Court Opinion

ID: 2782361
Source: CourtListenerOpinion
Date Created: 2015-02-26 16:06:38.863063+00
Date Added: 2024-06-11T11:26:51.316483
License: Public Domain

State of New York
                   Supreme Court, Appellate Division
                      Third Judicial Department
Decided and Entered: February 26, 2015                    519128
________________________________

NEW YORK STATE WORKERS'
   COMPENSATION BOARD, as
   Administrator of the
   Workers' Compensation Law
   and Attendant Regulations
   and as Successor in
   Interest to THE
   MANUFACTURING INDUSTRY
   WORKERS' COMPENSATION
   SELF-INSURANCE TRUST
   et al.,
                    Appellant-                    MEMORANDUM AND ORDER
                    Respondent,
      v

CONSOLIDATED RISK SERVICES,
   INC., et al.,
                    Respondents-
                    Appellants,
                    et al.,
                    Defendants.
________________________________

Calendar Date:   January 5, 2015

Before:   McCarthy, J.P., Egan Jr., Lynch and Clark, JJ.

                             __________

      Rupp Baase Pfalzgraf Cunningham & Coppola, LLC, Buffalo
(Daniel E. Sarzynski of counsel), for appellant-respondent.

      Stenger, Roberts, Davis & Diamond, LLP, Wappingers Falls
(Ian Lindars of counsel), for Consolidated Risk Services, Inc.
and others, respondents-appellants.
                              -2-                519128

      Woods Oviatt Gilman LLP, Rochester (Andrew J. Ryan of
counsel), for Mark Bartlett, 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 David Bramwell, respondent-appellant.

      Hodgson Russ LLP, Albany (Christian J. Soller of counsel),
for Melvin Hodis and 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.), entered September 4, 2013 in Albany County, which, among
other things, partially granted defendants' motions to dismiss
the complaint.

      In December 2011, plaintiff commenced this action in its
capacity as the governmental agency charged with administering
the state's workers' compensation system and as successor in
interest to certain group self-insured trusts that were formed to
provide workers' compensation coverage to employees of the
trusts' members (see Workers' Compensation Law § 50 [3-a]; 12
NYCRR 317.2 [i]; 317.3). The trusts at issue herein are the New
York Manufacturing Industry Workers' Compensation Self-Insurance
Trust (hereinafter NYMIT), created in October 1997, the Provider
Agency 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
                               -3-                519128

related corporate entities (hereinafter collectively referred to
as the CRS defendants), insurance brokers allegedly engaged in
marketing the trusts, the former trustees of RITNY, and Regnier
Consulting Group, Inc., which provided actuarial reports for
RITNY.

      Plaintiff alleges that, as a result of defendants'
misconduct and malfeasance, the trusts 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 revealed deficits ranging from approximately $7
million to $25 million (see 12 NYCRR 317.20). Plaintiff
commenced this action seeking to recover the trusts' accumulated
deficits from defendants, alleging numerous causes of action,
including breach of fiduciary duty, fraud and fraud in the
inducement against the CRS defendants and the insurance brokers,
breach of contract against the RITNY trustees, and common-law
indemnification against all defendants. Defendants separately
moved to dismiss the complaint.

      As relevant here, Supreme Court partially denied the
motions by the CRS defendants and insurance brokers to dismiss
the breach of fiduciary duty, fraud and fraudulent inducement
claims as untimely, finding that the claims were timely as to
allegations on or after 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 certain
claims. With respect to the RITNY trustees, the court dismissed
as untimely the breach of contract claim against certain trustees
– defendants Jennifer Bartlett and Alice Nykaza – because they
demonstrated that their services as trustees terminated more than
six years before the action was commenced, but denied the motions
to dismiss of the remaining former trustees.1 The court also
dismissed the cause of action for implied indemnification, as
asserted against all defendants.

