Summary
stating that, "[w]hile it is clear that the original complaint's allegations regarding the loan are only a small part of the larger controversy between the parties, this does not mean that defendant's potential third-party claims 'predominate' over the issues raised by plaintiffs [p]laintiffs have properly invoked this Court's diversity of citizenship jurisdiction with a substantial claim against defendant, and their proposed amended complaint would bring before this Court the full breadth of the dispute between the parties"
Summary of this case from Fisk Elec. Co. v. Obayashi Corp.Opinion
03 Civ. 3093 (TPG)
May 27, 2004
Opinion
This is an action for breach of contract by plaintiffs CCC Insurance Company, Limited ("CCC Ltd.") and CCC Insurance Corporation ("CCC Corp.") against defendant Brooklyn Hospital Center.
Defendant moves to dismiss or, in the alternative, to stay the action in deference to a closely related state court proceeding. Plaintiffs move to amend their complaint. For the reasons set forth, defendant's motion is denied and plaintiffs' motion is granted.
FACTS
CCC Ltd. is a corporation organized and existing under the laws of Bermuda. CCC Corp. is a wholly owned subsidiary of CCC Ltd., organized and existing under the laws of Barbados. Both corporations, together with a New York corporation named Combined Coordinating Council, Inc. ("CCC Inc."), were formed in the 1980s by defendant and six other New York hospitals, for the purpose of providing medical malpractice liability insurance and related benefits for the hospitals. CCC Ltd. was incorporated in 1983 to provide insurance to the seven hospitals, which were its sole shareholders. CCC Inc. was incorporated in 1985 for the purpose of providing certain risk assessment and management services to the insurer and the hospitals.
Although the submissions on the motions describe in some detail the unique regulatory context for this insurance arrangement, it is not necessary to set forth these details at this stage. However, a description of the roles and obligations of the various participants in the CCC insurance program is necessary to understand the issues presented by the motions.
In January 1991 the hospitals, including defendant, executed a Shareholders' Agreement. This Agreement codified the hospitals' status as shareholders in CCC Ltd., as well as any successor companies or subsidiaries, and codified a number of conditions and obligations in connection with the CCC insurance program. In particular, the Agreement stated that the shareholders intended to create a self-insurance fund. The Agreement stated that the program would be structured such that "each [shareholder] shall bear the costs of its own losses and expenses, without any material pooling thereof."
The CCC insurance program was maintained as a self-insurance fund by the use of several mechanisms that are at issue in the instant action. Section 12 of the Shareholders' Agreement established a Separate Experience Account ("SEA") for each hospital shareholder. Each SEA contained the balance of premiums paid and interest earned on each shareholder's premiums, minus claims and expenses paid by the insurer.
Another mechanism that ensured that each shareholder would be responsible for its own losses was the Target Equity Account ("TEA"). According to the proposed amended complaint, certain. government regulations required that the CCC insurance program maintain a positive balance of equity. Therefore, the program established a target equity level, that would be maintained by setting aside an amount equal to 10% of the sum allocated by the program to pay its losses. Each hospital shareholder contributed to the target equity level on a pro rata basis by paying funds into a TEA.
Also relevant to the instant action is a reinsurance program instituted as part of the CCC insurance program in 1999. The proposed amended complaint states that funding of this program was calculated based on an actuarial assumption regarding the premiums that would be paid by the shareholders, and the interest that would be earned on those premiums over a period of time. According to the proposed amended complaint, each shareholder agreed to pay a pro rata share of any shortfall in the reinsurance funding through an "Interest Rate Assessment."
The final aspect of the CCC insurance program relevant to the instant action is the section of the Shareholders' Agreement pertaining to withdrawal of a shareholder from the program. Section 7 of the Shareholders' Agreement mandated the payment of "Exit Charges" upon withdrawal of a shareholder from the program. These Exit Charges were to be assessed in order to compensate remaining shareholders for the increased costs incurred by the loss of a shareholder from the program.
In addition to the above insurance-related provisions, the CCC insurance program also provided for loans to the hospital shareholders. As will be described in more detail, the original complaint in this action relates only to a loan made to defendant by plaintiffs. The proposed amended complaint relates more broadly to defendant's role in the CCC insurance program, of which the loan is only a small part.
