Commissioners of the State Ins. Fund v Big Apple Intl. Contr. Corp.

[*1] Commissioners of the State Ins. Fund v Big Apple Intl. Contr. Corp. 2009 NY Slip Op 52137(U) [25 Misc 3d 1215(A)] Decided on September 25, 2009 Supreme Court, New York County Solomon, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 September 25, 2009
Supreme Court, New York County

Commissioners of the State Insurance Fund, Plaintiff,

against

Big Apple International Contracting Corp., Defendant.



400601/2007



Plaintiff was represented by Isaac N. Guy Okafor, Esq., of the State Insurance Fund, 199 Church Street, New York, NY 10007, tel. no. 212-312-9813. Defendant Big Apple International Contracting Corp. was represented by Arthur J. Semetis, Esq., 286 Madison Avenue, 14th Floor, New York, NY 10017, tel. no. 212-557-3000.

Jane S. Solomon, J.

In this action, plaintiff is The State Insurance Fund (SIF), suing through its commissioners. As an agency of the State of New York, SIF provides workers' compensation and disability insurance coverage, for a premium, to its policyholders. The defendant is Big Apple International Contracting Corp. (Big Apple), a company doing business in New York. SIF's complaint seeks a judgment against Big Apple for unpaid insurance premiums of $97,289.29, plus interest, and the cost of collection. Big Apple, in its answer, generally denies the allegations of the complaint, and asserts various affirmative defenses.

Two years after the commencement of this action, SIF moves for summary judgment in its favor, pursuant to CPLR 3212, on the grounds that there are no triable issues of fact, and that there is no defense to the claims asserted in its complaint. Big Apple opposes SIF's summary judgment motion, and cross-moves for an order to compel discovery, including deposition of individuals with personal knowledge of the audits conducted by SIF in respect of Big Apple's books and records. For the reasons stated herein, the cross motion is denied, and the relief sought by SIF in its summary judgment motion is granted in part and denied in part.

BackgroundAccording to the affidavit of Annie Itwaru (Itwaru), an underwriter of SIF, Big Apple filed an application for workers' compensation insurance in June 2003, and SIF issued to Big Apple a policy bearing contract number 13624317 (the Policy). Itwaru Affidavit, ¶ 6; Exhibits C (application), D and E (the Policy). The Itwaru Affidavit explains that the cost of insurance is dependent on several factors that are not finalized when an insurance policy is issued, such as the number of insured employees, their job classifications and the payroll amounts being insured by [*2]SIF. Id., ¶ 8. SIF has the right to audit a policyholder's books and records, after policy issuance, to determine the actual employee classifications and the actual payroll amount attributable to each classification. Id., ¶ 9. SIF calculates the premium by multiplying the applicable rates by the actual payroll attributable to each classification. Id. When SIF fails to conduct an audit close to the expiration of a policy period in order to determine an actual premium, it estimates the renewal premium based on the prior policy year's premium. Id., ¶ 10. The estimated premium will thereafter be adjusted based upon a subsequent audit. Id.

SIF seeks to recover from Big Apple the premium balances due, calculated retrospectively by its auditors, for four policy years: 6/27/03 to 6/27/04; 6/27/04 to 6/27/05; 6/27/05 to 6/27/06; and 6/27/06 to 11/30/06, on which date the Policy was cancelled by SIF for the nonpayment of overdue premiums. Id., ¶ 11. According to the Itwaru Affidavit, SIF conducted audits of Big Apple's books and records, and issued and mailed copies of the corresponding audit reports to Big Apple. Id., ¶¶ 13-17; Exhibits F, G, H and I. Copies of the audit worksheets showing the source of information obtained from Big Apple's books and records by SIF's auditor, Olivia McInnis (McInnis), are annexed as Exhibits J, K, L and M, respectively, to the Itwaru Affidavit. Also annexed to the Itwaru Affidavit is a copy of a Statement of Account, which shows SIF's transactions with Big Apple since inception of the Policy, including payments made. Id., ¶ 19; Exhibit N. The Itwaru Affidavit further states that all of the annexed documents are official business records of SIF, which are maintained in the ordinary course of its business, as they are kept or made contemporaneously with its auditor's review of Big Apple's books and records. Id., ¶ 20. A final invoice in the total sum of $97,289.29 was mailed by SIF to Big Apple on or about January 29, 2007. Id., ¶ 21; Exhibit O. SIF's complaint seeks to recover that sum based on causes of action sounding in breach of contract and account stated. Id.,

¶ 12. SIF also seeks interest, and an additional award of $21,403.64, as collection costs pursuant to State Finance Law

§ 18 (5), which represents 22% of the principal sum due and owing. Id.

