Pardee, et al v. Consumer Services

Filing 270

DECISION AND ORDER denying 244 Motion for Summary Judgment; granting 253 Motion for Summary Judgment and grants plaintiffs' motion for summary judgment on defendant's counterclaims. The Court dismisses the counterclaims against Count erclaim Defendants Sutro and Dunbar/Wheeler Trust. This ruling is limited to the issue of liability only. The Court will issue a scheduling order concerning the issue of damages and set a date for a jury trial on that issue. No judgment to issue until all issues are resolved. So Ordered by Senior Judge Ronald R. Lagueux on 2/13/13. (Cavaco, Janice)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND

JONATHAN H. PARDEE,
Carol Havican as TRUSTEE of the
JONATHAN H. PARDEE CHARITABLE
REMAINDER TRUST
Plaintiffs,
v.

C.A. 01-594L

CONSUMER PORTFOLIO SERVICES, INC.,
Defendant.
_________________________________
CONSUMER PORTFOLIO SERVICES, INC.
Counterclaimant Plaintiff,
v.
JONATHAN H. PARDEE, Carol Havican
as TRUSTEE of the JONATHAN H. PARDEE
CHARITABLE REMAINDER TRUST,
ODGEN H. SUTRO, DUNBAR/WHEELER TRUST,
Counterclaim Defendants.

DECISION AND ORDER

This matter comes before the Court on Plaintiffs’ Motion for
Summary Judgment, seeking judgment in their favor on their Second
Amended Complaint (“Complaint”), as well as judgment in their
favor on Defendant’s counterclaims.

Defendant has cross-moved

for summary judgment on Plaintiffs’ Complaint.

These motions

address issues of liability only, the Court having previously

granted Plaintiffs’ motion to bifurcate the issues of liability
and damages.
Plaintiffs bring their Complaint in order to enforce an
indemnity agreement that was part of a 1997 business transaction
resulting in the sale of a company owned by Plaintiff Jonathan H.
Pardee (“Pardee”) and others to associates of Defendant.
Defendant served as conditional indemnitor for the transaction.
However, Defendant now asserts that, pursuant to the terms of the
parties’ agreement, it is not required to indemnify Plaintiffs,
and that, moreover, the agreement is invalid because of
misrepresentations made by Plaintiffs at the time of the
transaction.

For reasons that will be explained below, the Court

grants Plaintiffs’ Motion for Summary Judgment, holding that the
indemnification agreement is not only valid, but enforceable
against Defendant.
Background
It is necessary to delve into a past century in order to
explain important aspects of this case, which begins in the 1970s
with some two hundred personal injury victims in California.
Tortfeasors entered into structured settlements with these injury
victims (hereinafter “Settlement Payees”) in order that the
Settlement Payees could receive their awards in periodic
installments.

The tortfeasors made one-time, lump-sum payments

and turned the administration of the structured settlements over

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to an assignment company set up for this purpose.

The assignment

company changed names and ownership over time – when owned by
Plaintiff Pardee, it was called Settlement Services Treasury
Assignments, Inc., or SSTAI; however, for convenience, all
incarnations (prior to the 1997 sale) will be identified herein
as “the Assignment Company.”

In exchange for a one-time

commission, the Assignment Company established an individual
trust for each Settlement Payee, invested the settlement monies
in various financially-conservative vehicles, and was thereafter
responsible for making payments to the Settlement Payees on a
periodic basis.

The Assignment Company was contractually

obligated to hold the settlement proceeds in irrevocable,
spendthrift trusts that could not be sold, pledged or encumbered.
Most of the settlement monies were invested in United States
Treasury Bonds, specifically selected to match maturity dates
with the schedule of settlement payments.

Alternative funding

instruments included Treasury Investment Growth Receipts or “TIGR
bonds.”

The legal arrangement, as memorialized by the various

settlement, trust and assignment agreements, was that a single
bank served as trustee and the Assignment Company was the trustor
and sole beneficiary of the trusts, while the Settlement Payees
were general creditors of the Assignment Company.

This

arrangement provided advantages for all parties: the tortfeasor
entities were released from ongoing liability to the Settlement

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Payees; the irrevocable trusts holding low-risk financial
instruments provided long-term security for the Settlement
Payees; and both sides enjoyed tax advantages enacted by Congress
to encourage these kinds of settlements.

In 1982, the Assignment

Company created a single master trust Agreement to facilitate its
administration of the structured settlements.
Pardee’s involvement
In 1991, the Assignment Company brought a lawsuit in Los
Angeles Superior Court to remove Wells Fargo Bank as trustee for
the various trusts.

In the course of that litigation, the court

ruled twice that the Assignment Company did not have the power to
remove Wells Fargo as trustee without the consent of the
Settlement Payees.

While the Assignment Company’s appeal of

those rulings was pending, an agreement was reached by the
parties pursuant to which Wells Fargo resigned as trustee – with
no notice to the Settlement Payees.

