Opinion
DOCKET NO. A-2066-14T3
12-05-2016
U.S. BANK NATIONAL ASSOCIATION, a national banking association, Plaintiff-Respondent, v. ANGELO P. PODES and MARY PODES, individually, as bondholders and trustees of bondholders of the Duval County Housing Finance Multifamily Housing Revenue Bonds, Series 1987A; ANGELO P. PODES AND MARY PODES CHILDREN'S TRUST; ANGELO P. PODES MARITAL DEDUCTION TRUST; ANGELO P. PODES AND MARY PODES GRANDCHILDREN'S TRUST; and STAMATINA PODES, jointly and severally, Defendants/Third-Party Plaintiffs, v. WACHOVIA BANK, N.A., Third-Party Defendant/Appellant, and BANK OF OKLAHOMA, N.A. and INTERSTATE REALTY MANAGEMENT COMPANY, Third-Party Defendants.
Greenbaum, Rowe, Smith & Davis, LLP, attorneys for appellant (John D. North, of counsel and on the briefs; Robert J. Flanagan, III, on the briefs). Goldman, Davis & Gutfleish, PC, attorneys for respondent (Daniel S. Eichhorn, on the brief).
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
This opinion shall not "constitute precedent or be binding upon any court." Although it is posted on the internet this opinion is binding only on the parties in the case and its use in other cases is limited. R.1:36-3. Before Judges Hoffman and O'Connor. On appeal from Superior Court of New Jersey, Law Division, Monmouth County, Docket No. L-0289-07. Greenbaum, Rowe, Smith & Davis, LLP, attorneys for appellant (John D. North, of counsel and on the briefs; Robert J. Flanagan, III, on the briefs). Goldman, Davis & Gutfleish, PC, attorneys for respondent (Daniel S. Eichhorn, on the brief). PER CURIAM
Wachovia appeals from a November 21, 2014 Law Division order awarding $129,232.77 in attorneys' fees and costs to plaintiff U.S. Bank National Association (U.S. Bank or plaintiff) as an indemnitee in connection with defending a counterclaim brought by defendants. Wachovia argues the court erred in ordering it to pay plaintiff's legal fees and expenses because plaintiff also defended claims based on its own independent fault. We disagree and affirm the trial court.
Defendants consisted of three members of the Podes family, along with several family-related trusts (collectively the Podeses). --------
I.
We discern the following facts from the record. On August 1, 1987, the Duval County Housing Finance Authority (Housing Authority) provided a non-recourse mortgage loan to Magnolia Arms Associates, Ltd. (Magnolia), which planned to rehabilitate a housing project in Jacksonville, Florida. Magnolia retained Interstate Management Realty Company to manage the project. To fund the loan, the Housing Authority issued Housing Revenue Bonds, Series 1987A to investors. The Housing Authority issued $2,540,000 of these bonds to the Podeses.
An indenture of trust secured the bonds. First Union National Bank of Florida (First Union), and then Wachovia, its successor by merger, served as the indentured trustee, overseeing the distribution of interest and principal payments to the bondholders. From 1987 to December 31, 2005, First Union and then Wachovia administered the corporate trust account, distributing revenue from the project to the bondholders. A supplemental indenture of trust amended the trust in 1995.
On November 29, 2005, Wachovia and U.S. Bank entered into a purchase agreement whereby U.S. Bank purchased Wachovia's corporate and institutional trust business. The purchase agreement required the parties to enter into certain collateral transaction agreements, including a servicing agreement and a transition support agreement.
Due to the complexity of Wachovia's corporate and institutional trust business, U.S. Bank could not succeed as trustee in all of Wachovia's trusts simultaneously. As a result, the purchase agreement and related documents established a process allowing U.S. Bank to assume Wachovia's liabilities and assets as of December 30, 2005, even though Wachovia was to remain the trustee of certain trusts until U.S. Bank could properly succeed it. The purchase agreement included the following indemnification provision:
Section 11.2 Indemnification By Parent
(a) Following the Effective Time, Parent [Wachovia] will indemnify Buyer [U.S. Bank], its Affiliates and their respective directors, officers, employees and agents against, and agrees to hold each of them harmless from, any Loss incurred or suffered by them arising out of:
. . . .
(2) the Excluded Liabilities and the failure of Parent or any Seller [Wachovia] to satisfy, perform, discharge or pay any Excluded Liability . . . .
