Crossroads ABL, LLC v. Canaras Capital Mgmt., LLC

• Decision Date: 11 June 2012
• Docket Number: No. 651268/2011.,651268/2011.
• Citation: 954 N.Y.S.2d 758,35 Misc.3d 1238,2012 N.Y. Slip Op. 51042
• Parties: CROSSROADS ABL, LLC and Crossroads Financial Services, LLC, Plaintiffs, v. CANARAS CAPITAL MANAGEMENT, LLC, Saranac ABL, LLC, Canaras Management Limited, Richard Levinson, Anthony Clemente, Simon Airey, Shiloh Bates, Belfar Securities, Richard Bentley, C. Clemente, Peter Clemente, S. Clemente, Peter Kroon, Fred Kulikowski, J.C. Levinson, J.B. Levinson, Ryan Mingo, C. Phair, Sage Group, Ben Steger, and Quad–C Funding, LLC, Defendants.
• Court: New York Supreme Court

35 Misc.3d 1238
954 N.Y.S.2d 758
2012 N.Y. Slip Op. 51042

CROSSROADS ABL, LLC and Crossroads Financial Services, LLC, Plaintiffs,
v.
CANARAS CAPITAL MANAGEMENT, LLC, Saranac ABL, LLC, Canaras Management Limited, Richard Levinson, Anthony Clemente, Simon Airey, Shiloh Bates, Belfar Securities, Richard Bentley, C. Clemente, Peter Clemente, S. Clemente, Peter Kroon, Fred Kulikowski, J.C. Levinson, J.B. Levinson, Ryan Mingo, C. Phair, Sage Group, Ben Steger, and Quad–C Funding, LLC, Defendants.

No. 651268/2011.

Supreme Court, New York County, New York.

June 11, 2012.

Kennedy Berg LLP, New York, By: Gabriel Berg, Esq. Andrew Smith, Esq., for the Plaintiffs.

Herrick Feinstein LLP, New York, By:David T. Feuerstein, Esq., Michael Berengarten, Esq., for the Defendants.

BERNARD J. FRIED, J.

By this motion, Plaintiff, Crossroads Financial Services, LLC (“Crossroads”) seeks summary judgment on its claim for advancement of litigation expenses, pursuant to the indemnification provision of the parties' Origination and Administrative Services Agreement (the “Servicing Agreement”). By cross-motion, Defendant, Quad–C Funding, LLC (“Quad–C” or the “Company”) seeks to dismiss Crossroads' claim for indemnification and advancement.

Familiarity with this action, and with all prior proceedings, is presumed.

Section 8(b) of the Servicing Agreement provides as follows:

(i) Each of Crossroads and any affiliate thereof (each, an [sic] “Crossroads Indemnified Party”, and collectively, the “Crossroads Indemnified Parties”) shall, in accordance with this Section 8(b), be indemnified and held harmless by the Company from and against any and all losses, claims, damages, liabilities, expenses (including reasonable legal and other professional fees and disbursements), judgments, fines, settlements and other amounts incurred (collectively, “Indemnifiable Losses”) in connection with any and all claims, demands, actions, suits or proceedings (civil, criminal, administrative or investigative), actual or threatened (collectively, “Claims”), in which such Crossroads Indemnified Party may be involved, as a party or otherwise, by reason of such Crossroads Indemnified Party's service to, or on behalf of, or management of the affairs of, the Company, or rendering of advice or consultation with respect thereto, whether or not Crossroads Indemnified Party continues to be serving in the above-described capacity at the time any such Indemnifiable Loss is paid or incurred; provided, however, that no Crossroads Indemnified Party shall be entitled to indemnification under this Section 8(b) to extent it is finally determined by a court of competent jurisdiction that such Crossroads Indemnified Party's acts or omissions constituted gross negligence or willful misconduct.

(ii) The Company shall advance expenses incurred by such Crossroads Indemnified Party upon receipt by the Company of a signed statement of an [sic] Crossroads Indemnified Party agreeing to reimburse the Company for such advance in the event it is ultimately determined by a court of competent jurisdiction that such Crossroads Indemnified Party is not entitled to be indemnified by the Company for such expenses.