Also in 1991, Pardee became

an officer of the Assignment Company, and the Providence law firm
then known as Hinckley, Allen & Snyder (“Hinckley Allen”) became
its legal counsel.

At this time, because the Assignment Company

was not entering into new structured settlement arrangements, it
had no source of income beyond what was allocated for payments to
the Settlement Payees. The Assignment Company was essentially in
run-off.
Late in 1991, Pardee became majority shareholder of the

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Assignment Company when he purchased the stock for $1.
Trust Company became the new trustee.

U.S.

A new master trust

agreement was created, superceding all previous trust agreements.
This master trust agreement included some important changes: gone
were all provisions stating that the trusts were irrevocable; and
new language was inserted permitting the Assignment Company to
receive a portion of the Trustee’s fee.
During 1993, Pardee, along with Hinckley Allen, began to
explore the idea of using, or “harvesting,” the excess equity
earned by the trust assets as collateral to secure loans for
other enterprises.

When U.S. Trust Company refused to go along

with this plan, Pardee replaced it as trustee with Bankers Trust
Company of New York (“Bankers Trust”).

Trustor and trustee then

ironed out a new master trust agreement, superceding all previous
trust agreements.
The 1994 Master Trust Agreement omitted all references to
the settlement agreements and to the orders to make payments to
the Settlement Payees, stating only that payments should be made
from the trust “to the persons and at the times set forth in the
instructions delivered to the Trustee by the Trustor.”

Moreover,

the trustor was authorized to direct the trustee to pay over to
the trustor money deemed by the trustor to be excess of that
necessary to satisfy the trustor’s obligations.

Another

important change in the 1994 Master Trust Agreement was a

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provision enabling the Assignment Company to borrow money using
the trust assets as collateral, and to use the loans for the
benefit of other enterprises.1

The revised Trust Agreement gave

the Assignment Company full discretionary power to amend or
terminate the trust at any time.
As a result of these changes, the Assignment Company was
able to sell the Treasury Bonds to Morgan Stanley in exchange for
a line of credit, entering into repurchase agreements whereby
Morgan Stanley would essentially hold the bonds until the
Assignment Company exercised its right to buy them back at a
slightly higher price.

In addition, during this time period,

Pardee liquidated the TIGR bonds, which had been held by the
Assignment Company for the purpose of making payments to certain
of the Settlement Payees.

According to Defendant, the sale of

the TIGR bonds left the Assignment Company underfunded by $1.4
million, in terms of its obligation to the Settlement Payees.
Additionally, because of its new-found borrowing power, the
Assignment Company changed the way its remaining assets were
valued for accounting purposes – a change that increased the
Company’s stockholder equity from just over $1 million to $24.7
million over a three-month period.

1

The Settlement Payees never

Taking advantage of this modification, Pardee loaned his
wholly-owned investment company, Bellevue Capital Ventures, $5
million around 1994. This amount was repaid to the Assignment
Company in 1997, though not necessarily by Bellevue.
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consented to, nor were they ever even notified of any of these
transactions or of any of the changes to the structure and
practices of the Assignment Company.

Notwithstanding these

changes, the Assignment Company consistently fulfilled its
payment obligations to the Settlement Payees.
In 1996, the Assignment Company shareholders worked with
investment bank Bear Stearns & Co. to market the Assignment
Company for sale.

In its Marketing Summary, Bear Stearns

described the Assignment Company as being in “run-off mode.”
The first paragraph reads:
SSTAI was founded in 1969 to primarily
satisfy defendants’ obligations to payees
under legal settlement of various insurance
claims. The Company is required to make
periodic and lump sum payments to payees for
periods between one and thirty years. The
Company’s future payment obligations are
fully funded by a portfolio of US Treasury
Bonds. These securities provide for the
future payment obligations because payments
on the bonds are matched to the amounts due
payees.
Still on the first page, the Summary states, “Because the Company
has not acquired new business since 1992, any acquisition should
be viewed as a purchase of high quality, highly liquid and
flexible assets, primarily US Treasury Bonds.”

The “professional

responsibility” of any potential buyer was stressed as a special
consideration, due to the fact that the “securities are tied to
vehicles intended to provide injured claimants with security.”

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Bear Stearns soon recommended potential buyers: Charles E.
Bradley, Sr., and his son, Charles E. Bradley, Jr., from
Connecticut.

Bear Stearns prepared a detailed analysis of the

Assignment Company’s assets and liabilities for the Bradleys’
review.

The Bradleys owned several other companies and financial

interests, including Defendant Consumer Portfolio Services, Inc.,
(“CPS”), of which Bradley Sr. was a 25% owner and served as
chairman of the board, while Bradley Jr. was president and chief
executive officer.

The Bradleys were interested in the

Assignment Company as a source of liquid capital, particularly
for CPS, a publicly-traded consumer car financing business.
The Bradleys hired a Providence law firm, Cameron &
Mittleman, to review the Assignment Company’s records, including
the original settlement agreements with the Settlement Payees,
the assignment agreements, and all versions of the trust
agreements (the “Settlement Documents”).

