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SHERLEIGH ASSOCIATES INC. v. PATRON SYSTEMS

August 9, 2005.

SHERLEIGH ASSOCIATES INC., PROFIT SHARING PLAN, Plaintiff,
v.
PATRON SYSTEMS, INC. (f/k/a Patron Holdings, Inc.), PATRICK J. ALLIN and ROBERT E. YAW, Defendants.



The opinion of the court was delivered by: JOHN KEENAN, Senior District Judge

MEMORANDUM OPINION and ORDER

This is a diversity action for common law fraud in connection with a stock purchase. Plaintiff Sherleigh Associates, Inc., Profit Sharing Plan ("Sherleigh") is a New York investment company with its principal place of business in New York City. Defendant Patron Systems Inc. ("Patron") is a Delaware corporation with its principal place of business in either Florida or Illinois.*fn1 Defendant Patrick Allin, Patron's former CEO and a member of the Board of Directors, is a resident of Illinois. Defendant Robert Yaw, the Chairman of Patron's Board of Directors, is a resident of Florida.

  Plaintiff claims that defendants represented, in early 2003, that Patron was poised to acquire two target corporations that would make Patron a strong company with $40 million in expected revenues. Based on information provided by defendants, and on the results of plaintiff's own research, plaintiff purchased one million shares of Patron stock between March 19 and March 28, 2003, at two dollars per share. According to plaintiff, the anticipated acquisition of the two target companies never took place. The value of plaintiff's shares dropped to less than twenty cents per share as a result.

  Plaintiff and Defendant Allin have reached a settlement, embodied in a Settlement Agreement. "The Settlement Agreement is conditioned on a finding by this Court that (1) the Settlement Agreement was entered into in good faith and (2) bars any future contribution claims against Defendant Allin relating to the claims or allegations asserted in Plaintiff's Amended Complaint." Memorandum in Support of Motion to Voluntarily Dismiss and to Issue Bar Order ("Mem. in Support") at 2-3 (emphasis in original). They thus move the Court for the entry of an Order dismissing Defendant Allin with prejudice, finding that the settlement is fair, reasonable and in good faith, and barring any subsequent claims by Defendants Patron and/or Yaw against Allin for contribution or indemnification relating to the claims or allegations asserted in Plaintiff's amended complaint. They seek the Court's determination that the settlement was reached in good faith and the Court's Order dismissing the action with prejudice as to Allin and barring all claims in contribution and indemnification with respect to the claims specified in Plaintiff's Amended Complaint.

  Defendants Patron and Yaw oppose the motion on the following grounds: (1) that contribution is regulated by N.Y. General Obligations Law § 15-108 ("§ 15-108") and thus need not be addressed by the Court; (2) that indemnification is not covered by § 15-108 and thus an Order barring indemnification claims should not be issued, at least with respect to claims that Patron might make; and (3) that no evidence has been put forth demonstrating the reasonableness of the settlement.

  Following the service of Defendants Patron and Yaw's Memorandum in Opposition to the Plaintiff's and Defendant Allin's Joint Motion to Voluntarily Dismiss and for Bar Order ("Mem. in Opp."), Plaintiff and Defendant Allin modified their request to accommodate some of Defendants Patron and Yaw's concerns. They submitted a Proposed Order reflecting these modifications. Reply Memorandum in Support of Motion to Voluntarily Dismiss and to Issue Bar Order ("Rep. Mem.") Exhibit B.

  I. New York General Obligations Law § 15-108

  "[T]he Court notes the strong federal and state interest in promoting settlements and the role of bar orders in serving that interest." FDIC v. Abel, No. 92 Civ. 9175 (JFK), 1995 WL 716729 at *13 (S.D.N.Y. Dec. 6, 1995). In the context of the settlement of a state common law tort claim, the entry of a bar order pursuant to § 15-108 is appropriate. Id. Section 15-108 contains the following provisions: (b) Release of tortfeasor. A release given in good faith by the injured person to one tortfeasor . . . relieves him from liability to any other person for contribution. . . .

 
(c) Waiver of contribution. A tortfeasor who has obtained his own release from liability shall not be entitled to contribution from any other person.
New York Gen. Oblig. Law § 15-108 (McKinney 2001).

  Defendants Patron and Yaw argue that Plaintiff and Defendant Allin overlooked two key elements of these provisions in drafting the original Proposed Settlement Agreement. First, under § 15-108, the bar against contribution claims is a two-way street, such that non-settling defendants cannot bring contribution claims against settling defendants, and settling defendants cannot bring contribution claims against non-settling defendants. Second, a finding of good faith, rather than reasonableness, is all that the statute requires.

  As to the first issue, Plaintiff and Defendant Allin have conceded their error. Rep. Mem. at 2 n. 2. They have addressed this deficiency in their Proposed Order. Because of this concession, Plaintiff and Defendant Allin's request regarding contribution claims under § 15-108 is granted. As to the second issue, Plaintiff and Defendant Allin also concede that a finding of reasonableness has been required by only one district court in this circuit in a non-class action case. Thus, "[i]f this Court determines that a reasonableness finding is not necessary to issue the requested bar order, Defendant Allin requests that the requested bar order be entered without a finding of reasonableness." Rep. Mem. at 7. Because of the plain language of the statute, and on the basis of the parties' submissions, the request for a finding of good faith is granted and there is no need for a finding of reasonableness.

  II. Indemnification

  As a preliminary matter, it is important to note the difference between contribution and indemnification.

 
The right of contribution arises among several tort-feasors who share culpability for an injury to the plaintiff and whose liability may be equitably apportioned according to fault. Indemnity, however, flows from either a contractual or other relationship between the actual wrongdoer and another, such as that of employee and employer, and involves a complete shifting of the loss.
Riviello v. Waldron, 47 N.Y.2d 297, 306 (1979) (citations omitted). "A classic indemnity claim exists, of course, in favor of a person who has been held vicariously liable for the tort of another. Thus, an employer who has been cast in ...

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