myCU, however, fails to address Magistrate Judge Ovington’s finding that,
under New Jersey law, a lack of actual damages is not fatal to a breach of
contract claim. As she noted, “[t]he general rule is that whenever there is a
breach of contract . . . or an invasion of a legal right, the law ordinarily infers that
damage ensued, and, in the absence of actual damages, the law vindicates the
tight by awarding nominal damages.” Nappe v. Anschelewitz, Barr, Ansell &
Bonello, 477 A.2d 1224, 1228 (N.J. 1984).

Accordingly, even though Cenlar may not be able to recover attorneys’ fees
and costs for the alleged breach of contract, it may be able to recover nominal
damages. To this limited extent, the Court overrules myCU’s Objection to the
Report and Recommendations with respect to the breach of contract claim (Count

Two). Count Two is not subject to dismissal at this time.

IV. Conclusion

For the reasons set forth above, the Court ADOPTS IN PART and REJECTS
IN PART Magistrate Judge Ovington’s Report and Recommendations, Doc. #22,
and SUSTAINS IN PART and REJECTS IN PART Plaintiff's Objections thereto, Doc.
#23. Plaintiff's Partial Motion to Dismiss and for Judgment on the Pleadings, Doc.
#13, is SUSTAINED IN PART AND OVERRULED IN PART. Although Cenlar may
proceed on Count Two of its Counterclaims (breach of contract), Counts Three
(breach of implied covenant of good faith and fair dealing) and Four

(indemnification) are DISMISSED WITH PREJUDICE.

14


error or omission on the part of Subservicer and (ii) with respect
to which Subservicer must indemnify Owner/Servicer pursuant
to this Agreement.

Doc. #1-2, PagelD##43-44.

Cenlar argues that, because it was made a party to this litigation as a result
of its status as the Subservicer of the mortgage loans, the plain language of
§ 8.3(f) of the Agreement requires myCU to indemnify Cenlar for costs, including
attorneys’ fees, incurred in asserting the counterclaims raised in this suit.'

However, myCU maintains that, under New Jersey law, § 8.3 of the
Agreement must be read to require indemnification only in connection with a third-
party claim, /e., one in which a third party has sued Cenlar. According to myCU,
New Jersey does not recognize first-party indemnification provisions like the one
asserted by Cenlar, /.e., a suit in which one party to the agreement sues another
party to the agreement.

1. Report and Recommendations (Doc. #22)

As Magistrate Judge Ovington acknowledged in her Report and
Recommendations, there is recent case law to support myCU’s arguments. In
Travelers Indemnity Co. v. Dammann & Co., Inc., 594 F.3d 238 (3d Cir. 2010),
the court noted that it had found no New Jersey case that had permitted first-party

indemnification. However, “given the expansive meaning of ‘indemnity’ and New

' Cenlar notes that the exception set forth in § 8.3(f)—for claims based on

Cenlar’s misrepresentation, breach, error or omission—does not apply.


3. Discussion

As Cenlar points out, the indemnification provision in the Agreement does
explicitly authorize indemnification for attorneys’ fees and costs. The question,
however, is whether they are available to Cenlar in the context of this particular
dispute. Having considered the arguments of the parties, the Court sustains
myCU’s Objections and, to the extent that Magistrate Judge Ovington
recommends overruling myCU’s motion to dismiss Count IV of Cenlar’s
counterclaims, the Court rejects the Report and Recommendations.

In this case, the Court need not decide whether New Jersey law
categorically bars first-party indemnification agreements. Statements made in
Investors Savings Bank, Atlantic City Associates and, to a certain extent, Travelers
Indemnity, certainly appear to support a categorical bar on such claims.
Nevertheless, as the court noted in Travelers Indemnity, such a “sweeping rule”
would appear to run afoul of New Jersey’s respect for “the ability of parties to
contract freely.” 594 F.3d at 255. The court must instead look to the language of
the contract at issue. /d. The court must read the indemnity provision “as a whole
in a fair and common sense manner,” interpret the provision “according to its plain
language,” and “avoid ignoring certain words or reading the contract in such a way
as to make any words ‘meaningless.’” /d. (quotations omitted).