According to

Plaintiffs, two attorneys from Cameron & Mittleman, accompanied
by both Bradleys, spent five days in the Assignment Company’s
office inspecting its files.
Although the Bradleys’ attorneys had access to virtually all
the Assignment Company’s documentation, Defendant now asserts
that they were only able to conclude that the more recent master
trust agreements appeared to be consistent with Plaintiffs’
representations.

Moreover, Defendant presently complains that

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the Bradleys’ attorneys did not have access to Hinckley Allen’s
legal files, which Defendant has since seen in the course of the
discovery for other related litigation.

According to Defendant,

these documents reveal Hinckley Allen’s research and analysis
about the propriety of the ongoing modifications to the Trust
Agreements. Access to these files would also have revealed the
Plaintiffs’ and their attorneys’ concerns about whether or not
the Settlement Payees might be deemed third-party beneficiaries
of the trusts to whom the Assignment Company could owe a legal
duty; the sale of the TIGR bonds; information about prior banktrustees which refused to go along with the Assignment Company’s
plan to borrow against the trust assets; and the concerns about
Pardee’s potential liability if he sold the Assignment Company to
a buyer who made poor investment decisions and lost the trust
assets.
As part of their “due diligence” review, the Bradleys were
able to obtain from Hinckley Allen a legal opinion letter
assuring them specifically of the Assignment Company’s right to
borrow money using the trust assets as collateral.

The letter

also stated:
There are no facts known to us which give us
reason to believe that the SSTAI Trust does
not hold all of the assets now held by it,
free and clear of all liens, charges and
encumbrances and adverse claims of every kind
or nature.

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In its memorandum of law to this Court, Defendant quotes
from Pardee’s deposition, explaining that Pardee met with Bradley
Sr. and “described to him in detail what we did, how we did it,
with whom we did it, and took him down to meet the managers in
the event that he wanted to continue to do the same type of
borrowing and reinvesting.”

At the end of their investigation,

the Bradleys offered to buy all the Assignment Company’s common
stock, and the parties agreed upon a selling price of
$16,833,400.00.

CPS agreed to participate in the sale as a

conditional indemnitor for the Bradleys.
Sale of the Assignment Company
On May 20, 1997, Pardee and the Assignment Company’s other
shareholders, Plaintiff Jonathan H. Pardee Charitable Remainder
Trust (“the Charitable Trust”) and counterclaim co-defendants
Ogden H. Sutro and the Dunbar/Wheeler Trust (collectively
“Sellers”), entered into a Stock Purchase Agreement (“SPA”) with
two Bradley-owned entities, CPS (identified as “Indemnitor” in
the SPA) and the SST Acquisition Company (“Purchaser”).

The SPA

contained multiple warranties made by the Sellers: that the
Assignment Company’s prior conduct was in full compliance with
the law (§ 3.20); that the information provided by the Sellers in
the Agreement was accurate (§ 3.26); that all obligations imposed
by the Settlement Agreements had been fulfilled up to the date of
the closing (§ 3.28); that the operative Master Trust Agreement,

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and all previous master trust agreements, complied with the law
(§ 3.29); that the incorporated list of assets were held free and
clear of liens and encumbrances (§ 3.30); and that all previous
administration of the trusts had been in full compliance with the
law and the Settlement Agreements (§ 3.30).

According to

Defendant, the truth of these warranties and other
representations was a condition precedent of CPS’s indemnity
obligations.
At the time of the closing, Sellers also asserted that the
Assignment Company had no debts or encumbrances – its only
obligations comprised the ongoing payments due the Settlement
Payees.

The Company’s annual records show that its stockholder

equity was $18.8 million as of year-end 1996, and $15.5 million
one year later.
Sections 9.01 and 9.02 of the SPA are reciprocal
indemnification provisions designed to protect the buyers from
liability for the Sellers’ pre-closing conduct, and to protect
the Sellers from liability for the buyers’ post-closing conduct.
Section 9.02 provided for the indemnification of the Sellers, to
hold them harmless and defend them promptly for “any and all
losses, damages, costs, expenses...., including, without
limitation, reasonable attorneys’ fees and other legal and
professional costs and expenses” incurred “as a result or in
connection with...any failure of the Purchaser... after the date

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hereof, to carry out and perform its obligations under any
agreement, instrument or other document to which the Company is
now bound or hereafter becomes bound...”
Section 9.02(b)(ii) set forth time limits for some of
Sellers’ possible claims, including in part (d):

“with respect

to any failure to make required payments to the Payees due and
payable after the Closing Date, December 31, 2014 except with
respect to Treasury Bonds of the SSTAI Trust which are called, as
to which the date shall be December 31, 2009 (sic).”
The rise and fall of Stanwich
In order to complete the sale, the Bradleys entered into
several repurchase agreements with Morgan Stanley, whereby they
sold some of the Assignment Company’s Treasury Bonds in exchange
for the $16 million purchase price they needed to buy the
Assignment Company.

