Woodson v American Tr. Ins. Co.

[*1] Woodson v American Tr. Ins. Co. 2005 NY Slip Op 51627(U) [9 Misc 3d 1117(A)] Decided on October 11, 2005 Supreme Court, New York County Cahn, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on October 11, 2005
Supreme Court, New York County

ZACHARY WOODSON, an Infant, by his Mother, and Natural Guardian, TRACY WOODSON, and TRACY WOODSON, individually, Plaintiffs,

against

AMERICAN TRANSIT INSURANCE COMPANY, ALLSTATE INSURANCE COMPANY, FEDERAL INSURANCE COMPANY, Defendants.



TRACY WOODSON, as Administratrix of the Goods, Chattels and Credits, which were of JOHN DANSBY, For the purpose of enforcement, collection and satisfaction Of a Final Judgment Plus interest entered against JOHN DANSBY for a related action in Supreme Court, Bronx County, Index No. 14661/90, Plaintiff, -against-

against

AMERICAN TRANSIT INSURANCE COMPANY, BISCEGLIA & OPPENHEIM, P.C., PHILIP BISCEGLIA, NORMAN VOLK, BERGER STERN & WEBB, LLP, CHARLES WEBB, III, JOHN R. CAHILL, MENDON LEASING CORP., STACEY COHEN and NORMAN VOLK & ASSOCIATES, P.C., Defendants.



104008/96

Herman Cahn, J.

This is an action by the Administratrix of a motorist's estate, against an insurer for bad faith refusal to settle a personal injury claim within the policy limits. It is also brought against various attorneys for legal malpractice in connection with the entry of a default judgment on the personal injury claim against the motorist, in excess of $4 million.

Plaintiff, beneficiary of the default judgment and Administratrix of the motorist's claims, moves for summary judgment (CPLR 3212) against the insurer and former counsel.

The insurer, defendant American Transit Insurance Company ("ATIC") moves for summary judgment dismissing the claims for lack of damages, failure to mitigate damages, absence of vicarious liability and judicial estoppel. The attorneys, Bisceglia & Oppenheim, P.C. ("B&O"), Philip Bisceglia ("Bisceglia"), Norman Volk ("Volk") and Norman Volk & Associates, P.C. ("NVA") (the "Attorney Defendants") move for summary judgment on statute of limitations grounds and failure to state a claim.

FACTS

The facts as here recited are taken from the parties' respective Rule 19-A Statements of Material Undisputed Facts and the affidavits and exhibits accompanying the motions. The background of this litigation has also been set forth in the decisions of: this court, dated September 22, 2004; Supreme Court, Bronx County (Howard Silver, J.); and the Court of Appeals (100NY2d 62 [2003]), familiarity with which is presumed.

The action arises from a 1990 automobile accident in which the infant plaintiff, Zachary Woodson, was injured. Plaintiff, Tracy Woodson, is his mother. In 1992, in a separate personal injury action brought in the Supreme Court, Bronx County(Howard Silver, J.), Woodson obtained a default judgment as to liability against John Dansby, the driver of a leased truck allegedly involved in the accident. After an inquest, in March 1995, a final judgment of over $4,000,000 was entered against Dansby ("the Dansby Judgment"). The Dansby judgment was vacated by Bronx County Supreme Court in 2001 (affd 289 AD2d 158 [1st Dept 2001]), but ultimately reinstated by the Court of Appeals in 2003 (Woodson v Mendon Leasing Corp., 100 NY2d 62 [2003] [reversing]).

Plaintiff was appointed receiver of Dansby's property and commenced this action (Action No. 2) in 1998 to pursue his claims against the Attorney defendants for their conduct with respect to the default, and against ATIC for failing to settle within the policy limits. After Dansby died in 2002, plaintiff was appointed administratrix of his estate for the purpose of continuing the litigation. [*2]

THE ATTORNEY DEFENDANTS' MOTION TO DISMISS

The instant action was commenced on March 2, 1998 and is thus presumptively time-barred as to all acts of alleged

malpractice occurring before March 2, 1995. The statute of limitations for professional malpractice is three years (CPLR 214[6]). Plaintiff's assertion that the legal malpractice claim did not accrue until entry of the Dansby judgment on March 3, 1995 misconstrues the law. The actual misconduct relevant for accrual purposes occurred in connection with the default and inquest several years earlier. At the time the final judgment was entered, Dansby was represented by new counsel, Berger Stern & Webb ("BSW"), a firm he retained by letter dated February 7, 1995 and which filed a notice of appeal on his behalf the next day.