Section 2.7(a) of the purchase agreement defined "Effective Time" as the closing date, which was December 30, 2005. The purchase agreement, under "[e]xcluded [l]iabilities," specifically excluded any liability or obligations relating to Wachovia's Corporate Trust accounts or operation thereof, prior to the closing date, irrespective of whether such liability was known, unknown, accrued, unaccrued, absolute, or contingent. The purchase agreement defined "[l]oss" as:
[A]ny damage, loss, liability, cost, charge, fee, penalty, [t]ax or expense (including reasonable expenses of investigation and reasonable attorneys' fees and expenses and other out-of-pocket expenses in connection with any action, suit, proceeding or investigation incurred) or suffered by a party . . . as a result of any matter for which indemnity may be sought under Section 11.2 or 11.3 . . . .
The servicing agreement also required Wachovia to indemnify, hold harmless, and defend U.S. Bank from any claim alleged to arise out of events before the December 30, 2005 closing. Likewise, under Article 7.1(a) of the servicing agreement, U.S. Bank was required to indemnify, hold harmless, and defend Wachovia from any claim alleged to arise out of events after the December 30, 2005 closing date. Together, these indemnification provisions required each party to defend claims alleged to arise out of the period of time when each bank had assumed the risks of ownership of Wachovia's corporate trust business.
Between 1995 and August 2005, Magnolia regularly paid the Housing Authority, which then paid the trustee. The bonds went into default in August 2005, and the Podeses stopped receiving their regular biannual bond payment in February 2006. Not knowing U.S. Bank had succeeded Wachovia, the Podeses asked Wachovia why they had not received the February 2006 bond payment. Inexplicably, in March 2006, Wachovia proceeded to pay the Podeses the missed payment, notwithstanding the default. Within the next three months, the Podeses learned the bonds had gone into default — no mortgage payments had been made since August 2005, the 2005 property taxes had not been paid, and the tax and insurance escrow accounts had not been funded.
On January 19, 2007, U.S. Bank filed its complaint against the Podeses, seeking recoupment of the bond payments made in error. The Podeses filed an answer, a counterclaim against U.S. Bank, and a third-party complaint against Wachovia. The Podeses' counterclaim and third-party complaint were based on the banks' alleged breach of their fiduciary duties in administering the trust and their failure to act in accordance with the terms of the supplemental indentured trust. The Podeses alleged identical claims against both banks, likely unsure which bank was the responsible entity for the relevant time the actionable conduct occurred. The Podeses sought to offset their liability to U.S. Bank with their right to recoup the unpaid interest.
In the introductory allegations of their amended counterclaim, the Podeses asserted Magnolia "failed to make monthly payment due under the Loan Documents for the months of October 2005, November 2005, December 2005, January 2006, February 2006 and March 2006." Paragraph thirty-seven stated a notice to the bondholders, dated May 22, 2006, advising them an "Event of Default" took place on February 15, 2006, and the bond payment due on February 15, 2006, was not made. Count one of the counterclaim, titled "Breach of Fiduciary Duty," alleged U.S. Bank failed to "[e]stablish a Revenue Fund as required by the Supplemental Indenture [of Trust]," "monitor Lock-Box Trigger Events," "deposit funds into the Revenue Fund," "monitor the receipt of monthly financial statements," monitor Interstate's performance in managing the property, or otherwise monitor the project's finances. The Podeses also alleged U.S. Bank breached the 1995 forbearance agreement. As noted, in their third-party complaint against Wachovia and other successor banks, the Podeses asserted the same allegations as they did in their counterclaim against U.S. Bank.
U.S. Bank and Wachovia filed cross-claims against each other. U.S. Bank's cross-claim included claims for contribution, common law indemnity, and two claims of contractual indemnity under Section 11.2 of the purchase agreement and Paragraph 7.2 of the servicing agreement. Wachovia asserted claims for contribution, common law indemnity, and contractual indemnity under the purchase and servicing agreements.
In March 2009, U.S. Bank moved for summary judgment on its cross-claims against Wachovia, seeking indemnification and the dismissal of Wachovia's cross-claims. On April 3, 2009, the court granted U.S. Bank's motion in part and denied it in part. Specifically, the court's order granted "U.S. Bank's motion for partial summary judgment against Wachovia for contractual indemnification," which required Wachovia to "indemnify U.S. Bank for the defense, losses, legal fees and any other damages arising out of all claims contained in the Counterclaim . . . , which arose prior to the closing date of December 30, 2005." The court's order denied U.S. Bank's attempt to dismiss Wachovia's cross-claims.
The case then proceeded until U.S. Bank and Wachovia entered into a settlement agreement, dated March 29, 2010. Under the agreement, Wachovia agreed to take over the defense of the Podeses counterclaim, pay all legal fees for the defense prospectively, and "indemnify and hold harmless U.S. Bank from all of the Podeses' claims, whether those claims arose from events that occurred prior to or after December 30, 2005." The parties do not address whether this settlement provision impacts their respective cross-claims. The agreement further provided U.S. Bank would continue to pursue its affirmative claim against the Podeses, and the banks agreed to dismiss their respective cross-claims against each other.
