| New York State Workers' Compensation Bd. v ConsolidatedRisk Servs., Inc. |
| 2015 NY Slip Op 01699 [125 AD3d 1250] |
| February 26, 2015 |
| Appellate Division, Third Department |
[*1]
| New York State Workers' Compensation Board, asAdministrator of the Workers' Compensation Law and Attendant Regulations and asSuccessor in Interest to the Manufacturing Industry Workers' CompensationSelf-Insurance Trust et al., Appellant-Respondent, v Consolidated Risk Services, Inc., etal., Respondents-Appellants, et al., Defendants. |
Rupp Baase Pfalzgraf Cunningham & Coppola, LLC, Buffalo (Daniel E.Sarzynski of counsel), for appellant-respondent.
Stenger, Roberts, Davis & Diamond, LLP, Wappingers Falls (Ian Lindars ofcounsel), for Consolidated Risk Services, Inc. and others, respondents-appellants.
Woods Oviatt Gilman LLP, Rochester (Andrew J. Ryan of counsel), for MarkBartlett, respondent-appellant.
Maguire Cardona PC, Albany (Kathleen A. Barclay of counsel), for Hickey-Finn& Co., Inc., respondent-appellant.
Nelson Brown & Co., New York City (Marc S. Voses of counsel), for DavidBramwell, respondent-appellant.
Hodgson Russ LLP, Albany (Christian J. Soller of counsel), for Melvin Hodis and[*2]others, respondents-appellants.
Wilson Elser Moskowitz Edelman & Dicker LLP, White Plains (Sheryl T.Parker of counsel), for Regnier Consulting Group, Inc., respondent-appellant.
Lynch, J. Cross appeals from an order of the Supreme Court (Platkin, J.), enteredSeptember 4, 2013 in Albany County, which, among other things, partially granteddefendants' motions to dismiss the complaint.
In December 2011, plaintiff commenced this action in its capacity as thegovernmental agency charged with administering the state's workers' compensationsystem and as successor in interest to certain group self-insured trusts that were formed toprovide workers' compensation coverage to employees of the trusts' members (seeWorkers' Compensation Law § 50 [3-a]; 12 NYCRR 317.2 [i]; 317.3). Thetrusts at issue herein are the New York Manufacturing Industry Workers' CompensationSelf-Insurance Trust (hereinafter NYMIT), created in October 1997, the ProviderAgency Trust for Human Services Workers' Compensation Trust (hereinafter PATH),created in November 1996, and the Retail & Wholesale Industry Workers'Compensation Trust of New York (hereinafter RITNY), created in June 1998.Defendants are the third-party administrator for the trust, Consolidated Risk Services,Inc. (hereinafter CRS), along with its employees and related corporate entities(hereinafter collectively referred to as the CRS defendants), insurance brokers allegedlyengaged in marketing the trusts, the former trustees of RITNY, and Regnier ConsultingGroup, Inc., which provided actuarial reports for RITNY.
Plaintiff alleges that, as a result of defendants' misconduct and malfeasance, thetrusts became insolvent, requiring it to assume administration of NYMIT in March 2006,PATH in February 2006 and RITNY in October 2008, and that a forensic audit revealeddeficits ranging from approximately $7 million to $25 million (see 12 NYCRR317.20). Plaintiff commenced this action seeking to recover the trusts' accumulateddeficits from defendants, alleging numerous causes of action, including breach offiduciary duty, fraud and fraud in the inducement against the CRS defendants and theinsurance brokers, breach of contract against the RITNY trustees, and common-lawindemnification against all defendants. Defendants separately moved to dismiss thecomplaint.
