Certain Underwriters at Lloyd's, London v. Mr. Demolition Inc.

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CERTAIN UNDERWRITERS AT LLOYD'S, LONDON, and HDI GLOBAL SPECIALTY SE f/k/a INTERNATIONAL INSURANCE COMPANY OF HANOVER SE, Plaintiffs, v. MR. DEMOLITION INC., 1241 41 DEVELOPMENT LLC, CLARENCE COBO, TOMAS V. ZAPETA, GABOR NEMETH, MICHAEL BARRETTO, CONSUELO RAMIREZ, ALEXANDER RODRIGUEZ, NOLVIA PACHECO, and MARTIN GEWIRTZ, Defendants.

No. 20 CV 1886 (PKC)(RML)

United States District Court, E.D. New York

April 3, 2023

REPORT AND RECOMMENDATION

ROBERT M. LEVY UNITED STATES MAGISTRATE JUDGE

By order dated October 3, 2022, the Honorable Pamela K. Chen United States District Judge, referred plaintiffs' motion for default judgment to me for report and recommendation. For the reasons stated below, I respectfully recommend that plaintiffs' motion be granted.

Background and Facts

Plaintiffs Certain Underwriters at Lloyd's, London (“Underwriters”), and HDI Global Specialty SE f/k/a International Insurance Company of Hannover SE (“HDI”) (together, “plaintiffs”) filed this action on April 23, 2020 against Mr. Demolition Inc. (“Mr. Demolition”), 1241 42 Development LLC (“42 Development”), Clarence Cobo, Tomas V Zapeta, Gabor Nemeth (“Nemeth”), Michael Barretto, Consuelo Ramirez, Alexander Rodriguez, Nolvia Pacheco, and Martin Gewirtz (“defendants”), seeking to void, ab initio, a series of liability and excess policies they issued to Mr. Demolition due to material misrepresentations in its insurance application, or alternatively a declaratory judgment that plaintiffs have no obligation to defend or indemnify Mr. Demolition or 42 Development. (Complaint, filed Apr. 23, 2020 (“Compl.”), Dkt. No. 1 ¶¶ 2-4.) An Amended Complaint was filed on May 29, 2020, and a Second Amended Complaint was filed on June 24, 2020. (Amended Complaint, filed May 29, 2020, Dkt. No. 12; Second Amended Complaint, filed June 24, 2020 (“Second Am. Compl.”), Dkt. No. 42.)

According to plaintiffs, on or about July 28, 2015, Mr. Demolition, through its president Joel Perlstein, applied for insurance with Underwriters. (Second Am. Compl. ¶ 38.) In its application, Mr. Demolition represented that it was a construction/project manager and that it uses written contracts with customers and subcontractors, that these contracts include hold harmless agreements in Mr. Demolition's favor, that Mr. Demolition obtains certificates of insurance from all of its subcontractors, and that Mr. Demolition arranges to be added as an additional insured on all of its subcontractors' liability policies. (Id. ¶¶ 39-51.) In reliance on these representations, Underwriters issued an insurance policy to Mr. Demolition for the period of October 31, 2015 to October 31, 2016, which was then renewed annually until October 31, 2019 (the “Policy”). (Id. ¶¶ 52-62; see also Plaintiffs' Memorandum of Law in Support of the Motion for Default Judgment, filed Oct. 3, 2022 (“Pls.' Mem.), Dkt. No. 88-2, at 5-7.)

Plaintiffs aver that after the Policy was issued, they were notified of various claims and lawsuits brought against Mr. Demolition. (Id. ¶¶ 68-86.) Plaintiffs allege that their investigation of these claims and lawsuits revealed that Mr. Demolition's insurance application contained material misrepresentations of fact, and that these misrepresentations were made in furtherance of a scheme “in which Mr. Demolition would, by contract, assume all liability for injuries at construction sites so as to transfer all liability to his liability insurers in exchange for a hefty sum of money.” (Id. ¶¶ 87-88.) According to plaintiffs, the scheme involved Mr. Demolition obtaining permits for various construction projects from the New York City Department of Buildings as the General Contractor when, in fact, it was not performing work in connection with those projects, overseeing the actual general contractor and subcontractors that were doing the work, or taking steps to ensure that the project work sites were safe. (Id. ¶¶ 8996.) Plaintiffs contend that Mr. Perlstein acknowledged this scheme in his deposition testimony in one of the underlying tort actions, where he admitted he was paid fees to be the General Contractor on various projects on paper only, and that in return for such fees he would transfer liability for injuries at the project construction sites from the project owner to his own liability insurance carriers. (Id. ¶¶ 99-101.)

