Wyle Inc. v ITT Corp

[*1] Wyle Inc. v ITT Corp 2012 NY Slip Op 52302(U) Decided on October 31, 2012 Supreme Court, New York County Ramos, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on October 31, 2012
Supreme Court, New York County

Wyle Inc. and WYLE SERVICES CORPORATION, Plaintiffs,

against

ITT Corp, ITT EXELIS INC., and XYLEM INC., Defendants.



653465/2011



For plaintiffs: Donald H. Chase, Esq., of Morrison Cohen LLP

For defendants: Michael Schatzow, Esq. and Julia L. Davis, Esq. of Venable LLP

Charles E. Ramos, J.

In motion sequence 002, defendants ITT Corp, ITT Exelis Inc., and Xylem Inc. (collectively, ITT Defendants) move, pursuant to CPLR 3211 (a) (1) and (7), to dismiss the complaint.

Background

This action arises out of plaintiff Wyle Services Corporation's (Wyle Services) purchase of non-party CAS, Inc. (CAS), a corporation specializing in providing engineering, scientific, and technical services to the United States federal government.

The following factual allegations are set forth in the complaint, and are accepted as true for the purposes of this motion.

CAS was founded in 1979 and grew its business by bidding on contracts to supply the Federal government with system engineering and analysis support for theater missile defense, air defense, aviation, and land-combat missile systems. In 2006, CAS's annual revenue exceeded $184 million, a majority of which was derived from work performed under Professional Engineering Services schedules (PES schedules), a type of Government Services Administration (GSA) schedule.[FN1] The PES schedules were important to CAS, because the labor rates contained in them formed the basis for the rates that CAS could charge under its biggest contract, known as AMCOM Express (AMCOM).

In 2006, CAS's founders sold the business to EDO Corporation. In 2007, ITT Corp acquired EDO Corporation. ITT Corp is now three separate entities, ITT Corp, ITT Exelis Inc., and Xylem Inc., all of whom are defendants in this lawsuit.

In 2010, after a few years of contributing only a small amount to ITT Corp's overall [*2]revenue, ITT Corp decided to put CAS up for sale. This coincided with the nearing end of the period of performance for CAS's PES schedule. However, the PES schedule gave the GSA an option to extend the period of performance, and in early 2010, the GSA notified CAS of its intent to do so. After notification of the extension, CAS elected to submit new proposed rates, which they were permitted to do.

On March 1, 2010, the Office of the Inspector General (OIG) sent a letter to CAS notifying it that the government had chosen CAS's PES schedule to be one of seventy-five schedules subject to a "pre-award audit" that fiscal year. While this audit process was ongoing, ITT Corp stepped up its efforts to sell CAS. On August 7, 2010, Wyle Services, and its parent company, Wyle Inc. (collectively, Wyle), entered into a stock purchase agreement with CAS and EDO Corporation (the Agreement).

Under the Agreement, Wyle agreed to pay EDO Corporation approximately $235 million for all capital stock of CAS. As part of the Agreement, Wyle insisted that EDO Corporation make certain representations designed to ensure that any potential risks associated with CAS's government contracts were disclosed. One such provision of the Agreement is Section 3.15 (c) (v), which provides, in relevant part, "Section 3.15 (c) (v) of the Company Disclosure Schedule lists each Government Contract or Government Bid to which [CAS] is a party which, to [CAS's] knowledge, is as of the date hereof under audit by any Governmental Authority or any other Person that is a party to such Government Contract or Government Bid"

(Complaint, Exhibit A).

On September 8, 2010, Wyle's acquisition of CAS closed without disclosure of the ongoing OIG audit. On March 4, 2011, the GSA announced the results of the OIG audit, and decided to reduce the rates that CAS could charge for many of its employees performing work for the government under the PES schedule. On March 23, 2011, CAS signed the new PES schedule. On April 15, 2011, Wyle's general counsel notified ITT Corp that they were enforcing their rights under Section 8.2 of the Agreement and sought indemnification from ITT Corp for their losses as a result of EDO Corporation's breach of section 3.15 of the Agreement. Wyle memorialized their demand for indemnification in two letters dated June 22, 2011 and September 16, 2011.

On December 14, 2011, Wyle commenced this action. The ITT Defendants now move to dismiss the complaint on the ground that Wyle's claim for breach of contract is barred as a result of Wyle's failure to comply with the express notice conditions of the Agreement.

