Delaware Business Litigation Report

Superior Court Denies Motion to Dismiss for Failure to State a Claim Because Indemnification Provision Required a Court to Rule on the Merits Before Provision Could be Invoked

Midland Red Oak Realty, Inc. v. Friedman, Billings & Ramsey & Co., Inc., C.A. No. 04C-05-091 CLS, 2005 WL 445710 (Del. Super. Ct. Feb. 23, 2005). Plaintiffs Midland Oak Realty, Inc. and MRO Southwest, Inc. ("MRO") sued Defendants Friedman, Billings, Ramsey & Co., Inc. ("FBR") and Velasco Group, L.L.C. ("Velasco") for breach of a real-estate financing contract. FBR moved to dismiss based on an indemnification provision. The Superior Court denied FBR's motion to dismiss, holding that the indemnification provision's language made it applicable only after a court had reached a decision on the merits of the claim. MRO, a real-estate investment firm, entered into a three-year financing contract with Lehman brothers to cover the cost of fifteen properties. The contract required MRO to pay the principal and $5.275 million exit fee when the credit facility expired on July 1, 2002. In 2001 MRO began the search for a deal to replace the Lehman contract. MRO discussed financing options with FBR and Holliday Fenoglio Fowler ("Holliday"). They suggested that MRO split the financing into an "A" piece and a "B" piece. MRO assigned the "A" piece to Holliday and the "B" piece to FBR. MRO entered into a written agreement with FBR. Additionally, Lehman agreed to waive the $5.275 million fee if the refinancing was completed before Lehman's contract expired. Holliday secured financing for the "A" piece, but FBR was unable to secure financing for the "B" piece. As a result of the FBR's failure to find a financing agreement, MRO became in default to Lehman and was forced to liquidate the majority of its holdings. MRO sued FBR for breach of contract. Pursuant to Rule 12(b)(6), FBR moved to dismiss the suit. FBR argued that under the contract language MRO agreed to indemnify FBR except for losses that a court determined were caused to MRO by FBR's "willful misconduct or gross negligence," and that MRO failed to plead either. According to MRO, the indemnification provision, which contained the willful misconduct or gross negligence language, reserved the right for MRO to deny indemnification if a court found FBR acted with gross negligence or willful misconduct. The court agreed with MRO's interpretation and denied FBR's motion to dismiss. Authored by: Jason C. Jowers 302-888-6860 jjowers@morrisjames.com Share