ¶ 3.3(a), (c).
Liberty alleges that the Underlying Action stems from Bell Sports’s failure
to disclose the Embark Band’s design defect and recall. This is a breach of
warranty and is indemnified by APA ¶ 3.3(a). Liberty further alleges that the
Underlying Action is covered by the definition of Excluded Liability, which
includes, “[a]ny legal proceeding initiated at any time (whether before, on, or after
the Closing Date), to the extent related to any action or omission on or prior to the
Closing Date including . . . any liability for . . . (ii) breach of product warranties; or
(iii) injury . . . caused by Seller’s products[.]” APA ¶ 1.4(e). The Underlying
Action fits this definition: It was a legal proceeding claiming breach of product
warranty “related to” both defendants’ failure to notify Bollinger of the design
defect and an injury caused by the Embark Band. Therefore, it fits the definition of
“Excluded Liability” and is indemnified by APA ¶ 3.3(c).
Either of Liberty’s theories suffices to state an indemnification claim, and
neither seek indemnification for Bollinger’s own negligence.5
Defendants’ related argument that settlement bars indemnification fails.
“Under Texas law, where an indemnitee enters into a settlement with a third party,
it may recover from the indemnitor . . . upon a showing that potential liability
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B.

Breach of Warranty
Defendants next argue that Liberty has not alleged facts showing Bell Sports

breached any specific warranty made in the contract. In order to recover for the breach
of an express warranty, a plaintiff must prove, inter alia, both “an express affirmation of
fact or promise by the seller relating to the goods” and “that such affirmation of fact or
promise became a part of the basis of the bargain.” Great Am. Prods. v. Permabond
Int’l, 94 S.W.3d 675, 681 (Ct. App. Tex. 2002).
The APA warranted that Bell Sports had “complied with all applicable laws, rules
and regulations . . . .” APA ¶ 3.1(f). The product recall was related to a design defect
that made the product design illegal to sell, and, therefore, Bell Sports violated products
liability tort law by selling it. It did not disclose this violation in the APA. Furthermore,
without discovery, Liberty has no assurances that Bell Sports complied with any terms
set forth by the CPSC in conjunction with the product recall. Therefore, Liberty has
alleged a specific warranty that Bell Sports breached in failing to disclose the product
recall or the CPSC’s involvement.6

existed, and that the settlement was reasonable, prudent, and in good faith under
the circumstances.” Ins. Co. of N. Am. v. Aberdeen Ins. Servs., Inc., 253 F.3d 878,
888 (5th Cir. 2001).
Whether, as Liberty alleges, other warranties were breached in relation to
the product recall can be established by discovery.
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C.

Anti-Assignment Provision
Finally, defendants argue that the APA’s anti-assignment provision bars Liberty

from entering the lawsuit as Bollinger’s subrogee. APA ¶ 6.1.
It is “the longstanding principle of Texas courts to ‘recognize the [subrogation]
doctrine . . . to its fullest extent.” Associated Int’l Ins. Co. v. Scottsdale Ins. Co., 862
F.3d 508, 510 (5th Cir. 2011) (quoting Frymire Eng’g Co. ex rel. Liberty Mut. Ins. v.
Jomar Int’l, Ltd., 259 S.W.3d 140, 141 (Tex. 2008)); see also Faires v. Cockrill, 88
Tex. 428, 437 (1895) (“Perhaps the courts of no state have gone further [than Texas] in
applying the doctrine of subrogation”).
Texas law recognizes two primary types of subrogation: equitable and
contractual. Continental Cas. Co. v. N. Am. Capacity Ins. Co., 683 F.3d 79, 85 (5th Cir.
2012). “Equitable subrogation ‘arises in every instance in which one person, not acting
voluntarily, has paid a debt for which another was primarily liable and which in equity
should have been paid by the latter.’” Id. (quoting Mid-Continent Ins. Co. v. Liberty
Mut. Ins. Co., 236 S.W.3d 765, 774 (Tex. 2007)). “Contractual subrogation, on the other
hand, ‘is created by an agreement or contract that grants the right to pursue
reimbursement from a third party in exchange for payment of a loss.’” Id. (quoting MidContinent, 236 S.W.3d at 774).
In Frymire Engineering, the Texas Supreme Court held plaintiff had standing to
pursue a claim under equitable subrogation even though defendant argued that plaintiff
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was “using equitable subrogation as a cloak to seek . . . an assignment of the [third
party’s] claims against [defendant] under circumstances under which Texas law
prohibits . . . assignment.” 259 S.W.3d at 146. The Court held that “equitable
subrogation confers standing on a party, opening the courthouse door and allowing the
subrogated party to pursue otherwise unavailable claims.” Id. at 146-47. Thus, equitable
subrogation is distinct from assignment under Texas law and available even where
assignment is barred. Cf. United States v. Aetna Cas. & Sur. Co., 338 U.S. 366, 374
(1949) (federal Anti-Assignment Act, 31 U.S.C.A. § 203, does not apply to claims
subrogated “by operation of law”); St. Paul & Marine Ins. v. State Volunteer Mut. Ins.
Co., 2000 WL 423419, at *2 (5th Cir. Apr. 5, 2000) (anti-assignment contract clause
does not bar equitable subrogation under Mississippi law).
Here, Liberty is pursuing its claims under a theory of subrogation. They were not
contractually assigned. Therefore, they are not barred by the anti-assignment clause.
III
Defendants’ motion to dismiss is denied in its entirety.
SO ORDERED
_/S/ Frederic Block__________
FREDERIC BLOCK
Senior United States District Judge
Brooklyn, New York
June 21, 2018
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