Opinion
02 Civ. 3175 (KMW)(FM).
June 18, 2003.
REPORT AND RECOMMENDATION
I. Introduction
This action arises out of the sinking of the ALOHA ("R/V ALOHA"), a research vessel owned by defendant Deep Sea International ("Deep Sea"). Plaintiff Royal Insurance Company of America ("Royal") seeks a declaratory judgment, pursuant to 28 U.S.C. § 2201, that it need not provide coverage to Deep Sea and one of its lenders, Texas Capital Corporation ("Texas Capital"), under a hull and protection and indemnity policy issued by Royal.
Texas Capital has never appeared in the action. After the suit was filed, however, I granted the motion of defendant Fleet National Bank ("Fleet") to intervene as a purported successor-in-interest to Texas Capital. (Docket No. 17). Thereafter, at the conclusion of a settlement conference held on November 22, 2002, Royal and Fleet (but not Deep Sea) reached a settlement, to which Deep Sea objected on several grounds. In light of those objections, Deep Sea was granted leave to file a motion contesting the proposed settlement. (Docket No. 35).
In its motion papers (and its Twelfth Counterclaim), Deep Sea alleges that the proposed settlement violates duties owed to it by Royal and Fleet, as well as several state and federal statutes. (Deep Sea Mem. of L. in Support of Mot. ("Deep Sea Mem."); Deep Sea Reply Mem. ("Reply Mem.")). On this basis, Deep Sea asks the Court to enjoin the settlement, or, at a minimum, not to "so order" it. (Id.).
In response, Royal has cross-moved, pursuant to Rule 11 of the Federal Rules of Civil Procedure, to strike the Twelfth Counterclaim in Deep Sea's Amended Answer ("Amended Answer" or "Am. Answer") to the Second Amended Complaint ("Amended Complaint" or "Am. Compl."). (Docket No. 52).
For the reasons that follow, both motions should be denied.
II. Background
Royal's Amended Complaint alleges that Royal is an insurance company organized and existing under the laws of the State of Illinois. (Am. Compl. ¶ 4). In or around 2001, Royal issued a hull and protection and indemnity insurance policy for a vessel owned by Deep Sea known as the R/V ALOHA. (Id. ¶ 23; Am. Answer ¶ 7). The policy named Deep Sea as the insured and Texas Capital as a loss payee. (See Am. Answer ¶ 5). Thereafter, on or about February 7, 2002, the R/V ALOHA sank. (Id. ¶ 10). Since the vessel was Deep Sea's only significant asset, Deep Sea's prospects of continuing as a going concern are remote unless it recovers a substantial sum under the Royal policy.
Several months after the loss of the R/V ALOHA, Royal commenced this declaratory judgment action. On June 25, 2002, Fleet moved to intervene, pursuant to Rule 24(c) of the Federal Rules of Civil Procedure, alleging that it was the assignee of Texas Capital's rights in connection with a loan made by Texas Capital to Deep Sea, which was evidenced by a Promissory Note in the principal amount of $439,194.97 ("TCC Note"). (Docket No. 11; Affidavit of Paul A. Cottone, sworn to June 20, 2002 ("Cottone Aff."), ¶ 2 Ex. A). Royal opposed Fleet's motion, (Docket No. 13), but Deep Sea did not.
On July 12, 2002, Your Honor referred this matter to me for general pretrial management as well as any dispositive motions requiring a report and recommendation. (Docket No. 16). On July 29, 2002, I granted Fleet's motion to intervene as a party defendant. (Docket No. 17). In its Answer, Fleet asserted counterclaims against Royal and cross-claims against Deep Sea. (Docket No. 23).
On November 22, 2002, I held a settlement conference which was attended by the parties and their counsel. Although the parties were unable to forge a global settlement, Royal and Fleet reached an understanding, pursuant to which Royal was to pay Fleet $275,000 in return for an assignment of Fleet's claims against Deep Sea. (11/22/02 Tr. at 47). When I announced that settlement in open court, Deep Sea's counsel objected, contending that it was "unethical." (Id. at 49). Deep Sea requested an opportunity to consider the issue and inform the Court whether it wished to make a formal motion challenging the proposed settlement. (Id. at 56). By letter dated December 2, 2002, Deep Sea informed the Court that it wished to file such a motion. (Docket No. 35).
