| Philips S. Beach, LLC v ZC Specialty Ins. Co. |
| 2008 NY Slip Op 08266 [55 AD3d 493] |
| October 30, 2008 |
| Appellate Division, First Department |
| Philips South Beach, LLC, Appellant, v ZC SpecialtyInsurance Company, Respondent. |
—[*1] Cahill Gordon & Reindel LLP, New York (Thorn Rosenthal of counsel), forrespondent.
Order, Supreme Court, New York County (Bernard J. Fried, J.), entered October 3, 2007,which granted defendant's motion to dismiss the complaint, affirmed, with costs.
Dismissal of the complaint was appropriate where the parties' settlement agreement, whichincorporated a release of any and all claims as between the parties, bars plaintiff's claims that itssurety agreements with defendant mortgage insurer were unenforceable and void as againstpublic policy on the basis that the agreements violated article 65 of the Insurance Law.Settlement agreements are judicially favored and may not be lightly set aside, and plaintiff'sallegation that the settlement agreement was procured by duress is unsupported by allegationsindicating that defendant's challenged conduct constituted a wrongful threat that effectivelyprecluded plaintiff's ability to exercise its free will (see Matter of Guttenplan, 222 AD2d255, 256-257 [1995], lv denied 88 NY2d 812 [1996]). Instead, as correctly concluded bythe motion court, defendant's challenged conduct constituted vigorous negotiation, and there wasno evidence of unequal bargaining power between the parties (see Fruchthandler v Green,233 AD2d 214 [1996]).
The record demonstrates that it was plaintiff's own actions, in initially refusing to paydefendant the agreed upon fees on the grounds that they were unenforceable and in prematurelyseeking replacement financing, that led to the subject release. Plaintiff accepted the benefits ofthe settlement agreement to the extent it obtained a premature satisfaction of its existingmortgage to allow it to timely close with its new lender. This conduct constituted a ratification ofthe settlement agreement and undermines plaintiff's arguments that it executed the release solelyout of duress, and that the agreement is void as against public policy (see Khalid vScagnelli, 290 AD2d 352, 354 [2002]). Furthermore, plaintiff's failure to repudiate thesettlement agreement in prompt fashion, as well as its acceptance of the benefits of theagreement, belies its claims of economic duress (see Mendel v Henry Phipps Plaza W.,Inc., 27 AD3d 375, 376 [2006]). In addition, it is unclear whether New York insurance lawwould govern the transaction, since plaintiff is an Illinois limited liability company, defendant isincorporated in Texas, the loan closing took place in New Jersey, the reimbursement agreementis governed by Illinois law and the mortgaged property is in Florida. Concur—Friedman,J.P., Williams and Acosta, JJ.[*2]
Catterson, J., dissents in a memorandum as follows: Irespectfully dissent because I believe that the motion court erred in granting defendant ZCInsurance Company's (hereinafter referred to as ZC) CPLR 3211 motion to dismiss on the basisof a release that plaintiff alleged was obtained under economic duress. In my opinion, the motioncourt ignored precedent and well-established legal principles in determining, without a trial orevidentiary hearing or even adequate evidentiary material, that the plaintiff's allegation ofeconomic duress lacked merit.
In this action, the plaintiff (Philips) seeks to recover damages arising out of an alleged illegalinsurance contract to which it claims it was an unwitting party. The undisputed facts of theinstant case are that, in 1999, Philips sought a loan to be secured by a mortgage for a propertylocated in Florida known as the Shore Club Hotel. ZC agreed, for a fee, to provide mortgageinsurance for Philips and successfully solicited Greenwich Capital Financial Product, Inc.(hereinafter referred to as Greenwich) to loan Philips $81 million. The loan was secured by amortgage on the property. As a condition for issuing the insurance, Philips and ZC signed areimbursement agreement in which Philips agreed to pay ZC an annual surety premium and atermination premium. The loan was closed on or about April 30, 1999, and the maturity date forthe loan was June 1, 2006.
In or about early 2001, Philips sought to borrow more funds, and negotiated with Greenwichto restructure the loan as well as negotiating with ZC to modify the reimbursement agreement. InMay 2001, the loan amount was increased to $104 million. In addition, both the terms of thereimbursement agreement and the annual surety premium were modified. On or about July 1,2002, Philips again restructured the loan.
