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recommending that jury demand be stricken
Summary of this case from Markel American Ins. Co. v. LinhartOpinion
02 Civ. 3175 (KMW)(FM)
March 15, 2004
REPORT AND RECOMMENDATION TO THE HONORABLE KIMBA M. WOOD
I. Introduction
In this action arising out of the sinking of the R/V ALOHA ("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 any coverage under an insurance policy ("Subject Policy") that it issued to Deep Sea.
Royal has now filed a three-part motion. First, pursuant to Rule 56 of the Federal Rules of Civil Procedure, Royal seeks partial summary judgment that New York law governs this action because there is no controlling federal maritime rule. Second, pursuant to Rule 12(b)(6) of the Federal Rules, Royal has moved to dismiss the Third through Thirteenth Counterclaims in Deep Sea's Answer ("Answer") to Royal's Second Amended Complaint ("Second Amended Complaint" or "Complaint") on the ground that they fail to state claims upon which relief can be granted under New York law. Third, pursuant to Rules 9(h) and 38 of the Federal Rules, Royal asks the Court to strike Deep Sea's demand for a jury trial.
For the reasons that follow, all three motions should be granted.
II. Factual Background
Most of the relevant facts are undisputed. In instances where there is some disagreement (or Royal contends that Deep Sea's position lacks evidentiary support), I have assumed for purposes of this Report and Recommendation that Deep Sea's view of the facts (even if unsupported by the record) is correct.
A. Parties
Royal is an Illinois corporation with its principal place of business in North Carolina. Royal also maintains an office in lower Manhattan. (Compl. ¶ 4).
Deep Sea is a Panamanian corporation with a place of business in Houston, Texas. (Decl. of Cary R. Wiener, Esq., dated July 7, 2003 ("Wiener Decl."), Ex. I (Decl. of Eric Galerne, dated July 7, 2003 ("Galerne Decl."), ¶¶ 6, 8)). Eric Galerne, who is not named as a defendant, is the Vice President and General Manager of Deep Sea. (Galerne Decl. ¶ 1).
In its Complaint, Royal also named as a defendant Texas Capital Corporation, one of Deep Sea's lenders. Texas Capital has never appeared in this action; however, on July 29, 2002, I granted Fleet National Bank, its purported successor-in-interest, leave to intervene. (See Docket No. 17). In November 2002, Royal and Fleet entered into a settlement agreement resolving any disputes between them.
Deep Sea objected to the settlement between Fleet and Royal. In light of Deep Sea's objections, on December 6, 2002, I granted Deep Sea leave to file a motion contesting the settlement. On June 18, 2003,1 issued a Report and Recommendation regarding that motion which concluded that there was nothing improper about the Royal/Fleet settlement. Royal Ins. Co. of Am, v. Deep Sea Int'l, 02 Civ. 3175 (KMW)(FM), 2003 U.S. Dist. EEXIS 11424, at *5-*24 (S.D.N.Y. June 18, 2003). I further stated that Royal's motion to dismiss Deep Sea's Twelfth Counterclaim, which challenged that settlement, failed to comply with the Federal Rules of Civil Procedure. Id. at *24-*26. Thereafter, on December 3, 2003, Your Honor adopted my recommendation that Royal's motion be denied, but declined to address the propriety of the settlement, reasoning that it did not require judicial approval. (See Docket No. 98 (12/3/03 Tr.), at 9). As explained below, any lingering questions regarding the settlement have apparently been mooted by Deep Sea's decision to withdraw its Twelfth Counterclaim.
B. Insurance Coverage
Deep Sea used an insurance broker to place the insurance coverage for the ALOHA. Between 1989 and 1991, Deep Sea's broker was Adams Porter, a firm located in lower Manhattan. (Aff. of John A.V. Nicoletti, Esq., sworn to on April 16, 2003 ("Nicoletti Aff."), Ex. 13 (Dep. of John Toscani, taken Oct. 1, 2002 ("Toscani Dep."), at 9-10)). After Frenkel Co. ("Frenkel") acquired Adams Porter in 1991, Frenkel placed Deep Sea's coverage for the AEOHA. (See id. at 9-10, 58-70). Most of Frenkel's staff was located in lower Manhattan throughout the period that it acted as Deep Sea's broker. (Id. at 11, 35-37). Following the World Trade Center tragedy, however, Deep Sea's principal contact at Frenkel, John Toscani, began to work for Frenkel from an office in New Jersey. (Id.).
For much of the time that he dealt with Deep Sea, Toscani's principal client contact was Pat McCabe. (See id. at 39-41; Nicoletti Aff. Ex. 12 (Dep. of Eric Galerne, taken Jan. 30, 2003 ("Galerne Dep."), at 191)). McCabe was employed by Inspectronics, Inc., a corporation owned by a member of Galerne's family, and was knowledgeable about insurance. (Galerne Decl. ¶ 10). Inspectronics had an office on City Island in the Bronx, which was where McCabe worked. (See Toscani Dep. at 39-42). After McCabe left Inspectronics in or around 2001, Galerne became Toscani's principal contact at Deep Sea. (Id. at 42-43, 45-46). Deep Sea contends, and for purposes of this Report and Recommendation I have assumed, that by this date Deep Sea had closed its City Island office. (See Deep Sea Mem. of. L. at 17-18).
