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Marlboro Inn, LLC v. Marlboro Loft Partners, LLC

A-5740-06T1 (N.J. Super. App. 2008) (Unpublished)

CONTRACTS; INDEMNITY; ATTORNEYS FEES — If an indemnity agreement does not expressly provide for the indemnitor to reimburse the indemnitee for legal fees incurred in enforcing the indemnity, then such legal fees are not recoverable.

A contract of sale was executed for a property on which an inn was operated. The contract provided that, from and after the closing, the buyer would indemnify and hold the seller harmless from claims, expenses, and the like arising out of a lease agreement for a particular telephone system. The provision provided that the indemnification would cover “all losses, penalties, costs and expenses relating to the any of the foregoing (including, but not limited to court costs and reasonable attorneys’ fees) arising out of the Lease.” The buyer stopped making payments under the Lease and the leasing company demanded that the owner’s principals, as guarantors of the lease, directly pay the balance “or else face adverse credit reports and an action to collect the money due [the lessor].” In communications between attorneys, the seller’s attorney concluded that the buyer had no intention of paying the charges. Consequently, the seller reached a settlement with the leasing company. The buyer agreed to pay almost all of the settlement amount but refused to pay any of the attorneys’ fees or costs incurred by the seller in negotiating the settlement. As a result, the seller paid the leasing company and sued the buyer for the settlement amount as well as for the legal fees and costs incurred by its attorney and resolution of the claim. In addition, it claimed entitlement to legal fees and costs that it incurred “to enforce the indemnity and hold harmless provision” of the purchase contract. The day before trial, the buyer tendered the amount of the settlement, which was slightly more than the amount it had been willing to pay to that time. The seller “was awarded attorneys’ fees and costs for dealing with and resolving the [leasing company’s] claim at a later hearing after the parties were afforded discovery concerning the fees billed by the Seller’s attorney.” The lower court held that the indemnification provision “clearly provided for reasonable attorneys’ fees to the Seller, regardless of the merits of [the leasing company’s] claim. It ordered the buyer to pay the seller’s attorneys’ fees “for [the seller’s] efforts to resolve the payment to [the leasing company].” On the other hand, the lower court “noted that because there was no provision in the Contract that would entitle Seller to its legal fees for enforcing its rights under the Contract, the [lower court] could not and would not award Seller’s attorneys’ fees for enforcing the indemnity and hold harmless provisions of the Contract.” It denied the claim that the buyer was entitled to attorneys’ fees because it had put forth a frivolous defense. In doing so, “[i]t found that claims made ... ‘require[] a strict adherence to the procedures set forth in Rule 1:4-8.’ [and] [b]ecause Seller did not provide Purchaser with the written notice and demand required by the rule.” Based on a subsequent decision by the New Jersey Supreme Court, the seller moved for reconsideration, but its motion for reconsideration was denied.

The seller appealed, arguing to the Appellate Division that, “unless its legal fees incurred in the enforcement of the underlying indemnity clause [were] paid, it [was] not ‘held harmless.’” It further argued that the broad language of the indemnification provision, “particularly the phrase ‘arising out of’ provide[d] authority for the court to award attorneys’ fees related to [its] efforts to enforce the [buyer’s] contractual obligation to hold [it] harmless with respect to the Lease.” The Court, in response, pointed to Rule 4:42-9 which provides that “[n]o fee for legal services shall be allowed in the taxed costs or otherwise,” except as set forth in the rule. None of the exceptions to the rule applied. The Court looked to the intention of the parties holding that “[i]n interpreting a contract, [i]t is not the real intent but the intent expressed through a parent in the writing that controlled.” With that in mind, the Court agreed that the “attorneys’ fees and costs which the [lower court] did award to [the] Seller arose out of the Lease,” and that those fees and costs were related to “the negotiation to subsequent settlement of the [leasing company’s] claim against Seller under the Lease, and hence arose out of the Lease.” In the end, it ruled that “the attorneys’ fees and costs to compel [the buyer] to honor its obligation under the Contract arose not out of the Lease, but from [the buyer’s] breach of its obligation under the Contract with [the] Seller.”

The Court then analyzed the fee shifting provision in cases involving a frivolous lawsuit. The lower court had “found that the seller did not comply with the safe harbor provisions of Rule 1:4-8,” and that the lower court had “found that the seller believed that the demand would be meaningless and ignored because the buyer’s principal stated that he would not pay the attorneys’ fees and costs.” Fortunately for the buyer, the Court agreed with the lower court that the law “does not permit wholesale non-compliance just because the moving party believes that any notice and demand would be meaningless and ignored by the offending party.”

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