Opinion ID: 4649278
Heading Depth: 1
Heading Rank: 4

Heading: Compliance with Indemnification Procedures

Text: The district court granted summary judgment to the Sellers on the ground that the Agreement does not require in‐ demnification if the notice is too late and the delay causes ir‐ revocable harm. The court reasoned that Sterling’s notice was late and left the Sellers without any way to challenge Ster‐ ling’s oﬀers to reimburse Damian’s clients or its six‐figure in‐ vestigation budget. On appeal, Sterling argues that the court made three er‐ rors. First, Sterling defends its notice as timely. Second, Ster‐ ling argues that even if its notice was late, any delay should have no consequence because the Sellers have not irrevocably forfeited any rights or defenses. Under the parties’ elaborate Agreement, we conclude that the Sellers have not shown that Sterling’s demand was late. Also, undisputed facts show that even if Sterling’s demand had been late, the Sellers have not irrevocably forfeited any rights or defenses by reason of any delay. We need not reach Sterling’s third argument, that fac‐ tual disputes about the extent of any prejudice to the Sellers preclude summary judgment. 12 Nos. 19‐2300, 19‐3122, & 19‐3235 Section 8.05(c) of the Agreement provides the following procedures for indemnification claims between the parties: Direct Claims. Any Action by an Indemnified Party on account of a Loss which does not result from a Third Party Claim (a “Direct Claim”) shall be asserted by the Indemnified Party giv‐ ing the Indemnifying Party reasonably prompt written notice thereof, but in any event not later than ten (10) days after the Indemnified Party becomes aware of such Direct Claim. The failure to give such prompt written notice shall not, however, relieve the Indemnifying Part of its in‐ demnification obligations, except and only to the extent that the Indemnifying Party irrevoca‐ bly forfeits rights or defenses by reason of such failure. Such notice by the Indemnified Party shall describe the Direct Claim in reasonable de‐ tail, shall include copies of all material written evidence thereof and shall indicate the esti‐ mated amount, if reasonably practicable, of the Loss that has been or may be sustained by the Indemnified Party. Late Notice? We are not persuaded that Sterling’s demand was actually late, or at least that the undisputed facts show it was late. The Agreement required notice within ten days, but only after a party became “aware of” the claim, and it required a demand with “reasonable detail.” This combination makes for an am‐ biguous mess, at least as applied to this dispute. The parties disagree about just how much Sterling needed to know before being “aware of” its claim against the Sellers and whether a Nos. 19‐2300, 19‐3122, & 19‐3235 13 precise trigger is needed to start the ten‐day clock for notice. According to Sterling, it did not become “aware of” its claim until Wachtell Lipton completed its investigation, especially since the Sellers contended that even the thirty‐page demand that Sterling presented was not detailed enough to count as a proper demand under the Agreement. The Sellers, on the other hand, counter that Sterling became “aware of” the claim no later than August 2015, when Sterling and Wachtell Lipton first presented the basic facts surrounding the 2009 change to the U.S. Attorney’s Oﬃce. Section 8.05(c) of the Agreement built in inherent tension between the need to investigate a Direct Claim before making a demand and the need to make a demand within just ten days after becoming “aware of” it. We have studied the Agreement’s definitions of Direct Claims and Actions and the need to support a demand for indemnification with a “reason‐ able” but uncertain quantum of evidence. We conclude that whether Sterling’s demand came more than ten days after it became “aware of” its Direct Claim cannot be decided in favor of the Sellers as a matter of law. We also conclude that we need not decide whether Sterling is entitled to summary judgment on the issue. As we explain next, Sterling is entitled to sum‐ mary judgment on the notice issue on a diﬀerent basis. Even if its demand was late, the undisputed facts show that the Sellers did not irrevocably forfeit any rights or defenses by reason of the timing of Sterling’s