Cenlar stakes its claim for attorney fees and costs on § 8.3(f) of its
Agreement with myCu. Regardless of whether New Jersey categorically bars first-

party indemnification claims, that subsection of the Agreement does not reflect an

10


Cir. 2011) (noting that recent New Jersey law foreclosed any argument “that
indemnification clauses might apply to first-party disputes between parties to a
contract.”).

According to myCU, pursuant to /nvestors Savings Bank and Atlantic City
Associates, first-party indemnification agreements are now categorically barred as
a matter of New Jersey law. Magistrate Judge Ovington disagreed. She noted
that, in GMFS, LLC v. Cenlar FSB, No. 18-00582, 2019 WL 165711 (M.D. La.
Jan. 9, 2019), the district court pointed out that the decisions in those two cases
were based “on the language of the particular indemnity provisions—not on any
statutory or jurisprudential bar.” /d, at *5. Given that neither of those provisions
contained “language reflecting an intent to allow first-part indemnity,” the court
found these cases not “particularly instructive.” /d. at *5 n.5.

In GMFS, the court interpreted the exact same contract language that is at
issue in this case. As here, Cenlar was the named defendant. The GMFS court
found that 8 8.3(c) contained language reflecting an intent to permit first-party
claims. That subsection requires the owner of the loans to indemnify Cenlar
against loss “directly or indirectly resulting from or relating to . . . any material
breach by [the owner] of a representation, warranty, or covenant of [the owner]
contained in this Agreement.” The court in GMFS questioned “how Cenlar could
have liability to a third party ‘directly . . . resulting from’” the Owner's material

breach. The GMFS court stated that it “cannot interpret § 8.3 to apply only to


Jersey law’s respect for the ability of parties to contract freely, .. . we cannot
hold that first-party indemnification claims . . . are categorically barred as a matter
of law in New Jersey absent direct authority to that effect.” /d. at 255.

In Travelers, the court, interpreting the contract at issue “according to its
plain language,” concluded that “the only sensible reading . . . evidences a
requirement that third-party liability exist for the clause to be triggered.” /d. The
court held that, although the Seller (Dammann) had agreed to “defend, indemnify
and hold harmless” the Buyer (IFF) from “all claims, actions, losses, damages and
expenses,” IFF’s “indemnification crossclaim for first-party damages fails as a
matter of law.” /d. The court explained that, “just as Dammann cannot ‘defend’
IFF from itself or ‘hold harmless’ IFF for IFF’s own wrong, Dammann cannot
‘indemnify’ IFF for IFF’s own loss.” /d.

Subsequently, in /nvestors Savings Bank v. Waldo Jersey City, LLC, 12 A.3d
264 (N.J. Supr. Ct. App. Div. 2011), the court held, “[i]t is axiomatic . . . that an
indemnification agreement must be based upon ‘the indemnitee’s claim to obtain
recovery from the indemnitor for liability to a third party.'” /d. at 270 (quoting
Travelers Indem. Co. v. Dammann & Co., Inc., 592 F. Supp. 2d 752, 766-767
(D.N.J. 2008)). “Accordingly, the indemnity provision here has no application
when presented as a shield against claims asserted against the indemnitee by the
indemnitor. It is only when the indemnitee is found liable to a third party that the
indemnification agreement may be triggered.” /d. at 271. See also Atl. City

Assocs., LLC v. Carter & Burgess Consultants, Inc., 453 F. App’x 174, 180 (3d


outcome of this case and that first-party indemnification provisions are
categorically prohibited under New Jersey law. myCU maintains that Magistrate
Judge Ovington’s reliance on GMFS, an unpublished Louisiana district court
decision interpreting New Jersey law, is misplaced. myCU urges this Court to
instead defer to the decision of the Superior Court of New Jersey in /nvestors
Savings Bank, and the decisions of federal courts within the Third Circuit
interpreting New Jersey law, i.e., Travelers Indemnity and Atlantic City Associates,
to avoid creating a split of authority over this issue.

myCU further argues that, because of the “strong public policy” disfavoring
the shifting of attorneys’ fees, any contractual provision concerning
indemnification for attorneys’ fees must be strictly construed against the
indemnitee. Litton Indus., Inc. v. IMO Indus., Inc., 982 A.2d 420, 439-40 (N.J.
2009). Finally, myCU objects to Magistrate Judge Ovington’s finding that
construing § 8.3 of the Agreement to apply only to third-party claims would read
§ 8.3(c) out of the Agreement. As previously noted, myCU has explained how
direct liability might arise under 8 8.3(c), thereby removing the only impediment
cited by the GMFS court.