Deep Sea's motion, which seeks to enjoin the settlement, was filed on January 15, 2003. (Docket No. 43). On March 4, 2003, Royal filed its cross-motion for an order, pursuant to Rule 11 of the Federal Rules of Civil Procedure, striking the Twelfth Counterclaim in Deep Sea's Amended Answer. (Docket No. 52). Both motions are now fully submitted.
III. Discussion
A. Deep Sea's Motion to Enjoin the Proposed Settlement
In its motion papers, Deep Sea contends that the proposed settlement is unethical and a violation of duties owed to Deep Sea by both Royal and Fleet. (Deep Sea Mem. at 6-10; Reply Mem. at 5-9). Deep Sea further contends that the proposed settlement violates both state and federal statutes. (Deep Sea Mem. at 10-11; Reply Mem. at 9-12). As explained below, neither assertion is correct.
1. Standing
At the outset, Royal questions whether Deep Sea has standing to object to the terms of the proposed settlement agreement. (Royal Mem. of L in Opp. ("Royal Mem.") at 4). Although it is black letter law that a debtor or mortgagor generally has no right to challenge an assignment of its obligations for want of consideration, see, e.g., General Motors Acceptance Corp. v. Scio Volunteer Fire Dep't, 595 N.Y.S.2d 145, 146 (4th Dep't 1993), Deep Sea's argument does not turn on the validity of the assignment, but, rather, on an alleged breach of the duty of good faith and fair dealing owed to it under the Royal insurance contract. (See Reply Mem. at 4). An insured plainly has standing to challenge its insurer's good faith in such circumstances. See Koh-I-Noor Inc. v. Ikon Photographic Corp., 1993 WL 561139, at *1 (S.D.N.Y. Dec. 23, 1993) ("parties to a contract have standing to assert a breach of contract claim") (collecting cases). Accordingly, Deep Sea has standing to challenge the proposed settlement.
2. The Proposed Settlement is Not Unethical
"Typically, settlement rests solely in the discretion of the parties, and the judicial system plays no role. . . . Certain settlements require judicial approval, however, see, e.g., Fed.R.Civ.P. 23(e) (class actions); Fed.R.Civ.P. 23.1 (shareholder derivative suits), and on other occasions parties are unwilling to drop litigation unless a court invokes its equitable powers to enforce their agreement." In re Masters Mates Pilots Pension Plan IRAP Litig., 957 F.2d 1020, 1025 (2d Cir. 1992) (citations omitted). This lawsuit does not appear to fall within any of the categories specifically requiring judicial scrutiny. Accordingly, on this basis alone, the proposed settlement would appear to be one that Royal and Fleet may effect.
The proposed settlement would pass muster even if this Court were to apply the standards applicable to class action suits. In such cases, courts must determine whether "the settlement, taken as a whole, is fair, reasonable, and adequate." Maywalt v. Parker Parsley Petroleum Co., 67 F.3d 1072, 1079 (2d Cir. 1995). This determination is committed to the discretion of the trial judge, Strougo ex rel. Brazilian Equity Fund. Inc. v. Bassini, 2003 WL 1858155, at *2 (S.D.N.Y. Apr. 7, 2003), who must consider whether the settlement is the result of good-faith, arms-length bargaining undertaken by experienced counsel, and whether there is any evidence of collusion. State of New York v. Reebok Int'l Ltd., 903 F. Supp. 532, 535 (S.D.N.Y. 1995). Where the proposed settlement is negotiated under the court's supervision, there is a strong presumption that it is fair and reasonable. In re Milken and Assocs. Secs. Litig., 150 F.R.D. 46, 54 (S.D.N.Y. 1993).
As set forth in my written procedures for settlement conferences, which were provided to counsel prior to November 22, 2002, it is my practice during the course of a settlement conference to meet separately with each party represented by counsel. Consistent with this practice, I held ex parte conferences with representatives of Royal, Deep Sea, and Fleet. As a result of these discussions, Royal and Fleet reached the agreement to which Deep Sea now objects. Since the settlement grew out of discussions with the Court, it is presumptively proper.