Servicing Agreement § 8(b).¹

By letter dated August 1, 2011, Crossroads made a demand upon Quad–C, through its counsel, for advancement of the legal fees incurred from April through May of that year. (Haskin Aff. Ex. 2 at 3.) In that letter, Crossroads agreed, pursuant to Section 8(b)(ii), above, “to reimburse the Company for such advance in the event it is ultimately determined by a court of competent jurisdiction that such Crossroads Indemnified Party is not entitled to be indemnified by the Company for such expenses.” ( Id.) Similarly, by letter dated December 21, 2012, Crossroads demanded additional funds in advanced litigation expenses and agreed to reimburse the Company in the event that it is ultimately decided that Crossroads is not entitled to indemnification. (Haskin Aff. Ex. 6.)

Crossroads asserts that, having thus submitted the signed statement required by Section 8(b)(ii), it is entitled to advancement of the litigation expenses it has incurred so far, pursuant to the plain language of the Servicing Agreement.² Crossroads further contends that Quad–C is estopped from refusing to advance litigation expenses, since Quad–C is already advancing the expenses of all other Quad–C unit holders, and has thereby ratified the contractual provision it now disputes. Quad–C, along with the Canaras Defendants ³ and the Voting Defendants ⁴ (collectively, “Defendants”), argue that Section 8(b) (the “Indemnification Provision”) was intended only to cover third-party claims, as there is no express indication that the parties intended to advance or indemnify Crossroads in an action between it and Quad–C. Defendants therefore assert that they are not obligated to advance funds to Crossroads in connection with its claims for declaratory judgment, judicial dissolution and breach of contract, nor for Crossroads' defense of the counterclaims asserted by Quad–C.

Defendants further argue that the claims asserted by Crossroads against the Canaras Defendants and the Voting Defendants fall outside the scope of the Indemnification Provision. Defendants contend that those claims, including bad faith breach of the duty of good faith and fair dealing, fraudulent inducement, and tortious interference with business relations, are not claims in which Crossroads is involved by reason of its “service to, or on behalf of, or management of the affairs of” Quad–C, and are therefore not indemnifiable.

With respect to Plaintiff's estoppel argument, Quad–C argues that there is no basis to apply estoppel here, first, because Crossroads is not similarly situated to the other unit holders, and even if it were, Quad–C does not admit that it is, in fact, indemnifying the other unit holders. Quad–C further asserts that if it did make a business decision to defend its members against Crossroads' claims, such decision is not based on a contractual right and has no bearing on any contractual right asserted by Crossroads.

Upon review of the Indemnification Provision, it is clear that Crossroads is entitled to have certain of its litigation expenses advanced. This provision, negotiated and agreed upon by the two, commercially sophisticated parties, is extremely broad. There are only two phrases which contain any sort of limiting language. The first, which provides the only limitation on the type of action, proceeding, etc. for which Crossroads may be indemnified, is that Crossroads must be “involved” in such action, proceeding, etc., “by reason of” its “service to, or on behalf of, or management of the affairs of, the Company, or rendering of advice or consultation with respect thereto.” (Servicing Agreement § 8(b)(i).) The second limitation is that indemnification will not be ordered in the event that Crossroads (or its affiliate) is found, upon final determination “by a court of competent jurisdiction that [its] acts or omissions constituted gross negligence or willful misconduct.” ( Id.) It is thus clear that Quad–C is obligated to indemnify (ultimately) and advance expenses (at the outset) for Crossroads, to the extent that the action involves Crossroads by reason of its service to Quad–C. It is also clear that Crossroads will be required to reimburse any advanced expenses only to the extent that this court ultimately concludes that Crossroads' actions or omissions rise to the level of gross negligence or willful misconduct. The question I now face is not, therefore, whether Crossroads is entitled to advancement of expenses, but rather, which of the claims asserted in the context of this litigation are subject to advancement.

I am not swayed by Defendants' contention that Hooper Associates v. AGS Computers, 74 N.Y.2d 487 (1989) compels a different result. In that case, the Court of Appeals concluded that the indemnification provision contained within the parties' agreement only applied to claims or actions involving third parties, and did not apply to a suit against the defendant for claims under the contract. Defendants rely on the Hooper Court's statements that, “When a party is under no legal duty to indemnify, a contract assuming that obligation must be strictly construed to avoid reading into it a duty which the parties did not intend to be assumed”, and “the court should not infer a party's intention to waive the benefit of the rule [that each party pays its own attorney's fees in litigation...