Big Apple cross-moves for an order requiring SIF to fully respond to a Notice of Discovery and Inspection, and to produce for deposition an individual with personal knowledge of the audits conducted with respect to Big Apple and SIF's underwriting and billing processes. In support of the cross motion, Big Apple submitted, inter alia, the affidavit of Arian Marku (Marku), its president. In his affidavit, Marku asserts, among other things, that (1) Itwaru failed to identify the specific books and records which she relied upon in support of her statements, and that she also failed to attach copies of the books and records which the [*3]SIF auditor relied upon in conducting the audits; (2) he never agreed with SIF's audit reports, and his requests for re-audit were denied; (3) the audit reports are contradicted by Big Apple's books and records, including its payroll and tax records; and (4) the audit reports erroneously classified certain employees, and improperly attributed to Big Apple the payrolls of its affiliate and subcontractors, which have their own workers' compensation policies with SIF (as more fully discussed below). In particular, Marku asserts that, with respect to the periods covered by the audits, Big Apple's records reflect a payroll of $143,330.89, but SIF's audits reflect a payroll of $321,085.00, resulting in a discrepancy of $177,754.11, so that SIF's motion should be denied. Marku Affidavit, ¶ 14.

DiscussionThe Alleged Books And Records Discrepancy

In response to the Marku Affidavit, SIF supplemented the Itwaru Affidavit with the affidavit of McInnis, the auditor who performed the Big Apple audits, and whose name is on the front page of the audit worksheets that are annexed as exhibits to the Itwaru Affidavit. In her affidavit, McInnis states that (1) Big Apple's books and records used for the audits were supplied to her by Marku; (2) at no time did Marku provide any payroll and tax records for the audits; (3) the Big Apple payroll information she used was obtained from its checkbooks and bank statements, which were identified on the last page of the audit worksheets under the heading "supplementary report," as the documents she reviewed; (4) upon the completion of audits, she returned the documents supplied to her, which have since been in the custody and control of Big Apple; (5) Big Apple failed to provide the court with copies of those checkbooks and bank statements that reflected more employees and/or casual laborers (and thus a higher payroll and a higher SIF insurance premium) than those shown on its tax records; and in those instances where the tax records showed a higher payroll, the premium would have been higher if such records were used in the premium calculation; and (6) it is insincere and misleading for Big Apple to argue that its other books and records reflect different amounts than those in the audit reports and worksheets, because the audits and calculated premiums were based upon the documents supplied by Big Apple. McInnis Affidavit, ¶¶ 5-9.

SIF consented to Big Apple's request to file a sur-reply in further opposition to the facts presented in SIF's reply, and leave to do so hereby is granted nunc pro tunc. The sur-reply is made on the affirmation of Big Apple's attorney, and does not refute the facts stated in the McInnis Affidavit.

It is noteworthy that the copies of the tax returns annexed to the Marku Affidavit are unsigned and undated, nor is there an allegation that Big Apple submitted these tax returns to SIF for the audits. Further, contrary to Marku's allegation that his salaries were included in Big Apple's employee payroll, the record shows that his salaries were not so included, and hence no additional premium was assessed. McInnis Affidavit, ¶ 4; Itwaru Affidavit, Exhibits J to M. Moreover, contrary to the allegation that SIF improperly attributed to Big Apple's own payroll [*4]the payrolls of its affiliate, Big Apple Roofing and Construction Corp. (Roofing),[FN1] and certain of its subcontractors (such as DP Consulting Corp. and Arcade Contracting and Restoration, Inc.), the record reflects otherwise; and in those instances where such attributions were made, they were made because neither Big Apple nor the relevant subcontractors produced any certificate or other evidence of workers' compensation insurance at the time of the audits. McInnis Affidavit, ¶¶ 12-14; Itwaru Affidavit, Exhibits J to M.