Prior to 1999, a company known as Global Special Risks served as an intermediary between Adams Porter and Frenkel in placing the insurance coverage for the AEOHA. (Toscani Dep. at 46-48, 53-54). Global Special Risks is located in lower Manhattan. (Id. at 53-54). In or around 1999, when Global Special Risks discontinued its research vessel program, Toscani negotiated Deep Sea's coverage directly with insurance companies, contacting the New York City offices of Commercial Union, St. Paul's, and Royal for this purpose. (Id. at 60-61). Royal eventually agreed to bind the coverage, issuing a policy which was effective from August 5, 1999, until August 5, 2000. (Id. at 58, 61-62). The policy for this initial period provided Deep Sea with several forms of insurance, including hull and scientific equipment coverage. The policy was bound and delivered to Frenkel in New York, and the premiums were paid to Frenkel's New York office. (Id. at 62-64; Nicoletti Aff. Ex. 14 (Aff. of Michelle Gallego, sworn to on April 16, 2003 ("Gallego Aff."), ¶¶ 4-5)).
Although Deep Sea contends that Toscani was confused about the location where these negotiations took place, his uncertainty related to the precise office. (Toscani Dep. at 62-63). He testified that all of his negotiations with the underwriters took place in New York. (Id. at 63).
The Royal policy was renewed twice for one-year renewal terms. (Id. at 64-70). In connection with the second renewal, which involved the Subject Policy, Toscani's contact at Deep Sea was Galerne. (Id. at 68-69). Prior to the issuance of the Subject Policy, Toscani and Galerne met with representatives of Royal in New York to discuss a claim for the loss of a "sphere" during the prior policy period. (Galerne Dep. at 196-97). During that same meeting, Deep Sea decided to "re-up with Royal." (Id. at 196). Although the Subject Policy thereafter was bound in New York City, it may have been delivered to Toscani in New Jersey if it was forwarded to Frenkel after the company had to abandon its World Trade Center offices on September 11, 2001. (See Toscani Dep. at 11, 35-37, 66; Gallego Aff. ¶ 5).
C. Insurance Claim and Response
Following the sinking of the ALOHA in the Gulf of Mexico during the early morning hours of February 7, 2002, Deep Sea submitted an insurance claim to Frenkel in New York, which, in turn, reported the claim in a timely manner to Royal's New York office. (See Nicoletti Aff. Ex. 15 (Dep. of Stephen Wang, taken Sept. 5, 2002 ("Wang Dep."), at 57-58, 60-62, 65)).
Royal assigned the investigation of Deep Sea's claim to the Salvage Association, a marine surveyor, and asked that it conduct its inquiry in connection with Royal's in-house fraud investigations unit. (Deep Sea Rule 56.1 Stmt. ¶ 43). The in-house unit never found any evidence of fraud. (Id.). Additionally, the Salvage Association failed to ascertain the cause of the loss before this declaratory judgment action was filed. (Id. ¶ 44).
Deep Sea contends, and for purposes of this Report and Recommendation I have assumed, that Royal's investigation was inadequate and that its declination of coverage under the Subject Policy was made in bad faith. (See Deep Sea Mem. of L. at 2-3, 4-5). I further have assumed, as Deep Sea alleges, that Royal raced to file its declaratory judgment action in this District to avoid having to explain its improper actions in Texas, a forum that it believed would be inhospitable to its coverage position. (See id. at 3-4).
D. Counterclaims
In its Answer, Deep Sea asserted thirteen counterclaims. Deep Sea has now stated that it wishes to "withdraw" its Third through Seventh and Eleventh and Twelfth Counterclaims. (Wiener Decl. ¶ 3). Deep Sea further has stated that the only counterclaims that remain in this suit are the First and Second Counterclaims, which seek to recover the proceeds of the disputed hull and scientific equipment coverages on a contract theory, and the Eighth, Ninth and Tenth Counterclaims, which seek punitive damages for Royal's bad faith refusal to honor the Subject Policy, bad faith claims handling practices, and violation of the implied covenant of good faith and fair dealing. (See id. ¶ 4). Accordingly, it appears that Deep Sea also has withdrawn its Thirteenth Counterclaim.
E. Jury Demand
At the time that it served and filed its original complaint, Royal designated this case as one falling "within the Admiralty and Maritime jurisdiction of [this Court]
. . . within the meaning of Rule 9(h) of the Federal Rules of Civil Procedure." (Docket No. 1, ¶ 2). In its answer to the original complaint, Deep Sea asserted four counterclaims, alleging that Royal's refusal to pay Deep Sea the policy proceeds was wrongful, in bad faith, and a breach of its implied covenant of good faith and fair dealing (First Counterclaim), caused Deep Sea to incur unnecessary attorneys' fees and costs (Second Counterclaim), caused Deep Sea to suffer consequential losses (Third Counterclaim), and entitled Deep Sea to recover punitive damages under the New York Insurance Law (Fourth Counterclaim). (Docket No. 5, ¶¶ 73-85). Deep Sea repeated those counterclaims in its answer to the first amended complaint. (Docket No. 7, ¶¶ 73-85).
