Opinion
00 CIV. 5368 (SAS)
March 19, 2002
For plaintiff: Michael Schneider, Esq. New York, New York 10022
Robert K. Whitt, Esq. Midland, Texas 79701
For Defendants/Third-Party Plaintiffs: Leonard Benowich, Esq. Roosevelt, Benowich Lewis, LLP White Plains, New York 10604
For Third-Party Defendant: Ross J. Ellick, Esq. Andrew J. Goodman, Esq. Kurtzman Eisenberg Corbin Lever Goodman, LLP New York, New York 10017
OPINION AND ORDER
I. INTRODUCTION
These actions arise as a result of a $650,000 loan made by Michael P. Lewis to Mad Martha's Ice Cream, Inc. ("Mad Martha's") in June 1995 — a loan that was never repaid because Mad Martha's filed for bankruptcy just eight months later. Lewis sued Eric D. Rosenfeld and his law firm, Rosenfeld, Bernstein Tannenhauser ("RBT"), as well as others, to recover the $650,000. Rosenfeld and RBT (collectively "defendants") then brought a third-party action against the investment bank Auerbach, Pollack Richardson, Inc. ("Auerbach"), seeking indemnification for any liability imposed upon them in the primary action. Auerbach now moves for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. For the reasons stated below, Auerbach's motion is granted.
II. SUMMARY JUDGMENT STANDARD
Rule 56 provides for summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). "An issue of fact is `material' for these purposes if it `might affect the outcome of the suit under the governing law[,]' [while] [am issue of fact is `genuine' if `the evidence is such that a reasonable jury could return a verdict for the nonmoving party.'" Konikoff v. Prudential Ins. Co. of Am., 234 F.3d 92, 97 (2d Cir. 2000) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)).
In assessing the record to determine whether genuine issues of material fact are in dispute, a court must resolve all ambiguities and draw all reasonable factual inferences in favor of the non-moving party. See Parkinson v. Cozzolino, 238 F.3d 145, 150 (2d Cir. 2001). "Although the moving party bears the initial burden of establishing that there are no genuine issues of material fact, once such a showing is made, the non-movant must `set forth specific facts showing that there is a genuine issue for trial.'" Weinstock v. Columbia Univ., 224 F.3d 33, 41 (2d Cir. 2000) (quoting Anderson, 477 U.S. at 256). However, the non-moving party may not "rest upon . . . mere allegations or denials." St. Pierre v. Dyer, 208 F.3d 394, 404 (2d Cir. 2000) "Statements that are devoid of any specifics, but replete with conclusions, are insufficient to defeat a properly supported motion for summary judgment." Bickerstaff v. Vassar Coll., 196 F.3d 435, 452 (2d Cir. 1999), cert. denied, 120 S.Ct. 2688 (2000) ; see also Scotto v. Almenas, 143 F.3d 105, 114 (2d Cir. 1998) ("If the evidence presented by the non-moving party is merely colorable, or is not significantly probative, summary judgment may be granted.") (quotation marks, citations, and alterations omitted).
III. BACKGROUND
This Court's two prior decisions in this case include extensive discussions of the facts and procedural history of this dispute. See Lewis v. Rosenfeld, 138 F. Supp.2d 466 (S.D.N Y 2001) ("Lewis I"); Lewis v. Rosenfeld, 145 F. Supp.2d 341 (S.D.N.Y. 2001) ("Lewis II") . The following facts are those material to this motion.
These facts are primarily taken from Third-Party Plaintiff's Counter-Statement Pursuant to Local Rule 56.1 ("Pl. 56.1") because Auerbach's Memorandum of Law argues that, even if these facts are true, it is entitled to summary judgment.
A. Lewis' Loan to Mad Martha's
Mad Martha's is a closely held corporation that operated several ice cream stores on Martha's Vinyard and Nantucket. See Pl. 56.1 ¶ 16. In June 1995, Lewis declined an offer by his stock-broker, defendant David Fresne, to make an equity investment in Mad Martha's. See id. ¶ 17. Later that month, Mad Martha's retained Auerbach to use its "best efforts" to conduct a private placement of $2.4 million worth of Mad Martha's stock (the "Private Placement"). See id. ¶¶ 4, 18; Rule 56.1 Statement of Material Facts as to Which There is No Genuine Issue to be Tried ("Def. 56.1") ¶ 4. Auerbach valued the shares it intended to sell at $1.20 per share, assuming the completion of the Private Placement. See Pl. 56.1 ¶ 19. Later in June, Lewis agreed to make a $650,000 Bridge Loan (the "Loan") to Mad Martha's. See id. ¶¶ 16, 22.