A claim for legal malpractice accrues on the date of the professional misconduct (Glamm v Allen, 57 NY2d 87 [1982]; Murray Hill Investments, Inc. v Parker Chapin Flattau & Klimpl, LLP, 305 AD2d 228 [1st Dept 2003]).

In determining the date of accrual, "[w]hat is important is when the malpractice was committed, not when the client discovered it" (Murray Hill, supra at 95; see, McCoy v Feinman, 99 NY2d 295 [2002]; Shumsky v Eisenstein, 96 NY2d 164 [2001]; Wells Fargo Home Mortgage, Inc. v Zeichner, Ellman & Krause, LLP, 5 AD2d 128 [1st Dept 2004]). Accordingly, accrual is not delayed until the damages develop or become quantifiable or certain (see, Gilbert Props., Inc. v Millstein, 40 AD2d 100 [1st Dept 1972], aff'd 33 NY2d 857 [1973]; McCoy, supra; see, e.g., Aaron v Roemer, Wallens & Mineaux, LLP, 272 AD2d 752 [3d Dept 2000][malpractice claim accrued at time attorney negligently prepared answer to complaint, not at time the money judgment was entered against defendant as a result]).

Plaintiff argues that there was a continuous representation of Dansby by the attorney defendants, and that therefore the statute of limitations did not begin to run until entry of the Dansby judgment.

Although the continuous representation doctrine applies to legal malpractice claims, the plaintiff must demonstrate "clear indicia of an ongoing, continuous, developing and dependent relationship between the client and the attorney" (Muller v Sturman, 79 AD2d 482, 485 [4th Dept 1981]; see, In Re Estate of Merker, 18 AD3d 332 [1st Dept 2005]) or "a mutual understanding of the need for further representation on the specific subject matter underlying the malpractice claim" (McCoy, supra at 306). Furthermore, "[o]ne of the predicates for the application of the doctrine is continuing trust and confidence in the relationship between the parties" (Luk Lamellen U. Kupplungbau GmbH v Lerner, 166 AD2d 505, 506 (2d Dept 1990]). The doctrine does not apply where the relationship has been "clearly ruptured" (Murray Hill Investments, Inc. v Parker Chapin Flattau & Klimpl, LLP, 305 AD2d 228 [1st Dept 2003]; see, Aaron, supra), such as by representation by new counsel (see, In Re Merker, supra). In such instances, formal termination or withdrawal of counsel is unnecessary (see, Aaron, supra). A mere failure to take action to protect the client's interest does not qualify as continuous representation in the absence of such an underlying relationship of trust and confidence (see, Shumsky, supra).

Plaintiff has not submitted any evidence of an ongoing dependant relationship between Dansby and the Attorney Defendants during the relevant period. Rather, it is undisputed that between September 1992 and January 1995, Dansby was served with numerous legal papers by [*3]the parties, including plaintiff, identifying him as "defendant pro se." As noted, BSW assumed his defense in February 1995, a fact which would have ended the Attorney Defendants' duty to act for him even in the absence of a formal withdrawal (see, MacArthur v Hall, McNicol, Hamilton & Clark, 217 AD2d 429 [1st Dept 1995]). Although the attorney-client relationship may continue for limitations purposes, during a time when counsel is compelled to represent the client by court order despite a breakdown of trust and confidence (see, Deutsch v Polly N. Passonneau, P.C., 297 AD2d 571 [1st Dept 2002]), this is not such a case. Because the claims against the Attorney Defendants are so clearly time-barred, it is unnecessary to reach the Attorney Defendants' other grounds for dismissal (see, Caplan v Winslett, 218 AD2d 148 [1st Dept 1996]; Salman v Econo Lodge, 303 AD2d 293 [4th Dept 2003]).

The motion of the Attorney defendants for dismissal of the action against them, is granted.

