Opinion
99 Civ. 9705 (JSM).
December 18, 2000.
OPINION and ORDER
Plaintiff RSL COM U.S.A., Inc. ("RSL") brings this action against One Step Billing, Inc. ("OSBI") and Neil Sollinger ("Sollinger"), former President of OSBI, alleging breach of an Asset Purchase Agreement under which OSBI agreed to indemnify RSL for pre-sale slamming activities. RSL seeks partial summary judgment on its claim for indemnity against Sollinger and OSBI, requesting a declaration of liability only. For the reasons set forth below, RSL's motion is granted.
I. BACKGROUND
Before its dissolution, OSBI was a provider of long distance telephone services. In July 1997, OSBI and LDM Systems, Inc. ("LDM") entered into a contract pursuant to which LDM sold OSBI the long distance telephone services that OSBI then provided to its customers. In December 1997, RSL purchased LDM's stock, and LDM became a wholly owned subsidiary of RSL. In February 1998, RSL and OSBI entered into an agreement under which RSL undertook the service-provider role previously held by LDM.
Sometime around February 1998, the Florida Attorney General ("Florida AG") embarked on an investigation of OSBI, LDM, and Promark Communications, Inc. ("Promark") for alleged slamming activities, among other things. In December 1998, pursuant to the wishes of the Florida AG, RSL and OSBI executed an Asset Purchase Agreement (the "Purchase Agreement") under which RSL acquired certain assets of OSBI. The Florida AG supported this acquisition as part of a settlement plan because it was felt that RSL was a responsible company that would treat its customers more fairly. (Fischer Aff. Ex. I at 30-31, 35.) At the time that the Purchase Agreement was signed, the investigation was still ongoing.
"Slammming" occurs when a telephone customer's long-distance service is switched to another company without the customer's permission.
In February 1999, the Florida AG entered into a settlement agreement with OSBI, LDM, and Promark pursuant to which those entities agreed to pay a fine of $1.3 million. (Fischer Aff. Ex. D.) Although RSL was not a party to the settlement agreement, it agreed in an exchange of letters with OSBI that LDM would pay the fine on behalf of the other two companies, apparently in order to facilitate the settlement. (Fischer Aff. Exs. E, F, G.) Although OSBI admits in this action that its slamming activities were the sole basis for the fine, (Fischer Aff. Ex. H), OSBI has not reimbursed RSL for any portion of that fine.
Another principal of OSBI, Louis Steiner, has indemnified RSL for a portion of its costs pursuant to a separate contract indemnification provision. (Fischer Aff. at 6.)
Contained in Section 11.01 of the Purchase Agreement is a provision requiring that OSBI indemnify RSL for all fines levied against OSBI for pre-sale slamming activity. OSBI does not dispute its general indemnification obligations under this Section. However, appearing at the end of Section 11.01 is the following language:
Notwithstanding anything contained in the Article XI to the contrary, the terms of the indemnification provisions contained in this Article XI shall not in any manner be deemed or construed to be an agreement between the parties with respect to their relative liability or responsibility with respect to the currently ongoing Florida attorney general investigation except that Seller and Shareholder shall be solely liable and responsible to the extent that such proceeding relates to Excluded Customers.
(Fischer Aff. Ex. C § 11.01.) OSBI argues that this language is a carve-out exempting it from indemnifying RSL for any fines levied by the Florida AG. RSL, on the other hand, argues that this provision was intended to clarify that RSL and OSBI were not allocating liability between themselves as to that investigation, in the event that RSL or LDM was found to be responsible for some portion of the fault. In addition, RSL expressly reserved its right to seek indemnification from OSBI in the February letters in which it agreed to pay the fine. Both the plain language of
the provision and RSL's extrinsic evidence support their interpretation of the Purchase Agreement.
II. DISCUSSION
In interpreting the terms of a contract, a court must first attempt to discern the parties' intent as reflected in the contractual language. See Consarc Corp. v. Marine Midland Bank, 996 F.2d 568, 573 (2d Cir. 1993) (citing Slatt v. Slatt, 488 N.Y.S.2d 645 (1985)). A grant of summary judgment is appropriate only where a contract's terms are unambiguous. See John Hancock Mut. Life Ins. Co. v. Amerford Int'l Corp., 22 F.3d 458, 461 (2d Cir. 1994) (citing Seiden Assocs. v. ANC Holdings, Inc., 959 F.2d 425, 428 (2d Cir. 1992)). Whether a contract's terms are ambiguous is a question of law, and ambiguity arises where "reasonable minds could differ." Consarc, 996 F.2d at 573 (listing cases). If no ambiguity exists, courts are required to enforce the contract as written and refrain from considering extrinsic evidence. See id. (listing cases). On the other hand, where reasonable minds can differ as to a contract's interpretation, and where extrinsic evidence of the parties' intent exists, a question of fact is raised. See id. (citing Seiden, 959 F.2d at 428).