Before making the Loan, Lewis had several conversations with Fresne and at least one telephone conversation and one correspondence with Auerbach. See id. ¶ 23. Fresne and Auerbach convinced Lewis that the Private Placement was a small deal and that Auerbach foresaw no problems selling out the placement. See id. When Auerbach made these statements and representations, it knew that Mad Martha's was "thinly capitalized" prior to June 5, 1995, that the interest rate on Lewis' Loan was "very hefty", and that the maturity date for Lewis' note was "very short". Id. (quoting Deposition of Conrad Russ, Auerbach employee, Ex. 5 to Declaration of Leonard Benowich in Opposition to Motion for Summary Judgment ("Benowich Dec."), at 22-26) Nevertheless, Lewis "made the loan based on the representations that Auerbach [was] going to raise the money and pay [him] back" and "rely[ingl on the people who [said] they [could] raise the money." Id. ¶ 24 (quoting Deposition of Michael P. Lewis ("Lewis Dep."), Ex. 3 to Benowich Dec., at 396-97).
At that time, Auerbach was not aware of any mechanism other than the Private Placement by which the Loan could be repaid. See Pl. 56.1 ¶ 23.
Auerbach was not successful in raising any money for Mad Martha's. See Pl. 56.1 ¶ 27. Yet the firm wrote several encouraging letters to Lewis, informing him that it was scheduling a closing. See id. ¶ 27; Exs. 8 and 11 to Benowich Dec. As late as January 16, 1996, Auerbach told Lewis that, despite some delays, it was "anticipat[ing] receipt of more subscription agreements and payments prior to the end of the month." Ex. 11 to Benowich Dec. The very next month, Mad Martha's filed for bankruptcy. See Pl. 56.1 ¶ 30.
B. Interaction Between Rosenfeld and Auerbach
During the time Auerbach was engaged by Mad Martha's to complete the Private Placement, there was little, if any, interaction between Rosenfeld and Auerbach. James Sinclair, one of the Auerbach employees who worked on the private placement, testified that he had no contact with Rosenfeld and that Rosenfeld provided him with no financial, operational or other such information regarding Mad Martha's. See Deposition of James Pratt Sinclair, Ex. 4 to Benowich Dec., at 104-105; Pl. 56.1 ¶ 29. Similarly, Rosenfeld testified that he had "not much of anything" to do with Auerbach, that he "never went to their offices" and "had almost no dealings with Auerbach." Deposition of Eric D. Rosenfeld, Ex. J to Affidavit of Ross J. Ellick ("Ellick Aff."), counsel for Auerbach, at 102-103. He further testified that none of the statements he made to Lewis were based on anything he was told by Auerbach. See id. at 104.
In its Rule 56.1 Statement, Auerbach states:
During his deposition in the third-party action, Rosenfeld conceded that he had practically no interaction with Auerbach, and that none of the representations attributed to him in the plaintiff's amended complaint concerning Mad Martha's ownership of the Nantucket Mad Martha's store, the liens that would secure the plaintiff's loan, or the extent of Mad Martha's debt, could be or were based upon conduct or representations of Auerbach.
Def. 56.1 ¶ 11. Rosenfeld denied this factual allegation, even though the evidence in support of the allegation is Rosenfeld's own deposition testimony. See Pl. 56.1 ¶ 11. "The rule is well-settled in this circuit that a party may not, in order to defeat a summary judgment motion, create a material issue of fact by submitting an affidavit disputing his own prior sworn testimony. Klein v. National Life of Vermont, 7 F. Supp.2d 223, 233 (E.D.N.Y. 1998) (citing Trans-Orient Marine Corp. v. Star Trading Marine Inc., 925 F.2d 566, 572 (2d Cir. 1991)).
C. Procedural History
On May 13, 2001, Lewis filed an action against Rosenfeld, Auerbach, Fresne and other defendants in Texas state court to recover the $650,000 that he lent to Mad Martha's (the "Texas Action"). See Def. 56.1 ¶ 7; Pl. 56.1 ¶ 7; Lewis I, 138 F. Supp. 2d at 472. That action was removed to the United States District Court for the Southern District of Texas. See Pl. 56.1 ¶ 6; Def. 56.1 ¶ 6. In the Texas Action, Lewis asserted claims against Auerbach and Rosenfeld as joint-tortfeasors for aiding and abetting breach of fiduciary duty, common law fraud, civil conspiracy, and violations of federal and state securities laws. See Plaintiff's Original Petition, Ex. A to Ellick Aff.; Third-Party Plaintiff's Memorandum in Opposition to Third-Party Defendant's Motion for Summary Judgment ("Pl. Opp.") at 4 n. 2 (admitting that Auerbach and Rosenfeld were named as joint-tortfeasors in the Texas Action)
On November 27, 2001, the Texas district court transferred the Texas Action to this Court. See 11/27/01 Order to Transfer, attached to 12/30/01 Letter from Benowich to the Court.
