Opinion
Index No. 653820/2022
01-22-2024
PREFERRED TERM SECURITIES XXV, LTD., Preferred Term Securities XXVII, Ltd., Tropic CDO V Ltd., Plaintiff, v. ACP RE, LTD., ACP Re Holdings, LLC, Amtrust Financial Services, Inc., Castlepoint Bermuda Holdings, Ltd., Estate of Michael Karfunkel, Integon National Insurance Company, Michael Karfunkel 2005 Grantor Retained Annuity Trust, Michael Karfunkel Family 2005 Trust, National General Holdings Corp., Technology Insurance Company, Inc., Tower Group, Inc., Tower Group International, Ltd., George Karfunkel, Leah Karfunkel, Barry Zyskind, Defendant.
The following e-filed documents, listed by NYSCEF document number (Motion 003) 81, 82, 83, 84, 85, 86, 87, 88, 89 were read on this motion to/for DISMISS.
The Defendants' motion (Mtn. Seq. No. 003) to dismiss is denied except to the extent set forth below.
In the well pled Amended Complaint (the AC ; NYSCEF Doc. No. 56), the Plaintiffs assert a single cause of action against the Defendants — i.e. , breach by failing to pay amounts due under three issues of TruPS on two dates — June 23, 2017 and July 7, 2019 (NYSCEF Doc. No. 56, ¶¶ 14-15, 220-243). The lawsuit was filed on October 14, 2022, well within the six-year statute of limitations for breach of contract ( CPLR § 213 ; Chase Sci. Research, Inc. v NIA Group, Inc. , 96 NY2d 20, 25 [2001] ). As such, these claims are timely and properly asserted against the Defendants.
Although the Defendants are correct that any claims predicated on a breach of the successor obligation clause by virtue of the failure to execute a supplemental indenture are untimely because such claims would have accrued in 2009, 2013, and 2014, this is not the claim asserted against these Defendants in this case. As discussed above, the claim asserted in this case is for breach of contract for the failure to pay the TruPS on June 23, 2017 and July 7, 2019 including as successor obligors. The allegations that the failure to execute a supplemental indenture was also a breach provides background and highlights why under the circumstances of the combination transactions discussed in Alesco (hereinafter defined) the Plaintiffs have stated a claim as to why the Defendants may be held contractually liable for the failure to pay the TruPS. However, any claim based on the failure to execute a supplemental indenture pursuant to the successor liability provisions in 2009, 2013 and 2014 is dismissed as untimely and the Plaintiffs cannot claim separate damages based on that breach from the damages asserted for failure to pay the TruPS including as successor obligors.
The Defendants are also not entitled to dismissal based on their argument that they cannot be held contractually liable as "successors" under the TruPS indentures:
The Amended Complaint should also be dismissed to the extent it alleges TGI, TGIL and ACP Re breached contracts they never signed nor consented to (NYSCEF Doc. No. 82 at 7).
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[This Court's prior decisions] are not sufficient, as a matter of law, to impose TruPS liabilities on the nonsignatory Defendants because contracts cannot bind nonsignatories merely by saying so (NYSCEF Doc. No. 89 at 3).
This argument was previously advanced in the related case ( Alesco ) captioned Alesco Preferred Funding VIII, Ltd. V ACP Re, Ltd. , 209 AD3d 558, 559 (1st Dept 2022) involving substantially the same facts and many of the same parties. Relying on Stefatos v Fred-Doug Manager, LLC , 116 AD3d 419 (1st Dept 2014) (NYSCEF Doc. No. 189 at 11-12, in Alesco ), the defendants in Alesco argued:
Plaintiffs also purport to sue TGIL and ACP for breach of the indentures. (AC ¶¶ 81, 93.) But a contract only binds the parties who agreed to it; nonparties like TGIL and ACP cannot be liable for breach. Stefatos v. Fred-Doug Manager, LLC , 116 AD3d 419, 419 (1st Dep't 2014)
Indeed, the Successor Obligor clause by its terms binds only the Company, defined as the original Issuer and its successors: "the Company hereby covenants and agrees that, upon any such consolidation, merger (where the Company is not the surviving corporation), sale, conveyance, transfer or other disposition," obligations "shall be expressly assumed by supplemental indenture satisfactory in form to the Trustee." (E.g., AC Ex. 2, § 11.1 (emphasis added).)
Although Plaintiffs repeatedly quote boilerplate language confirming that the indentures—like every contract—are binding on successors (e.g. , AC ¶¶ 62—64), Plaintiffs do not allege that TGIL and ACP executed a supplemental indenture assuming the role of successors and do not state a cause of action for successor liability. (See infra Part IV(C)). Thus, even if there had been a breach of the Successor Obligor provision (and there has not), the liability for such a breach would fall solely on the Issuer (NYSCEF Doc. No. 189 at 11-12, in Alesco [emphasis added]).