Furthermore, while Big Apple argues that certain of its office workers were erroneously classified in the audit reports as "roofers" (thus requiring a higher premium), neither the W-2s included as exhibits to the Marku Affidavit, nor the books and records furnished to SIF for the audits, showed what positions these employees held. McInnis Affidavit, ¶ 11. Hence, there is no basis to contend that the audit classification was erroneous. In any event, regardless of Big Apple's contention, the issue of employee classification requires an administrative review, and may not be collaterally raised by way of a defense or otherwise, in an action by an insurer to recover unpaid insurance premiums. Commissioners of The State Insurance Fund v Mascali-Robke Co., Inc., 208 Misc 316, 320 (Sup Ct, NY County 1955), affd 1 AD2d 945 (1st Dept 1956); see also Commissioners of The State Insurance Fund v Kenneth Yesmont & Associates, Inc., 226 AD2d 147 (1st Dept 1996).

Notwithstanding the foregoing, Big Apple argues that SIF's motion should be denied because SIF "failed to take all the necessary measures to review the entirety of Big Apple's records to ensure accurate and complete audits." Big Apple Sur-Reply, ¶ 7. In other words, Big Apple attempts to deflect its failure (deliberate or otherwise) to supply SIF with all of its books and records relevant to the audits by claiming that SIF conducted incomplete audits. Big Apple's argument is unavailing and unpersuasive in light of its failure or inability to refute the assertion made in the McInnis Affidavit that it never supplied proper records to her.

Based on the foregoing, SIF has submitted sufficient evidence to make out a prima facie showing of its entitlement to judgment as a matter of law. On the other hand, Big Apple has failed to demonstrate that SIF's submissions are insufficient or inaccurate, nor has it shown the existence of triable issues of fact with respect to the audits. Commissioners of the State Insurance Fund v Beyer Farms, 15 AD3d 273 (1st Dept 2005)(summary judgment granted in favor of SIF because it submitted, among other things, unrebutted business records, audit reports and resulting invoices). Thus, that part of SIF's motion for summary judgment against Big Apple for the sum of $97,289.29 (as reflected in the SIF final invoice), plus interest in accordance with State Finance Law § 18 (3) and (4), should be granted.

Recovery Of Collection Costs

SIF also seeks summary judgment against Big Apple in the sum of $21,403.64, as and for its collection costs pursuant to State Finance Law § 18 (5), which, according to SIF, represents 22% of the principal amount due and owing to SIF. The statute provides, in relevant part, as follows:

a debtor that fails to make payment ... within ninety days of receipt by the debtor of the first [*5]billing invoice or notice may be assessed an additional collection fee ... not to exceed twenty-two percent of the outstanding debt, which is owed to cover the cost of processing, handling and collection of such debt. The assessed charge may not exceed the agency's estimated cost of processing, handling and collecting such debt.

State Finance Law § 18 (5). The statute has been interpreted as requiring SIF to "establish at least an estimated cost' of the actual collection," and that SIF "may not recover 22% of the debt if that cost is less." Commissioners of State Insurance Fund v Brooklyn Barber Beauty Equipment Co., Inc., 191 Misc 2d 1, 12 (Civ Ct, NY County 2001); see also Commissioners of State Insurance Fund v Kassas, 5 Misc 3d 1012(A), Slip Op 51337(U) (Civ Ct, NY County 2004) (statute does not automatically entitled SIF to collection costs of 22% of principal debt).

In this case, based on the Itwaru and McInnis Affidavits, SIF has established sufficient proof as to its mailing of invoices to Big Apple in the regular course of its business, including the final invoice annexed as Exhibit O to the Itwaru Affidavit. Indeed, copies of some of these invoices, and Big Apple's payment checks for such invoices, are attached as exhibits to the Marku Affidavit. However, SIF has not established that its collection costs actually amounted to 22% of the principal debt owed by Big Apple. Also, SIF's reliance upon the case of Commissioners of State Insurance Fund v Photocircuits Corp. (2 Misc 3d 300 [Sup Ct, NY County 2003]) is misplaced. In Photocircuits, SIF sought to recover only 14% of the principal debt, and the relief sought was unopposed. Id., at 313-314.[FN2] Therefore, that part of SIF's motion for $21,403.64 as collection costs is denied.

Cross Motion for Discovery

Opposing SIF's summary judgment motion, Big Apple argues, in the alternative, that SIF's motion is premature because Big Apple has not had an opportunity to conduct discovery. In its cross motion, Big Apple seeks an order for additional discovery, including depositions.

