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: Richard D. Katzman v. : Helen of Troy Texas Corporation and Helen of Troy Limited


August 28, 2012


The opinion of the court was delivered by: Paul A. Engelmayer, District Judge:


The Court has received plaintiff's letter, dated August 14, 2012, seeking permission to move to dismiss defendants' counterclaims; defendants' letter in response, dated August 20, 2012; and plaintiff's reply, dated August 20, 2012. The parties' letters are attached here.

The Court construes plaintiff's August 14 letter as a motion to dismiss the counterclaims set out in the Amended Answer (Dkt. 20), the defendants' August 20 letter as opposition to that motion, and plaintiff's August 20 letter as a reply. For the reasons that follow, the Court grants plaintiff's motion to dismiss defendants' counterclaims.

I. Background

The Complaint in this case contains two causes of action. Both are tightly focused on the issue whether defendants were entitled to retain approximately $11 million in Escrow Funds after the May 15, 2012 deadline set in the Merger Agreement for relinquishing those funds to plaintiff. First is a breach of contract claim. This claim alleges that defendants breached the Merger Agreement when they failed to direct the escrow agent to release the Escrow Funds to plaintiff. In fact, plaintiff alleges that defendants had not "actually suffered or incurred" a Loss as defined in the Merger Agreement, as of the May 15, 2012 deadline, so as to justify retention of the Escrow Funds. Thus, the contract claim alleges, defendants were obliged to direct the release of those funds. Second, plaintiff seeks declaratory relief to the same effect. See Compl. ¶¶ 29--44.

On June 21, 2012, the Court held an extended phone conference with the parties, arising out of plaintiff's request to move for summary judgment without the benefit of discovery. The Court denied that request and granted defendants' request for discovery. However, the Court limited the scope of discovery to the information known to defendants, as of May 15, 2012, which formed the basis for defendants' assertion of a right to retain the funds in escrow beyond the May 15, 2012 deadline set in the Merger Agreement. The discovery permitted by the Court focused on whether defendants had paid any money, were formally obliged to pay any money, or were subject to actual claims by a taxing authority, with respect to the 18 alleged tax claims identified in defendants' "Indemnity Demand Notice" issued in ostensible support of their retention of the Escrow Funds.

However, in the discovery conference, the Court forcefully rejected defendants' persistent attempts to obtain broader discovery, including from plaintiffs, on the underlying issues of whether colorable tax claims might be developed in the future that could support a claim of indemnification under the Merger Agreement. Discovery seeking to establish such liability was irrelevant, the Court ruled, because the only issue in the case is whether it was proper under the Merger Agreement for defendants to retain the Escrow Funds after May 15, 2012.

On July 25, 2012, defendants brought counterclaims for (1) indemnification under the Merger Agreement; and (2) a declaratory judgment to the same effect, with respect to all 18 claims listed in the Indemnity Demand Notice. See Dkt. 20.

In a July 27, 2012 Order, the Court denied defendants' request to extend the deadline and scope of discovery. The Court reiterated that, to resolve plaintiff's claims, it is not necessary for defendants to probe whether bona fide claims by defendants for indemnification may one day arise. Rather, the issue in this case is solely whether defendants possessed a valid basis, as of May 15, 2012, to retain the Escrow Funds. "[W]hether indemnification will, at some future date, be required" under the Merger Agreement does "not bear on this narrow issue." Dkt. 21.

Following that Order, the Court received plaintiff's August 14, 2012 letter, seeking leave to move to dismiss defendants' counterclaims; defendants' response; and plaintiff's reply.

II. Discussion

Plaintiffs move to dismiss defendants' counterclaims seeking to establish plaintiff's duty of indemnification, on the grounds that these claims are premature and not ripe for adjudication. Defendants respond that the counterclaims are not premature because they are "compulsory counterclaims" within the meaning of Federal Rule of Civil Procedure 13.

Rule 13(a) provides: "A pleading must state as a counterclaim any claim that-at the time of its service-the pleader has against an opposing party if the claim: (A) arises out of the transaction or occurrence that is the subject matter of the opposing party's claim; and (B) does not require adding another party over whom the court cannot acquire jurisdiction." Rule 13(b), in turn, provides that "any claim against an opposing party not arising out of the transaction or occurrence that is the subject matter of the opposing party's claim" is a permissive counterclaim.

The test under Rule 13(a) for "determining a compulsory counterclaim is identical to the Rule 13(g) test for cross-claims." Federman v. Empire Fire and Marine Ins. Co., 597 F.2d 798, 813 (2d Cir. 1979). "To determine whether a cross-claim arises out of the same transaction or occurrence that is the subject matter of the original action . . . the court examines (1) the identity of facts between the initial claim and the cross-claim; (2) mutuality of proof; and (3) the logical relationship between the original claim and the cross-claim." Bank of Montreal v. Optionable, Inc., No. 09-cv-7557, 2011 WL 4063324, at *3 (S.D.N.Y. Aug. 12, 2011) (citing Federman, 597 F.2d at 812). "Although the 'logical relationship' test does not require 'an absolute identity of factual backgrounds,' the 'essential facts of the claims [must be] so logically connected that considerations of judicial economy and fairness dictate that all the issues be resolved in one lawsuit.'" Jones v. Ford Motor Credit Co., 358 F.3d 205, 209 (2d Cir. 2004) (quoting Critical-Vac Filtration Corp. v. Minuteman Int'l, Inc., 233 F.3d 697, 699 (2d Cir. 2000)).