The original complaint alleges that in December 1995 defendant borrowed $8 million from CCC Corp. To secure this loan, defendant executed a promissory note in favor of CCC Corp., and pledged 92,143 shares of its stock in CCC Ltd. to CCC Corp. The promissory note and pledge agreement provided that $4 million of the principal on the note was payable on or before December 31, 2000, and that the balance was due on December 31, 2005. The promissory note also provided that if, for any reason defendant withdrew from the CCC insurance program, such withdrawal would constitute an event of default and would cause the note to become due and payable in quarterly installments.
Defendant apparently made payments on the loan for some period of time. However, the original complaint states that in June 2002 defendant's senior management changed, and defendant advised plaintiffs that it would no longer make insurance premium payments or payments on its outstanding loan obligation. The original complaint alleges that on June 30, 2002 defendant owed plaintiffs approximately $1.3 million on the loan.
On November 13, 2002 plaintiffs issued a notice of default to defendant for nonpayment of its insurance premiums. On December 20, 2002 plaintiffs and defendant entered into a "Standstill Agreement" whereby defendant's participation in the CCC insurance program would continue while the parties negotiated for defendant's payment of its outstanding obligations. The Standstill Agreement provided that failure by defendant to enter into a settlement of its debts by May 1, 2003 would result in "an immediate acceleration of all obligations" to plaintiffs, and would cause an immediate notice of termination of insurance coverage.
According to the complaint, defendant failed to settle its debts by May 1, 2003.
On May 2, 2003 plaintiffs filed the instant action to recover defendant's outstanding obligation on the $8 million loan. The complaint states that, "While there exist other significant disputes between [plaintiffs and defendant], as referenced by the Standstill Agreement, these disputes are not yet ripe for judicial determination." This sentence pertains to a provision of the Shareholders' Agreement governing litigation among parties to the Agreement. Section 23 of the Agreement states that sixty days notice must be provided to all parties to the Agreement before any party to the Agreement commences litigation "of any claim or controversy arising hereunder or relating hereto." It is the position of plaintiffs that the loan obligation that forms the basis for the original complaint does not arise under the Shareholders' Agreement. However, plaintiffs wish to assert a number of other claims regarding defendant's alleged debts relating to its participation in the CCC insurance program. Plaintiffs' position was that these other claims fell within the Shareholders' Agreement sixty-day notice provision.
Therefore, also on May 2, plaintiffs gave defendant written notice of plaintiffs' "intention to commence litigation to assert claims and rights accruing under and related to the Shareholders' Agreement dated 01/11/92." The notice specified that among the claims to be litigated would be plaintiffs' claim that defendant owed $27 million in arrears to its SEA.
On May 22, 2003 defendant answered plaintiffs' complaint. Defendant did not assert any counter-claims or affirmative defenses.
On June 26, 2003 defendant filed an action in Supreme Court, New York County asserting a variety of claims against plaintiffs, as well as against CCC Inc. and a number of other individual and corporate defendants affiliated with the CCC insurance program. That action alleges that through fraud, negligence, breach of fiduciary duty, and other wrongful conduct CCC Ltd., CCC Corp., CCC Inc., and other parties caused defendant's substantial losses in connection with the CCC insurance program. On July 18, 2003 defendant filed a second action in New York County Supreme Court against only CCC Ltd., CCC Corp., and CCC Inc., seeking equitable relief and an accounting.
On September 12, 2003 defendant moved to dismiss or stay the instant action so that the entire litigation could be in the state court. On October 14, 2003 plaintiffs moved to amend their complaint in this Court to include the claims alluded to in the original complaint as "not yet ripe" due to the sixty-day notice provision in the Shareholders' Agreement. Plaintiffs' proposed amended complaint alleges that defendant owes approximately $36 million in arrears on its SEA TEA, Interest Rate Assessment, and Exit Charges. Plaintiffs also oppose the motion to dismiss or stay the present federal action.
DISCUSSION
I. Defendant's Motion to Dismiss or Stay
Defendant moves to dismiss the instant action for lack of subject matter jurisdiction on the ground that plaintiffs have failed to name an indispensable, and non-diverse, party, CCC Inc. In the alternative defendant asks this Court to stay the instant action in favor of the state court actions.
Fed.R.Civ.P. 19 requires that, if feasible, a party must be joined in an action if either: (1) the person's absence prevents complete relief from being accorded among the parties, or (2) the person claims an interest in the subject of the action and the person's absence would "as a practical matter impair or impede the person's ability to protect that interest" or "leave any of the persons already parties subject to a substantial risk of incurring" multiple or inconsistent obligations. Fed.R.Civ.P. 19(a). If a party is indispensable under Rule 19(a), but cannot be joined because the party is non-diverse, the Court must decide whether the action may proceed with the parties before the Court, or whether it must be dismissed. Fed.R. 19(b). Defendant claims that CCC Inc. is an indispensable party under Rule 19.
