Opinion
99 Civ. 0876 (BSJ).
April 18, 2000.
OPINION ORDER
Plaintiff BankBoston (Guernsey) Ltd. ("BankBoston") has brought an action seeking to recover $757,242.00 in funds mistakenly overpaid to defendant Donald C. Schupak ("Schupak"), on the closing of Schupak's account on December 29, 1998. The defendant asserts fourteen affirmative defenses challenging plaintiff's right to the funds and one counterclaim for tortious interference with contract. Pending before the Court is plaintiff's motion for summary judgment on its claims seeking a declaratory judgment entitling it to $757,242.00, to recover attorneys' fees for bringing this action, and to dismiss Schupak's counterclaim. For the reasons set forth below, plaintiff's summary judgment motion is granted in part and denied in part.
Background
The following facts are, unless otherwise noted, undisputed. Defendant Schupak, a New York citizen, maintained an account (the "Account") with plaintiff BankBoston, a corporation organized under the laws of Guernsey, chancels Islands. Defendant established a letter of credit at BankBoston on January 1, 1986, for the amount of £ 70,000, which was later replaced on January 1, 1991 by another letter of credit for £ 120,000. The Account was maintained pursuant to a Custody Agreement signed by the parties in September 1986. The Account held a letter of credit in connection with defendant's investment as a Name in Lloyd's of London ("Lloyd's"). Lloyd's had authority to make "draw down payments" from Schupak's letter of credit for underwriting losses incurred with respect to Schupak's investment in Lloyd's. Throughout the period in which Schupak maintained the Account, numerous payments were made against his letter of credit in accordance with his obligation to Lloyd's.
As of December 29, 1998, BankBoston records reflected the remaining amount in the Account to be £ 459.84, or $758.69. On December 29, 1998, BankBoston closed the Account and prepared a check to return the remaining $758.69. The check prepared by a BankBoston employee and issued to Schupak, however, reflected the amount to be $758,000.69. The portion of the check spelling the amount in words reads: "seven hundred fifty eight thousand dollars and sixty-nine cents." The portion of the check written in numerals reads: "$758,000.69." There is a short horizontal line above the three zeroes between the "758" and ".69," which are written smaller than the "758" and the same size as the "69." The check was signed by Anthony Le Tissier, a Managing Director at BankBoston, and remitted to Schupak with a transmittal letter also signed by Le Tissier. The transmittal letter informed Schupak that BankBoston was closing his account, and that BankBoston was enclosing a check for the remaining $758.69.
Plaintiff alleges that the numerical portion of the check was altered after its issuance by the adding of the three zeroes between the "758" and the ".69." Defendant denies altering the check. Nevertheless, it is undisputed that BankBoston's records reflected that defendant had $758.69 on deposit in the Account, and that BankBoston intended the check to be in the amount of $758.69. It is further undisputed that plaintiff made a clerical mistake as to the amount reflected on the check — whether the mistake was made only in the portion of the check that was written in words, or in both the written and numerical portions of the check.
Schupak endorsed the check for $758,000.69 on January 5, 1999, and deposited the check into his account at Sterling National Bank ("Sterling"). BankBoston, N.A., the payor bank for BankBoston, paid the check and Schupak's Sterling account was credited for that amount. When the mistake was discovered, BankBoston, N.A., wrote to Sterling on BankBoston's behalf on January 15, 1999, explaining the error and requesting that Sterling release $757,242.00, the mistakenly overpaid amount, to BankBoston. In this letter, BankBoston also offered to release Sterling from all claims and to hold it harmless from all costs and liabilities arising from the payment of the difference in funds to BankBoston. BankBoston contacted Schupak through its lawyers in a letter dated February 3, 1999, requesting that Schupak immediately instruct Sterling to remit the overpaid amount of $757,242.00 to BankBoston. Schupak refused, and has continued to refuse to return the difference in funds.
BankBoston filed this action to recover the overpaid amount of $757,242.00. By previous Stipulation and Order, the funds at issue were placed in escrow in an interest bearing account at Sterling pending resolution of this action.
I.
Summary judgment may be granted only "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue of as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). A party opposing a properly supported summary judgment motion must establish a genuine issue of material fact in order to preclude summary judgment. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 476 U.S. 574, 585-6 (1986). Disputed facts preclude summary judgment if the evidence would allow a reasonable jury to return a verdict for the non-movant. Id. In deciding a summary judgment motion, the court must view all inferences to be drawn from the underlying facts in the light most favorable to the party opposing the summary judgment motion. Id. The substantive law governing the case will identify those facts that are material; and "only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
A court must entertain a declaratory judgment action (1) when the judgment will serve a useful purpose in clarifying and settling the legal relations in issue, or (2) when it will terminate and afford relief from the uncertainty, insecurity, and controversy giving rise to the proceeding. See Continental Cas. Co. v. Coastal Savings Bank, 977 F.2d 734, 737 (2d Cir. 1992). If either prong is met, the action must be entertained. Id.
