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Abakan, Inc. v. Uptick Capital, LLC 934 F.Supp2d 410 (S.D.N.Y.2013)

Two businesses, Abakan, Inc. (Abakan) and Uptick Capital, LLC (Uptick) entered into a Consulting Agreement.  Thereafter, Abakan commenced a breach of contract action against Uptick with respect to the agreement.  Uptick moved for an order requiring Abakan to advance Uptick’s legal fees.  The basis for the motion was a provision in the contract providing that Abakan would indemnify Uptick for legal expenses resulting out of Uptick’s activities under the agreement. On May 2nd, 2013 the US District court for the Southern District of New York found in favor of Abakan on the legal fees motion.

The Court held that a contract between two parties, which includes a provision wherein one party agreed to indemnify the other in legal matters arising out of their agreement, should not be construed to provide for indemnification for legal matters arising between those two parties.  The exception to this rule would be if the terms of the contract made it clear that indemnification was exclusively intended for legal disputes between the contracting parties or unequivocally included such interparty disputes.

The Court reasoned that, in the present case, the indemnification provision was clearly meant for application in the event of a legal dispute with a third-party, not between Abakan and Uptick.  The terms of the contract called for Uptick to notify Abakan in writing of any claims against Uptick, and provided that Abakan was entitled to assume the defense of any suit in Uptick’s place.  These provisions would not make any sense if they were intended to be applied in disputes between Abakan and Uptick.  So, because the terms of the agreement did not unequivocally or unmistakably cover disputes between the contracting parties, the Court ruled that Uptick was not entitled to indemnification from Abakan in this instance.  It followed, the Court reasoned, that Uptick was not entitled to receive an advance of its fees in the dispute with Abakan.

The key take away from Abakan, Inc. v. Uptick Capital, LLC 934 F.Supp2d 410 (S.D.N.Y.2013) is that when entering into a commercial agreement that includes an indemnification provision, it is important to be unambiguous on whether that indemnification applies to legal disputes between the parties to the contract.  In the absence of that clear language, the assumption will likely be that indemnification does not extend beyond disputes with third-parties.  This case exemplifies the necessity for an experienced commercial litigator to assist in drawing up commercial agreements.

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The Importance of Assuring Subject Matter Jurisdiction Exists Prior to Commencing a Case in Federal Court

The recent case, HICA Education Loan Corp. v. Meyer, 12 Civ. 4248 (S.D.N.Y. 2014), underscores the need of parties to assure that a Federal Court has proper subject matter jurisdiction prior to commencing an action within the Federal Courts. Almost two (2) years after HICA Education Loan Corp. commenced an action against Amy Meyer seeking payment on a student loan in the amount of $72,722.61, the Court held, sua sponte, that it lacked subject matter jurisdiction over the matter. In this respect, one is reminded of then Second Circuit Judge (now Justice) Sotomayor’s decision in Handelsman v. Bedford Village Associates, L.P., where the Second Circuit dismissed a case for want of subject matter jurisdiction after a bench trial was had before the Southern District of New York. Handelsman v. Bedford Village Associates, L.P., 213 F.3d 48 (2d Cir. 2000).

The Court’s reasoning in HICA was twofold. First it held that it lacked diversity jurisdiction over the matter, as the amount being sought was below $75,000.00. Second, it held that there was no federal question involved as “virtually all district courts that have considered the question of whether a collection action for nonpayment of a HEAL loan arises under federal law have concluded that federal question jurisdiction is lacking.”

It is of note that the docket sheet revealed that HICA had already brought a motion for summary judgment against Ms. Meyer which was unopposed. Further, Ms. Meyer previously submitted an answer to the complaint and raised affirmative defenses, none of which were for lack of subject matter jurisdiction.

The lesson from HICA is simple. Prior to commencing a matter in Federal Court an experienced attorney must determine whether a basis exists for subject matter jurisdiction. If, at any point during the litigation, it becomes apparent that the Court does not have subject matter jurisdiction over the action, the case may be dismissed, either on motion or sua sponte.

Posted in: Commercial

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