In its Response to myCU’s Objections, Cenlar argues that New Jersey law
does not categorically prohibit first-party indemnification provisions, and that the

Agreement here clearly contemplates first-party claims.


IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION

myCUmortgage, LLC,

Plaintiff,
Case No. 3:18-cv-91
Vv.
JUDGE WALTER H. RICE
CENLAR FSB,
Defendant.

DECISION AND ENTRY ADOPTING IN PART AND REJECTING IN
PART UNITED STATES MAGISTRATE JUDGE’S REPORT AND
RECOMMENDATIONS (DOC. #22); SUSTAINING IN PART AND
OVERRULING IN PART PLAINTIFF’S OBJECTIONS THERETO (DOC.
#23); SUSTAINING IN PART AND OVERRULING IN PART PLAINTIFF
myCUmortgage’s PARTIAL MOTION TO DISMISS AND FOR
JUDGMENT ON THE PLEADINGS (DOC. #13); DISMISSING WITH
PREJUDICE COUNTS THREE AND FOUR OF DEFENDANT'S
COUNTERCLAIMS

This matter is currently before the Court on Plaintiff’s Objections, Doc. #23,
to United States Magistrate Judge Sharon L. Ovington’s Report and
Recommendations, Doc. #22, recommending that the Court sustain in part and
overrule in part Plaintiff's Partial Motion to Dismiss and for Judgment on the
Pleadings, Doc. #13. Plaintiff seeks dismissal of Defendant's counterclaims for
breach of contract (Count Two), breach of implied covenant of good faith and fair

dealing (Count Three), and indemnification (Count Four).


identical contract language at issue in this case. Notably, however, the decision
contains no discussion of § 8.3(f), the subsection on which Cenlar relies.

To the extent that the GMFS court found that § 8.3 cannot be interpreted to
apply only to third-party indemnity claims without reading § 8.3(c) out of the
agreement, the Court respectfully disagrees. As previously noted, myCU has
explained how Cenlar might be directly liable to a third party as a result of myCU’s
breach.

Moreover, GMFS does not necessarily push Cenlar across the finish line in
its quest for indemnification. The court did not hold that Cenlar could bring a first-
party indemnification claim. Although it found that § 8.3(c) “contains language
reflecting an intent to permit first-party claims,” it also found that, as in Travelers
Indemnity, the “hold harmless" language appeared to limit indemnification to third-
party claims. GMFS, 2019 WL 165711, at *5. Given that the parties had not
“briefed this conflict or suggested how the Court should resolve it,” the court
declined, at that juncture, to decide “whether Cenlar may bring a first-party
indemnity claim against GMFS.” /d.

For the reasons stated above, the Court finds that § 8.3(f) of the Agreement
does not permit Cenlar to recover its attorneys’ fees and expenses incurred in this
litigation. Cenlar has therefore failed to state a claim upon which relief may be
granted. Accordingly, the Court sustains myCU’s Objections to the Report and
Recommendations, and dismisses Cenlar’s counterclaim for indemnification (Count

Four) with prejudice.

12


intent to allow Cenlar to recover its attorneys’ fees and costs in defending itself in
this lawsuit. In Section 8.3(f) of the Agreement, myCU expressly agreed to
“indemnify and hold [Cenlar] harmless against any loss, liability forfeiture or
expense,” including attorneys’ fees, incurred by Cenlar “arising out of, directly or
indirectly resulting from or relating to: . . . (f) any claim, litigation or proceeding to
which [Cenlar] is made a party as a result of its acting as, or status as, Subservicer
of a Mortgage Loan." Doc. #2-1, PagelD##141-42 (emphasis added).

