TOWN OF AMHERST v. HILGER, ARTHUR

SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
38
CA 12-00803
PRESENT: SMITH, J.P., FAHEY, VALENTINO, WHALEN, AND MARTOCHE, JJ.
TOWN OF AMHERST AND GRANITE STATE
INSURANCE COMPANY, PLAINTIFFS-RESPONDENTS,
V OPINION AND ORDER
ARTHUR HILGER, SALLY BISHER,
DEFENDANTS-APPELLANTS,
AND AARON HILGER, DEFENDANT.
(APPEAL NO. 2.)
SMITH, MURPHY & SCHOEPPERLE, LLP, BUFFALO, MAURO LILLING NAPARTY LLP,
WOODBURY (MATTHEW W. NAPARTY OF COUNSEL), FOR DEFENDANTS-APPELLANTS.
SHAUB, AHMUTY, CITRIN & SPRATT, LLP, LAKE SUCCESS, DEMARIE &
SCHOENBORN, P.C., BUFFALO (JOSEPH DEMARIE OF COUNSEL), FOR
PLAINTIFFS-RESPONDENTS.
MICHAEL JAFFE, NEW YORK CITY, FOR NEW YORK STATE TRIAL LAWYERS
ASSOCIATION, AMICUS CURIAE.
Appeal from a judgment of the Supreme Court, Erie County (Paula
L. Feroleto, J.), entered January 23, 2012. The judgment awarded
plaintiffs the sum of $30,230,533.15 against defendants Arthur Hilger
and Sally Bisher.
It is hereby ORDERED that the judgment so appealed from is
unanimously modified on the law by denying plaintiffs’ motion in its
entirety and as modified the judgment is affirmed without costs, and
the matter is remitted to Supreme Court, Erie County, for further
proceedings in accordance with the following Opinion by FAHEY, J.:
I
This appeal arises from the refusal of Arthur Hilger and Sally
Bisher (collectively, defendants), who were officers of nonparty
McGonigle and Hill Roofing, Inc. (M&H), to seek insurance coverage
from nonparty New York State Insurance Fund (SIF), M&H’s insurer, with
respect to a judgment plaintiff Town of Amherst (Town) has against M&H
(Town judgment). There is no dispute that M&H, which is now
dissolved, had insurance coverage under a workers’ compensation and
employers’ liability policy that was issued to it by SIF (hereafter,
SIF policy) and that was effective at the time of the underlying loss.
There is also no dispute that SIF has not paid the Town judgment on
behalf of M&H only because of defendants’ intractable refusal to
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request that SIF satisfy that judgment. For the reasons set forth
below, plaintiffs commenced this action against defendants and
defendant Aaron Hilger (collectively, Hilgers) in an effort to force
the Hilgers to ensure SIF’s compliance with the terms of the SIF
policy.
Plaintiffs moved for summary judgment seeking, inter alia, a
money judgment against the Hilgers and an order directing the Hilgers
to take all necessary actions to ensure that SIF complies with the SIF
policy. The Hilgers, in turn, cross-moved for summary judgment
dismissing the complaint. Supreme Court granted that part of the
cross motion seeking summary judgment dismissing the complaint against
Aaron Hilger and otherwise denied the cross motion. The court also
granted plaintiffs’ motion insofar as it related to defendants and
awarded plaintiffs judgment in the amount of $30,230,533.15. On
defendants’ appeal, we conclude that the judgment should be modified
by denying plaintiffs’ motion in its entirety, and we remit the matter
to Supreme Court for further proceedings in accordance with our
conclusions herein.
II
On February 21, 2002, Peter E. Bissell, who is not a party to
this action, fell from a ladder that was not properly secured
(hereafter, accident) and “sustained serious injuries, including
bilateral lower extremity paraparesis and paralysis of the ankles and
feet” (Bissell v Town of Amherst, 41 AD3d 1228, 1229, lv denied 14
NY3d 703). At the time of the accident, Bissell was working on a
building owned by the Town as a roofer employed by M&H, a New York
corporation. The father of Arthur Hilger was the president of M&H and
died in or before 2004. Arthur Hilger was a vice-president of M&H and
is the brother of Sally Bisher, who was the secretary of M&H.
After the accident, Bissell and his wife commenced a lawsuit
against the Town alleging, inter alia, Labor Law violations and
common-law negligence. The Town commenced a third-party action
against M&H, which was consolidated with the main action. That action
was before us on several occasions (Matter of Bissell v Town of
Amherst, 79 AD3d 1638, affd 18 NY3d 697; Bissell v Town of Amherst, 56
AD3d 1144, lv denied in part and dismissed in part 12 NY3d 878; 41
AD3d 1228, lv denied 14 NY3d 703; 32 AD3d 1287; 6 AD3d 1229). On the
prior appeals we, inter alia, affirmed an order denying the Town’s
motion to set aside a jury verdict on liability pursuant to Labor Law
§ 240 (1) (Bissell, 32 AD3d at 1287), affirmed that part of a judgment
determining that Bissell sustained a grave injury in the accident
(Bissell, 56 AD3d at 1147) and affirmed a judgment, i.e., the Town
judgment, directing M&H to indemnify the Town for all amounts the Town
paid pursuant to a judgment issued in Bissell’s favor in the main
action (Bissell v Town of Amherst, 56 AD3d 1149, 1149).
