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Hill v. Commerce Bancorp, LLC

2011 WL 2293324 (U.S. Dist. Ct. D. N.J. 2011) (Unpublished)

AGREEMENTS; INDEMNIFICATION — A contract’s indemnification provision should be read carefully to determine whether it applies to attorney’s fees that relate to claims by outside parties or to attorney’s fees related to claims between the contracting parties themselves.

The founder, chairman, president, and CEO of a bank built it into a large and successful regional bank. Over his thirty-four years with the bank, the bank worked with real estate developers, including development firms in which the founder had a financial interest. One such entity, a full-service architectural and design firm, founded by his wife, provided extensive services to the bank, including interior design, exterior design, space planning, move coordination, and landscape design services. The founder’s wife remained president of the design firm.

His employment originally was pursuant to a written agreement. It was for a five-year term and renewed automatically on each anniversary date for a new five-year term. Later, the founder entered into the Amended and Restated Employment Agreement continuing his employment for a five-year period. That agreement permitted the bank to terminate his employment with or without cause. A termination without cause entitled him to certain benefits, including a lump sum severance payment equal to the full compensation he would have received for the remaining term of the agreement, the right to participate in the bank’s medical, disability, hospitalization, and life insurance benefit plans for three years, and the immediate vesting of his stock options. If the bank terminated his employment without cause, the agreement required the bank to make the required severance payments within thirty days.

The bank terminated the founder without cause. After the termination, the founder demanded payment under the agreement’s severance provisions and also exercised his vested stock options. The bank never paid and never issued the stock. During the same period, his wife’s design firm executed an Agency Agreement with the bank. In it, the bank agreed to continue using the firm for certain design, management, and administration services. Pursuant to the agreement, it was the parties’ practice for the design firm to submit, for approval, a proposal for services for the upcoming year. This would include a list of services that the firm intended to perform for the bank and included a rate schedule for that work. The bank’s board of directors typically approved the proposal and notified the design firm of its acceptance.

The design firm and the bank had a Master Agreement for certain services. The firm submitted its proposal of services to the bank on the bank’s board approved it. The design firm interpreted that acceptance as renewing the agreement on the same terms and conditions as the then-expired master agreement, thus extending its term one year. Subsequently, the bank terminated its relationship with the firm effective the following year. The master agreement incorporated, by reference, certain indemnification provisions.

The founder and his wife sued, alleging eleven causes of action: (1) breach of contract (by the founder against the bank); (2) breach of the implied covenant of good faith and fair dealing (by the founder against the bank); (3) contractual indemnification (by the founder against the bank); (4) breach of contract (by the design firm against the bank); (5) quantum meruit /unjust enrichment (by the firm against the bank); (6) promissory estoppel (by the firm against the bank); (7) breach of the implied covenant of good faith and fair dealing (by the firm against the bank); (8) tortious interference (by the firm against the bank); (9) contractual indemnification (by the firm and the founder’s wife against the bank); (10) copyright infringement (by the firm against the bank); and (11) intentional infliction of emotional distress (by the founder and his wife against the bank).

Later, the Court dismissed count ten. The bank then moved for partial summary judgment denying counts nine and eleven. Count nine alleged that the indemnification provision required the bank to indemnify the firm and the founder’s wife for legal fees and expenses incurred as a result of bringing the action against the bank, and incurred as a result of responding to various regulatory investigations. Count eleven alleged that the bank intentionally caused the founder and his wife emotional distress during the founder’s separation from the bank and by terminating the firm’s agreement with the bank. In response, the founder’s wife and her design firm abandoned their claim that the indemnification provision required the bank to pay for expenses incurred as a result of the regulatory investigations. However, her firm maintained that the indemnification provision required the bank to pay its legal fees and expenses in the present action. The founder and his wife did not submit any opposition regarding the bank’s motion for partial summary judgment denying count eleven.

The design firm alleged that it was entitled to contractual indemnification from the bank for legal fees, costs, and expenses incurred as a result of bringing the present suit to enforce its agreements with the bank. The bank argued that the provision applied only to third-party liabilities incurred as a result of the parties’ performance under the agreement, and, therefore, it did not apply to legal fees incurred to enforce the firm’s agreements with the bank. In other words, the bank argued that the provision was not a fee-shifting provision. The design firm responded that the provision’s plain language required the bank to indemnify the firm for costs incurred to enforce the agreement. Neither party submitted any extrinsic evidence in support of its interpretation of the provision.

The Court, on careful reading of the indemnification provision, found that the provision applied only to attorneys’ fees that were related to liabilities that the design firm incurred as a result of the bank’s acts or omissions. In this case, the cause of the firm’s attorneys’ fees was the bank’s alleged breach of the agreement, which could not fairly be called a liability of the design firm. In fact, the fees were a result of the bank’s alleged liabilities, not the firm’s. Thus, the provision did not apply to this dispute. Second, other provisions in the agency agreement suggested that indemnification related to third-party liabilities and not to direct contract claims between the parties; for example, if the indemnification related to direct claims between the bank and firm, the agreement’s notice requirement would be, at least in part, superfluous. Third, the provision did not explicitly provide for fee-shifting in disputes between the bank and the firm to enforce the agreement. And fourth, the “American rule” strongly disfavors fee shifting. Thus, the Court held that the indemnification provision could not reasonably be interpreted to apply to the firm’s attorneys’ fees and costs incurred as a result of bringing its action against the bank to enforce the agreement and granted the bank summary judgment on that count.

Neither the founder nor his wife opposed the bank’s motion for partial summary judgment denying their claim for intentional infliction of emotional distress. To survive summary judgment, a plaintiff must present at least some evidence proving each element of his or her claim. Here, because no such evidence was provided, and their certified responses to the bank’s interrogatories established that they could not prove the requisite severe emotional distress, the Court granted the bank’s motion for summary judgment denying that count.


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