Opinion
600058/04.
Decided February 1, 2006.
Motion sequence numbers 06 and 07 are consolidated for disposition.
Third-party defendants Mark D. Derrenberger and Diane Krause move to dismiss the counterclaims and third party claims of defendant Zurich American Insurance Company ("Zurich") on the grounds of illegality, lack of consideration, failure to state a claim, and judicial estoppel (CPLR 3211[a][1],[5], [7]). Plaintiff The Whitmore Group, Ltd. and third-party defendant James C. Metzger move to dismiss Zurich's claim for failure to state a claim, also asserting the defense of illegality.
The Counterclaim and Cross Claim:
The following facts are taken from the counterclaim and various documents submitted by the parties in connection with this motion. Zurich is an insurance company which provides coverage for property damage. Whitmore is an insurance broker which placed coverage on behalf of Zurich. Whitmore merged with or otherwise acquired Risk Management Specialists, Ltd. ("RMS") in or around 1999 and is its successor in interest (collectively, "Whitmore/RMS").
Third-party defendant Derrenberger was the President and CEO of Whitmore/RMS, owning 50% of its stock. Third-party defendant Metzger owned the other 50%. Third-party defendant Krause was an officer of Whitmore/RMS.
The McDonald's Program:
In early 2000, Whitmore/RMS proposed that Zurich offer a program of property insurance to certain McDonald's franchisees throughout the United States (the "McDonald's Program"). Zurich initiated coverage under the McDonald's Program on October 1, 2000.
During the course of the McDonald's Program, disputes arose over the volume and amount of claims made by the insured franchisees. Zurich alleges that the disputes arose out of Whitmore/RMS's structuring of the program and representations about its history. As elaborated in its papers, Zurich alleges that Whitmore/RMS (through Krause) issued certificates of insurance which reflected that there was no cap on liability, whereas Zurich had been promised that the extent of its coverage would be limited to $1.25 million per location. Furthermore, Zurich was led to believe that there would be fewer than 3,500 franchisees in the program, while in actuality certificates of insurance were issued to approximately 4,000 franchisees.
The "Reimbursement Agreement":
To settle these differences, in November 2001, Zurich proposed a "reimbursement agreement," in order to recover from Whitmore/RMS losses Zurich incurred under the McDonald's Program between October 1, 2000 and October 1, 2001. Krause executed the agreement on behalf of Whitmore/RMS on January 9, 2002.
The Reimbursement Agreement, inter alia, required Whitmore/RMS to reimburse Zurich within one year for certain individual payments made to McDonald's franchisees in excess of $1.25 million for property damage. The agreement also obligated Whitmore/RMS to reimburse Zurich, within three years, for aggregate payments made in excess of $5 million in reinsurance coverage.
Zurich alleges that it has made payments totaling $1,003,775.76 to McDonald's franchisees in excess of the $1.25 million cap, and aggregate payments totaling $2,860,035 in excess of the $5 million reinsurance limit. The counterclaim seeks $3,863,810.76 from Whitmore/RMS for breach of the Reimbursement Agreement.
The Claims Against the Individuals:
Zurich seeks the same amount from the individual third party defendants, Derrenberger, Krause and Metzger under a veil-piercing theory. It is alleged that Derrenberger, Metzger and Krause exercised complete domination over the affairs of Whitmore/RMS. While Derrenberger and Metzger are each 50% owners of Whitmore/RMS, Krause is alleged to have had an "equitable ownership" of those companies due to her domination of corporate affairs and her right to receive certain proceeds from the company's operations.
In support of its claim that the individual third-party defendants abused the corporate form, Zurich alleges that they failed to name a board of directors, failed to hold corporate meetings or maintain corporate minutes, undercapitalized the corporations, commingled funds, and essentially ran personal business enterprises under cover of the corporate names.
The Motion to Dismiss:
In moving to dismiss, Whitmore and the individual third-party defendants argue that the Reimbursement Agreement is unenforceable because it is, in effect, a co-insurance or reinsurance agreement, and as such is illegal. Specifically, they allege that the agreement violates New York and Illinois law by requiring Whitmore to assume insured risks even though it is not a licensed insurer. They also argue Zurich's allege failure to comply with state statutes requiring notice of non-renewal, renders the agreement unenforceable for lack of consideration, insofar as it was executed on the false premise that coverage had lapsed.
With respect to the veil-piercing claims, movants assert that the allegations of abuse of the corporate form are conclusory or contradicted by the record. Finally, Derrenberger and Krause allege that Zurich should be judicially estopped from suing them because it obtained an order in 2004 dismissing an Illinois declaratory judgment action brought by them on the ground that they lacked standing to maintain it. Zurich's position in the Illinois action should prevent it from taking a contradictory position in this action.
Discussion
The motions to dismiss are denied. In contending that the Reimbursement Agreement is void for illegality, movants rely on New York Insurance Law § 1102, which prohibits conducting "an insurance business in this state unless authorized by a license in force." Asserting that the agreement is an "insurance contract" under section 1101(a)(1), movants argue that it cannot be enforced because Whitmore is not licensed as an insurer. Movants make similar arguments under NY Insurance Law §§ 1114 and 2117 and the Illinois Insurance Code regarding the placement of reinsurance.
