Opinion
No. 03 Civ. 3093 (TPG).
May 10, 2005
OPINION
But I think it's a little late after all this argument and all this briefing to suddenly turn around and say that the motion is premature. I don't think I can, in conscience, do that.
I appreciate your arguments. Your arguments are very eloquently presented. I appreciate both sides. But what I really have to tell you that I have no question about the validity of that agreement.
I think there may very well be issues about whether the agreement was properly performed by CCC and the hospital and those issues are not at all done away with by striking the 14th affirmative defense. In fact, the more I hear about it, and I think — the gentlemen who —
MR. BEGLEITER: Brown?
THE COURT: No.
MR. BEGLEITER: Mr. Bar-Kokhba.
THE COURT: Mr. Bar-Kokhba. I think both you and he have indicated there are problems about the performance of that standstill agreement.
MR. BEGLEITER: Absolutely.
THE COURT: They will remain. But I want to — I think at this point we have to draw this phase to a close, and so I will dictate a very brief ruling. There is a lot said in the record. And so if you would just return to your seat, please, and I will dictate a ruling.
Would you do that, please?
MR. BEGLEITER: I was just going to mention — all right.
THE COURT: I think you have mentioned quite a bit.
The detailed facts and the instruments are set forth in the record and I will make no attempt to give a full description now. The important thing is to get a ruling. If there is a need for further elaboration, that can be done at a later time. But there is an amended complaint here which does raise certain issues about this document called the standstill agreement of December 20, 2002, and there is an affirmative defense, I think I got the right date — and there is an affirmative defense, the 14th affirmative defense which claims that that agreement is invalid and unenforceable.
There is a motion by the plaintiffs to strike the 14th affirmative defense. That motion is granted.
The essential terms of the standstill agreement need not be quoted in detail, but the essence is this:
The hospital, TBHC had entered into an insurance agreement or actually a shareholders agreement with CCC — I am using CCC as a shorthand for the plaintiffs, the two plaintiffs — and there was an insurance policy insuring TBHC against liability. The insurance policy which was in effect from about the year 2000 to the end of 2002, and even thereafter, provided for an annual limit of $50 million per occurrence and $150 million aggregate per year.
The TBHC had obligations to make payment to CCC to cover its liabilities in a way that was agreed, and I won't go into details. I do not believe that these payments were literally called premiums, they were called something else, but they were payments, and they were substantial as required.
TBHC fell seriously into default. As of the end of 2002 TBHC was in default in the amount of at least $13 million.
The danger to TBHC was that its insurance would be terminated. TBHC did not want that. TBHC entered into a negotiation with CCC to prevent the termination of its insurance, and the result of that negotiation was the standstill agreement.
By virtue of the standstill agreement the insurance was continued rather than being terminated. However, the limits were reduced, and they were reduced to $5 million per occurrence and $5 million aggregate. The limits were reduced so as to be commensurate with a payment which it was hoped TBHC could afford.
Under the terms of the standstill agreement TBHC had the right to resume sufficient payments so as to reactivate the $50 million per occurrence and the $150 million aggregate limits. But at the time of the standstill agreement TBHC could not afford to make the payments which would sustain and fund such large limits.
The standstill agreement was entered into by the parties, by CCC and TBHC. Both were represented by able counsel and both were represented by counsel who did the legal work which resulted in this agreement.
There is an internal memo, a memorandum between officials in the hospital structure which vividly describes the plight of TBHC and the need and desire of TBHC for this agreement in order to allow the insurance to continue.
Now, as it turned out, things were not as hoped for. A work-out agreement which was contemplated as being developed to further implement the relationship between the parties on these issues was never worked out. The unfortunate result which actually occurred is that despite the standstill agreement, the insurance ultimately was terminated.
On the question of the validity of the standstill agreement, there has been extensive reference to New York case law and to a New York statute, namely, Section 3420 of the Insurance Law, and its predecessor statutes.
The lawyers at the hearing yesterday and today have briefed and argued this case law thoroughly and each side has tried vigorously to emphasize particular cases. The matter is not a simple one under New York law. However, it is my view that the consistent trend of New York law is to uphold the rights of an insurance company and an insurer to make or not make a contract, and if a contract is made to make necessary appropriate amendments to that contractual relationship. That is a basic contract law and, in my view, the New York courts do not depart from that.
There may be exceptions in the case of automobile insurance, but it is my view that this basic concept of contract law is applied by the New York courts in the case of insureds and insurance companies such as we have here.
Furthermore, there is very clear statutory and case law dealing with the issue of the right of a claimant who makes a liability claim against an insured. There is statutory and case law about the extent to which such a party acquires a right against the liability insurer. This is dealt with in Section 3420 of the insurance law, and I believe I'm correct in saying that the basic provision and effect of that law is that if such a party acquires a judgment and if that judgment is not paid within 30 days, the party has a direct right against the insurance company, but prior to that time the party does not have a right against the insurance company.
Now, I accept the idea advanced by CCC that the courts should take as a necessary implication from the law I just referred to that such a claimant has no right to prevent the revision of an insurance contract in the way that has occurred here. When I say such a claimant, I mean a claimant who does not have a judgment or whose judgment has not been unpaid for 30 days.
Now I want to take into account something which I discussed with counsel, and that is the issue of whether CCC could simply have terminated the insurance and whether such termination would have had the effect of doing away with insurance coverage as to claims arising before the termination.
Apparently if CCC were a New York insurance company, that could not be done, it can only be done prospectively. But CCC is not a New York insurance company and under a statute in the insurance law or provision in the insurance law it is my view that the rule that I have just spoken about prospective effect only does not apply.
In any event, we did not have a situation where there was a termination of insurance in December of 2002, we had the standstill agreement and the effect of the standstill agreement was to preserve the insurance. In my view, that agreement with that purpose was valid. Consequently, I am granting the motion to strike the 14th affirmative defense because as a matter of law I am holding that the standstill agreement was valid and enforceable.
The motion is made under Rule 12(f) of the Federal Rules of Civil Procedure and under the summary judgment rule, Rule 56.
In my view, there are no facts which have been presented and no factual issues suggested which would indicate that this agreement would be invalid or that there needs to be further discover and trial as to the issue of its validity or invalidity. Consequently, I am granting the motion under Rule 56 and I am also granting the motion under Rule 12(f).
So that concludes that ruling.
I will only add what was talked about during the argument, and that is that there may very well be issues about whether the standstill agreement was properly performed by the hospital or by CCC or by both, and those issues are not in any way foreclosed by my ruling.
That's the end of this double session of yesterday and today.
Thank you.
SO ORDERED.