The settlement also makes business sense. From Fleet's perspective, the settlement provides a sum certain equal to approximately fifty percent of the outstanding loan balance. Although Fleet's assignment of its interest in the TCC Note means that it will be unable to secure a deficiency judgment, it seems unlikely that Deep Sea will be able to satisfy such a judgment unless it prevails in this lawsuit, which, at this juncture, is far from a certainty. Additionally, although there apparently are some guarantors of Deep Sea's indebtedness on the note, Deep Sea has not shown that the pursuit of those guarantors has any greater likelihood of success than continuing to defend this action in the hope that Deep Sea will prevail. To pursue either a recovery in this lawsuit, or a deficiency judgment, or the guarantors, Fleet would, of course, have to expend additional sums for legal fees. In these circumstances, it is understandable that Fleet would want to avoid a further financial drain by settling with Royal at this stage.
The amount of the outstanding balance on the TCC Note is itself in dispute. During the course of settlement discussions, however, Fleet represented to the Court that the balance was at least $500,000, plus attorney's fees and costs.
The settlement makes equal sense for Royal. First, by settling with Fleet, Royal will eliminate the adversary best able to mount an aggressive defense. Although Deep Sea clearly is distressed by the prospect of proceeding as the sole remaining defendant in this case, a decision to settle with one defendant because it is stronger is a traditional litigation strategy that cannot seriously be characterized as "unethical." See, e.g., Eugene F. Lynch, et al., Negotiation and Settlement § 11.22 (1995 Cum. Supp. at 88) ("It is common for [a] plaintiff to negotiate a partial settlement with the defendant who is represented by the most skilled defense counsel.").
Second, if Deep Sea prevails at trial, Royal's acquisition of the TCC Note will offset any amount that Royal is found to owe. Indeed, by purchasing Fleet's interest in the note, Royal may be able to eliminate its need to make any payment to Deep Sea since the outstanding loan balance presumably is continuing to grow as interest accrues while this action is pending.
Notwithstanding Deep Sea's protestations to the contrary, the settlement does not appear to be the product of a collusive effort to harm Deep Sea. Indeed, Deep Sea's situation following the settlement will be no worse that it would have been if Fleet had retained its interest in the TCC Note or granted an assignment to a third party in exchange for a payment representing a substantial discount from the outstanding loan balance. Under the first alternative, Fleet would retain a security interest in the assets of Deep Sea, including any proceeds of this suit. Accordingly, any amounts that Royal might claim as a setoff pursuant to the settlement would remain unavailable to Deep Sea and would, instead, be paid to Fleet.
Similarly, under the second alternative, Deep Sea could not complain about the assignment since the holder of a promissory note may freely assign it to a third party, provided that the note, as here, contains an unconditional promise to pay the note holder on demand, is signed by the maker, and does not expressly proscribe such a transfer. See A.I. Trade Finance, Inc. v. Laminaciones de Lesaca, S.A., 41 F.3d 830, 835 (2d Cir. 1994);Royal Bank of Canada v. Mahrle, 818 F. Supp. 60, 62 (S.D.N.Y. 1993). Any such third-party assignee would have the same rights as Fleet, including the right to enforce its security interest in the Royal proceeds.
Fleet can scarcely be faulted for assigning the TCC Note to Royal, which is embroiled in a dispute with Deep Sea, rather than engaging in a Don Quixote-like search for a third-party assignee willing to pay reasonable value. In fact, because Deep Sea's only real asset is its interest in this lawsuit, only another party to the suit would be in a position to determine whether the TCC Note has any value.
In an effort to argue that the proposed settlement is somehow improper, Deep Sea notes that there is no "loss-payee" clause in the Royal policy. Generally, in a marine insurance policy, a loss payee is not a separate insured and is entitled to recover only if the named insured can recover. See Ressler v. White, 968 F.2d 1478, 1479-80 (2d Cir. 1992) (per curiam) (collecting cases). Through specialized language, however, a lienholder may be granted additional rights. See Pac. Ins. Co. v. Kent, 120 F. Supp.2d 1205, 1216 (C.D. Cal. 2000).