The italicized language strongly suggests that myCU is obligated to
indemnify only against liability and expenses arising from individual claims asserted
against Cenlar by a third party whose loan Cenlar is servicing. Here, Cenlar was
made a party to this litigation, not because it was acting as the Subservicer of any
particular \oan, but because it allegedly breached contractual obligations imposed
on it as the designated Subservicer of a// mortgage loans covered by the
Agreement. The plain language of § 8.3(f) cannot logically be interpreted to
require myCU to indemnify Cenlar for expenses incurred in defending itself in this
lawsuit. Moreover, to the extent that this language is ambiguous, it must be
strictly construed against a finding that myCU must indemnify Cenlar for attorney
fees incurred in the context of this lawsuit. Litton Indus., 982 A.2d at 440 (noting
that courts strictly construe fee-shifting provision in contracts “in light of the
general policy disfavoring the award of attorneys’ fees.”) (quotation omitted).

A brief discussion of the GMFS decision on which Magistrate Judge

Ovington relied is in order. That decision is directly on point in that it interprets the

11


third-party indemnity claims without reading § 8.3(c) out of the agreement.” /d. at
*5,

In its motion, myCU addressed the GMFS court's concern, providing an
example of how Cenlar could be directly liable to a third party as a result of
myCU’s breach. Under § 6.1 of the Agreement, myCU must cooperate and assist
Cenlar in carrying out its obligations, and must “execute and deliver all such
papers, documents, and instruments . . . as may be necessary and appropriate.”
Doc. #2-1, PagelD#138. myCU’s failure to do so would be a material breach that
could subject Cenlar to direct liability to a third party.

Magistrate Judge Ovington, however, found that this example shows only
that § 8.3(c) could lead to third-party claims against Cenlar “arising directly or
indirectly resulting from that breach.” It “does not demonstrate that, as a result of
potential third-party claims, Section 8.3(c) excludes first-party claims.” Doc. #22,
PagelD#473. Relying on GMFS, she found that “Section 8.3(c) could arguably
apply to both first-party and third-party claims” and “interpreting Section 8.3 of the
Agreement to apply only to third-party claims would result in reading Section
8.3(c) out of the Agreement.” /d. at PagelD#474. For this reason, Magistrate
Judge Ovington recommended that the Court overrule myCU’s motion to dismiss
the indemnification counterclaim.

2. myCU’s Objections and Cenlar’s Response (Docs. ##23, 26)
myCu has filed timely Objections to this portion of the Report and

Recommendations. Doc. #23. It argues that /nvestors Savings Bank governs the


Ill. Discussion

As noted, myCU objects to Magistrate Judge Ovington’s recommendation
that the Court overrule myCU’s motion to dismiss the counterclaims for
indemnification and breach of contract. The parties agree that, pursuant to the
terms of the Agreement, these two counterclaims are governed by New Jersey
law.

A. Indemnification

Cenlar seeks indemnification for losses, including attorney fees, under
§ 8.3(f) of the parties’ Agreement. Section 8.3 provides as follows:

Except as otherwise stated herein, Owner/Servicer [Plaintiff myCU]
shall indemnify and hold Subservicer [Cenlar] harmless against any
loss, liability, forfeiture or expense, including without limitation
carrying costs, investigation costs, fines, penalties and attorneys’ fees
and expenses, including, without limitation, the costs and expense of
curing any breaches of Owner/Servicer’s representations and
warranties relating to the Mortgage Loans (collectively, the
“Liabilities”), suffered or incurred by Subservicer arising out of,
directly or indirectly resulting from or relating to:

a. Owner/Servicer's willful misfeasance, bad faith, fraud, gross
negligence, or reckless disregard of its obligations hereunder;

b. any material misrepresentation made by Owner/Servicer in this
Agreement;

c. any material breach by Owner/Servicer of a representation,
warranty or covenant of Owner/Servicer contained in this
Agreement;

d. errors and omissions in the processing, origination or servicing
of any Mortgage Loan prior to the applicable Transfer Date;

e. compliance by Subservicer with instructions or requirements of
Owner/Servicer in connection with this Agreement; and

f. any claim, litigation or proceeding to which Subservicer is made
a party as a result of its acting as, or status as, Subservicer of
a Mortgage Loan, other than any such claim, litigation or
proceeding (i) which is based on a misrepresentation, breach or


Ss“
Date: March 28, 2019 laure Cle,

WALTER H. RICE
UNITED STATES DISTRICT JUDGE

15


States Magistrate Judge Ovington issued a Report and Recommendations, Doc.
#22, recommending that the Court sustain in part and overrule in part myCu’s
motion.

