Sbar v District Council 37 Health & Sec. Fund Trust

[*1] Sbar v District Council 37 Health & Sec. Fund Trust 2006 NY Slip Op 51246(U) [12 Misc 3d 1176(A)] Decided on May 15, 2006 Supreme Court, New York County Edmead, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. As corrected in part through July 20, 2006; it will not be published in the printed Official Reports.

Decided on May 15, 2006
Supreme Court, New York County

Louis Sbar, Plaintiff,

against

District Council 37 Health and Security Fund Trust, Defendant.



116321/05

Carol R. Edmead, J.

Petitioner, Louis Sbar, is a participant of the respondent, District Council 37 Health and Security Fund Trust (the "Trust"), which is a union health benefit trust. Petitioner seeks, pursuant to Article 78, or in the alternative, summary judgment in the event this action is converted to a plenary action, attorneys' fees from the Trust resulting from an underlying action entitled Rosenthal v Roberts (the "Rosenthal action"), brought in the Southern District of New York.

In Rosenthal, petitioner sought to enjoin the then-trustees of the Trust from effectuating an amendment which transferred the power to appoint trustees from the Executive Board to the Executive Director of the Trust. In July 2005, the Southern District Court of New York entered a judgment finding a breach of fiduciary duty and permanently voided the amendment. When petitioner moved in the District Court to recover attorneys' fees from the Trust, the District Court denied such application, on the ground that the Trust was not a party before it.

Consequently, petitioner argues that having brought a successful action to protect the Trust assets, he is entitled to have his counsel's fees paid from the Trust as a matter of equity pursuant to the common law of trust. Petitioner argues that under common law, there is a general principle that a trust estate must bear the expenses of its administration. Furthermore, petitioner argues that since the Trust received a "substantial benefit" from petitioner's litigation in Rosenthal, its members and participants should, through their collective entity, pay attorneys' fees. Petitioner also contends that the District Court's denial of attorneys' fees does not have res judicata effect since (1) the claim was raised as part of a post-judgment application, which was denied on procedural grounds, and not determined on the merits, and (2) the Trust was not in

privity with the Rosenthal defendants. Petitioner claims that it demanded payment of attorneys' fees from the Trust and payment has not been made.

In response, the Trust cross moves to dismiss the petition for failure to state a cause of action upon which relief can be granted (CPLR 3211(a)(7)). The Trust argues that it is not a "body or officer" and does not fall within the definition of a "party" under Article 78, whose decisions may be reviewed under Article 78 analysis. Unlike other agents and instrumentalities [*2]of the state and local government, or corporations or other state-chartered organizations which are beholden to the state for the exercise of its functions, the Trust herein is an unincorporated trust fund governed by a private Trust Agreement between District Counsel 37 and the Trust.

The Trust further argues that even assuming the Trust is a proper party to an Article 78 proceeding, this proceeding is premature because there is no allegation that the Trust has made a final and binding decision on whether to provide attorneys' fees, or that petitioner exhausted his administrative remedies before seeking judicial relief. Although an Article 78 proceeding may proceed in the absence of a final decision where the relief sought is by way of prohibition or by way of mandamus to compel performance of a duty enjoined by law, the attorneys' fees sought herein are not mandated by law.

Further, the sole questions reviewable under Article 78 are either inapplicable or not alleged. The petition does not allege that the Trust exceeded its jurisdiction, that a hearing was held by the Trust, that a proceeding was held by "state review officer," or that a decision was arbitrary or capricious or an abuse of discretion.

Finally, the Trust contends, petitioner failed to raise any contractual or statutory basis for an award of attorneys' fees as required under New York caselaw.

In reply, petitioner opposes dismissal, arguing that the Trust is not an unincorporated association, but provides health benefits for City of New York and not-for-profit employees. Also, since the Trust functions through a board, it is the type of organization which makes administrative decisions, which therefore, are subject to review under Article 78. Further, the Trust is governed by New York State Insurance Law and subject to audit by the City Comptroller.

Petitioner also argues that under CPLR 103(c), once the Court has jurisdiction over the parties, the proceeding shall not be dismissed solely because it was not brought in the proper forum. Further, there is no appeals process or additional administrative process which petitioner can address or has failed to exhaust.

