United States District Court, S.D. New York
August 9, 2005.
SHERLEIGH ASSOCIATES INC., PROFIT SHARING PLAN, Plaintiff,
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.
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 damages, by
virtue of respondeat superior, may obtain indemnity from his
employee." McDermott v. City of New York, 50 N.Y.2d 211, 218 n.
4 (1980) (citation omitted).
The Court of Appeals of New York has held that § 15-108 does
not preclude indemnification claims between settling and
non-settling parties. See, e.g., Rosado v. Proctor & Schwartz,
Inc., 66 N.Y.2d 21, 24 (1985) (citations omitted). However, to
establish a viable indemnification claim, the party seeking
indemnification "must show that it may not be held responsible in
any degree," that is, any liability that may be found against the
party must flow from an indemnification relationship as described
above. Id. at 24-25; see Sabater v. Lead Indus. Ass'n, No.
00 Civ. 8026 (LMM), 2001 WL 1111505 at *5 (S.D.N.Y. Sept. 21,
2001); Lewis v. Rosenfeld, No. 00 Civ. 5368 (SAS), 2002 WL
441185 at *4 (S.D.N.Y. Mar. 20, 2002). If, based on this
requirement, no viable indemnification claim is possible, a court
may issue an order barring such an indemnification claim. See
FDIC v. Bober, No. 95 Civ. 9529 (JSM), 1999 WL 440779 at *1-2
(S.D.N.Y. June 29, 1999); Resolution Trust Corp. v. Young,
925 F. Supp. 164, 168-69 (S.D.N.Y. 1996) (interpreting the request
for an order barring indemnification claims as a motion to
dismiss with prejudice all cross-claims for indemnification against a settling party and
dismissing those claims).
Plaintiff and Defendant Allin assert that no relationship
giving rise to an indemnification situation exists between
Defendants Allin and Yaw, and therefore, Yaw could not bring a
viable indemnification claim against Allin. Yaw concedes this in
the memorandum in opposition. Mem. in Opp. at pages 7-8, note 5.
Therefore, Plaintiff and Defendant Allin's request for an Order
barring indemnification claims brought by Yaw against Allin with
respect to the claims specified in Plaintiff's Amended Complaint
Plaintiff and Defendant Allin also seek an order barring
indemnification claims that Patron might bring against Allin with
respect to the claims specified in Plaintiff's Amended Complaint.
Plaintiff and Defendant Allin say that, with respect to Allin,
Patron cannot make the required showing that it may not be held
responsible in any degree for any liability that may be found
against Patron. Patron says, on the other hand, that the
employer-employee relationship is a classic example of a
vicarious liability situation such that Patron could indeed be
found liable for actions committed by Allin even though Patron
may not be responsible to any degree for those actions, and thus Patron could bring an indemnity claim against Allin. Patron
argues that there is no authority by which the Court can grant
Allin the requested relief.
Neither party cites any authority to support its contention
regarding the existence or non-existence of a vicarious liability
relationship between a corporation and its CEO or its board
members. It is clear that a director or officer of a corporation
may seek indemnification from the corporation, and, indeed, many
states have statutes that provide for such indemnification.
However, the Court has found no authority exploring the issue of
whether or not a corporation may seek indemnification from its
directors or officers under a theory of respondeat superior. In
the absence of such authority, the Court will not grant Allin
relief that § 15-108 does not anticipate. For this reason,
Allin's request for an order barring Patron from bringing any
indemnification claims against Allin with respect to the claims
specified in Plaintiff's Amended Complaint is denied. CONCLUSION
For the foregoing reasons, it is hereby ORDERED that:
1. Pursuant to the Settlement between Plaintiff Sherleigh and
Defendant Allin, each and every claim asserted in this litigation
by Plaintiff Sherleigh against Defendant Allin is dismissed with
2. Plaintiff Sherleigh and Defendant Allin will each bear their
own costs and attorneys' fees relating to this litigation;
3. This Court retains jurisdiction to enforce the terms of the
Settlement between Plaintiff Sherleigh and Defendant Allin;
4. This Court has been apprised of the negotiations that
preceded the Settlement and finds that the Settlement is a result
of arms-length bargaining among Plaintiff Sherleigh and Defendant
Allin and represents a good faith compromise and resolution of
the matters settled. This Court thus finds that the Settlement,
and the releases contained therein, were given in good faith
pursuant to N.Y. General Obligations Law § 15-108;
5. Pursuant to N.Y. General Obligations Law § 15-108,
Defendants Patron and Yaw are barred and enjoined from bringing
any action styled in contribution against Defendant Allin with
respect to the claims specified in Plaintiff's Amended Complaint;
6. Pursuant to N.Y. General Obligations Law § 15-108, Defendant
Allin is barred and enjoined from bringing any action styled in
contribution against Defendants Patron Systems, Inc. and/or Robert Yaw with respect to the claims specified in
Plaintiff's Amended Complaint;
7. Having determined that Defendant Yaw cannot, under any set
of facts, maintain a claim against Defendant Allin styled in
indemnification with respect to the claims specified in
Plaintiff's Amended Complaint, such claims are hereby enjoined
8. In the event that an adverse judgment is entered in this
matter against Defendants Patron and/or Yaw, Defendants Patron
and/or Yaw are entitled to a judgment setoff as prescribed by
N.Y. General Obligations Law § 15-108.
9. Plaintiff Sherleigh and Defendants Patron and Yaw shall
appear before the Court for a conference on Monday, August 29,
2005, at ten o'clock in the forenoon.