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Contractual Indemnification: Cohen v. Trump Organization LLC

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  • Posted on: Nov 16 2022

By: Jeffrey M. Haber

As a general matter, indemnity is defined to encompass a duty to make good on any loss, damage, or liability incurred by another. Therefore, when a person agrees to indemnify another, he or she agrees to hold the other person harmless for some loss or damage. 

Indemnification “may be based upon an express contract,” though it is “more commonly” implied “based upon the law’s notion of what is fair and proper as between the parties.”1 Where the right to indemnification is based upon a written agreement, the specific language of the contract controls.2 

Under the well-settled rules of contract interpretation, courts must construe contracts so as to give full meaning and effect to all their material provisions.3 A contract should not be construed so as to render any portion of it meaningless.4 In addition, a contract should be read as a whole and, whenever possible, interpreted to give effect to its general purpose.5 Therefore, under the foregoing rules, 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 facts and circumstances.6 

The foregoing principles were examined in Cohen v. Trump Organization LLC, 2022 N.Y. Slip Op. 06421 (1st Dept. Nov. 15, 2022) (here).

In Cohen, the issue before the Court was whether Plaintiff, Michael D. Cohen (“Plaintiff”), was entitled to indemnification from his former employer, Defendant, Trump Organization LLC (the “Trump Organization” or “Defendant”), for the legal fees and expenses he incurred in connection with the lawsuits and investigations targeting the former President’s campaign and business dealings. Plaintiff maintained that Defendant promised to cover those legal expenses but reneged after it became clear that Plaintiff would cooperate in the ongoing investigations, leaving him with “millions of dollars” in unpaid legal bills.

Plaintiff’s claim for indemnification was based upon both oral and written agreements. In that regard, Plaintiff asserted a claim for breach of contract based on alleged oral commitments from the Trump Organization, as well as the Trump Organization’s written Operating Agreement.

The motion court held that the alleged oral agreements were unenforceable because the operating agreement contained a “no oral modification” clause. Under New York law, “where a contract contains a ‘no oral modification’ clause, that clause will be enforceable”.7 

The motion court noted that the operating Agreement “was in effect … at all times relevant to [Plaintiff’s] claims for indemnification”. The only evidence of the oral agreements, said the motion court, was Plaintiff’s testimony about the alleged promises between the parties. Since “the only proof of an alleged agreement to deviate from a written contract [was] the oral exchanges between the parties, the writing control[ed]”.8 

Therefore, concluded the motion court, because the alleged oral agreements were unenforceable, the court had to look to the operating agreement to determine the scope of Defendant’s duty to indemnify Plaintiff.

Under Section 7.2 of the operating agreement, Defendant agreed to indemnify employees of the Trump Organization under specified conditions. In pertinent part, the section provided: 

[E]ach person (an “Indemnified Person”) who was or is made a party or is threatened to be made a party to or is involved in any threatened, pending or completed claim, action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative (“Proceeding”), or any appeal in a Proceeding, or any inquiry or investigation that could lead to a Proceeding, by reason of the fact that he is the Member, or he, she or it was or is the legal representative of or a manager, director, officer, partner, venture, proprietor, trustee, employee, agent or similar functionary of the Company or of the Member, shall be indemnified by the Company against judgments, penalties (including excise and similar taxes and punitive damages), fines, settlements, and reasonable costs and expenses (including, without limitation, attorneys’ fees) actually incurred by such Indemnified Person in connection with a Proceeding ….

In addition, Section 7.3 of the agreement provided that the right to indemnification under Section 7.2 would “continue as to a person who has ceased to serve in the capacity which initially entitled such person to indemnity”.

As to legal expenses related to the search warrants executed as part of the criminal investigation against Plaintiff, the motion court held that Defendant had not obligation to indemnify under Section 7.2. The court found that the fees related to the search warrants were bound up in the criminal investigation against Plaintiff.

The motion court held that Section 7.2 did not allow for indemnification in connection with the Mueller Investigation. The motion court found that Plaintiff did not become “involved in” the investigation “by reason of the fact that he . . . was . . . [an] employee” of the Trump Organization.9 

Here, the tether from the Mueller Investigation to the Trump Organization – as opposed to former President Trump, the Trump campaign, or other Trump ventures – is too tenuous to support indemnification under section 7.2. Based on the record before the Court, the subject matter of the various investigations appears to relate mainly, if not entirely, to former President Trump personally, or the Trump campaign, or to the Trump Foundation.

The motion court noted that Plaintiff failed to “tender evidence showing that his involvement in the Mueller Investigation relate[d] directly to his capacity as a Trump Organization employee, rather than his role more generally in the Trump orbit.” “It is not enough to argue,” said the motion court, “that but for his employment at the Trump Organization, Plaintiff would not have known some of the information that made him a target – and, later, a cooperator – in the investigation.” The motion court found that such “reasoning sweeps too broadly, permitting corporate indemnification even where it is not tied to actions on behalf of the corporation.” Consequently, the motion court concluded that the “Operating Agreement only compels Defendant to indemnify Plaintiff with regard to the business of the Trump Organization. And Plaintiff has not tendered evidence to show this connection.”

Finally, the motion court held that the “reasoning above also foreclose[d] Plaintiff’s claim for indemnification in connection with the five Congressional Investigations.” The court observed that since Plaintiff confessed that his testimony before Congress was perjurious, Plaintiff was not entitled to the reimbursement of legal fees in connection therewith.10 And, since Plaintiff’s involvement in these investigations was not entwined with his service to the Trump Organization, indemnification was unavailable. 

On appeal, the Appellate Division, First Department unanimously modified the motion court’s holding related Plaintiff’s first cause of action for breach of the contractual indemnification provision of the operating agreement – i.e., Plaintiff’s request for the indemnification of outstanding legal fees incurred in connection with the Special Counsel and Congressional hearings, New York State Attorney General, and Manhattan District Attorney proceedings, and the proceeding related to FBI search warrants. 

