Date: 04-09-2010

Case Style: Murugesan Kannayan v. Dollar Home Corporation

Case Number: 09-6103

Judge: Stephen H. Anderson

Court: United States Court of Appeals for the Tenth Circuit on appeal from the Western District of Oklahoma (Oklahoma County)

Plaintiff's Attorney:

Defendant's Attorney:

Description: Chad Dobbins appeals from the district court’s order denying his motion to recover attorneys’ fees in an action brought against him by appellees Dollar Phone Corporation and Dollar Phone International, Inc. (collectively “Dollar Phone”). Exercising jurisdiction under 28 U.S.C. § 1291, and reviewing the indemnity provision at issue de novo,1 we affirm.

Dollar Phone is a wholesale provider of telephone calling cards. In 2005, it entered into sales agreements with two separate distributors of such cards, Time Advisors, L.P. and Kannayan Family LLC (d/b/a “Spydernett”). The Time Advisors agreement was signed by Dobbins on behalf of Time Advisors. The Spydernett agreement was signed by Murugesan Kannayan, plaintiff and counter-defendant below. Both agreements contained arbitration clauses and cross-indemnification provisions.

In November 2007, Dollar Phone filed a demand for arbitration against Kannayan pursuant to the arbitration clause in the Spydernett agreement, claiming that Spydernett’s account was in default. In response, Kannayan claimed he was not personally a party to the Spydernett agreement, and he filed a state court action against Dollar Phone seeking to enjoin the arbitration proceeding against him in his individual capacity. Dollar Phone removed that action to federal court based on diversity of citizenship and filed a counterclaim against Kannayan and a third-party claim against Dobbins, seeking an order compelling both men to participate in the arbitration proceeding. Dollar Phone alleged that Dobbins and Kannayan were general partners of Time Advisors, and that Time Advisors and Spydernett had commingled their accounts. Dollar Phone theorized that, as a general partner of Time Advisors, Kannayan believed he was personally liable for that entity’s debts, but that he did not believe he could be held personally liable for Spydernett’s debts. Therefore, he used Spydernett’s funds to keep Time Advisors’s account current, thereby causing Spydernett to default on its own account.

Finding no evidence of a general partnership between Dobbins and Kannayan, the district court rejected the argument that Time Advisors or Dobbins could be held liable for Spydernett’s debt. Thus, it concluded that the arbitration clause in the Time Advisors agreement could not possibly cover Dollar Phone’s collection action against Spydernett. The court therefore awarded summary judgment to Dobbins, dismissing Dollar Phone’s action to compel arbitration. Dobbins then moved for his attorneys’ fees under the indemnity provision of the Time Advisors agreement, § 3.5, which provides as follows:

Provider hereby indemnifies and agrees to hold [Distributor]2 its officers, directors, shareholders, employees, agents . . . (the ‘Indemnified Parties’) harmless from and against any claim, liability, damage, cost, and expense, including . . . attorneys’ and expert witness fees, incurred by any of the Indemnified Parties directly arising out of or in connection with the failure to comply with any regulatory obligations or any other obligations contained herein. Aplt. App. at 117.

Consistent with its summary judgment ruling, the district court denied Dobbins’s motion for attorneys’ fees because it concluded the Time Advisors agreement “had no connection to Dollar Phone’s third-party action against him.” Aplee. Supp. App. at 3. Essentially, the court would not allow Dobbins to benefit from the indemnity clause of the Time Advisors agreement and simultaneously avoid application of its arbitration clause. Dobbins argues this was unfair, pointing out that if Dollar Phone had prevailed, it likely would have been entitled to its attorneys’ fees under the cross-indemnification provision, § 3.3. He claims he should not be penalized for defeating Dollar Phone’s misguided attempt to compel his participation in the arbitration proceeding. And he notes that other jurisdictions, primarily California, guard against this unfair result by awarding attorneys’ fees to the prevailing party on a contract claim even if the party successfully argues that the contract is inapplicable. See, e.g., Hsu v. Abbara, 891 P.2d 804, 808 (Cal. 1995) (applying Cal. Civ. Code § 1717).

We do not disagree with Dobbins’s general hypothesis that Dollar Phone would have been entitled to recover its fees had it prevailed; nor his assertion that in certain jurisdictions, he would be entitled to his fees notwithstanding the general inapplicability of the Time Advisors agreement. But unlike California, Oklahoma has not enacted legislation or otherwise recognized a doctrine that enforces an attorneys’ fees provision in an otherwise inapplicable contract.3 Thus, while we recognize the potential inequity that results from the district court’s interpretation, we cannot say it was legally incorrect.

The cardinal rule when interpreting an indemnity clause, as with all contractual provisions, is “to ascertain the intention of the parties and to give effect to that intention if it may be done consistently with legal principles.” Luke v. Am. Surety Co. of N.Y., 114 P.2d 950, 951-52 (Okla. 1941). Section 3.5 is no model of clarity. But in our view, most reasonably construed, it expresses Dollar Phone’s intent to indemnify Time Advisors in the event of its own failure to comply with its regulatory or contractual obligations. Under this natural and logical interpretation, the agreement harmoniously provides for the recovery of attorneys’ fees by both parties if such fees were incurred in connection with the other party’s breach. By contrast, Dobbins’s interpretation, unsupported by any Oklahoma cases, would permit the recovery of attorneys’ fees in any lawsuit between the parties so long as an allegation is made under the contract, no matter how frivolous. The district court committed no error in rejecting this expansive construction.

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See: http://www.ca10.uscourts.gov/opinions/09/09-6103.pdf

Outcome: Its judgment is therefore AFFIRMED.

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Defendant's Experts:

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