II.
The facts here are undisputed that (1) there was $758.69 remaining in defendant's Account as of December 29, 1998, and (2) plaintiff BankBoston made an administrative mistake in issuing the defendant a check for $758,000.69, instead of the intended amount of $758.69. Moreover, the declaratory judgment sought by the plaintiff to determine the entitlement of the overpaid funds satisfies the Continental Casualty test, as it settles the legal relations in issue and will "terminate and afford relief from the uncertainty, insecurity, and controversy giving rise to the proceeding." Continental Casualty, 977 F.2d at 737.
III.
The defendant does not dispute the fact that plaintiff remitted the funds to him in error, but asserts fourteen affirmative defenses which he argues give him some right to the overpaid funds and warrant denial of summary judgement on plaintiff's claim for declaratory judgment. The Court disagrees.
A.
In his first four affirmative defenses Schupak contends that plaintiff's claim of entitlement to the money fails to state a claim upon which relief may be granted; is barred by waiver and/or estoppel; is barred by plaintiff's unclean hands; and is barred by plaintiff's own gross negligence. The short answer is that none of these defenses has any support in fact or law. Schupak does not dispute, as he cannot, that the issuance of the check was a mistake on the Bank's part and that it attempted to recover the funds within ten days after Schupak deposited it. Under these facts, the Bank has stated a claim, and there is no legal authority known to this Court, and defendant provides none, that would bar the Bank from the recovery of its money on the theories advanced by Schupak. Accordingly, they cannot act as a bar to plaintiff's motion for summary judgment on its declaratory judgement claim.
B.
Defendant also alleges nine affirmative defenses (the fifth through thirteenth) against BankBoston sounding in contract, fraud, breach of fiduciary duty, and securities law. Almost all of these claims are based upon allegations that the Bank made fraudulent misrepresentations and omissions in 1985, which induced Schupak to enter into his ill-fated Lloyd's investment on January 1, 1986. BankBoston asserts that virtually all of these claims are barred by the six year statute of limitations as set forth in CPLR 213.
In an effort to salvage these claims the defendant relies on the common law principle of recoupment which is codified at CPLR 20(d). See 118 East 60th Inc. v. Bonner Properties Inc., 677 F.2d 202, 203 (2d Cir. 1982). CPLR 203(d) provides:
Defense or counterclaim. A defense or counterclaim is interposed when a pleading containing it is served. A defense or counterclaim is not barred if it was not barred at the time the claims asserted in the complaint were interposed, except that if the defense or counterclaim arose from the transactions, occurrences, or series of transactions or occurrences, upon which a claim asserted in the complaint depends, it is not barred to the extent of the demand in the complaint notwithstanding that it was barred at the time the claims asserted in the complaint were interposed.
Recoupment is the right of a defendant to have the plaintiff's claim reduced by reason of a claim the defendant has against the plaintiff arising out of the same transactions on which the plaintiff's claim is based. See McCoy v. Goldberg, 845 F. Supp. 155, 158 (S.D.N.Y. 1994) (citing 6C. Wright A. Miller M. Kane, Fed. Practice and Procedure 1401 (2d ed. 1990)). For the doctrine to apply, defendant's defense or counterclaim must "seek a recovery back predicated on some act or fact growing out of the matter constituting the cause or ground of the action brought."SCM Corp. v. Fisher Park Lane Co., 358 N.E.2d 1024, 1027 (N Y 1976). Such claims must "arise out of the same transactions that form the basis of, and must be sufficiently related to, the causes of action alleged in the plaintiff's complaint." 182 Franklin St. Holding Corp. v. Franklin Pierrepont Associates et al., 630 N.Y.S.2d 64, 64 (N.Y.App.Div. 1995).
Further, CPLR 203(d) is defensive in nature, and is not to be applied to seek affirmative relief against the party initiating the action. See 118 East 60th Owners, Inc., 677 F.2d at 203. "Recoupment does not allow one transaction to be offset against another, but only permits a transaction which is made subject to a suit by a plaintiff to be examined in all its aspects, and judgment to be rendered that does justice in view of the one transaction as a whole." Rochester Health Network, Inc. v. Rochester Hosp. Serv. Corp., 507 N.Y.S.2d 100, 101 (N.Y.App.Div. 198 6). The burden is on the defendant to demonstrate that his claims fall within the purview of CPLR 203(d). See Id.; see also Farkas v. Farkas, No. 95 Civ. 8464, 1998 WL 3633, at *3 (S.D.N.Y. Jan. 7, 1998).
