Article

Factual Summary: To assure payment of three longterm purchase notes totaling US$105 million delivered in exchange for the sale of a poultry farm, Buyer applied for a US$150,723,202.38 LC to be issued in favor of Seller/Beneficiary. Affiliated Company guaranteed reimbursement to Issuer.

The Credit Agreement between the Issuer and Applicant provided that:

The Borrower shall indemnify each Agent, the Issuing Bank and each Lender, and each Related Party of any of the foregoing (each, an 'Indemnitee') against, and hold each of them harmless from, any and all costs, losses, liabilities, claims damages and related expenses, including the fees, charges and disbursements of any counsel for any Indemnitee, which may be incurred by or asserted against any Indemnitee arising out of, in connection with or as a result of (i) the execution or delivery of this Agreement or any other agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder or the consummation of any of the transactions contemplated hereby, (ii) any Loan or Letter of Credit or any actual or proposed use of the proceeds therefrom (including any refusal by the Issuing Bank to honor a demand for payment under the Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of the Letter of Credit), (iii) any actual or alleged presence or release of Hazardous Materials on or from any property owned by the Borrower or any Subsidiary or any Environmental Liability related in any way to the Borrower or any Subsidiary of (iv) any actual or prospective claim, litigation, investigation or proceeding related to any of the foregoing, whether based on contract, tort, or any other theory and regardless of whether any Indemnitee is a party thereto; provided, that the Borrower shall not be obligated to indemnify any Indemnitee for any of the foregoing arising out of such Indemnitee's gross negligence or willful misconduct as determined by a court of competent jurisdiction in a final and nonappealable judgment.

The Agreement also provided that:

[Issuer] only expects indemnification from [Applicant] if it is determined that [Issuer] committed no wrong. In fact, the indemnification provision clearly states that [Applicant] are not obligated to indemnify [Issuer] for damages which arise from [Issuer]'s own 'gross negligence or willful misconduct.' The issue of whether the indemnification would be enforceable as an exculpatory clause is not, and will not be, an issue in this case.

Subsequently, as alleged in the Complaint, Issuer attempted "to transfer beneficial ownership of the Letter of Credit to itself".

Applicant and Guarantor sued Issuer for breach of contract in the California state courts. It was also alleged that Issuer "disclosed confidential information[,] ... entered into dealings with [Beneficiary] relating to the same transaction[, and] ... agreed to advance monies to [Beneficiary] in exchange for [Beneficiary's] agreement to transfer beneficial ownership of the Letter of Credit to [Issuer], along with a portion of the Notes ... [in] violation [of] the express terms of the Letter of Credit and [Issuer's] obligations to plaintiffs ... ."

Applicant and Guarantor sought to be excused from paying all fees and "to remove [Issuer] as the 'Administrative Agent and Collateral Agent under the Credit Agreement,' to recover damages 'not less than $16 million,' to recover 'attorneys' fees and costs'". Issuer removed the action to the federal courts in California and filed a counterclaim to recover "'any and all costs, losses, liabilities, claims, damages, and expenses, which [Issuer] has incurred or will incur directly or indirectly by reasons of this action or the claims set forth in the Complaint'" on the theory that Applicant had agreed to indemnify Issuer in the Credit Agreement and that Guarantor had guaranteed all of Applicant's obligations and liabilities. Applicant and 290 Guarantor moved to dismiss the counterclaim. The court applied New York law which was selected as the applicable law in the Agreement. After oral argument, the trial court granted the motion and dismissed the counterclaim.

Legal Analysis:

1. Indemnity; Reimbursement Agreement, Attorney's Fees: New York law provides that an agreement to indemnify another for attorney's fees Issuer argued that coverage under the Agreement extended to any liability with the exception of Issuer's gross negligence or willful misconduct. Applicant argued that the agreement provided for indemnity in the event of claims by third parties and not in the event of litigation between the parties to the Agreement. The court noted that under New York law provisions for attorney's fees must be "unmistakably clear" in intra-party litigation arising from breach of contract disputes, citing Hooper Assoc., Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487, 492, 548 N.E.2d 903, 905, 549 N.Y.S.2d 365, 367 (1989).

Issuer argued that "indemnification for attorney's fees may be authorized, even without 'unmistakably clear' language, if the intent is 'manifest from the surrounding facts and circumstances or purpose of the agreement,' relying on Hooper." Noting that Hooper applied where there was a potential for application of the indemnity to third party actions, the court indicated that the Agreement could be read to apply to third party actions. The court recognized the general policy of the New York courts not to extend indemnity provisions, and concluded that the general language in the Agreement such as the reference to "'any breach' is not specific enough to allow the court to infer that the parties intended the indemnification of 'counsel fees in an action on the contract'", quoting from Bourne Co. v. MPL Communications, Inc., 751 F. Supp. 55, 57-58 (S.D.N.Y. 1990) which, in turn, quoted from Hooper.

Comment:

There is no doubt that the bank expected to be covered for attorney's fees in an action between the parties. There is also no doubt that this expectation was not "unmistakably clear" within the New York standard. One wonders how many reimbursement agreements that come within New York law would meet this test.

[JEB/jnh]

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