There is no dispute that Wyle gave late written notice to the ITT Defendants, as Wyle did not memorialize its demand for indemnification until June 22, 2011.

Analysis

Section 8.5 (a) of the Agreement states, in relevant part, "An Indemnified Party shall give the Indemnifying Party prompt written notice of any matter which an Indemnified Party has determined has given or could give rise to a right of indemnification under this Agreement, within ten (10) Business Days of such determination ...; provided, however, that the failure to give the Indemnity Notice shall not waive an Indemnified Party's right to indemnification, [*3]except to the extent the Indemnifying Party can show that it was materially prejudiced by the Indemnified Party's failure to give notice "

(Complaint, Exhibit A).

Further, Section 8.5 (b) of the Agreement states, in relevant part, "If any claim, action, suit, proceeding or demand is brought by a Person who is not a party to this Agreement or an Affiliate thereof (a Third Party Claim') against an Indemnified Party, and if such party intends to seek indemnification with respect thereto pursuant to this Article VIII, such Indemnified Party shall promptly notify the Indemnifying Party in writing and in reasonable detail of the Third Party Claim...; provided, however, that no delay on the part of the Indemnified Party in notifying the Indemnifying Party will relieve the Indemnifying Party from any obligation hereunder unless the Indemnifying Party can show that it was materially prejudiced by the Indemnified Party's failure give notice ...; provided, further, that it being understood and agreed that the failure of the Indemnified Party to so notify the Indemnifying Party prior to the settlement of a Third Party Claim (whether by paying a claim or executing a binding settlement agreement with respect thereto) or the entry of a judgment or issuance of an award with respect to a Third Party Claim shall constitute actual prejudice to the Indemnifying Party's ability to defend against such Third Party Claim..."

(Complaint, Exhibit A).

The ITT Defendants argue that Wyle's failure to comply with these notice provisions is fatal to their claim for indemnification. In opposition, Wyle argues that only Section 8.5 (a) applies here, as there is no Third Party Claim, as defined in the Agreement, and that under Section 8.5 (a), the ITT Defendants must show that they were materially prejudiced by the untimely notice, which they have not shown.

Since the Agreement provides separate notification requirements for matters that have given or could give rise to a right of indemnification (Section 8.5 [a]), versus notification requirements for indemnification of existing Third Party Claims (Section 8.5 [b]), the Court will first analyze whether a Third Party Claim exists under the Agreement, and if so, will look to the notification provision of Section 8.5 (b).

Section 8.5 (b) defines a "Third Party Claim" as "any claim, action, suit, proceeding or demand ... brought by a Person who is not a party to this Agreement or an Affiliate thereof." Here, the GSA made demands to CAS, audited CAS, and after completion of that audit, presented CAS with a proposal of new labor rates for renewal of the PES schedule. Wyle, as they acknowledge, engaged in some negotiation with the GSA after receiving the GSA's proposal, and received some minor concessions with respect to some of the labor rates, and finally, accepted a proposal.

This pre-award review qualifies as a Third Party Claim, subjecting Wyle to the notice provision of Section 8.5 (b), as well as Sections 8.5 (c) and (d), which govern the indemnifying party's rights to participate in any Third Party Claims, defenses, settlements, or compromises.

The Court finds Wyle's argument that this is not a Third Party Claim, because they had [*4]little negotiating room, without merit. Wyle is seeking indemnification based on the results of the pre-award review. The GSA presented Wyle with a proposal of new rates as determined by the results of the audit, Wyle did some negotiating with the GSA, some concessions were made, and a new rate schedule was entered into. This triggered an obligation to provide the ITT Defendants with notice that the GSA made such demands based on the audit, and that the GSA and Wyle were coming to some agreement as to the new PES schedule.

Wyle also argues that this is not a Third Party Claim, because they are seeking indemnification for losses arising from EDO Corporation's breach of the Agreement, and EDO Corporation is a party to the Agreement. This argument is also without merit. Wyle is seeking indemnification for losses as a result of the government's pre-award review. If there were no Third Party Claim by the government, there would be no losses, even if EDO Corporation did breach the Agreement by not disclosing the audit. The losses flow from the GSA's pre-award review, not EDO Corporation's alleged breach.

