Right Out of the Gate... Aldous pllc Achieves a Significant Victory

12-Oct-2011

With the paint still wet on its shingle, Aldous pllc has achieved a significant victory for its client, BT United States L.L.C. (a subsidiary of British Telecommunications plc) (“BT”). In CIH International Holdings, LLC v. BT United States, LLC, 2011 WL 4483983 (S.D.N.Y. Sept. 28, 2011), Judge Paul A. Crotty dismissed, in its entirety, a complaint filed against BT.

In 2007, BT acquired Brazilian telecommunications company, CI Holding Corporation. In the Merger Agreement memorializing the transaction, CIH International Hodings, LLC (“CIH”) agreed to indemnify BT for pre-closing Brazilian tax losses. In connection with the indemnification, the parties also entered into an Escrow Agreement. In the Merger Agreement, BT agreed, among other things, to give CIH prompt notice of any tax claims asserted against BT, to keep CIH regularly informed regarding the status of any such claims, and to give CIH the right to control the conduct and settlement of any proceedings involving such claims.

In June 2010, BT gave CIH notice of certain potential tax claims, pending in Brazil. This notice effectively prevented the release of some escrowed funds. Months later, in October 2010, CIH filed the lawsuit, claiming that, by virtue of alleged breaches of the Merger and Escrow Agreements, as well as breaches of the implied covenant of good faith and fair dealing, the Court should render BT’s notice a nullity and bar any further attempt by BT to seek indemnification. In January 2011, BT moved to dismiss the complaint, arguing that CIH’s claims were non-justiciable and not adequately pleaded because CIH had not suffered any prejudice.

First, BT argued that CIH could not be excused from its indemnification obligation – unless it could show prejudice – because the Merger Agreement’s notice obligation was not a condition precedent to CIH’s indemnification obligation (discussing Red Ball Interior Demolition Corp. v. Palmadessa, 947 F. Supp. 116 (S.D.N.Y. 1996)). The Court agreed, observing that “[u]nder New York law, a court will not ordinarily construe a contractual duty as a condition precedent absent clear language showing that the parties intended to make it a condition” (quoting Unigard Sec. Ins. Co. v. N. River Ins. Co., 79 N.Y.2d 576, 584 (1992)), and that no such clear language appeared in the Merger Agreement.

Next, CIH argued that – notwithstanding the Merger Agreement’s express requirement that it show “actual prejudice” – New York’s no-prejudice rule entitled CIH to proceed with its claims regardless of whether or not it could plead prejudice. The Court rejected this argument, affirming that the no-prejudice rule is a limited exception to a general tenet of contract law, reserved solely for insurance contracts (discussing Smurfit Newsprint Corp. v. Se. Paper Mfg. Co., 368 F.3d 944 (7th Cir. 2004)).

The Court then examined whether CIH’s purported allegations of prejudice constituted “tangible economic injury,” as required under New York law. Although CIH argued that BT’s alleged delayed notice “deprived CIH of its bargained-for right to play a meaningful role in the tax matters,” the Court held that it nonetheless failed to allege that it suffered any “tangible economic injury.” Indeed, “BT may ultimately win all of the pending tax claims.” After noting that BT’s notice was, in fact, timely, the Court also observed that, even after CIH received notice, the complaint failed to allege that CIH took any action to exercise its right to control the defense of the claims.

Finally, the Court rejected CIH’s claims of breaches of the Escrow Agreement and implied duty of good faith and fair dealing. CIH did not allege precisely what information, if any, was missing from BT’s notice (so as to constitute a breach of the Escrow Agreement), nor could it logically argue that it was prejudiced by its loss of the use of the escrow funds. And because CIH predicated its breach-of-contract claims upon the same alleged conduct as its claim that BT breached the implied duty of good faith and fair dealing, the Court dismissed that claim as well.

 

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Aldous pllc is a law firm located in mid-town Manhattan and Westchester County (New York), dedicated to providing quality and cost-effective legal services to its clients. Its founding member, Kenneth E. Aldous, is an experienced lawyer, qualified to practice in both the U.S. and UK, who has represented a broad range of diverse interests in complex litigation before various federal and state courts, as well as in domestic and international arbitration.

With the right experience, an unwavering dedication to client needs, and a strong commitment to quality – not to mention a strategic network of outside legal professionals in a variety of specializations and geographic locations – Aldous pllc offers its clients an attractive alternative. Whatever your legal needs, Aldous pllc is well situated to help you and your business find your way through a complex and fast-paced world.

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Kenneth E. Aldous
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New York, New York 10017

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