One of the aforementioned lawsuits that led to plaintiffs' investigation and discovery of Mr. Demolition's scheme was brought by defendant Nemeth. On October 5, 2017, Nemeth filed a Verified Complaint against 42 Development, Prestige Construction NY LLC (“Prestige”), and ABC Corp. in the New York State Supreme Court (the “Underlying Nemeth Action”). (Pls.' Mem. at 2.)^[1]In that action, Nemeth alleged that on May 27, 2016, while lawfully upon the defendants' premises and because of the defendants' negligence, carelessness, and recklessness, he was caused to suffer severe and serious personal injuries to mind and body, as well as physical pain and mental anguish. (Id.) On April 30, 2019, Prestige filed a Second Third-Party Complaint against OHR Chodosh Electrical Contracting, Inc. and Mr. Demolition alleging, in relevant part, that Mr. Demolition was contracted by 42 Development to perform work at the premises located at 1245 42nd Street, Brooklyn, New York, and that, prior to the alleged injury of Nemeth, Mr. Demolition entered into a contract or agreement to perform construction and/or renovation work at said premises. (Id.)

42 Development tendered to plaintiffs for defense and indemnification as an “additional insured” under the Policy issued by plaintiffs to Mr. Demolition. (Pls.' Mem. at 2, 56.) For 42 Development to be an additional insured under the Policy issued by plaintiffs, Mr. Demolition was required to name 42 Development as an additional insured in a written contract, and additional insured status existed only for the project specified in that contract. (Id. at 2-3; see also Insurance Policy, attached as Ex. D to Pls.' Mem., Dkt. No. 88-5, at 27.) To date, no contract or agreement between 42 Development and Mr. Demolition to perform construction and/or renovation work at the aforementioned premises has been provided. (Id.; see also Affidavit of Thomas Cantwell, sworn to Sept. 27, 2022, Dkt. No. 88-3, ¶ 21; Affidavit of Joel Perlstein, sworn to Sept. 28, 2022 (“Perlstein Aff.”), Dkt. No. 88-4, ¶ 5.) Accordingly, on October 30, 2018, Underwriters issued a disclaimer of coverage to 42 Development advising it of the impediment to its position as an additional insured under Mr. Demolition's policy and that plaintiffs would provide a courtesy defense while it pursued a declaratory action. (Pls.' Mem. at 3, 13; see also Disclaimer of Coverage, attached as Ex. O to Pls.' Mem., Dkt. No. 88-16.) A courtesy defense has been provided to 42 Development while plaintiffs seek a ruling from this court regarding its obligations under the Policy. (Pls.' Mem. at 3.)

Plaintiffs now seek a default judgment against defendants and a declaratory judgment that plaintiffs do not have a duty to defend or indemnify 42 Development in the Underlying Nemeth Action. (Id. at 15.)^[2]

Discussion

A. Declaratory Judgment Standard

Rule 57 of the Federal Rules of Civil Procedure and 28 U.S.C. § 2201 allow a court to issue a declaratory judgment in cases where the party seeking the declaratory judgment demonstrates the existence of an actual case or controversy. 28 U.S.C. § 2201; FED. R. CIV. P. 57. See U.S. Underwriters Ins. Co. v. Orion Plumbing & Heating Corp., 321 F.Supp.3d 313, 316 (E.D.N.Y. 2018) (“[B]efore a court may issue any declaratory order, it must satisfy itself that the matter presents an actual case or controversy.”) Once a party has demonstrated an actual case or controversy, it is within the sound discretion of the court to decide whether to grant the declaratory relief sought. N.Y. Guardian Mortgagee Corp. v. Cleland, 473 F.Supp. 409, 418 (S.D.N.Y. 1979) (collecting cases). Declaratory relief is proper “(1) where 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 proceedings.” Dukes Bridge, LLC v. Sec. Life of Denver Ins. Co., No. 10 CV 5491, 2020 WL 1908557, at *76 (E.D.N.Y. Apr. 17, 2020); see also Universal Acupuncture Pain Servs., P.C. v. State Farm Mut. Auto. Ins. Co., 196 F.Supp.2d 378, 384 (S.D.N.Y. 2002) (quoting Md. Casualty Co. v. Rosen, 445 F.2d 1012, 1014 (2d Cir. 1971)). “Courts within this district have, on numerous occasions, found these requirements met in actions by insurers seeking declaratory judgments regarding obligations relating to allegedly fraudulent claims.” Gov't Emps. Ins. Co. v. Badia, No. 10 CV 5611, 2012 WL 1427796, at *4 (E.D.N.Y. Apr. 6, 2012).

B. Default Judgment Standard

Where as here, declaratory relief is requested following a default, plaintiffs must (1) adhere to the two-step process prescribed in Fed.R.Civ.P. 55 to obtain a default judgment, and (2) establish entitlement to the requested relief based on the facts established by the default. See PHL Variable Ins. Co. v. Bimbo, No. 17 CV 1290, 2018 WL 4691222, at *2 (E.D.N.Y. Aug. 30, 2018) (citation omitted). A default constitutes the defendants' admission to all the well-pleaded allegations in the complaint pertaining to liability. A&B Alt. Mktg. Inc. v. Int'l Quality Fruit Inc., 35 F.4th 913, 916 (2d Cir. 2022); Greyhound Exhibitgroup, Inc., v. E.L.U.L. Realty Corp., 973 F.2d 155, 158 (2d Cir. 1992). As such, plaintiffs must demonstrate that the unchallenged facts and all reasonable inferences drawn from such facts establish defendants' liability. See City of New York v. Mickalis Pawn Shop, 645 F.3d 114, 137 (2d...