Sparta Commercial Services Inc. v. DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main, New York Branch
Filing
113
OPINION AND ORDER. DZ Bank's motion for summary judgment granting its counterclaim for indemnification (Dkt. No. 82) is denied. Unless either party raises other matters before January 15, 2016, the Clerk will enter judgment in favor of DZ Bank d ismissing the complaint, with costs and disbursements according to law. So ordered. re: 82 MOTION for Summary Judgment filed by DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main, New York Branch. (Signed by Judge Louis L. Stanton on 12/18/2015) (rjm)
ORIGINAL
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
SPARTA COMMERCIAL SERVICES, INC.,
USDCSDNY
DOCUMENT
ELECTRONICALLY FILED
DOC#:_ _---:----,--+-~
DATE FILED: j;Lj;;)_, I(<{
I
Plaintiff/Counter Defendant,
C::::======::::;:!l,,
12 Civ. 9220
(LLS)
- against OPINION & ORDER
DZ BANK AG DEUTSCHE ZENTRALGENOSSENSCHAFTSBANK, FRANKFURT AM
MAIN, NEW YORK BRANCH,
Defendant/Counter Claimant.
After prevailing at trial, defendant DZ Bank moves for
summary judgment granting its counterclaim for indemnification
of its attorneys' fees and disbursements.
BACKGROUND
In December 2008, plaintiff Sparta Commercial Services,
Inc.
("Sparta"), DZ Bank, and several other parties entered into
a Revolving Credit Agreement or "RCA" to provide for the
issuance of a line of credit for Sparta's business financing
consumer motorcycle purchases and leases. However, Sparta was
unable to meet the preconditions to draw down on the line of
credit, and the RCA expired in December 2009, before any funds
were advanced under it.
Sparta then sued DZ Bank, asserting various claims which
were ultimately reduced to breach of the implied covenant of
good faith and fair dealing. DZ asserted a counterclaim for
indemnification of its cost of defense. Sparta's claims were
dismissed after an eight-day bench trial, and DZ Bank asserts
that under the express language of the RCA it is entitled to be
reimbursed for its attorneys' fees and disbursements.
DISCUSSION
Sparta was the servicer as defined in the RCA. DZ Bank is
included among the "Indemnified Parties" as that term is
defined, and the RCA explicitly includes attorneys' fees within
the definition of "Indemnified Amounts." Section 11.2(a) of the
RCA addresses indemnities by the servicer:
Without limiting any other rights that any such Person may
have hereunder or under Applicable Law, the Servicer hereby
agrees to indemnify each Indemnified Party, forthwith on
demand, from and against any and all Indemnified Amounts
[defined by§ ll.l(a) as "damages (exclusive of consequential
damages), losses, claims, liabilities and related costs and
expenses, including reasonable attorneys' fees and
disbursements"] awarded against or incurred by any such
Indemnified Party by reason of any acts or omissions of the
Servicer, excluding, however, [list of irrelevant exceptions],
including, but not limited to (i) any representation or
warranty made or deemed made by the Servicer under or in
connection with any Transaction Document, any Servicing
Report, Servicer's Certificate or any other information or
report delivered by or on behalf of the Servicer pursuant
hereto, which shall have been false, incorrect or misleading
in any respect when made or deemed made, (ii) the failure by
the Servicer to comply with any Applicable Law, (iii) the
failure of the Servicer to comply with its covenants under
this Agreement or the other Transaction Documents, (iv) any
litigation, proceedings or investigation against the Servicer
(v) the failure to vest (in the case of the initial Servicer)
and maintain vested in the Administrative Agent (in the case
of the initial Servicer and each Successor Servicer (if any)),
as agent for the Secured Parties, a first priority perfected
security interest in the Collateral, free and clear of any
Lien (other than Permitted Liens) whether existing at the time
of any Advance or at any time thereafter (including, without
limitation, as the result of the failure to file, or any delay
in filing, financing statements, continuation statements or
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other similar instruments or documents under the UCC of any
applicable jurisdiction or other Applicable Law with respect
to any Collateral), (vi) any failure of the Servicer to
perform its duties under the Transaction Documents with
respect to any Collateral, (vii) solely with respect to the
initial Servicer, the failure of any Receivable represented by
the initial Servicer to be an Eligible Receivable to be an
Eligible Receivable on the date of the applicable
representation, (viii) any inability to obtain any judgment
in, or utilize the court or other adjudication system of, any
state in which an Obligor may be located as a result of the
failure of the Servicer to qualify to do business or file any
notice or business activity report or any similar report,
(ix) any action taken by the Servicer in the enforcement,
servicing or collection of any Collateral, (x) solely with
respect to the initial Servicer, any claim, suit or action of
any kind arising out of or in connection with the breach of
any Applicable Law with respect to the Collateral or the
Transaction Documents or the ownership or operation of any
Powersports Vehicle, including any vicarious liability,
(xi) the failure by the Servicer to pay when due any Taxes for
which the Servicer is liable, including without limitation,
sales, excise or personal property taxes payable in connection
with the Collateral, or (xii) the commingling of Collections
on the Collateral by the Servicer at any time with other
funds.
