Pleading Equitable vs. Contractual Indemnification

October 05, 2017

Can a claim for equitable or common-law indemnification co-exist with a claim for express or contractual indemnification?

In Live Invest, Inc. v. Morgan Justice Emerson says “no”, when the claim seeks to recover for the defendant’s wrongdoing (e.g., breach of contract) as opposed to simply trying to hold a defendant liable based on vicarious liability.

In Live Invest, the court was faced with a motion to dismiss  a third-party action brought by Jericho Capital Corp. (“Jericho”) against Gamma Enterprises, LLC (“Gamma”).  The main action alleged claims seeking to pierce the corporate veil against an individual and several entities, including Jericho.  On motions to dismiss the main action, the court dismissed all but Jericho, see Order, and Order 2, Live Invest v. Morgan (Jan. 13, 2017).   Jericho then pursued the third-party action against Gamma, asserting three causes of action, all premised on variations of indemnification.   The first claim, for express or contractual, based liability on a clause in the Purchase Agreement between Jericho and Gamma, stating that Gamma, “agrees to indemnity and hold harmless [Jericho]. . . from. . . any and all manner of loss, suits, claims,or causes of action. . . arising out of. . . Delta.”  The latter two claims were based on equitable and common-law indemnification.

Noting that equitable or common-law indemnification generally applies when one is held responsible by operation of law due to the relationship of the parties, such as vicarious liability, the dismissed the two equitable claims since the contract itself is claimed to have been breached.  Therefore, the court reasoned, the claim is properly premised for the breach, not by reason of the relationship of the parties.

Interestingly, as to the express or contractual indemnification claim, Gamma raised the threshold issues of whether that claim was “premature” and if the claim for indemnification was incompatible with plaintiff’s veil-piercing claim, see Gamma’s Memorandum of Law.  The Court rejected both arguments.  Finding first that although public policy will render unenforceable contracts that purport to indemnify one for conduct that involves an “intent to harm”, the court here found that nothing precludes indemnification for damages flowing from a mere “volitional act” where no finding of intent to harm has been made.  As to the incompatibility argument, Justice Emerson found that the indemnification and veil-piercing actions could co-exist.  The court reasoned that a claim based on an alter-ego theory is a “procedural device”, not a substantive remedy.  It “merely furnishes a means for a complainant to reach a second corporation or individual”.