As relevant here, Supreme Court partially denied the motions by the CRS defendantsand insurance brokers to dismiss the breach of fiduciary duty, fraud and fraudulentinducement claims as untimely, finding that the claims were timely as to allegations on orafter certain dates, and that questions of fact exist regarding whether the "discovery rule"would permit review of allegations relating to conduct before those dates on certainclaims. With respect to the RITNY trustees, the court dismissed as untimely the breach ofcontract claim against certain trustees—defendants Jennifer Bartlett and AliceNykaza—because they demonstrated that their services as trustees terminated morethan six years before the action was commenced, but denied the motions to dismiss of theremaining former trustees.[FN1] The court also dismissed the cause of[*3]action for implied indemnification, as assertedagainst all defendants.
Plaintiff now appeals and, in its brief, challenges only those portions of SupremeCourt's order as limited the temporal scope of its claim for breach of fiduciary dutyagainst the CRS defendants and insurance brokers, and dismissed its claim forcommon-law indemnification. The CRS defendants cross-appeal. Defendant Hickey-Finn& Co., Inc., an insurance broker, also cross-appeals, as limited by its notice ofappeal, from so much of the order as partially denied its motion to dismiss the claims ofbreach of fiduciary duty, fraud and fraud in the inducement against it. Finally, formerRITNY trustee defendant Mark Bartlett cross-appeals, as limited by his notice of appeal,from the partial denial of his motion to dismiss the claim for breach of contract againsthim.[FN2]
Initially, we agree with plaintiff that Supreme Court improperly limited the temporalscope of the actionable misconduct on its breach of fiduciary duty claim. Plaintiffmaintains that the court misapplied the repudiation rule, which provides that "theapplicable statutory period . . . does not begin to run until the fiduciary hasopenly repudiated his or her obligation or the relationship has been otherwise terminated"(Westchester Religious Inst. v Kamerman, 262 AD2d 131, 131 [1999]; see Tydings v Greenfield, Stein& Senior, LLP, 11 NY3d 195, 201-202 [2008]; Matter of Baird, 58AD3d 958, 959 [2009]). The Court of Appeals has instructed that, under the repudiationrule, "the time starts running when a successor [fiduciary] is put in place" (Tydings vGreenfield, Stein & Senior, LLP, 11 NY3d at 202). After the fiduciary "hasyielded . . . to a successor, . . . [t]he running of the statute [oflimitations] then begins, and only actual or intentional fraud will be effective to suspendit" (Spallholz v Sheldon, 216 NY 205, 209 [1915] [citations omitted]; accordTydings v Greenfield, Stein & Senior, LLP, 11 NY3d at 201).
Here, for purposes of defendants' motion to dismiss, we accept as true the allegationsin the complaint that a fiduciary relationship existed between the CRS defendants and thetrusts, of which plaintiff is the successor in interest, and afford plaintiff the benefit ofevery favorable inference (seee.g. EBC I, Inc. v Goldman, Sachs & Co., 5 NY3d 11, 19 [2005]; Murray Bresky Consultants, Ltd vNew York Compensation Manager's Inc., 106 AD3d 1255, 1258 [2013]). Thatfiduciary relationship would have terminated on the dates that CRS ceased administrationof the trusts in 2006, and Supreme Court properly determined that the limitations periodcommenced running at that point (see Tydings v Greenfield, Stein & Senior,LLP, 11 NY3d at 201; Spallholz v Sheldon, 216 NY at 209).[FN3] The court erred,however, in failing to apply the [*4]repudiation rule as a"toll" and in sustaining the claim only with respect to misconduct that was otherwisetimely. The limitations period for all breaches of fiduciary duty, regardless of when theyoccurred, was tolled until CRS ceased administration of the trusts and, thus, allmisconduct would "fall[ ] within the permissible temporal scope of the" claims so long asany portion of the claim fell within the limitations period (Westchester Religious Inst.v Kamerman, 262 AD2d at 132; see Golden Pac. Bancorp v Federal Deposit Ins.Corp., 273 F3d 509, 519 [2d Cir 2001]). That is, the repudiation rule acts as a toll ofthe limitations period for all misconduct committed by the fiduciary prior torepudiation of its obligation or termination of the relationship. In other words, all of thealleged misconduct prior to the severance date is included in the actionable portion of theclaim.
