Breed, Abbott & Morgan v. Hulko

OPINION OF THE COURT

Sandler, J.

The complaint, whose allegations are necessarily accepted as true on this appeal from an order granting defendant’s motion pursuant to CPLR 3211 (a) (7) to dismiss for legal insufficiency, alleges that defendant R. Lee Hulko (Hulko) entered into a contract for the purchase of certain real property. Paragraph 39 of the contract designated plaintiff, Breed, Abbott & Morgan (Breed, Abbott) as escrowee of Hulko’s $82,500 down payment and provided, inter alia, that the down payment was to be delivered to the sellers in the event of a default by Hulko.

The contract contained the following provision, central to the issue on this appeal, relating to Breed, Abbott’s liability and its right to indemnification as escrowee: "The escrowee shall not be liable to either of the parties for any act or omission except for bad faith or gross negligence, and the parties hereby indemnify the escrowee and hold the escrowee harmless from any claims, damages, losses or expenses arising in connection herewith.”

The complaint alleges that Hulko defaulted by failing to appear at the scheduled closing, and that, in accordance with the terms of the contract, Breed, Abbott delivered Hulko’s down payment to the sellers. Thereafter Hulko sued Breed, Abbott in the Supreme Court, New York County, claiming that Breed, Abbott’s release to the sellers of his escrow down payment was wrongful. The trial of the action resulted in a judgment in favor of Breed, Abbott dismissing Hulko’s complaint. That judgment was based, in pertinent part, on a determination that Hulko had defaulted under the contract by failing to appear at the scheduled closing, and that Breed, Abbott had acted neither in bad faith nor with gross negligence in releasing the escrow funds.

In this action, Breed, Abbott seeks to recover the expenses it incurred in connection with the defense of Hulko’s claim. Since Breed, Abbott received costs and disbursements in connection with the judgment entered in its favor, it is clear that the expenses here sought to be recovered are the legal expenses it incurred in defending against Hulko’s action.

In the order appealed from, the I.A.S. court granted Hulko’s motion pursuant to CPLR 3211 (a) (7) to dismiss for failure to state a cause of action. The court concluded that the plaintiff could not recover its legal expenses under the indemnification clause because the clause did not explicitly state that counsel fees were included. We disagree, and accordingly would reverse the order appealed from and deny defendant’s motion to dismiss.

The general rule is of course well established that the successful party in a lawsuit may not recover attorney’s fees from the losing party unless such an award is authorized "by agreement between the parties or by statute or court rule”. (Matter of A.G. Ship Maintenance Corp. v Lezak, 69 NY2d 1, 5; see also, City of Buffalo v Clement Co., 28 NY2d 241, 262-263; Mighty Midgets v Centennial Ins. Co., 47 NY2d 12, 21-22.)

The question presented is whether in the indemnification provision quoted above Hulko agreed to indemnify Breed, Abbott for the legal expenses it incurred under the circumstances that occurred. Applying the normal rules of construction of a contract, it would appear indisputably clear that the broad provisions of the indemnification agreement included the right of Breed, Abbott to recover the legal expenses incurred in defending a lawsuit by one of the parties to the contract that resulted in a determination that Breed, Abbott had acted appropriately in accordance with its contractual responsibilities.

The critical language appears in a single sentence, which has two separate parts, each linked to the other, and clearly intended to be read together. In the first part of the sentence, the parties agreed that the escrowee shall not be liable to either for an act or omission except for bad faith or gross negligence. Having carefully defined the circumstances under which the escrowee could be liable to the parties, the clause went on to state that "the parties hereby indemnify the escrowee and hold the escrowee harmless from any claims, damages, losses or expenses arising in connection herewith.” If this broadly phrased agreement to indemnify did not include legal expenses incurred in defending against an action by one of the parties alleging misconduct by the escrowee which resulted in a determination in favor of the escrowee, it is difficult, if not impossible, to ascertain for what it was that the parties had agreed to indemnify the escrowee.

In an able brief, defendant did not even begin to suggest a plausible alternative meaning, nor does the dissenting opinion. Since the relevant clause was addressed to defining the limited circumstances under which the escrowee would be liable to the parties, it is manifestly untenable to construe the agreement to indemnify as addressed exclusively to actions against the escrowee by third parties. Indeed, it may be open to question, although we need not decide the question, whether the agreement to indemnify embraced actions by third parties since such actions were explicitly addressed in a separate part of the agreement and the clause appears to be addressed to the relationship between the parties and the escrowee.

