In this insurance dispute, arising from construction-related property damage that occurred in late 2004 and early 2005, plaintiff policyholder seeks indemnification from defendant insurer of a multi-million-dollar property-damage judgment. Defendant argues that it need not indemnify plaintiff. According to defendant, plaintiff, with its current counsels help, fraudulently colluded with the injured property-owner against defendant and other insurers. Defendant alleges that plaintiff and the property-owner agreed to entry of an inflated damages judgment against plaintiff that the property-owner would never seek to collect. Instead, under their agreement, plaintiff would recoup the amount of the inflated judgment from various insurers and then split the proceeds with the property-owner and their respective counsel. Defendant further alleges that plaintiff successfully concealed its collusion with the property-owner from the Supreme Court justice who was hearing the property-damage action—and that plaintiff then obtained millions in settlements from other insurers while concealing those offsetting settlements from the undersigned.
Plaintiff, S.T.A. Parking Corp. (STA), operates a parking garage at 433 East 77th Street in Manhattan. STAs efforts to expand that garage caused property damage to several adjoining properties. That damage led, in turn, to extensive litigation among the owners of the damaged property, STA, its contractors, and others.
In 2013, one of the adjoining property-owners, nonparty East 77 Owners Co., LLC (East 77), obtained a judgment against STA for $3,417,015.19 (plus interest) in an action brought in Supreme Court, New York County (Martin Schoenfeld, J.). STA sought indemnification of that judgment from its excess insurer, defendant Federal Insurance Company (Federal), under two policies issued by Federal that spanned the period of STAs ill-fated construction work. Federal denied STAs indemnification request on two grounds: That STAs damages during the period of the first Federal policy did not reach that policys attachment point, and that STAs damages during the period of the second Federal policy were excluded from coverage by the policys terms.
In 2018, STA brought this action against Federal, seeking indemnification of the judgment. On motion sequence 001, Federal moved for summary judgment dismissing STAs claims, arguing that the property damage at issue occurred after the policy period of the earlier Federal policy; and that the damage was known to STA before the start of the later Federal policy, such that the known-loss exclusion of STAs underlying primary insurance excluded the damage from coverage. (See NYSCEF No. 32 at 5-9.) This court denied the motion as to the first of the two Federal policies, and granted it as to the second policy. (See NYSCEF No. 44 [transcript of on-the-record oral decision]; NYSCEF No. 40 [order memorializing decision].) On appeal, the Appellate Division, First Department, affirmed in full. (See S.T.A. Parking Corp. v Federal Ins. Co., 209 AD3d 510 [1st Dept 2022].)
On motion sequence 003, STA now moves for summary judgment in its favor on its coverage claims and for an award of sanctions against Federals counsel. In opposing the motion, Federal claims that the original 2013 judgment was the product of a deceptive scheme between East 77 and STA. According to Federal, East 77 and STA agreed that East 77 would obtain an inflated damages judgment against STA yet forgo any effort to collect. Instead, STA would obtain indemnification of the inflated judgment from several potentially responsible insurers (including Federal), pass part of the proceeds along to East 77, and keep a share of the proceeds for itself and its counsel (the same counsel who represents STA here). Federal argues that given this agreement—which was not given to the court hearing the property-damage action—Federal cannot be required to indemnify STA for the resulting property-damage judgment.
On motion sequence 004, Federal, relying on essentially the same allegations and supporting documentation as on motion sequence 003, moves for leave to amend its answer to assert numerous coverage-related counterclaims. And at oral argument, Federal asked this court to grant it summary judgment dismissing STAs claims based on Federals proffered evidence of collusion.
Motion sequences 003 and 004 are consolidated for disposition. STAs motion is denied. Federals motion for leave to amend is granted. Federals oral application for summary judgment is denied.
BACKGROUND
In November 2004, STA attempted to expand its 77th Street parking garage. Due to alleged inadequate underpinning by STAs contractors, King Sha Group, Inc., Certified Testing Laboratories, Inc., and Golden Vale Construction Corp., the expansion work damaged several adjacent properties, including a building owned by nonparty East 77. The damage led the New York City Department of Buildings to issue a stop-work order from December 27, 2004 to February 15, 2005, inclusive.
A. East 77s Claim Against its Insurer
One of the nearby buildings damaged by STAs construction work was 436 East 77th Street, owned by East 77. East 77 brought several actions against STA and its contractors to recover the cost of repairs, lost rental income, and other damages. STA counterclaimed and also brought third-party claims against its contractors.
East 77s primary insurer was Interstate Indemnity Company. East 77 submitted claims to Interstate for the losses it asserted to have suffered due to the work done by STA and its contractors. Interstate paid East 77 approximately $800,000 on those claims—substantially less than what East 77 had claimed.
1
(See NYSCEF No. 170 [letter from Interstates claims administrator to East 77s principal].) Interstate brought its own action against STA and STAs contractors to recover in subrogation the money Interstate had paid out on East 77s insurance claim. Interstate provided counsel to East 77 in the actions it brought against STA/contractors, and in defending East 77 against STAs counterclaim.
East 77 continued to argue to Interstate that it was entitled to additional payments under the Interstate policy. In April 2011, East 77 and Interstate agreed to settle that dispute. Under the settlement, East 77 released its claims against Interstate; Interstate withdrew from providing counsel to East 77 in actions related to the parking-garage damage; Interstate assigned its subrogation rights (including the claims brought by Interstate against STA and its contractors) back to East 77; and East 77 agreed to pay Interstate 12% of any amount over $1.2 million obtained by East 77 in litigation against STA, its contractors, and their insurers. (See NYSCEF No. 197.)
B. East 77s Claims Against STA and its Contractors
With respect to East 77s actions against STA and its contractors, East 77s counsel sent some of the contractors a damages estimate in February 2008 (later provided to counsel for STA), claiming unreimbursed damages of approximately $1.8 million. (See NYSCEF No. 174 at 1-2 [cover emails]; id. at 3 [damages breakdown].) In a March 2009 letter to counsel for Axis Specialty Insurance Company (Golden Vales primary carrier), counsel for STA, Russell Wolfson, Esq., cast aspersions on the reliability of that estimate. (See NYSCEF No. 183 at 4.) Wolfson told Axis that it was common sentiment among the defense counsel that East 77s damages estimate would be very difficult for East 77 to substantiate and that its true claim is substantially less than the $1,800,000 asserted. (Id.) Wolfson said that the $1.8 million claim was so largely inflated that counsel found it difficult to effectively discuss settlement. (Id.)
Wolfsons criticism of East 77s damages claim notwithstanding, in July 2009 East 77 sent STA and its contractors a settlement offer, now claiming that East 77s damages (net of the Interstate payment) had reached $2.8 million, and that East 77 was willing to settle for the $1.8 million in damages it had claimed 18 months earlier. (See NYSCEF No. 182 at 2.) The various parties, and their insurers, engaged in settlement negotiations off and on over the next two years. An April 2011 note in Federals claims file for these actions, for example, reflects that at that time East 77s demand had been lowered to $1.6 million, against a settlement offer from STA and its contractors of $930,000. (See NYSCEF No. 184.)
In April 2012, STA, STAs contractors, Interstate, and East 77 collectively entered into an agreement settling four actions arising from the damage to East 77—three brought by East 77 against STA and three of STAs contractors, and the fourth brought initially by Interstate (as East 77s subrogee) against STA and those contractors. Under the settlement, East 77 received $1.4 million; STA released its claims against the contractors; East 77 and the contractors released all claims against one another; and STA released its counterclaim against East 77.
2
(See NYSCEF No. 205.)
The settlement agreement provided for an unusual payment structure. Under the agreement, STAs three contractors were to give STA separate checks (made out jointly to counsel for STA and for East 77) totaling $1,108,333. STA would then endorse and deliver those checks to East 77 along with a separate check from STA for $291,667. (See NYSCEF No. 205 at 3-4.) As a result, although the actual source of much of the total payment to East 77 would be STAs contractors, the payment would appear to have come from STA.