In this case, it appears that Texas Capital was named in a loss-payee clause which conferred no greater rights on Fleet, as assignee, than Deep Sea itself had. Deep Sea argues that Royal therefore had "absolutely no legal obligation to settle with [Fleet] so that [Royal's] only possible explanation for [settling] is to gain an improper economic advantage over its insured. . . ." (Deep Sea Mem. at 6) (emphasis in original). Deep Sea's contention appears to be that it is inconsistent for Royal to deny any liability to Deep Sea under its insurance policy and yet make a payment to Fleet, which has no greater right than Deep Sea to recover.
What Deep Sea overlooks is that by purchasing Fleet's interest in the TCC Note, Royal has effectively hedged its exposure. Thus, if Royal is ultimately found liable to Deep Sea, it will have reduced the amount it must pay by a sum equal to the difference between the amount outstanding on the TCC Note and the amount of any judgment that may be awarded to Deep Sea. Moreover, because Royal paid only fifty cents on the dollar to acquire the TCC Note, the economic benefit of acquiring the note will be further enhanced.
Alternatively, even if Royal prevails at trial, it will own a note entitling it to recover damages which could potentially offset, in whole or in part, both the cost of acquiring the note and the amount it has expended for legal fees. Although the Deep Sea loan is in default, as noted above, several individuals and entities apparently guaranteed Deep Sea's obligations. Accordingly, Royal may conceivably be able to recoup some or all of the amount that it paid Fleet for the assignment of the TCC Note.
In sum, the proposed assignment of the TCC Note may place Deep Sea in a difficult position, but it was a reasonable strategy for Royal and Fleet to pursue, and is not unethical.
3. The Proposed Settlement Does Not Violate Royal's Duty of Good Faith and Fair Dealing
In a footnote to its memorandum of law, Deep Sea indicates that it has "contacted insurance experts in the field" who collectively agree "that the proposed settlement is completely improper." (Deep Sea Mem. at 9 n. 6). Suffice it to say, none of these purported experts is identified in Deep Sea's papers, nor have any of them submitted an affidavit to the Court.
Deep Sea also contends that the proposed settlement violates Royal's duty of good faith and fair dealing. Although the parties have not specifically addressed which jurisdiction's law is controlling here, Deep Sea has cited New York law in support of its claim that Royal is not proceeding in good faith. (See Deep Sea Mem. at 8 (citing Pavia v. State Farm Mut. Auto. Ins. Co., 626 N.E.2d 24 (1993)). Accordingly, I will assume that New York law controls.
Under New York law, "in every contract there is an implied covenant that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract, which means that in every contract there exists an implied covenant of good faith and fair dealing." Bank of New York v. Sasson, 786 F. Supp. 349, 353 (S.D.N.Y. 1992) (quoting Kirke La Shelle Co. v. Paul Armstrong Co., 188 N.E. 163, 167 (1933)). However, "the implied covenant does not extend so far as to undermine a party's 'general right to act on its own interests in a way that may incidentally lessen' the other party's anticipated fruits from the contract." M/A-COM Sec. Corp. v. Galesi, 904 F.2d 134, 136 (2d Cir. 1990) (per curiam) (quoting VanValkenburgh, Nooger Neville, Inc. v. Hayden Publ'g Co., 281 N.E.2d 142, 145 (1972)).
In Deep Sea's view, if Fleet is willing to divest itself of its interest in the TCC Note in exchange for a $275,000 payment, Royal should advance that sum to Deep Sea, rather than Fleet, so that Deep Sea may extinguish its indebtedness. (Deep Sea Mem. at 7). Under that scenario, however, Royal would be in a substantially less advantageous position. For example, in the event that Royal prevails in this lawsuit, it would be able to recover from Deep Sea only the $275,000 that it had advanced (and perhaps interest), instead of the $500,000 or more it may seek to recover if the proposed settlement is approved. Conversely, if Deep Sea prevails in this action, Royal would lose the financial leverage it hopes to gain by purchasing Fleet's interest in the TCC Note at a discount.