The Court held that Plaintiff’s “claim for outstanding legal fees incurred in connection with the Special Counsel and Congressional hearings and New York State Attorney General and Manhattan District Attorney proceedings should not have been dismissed based on the finding that those fees were not, as a matter of law, incurred by reason of the fact that he had been an employee of defendant.”11 The Court disagreed with the motion court’s “strict[ ] [construction  of] the indemnification provision and conclu[sion] that plaintiff did not become involved in the investigations by reason of the fact that he was an employee of the Trump Organization, since ‘the tether’ from those investigations to the Trump Organization, as opposed to former President Trump, the Trump campaign, or other Trump ventures, [was not] too tenuous to support indemnification under section 7.2.”12 The Court found “that, given the record evidence showing that the proceedings at issue concern[ed], among other things, the activities of the Trump Organization, material issues of fact exist[ed] as to whether plaintiff ha[d] established the ‘nexus or causal connection’ between the proceedings and his corporate capacity sufficient to give rise to the section 7.2 indemnification obligation for the fees incurred”.13 

The Court further held that the motion court correctly rejected Defendant’s other arguments for dismissing the claim for indemnification under Section 7.2.

“Likewise”, said the Court, “claims for legal fees incurred in connection with the proceeding related to FBI search warrants used in the April 9, 2018, raids should not have been dismissed since there [were] issues of fact as to whether the fees were incurred in reviewing the materials for privilege and confidentiality concerns of the Trump Organization and its executives.”14

Finally, the Court held that “[i]ssues of fact … preclude[d] summary dismissal of the indemnification claim based on defendant’s alleged oral agreements.”15 Plaintiff claimed that Defendant made oral commitments to indemnify him for fees incurred in connection with the Special Counsel and Congressional proceedings that were separate and distinct from Section 7.2 of the operating agreement. The Court agreed with Plaintiff that the oral agreements modified Section 7.2 of the operating agreement and, therefore, “would apply regardless of the applicability of section 7.2”.16

Takeaway

Contractual indemnification “requires a clear expression or implication, from the language and purpose of the agreement as well as the surrounding facts and circumstances, of an intention to indemnify.”17 Customary rules of contract interpretation are used to determine an intent to indemnify. In Cohen, the language of the operating agreement was critical to the finding that there were issues of fact precluding dismissal of Plaintiff’s claim for indemnification. In particular, the Court focused on, among other things, the “by reason of” clause of Section 7.2 of the operating agreement. As discussed, that clause served as a precondition for indemnification – it required a nexus between the underlying proceedings and the employee acting in his or her capacity as employee before indemnification would be made. Cohen is also instructive in its refusal to interpret a contract provision too broadly or too narrowly. In the former, the Court did not read Section 7.2 so broadly as to ensnare any promise to indemnify within its ambit. As discussed, oral promises that were separate from the written obligation could stand alone as agreements that could be breached. Similarly, the Court cautioned against reading Section 7.2 to narrowly to exclude activities that could fall within that provision’s reach. 


Footnotes

  1. Mas v. Two Bridges Assocs., 75 N.Y.2d 680, 690 (1990) (internal citations omitted).
  2. Roldan v. New York Univ., 81 A.D.3d 625, 628 (2d Dept. 2011).
  3. Beal Sav. Bank v. Sommer, 8 N.Y.3d 318, 323 (2007).
  4. Id.
  5. Id. (citing, Matter of Westmoreland Coal Co. v. Entech, Inc., 100 N.Y.2d 352, 358 (2003)).
  6. See Roldan, 81 A.D.3d at 628 (citing, Hooper Assoc. v. AGS Computers, 74 N.Y.2d 487, 491-492 (1989)); 905 5th Assoc., Inc. v. Weintraub, 85 A.D.3d 667, 668 (1st Dept. 2011) (indemnification provisions “must be strictly construed so as to avoid reading unintended duties into them”).
  7. Israel v. Chabra, 12 N.Y.3d 158, 163 (2009) (citing, N.Y. Gen. Obligations Law §15-301(1)).
  8. Rose v. Spa Realty Assocs., 42 N.Y.2d 338, 343 (1977); Eujoy Realty Corp. v. Van Wagner Communications, LLC, 22 N.Y.3d 413, 425 (2013).
  9. 546-552 W. 146th St. LLC v Arfa, 99 A.D.3d 117, 122 (1st Dept 2012) (where “a party is under no legal duty to indemnify, a contract assuming that obligation must be strictly construed to avoid reading into it a duty which the parties did not intend to be assumed”).
  10. See N.Y. LLC Law §420 (prohibiting indemnification to any person “if a judgment … adverse to such … person establishes (a) that his … acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated[.]”); see also Operating Agreement § 7.2 (requiring “such Indemnified Person [have] acted in good faith”).
  11. Slip Op. at *1.
  12. Id.
  13. Homestore, Inc. v. Tafeen, 888 A.2d 204, 213-214 (Del. 2005); see Crossroads ABL LLC v. Canaras Capital Mgt., LLC, 105 A.D.3d 645 (1st Dept. 2013); Schlossberg v. Schwartz, 43 Misc. 3d 1224(A), 2014 N.Y. Slip Op. 50760(U), *13 (Sup. Ct., Nassau County 2014)).
  14. Slip Op. at *1-*2.
  15. Id. at *2.
  16. Id.
  17. Martins v. Little 40 Worth Assocs., Inc., 72 A.D.3d 483, 484 (1st Dept. 2010) (quoting, Drzewinski v. Atlantic Scaffold & Ladder Co., 70 N.Y.2d 774, 777 (1987)).

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

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