demand. B. Irrevocable Forfeiture? Section 8.05(c) of the Agreement requires prompt notice of a Direct Claim. Delay is excused, however, unless the Sellers “irrevocably forfeit[] rights or defenses by reason of such fail‐ ure.” The Sellers claim that Sterling’s supposed delay caused 14 Nos. 19‐2300, 19‐3122, & 19‐3235 them to forfeit three rights: (1) the right to settle the underly‐ ing claims with overcharged clients; (2) the right to litigate the underlying breach‐of‐contract claims with overcharged cli‐ ents, including raising certain defenses; and (3) the right to investigate as granted by the Agreement. The Sellers cannot show, however, that they have irrevocably forfeited any of these rights. Under § 8.05(c), therefore, the timing of Sterling’s indemnification demand could not relieve the Sellers of a duty to indemnify. See Dkt. 135, at –15 (Sterling’s request for summary judgment on this issue); Dkt. 136, ¶ 66. First, the Sellers have not irrevocably forfeited the right to settle the underlying claims because they never had that right to begin with. The Sellers argue that Sterling’s premature set‐ tlements of these claims with current clients for one hundred cents on the dollar deprived them of their right to drive harder bargains. The Sellers cite cases applying Illinois law in the insurance context that have required notice to head oﬀ in‐ sureds’ incentives to overpay when playing with someone else’s money. The problem for the Sellers is that this case does not di‐ rectly involve any of Damian’s clients or temporary employ‐ ment payroll contracts. To use the Agreement’s terms, Ster‐ ling has asserted a Direct Claim, not a Third Party Claim: Ster‐ ling has sued the Sellers for concealing these potential liabili‐ ties. Whether Sterling actually paid refunds to Damian’s cli‐ ents or not does not tell us whether it was required to do so. The key liability issue for indemnification is whether the Sellers misrepresented anything in the Agreement. To be sure, if a temp agency had ever sued or threatened to sue Damian for the 2009 change after the 2015 purchase, that would have been a Third Party Claim. Such a claim would have required Nos. 19‐2300, 19‐3122, & 19‐3235 15 the parties to consult before any settlement. See § 8.05(b) (“Settlement of Third Party Claims”). But that is not what hap‐ pened. The cooperation clauses in § 8.05(b) simply do not ap‐ ply. Moreover, the fact that the Agreement expressly requires the parties to cooperate on Third Party Claims implies that there is no such duty on Direct Claims, for which the Agree‐ ment says nothing about cooperation. See Land of Lincoln Goodwill, 762 F.3d at 679 (“[W]e attempt to … avoid a con‐ struction that would render a provision superfluous.”); Rick‐ her v. Home Depot, Inc., 535 F.3d 661, 668 (7th Cir. 2008), dis‐ cussing Drexel State Bank of Chicago v. O’Donnell, 344 Ill. 173, 183, 176 N.E. 348, 352 (1931) (Illinois courts use expressio unius canon as a rule of construction, but do not allow it to override a contract’s unambiguous terms). The Sellers’ citations to insurance cases miss the mark. Many of those cases applied contract language expressly re‐ quiring cooperation during litigation or settlement. The par‐ ties here drafted their elaborate Agreement without requiring cooperation for Direct Claims. Compare § 8.05(c), with Waste Management, Inc. v. Int’l Surplus Lines Ins. Co., 144 Ill. 2d 178, 192, 161 Ill. Dec. 774, 779, 579 N.E.2d 322, 327 (1991) (“The co‐ operation clause in this case imposes upon insureds the duty to assist insurers in the conduct of suits and in enforcing any right to contribution or indemnity against persons potentially liable to insureds.”); Country Mut. Ins. Co. v. Livorsi Marine, Inc., 358 Ill. App. 3d 880, 882, 885, 295 Ill. Dec. 665, 666, 668, 833 N.E.2d 871, 872, 874 (2004) (distinguishing “notice of oc‐ currence” and “notice of lawsuit” cases because the contract in question gave the insurer “the right and duty to defend any suit” or to “settle any claim or suit”) (internal quotation marks 16 Nos. 19‐2300, 19‐3122, & 19‐3235 omitted); American Country Ins. Co. v. Bruhn, 289 Ill. App. 3d 241, 244, 224 Ill. Dec. 805, 807, 682 N.E.2d 366, 368 (1997) (no‐ tice provision required insured to “[c]ooperate with [insurer] in the investigation, settlement