In 2005, Philips obtained replacement financing with a closing scheduled in early November2005. In order to secure the replacement financing, Philips was required to repay, defease orassign the $104 million mortgage loan and obtain a satisfaction on the mortgage from the lender.Greenwich advised Philips that it would not provide a satisfaction unless ZC providedGreenwich with a notification stating that Philips had repaid all its debts to ZC. Subsequently,ZC demanded Philips pay approximately $1.5 million for the surety premium through June 1,2006, plus approximately $5.2 million for the minimum final surety premium, and legal fee(together, hereinafter referred to as the demand payment). ZC also made it clear that it would notprovide the required notification to Greenwich until Philips signed a settlement agreementcontaining a release. Philips eventually paid the demand payment and signed the release.
On or around March 5, 2007, Philips filed an action in the Supreme Court, New York Countyfor recovery of damages of more than $6 million, alleging that the mortgage insurance issued byZC and the demand payment were obtained in violation of article 65 of the Insurance Law, andthat the types of mortgage insurance sold by ZC to Philips was not permitted under InsuranceLaw § 6503 (a) (2) and (3). In addition, Philips alleged that ZC failed to seek the requisiteapproval on the premium rates from the Superintendent of Insurance, as required under InsuranceLaw § 6504 (a). Philips further contended that both the insurance and the settlementagreement at issue were void against public policy since they are illegal contracts under sections6503 (a) and 6504 (a) of the Insurance Law.[*3]
ZC moved to dismiss the case pursuant to CPLR 3211 (a)(1), (5) and (7). In support of the motion, ZC attached the settlement agreement containing therelease signed by both parties in November 2005. In opposition, Philips filed an affidavit allegingthat the release was signed under economic duress. Philips asserted that "[t]he terms andsubstance of the release were essentially non-negotiable. None of the agreements betweenplaintiff and defendant required plaintiff to deliver the release." In reply, ZC filed with the court,the 50-page reimbursement agreement, which established the contractual relationship betweenthe parties.[FN1]
The court scheduled oral argument on the motion to dismiss during which ZC asserted thatPhilips's allegations of economic duress were conclusory, and that the burden was on Philips toraise a triable issue of fact.[FN2]Philips's counsel then attempted to present his client's case for a finding of economic duress.Subsequently, the motion court granted ZC's motion and dismissed the case, determining that therelease was valid. The court held that the settlement agreement was obtained as a result of"vigorous bargaining tactics" and not a "wrongful threat" because Philips had received andaccepted benefits from the exchange of the release. Thus, the court held that the release was notacquired under economic duress, and therefore it dismissed Philips's lawsuit.
For the reasons set forth below, I believe the motion court erred in granting ZC's motion todismiss pursuant to CPLR 3211 (a) (1), (5) and (7). While it is well-established that a generalrelease containing language that is clear and unambiguous will protect parties from lawsuits,duress, illegality, fraud or mutual mistake are causes sufficient to invalidate it. (Mangini vMcClurg, 24 NY2d 556, 563 [1969[.) Moreover, a motion to dismiss should be denied whereduress in the procurement of the release is alleged. (See Newin Corp. v Hartford Acc. &Indem. Co., 37 NY2d 211, 217 [1975]; Gibli v Kadosh, 279 AD2d 35, 40 [1st Dept2000]; see also Anger v Ford Motor Co., Dealer Dev., 80 AD2d 736 [4th Dept 1981]["(w)here a complaint alleges fraud or duress in the procurement of a release . . . amotion to dismiss which is based solely on the release should be denied"].)
Here, it appears the motion court heard from both parties at oral argument as to the law oneconomic duress, and then summarily applied that law to facts not in evidence. The motion courtdetermined that there was no economic duress because the settlement agreement resulted fromvigorous bargaining tactics whereby Philips had accepted the benefit of ZC's permission toprematurely terminate the insurance contracts. However, that determination was made solely onthe assertions of counsel and without any testimony from witnesses, nor was it based on anycontractual interpretation of the reimbursement agreement. For example, there was no [*4]testimony as to how and when the vigorous bargaining occurred.Nor was there any analysis of the relevant provisions of the reimbursement agreement.[FN3]
In my opinion, the motion court should have utilized CPLR 3211 (c) and reserved the issueof the validity of the release for trial. (See Art Stone Theat. Corp. v Technical Programming& Sys. Support of Long Is., 157 AD2d 689 [2nd Dept 1990] [when plaintiff and defendantraise an issue on validity of a release pursuant to CPLR 3211 motion to dismiss, a separate trialshould be conducted pursuant to CPLR 3211 (c) on that issue]; see also Anger, 80 AD2dat 736 ["(b)ecause resolution of the issue of the validity of the release may well be dispositive ofthe entire matter . . . an evidentiary hearing pursuant to CPLR 3211 (c) isdirected"].)