The name of the Assignment Company was

changed to Stanwich Financial Services Corporation (“Stanwich”).
After the purchase, the Bradleys continued to leverage virtually
all the trust assets, entering into more repurchase agreements
with Morgan Stanley for a total of $98 million,2 which was, by
September 1998, distributed in its entirety to Bradley family
members and affiliates, including loans to CPS and other
companies under the Bradleys’ control.

2

Defendant CPS states,

This figure is taken from the 2003 Amended Complaint of
the Official Committee of Unsecured Creditors in the subsequent
Stanwich bankruptcy.
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however, that it never played any role in Stanwich’s operations
or investment decisions.
In 1997, Morgan Stanley notified Stanwich of its intent to
terminate the repurchase agreements by selling the Treasury
Bonds.

After giving Stanwich several extensions on its option to

repurchase the Treasury Bonds, Morgan Stanley sold the Bonds,
paid itself from the proceeds and remitted the balance to
Stanwich.

In 2000, Stanwich’s financial condition was such that

it was unable to make payments to the Settlement Payees.

The

Settlement Payees then brought multiple lawsuits in California
Superior Court against Stanwich, CPS, Pardee and other former
Assignment Company shareholders, the various banks which had
served as trustees for the Assignment Company, and all other
entities involved in the structured settlements, past and
present.
Claims against Pardee
One group of Settlement Payees consolidated their claims in
a class-action suit in Los Angeles Superior Court.3

The

complaint alleged, inter alia, that Settlement Payees’ losses
were caused by the changes Pardee made to the trust agreements
enabling the Assignment Company to sell and borrow against the
Treasury Bonds.

An additional lawsuit, with the same group of

3

This case was captioned: Stuber v. Merrill Lynch Pierce
Fenner & Smith, Inc., et al./In re Structured Settlement
Litigation, Lead Case No. BC-244111.
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defendants, alleged that Pardee had breached contractual and
fiduciary duties when, in 1993, the Assignment Company sold the
TIGR bonds without notice to, or the consent of, the Settlement
Payees.4

Co-defendants in these cases brought cross-claims

against Pardee, including claims for fraud, intentional and
negligent interference with contractual relations, unjust
enrichment, negligent interference with prospective economic
advantage, etc.

Stanwich soon declared bankruptcy, and, in

connection with that case, Pardee was brought into an adversary
proceeding5 in United States Bankruptcy Court for the District of
Connecticut, in which Stanwich’s creditors’ committee alleged
that Plaintiffs’ sale of the Assignment Company to the Bradleys
constituted a fraudulent conveyance under 11 U.S.C. § 544(b).
Facing an avalanche of claims in California and Connecticut,
Plaintiffs sought indemnification from CPS to cover legal
expenses, pursuant to section 9.02 of the SPA.

When CPS refused,

Plaintiffs filed suit in Rhode Island Superior Court in 2001.
CPS removed the case to this Court soon thereafter.
The Rhode Island litigation
The dispute was the subject of extensive motion practice at
this phase, including hearings before Judge Ernest Torres on the

4

The second lawsuit was captioned Hawkins v. Merrill Lynch,
Pierce, Fenner & Smith, Inc., Case No. BC 279691.
5

In re Stanwich Financial Services Corp., C.A. No. 01-

50831.
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issues of ripeness and abstention, hearings before Judge William
E. Smith on a summary judgment motion, hearings on discovery
before Magistrate Judge Lovegreen and Magistrate Judge David
Martin, and a conference before Judge Mary Lisi.

During this

time, CPS filed several counterclaims, making the same
allegations against Pardee that the Settlement Payees had made in
the California litigation, and adding additional counter-claim
defendants.6

Eventually, the case wound up before this writer

where, in 2004, it was stayed pending the resolution of the
litigation in California and Connecticut.

For details on this

travel, see Pardee v. Consumer Portfolio Services, Inc., 344 F.
Supp.2d 823 (D.R.I. 2004).
Shortly before this Court issued its stay, the class action
suit in California was settled, with more than $90 million being
distributed to the Settlement Payees.

Plaintiffs herein did not

participate in the settlement, and the Settlement Payees’ claims
against them were assigned to Bankers Trust, the largest
contributor to the settlement.

Although Bankers Trust did file

6

Ogden H. Sutro and the Dunbar/Wheeler Trust were added at
this time as counterclaim defendants by Defendant CPS. Although
they initially retained counsel who entered an appearance prior
to the stay, that counsel has subsequently withdrawn. Since that
time, they have been served with a Third Amended Counterclaim but
have failed to answer or respond. No successor counsel has
entered an appearance, nor have Sutro or the Trust appeared on
their own behalf. Consequently, in April 2012, these parties
were defaulted. Other counter and cross-claim defendants, such as
Hinckley Allen, are no longer parties to the lawsuit.
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cross-claims against some non-settling defendants, it did not
pursue any claims against Plaintiffs herein.

Consequently, on

September 4, 2004, Pardee and the Charitable Trust were dismissed
without prejudice from the class-action suit.
On February 19, 2010, the California Superior Court granted
summary judgment in Pardee’s favor in the second lawsuit.

