QUANTUM SERVICING CORPORATION v. FIRST MADISON SERVICES LLC LLC (2019)

The following papers CEF numbered as follows read on this motion by plaintiff Quantum Servicing Corporation for summary judgment on its complaint and on this cross motion by defendant First Madison Services LLC and defendant Clayton Holdings LLC for summary judgment dismissing the complaint against them.

Papers Numbered

Notice of Motion - Affidavits - Exhibits 24-28

Notice of Cross Motion - Affidavits - Exhibits 34-48

Answering Affidavits - Exhibits 56

Memoranda of Law 49

Statement of Material Facts 50

Response to Statement of Material Facts 51,54-55

Upon the foregoing papers, it is ordered that the motion by plaintiff Quantum Servicing Corporation (Quantum) for summary judgment on its complaint is denied. The cross-motion by defendant First Madison Services LLC and defendant Clayton Holdings LLC for summary judgment dismissing the complaint against them is granted.

I. The Facts

Defendant First Madison Services, LLC (Madison) owned plaintiff Quantum Servicing Corporation, which serviced mortgages. On September 16, 2013, Madison entered into a stock purchase agreement (SPA) whereby it agreed to sell all of the stock of Quantum to Rialto Capital Servicing, LLC. The SPA contained sections setting out circumstances under which the parties to the SPA could seek indemnification from each other. Relevant to the case at bar, Quantum had the right to seek indemnification from Madison for “Excluded Liabilities,” which encompassed legal claims against Quantum for events that arose prior to Rialto's acquisition of Quantum. Defendant Clayton Holdings, LLC guaranteed defendant Madison's obligation to indemnify Quantum.

As conditions to Madison's obligation to indemnify, the SPA required Quantum (1) to deliver a claim notice to the defendants, which, inter alia, described the basis for the claim, (2) to deliver the claim notice “promptly after [becoming] aware of the Third Party Claim and, in all events, no later than (A) within (30) days after receipt by the Indemnified Party of notice of such Third Party Claim․ provided, however, that no delay or failure on the part of the Indemnified Party in so notifying the Indemnifying Party will limit any liability or obligation for indemnification pursuant to this Article 10, except to the extent of any damage or liability caused by or arising out of such delay,” and (3) to allow the indemnifying party to “assume control of the defense of such Third Party Claim.” Section 10.3.3 of the SPA provided in relevant part: “Within twenty (20) days after delivery of such Claim Notice, the Indemnifying Party may, upon written notice thereof to the Indemnified Party assume control of the defense of such Third Party Claim․ If the Indemnifying Party does not, or is not permitted under the terms hereof to, so assume control of the defense of a Third Party Claim, the Indemnified Party will control such defense with counsel reasonably satisfactory to the Indemnifying Party ․”

On June 22, 2015, Conrad and Ceilia Traut gave a written notice of claim to Quantum concerning the servicing of their mortgage. Quantum did not inform the defendants of the claim. On September 21, 2015, the Trauts commenced an action in federal court in Massachusetts for wrongs allegedly committed by Quantum and others in the course of servicing their mortgage. On November 13, 2015, without informing the defendants, Quantum agreed with another defendant in the litigation, Rushmore Loan Management Services LLC, that Rushmore's attorneys would also represent Quantum. Shortly thereafter, Rushmore's attorney's filed a notice of appearance for Quantum. However, on October 23, 2017, Rushmore's attorneys advised Quantum that they could no longer represent the corporation due to a conflict of interest. Quantum hired new attorneys without consulting the defendants even though the SPA gave Madison the right to have “counsel reasonably” satisfactory to them, notwithstanding that the defendants did not assume control of the litigation outright.

Although the Trauts served Quantum with process on September 24, 2015, Quantum did not make the defendants aware of the litigation until October 25, 2017, twenty-five months later and approximately five months before the scheduled trial date and two months before the filing of any remaining dispositive motions in the Traut litigation. The plaintiffs in the Traut litigation were not deposed until January 5, 2018 and discovery did not end until January 9, 2018 yet Quantum did not provide the defendants with notice of the claim in the manner required by the SPA until March 5, 2018, thirty-two months after Quantum first learned of the Trauts' grievance. By the time that Madison received the claim notice: (1) other defendants had been dismissed from the Traut litigation, (2) there had been documentary disclosure and the taking of some depositions, (3) Quantum had unsuccessfully moved for summary judgment, (4) a trial date had been set, (5) trial documents had been filed, and (6) a settlement conference had been scheduled. The settlement conference occurred only four days after Madison received the claim notice. Madison rejected the notice of claim as untimely.