The record suggests a connection between this settlement structure and the terms of the excess policy issued by Federal to STA. The terms of the Federal policy provide that it covers only amounts above the policys $1 million attachment point that are actually paid in the settlement or satisfaction of a claim which the insured is legally obligated to pay as damages because of injury. (NYSCEF No. 16 at 8 [attachment point]; id. at 13 [definition of covered loss] [emphasis added].) The record contains emails to other settling parties from counsel for East 77 (Friedman) and from counsel for STA (Wolfson) stating that the settlement payments to East 77 would go through STA to exhaust STAs primary coverage and thereby reach the Federal policy. (See NYSCEF No. 171 at 57; see also id. at 23 [email to same effect between Friedman and Wolfson], id. at 56 [email to same effect from Wolfson to counsel for STAs insurance broker].)
STA now acknowledges that the other defendants issu[ed] two party checks to STA and E77 Owners in order to exhaust the primary limits. (NYSCEF No. 323 at 10 [emphasis added].) Indeed, STA asserts that doing so is common practice. (Id.) STA provides no authority for the proposition that this practice is commonly engaged in—much less that the practice is consistent with the legal and ethical obligations of attorneys who engage in it.
Notably, even the one-party check from STA itself to East 77 did not represent STAs own funds. Rather, it came from another litigation settlement—this one between STA and its insurance broker, CBS Coverage Group. (See NYSCEF No. 171 at 33-34, 53, 54.) That settlement resolved STAs claim that CBS had negligently failed to ensure that STAs primary insurance policy was properly renewed before the underlying construction-related damage to East 77. (See S.T.A. Parking Corp. v CBS Coverage Group, Inc., Index No. 111238/2007.)
In short, under the settlement, East 77 received $1.4 million in checks made out, or endorsed, by STA, in addition to the $800,000 already paid to East 77 by Interstate. But STA paid nothing out of pocket. STAs complaint in this action does not disclose this payment structure. Rather, the complaint implies that STA itself paid East 77 the full $1.4 million.
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(See NYSCEF No. 2 at ¶¶ 28-30.)
C. The Assignment Agreement Between East 77 and STA
The settlement resolving East 77s claims against STAs contractors (and STAs counterclaim against East 77) still left East 77s claims against STA itself. In May 2012, East 77 and STA entered into a separate agreement (the assignment agreement) addressing those claims. (See NYSCEF No. 218.) Although the details of the agreement were hammered out between East 77 and STA during the spring of 2012 (see NYSCEF Nos. 208-217 [agreement drafts]), the agreements basic framework and core elements dated back to a July 2011 call between Friedman and Wolfson (see NYSCEF No. 171 at 23). This agreement had several peculiar terms.
4
The assignment agreement acknowledged in one of its recitals that under recent Court of Appeals precedent, STA effectively had no defense against liability to East 77, leaving only the issue of damages. (See NYSCEF No. 218 at 3-4, citing Yenem Corp. v 281 Broadway Holdings, 18 NY3d 481 [2012].) The agreement provided that upon a judicial finding that STA was liable to East 77, the parties would jointly request that the court conduct an inquest on damages—and that judgment would be entered against STA for the damages amount determined at inquest. (See id. at §§ 3.3, 3.5.)
The agreement also provided, however, that East 77 would never attempt to collect on its judgment against STA. That is, the agreement required STA to continue to pursue claims against its primary and excess insurers (Lancer Insurance Company and Federal, respectively); to seek an award of damages on the default judgment already entered against the remaining STA contractor not covered by the earlier settlement (Golden Vale Construction Corp.); and to pursue claims against Golden Vales primary and excess insurers (Axis Specialty Insurance Company and General Star Indemnity Company, respectively).
5
(See id. at §§ 3.8, 4.1.) Any proceeds recovered by STA would, with limited exceptions, be split four ways: 40% to East 77; 20% to STA; 20% to East 77s counsel; and 20% to STAs counsel.
6
(Id. at § 4.1 [a].)
As long as STA performed these pursuit obligations, the agreement stated, East 77s judgment against STA would not be subject to collection. (See id. §§ 3.6, 3.9.) Regardless, any money owed by STA on the judgment would be recoverable by East 77 only from the proceeds of settlements with or judgments obtained against Golden Vale and the insurance companies. (See id. § 3.8). East 77 committed to refrain from seeking to recover on the judgment even if STAs pursuit of claims against those third parties proved unsuccessful: East 77 agreed that it would treat its judgment as satisfied, and provided a satisfaction of judgment, upon the conclusion of all actions (and appeals) brought against the third parties, regardless of whether monies are recovered from them. (Id. § 3.10.)
Thus, under the assignment agreement, STA could use the paper liability to East 77 imposed in the property-damage action to obtain indemnification and insurance payments from third parties, retain a substantial share of those proceeds, yet never be subject to actual liability to East 77. In effect, STA would be able to split with its counsel up to 40% of the judgment against itself.
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D. The 2013 Judgments Obtained by East 77 Against STA and by STA Against Golden Vale
STA had previously obtained a default judgment on liability against Golden Vale. (See NYSCEF No. 202.) At the inquest on STAs damages against Golden Vale, STA and East 77 jointly requested that the court (Schoenfeld, J.) determine (i) STAs liability, if any, to East 77; (ii) the amount in damages that STA owed to East 77; and (iii) the amount in damages that Golden Vale owed to STA. (See NYSCEF No. 226 at 6.)
As East 77 and STA had anticipated in the assignment agreement (see NYSCEF No. 218 at 3-4), the inquest court quickly determined that STA was liable to East 77 under then-recent Court of Appeals precedent. (See NYSCEF No. 226 at 6-7, citing Yenem Corp, 18 NY3d at 490-491.) Only the issue of the amount of damages to be awarded to East 77 against STA (and STA against Golden Vale) remained.
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1. East 77s Unopposed Damages Claim Against STA
East 77 claimed approximately $5.26 million in damages, comprising approximately $3.87 million before interest and approximately $1.39 million in interest. (See NYSCEF No. 223 [itemization of claimed damages].) The itemized damages claimed by East 77 for the 2005-2008 period tracked the damages breakdown that East 77 had circulated in 2008—and which STA, through Wolfson, had dismissed as inflated and unsupported. (See NYSCEF No. 223 [2013 damages breakdown]; NYSCEF No. 174 at 3 [2008 damages breakdown]; NYSCEF No. 183 at 3 [Wolfson critique of 2008 damages estimate].) Those damages thus substantially exceeded the lesser amounts East 77 had indicated in 2009, and again in 2011, that it would accept in a settlement.
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(Compare NYSCEF No. 223 [2013 damages breakdown], with NYSCEF No. 182 [2009 settlement proposal] and NYSCEF No. 184 [claims note reflecting 2011 settlement offer].)
Yet STA chose not to oppose East 77s request for judgment against it, or the amounts requested by East 77 in damages. (NYSCEF No. 226 at 6 [post-inquest decision and order].) STA did not even point out that East 77s damages claim failed to account for the $1.4 million in settlement payments already made to East 77 under the 2012 settlement agreement. Rather, STA argued only that any amount adjudged against it for Plaintiffs damages should then be added to STAs assessment of damages against Golden Vale. (Id.)
Under the terms of the assignment agreement, STAs choice to concede the issue of damages made its position better, not worse. An increase in damages awarded to East 77 would not increase STAs liability exposure, but it would increase the amounts that STA, East 77, and their counsel, could ultimately obtain from STAs and Golden Vales insurers.
Remarkably, neither East 77 nor STA provided a copy of the assignment agreement to the court in connection with the inquest. They told the court only that the agreement allowed [East 77] to proceed with its claim against STA while giving certain protections to STA that would allow it to stay in business even if [East 77] received a judgment against it. (NYSCEF No. 226 at 5 n 2.) But East 77 and STA did not inform the court of the nature of those protections—or how they skewed the parties litigation incentives.
Even absent opposition, the court declined to award the $3.87 million in pre-interest damages sought by East 77. It concluded that approximately $1.l6 million in claimed damages, or 30% of the pre-interest total, was not recoverable as a legal matter. (See id. at 10-11.) East 77 had proven damages only of $2,713,177.148. (Id. at 11.) That amount in damages had to be offset further by the $1.4 million from the prior settlement with STAs contractors. The total award, therefore, before interest, was reduced from the claimed $3.87 million to $1,313,177.48—even without taking into account STAs earlier critique of East 77s claimed construction-cost damages. (Id.)
Moreover, at least another $128,000 of those construction-related damages consisted of costs that East 77s principal (Allen London) had expressly conceded at deposition were not caused by damage from STAs project.