Royal did not reply to the counterclaims in the original answer. Thereafter, however, on June 20, 2002, Royal served a reply to the counterclaims in Deep Sea's answer to the first amended complaint. (Docket No. 8). Thereafter, on June 24, 2002, Deep Sea demanded a jury trial. (Docket No. 9).
The Court's docket sheet erroneously describes the reply as an "Answer."
III. Discussion
A. Summary Judgment Motion
In its motion for partial summary judgment, Royal seeks a declaration that New York law governs this action because there is no controlling federal maritime rule. Deep Sea disagrees, arguing that this Court should either apply a uniform admiralty rule or Texas law.
1. Summary Judgment Standard
Under Rule 56(c) of the Federal Rules of Criminal Procedure, summary judgment is appropriate only when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."
In deciding a motion for summary judgment, the court must "view the evidence in the light most favorable to the party against whom summary judgment is sought and . . . draw all permissible inferences in favor of that party." Fischl v. Armitage, 128 F.3d 50, 55 (2d Cir. 1997). The Court also must accept as true the non-moving party's evidence, if supported by affidavits or other evidentiary material. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). Moreover, assessments of credibility, choosing between conflicting versions of the events, and the weighing of evidence are matters for the jury, not for the court. Fischl, 128 F.3d at 55; see also Fed.R.Civ.P. 56(e) 1963 Advisory Committee Note. Thus, "[t]he court's function is not to resolve disputed issues of fact but only to determine whether there is a genuine issue of material fact to be tried."Fischl, 128 F.3d at 55.
To defeat a motion for summary judgment, the non-moving party cannot merely rely upon allegations contained in the pleadings that raise no more than "some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co., LTD. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). The non-moving party must offer "concrete evidence from which a reasonable juror could return a verdict in [its] favor." Anderson, 477 U.S. at 256. Moreover, the moving party is not required to affirmatively disprove unsupported assertions made by the non-movant. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). "Conclusory allegations, conjecture, and speculation are insufficient to create a genuine issue of fact." Kerzer v. Kingly Mfg., 156 F.3d 396, 400 (2d Cir. 1998) (citingD'Amico v. City of New York, 132 F.3d 145, 149 (2d Cir. 1998)).
2. Choice-of-Law Standard in Admiralty Cases
The Subject Policy is a maritime contract within this Court's admiralty and maritime jurisdiction, and, as such, is governed by the general federal maritime law of the United States. See Advani Enters., Inc. v. Underwriters at Lloyd's, 140 F.3d 157, 161-62 (2d Cir. 1998). Nevertheless, the federal courts have typically deferred to the state courts in regulating such contracts. See Wilburn Boat Co. v. Fireman's Fund Ins. Co., 348 U.S. 310, 314-16, 320-21 (1955). For this reason, state law controls the rights of the parties to the Subject Policy unless there is a judicially-established federal rule or a need to fashion a new uniform federal rule addressing a particular issue. See id. at 314-16.
In its opposition papers, Deep Sea suggests that federal maritime law should govern its punitive damages counterclaims, but has not cited any authority suggesting that the federal courts have adopted a maritime rule recognizing an insured's right to recover punitive damages when an insurer acts in bad faith by declining to provide coverage under a marine insurance policy. Additionally, although Deep Sea has cited other areas in which the federal courts have applied uniform rules, it has not offered any persuasive reason why this Court should adopt such a rule in this action. At best, Deep Sea has attempted to show that "there is no controlling case law that prohibits the imposition of punitive damages under a federal common law standard." (Deep Sea Mem. of L. at 6) (emphasis added). This, however, is not the issue.
As the Supreme Court noted in Wilburn Boat:
Under our present system of diverse state regulations, which is as old as the Union, the insurance business has become one of the great enterprises of the Nation. Congress has been exceedingly cautious about disturbing this system, even as to marine insurance, where Congressional power is undoubted. We, like the Congress, leave the regulation of marine insurance where it has been — with the States.Wilburn Boat. 348 U.S. at 320-21.
The mere fact that the federal government has the power to impose a uniform rule hardly suggests that it should do so. Accordingly, in the absence of any showing that there is a need to depart from the existing paradigm, the Court should decline to craft a new federal maritime rule governing the availability of punitive damages to an insured who alleges that its insurance company acted in bad faith by denying a marine insurance claim. See, e.g., New York Marine Gen. Ins. Co. v. Tradeline(L.L.C.), 266 F.3d 112, 130 (2d Cir. 2001) (affirming dismissal of an insured's counterclaim seeking punitive damages for the alleged bad faith of an insurer under a marine cargo policy on the basis of state law).
