Contribution and Indemnity: Court Rejects Claims for Both

• Posted on: Oct 15 2018

The distinction between common-law indemnification and contribution is important, though its application is often difficult to navigate. Glaser v. Fortunoff, 71 N.Y.2d 643, 646 (1988) (noting, “the distinction [between the concepts] is … critical,” although “the proper characterization of third-party claims … often cause[s] confusion.”).

Generally speaking, indemnity and contribution sort out the degree of culpability of multiple defendants and their responsibility for the payment of damages to the plaintiff. In the “classic indemnification case,” the one seeking indemnification “had committed no wrong, but by virtue of some relationship with the tort-feasor or obligation imposed by law, was nevertheless held liable to the injured party.” D’Ambrosio v. City of New York, 55 N.Y.2d 454, 461 (1982). Thus, “where one is held liable solely on account of the negligence of another, indemnification, not contribution, principles apply to shift the entire liability to the one who was negligent.” Id. at 462.

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.” Mas v. Two Bridges Assocs., 75 N.Y.2d 680, 690 (1990) (internal citations omitted). “[T]he key element of a common-law cause of action for indemnification is not a duty running from the indemnitor to the injured party, but rather is a separate duty owed the indenmitee by the indemnitor. The duty that foms the basis for the liability arises from the principle that every one is responsible for the consequences of his own negligence, and if another person has been compelled to pay the damages which ought to have been paid by the wrongdoer, they may be recovered from him.” Raquet v. Braun, 90 N.Y.2d 177, 183 (1997) (internal quotation marks, citations, and ellipsis omitted.)

“[W]here a party is held liable at least partially because of its own negligence, contribution against other culpable tort-feasors is the only available remedy.” Glaser, 71 N.Y.2d at 646.  “[I]n contribution, the tort-feasors responsible for plaintiffs loss share liability for it …. [T]heir common liability to plaintiff is apportioned and each tort-feasor pays his ratable part of the loss.” Mas, 75 N.Y.2d at 689-690 (internal citation omitted). Under Article 14 of the Civil Practice Law and Rules (“CPLR”), “[t]he ‘critical requirement’ for apportionment by contribution … is that the breach of duty by the contributing party must have had a part in causing or augmenting the injury for which contribution is sought.” Raquet, 90 N.Y.2d at 183 (citations omitted).

Contribution can be sought in a separate action or by asserting a cross-claim, counterclaim or third-party claim in a pending action. Consequently, if a defendant is found liable, he/she may seek contribution from a third party who is not a named party to the original action.

General Obligations Law (“GOL”) § 15-108 governs what happens when one of several tortfeasors obtains a release from liability. A settlement, or release, by one tortfeasor does not relieve the others from liability, but it does reduce the amount that can be recovered from them “by (1) the amount stipulated by the settlement, (2) the amount of consideration paid for it, or (3) the released tortfeasor’s equitable share of the damages, whichever is greatest.” Gonzales v. Armac Indus., 81 N.Y.2d 1, 6 (1993) (citing GOL§ 15-108 (a)). “The settling tortfeasor is relieved from liability to any other person for contribution but, in exchange, is not entitled to obtain contribution from any other tortfeasor. Id. (citing GOL § 15-108 (b), (c)). “Thus, the statute establishes a quid pro quo arrangement: the settlor limits its liability but in exchange forfeits any right to contribution.” Id. Any payment or settlement prior to judgment is a voluntary payment; however, a tortfeasor who settles after judgment is not a volunteer. Id.

In addition, the bar on contribution under GOL §15-108 can be waived as a part of the settlement. See Mitchell v. New York Hosp., 61 NY 2d 208, 216-17 (1984) (holding contribution was not barred where settlement was subject to stipulation that settling defendant preserved the right to contribution against third-party defendants).

Recently, some of these principles were considered by Justice Marcy Friedman of the Supreme Court, New York County, Commercial Division, in Foremost Contr. & Bldg., LLC v Go Cat Go, LLC, 2018 N.Y. Slip Op. 32381(U) (here).

Foremost arose out of the construction of a condominium project (the “Project”) located in New York City (the “Property”). Foremost Contracting & Building, LLC (“Foremost”), a contractor and the plaintiff in the main action, brought suit against the defendants/third-party plaintiffs Go Cat Go, LLC (“Go Cat Go”), 87 Leonard Development LLC (“87 Leonard Development”), Anthony C. Marano, and Anthony M. Marano (collectively, the “Developer Defendants”) to recover its unpaid fees for the Project. Foremost claimed unjust enrichment, breach of trust and creditor fraud against the Developer Defendants, and breach of contract against Go Cat Go and 87 Leonard Development, based upon allegations that Go Cat Go failed to pay the amounts due and owing under the agreement between them, and that 87 Leonard Development was a third-party beneficiary of the contract as the record owner of the Property.

In the third-party action, the Developer Defendants sought common law indemnification and common law contribution from the third-party defendant, German American Capital Corporation (“German American Capital”), a lender of funds for the Project.

German American Capital moved to dismiss the amended third-party complaint in its entirety on the grounds that the Developer Defendants’ claims were barred by res judicata and, in the alternative, failed to state a cause of action. The Court granted the motion.

First, the Court rejected the claim for common-law indemnification, noting that there was no authority supporting the argument advanced by the Developer Defendants – i.e., that a lender is obligated by statute or common law to compensate a contractor for its work after a lender forecloses on a loan made to finance a construction project.

Second, the Court found that the third-party defendants failed to allege a cognizable claim for contribution because Foremost did not allege “a viable tort” against the Developer Defendants.

In opposing German American Capital’s motion, the developer defendants argued that Foremost pleaded tort causes of action against them for breach of trust, defrauding creditors, and breach of fiduciary duty, in connection with the sale of the Property. As the developer defendants acknowledged at the oral argument, Foremost’s pleading was predicated on the allegation that 87 Leonard Development was the owner of the premises at the time the Property was sold. This allegation was, however, based on a mistake of fact as to the ownership, as it was German American Capital that owned and sold the Property. Significantly also, the amended third-party complaint fails to plead a viable tort against German American Capital. As noted above, the decision of the prior action against German American Capital held that the foreclosure was not wrongful.

Takeaway

In contribution, the loss is allocated among tortfeasors by requiring them to pay a proportionate share of the loss to one who has discharged their joint liability, while in indemnity the party held legally liable shifts the entire loss to another. Foremost makes clear that to avail oneself of either cause of action, the facts must support the claim.  While this point seems obvious, it was enough to warrant dismissal of the third-party complaint by the Foremost court.

Tagged with: Business Litigation, Commercial Litigation, Contribution, Indemnification