10
(See NYSCEF No. 165 at ¶¶ 166-168 & fig. 1 [summary chart identifying change orders]; NYSCEF No. 203 at Tr. 115-120, 135-144, 159-163, 171-170 [transcript of deposition testimony, in which London conceded that some change orders were unrelated to STAs project].) STAs counsel, Wolfson, was present at Londons 2010 deposition, and indeed elicited some of these concessions. Yet he did not challenge in 2013 East 77s claims to be entitled to recover these costs from STA. Nor did he inform the court of Londons deposition testimony that undermined those claims.
In all, the record reflects that the damages the inquest court rejected as unavailable as a legal matter, and the damages that East 77 had previously conceded to be factually unrelated to STAs conduct, composed one-third of the total pre-interest amount claimed by East 77 at the inquest. STA challenged none of those claimed damages.
2. STAs Default Judgment Against Golden Vale
Instead of raising any damages-related arguments, STA asked merely that the court award it a default judgment against Golden Vale for the amount awarded in damages to East 77, plus the $1.4 million from the 2012 settlement among East 77, STA, and STAs contractors. (See NYSCEF No. 226 at 12.)
As discussed above, neither STA nor East 77 ever disclosed to the court the terms of their 2012 assignment agreement. The court was unaware, therefore, that STA was seeking indemnification from Golden Vale of STAs damages liability to East 77 while party to an agreement under which East 77 had committed to refrain from enforcing that liability. By hiding this information, STA avoided having to explain to the court how it could be entitled to indemnity to recoup what likely would be a purely paper loss.
Without this information, the inquest court held that STA was entitled to a default judgment against Golden Vale sounding in common-law indemnification. The court declined, though, to include in that judgment the full amount of the 2012 settlement, as STA had requested. (Id.) The court explained that the $1.4 million included payments from three other parties in addition to STA. Although for some reason the checks from the three other parties were made out to both [East 77s] and STAs counsel, there was no doubt that the checks were meant for and endorsed to [East 77]. Excluding those payments, STA was entitled to be indemnified for that portion of the settlement amount it paid to [East 77], or $291,667. (Id.) The court therefore added only that amount to the damages awarded to East 77, and granted STA a default judgment for that sum against Golden Vale. The court was not aware—and STA did not make it aware—that even the $291,667 payment in question did not originate from STA but from STAs insurance broker, with STA acting in effect as an undisclosed pass-through. (See NYSCEF No. 171 at 33-34, 53-54.)
3. Inclusion of the Interstate Payment to East 77 in the Judgments Against STA and Against Golden Vale
One other aspect of East 77s claims against STA (and STAs against Golden Vale) bears mention. East 77 had requested that the inquest court also award it the $800,093.97 that Interstate had paid it under the Interstate insurance policy. (See NYSCEF No. 226 at 11.) East 77 argued that it was entitled to that amount under its 2011 settlement with Interstate, by which East 77 supposedly was given Interstates subrogation rights to its claims against STA. (Id.) The inquest court initially declined to award this $800,000, both because the court had not been provided a copy of the 2011 agreement and because of the courts concern that awarding this sum would provide [East 77] with a double recovery, to which no party is entitled. (Id.) The court left open the possibility, however, that East 77 could, on a proper showing, show that it should be awarded the $800,000. (Id. at 13.)
In September 2013, East 77 filed papers seeking to address the courts reasons for declining in its July 2013 decision to award East 77 the $800,000. (See NYSCEF Nos. 447 [memorandum of law], 448 [affidavit of Robert Friedman].) This new filing included a copy of the settlement agreement with Interstate. East 77 argued, in essence, that it had purchased for fair consideration Interstates subrogation claim against STA for the $800,000, such that awarding East 77 that amount against STA would not amount to a double recovery. (See NYSCEF No. 447 at 5-7.)
The court found this argument persuasive. It held that under the 2011 settlement there was a proper assignment of the subrogation claim by Interstate to East 77, and that East 77 had waive[d] its right . . . to any further subrogation claim against STA beyond the $800,000. Therefore, the court concluded, awarding the $800,000 to East 77 in damages against STA will not create a double recovery for any of the parties involved. (NYSCEF No. 142 at Tr. 3-4 [transcript of decision delivered on the record].) The court added the $800,000 to East 77s damages award against STA and to STAs default judgment against Golden Vale. (Id. at 4.) The court did not discuss, however, why East 77 would purchase from Interstate, in effect, a claim for the same $800,000 that East 77 had already received from Interstate. Nor, more broadly, did the courts on-the-record ruling explain what had persuaded it that permitting East 77 to recover from STA the same money it had received from Interstate would avoid an impermissible double recovery.
In November 2013, the County Clerk entered a judgment for East 77 against STA for $2,113,271.45 in damages plus $1,303,743.74 in prejudgment interest, totaling $3,417,055.19. (See NYSCEF No. 143.) STA, in turn, was awarded a judgment against Golden Vale for $2,404,938 in damages, plus $1,443,658.62 in prejudgment interest, totaling $3,848,596.62.
11
(See NYSCEF No. 165 at ¶ 193; NYSCEF No. 305 at ¶ 31.)
E. STAs Efforts to Recover the Amount of East 77s Judgment from Insurers
Under the assignment agreement, STA was obligated to seek to recover the amount of East 77s judgment against it from potentially responsible parties—(i) STAs primary and excess insurers (Lancer and Federal); (ii) contractor Golden Vale; (iii) Golden Vales primary and excess insurers (Axis and General Star). (See NYSCEF No. 218 at 7 § 3.8, 9-13.)
1. STAs Coverage Claims Against its Primary Insurer, Lancer
STA had already brought a coverage action against Lancer. (See S.T.A. Parking Corp. v. Lancer Ins. Co., Index No. 108091/2008 [Sup Ct, NY County, Carol Edmead, J.].) In 2011, Supreme Court had held in that action that Lancer was not obligated to indemnify STA because STA had known of the potential losses due to its construction project when it took out the Lancer policy. (See S.T.A. Parking Corp. v Lancer Ins. Co., 2011 WL 11166186 [Sup Ct, NY County Dec. 22, 2011].) In October 2013, shortly before entry of East 77s judgment against STA, the First Department affirmed the ruling below. (See 110 AD3d 512 [1st Dept 2013].) STA then moved in the Court of Appeals for leave to appeal. The Court denied leave in May 2014. (See 23 NY3d 902 [2014].)
2. STAs Coverage Demand to Federal
In March 2015, STA wrote to Federal to demand indemnification of the 2013 judgment (plus interest). (See NYSCEF No. 145 at 7.) Federal retained outside counsel, Judith Goodman, Esq., to review the file to determine whether STA was entitled to payment under the Federal policy. At Federals request, STA gave Goodman extensive documentation related to its claim. That documentation included a copy of the assignment agreement. (See NYSCEF No. 326 at 9.) Goodman ultimately concluded, and Federal agreed, that Federal was not obligated to indemnify STA. (See NYSCEF No. 328 [Goodman report].) She reached that conclusion on two grounds: (i) Damages owed by STA stemming from work done before mid-February 2005 did not reach the Federal policys $1 million attachment point; and (ii) damages owed by STA stemming from work after mid-February 2005 were excluded from coverage by the underlying Lancer policys known-loss exclusion, as incorporated into the Federal policy. (See id. at 3-4, 7-16.) Goodman did not discuss the terms of the assignment agreement or indicate that her recommendation was based on any concern about those terms.
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3. STAs Coverage Claims against Golden Vales Primary Insurer (Axis) and Excess Insurer (General Star)
In August 2014, STA sued Axis, as Golden Vales primary insurer. (See S.T.A. Parking Corp. v Axis Specialty Ins. Co., Index No. 652409/2014 [Sup Ct, NY County].) The complaint, signed by Wolfson, sought the full amount of the default judgment STA had obtained against Golden Vale, or that smaller amount that is within the limits of the Axis policy. (Index No. 652409/2014, NYSCEF No. 1 at 6.) In October 2016, the STA-Axis action settled. (See NYSCEF No. 12 [stipulation of discontinuance].) The record in that action does not reflect the amount of the settlement. But STA represented in its subsequent action against General Star that Axis paid STA the per-occurrence policy limit of $1 million. (See S.T.A. Parking Corp. v General Star Indem. Co., Index No. 656507/2018, NYSCEF No. 2 at ¶¶ 9, 38 [Sup Ct, NY County].)