These arguments fail because the Reinsurance Agreement does not appear to be a contract of insurance by which Whitmore insured either the McDonald's franchisees or Zurich. Rather, accepting the allegations of the counterclaim as true, the Reimbursement Agreement appears to be a settlement agreement in which Whitmore agreed to repay Zurich for losses arising from Whitmore's alleged mishandling of the McDonald's Program. The cause of action more closely resembles a claim against a broker for damages flowing from the failure to procure insurance, or for procuring inadequate or inappropriate insurance ( see, Baseball Office of Com'r v. Marsh McLennan, Inc., 295 AD2d 73 [1st Dept 2002]; Soho Generation of New York, Inc. v. Tri-City Ins. Brokers, Inc., 256 AD2d 229 [1st Dept 1998]). Such claims would not be possible if the law required, in every case, that the broker also be a licensed insurer before recovery could be had against it for malfeasance.
Further, the Reimbursement Agreement, by its very terms is not an "insurance contract" as that term is defined in § 1101 (a)(1), Insurance Law.
Section 1102, Insurance Law, provides for specific penalties against the unlawful insurer ( see, People v. Amer. Motor Club, Inc., 209 AD2d 183 [1st Dept 1994]). The allegedly unlawful contract, however, may be enforced ( see, People v. Shnaider, 150 Misc 2d 728, 730 [NY Co Crim Ct 1991]["by limiting, in section 1102, the remedy for not being licensed to a civil penalty rather than declaring any insurance contracts entered into by such unlicensed companies a nullity, the legislature has taken a position that such contracts are still enforceable"]; see also Lloyd Capital Corp. v. Pat Henchar, Inc., 80 NY2d 124, 128["As a general rule . . . forfeitures by operation of law are disfavored, particularly where a defaulting party seeks to raise illegality as sword for personal gain rather than a shield for the public good.' Allowing parties to avoid their contractual obligation is especially inappropriate where there are regulatory sanctions and statutory penalties in place to redress violations of the law"][citation omitted]). In short, the purpose of the insurance licensing statute is "to protect New York consumers from unscrupulous operators" ( see, City of New York v. Britestarr Homes, Inc., 150 Misc 2d 820, 825 [Bronx Co Sup Ct 1991]; People v. Shnaider, supra), not to relieve parties who have contracted of their contractual obligations.
Krause and Derrenberger also contend that Zurich's alleged failure to send a notice of non-renewal to each McDonald's franchisee whom it covered, renders the Reimbursement Agreement void for lack of consideration. They argue that Whitmore was coerced into executing the Reimbursement Agreement by the prospect of financial exposure to the franchisees, incorrectly believing that the policies had expired and would not be renewed by Zurich. However, they assert, the failure of Zurich to give notice, extended the policies by operation of law, so that any promises made by Whitmore under the assumption that they had expired were gratuitous. Apart from relying on facts outside the scope of the counterclaim, this argument fails because the Reimbursement Agreement contains mutual promises which may in themselves constitute consideration ( see, Johnson v. Johnson, 191 AD2d 257 [1st Dept 1993]). Furthermore, Zurich alleges that the agreement represented the settlement of a dispute, and "[i]t is well-established that promises to waive claims, forego future litigation, or forebear from enforcing legal rights constitute valid consideration" ( Joab Commercial Laundries Inc. v. Reeder, 159 AD2d 489, 489 [2nd Dept 1990]). Indeed, the "good-faith relinquishment of a cause of action, even one which proves to be unenforceable, constitutes valid consideration" ( Nolfi Masonry Corp. v. Lasker-Goldman Corp., 160 AD2d 186, 187 [1st Dept 1990]). Notwithstanding movants' assessment of the strength or validity of the insurer's claims, Zurich has sufficiently pleaded the existence of a dispute and compromise to establish valid consideration.
Zurich has sufficiently pleaded claims for veil-piercing against the individual movants. To state such a cause of action, the plaintiff must allege that the defendants exercised complete dominion over the corporation with respect to the transaction in question, and the domination was used to commit a wrong against the defendant ( see, Morris v. New York Dep't of Finance, 82 NY2d 135). A finding of veil-piercing may be justified by, inter alia, (1) the absence of corporate formalities such as the issuance of stock, election of directors or keeping of corporate records, (2) inadequate capitalization, (3) use of funds for personal rather than corporate purposes and (4) the payment or guarantee of the dominated corporations by other parties ( see, Shisgal v. Brown, 21 AD3d 845 [1st Dept 2005]). A complaint should be upheld unless it can be said that it is "is totally devoid of solid, nonconclusory allegations" ( Int'l Credit Brokerage Co. v. Agapov, 249 AD2d 77, 78 [1st Dept 1998]). Here, Zurich has supplemented its pleadings with evidence that Whitmore lacked a board of directors, relied on third-party guarantees to finance its business, commingled funds, and was undercapitalized. Although movants contest some of the facts alleged and have submitted evidence of Whitmore's solvency and corporate governance, that proof is more appropriately considered on a summary judgment motion following the completion of discovery. Finally, movants have abandoned, on reply, their argument that judicial estoppel precludes the veil-piercing claims.
Accordingly, it is
ORDERED, that the motion to dismiss the counterclaim is denied.