We reject the argument of the CRS defendants on their cross appeal that the statuteof limitations for the entire breach of fiduciary duty claim is three years, rather than six.The parties are in agreement that, because plaintiff does not seek equitable relief, asix-year statute of limitations period applies to the breach of fiduciary duty claim againstCRS only if "an allegation of fraud is essential to" the claim (IDT Corp. v Morgan Stanley DeanWitter & Co., 12 NY3d 132, 139 [2009]; see New York State Workers'Compensation Bd. v SGRisk, LLC, 116 AD3d 1148, 1154 [2014]). To state aclaim for fraud, a plaintiff must allege "that the defendant knowingly misrepresented amaterial fact for the purpose of inducing reliance upon it, that there was, in fact,justifiable reliance thereon, and that damages resulted" (Paolucci v Mauro, 74 AD3d1517, 1520 [2010] [internal quotation marks and citation omitted]). In addition, andparticularly relevant here, "[f]raud may also result from a fiduciary's failure to disclosematerial facts when the fiduciary had a duty to disclose and acted with the intent todeceive" (id.; seeMandarin Trading Ltd. v Wildenstein, 16 NY3d 173, 178 [2011]; Kaufmanv Cohen, 307 AD2d 113, 119-120 [2003]).
Here, a portion of plaintiff's breach of fiduciary duty claim is grounded in itsallegations that the CRS defendants breached their fiduciary duties to the trusts byfraudulently concealing or misrepresenting the financial condition of the trusts, thedanger of operating deficits and issues associated with underwriting deficiencies, andthat CRS did so as part of a scheme to increase membership and thereby increase its owncommissions. These are fraud allegations, and they are essential to this portion of thefiduciary duty claim. That is, the relevant portion of the claim is "based on fraud" and"there would be no injury but for the fraud" (Paolucci v Mauro, 74 AD3d at 1520[internal quotation marks and citation omitted]). As such, that portion of the fiduciaryduty claim is subject to a six-year limitations period (see New York State Workers'Compensation Bd. v SGRisk, LLC, 116 AD3d at 1154; Paolucci v Mauro, 74AD3d at 1519-1520; see alsoMcDonnell v Bradley, 109 AD3d 592, 594-595 [2013]; Carbon Capital Mgt., LLC vAmerican Express Co., 88 AD3d 933, 939-940 [2011]; Monaghan v Ford Motor Co.,71 AD3d 848, 850 [2010]; Kaufman v Cohen, 307 AD2d at 120).
While we further reject the CRS defendants' assertions that Supreme Courtimproperly applied the "discovery rule" to certain of those defendants on the fraud andfraudulent inducement claims, we agree with Hickey-Finn, whose marketing agreementswith PATH and NYMIT terminated effective January 1, 2000, that the court erred inrelying upon that rule to sustain the claims against it. The "discovery rule" is found inCPLR 213 (8), which provides that claims based on fraud "must be commenced [within]the greater of six years from the date the cause of action accrued or two years from thetime [a] plaintiff . . . discovered the fraud, or could with reasonablediligence have discovered it." It is settled that "[t]he inquiry as to whether a [*5]plaintiff could, with reasonable diligence, have discoveredthe fraud turns on whether the plaintiff was possessed of knowledge of facts from which[the fraud] could be reasonably inferred" (Sargiss v Magarelli, 12 NY3d 527, 532 [2009]; see Elhannon, LLC v Brenda J.DeLuca Trust, 108 AD3d 911, 912 [2013]; Kaufman v Cohen, 307AD2d at 123; Waters of Saratoga Springs v State of New York, 116 AD2d 875,877-878 [1986], affd 68 NY2d 777 [1986]).