Thus, the attorneys' fee issue is properly addressable under "Article 7803(I)."

Analysis

To the degree that the Trust argues that petitioner's application for Article 78 relief fails to state a cause of action, the Trust is correct. Article 7802(a) explicitly enumerates who may be made parties to an Article 78 proceeding. A voluntary, unincorporated association is not a body or officer against whom an Article 78 proceeding can be maintained (Ivey v Coughlin, 111 AD2d 648, 490 NYS2d 210 [1st Dept 1985] [Article 78 petition seeking reinstatement as a correction officer as against Council 82, AFSCME, AFL-CIO dismissed]; Matter of Fraser v Patrolmen's Benevolent Assn. of City of NY, 179 AD2d 563, 578 NYS2d 574 [1st Dept 1992] [mandamus does not lie against a private association]). The Verified Petition states that the Trust is an unincorporated entity which exists pursuant to a private contractual agreement. It cannot be disputed that the fund from which petitioner seeks payment of his attorneys' fees was created and governed under a trust agreement entitled "District Council 37 Health and Security Plan Trust." As such, the Trust does not owe its existence to a state charter, and therefore, is not subject to Article 78 review (see Alexander, Vincent C., Practice Commentaries, CPLR 7802, C7802:1, McKinney's Cons. Laws [1994] citing Weidenfled v Keppler, 84 AD 235, 239 [1st Dept 1093]).

Furthermore, and contrary to petitioner's contention, petitioners failed to allege any final [*3]determination made by the Trust. Article 7801(1) states that Except where otherwise provided by law, a proceeding under this article shall not be used to challenge a determination: 1. which is not final or can be adequately reviewed by appeal to a court or to some other body or officer or where the body or officer making the determination is expressly authorized by statute to rehear the matter upon the petitioner's application unless the determination to be reviewed was made upon a rehearing, or a rehearing has been denied, or the time within which the petitioner can procure a rehearing has elapsed

In determining a motion to dismiss for failure to state a cause of action, the Court's role is ordinarily limited to determining whether the complaint states a cause of action (Frank v DaimlerChrysler Corp., 292 AD2d 118, 741 NYS2d 9 [1st Dept 2002]). The standard on a motion to dismiss a pleading for failure to state a cause of action is not whether the party has artfully drafted the pleading, but whether deeming the pleading to allege whatever can be reasonably implied from its statements, a cause of action can be sustained (see Stendig, Inc. v Thom Rock Realty Co., 163 AD2d 46 [1st Dept 1990]; Leviton Manufacturing Co., Inc. v Blumberg, 242 AD2d 205, 660 NYS2d 726 [1st Dept 1997]). When considering a motion to dismiss for failure to state a cause of action, the pleadings must be liberally construed (see, CPLR §3026), and the court must "accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit into any cognizable legal theory" (Leon v Martinez, 84 NY2d 83, 87-88, 614 NYS2d 972, 638 NE2d 511 [1994]). Given that the Trust is not a proper party to which Article 78 applies, and petitioner failed to allege any final determination made by the Trust, this Court determines that this action is improperly brought pursuant to Article 78.

However, the Court can convert this proceeding to a plenary action to address the relief sought (CPLR 103(c) and 104). The Trust has addressed the merits of petitioner's application, and has not opposed conversion. Therefore, the Court will address the merits of petitioner's summary judgment application for attorneys' fees.

To obtain summary judgment, the movant must establish its cause of action or defense sufficiently to warrant the court as a matter of law in directing judgment in its favor (CPLR § 3212 [b]). This standard requires that the proponent of a motion for summary judgment make a prima facie showing of entitlement to judgment as a matter of law, by advancing sufficient "evidentiary proof in admissible form" to demonstrate the absence of any material issues of fact (Winegrad v New York Univ. Med. Ctr., 64 NY2d 851, 853 [1985]; Zuckerman v City of New York, 49 NY2d 557, 562 [1980]; Silverman v Perlbinder, 307 AD2d 230, 762 NYS2d 386 [1st Dept 2003]; Thomas v Holzberg, 300 AD2d 10, 11, 751 NYS2d 433, 434 [1st Dept 2002]).

