| HSBC Bank USA v Bond, Schoeneck & King, PLLC |
| 2008 NY Slip Op 07726 [55 AD3d 1426] |
| October 10, 2008 |
| Appellate Division, Fourth Department |
| HSBC Bank USA, Plaintiff, and Janet S. Bordages et al.,Respondents, v Bond, Schoeneck & King, PLLC, et al.,Appellants. |
—[*1] Nixon Peabody LLP, Rochester (Margaret A. Clemens of counsel), for defendant-appellantCoughlin & Gerhart LLP. Harter Secrest & Emery LLP, Buffalo (Kenneth W. Africano of counsel), forplaintiffs-respondents.
Appeals from an order of the Supreme Court, Erie County (John M. Curran, J.), enteredAugust 9, 2007. The order, insofar as appealed from, denied in part defendants' motions todismiss the amended complaint (16 Misc 3d 813 [2007]).
It is hereby ordered that the order insofar as appealed from is unanimously reversed on thelaw without costs, the motions are granted in their entirety and the amended complaint isdismissed.
Memorandum: Plaintiffs-respondents (plaintiffs) and plaintiff HSBC Bank USA (HSBC)commenced this action seeking, inter alia, implied indemnification from defendants for sumsthey paid in defending and settling claims asserted against them in the federal class actionentitled Beam v HSBC Bank USA (hereafter, Beam action). We note at the outsetthat the causes of action asserted by HSBC were subsequently dismissed, and it therefore is nolonger a party.
In September 1999, plaintiffs sold their shares of Azon Corporation stock for $25 million tothe Azon Employee Stock Ownership Plan (ESOP). At the time of the sale of the stock(transaction), four plaintiffs were members of the Board of Directors of Azon and, as a result ofthe transaction, the ESOP increased its ownership of Azon from 19% to 57%. Defendant Bond,Schoeneck & King, PLLC (BS & K) were the attorneys who represented the ESOP in thetransaction, and defendant Coughlin & Gerhart LLP (C & G) served as counsel to Azon. Also aspart of the transaction, the treasurer and chief financial officer of Azon and its president and chiefexecutive officer received retention bonuses equal to the amount of their annual salaries, [*2]pursuant to the terms of their prior employment agreements. Thoseemployment agreements provided that the two officers would be entitled to such bonuses in theevent that there was a change in control of Azon and that they "fully support[ed] and assist[ed] inthe implementation of the process."
In July 2002, Azon went bankrupt, and its current and former employees thereafter filed theBeam action. The Beam plaintiffs alleged that the ESOP transaction constituted anonexempt prohibited transaction under the Employee Retirement Income Security Act of 1974(ERISA) because the shares had allegedly been improperly valued and that the plaintiffs hereinhad allegedly received more for their shares than the value of the shares. After settling theBeam action for $9,000,000, plaintiffs and HSBC commenced this action, whereupon BS& K moved to dismiss the amended complaint against it pursuant to CPLR 3211 (a) (5) and (7),and C & G moved to dismiss the amended complaint against it pursuant to CPLR 3211 (a) (1),(5) and (7). Supreme Court granted the motions only in part, and we agree with defendants thatthe court should have granted their motions in their entirety.
With respect to the first cause of action, for implied indemnification, plaintiffs and HSBCalleged that they were subject to strict liability in the Beam action under ERISA if theESOP transaction was a prohibited transaction, and defendants must indemnify them becausedefendants were responsible for determining whether the ESOP transaction would be deemed aprohibited transaction. Plaintiffs and HSBC further alleged that defendants therefore wererequired to indemnify them because they were placed "in a legally untenable position in whichthey were required to . . . participate in a settlement with the Beam plaintiffsso as to avoid the draconian liabilities and penalties that they would incur if the payments to [thetwo officers] were judicially determined to be impermissible commissions."
Pursuant to 29 USC § 1106 (a), transactions between an employee benefit plan and a"party in interest" are generally prohibited. Nevertheless, the provisions of section 1106 "shallnot apply to the acquisition or sale by a plan of qualifying employer securities . . .(1) if such acquisition . . . is for adequate consideration . . . , (2) if nocommission is charged with respect thereto, and (3) if . . . the plan is an [ESOP]"(29 USC § 1108 [e]; see 29 USC § 1107 [d] [3] [A]). A "commission" undersection 1108 includes "any fee, commission or similar charge paid in connection with atransaction" (29 CFR 2550.408e [e]).