In determining whether Schupak's affirmative defenses are allowed as an exception to time-barred claims under CPLR 203(d), the central question then is whether the transactions that are the subject of defendant's recoupment defenses are part of the same transaction or transactions raised by plaintiff BankBoston's claim, within the meaning of the 203(d). First, the Court notes that defendant himself characterizes plaintiff's issuance of the mistaken check as a "leveling of the playing field" that gives rise to an opportunity for the defendant to challenge plaintiff's right to the overpaid amount. Such a characterization smacks of the very offsetting of one transaction against another not permitted under 203(d). See, e.g., Rochester Health Network, 507 N YS.2d at 101.
Second, and more importantly, plaintiff's claim is based on a single, specific event that is undisputed: a mistaken overpayment by $757,242.00 made on December 29, 1998. None of Schupak's nine claims seek a "recovery back predicated on a fact growing out of" the erroneous transaction that is the focus of plaintiff's claim.See, e.g., SCM Corp., 358 N.E.2d at 1027 (a defendant landlord's counterclaim of the negotiations and events leading up to formation of a lease did not fall within § 203(c) (now § 203(d)) because the counterclaim did not arise from the same transaction as the tenant's action to recover rental overpayments.)
To the contrary, plaintiff seeks to offset transactions dating as far back as thirteen years against plaintiff's mistaken overpayment. Because defendant's claims did not arise out of the same transaction or series of transactions within the meaning of CPLR 203(d), the "recoupment" exception to time-barred claims does not apply. Accordingly, almost all of Schupak's fifth through thirteenth affirmative defenses are time-barred by the six year statute of limitations and cannot present a bar to the grant of summary judgment for the plaintiff on its claim for a declaratory judgment.
Schupak does allege certain claims, however, that may be timely asserted. First, he alleges that BankBoston breached its fiduciary duty to him when it failed to follow his directions to refuse to honor Lloyd's draw-down payments against his letter of credit at various times in 1992, 1993 and 1998. These claims are barred, however, by the terms of a 1996 Settlement Agreement between Schupak and Lloyd's (See Exhibit A to Corbet Declaration). In Section 4.1 of that agreement, Schupak agreed to make payments to satisfy his obligations to Lloyd's according to the Agreement's terms, "free and clear of any set off, counterclaim or other deduction on any account whatsoever . . . in respect of any claim against Lloyd's, Equitas or any other person. . . ." (emphasis added.) In addition, Schupak agreed in Section 4.2 to "take all necessary steps to facilitate the payment" of his liabilities covered by the Agreement "out of any assets held at Lloyd's, or otherwise held in relation to his underwriting at Lloyd's, including, without limitation, his funds at Lloyd's." Schupak further agreed that he would not take any action to prevent or seek to withdraw any authority for payment out of any such assets and revoked any prior withdrawal of such authority. Because Schupak expressly released any party from liability for this very claim, plaintiff's counterclaim for breach of fiduciary duty arising out of the settlement of plaintiff's obligations to Lloyd's is barred by the terms of the Settlement Agreement.
While the defendant brings these "recoupment" claims as affirmative defenses, the claims should have been pled as counterclaims to the plaintiff's claim. Fed.R.Civ.P. Rule 8(c) provides, however, that when a party has mistakenly designated a defense as a counterclaim or a counterclaim as a defense, the court, on terms and if justice so requires, shall treat the pleading as if there had been a proper designation. Pursuant to Rule 8(c), the Court treats the defendant's timely asserted "recoupment" claims as counterclaims.
Defendant signed the Settlement Agreement with Lloyd's on August 28, 1996.
Second, Schupak alleges that the Bank breached its fiduciary duties to him when it advised him "in or about 1993" to enter into a restructuring agreement "commonly referred to as the Equitas Agreement" and that the Bank misled him to believe that his letter of credit would be returned upon signing the agreement. Schupak can only be referring to the 1996 Settlement Agreement in this allegation and by its own terms it bars this claim. In Section 12.20 of the agreement, Schupak expressly acknowledged that he "[had] not entered into the Settlement Agreement in reliance upon any representation, warranty, or undertaking which is not expressly set out or referred to in this Settlement Agreement." Schupak's claim is barred by the terms of the Settlement Agreement because there is no "advice" from BankBoston set forth in the agreement. Accordingly, this Court grants summary judgment to the plaintiff on its claim for a declaratory judgment and declares that BankBoston is entitled to the $757,242.00 currently being held in escrow by Sterling.