As regards CRS and its employees, Supreme Court determined that questions of factexist regarding whether misconduct predating the statute of limitations period iscognizable under the two-year discovery rule. With respect to the insurance brokers, thecourt concluded that the fraud causes of action, along with the cause of action for breachof fiduciary duty, were untimely under a six-year statute of limitations, but that the recorddid not foreclose application of the discovery rule. Both the CRS defendants andHickey-Finn argue that the claims against them are untimely even pursuant to thediscovery rule because plaintiff could have discovered the fraud with reasonablediligence within two years of assuming administration of PATH and NYMIT in 2006 or,at the latest, when plaintiff received forensic accounting reviews for those trusts in 2008.In addition, the CRS defendants contend that the alleged fraud with respect to RITNYcould have been discovered in 2002 when, according to the complaint, an audit revealed"material deficiencies" in that trust's funding status.
As Hickey-Finn notes, plaintiff argues before this Court that "[i]t was only after. . . a forensic audit was completed[ ] that [plaintiff] possessed knowledgeof the facts from which the fraud [committed by CRS] reasonably could be inferred." Inlight of plaintiff's admission that it had knowledge of the facts from which fraud couldreasonably be inferred after receiving the forensic accountings, the two-year discoveryrule would run from the date that plaintiff received the audit reports, February 19, 2008for NYMIT and PATH, and June 11, 2010 for RITNY. Consistent with that admission, areview of the reports "unequivocally establish[es] that plaintiff was possessed of facts"upon receiving them "that put it on notice of a potential fraud claim" (Elhannon, LLCv Brenda J. DeLuca Trust, 108 AD3d at 913). Thus, to be timely under the discoveryrule, an action on the claims involving NYMIT and PATH was required to becommenced by February 19, 2010, and on the claims involving RITNY by June 11,2012, absent a further toll of the statute of limitations. This action was commenced onDecember 5, 2011. Even pursuant to the discovery rule, then, the fiduciary duty, fraudand fraudulent inducement claims are untimely with respect to Hickey-Finn, which hadno involvement with RITNY (see Elhannon, LLC v Brenda J. DeLuca Trust, 108AD3d at 913; cf. Kaufman v Cohen, 307 AD2d at 123).
As to the CRS defendants, however, the discovery rule would render all fraud claimsregarding RITNY timely if receipt of the forensic audits is the earliest date that plaintiffcould be said to have possessed knowledge of facts from which fraud could reasonablybe inferred. Moreover, because it is undisputed that a tolling agreement extended thestatute of limitations period for CRS and its employees by approximately 33 months,from February 2009 through November 30, 2011, the claims involving NYMIT andPATH would also be timely as to those defendants.[FN4] Although the CRS defendants arguethat the fraud against RITNY was discoverable in 2002 when an audit revealed materialdeficiencies in funding, plaintiff persuasively responds [*6]that the audit uncovered only funding issues related toreserves and liabilities at a particular point in time, not evidence of an intentional failureto disclose the true financial state of RITNY and the dangers related to its operating at adeficit. In our view, given the complex nature of the fraud allegations—includingthe fact that forensic accountings were required to determine the circumstancesconstituting the fraud—Supreme Court properly determined that questions of factexist regarding whether the discovery rule should apply such that alleged misconductpredating the six-year limitations period is cognizable on the fraud claims against theCRS defendants involving RITNY, and on those claims against CRS and its employeesinvolving NYMIT and PATH (see Kaufman v Cohen, 307 AD2d at 123).