In the Court's assessment, the Rule 13(a) test is not met here, nor is it even close to being met. Simply put, the issue presented by plaintiff's Complaint (whether defendants were obliged under the Merger Agreement to transfer the Escrow Funds to plaintiff after May 15, 2012) is fundamentally distinct from the issue presented by defendants' counterclaims (whether, based on claims that may one day be made by third parties against Kaz, Inc., defendants will have a right to indemnification with respect to such claims).

Of particular importance, the facts needed to establish defendants' counterclaims for indemnification sweep far beyond those necessary to resolve plaintiff's pending claim-that defendants' retention of Escrow Funds breached the Merger Agreement. Injecting defendants' counterclaims into the current litigation would expand, potentially dramatically, the scope of discovery and the factual and legal issues to be resolved. That is because, measured by the present Complaint, the issues to be resolved are focused narrowly on the information known to defendants as of May 15, 2012 that would justify their retention of the Escrow Funds. By contrast, the indemnification claims would necessitate a plenary review as to potential claims of liability that could be made by third parties (e.g., tax authorities) but quite possibly may never be made as to many (if not most, or all) of the matters defendants seek to put at issue. Under these circumstances, the paramount interest of judicial economy strongly disfavors cleaving the counterclaims to the current lawsuit.

Indeed, the indemnification claims raised by defendants are not yet ripe for resolution. "A claim is not ripe for adjudication if it rests upon 'contingent future events that may not occur as anticipated, or indeed may not occur at all.'" Texas v. United States, 523 U.S. 296, 300 (1998) (citation omitted). Whether third party tax authorities will one day come to claim tax liabilities or payment shortfalls by Kaz, Inc., and whether on that basis defendants will one day come to have a valid basis to claim to have suffered losses by virtue of breaches by Kaz of its representations and warranties in the Merger Agreement so as to merit indemnification, see Merger Agreement, Compl. Ex. A § 10.2, with respect to such matters is today unknown. It is a matter for conjecture. As such, it is entirely premature for the Court to adjudicate that issue. It is well-settled that "[u]nder an agreement to indemnify against loss, a right to indemnification does not accrue until the indemnified party has satisfied the judgment, i.e., suffered a loss." Madeira v. Affordable Housing Found., Inc., 323 F. App'x 89, 91 (2d Cir. 2009) (summ. order); Atlantic Richfield Co. v. Interstate Oil Transp. Co., 784 F.2d 106, 112 (2d Cir. 1986) ("[A] claim for indemnity . . . requires that an actual liability be sustained by the indemnitee."); see also Pfizer Inc. v. Stryker Corp., 348 F. Supp. 2d 131, 150 (S.D.N.Y. 2004) (citing McDermott v. New York,

50 N.Y.2d 211, 217, (1980); Varo, Inc. v. Alvis, P.L.C., 261 A.D.2d 262, 265, (1st Dep't 1999)).

Plaintiff asserts that "with two minor exceptions, none of the 18 claims in the Indemnity Demand Notice has been finally adjudicated or settled." Pl.'s Aug. 14, 2012 Letter at p.1. Defendants do not dispute this.

Moreover, adjudicating this speculative issue would expand significantly the facts and legal questions at issue. As the Court has advised defendants several times, the facts relevant to resolving the propriety of retention of the Escrow Funds are limited to what was known to defendants on May 15, 2012; by contrast, the facts and evidence bearing on numerous conjectural claims by third parties against Kaz, Inc., which might support a claim by defendants for indemnification, are potentially quite expansive, necessitating plenary discovery. Further, the legal issues are distinct. Plaintiff's Complaint addresses the right to temporary possession of the Escrow Funds, whereas defendants' counterclaims address the issue of ultimate entitlement to indemnification. Put differently, if the relief plaintiff seeks is granted and the Escrow Funds are returned in whole or large part to plaintiff, that will not in any way resolve the issue that defendants raise, which is whether, in the long term, assuming claims are made against Kaz, Inc., plaintiffs will have a duty to indemnify them on such claims. Rather, the grant of such relief would merely denote that, as of May 15, 2012, the conditions for defendants' continued retention of those Escrow Funds had not been met.

Measured in terms of the Federman factors, it is, therefore, clear that defendants' premature claims are not compulsory within the meaning of Rule 13. See Federman, 597 F.2d at 812. First, there is a very limited overlap of facts between plaintiff's claim and defendants' counterclaims, because the propriety of defendants' retention of the escrow funds turns, overwhelmingly, on different facts than those needed to resolve whether a bona fide claim for indemnification could be made by a third party. Second, there is no mutuality of proof, because


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