     1
        In their brief, the trustees indicate that plaintiff has
since discontinued all of its claims against defendant trustees
Gil Rouff, Kathleen Smith, Jamie Striley, James Groff, Melvin
Hodis and William Mooradian.
                              -4-                519128

      Plaintiff now appeals and, in its brief, challenges only
those portions of Supreme Court's order as limited the temporal
scope of its claim for breach of fiduciary duty against the CRS
defendants and insurance brokers, and dismissed its claim for
common-law indemnification. The CRS defendants cross-appeal.
Defendant Hickey-Finn & Co., Inc., an insurance broker, also
cross-appeals, as limited by its notice of appeal, from so much
of the order as partially denied its motion to dismiss the claims
of breach of fiduciary duty, fraud and fraud in the inducement
against it. Finally, former RITNY 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 against him.2

      Initially, we agree with plaintiff that Supreme Court
improperly limited the temporal scope of the actionable
misconduct on its breach of fiduciary duty claim. Plaintiff
maintains that the court misapplied the repudiation rule, which
provides that "the applicable statutory period . . . does not
begin to run until the fiduciary has openly 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, 58 AD3d 958, 959 [2009]).
The Court of Appeals has instructed that, under the repudiation
rule, "the time starts running when a successor [fiduciary] is
put in place" (Tydings v Greenfield, Stein & Senior, LLP, 11 NY3d
at 202). After the fiduciary "has yielded . . . to a successor,
. . . [t]he running of the statute [of limitations] then begins,
and only actual or intentional fraud will be effective to suspend
it" (Spallholz v Sheldon, 216 NY 205, 209 [1915] [citations
omitted]; accord Tydings v Greenfield, Stein & Senior, LLP, 11
NY3d at 201).

    2
        The parties have abandoned any challenges that they may
have had to Supreme Court's resolution of the motions to dismiss
the remaining causes of action by failing to raise those
challenges in their briefs (see e.g. HSBC Bank USA, N.A. v
Ashley, 104 AD3d 975, 975 n [2013], lv dismissed 21 NY3d 956
[2013]).
                              -5-                519128

      Here, for purposes of defendants' motion to dismiss, we
accept as true the allegations in the complaint that a fiduciary
relationship existed between the CRS defendants and the trusts,
of which plaintiff is the successor in interest, and afford
plaintiff the benefit of every favorable inference (see e.g. EBC
I, Inc. v Goldman, Sachs & Co., 5 NY3d 11, 19 [2005]; Murray
Bresky Consultants, Ltd. v New York Compensation Manager's, Inc.,
106 AD3d 1255, 1258 [2013]). That fiduciary relationship would
have terminated on the dates that CRS ceased administration of
the trusts in 2006, and Supreme Court properly determined that
the limitations period commenced running at that point (see
Tydings v Greenfield, Stein & Senior, LLP, 11 NY3d at 201;
Spallholz v Sheldon, 216 NY at 209).3 The court erred, however,
in failing to apply the repudiation rule as a "toll" and in
sustaining the claim only with respect to misconduct that was
otherwise timely. The limitations period for all breaches of
fiduciary duty, regardless of when they occurred, was tolled
until CRS ceased administration of the trusts and, thus, all
misconduct would "fall[] within the permissible temporal scope of
the" claims so long as any 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 of the limitations period for all misconduct
committed by the fiduciary prior to repudiation of its obligation
or termination of the relationship. In other words, all of the
alleged misconduct prior to the severance date is included in the
actionable portion of the claim.

