Opinion
01 Civ. 7484 (WK)
July 2, 2002
William M. Savino, Esq., Stephen J. Smirti, Jr., Esq., Joseph K. Poe, Esq., Rivkin Radler LLP, Uniondale, New York, Attorney for Plaintiffs.
Douglas J. Pick, P.C., Douglas J. Pick, Esq., New York, New York, Attorney for Defendants.
MEMORANDUM ORDER
Plaintiffs Hanover Insurance Company ("Hanover") and Massachusetts Bay Insurance Company ("Massachusetts Bay") (collectively "plaintiffs") brought this action seeking a declaratory judgment of their rights and obligations under insurance contracts issued to defendants Dialuck Corporation ("Dialuck") and Antrix Diamond Export, Ltd. ("Antrix"). Dialuck and Antrix, along with defendants Ajay Gandhi and Anil D. Khanna (collectively "defendants") have been named as counterclaim-defendants in an action filed in the Circuit Court of Alabama, Jefferson County entitled Dialuck Corp. v. Americanstone Diamond, Inc. (the "Underlying Action"). Currently before us are: (1) plaintiffs' motion for a judgment on the pleadings; and (2) defendants' motion to stay the current action pending the determination of the involuntary Chapter 7 petitioners filed pursuant to 11 U.S.C. § 303(b)(1), by Dialuck, Antrix and others against plaintiffs in the Underlying Action. For the reasons that follow, we deny defendants' motion and allow them to respond to plaintiffs' motion, to which opposition papers have not yet been filed.
It is our understanding that defendants have not responded to plaintiffs' motion since prior to its filing they had contacted chambers in regard to its request to stay this action. Once plaintiffs filed their motion we instructed defendants formally to file a motion to stay and informed them that we would address the motion to stay first.
BACKGROUND
On January 25, 1995, Dialuck and Antrix entered into a contract with Hanover for Commercial General Liability Insurance and Commercial Property Insurance, expiring January 25, 1996. The insurance contract has been renewed annually for five consecutive terms by Massachusetts Bay ("the Insurance Contracts").On November 3, 1999 Dialuck and Antrix commenced the Underlying Action against Americanstone Diamond, Inc. ("Americanstone Diamond") and Americanstone Diamond of Alabama, Inc.("Americanstone of Alabama") (collectively, the "Americanstone Entities") to recover certain monies owed for goods sold and delivered, and money they lent to the Americanstone Entities. On or about December 27, 2000, the Americanstone Entities filed an answer and counterclaim.
Defendants requested that Hanover provide a defense to the counterclaim filed against it, which contained two counts; one under the Racketeer Influenced and Corrupt Organizations Act ("RICO") ("Count I"), and one for interference with business relationships ("Count II") (collectively, the "Counterclaim"). Hanover alleges that it agreed to defend defendants in connection with Count II subject to a reservation of rights, but disclaimed any duty to defend or indemnify the defendants with regard to the Americanstone Entities' RICO claim.
On February 8, 2000, Antrix, Dialuck and four other Americanstone of Alabama creditors, pursuant to 11 U.S.C. § 303(b)(1), filed an involuntary Chapter 7 petition against it in the United States Bankruptcy Court for the Northern District of Alabama, Southern Division (the "Bankruptcy Court"). On June 29, 2000 Dialuck and three other Americanstone Diamond creditors filed a similar involuntary Chapter 7 petition against it in the Bankruptcy Court (collectively, with the February 8, 2000 petitions, the "Involuntary Petitions"). On September 7, 2000 the two involuntary proceedings were consolidated for joint administration. As a result of the filing of the Involuntary Petitions, the Underlying Action was stayed pursuant to the provisions of 11 U.S.C. § 362.
On December 13 and 14, 2000, and January 9, 2001, a bench trial was held on the merits of the Involuntary Petitions, the only dispute being whether or not the Americanstone Entities were paying its debts as they became due. At that time, the Bankruptcy Court held that the Americanstone Entities were generally paying their debts as they became due and signed an order dated February 15, 2001 dismissing the Involuntary Petitions. On February 26, 2001, the petitioning creditors filed a motion for reconsideration with the Bankruptcy Court, which was denied without hearing, by order dated March 14, 2001 (collectively, with the February 15, 3002 order, the "Orders"). Upon entry of the Orders, the automatic stay provisions of 11 U.S.C. § 362 were no longer effective as to the Underlying Action.
On March 23, 2001, the petitioning creditors filed a notice of appeal from the Orders with the United States District Court for the Northern District of Alabama, Southern Division (the "Appellate Court") (the "Appeal"). On December 21, 2001, the Appellate Court entered a final order holding that the Amercanstone Entities were paying their debts as they became due, reversing the decision of the Bankruptcy Court and remanded the case with instructions that it reinstate the Involuntary Petitions. As such, due to the automatic stay provisions of 11 U.S.C. § 362, the Underlying Action has again been stayed.
DISCUSSION
Defendants argue that the current case should be stayed since any action taken by this court would likely be rendered moot by the reinstatement of the Involuntary Petitions. They state that if the Involuntary Petitions are entered, the Counterclaim would become an asset of the bankruptcy estate and the enforcement thereof placed in the hands of the Chapter 7 Trustee, who may want to participate in this action or to withdraw the Counterclaim because the possible lack of any funds in the estate or her opinion that the Counterclaim lacks merit. Plaintiffs assert that we should exercise our jurisdiction to hear their declaratory judgment claim since even with the stay in effect an actual controversy exists entitling them to relief.
The Supreme Court has held that a declaratory judgment is appropriate even when it is uncertain whether the insured will in fact be liable. Maryland Casualty Co. v. Pacific Coal Oil (1941) 312 U.S. 270. Similarly, the Second Circuit has stated that even though the underlying liability in question may be contingent, "litigation over insurance coverage has become the paradigm for asserting jurisdiction [in declaratory judgment actions] despite `future contingencies that will determine whether a controversy ever actually becomes real.'" Associated Indem. Corp. v. Fairchild Indus., Inc. (2d Cir. 1992) 961 F.2d 32, 35) (quoting 10A C. Wright, A. Miller M. Kane, Federal Practice and Procedure, ¶ 2757, at 586 (2d ed. 1983)); see also MacMillan, Inc. v. Fed. Ins. Co. (S.D.N.Y. 1990) (stating declaratory relief is proper in insurance cases, particularly when the underlying proceeding is out of the control of the party seeking the relief, even when the underlying liability has not yet been decided.) (citation omitted).
For these reasons, we will not stay this action despite the future contingencies upon which plaintiffs' ultimate liability to defendants depend. Furthermore, defendants' arguments as whether or not the Counterclaim will actually be pursued are completely speculative. Moreover, we are not concerned that the yet to be appointed Chapter 7 trustee would not be able to participate in this action since he or she would not have standing to intervene or commence a direct action unless "judgment against the insured . . . shall remain unsatisfied at the expiration of thirty days from the serving of notice of entry of judgment . . . upon the insured, and upon the insurer." Ins. Law § 3420(a)(2) (2001); Hartford Fire Ins. Co. v. Mitlof (S.D.N.Y. 2000) 123 F. Supp.2d 762, 769.
CONCLUSION
For the aforementioned reasons we deny defendants' motion to stay this action. In addition we allow defendants until July 22, 2002 to file opposition papers to plaintiffs' motion.