Contrary to Big Apple's allegation that it has not had an opportunity to conduct discovery, prior correspondence between the parties reflects otherwise. For example, in a letter dated August 21, 2007 from SIF's in-house counsel (Issac Okafor), to Big Apple's counsel (Michael McDermott), Okafor wrote:

Since [SIF] has responded completely and fully to [Big Apple's Notice of Discovery and Inspection,] and provided you with names of both the Auditor [Itwaru] and Underwriter [McInnis] assigned to the defendant's cancelled policy, there is no reason why this matter cannot proceed with the deposition of a witness for the plaintiff ... If we do not hear from you within seven days from the date of this letter, we will assume that you no longer desire to depose the plaintiff's witness. In that event, we will move forward with litigation without further recourse to you.

The above letter is annexed as Exhibit 5 to the McDermott Affirmation in support of Big Apple's [*6]opposition to SIF's motion for summary judgment. In his letter dated September 4, 2007, McDermott replied: "[P]lease produce Olivia McInnis on October 1, 2007 and Annie Itwaru on October 10, 2007 [for deposition] in our offices ...." Okafor Reply Affirmation, Exhibit R. In response, Okafor wrote in his letter dated October 18, 2007: "[P]lease be advised that ... Olivia McInnis is available for deposition on November 8, 2007, November 13, 2007, or November 19, 2007 ... Annie Itwaru is available for deposition on November 14, 2007 or November 29, 2007." Id. Eventually, Big Apple agreed to depose McInnis on November 26, 2007, and Itwaru on November 29, 2007. Id., ¶ 17. However, Big Apple decided to depose such witnesses only in SIF's action against Roofing (footnote 1, supra), and no attempt was made to depose witnesses here until SIF filed the instant motion for summary judgment. Id.

Big Apple does not dispute the summary of transpired events, as detailed in the Okafor Reply Affirmation. Instead, it accuses SIF of "attempting to obfuscate the discovery process in the instant action" with the discovery process in the action against Roofing. Big Apple's Sur-Reply, ¶ 19. Such accusation is unfounded, especially where Okafor's letters referenced the instant action, but McDermott's letters referenced depositions to be taken in both actions. Also noteworthy is the fact that Big Apple's cross motion is brought more than 16 months after the last time it attempted to depose witnesses, and only after SIF sought summary judgment. Further, even though Marku alleges that he had discussed the audits with various SIF representatives, and requested re-audits, he failed to submit any evidence that Big Apple ever objected to the premiums sought until SIF started this action. Thus, Big Apple's argument that it should be allowed more time to discover facts that are allegedly essential to its defense is unpersuasive, where its "own voluntary inaction is the cause of the lack of knowledge ... ." Selznick v Ordan Corp., 202 AD2d 268, 269 (1st Dept 1994), citing Moxon v Barbour, 106 AD2d 558, 559 (2d Dept 1984)(court denied defendant's motion for discovery of third-party defendant where third-party action was brought more than eight months earlier but defendant failed to seek discovery). Hence, the relief sought in Big Apple's cross motion is denied.

Accordingly, it is

ORDERED that the relief sought in defendant's cross motion is denied; and it is further

ORDERED that the branch of plaintiff's motion that seeks summary judgment against defendant for collection costs is granted as to liability only, and the issue of the amount of reasonable attorneys fees and costs incurred by SIF in collection, not to exceed 22% of the principal amount owed, is referred to a 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 Special Referee, or another person designated by the parties to serve as referee, shall determine the aforementioned issue; and it is further

ORDERED that the branch of plaintiff's motion that seeks summary judgment against defendant in the principal amount of $97,289.29 is granted, together with interest from January 27, 2007, together with costs and disbursements to be taxed by the Clerk upon submission of an appropriate bill of costs, provided that entry of judgment shall be held in abeyance pending the report and recommendations of the Special Referee and a motion pursuant to CPLR 4403 or receipt of the determination of the Special Referee or the designated referee; and it is further

ORDERED that a copy of this order with notice of entry shall be served by hand within 45 days on the Referee Clerk in the Motion Support Office (Room 119) to arrange a date for the [*7]reference to a Special Referee.

Dated: September, 2009

ENTER:

____________________

J.S.C. Footnotes

Footnote 1: SIF also commenced a separate action against Roofing in this court, bearing index number 400600/2007. In that action, SIF has moved for an order to compel Roofing to produce its books and records so as to enable SIF to compute the premiums due.

Footnote 2: On appeal, the decision was reversed on other grounds. Commissioners of State Insurance Fund v Photocircuits Corp., 20 AD3d 173 (1st Dept 2005) (issue of fact as to whether SIF failed to meet its obligation to perform its duties to insured in a reasonable manner, i.e., SIF paid benefit claims to a known imposter, precluded summary judgment in its favor).