Ultimately the defendant’s position rests on the thesis that the normal rules of contract construction are here inapplicable, and that, no matter how clear the meaning of the clause, broad indemnification clauses are to be construed as embracing litigation expenses only where such a term is specifically used. We have been unable to find any support whatever in the decided cases for this view, nor does there appear to be any principled reason for excepting or excluding a clause of this kind from the normal rules of contractual construction. Indeed, the controlling rule of law is unmistakably to the contrary, as was clearly pointed out some years ago by one of this country’s most distinguished Judges in words that are as valid today as when they were first written. In Artvale, Inc. v Rugby Fabrics Corp. (363 F2d 1002, 1008 [2d Cir 1966]), Judge Friendly said, "[w]e find nothing in the New York decisions to indicate that if a contract ought fairly to be construed as covering such reimbursement [reimbursement for counsel fees], the provision would not be given effect.”

Consistent with this statement of New York law, there is a long, uninterrupted line of decisions which have interpreted broadly worded indemnification clauses as embracing the right to reimbursement for counsel fees. (See, Tyng v American Sur. Co., 174 NY 166; Johnson v General Mut. Ins. Co., 24 NY2d 42; Owens v Palm Tree Nursing Home, 89 AD2d 619; Lavorato v Bethlehem Steel Corp., 91 AD2d 1184; Matter of Campbell, 176 Misc 543; Colon v Automatic Retailers Assn. Serv., 74 Misc 2d 478; Zissu v Bear, Stearns & Co., 627 F Supp 687, affd 805 F2d 75, 79, 80 [2d Cir 1986].)

Confronted with this overwhelming body of authority, defendant argues that the rule promulgated in them applies only where the indemnification clause relates to actions by third parties (but see, Tyng v American Sur. Co., supra; Zissu v Bear, Stearns & Co., supra), and that somehow a different rule applies where the promise to indemnify is sought to be applied to recover legal expenses incurred in defending against an action brought by the promisor itself. No plausible reason for such a distinction has been presented. Indeed, it is a curious notion that a broad indemnification clause will be interpreted to embrace counsel fees, though that term is not specified, where the action is brought by third parties, but will not be so interpreted where the action is brought by the promisor. One would have thought the latter situation, the one presented here, an even stronger one for construing the agreement in accordance with its obvious meaning.

In support of the dubious distinction he urges, defendant has cited two Trial Term decisions, Robbins v Melbrook Realty Co. (28 Misc 2d 1076 [Sup Ct 1961]) and Gorman v Kings Mercantile Co. (36 Misc 2d 38 [Sup Ct 1962]). Analysis of these decisions immediately discloses that the first decided of the cases relied upon by defendant (Robbins v Melbrook Realty Co., supra), which was in turn relied upon by the later decided case, provides no support whatever for defendant’s position, and in fact is quite consistent with the long line of authority referred to above. Robbins involved an action against a bonding company and its principal on a performance bond, which indeed contained broad language comparable to that presented in this case. In concluding that the bond did not permit recovery of counsel fees, the court relied on out-of-State cases involving actions on performance bonds, which opinions significantly noted that such bonds take the form of an ordinary suretyship as opposed to one of indemnity. On the basis of that distinction, the court decisions relied upon in Robbins concluded that since the surety’s principal had assumed no obligation to reimburse for counsel fees, the surety’s liability could be no greater. In the second case relied on by defendant (Gorman v Kings Mercantile Co., supra), apart from the fact that the court incorrectly relied on Robbins in a case not involving a performance bond, it is clear that the language presented in Gorman, significantly different from that presented here, could reasonably have been construed under the circumstances presented as not intended to embrace litigation expenses.

On the basis of the authorities set forth above, it is clear that broad indemnification agreements will be interpreted as embracing litigation expenses where that meaning clearly appears from the clause on application of the usual criteria for construing contracts, even though such a term does not specifically appear in the agreement. It is equally clear that the broad indemnification clause at issue here, clearly embraced, and was intended to embrace, litigation expenses.