In the absence of a controlling federal rule, federal maritime law requires this Court "to determine 'the scope and validity of the [marine insurance] policy provisions involved and the consequences of breaching them' by using state law." Advani, 140 F.3d at 162 (quotingWilburn Boat, 348 U.S. at 316) (alterations in original). Nevertheless, federal choice-of-law rules control the determination of which state's laws should be applied. Id.
Under federal choice-of-law rules, we determine which state law to use by ascertaining and valuing points of contact between the transaction [giving rise to the cause of action] and the states or governments whose competing laws are involved. . . . More concretely, this choice-of-law analysis should include an assessment of the following contacts: (1) any choice-of-law provision contained in the contract; (2) the place where the contract was negotiated, issued, and signed; (3) the place of performance; (4) the location of the subject matter of the contract; and (5) the domicile, residence, nationality, place of incorporation, and place of business of the parties.Id. (internal citations and quotation marks omitted; alterations in original).
Balancing the Advani factors, it is clear that New York has the most — and the most substantial — contacts with the Subject Policy. Therefore, New York law should govern this dispute.
First, there is no choice-of-law provision in the Subject Policy. (See Gallego Aff. Ex. A (Policy No. P2OH006873)). Accordingly, this factor points to neither Texas nor New York as the appropriate state whose laws should apply.
Turning to the place where the insurance policies in question were negotiated and signed, it is undisputed that most of the dealings between Royal and Deep Sea took place in New York. Thus, for many years prior to the issuance of the Subject Policy, Deep Sea relied on McCabe, whose office was on City Island, to represent its interests. (See Toscani Dep. at 39-42). Deep Sea also used a New York City broker, Frenkel, to act on its behalf. The Subject Policy also was bound, assembled and issued here. (Id. at 67-70; Gallego Aff. ¶¶ 4-5).
These are scarcely the only New York contacts in this case. Although Royal is an Illinois corporation, with its principal place of business in North Carolina, all of its dealings with McCabe, Deep Sea and Frenkel relating to the issuance of the Subject Policy occurred in New York, where it maintains an office. (See Toscani Dep. at 58, 60-62, 67-70; Gallego Aff. ¶¶ 4-5). Similarly, although Deep Sea is a Panamanian corporation headquartered in Texas, all of its dealings with Royal concerning the underwriting of its coverage took place in New York. (See Toscani Dep. at 9-10, 58-70). Deep Sea also maintained an office on City Island for at least some of the period during which it was purchasing its insurance coverage for the ALOHA from Royal. (See Id. at 39-42). Indeed, the Subject Policy expressly notes that some of the unscheduled equipment insured under the Research and Scientific Equipment Coverage was located in a warehouse on City Island. (See Gallego Aff. Ex. A at C 000756).
Scouring the record, Deep Sea attempts to point out as many non-New York contacts as it can muster. For example, Deep Sea notes that the Subject Policy was "most likely" delivered to Frenkel in New Jersey. (Deep Sea Mem. of E. at 16 (citing Toscani Dep. at 70)). However, this New Jersey contact is an outgrowth of the World Trade Center tragedy. The fact that Toscani chose to operate from an office in New Jersey after September 11, 2001, scarcely suggests that New York law should not be applied or that the law of Texas, a far more remote jurisdiction, should be applied.
Deep Sea also argues that the place of performance of the Subject Policy was New Jersey because this is where "the policy was delivered and the premium was demanded." (Deep Sea Mem. of E. at 16 (citing Wiener Decl. Ex. G at F 017)). In fact, the exhibit that Deep Sea relies on shows only that Deep Sea borrowed the money to pay its premiums from First Insurance Funding Corporation, a company located in Illinois. (See id.). The document identifies Frenkel in New Jersey as Deep Sea's broker, but it does not reflect when or where First Insurance tendered to Royal the premium due under the Subject Policy. (See id.).
Similarly, Deep Sea notes that the schedule of equipment covered by the Research and Scientific Equipment Coverage of the Subject Policy lists the "address" of two items of unscheduled equipment as a warehouse in Texas. (Id. at 17 (citing Gallego Aff. Ex. A at C 000756)). As noted above, however, the very same document also indicates that additional unscheduled Deep Sea equipment was located on City Island.
Finally, Deep Sea observes that Galerne was in Texas during many of his dealings with Frenkel. As an insurance broker, Frenkel was the agent of Deep Sea, not Royal. See N.Y. Ins. Law § 2101(c) (McKinney 2000);Ribacoff v. Chubb Group of Ins. Cos., 770 N.Y.S.2d 1, 2 (1st Dep't 2003) (citing § 2101(c) and noting that "[a]n insurance broker is an agent of the insured"); Duzich v. Marine Office of A. Corp., 980 S.W.2d 857, 865 (Tex.Ct.App. 1998) ("generally speaking, an insurance broker is considered the agent of the insured"). Thus, the fact that Deep Sea was located in Texas when it interacted with its own agent does nothing to shift the balance of contacts in this case.