or defense of any claim or suit”). To be sure, some cases applying Illinois law have gone be‐ yond contractual texts to find implied remedies for lack of no‐ tice in contracts to give full eﬀect to notice provisions. See, e.g., Kerr v. Illinois Central R.R. Co., 283 Ill. App. 3d 574, 581– 82, 219 Ill. Dec. 81, 87, 670 N.E.2d 759, 765 (1996) (construing notice provision to include implied remedy where excess in‐ surer did not reserve right to participate in defense of claim, lest insurer “be called on simply to write the check”); see also AU Electronics, Inc. v. Harleysville Grp., Inc., 82 F. Supp. 3d 805, 814 (N.D. Ill. 2015) (explaining rationale of Illinois insurance rules as applied to contracts that “entitle the insurers to con‐ trol the insured’s defense against a covered claim and negoti‐ ate a settlement”). The principal‐agent problems motivating the unusual, non‐textual finding of an implied duty to cooperate in Kerr are less relevant here because the underlying alleged contract breaches were not with strangers but with Damian’s clients. And apart from policy arguments, the Sellers’ contention that the notice requirement implicitly granted the Sellers a right to bargain independently with their former clients is not supported by the text of the sophisticated parties’ elaborate Agreement. Nothing in the language of the Agreement required Sterling to involve the Sellers in any settlement negotiations or to allow the Sellers to settle the claims themselves. It would seem odd to give the Sellers the ability to poison the relationship between Damian and its clients. Nos. 19‐2300, 19‐3122, & 19‐3235 17 Odd enough, anyway, not to find an implied right to do so. Any exception that might be gleaned from Kerr does not apply here, so any supposed delay in giving notice of the indemnification claim did not cause the Sellers to lose a right secured by the Agreement. Second, the Sellers also have not irrevocably forfeited the right to litigate the underlying contract claims. They are in fact litigating the merits of those claims in this case. They can still assert contract defenses, and the merits of Sterling’s claim hinge on whether the underlying hypothetical contract claims against Damian would have had any merit. That is, even though the temp agency clients are not parties to this litiga‐ tion, Sterling must still show that Damian was liable to them. The Sellers can litigate these claims now. The Sellers counter that this reading unduly narrows their rights to litigate the claims. Their theory seems to be that they will have a more diﬃcult time proving damages now that some but not all clients have already been reimbursed. But the parties here are commercially sophisticated. They wrote their Agreement to nullify an indemnification demand for delay only if and to the extent the delay resulted in “irrevocable for‐ feiture” of a claim or defense. That’s a high bar. If they had wanted the Agreement to bar indemnification if late notice merely impeded or weakened a claim or defense, they could have said so. E.g., Procaccio Painting, 794 F.3d at 680. Third, the Sellers have not irrevocably forfeited any inves‐ tigation rights. The relevant provisions of § 8.05(c) are in some tension on this point: 18 Nos. 19‐2300, 19‐3122, & 19‐3235 The Indemnified Party shall allow the Indemni‐ fying Party and its professional advisors to in‐ vestigate the matter or circumstance alleged to give rise to the Direct Claim, and whether and to what extent any amount is payable in respect of the Direct Claim and the Indemnified Party shall assist the Indemnifying Party’s investiga‐ tion by giving such information and assistance (including access to the Company’s premises and personnel and the right to examine and copy any accounts, documents or records) as the Indemnifying Party or any of its professional advisors may reasonably request. The Sellers claim that this language gave them a right to par‐ ticipate in Sterling’s internal, pre‐claim investigation, which they say was irrevocably lost when Sterling investigated on its own. The Sellers also contend that they have lost the right to conduct their own timely investigation because (a) infor‐ mation about the settlement value of the underlying claims is now unobtainable, (b) any subsequent investigation would be rendered