On December 31, 2018, STA sued General Star, as Golden Vales excess insurer. (See id.) As stated above, the complaint, signed by Wolfson, alleged that STA had previously sued Axis to recover the amount of the Golden Vale default judgment and that Axis had satisfied its portion of the Judgment and exhausted the limit of the Axis policy. (Index No. 656507/2018, NYSCEF No. 2 at ¶ 38.) STA therefore sought the balance of the judgment (with interest), up to General Stars $10 million policy limit. (Id. at 2 ¶ 10, 6-7.)
In May 2019, General Star removed the claims against it to the U.S. District Court for the Southern District of New York on the ground of diversity of citizenship. (See Index No. 656507/2018, NYSCEF No. 4 [notice of removal filed in Supreme Court].) In January 2021, the General Star action settled. (See S.T.A. Parking v General Star Indem. Co., Dkt. No. 19-4250, ECF Nos. 56, 57, Gregory H. Woods III, U.S.D.J.) The record does not reflect the amount of the settlement. STA represented in a July 2021 interrogatory response in this action that East 77 received $1,376,842.96 from STA in about January 2021. (NYSCEF No. 51 at 4.) It is unclear whether this payment stems from the 2016 settlement with Axis, the January 2021 settlement with General Star, or some combination of the two. Either way, STA did not then inform the undersigned court of the General Star settlement.
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4. STAs Current Coverage Action Against Federal
On December 31, 2018, the same day STA sued General Star, it brought this action against Federal, as its own excess insurer. STAs complaint in this action, signed by Wolfson, sought the full amount of the Golden Vale default judgment—without mentioning the $1 million payment already made on that judgment by Axis. (See NYSCEF No. 2 at 5-6.)
In this action, Federal moved for summary judgment dismissing the complaint, on the ground that as a matter of law, neither of the two Federal policies at issue (one covering the period February 2004 to February 2005, and one the period February 2005 to February 2006) covered the 2013 judgment against STA. (See NYSCEF No. 8 [notice of motion]; NYSCEF No. 10 [mem. of law].) In April 2021, the undersigned court denied the motion with respect to the first Federal policy and granted it with respect to the second Federal policy. (See NYSCEF No. 40 [order memorializing decision delivered on the record]; NYSCEF No. 44 at Tr. 14-22 [transcript of decision].)
This court, disagreeing with Goodman (the attorney who had reviewed STAs claim for Federal), held that STAs loss occurred before mid-February 2005, bringing it within the coverage period of the first Federal policy. (NYSCEF No. 44 at Tr. 16-17; compare NYSCEF No. 328 at 3-4.) This court also concluded that the first Federal policy was triggered on an excess basis by the 2013 judgment, because under that judgment STA was obligated to pay more than the underlying policy limit of $1 million. (NYSCEF No. 44 at Tr. 18-20.) And this court held that coverage under the second Federal policy was barred by the known-loss exclusion of the underlying insurance in place during that policys term (i.e., the Lancer policy). (Id. at 21-22.) On appeal, the Appellate Division, First Department, affirmed each ruling. (See S.T.A. Parking Corp. v Federal Ins. Co., 209 AD3d 510 [1st Dept 2022].)
On motion sequence 003, STA now moves for summary judgment with respect to its claim for coverage under the first Federal policy. (See NYSCEF No. 108.) On motion sequence 004, Federal moves for leave to amend its answer to add affirmative defenses and assert counterclaims. The counterclaims, supported by extensive new allegations (and accompanying documentary exhibits), seek (i) a declaration that for several reasons Federal is entitled to refuse to pay STAs claim; and (ii) damages and injunctive relief for alleged fraud by STA against Federal. (See NYSCEF No. 320 [order to show cause]; NYSCEF No. 165 [proposed amended complaint].)
Federals opposition to STAs summary-judgment motion is largely grounded in the same factual allegations (and supporting documents) that underlie the proposed amended complaint. This court therefore considers first the motion for leave to amend, then addresses the summary-judgment motion. Federals motion is granted in part and denied in part. STAs motion is denied.
DISCUSSION
I. Federals Motion for Leave to Amend (Motion 004)
Leave to amend under CPLR 3025 (b) is freely granted: Absent prejudice or surprise, leave should be denied only if the nonmovant establishes that the proffered amendment is palpably insufficient or clearly devoid of merit. (Fairpoint Cos., LLC v Vella, 134 AD3d 645, 645 [1st Dept. 2015] [internal quotation marks omitted].) In opposing the motion, STA does not claim that it would be prejudiced were this court to grant leave to amend; it contends only that the proposed amendments are clearly devoid of merit.
A. Federals Proposed First Counterclaim (Fraud)
Federals first counterclaim sounds in common-law fraud. It seeks damages in the form of the attorneys fees costs [required] to defend [Federal] in this objectively baseless and improperly motivated litigation, and injunctive relief barring STA and its counsel from undertaking further efforts to obtain recognition or enforcement of the underlying 2013 judgment. (NYSCEF No. 165 at ¶¶ 213, 215.) STA argues that this counterclaim is clearly meritless because it is time-barred. This court agrees with STA.
A proposed claim is palpably insufficient or patently devoid of merit for purposes of CPLR 3025 (b) when the claim would be barred by the applicable statute of limitations. (Belair Care Ctr., Inc. v Cool Insuring Agency, Inc., 161 AD3d 1263, 1266 [3d Dept 2018].) The statute of limitations for fraud is the later of six years from accrual or two years from when the alleging party discovered the fraud—or with reasonable diligence could have discovered it. (See CPLR 213 [8].) This reasonable-diligence obligation is triggered when the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, thereby giving rise to a duty of inquiry. (Boesky v Levine, 193 AD3d 403, 405 [1st Dept 2021] [internal quotation marks omitted].) Once this duty to inquire arises, a failure to pursue a reasonable investigation will trigger the statute of limitations. (See MBI Intl. Holdings Inc. v Barclays Bank PLC, 151 AD3d 108, 115 [1st Dept 2017].)
Federal argues that the fraud claim is timely. Federal asserts that the claim rests on emails between counsel for E77 and counsel for STA that Federal did not receive until March 2022 during discovery in this action. (See NYSCEF No. 337 at 6.) This assertion is unpersuasive. Federal and its counsel had information sufficient to give rise to a duty to inquire no later than when Goodman reviewed STAs claim-related documentation in 2015: At that point, they had, at a minimum, a copy of the 2012 assignment agreement, plus the inquest courts July 2013 decision reflecting that STA had not opposed E77s damages claim in the underlying property-damage action. (See NYSCEF No. 326 at 9.) Federal itself first raised the possibility of fraud in a November 17, 2021, discovery letter to this court, which Federal submitted before it obtained the emails between counsel on which it now relies. (See generally NYSCEF No. 56.)
Federals claims of fraud are time-barred. Federals request for leave to assert a fraud counterclaim (the first proposed counterclaim) is therefore denied as clearly devoid of merit. So too are those parts of the second and third proposed counterclaims (discussed further below) that are based on allegations of common-law fraud. In light of this disposition, the court does not reach STAs other arguments challenging the merits of Federals allegations of fraud.
B. Federals Sixth Proposed Counterclaim (Late Notice)
Federals sixth proposed counterclaim seeks a declaratory judgment that STAs claim under the Federal excess policies is untimely as a matter of law. STA argues that leave to add this counterclaim should be denied because Federal waived any late-notice defense, thereby rendering the counterclaim patently without merit. This court agrees with STA.
Federals proposed counterclaim contends that notice was late because E77 first asserted its property-damage claim against STA in January 2005 but STA did not inform Federal until October 2006. (NYSCEF No. 165 at 78 ¶ 242 [proposed amended complaint].) But Federal did not raise this argument until 2023. Outside the context of insurance claims arising from actions for death or bodily injury, the timeliness of an insurers late-notice-based coverage disclaimer depends on whether, under common-law principles, the insurer clearly manifested an intent to abandon [its] late-notice defense. (KeySpan Gas E. Corp. v Munich Reins. Am., Inc., 23 NY3d at 590-591 [2014].) Here, Federal waited more than 15 years to assert a late-notice defense despite being actively involved in STAs litigation of the underlying action and despite raising other coverage-related arguments—including in Federals prior summary-judgment motion in this action. Taking into account the totality of the circumstances, this court agrees that Federal manifested an intent to abandon any late-coverage defense.
