| PPF Safeguard, LLC v BCR Safeguard Holding, LLC |
| 2011 NY Slip Op 05121 [85 AD3d 506] |
| June 14, 2011 |
| Appellate Division, First Department |
| PPF Safeguard, LLC, et al., Appellants, v BCR SafeguardHolding, LLC, et al., Respondents. |
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Order, Supreme Court, New York County (Bernard J. Fried, J.), entered September 19, 2010,which, insofar as appealed from, denied plaintiffs' motion for partial summary judgment on theirfirst cause of action for breach of an indemnity agreement and their fourth cause of action for adeclaration that defendants must honor their obligations to indemnify plaintiffs for any coveredpayments due to any employees under the employment agreements and the side letteragreements, unanimously reversed, on the law, without costs, the motion granted, and it isdeclared that defendants must honor their obligations to indemnify plaintiffs for any coveredpayments due to any employees under the employment and side letter agreements.
The issue before us is whether defendants raise a viable "frustration of purpose" defense toplaintiffs' contractual indemnification claims. We hold that the defense is insufficient to defeatsummary judgment.
On May 31, 2005, the parties consummated a transaction under which plaintiff PPFSafeguard, LLC (PPF) purchased a 94% interest in plaintiff Safeguard Storage Properties, LLC(Safeguard), a self-storage business which at the time was headquartered in New Orleans. Afterthe PPF acquisition, the remaining six percent interest in Safeguard was held by the threedefendant limited liability companies (the LLC defendants), all of which were controlled byindividual defendants Bruce Roch and Jack Chaney. In connection with the transaction,Safeguard, PPF, and the LLC defendants entered into a securities purchase agreement, and PPFand the LLC defendants entered into an amended & restated LLC agreement setting forthSafeguard's governance and operation. Pursuant to the LLC agreement, Roch remained thecompany's chief executive officer and Chaney remained its chief operations officer. PPF'smanagement role in Safeguard was limited.
Also on May 31, 2005, the LLC defendants, Safeguard and PPF entered into the indemnityagreement at issue in this appeal. The "Recitals" section of the agreement states that, before thePPF acquisition, Safeguard had entered into agreements with current and former Safeguardemployees (the employment agreements) which provided them with the right under certaincircumstances to receive extra compensation which the employment agreements variously [*2]describe as incentive compensation, bonus payments, andparticipation payments (collectively, bonuses). The indemnity agreement further recites that,"[a]s a condition of PPF entering into the Securities Purchase Agreement and the [amended &restated LLC agreement]," the LLC defendants agree to indemnify Safeguard from liabilitiesarising from the bonus provisions in the employment agreements and "make good faith efforts tonegotiate a termination of the [bonus] provisions of the [e]mployment [a]greements and replacethem with alternative bonus arrangements paid for by [the LLC defendants] and acceptable toPPF."
Article II of the indemnity agreement specifically requires the LLC defendants to pay anyobligations owed by Safeguard for bonuses under the employment agreements and to indemnifySafeguard and PPF from all claims in connection with the bonuses. The indemnity provision alsoholds the LLC defendants responsible for interest on the indemnified amounts and PPF's legalfees, costs, and expenses with respect to enforcing the agreement.
In section 3.1 of the indemnity agreement, the LLC defendants agree that they shall use goodfaith efforts to terminate the bonus arrangements with two former Safeguard employees, with anysettlement amount to be paid by the LLC defendants. With respect to the three currentemployees, the LLC defendants agree to renegotiate their present bonus arrangements andsubstitute alternative arrangements for which the LLC defendants and not Safeguard would beresponsible.
In August 2005, Hurricane Katrina struck the Gulf Coast and disrupted Safeguard'soperations in New Orleans. By that time, the LLC defendants had attempted but were unable torenegotiate the existing bonus arrangements. Between 2006 and 2009, multiple bonus paymentsto two employees, Jeff Ottmar and Jim Goonan, became due under their employment agreements,and as defendants admit, rather than have the LLC defendants pay the bonuses, Roch and Chaneycaused Safeguard to pay Ottmar and Goonan without PPF's knowledge.
In July 2009, PPF acquired the LLC defendants' remaining interests in Safeguard andinstalled its own management. At that point, PPF learned of the payments to Ottmar and Goonan,and in October 2009 Safeguard's new president and chief executive officer wrote to Roch andChaney, individually and in their capacities as the sole members of the LLC defendants,demanding reimbursement of the bonuses plus interest, an amount which Safeguard calculated atabout $382,000. When defendants failed to make any payments, plaintiffs filed this lawsuit inNovember 2009 seeking damages for the amount due under the indemnity agreement, along witha declaration that the LLC defendants remained liable for any future bonuses paid under theemployment agreements.
Thereafter, plaintiffs moved for an order granting partial summary judgment as against theLLC defendants, who argued in opposition that they were only obliged to indemnify plaintiffs ifthey failed to make good faith efforts to renegotiate the bonus arrangements in the employmentagreements, that their obligations ended when they sold all their remaining interest in Safeguardto PPF, and that their obligations under the indemnity agreement should be excused becauseHurricane Katrina frustrated the purpose of the contract.
The motion court properly rejected the first two arguments. It found that the indemnityagreement unambiguously provided that the LLC defendants' obligation to indemnify wasindependent of its separate obligation to attempt to renegotiate the employment agreements. Thecourt also concluded that whether the LLC defendants still owned an interest in Safeguard had nobearing on whether they were contractually obligated to indemnify plaintiffs.
However, the motion court denied plaintiffs summary judgment on the ground that the [*3]LLC defendants had raised a factual issue as to whether theirperformance was excused because Hurricane Katrina frustrated the purpose of the indemnityagreement. The court accepted extrinsic evidence, in the form of the affidavit of Bruce Roch, thatthe hurricane made it impossible for the LLC defendants to renegotiate the employmentagreements successfully, which Roch contended was the parties' purpose in entering into theindemnity agreement.
Summary judgment should have been granted because the frustration of purpose defense isunavailing. For a party to a contract to invoke frustration of purpose as a defense fornonperformance, "the frustrated purpose must be so completely the basis of the contract that, asboth parties understood, without it, the transaction would have made little sense" (Crown IT Servs., Inc. v Koval-Olsen,11 AD3d 263, 265 [2004]; see also Restatement [Second] of Contracts § 265).The doctrine applies "when a change in circumstances makes one party's performance virtuallyworthless to the other, frustrating his purpose in making the contract" (Restatement [Second] ofContracts § 265, Comment a).
The purpose of the indemnity agreement is evident from the plain language of the contract: toinduce PPF to purchase an interest in Safeguard, the LLC defendants agreed to be responsible forbonus payments under the employment agreements. Given the purpose of the indemnityagreement, Hurricane Katrina had no effect on the value to the LLC defendants of PPF'sperformance under the contract, namely PPF's execution of the securities purchase agreement andthe amended & restated LLC agreement and its completion of the acquisition.
Since the parties' intent was clearly expressed within the four corners of their writing, Roch'sself-serving affidavit should not have been considered (see W.W.W. Assoc. vGiancontieri, 77 NY2d 157, 162 [1990]).
Accordingly, we reverse. Concur—Saxe, J.P., Friedman, Freedman and Richter, JJ.