Plaintiffs' current and proposed claims are contractual in nature, governed by agreements pertaining to the loan and the Shareholders' Agreement. CCC Inc. is not a party to any of the agreements under which plaintiffs' claims are being asserted, and appears to have no claim against defendant under them. Nor does it appear that CCC Inc. is in any sense the "real" party in interest in this action. Notwithstanding the fact that plaintiffs and CCC Inc. are closely related, plaintiffs are independent entities with which defendant entered into agreements that are now the subject of the instant action. CCC Inc. is not required for resolution of plaintiffs' rights.
Defendant claims that CCC Inc. is liable, along with plaintiffs, for wrongfully preventing defendant from obtaining sufficient insurance coverage and mismanaging the CCC insurance program. This does not by itself render CCC Inc. an indispensable party to the instant action. However, defendant is free to assert its claims against CCC Inc. in a third-party complaint. Notwithstanding the fact that there is no diversity of citizenship between defendant and CCC Inc., the Court would still have jurisdiction over defendant's third-party claims under the doctrine of supplemental jurisdiction. The supplemental jurisdiction statute provides that where the Court has original jurisdiction over a case or controversy, the Court also has jurisdiction over any claim that is "so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III." 28 U.S.C. § 1367 (a). Lack of diversity does not defeat supplemental jurisdiction over a claim, as long as the non-diverse party is not brought in by the original plaintiff. See Viacom International v. Kearney, 212 F.3d 721, 726-28 (2d Cir. 2000).
Finally, defendant suggest that the Court should exercise its discretion to decline to exercise jurisdiction over any third-party claims that arguably come within the Court's supplemental jurisdiction, pursuant to 28 U.S.C. § 1367(c). Defendant argues that its state law claims against non-diverse defendants "substantially predominate" over the claims over which this Court has original jurisdiction. See 28 U.S.C. § 1367(c)(2). While it is clear that the original complaint's allegations regarding the loan are only a small part of the larger controversy between the parties, this does not mean that defendant's potential third-party claims "predominate" over the issues raised by plaintiffs. Plaintiffs have properly invoked this Court's diversity of citizenship jurisdiction with a substantial claim against defendant, and their proposed amended complaint would bring before this Court the full breadth of the dispute between the parties. Under those circumstances, it is proper for the Court also to exercise jurisdiction over any third-party claims defendant wishes to assert.
As for defendant's alternative request that the instant action be stayed in deference to the state court proceedings, the Court declines to do so. The only "exceptional circumstance" to which defendant points that would require this Court to abstain from adjudicating a case properly before it is the risk of piecemeal litigation in state and federal court. This danger is easily obviated by this Court retaining jurisdiction, and defendant, if it chooses to do so, asserting its state court claims as third-party claims in this action. Such an outcome is utterly reasonable, given that the instant action was commenced two months before defendant filed in state court. Moreover, the state court actions are apparently in only the most nascent stages of discovery, with preliminary document production having commenced, and no depositions yet taken. There is every indication that any discovery that has already occurred will be equally useful if defendant chooses to pursue its state court claims as third-party claims in this Court.
In sum, plaintiffs' claims against the defendant for nonpayment of the loan and other matters raised by the proposed amended complaint come within the diversity of citizenship jurisdiction of this Court. Under the circumstances here, the Court believes that plaintiffs should not be deprived of the benefits of such jurisdiction. Therefore, defendant's motion to dismiss or stay this action is denied.
II. Plaintiffs' Motion to Amend the Complaint
Plaintiffs move to amend their complaint to add causes of action arising under the Shareholders' Agreement that, for reasons already discussed, were not ripe for adjudication at the time this action was filed. Under Fed.R.Civ.P. 15(a), "a party may amend the party's pleading only by leave of the court or by written consent of the adverse party; and leave shall be freely given when justice so requires." Here there is no prejudice to defendant by allowing plaintiffs to amend the complaint. Defendant has been on notice of the scope of plaintiffs' proposed additional claims since at least May 2, 2003, when this action was filed. Therefore, plaintiffs' motion is granted.
CONCLUSION
Defendant's motion to dismiss or stay is denied. Plaintiffs' motion to amend the complaint is granted.
SO ORDERED.