In February, 1999, Auerbach settled with Lewis and was released from all claims asserted against him in the Texas Action. See Pl. 56.1 ¶¶ 7, 8; Def. 56.1 ¶¶ 7, 8; Agreed Final Judgment Pursuant to Fed.R.Civ.P. 54(b) ("Agreed Judgment"), Ex. B to Ellick Aff., at 2. The Texas district court approved an Agreed Final Judgment, stating that "proper notice [was] provided to all parties." Agreed Judgment at 1. The Agreed Judgment dismissed with prejudice:
Claims between [Lewis] and Auerbach which have or could have been asserted in [the Texas Action] or otherwise in connection with, arising out of, or in any way related to . . . the subject matter which is or could have been alleged in their pleadings against one another in [the Texas Action]. . . .Id. at 2. The Judgment also "barred and enjoined":
All claims of any kind, including for indemnity, contribution or other liability, by any nonsettling defendant or any other party against Auerbach, arising out of, related to or in connection with, directly or indirectly the claims in [the Texas Action]. . . .Id.
On July 20, 2000, Lewis commenced the present action in the Southern District of New York. He asserted claims against Rosenfeld, RBT, and others for breach of fiduciary duty, common law fraud, civil conspiracy and negligent misrepresentation. See Pl. 56.1 ¶ 2; Def. 56.1 ¶ 2. On March 8, 2001, this Court dismissed the claim for civil conspiracy. See Lewis I, 138 F. Supp. 2d at 479. In April, 2001, Rosenfeld and RBT commenced a third-party action seeking indemnification from Auerbach and two of its employees, James Sinclair and Conrad Huss. See Pl. 56.1 ¶¶ 9, 12; Def. 56.1 ¶¶ 9, 12. The third-party action against Sinclair and Huss was subsequently discontinued with prejudice. See Pl. 56.1 ¶ 10; Def. 56.1 ¶ 10.
The New York action was commenced after the Fifth Circuit dismissed some of the defendants from the Texas Action. For a more detailed description of the procedural history of the Texas Action, see Lewis I, 138 F. Supp. 2d at 472; Lewis II, 145 F. Supp. 2d at 343-44; 11/27/01 Memorandum and Order, Civil action No. H-96-1861 (S.D. Tx.), attached to 11/30/01 Letter from Benowich to the Court.
At a July 6, 2000 conference before the Court, counsel for Rosenfeld and RBT stated that neither was asserting a claim for contribution. See Pl. 56.1 ¶ 12; 7/6/00 Tr. at 35-36.
Defendant's third-party complaint (the "Complaint") alleges that Auerbach "induced and encouraged" Lewis to make the Loan to Mad Martha's and "informed [Lewis] and others that the Private Placement would be a `slam-dunk'." Third-Party Complaint ("Compl."), Ex. D to Ellick Aff., ¶ 20. It further alleges that Auerbach was "solely responsible for the Private Placement and for raising the funds that were necessary in order to repay [Lewis'] Bridge Loan" and that the firm "failed to honor and perform its contractual obligations in connection with the Private Placement." Id. ¶¶ 15, 26. According to the Complaint, Lewis would not have made the Loan "[h]ad Auerbach not repeatedly assured Mad Martha's and others acting on its behalf that it could and would" complete the $24 million Private Placement. Id. ¶ 27. Moreover, the Loan "would have been repaid" if Auerbach had "performed its contractual duty to use its best efforts to" raise those funds. Id. ¶ 28. Based on these allegations, Rosenfeld and RBT seek indemnification from Auerbach based on the theory that any liability of Rosenfeld to Lewis "is vicarious as a consequence of" Auerbach's acts or omissions. Id. ¶ 30.
III. DISCUSSION
Auerbach argues that the Complaint must be dismissed because defendants' claim for indemnification is actually a claim for contribution and New York law bars them from seeking contribution from a setthng co-defendant. See Def. Mem. at 2. Rosenfeld and RBT insist that there is a genuine issue of material fact as to whether they have a valid claim for implied indemnification and that they are permitted to assert such a claim against a settling co-defendant. See Pl. Opp. at 13.
