Zurich Am. Ins. Co. v Whitmore Group, Ltd.

[*1] Zurich Am. Ins. Co. v Whitmore Group, Ltd. 2006 NY Slip Op 50447(U) [11 Misc 3d 1070(A)] Decided on February 7, 2006 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 February 7, 2006
Supreme Court, New York County

ZURICH AMERICAN INSURANCE COMPANY, Plaintiff,

against

THE WHITMORE GROUP, LTD., individually and as successor-in-interest to RISK MANAGEMENT SPECIALISTS, LTD., MARK DERRENBERGER, DIANE KRAUSE and JAMES C. METZGER, Defendants.



600058/04

Herman Cahn, J.

Motion sequence numbers 03, 04 and 06 are consolidated for disposition.[FN1]

Defendants Mark Derrenberger and Diane Krause move to dismiss the Amended Complaint based on the statute of limitations, the statute of frauds and for failure to state a claim (CPLR 3211[a][1][5] and [7]). Defendants James C. Metzger and The Whitmore Group, Ltd. ("Whitmore") move to dismiss the first through third and fifth through seventh causes of action under the statute of limitations and for failure to state a claim.

Plaintiff Zurich American Insurance Company cross-moves for leave to serve a Second Amended Complaint to assert an additional claim for breach of fiduciary duty against defendant Krause.

The Amended Complaint

This is an action by an insurer against a broker to

recover, under a variety of contract and tort theories, amounts allegedly owed for policy premiums.

The Amended Complaint contains seven causes of action. The first cause of action is for breach of the Broker Agreement, the breach being the failure to collect certain premiums and the failure to remit amounts collected and claims to be due to Zurich. The second cause of action is [*2]for breach of fiduciary duty, the breach apparently being the same breach which underlies the first cause of action. The third cause of action is for conversion, the conversion again being based on the alleged failure to remit as underlies the first cause of action. The same facts are apparently the predicate of the fourth cause of action for an accounting. The fifth cause of action (breach of fiduciary duty), relates to amounts defendants were obligated to, but failed to, collect on plaintiff's behalf. The sixth (breach of fiduciary duty) and seventh causes of action (conversion) relate to amounts other than premiums allegedly collected on behalf of Zurich.

The following facts are taken from the pleadings and various documents submitted by the parties in connection with this motion.

Zurich is an insurance company and Whitmore is an insurance broker. Whitmore merged with or otherwise acquired defendant Risk Management Specialists, Ltd. ("RMS") in or around 1999 and is its successor in interest (collectively, "Whitmore/RMS"). At the relevant times, Derrenberger was President and CEO of Whitmore/RMS, owning 50% of its shares. Metzger owned the other 50%. Krause was an officer of Whitmore/RMS.

In 1998, at RMS' suggestion, Zurich became an approved insurance provider for the McDonald's Corporation, offering casualty insurance to McDonald's United States franchisees. In August of that year, Zurich and RMS entered into an agreement (the "Broker Agreement") in which Zurich recognized RMS as a broker authorized to submit applications for insurance offered by it, for its approval.

Zurich and RMS agreed that RMS would act as the insurance broker for insurance sold to McDonald's franchisees, collecting premiums and remitting them to Zurich. Pursuant to paragraph 2(F) of the Broker Agreement, RMS was obligated to hold the premiums and other amounts collected, in trust for Zurich in a "premium trust fund" account. RMS was also obligated to remit to Zurich amounts due that it had been unable to collect, unless it gave notice of such failure to collect within 45 days. After execution of the Broker Agreement, Zurich issued policies on an annual basis for the periods commencing October 1, 1998 up to and including the period commencing October 1, 2001.

Paragraph 4 of the Broker Agreement governed suspension or termination of the contract. Section 4(B), "Termination of Agreement," provides that "[t]he Agreement will terminate . . . [a]utomatically, on the effective date of the sale, transfer, or merger of your [RMS] business unless we [Zurich] appoint the successor as our producer." Furthermore, paragraph 7[L] of the Broker Agreement states that "[n]either your commissions nor this Agreement may be assigned by you [RMS] and any attempted assignment in contravention of the paragraph shall be null and void and of no legal effect." Paragraph 7[O] provides that "neglect or failure by us [Zurich] to enforce any or all of the provisions of this Agreement . . . shall not be construed as a waiver of any rights or privileges of ours."

As noted above, plaintiff alleges that Whitmore acquired RMS in 1999 and became its successor in interest. Relevant to this allegation, defendants have submitted a copy of an agreement dated February 1, 1999 (the "Asset Purchase Agreement") by which Whitmore acquired the assets of RMS and another company, Risk Management Liability ("RML"). Paragraph 1.2 of the Asset Purchase Agreement provides that Whitmore did not assume any of the liabilities of either company. The schedule of assets transferred pursuant to the Asset Purchase Agreement did not include the Broker Agreement between RMS and Zurich. On August 13, 1999, Whitmore filed a certificate of assumed name with the Secretary of State, stating that it was doing business under the assumed name "Risk Management Specialists." [*3]

Zurich alleges that the same RMS employees interacted with Zurich after the acquisition, continuing to send e-mail and other correspondence which in many cases did not mention Whitmore at all. Sometimes correspondence was sent under the name "Risk Management Specialists, A Division of the Whitmore Group." Additionally, Zurich continued to submit statement and other notices to "Risk Management Specialists" without objection. In September 2002, however, Whitmore (and Metzger) entered into an indemnification agreement in which it was agreed that Whitmore had obligations as a broker under the McDonald's program.