Simply put, the only real connection that this case has to Texas is the fact that Deep Sea is located and occasionally communicated from there. This suit, however, is not about Deep Sea, but about its insurance coverage. Accordingly, it is clear that New York, rather than Texas, had the most significant contacts with the subject matter of this suit. New York law therefore governs the rights of the parties under the Subject Policy.
B. Motion to Dismiss
1. Third through Seventh and Eleventh through Thirteenth Counterclaims
The next branch of Royal's motion seeks the dismissal of Deep Sea's Third through Thirteenth Counterclaims for failure to state a claim. Through these counterclaims, Deep Sea seeks to recover compensatory and punitive damages, as well as attorneys' fees, for Royal's allegedly improper refusal to honor its claim. (See Answer
¶¶ 35-99).
In its papers opposing Royal's motions, Deep Sea states that it is voluntarily withdrawing its Third through Seventh, and Eleventh and Twelfth counterclaims. (Wiener Decl. ¶ 3). In fact, it appears that Deep Sea is also abandoning its Thirteenth Counterclaim because the declaration of its attorney notes that only "Deep Sea's [F]irst, [S]econd, [E]ighth, [N]inth and [T]enth counterclaims are not withdrawn." (Id. ¶ 4). Deep Sea also has not suggested any reason why Royal's motion to dismiss the Thirteenth Counterclaim should not be granted.
Although Deep Sea's papers indicate that most of its counterclaims are being "withdrawn," Royal remains concerned that Deep Sea might seek to reinstitute these claims at a later date. (See Royal Reply Mem. of E. at 15-16). There is, in fact, some reason for Royal to be concerned because Deep Sea's opposition papers indicate that it is not withdrawing these counterclaims because they lack legal or factual merit, but because Deep Sea currently lacks the financial resources to prosecute them. (See Wiener Decl. ¶ 3).
Rule 41(c) of the Federal Rules of Civil Procedure governs the voluntary dismissal of actions. See 8 James Wm. Moore et al., Moore's Federal Practice ¶¶ 41.13[4], 41.60 (3ded. 2000). The rule provides that "[a] voluntary dismissal by the claimant alone . . . shall be made before a responsive pleading is served or, if there is none, before the introduction of evidence at the trial or hearing." Fed.R.Civ.P. 41(c). Here, Royal served its Reply to Deep Sea's counterclaims long before Deep Sea sought to withdraw them. (See Docket No. 39). Accordingly, Deep Sea can no longer unilaterally withdraw any of its counterclaims without prejudice.
In its motion papers, Royal has set forth the reasons why it is entitled to the dismissal of each counterclaim that is the subject of its motion. In response, as noted above, Deep Sea has opposed Royal's motion to dismiss only insofar as it is addressed to Deep Sea's Eighth through Tenth Counterclaims. Accordingly, because Royal has shown that it is entitled to judgment on the remaining counterclaims as a matter of law, and because Deep Sea has failed to establish the existence of any genuine issue of material fact related thereto, Royal is entitled to the relief it seeks. Royal should therefore be awarded judgment dismissing with prejudice Deep Sea's Third through Seventh and Eleventh through Thirteenth Counterclaims.
2. Eighth through Tenth Counterclaims
a. Standard Under Rule 12(b)(6)
A court reviewing a motion to dismiss counterclaims pursuant to Rule 12(b)(6) must accept all well-pleaded facts as true and construe the answer and counterclaims in a light most favorable to the nonmoving party. See Leatherman v. Tarrant County Narcotics Intelligence Coordination Unit, 507 U.S. 163, 164 (1993); Hishon v. King Spalding, 467 U.S. 69, 73 (1984); Hernandez v. Coughlin, 18 F.3d 133, 136 (2d Cir. 1994); Meridian Int'l Bank Ltd. v. Gov't of the Republic of Liberia, 23 F. Supp.2d 439, 445 (S.D.N.Y. 1998). A counterclaim may be dismissed only when it has been established "beyond doubt that the [defendant] can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46(1957).
b. Relevant Facts
Deep Sea's Eighth through Tenth Counterclaims seek punitive damages. In the Eighth Counterclaim, Deep Sea alleges that Royal "willfully and purposefully" refused to pay Deep Sea insurance proceeds which were due and owing by reason of the AEOHA's sinking. (Answer ¶¶ 72-74). In its Ninth Counterclaim, captioned "Bad Faith Claims Handling Practices," Deep Sea alleges that Royal "failed to properly and fully investigate and handle the subject claims as a result of an improper global practice on its part to limit its exposure to various losses." (Id. ¶ 76). Specifically, Deep Sea contends that this practice involves:
identifying by way of its in-house Large Loss Reports those claims in which it faces significant exposure and then refusing to fully and properly investigate the loss; failing to properly segregate the claim information gathering process and coverage decision making process; retaining legal counsel for the sole purpose of having them assist, direct and advise with respect to the acquisition of information from its insured and others designed to support a "no coverage' position; acquiring obligations, assets and other interests of its insured during pendency of a claim so as to gain an unfair bargaining advantage; and initiating legal proceedings improperly designed to force their insureds into accepting discounted claim settlements.