In

that suit, involving the TIGR bonds, the Court held that Pardee
owed no duty of care, fiduciary or otherwise, to the Settlement
Payees, and that he had not committed constructive fraud.
On April 6, 2011, the adversary proceedings against Pardee
and the Charitable Trust in the Connecticut bankruptcy court were
dismissed with prejudice, with no payment being made by or on
behalf of either party.

Moreover, the bankruptcy court

specified that nothing in the Chapter 11 Plan should be
interpreted as precluding or interfering with Pardee or the
Charitable Trust’s indemnification rights against CPS or the
Bradleys.
While no judgments were ever entered against Plaintiffs in
any of these lawsuits, Pardee and the Charitable Trust claim they
have incurred legal expenses and costs of over $50,000 each.
Those claims will be left for resolution on another day.
Analysis
Standard of review
When ruling on a motion for summary judgment, the court must
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look to the record and view all the facts and inferences
therefrom in the light most favorable to the nonmoving party.
Continental Cas. Co. v, Canadian Univ. Ins. Co., 924 F.2d 370,
373 (1st Cir. 1991).

Once this is done, Rule 56(c) requires that

summary judgment be granted if there is no issue as to any
material fact and the moving party is entitled to judgment as a
matter of law.
The analysis required for cross motions for summary judgment
is the same.

Scottsdale Ins. Co. v. Torres, 561 F.3d 74, 77 (1st

Cir. 2009) (“The presence of cross-motions neither dilutes nor
distorts this standard of review.”).

In evaluating cross-

motions, the court must determine whether or not either party is
entitled to judgment as a matter of law based upon the undisputed
facts.

Id.
CPS’s counterclaims

The gravamen of CPS’s counterclaims is that, at the time of
the sale of the Assignment Company, Plaintiffs misrepresented key
information about its authority to engage in financial
transactions using the trust assets; and that these
misrepresentations render the SPA void, and the indemnification
agreement unenforceable.

As these claims attack the fundamental

validity of the SPA, rather than its interpretation, the Court
will address these issues before reaching Plaintiffs’ motion for
summary judgment on the Complaint.

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Plaintiffs have moved for

summary judgment on the counterclaims; however, Defendant has not
cross-moved, arguing that there are material factual issues in
dispute that made summary judgment improper.
CPS brings six counterclaims: Count I for fraud and
intentional misrepresentation; Count II for negligent
misrepresentation; Count III seeks indemnification from
Plaintiffs pursuant to Section 9.01 of the SPA because of
Plaintiffs’ misrepresentations at the time of the closing; Count
IV seeks indemnification based on Plaintiffs’ negligent failure
to perform duties arising out of the SPA; Count V seeks
indemnification based on equity; and Count VI seeks a declaratory
judgment that CPS is entitled to indemnification from Plaintiffs.
The alleged misrepresentations
CPS alleges that Plaintiffs knowingly or negligently made
misrepresentations, in order to induce CPS to participate as an
indemnitor in the purchase of the Assignment Company.

The

alleged misrepresentations include that the Assignment Company
had the legal and contractual right to borrow against the
Treasury Bonds; that the modifications of the trust agreements
made by Pardee were legal and in full compliance with the
Assignment Company’s contractual obligations to the Settlement
Payees; and that the Settlement Payees had no claims against the
Assignment Company or the trust assets as of the date of the
closing.

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For the purpose of analyzing Plaintiffs’ motion in the light
most favorable to CPS, the Court assumes that Plaintiffs made the
representations as alleged.

Nevertheless, CPS’s claims fail, as

a matter of law, because they lack two elements of the requisite
prima facie case for misrepresentation: reliance and causation.
In order to make a claim for intentional misrepresentation or
fraud, a plaintiff must establish that the defendant knowingly
misrepresented a material fact, with the intent not only to
deceive but also to induce the plaintiff to rely on the
misrepresentation to his detriment.

Fleet Nat. Bank v. Anchor

Media Television, 831 F.Supp. 16, 38 (D.R.I. 1993) (citing East
Providence Loan Co. v. Ernest, 103 R.I. 259, 263, 236 A.2d 639,
642 (1968).

If the misrepresentation is made negligently, it

must be made without knowledge as to its truth or falsity, under
circumstances where the defendant should have known of the
statement’s falsity.

As with fraud, the representation must be

made in order to induce reliance.

Mallette v. Children’s Friend

and Service, 661 A.2d 67, 69 (R.I. 1995).
Because of the roles that the Bradleys played in the
management and ownership of CPS, the information obtained for
them by their attorneys during the due diligence phase of the
purchase of the Assignment Company may be imputed to Defendant
CPS.

See Cook v. American Tubing & Webbing Co., 28 R.I. 41, 77,

65 A. 641, 655 (1905); U.S. v. Bank of New England, N.A., 821

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F.2d 844, 856 (1st Cir. 1987).