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Plaintiffs ignore the plain language of the Indentures; instead, they ask the Court to rewrite them in Plaintiffs' favor. But under New York law, "[i]f a contract is complete, clear and unambiguous, it must be enforced according to its plain meaning." Littleton Constr. Ltd. v. Huber Constr., Inc. , 27 NY3d 1081, 1083 (2016).
By the Indentures' plain terms, only the Issuers are bound by the successor obligor provisions. As nonparties, TGIL and ACP had no obligations under the Indentures and cannot be held liable for any breach of their provisions. See, e.g., Stefatos v. Fred-Doug Manager, LLC , 116 AD3d 419, 419 (1st Dep't 2014) (nonparty not bound by contract). The only relevant cases Plaintiffs cite enforced successor obligor provisions by granting declaratory or injunctive relief against the issuer before a threatened breach occurred. HFTP Invs., L.L.C. v. Grupo TMM, S.A. , 18 AD3d 369 (1st Dep't 2005) ; In re BankAtlantic Bancorp, Inc. Litig. , 39 A.3d 824 (Del. Ch. 2012). Such relief was necessary precisely because , in its absence, the creditors would have had no remedy against the purchaser after the transaction was completed. See BankAtlantic , 39 A.3d at 844—45. We are aware of no case——and Plaintiffs have cited none——that retroactively imposes liability on a party that did not expressly agree to assume it at the time of the transaction.
Finally, Plaintiffs' statement that "TGIL publicly acknowledged that it is the successor to TGI" is misleading. (Opp. 10 (citing AC ¶¶ 82—83).) TGIL disclosed that it "was the successor to Tower Group, Inc. pursuant to Securities Exchange Act Rule 12g-3(a). " (AC ¶ 83 (emphasis added).) Rule 12g-3(a), 17 C.F.R. § 240.12g-3(a), only addresses succession to a registration of publicly traded securities after an M&A transaction, not corporate succession for purposes of state-law civil liability. Plaintiffs concede that TGI survived each of the transactions at issue and still exists today. (AC ¶ 82) (NYSCEF Doc. No. 215 at 5-6, in Alesco [emphasis added]).
This Court rejected that argument in Alesco , holding that the Plaintiffs stated a claim for breach of contract against the Defendants under the successor obligor provisions (despite not having signed them) by virtue of the same 2013 transaction at issue in this case (NYSCEF Doc. No. 234 at 17, in Alesco ). On appeal, the Appellate Division affirmed, holding:
The court properly denied defendants' motion to dismiss the first cause of action for breach of contract and third cause of action for tortious interference asserted against TGIL, ACP, and the Karfunkel Defendants as asserted based on the indenture clauses providing for the assumption of liability for indenture payments by entities that succeed to those obligations based on the occurrence of certain consolidation, merger, or asset/stock disposition transactions. Plaintiffs adequately stated these causes of action against these defendants based on allegations that there were certain merger transactions in which the indenture issuer "was not the surviving corporation" so as to trigger the indentures' Section 11.1 and 11.2 successor liability provisions requiring an assumption of liabilities by the other entity involved in the merger transaction. Contrary to defendants' contention, the plain language of those provisions does not require, as a matter of law, the finding that the transactions at issue were ones in which the indenture issuer company was "the surviving corporation," merely based on the fact that the issuer's corporate existence was not entirely extinguished by the transaction and the issuer continued as an indirect subsidiary of the merger counterparty. Nor does the plain language require the finding that the transactions did not trigger the provisions based on the fact that there was no execution of a supplemental indenture, as the failure to execute a supplemental indenture in connection with a merger where the issuer was not the surviving corporation would have constituted a breach of the required promise by the merger counter-party to execute such a document
( Alesco , 209 AD3d at 559 ). As such, the Defendants cannot now simply whisk away the argument which they previously made and Alesc o's holding by claiming now that the argument that they advanced, which the Court rejected, was merely "definitional." As the above makes clear, it was not. Thus, the issue now raised was previously litigated and decided, and for the same reasons set forth in Alesco , by virtue of the transactions at issue, the Plaintiffs have stated a claim as to why the Defendants may be held contractually liable as successors under the Indenture.
The Court has considered the Defendants remaining arguments and finds them unavailing.
The Defendants shall file an answer within 30 days of this Decision and Order and a conference is scheduled for March 4, 2024 @ 11:30 am.