Opinion
000844/2088.
July 26, 2010.
The following papers read on this motion:
Notice of Motion, Affidavit Exhibits Annexed ................................ 1 Affidavit of Arthur N. Lambert in Support of Travelers' Motion for Summary Judgment Exhibits Annexed .................................................... 2 Defendant Travelers Casualty and Surety Company of America's Memorandum of Law in Support of Motion for Summary Judgment ............................... 3 Affirmation of Steven R. Schlesinger in Opposition, Affidavit of Mark H. Lundy in Opposition Exhibits Annexed ........................................ 4 Memorandum of Law in Opposition to Motion for Summary Judgment .................. 5 Defendant Travelers Casualty and Surety Company of America's Reply Memorandum of Law in Further Support of Motion for Summary Judgment ............ 6PRELIMINARY STATEMENT
Motion pursuant to CPLR 3212 by the defendants Travelers Casualty and Surety Company of America, et., al., for summary judgment dismissing the complaint.
BACKGROUND
In substance, and as more fully detailed in this Court's March, 2009 order, in May of 2003, the defendant Travelers Casualty and Surety Company of America ["Travelers"] issued to the plaintiffs Gould Investors, L.P., ["Gould"] and its affiliate, co-plaintiff One Liberty Properties, Inc ["Liberty" or collectively "the plaintiffs"], a so-called "Commercial Crime Policy" covering, inter alia, stated acts of "Employee Dishonesty" (Kiernan Exh., "A").
Among other things, the policy provides that the insured "must transfer to us all your rights of recovery against any person or organization for any loss you sustained and for which we have paid or settled" (Coverage Form, General Provisions Form, "General Conditions," ¶ B[19]; Form at 3).
The immediately following sentence further states that, "[y]ou [the insured] must also do everything necessary to secure those rights and do nothing after loss to impair them" (General Conditions, ¶ B[19]).
In late 1999, Liberty hired non-party Jeffrey Fishman as its president, after which Fishman — who later served as Liberty's CEO — remained in the plaintiffs' employ until July of 2005. At approximately that time, the plaintiffs discovered that Fishman had allegedly engaged in dishonest conduct during his employment (Cmplt., ¶¶ 12-13, 29), i.e., they discovered that Fishman had negotiated a number of real estate transactions in connection with which he allegedly received bribes and kickbacks (Cmplt., ¶¶ 12, 16-22, 25-34; Liberty A. Cmplt., ¶¶ 1-3 see also, Fishman Plea Colloquy, at 19-20 [Pltffs' Exh., "G"]).
Many of these improper transactions involved the so-called "Pritchard Square" entities; namely "Pritchard Square, LLC," "Pritchard Square Cinema, LLC" and/or their principal, Norman Adie (Cmplt., ¶¶ 16-22, 25, 30, 34).
In August of 2005, the plaintiffs filed a claim under the subject Travelers policy, after which Travelers requested that the plaintiffs substantiate their alleged losses through the filing of a proof of loss statement and other supporting materials (Cmplt., ¶¶ 36-38).
At approximately the same time, i.e., in August of 2005, Pritchard entities commenced an action against Gould/Liberty and others, contending that Pritchard had been victimized by a "criminal scheme and course of conduct" arising out Fishman's improper actions ( see, Kiernan Aff., Exhs., "6" [Pritchard 2nd A. Cmplt., ¶¶ 2-4; Pritchard Square, et., al .v. One Liberty Properties Inc., et., al., Index No. 012830-05, ___ Misc3d ___ [Supreme Court, Nassau County 2005]). Simultaneously, Liberty and certain related entities also commenced an action in the Supreme Court, Nassau County as against Pritchard, Norman Adie and Fishman. The Liberty complaint similarly alleges, inter alia, that these defendants "collectively" conspired together and jointly perpetrated a scheme to defraud Liberty, pursuant to which they "confer[ed] benefits and fraudulent inducements" upon Fishman ( e.g., Liberty A. Cmplt., ¶¶ 2-3, 21, 66-67; 74-75, 79-81, 124 Kiernan Exh., "5" see, One Liberty Properties Inc., et., al. v. Pritchard Square, et., al., Index No. 12807-07, ___ Misc3d ___ [Supreme Court, Nassau County]). Liberty's amended, Pritchard complaint further avers that Fishman, together with the codefendants named in that action, conspired to, inter alia, commit wire fraud and mail fraud as against Liberty (Liberty/Pritchard Cmplt., ¶ 95).
In February and March of 2007, both of the above-referenced Pritchard/One Liberty actions were settled — although not as to Fishman — when the parties executed stipulations of partial settlement and voluntary discontinuances (Travelers Exh., "7"; Travelers Brief at 6, fn 9).
Thereafter, in January of 2008, the plaintiffs commenced the within action for, inter alia, declaratory and related relief as against Travelers, alleging that its claim was covered under the policy and that Travelers breached its obligations thereunder by failing to act upon the claim in good faith and/or to pay it (Cmplt., ¶¶ 51-54).