Deep Sea has not cited any authority requiring Royal to forebear from maximizing the financial benefit that it can obtain by acquiring Fleet's interest in the TCC Note. If Royal were a third-party assignee, Deep Sea would not be able to object to Fleet's assignment of its interest for less than full value. See Globe Indemnity Co v. Puget Sound Co., 53 F. Supp. 51, 54 (W.D.N.Y. 1943) ("Any benefit accruing to the assignor will be sufficient consideration to support an assignment.");Fed. Nat'l Mortgage Ass'n v. Youkelsone, 755 N.Y.S.2d 730, 731 (2d Dep't 2003) ("the amount of consideration does not affect the validity of the assignment"). The fact that Royal is not a third party, but is instead in privity with Deep Sea, does not suggest that its options should be further constrained.
Indeed, the proposed settlement between Fleet and Royal has no impact on Deep Sea's contractual rights under the insurance policy at issue in this case. While Deep Sea may ultimately receive less from Royal as a consequence of the assignment, and might even have to pay money to Royal, these consequences do not flow from the Royal insurance policy, but, rather, from the wholly separate agreement that Deep Sea entered into with Texas Capital. There consequently is no basis for Deep Sea's claim that Royal will breach its implied covenant of good faith and fair dealing under the insurance policy by acquiring an assignment of the TCC Note.
To be sure, there is a body of New York law which holds that an insurer may be liable to an insured or the insured's excess carrier for a bad faith refusal to settle a claim. Harris v. Provident Life Ac. Ins. Co., 310 F.3d 73,80 (2d Cir. 2002). As the Second Circuit has expressly noted, however, such claims of "bad faith" are "limited to cases in which an insurance company refuses to settle a claim against the insured." Id. Here, Royal has brought suit against Deep Sea and Texas Capital seeking a declaratory judgment that it may disclaim coverage, and Deep Sea, in turn, has counterclaimed against Royal. Inasmuch as these causes of action relate to a first-party insurance claim, rather than a claim against Royal's insured by a third party, the special rules applicable to bad faith refusals to compromise a claim are inapplicable.
In sum, for the reasons noted, there is no legal or factual basis for Deep Sea's claim that Royal has breached its implied covenant of good faith and fair dealing.
4. Deep Sea Has Not Shown that Fleet Acted Improperly
Deep Sea advances two alternative theories why Fleet's actions are improper. First, Deep Sea alleges that Fleet has not established that it is Texas Capital's assignee and, consequently, should be considered to be nothing more than "a meddlesome interloper" in this suit. (Deep Sea Mem. at 9). Second, and somewhat inconsistently, Deep Sea argues that by injecting itself into this action, Fleet has "willingly assumed a position of trust with [Deep Sea] by agreeing to not foreclose on the alleged obligations and by agreeing to discount the alleged obligations at a later date." (Id. at 9-10).
If Fleet does not have a valid assignment of the TCC Note, it is difficult to see how a further purported assignment to Royal could prejudice Deep Sea. Indeed, unless it is able to prove that it is the assignee of the note, Royal will have no right at all to enforce the TCC Note — by way of setoff or otherwise.See Beal Bank, SSB v. Nassau County, 973 F. Supp. 130, 134 (E.D.N.Y. 1997) ("It is axiomatic that an assignee takes all of the rights of the assignor, no greater and no less.").
In any event, there does not appear to be any basis for Deep Sea's allegation that Fleet is a "meddlesome interloper." In its original motion to intervene, Fleet explained that following the execution of the TCC Note:
. . . In order to finance its business, [Texas Capital] entered in a certain Loan and Security Agreement dated July 31, 1998 (the "Loan Agreement") between Fremont Financial Corporation ("Fremont") and [Texas Capital]. Pursuant to the terms of the Loan Agreement[, Texas Capital] granted to Fremont a security interest in all of [Texas Capital's] accounts, equipments, general intangibles, inventory, negotiable collateral, deposit accounts, any money or other assets of [Texas Capital] and all proceeds and products whether tangible or intangible, including proceeds of insurance covering any or all collateral (the "Collateral"). . . .
. . . In or about October 1999, Fremont assigned its rights in the Loan Agreement to Summit Bank. Subsequently, Summit Bank merged with Fleet National Bank.
. . . On or about October 4, 2001, [Texas Capital] executed and delivered to Summit Bank a letter agreement (the "Letter Agreement") wherein [Texas Capital] voluntarily turned over to Summit Bank the Collateral, including but not limited to Deep Sea's obligations to [Texas Capital].