(Id. ¶ 77). In its Tenth Counterclaim, Deep Sea seeks punitive damages for Royal's alleged violation of the implied covenant of good faith and fair dealing. Deep Sea contends that Royal "instructed [its] in-house investigator . . . to perform an investigation for the purpose of setting up [Deep Sea], . . . for a 'no coverage' position." (Id. ¶ 81).
The leading New York Court of Appeals case addressing the viability of punitive damages claims arising out of a contractual arrangement is New York University v. Continental Insurance Company, 87 N.Y.2d 308 (1995). There, applying its earlier decision in Rocanova v. Equitable Life Assurance Society, 83 N.Y.2d 603 (1994), the New York Court of Appeals set forth a four-part test to determine when a claim for punitive damages arising out of an alleged breach of contract may be asserted. New York Univ., 87 N.Y.2d at 316. As the court recognized, under New York law, punitive damages generally are "available only in those limited circumstances where it is necessary to deter defendant and others like it from engaging in conduct that may be characterized as gross and morally reprehensible, and of such wanton dishonesty as to imply a criminal indifference to civil obligations."Id. at 315-16 (internal quotation marks omitted). Where such misconduct is alleged to have occurred in connection with the breach of a contract, the elements that a plaintiff must establish to recover punitive damages are as follows:
(1) [the] defendant's conduct must be actionable as an independent tort; (2) the tortious conduct must be of the egregious nature set forth in Walker v. Sheldon ( 10 N.Y.2d 401, 404-05 [(1961)] . . .); (3) the egregious conduct must be directed to plaintiff; and (4) it must be part of a pattern directed at the public generally. . . . Where a lawsuit has its genesis in the contractual relationship between the parties, the threshold task for a court considering defendant's motion to dismiss a cause of action for punitive damages is to identify a tort independent of the contract.Id. at 316 (citation omitted and emphasis added). Accord Brown v. Paul Revere Life Ins. Co., No. 00 Civ. 9110 (KMW)(HBP), 2001 WL 1230528, at *3 (S.D.N.Y. Oct. 16, 2001) (describing New York Univ. as the New York Court of Appeals' "most comprehensive discussion of the situations in which an insurer's refusal to pay first party benefits will support both punitive damages and tort claims"). See also Clark-Fitzpatrick v. Long Island R.R. Co., 70 N.Y.2d 382, 389 (1987) ("It is a well-established principle that a simple breach of contract is not to be considered a tort unless a legal duty independent of the contract itself has been violated.").
In an effort to show that Deep Sea's punitive damage counterclaims meet the requirements of New York University. Deep Sea alleges, without any citation of authority, that
there are numerous identifiable torts independent of the contract of insurance by which Royal's conduct would be actionable, e.g., improper handling of claim, misleading insured that investigation was continuing when insurer stopped the investigation prematurely and setting insured up for declaratory action and forum shopping; obtaining financial leverage over the insured after claim submitted in order to obtain a favorable but unfair settlement.
(Deep Sea Mem. of L. at 24).
Contrary to this assertion, the case law in New York overwhelmingly establishes that bad faith claims handling does not give rise to an independent tort claim. See, e.g., Rocanova, 83 N.Y.2d at 615 ("A complaint does not state a claim for compensatory or punitive damages by alleging merely that the insurer engaged in bad faith conduct.");Telemaque v. N.Y. Prop. Ins. Underwriting Ass'n, 556 N.Y.S.2d 391 (2d Dep't 1990) ("The courts have repeatedly recognized that since unfair claims settlement practices may be redressed by administrative action pursuant to the Insurance Law, there is no need to recognize private causes of action for punitive damages."); see also Manning v. Utils. Mut. Ins. Co., 98 Civ. 4790 (RCC), 2004 WL 235256, at *4 (S.D.N.Y. Feb. 9, 2004) (collecting cases).
Deep Sea notes that the Appellate Division, First Department, has allowed an insured to seek consequential damages beyond the coverage limits of an insurance policy for bad faith denial of a claim. (See Deep Sea Mem. of L. at 24 n. 4 (citing Acquista v. N.Y. Life Ins. Co., 285 A.D.2d 73, 81 (1st Dep't 2001))). Acquista is plainly inapposite because Deep Sea's Eighth through Tenth Counterclaims seek only punitive damages. Additionally, although the Acquista court indicated that consequential damages might be recoverable on a contract theory, it went on to observe: "We are unwilling to adopt the widely accepted tort cause of action for 'bad faith' in the context of a first-party claim, because we recognize that to do so would constitute an extreme change in the law of this State." Id. In any event, even if Acquista had some potential relevance here, courts in this District have declined to follow it. See Manning, 2004 WL 235256, at *4; Cont'l Info. Sys. v. Fed. Ins. Co., 02 Civ. 4168 (NRB), 2003 WL 145561, at *3 (S.D.N.Y. Jan. 17, 2003); Brown, 2001 WL 1230528, at *5.
