Am. Auto. Ins. Co. v. Sec. Income Planners & Co.

847 F.Supp.2d 454

AMERICAN AUTOMOBILE INSURANCE COMPANY, Plaintiff,

v.SECURITY INCOME PLANNERS & CO, LLC, et al., Defendants.

No. 10–cv–00048 (JFB)(GRB).

United States District Court, E.D. New York.

March 22, 2012.

Concepcion A. Montoya and Douglas A. Johns, Hinshaw & Culbertson LLP, New York, NY, for AAIC.

William J. O'Mahony and Richard J. Quadrino, Quadrino & Schwartz, Garden City, NY, for SIPCOLLC and SIPCOINC.

Martin P. Unger and Anthony W. Cummings, Certilman, Balin, Adler & Hyman, LLP, East Meadow, NY, for Gross and Cerulli.

Christopher Sommaruga, St. James, NY, pro se.

MEMORANDUM AND ORDER

JOSEPH F. BIANCO, District Judge:

Plaintiff American Automobile Insurance Company (“plaintiff” or “AAIC”) brought this action against Security Income Planners & Co., LLC (“SIPCOLLC”), Security Income Planners & Co., Inc. (“SIPCOINC”), Jay Hoffman (“Hoffman”), Maria Gross (“Gross”), Marianna Cerulli (“Cerulli”), Christopher Sommaruga (“Sommaruga”), Dominick Greco (“Greco”), Catherine Sferlazza (“Sferlazza”), and Frank DiCarlo (“DiCarlo”) (collectively, “defendants”) seeking a declaratory judgment that AAIC is not obligated to indemnify or defend SIPCOLLC against claims asserted by Gross and Cerulli in an underlying state lawsuit ¹ concerning the fraudulent activity of defendant Hoffman, who was the president of SIPCOLLC, as well as a declaratory judgment that AAIC is not obligated to indemnify or defend SIPCOLLC against any lawsuits which may be filed in the future by potential claimants who had investments mishandled and/or defalcated by Hoffman.

Gross and Cerulli moved for summary judgment seeking a declaration that AAIC has an obligation to defend and pay the claims asserted against SIPCOLLC by Gross and Cerulli on the grounds that those claims concern services rendered by Hoffman and the negligence rendered by SIPCOLLC in failing to implement usual and customary business practices to avoid foreseeable misdeeds. SIPCOLLC moved for partial summary judgment seeking a declaration that AAIC is obligated to defend SIPCOLLC, and seeking attorneys' fees. AAIC, in turn, cross-moved for summary judgment seeking a declaration that AAIC has no duty to defend or indemnify SIPCOLLC against claims relating to Hoffman's conduct on the grounds that Hoffman's conduct falls within several exclusions to the AAIC policy.

For the reasons set forth below, the Court holds that AAIC has a duty to defend against the claims asserted against SIPCOLLC by Gross and Cerulli. The Court refrains from determining whether AAIC has a duty to indemnify SIPCOLLC for the claims asserted by Gross and Cerulli because it would be premature to do so. Accordingly, the Court grants partial summary judgment to Gross and Cerulli on the duty to defend issue, but denies summary judgment to Gross and Cerulli on the duty to indemnify issue. The Court grants SIPCOLLC's partial motion for summary judgment seeking a declaration that AAIC is obligated to defend SIPCOLLC against the claims asserted by Gross and Cerulli, and awards SIPCOLLC attorneys' fees. The Court denies AAIC's cross-motion for summary judgment in its entirety.

I. Background

A. Factual Background

The Court has taken the facts set forth below from the parties' depositions, affidavits, and exhibits, and from the parties' respective Rule 56.1 Statements of Facts. Upon consideration of a motion for summary judgment, the Court shall construe the facts in the light most favorable to the non-moving party. See Capobianco v. City of New York, 422 F.3d 47, 50 (2d Cir.2005). Unless otherwise noted, where a party's 56.1 Statement is cited, that fact is undisputedor the opposing party has pointed to no evidence in the record to contradict it.²

AAIC issued Independent Life Insurance Agents Errors and Omissions Liability insurance policy number ME07324731 for the policy period from April 18, 2009 to April 18, 2010, and named SIPCOLLC as the insured. (G & C's ³ 56.1 ¶¶ 1, 2.) AAIC asserts that Hoffman was also an insured under the AAIC policy, but SIPCOLLC disputes whether Hoffman was insured at the time of his conduct. (Pl.'s 56.1 ¶ 1; Pl.'s Response to G & C's 56.1 ¶ 2; SIPCOLLC's Response to Pl.'s 56.1 ¶ 1.)

SIPCOLLC, a New York limited liability company, was formed in 1999 by Hoffman and Gary Hertzan (“Hertzan”). (Pl.'s 56.1 ¶ 4, G & C's 56.1 ¶¶ 3, 4.) Hoffman was the president and Hertzan acted as Chief Financial Officer. (Pl.'s 56.1 ¶ 5.) Neil Himmelstein (“Himmelstein”) joined as an “independent producer” of insurance products, then became a partner of SIPCOLLC in 2006 and held the title of senior vice president. ( Id. ¶¶ 6, 7.)

Hoffman was also the sole shareholder of a separate entity known as SIPCOINC, an inactive New York domestic corporation. (SIPCOLLC's 56.1 ¶ 5.) In 2005, Hoffman began transferring the insurance licenses of SIPCOINC to SIPCOLLC, which allowed SIPCOLLC to offer insurance products as an insurance broker and general agent. (Pl.'s 56.1 ¶ 10.)