(Cottone Aff. ¶¶ 5-7).
Deep Sea did not contest the validity of Fleet's interest in the TCC Note prior to the settlement, and it voiced no opposition to Fleet's motion to intervene in this action as a party defendant. In fact, after the motion to intervene was filed, Eric Garlerne, one of the principals of Deep Sea, sent a Fleet officer an email dated September 5, 2002, which contained two schedules detailing Deep Sea's indebtedness to Fleet. One of those schedules appears to reflect at least one "On Account Payment" to Fleet in the amount of $50,000. (Declaration of Jeffrey S. Moller, dated Feb. 6, 2003, Ex. A). If Deep Sea seriously had questions about Fleet's status as holder of the TCC Note, this payment presumably would not have been made.
Deep Sea's contention that Fleet had agreed to a standstill agreement, to be followed by a discounting of the TCC Note, is equally unsupported. Indeed, the only statement in Fleet's papers relating to this issue is the declaration of Deep Sea's counsel that, prior to the settlement conference, Deep Sea and Fleet "had orally agreed to various issues, all of which were in consideration of [Deep Sea] being able to complete the instant lawsuit." (Declaration of Cary R. Wiener, Esq., dated Jan. 15, 2003, ¶ 14). Even if this cryptic representation were to be accepted at face value, it obviously would be insufficient to show that Fleet had agreed to forebear from enforcing the TCC Note.
Curiously, the TCC Note does not contain any language limiting the parties' ability to modify its terms without a signed writing. (See Fleet Answer with Counterclaims and Crossclaims at Ex. B).
Deep Sea therefore has not established that Fleet's decision to sell its interest in the TCC Note was improper in any respect.
5. The Proposed Settlement Does Not Violate Any of the Statutes Cited by Deep Sea
Deep Sea's final contention is that the proposed settlement agreement violates a number of state and federal statutes. Although Deep Sea suggests that "a lengthy exposition could be penned on the various statutory prohibitions implicated by the proposed settlement," (Deep Sea Mem. at 10), its motion papers specifically reference only four statutes. Deep Sea alleges that the settlement would violate: (a) Section 1404 of the New York Insurance Law ("Insurance Law") because Deep Sea is in default as to both principal and interest on the TCC Note; (b) Section 1407(a)(1) of the Insurance Law because Deep Sea is insolvent; (c) Section 1407(a)(7) of the Insurance Law because Deep Sea is a foreign business entity organized and existing under the laws of Panama; and (d) Title 12, United States Code, Section 92, which relates to banks engaged in insurance work. (Deep Sea Mem. at 10-11; Reply Mem. at 8-9). Each of these assertions is misplaced.
Section 1404 of the Insurance Law limits the types of reserve investments that a domestic insurer may make. A "domestic insurer" is defined in the Insurance Law as an "authorized insurer incorporated or organized under any law of this state." N.Y. Ins. L. § 107(a)(19) (McKinney's 2000). In this case, Deep Sea has not shown, as it must, that Royal is a domestic insurer. Additionally, there is no reason to disbelieve Royal's complaint, which alleges that the company is organized under the laws of the State of Illinois. (See Am. Compl. ¶ 4).
Section 1407 of the Insurance Law sets forth certain permitted (and prescribed) investments for insurers who make investments under Section 1403(c) of the Insurance Law. The latter provision, however, applies only to "domestic insurers." See N.Y. Ins. L. § 1403(c) (McKinney's 2000) ("If the requirements of section one thousand four hundred two of this article are met, any domestic insurer . . . may, except as set forth below, invest its funds. . . ."). Consequently, because Royal has not been shown to be a domestic insurer making investments pursuant to Section 1403(c), Section 1407 of the Insurance Law is inapplicable.
