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TAYLOR WOODROW PLC v. BLITMAN

March 5, 1985

TAYLOR WOODROW plc f/k/a, TAYLOR WOODROW LIMITED, Plaintiff,
v.
BERNICE BLITMAN and NATHAN BLITMAN, as Co-Personal Representatives under the Last Will and Testament of Charles H. Blitman, deceased, and HOWARD N. BLITMAN, Defendants



The opinion of the court was delivered by: MACMAHON

MacMAHON, District Judge.

Plaintiff moves, pursuant to Rule 56, Fed.R.Civ.P., for summary judgment against defendant Howard N. Blitman.

 In 1968, plaintiff Taylor Woodrow plc. owned 50% of the common stock of Blitman Construction Company ("BCC"), and defendants Charles and Howard Blitman owned the remaining 50% of BCC's common stock. In November 1968, plaintiff provided a $1 million letter of credit to Travelers Indemnity Company ("Travelers"), issued by European American Banking Corporation ("EAB"), as security for performance bonds issued by Travelers on behalf of BCC. Shortly thereafter, defendants agreed to indemnify plaintiff for one-half of any sum plaintiff paid under the letter of credit. *fn1"

 In April 1981, one of BCC's subcontractors on the Albee Mall project, Metropolitan Steel Industries, Inc. ("Metropolitan Steel"), commenced an action in the United States District Court for the Eastern District of New York against Travelers for approximately $333,500 based on a performance bond Travelers issued on behalf of BCC. The following November, Howard Blitman resigned as president of BCC. Six months later, in June 1983, Travelers agreed to settle Metropolitan Steel's suit out of court. In exchange for dismissal of the suit, Travelers allegedly paid Metropolitan Steel $325,000. On September 19, 1983, plaintiff filed the instant action against defendants for $162,000 (one-half of the amount allegedly paid out under the letter of credit) based on the indemnification agreement.

 In April 1984, plaintiff moved before us for an order striking defendants' second and third affirmative defenses and for summary judgment, and defendants cross-moved for summary judgment. On July 13, 1984, by Memorandum and Order, we granted plaintiff's motion to strike the affirmative defenses but found that the following issues of material fact precluded summary judgment: (1) proof of the chain of payment extending to Metropolitan Steel from plaintiff: and (2) proof that the sum paid to settle the Metropolitan Steel claim was reasonable and negotiated in good faith.

 Plaintiff contends that the instant summary judgment motion is proper because it now has documentary evidence and deposition testimony establishing the chain of the alleged settlement payment of $325,000 by plaintiff to Metropolitan Steel and the reasonableness of that amount. See Home Indem. Co. v. Famularo, 530 F. Supp. 797 (D. Colo. 1982).

 The contemplated method of payment under the indemnification agreement was as follows: Metropolitan Steel, the underlying claimant, was to be paid by Travelers, which was to be reimbursed by EAB under the letter of credit, which would debit the account maintained with EAB by Midland Bank, Ltd., which was in turn to be reimbursed by plaintiff. Plaintiff has submitted adequate documentary evidence tracing the chain of the $325,000 settlement payment extending from plaintiff to Metropolitan Steel. *fn2" Moreover, defendant, in his answering papers, does not challenge any of plaintiff's statements of fact as to this chain of payment.

 We conclude that there is no genuine issue as to the chain of payment which must exist to find defendant liable for indemnification.

 The remaining question for us is whether the settlement amount was reasonable and negotiated in good faith. In our July 13, 1984 Memorandum and Order, we noted that:

 
[B]ecause defendant was notified and failed affirmatively to intervene or to undertake a defense, defendant cannot now attack the validity of the Metropolitan Steel claim against Travelers. Feuer v. Menkes Feuer, Inc. [8 A.D.2d 294, 187 N.Y.S.2d 116 (1st Dept. 1959)]; Whitaker v. Equitable Laundry Machine Corp., 131 Misc. 505, 227 N.Y.S. 233, 234 (Sup. Ct. 1928), aff'd, 223 A.D. 881, 228 N.Y.S. 922 (1st Dept. 1928); see also 28 N.Y. Jur. Indemnity §§ 27, 32. Therefore, plaintiff need not establish that Travelers would have been liable and that there were no good defenses to liability or that settlement was the only reasonable course. Id.
 
Nevertheless, even where the indemnitor is notified of the claim giving rise to the indemnitee's liability, the indemnitor must establish that the sum paid to settle the claim our of court was reasonable and negotiated in good faith. Del- aware & H.R. Corp. v. Adirondack Farm Co-op Exchange, Inc., 33 A.D.2d 962, 306 N.Y.S.2d 1002, 1005 (3d Dept. 1970); Feuer v. Menkes Feuer, Inc., supra, at 121; see also 28 N.Y. Jur. Indemnity § 32.

 Plaintiff now contends that defendant admitted, no later than March 1981, that a settlement in the range of $260,000 to $280,000 was reasonable. Given this admission, plaintiff submits that proof of the reasonableness of the settlement is merely a question of arithmetic. Application of the statutory interest rate on a judgment to the principal amount of $260,000 yields additional interest totalling $52,270, for a total of principal plus interest of $312,270 as of the actual settlement date. This amount does not take into account any costs or attorney's fees saved by reason of the settlement.

 The ultimate decision to settle the Metropolitan Steel claim was made by Richard Johnson, president of BCC. He relied on recommendations of counsel and information relayed to him by Robert Posner, a former vice president of BCC. Specifically, Johnson based his decision on the following factors: (1) the outstanding undisputed construction costs owed Metropolitan Steel were approximately $230,000; (2) Metropolitan Steel claimed that it was owed between $30,000 and $40,000 in "change orders;" (3) the value of the work preformed by Metropolitan Steel which was still unpaid was approximately $30,000; (4) Metropolitan Steel had asserted additional claims totaling $100,000 to which there was some exposure; (5) the counterclaims asserted against Metropolitan Steel were essentially worthless; and (6) potential litigation costs were between $50,000 and $60,000.

 In opposing the instant motion for summary judgment, defendant makes three arguments on the good faith and reasonableness of the settlement. First, he argues that settlement negotiations were not conducted in good faith because Johnson did not make a sufficient investigation of the merits of Metropolitan Steel's claims. In essence, defendant alleges that by relying on Posner's advice, rather than seeking out the advice of individuals who had first-hand knowledge of the claims, Johnson disregarded the facts and breached his duty. Defendant also alleges that Albee Mall Associates ("Albee Mall"), the owner of the project, ...


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