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Live Invest, Inc. v. Morgan

Supreme Court, Suffolk County

September 7, 2017

Live Invest, Inc., Plaintiff,
v.
Clifford Morgan, Gamma Enterprises LLC, Alpha Direct Marketing LLC and Jericho Capital Corp., Defendants. Jericho Capital Corp., Third-Party Plaintiff,
v.
Gamma Enterprises, LLC, d/b/a Gamma Labs, Third-Party Defendant.

          Frenkel Lambert Weiss Weisman & Gordon, LLP, Attorneys for Defendant/Third-Party Plaintiff Jericho Capital Corp.

          Lax & Neville LLP Attorneys for Third-Party Defendant

          Hon. Elizabeth H. Emerson J.S.C.

         Upon the following papers read on this motion to dismiss; Notice of Motion and supporting papers 133-135; 125-127; Notice of Cross Motion and supporting papers; Answering Affidavits and supporting papers 136; Replying Affidavits and supporting papers 137; it is, ORDERED that this motion by the third-party defendant, Gamma Enterprises, LLC, d/b/a Gamma Labs, for an order dismissing the third-party complaint is granted to the extent of dismissing the second and third causes of action for equitable and common-law indemnifiction; and it is further

         ORDERED that the motion is otherwise denied.

         The plaintiff is the successor-in-interest to TonicCare, LLC ("TonicCare"), which was engaged in the skin-care business. On October 15, 2010, TonicCare entered into an agreement with Delta Direct Marketing, LLC ("Delta"), that allowed Delta to sell and distribute its products on consignment. The agreement required Delta to use its best efforts to sell and distribute the inventory of TonicCare's products that was consigned to it (the "consigned inventory"). TonicCare dissolved on December 31, 2010, and the plaintiff succeeded to its rights under the agreement with Delta. The plaintiff terminated that agreement on March 16, 2012, and commenced an action against Delta in this court alleging, inter alia, that Delta had failed to use its best efforts to sell and distribute the consigned inventory and that it had failed to account therefor. A default judgment was entered against Delta on July 17, 2014. Delta's motion to vacate its default was denied by an order of this court dated December 16, 2015. No part of the judgment has been satisfied.

         On May 28, 2015, the plaintiff, seeking to pierce Delta's corporate veil, commenced this action against Clifford Morgan ("Morgan"); Gamma Enterprises, LLC ("Gamma"); Alpha Direct Marketing, LLC ("Alpha"); and Jericho Capital Corp. ("Jericho"). The plaintiff alleged that Delta was a sham entity and the alter ego of Morgan, Gamma, Alpha, and Jericho. Morgan was the managing member of Delta and the manager and president of both Gamma and Alpha. He had an ownership interest in Gamma, which had an ownership interest in both Delta and Alpha. Jericho had a 51% ownership interest in both Delta and Alpha until it sold those interests to Gamma on December 31, 2011. Morgan, Gamma, and Alpha moved to dismiss the complaint insofar as it was asserted against them. Jericho also moved for the same relief. In separate orders dated January 13, 2017, Morgan, Gamma, and Alpha's motion was granted, and Jericho's motion was denied. Jericho then commenced a third-party action for equitable, common-law, and contractual indemnification against Gamma. Gamma now moves to dismiss the third-party action.

         The second and third causes of action are for equitable and common-law indemnification. The plaintiff in the main action alleges that Jericho was Delta's alter ego and, therefore, liable for payment of the default judgment against Delta. Jericho alleges that it did not direct, supervise, or control Delta. Jericho alleges that Delta was directed, supervised, and controlled by Gamma. Therefore, Gamma should indemnify Jericho for any damages that it is liable to pay the plaintiff.