Finally, the only federal statute that Deep Sea cites is Title 12, United States Code, Section 92. Pursuant to that provision, national banking associations are permitted to act as insurance agents or brokers, but only in small towns of less than 5,000 people. 12 U.S.C. § 92. In this case, Fleet is a national bank, but there has been no showing that it has acted as a rural insurance broker or agent. Furthermore, even if this were the capacity in which Fleet was proceeding, the only potentially relevant proscription in the statute is that a bank may not "assume or guarantee the payment of any premium on insurance policies issued through its agency. . . ." Id. Here, however, Fleet is not paying or guaranteeing any insurance premiums as part of the proposed settlement. Instead, the settlement provides for Fleet to receive funds from the insurer.
B. Royal's Cross-Motion to Strike Deep Sea's Twelfth Counterclaim
After the settlement conference, Deep Sea filed an Amended Answer containing numerous counterclaims, including one which alleges that:
. . . Upon information and belief, and without consideration of whether defendant FLEET is a proper holder of any alleged DEEP SEA obligations, ROYAL's actions in threatening to purchase and/or purchasing DEEP SEA's alleged obligations which have accumulated and are accumulating purported interest charges on a daily basis was done solely to gain an improper bargaining advantage over its insured and is unfair and unreasonable behavior in violation of its covenant of good faith and fair dealing.
. . . Upon information and belief, and without consideration of whether defendant FLEET is a proper hold[er] of any alleged DEEP SEA obligations, ROYAL's actions in threatening to purchase and/or purchasing DEEP SEA's alleged obligations is in violation of federal and state insurance law as well as in violation of ethical standards for the industry.
(Am. Answer ¶¶ 95, 96).
Royal's cross-motion seeks to strike that Twelfth Counterclaim, pursuant to Rule 11 of the Federal Rules of Civil Procedure, for lack of a legal or factual basis. (Royal Mem. of L. in Opp. to Mot. at 7).
Under Rule 12(b) of the Federal Rules of Civil Procedure, a motion to dismiss a counterclaim must be made before a required responsive pleading is served. Rather than moving to dismiss, however, Royal served a reply to Deep Sea's counterclaims on or about December 31, 2002. (Docket No. 39). That pleading waived Royal's right to move to dismiss the counterclaim. See, e.g., Eldridge v. Springs Indus., Inc., 882 F. Supp. 356, 357 (S.D.N.Y. 1995) ("Because defendants have filed an answer, they cannot now bring a motion pursuant to Rule 12(b).").
On March 4, 2003, in an apparent end run around Rule 12, Royal cross-moved for the dismissal of Deep Sea's Twelfth Counterclaim pursuant to Rule 11 of the Federal Rules of Civil Procedure. (Docket No. 52). Although there does not appear to be any factual or legal basis for Deep Sea's counterclaim, this motion clearly violates the time limitations imposed by Rule 12(b). Moreover, Rule 11 contains a safe harbor provision, which requires a movant to refrain from filing any motion papers for at least 21 days after service of the motion so that the adverse party will have an opportunity to correct its behavior without judicial intervention. See Fed.R.Civ.P. 1(c)(1)(A). As Royal's notice of motion plainly shows, Royal failed to comply with this provision, filing its motion the same day it effected service. (See Docket No. 52).
Royal's motion to dismiss Deep Sea's Twelfth Counterclaim pursuant to Rule 11 therefore must be denied. Of course, if Your Honor adopts this Report and Recommendation, the denial will be a mere technicality because Royal will later be able to move for summary judgment dismissing the Twelfth Counterclaim.
IV. Conclusion
For the foregoing reasons, both Deep Sea's motion to enjoin the settlement between Royal and Fleet and Royal's cross-motion to strike Deep Sea's Twelfth Counterclaim should be denied.
V. Notice of Procedure for Filing of Objections to this Report and Recommendation
The parties are hereby directed that if they have any objections to this Report and Recommendation, they must, within ten (10) days from today, make them in writing, file them with the Clerk of the Court, and send copies to the chambers of the Honorable Kimba M. Wood, United States District Judge, and to the chambers of the undersigned, at the United States Courthouse, 500 Pearl Street, New York, N.Y. 10007, and to any opposing parties. See 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 6(a), 6(e), 72(b). Any requests for an extension of time for filing objections must be directed to Judge Wood. Any failure to file timely objections will result in a waiver of those objections for purposes of appeal. See Thomas v. Arn, 474 U.S. 140 (1985); 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 6(a), 6(e), 72(b).