The only agreement in the record is the 1996 Settlement Agreement. According to the plaintiff, this agreement is the only such "restructuring" agreement between the parties. Defendant offers no evidence in the record of any other agreement.
C.
The defendant asserts a counterclaim of tortious interference with contract. Defendant alleges that plaintiff's conduct following discovery of its mistaken overpayment constituted tortious interference with his contractual relationship as a customer of Sterling. First, defendant asserts that BankBoston's January 15, 1999 letter communication to Sterling requesting that Sterling release the funds to BankBoston caused Sterling to place a freeze on funds allegedly belonging to Schupak, thereby inducing Sterling to breach its contract with Schupak. Second, Schupak alleges that BankBoston's submission of a proposed stipulation and order signed by BankBoston and Sterling, and without Schupak, constituted tortious interference with Schupak's contract with Sterling.
A claim of tortious interference with contract requires proof of (1) the existence of a valid contract between the Schupak and a third party; (2) BankBoston's knowledge of that contract; (3) the BankBoston's intentional procuring of the breach, and (4) damages. See Foster v. Churchill, 665 N.E.2d 153, 156 (N Y 1996). Schupak alleges, and BankBoston does not dispute for the purpose of this motion, that Schupak has established the elements of the tort. BankBoston instead asserts a defense of economic justification against the counterclaim.
"Procuring the breach of a contract in the exercise of equal or superior right is acting with just cause or excuse and is justification for what would otherwise be an actionable wrong."Felsen v. Sol Cafeé Mfg. Corp., 249 N.E.2d 459, 464 (N Y 1969); see also Foster, 665 N.E.2d at 157. To be an actionable claim, "the interference must be intentional and not incidental to some other lawful purpose." Health-Chem Corp. v. Baker, 915 F.2d 805, 809 (2d Cir. 1990). To defeat a claim of tortious interference, a party defending against the claim must establish that its actions were to protect an economic interest. See Foster, 665 N.E.2d at 156. When the party demonstrates that it acted in its own economic interest, "the imposition of liability in spite of a defense of economic interest requires a showing of either malice on the one hand, or fraudulent or illegal means on the other." See id.
Here, the undisputed facts show that BankBoston acted out of economic interest to correct the consequences of its mistaken overpayment. Any "interference" with the contract between Schupak and Sterling was incidental to that lawful purpose. See Drummond v. Morgan Stanley Co., No. 95 Civ. 2011, 1996 WL 631723, at *1 (S.D.N.Y. Oct. 31, 1996) (Morgan Stanley was acting out of economic interest when it rescinded a transaction after discovering it had overpriced bonds due to inadequate information, and that any "interference" was incidental to that lawful purpose.) Further, Schupak has not set forth any evidence that BankBoston was acting out of malice or fraudulent or illegal means. See Foster, 665 N.E.2d at 156-57. Accordingly, plaintiff's motion for summary judgment dismissing defendant's counterclaim is granted.
IV.
Plaintiff further moves for certification under Fed.R.Civ.P. 54(b) of a final judgment on its declaratory judgment claim. The Court reserves judgment on the motion for certification under Rule 54(b) until after the next conference with the parties.
V.
Finally, plaintiff moves for summary judgment on its claim for attorney's fees, based on two provisions in the Custody Agreement. Paragraph 11 of the Custody Agreement provides in relevant part:
You [BankBoston] shall be entitled to compensation for your services in accordance with your Standard Charge Schedule. . . . I [Schupak] will reimburse you on demand for all reasonable out-of-pocket expenses incurred by you in performance of your duties hereunder (including stamp duties, taxes, on income or capital and other like charges).
Paragraph 13 of the Custody Agreement provides in relevant part:
You [BankBoston] shall incur no liability to me [Schupak] pursuant hereto except for acts or omissions of gross negligence or wilful default. I shall indemnify you and hold you harmless from and against all losses, costs, liabilities, expenses and claims resulting directly or indirectly from our performance of our duties hereunder unless they result from your gross negligence or wilful default.
Plaintiff maintains that Schupak must either reimburse plaintiff for its attorney's fees in prosecuting this action because the fees were a "reasonable out-of-pocket expense" incurred pursuant to Paragraph 11, or indemnify plaintiff for its attorney's fees in prosecuting this action pursuant to Paragraph 13. Plaintiff further asserts that these two clauses should be interpreted according to the law of Guernsey (the law of the United Kingdom) pursuant to a choice of law provision in Paragraph 21 of the Custody Agreement, which provides that the Agreement is governed by Guernsey law and that Schupak agrees to "submit to the nonexclusive jurisdiction of Guernsey courts for the purpose of any action or proceeding" in connection to the Agreement.