      We reject the argument of the CRS defendants on their cross
appeal that the statute of limitations for the entire breach of
fiduciary duty claim is three years, rather than six. The

    3
        Contrary to the CRS defendants' argument, Spallholz v
Sheldon (supra) contemplates that the repudiation and discovery
rules extend beyond claims for an accounting to the recovery of
monetary damages for breach of fiduciary duty; Spallholz was an
action to reclaim excessive payments to a trustee, not an action
for an accounting (Spallholz v Sheldon, 216 NY at 208-209; see
People v Ben, 55 AD3d 1306, 1308 [2008]).
                              -6-                519128

parties are in agreement that, because plaintiff does not seek
equitable relief, a six-year statute of limitations period
applies to the breach of fiduciary duty claim against CRS only if
"an allegation of fraud is essential to" the claim (IDT Corp. v
Morgan Stanley Dean Witter & Co., 12 NY3d 132, 139 [2009]; see
New York State Workers' Compensation Bd. v SGRisk, LLC, 116 AD3d
1148, 1154 [2014]). To state a claim for fraud, a plaintiff must
allege "that the defendant knowingly misrepresented a material
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 AD3d 1517, 1520 [2010] [internal
quotation marks and citation omitted]). In addition, and
particularly relevant here, "[f]raud may also result from a
fiduciary's failure to disclose material facts when the fiduciary
had a duty to disclose and acted with the intent to deceive"
(id.; see Mandarin Trading Ltd. v Wildenstein, 16 NY3d 173, 178
[2011]; Kaufman v Cohen, 307 AD2d 113, 119-120 [2003]).

      Here, a portion of plaintiff's breach of fiduciary duty
claim is grounded in its allegations that the CRS defendants
breached their fiduciary duties to the trusts by fraudulently
concealing or misrepresenting the financial condition of the
trusts, the danger of operating deficits and issues associated
with underwriting deficiencies, and that CRS did so as part of a
scheme to increase membership and thereby increase its own
commissions. These are fraud allegations, and they are essential
to this portion of the fiduciary 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 fiduciary duty 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, 74 AD3d at 1519-1520; see also McDonnell v Bradley, 109
AD3d 592, 594-595 [2013]; Carbon Capital Mgt., LLC v American
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 Court improperly applied the "discovery rule" to certain
of those defendants on the fraud and fraudulent inducement
                              -7-                519128

claims, we agree with Hickey-Finn, whose marketing agreements
with PATH and NYMIT terminated effective January 1, 2000, that
the court erred in relying upon that rule to sustain the claims
against it. The "discovery rule" is found in CPLR 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 the time [a] plaintiff . . . discovered
the fraud, or could with reasonable diligence have discovered
it." It is settled that "[t]he inquiry as to whether a plaintiff
could, with reasonable diligence, have discovered the 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, 307 AD2d
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 fact exist regarding whether misconduct
predating the statute of limitations period is cognizable under
the two-year discovery rule. With respect to the insurance
brokers, the court concluded that the fraud causes of action,
along with the cause of action for breach of fiduciary duty, were
untimely under a six-year statute of limitations, but that the
record did not foreclose application of the discovery rule. Both
the CRS defendants and Hickey-Finn argue that the claims against
them are untimely even pursuant to the discovery rule because
plaintiff could have discovered the fraud with reasonable
diligence 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
RITNY could 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 knowledge of the facts from which the
fraud [committed by CRS] reasonably could be inferred." In light
of plaintiff's admission that it had knowledge of the facts from
                              -8-                519128

which fraud could reasonably be inferred after receiving the
forensic accountings, the two-year discovery rule would run from
the date that plaintiff received the audit reports, February 19,
2008 for NYMIT and PATH, and June 11, 2010 for RITNY. Consistent
with that admission, a review 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, LLC v Brenda J. DeLuca Trust, 108 AD3d at 913). Thus,
to be timely under the discovery rule, an action on the claims
involving NYMIT and PATH was required to be commenced 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 on December 5, 2011. Even pursuant to the
discovery rule, then, the fiduciary duty, fraud and fraudulent
inducement claims are untimely with respect to Hickey-Finn, which
had no involvement with RITNY (see Elhannon, LLC v Brenda J.
DeLuca Trust, 108 AD3d at 913; cf. Kaufman v Cohen, 307 AD2d at
123).