In addition to determining whether the pre-award review is a Third Party Claim, Section 8.5 (b) provides a second prong requirement that "no delay on the part of the Indemnified Party in notifying the Indemnifying Party will relieve the Indemnifying Party from any obligation hereunder unless the Indemnifying Party can show that it was materially prejudiced by the Indemnified Party's failure give notice" (Complaint, Exhibit A).

Section 8.5 (b) further provides that it is "understood and agreed that the failure of the Indemnified Party to so notify the Indemnifying Party prior to the settlement of a Third Party Claim (whether by paying a claim or executing a binding settlement agreement with respect thereto) or the entry of a judgment or issuance of an award with respect to a Third Party Claim shall constitute actual prejudice to the Indemnifying Party's ability to defend against such Third Party Claim" (Complaint, Exhibit A).

Wyle argues that, even if this provision were applicable, "actual prejudice" is not the same as "material prejudice," and thus, the ITT Defendants cannot rely on the language of this provision. Wyle's attempt to raise an ambiguity in this provision of the agreement is unsupported.

A contract is ambiguous if it is susceptible to more than one meaning (Computer Assoc. Intl., Inc. v U.S. Balloon Mfg. Co., Inc., 10 AD3d 699, 700 [2d Dept 2004]). Wyle provides no support as to how Section 8.5 (b) can be understood in more than one way. "The interpretation of written contracts which are clear and explicit is a matter for the courts to resolve" (Eden Music Corp. v Times Sq. Music Publs. Co., 127 AD2d 161, 164 [1st Dept 1987]). "A contract is unambiguous if the language it uses has a definite and precise meaning' [citation omitted]" (Greenfield v Philles Records, 98 NY2d 562, 569 [2002]). "[I]f the agreement on its face is reasonably susceptible of only one meaning, a court is not free to alter the contract to reflect its personal notions of fairness and equity" (id. at 569-570).

The language of Section 8.5 (b) has a definite and precise meaning, and thus, is unambiguous, as a matter of law. In its clear and plain language, Section 8.5 (b) requires a showing by the ITT Defendants that they were materially prejudiced by Wyle's failure to give proper notice, and [*5]specifically provides that the parties have agreed that the failure of Wyle to notify the ITT Defendants prior to the settlement of the Third Party Claim is actual prejudice to the ITT Defendants. This provision would be rendered illogical if agreed-upon actual prejudice were not material. Any other interpretation of this provision is unreasonable.

Thus, as the ITT Defendants were prejudiced because they were not notified of the Third Party Claim until months after Wyle and government settled the claims arising out of the pre-award review, the ITT Defendants have met this second prong. Wyle's failure to properly notify the ITT Defendants is fatal to their claim for indemnification. Therefore, the complaint is dismissed.

Further, independent of the "actual prejudice" provision in Section 8.5 (b), Section 8.5 (c) gives the ITT Defendants the right to participate in or assume the defense of the Third Party Claim. In addition, section 8.5 (d) provides that neither the indemnifying party or indemnified party, without the written consent of the other, can settle or compromise any Third Party Claim. Under these provisions, Wyle had an obligation to notify the ITT Defendants of the Third Party Claim, permitting the ITT Defendants an opportunity to participate in discussions with the GSA in regard to the new PES schedule.

Wyle also had an obligation to notify the ITT Defendants in writing when they finalized the new PES schedule. The ITT Defendants were deprived of these rights by Wyle's failure to notify them. This deprivation of rights materially prejudiced the ITT Defendants. These provisions set forth express conditions which were not met, and a failure to comply with such provisions is also fatal to Wyle's demand for indemnification (see Erickson Air-Crane Inc. v EAC Holdings, L.L.C., 84 AD3d 464 (1st Dept 2011).

Accordingly, it is

ORDERED that defendants ITT Corp, ITT Exelis Inc., and Xylem Inc.'s motion to dismiss is granted and the complaint is dismissed with costs and disbursements to defendants as taxed by the Clerk upon the submission of an appropriate bill of costs; and it is further

ORDERED that the Clerk is directed to enter judgment accordingly.

Dated: October 31, 2012

ENTER:

J.S.C. Footnotes

Footnote 1: The GSA developed several vehicles to simplify the government contracting process, one of which is GSA schedules, which are standardized pre-negotiated price lists that permit government departments to purchase services from a contractor at the prices contained in it.