Federal argues that it could not assert that defense without first knowing exactly when the underlying property damage occurred; and that Federal acquired that knowledge only once the First Department assertedly fixed the date of damage as early as late 2004 or early January 2005. (NYSCEF No. 337 at 12). But regardless whether the damage occurred in late 2004, early January 2005, or later in 2005, Federal still could have argued at the time that the gap between the date of occurrence and the date of notice in October 2006 rendered notice late. (See RMD Produce Corp. v Hartford Cas. Ins. Co., 37 AD3d 328, 331 [1st Dept 2007] [holding that notice provided nearly one year after the occurrence was untimely as a matter of law].)
Federals request for leave to add a counterclaim raising a late-notice defense to coverage is denied.
C. Federals Second Proposed Counterclaim (Unreasonable Settlement)
Federals second proposed counterclaim seeks a declaration that it is not required to cover the 2013 judgment because (i) the judgment was functionally a settlement that (ii) does not reflect what a reasonably prudent person in STAs position would have settled for on the merits of E77s claim. (NYSCEF No. 165 at ¶ 218.) This counterclaim is not patently meritless.
As a functional matter, the 2013 judgment against STA has many of the characteristics of a consent judgment: The process that led to judicial determination of East 77s damages against STA stemmed from the assignment agreement between them, and STA chose not to put on a damages defense.
STA now argues that the judgment should not be considered as having been entered on consent because the judgment stemmed from a hearing at which the inquest court declined to award some of the damages that East 77 had claimed. That reduction, though, did not stem from anything STA did. Rather, STA effectively consented to the courts awarding damages against it as the court saw fit; and the court then reduced East 77s damages sua sponte. In these circumstances, Federals argument that this court should treat the 2013 judgment as having been entered on consent—and should evaluate Federals coverage obligations accordingly—does not clearly lack merit.
STA additionally contends, relying on Serio v Public Serv. Mut. Ins. Co. (7 AD3d 277, 278 [1st Dept 2004]), that Federal may not challenge the reasonableness of the 2013 judgment, because it chose not to participate in the underlying litigation or the settlement negotiations among the parties to that litigation. STAs contention is unpersuasive. Decisions like Serio and City of New York v Zurich-American Insurance Group (27 AD3d 609 [2d Dept 2006]), also cited by STA, address primary insurers that were involved in the underlying proceeding yet fail[ed] to challenge the reasonableness of the settlement there. (Zurich-American Ins., 27 AD3d at 611 [citation omitted].) Federal, on the other hand, was STAs excess insurer. An excess insurer may—but is not required to—participate in the insureds defense. (See Fieldston Prop. Owners Assn, Inc. v Hermitage Ins. Co., Inc., 16 NY3d 257, 265 [2011].) STA provides no authority (and this courts research has not found any) holding that an excess insurer that neither provides a defense in the underlying litigation, nor is a named party or intervenor in that litigation, is thereafter foreclosed from challenging the reasonableness of a settlement.
In evaluating the reasonableness of a settlement, courts consider the likelihood of liability being established and the amount of the settlement relative to the settling partys potential damages exposure. (See Deutsche Bank Trust Co. of Ams. v Tri-Links Inv. Trust, 74 AD3d 32, 44 [1st Dept 2010]; Acunto v Conklin, 285 AD2d 712, 713-714 [3d Dept 2001]; Pahl v Grenier, 279 AD2d 882, 884 [3d Dept 2001].)
Here, STAs liability to East 77 was already established. But the record raises questions about whether STAs choice not to contest damages led to an unreasonably large judgment being awarded against it. East 77s claimed damages effectively placed a ceiling on STAs liability exposure. And it is clear that East 77s damages claims were inflated. As discussed above in Background § D.1, for example, the inquest court determined on its own that $1.16 million of East 77s claimed $3.87 million (before interest) was not recoverable. (See NYSCEF No. 226 at 7-13.) And the record reflects that an additional amount of approximately $128,000 reflected construction costs that East 77s principal had conceded in deposition to be unrelated to STAs construction work.
Additionally, STA does not attempt to argue (much less conclusively establish) that it would have been impossible, or at least unlikely, to challenge East 77s claimed costs for construction and lost rental income, on top of the 30% reduction in damages imposed by the court. Any such argument, moreover, would be in tension with STAs counsels prior criticism of East 77s claimed construction-related damages as plainly excessive and unsupported. (See Background § B, supra.)
Further, East 77 persuaded the court on reargument that it should be entitled to claim as damages the $800,000 payment it had already received from its insurer Interstate. That is, East 77 contended that it had been validly assigned Interstates subrogation claim in exchange for adequate consideration. (See NYSCEF No. 447 [East 77 mem. of law]; No. 229 [decision on the record]; NYSCEF No. 197 [East 77/Interstate agreement].) In arguing to the inquest court that it should be awarded the $800,000 in damages against STA, East 77 provided no authority for the proposition that an insured could both receive payment on a policy and later recover the same amount from the tortfeasor in subrogation, acting as the assignee of its own insurer.
14
(See NYSCEF No. 447 at 5-6.) Yet STA chose not to contest East 77s request for this additional $800,000 payment, whether on the ground that it would constitute an impermissible double recovery or otherwise.
This court does not mean to suggest that STA would necessarily have prevailed in opposing East 77s request to add the $800,000 to its damages, or in opposing East 77s construction-related damages claims. At a minimum, though, the allegations in Federals proposed amended complaint, taken as true, raise sufficient doubts about the validity of the total amount in damages that East 77 claimed in 2013 to support for Federals position that the 2013 damages award was an unreasonable settlement. No more is required on a motion for leave to amend.
D. Federals Third Proposed Counterclaim (Bad Faith/Collusion)
Federals third proposed counterclaim seeks a declaration that STA may not enforce the 2013 judgment against Federal (through obtaining a payment under the Federal policy), because that judgment stemmed from bad faith and collusion between East 77 and STA at the expense of Federal and the other insurers.
STA argues that this proposed counterclaim seeks, in effect, vacatur of the 2013 judgment under CPLR 5015 (a) (3)—and that vacatur on that ground is barred by laches because Federal has been aware of the provisions of the assignment agreement, and the lack of a damages defense at the inquest, for more than a decade. STA misconstrues the nature of the counterclaim.
Federal is not moving to vacate the judgment directly, as entered in favor of East 77 and against STA. Federal is arguing that the judgment is invalid as obtained through bad faith and collusion—not to mention deception of the court—and is therefore unenforceable as against Federal. This argument, like a fraud-based defense to an Insurance Law § 3420 (a) (2) defense to a direct action by an injured party against the tortfeasors insurer, does not first require vacating the underlying judgment.
15
(See Bahnuk v Countryway Insurance (214 AD3d 1218, 1220 [3d Dept 2023]
16
; Roth v National Auto. Mut. Cas. Co., 202 AD 667, 668-669 [1st Dept 1922] [holding, in direct action by injured party against insurer, that if the plaintiff colluded with the assured for the purpose of enabling her to obtain a judgment against him, it would seem to be clear that in such a case her act would be a fraud, sufficient to defeat a recovery against the company]; accord Hernandez v American Transit Ins. Co., 2 AD3d 584, 585 [2d Dept 2003].)
Federals proposed bad-faith/collusion counterclaim is, at a minimum, not plainly devoid of merit. As discussed above, STA chose at the 2013 damages inquest not to raise arguments available to it that would have significantly reduced the amount awarded against it. (See Background § D.1, supra.) Relatedly, the terms of the assignment agreement ensured that awarding a greater amount in damages to East 77 against STA would benefit STA: Doing so would increase the potential amount that it could recover from Axis, General Star, and Federal, yet leave its liability exposure unchanged, practically speaking.
The Third Department held in Bond v Giebel that this type of arrangement—creating an incentive for opposing parties to act in unison through assigning part of the insurance proceeds to the insured—offends our sense of justice and propriety and cannot be condoned. (101 AD3d 1340, 1343 [3d Dept 2012].) The possibility of such a collusive arrangement was sufficient in Bond to require vacating a default judgment against tortfeasors to uphold the integrity of the judicial process. (Id. at 1344.) Those concerns are even stronger here: STA withheld the terms of the assignment agreement from the court that determined how much East 77 should be awarded in damages.
