Frelinghuysen Morris Found. v Axa Art Ins. Corp.

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Frelinghuysen Morris Found. v Axa Art Ins. Corp. 2013 NY Slip Op 33607(U) October 18, 2013 Sup Ct, New York County Docket Number: 603015/09 Judge: Barbara R. Kapnick Cases posted with a "30000" identifier, i.e., 2013 NY Slip Op 30001(U), are republished from various state and local government websites. These include the New York State Unified Court System's E-Courts Service, and the Bronx County Clerk's office. This opinion is uncorrected and not selected for official publication. [*FILED: NEW YORK COUNTY CLERK 10/22/2013 1] INDEX NO. 603015/2009 NYSCEF DOC. NO. 55 RECEIVED NYSCEF: 10/22/2013 SUPREME COURT OF THE STATE OF NEW YORK NEW YORK COUNTY PRESENT: BARBARA fl. KAPNICK PART~ Justice Index Number : 603015/2009 FRELINGHUYSEN MORRIS vs. AXA ART INSURANCE CORPORATION SEQUENCE NUMBER : 001 INDEX N O . - - - - MOTION DATE _ _ __ MOTION SEQ. NO. PARTIAL SUMMARY JUDGMENT The following papers, numbered 1 to _ _ , were read on this motion to/for _ _ _ _ _ _ _ _ _ _ _ _ __ Notice of Motion/Order to Show Cause - Affidavits - Exhibits Answering Affidavits - Exhibits---------------- Replying A f f i d a v i t s - - - - - - - - - - - - - - - - - - - - I No(s)._ _ _ _ __ I No(s). - - - - 1No(s). - - - - - Upon the foregoing papers, It Is ordered that this motion is w (.) MOTION JS DECID!m IN ACCORDANCE WITH ACCOMPANYING MEMORAr\'JUM DECISION j:: ::::> .., "' g c w 0::: 0::: w w LL 0::: >- ~ ..J z LL .... (!) 3; (!) ...J ~ ::::> 0 <( (.) w w 0::: w z 0::: - "' 0 ; - 31' w ...J "' ...J <( 0 (.) z 0 LL ~ .... ~ ~ 0::: 0 0 :::!: LL Dated: (O~~b /I ~---___::._ _ __,,J.S.C. _ _ __ \__ ~~~~"~~ ~ 1. CHECK ONE:..................................................................... [J CASE DISPOSED 2. CHECK AS APPROPRIATE: ........................... MOTION IS: [ j GRANTED 3. CHECK IF APPROPRIATE: ................................................ 0 DENIED CJ SETILE ORDER =DO NOT POST ~ON:FINAtil~OSITION ~RANTED IN PART [l OTHER C SUBMIT ORDER 0 FIDUCIARY APPOINTMENT ~-J REFERENCE [* 2] SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK IAS PART 39 ---------------------------------------x FRELINGHUYSEN MORRIS FOUNDATION, DECISION/ORDER Index No. 603015/09 Motions Seq. Nos. 001 and 002 Plaintiff, - against AXA ART INSURANCE CORPORATION, Defendant. ---------------------------------------x BARBARA R. KAPNICK, J.: Motion sequence numbers 001 and 002 are consolidated herein for disposition. In motion sequence 001, plaintiff seeks partial summary judgment, pursuant to CPLR 3212, for liability only on its cause of action for breach of contract, with respect to forty-one works of art that were owned by plaintiff and sold pursuant to a consignee agreement. In motion sequence 002, defendant seeks summary dismissing plaintiff's Complaint in its entirety. judgment Alternatively, defendant seeks an order compelling non-party Cravath, Swaine & Moore LLP to provide documents responsive to defendant's January 6, 2012 subpoena duces tecum. [* 3] Background Plaintiff Frelinghuysen Morris Foundation ("FMF") is a private operating foundation, organized as a trust under the laws of the State of New York, with its principal place of business in Lenox, (Compl ~ 1.) FMF is named after L.K. Morris and his Massachusetts. wife who Estelle died Compl. ~ "Suzy" 1975 in Frelinghuysen, and Morris' 4). abstract respectively. 1988, will American bequeathed all including unsold paintings he had created, artists (Beshar Aff. of his ~ 2, property, to his widow, who in turn created FMF and left to it the artworks that she owned at the time of her death. ~~ (Compl. 5, 7.) The sole trustees of FMF, who are also the executors of the Frelinghuysen estate, are Christine Beshar ("Beshar") and T. (or Thomas) Kinney ("Kinney"), who is domiciled in Massachusetts. Commencing in 1995' pursuant to Frelinghuysen ~ (Id. written 8.) consignment agreements, plaintiff from time to time delivered works of fine art created by Morris and Estelle Frelinghuysen into the possession of Salander-0' Reilly Lawrence B. Galleries Sa lander ("the Gallery") ("Salander") consignment for exhibition and/or sale. and its (collectively, (Id.