The First Department determined the plaintiffs’ motion for summary judgment relieving them of liability for the costs of a tax audit should have been granted. In a stock purchase agreement (SPA) plaintiffs agreed to indemnify Dearborn for costs associated with tax audits relating to any time up until the closing date. Dearborn had been sold by plaintiffs to a third party. A tax audit of Dearborn was conducted resulting in a $2.2 million tax assessment. In violation of the SPA, Dearborn did not notify plaintiffs of the tax audit. The SPA provided that the failure to notify would be actionable only to the extent plaintiffs were prejudiced by it. The issue before the First Department was whether the prejudice must be economic loss, or whether the inability to control the defense of the tax audit was sufficient. Reversing Supreme Court, the First Department held the deprivation of the right to control the defense of the audit was sufficient:
What we must determine, therefore, is the standard that plaintiffs must meet to demonstrate that the untimely notice of the second audit that they received caused them actual prejudice, and whether, on this record, that standard has been met. We agree with plaintiffs that, contrary to the view of Supreme Court and the position of defendants, in view of their “sole right” under the SPA to “control” the defense of the second audit (expressly including the rights to choose counsel and to settle), plaintiffs need not establish “tangible economic injury” to show that they have been actually prejudiced by the late notice … . Rather, to establish actual prejudice due to late notice, it suffices for an indemnitor afforded the right to control the defense of an idemnifiable claim to show that it was deprived of its right to exercise that right for a material portion of the proceedings on the claim. Conergics Corp. v Dearborn Mid-West Conveyor Co., 2016 NY Slip Op 07750, 1st Dept 11-17-16
CONTRACT LAW (INDEMNITOR WAS NOT NOTIFIED OF A TAX AUDIT UNTIL A TAX ASSESSMENT WAS IMPOSED, PREJUDICE SUFFICIENT TO RELIEVE THE INDEMNITOR OF THE CONTRACTUAL OBLIGATION TO INDEMNIFY NEED NOT ENTAIL TANGIBLE ECONOMIC LOSS, IT IS ENOUGH THE INDEMNITOR WAS DENIED THE OPPORTUNITY TO CONTROL THE DEFENSE OF THE AUDIT)/INDEMNIFICATION (INDEMNITOR WAS NOT NOTIFIED OF A TAX AUDIT UNTIL A TAX ASSESSMENT WAS IMPOSED, UNDER THE CONTRACT, PREJUDICE SUFFICIENT TO RELIEVE THE INDEMNITOR OF THE CONTRACTUAL OBLIGATION TO INDEMNIFY NEED NOT ENTAIL TANGIBLE ECONOMIC LOSS, IT WAS ENOUGH THE INDEMNITOR WAS DENIED THE OPPORTUNITY TO CONTROL THE DEFENSE OF THE AUDIT)