17
STAs leaving the court in the dark was particularly significant because the basis for STAs claim against Golden Vale was indemnification to recoup the damages that STA notionally had to pay to East 77; yet the terms of the assignment agreement made it likely that STA would never have to pay those damages in the first place. Had the inquest court been aware of the agreements terms, STA likely would have found it significantly harder to obtain default judgment against Golden Vale (or then to obtain payment from Golden Vales insurers).
18
In these circumstances, Federal has shown that it should be permitted to amend its answer to assert its bad-faith/collusion counterclaim.
E. Federals Fourth Proposed Counterclaim (Breach of Cooperation Clause)
Federals fourth counterclaim seeks a declaratory judgment that STAs conduct breached the Federal policys cooperation clause. An insureds effort to aid a plaintiff that has brought litigation against it, so as to get money out of the insurance company, will constitute a breach of an insurance policys cooperation clause. (Seltzer v Indemnity Ins. Co. of N. Am., 252 NY 330, 335 [1929]; accord Lauritano v American Fid. Fire Ins. Co., 3 AD2d 564, 572 [1st Dept 1957]; U.S. Fid. & Guar. Co. v Von Bargen, 7 AD2d 872, 873 [2d Dept 1959].)
STA contends that Federals allegations of collusion are completely devoid of merit because STA assertedly kept Federals monitoring counsel apprised about the underlying litigation (and settlement negotiations); gave Federal copies of the drafts of the assignment agreement; made Federal aware that East 77s damages would be determined at inquest; and provided copies of documents and communications to Goodman on request. (NYSCEF No. 332 at 7.)
STA does not, however, represent that it told Federal in advance that it intended not to mount any damages defense at the 2013 inquest. Moreover, a direct connection exists between this silence and STAs current claims against Federal, given that STA refrained from disclosing the material terms of the assignment agreement to the court in 2013—or, for that matter, to this court, prior to Federals November 2021 letter raising concerns about fraud.
19
That STA gave Goodman documents (such as the assignment agreement) that could have led her to raise questions about collusion and the 2013 inquest is insufficient to establish that any later claim of collusion is plainly devoid of merit.
F. Federals Fifth Proposed Counterclaim (Breach of Consent-to-Settle Clause)
Federals fifth counterclaim seeks a declaratory judgment that it is not required to cover the 2013 judgment, because STA violated the consent-to-settle clause in the controlling underlying insurance policy. The Federal policy provides that it follows form to the controlling underlying insurance policy—here, a primary insurance policy issued by Burlington Insurance Company.
20
(See NYSCEF No. 16 at 4, 13.) The Burlington policy contains a consent-to-settle clause that bars the insured from assuming legal obligations without consent from its insurer. (See NYSCEF No. 318 at 31.) The terms of the Federal policy also bar the insurer from reaching settlements, or payments of expenses, without the insurers consent. (See NYSCEF No. 16 at 8, 16.)
As discussed above in Discussion § I.C, there is at least some merit to Federals argument that the combination of the assignment agreement and STAs choice not to contest damages rendered the 2013 judgment one entered on consent, functionally speaking, and therefore that Federals consent to that choice was required for coverage purposes. STA argues that it obtained the necessary consent by providing drafts of the assignment agreement to Federal before its execution and by eliminating the express-consent-judgment aspect of the agreement to respond to Federals objection. But again, STA has not shown that it informed Federal in advance that it did not intend to raise any damages-related arguments at the inquest—or that it obtained Federals consent to STAs proceeding in that manner. In these circumstances, Federals proposed fifth counterclaim is not patently meritless.
II. STAs Motion for Summary Judgment (Motion 003)
On motion sequence 003, STA moves for summary judgment in its favor. STA contends initially that this court already resolved the dispositive legal issues in its favor in the courts ruling on motion sequence 001. STA therefore seeks renewal of its request on that motion for the award of interest on the 2013 judgment. Those issues are dealt with below in section (A). STA also contends that it is entitled in any event to summary judgment. Those contentions are addressed in section (B). STA asserts that Federals motion papers contain sanctionable (and indeed defamatory) misrepresentations. That assertion is considered in section (C). Finally, Federal requested at argument on this motion that the court grant summary judgment to Federal as the nonmoving party under CPLR 3212 (b). That request is dealt with in section (D).
STAs motion for renewal and for summary judgment in its favor is denied. STAs request for sanctions is denied. Federals oral application for summary judgment dismissing the action is denied.
A. STAs Request to Renew its Claim for Interest on the 2013 Judgment
STA argues that this Court and the First Department have already concluded that STA is entitled to coverage for the Judgment under the first Federal policy. (NYSCEF No. 109 at 3-4.) Therefore, STA says, it is entitled to summary judgment in its favor, and also to renewal of this courts prior denial of prejudgment interest. STA is incorrect.
This court previously held, and the First Department affirmed, that Federals motion for summary judgment dismissing the action (mot seq 001) should be denied because, on the record then before the court, STAs liability to East 77 was within the scope of coverage of the first of the two potentially applicable Federal policies. (See NYSCEF No. 44 at Tr. 16-17 [transcript of decision]; S.T.A. Parking Corp. v Federal Ins. Co., 209 AD3d 510, 510 [1st Dept 2022].) Neither this court nor the First Department went on to grant summary judgment in STAs favor as the nonmoving party. Nor did this court (or the First Department) purport to resolve any coverage-related issues with respect to the first Federal policy other than those presented by the parties arguments on motion sequence 001—i.e., whether the underlying damage to East 77 happened during the period of that policy, and whether Federal would be liable on a first-dollar basis or only for damages liability over the $1 million attachment point. (See 209 AD3d at 510-511.)
STAs summary-judgment motion presents separate and independent questions: Whether STA has established as a matter of law that (i) it suffered covered losses over $1 million and (ii) Federal has no defenses to payment for those losses. This court has not previously considered or resolved those questions.
Relying on its argument about the scope of the holding on motion sequence 001, STA also seeks renewal of a statement by this court, in ruling on that motion, suggesting that STA is not entitled to payment by Federal of accrued interest on the 2013 judgment. (See NYSCEF No. 109 at 4, quoting NYSCEF No. 115 at Tr. 20 [transcript of ruling delivered on the record].) As an initial matter, it is by no means clear that this court may properly grant renewal of a prior order after that order was affirmed on appeal. (See Kattan v 119 Christopher LLC, 2021 NY Slip Op 50549[U], at *2 [Sup Ct, NY County 2021] [discussing this issue].) Regardless, in the context of this courts prior decision, the statement on which STA now seeks renewal was dicta that did not give a definite answer to the question of when interest on the 2013 judgment would have stopped accruing. Finally, it remains to be decided whether STA is, in fact, entitled to payment from Federal of any amount of the 2013 judgment—let alone accrued interest on that judgment. STAs request for renewal is denied.
B. STAs Request for Summary Judgment in its Favor
A party moving for summary judgment must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to eliminate any material issues of fact from the case. (Winegrad v New York Univ. Med. Ctr., 64 NY2d 851, 853 [1985].) If the movant meets this burden, the non-moving party must then establish the existence of material issues of fact. (See Alvarez v Prospect Hosp., 68 NY2d 320, 324 [1986].)
Federal does not seriously contest that STA has met its prima facie burden on this motion. Federal argues only that factual disputes exist that preclude granting summary judgment to STA. This court agrees. Even absent amendment of Federals answer, material disputes of fact exist on at least three independent issues in the action.
First, the scope of Federals obligation (if any) to pay STA the amount of the 2013 judgment (plus interest).
Federal argues initially that its policy was not even triggered. Federal relies on its allegation that STA did not actually pay East 77 at least $1 million. (See NYSCEF No. 233 at 16-17.) This argument is unpersuasive. The policy provides that it will only apply after the the insured or the insureds underlying insurer is obligated to pay the full amount of the underlying limits of insurance, namely $1 million. (NYSCEF No. 16 at 19 [italics added; bolding omitted].) It is indisputable that this requirement has been satisfied in light of the 2013 judgment, thereby triggering applicability of the Federal policy.