a nullity because Sterling paid the clients already, and (c) Sterling unfairly blocked third‐party discovery in this case. The Sellers’ arguments assert rights not granted by the Agreement. Section 8.05(c) of the Agreement is ambiguous in important respects, but it quite plainly assumes that Sterling would need to conduct some investigation of its own before giving notice of a Direct Claim for indemnification. The Agreement required Sterling, in giving formal notice, to “de‐ scribe the Direct Claim in reasonable detail, [] include copies Nos. 19‐2300, 19‐3122, & 19‐3235 19 of all material written evidence thereof and [] indicate the es‐ timated amount … of the Loss.” § 8.05(c). Sterling could not have met that requirement without a substantial pre‐demand investigation. The Sellers’ asserted right to investigate must be consistent with these requirements. Nothing in the Agreement granted the Sellers a right to conduct a contemporaneous investiga‐ tion even before Sterling gave notice of its demand. Perhaps, as the Sellers suggest, it was unreasonable for Sterling to run up $650,000 in investigation costs. If so, that issue would aﬀect only whether the professional fees were indemnifiable “Losses,” not whether one can find an implied (and illogical) right for an indemnifying party to conduct its own investiga‐ tion even before a demand is made. The Agreement refers to the “Indemnifying Party’s inves‐ tigation,” not to the “Indemnifying Party’s participation in the Indemnified Party’s investigation,” which would make little sense. After demand is made, according to the Agreement, the Sellers had a limited right of access to documents and person‐ nel. The Sellers had that right whether the notice was late or timely, but they did not have a right to do more earlier. The Sellers also complain about being denied the right to depose certain clients of Damian under the Federal Rules of Civil Procedure in this action. The Sellers’ argument on this point is diﬃcult to follow. Nothing in the Agreement itself provides—or could provide—the right to subpoena third par‐ ties through the parties’ private dispute‐resolution proce‐ dures. The Federal Rules of Civil Procedure apply in this case, of course, but on appeal, the Sellers have not challenged any case‐management limits on depositions. On remand, the dis‐ 20 Nos. 19‐2300, 19‐3122, & 19‐3235 trict court may of course choose to revisit the scope of discov‐ ery, but nothing about this dispute relieves the Sellers of any otherwise valid claim for indemnification. The Sellers’ original response to the indemnification de‐ mand underscores that any right to investigate is far more limited than they argue now. As noted, the Sellers objected to Sterling’s thirty‐page demand for indemnification on the ground that it did not provide enough detail. That is, the Sellers claimed the demand was insuﬃcient under the Agree‐ ment unless and until Sterling provided the kinds of docu‐ mentation that could have come only from an investigation that would have been even more thorough than the one that the Sellers now argue took too long and was too expensive. Along those lines, the Sellers also argue that the right to investigate was lost because Sterling prematurely settled any outstanding claims by customers. We reject this attempt to re‐ cast the first two arguments within the framework of the in‐ vestigation for the reasons above. The Agreement simply did not grant the Sellers a right to negotiate with third parties in addressing a Direct Claim like this. And even if the Sellers lost the ability to learn exactly what each current client might have accepted as a settlement oﬀer for purposes of computing damages in this lawsuit, they have not lost access to Damian’s former clients, who have not yet been paid. The Sellers have not irrevocably lost any opportunity to investigate the amounts for which temp agencies would settle.2 2 We need not resolve Sterling’s back‐up argument that disputed facts about the extent to which the Sellers were harmed require remand for trial. Section 8.05(c) relieves the Sellers of a duty to indemnify only “to the ex‐ tent that the Indemnifying Party irrevocably forfeits rights or defenses.” Our conclusion that the extent of irrevocable harm was zero resolves this Nos. 19‐2300, 19‐3122, & 19‐3235 21