      As to the CRS defendants, however, the discovery rule would
render all fraud claims regarding RITNY timely if receipt of the
forensic audits is the earliest date that plaintiff could be said
to have possessed knowledge of facts from which fraud could
reasonably be inferred. Moreover, because it is undisputed that
a tolling agreement extended the statute of limitations period
for CRS and its employees by approximately 33 months, from
February 2009 through November 30, 2011, the claims involving
NYMIT and PATH would also be timely as to those defendants.4
Although the CRS defendants argue that the fraud against RITNY
was discoverable in 2002 when an audit revealed material
deficiencies in funding, plaintiff persuasively responds that the
audit uncovered only funding issues related to reserves and
liabilities at a particular point in time, not evidence of an
intentional failure to disclose the true financial state of RITNY
and the dangers related to its operating at a deficit. In our

    4
        Regarding the CRS entities not covered by the tolling
agreement – the corporate affiliates – the claims involving NYMIT
and PATH are timely only with respect to misconduct occurring on
or after December 5, 2005.
                              -9-                519128

view, given the complex nature of the fraud allegations –
including the fact that forensic accountings were required to
determine the circumstances constituting the fraud – Supreme
Court properly determined that questions of fact exist regarding
whether the discovery rule should apply such that alleged
misconduct predating the six-year limitations period is
cognizable on the fraud claims against the CRS defendants
involving RITNY, and on those claims against CRS and its
employees involving NYMIT and PATH (see Kaufman v Cohen, 307 AD2d
at 123).

      Turning to the arguments of defendant David Bramwell, a
former employee of CRS who submits his own brief on the CRS
defendants' cross appeal, we are unpersuaded by his assertion
that his affidavit and documentary evidence conclusively
demonstrated that his employment with CRS terminated in September
1996, such that he had no obligations under the relevant
agreements, and that all claims against him were, in any event,
barred by the statute of limitations. "Under CPLR 3211 (a) (1),
a dismissal is warranted only if the documentary evidence
submitted conclusively establishes a defense to the asserted
claims as a matter of law" (Leon v Martinez, 84 NY2d 83, 88
[1994]; see Goshen v Mutual Life Ins. Co. of N.Y., 98 NY2d 314,
326 [2002]). Contrary to his assertions, Bramwell cannot rely
upon his own affidavit in seeking dismissal based on that
provision – "such an affidavit does not constitute documentary
evidence upon which 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
the remaining documentary evidence establishes that Bramwell left
CRS in 1996, it does not establish that he had no further
employment by CRS. In that regard, plaintiff submitted evidence
– the forensic accounting report for RITNY – indicating that
Bramwell left CRS in or around 2002. Inasmuch as Bramwell's
documentary evidence does not "'utterly refute[]'" plaintiff's
factual allegations (New York State Workers' Compensation Bd. v
SGRisk, LLC, 116 AD3d at 1153, quoting Goshen 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 the
benefit of every favorable inference (see EBC I, Inc. v Goldman,
                              -10-               519128

Sachs & Co., 5 NY3d at 19), we conclude that plaintiff adequately
stated its causes of action against Bramwell. Similarly, given
the potential application of the repudiation and discovery rules
against Bramwell, as discussed above, Supreme Court properly
concluded that questions of fact preclude dismissal on statute of
limitations grounds at this stage of the proceedings.

      On his cross appeal, Bartlett, a former trustee of RITNY,
challenges Supreme Court's denial of his motion to dismiss
plaintiff's breach of contract claim against the trustees of
RITNY. Supreme Court dismissed a breach of fiduciary duty claim
against those trustees as untimely pursuant to a three-year
statute of limitations. Bartlett argues that the breach of
contract claim is also untimely because it is merely a
restatement of the breach of fiduciary duty claim and that, in
any event, there is no express or implied contract between the
trustees and the trust because fundamental elements required for
a contract – mutual assent and consideration (see Maas v Cornell
Univ., 94 NY2d 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 plaintiff adequately stated a
cause of action for breach of contract to survive a motion to
dismiss.