~ terms of the written consignment agreements, 9.) principal, "SOG") , on Pursuant to the SOG was required to remit to plaintiff 60% of the proceeds of any sale of the consigned 2 [* 4] artworks, with the price of each work to be agreed upon in advance with plaintiff. (Id. <JI 12.) Plaintiff claims that in October 2007, it learned for the first time from news articles about the court-ordered closure of the Gallery in response to a consignor's lawsuit. (Compl. <JI 15.) FMF alleges it learned through its own investigation that SOG had secretly sold or otherwise disposed of forty-one artworks owned by plaintiff and consigned by it to SOG (Id. On October 26, against SOG 2007, inter for, plaintiff brought suit in this Court alia, conversion, Index No. stayed early November were commenced in proceedings 19.) <JI breach 60 3 5 63 /07 declared personal bankruptcy. of fiduciary (the "Action") . 2007, when duty and The Action was involuntary bankruptcy against the Gallery, (Id. 18.) Plaintiff asserts that <JI and Salander almost contemporaneously with its filing of the Complaint in the prior Action, it moved for a seizure order to recover any unsold works of art. Plaintiff further contends that shortly after it filed the prior Action, the Manhattan District Attorney searched the Gallery premises, records as as well as part of Salander' s a criminal townhouse, and seized business investigation, 3 and subsequently [* 5] arrested Salander. (Id. ':IT When Salander pleaded guilty to 1 7.) grand larceny in 2010, included in his allocution was an admission that he stole property from FMF with a value of approximately $2.1 million. (Sentencing Tr. 25:7-13, March 18, 2010.) 1 Plaintiff notified defendant of its potential loss under AXA's Commercial "Policy") Inland Marine policy, on or about October 23, No. 01-333-20-97-00308 2007, coverage by letter dated June 13, 2008 (the and defendant declined (the "disclaimer letter"). In the disclaimer letter, defendant stated that: (1) the alleged loss was not a fortuitous physical loss of the artwork; (2) the works of art were seized bi the order of a governmental authority (the New York State Court) and, therefore, claims for it were excluded under the Policy; and (3) the works of art that were still in Salander's possession at the time that the Gallery was closed could be recovered through a protocol that had been established to resolve claims of ownership for those works. Plaintiff seeks partial summary judgment on liability only for the defendant's breach of the policy as to the forty-one works of art that Salander and the Gallery sold prior to the close of the Gallery. Defendant opposes plaintiff's motion, and separately moves 1 Plaintiff contends that neither Salander nor the Gallery have made any restitution to it, nor has any of the art been recovered. 4 [* 6] for summary judgment dismissing the Complaint, contending that this action is time-barred, in that the Policy requires an insured to commence a legal action within two years of learning of its loss. Additionally, defendant maintains that the Policy only covers physical loss or damage to the works of art, and that of the fortyone works of art that Salander, plaintiff asserts none suffered were physical converted by the Gallery and loss or damage; rather, those works of art duly passed to third-party bona fide purchasers for value. Defendant fortuitous nor constructive further argues accidental, notice of as the that the plaintiff alleged either Gallery/Salander's loss had was not actual or misconduct long before plaintiff gave notice to AXA and should have investigated and taken action to remove the works from this consignee. Finally, defendant contends that once these forty-one works of art were consigned to Salander and then sold to third parties, plaintiff no longer had an insurable interest in them as required for recovery under the Policy. 5 [* 7] The AXA Policy The Policy, which provides Museum Coverage, was issued to "The George and Suzy Frelinghuysen Morris Foundation," for the term of January 10, 2007 through January 10, 2008. 2 $30,000,000 for (with a $25,000 deductible), "Covered Property" 3 located at The policy limit was and contained insurance 159 West St, Lenox, Massachusetts, as well as coverage at unnamed locations and while in transit. Coverage is, however, limited to "Covered Property" in which the named insured had an "Insurable Interest." 4 "Loss" is defined as "accidental loss or damage" (Policy at General Conditions, Section F), and the "Covered Causes of Loss" 2 The initial policy had commenced in 1995, and had been renewed annually. 3 "Covered property" is defined in the policy as "property consisting of objects of art or rarity or historic merit of every nature and description, and their frames, crates, cases, and packing materials." (Policy at Museum Coverage, Section A.1. (b).) 