Deep Sea's Eighth through Tenth Counterclaims seeking punitive damages consequently must be dismissed for failure to meet the threshold requirement that the defendant's actions constitute a tort independent of the contract.
C. Motion to Strike Deep Sea's Jury Demand
Royal has also moved, pursuant to Rules 9(h) and 38 of the Federal Rules of Civil Procedure, to strike Deep Sea's jury demand. In its papers, Royal contends that its initial designation of its suit as an admiralty and maritime claim precludes a jury trial on any of Deep Sea's counterclaims. (Royal Mem. of L. at 29-31). In the alternative, Royal argues that Deep Sea waived its right to a jury trial because its jury demand was untimely (Id. at 31-33).
1. Availability of Jury Trial Where Counterclaims Are Brought on Non-Admiralty Grounds
Rule 38(e) states that the Federal Rules "are not to be construed to create a right to a jury trial of . . . issues in an admiralty or maritime claim within the meaning of Rule 9(h)." Rule 9(h), in turn, provides, in part, that a
pleading or count setting forth a claim for relief within the admiralty and maritime jurisdiction that is also within the jurisdiction of the district court on some other ground may contain a statement identifying the claim as an admiralty or maritime claim for the purposes of Rules 14(c), 38(e), 82, and the Supplemental Rules for Certain Admiralty and Maritime Claims.
Therefore, "when a claimant properly designates a claim as one in admiralty under Rule 9(h), or when the claim is cognizable only in admiralty, whether so identified or not, there is no constitutional jury trial right as to that claim." 8 Moore's Federal Practice
¶ 38.32[1][a]. Here, from the filing of its very first complaint, Royal has consistently identified its claim as one arising under the admiralty and maritime jurisdiction of the United States. (See Docket No. 1, ¶ 2).
There is a split of authority, in this District and elsewhere, as to whether a defendant is entitled to a jury trial of its compulsory counterclaims in an admiralty case when it alleges that the court has jurisdiction over those counterclaims on a non-admiralty basis. Compare Wilmington Trust v. U.S. Dist. Court for the Dist. of Hawaii, 934 F.2d 1026, 1029-32 (9th Cir. 1991), and Sphere Drake Ins. PLC v. J. Shree Corp., 184 F.R.D. 258, 260-61 (S.D.N.Y. 1999). with St. Paul Fire and Marine Ins. Co. v. Holiday Fair. Inc., No. 94 Civ. 5707 (TPG), 1996 WL 148350, at *1-*2 (S.D.N.Y. April 2, 1996), and Camrex (Holdings) Ltd. v. Camrex Reliance Paint Co., 90 F.R.D. 313, 317-18 (E.D.N.Y. 1981).
In Wilmington Trust, the Ninth Circuit granted a writ of mandamus requiring a jury trial of counterclaims in an action commenced under the court's admiralty and maritime jurisdiction to foreclose a mortgage on a vessel. In reaching this outcome, the court relied upon Beacon Theatres, Inc. v. Westover, 359 U.S. 500 (1959), a case in which the plaintiff had filed a declaratory judgment action under the federal antitrust laws and the defendant interposed a counterclaim seeking treble damages. There, the Supreme Court held that the "right to a jury trial of legal issues [cannot] be lost through prior determination of equitable claims." Beacon Theatres, 359 U.S. at 511.
In the Second Circuit, only one judge has followed Wilmington Trust in the context of an admiralty suit. In Sphere Drake. Judge Berman recognized that there was considerable authority to the contrary, but concluded that "the rationale of Wilmington Trust is persuasive since, with regard to counterclaims, it both preserves a litigant's 'inviolate' right to a trial by jury and comports with Supreme Court precedent as enunciated in Beacon Theatres." Sphere Drake, 184 F.R.D. at 261. Judge Berman therefore determined that, notwithstanding the plaintiff insurers' designation of their claim as a nonjury admiralty claim, the defendant insured was entitled to a jury trial on its compulsory counterclaims.Id.