Magistrate Judge Ovington recommended that the Court dismiss Defendant
Cenlar’s counterclaim for breach of implied covenant of good faith and fair dealing
(Count Three). Neither party has filed Objections to this portion of the Report and
Recommendations. Based on the reasoning and citations of authority set forth
therein, as well as upon a thorough de novo review of this Court's file and the
applicable law, the Court adopts that portion of said judicial filing, and dismisses
with prejudice Cenlar’s counterclaim for breach of implied covenant of good faith
and fair dealing (Count Three).

With respect to Cenlar’s counterclaims for breach of contract (Count Two)
and indemnification (Count Four), Magistrate Judge Ovington recommended that
the Court overrule myCU’s motion. myCU has filed timely Objections to this
portion of the Report and Recommendations, Doc. #23, arguing that Magistrate
Judge Ovington misapplied the New Jersey law that governs these two

counterclaims. Cenlar has filed a Response to myCU’s Objections, Doc. #26.

1 Standard of Review
Under Federal Rule of Civil Procedure 72(b)(3), the Court must make a de
novo review of those portions of the Report and Recommendations to which

proper Objections have been filed.


I Background and Procedural History

The relevant facts are as follows. In 2008, Wright-Patt Financial Group
entered into a mortgage subservicing agreement (the “Agreement”) with
Defendant, Cenlar FSB. Doc. #2-1. Wright-Patt’s successor, Plaintiff,
myCUmortgage, LLC (“myCU”), and Cenlar amended the Agreement in 2011, and
again in 2015. Docs. ##2-2, 2-3. According to myCU, Cenlar materially breached
that Agreement in several respects. In January of 2017, myCU notified Cenlar
that it would allow the Agreement to expire on May 31, 2017.

The Agreement required myCU to reimburse Cenlar for costs reasonably
incurred in connection with the expiration of the Agreement, and myCU did so.
Pursuant to § 5.3 of the Agreement, if myCU allowed the Agreement to expire or
terminated it without cause, myCU was also required to pay Cenlar certain Exit
Fees. When myCU refused to pay the Exit Fees, claiming that this was an
unenforceable penalty, Cenlar withheld the $945,693.70 in Exit Fees from the
borrower escrow funds that it was required to return to myCU.

myCU then filed suit against Cenlar, asserting claims of breach of contract
and conversion, and seeking a declaratory judgment. Doc. #2. Cenlar filed
counterclaims for declaratory judgment (Count One), breach of contract (Count
Two), breach of implied covenant of good faith and fair dealing (Count Three), and
indemnification (Count Four). Doc. #9.

myCU has filed a Partial Motion to Dismiss and for Judgment on the

Pleadings, Doc. #13, on Counts Two through Four. On February 21, 2019, United


B. Breach of Contract

In its Second Counterclaim, Cenlar alleges that the Agreement unequivocally
sets forth Cenlar’s right to receive Exit Fees regardless of whether the Agreement
is terminated for cause. Cenlar further alleges that myCU anticipatorily repudiated
the Agreement by refusing to pay the Exit Fees, and later filed suit seeking a
declaration that they are unenforceable. Cenlar maintains that this constitutes a
material breach of the Agreement. As a result of the anticipatory repudiation,
Cenlar has been unable to receive the benefits of the Agreement and has suffered
damages.

myCU argues that this counterclaim must be dismissed because Cenlar
suffered no damages. Cenlar, in fact, admits that it retained all of the Exit Fees to
which it claims to be entitled. In her Report and Recommendations, however,
Magistrate Judge Ovington found that Cenlar had stated a plausible claim for
damages in that Cenlar alleges that it has incurred costs and attorney's fees in
response to myCU’s efforts to avoid paying the Exit Fees.

myCu’s Objection to this finding is intertwined with its previous Objection.
It argues that Cenlar’s costs and attorney’s fees can be recovered, if at all, only
pursuant to the indemnification provision in the Agreement, which fails as a matter
of law because, under New Jersey law, it does not apply to first-party claims.
Accordingly, myCU argues that Cenlar has failed to allege any actual, recoverable

damages.

13