We agree with defendants that the court erred in denying those parts of their motions todismiss the first cause of action. " 'Where a party voluntarily settles a claim, he must demonstratethat he was legally liable to the party whom he paid and that the amount of [the] settlement wasreasonable in order to recover against an indemnitor' " (Van Epps v Town of Verona[appeal No. 2], 305 AD2d 1035, 1036 [2003]). Thus, "[a] party [who] voluntarily settles anaction without being legally liable may not obtain indemnification from a third party for theamount of the settlement" (Midura v 740 Corp., LLC, 31 AD3d 401, 401 [2006]). Here,plaintiffs are relying on a theory of liability that was not pleaded by the Beam plaintiffs.The Beam plaintiffs alleged that the ESOP transaction was a prohibited transaction underERISA because the stocks were overvalued and thus the transaction was not for adequateconsideration, while plaintiffs and HSBC alleged in the first cause of action that they were liableto the Beam plaintiffs because the ESOP transaction was prohibited under ERISAinasmuch as there were commissions charged with respect thereto, i.e., the retention bonuses paidto two officers of Azon. Indeed, plaintiffs and HSBC alleged that the claims of overvaluationwere defensible. We thus conclude that the plaintiffs failed to establish that they were everlegally liable to the Beam plaintiffs.
To the extent that the first cause of action may be deemed to include a claim for contribution,we further conclude that the court erred in denying those parts of defendants' [*3]motions to dismiss that claim. General Obligations Law §15-108 (c) provides that "[a] tortfeasor who has obtained his own release from liability shall notbe entitled to contribution from any other person," and that "statutory bar to contribution may notbe circumvented by the simple expedient of calling the claim indemnification" (Rosado vProctor & Schwartz, 66 NY2d 21, 25 [1985]). We further conclude that the court erred in suasponte analyzing whether plaintiffs stated a contribution claim under the federal law (seegenerally Clarke v Davis, 277 AD2d 902 [2000]).
In any event, even assuming, arguendo, that General Obligations Law § 15-108 is notapplicable to plaintiffs' contribution claim, we conclude that it fails to state a cause of action(see CPLR 3211 [a] [7]). "While ordinarily contribution rights arise when damages aresought to be apportioned among tort-feasors each of whom owes a duty directly to the injuredparty, this is not invariably so. In the unusual case the right to apportionment may arise from theduty owed from the contributing party to the party seeking contribution" (Guzman v HavenPlaza Hous. Dev. Fund Co., 69 NY2d 559, 568 n 5 [1987]). "[A] claim of contribution maybe asserted if there has been a breach of duty that runs from the contributor to the defendant whohas been held liable" (Raquet v Braun, 90 NY2d 177, 182 [1997]). "The 'criticalrequirement' for apportionment by contribution under CPLR article 14 is that 'the breach of dutyby the contributing party must have had a part in causing or augmenting the injury for whichcontribution is sought' " (id. at 183, quoting Nassau Roofing & Sheet Metal Co. vFacilities Dev. Corp., 71 NY2d 599, 603 [1988]).
According to plaintiffs and HSBC, defendants breached a duty owed to them by failing toadvise them that the ESOP transaction was a prohibited transaction under ERISA based on theimproper commissions, and they would not have settled with the Beam plaintiffs had theynot believed that they were liable because of the improper commissions. We agree withdefendants that plaintiffs failed to establish an ERISA violation based on improper commissions.Pursuant to 29 CFR 2550.408e (a) (2), "[n]o commission may be charged directly or indirectly tothe [ESOP] with respect to [a] transaction [pursuant to 29 USC § 1108]." The amendedcomplaint alleges that the retention bonuses paid to the two officers of Azon were pursuant toemployment agreements entered into more than one year prior to the ESOP transaction andbefore the stock sale to the ESOP was contemplated. The amount of the bonuses was notdetermined based on the amount paid by the ESOP for the stock but, rather, it was determinedbased solely on the employment agreements. In addition, plaintiffs and HSBC alleged that thepayments were made by Azon, not the ESOP, and they did not allege the bonuses were chargeddirectly or indirectly to the ESOP.
We further conclude that the court erred in denying those parts of C & G's motion to dismissthe second cause of action, for legal malpractice, and the fourth cause of action, for negligentmisrepresentation. According to plaintiffs, C & G failed to advise them of the likelihood that theESOP transaction was a prohibited transaction because of the improper commissions and that itsrepresentations that the transaction was proper and legal were inaccurate. Inasmuch as plaintiffsfailed to establish that the retention bonuses were indeed improper commissions pursuant toERISA, they failed to state a cause of action against C & G for legal malpractice (seegenerally McCoy v Feinman, 99 NY2d 295, 301-302 [2002]), or for negligentmisrepresentation (see generally Dunlevy v New Hartford Cent. School Dist., 266 AD2d931, 932 [1999], lv denied 94 NY2d 760 [2000]). Present—Hurlbutt, J.P., Smith,Centra and Gorski, JJ. [See 16 Misc 3d 813 (2007).]