Zurich thus alleges that Whitmore/RMS continued to perform under the Broker Agreement, submitting applications for insurance policies, collecting and remitting premiums due and taking commissions. Zurich was not advised that RMS had ceased to exist or had been released from its obligations under the Broker Agreement. Defendant Krause allegedly told Zurich that no new agreement was necessary because she was continuing to run the program as before. Nevertheless, in June 2003, Zurich sent Whitmore a "Zurich North American Producer Agreement" which set forth terms similar to those of the Broker Agreement.

Zurich claims that Whitmore/RMS breached its obligations by either routinely failing to bill the McDonald's franchisee-insureds, or by billing, collecting and/or remitting amounts less than were actually due. Zurich asserts that Whitmore/RMS concealed these practices and made it impossible for Zurich to determine whether the contractual obligations were being met. In 2002, Zurich met with representatives of Whitmore/RMS and was promised that it would receive a full accounting of billings, collections and remittances. Whitmore/RMS also allegedly promised to make three weekly payments for shortfalls in the earlier years of the program, and later agreed to reimburse Zurich for certain undisputed items.

The Amended Complaint asserts that Whitmore/RMS failed to provide the promised accounting or make the promised payments. Zurich estimates that it is owed in excess of $300,000 for the policy year ending in October 2001 and more than $700,000 for the year ending in October 2002. It seeks recovery of those sums from Whitmore/RMS under theories of breach of contract, breach of fiduciary duty and conversion, and seeks an accounting.

Zurich seeks recovery against individual defendants

Derrenberger, Krause and Metzger on all causes of action (except an accounting) under a veil-piercing theory. The Amended Complaint alleges that those defendants exercised complete domination over various affairs of Whitmore/RMS. Krause allegedly had an "equitable ownership" of those companies due to her domination of corporate affairs and her right to receive certain proceeds from the company's operations. In support of its claim that the individual defendants abused the corporate form, Zurich further alleges that they failed to name a board of directors, failed to hold corporate meetings or keep corporate minutes, undercapitalized the corporations, commingled funds, and ran essentially personal business enterprises under the cover of the corporate names. Additionally, in its submissions, plaintiff notes that Metzger had accused Krause of running the McDonald's program with a lack of documentation and concealing its financial structure from Whitmore. Pleadings in a separate lawsuit brought by Whitmore/RMS against Krause and Derrenberger allege that they marketed insurance programs for fast food restaurants in an independent unit despite their affiliation with Whitmore, and accuse them of breaching their fiduciary duty to Whitmore by failing to disclose to Whitmore and its shareholders a reimbursement agreement they had entered into with Zurich allegedly on behalf of the corporation.

Zurich filed the original complaint in January 2004, as against Whitmore and RMS only. [*4]By order dated June 18, 2004, the court (Moskowitz, J.) granted Zurich summary judgment as to liability on the second cause of action for breach of fiduciary duty and the third cause of action for conversion, which are essentially identical to the second and third causes of action in the Amended Complaint. In September 2004 the court granted Zurich's motion to amend the complaint to add, inter alia, the veil-piercing claims against the individual defendants, stating from the bench that the allegations were "adequate for amendment." The proposed Second Amended Complaint differs from the Amended Complaint in that it adds a single additional cause of action seeking to hold defendant Krause directly liable for breach of fiduciary duty.

Discussion

The motions to dismiss are denied except as indicated below with respect to any time-barred portions of the claims for conversion and breach of fiduciary duty.

First, the Amended Complaint sufficiently pleads a claim for breach of the Broker Agreement against the corporate and individual defendants. Although the agreement clause provides for its "automatic" termination upon the sale of RMS absent the appointment of the successor as the "producer" by Zurich, no method of appointment is specified. The record raises substantial issues as to whether Whitmore, and/or RMS as a division of Whitmore, explicitly or implicitly accepted appointment or re-appointment under the Broker Agreement by ratifying it and continuing to operate under its terms as producers. Whitmore's failure to execute the contract is not dispositive, insofar as "[o]ne who accepts and acts under a written agreement is bound by it even though he fails to sign it . . . [a] written contract need not be signed to be binding against a party, so long as the party indicates through performance of its terms or other unequivocal acts that it intends to adopt the contract" (Colonia Ins. A.G. v D.B.G. Property Corp., 1992 WL 204376, *8 [SDNY 1992]); see, Ambassador Ins. Co. v Allied Programs Corp., 165 AD2d 806 [1st Dept 1990]).