      To state a cause of action for breach of contract, a
plaintiff must allege "formation of a contract, performance by
one party, failure to perform by another and resulting damage"
(New York State Workers' Compensation Bd. v SGRisk, LLC, 116 AD3d
at 1153). As Bartlett concedes, the same conduct that
constitutes a breach of contractual obligation may also
constitute a breach of fiduciary duty (see e.g. id. at 1153-
1154). Here, plaintiff alleged that Bartlett executed a
"Designation of Trustee" form in 2004, in which he agreed to
accept all duties and responsibilities of a trustee in accordance
with RITNY's trust agreement. Plaintiff further alleged that,
although RITNY provided workers' compensation insurance to the
trust members, the RITNY trustees caused damages in excess of $7
million to the trust when they breached their contractual duties
by, among other things, failing to ensure that the trust's
underwriting practices and discount policies were reasonable and
consistently applied, failing to evaluate new members properly,
                              -11-               519128

failing to hold regular board meetings, failing to take remedial
actions to address RITNY's underfunding and failing to 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 formation of a contract between RITNY and
the trustees, that the trust performed its obligations while the
trustees, including Bartlett, did not, and that RITNY was damaged
as a result.

      This Court recently found that nearly identical allegations
were sufficient to state a claim for breach of contract (see
Murray Bresky Consultants, Ltd. v New York Compensation
Manager's, Inc., 106 AD3d at 1256-1258; see also New York State
Workers' Compensation Bd. v SGRisk, LLC, 116 AD3d at 1153), and
Bartlett's arguments that the required contractual elements of
mutual assent and consideration were absent provide no basis for
distinguishing those cases. As Supreme Court concluded,
Bartlett's assent is manifest in his signed, notarized agreement
expressly "accept[ing] all duties and responsibilities of [a
trustee] in accordance with the terms and conditions of the Trust
Agreement." Regarding consideration, we note that every
trustee's service was undertaken on behalf of their employers who
were parties to a complex relationship with the trusts, and agree
with Supreme Court that the record does not foreclose the
possibility that consideration flowed to the trustees via their
employers.

      Finally, based upon this Court's recent precedent, the
portion of plaintiff's common-law indemnification claim that was
asserted against the RITNY trustees must be reinstated.
Plaintiff acknowledges that, although it appealed from that
portion of Supreme Court's order as dismissed its common-law
indemnification claim in the entirety, this Court's decision in
State of N.Y. Workers' Compensation Bd. v Madden (119 AD3d 1022
[2014], supra) – which involved a substantially similar factual
background and was decided while this appeal was pending –
precludes it from seeking indemnification except as against the
trustee defendants (id. at 1023-1025). However, as plaintiff
further argues, Madden dictates that its claims against the
trustees be reinstated on the ground that the trustees "owed a
common duty to the covered employees to ensure that the trust
                              -12-                 519128

maintained adequate reserves such that its assets 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 our decision, 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 of
defendant Hickey-Finn & Co., Inc. to dismiss the first, fourth
and fifth causes of action against it, (2) limited the actionable
misconduct to the limitations period on the first cause of action
as to the remaining defendants, and (3) granted the motion of
defendants Mark Bartlett, Ronald Birdsall, Bonnie Carpineta,
Robert Finch, Vince Minieri, Thomas Mirabito and William
Bonisteel to dismiss the common-law indemnification claims
against them; motion by Bartlett, Birdsall, Carpineta, Finch,
Minieri, Mirabito and Bonisteel to dismiss is denied to the
extent asserted by plaintiff in its governmental capacity as the
entity charged with the administration of the Workers'
Compensation Law, motion by Hickey-Finn to dismiss the first,
fourth and fifth causes of action is granted and said claims
dismissed, and matter remitted to the Supreme Court to permit
defendants to serve an answer within 20 days of the date of this
Court's decision; and, as so modified, affirmed.

                             ENTER:

                             Robert D. Mayberger
                             Clerk of the Court