Alternatively, to defeat a motion for summary judgment, the opposing party must show facts sufficient to require a trial of any issue of fact (CPLR §3212 [b]). Thus, where the proponent of the motion makes a prima facie showing of entitlement to summary judgment, the burden shifts to the party opposing the motion to demonstrate by admissible evidence the existence of a factual issue requiring a trial of the action, or to tender an acceptable excuse for his or her failure to do so (Vermette v Kenworth Truck Co., 68 NY2d 714, 717 [1986]; Zuckerman v City of New York, supra , 49 NY2d at 560, 562; Forrest v Jewish Guild for the Blind, 309 AD2d [*4]546, 765 NYS2d 326 [1st Dept 2003]). Like the proponent of the motion, the party opposing the motion must set forth evidentiary proof in admissible form in support of his or her claim that material triable issues of fact exist (Zuckerman, supra at 562).

Under the prevailing rule in New York, known as the "American Rule," attorneys' fees are considered incidental to litigation and may not be recovered unless supported by statute, court rule or written agreement of the parties (Hooper Assoc., Ltd. v AGS Computers, 74 NY2d 487, 491, 549 NYS2d 365 [1989]; A.G. Ship Maintenance Corp. v Lezak, 69 NY2d 1, 5, 511 NYS2d 216 [1986]; Green v Potter, 51 NY2d 627, 629-630, 435 NYS2d 695 [1980]). Further, an attorney may not recover legal fees from persons other than his client, merely because such persons were benefitted by his services (In re Loomis, 273 NY 76, 6 NE2d 103; Attorney General v North American Life Ins. Co., 91 NY 57; In re Hurewitz' Will, 174 Misc 182, 20 NYS2d 432; In re Winburn's Estate, 160 Misc 49, 289 NYS 717).

However, there are certain exceptions to the American Rule, including stockholders' derivative actions brought on behalf of their corporation, which is made a nominal defendant; class or representative actions brought on behalf of all members of a class for whose benefit the plaintiff may properly sue; and where the plaintiff's lawsuit has obtained a decree which creates a fund in which others may share or where plaintiff has rendered services in connection with such a fund which benefit other persons interested in the fund, also known as the "common-fund" doctrine (Realty Equities Corp. of NY v Gerosa, 30 Misc 2d 481, 209 NYS2d 446 [NY Sup Ct 1960]; Kantrowitz, Goldhamer & Graifman, P.C. v New York State Elec. & Gas Corp., 27 AD3d 872, 810 NYS2d 550, 2006 [3d Dept 2006]).

The common-fund doctrine has been held to be available to a party who successfully litigates a suit which results in the creation or preservation of a common fund to be distributed to a class of additional individuals (see e.g. Gerzof v Sweeney, 22 NY2d 297, 308, 292 NYS2d 640, 239 NE2d 521 [1968]; Nance v Town of Oyster Bay, 54 Misc 2d 274, 275, 282 NYS2d 324 [1967]; Chase v City of Syracuse, 34 Misc 144, 145, 69 NYS 469 [1901]). Once applied, a counsel fee is allowed to the party, to be taken from the fund itself, and "is justified by the equitable need to apportion expenses among all who have benefitted from the suit" (see Kantrowitz, Goldhamer & Graifman, P.C. v New York State Elec. & Gas Corp., 27 AD3d 872, supra citing Nance v Town of Oyster Bay, supra at 275, 282 NYS2d 324). The doctrine has also been held applicable where the litigation does not confer a monetary award on others but nonetheless imparts some other "substantial benefit on the members of an ascertainable class"(Seinfeld v Robinson, 246 AD2d 291, 676 NYS2d 579 [1998] citing Mills v Electric Auto-Lite Co., 396 US 375, 90 SCt 616, 24 LEd2d 593 [1970] [the creation of a common fund is no longer a prerequisite to an award of counsel fees]; Kopet v Esquire Realty Co., 523 F2d 1005 [2d Cir 1975]). The "substantial benefit rule" has arisen and been articulated primarily in a series of Federal cases (Seinfeld v Robinson (246 AD2d 291, 676 NYS2d 579 [1st Dept 1998]).