Auerbach insists that New York law applies to the claims in the Third-Party Complaint. See Memorandum of Law in Support of Motion to Dismiss Third-Party Action ("Def. Mem.") at 2 n. 2. Defendants do not contest this assertion.
In order to remove a disincentive to settlement, the New York legislature amended section 15-108 of New York General Obligations Law ("G.O.L.") in 1976 to provide that a settling joint-tortfeasor may not be sued for contribution by a nonsettling tortfeasor. See N.Y. G.O.L. § 15-108(b); Rosado v. Proctor Schwartz, Inc., 494 N.Y.S.2d 851, 853 (1985). To ensure that a non-settling tortfeasor who is only partially responsible for plaintiff's injury is not required to pay for damages attributable to the settling tortfeasor, the statute reduces any damages assessed against the non-settling tortfeasor by the greater of (i) the amount of consideration paid for the release or (ii) the settling tortfeasor's equitable share of the plaintiff's loss. See N.Y. G.O.L. § 15-108(a); see also David D. Seigel, N.Y. Prac. § 176 (2d Ed.).
Recognizing the statutory bar to contribution, Rosenfeld and RBT insist that they are seeking indemnification, not contribution. See 7/6/01 Tr. at 36. "Indemnification is the flip side of contribution." Fromer v. Yogel, 50 F. Supp.2d 227, 237 (S.D.N.Y. 1999). Whereas contribution "arises among several tort-feasors who share culpability for an injury to the plaintiff and whose liability may be equitably apportioned according to fault, " indemnification "flows from either a contractual or other relationship between the actual wrongdoer and another . . . and involves a complete shifting of the loss." Riviello v. Waldron, 418 N.Y.S.2d 300, 305 (1979); see also The City of New York v. Black Veach, No. 95 Civ. 1299, 1997 WL 624986, at *8 (S.D.N Y Oct. 6, 1997). Essentially, indemnification is a restitution concept which permits shifting of the loss in order to avoid unjust enrichment of one party at the expense of another. See Mas v. Two Bridges Assoc., 555 N.Y.S.2d 669, 690 (1990).
The New York Court of Appeals has held that G.O.L. § 15-108 does not bar indemnification claims against a settling tortfeasor "[i]n as much as an entire shifting of the loss to another would not act as a disincentive to settlement or necessitate an examination of relative degrees of fault." Rosado, 494 N.Y.S.2d at 854; see also Riviello, 418 N.Y.S.2d at 306-07. The Court has warned, however, that "[t]he statutory bar to contribution may not be circumvented by the simple expedient of calling the claim indemnification." Rosado, 494 N.Y.S.2d at 854; see also County of Westchester v. Welton Becket Assoc., 478 N.Y.S.2d 305, 314 (2d Dep't 1984), aff'd, 66 N.Y.S.2d 642 (1985) ("Mere use of the term `indemnification' is insufficient to evade the bar of subdivision (b) of section 15-108 of the General Obligations Law."). "If there is actual wrongdoing by the person seeking to assert an indemnification claim, that claim is not viable" against a settling tortfeasor. County of Westchester, 478 N.Y.S.2d at 314. Thus, the Court of Appeals has insisted that a party seeking what it characterizes as indemnification from a settling tortfeasor must show that "it may not be held responsible to any degree." Rosado, 494 N.Y.S.2d at 854.
There is no possibility here that Rosenfeld or RBT will be compelled to pay damages for which they are not "responsible to any degree." Id. Where the only claims against a nonsettling defendant require a finding of fault, indemnification against a settling tortfeasor is inappropriate. See Burda Media, 1999 WL 413469, at *8 (holding that "to the extent that [defendant] is found to be an intentional tortfeasor or a joint tortfeasor with any fault of its own for the injuries suffered by [plaintiff], [defendnant] will not be allowed to seek indemnification" from third-party defendant, a settling tortfeasor); see also Gabriel Capital, L.P. v. Natwest Finance, Inc., 137 F. Supp.2d 251, 268 (S.D.N.Y. 2000) (holding that third-party plaintiff could not assert a claim for indemnification from third-party defendant because it "[could not] be liable to plaintiffs in the absence of wrongdoing").