On March 9, 2018, counsel representing Quantum in the federal litigation informed the defendants by letter that the judge had set a 5:00 PM March 9, 2018 deadline for settlement discussions and a trial dated of March 12, 2018. On March 9, 2018, Quantum sent a letter to Madison informing the latter of the progress of settlement negotiations and then followed up with another letter to Madison, on the same date, announcing the settlement of the Traut claim. As of July 5, 2018, Quantum had incurred $162,839 in legal fees and costs in the defense of the Traut claim.

II. Discussion

Madison relies heavily on Conergics Corp. v. Dearborn Mid-W. Conveyor Co., (144 AD3d 516 [1st Dept. 2016]). Quantum takes that position that “Conergics, [w]hile [c]ontrolling, is not [d]ispositive.”

In Conergics Corp. v. Dearborn Mid-W. Conveyor Co., (supra), the seller of a corporation (Conergics) entered into a stock purchase agreement (SPA) with the buyer of the corporation (DMW) on November 3, 2007 and subsequently began an action against the latter for a judgment declaring that that it was not required to indemnify the buyer for certain tax losses. The buyer, alleging that the seller had breached the SPA by refusing to provide indemnification for the tax losses, counterclaimed for a declaratory judgment that the seller was obligated to provide it with indemnification. The dispute concerned a section of the SPA which provided in relevant part that “the Seller [Conergics] shall indemnify the Buyer [DMW] and hold the Buyer harmless from and against․ all Taxes of the Company [Dearborn] for all taxable periods, or portions thereof, ending on or before the Closing Date in excess of the amount of Taxes reflected in the determination of Net Working Capital ․”

In Conergics (supra), Section 8.1(c) of the SPA required a party seeking indemnification with respect to a tax audit to give the other party “ ‘prompt[ ]’ written notice of the commencement of such an audit, but further provides that ‘a failure to give such notice will not affect’ the asserted indemnification right ‘except to the extent that [the indemnifying party] is actually prejudiced thereby.’ ” Section 8.5(b) of the SPA provided in substance that the seller would have the “the sole right” to represent the sold company's interests in any audit, examination, or proceeding “by any Taxing Authority ('Tax Audit') with respect to taxable periods or portions thereof ending on or before the Closing Date.” Moreover, the SPA required the parties to “cooperate fully” with each other “in connection with any Tax Audit.”

On April 19, 2012, a Mexican tax authority (SAT) sent a letter to Dearborn announcing its determination to reopen the audit of Dearborn's 2004 tax year (the second audit). Neither DMW nor Dearborn provided Conergics with written notice of the second audit in the manner specified by section 13.8 of the SPA until January 24, 2014, twenty-one months after the defendants had received notice of the second audit from the SAT in April of 2012. Instead, Dearborn assumed its own defense of the second audit in the proceedings before the SAT and in court by commencing a proceeding in a Mexican federal court to dispute whether the tax authority had the constitutional authority to conduct the second audit. On November 19, 2013, the SAT issued an adverse determination, but DMW waited two months before sending Conergics a letter, dated January 24, 2014, giving notice of the second audit and demanding indemnification pursuant to the SPA. By letter dated January 30, 2014, an attorney for Conergics rejected the indemnification demand and refused to assume the defense of the second audit on the grounds that defendants' 21-month delay in giving notice had prejudiced Conergics by depriving it of its right to defend the audit under section 8.5(b) of the SPA. DMW continued the defense of the second audit, but without abandoning its claim for indemnification. The indemnification dispute was eventually added to others in a case already pending in the courts of New York State, and the indemnification dispute eventually reached the Appellate Division, First Department.

The Appellate Division stated early in its analysis of the case: “[D]efendants' failure to notify plaintiffs of the second audit until 21 months after it was commenced—a breach of the SPA's notice provision that, to reiterate, is not disputed on this appeal—relieves plaintiffs of their indemnity obligations with respect to the second audit only in the event plaintiffs establish that this breach caused them ‘actual[ ] prejudice[ ]’.” (Conergics Corp. v. Dearborn Mid-W. Conveyor Co., supra, 523,) “What we must determine,” the Appellate Court continued,” is the standard that plaintiffs must meet to demonstrate that the untimely notice of the second audit that they received caused them actual prejudice, and whether, on this record, that standard has been met.” (Conergics Corp. v. Dearborn Mid-W. Conveyor Co., supra, 523,) “We agree with plaintiffs” the Appellate Division stated further, “in view of their ‘sole right’ under the SPA to ‘control’ the defense of the second audit (expressly including the rights to choose counsel and to settle), plaintiffs need not establish ‘tangible economic injury’ to show that they have been actually prejudiced by the late notice. Rather, to establish actual prejudice due to late notice, it suffices for an indemnitor afforded the right to control the defense of an indemnifiable claim to show that it was deprived of its right to exercise that right for a material portion of the proceedings on the claim.” (Conergics Corp. v. Dearborn Mid-W. Conveyor Co., supra, 523—24.) “[W]e hold that such late notice actually prejudices the indemnitor when it results in a material deprivation of the indemnitor's right to control the defense of the claim․” (Conergics Corp. v. Dearborn Mid-W. Conveyor Co., supra, 527,)