By verified answer dated April, 2007, Travelers denied the material allegations of the within complaint and interposed several affirmative defenses, including defenses that the plaintiffs: (1) impaired Traveler's subrogation rights in violation of the policy's general conditions by executing the Pritchard settlements; and (2) that they also failed to demonstrate the existence of a direct loss within the meaning of the policy (2nd and 3rd Aff., Defenses, ¶¶ 61-62).
The parties subsequently stipulated to the discontinuance, with prejudice, of the plaintiffs' first and third causes of action for stated declaratory relief, with the result that the sole remaining (second) cause of action now sounds in breach of contract (Order of Warshawsky, J., Gould Investors, LLP, et. al. v Travelers [dated March 9, 2009 at 4]).
Thereafter, in August of 2008, the United States Attorney for the Eastern District of New York, filed a criminal information accusing Fishman of conspiracy to commit wire fraud and intentionally conspiring "to devise a scheme and artifice to defraud" Liberty with respect to the Brooklyn Pavilion transaction (Pltffs' Exh., "F" see, Fishman Criminal Information, ¶¶ 8-10).
Fishman later entered a guilty plea to a single count of conspiring to commit wire fraud. During his plea colloquy, he apparently characterized the amounts he received from Pritchard's principal, Norman Adie, as a loan (Def's Exh., "12"; Plea Colloquy at 18-19).
At approximately the same time, the Securities and Exchange Commission ["SEC"], commenced suit against Fishman alleging, inter alia, that Fishman engaged in two separate, fraudulent schemes. One of the schemes arose out of his Liberty employment, during which he allegedly received — according to the SEC — "undisclosed" kickbacks and "illicit payments" in violation of, inter alia, the Securities Acts of 1933 and 1934 (Pltffs' Exh., "H" SEC Cmplt., ¶¶ 5, 7, 21, 27).
Fishman subsequently filed a consent to entry of judgment in the SEC matter — albeit without admitting or denying the allegations of the complaint.
Pursuant to the final judgment later entered in the SEC matter, Fishman was directed to disgorge the sum of $896,843,65, which amount was to be paid within ten days of entry of the judgment (Pltffs' Exh., "I"; Judgment at 7, ¶ IX). The foregoing sum was apparently derived from both of the separate schemes perpetrated by Fishman — although only one relates to the subject insurance claim.
Travelers claims without dispute that the SEC later created a so-called "fair fund" comprised of the above-referenced disgorgement amounts which would be available to Fishman's victims, but that Gould/Old Liberty affirmatively waived entitlement to any portion of the fund proceeds (Travelers' Brief at 9-1; Kiernan Exh., "14").
In January of 2009, the plaintiffs moved for summary judgment on their contract claim herein, as against Travelers under the subject policy.
By order dated March 9, 2009, this Court denied the motion, concluding in sum that factual issues existed as to whether: (1) the plaintiffs sustained a compensable, direct loss within the meaning of the policy; and (2) whether the plaintiffs ["transferred] to * * * [Travelers] all * * * [of their] rights of recovery against any person or organization for any loss you sustained * * * [and did] * * * everything necessary to secure those rights and do nothing after loss to impair them" (Coverage Form, General Conditions, ¶ B[19]) (Order of Warshawsky, J., March 9, 2009, at 8-10).
At approximately the same time, this also Court granted summary judgment on the issue of liability only — to Gould/Liberty in the Pritchard action (as against Fishman), although the Court declined to award any damages. Rather, this Court concluded that a hearing was required to ascertain, among other things, "[w]hat actual money damages, if any, [the plaintiffs] * * * can establish as resulting from the conduct of Fishman * * *" (Order at 9).
Significantly, after this Court granted judgment to the plaintiffs as against Fishman on the issue of liability in the Pritchard action — but before the Court-ordered hearing on damages could be conducted — the plaintiffs settled their claims against Fishman and certain others (Lundy Aff., ¶¶ 21-22). According to the plaintiffs, the settlement — which has not been attached or described in specific detail — allegedly "reserved any and all subrogation rights" possessed by Travelers (Lundy Aff., ¶¶ 22-23; Schlesinger Aff., ¶¶ 11-12). The plaintiffs further advise that the settlement is subject to a confidentiality provision and, for that reason, has not been produced in opposition to Travelers' motion, but would be if requested by the Court for an in camera review. (Schlesinger Aff., ¶¶ 10-12; Pltffs' Brief at 6, fn 3).
Travelers now moves for summary judgment dismissing the complaint principally arguing, inter alia, that the plaintiffs breached the policy as a matter of law by entering into the February and March stipulations/releases and thereafter waiving their right to seek recovery as against certain funds disgorged by Fishman in the SEC matter.
Travelers claims that it has established its prima facie entitlement to judgment as a matter of law with respect to its claim that the plaintiffs violated General Conditions, paragraph B[19], i.e., the policy provisions requiring the insured to: (1) "transfer to * * * [Travelers] all your rights of recovery against any person or organization for any loss you sustained and for which we have paid or settled"; and then (2) "do everything necessary to secure those rights and do nothing after loss to impair them".
