Opinion
01 Civ. 8986 (HB)
March 20, 2002
OPINION ORDER
Defendant Integrated Fund Services, Inc. ("Integrated," formerly Countrywide Fund Services, Inc.) ("defendant") moves for partial dismissal of claims brought by plaintiffs TD Waterhouse Investor Services, Inc. ("TDWIS," formerly Waterhouse Securities, Inc.) and National Investor Services Corp. ("NISC"). Specifically, TDWIS and NISC bring the following four causes of action against defendant: (1) breach of contract by failure to perform on the parties' December 10, 1997 Accounting Services Agreement; (2) breach of contract by failure to comply with the Agreement's indemnification clause; (3) breach of the duty of care; and (4) breach of fiduciary duty. Defendant moves to dismiss the second cause of action brought by plaintiff TDWIS and all four causes of action brought by plaintiff NISC. Defendant does not challenge the sufficiency of TDWIS's first, third, and fourth causes of action. For the reasons detailed below, defendant's motion is denied on TDWIS's indemnification claim and granted on all four causes of action asserted by NISC.
BACKGROUND
On a motion to dismiss, the Court must accept the material facts alleged in plaintiff's complaint as true. Cohen v. Koenig, 25 F.3d 1168, 1172 (2d Cir. 1994). The following facts are derived from TDWIS's and NISC's complaint.
TDWIS acts as investment adviser to certain registered open-end investment companies, including TD Waterhouse Family of Funds, Inc. ("Fund," formerly Waterhouse Investors Cash Management Fund, Inc.); NISC, an affiliate of Waterhouse, acts as the Fund's transfer agent (Compl. ¶ 1). Pursuant to a December 10, 1997 Accounting Services Agreement ("Agreement"), TDWIS employed defendant as its agent to perform certain accounting and pricing services for the Fund (Id. ¶ 1). Specifically, under Section 2 of the Agreement, defendant agreed to "calculate the net asset value of each Portfolio of the Fund and the per share net asset value of each Portfolio of the Fund, in accordance with the Fund's current prospectus and statement of additional information." (Amera Aff. Ex. A, § 2). In addition, under Section 11 of the Agreement, defendant agreed to "indemnify and hold harmless the Fund and [TDWIS], and their respective . . . affiliates from and against any and all claims, demands, expenses and liabilities of any and every nature which the Fund . . . may sustain or incur by reason of, or as a result of [defendant's] negligence, willful misconduct, bad faith, or reckless disregard of its duties hereunder." (Id. § 11). As administrator of the Fund, TDWIS was contractually entitled to shareholder service fees at the annual rate of .25% of the average daily net asset value of the Fund's Money Market Portfolio ("Portfolio"); as the Fund's transfer agent, NISC was contractually entitled to transfer agency fees at the annual rate of .20% of the Portfolio's average daily net asset value. (Compl. ¶ 11). In order to remain competitive with the marketplace and safeguard its reputation, TDWIS routinely waived these fees so that the annual expense ratio would not exceed .75% of the average daily net asset value. Aware of this practice, Integrated calculated TDWIS's fees and reflected the payment or waiver of those fees in the Fund's records and reports. (Id.).
During the period from June 1998 through November 1999, defendant inaccurately recorded less than the actual amount of income with respect to a number of securities held by the Portfolio, representing a total of $3.8 million in under-accrued and undistributed income. (Id. ¶ 14). As a result of the inaccurately reported income, plaintiffs waived approximately $1.5 million in fees in addition to the fees that they would ordinarily have waived. (Id. ¶ 12). In November 1999, plaintiffs investigated the consistent under performance of the Portfolio and discovered that Integrated's accounting errors had resulted in a total of $3.8 million in under-accrued and undistributed income, and, consequently, in a total of $1.5 million in waived fees in addition to the fees that plaintiffs would ordinarily have waived. (Id. ¶ 14). However, rather than reclaim the fees from the Portfolio and thereby possibly raise concern with the Securities and Exchange Commission and incur reputational damage, plaintiffs distributed to the Portfolio's shareholders of record a one-time lump sum of approximately $3.8 million. (Id. ¶ 17). On November 17, 1999, plaintiffs made a timely request to defendant for reimbursement of the waived fees in the amount of approximately $1.5 million — that is, the amount directly attributable to defendant's negligent accounting. (Id. ¶ 18).
Despite this request as well as subsequent requests by letters dated July 26, 2000 and March 27, 2001, defendant refused, and continues to refuse, to reimburse plaintiffs for the waived fees. (Id. ¶ 19). As a result, plaintiffs bring this lawsuit.