Assuming that attorneys' fees might be permissible in New York in the absence of a statute, court rule, or contract between the parties, it is clear that recovery in a common-fund case is limited to "exceptional cases" in which "dominating reasons of justice" require the allowance of counsel fees (Realty Equities Corp. of NY v Gerosa, supra citing Sprague v Ticonic Natl. Bank, 307 US 161, 167, 59 SCt 777, 780, 83 LEd 1184). Seinfeld v Robinson (246 AD2d 291, 676 NYS2d 579 [1st Dept 1998]) outlined the [*5]development of the common-fund doctrine since its creation by the United States Supreme Court in Trustees of the Internal Improvement Fund v Greenough (105 US 527, 26 LEd 1157 [1881]). In Seinfeld, a shareholder derivative action, the issue was whether the benefit conferred on American Express ("Amex") by virtue of the derivative action was sufficiently "substantial" to warrant an award of attorneys' fees. The Court reviewed the "substantial benefit rule," and the nature and extent of the benefits that have been held sufficient to justify awards of attorneys' fees. The Court noted that the resolution in Amex provided that no outside investigator shall be hired by Amex at a cost of $150,000 or more per engagement "unless the procedures set forth in this Resolution are met." These procedures, the Court stated, "required the company and outside investigators to enter into a written contract, to be approved by the company's general counsel, and require Amex to preserve records of all contracts with and payments to outside investigators, including all related expense vouchers. It is designed to prevent the retention of outside investigators in the behind-the-scenes manner as previously done. "Essentially, the resolution now ensures that an ill-conceived plan like that which led to Amex's most embarrassing public apology in 1988 could not be so secretly undertaken" and "will work to "eliminate clandestine activities of questionable legality . . . ." As such, petitioners were held to have furnished a benefit to all shareholders.

This Court determines that the underlying litigation is such a case. In addressing the merits of plaintiff's request for injunctive relief in Rosenthal, the Southern District Court found that the amendment adopted by the Rosenthal defendants was an "unlawful attempt by the defendants to structurally entrench themselves and bypass the wishes of the board with respect to management of the trust" and by passing the amendment, the defendants "violated their fiduciary duty to the trust." Further, by excluding the plaintiffs therein from making "trust-related decisions such as appointing and removing trustees" the Rosenthal defendants affected the proper administration of the Trust, and its ability to serve the 150,000 city employee participants. The type of conduct the underlying plaintiffs were successful in curtailing benefitted the Trust, which arguably consisted of $250 million in assets, as well as its participants. Therefore, this Court determines that the results achieved by the petitioner are sufficient to support an award of attorneys' fees. The issue as to the appropriate amount of the award for attorneys' fees is referred to a referee.

Based on the foregoing, it is hereby

ORDERED that the application by petitioner pursuant to Article 78, or in the alternative, summary judgment in the event this action is converted to a plenary action, for an award of attorneys' fees against respondent, District Council 37 Health and Security Fund Trust resulting from an underlying action entitled Rosenthal v Roberts is granted, to the extent that this action is shall be converted to a plenary action pursuant to CPLR 103(c) and 104, and attorneys' fees shall be awarded; and it is further

ORDERED that the amount of attorneys' fees to which petitioner is entitled is referred to a Special Referee to hear and report with recommendations, except that, in the event of and upon the filing of a stipulation of the parties, as permitted by CPLR 4317, the Referee, or Special Referee, or another person designated by the parties to serve as referee, shall determine the aforesaid issue; and it is further

ORDERED the movant shall move pursuant to CPLR 4403 within 30 days of receipt of [*6]the determination of the Special Referee or the designated referee; and it is further

ORDERED that petitioner shall serve a copy of this order with notice of entry on all parties and the Special Referee Clerk, Room 119M, within 30 days of entry to arrange a date for the reference to a Special Referee.

This constitutes the decision and order of the Court.

Dated May 15, 2006ENTER: _______________________, J.S.C.