Turning to the arguments of defendant David Bramwell, a former employee of CRSwho submits his own brief on the CRS defendants' cross appeal, we are unpersuaded byhis assertion that his affidavit and documentary evidence conclusively demonstrated thathis employment with CRS terminated in September 1996, such that he had no obligationsunder the relevant agreements, and that all claims against him were, in any event, barredby the statute of limitations. "Under CPLR 3211 (a) (1), a dismissal is warranted only ifthe documentary evidence submitted conclusively establishes a defense to the assertedclaims as a matter of law" (Leon v Martinez, 84 NY2d 83, 88 [1994]; seeGoshen v Mutual Life Ins. Co. of N.Y., 98 NY2d 314, 326 [2002]). Contrary to hisassertions, Bramwell cannot rely upon his own affidavit in seeking dismissal based onthat provision—"such an affidavit does not constitute documentary evidence uponwhich a proponent of dismissal pursuant to CPLR 3211 (a) (1) may rely" (State of N.Y. Workers'Compensation Bd. v Madden, 119 AD3d 1022, 1029 [2014]; see State Farm Fire & Cas.Co. v Main Bros. Oil Co., 101 AD3d 1575, 1577 n 3 [2012]). While theremaining documentary evidence establishes that Bramwell left CRS in 1996, it does notestablish that he had no further employment by CRS. In that regard, plaintiff submittedevidence—the forensic accounting report for RITNY—indicating thatBramwell left CRS in or around 2002. Inasmuch as Bramwell's documentary evidencedoes not " 'utterly refute[ ]' " plaintiff's factual allegations (New YorkState Workers' Compensation Bd. v SGRisk, LLC, 116 AD3d at 1153, quotingGoshen v Mutual Life Ins. Co., 98 NY2d at 326; see State of N.Y. Workers'Compensation Bd. v Madden, 119 AD3d at 1026, 1029), and giving plaintiff thebenefit of every favorable inference (see EBC I, Inc. v Goldman, Sachs &Co., 5 NY3d at 19), we conclude that plaintiff adequately stated its causes of actionagainst Bramwell. Similarly, given the potential application of the repudiation anddiscovery rules against Bramwell, as discussed above, Supreme Court properlyconcluded that questions of fact preclude dismissal on statute of limitations grounds atthis stage of the proceedings.
On his cross appeal, Bartlett, a former trustee of RITNY, challenges Supreme Court'sdenial of his motion to dismiss plaintiff's breach of contract claim against the trustees ofRITNY. Supreme Court dismissed a breach of fiduciary duty claim against those trusteesas untimely pursuant to a three-year statute of limitations. Bartlett argues that the breachof contract claim is also untimely because it is merely a restatement of the breach offiduciary duty claim and that, in any event, there is no express or implied contractbetween the trustees and the trust because fundamental elements required for acontract—mutual assent and consideration (see Maas v Cornell Univ., 94NY2d 87, 93-94 [1999]; Apfel v Prudential-Bache Sec., 81 NY2d 470, 475-476[1993])—are absent. In our view, both of these arguments lack merit, and plaintiffadequately stated a cause of action for breach of contract to survive a motion todismiss.
To state a cause of action for breach of contract, a plaintiff must allege "formation ofa contract, performance by one party, failure to perform by another, and resultingdamage" (New York State Workers' Compensation Bd. v SGRisk, LLC, 116AD3d at 1153). As Bartlett concedes, the same conduct that constitutes a breach ofcontractual obligation may also [*7]constitute a breach offiduciary duty (see e.g. id. at 1153-1154). Here, plaintiff alleged that Bartlettexecuted a "Designation of Trustee" form in 2004, in which he agreed to accept all dutiesand responsibilities of a trustee in accordance with RITNY's trust agreement. Plaintifffurther alleged that, although RITNY provided workers' compensation insurance to thetrust members, the RITNY trustees caused damages in excess of $7 million to the trustwhen they breached their contractual duties by, among other things, failing to ensure thatthe trust's underwriting practices and discount policies were reasonable and consistentlyapplied, failing to evaluate new members properly, failing to hold regular boardmeetings, failing to take remedial actions to address RITNY's underfunding and failingto properly monitor CRS's management of RITNY. Accepting these facts as true,plaintiff adequately stated a cause of action for breach of contract by alleging formationof a contract between RITNY and the trustees, that the trust performed its obligationswhile the trustees, including Bartlett, did not, and that RITNY was damaged as aresult.