That Federals obligations under the policy have been triggered, though, does not resolve what those obligations consist of. A material dispute of fact exists on that issue—in particular, on the question of what, if anything, Federal must pay to STA from the increment of the 2013 judgment (plus interest) that exceeds the Federal policys $1 million attachment point. The policy provides that Federal will pay to STA that part of loss covered by this insurance in excess of [the] underlying limits of insurance. (Id. at 8.) Loss is defined as those sums actually paid in the settlement or satisfaction of a claim which the insured is legally obligated to pay as damages because of injury or offense, after making proper deductions for all recoveries and salvage. (Id. at 13.) The documents submitted by Federal in opposition to summary judgment (such as the assignment agreement and the emails relating to the 2012 settlement payments) raise a material dispute of fact about whether STA has paid amounts in damages to East 77 that exceed $1 million—and, if so, by how much.
21
Second, whether the 2013 judgment for which STA seeks coverage resulted from collusion between STA and East 77. As discussed above on Federals motion for leave to amend, an insurer may defend against an action seeking to require an insurer to cover the cost of a judgment by arguing that the judgment was obtained collusively or fraudulently. (See Roth, 202 AD at 668-669; accord Bahnuk, 214 AD3d at 1220; Hernandez, 2 AD3d at 585;cf. Plotkin v Republic-Franklin Ins. Co., 2018 NY Slip Op 33637[U], at *2 [Sup Ct, Kings County 2018] [denying injured partys summary-judgment motion against tortfeasors insurer as premature under CPLR 3212 [f] because injured partys deposition is both material and necessary as to the reasonableness of the $3.25 million settlement and consent judgment against the tortfeasor and a determination as to whether or not they were the product of fraud and collusion].)
The undisputed evidence in this action—particularly the assignment agreement and its being withheld from the court in 2013, STAs choice at that time not to oppose East 77s damages claim, and the courts ensuing ruling on damages—raises factual questions about whether East 77 and STA colluded to bring about the 2013 judgment. (Cf. Bond, 101 AD3d at 1342-1343 [holding improper an assignment agreement under which the tortfeasor-insured would receive 40% of any recovery obtained the by injured party against the insurer].
22
) In Bahnuk, the Third Department held that an issue of fact existed about whether the confessed judgment was the product of collusion between the injured party and the tortfeasor-insured, even absent evidence that the settlement agreement was withheld from the court and that the tortfeasor was promised a portion of the potential recovery from the insurer. (See 214 AD3d at 1220-1221.) STAs argument in favor of summary judgment is weaker in this action than the plaintiffs in Bahnuk, given the evidence of collusion introduced by Federal here.
Third, whether and to what extent the amount of Federals liability to STA (if any) must be set off by STAs recoveries on its default judgment against Golden Vale. In pursuing collection of that default judgment, STA has received substantial sums from Axis and General Star as Golden Vales insurers. Federal would be entitled, at a minimum, to set off those payments against any liability it owes to STA. As noted above, the policy expressly provides that all recoveries and salvage obtained by the policyholder must be deducted from the amount of loss that Federal must pay. (NYSCEF No. 16 at 13.) And Federal would be entitled to a common-law-based setoff in any event. (See Connecticut Fire Ins. Co. v Erie Ry. Co., 73 NY 399, 404-405 [1878]; Rosenblatt v Washington County Coop. Ins. Co., 191 AD2d 883, 885 [3d Dept 1993], citing Camden Fire Ins. Assn. v Bleem, 132 Misc 22, 29-30 [Buffalo City Court 1928]; Silinsky v State-Wide Ins. Co, 30 AD2d 1, 5 [2d Dept 1968].)
STA argues that the collateral source rule prohibits [Federal] from seeking a setoff for monies collected by STA from insurers for other parties. (NYSCEF No. 323 at 19-20.) This argument is without merit. The collateral source rule provides that the damages recoverable for a wrong are not diminished by the fact that the party injured has been wholly or partly indemnified for his loss by insurance effected by him and to the procurement of which the wrongdoer did not contribute. (Healy v Rennert, 9 NY2d 202, 206 [1961].) In other words, had STA first obtained an insurance payment from Federal, the collateral-source rule would bar Golden Vale from setting off its liability to STA by the amount of the Federal payment. This case, on the other hand, presents the converse scenario: STA first collected from wrongdoer Golden Vale (or, more precisely, from Golden Vales insurers) and is now seeking to recover against STAs own insurers. The Appellate Division has made clear that in these circumstances the collateral-source rule rule does not apply.
23
(Silinsky, 30 AD2d at 5.)
Thus, even indulging the assumption that Federals other defenses to payment fail, Federal would still not owe the full amount claimed by STA on this motion. Moreover, the amount it would owe, after setoff, would depend on facts (such as the amount of the General Star settlement) that do not appear in the record. Granting summary judgment in these circumstances would be inappropriate.
C. STAs Request for Sanctions
STA seeks sanctions against Federals counsel for claimed false statements of fact in Federals proposed amended complaint and motion papers. (See NYSCEF No. 109 at 6-8; NYSCEF No. 323 at 23-24.) The sanctions request is denied.
Sanctions may properly be imposed when the conduct of a litigant or lawyer is completely without merit in law and unsupportable by reasonable arguments; or is undertaken to delay litigation, harass, or injure another; or involves assertions of material factual statements that are false. (See 22 NYCRR 130-1.1 [c].) That is a high bar. (See Matter of Kover, 134 AD3d 64, 87-88 [1st Dept 2015]; Levy v Carol Mgt. Corp., 260 AD2d 27, 34 [1st Dept 1999].) This court is not persuaded that Federal has made any material misrepresentation of fact that might support an award of sanctions. Nor does this court agree with STA that the evidence in this action is susceptible only to the innocent interpretation that STA would give it, such that Federals forceful contrary rhetoric is sanctionable.
D. Federals Oral Application for Summary Judgment
During oral argument on these motions, Federal brought an oral application for summary judgment in its favor, based on the arguments and evidence provided in support of its motion for leave to amend the answer. This belated request is denied without prejudice. It would be premature to grant Federal not only leave to amend but also summary judgment without first affording STA the opportunity to reply to the amended answer. (See Greene v Hayes, 30 AD3d 808, 810 [3d Dept 2006]; Organek v Harris, 90 AD3d 1512, 1513 [4th Dept 2011].)
Accordingly, it is
ORDERED that STAs motion for summary judgment in its favor and for sanctions (mot seq 003) is denied; and it is further
ORDERED that Federals oral application for summary judgment dismissing STAs complaint (mot seq 003) is denied; and it is further
ORDERED that Federals motion for leave to amend its answer (mot seq 004) is granted, and the proposed amended answer with counterclaims, filed at NYSCEF No. 165, is deemed Federals operative pleading in this matter; and it is further
ORDERED that STA shall, within 30 days of entry of service of a copy of this order with notice of its entry, file a reply to counterclaims; and it is further
ORDERED that Federal serve notice of entry.
DATE 7/8/2024
FOOTNOTES
1
. In a 2010 email to counsel for some of STAs contractors, STAs counsel described Interstate as having seemed to conduct a rather thorough investigation before concluding that East 77 was entitled to the $800,000 payment. (See NYSCEF No. 171 at 1.)
2
. The settlement also provided that one of the contractors would assign to East 77 the contractors claims against its insurer (Travelers) for defense costs, indemnification, and contribution. (See NYSCEF No. 205 at 5.) The record does not reflect what, if anything, East 77 ultimately received from Travelers on these claims.
3
. Moreover, in opposing Federals initial summary-judgment motion, STA argued unsuccessfully that the terms of the Federal policy should be construed as requiring it to afford STA first-dollar coverage, rather than only above $1 million in damages liability. (See NYSCEF No. 30 at 6-7 [mem. of law]; NYSCEF No. 44 at Tr. 19-20 [transcript of decision on the record, rejecting this argument]; S.T.A. Parking v Federal Ins. Co., 209 AD32d 510, 511 [1st Dept 2022] [affirming this courts decision].)
4
. Federal was aware of the terms of the Settlement Agreement and the Assignment Agreement during negotiations between STA and East 77. Federal received a final copy of the Settlement Agreement along with a draft of the Assignment Agreement on April 25, 2012. Federal objected May 3, 2012, on the ground that the agreements required admitting liability in a manner disallowed by its insurance policy with STA. On May 7, 2012, Federal further objected to the term of the final Assignment Agreement that would allow entry of a consent judgment if an inquest into damages proved impractical. Nonetheless, the final Assignment Agreement was executed by East 77 and STA on May 24, 2012.
5
. Golden Vale had gone out of business several years earlier. (See NYSCEF No. 171 at 48 [February 2011 email from Wolfson to counsel for STAs insurance broker].) In practice, therefore, STA would be pursuing recoveries only from the insurers who had issued policies that might cover the loss.
