Case Title: The People of the State of New York by Andrew M. Cuomo, Attorney General of the State of New York v. Coventry First LLC

Citation: 

Docket Number: 

State: new-york

Court: New York Appellate Court

Date: 2009-06-30T00:00:00Z

Document:
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This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 115  
The People of the State of New 
York by Andrew M. Cuomo, Attorney 
General of the State of New York,
            Respondent, 
        v. 
Coventry First LLC, et al.,
            Appellants.
John G. Kester, for appellants.
Benjamin N. Gutman, for respondent.
PIGOTT, J.:
In recent years, an industry has developed in the
United States in which investors, known as life settlement
providers, buy life insurance policies from policy owners for
cash, ultimately receiving the benefits of the policies when the
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No. 115
1 Life settlement providers distinguish life settlements
from viatical settlements, in which the policy seller suffers
from a "catastrophic or life threatening illness or condition"
(Insurance Law § 7801 [b]).  The latter, but not the former, are
regulated by Insurance Law article 78.
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insureds die.  An example will illustrate the type of transaction
involved.  A company that holds a policy insuring the life of an
executive who has retired wishes to sell the policy, to avoid
paying premiums.  A life settlement provider buys the life
insurance policy from the company, for an amount exceeding the
surrender value offered by the insurer, calculating that the
value of the death benefits exceeds the purchase price,
transaction costs, and continued premiums.1  
Importantly, the life settlement industry purports to
employ a competitive auction model.  The policy owner -- or the
owner's financial advisor or agent -- will often hire a broker to
solicit competing bids for the policy from life settlement
providers. 
I.
In October 2006, the Attorney General of New York State
commenced this enforcement action against Coventry First LLC; its
parent corporation, Montgomery Capital, Inc.; its executive vice-
president, Reid S. Buerger; and an affiliate, The Coventry Group
Inc. (collectively "Coventry First"), alleging fraudulent and
anticompetitive conduct.  The Attorney General alleges that
defendants, life settlement providers, engaged in bid-rigging by
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paying substantial, concealed commissions to life settlement
brokers, who in return persuaded their clients to accept
defendants' offers, rather than higher bids from rival life
settlement providers.  The Attorney General also claims that
defendants concealed a scheme of "gross offers" whereby brokers
were allowed to determine how much of a purchase price paid by
defendants they would keep and how much they would pass on to the
policy seller.  Additionally, falsification of documents is
alleged.  
The Attorney General seeks damages "on behalf of the
owners of life insurance policies who have been damaged by the
schemes" and injunctive relief preventing further misconduct. 
The State's six causes of action are based on (1) Executive Law §
63 (12), (2) General Business Law § 340 et seq. (the Donnelly
Act), (3) General Business Law § 352 et seq. (the Martin Act),
(4) common law fraud, (5) unjust enrichment, and (6) inducement
of breach of fiduciary duty.  
Defendants moved to dismiss plaintiff's complaint
pursuant to CPLR 3211 (a) (7).  In addition, because the
contracts entered into by Coventry First and individual policy
sellers contained paragraphs providing that contractual disputes
and controversies between the parties would be settled by
arbitration, defendants filed a motion pursuant to CPLR 7503 (a),
seeking to "[c]ompel arbitration of all claims for victim-
specific relief." 
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As relevant to this appeal, Supreme Court denied
defendants' motion to compel arbitration and allowed the Attorney
General's breach of fiduciary duty cause of action to proceed,
along with two others.  The court also dismissed the Attorney
General's claims to the extent that "they pertain to life
settlement transactions that do not involve New York life
settlement brokers, New York policy sellers, or alleged
misconduct in New York."
The Appellate Division reinstated the common law fraud
cause of action, dismissed by Supreme Court, and otherwise
affirmed (52 AD3d 345).  The same court then granted leave to
appeal to this Court, certifying the question whether Supreme
Court's order, as modified by the Appellate Division, was
properly made.  We conclude that it was.
On appeal, defendants challenge the Appellate
Division's decision in only two respects: insofar as it affirmed
the denial of their motion to compel arbitration and insofar as
it allowed the Attorney General's sixth cause of action, alleging
inducement of breach of fiduciary duty, to proceed.  We address
the arbitration question first.
II.
While defendants concede that the State's injunctive