4 Included within the definition of "Insurable Interest" is: "(1) Property owned by you; (2) Property of others for which you have agreed prior to 'loss' to insure; (3) Property of others offered as gifts to you or for sale to you and while waiting formal acceptance by the Trustees or other authorized representatives; (4) Your interest in jointly owned property, but only to the extent of your interest at the time of 'loss'." (Policy at Museum Coverage, Section A.l. (a).) 6 [* 8] under the policy are "all risks of physical loss or damage to property insured hereunder unless the 'loss' is excluded in Section B-Exclusions." (Id. at Museum Coverage, Section A.5.) One of the exclusions is entitled "Governmental Action," which states in relevant part: "Seizure or destruction of property by order of governmental authority." (Id. at Museum Coverage, Section B.1. (b).) In the event of a loss, plaintiff was required to "[a]s soon as possible, give [defendant] a description of how, when and where the 'loss' occurred." (Id. at Commercial Inland Marine Conditions, Loss Conditions, Section C.3.) Regarding "Concealment, Misrepresentation or Fraud," the Policy states: "This coverage is void in any case of fraud by you relating to it. It is also void if you intentionally conceal or misrepresent a material fact concerning: 1. This coverage; 2. The Covered Property; (Id. or 3. Your interest in the Covered Property." at General Conditions, Section A.) Finally, with respect to "Legal Action Against [Defendant]", the policy provides the following: "[n] o one may bring a legal action against [defendant] under this coverage unless: 1. There has 7 [* 9] been full compliance with all the terms of the coverage; [and] 2. The action is brought within 2 years after [the plaintiff] [has] knowledge of the 'loss'." (Id. at General first Conditions, Section B.) Discussion "The proponent of a summary judgment motion must make a prima facie showing of entitlement to judgment as a Alvarez v Prospect Hosp., 68 NY2d 320, 324 (1986) function of a credibility court deciding a determinations or 18 NY3d 499, 505 law." "It is not the summary judgment motion to make findings identify material triable issues of fact" Corp., matter of [2012]), of fact, but rather to (Vega v Restani Constr. because summary judgment is a drastic remedy that should not be invoked where there is any doubt as to the existence of a triable issue or when the issue is even arguable. 395, 404 See Sillman v Twentieth Century-Fox Film Corp., 3 NY2d (1957); see also DuLuc v Resnick, 224 AD2d 210 (1st Dept 1996) . Timely Commencem~nt of this Action Prior to examining whether plaintiff's instant claim for loss of the forty-one sold works of art is covered under the Policy, this Court must examine whether or not, pursuant to the terms of the Policy, plaintiff tendered a timely claim. 8 [* 10] The Policy requires that an insured bring legal action "within 2 years after [the plaintiff] first [has] knowledge of the 'loss'." Although this action was commenced within two years of plaintiff giving the October 23, 2007 notice of its potential loss, defendant asserts that plaintiff's trustees had actual or constructive knowledge of the potential claims long, perhaps even years, before such notice was given. Plaintiff asserts, however, that even if plaintiff's trustees were aware of reasons to be suspicious of the Gallery or Salander, defendant waived this defense because there was no mention of it in the disclaimer letter. "A notice of disclaimer must provide a claimant with a very specific ground upon which the disclaimer is predicated. . A ground not raised in the letter of disclaimer may not later be asserted as an affirmative defense." Benjamin Shapiro Realty Co. v 389, Agricultural Ins. Co., 287 AD2d 389 (1st Dept 2001) (internal citation omitted) Although defendant contends that it only became aware of the extent of plaintiff's prior knowledge of Salander and the Gallery's possible misdeeds through the trustees' Examinations Before Trial and other discovery conducted after the June 13, 2008 disclaimer letter, plaintiff correctly maintains that defendant sent its disclaimer letter almost eight months after being notified about 9 [* 11] the potential loss and after it had conducted an extensive investigation. Further, the disclaimer letter does not contain a reservation of rights, alerting plaintiff that it was considering additional reasons to disclaim coverage. Accordingly, defense that this plaintiff Court finds failed to that timely defendant commence waived the its instant action. Concealment of Material Facts Defendant additionally seeks dismissal of this action based upon plaintiff's concealment of material facts which, pursuant to the terms in the "General Conditions" of the Policy, voids coverage for the alleged allegation that loss. Without ruling on the plaintiff concealed material validity of facts, this the Court holds that any such defense is waived, as it also was not included within the disclaimer letter, and defendant did not reserve its rights to add further grounds upon which it might decline coverage after further investigation. 