After the settlement, the banks moved for summary judgment against the Podeses, seeking to dismiss the counter-claim and third-party complaint. The banks argued, among other things, the Podeses lacked standing to assert their claims, and their causation and liability expert lacked the requisite qualifications to render an opinion. In the Podeses' brief in opposition to the motion, they reference U.S. Bank's conduct after December 30, 2005, writing:
[S]everal events material to this lawsuit occurred after the December 31, 2005 scheduled closing date under the Purchase Agreement. Specifically, the checks at issue in this case were issued on or about March 3, 2006, and the Bonds and Note were accelerated on or about May 22, 2006. In addition, [Magnolia] missed several payments after the closing date, creating Lock-Box Trigger Events that were ignored by both Wachovia and U.S. Bank.The Podeses then contended "the failure of Wachovia/U.S. Bank to enforce the lockbox mechanism is a direct[] cause of the approximately $700,000 in funds[] being dissipated and not properly captured for the benefit of the Bondholders."
On September 2, 2011, the court denied the banks' motions, concluding the parties disputed facts material to the Podeses' claims, specifically "as to when the [e]vent of [d]efault occurred." The judge also concluded the parties disputed "the reasonableness of the [b]anks' actions after August 2005," and "[a] jury must decide what responsibilities the Indenture and Forbearance Agreement placed on the Banks after August 2005." The court added, "[A] jury must decide whether the [b]anks' actions and inactions constitute a [b]reach of their [f]iduciary [d]uty to the [b]ondholders and/or negligence under the circumstances."
In August 2014, U.S. Bank, Wachovia, and the Podeses settled their claims. Following the settlement, the only remaining dispute was U.S. Bank's claim against Wachovia for attorney's fees and costs incurred prior to the banks' March 29, 2010 settlement agreement for having to defend against the Podeses' claims arising prior to December 30, 2005. U.S. Bank sought legal fees in excess of $195,000. On November 21, 2014, the court heard oral argument on U.S. Bank's motion for attorneys' fees and expenses from Wachovia.
The court concluded U.S. Bank was entitled to a large portion of their requested attorneys' fees and expenses, explaining:
Here, the Court previously found that a valid indemnity agreement existed between U.S. Bank and Wachovia and that Wachovia was expected to indemnify U.S. Bank for the defense, losses, legal fees and other damages arising out of the claims contained in the Podeses' counterclaim, which arose prior to the closing date of December 30, 2005. While the fees for which U.S. Bank seeks are most[ly] covered by the agreement, all of them are not and they must be reasonable. The total of in excess of $195,000 should be reduced to account for the work associated with their affirmative claim against the Podeses, and any claims against them for their own individual actions. Even if the Podeses never asserted
a claim against U.S. Bank, U.S. Bank, as the plaintiff's attorney, would still have had to attend many of the events for which they seek reimbursement. Therefore, they should not be reimbursed for all of those fees and expenses.
For those reasons, the motion will be granted, but reduced.
The court believes, for example, that an attorney in this country with less than ten years' experience and being billed out at $350 an hour is unreasonable. . . . I think the fee is extreme. . . . [I]n doing the math, [after calculating the new hourly rate at $250], it comes down to $162,575.77. [U.S. Bank submitted a reply affidavit] indicating that there was a clerical error reducing the figure by $1,000 and change, so the net was [$]161,540.71.
The Court then looked to the entire bill and tried to make a reasonable adjustment to deal with the concerns of Wachovia . . . that not all of the work was related to the indemnification[,] that some of it was related to the affirmative claim, some of it was related to U.S. Bank's own defenses, if you will, as well as some of the items in resolving the matter for the settlement between the two banks and the settlement ultimately with the Podeses. And the Court felt that a reasonable reduction in that would be 20 percent, so I reduced the 161 [by] 20 percent . . . for a net of [$]129,232.77. . . . And that will be the amount that is put into the . . . order.
II.
On appeal, Wachovia argues the trial court should not have granted attorneys' fees and expenses to U.S. Bank because "absent an express contractual provision that the indemnitee is to be indemnified for its own wrongdoing, once an indemnitee has had to defend against claims of its own independent fault, the indemnitee is not entitled to recover any of its defense costs." We disagree and affirm the trial court.