Although Deep Sea suggests that Sphere Drake now reflects the majority view, (see Deep Sea Mem. of L. at 31), most courts in fact continue to "hold that the Federal Rules confer rights upon the plaintiff electing to sue in admiralty to determine the character of the action, which should not be disturbed by the defendant's counterclaims." Mark Thomas Mahfouz, Comment, Whose Interests Are More Important: Should a Plaintiff's Rule 9(h) Designation "Trump" a Counterclaimant's Right to Jury Trial?, 27 Tul. Mar. L. J. 277, 297 (2002). For example, Judge Griesa has characterized Wilmington Trust as the "one exception" to a series of cases which did not allow a defendant's counterclaim to control the right to a jury trial. St. Paul Fire Marine Fire Ins., 1996 WL 148350, at *1; see also Windsor v. Mount Joy Mut. Ins. Co. v. Johnson, 264 F. Supp.2d 158, 163 (D.N.J. 2003) (noting that "separate trials [of insurer's claims and insured's counterclaims] would be duplicative and wasteful, and could lead to inconsistent results"); Jefferson Ins. Co. of New York v. Maine Offshore Boats, Inc., No. 01-44-P-H, 2001 WL 484040, at *2 (D. Me. May 7, 2001) (concluding that defendants were not entitled to jury trial on a counterclaim which was "intertwined" with plaintiff's declaratory judgment action invoking the court's admiralty jurisdiciton); Norwalk Cove Marina. Inc. v. S/V ODYSSEUS, 100 F. Supp.2d 113, 114 (D. Conn. 2000) ("The majority of courts hold that the plaintiff electing to sue in admiralty has the right to determine the character of the action, which should not be disturbed by the defendant's counterclaims."); Clarendon Am, Ins. Co. v. Rodriguez, No. Civ. 99-1623, 1999 WL 33218159, at *2 (D. P.R. Oct. 4, 1999) (holding that defendant's counterclaims could not be heard by a jury because they were "directly linked with the insurance contract in question and intertwined with the main action"); Homestead Ins. Co. v. Woodington Corp., No. 92CV288, 1993 WL 540717, at *5 (E.D. Va. Dec. 17, 1992) (granting motion to strike defendant's jury demand because "the counterclaim raises no new claims; instead, the named defendant has asserted the right to a jury trial on the identical issues raised in the plaintiff's complaint"); Camrex, 90 F.R.D. at 317 ("a plaintiff's election to sue on an admiralty or maritime claim binds the parties in the lawsuit to the inevitable procedural consequences of a court trial, . . . even where a 'legal' counterclaim has been interposed").
As Judge Griesa has noted, a declaratory judgment suit by an insurer is "not a mere 'race to the courthouse,' but is a normal and orderly procedure." St. Paul Marine Fire Ins., 1996 WL 148350, at *2. Here, of the thirteen counterclaims that it originally asserted, Deep Sea is left with but two, and both of those are merely the flip side of Royal's claims. Having chosen to forego a jury with respect to its claims, Royal should not be required to present its proof to a jury simply because Deep Sea, in addition to answering Royal's claims, chose to recast its denials as counterclaims. Instead, consistent with the majority rule, Deep Sea's jury demand should be stricken.
Royal also seeks the dismissal of Deep Sea's jury demand as untimely. This issue need only be addressed if Your Honor chooses to follow the minority rule. In that event, the timeliness of Deep Sea's demand would be governed by Rule 38 of the Federal Rules. Subdivision (b) of that rule provides:
Any party may demand a trial by jury of any issue triable of right by a jury by (1) serving upon the other parties a demand therefor in the writing at any time after the commencement of the action and not later than 10 days after the service of the last pleading directed to such issue, and (2) filing the demand as required by Rule 5(d). Such demand may be indorsed upon a pleading of the party.
Subdivision (d) of the rule further provides, in pertinent part, that "[t]he failure of a party to serve and file a demand as required by this rule constitutes a waiver by the party of trial by jury."
Deep Sea's answer to the original complaint asserted four counterclaims, which incorporated the substance of the breach of contract allegations set forth in its present First and Second Counterclaims (which Royal has not sought to dismiss). Royal never filed a reply to those counterclaims because it served an amended complaint in May 2002. (The differences between Royal's first two complaints were minor.) After Deep Sea filed an answer to the amended complaint which reiterated its counterclaims, Royal served its reply on June 20, 2002. (See Docket No. 8). Four days later, Deep Sea served its first jury demand. (Docket No. 9).
In McCarthy v. Bronson, 906 F.2d 835, 840 (2d Cir. 1990), aff'd, 500 U.S. 136 (1991), the Second Circuit held that, for purposes of Rule 38(b), the last pleading directed to an issue is "not the pleading that raises the issue, it is the pleading that contests the issue," which is "[n]ormally . . . an answer, or, with respect to a counterclaim, a reply." Accordingly, if Deep Sea's counterclaims in its answer to the amended complaint raised new issues, Deep Sea might be entitled to a jury trial with respect to those issues since its jury demand was filed only four days after Royal served its reply. It appears, however, that Deep Sea's counterclaims addressed precisely the same subject as Royal's original complaint, which is whether Deep Sea is entitled to recover the proceeds of the Subject Policy. Since issue as to that question appears to have been joined when Deep Sea filed its original answer, its jury demand, which first was filed approximately two months later, is arguably untimely.
IV. Conclusion
For the foregoing reasons, the Court should grant all three branches of Royal's motion. Thus, New York law should govern this case, all of Deep Sea's counterclaims other than its First and Second Counterclaims should be dismissed with prejudice, and Deep Sea's jury demand should be stricken.
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 and the chambers of the undersigned, at the United States Courthouse, 500 Pearl Street, New York, New York 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. Am, 474 U.S. 140 (1985); 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 6(a), 6(e), 72(b).