10 [* 12] Breach of Contract Plaintiff seeks partial summary judgment on its sole cause of action for breach of contract with respect to the forty-one works of art that were sold by Salander and the Gallery. "[A] policyholder bears the initial burden of showing that the insurance contract covers the loss" (Roundabout Co. Theatre v Continental Cas. Co., 302 AD2d 1, 6 [1st Dept 2002]), a principle that does not change when that policy covers "all risks." See United States Dredging Corp. v Lexington Ins. Co., 99 AD3d 695, 696 (2d Dept 2012). Plaintiff contends that the works of art were "Covered Property" within the meaning of the Policy, and that the loss it sustained was included within the "Covered Causes of Loss" therein. Under New York law, "[w]here the terms of an are clear and unambiguous, interpretation of matter of law for the court." in~urance those terms policy is a Town of Harrison v National Union Fire Ins. Co. of Pittsburgh, Pa., 89 NY2d 308 (1996), rearg den 89 NY2d 1031 (1997). Clear and unambiguous provisions are their plain and ordinary meaning" v Annunziata, 67 NY2d 229, 232 (United States Fid. "given & Guar. Co. (1986]), and ambiguous provisions 11 [* 13] are construed in favor of the insured. Id.; see also Handelsman v Sea Ins. Co., 85 NY2d 96, 101 (1994). The Loss A loss under the Policy is defined as damage." "accidental loss or Defendant contends that the loss for which plaintiff is attempting to recover was not fortuitous as to the plaintiff. "[A] s a matter of law [,] insurance coverage, even under an all risk policy, extends only to fortuitous losses II Renaissance Art Investors, LLC v AXA Art Ins. Corp., 102 AD3d 604, 605 (1st Dept. 2013), lv den 21 NY3d 855 (2013), Marine Corp. v Poland, 46 FRO 81, 87 [SONY 1969]). (quoting Redna "Whether or not a loss is fortuitous, however, is a legal question to be resolved by the Court, and the characterization of a loss as 'fortuitous' is a legal conclusion to be distinguished from the facts upon which it is based." 46 FRO at 87. Redna Marine Corp. v Poland, Under Insurance Law § 1101 (a) (2), a "[f] ortuitous event" means "any occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party." "happening Maintenance, by Fortuitous has been defined in this context as chance Inc., or accident." 14 Misc 3d 963, 12 968 See Wider v Heritage (Sup Ct, NY Co 2007); see [* 14] also 80 Broad St. 706, 707 Co. v United States Fire Ins. (Sup Ct, NY Co 1975), affd 1 54 AD2d 888 Co., 88 Misc 2d (1st Dept 1976). "As such, losses that result from inherent defects, ordinary wear and tear, or constitute intentional fortuitous Property Cas. of misconduct losses." 40 of the Gardenville, insured LLC v do not Travelers Am., 387 F Supp 2d 205, 211 (WDNY 2005). Although the fraud engaged in by Salander and the Gallery was not fortuitous Renaissance as Art to them or Investors, any entity LLC, 102 AD3d insured - the plaintiff - it was fortuitous. issues of whether investigated some or not alleged plaintiff's irregularities related at 604), to them as to (see this Defendant has raised trustees in should reporting have by the Gallery and Salander, but this is irrelevant because, as to these trustees, at the time it happened, the alleged loss was an accident. Therefore, this Court holds that as a matter of law, the alleged loss was fortuitous. As to whether or not plaintiff's alleged loss is a "Covered Cause[] of Loss," the coverage under the policy is for "all risks of physical loss or damage to property insured hereunder unless the 'loss' is excluded in Section B - Exclusions." 13 [* 15] Defendant's disclaimer letter only asserted that there was no coverage according because to plaintiff's the insurer, artwork would had been trigger governmental seizure of the artwork. the However, seized, which, exclusion for defendant did not proffer any evidence that any governmental authority had seized any of plaintiff's forty-one works of art that were sold to third parties prior to the closing of the Gallery. Additionally, this Court notes that the Policy that defendant issued to plaintiff had no fraud exclusion, which in at least one other action has been successfully invoked to preclude a plaintiff from recovering from this same insurer for the SOG fraud. Art Ins. Corp. v Renaissance Art Invs., (Sup Ct, NY Co 2011), affd, 102 AD3d 604 LLC, See AXA 32 Misc 