ATIC'S MOTION TO DISMISS

ATIC's motion to dismiss is denied. The defense based upon lack of damages is untenable. Even accepting as undisputed the evidence that Dansby was insolvent, the weight of authority in New York and elsewhere is that "excess judgments are damages in themselves, even where the insured is insolvent, and so properly the subject of awards in bad faith claims" (Pinto v Allstate Ins. Co., 221 F2d 394, 402 [2d Cir 2000]). This is because "[t]o allow an insurer to escape bad faith liability because its insured lacks the ability to pay an excess judgment would introduce a perverse and undesirable incentive into personal liability actions, discouraging rather than encouraging settlement . . . [s]uch a rule would allow an insurer who has acted in bad faith to reap a windfall because its insured is of limited means, and would ignore the very real harm an excess judgment can work on an insured's credit and financial future" (Id. at 403).

The New York Court of Appeals has not addressed whether the insured's insolvency precludes a bad faith claim. The plurality in Gordon v Nationwide Mut. Ins. Co., 30 NY2d 427 (1972) failed to reach the issue, although a concurring and a dissenting opinion proposed rules either limiting or eliminating damages for uncollectible judgments (see, id. at 339-40 [Fuld, C.J., concurring]; id. at 350-51 [Breitel, dissenting]. The existing appellate authority, however, suggests a bright-line rule: "[r]eason as well as economic fact dictate that the mere existence of an excess final judgment causes harm to the judgment debtor . . . [t]he judgment increases his debts, it damages his credit, it subjects his property to the lien of the ubiquitous judgment" (Henegan v Merchants Mut. Ins. Co., 1 AD2d 12, 13 [1st Dept 1968]). Although there is dicta in some cases suggesting that the rule might be different in situations where, as here, the insured is completely judgment-proof (see, Pavia v State Farm Mut. Auto. Ins. Co., 183 AD2d 189 [2d Dep't 1992], aff'd in part and rev'd on other grounds, 82 NY2d 445 [1993]), there is little reason to distinguish between those defendants who can satisfy an insignificant fraction of the excess judgment, and those who can satisfy none of it. In either case, despite its bad faith, the insurer reaps a windfall by reason of the happenstance that the insured is impecunious. Furthermore, regardless of the defendant's assets, his or her ability to re-establish credit, accumulate assets, seek employment, benefit from an inheritance or engage in estate planning is impaired.

Similarly unavailing is ATIC's argument that plaintiff, having alleged Dansby's [*4]negligence in the personal injury action in order to procure the default judgment, is judicially estopped from disputing that negligence for the purpose of the bad faith action. Although a number of jurisdictions have precluded a plaintiff from taking assignment of a defendant's bad faith or malpractice claims and then pursuing theory that the plaintiff's judgment should never have been entered (see, Picadilly, Inc. v Raikos, 582 NE2d, 338 [Ind. 1991]; Coffey v Jefferson Co. Bd of Ed., 756 SW2d 155 [Ky. App. 1984]; Wagener v McDonald, 509 NW2d 188 [Minn. App. 1993]; Kommavongsa v Haskell, 67 P3d 1068 [Wash. 2003]; Zuniga v Groce, Locke & Hebdon, 878 SW2d, 313 [Tex. App. 1994]; Alcman Servs. Corp. v. Samuel H. Bullock, P.C., 925 F Supp 252, 258 [D NJ 1996], aff'd, 124 F3d 185 [3d Cir. 1997]), New York has not adopted that policy. Rather, "assignment of the defendant's bad faith claim to the plaintiff in a personal liability suit is the ordinary mechanism for pursuing such claim against the insurer" (Pinto, supra at 403; see, e.g., Pavia v State Farm Mut. Automobile Ins. Co., 82 NY2d 445 [1993]); Greevy v Becker, Isserlis, Sullivan & Kurtz, 240 AD2d 1997]). Defendant's related argument that Dansby failed to mitigate his damages by extinguishing his liability through a release when presented with the opportunity is simply an attempt to circumvent the state's policy with respect to the assignment or other transfer of malpractice and bad faith claims. Any action Dansby took to eliminate his liability to plaintiff would render his claims worthless for the purpose of assignment.