6
. The principal exception relevant here is that the first $250,000 recovered from Axis would go entirely to East 77 rather than being subject to the four-way split discussed above. (See NYSCEF No. 218 at § 4.1 [c].)
7
. In August 2012, East 77s counsel proposed a modification to the assignment agreement wherein he would purchase 75% of East 77s rights under the assignment agreement under a Delaware trust operated by his father. STAs counsel consented to this modification. But the record is unclear whether this change was carried out. If it was, then any recovery by STA against Federal would be allocated as follows: 10% to East 77, 20% to East 77s counsel, 20% to STA, and 50% to STAs counsel.
8
. Formally speaking, the courts assessment of East 77s damages against STA was more akin to the second part of a bifurcated liability/damages hearing. But because that assessment was undertaken (at the parties request) in the context of the inquest on STAs damages against Golden Vale, this decision refers for simplicity to East 77s damages being determined at an inquest, and to the court deciding the amount of East 77s damages as the inquest court.
9
. If one were to deduct the $1.4 million in settlement payments accepted by East 77 in 2012 (see NYSCEF No. 205) from the damages East 77 claimed in 2013 and the settlement offer East 77 made in 2011, respectively, the remaining amount on the 2013 damages claim would be more than 10 times the remaining amount of the 2011 settlement offer ($2.47 million versus $200,000).
10
. As STA points out (see NYSCEF No. 324 at 11-12), Federals proposed amended complaint misleadingly implies (albeit without saying expressly) that the total sum of these questionable construction costs was several hundred thousand dollars higher than the sums true amount. Federals proposed amended complaint contains a summary chart identifying the total amount in payments that, in Whole or in Part, included the costs of work unrelated to STAs project, or $826,343.25. (See NYSCEF No. 165 at 62 [summary chart in the amended complaint, highlighting three payments in particular].) But the sum of the specific construction costs that Federal identified (based on Londons deposition testimony) as unrelated was far smaller—only $128,001.61. Federals proposed amended complaint does not include that lower number.
11
. In defending the rigorousness of the 2013 damages inquest (and the reasonableness of the amount ultimately awarded), STA twice asserts on this motion that the court reduced East 77s damages from a claimed amount of $6,601,700.19 to $2,113,271.45. (See NYSCEF No. 323 at 4, 8.) That assertion mischaracterizes the record. That $6.6 million amount includes approximately $1.8 million in prejudgment interest. (See NYSCEF No. 223.) As explained above, the inquest courts $2.1 million damages award to East 77 was exclusive of prejudgment interest. (See NYSCEF No. 143.) The proper comparison is between the claimed amount of $4,769,109.17 before interest and the awarded amount of $2,113,271.45 before interest.
12
. Goodmans report mentions that Federal had objected to the STA/East 77 settlement proposal that entailed STAs express consent to entry of judgment against it. (See NYSCEF no. 328 at 18-19.) But the report does not discuss the proposals later modifications that were implemented in the executed assignment agreement. In any event, it does not appear from the report that Goodmans ultimate conclusion about coverage rested on concerns about STAs failure to obtain consent to settle.
13
. In 2022, Interstate sued East 77 for allegedly failing to pay it the share of the funds received from STA to which Interstate was entitled under the terms of the 2011 Interstate/East 77 settlement. (See Interstate Indem. Co. v East 77 Owners Co., LLC, Index No. 650794/2022, NYSCEF No. 1 [Sup Ct, NY County].) Supreme Court (Nancy Bannon, J.) denied East 77s motion to dismiss (see 2023 NY Slip Op 30095[U] [Sup Ct, NY County 2023]); and the First Department affirmed (see 224 AD3d 456 [1st Dept 2024). The action remains pending.
14
. At most, East 77 cited the Third Departments decision in Chicago Title Ins. Co. v Mazula (38 AD3d 1114 [3d Dept 2007]). But Mazula was inapposite. That decision, addressing an action by a subrogated insurer against a tortfeasor, considered the estoppel effect of the motion courts ruling in a prior related action brought by the insured against the tortfeasor. In that prior action, the insureds, having received (i) payment on the policy that covered most of their damages and (ii) an assignment of the insurers subrogation rights in exchange for a nominal fee, sued the tortfeasor for the full amount of their damages. The motion court held that the assignment was invalid and awarded the insureds only the uncovered increment of their damages. (See id. at 1114 [describing ruling].) The insurer then brought the second action against the tortfeasor for the amount of its payment on the policy. The Third Department held that in light of the prior ruling obtained by the tortfeasor that invalidated the assignment, the tortfeasor was estopped from contesting the insurers standing to sue in subrogation. (See id. at 1115-1116.) The Third Department did not hold—or even have occasion to consider holding—that an insurer could validly assign its subrogation rights against the tortfeasor back to the insured or that pursuant to such an assignment the insured could recover payment a second time for the same injury.
15
. Similarly, an insurance company may raise as an Insurance Law § 3420 (a) (2) defense that jurisdiction was absent in the underlying action without needing first to obtain vacatur of that judgment under CPLR 5015 (a) (4). (See Vaccarino v Allstate Ins. Co., 270 AD2d 411, 411 [2d Dept 2000].)
16
. In a supplemental letter brief discussing Bahnuk, STA distinguished other aspects of the decision—but not its analysis indicating that Federal could raise a bad-faith defense to payment without first obtaining vacatur under CPLR 5015 of the 2013 judgment at issue. (See NYSCEF No. 443.)
17
. Further, in addition to withholding the agreement itself from the court, STA misleadingly characterized the agreement as "allow[ing] [East 77] to proceed with its claim against STA while giving certain protections to STA that would allow it to stay in business even if [East 77] received a judgment against it. (NYSCEF No. 226 at 5 n 2.)
18
. STAs principal asserts, in an affidavit submitted in support of STAs summary-judgment motion, that the reason STAs inquest papers did not include a copy of the assignment agreement is that it was not material to the issues before the Court. (NYSCEF No. 111 at 15 ¶ 79.) That dubious assertion strengthens, rather than undermines, Federals proposed bad-faith/collusion counterclaim.
19
. As noted above, STA even failed to disclose that it had already obtained a settlement of at least $1 million from Golden Vales primary insurer and was suing Golden Vales excess insurer for the balance of the 2013 default judgment. (See Background § E.4, supra.)
20
. The Burlington policy expired in April 2004, before the construction-related damages at issue in the underlying litigation. STA therefore could not pursue coverage claims against Burlington. But the terms of the Federal policy makes clear that it follows form to the Burlington policy.
21
. As noted in Background § E.3, STA represented in an interrogatory response in this action that East 77 received $1,376,842.96 from STA in about January 2021. (NYSCEF No. 51 at 4.) But the record does not reveal the source of that $1,376,842.96. One might speculate that this payment was East 77s share under the assignment agreement of funds from the settlements between STA and Axis/General Star. If so, STA has not shown (or even tried to show) that the payment should be treated as having been made by STA for purposes of the Federal policys definition of loss.
22
. In Bond, the parties agreed that they would split the proceeds of an Insurance Law § 3420 (a) (2) action brought by the injured party against the tortfeasors primary insurer after that insurer had disclaimed coverage. (See 101 AD3d at 1341.) The structure of the assignment agreement in Bond, and the identity of the plaintiff in the ensuing action against the insurer, in other words, differ from the scenario in this case. The courts conclusion in Bond, though, did not rest on considerations specific to § 3420 (a) (2), but on its concern that the financial benefit that the [tortfeasors] stand to gain under the collusive . . . assignment agreement would provide the tortfeasors with an incentive to act in unison with [the injured party] going forward, to the detriment of the insurer. (Id. at 1342-1343.) That same concern exists here.
23
. The trial-court decision that STA itself quotes to support its argument states that as a general rule, a plaintiff may recover damages that include amounts for which the plaintiff has already been compensated through sources wholly independent of and collateral to the wrongdoer. (See NYSCEF No. 323 at 20, quoting Ideal Mut. Ins. Co. v Korean Reins. Corp., 657 F Supp 1174, 1175 [SD NY 1987] [emphasis added].) STAs recovery from Golden Vale under Golden Vales insurance policies is not independent of and collateral to Golden Vale for purposes of this rule.
Gerald Lebovits, J.