Charles Bradley Jr. haS served as

CPS’s president and chief executive officer since the company’s
founding.

At the time of the sale, Charles Bradley Sr. was its

chairman of the board.
Reliance
It is a well-settled point of law that there is no liability
on the part of the seller when the buyer enters into the
transaction based on an independent investigation, unless the
seller intentionally prevents the investigation from being
effective.

French v. Isham, 801 F.Supp. 913, 921 (D.R.I. 1992)

(citing Restatement (Second) of Torts § 547 (1976): “Thus one who
has fully inspected a house before buying it ordinarily cannot
claim that he was deceived by a misrepresentation of the
condition of the ceilings that was apparent to any one taking the
trouble to look at them....”).
The Bradleys and CPS entered into the purchase of the
Assignment Company with their eyes wide open, having conducted an
extensive independent investigation.

The Bradleys’ attorneys

spent five days reviewing all of the Assignment Company records,
including the original Settlement Documents and all versions of
the trust agreements.

Consequently, CPS was aware of the

Assignment Company’s ongoing obligations to the Settlement
Payees; it knew that Pardee had modified the trust agreements,
switched out the recalcitrant bank-trustees and fundamentally

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altered the arrangements from their original forms as irrevocable
spendthrift trusts.
Defendant complains that Pardee’s failure to produce
Hinckley Allen’s internal memoranda prior to the closing
prevented it from conducting an effective independent
investigation.

The Hinckley Allen documents, obtained by CPS

during discovery in later litigation, revealed the attorneys’
concerns about some of Pardee’s maneuvers, as well as their
commitment to ensuring that the trust modifications and other
changes did not leave Pardee exposed to potential liability.
Even without the benefit of Hinckley Allen’s internal memoranda,
these concerns obviously did arise for the Bradleys during their
due diligence review, because, before the sale, they requested
and received an opinion letter on these issues from Hinckley
Allen.
The Bradleys and their attorneys were also able to review
letters from Plaintiffs’ California attorneys, Ross & Sacks,
opining on the legality of the trust modifications, and
documentation from the litigation with Wells Fargo, when the
California judge ruled that the trustee could not be changed
without the consent of the Settlement Payees.
The Bradleys understood the nature of the Assignment
Company’s activities, past and present, and understood, as well,
the nature of the ongoing obligations to the Settlement Payees.

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The Bradleys entered into the purchase of the Assignment Company
wittingly and willingly, having, in the words of the Restatement,
“taken the time to look at the ceiling.”

CPS was motivated to

serve as indemnitor by the prospect of an influx of capital to
its company, and, in fact, it received a multimillion dollar loan
soon after the Bradleys purchased the Assignment Company.

The

facts, as provided by CPS, support the conclusion that CPS and
the Bradleys did not rely on Plaintiffs’ representations, but
instead conducted an independent investigation of the Assignment
Company and decided thereafter to purchase the company.
Causation
CPS’s counterclaims for negligent and fraudulent
misrepresentation fail for the additional reason that there is no
evidence to demonstrate that the alleged misrepresentations were
the proximate cause of CPS’s damages.

In fact, all the evidence

demonstrates that the Bradleys’ own investment strategy was to
blame for Stanwich’s insolvency and consequent failure to pay the
Settlement Payees, which led to the litigation, and ultimately
triggered CPS’s indemnification obligations.
Rhode Island law is clear that an independent intervening
negligent act breaks the chain of tort causation.

The Rhode

Island Supreme Court case of Clements v. Tashjoin is
illustrative, 92 R.I. 308, 168 A.2d 472 (1961).

In that case,

defendant Tashjoin visited a Providence mental hospital and left

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his car unlocked with the keys in the ignition in the hospital’s
parking area.

While the car was unattended, it was stolen by a

patient, who drove it off the grounds and eventually caused an
accident, resulting in injuries to Clements.

It turned out that

state law required that a driver remove the key from the ignition
when leaving a car unattended.

92 R.I. at 310, 168 A.2d at 473.

Although Tashjoin’s violation of the Rhode Island statute may
have provided prima facie evidence of negligence, the Supreme
Court affirmed the trial judge’s holding:
The trial justice sustained the demurrer
substantially on the ground that an
independent intervening act of a third person
broke the chain of causation between the
negligence of defendant, if any, and the
plaintiff’s injury. He based his decision on
the ground that defendant was not bound to
anticipate that a thief would steal his
automobile and negligently operate it so as
to collide with another vehicle on the
highway.
92 R.I. at 310-311, 168 A.2d at 473. See also Almeida v. Town of
North Providence, 468 A.2d 915, 917 (R.I. 1983); Travelers Ins.
Co. v. Priority Business Forms, Inc., 11 F.Supp.2d 194, 200
(D.R.I. 1998).
Pardee’s scheme to alter the trusts and siphon the money out
of the trust assets for the benefit of his other enterprises was
greedy and risky.