"The interpretation of a contract is subject to de novo review by an appellate court." Kieffer v. Best Buy, 205 N.J. 213, 222 (2011) (citation omitted). "The objective in construing a contractual indemnity provision is the same as in construing any other part of a contract — it is to determine the intent of the parties." Id. at 223 (citing Mantilla v. NC Mall Assocs., 167 N.J. 262, 272 (2001)). "If an indemnity provision is unambiguous, then the words presumably will reflect the parties' expectations." Ibid. (citation omitted). But, unlike interpretive rules applicable to other contracts, "[i]f the meaning of an indemnity provision is ambiguous, the provision is 'strictly construed against the indemnitee.'" Ibid. (quoting Mantilla, supra, 167 N.J. at 272).
The strict-construction approach is taken for two apparent reasons. One is that a party ordinarily is responsible for its own negligence, and shifting liability to an indemnitor must be accomplished only through express and unequivocal language. Another is that, under the American Rule, absent statutory or judicial authority or express contractual language to the contrary, each party is responsible for its own attorney's fees.
[Id. at 224 (citations omitted).]
In Mantilla, the Court had "granted [the appellant's] petition for certification to determine whether [the respondent was] entitled to indemnification for legal fees incurred in defending itself against a claim of its own negligence." Mantilla, supra, 167 N.J. at 266 (citation omitted). It concluded "absent explicit contractual language to the contrary, an indemnitee who has been found to be at least partially at fault may not recover the costs of its defense from an indemnitor." Id. at 264. When the indemnification provision of a contract fails to expressly provide indemnification against allegations of the indemnitee's own fault, the "default rule," set forth in Central Motor Parts Corp. v. E.I. duPont deNemours & Co. Inc., 251 N.J. Super. 5 (App. Div. 1991), "applies and fills the gap that the parties left open in their contract." Mantilla, supra, 167 N.J. at 273. That "default rule" "expresses the common-law principle that 'an indemnitee who has defended against allegations of its independent fault may not recover its [defense] costs.'" Id. at 272 (quoting Central Motor, supra, 251 N.J. Super. at 10).
In Central Motor, we established the "after-the-fact approach" to determining whether a defendant had defended against its independent fault or the fault of its indemnitor. Central Motor, supra, 251 N.J. Super. at 11. Pursuant to the "after-the-fact approach," a court must look beyond the "[a]negations in the pleadings;" "the actual facts developed during trial . . . control." Ibid. "[A]n indemnitee who defends exclusively against the acts of the indemnitor may recoup from the indemnitor the reasonable costs of its defense." Id. at 10 (emphasis in original). "Costs incurred by [an indemnitee] in defense of its own active negligence or independent warranties are not recoverable, but those costs incurred on defending claims on which the [indemnitee] is found only derivatively or vicariously liable are recoverable." Id. at 11.
Mantilla and Central Motor did not hold, as Wachovia argues, an indemnitee is excluded from seeking indemnification for legal fees incurred from claims for which it had no direct liability when it defends against other claims of its own independent fault. Rather, Mantilla established an indemnitee cannot recover legal fees for defending independent claims against itself unless the parties explicitly agree otherwise. Mantilla, supra, 167 N.J. at 275. Central Motor established a court should review the record to determine whether claims were for the indemnitee's fault or the indemnitor's fault. Central Motor, supra, 251 N.J. Super. at 11. It should allow the indemnitee to recover attorneys' fees and expenses for its defense against the indemnitor's fault but not its own. Ibid.
U.S. Bank was not seeking indemnification for defending claims based on its own independent fault, only its costs in defending claims for Wachovia's fault. Wachovia and U.S. Bank's contract apportioned liability according to when it arose. An unchallenged order, based on the purchasing and servicing agreement's indemnity provision, required Wachovia to indemnify U.S. Bank for the "defense, losses, legal fees and any other damages arising out of all claims contained in" the Podeses' counterclaim, "which arose prior to the closing date of December 30, 2005." The Podeses' complaint alleged improper conduct ranging from August 2005 to March 2006, implicating both banks, and nothing in the contract provision precluded U.S. Bank from seeking indemnification, despite independent claims against itself arising after December 30, 2005. U.S. Bank was only seeking a portion of its overall fees incurred while defending the Podeses' claims relating to Wachovia's conduct arising from August 2005 to December 2005.
The trial court properly granted U.S. Bank's request for indemnification because a portion of the Podeses' counterclaim "arose prior to the closing date of December 30, 2005." After accounting for reasonableness of fees under RPC 1.5 and correcting a clerical inaccuracy, the court reduced the fees by twenty percent for the cost of U.S. Bank's defense for its own fault as well as its affirmative claims. Wachovia argues the court should not have awarded any fees, but does not contend the court improperly apportioned the fees based on when the Podeses' claims arose. We therefore decline to review this aspect of the trial court's decision.
Affirmed. I hereby certify that the foregoing is a true copy of the original on file in my office.
CLERK OF THE APPELLATE DIVISION