As we understand the analysis set forth in the dissenting opinion, it rests on the supposition that it was unlikely that a party to the transaction would have agreed to indemnify the escrowee for litigation expenses incurred in a lawsuit commenced by the other party, from which the conclusion is drawn that the parties did not intend the clause with which we are concerned to embrace litigation expenses. In our opinion, it is not at all difficult to believe that parties to such a transaction would assume that obligation. What is far more difficult to believe is that a respected law firm would accept the responsibilities of an escrowee, with the inherent risk that a good-faith discharge of those responsibilities might give rise to an unjustified lawsuit by an aggrieved party, without a firm promise that it would be protected against the heavy financial detriment inherent in defending against such a lawsuit.

The approach taken in the dissenting opinion misconceives in a fundamental way the central importance of escrow arrangements to those who have entered into an agreement for the sale of real property. The opinion appears to treat the escrow arrangement as a mere convenience, of little importance, and one that the parties could just as well do without. But, in reality, it is critically important to the consummation of the kind of agreement to sell real property into which the defendant and seller entered, that there be a trustworthy escrowee with the powers and responsibilities that were assigned the escrowee here. As between the parties to the underlying agreement, who have a compelling interest in the successful fulfillment of the agreement into which they have presumably entered in good faith, and the escrowee, it surely makes more sense for the burden of litigation expenses incurred by the escrowee in defending against an unjustified action by one of the parties to the agreement to be borne by the parties themselves rather than by the escrowee.

The dissenting opinion goes on to contend that if the defendant here were found responsible for the litigation expenses incurred by the plaintiffs in the action commenced by the defendant, it would be entitled to indemnification for half of those expenses from the other party, the client of the plaintiff law firm. With respect, this seems to us an unrealistic interpretation of the consequences that would follow from construing the indemnification clause to embrace litigation expenses. We should have supposed that common sense and familiar, universally accepted indemnification principles would make it undisputably clear that as between the two parties to the transaction, the ultimate responsibility for indemnification of litigation expenses would rest on the party whose unjustified lawsuit gave rise to those expenses.

As already observed, the dissenting opinion, although rejecting the construction of the relevant clause set forth here, does not undertake to present an alternative interpretation. This is understandable. It is not easy to find an alternative construction that is consistent with the language of the clause and the realities of the situation. Let us consider some possible alternative constructions.

Is it possible that the clause should be construed as limited to indemnification of expenses incurred in defending against actions by third parties although no such limiting language appears in the clause and it commenced with a limiting definition of the liabilities of the escrowee to the parties? If so, does the clause indemnify the escrowee for litigation expenses incurred in actions brought by third parties? Alternatively, does the clause indemnify the escrowee against both lawsuits by third parties and lawsuits by one of the signatories, but only indemnifies the escrowee against litigation expenses incurred in actions by third parties and not in an action by one of the parties to the transaction? If so, what language provides the basis for such differential treatment? Or are we to believe that the clause indemnifies the escrowee against losses and expenses in actions both by third parties and by one of the parties to the transaction, but does not in either situation embrace litigation expenses? If so, what expenses were intended to be embraced in the indemnification clause? The reality is that there is no alternative construction of the clause that makes any sense whatever. The absence of any plausible alternative construction confirms the conclusion that the clause embraced a commitment by the parties to indemnify the escrowee against litigation expenses where it was determined that the escrowee had acted in good faith and without gross negligence.

We also disagree with the implicit criticism in the dissenting opinion of the escrowee for not "simply retaining] the down payment or depositing] it in court * * * thereby avoiding all prospect of liability.” These options were made available to the escrowee in the agreement, but surely these risk-free options were intended to be utilized only in a situation in which the escrowee was in genuine doubt as to the merits of the issue presented, and were not designed as a refuge behind which the escrowee could hide to avoid acting in accordance with its honest evaluation of the situation.

The message to escrowees implicit in this aspect of the dissenting opinion does not seem a constructive one. If provisions of the kind referred to were intended to be used by escrowees to avoid acting in accordance with their honest, good-faith judgment, it would be difficult to understand what appropriate purpose is served by vesting an escrowee with the powers and responsibilities that were vested in this agreement, and which are commonly encountered in escrow arrangements.

Accordingly, the order of the Supreme Court, New York County (Bruce McM. Wright, J.), entered August 14, 1986, which dismissed plaintiffs action to recover previously incurred litigation expenses for failure to state a cause of action, should be reversed, on the law, with costs, and the motion to dismiss should be denied.