Further, I believe that dismissal pursuant to CPLR 3211 (a) (7) and (a) (1) was not proper. Indetermining a motion which seeks to dismiss the action for failure to state a cause of action, thecourt must accept as true the allegations of the complaint, and give the nonmoving party (Philips)the benefit of any reasonable inference in the light most favorable to it. (Sokoloff v HarrimanEstates Dev. Corp., 96 NY2d 409, 414 [2001], citing Tenuto v Lederle Labs., Div. ofAm. Cyanamid Co., 90 NY2d 606, 609-610 [1997] and Leon v Martinez, 84 NY2d83, 87-88 [1994].) To grant or deny a motion under CPLR 3211 (a) (7), the court must determinewhether the facts as alleged "manifest any cause of action cognizable at law." (Guggenheimerv Ginzburg, 43 NY2d 268, 275 [1977].) Whether a plaintiff (Philips) can ultimately establishits allegations is not taken into consideration in determining a motion to dismiss. (Id.;EBC I, Inc. v Goldman, Sachs & Co., 5 NY3d 11, 19 [2005].)
In my opinion, Philips met its burden by pleading facts sufficient to support a cause of actionfor recovery of payment under an illegal contract (the insurance and the reimbursementagreement) pursuant to section 6408 (c) and section 6503 (a) of the Insurance Law. Indeed, ZCdid not dispute any of the allegations; namely, that it is not a licensed mortgage insurer underarticle 65 of the New York Insurance Law or that it failed to obtain approval from theSuperintendent of Insurance of the State of New York for the amount charged by it.
Finally, it appears that ZC moved pursuant to CPLR 3211 (a) (1) (dismissal on ground ofdocumentary evidence) based on the same release it used as a ground for dismissal under CPLR3211 (a) (5). However, utilizing the release for a section 3211 (a) (1) dismissal does not, in myopinion, help ZC either. A motion to dismiss based on documentary evidence requires that thedocument relied upon must definitely dispose of plaintiff's claim. (See Farber v Breslin,47 AD3d 873, 876 [2nd Dept 2008] ["documentary evidence utterly refutes the plaintiff's factualallegations, thereby conclusively establishing a defense as a matter of law"]; see alsoSiegel, Practice Commentaries, McKinney's Cons Laws of NY, Book 7B, CPLR C3211:10, at 22[documentary evidence "apparently aims at a paper whose content is essentially undeniable and[*5]which, assuming the verity of its contents and the validity ofits execution, will itself support the ground on which the motion is based"].) Clearly, in this case,such documentary evidence was not produced by ZC. The release did not refute any of Philips'sallegations about the illegality of the contract, and certainly did not refute any allegation aboutthe validity of the release itself.
I would therefore reverse the order of the motion court and reinstate the complaint.[See 17 Misc 3d 1109(A), 2007 NY Slip Op 51891(U).]
Footnote 1: The affidavit of counsel refers toa defendant's reply memorandum of law that purportedly references this reimbursementagreement. However, that memorandum is not in the record before this Court, and in fact,nothing in the record before this Court indicates which provisions, if any, ZC relied on to counterPhilips's contentions.
Footnote 2: Counsel for ZC apparentlyeither forgot or misunderstood that the argument was on a motion to dismiss and not on a motionfor summary judgment, and thus it was not incumbent on plaintiff to raise a "triable issue offact."
Footnote 3: For example, contrary to ZC'sassertions before the motion court, certain provisions in the reimbursement agreement appear toindicate that a premature termination of the insurance contract with ZC was contemplated, andthe method for calculating "discounted present value" appears to be outlined in some detail inarticle VII section 7.02 and article X section 10.03.