As a second reason for its decision, the Appellate Division added: “An additional ground for relieving plaintiffs of their indemnity obligations with respect to the second audit—independent of defendants' failure to give timely notice—is that the deprivation of plaintiffs' ‘sole right’ to defend the audit for 21 months, until after the SAT had completed its review and rendered an adverse assessment, constituted a sufficiently material breach of the indemnity provisions of the SPA to excuse plaintiffs' duty to indemnify with respect to this audit.” (Conergics Corp. v. Dearborn Mid-W. Conveyor Co., supra, 530.)

The court agrees with the parties that Conergics is the controlling case although the wording of the Madison SPA, “except to the extent of any damage or liability caused or arising out of such delay,” is not the wording, “actually prejudiced, ” used in the Conergics SPA. As the attorney for Madison states in his memorandum of law dated August 7, 2018 (fn p 10): ” There is no material difference between the ‘actual[ly] prejudice[d]’ language used in the Conergics SPA and the ‘any damage’ language used in the parties' [to this action] SPA. Under both the Merriam-Webster dictionary and Black's Law Dictionary, prejudice is defined respectively as ‘injury or damage resulting from judgment or action of another in disregard to one's rights’ and ‘[d]amage or detriment to one's legal rights.’ (Emphasis added.) Also, as explained in Black's Law Dictionary, the singular ‘damage’ (as used in the SPA) “is to be distinguished from its plural ‘damages’ which means a compensation of money.” “Moreover, the court notes that the Madison SPA expresses an intent to include both the impairment of legal rights and the obligation to pay compensation from the use of two words, “damage” and “liability.”

The attorney for Quantum argues that “Conergics [w]hile [c]ontrolling is not [d]ispositive.” This court finds Conergics both controlling and dispositive. It is true that the Appellate Division did not establish a definite, fixed threshold which must be crossed for prejudice to occur, but stated instead “we need not define the lower limit of what would constitute a material deprivation of plaintiffs' ‘sole right’ to control the defense of the second audit․” (Conergics Corp. v. Dearborn Mid-W. Conveyor Co., supra, 528—29.) The Appellate Division simply found that the threshold had been crossed under the facts and circumstances of the case. Similarly, this court finds that Quantum crossed the threshold under the facts and circumstances of this case. The court notes in particular that Quantum did not provide the defendants with notice of the claim in the manner required by the SPA until March 5, 2018, thirty-two months after Quantum first learned of the Trauts' grievance. The Trauts began their federal action on September 21, 2015, and it remained pending until March 9, 2018, however, Quantum did not provide the defendants with notice of the claim in the manner required by the SPA until March 5, 2018, days before the case settled. Due to the long delay in providing Madison with notice of the Trauts' claim, Quantum deprived Madison of the opportunity to obtain an earlier, possibly more favorable, settlement and left the defendant with the consequences of actions not taken by Quantum, including but not limited to incurring $162,839 in legal fees and costs in defense of the Traut claim. There is no issue of fact in this case concerning whether Madison suffered damage because Madison, an indemnifying party afforded the right to control the defense of an indemnifiable claim, established as a matter of law that “it was deprived of its right to exercise that right for a material portion of the proceedings on the claim.”(Conergics Corp. v. Dearborn Mid-W. Conveyor Co., supra, 523-524.)

Quantum did not successfully distinguish Conergics and instead relies on cases that are inapposite. For example, CIH Int'l Holdings, LLC v. BT United States, LLC, (821 F. Supp. 2d 604[S.D.NY 2011]) decided approximately five years before Conergics, is inconsistent with the Appellate Division case, because it requires an allegation of tangible economic injury: “CIH fails to allege that it suffered any ‘tangible economic injury’ as a result of the allegedly delayed notice.” (CIH Int'l Holdings, LLC v. BT United States, LLC, supra. 613.)

There are no issues of fact to be tried in this case, and Madison, not Quantum, successfully demonstrated its entitlement to summary judgment. (See Alvarez v. Prospect Hospital, 68 NY2d 320.)

Accordingly, plaintiff's motion for summary judgment is denied and defendants' cross motion for summary judgment is granted.

This is the decision and order of the Court.

Joseph Risi, J.