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Posted: September 25, 2017

Veil Piercing Claim Not Incompatible with Indemnification Claim

On September 7, 2017, Justice Emerson of the Suffolk County Commercial Division issued a decision in Live Invest, Inc. v. Morgan, 2017 NY Slip Op. 27294, holding that a veil piercing claim was not incompatible with a claim for indemnification.

First, the court discussed the availability of common-law indemnification:

The principle of equitable indemnification, also known as common-law indemnification, allows a non-culpable party who has been compelled to make a payment to shift the entire burden of loss to the liable party and obtain full reimbursement. Common-law indemnification is generally available in favor of one who is held responsible solely by operation of law because of his relation to the actual wrongdoer. The predicate of common-law indemnity is vicarious liability without actual fault on the part of the proposed indemnitee. Thus, there is no common-law indemnification claim when, as here, the plaintiff seeks recovery from the defendant because of the latter’s alleged wrongdoing, i.e., breach of contract, and does not seek to hold the defendant vicariously liable for any negligence by the third-party defendant. Accordingly, the second and third causes of action for equitable and common-law indemnification are dismissed.

(Internal citations omitted) (emphasis added). Next, the court considered whether there was a contractual right to indemnification.

The right to contractual indemnification depends upon the specific language of the contract. The promise to indemnify should not be found unless it can be clearly implied from the language and purpose of the entire agreement and the surrounding circumstances. The Equity Ownership Purchase Agreement dated December 31, 2011, in which Jericho sold its 51% ownership interest in Delta to Gamma, contains the following language:

“[Gamma] hereby agrees to indemnify and hold harmless [Jericho], and [Jericho’s] members, managers, officers, and directors and their respective heirs executors and administrators from…any and all manner of loss, suits, claims, demands, damages, debts, liabilities, obligations, costs, expenses, actions, or causes of action (including, but not limited to, actual damages, punitive damages, fines and attorney’s fees and costs, whether or not litigation is commenced) arising out of, involving, or relating in any way to the operation of [Delta] from the date of its organization and continuing through and after the date of this Agreement.”

. . . [T]he court finds that a promise to indemnify Jericho for Delta’s breach of contract may be implied from the language and purpose of the Equity Ownership Purchase Agreement and the surrounding circumstances. The Agreement provided for Jericho to sell its 51% equity interest in Delta to Gamma for $26,000 “plus [Gamma’s] assumption of all liabilities of [Delta].” Gamma’s assumption of Delta’s contractual liabilities was, therefore, part of the purchase price. The Agreement also provided for Gamma to indemnify Jericho for “all manner of loss, suits, claims, demands, damages, debts, liabilities, obligations, costs, expenses, actions, or causes of action… arising out of, involving, or relating in any way to the operation of [Delta]”.

. . . Gamma contends that, when, as here, the indemnification agreement is between sophisticated business entities, it will not be construed as intending to indemnify either party for its own wrongdoing unless the language of the agreement clearly connotes an intent to provide for such indemnification. Gamma contends that the Equity Ownership Purchase Agreement does not so provide. The Agreement, however, provides for Gamma to indemnify Jericho for punitive damages and fines. Although an agreement to be indemnified against punitive damages is unenforceable as against public policy, the court finds that the inclusion of punitive damages and fines in the indemnity language evinces an intent to indemnify Jericho for its own and/or Delta’s wrongdoing.

(Citations omitted). Last, the court considered whether the claim for indemnification was “incompatible with the plaintiff’s veil-piercing claim” because “veil piercing requires a showing that Jericho abused the corporate form, which is predicated on intentional, wrongful conduct” and “indemnity is not available for intentional misconduct. The court rejected that argument, explaining:

Gamma is correct that New York law does not permit a party to indemnify itself against damages for its intentional torts. Contracts that purport to indemnify a party for damages flowing from the intentional causation of injury are unenforceable as against public policy. However, where no finding of an intent to injure has been made, nothing in the public policy of this State precludes indemnity for compensatory damages flowing from a defendant’s volitional act.

Contrary to Gamma’s contentions, indemnification and veil-piercing actions are not inherently incompatible. A claim based on the alter-ego theory is not a claim for substantive relief, but a procedural device. A finding of alter ego, standing alone, creates no cause of action. It merely furnishes a means for a complainant to reach a second corporation or individual upon a cause of action that otherwise would have existed only against the first corporation. An attempt to pierce the corporate veil is simply a means of imposing liability on an underlying cause of action such as a tort or breach of contract.

The gravamen of the plaintiff’s complaint against Delta in the underlying action was that Delta breached its contract with TonicCare by failing to use its best efforts to sell and distribute TonicCare’s consigned inventory. After an inquest, this court awarded the plaintiff damages against Delta in the principal amount of $1,240,094.78, which is exactly the same amount of damages that the plaintiff sought in its first cause of action for breach of contract against Delta. Although the complaint in the underlying action also contained a cause of action for tortious interference with prospective economic advantage, no damages were awarded thereon. Thus, if the plaintiff is successful in its attempt to pierce Delta’s corporate veil, Jericho will be liable to the plaintiff for the damages flowing from Delta’s breach of contract. While a breach of contract is a “volitional act,” it is not an intentional tort or crime for which indemnity is unavailable. Since a contract is simply a set of alternative promises either to perform or to pay damages for nonperformance, a breach of contract is not necessarily a wrongdoing.

(Internal quotations and citations omitted) (emphasis added).

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