However, during the time that Pardee owned the

Assignment Company, he made it work: all payments to the
Settlement Payees were made on schedule and in the proper amount.
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Pardee’s dubious scheme did not unravel until after the Bradleys
purchased the Assignment Company, as they continued to borrow
large sums of money against the trust assets over a two-year
period, and invest that money into what were arguably more risky
enterprises than those chosen by Pardee.

Analogizing with the

Tashjoin case, Pardee is the careless driver who left his car
unlocked with the keys in the ignition on the grounds of a mental
hospital.

The Bradleys are the mental patient who then took the

car for a joy-ride.
Had the Bradleys continued to make the proper payments to
the Settlement Payees, the two California lawsuits would not have
been filed, and had the Bradleys operated Stanwich more
cautiously, it would not have gone into bankruptcy.

Had this

litigation been avoided, CPS would not have incurred the loss it
complains of today.
This Court’s conclusions are supported by the holdings of
the California Superior Court, as well as the Connecticut
bankruptcy court.

While none of those cases resulted in the

wholesale exoneration that Pardee argues is binding on this
Court; at the same time, neither did any of those lawsuits result
in any liability for Pardee.

Consequently, none of this other

litigation served to establish that Pardee’s warranties and
representations were in fact false.
For the reasons explained above, the Court grants

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Plaintiffs’ motion to dismiss Defendant CPS’s first and second
counterclaims.

Because CPS has failed as a matter of law to

establish that Plaintiffs made any actionable misrepresentations
or fraudulent statements in connection with the sale of the
Assignment Company, the Court also grants Plaintiffs’ motion for
summary judgment on counterclaims III, IV, V and VI, as those
claims are not viable absent a finding of tortious
misrepresentation.

Likewise, the Court, sua sponte, dismisses

CPS’s counterclaims against defaulted counterclaim defendants
Ogden Sutro and the Dunbar/Wheeler Trust because they made no
representations to the Bradleys or to CPS independent of those
made by Plaintiffs.
Plaintiffs’ Complaint
Plaintiffs also move for summary judgment on their
Complaint.

The Complaint has three counts, two counts for breach

of contract for CPS’s failure to indemnify Plaintiffs for their
legal expenses in the California litigation (I) and the
Connecticut bankruptcy litigation (II), and a third count for
declaratory judgment concerning CPS’s obligations under the
indemnity provision of the SPA.

Defendant has cross-moved for

summary judgment on these counts.
As explained previously, the indemnification provision was
included in the SPA, pursuant to which Pardee and the other
shareholders sold the Assignment Company to the Bradleys.

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CPS

served as the indemnitor.

Section 9.02 provides:

Section 9.02 Indemnification by the
Purchaser, the Company and the Indemnitor.
(a)
The Purchaser, the Indemnitor and, from
and after the Closing Date, the Company
hereby indemnify and hold each of the
Sellers, Sutro and each of the Sellers’
respective trustees and agents (collectively,
the “Seller Indemnified Parties”) harmless
from and against, and agree to defend
promptly each of the Seller Indemnified
Parties for, any and all losses, damages,
costs, expenses, fines, penalties, settlement
payments and expenses, liabilities,
obligations and claims of any kind,
including, without limitation, reasonable
attorneys’ fees and other legal and
professional costs and expenses (hereinafter
referred to collectively as “Seller Losses”),
that any of the Seller Indemnified Parties
may at any time suffer or incur, or become
subject to, as a result of or in connection
with the following (the “Seller Claims”): (i)
any breach or inaccuracy of any of the
representations and warranties made by the
Purchaser and/or the Indemnitor in or
pursuant to this Agreement; (ii) any failure
of the Purchaser and/or the Indemnitor to
carry out, perform, satisfy and discharge any
of its or their covenants, agreements,
undertakings, liabilities or obligations
under this Agreement or under any of the
documents and instruments delivered by the
Purchaser and/or the Indemnitor pursuant to
this Agreement; (iii) any liability for the
payment by the Purchaser, the Indemnitor
and/or the Company of federal, state or
foreign taxes arising from and after the date
hereof; (iv) any failure of the Purchaser,
the Indemnitor and/or the Company, after the
date hereof, to carry out and perform its
obligations under any agreement, instrument
or other document to which the Company is now
bound or hereafter becomes bound, (v) any
fraudulent behavior by the Company, the
Purchaser and/or the Indemnitor arising after
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the date hereof, (vi) any claim that the
purchase and sale of the Shares constitutes a
fraudulent transfer or fraudulent conveyance
under applicable federal or state law and
(vii) any failure to fulfill any obligations
of the Sellers, the Company and/or the STTAI
Trust to any Payee as and when due at any
time after the Closing Date.
(emphasis added).
When the California class action litigation began,
Plaintiffs sought indemnification from CPS to cover their defense
costs in May 2001.

CPS denied that it was obligated to indemnify

Pardee or the Charitable Trust.

In October of 2002, Plaintiffs

requested that CPS indemnify them in connection with the
bankruptcy litigation, and CPS again refused.

In September 2004,

Pardee made a third request to CPS, this time for indemnification
for the California TIGR bond litigation.