DISCUSSION
I. Rule 12(b)(6) Standard
In deciding a motion to dismiss under Rule 12(b)(6) for failure to state a claim upon which relief may be granted, the court "must accept the material facts alleged in the Complaint as true." Cohen v. Koenig, 25 F.3d 1168, 1172 (2d Cir. 1994). Dismissal is appropriate only where "it appears beyond doubt that the plaintiff can prove no set of facts in support of the claim which would entitle him to relief" Conley v. Gibson, 355 U.S. 41, 45-46 (1957). "The task of the court in ruling on a Rule 12(b)(6) motion is merely to assess the legal feasibility of the Complaint, not to assay the weight of the evidence which might be offered in support thereof" Cooper v. Parsky, 140 F.3d 433, 440 (2d Cir. 1998) (internal quotation marks omitted). Although bald assertions and conclusions of law are insufficient, the pleading standard is nonetheless a liberal one. Leeds v. Meltz, 85 F.3d 51, 53 (2d Cir. 1996).
II. TDWIS's Indemnification Claim Against Integrated
Indemnification, defined as the right of one party to shift an entire loss onto another party, may exist either expressly through contract or impliedly by law, also known as common law indemnification. The gravamen of an indemnification claim is that both parties owe a duty to a third person, and, because of the defendant's negligence or wrongful conduct, the plaintiff has been held "legally liable and cast in damages to the third party." City of New York v. Lead Indus. Assoc., Inc., 222 A.D.2d 119, 126-27, 644 N.Y.S.2d 919, 924 (1st Dep't 1996). The plaintiff in an indemnification action may recover under common law or "ex-contractu" indemnification only by showing the existence of a duty between plaintiff and defendant. Travelers Indemnity Co. v. AMR Srvcs. Corp. et al., 921 F. Supp. 176, 182 (S.D.N.Y. 1996). Alternatively, in the absence of such a duty, the plaintiff may bring an indemnification action based on express contractual language. Id. at 182. New York courts have consistently held that the rule of strict construction applies with particular force to indemnity contracts in order to avoid reading into the contract a duty which the parties did not anticipate. "When 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 that the parties did not intend to be assumed." Weissman v. Sinorm Deli Inc., 88 N.Y.2d 437, 446, 669 N.E.2d 242, 246, 646 N.Y.S.2d 308, 312 (1996) (quoting Hooper Assocs. v. AGS Computers, 74 N.Y.2d 487, 492, 549 N.Y.S.2d 365, 367, 548 N.E.2d 903, 905 (1989)). Indeed, 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." Hooper Assocs., 74 N.Y.2d at 492-93.
The defendant in this case contends that plaintiff TDWIS cannot recover as a matter of law since the shareholder service fees that plaintiff waived fall outside the scope of the Agreement's indemnification provision. More precisely, defendant claims that TDWIS is unable to "demonstrate a predicate legal liability to support its indemnification claim" because the waived fees represented a voluntary business decision, which as a matter of law cannot constitute "expenses." (Def Memorandum at 7). Unless plaintiff was under a legal compulsion to pay a third party, defendant argues, indemnification or entire loss-shifting does not apply. (Def Reply Memorandum at 3-4). In opposition, plaintiff maintains that it has sufficiently pled a claim for contractual indemnification on the ground that Section 11 of the Agreement, "Indemnification of Fund and WSI," explicitly and unambiguously states that defendant "shall indemnify and hold harmless the Fund and [TDWIS], and their respective directors, officers, employees, agents, control persons and affiliates from and against any and all such claims, demands, expenses and liabilities of any and every nature" which plaintiff may sustain as a result of defendant's negligence or willful misconduct (Pls. Memorandum at 11, emphasis added). Specifically, plaintiff argues that excessive fees waived as a result of defendant's negligence undoubtedly fall within the expansive scope of the Agreement's indemnification provision, which provides for indemnification of "any and all such . . . expenses." Furthermore, plaintiff claims that its decision to waive $1.5 million in fees, while a voluntary decision, was nevertheless made necessary by defendant's negligence and was motivated by a desire to avoid adverse SEC action and reputational damage that could have far exceeded $1.5 million. (Id.).
