No Entitlement to Indemnification or Advancement In Suit Between Contracting Parties Unless Indemnification Provision Unequivocally Requires It

On November 05, 2020, the First Department issued a decision in Shatz v. Chertok, 2020 NY Slip Op. 06369, holding that there was no entitlement to indemnification or advancement in a suit between contracting parties because the indemnification provision did not unequivocally reflect that intent, explaining:

The motion court properly dismissed defendants' counterclaim for the indemnification and advancement of legal fees as barred by the clear terms of section 14.7 of the operating agreement. In order for an indemnification clause to apply to claims between the contracting parties rather than to third-party actions, its language must unequivocally reflect that intent. Here, although section 11.1 of the operating agreement provided for indemnification to the fullest extent permitted by the LLC Act and by law, there is no indication that it was intended to apply to suits between members or among members of the LLC. By contrast, section 14.7 expressly states that in the event of litigation among the Members, Managing Member, or between a Member or Members, Managing Member and the LLC, arising out of or relating to this Agreement, each party shall bear its own legal fees and any related expenses.

Contrary to defendants' contention, the express language that each party bear its own legal fees and any related expenses applies with equal weight to both defendants, as the section does not apply solely to Members but to each party to a suit among or between a member or members, and thus, as in Hooper, the agreement does not contain language clearly permitting either defendant to recover attorneys' fees in this action. Although defendants insist that the court should not have dismissed the counterclaim to the extent it requested advancement of fees under section 11.1(c), rather than indemnification under section 11.1(a), this argument, too, fails to overcome the express language under section 14.7, which requires each party to an action between members to bear their own legal expenses.

(Internal quotations and citations omitted).

We frequently litigate issues relating to the advancement or indemnification of litigation expenses such as attorneys' fees to corporate officers, directors and employees as well as to contractual counter-parties. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding indemnification and advancement claims.