claims are not susceptible to arbitration, they insist that the
claims for relief specific to particular policy sellers -- claims
for rescission of purchase agreements and for restitution -- are
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subject to arbitration under the sellers' contracts with Coventry
First.  We have "repeatedly recognized New York's 'long and
strong public policy favoring arbitration'" (Stark v Molod Spitz
DeSantis & Stark, P.C., 9 NY3d 59, 66 [2007], quoting Matter of
Smith Barney Shearson v Sacharow, 91 NY2d 39, 49 [1997]). 
However, the obligation to arbitrate depends on an agreement to
arbitrate; arbitration "is a matter of consent, not coercion"
(Salvano v Merrill Lynch, Pierce, Fenner & Smith, Inc., 85 NY2d
173, 182-183 [1995], quoting Volt Information Sciences, Inc. v
Board of Trustees of Leland Stanford Junior Univ., 489 US 468,
479 [1989]).  
Consent to arbitrate occurs in the most straightforward
manner when a party signs a formal agreement to arbitrate.  The
Attorney General, of course, did not enter into any contract with
defendants, agreeing to arbitration.  Instead, defendants argue
that the Attorney General, by suing on behalf of policy sellers
who contracted with Coventry First, has become the "agent or
alter ego of the contracting sellers" and is bound by their
obligation to arbitrate.  They also argue that that obligation is
enforceable against the Attorney General pursuant to the Federal
Arbitration Act.  It is true that courts apply common law
principles of contract and agency to determine whether a
nonsignatory is bound by an arbitration agreement.  However,
defendants' arguments fail in light of United States Supreme
Court precedent.
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In Equal Employment Opportunity Commission v Waffle
House, Inc. (534 US 279 [2002]), the Supreme Court held that an
agreement between an employer and an employee to arbitrate
employment-related disputes does not bar the Equal Employment
Opportunity Commission from seeking victim-specific relief, such
as backpay, reinstatement, and damages, in an enforcement action
alleging that the employer had violated the Americans with
Disabilities Act.  Waffle House stands for two broad
propositions, applicable to the present case.  The first is that
pro-arbitration policy goals do not require a government agency
to give up its statutory enforcement authority in favor of
arbitration if it has not consented to do so, because those goals
do not "require parties to arbitrate when they have not agreed to
do so" (534 US at 293, quoting Volt, 489 US at 478; see 534 US at
288-289, 293-294).  The second is that the government agency may
seek relief specific to a victim who agreed to arbitrate claims,
because, as here, that relief is best understood as part of the
vindication of a public interest (see 534 US at 294-296).
The Attorney General of New York State has statutory
authority to serve the public interest by seeking both injunctive
and victim-specific relief, comparable to that of the EEOC in the
federal arena.  The EEOC is authorized by statute to bring an
enforcement action, seeking to enjoin an employer from engaging
in unlawful employment practices and seeking appropriate
affirmative action, such as reinstatement and/or backpay (42 USC
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§ 2000e-5 [f] [1], [g] [1]), as well as compensatory and punitive
damages (42 USC § 1981a [d] [1] [A], [d] [1] [B]).  Similarly,
the Attorney General of New York State, when apprised of the
persistent fraud or illegality of a business, is authorized by
statute to bring an enforcement action seeking "an order
enjoining the continuance of such business activity or of any
fraudulent or illegal acts, [and] directing restitution and
damages" (Executive Law § 63 [12]).  He is also authorized, when
informed of deceptive acts or practices affecting consumers in
New York, to "bring an action in the name and on behalf of the
people of the state of New York to enjoin such unlawful acts or
practices and to obtain restitution of any moneys or property
obtained" thereby (General Business Law § 349 [b]).  Like the
EEOC, the Attorney General should not be limited, in his duty to
protect the public interest, by an arbitration agreement he did
not join.  Such an arrangement between private parties cannot
alter the Attorney General's statutory role or the remedies that
he is empowered to seek.  We therefore hold that the arbitration
agreement between defendants and their alleged victims does not
bar the Attorney General from pursuing victim-specific judicial
relief in his enforcement action.  
III.
We now turn to the issue of whether the Attorney
General has pleaded a viable cause of action for inducement of
breach of fiduciary duty.  The Attorney General claims that
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defendants "aided and abetted, participated in, and benefitted
from" the life settlement brokers' breach of fiduciary duties to
their clients.  
"When assessing the adequacy of a complaint in light of