I agree with plaintiff that the Agreement's indemnification provision applies to the $1.5 million in fees that plaintiff waived as a result of defendant's negligent accounting. First and most important, New York courts have consistently held that contractual indemnification provisions should be strictly construed in order to give life to the parties' intentions. Weissman, 88 N.Y.2d at 446, 669 N.E.2d at 246, 646 N.Y.S.2d at 312. In this case, the Agreement's indemnification provision states in unequivocal and unambiguous terms that the defendant will indemnify TDWIS and the Fund for any expense of any nature. Indeed, perhaps the clearest indication of the parties' intent is the indemnification provision's inclusive use of "all" and "any": "any and all . . . expenses . . . of any and every nature." See, e.g., Jacksonville Terminal Co. v. Railway Express Agency, Inc., 296 F.2d 256, 261 (5th Cir. 1962), cert. denied., 369 U.S. 860 (1962) (in "its ordinary and natural meaning, the word `all' leaves no room for exceptions"); Levine v. Shell Oil Co., 28 N.Y.2d 205, 212, 269 N.E.2d 799, 803, 321 N.Y.S.2d 81, 86 (1971) (finding that an indemnification clause's all-inclusive language, providing that plaintiff lessee was required to indemnify defendant-indemnitee against "all" claims, suits, loss, cost, and liability, included indemnification against the indemnitee's own negligence).
Second, the indemnification provision at issue in this case sets forth a catalogue of different possible bases for indemnification, including "claims, demands, expenses and liabilities" (Amera Aff Ex. A at § 11, emphasis added). As such, the Agreement itself makes a distinction between "expenses" and "liabilities," both of which may form a basis for indemnification. Defendant mistakenly contends that indemnification can only apply to the legal liabilities that one party is compelled to pay due to the negligence of the other party. Specifically, defendant cites Weissman v. Sinorm Deli, Inc., 88 N.Y.2d 437, 669 N.E.2d 242, 646 N.Y.S.2d 308 (1996) and City of New York v. Lead Industries Association, Inc., 222 A.D.2d 119, 644 N.Y.S.2d 919 (1st Dep't 1996), in support of its argument that indemnity requires that the indemnitee become "legally liable" (Def Memorandum at 6-7), and thereby be "compelled to pay" (Def Reply Memorandum at 3), a third party. However, the facts of this case differ in some material respects from the facts of those cases. First, unlike this case, Lead Industries Association, Inc. involved indemnification based on common law indemnity rather than on an explicit contractual provision. Consequently, the court in that case had to determine whether the "equitably imposed obligation" of indemnification would apply in an instance where the plaintiff became legally liable to a third-party to whom that plaintiff owed a duty. Lead Indus. Assoc., Inc., 222 A.D.2d at 127, 644 N.Y.S.2d 919 at 924. By contrast in this case, the explicit contractual language of the indemnification provision makes it clear that defendant must indemnify plaintiff not only for legal liabilities, but also for any other claims, demands, and expenses that plaintiff sustained as a result of defendant's negligence or willful misconduct. Second, unlike this case, Weissman involved a conflict over whether a particular clause constituted a guaranty or an indemnity — that is, whether the indemnification clause covered only personal liability or liability of the corporation as well — rather than whether an inherent difference existed among the clause's list of terms, "costs, losses, claims, taxes, liabilities, fines, penalties, damages and expenses." Weissman, 88 N.Y.2d at 441, 669 N.E.2d at 244, 646 N.Y.S.2d at 310. By contrast, in this case, the conflict turns on whether plaintiffs waived fees constitute a "cost" or "expense" that fall within the scope of what is quite clearly an indemnification provision.
The legal definition of "indemnity" is certainly not confined to liability incurred by another but rather encompasses loss and damage/financial injury as well. See Black's Law Dictionary 772 (7th ed 1999) (providing as the primary definition of indemnity "[a] duty to make good any loss, damage, or liability incurred by another"). I find that plaintiffs Complaint sufficiently pleads a form of loss or financial injury — namely, its loss of an additional $1.5 million as a consequence of defendant's negligent accounting — to sustain defendant's motion for partial dismissal.
Accordingly, because I find that the Agreement's all-inclusive indemnification provision is unambiguous with respect to the bases of indemnification; and because I also find that plaintiffs waived fees in the amount of $1.5 million may be termed a cost or expense for the purposes of this provision, defendant's motion to dismiss plaintiff TDWIS's indemnification claim is denied.
III. NISC's Four Causes of Action Against Integrated
Defendant moves to dismiss all four causes of action asserted by plaintiff NISC premised on a third party beneficiary theory as an "affiliate." For the reasons detailed below, defendant's motion as to NISC is granted in its entirety.