Moreover, as noted, paragraph 7(0) of the agreement provides that Zurich could waive strict compliance, or fail to enforce, the contract terms without waiving its rights thereunder. Accordingly, Zurich was not obligated to enforce the termination clause and immediately cease doing business with Whitmore/RMS. Nor does the language in paragraph 7(K) prohibiting assignment of commissions defeat plaintiff's claims. That provision, too, could be waived, and in any event was limited to assignments to third parties. Zurich alleges that Whitmore and RMS were direct parties to the agreement.

The individual defendants may be held liable for

the contractual and other breaches insofar as the veil-piercing claims are adequately pleaded. As a preliminary matter, the court previously upheld those claims in connection with the earlier motion to amend. The record on this CPLR 3211 motion is essentially the same as it was on the prior application.

In any event, to withstand dismissal of allegations of veil-piercing, the plaintiff must plead that the defendants exercised complete domination over the corporation with respect to the transaction in question, and the domination must be used to commit a wrong against the plaintiff (see, Morris v New York Dep't of Finance, 82 NY2d 135 [1993]). Veil-piercing may be shown by, inter alia, (1) the absence of corporate formalities such as the issuance of stock, election or directors or keeping of corporate records, (2) inadequate capitalization, (3) use of funds for personal rather than corporate purposes and (4) the payment or guarantee of the dominated corporations by other parties (see, Shisgal v Brown, 21 AD3d 845 [1st Dept 2005]). A complaint [*5]should be upheld at least at the pleading stage unless it can be said that it is "is totally devoid of solid, nonconclusory allegations" (Int'l Credit Brokerage Co. v Agapov, 249 AD2d 77, 78 [1st Dept 1998]). Zurich has pleaded the elements of veil-piercing and, as noted, supplemented its pleadings with allegations substantiating other abuses of the corporate form. Although defendants contest some of the facts and have submitted evidence of Whitmore's solvency and corporate governance, that proof is more appropriately considered on a summary judgment motion following the completion of discovery.

Defendants Krause and Derrenberger also contend that Zurich's claims for uncollected premiums are barred by the statute of frauds. This defense fails. Zurich does not allege that their liability arose from a guaranty of the insureds' obligations. Rather, it alleges that Whitmore breached a contractual obligation to reimburse it for uncollected funds, and seeks recovery for that breach from the individual defendants on a veil-piercing theory.

All defendants challenge the claims for conversion and breach of fiduciary duty as time-barred. Defendants are correct that the statute of limitations for each of those claims is three years (see, Kaufman v Cohen, 307 AD2d 113 [1st Dept 2003][three-year limitations period for breach of fiduciary duty where monetary damages are sought]; D'Amico v First Union Nat. Bank, 285 AD2d 166 [1st Dept 2001][three year statute of limitations for conversion pursuant to CPLR 214(3)]). Accordingly, plaintiff's recovery, if any, on those causes of action will be limited to claims accruing within three years of the commencement of the action on January 23, 2004. Insofar as plaintiff is proceeding against the individual defendants on a veil-piercing theory, the date of filing as against Whitmore shall be employed (see, Solow v Domestic Stone Erectors, Inc., 229 AD2d 312 [1st Dept 1996]).

Whitmore's assertion that the conversion claim is duplicative of the contract claim is foreclosed by the prior grant of summary judgment against it on that cause of action, and is in any event without merit. A conversion claim may be asserted separately from a contract claim where it arises out of a duty distinct from that imposed by the contract. In particular, as Zurich asserts, a conversion claim arising out of a broker's statutorily mandated fiduciary duty to hold and remit insurance funds under Insurance Law 2120 is not duplicative of a contract cause of action (see, Fireman's Fund Ins. Co. v. Allied Programs Corp., 1993 WL 481344, *8 [SDNY 1993]).

Finally, the motion to amend is granted. Leave to amend is freely granted where the movant makes some evidentiary showing that the amendment has "arguable merit" (Helene-Harrisson Corp. v Moneyline Networks, Inc., 6 AD3d 151, 151 [1st Dept 2004]). Insofar as Krause objections relate to the issues of facial sufficiency and the statute of limitations, they have been addressed above.

Accordingly, it

ORDERED, that the motions to dismiss are denied, except to the extent that the claims for breach of fiduciary duty and conversion accruing prior to January 23, 2001 are dismissed, and it is further

ORDERED, that motion to amend is granted, and it is further

ORDERED, that the Second Amended Complaint in the form attached to plaintiff's [*6]motion papers is deemed served upon the parties, and it is further

ORDERED, that defendants shall answer the Second Amended Complaint within twenty days of service of notice of entry of this order, and it is further

ORDERED, that the motion for a protective order is denied.

Dated: February 7, 2006

ENTER:

_______/S/________________

J.S.C. Footnotes

Footnote 1: Motion sequence number 03, by Zurich for a protective order, to the extent is is not moot, is hereby denied for the reasons set forth in an order dated April 15, 2005 denying an essentially identical motion in a related action, Whitmore Group, Ltd. v Zurich Ins. Co., NY Co Index No 600058/04 (motion sequence number 005).