a CPLR 3211 (a) (7) motion to dismiss, the court must afford the
pleadings a liberal construction, accept the allegations of the
complaint as true and provide plaintiff . . . the benefit of
every possible favorable inference" (AG Capital Funding Partners,
L.P. v State St. Bank & Trust Co., 5 NY3d 582, 591 [2005]
[internal quotation marks omitted]).  "[O]ur sole criterion is
whether the pleading states a cause of action, and if from its
four corners factual allegations are discerned which taken
together manifest any cause of action cognizable at law a motion
for dismissal will fail" (Polonetsky v Better Homes Depot, Inc.,
97 NY2d 46, 54 [2001] [internal quotation marks omitted]).  In
determining whether the Attorney General's allegations are
sufficient to state the necessary elements of a cognizable cause
of action, we begin by noting that the claim that defendants
knowingly induced or participated in a fiduciary's breach of
obligations to another necessarily fails if no fiduciary duty
exists or if defendants did not know of the duty.  
Our first question therefore is whether the facts
concerning life settlement brokers, as alleged by the Attorney
General, fit within the legal theory of fiduciary duty.  "A
fiduciary relationship 'exists between two persons when one of
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them is under a duty to act for or to give advice for the benefit
of another upon matters within the scope of the relation'" (EBC
I, Inc. v Goldman Sachs & Co., 5 NY3d 11, 19 [2005], quoting
Restatement [Second] of Torts § 874, Comment a).  It exists only
when a person reposes a high level of confidence and reliance in
another, who thereby exercises control and dominance over him
(see Northeast Gen. Corp. v Wellington Advertising, 82 NY2d 158,
172-173 [1993]).  
According to the Attorney General, life settlement
brokers hold themselves out as working to obtain the highest
purchase price for their clients' policies.  A promise to obtain
for a client the "highest possible" offer -- in contrast to, for
example, simply "obtain[ing] requested coverage for [a client]
within a reasonable time or inform[ing] the client of the
inability to do so . . . [with] no continuing duty to advise,
guide or direct a client to obtain additional coverage" (Murphy v
Kuhn, 90 NY2d 266, 270 [1997] [citations omitted]) -- would, if
made in a manner that could be reasonably relied upon by the
client, suggest a fiduciary duty.  Here, the Attorney General's
allegations describe a set of circumstances in which life
settlement brokers, by claiming relationships with large numbers
of other financial institutions and professionals, and by
persistently representing that they seek the highest possible
offer for their clients' life insurance policies, hold themselves
out to be highly-skilled experts and are on notice that their
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advice is specially relied on by their clients.  The sale of life
insurance policies is alleged to be a relatively new and largely
unregulated industry -- one in which even sophisticated clients
rely on what they take to be expert advice when seeking offers on
policies they wish to sell.  These allegations comport with the
legal theory of fiduciary duty.  
The Attorney General's allegations also sufficiently
state a claim that defendants knew that the life settlement
brokers' conduct constituted a breach of fiduciary duty. 
Defendants' only argument in this regard is that they could not
have had the requisite knowledge because the present case was the
first time that a fiduciary duty on the part of life settlement
brokers had been announced in this jurisdiction.  However, the
Attorney General's complaint cited a Life Settlement Insurance
Association White Paper, published in 2006, which states that the
life settlement broker "has a fiduciary role to represent the
seller by law . . . the bottom line is that the broker's job is
to fully represent the interests of the policy seller."  The
complaint was also accompanied by an exhibit of emails between
Coventry First executives who refer to the fiduciary duties of
life settlement brokers.  According the Attorney General the
benefit of every possible favorable inference, as we must on a
CPLR 3211 (a) (7) motion to dismiss, we conclude that he
sufficiently alleged defendants' knowledge of the life insurance
brokers' fiduciary duties.
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IV.
Finally, defendants' argument that the State does not
have standing to bring a claim seeking damages on behalf of life
insurance policy sellers was not preserved below and is waived
under CPLR 3211 (e). 
Accordingly, the order of the Appellate Division should
be affirmed, with costs, and the certified question answered in
the affirmative.
*   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *
Order affirmed, with costs, and certified question answered in
the affirmative.  Opinion by Judge Pigott.  Judges Ciparick,
Graffeo, Read, Smith and Jones concur.  Chief Judge Lippman took
no part.
Decided June 30, 2009