1. First Cause of Action: Breach of Contract
To determine a party's status as an intended beneficiary, New York courts apply the standard set forth in the Restatement (Second) of Contracts, Section 302. Goodridge v. Harvey Group, Inc. et al., 778 F. Supp. 115, 134 (S.D.N.Y. 1991); Fourth Ocean Putnam Group Corp. v. Interstate Wrecking Co. Inc., 66 N.Y.2d 38, 44-45, 485 N.E.2d 208, 211, 495 N.Y.S.2d 1, 4 (1985). That section provides that:
(1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either
(a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or
(b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.
(2) An incidental beneficiary is a beneficiary who is not an intended beneficiary.
Although New York law does not require that "the obligation to perform to the third party beneficiary . . . be expressly stated in the contract,"Trans-Orient Marine Corp. v. Star Trading Marine, Inc., 925 F.2d 566, 573 (2d Cir. 1991), the parties' intent to benefit the third party must nevertheless be apparent from the face of the contract. LaSalle Nat'l Bank v. Ernst Young LLP, 285 A.D.2d 101, 108-09, 729 N.Y.S.2d 671, 676 (1st Dep't 2001) ("[a]bsent clear contractual language evincing such intent, New York courts have demonstrated a reluctance to interpret circumstances to construe such an intent"). In addition, New York courts have found that the absence of a duty of the promisee to the third-party beneficiary negates an intention to benefit that third-party. In cases where such a duty does not exist, the third party may uphold the contract only if (1) no one other than the third party can recover if the promisor breaches the contract, or (2) the language of the contract clearly evidences an intent to permit enforcement by the third party. Fourth Ocean Putnam Corp., 66 N.Y.2d at 45, 485 N.E.2d at 212, 495 N.Y.S.2d at 5.
In this case, defendant moves to dismiss NISC's first cause of action for breach of contract on the ground that NISC was neither a party to, nor an intended third-party beneficiary of, the Agreement. (Def Memorandum at 7); for this reason, defendant argues, NISC may not sue for breach of contract under New York law. In opposition, NISC contends that the indemnification provision of the complaint clearly encompasses "affiliates" of the signatory, TDWIS; that the complaint alleges that NISC is such an affiliate; and that this is therefore "the quintessential case of an intended third party beneficiary i.e., the third party beneficiary is identified, here by status as an affiliate, as entitled to certain benefits of the bargain struck between the contracting parties." (Pls. Memorandum at 12). In addition, NISC maintains that the circumstances surrounding the Agreement evince a clear intent on behalf of the parties to identify NISC and other "affiliates" of TDWIS as the intended beneficiaries of defendant's promise to indemnify in the event of a breach. (Id. at 15).
I agree with defendant that NISC is not an intended, third-party beneficiary of the Agreement. Consequently, NISC may not sue for breach of contract under New York law. Fourth Ocean Putnam Corp., 66 N.Y.2d at 43, 495 N.Y.S.2d at 4, 485 N.E.2d at 211; Alicea v. City of New York, 145 A.D.2d 315, 317, 534 N.Y.S.2d 983, 985 (1st Dep't 1988). Specifically, NISC is neither a signatory to, nor specifically named in, the parties' Agreement. Although the Agreement includes "affiliates" within the indemnification provision and although NISC identifies itself as an affiliate of TDWIS in its complaint (Compl. ¶ 10), the Agreement itself makes no explicit mention of NISC as an affiliate. In addition, while the law is that a third-party beneficiary need not be expressly named in the contract, Trans-Orient Marine Corp., 925 F.2d at 573, I nevertheless do not find that NISC has satisfied the requisites of the Restatement (Second) of Contracts, Section 302. More precisely, NISC has not demonstrated that defendant's performance of the promise would satisfy any obligation that TDWIS had to NISC or that TDWIS intended to give NISC the benefit of defendant's promise. For these reasons, defendant's motion to dismiss NISC's first cause of action for breach of contract is granted.
2. Second Cause of Action: Indemnification
Defendant's motion to dismiss NISC's second cause of action for indemnification is granted for the same reasons discussed supra with respect to NISC's first cause of action, namely, because NISC is not an intended third-party beneficiary that can sue on the parties' Agreement.