This Court stayed

Plaintiffs’ complaint in 2004, pending the outcome of the other
litigation.

Plaintiffs’ claims are now ripe for review.

Plaintiffs argue that the indemnification provision is
straightforward and unambiguous, and clearly encompasses their
claims.

Defendant asserts that Plaintiffs’ claims fall outside

the scope of the indemnification provision because the
allegations against Plaintiffs made in the California and
Connecticut litigation resulted from Plaintiffs’ own conduct, and
were not caused by Stanwich’s actions.

Consequently, Defendant

argues, Plaintiffs’ claims did not arise “as a result or in

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connection with”... the Bradleys’ “failure to fulfill any
obligations of...the Company...to any Payee as and when due at
any time after the Closing Date.”

Instead, Defendant asserts,

Plaintiffs’ loss arose because they were sued for dissolving and
modifying the Trust Agreements during their tenure as owners of
the Assignment Company.
An examination of the complaints in the California
litigation supports Defendant’s argument that Plaintiffs were
sued because of actions taken in the years before the Assignment
Company was sold to the Bradleys.

Nonetheless, the Court is not

persuaded that the claims against Plaintiffs are not covered by
the broad and inclusive terms of the indemnification provision.
Under Rhode Island law, “contract terms must be assigned
their plain and ordinary meaning.”

Rivera v. Gagnon, 847 A.2d

280, 284 (R.I. 2004); Vaccaro v. E. W. Burman, Inc., 484 A.2d
880, 881 (R.I. 1984).

Indemnity agreements, despite their

function of assigning tort liability, are interpreted according
to contract principles.

A and B Construction, Inc. v. Atlas

Roofing and Skylight Co., 867 F. Supp. 100, 105 (D.R.I. 1994).
While indemnity agreements are strictly construed against the
party seeking indemnification, they may be designed to transfer
liability even from a negligent party to a non-negligent one if
the language is specific and unequivocal.

Sangermano v. Roger

Williams Realty Corp., 22 A.3d 376, 377 (R.I. 2011); Dower v.

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Dower’s Inc., 100 R.I. 510, 511-12, 217 A.2d 437, 438-39 (1966).
More commonly, an indemnity agreement is used to ensure that one
who has been exposed to liability as the result of another’s
wrongful act is able to recover from the wrongdoer.

Muldowney v.

Weatherking Products, Inc., 509 A.2d 441, 443 (R.I. 1986).
The indemnity provision contained in the SPA is broad and
inclusive, starting with a list of potential losses, including
legal expenses, that could potentially be incurred by Plaintiffs
“as a result of or in connection with” seven enumerated
scenarios.

Those scenarios include, in subsection (iv), the

specific eventuality that came to pass, wherein the “Purchaser”
fails “to carry out and perform its obligations under any
agreement, instrument or other document to which the Company is
now bound or hereafter becomes bound;” as well as, in subsection
(vii), any failure “to fulfill any obligation of the Sellers, the
Company and/or the SSTAI Trust to any Payee7 as and when due at
any time after the Closing Date.”

In addition, the indemnity

provision also expressly includes, in subsection (vi), indemnity
for the Sellers for “any claim that the purchase and sale of the
Shares constitutes a fraudulent transfer or fraudulent conveyance
under applicable federal or state law...”

7

The SPA previously defined “Payee” in Section 3.28, as
this writer has also used it, to identify those individuals
receiving periodic payments as set forth in the Settlement
Documents.
-29-

Plaintiffs incurred significant expenses when Stanwich
defaulted on its obligations to the Settlement Payees, which
eventually triggered Stanwich’s bankruptcy, causing further legal
expense to Plaintiffs.

By its clear and unambiguous terms, the

SPA’s indemnity provision covers these losses.

No exception is

created because the claims brought by the Settlement Payees or
the Stanwich Creditors’ Committee against Plaintiffs stemmed from
Plaintiffs’ conduct.

Therefore, the Court concludes that, as a

matter of law, Defendant is obliged to honor the indemnity
provision.

The Court grants Plaintiffs’ motion for summary

judgment on all three counts of their Complaint, and denies
Defendant’s cross motion for summary judgment.
Conclusion
For the reasons stated above, this Court grants summary
judgment in favor of Plaintiffs on their Second Amended
Complaint, and denies Defendant’s cross motion for summary
judgment.

In addition, the Court grants Plaintiffs’ motion for

summary judgment on Defendant’s counterclaims.

By its own

authority pursuant to Fed. R. Civ. P. 56(f), this Court summarily
dismisses the counterclaims against Counterclaim Defendants Ogden
H. Sutro and the Dunbar/Wheeler Trust.

Today’s ruling is limited

to the issue of liability only.
The Court will issue a scheduling order concerning the issue
of damages and set a date for a jury trial on that issue.

-30-

No

judgment will be entered until all issues are resolved.
It is so ordered.

/s/Ronald R. Lagueux
Ronald R. Lagueux
Senior United States District Judge
February
13
, 2013

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