         The principle of equitable indemnification, also known as common-law indemnification, allows a non-culpable party who has been compelled to make a payment to shift the entire burden of loss to the liable party and obtain full reimbursement (Arch Ins. Co. v Harleysvill Worcester Ins. Co., U.S. Dist Ct, SDNY, July 7, 2014, Cote, J. [2014 WL 3377124] at *7, citing Frank v Meadowlakes Dev. Corp., 6 N.Y.3d 687, 691). Common-law indemnification is generally available in favor of one who is held responsible solely by operation of law because of his relation to the actual wrongdoer (McCarthy v Turner Constr., Inc., 17 N.Y.3d 369, 375). The predicate of common-law indemnity is vicarious liability without actual fault on the part of the proposed indemnitee (Trustees of Columbia Univ. v Mitchell/Giurgola Assoc., 109 A.D.2d 449, 453). Thus, there is no common-law indemnification claim when, as here, the plaintiff seeks recovery from the defendant because of the latter's alleged wrongdoing, i.e., breach of contract, and does not seek to hold the defendant vicariously liable for any negligence by the third-party defendant (Chatham Towers, Inc. v Castle Restoration & Constr., Inc., 151 A.D.3d 419; Edgewater Constr. co v 81 & 3 of Watertown, Inc., 252 A.D.2d 951, 952). Accordingly, the second and third causes of action for equitable and common-law indemnification are dismissed. [1]

         The right to contractual indemnification depends upon the specific language of the contract (George v Marshalls of MA, Inc., 61 A.D.3d 925, 930). The promise to indemnify should not be found unless it can be clearly implied from the language and purpose of the entire agreement and the surrounding circumstances (Id.). The Equity Ownership Purchase Agreement dated December 31, 2011, in which Jericho sold its 51% ownership interest in Delta to Gamma, contains the following language:

"[Gamma] hereby agrees to indemnify and hold harmless [Jericho], and [Jericho's] members, managers, officers, and directors and their respective heirs executors and administrators from...any and all manner of loss, suits, claims, demands, damages, debts, liabilities, obligations, costs, expenses, actions, or causes of action (including, but not limited to, actual damages, punitive damages, fines and attorney's fees and costs, whether or not litigation is commenced) arising out of, involving, or relating in any way to the operation of [Delta] from the date of its organization and continuing through and after the date of this Agreement."

         It is well settled that, on a motion to dismiss pursuant to CPLR 3211, the court is to liberally construe the complaint, accept the alleged facts as true, give the plaintiff the benefit of every possible favorable inference, and determine only whether the alleged facts fit within any cognizable legal theory (see, Leon v Martinez, 84 N.Y.2d 83, 87-88). Under CPLR 3211(a)(1), dismissal is warranted only if the documentary evidence submitted utterly refutes the plaintiff's factual allegations, conclusively establishing a defense to the asserted claims as a matter of law (Id. at 88). The standard of review of a third-party defendant's motion to dismiss is even more liberal. The mere possibility of a claim over sustains the sufficiency of the third-party pleading (Assured Guar. Mun. Corp. v DB Structured Prods, Inc., 33 Misc.3d 720, 733, citing Braun v City of New York, 17 A.D.2d 264, 268).

         Applying these principles, the court finds that a promise to indemnify Jericho for Delta's breach of contract may be implied from the language and purpose of the Equity Ownership Purchase Agreement and the surrounding circumstances (George v Marshalls of MA, Inc., supra). The Agreement provided for Jericho to sell its 51% equity interest in Delta to Gamma for $26, 000 "plus [Gamma's] assumption of all liabilities of [Delta]." Gamma's assumption of Delta's contractual liabilities was, therefore, part of the purchase price. The Agreement also provided for Gamma to indemnify Jericho for "all manner of loss, suits, claims, demands, damages, debts, liabilities, obligations, costs, expenses, actions, or causes of action... arising out of, involving, or relating in any way to the operation of [Delta]" (emphasis added).

         Relying on Facilities Dev. Corp. v Miletta (180 A.D.2d 97, 102), Gamma contends that, when, as here, the indemnification agreement is between sophisticated business entities, it will not be construed as intending to indemnify either party for its own wrongdoing unless the language of the agreement clearly connotes an intent to provide for such indemnification. Gamma contends that the Equity Ownership Purchase Agreement does not so provide. The Agreement, however, provides for Gamma to indemnify Jericho for punitive damages and fines. Although an agreement to be indemnified against punitive damages is unenforceable as against public policy (Public Serv. Mut. Ins. Co. v Goldfarb, 53 ...


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