Outside Inhouse Lawyer Blog : New York & Seattle Corporate Dispute Lawyer & Attorney : Grace M. Healy : Outside counsel : King County, Tacoma, Bellevue

It must be pretty distressing for a company that purchased the assets of a boiler business in 1970 to learn that it really purchased the prior owner’s asbestos liability, but that is what OakFabco learned today when the New York Court of Appeals issued its decision in American Standard, Inc. v. OakFabco, Inc.

I know that I’ve been plenty distressed when I’ve read old agreements with internally conflicting language. In this case, my guess is that the current owners wish that more attention had been paid to the “whereas” clause and the agreement to service the seller’s customers when the sale took place forty years ago.

The asset purchase agreement defined the liabilities assumed with the assets as “all the debts, liabilities, obligations and commitments (fixed or contingent) connected with or attributable to [seller] existing and outstanding at the Closing Date.” The purchaser -- relying on this definition -- claimed that tort liabilities, which did not exist as of the closing date, were not part of the transaction.

However, the court did not limit its analysis to the agreement’s definition of liabilities. It read the asset purchase agreement as a whole, including the agreement’s statement of purpose, the definition of liabilities, and the hold harmless provision. The agreement’s statement of purpose stated that the assets were being sold “subject to all debts, liabilities and obligations connected with or attributable to” the business. In addition, the purchaser had agreed to hold the seller harmless against the defined liabilities – in other words those existing and outstanding as of the closing date – but also all warranty, service, repair and return obligations for products sold on or before the transaction closed.

Ouch. Hopefully, insurance was one of the assets purchased. In any event, the decision shows the importance of the language of a “whereas” clause, and that – no matter how great it seems to get access to an existing customer base -- a buyer should be wary of agreeing to service the seller’s customers and warrantees at its own expense.

An interesting procedural point was discussed in the decision. The Appellate Division had enjoined the purchaser from re-litigating the liability issue. The Court of Appeals ruled that an injunction is not the appropriate remedy for stopping repeated litigation. The Court of Appeals vacated the injunction noting that parties may take any position they want in litigation provided it is raised in good faith; however, they might be precluded from doing once it has been decided.

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At one time or another, almost every lawyer presented with a claim says: “I think that might be champerty!” Then, research shows, it isn’t. Champerty is elusive, to say the least.

Last week, the NY Court of Appeals affirmed the narrow definition of champerty. In answering certified questions from the Second Circuit, the court ruled that indemnity claims – obtained in a settlement where there was a pre-existing interest -- were not barred by champerty. Trust for the Certificate Holders of the Merrill Lynch Mortgage Investors, Inc. Mortgage Pass-Through Certificates, Series 1999-C1, by and through Orix Capital Markets, LLC as Master Servicer and Special Servicer v. Love Funding Corporation.

The facts – which involve the sale, transfer and litigation related to mortgages – cover several years and parties. However, the holding is clear.

• First, the court defined champerty very narrowly as: the purchase of claims for the purpose of bringing an action in order to involve parties in costs and annoyance, where such claims would not be prosecuted absent that purpose.

• Second, it is not champerty to acquire the right to bring a claim as part of a settlement. The court was not aware of any New York case holding that it is champerty to acquire -- as part of a settlement -- indemnification rights for reasonable costs and fees incurred in past legal actions.

• Third, the rights transferred may be for an amount greater than the amount demanded in the underlying action. The court noted that it was not aware of any New York case standing for the proposition that it is champerty to settle a dispute by accepting a transfer of rights having the potential for a recovery that is larger than one demanded as a cash settlement.

This should reassure anyone who has ever taken a claim as part of a settlement.

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The New York Court of Appeals handed down two rulings this week relating to employees’ job injury claims against third parties. One of the cases, Brooks v. Judlau Contracting, Inc., potentially expands an employer’s liability because it allows a third party to enforce a contractual indemnity to the extent that the employer was negligent.

    The second, Brothers v. New York State Electric & Gas Corp., discusses the exceptions to the rule that a person hiring an independent contractor is not liable for the contractor’s negligence. (The double negative – exceptions to not being negligent -- in that last sentence is intentional since it often seems that the rule really describes a rule of liability.)  Here, however, the court refuses to find a state permit holder vicariously liable for the failure of an independent contractor to comply with safety requirements that were contained in the permit. 

Brooks -- Employer/Sub-Contractor Required to Partially Indemnify Contractor

Brooks v. Judlau Contracting, Inc., involved a serious on the job construction injury – a situation which implicated General Obligations Law section 5-322.1, which limits indemnity in construction, maintenance and repair contexts. 

Plaintiff, Brooks, sued the general contractor who, in turn, made a third-party claim for contractual indemnity against the sub-contractor, Brooks’ employer.  The Appellate Division held that General Obligations Law section 5-322.1 barred indemnity and, therefore, the indemnity was not enforceable. 

The Court of Appeals disagreed on the grounds that:

•    the purpose of General Obligations Law section is to prohibit indemnity for a party’s own negligence, and
•    If the statute is read as a blanket prohibition, it would have the opposite effect  -- it would require a contractor to pay for, or, in effect, insure its sub-contractor’s negligence. 

The court went on to read the contract, which required the sub-contractor to indemnify the contractor “to the fullest extent permitted by law,” as an agreement contemplating partial indemnification, rather than an agreement requiring full indemnity. 

The bottom line is that a contractor has a right of indemnity to the extent that the sub-contractor/employer was negligent.  I suspect that a lot will be written about this decision, which on its face seems reasonable but seems to open up a lot of questions about this section of the General Obligations law, vicarious liability/non-delegable duty, and your ongoing business relationships.  It seems a lot easier to require insurance.

Brothers – Vicarious Liability Not Present Although Sub-Contractor Did Not Comply with Safety Regulations Required by Contractor's Permit

Brothers v. New York State Electric & Gas Corp. also involved an on the job serious injury.  Here, indemnity was not the issue; rather, plaintiff sought to hold defendant New York State Electric & Gas vicariously liable for his employer’s failure to comply with federal and state safety regulations.  The basis of the claimed vicarious liability was a work permit, which NYSE&G had obtained from the state and which required that all work be done in accordance with safety regulations.  NYSE&G contracted with plaintiff’s employer to do the work.  If the safety obligations were delegable, NYSE&G would not be vicariously responsible for the employer’s failures.  If they were not, NYSE&G would have breached a duty to plaintiff and be responsible for his injuries.

The opinion discusses the rule that a person who hires an independent contractor is not liable for the contractor’s acts and the various exceptions to the rule.  The opinion makes clear that there is no bright line for making a determination that the "rule" does not apply and a party will be responsible for the negligence of its independent contractor.  The court repeatedly points out that this determination requires a “sui generis” inquiry.  In reaching its determination that the duty of complying with safety regulations could be delegated in this situation, and, accordingly, NYSE&G is not vicariously liable, the court relies on the nature of the permit – not really a bargained for contract – and various policy reasons.  One policy reason rejected by the court was the argument that plaintiff would be left with only workers' compensation if NYSE&G  were dismissed.
 

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