Calica July 17, 2015 Decl. Ex. 1 ("RCA") at 104-05 (Dkt. No.
85) .
DZ Bank argues that "Section 11.2 provides broadly for
indemnification of all Indemnified Amounts incurred by an
Indemnified Party by reason of any acts or omissions of the
Servicer. The advancement by Sparta of its meritless suit is
plainly an 'act' as that term is commonly and ordinarily
understood." Mem. Law Supp. Def.'s Mot. for Summ. J. at 2 (Dkt.
-3-
No. 84)
1
LAW
In accordance with its choice of law provision, the RCA is
governed by New York law.
In litigation over claims for indemnification of attorneys'
fees, New York law draws a substantial and decisive distinction
between clauses which provide for indemnification of one
contracting party by another arising from litigation between the
parties to the contract themselves, on the one hand, and such
claims arising from a contracting party's defense of a suit by a
non-party to the contract (such as a contracting party's
customer), on the other hand. For example, a financier of a
business might see a need for protection against claims by the
business's customers, but not with respect to the business
itself with which the financier has contract rights.
The New York Court of Appeals treats the typical clauses
"which contemplate reimbursement when the indemnitee is required
to pay damages on a third-party claim" as different from those
"referable to claims between the parties themselves or support
an inference that defendant promised to indemnify plaintiff for
DZ Bank also argues that it is protected by Section 11.1 of the RCA, which
addresses indemnities by the borrower, on the theory that Sparta has stepped
into the shoes of the borrower in this litigation. However, applying Section
11.1 is equally (and for the same reasons) governed by the same analysis of
DZ's motion.
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counsel fees in an action on the contract." Hooper Assocs., Ltd.
v. AGS Computs., Inc., 74 N.Y.2d 487, 492, 549 N.Y.S.2d 365, 367
(1989). In that case, the Court of Appeals held that an
indemnity clause did not apply to suits between the contracting
parties where notice and assumption provisions had no
application to such suits and would be superfluous if the clause
applied to them:
Our interpretation also is supported by other provisions in
the contract which unmistakably relate to third-party claims.
Thus, article 9(0) requires plaintiff to "promptly notify"
defendant of "any claim or litigation to which the indemnity
set forth in Sub-Paragraph 9(A) shall apply" and it further
provides that defendant "may assume the defense of any such
claim or litigation with counsel satisfactory to [plaintiff]."
To extend the indemnification clause to require defendant to
reimburse plaintiff for attorney's fees in the breach of
contract action against defendant would render these
provisions meaningless because the requirement of notice and
assumption of the defense has no logical application to a suit
between the parties. Construing the indemnification clause as
pertaining only to third-party suits affords a fair meaning to
all of the language employed by the parties in the contract
and leaves no provision without force and effect (see, Corhill
Corp. v. S.D. Plants, 9 N.Y.2d 595, 599, 217 N.Y.S.2d 1, 176
N.E.2d 37).
Id. at 492-93, 549 N.Y.S.2d at 367. "It is a cardinal rule of
construction that a court should not 'adopt an interpretation'
which will operate to leave a 'provision of a contract .
without force and effect.'" Corhill Corp. v. S.D. Plants, Inc.,
9 N.Y.2d 595, 599, 217 N.Y.S.2d 1, 3 (1961)
Corhill)
(ellipsis in
(quoting Muzak Corp. v. Hotel Taft Corp., 1 N.Y. 2d 42,
46, 150 N.Y.S.2d 171, 174
(1956)).
In the RCA, there are two such clauses which show the
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inconsistency of applying the general indemnity clause to claims
between DZ Bank and Sparta. Sections 11.2 (a) (i) and (iii)
provide that Sparta will indemnify DZ Bank for damages and
attorneys' fees caused by DZ's reliance on Sparta's knowing
misstatements or failures of Sparta to perform. Subdivision (i)
gives indemnity for "any representation or warranty made or
deemed made by the Servicer [Sparta] under or in connection with
any Transaction Document, any Servicing Report, Servicer's
Certificate or any other information or report delivered by or
on behalf of the Servicer pursuant hereto, which shall have been
false,
incorrect or misleading in any respect when made or
deemed made.u Subdivision (iii) gives indemnity for "the failure
of the Servicer [Sparta] to comply with its covenants under this
Agreement or the other Transaction Documents.u DZ Bank would
naturally wish to be indemnified by Sparta for the consequences
of such derelictions by Sparta. The balance of the subdivisions
of Section 11.2(a) relate more generally to disputes involving
non-parties to the RCA.z
But if the wide indemnity characterized by Section 11.2(a)
as covering "any acts or omissionsu of Sparta were to be applied
DZ Bank says subdivision (x) provides it with indemnity in this case, but a
reading of the full subdivision, with its reference to the collateral and the
operation of any powersports vehicle giving rise to vicarious liability,
leaves that conclusion far from "unmistakably clear.u
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to such disputes as this litigation with DZ Bank, there would be
no need or use for subdivisions (i) and (iii). They would be
duplicative and superfluous. That is strong evidence that the
broad indemnity language was not intended to apply to this
litigation between DZ Bank and Sparta.