More particularly — and relying on the second sentence of paragraph B[19] — Travelers alleges that the plaintiffs entered into a settlement/release in the Pritchard actions as against various third-party entities — entities which the plaintiffs have described in their own, verified Pritchard complaint, as Fishman's co-conspirators. Nor is there any dispute that in the SEC matter, the plaintiffs agreed to waive their recovery rights as against the "fair fund," which was to be comprised of the disgorged proceeds deposited pursuant to the SEC consent judgment.
It is settled that an insured's failure to protect the subrogation rights of the carrier may constitute a breach of the policy terms, and that the insured "bears the burden of establishing that a release has not "operate[d] to prejudice the subrogation rights of the insurer" ( Weinberg v. Transamerica Ins. Co., 62 NY2d 379, 384 see generally, Progressive Ins. Co. v. Sheri Torah, Inc., 44 AD3d 837, 838; State Farm Mut. Auto. Ins. Co. v. Lucano, 11 AD3d 548; In re Allstate Ins. Co. (Richard E. Brown), 288 AD2d 955; Aetna Cas. Sur. Co. v. Longo Production, Inc., 247 AD2d 497; State Farm Fire and Cas. Co. v. Zyburo, 215 AD2d 566, 567; Leeds Peninsula Pharmacy, Inc. v. American Nat. Fire Ins. Co., 125 AD2d 551, 553).
The issue most often arises in a more simplistic setting, involving automobile collisions, additional personal injury protection, and receipt of benefits under a no-fault insurance policy. In Weinberg v. Transamerical Ins. Co., for example, plaintiff Weinberg was injured in an automobile accident while a passenger in a car owned and operated by James Felder. Felder was insured by GEICO for coverage of basic no-fault benefits for both medical payments and lost earnings. Weinberg was insured by Transamerica, and the policy provided, inter alia, for additional personal injury coverage above the statutorily required $50,000.
After receiving the payment of $17,500 under Felder's no-fault policy with GEICO, and issuing a general release in return, Weinberg sought to recover under his Transamerica policy. The Court concluded that "(i)t is the burden of the insured to establish by virtue of an express limitation in the release or of a necessary implication arising from the circumstances of its execution that the release did not operate to prejudice the subrogation rights of the insurer". Wtinstein at pp. 382 — 383. The Court noted that the insurer has no opportunity to participate in the negotiation of the insured's claim against the third-party tort-feasor. Once the insurer establishes the existence of a release, alleged to constitute a breach of the insurance agreement not to prejudice the insurer's subrogation rights, it is "fair and fitting and no undue imposition on the insured to place on him the burden of persuasion that there was no such breach". Id.
Plaintiffs' response to the comparison to automobile cases is that they are inapplicable. The reason is that in those cases the insured released the culpable party, whereas the insured in this case did not provide such a release to the culpable party, and the claim for subrogation remains viable as to the dishonest employee, Fishman. Affirmation of Schlesinger, Exh. "G" to affirmation of Lambert in Support of Motion, at ¶¶ 14 — 15. The issue is whether or not this is adequate under the obligations of the policy to take no action which would jeopardize the insurer's rights of subrogation. More importantly is the question as to whether or not the obligation to take no action which jeopardizes the insurer's rights of subrogation is contingent upon the payment of the claim by the carrier. Reading ¶ 19 of the policy leads to a reasonable interpretation that the obligation to preserve subrogation rights coextensive with the obligation of the carrier to pay the claim. While Travelers argues that the obligations to pay the claim and to preserve the rights of subrogation are severable, and equally enforceable, the fact is that they are described in the conjunctive, using the word "and", not in the disjunctive.
When there is more than one reasonable interpretation of the language in an agreement, the doctrine of contra proferendem requires the Court to adopt the interpretation which is contrary to the interpretation proffered by the author. In this instance, Travelers, the author of the document, must be bound by the interpretation that the obligation to protect subrogation rights arises only upon payment of the claim. In this case, Travelers was on notice of the claim in August 2005, while the settlements of which it complains in its affirmative defenses, were in 2007 and 2008. Had Travelers evaluated the damages sustained under the terms of the policy and made payment, they would have obtained subrogation rights against any and all persons against whom a claim could be made, but they did not do so.
Plaintiffs argue that they never issued a general release or settled with Fishman, the employee whose misconduct was the basis for their claim against Travelers. This is an interesting question as to whether the release issued to some, but not all, malefactors constitutes a breach of that portion of ¶ 19 of the policy. The Court finds it unnecessary to address this issue in view of its determination that the obligations to pay and protect subrogation rights are conjunctive, and the question of breach of the second part of ¶ 19 need not be reached in the absence of payment. It is therefore:
ORDERED that the motion pursuant to CPLR 3212 by the defendant Travelers Casualty and Surety Company of America, et. al., for summary judgment dismissing the complaint, is denied.
The foregoing constitutes the decision and order of the Court.