Because this action was filed in a district court within the State of New York, I apply New York's substantive law, see Erie R.R. v. Tompkins, 304 U.S. 64 (1938), including New York's choice of law rules. See Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487 (1941); Schiavone Constr. Co. v. City of New York, 99 F.3d 546, 548 (2d Cir. 1996). In New York, a choice of law provision in a contract is valid and enforceable. See Schiavone, 99 F.3d at 548. Accordingly, the Court should look to U.K. law to determine the meaning of Paragraphs 11 and 13.
Before turning to Paragraph 13, I note that while plaintiff refers in its papers to Paragraphs 11 and 13 collectively as two indemnification provisions, Paragraph 11 is clearly not an indemnity. Paragraph 11 simply states that Schupak will reimburse BankBoston for "all reasonable out-of-pocket expenses incurred by [BankBoston] in performance of [its] duties" under the Custody Agreement. Nothing in the language of this provision indicates the intent to cover BankBoston for its negligence in performing its duties. Nor does plaintiff cite any U.K. law in support of such an interpretation. Therefore, plaintiff is not entitled to summary judgment on its claim for attorney's fees on the basis of Paragraph 11.
Unlike Paragraph 11, Paragraph 13 is an indemnity. However, plaintiff does not cite a single U.K. case in support of its proposition that Paragraph 13 covers attorney's fees for an action brought by an indemnitee against the indemnitor. Plaintiff cites Halsbury's Laws of England for the proposition that under U.K. law "the extent of a person's liability under an indemnity depends on the nature and terms of the contract." 20 Halsbury's Laws of England Guarantee and Indemnity ¶ 354 (4th ed. reissue). But plaintiff's secondary source citation offers little help beyond that truism. In fact, the Halsbury's citation describes indemnity as an entitlement to recover losses and expenses in defending legal proceedings. See id. In the instant action, BankBoston, the indemnitee, seeks reimbursement forprosecution of a suit against the indemnitor. In the absence of any citation by plaintiff to U.K. law to support such an interpretation of Paragraph 13, I can find no basis in the contract for an award of attorney's fees to the plaintiff. The language of Paragraphs 11 and 13 does not evince a clear intent to provide for indemnification of claims asserted between the parties to the Custody Agreement. Accordingly, plaintiff's motion for summary judgment is denied.
New York law, on the other hand, is clear: a contractual obligation to indemnify for attorney's fees in litigation between the parties to the indemnity will not be inferred unless the intention to indemnify "is unmistakably clear from the language of the promise." Hooper Associates, Ltd. v. AGS Computers, Inc., 548 N.E.2d 903, 905 (N.Y. 1989); see also Bridgestone/Firestone, Inc. v. Recovery Credit Services, Inc., 98 F.3d 13, 20-21 (2d Cir. 1996) (applying the "unmistakably clear" test to deny indemnitee's claim for attorney's fees in litigation between the parties to an indemnification agreement); Coastal Power Intern. v. Transcontinental Capital, 10 F. Supp.2d 345, 371 (S.D.N Y 1998) (attorney's fees not recoverable where the agreement did not expressly apply to a suit by indemnitee against indemnitor);Bonnie Co. Fashions, Inc. v. Bankers Trust Co., 955 F. Supp. 203, 218 (S.D.N.Y. 1997) (same). Neither Paragraph 11 nor Paragraph 13 approaches the lofty standard of New York law.
Plaintiff's proffered interpretation is contrary to meaning of the word "indemnify." Black's Law Dictionary defines "indemnify" as follows: "1. To reimburse (another) for a loss suffered because of a third party's act or default. 2. To promise to reimburse (another) for such a loss. 3. To give (another) security against such a loss." Id. at 772 (7th ed. 1999) (emphasis added).
CONCLUSION
For the reasons stated above, plaintiff BankBoston's motion for summary judgment on the claim for declaratory judgment is GRANTED.
It is further ORDERED that plaintiff's motion for summary judgment dismissing defendant's tortious interference with contract counterclaim is GRANTED.
It is further ORDERED that plaintiff's motion for summary judgment on attorney's fees is DENIED.
The next case management conference shall be held in Courtroom 905, 40 Foley Square, New York, New York, on April 27, 2000, at 4:30 p.m..
SO ORDERED:
New York, New York April 2000