Rosenfeld relies on Burda Media, Inc. v. Blumenberg, No. 97 Civ. 7167, 1999 WL 413469 (S.D.N.Y. June 21, 1999), to argue that, "because this court cannot predict with certainty what finding of liability or fault will ultimately be made . Auerbach's motion must be denied." Pl. Mem. at 16 (emphasis in original) (citing Burda Media, 1999 WL 413469, at *9). However, Burda Media only held that, where a defendant could be held liable without a showing of fault or intent (e.g., unjust enrichment), defendant may bring a cross-claim for indemnification against a settling tort-feasor. Burda Media, 1999 WL 413469, at *8. By contrast, the only claims asserted against Rosenfeld and RBT require a showing of fault.
The claims remaining against Rosenfeld and RBT are breach of fiduciary duty, common law fraud and negligent representation. An action for breach of fiduciary duty requires "a showing of deceitful intent on the part of the fiduciary." Flickinger v. Harold C. Brown Co., Inc., 947 F.2d 595, 599 (2d Cir. 1991). In an action for common law fraud, plaintiff must establish, among other things, that any misrepresentation or material omission made by defendant was made "for the purpose of inducing the other party to rely upon it." Lewis I, 138 F. Supp.2d at 477. "Negligent misrepresentation is a species of fraud that replaces the required showing of scienter with a showing of negligence." Fromer, 50 F. Supp. 2d at 242-43. Thus, a finding of liability on any claim would entail a finding that Rosenfeld or RBT was somewhat at fault.
Rosenfeld and RBT insist that, even if they are at fault, they are entitled to indemnification under what had been called the "implied-in-law theory" of indemnification. See Pl. Opp. at 14. This tort-based indemnification doctrine applies when "there is a great disparity in the fault of two tortfeasers, and one of the tortfeasors has paid for a loss that was primarily the responsibility of the other."Peoples' Democratic Republic of Yemen v. Goodpasture. Inc., 782 F.2d 346, 351 (2d Cir. 1986); see also, e.g., Bankers Trust Co. v. State Street Bank and Trust Co., No. 96 Civ. 7573, 1998 WL 355418, at *5 n. 5 (S.D.N.Y. July 2, 1998); Mas, 555 N.Y.S.2d at 675. However, the cases cited by Rosenfeld and RBT are distinguishable because none involved an indemnification claim against a settling tortfeasor. Where a third-party defendant has not settled, there is a possibility that a third-party plaintiff who is slightly at fault will have to pay damages that are primarily attributable to the third-party defendant. But where, as here, the third-party defendant has settled with the plaintiff, section 15-108 serves to allocate damages among various wrongdoers. Because section 15-108 will ensure that Rosenfeld and RBT are not required to "[pay] for a loss that was primarily the responsibility of [Auerbach]," Peoples' Democratic Republic of Yemen, 782 F.2d at 351, they may not maintain a claim against Auerbach under the implied-in-law theory of indemnification.
Rosenfeld and RBT do not assert a claim for express indemnification, which arises out of an express agreement by one of the parties to hold the other harmless for claims brought against it by a third party. See Pl. Opp. at 13 n. 9. Nor do they suggest that they are entitled to indemnification based on the "implied contract theory" of indemnity, which implies a right to indemnification from "the special nature of a contractual relationship between two parties." Fromer, 50 F. Supp. 2d at 240.
This holding is consistent with the New York Court of Appeals' rationale for allowing indemnification claims against settling tortfeasors. In Rosado, the Court reasoned that allowing non-settling tortfeasors to seek indemnification from settling torfeasors would not undermine the purpose of section 15-108 because, unlike a contribution claim, an indemnification claim "would not act as a disincentive to settlement or necessitate an examination of relative degrees of fault."Rosado, 494 N.Y.S.2d at 854. Under the "implied-in-law" theory of indemnification, however, the trier of fact is required to assess relative degrees of fault to determine if, indeed, "there is a great disparity in the fault of two tortfeasors." Peoples' Democratic Republic of Yemen, 782 F.2d at 351.
This reasoning is similar to that adopted by the Second Circuit in the context of federal law. In the Second Circuit, a non-settling defendant is precluded from seeking contribution from the settling defendant but "a non-settling defendant is entitled to a judgment reduction at least in the amount of a prior settlement" if "the settlement and judgment compensate a plaintiff for the same injury." In re Masters Mates Pilots Pension Plan and IRAP Litig., 957 F.2d 1020, 1030-31 (2d Cir. 1992). While the non-settling defendant may generally seek indemnity against the settling defendant, the Second Circuit has precluded claims for indemnification "based on differences in fault." Id. at 1031.
IV. CONCLUSION
Because there is no set of facts under which Rosenfeld and RBT may assert an indemnification claim against Auerbach, Auerbach's motion for summary judgment is granted. The third-party complaint is therefore dismissed in its entirety.