3d 1223(A) (1st Dept 2013). Absent a fraud exclusion in the Policy, this Court holds that the alleged loss is a "Covered Cause of Loss." The Property Finally, plaintiff contends that the works of art are property within the meaning of maintains that, ( 1) "Covered Property." Defendant, however, because plaintiff transferred title to the works of art to the Gallery, pursuant to the consignment agreement, it no longer had an "insurable interest'' in such works of art, and therefore, those works of art were no longer "covered property, " or 14 [* 16] alternatively, (2) when the Gallery sold the forty-one works of art to third-parties in the ordinary course of business, it no longer had an "insurable interest" in those works of art, and therefore, t h ose forty-one works of art were no longer "covered property. " It is uncontested that the forty-one works of art were "covered property" until they were consigned to Salander and the Gallery. that It is plaintiff definition, at no that longer point had that an the insurer "insurable maintains interest." (See supra at 6, n. 4). No evidence of a formal transfer of title to the artwork to either Salander the Gallery Defendant herein. or was has submitted a proffered by either party December 14, 1995 "brief synopsis" of the agreement between plaintiff and the Gallery, which is signed by Sa lander and both of plaintiff's trustees. (See Defendant's Rule 19-A Statement and Counterstatement, Exhibit 8.) Nowhere in this "brief synopsis", however, does it mention transfer of title, nor even give a hint of this being the intention of the parties. Plaintiff contends that it was "entrusting" the artwork to the Gallery, Code as that term is defined in New York Uniform Commercial ("NYUCC") § 2-403, which gave 15 the Gallery the "power to [* 17] transfer all rights of the entruster to a buyer in ordinary course of business." (see NYUCC § 2-4 03 [2]), but does not cut off Porter v Wertz, 53 NY2d 696 (1981). plaintiff's title. Therefore, during the time that Salander and the Gallery had possession of the works of art, and had not sold them, plaintiff had an "insurable interest" in them. However, "[u) nlike a opposed to void, third party." 2840330, *5 title, thief, an en trustee has voidable, and therefore can pass good title to a Interested Lloyd's Underwriters v Ross, (SONY, as Oct. 28, 2005). Therefore, 2005 WL the consignment allowed the Gallery to sell a painting to a buyer in the ordinary course of business. The question at issue thus becomes whether a sale to a buyer in the ordinary course of business terminated any "insurable interest" the plaintiff had in such artwork. Pursuant to NYUCC, a "seller retains an insurable interest in goods so long as title to or iny security interest in the goods remains in him." NYUCC § 2-501 (2); see also Zurich Am. Ins. Co. v Felipe Grimberg Fine Art, 324 Fed Appx 117, 120 (2d Cir 2009). The proffered evidence reveals that the forty-one works of art were 16 [* 18] sold to buyers in the ordinary course of business, who paid either Salander or the Gallery for the sale. Even if plaintiff somehow retained the right to challenge any of these buyers' title to the works of art, that is not an "insurable interest" as defined in the Policy. Id. Because plaintiff has not offered any evidence that it retained an "insurable interest" in any of the forty-one works of art that were sold, plaintiff's claims as to those works of art must be dismissed. As to claims for the value of the unsold works of art, the plaintiff continues to have an "insurable interest" (as defined in the Policy) in the property entrusted to Salander and the Gallery which was not sold. Further Discovery That compelling portion Cravath, of defendant's Swaine motion and Moore LLP which to seeks provide an order documents responsive to defendant's January 6, 2012 subpoena duces tecum, is reserved for further discussion at the next conference which is scheduled in IA Part 39, 60 Centre Street - Room 208 on November 20, 2013 at 10:30 a.m. 17 [* 19] Conclusion Accordingly, it is hereby ORDERED that plaintiff's motion for partial summary judgment is denied; and it is further ORDERED that defendant's motion is granted only to the extent of dismissing plaintiff's claims regarding the 41 works of art that were sold by Lawrence Salander and the Salander-O'Reilly Galleries; and it is further ORDERED that plaintiff's claims as to the other works of art are severed and continued. This constitutes the decision and order of this Court. ~~. Dated: October((; , 2013 KAPNICK J.S.C. IARfWiA R. KAPN1c11. J.s.c. 18

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