This Court recently found that nearly identical allegations were sufficient to state aclaim for breach of contract (see Murray Bresky Consultants, Ltd v New YorkCompensation Manager's Inc., 106 AD3d at 1256-1258; see also New York StateWorkers' Compensation Bd. v SGRisk, LLC, 116 AD3d at 1153), and Bartlett'sarguments that the required contractual elements of mutual assent and consideration wereabsent provide no basis for distinguishing those cases. As Supreme Court concluded,Bartlett's assent is manifest in his signed, notarized agreement expressly "accept[ing] allduties and responsibilities of [a trustee] in accordance with the terms and conditions ofthe Trust Agreement." Regarding consideration, we note that every trustee's service wasundertaken on behalf of their employers who were parties to a complex relationship withthe trusts, and agree with Supreme Court that the record does not foreclose the possibilitythat consideration flowed to the trustees via their employers.
Finally, based upon this Court's recent precedent, the portion of plaintiff'scommon-law indemnification claim that was asserted against the RITNY trustees must bereinstated. Plaintiff acknowledges that, although it appealed from that portion ofSupreme Court's order as dismissed its common-law indemnification claim in theentirety, this Court's decision in State of N.Y. Workers' Compensation Bd. v Madden (119AD3d 1022 [2014], supra)—which involved a substantially similarfactual background and was decided while this appeal was pending—precludes itfrom seeking indemnification except as against the trustee defendants (id. at1023-1025). However, as plaintiff further argues, Madden dictates that its claimsagainst the trustees be reinstated on the ground that the trustees "owed a common duty tothe covered employees to ensure that the trust maintained adequate reserves such that itsassets would cover its liabilities" (id. at 1025; see Murray Bresky Consultants,Ltd v New York Compensation Manager's Inc., 106 AD3d at 1258-1259).
The parties' remaining arguments, to the extent not rendered academic by ourdecision, have been considered and found to be lacking in merit.
McCarthy, J.P., Egan Jr. and Clark, JJ., concur. Ordered that the order is modified,on the law, without costs, by reversing so much thereof as (1) denied the motion ofdefendant Hickey-Finn & Co., Inc. to dismiss the first, fourth and fifth causes ofaction against it, (2) limited the actionable misconduct to the limitations period on thefirst cause of action as to the remaining defendants, and (3) granted the motion ofdefendants Mark Bartlett, Ronald Birdsall, Bonnie Carpineta, Robert Finch, VinceMinieri, [*8]Thomas Mirabito and William Bonisteel todismiss the common-law indemnification claims against them; motion by Bartlett,Birdsall, Carpineta, Finch, Minieri, Mirabito and Bonisteel to dismiss is denied to theextent asserted by plaintiff in its governmental capacity as the entity charged with theadministration of the Workers' Compensation Law, motion by Hickey-Finn to dismiss thefirst, fourth and fifth causes of action is granted and said claims dismissed, and matterremitted to the Supreme Court to permit defendants to serve an answer within 20 days ofthe date of this Court's decision; and, as so modified, affirmed.
Footnote 1:In their brief, the trusteesindicate that plaintiff has since discontinued all of its claims against defendant trusteesGil Rouff, Kathleen Smith, Jamie Striley, James Groff, Melvin Hodis and WilliamMooradian.
Footnote 2:The parties haveabandoned any challenges that they may have had to Supreme Court's resolution of themotions to dismiss the remaining causes of action by failing to raise those challenges intheir briefs (see e.g. HSBCBank USA, N.A. v Ashley, 104 AD3d 975, 975 n [2013], lv dismissed21 NY3d 956 [2013]).
Footnote 3:Contrary to the CRSdefendants' argument, Spallholz v Sheldon (supra) contemplates that therepudiation and discovery rules extend beyond claims for an accounting to the recoveryof monetary damages for breach of fiduciary duty; Spallholz was an action toreclaim excessive payments to a trustee, not an action for an accounting (Spallholz vSheldon, 216 NY at 208-209; see People v Ben, 55 AD3d 1306, 1308 [2008]).
Footnote 4:Regarding the CRSentities not covered by the tolling agreement—the corporate affiliates—theclaims involving NYMIT and PATH are timely only with respect to misconductoccurring on or after December 5, 2005.