3. Third Cause of Action: Negligence
In order to withstand a motion to dismiss, a noncontractual party alleging negligence must satisfy the three criteria set forth in Credit Alliance Corp. v. Arthur Andersen Co. before a professional — in that case, accountants — may be held liable in negligence to noncontractual parties:
(1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes; (2) in furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants' understanding of that party or parties' reliance.Credit Alliance Corp. v. Arthur Andersen Co., 65 N.Y.2d 536, 551, 483 N.E.2d 110, 118, 493 N.Y.S.2d 435, 443 (1985). In that case, the Court of Appeals found that noncontracting parties failed adequately to plead privity of contract between themselves and the defendant accounting firm so as to permit plaintiffs to bring an action sounding in negligence for defendant's inaccurate financial reporting. Id. at 551, 483 N.E.2d at 118, 493 N.Y.S.2d at 443. The court maintained that plaintiffs failed to allege that they had any "direct dealings" with defendant or that defendant had "specifically agreed with [the contracting party] to prepare the report for plaintiffs' use or according to plaintiffs' requirements." In short, the court found that there was "simply no allegation of any word or action on the part of [defendant] directed to plaintiffs, or anything contained in [defendant's] retainer agreement with [the contracting party] which provided the necessary link between them."Id. at 553-54, 483 N.E.2d at 119, 493 N.Y.S.2d at 444-45. See also LaSalle Nat'l Bank, 285 A.D.2d at 105-06, 729 N.Y.S.2d at 674 (to survive a motion to dismiss, the "pleadings . . . must establish a basis of liability arising from "either actual privity of contract between the parties or a relationship so close as to approach that of privity,' requiring `a clearly defined set of circumstances which bespeak a close relationship premised on knowing reliance'") (quoting Parrott v. Coopers Lybrand, L.L.P., 95 N.Y.2d 479, 741 N.E.2d 506, 718 N.Y.S.2d 709 (2000)).
In this case, defendant moves to dismiss NISC's third cause of action for negligence on the ground that NISC cannot show either that defendant was aware that NISC was relying on it to produce accurate accounting statements or that defendant conducted itself in any matter linking it to NISC. (Def Memorandum at 9). In opposition, NISC contends that defendant not only undertook affirmative conduct directed toward NISC — namely, calculating NISC's fees — but also knew that NISC was relying on it to produce accurate accounting statements (Pls. Memorandum at 16).
I agree with defendant that NISC has failed to satisfy all three criteria set forth in Credit Alliance Corp. regarding negligence liability of a professional to a noncontracting third party. First, I do find that NISC has satisfied the first prong of the Credit Alliance Corp. test. NISC states in its complaint that "[t]hese arrangements [of plaintiffs waiving fees] were well known to Integrated and Integrated calculated TD Waterhouse's fees and reflected the payment or waiver of those fees in the Fund's records and reports." (Compl. ¶ 11). However, NISC cannot establish that defendant knew about NISC specifically and about its practice of waiving fees. Rather, plaintiff conclusorily states in its complaint that "[t]hese arrangements were well known to Integrated." Indeed, the ambiguously worded "these arrangements" fails to specify precisely which arrangements defendant was allegedly aware of — TDWIS's practice of waiving fees, NISC's practice of doing the same, or both parties' practice. Moreover, I do not find that NISC has satisfied the second and third prongs of Credit Alliance Corp.. Not only does NISC conclusorily assume that defendant was aware that NISC — as a "known party" — was relying on the accounting statements, but NISC cannot demonstrate any conduct on the part of the defendant that "links" it to NISC. Accordingly, because I do not find that NISC has satisfied the three prongs of Credit Alliance Corp., defendant's motion to dismiss NISC's third cause of action is granted.
4. Fourth Cause of Action: Breach of Fiduciary Duty
In order to establish the existence of an agency relationship, and, by extension, a fiduciary duty running from agent to principal, a party must satisfy the following three elements under New York law: "the manifestation by the principal that the agent shall act for him, the agent's acceptance of the undertaking and the understanding of the parties that the principal is to be in control of the undertaking."Cabrera v. Jakabovitz, 24 F.3d 372, 387 (2d Cir. 1994) (quoting Restatement (Second) of Agency, Section 1 cmt. (b)). As discussed supra, NISC cannot demonstrate that defendant knew that NISC even existed as an affiliate of TDWIS or that NISC was relying on defendant's accounting statements — let alone that NISC, as a "principal," made a manifestation to defendant to act as agent for NISC. Indeed, as I stated in my analysis of NISC's cause of action for negligence, I do not find that NISC can establish even the most tenuous of links between it and defendant. Accordingly, defendant's motion to dismiss NISC's fourth cause of action is granted.
CONCLUSION
For the foregoing reasons, defendant's motion to dismiss TDWIS's indemnification cause of action is denied, and defendant's motion to dismiss all four causes of action asserted by NISC is granted. Plaintiff TDWIS's remaining indemnification claim will be heard by this Court in July, 2002.