Martin Nicholas John Trott v. Deutsche Bank, AG

Background

Madison Asset LLC entered into a Multi-Market Custody Agreement with Deutsche Bank in March 2014. Section 13 required Madison to indemnify Deutsche Bank for specified losses and claims connected with the agreement, but stated that indemnification was unavailable for liabilities arising from Deutsche Bank’s own negligence or willful misconduct. The agreement also contained a New York choice-of-law provision.

Madison later entered liquidation proceedings in the Cayman Islands, and Trott and Smith were appointed its joint official liquidators. After a bankruptcy court recognized the Cayman proceeding as a foreign main proceeding, the liquidators brought a claim against Deutsche Bank under Section 147 of the Cayman Islands Companies Act for fraudulent trading. The court had previously allowed that claim to proceed, holding that the liquidators had to prove Deutsche Bank knowingly participated in Madison’s fraudulent conduct. The court explained that this required proof of either actual knowledge or “willful blindness,” meaning suspicion of the fraud combined with a deliberate decision not to investigate further.

Deutsche Bank then filed an answer asserting affirmative defenses and a counterclaim seeking indemnification under the custody agreement. The liquidators moved to dismiss the counterclaim under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a pleading does not state a legally sufficient claim. They also moved under Rule 12(f) to strike Deutsche Bank’s Thirteenth Affirmative Defense, which stated that the liquidators’ claims were limited by any applicable rights of set-off, contribution, and indemnification.

Indemnification Counterclaim

The court granted the motion to dismiss the counterclaim. It reasoned that if the liquidators prevailed on their Section 147 claim, they necessarily would have to establish that Deutsche Bank acted with actual knowledge or willful blindness. That required conduct more serious than ordinary or gross negligence and fell within the custody agreement’s exclusion for liabilities arising from negligence or willful misconduct. Therefore, the agreement could not provide Deutsche Bank indemnification for liability arising from a successful Section 147 claim.

Conversely, if the liquidators did not prevail on their claim, there would be no liability requiring indemnification. The court therefore concluded that there was no set of facts consistent with the counterclaim that would entitle Deutsche Bank to indemnification. The court declined to resolve the parties’ broader arguments about whether the agreement’s indemnification provision applied to claims between the parties, explaining that such a contract-interpretation issue went beyond what could be decided on a motion to dismiss.

Thirteenth Affirmative Defense

The court denied without prejudice the motion to strike the Thirteenth Affirmative Defense. Although the court found the indemnification counterclaim legally infeasible, it viewed the affirmative defense as broader because it referred not only to indemnification but also to set-off and contribution. The liquidators had not shown that those alternative theories were legally insufficient.

The court also rejected the argument that the defense should be stricken because it might confuse or prejudice the liquidators. At the pleading stage, considering possible jury confusion would be premature. The court noted that a factually sufficient and legally valid defense should generally be allowed when timely filed, and there were no allegations that Deutsche Bank had filed its defenses late.

Disposition

Judge Mary Kay Vyskocil granted the liquidators’ motion to dismiss Deutsche Bank’s indemnification counterclaim. She denied without prejudice the motion to strike the Thirteenth Affirmative Defense and directed the Clerk of Court to close the motion docket entry.