According to the Second Circuit, applying New York law, an
indemnification clause does not extend to attorneys' fees in a
suit between the contracting parties themselves unless the
language of the contract is unmistakably clear that the parties
intended that indemnification:
Under the general rule in New York, attorneys' fees are
the ordinary incidents of litigation and may not be awarded to
the prevailing party unless authorized by agreement between
the parties, statute, or court rule. See Bourne Co. v. MPL
Communications, Inc., 751 F. Supp. 55, 57 (S.D.N.Y. 1990);
A.G. Ship Maint. Corp. v. Lezak, 69 N.Y.2d 1, 5, 511 N.Y.S.2d
216, 503 N.E.2d 681 (1986); Mighty Midgets, Inc. v. Centennial
Ins. Co., 47 N.Y.2d 12, 21-22, 416 N.Y.S.2d 559, 389 N.E.2d
1080 (1979). This policy "provides freer and more equal access
to the courts . . . [and] promotes democratic and libertarian
principles.u Mighty Midgets, Inc., 47 N.Y.2d at 22, 416
N.Y.S.2d 559, 389 N.E.2d 1080. Accordingly, while parties may
agree that attorneys' fees should be included as another form
of damages, such contracts must be strictly construed to avoid
inferring duties that the parties did not intend to create.
See Hooper Assocs., Ltd. v. AGS Computers, Inc., 74 N.Y.2d
487, 491, 549 N.Y.S.2d 365, 548 N.E.2d 903 (1989).
Promises by one party to indemnify the other for
attorneys' fees run against the grain of the accepted policy
that parties are responsible for their own attorneys' fees.
See id. at 492, 549 N.Y.S.2d 365, 548 N.E.2d 903. Under New
York law, "the court should not infer a party's intentionu to
provide counsel fees as damages for a breach of contract
"unless the intention to do so is unmistakably clearu from the
language of the contract. Id. at 492, 549 N.Y.S.2d 365, 548
N.E.2d 903; see also Zissu v. Bear, Stearns & Co., 805 F.2d
75, 79 (2d Cir. 1986) (agreement did not "meet the requisite
level of specificityu to support an award of attorneys' fees
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in a security fraud suit); Eastman Kodak Co. v. STWB Inc., 232
F. Supp. 2d 74, 95 (S.D.N.Y. 2002) ("[t]he contractual
language must evince an 'unmistakable intention' to
indemnify"); Hooper, 74 N.Y.2d at 491-92, 549 N.Y.S.2d 365,
548 N.E.2d 903 (holding that the plaintiff could not recover
attorneys' fees from the defendant without express language in
the agreement permitting such a recovery); Tokyo Tanker Co. v.
Etra Shipping Corp., 142 A.D.2d 377, 536 N.Y.S.2d 75, 77-78
(1st Dep't 1989) (noting that an indemnity provision "'should
not be extended to include damages which are neither expressly
within its terms nor of such character that it is reasonable
to infer that they were intended to be covered under the
contract'" (quoting Niagara Frontier Transp. Auth. v. TriDelta Canst. Corp., 107 A.D.2d 450, 487 N.Y.S.2d 428, 431,
aff'd, 65 N.Y.2d 1038, 494 N.Y.S.2d 695, 484 N.E.2d 1047
( 1985))) .
Oscar Gruss & Son, Inc. v. Hollander, 337 F.3d 186, 199 (2d Cir.
2003)
(alterations in original).
Although the RCA's indemnification clause reads broadly,
under New York law its two subdivisions which would become
superfluous if it provided indemnification of DZ Bank's
attorneys'
contract
fees in a lawsuit by Sparta against DZ for breach of
(and are not superfluous but functional if the
indemnification clause is strictly construed) require that
strict construction, which also complies with New York's
requirement that indemnification of attorneys'
fees be expressed
"unmistakably."
CONCLUSION
DZ Bank's motion for summary judgment granting its
counterclaim for indemnification (Dkt. No. 82) is denied.
Unless either party raises other matters before January 15,
2016, the Clerk will enter judgment in favor of DZ Bank
-8-
dismissing the complaint, with costs and disbursements according
to law.
So ordered.
Dated:
New York, New York
December 18, 2015
t,.,..J
~.
st...,d..,.
LOUIS L. STANTON
U.S.D.J.
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