Here, the plain meaning of the provision is that even though the Agreement requires OSBI to indemnify RSL for fines levied against RSL as a result of OSBI's slamming activity, the parties were not assigning liability between themselves as to the Florida investigation. In other words, if the Florida AG found that LDM or RSL was partly responsible for the slamming activity, OSBI would not be required to indemnify RSL for that portion of the fine. The use of the phrase "relative liability" supports this reading. In addition, this provision as drafted would be quite a vague and murky way of accomplishing the simple task of exempting the Florida fine from the indemnification requirement.
That OSBI was capable of drafting a crystal clear provision exempting the Florida fine is shown in a letter written by OSBI's attorney on February 10, 1999. (Hodkin Aff. Tab B.) This letter contains a proposed side agreement regarding OSBI's responsibilities in relation to the Florida fine, and includes a provision that sought to bar RSL from seeking indemnity from OSBI for the fine. This agreement was never signed.
Even were the Court to look to the extrinsic evidence supplied by RSL, that evidence leans in its favor. See International Knitwear Co. v. M/V ZIM Canada, No. 92 Civ. 7508, 1994 WL 924203, at *5 (S.D.N.Y. Oct. 6, 1994) (considering extrinsic evidence and noting that it supports the "finding that the intent of the parties was consistent with the plain reading" of the contract). Attached to RSL's Reply Affidavit is a response of OSBI's attorney to a draft of the contract that did not contain the contested provision. OSBI's attorney requested that a carve-out be added "for fines and penalties imposed upon RSL due to RSL's own conduct. . . . For example, there is a current Florida attorney general investigation that we can discuss." (Fischer Reply Aff. Ex. A § 11.01.)
Indeed, an affidavit submitted by the defendants confirms that this was the purpose of that request. (Hodkin Aff. § 15.)
In attempting to raise a question of fact, OSBI not only argues that the provision is ambiguous, but submits two identical affidavits claiming that during negotiations of the Agreement, the parties understood that RSL would pay the fine, and that this understanding was factored into the purchase price that RSL paid for OSBI's assets. The affidavits are the only evidence of this understanding, the existence of which is somewhat contradicted by the exchange of February 1999 letters between the two companies. (Fischer Aff. Exs. E, F. G.) In those letters, RSL agrees that LDM will pay the Florida fine on behalf of the settling parties, but asserts that in doing so RSL is not waiving its right to seek indemnification for those fines pursuant to the Agreement.
In supplemental papers provided to the Court, the defendants assert a number of additional arguments. For example, they point to the fact that the contested provision did not appear in the draft that immediately followed their attorney's request for such a provision, but instead appeared in the final draft on December 8, 1998. They allege that this last-minute change reflected the decision to lower the purchase price in exchange for RSL's agreement to pay the fine. No documentary evidence of this agreement exists, and moreover, the defendants cannot contravene the plain language of the contract that they negotiated and signed by alleging that the subjective thoughts and intentions of the parties were otherwise. The defendants also submit an attorney's letter and an affidavit which reflect that after the Purchase Agreement was executed, OSBI objected to the settlement figure negotiated by RSL and stated that it would not pay any part of the fine. In addition to the fact that these negotiations regarding who would pay the fine took place after the Purchase Agreement was executed, RSL expressly reserved its indemnification rights in the February 1999 letters.
A valid claim for indemnification arises where one party, who is without fault, is required to pay a third party due to the fault of another. See City of New York v. Lead Indus. Assoc., 644 N.Y.S.2d 919, 922-23 (App.Div. 1996). Here, OSBI has admitted that it was solely responsible for the acts that triggered the fine. (Fischer Aff. Ex. H.) Under Rule 36, this admission conclusively establishes for the purposes of this litigation that RSL was not at fault. See Fed.R.Civ.P. 36(b); see also Town of Oyster Bay v. Occidental Chem. Corp., 987 F. Supp. 182, 198 (E.D.N.Y. 1997). Nor was RSL a party to the settlement agreement, except to the extent that it was bound to the agreement as LDM's parent. Thus, RSL is entitled to indemnification for paying the Florida fine.
III. CONCLUSION
RSL's motion for partial summary judgment on the issue of defendants' liability is granted.
SO ORDERED.