In October 2009, the Securities and Exchange Commission and the Suffolk County District Attorney's Office began investigating SIPCOLLC in connection with Hoffman's handling of investments and alleged fraud.⁴ ( Id. ¶ 11.) The District Attorney eventually brought charges against Hoffman, and on December 17, 2010, Hoffman pled guilty to a 24–count indictment, including 11 counts of second-degree grand larceny, 11 counts of third-degree grand larceny, and two counts of scheme to defraud. ( Id. ¶ 15.) At his plea proceeding, Hoffman testified that between January 1, 1989 through October 10, 2009, he engaged in a scheme constituting a systematic ongoing course of conduct with the intent to defraud ten or more people by false or fraudulent pretenses, representations or promises, and obtained property from one or more such persons, including Cerulli, Greco, Gross, Sferlazza, and Sommaruga. ( Id. ¶ 16.) On January 3, 2011, Hoffman was sentenced to a term of imprisonment of twenty-eight months to seven years. ( Id. ¶ 17.)

During the investigation, it was discovered that Hoffman deposited checks from individuals made out to “Security Income Planners” to SIPCOINC's bank account. ( Id. ¶ 12.) Hoffman also issued “Statements of Account,” which described the terms of the investment including the amount of money invested, the rate of return, and the maturity date. ( Id. ¶ 13.) These statements were issued on SIPCOLLC letterhead, SIPCOINC letterhead, and without letterhead, and many of them were unsigned. ( Id.) In 2008 and 2009, Hoffman advised or recommended to Gross and Cerulli that they should convert, redeem, or alter other insurance-related products to acquire certain fixed annuities. (G & C's 56.1 ¶¶ 11, 12.) On November 1, 2008, Hoffman issued a Statement of Account to Gross reflecting the purchase of her annuity from SIPCOLLC in the amount of $50,000. ( Id. ¶ 13.) That same day, Hoffman issued a Statement of Account to Cerulli reflecting the purchase of her annuity from SIPCOLLC in the amount of $181,000. ( Id. ¶ 14.)

On October 14, 2009, SIPCOLLC filed an action in the Supreme Court of the State of New York, Suffolk County, styled Security Income Planners & Co., LLC v. Security Income Planners & Co., Inc., and Jay Hoffman, Index No. 41348/2009. (Pl.'s 56.1 ¶ 18.) In the complaint, SIPCOLLC alleges breach of fiduciary duty against Hoffman, fraud, wrongful diversion of funds, unjust enrichment, unauthorized withdrawal and unlawful possession of funds by Hoffman. ( Id. ¶ 19.) On October 19, 2009, SIPCOLLC tendered its claim for coverage under the AAIC policy in connection with Hoffman's actions. ( Id. ¶ 20.) On December 15, 2009, AAIC denied SIPCOLLC's claim based on various provisions and exclusions of the AAIC policy. ( Id. ¶ 21.) SIPCOLLC does not seek coverage for the claims asserted in that lawsuit. ( See Mem. of Law in Further Support of Def. SIPCO, LLC's Mot. for Partial Summary Judgment and in Opp. to Pl.'s Cross–Mot. for Summary Judgment at 1 n. 1.)

On October 19, 2009, counsel for SIPCOLLC provided AAIC with notice of claims and potential claims that it had received concerning Hoffman. (SIPCOLLC's 56.1 ¶ 6.) The notice advised AAIC that it had received claims from Greco, Sferlazza, Sommaruga, and DiCarlo, and advised that potential claims could be brought by numerous other individuals. ( Id. ¶ 6.) AAIC disclaimed coverage for, and refused to defend, SIPCOLLC against these actual and potential future claims, and commenced this declaratory judgment action against SIPCOLLC. ( Id. ¶¶ 7, 8.)

On March 22, 2010, Gross and Cerulli filed a complaint in the Supreme Court of the State of New York, Nassau County, styled Maria Gross v. Marianna Cerulli v. Security Income Planners & Co., LLC, a/k/a SIPCO, Security Income Planners Co., Inc. and Jay Hoffman, Index No. 005625/2010.⁵ (Pl.'s 56.1 ¶ 50.) The complaint alleged failure to pay Gross and Cerulli's investments by SIPCOLLC, unjust enrichment as against SIPCOINC, and misrepresentation by Hoffman. ( Id. ¶ 51.) Gross filed a motion for summary judgment in that action and included within her moving papers an affidavit and memorandum of law advising AAIC that she would amend her complaint to assert negligence-based claims against SIPCOLLC. (SIPCOLLC's 56.1 ¶¶ 11, 12.)

Gross and Cerulli then filed a motion to amend their complaint in the underlying lawsuit against SIPCOLLC. (SIPCOLLC's Response to Pl.'s 56.1 ¶ 70.) The proposed amended verified complaint asserted claims for negligence, negligent training and supervision, and breach of fiduciary duty. ( Id. ¶ 71.) On November 28, 2011, Nassau County Supreme Court Judge Ira B. Warshawsky granted the motion to amend the complaint. (Letter from William J. O'Mahoney to Hon. Joseph F. Bianco, Dec. 1, 2011, ECF No. 153.)

B. Procedural Background

Plaintiff filed the complaint in this action on January 6, 2010. Sommaruga answered the complaint on February 17, 2010. AAIC voluntarily dismissed Frank DiCarlo on February 19, 2010. AAIC filed an amended...