Finally, insofar as the claims against the Attorney Defendants have been dismissed, plaintiff may not pursue claims against ATIC on a theory that the insurer is liable for its counsel's conduct on a theory of respondeat superior or otherwise (see, Karaduman v Newsday, Inc., 51 NY2d 531 [1980]).

PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT

Plaintiff is not entitled to summary judgment on its claim that ATIC failed to settle the Bronx Action against Dansby within the policy limits. "To establish a prima facie case of bad faith refusal to settle, a plaintiff must demonstrate that the insurance carrier's conduct constituted a gross disregard of the policyholder's interests-that is, a deliberate or reckless failure to place on an equal footing its own interests and those of the policyholder when considering a settlement offer" (Vecchione v Amica Mut. Ins. Co., 274 AD2d 576, 578 [2d Dept 2000]). The gross disregard standard requires a showing that the insurer "engaged in a pattern of behavior evincing a conscious or knowing indifference to the probability that an insured would be held personally accountable for a large judgment if a settlement offer within the policy limits were not accepted" (Pavia v State Farm Mut. Auto. Ins. Co., 82 NY2d 445, 453-454 [1993]). Among the factors to be considered in determining bad faith are "the likelihood of success on the liability issue in the underlying action, the potential magnitude of damages and resulting financial burden each party may be exposed to as a result of a refusal to settle, and the information available to the insurance carrier at the time the demand for settlement is made" (Vecchione, supra at 578-79). Moreover, "proof that a demand for settlement was made is a prerequisite to a bad-faith action for failure to settle" (Pavia, supra at 454). The plaintiff must show that at the time of the demand "all serious doubts about the insured's liability were removed" (id. at 454).

Serious questions of fact preclude summary judgment on the issue of bad faith. Plaintiff's [*5]evidence that an actual demand for settlement was made is far from conclusive. It rests primarily on a new affidavit from one of plaintiff's attorneys, who offers the uncorroborated recollection that he made a $1 million demand to an unnamed defense attorney "sometime either during the Inquest or soon after its completion." The allegation was first raised in interrogatory responses served earlier this year. No mention was made of this purported offer in that attorney's 1998 deposition, or in the examination of plaintiff's counsel of record. Moreover, the offer is inconsistent with plaintiff's efforts, shortly after the completion of the inquest, to increase the ad damnum clause from $5 million to $8 million. Further issues of credibility are raised by plaintiff's claim that the offer remained open until early 1996, a full year after the final $4 million judgment was entered.

The documentary evidence regarding offers in the insurer's file is also ambiguous. Although one document contains the notation "Demand $1,000,000," defendant contends that it was ATIC's procedure to declare the limits of the policy as the "demand" whenever the liability exceeded the limits. This interpretation is supported by a September 1995 claim sheet, which qualifies the "demand" by a reference to the "Default judgment in the amount of $3,415,415.97." Moreover, there is no mention of the alleged $1 million demand in any of the "Claim Progress" memoranda from the insurer's file.

Additionally, even assuming a demand was made, plaintiff has not proffered evidence regarding the insurer's alleged pattern of "knowing indifference" to Dansby's potential liability. Although plaintiff has offered some vague details regarding its demand, the record does not reflect the nature of the insurer's presumed rejection or the reasons therefore. Accordingly, whether a refusal to settle was justified in view of all the circumstances surrounding the default judgment cannot be determined on the present record.

Finally, on reply, plaintiff has abandoned its remaining arguments relating to ATIC's other pre-judgment and post-judgment conduct as a basis for liability. As discussed above, plaintiff cannot pursue ATIC based upon the theory that it is derivatively liable for the conduct of its counsel in view of the dismissal of the claims against the Attorney Defendants.

Accordingly, it is hereby

ORDERED, that the motion of Bisceglia & Oppenheim, P.C. Philip Bisceglia, Norman Volk and Norman Volk & Associates, P.C. to dismiss are granted, and the claims against them are severed and dismissed, and it is further

ORDERED, that the Clerk is directed to enter judgment accordingly, and it is further

ORDERED, that the motion of defendant American Transit Insurance Company for summary judgment is denied, and it is further

ORDERED, that the motion of plaintiff for summary judgment is denied.

Dated: October 11, 2005 ENTER:

__________/s/____________

J.S.C.