Plaintiff Granite State Insurance Company (Granite State) had
issued a liability insurance policy in the amount of $10 million to
the Town that was effective at the time of Bissell’s accident and that
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covered the loss resulting from that incident. The Town satisfied the
judgment issued in favor of Bissell in the amount of $23,552,070,
using insurance funds provided under the Granite State policy,
together with self-insurance funds provided by the Town.
M&H, in turn and as noted, was insured at the time of the
accident under the SIF policy. According to defendants, the SIF
policy was the only insurance available to M&H with respect to the
accident because there was no contract between M&H and the Town at the
time of that incident that would have triggered coverage for
contractual indemnification under M&H’s general liability policy.
Moreover, the SIF policy contains no policy limit for damages M&H must
pay because of bodily injury to its employees, i.e., it provides
unlimited coverage for common-law indemnification. In view of the
judgment in favor of the Town against M&H on the issue of common-law
indemnification (see Bissell, 56 AD3d at 1146), a logical mind would
think that SIF would have indemnified the Town and reimbursed Granite
State, and this matter would have been resolved.
Logic, however, did not prevail. M&H ceased doing business in
May 2002, which was three months after the accident, and was dissolved
on July 12, 2004. There is no dispute that SIF has no valid defense
allowing it to disclaim coverage for M&H, and indeed it has not
disclaimed coverage for M&H with respect to the Bissell action.
Further, it is uncontested that the SIF policy provides that the
insured’s bankruptcy or insolvency will not relieve SIF of its
coverage obligations. Nevertheless, M&H has never demanded that SIF
pay the Town judgment and, according to Aaron Hilger1 and defendants,
has no intention of doing so. To date, SIF has not paid the Town
judgment, and thus the Hilgers’ refusal to seek coverage from SIF for
M&H forced plaintiffs to satisfy a judgment for which M&H is
ultimately responsible (cf. Orlikowski v Cornerstone Community Fed.
Credit Union, 55 AD3d 1245, 1248, lv dismissed 11 NY3d 915), and for
which SIF has a contractual obligation to insure M&H.
III
By summons and complaint filed November 3, 2010, plaintiffs
commenced this action against the Hilgers, alleging that the Hilgers
dissolved and liquidated M&H without satisfying the Town judgment.
The complaint contained two causes of action: the first alleged that
the Hilgers breached their fiduciary duties to plaintiffs to take all
steps necessary to ensure that the lawful debts of M&H were paid, and
the second alleged that the Hilgers “caused M&H to be liquidated in
violation of Business Corporation Law [a]rticle 10,” which provides
for non-judicial dissolution. In the wherefore clause of the
complaint, plaintiffs sought, inter alia, an order directing the
Hilgers to “take all necessary steps” to ensure SIF’s compliance with
1
Unlike defendants, Aaron Hilger had no role in M&H’s
dissolution and was not an officer of that company when it was
dissolved. As such and as noted, the court granted summary
judgment dismissing the complaint against him.
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the terms of the SIF policy and a judgment against the Hilgers
personally for the amount the Town paid on the judgment Bissell took
against it, together with interest.
On January 10, 2011, SIF sent a letter to the Hilgers confirming
that
“[SIF] will pay for the legal fees and
disbursements incurred in [the Hilgers’] defense
in [this] lawsuit. In addition, [SIF] will pay
for any damages awarded against [the Hilgers] in
[this] action except for any damages attributable
to activities or actions taken by [any of the
Hilgers] as officers and/or employees of [M&H]
determined to be in violation of law.”2
Two days later, the Hilgers answered the complaint, alleging that they
had “fulfilled all of their legal obligations and obligations they may
have had under the [SIF] policy.”
The matter subsequently proceeded from discovery to motion
practice, where plaintiffs moved and the Hilgers cross-moved for
summary judgment. The submissions with respect to the motion and
cross motion demonstrate, inter alia, that coverage for M&H under the
SIF policy was effective at the time of the accident; that, despite
M&H’s dissolution, the Hilgers never requested that SIF indemnify M&H
relative to the Town judgment and had no intention of doing so; that
M&H’s rights and duties under the SIF policy cannot be transferred
without SIF’s written consent; that M&H’s creditors were paid upon its
dissolution; and that the Hilgers were insulated by SIF from any
personal liability resulting from this lawsuit.
Discovery did not establish a motive for the Hilgers’ refusal to
seek coverage from SIF, but at the oral argument of this appeal
defendants’ attorney indicated that their recalcitrance was borne of
“animosity” toward the Town. In any event, following oral argument on
the motion and cross motion, the court issued an order that reflects
the court’s rational umbrage with the Hilgers’ refusal to seek
coverage for M&H from SIF with respect to the Town judgment. The
court issued a judgment against defendants in the amount of
$23,552,070 and awarded statutory interest in the amount of
$6,678,463.15, thus yielding a judgment in the aggregate amount of
$30,230,533.15.
2
This letter was modified by correspondence from SIF to the
Hilgers’ counsel dated August 11, 2011, wherein SIF stated that
it “will pay for any damages awarded against [the Hilgers] in
[this] action.” The record does not speak to the issue whether
the modification was intended to protect the Hilgers from the
danger that SIF’s obligation to indemnify them would not accrue
because the Hilgers could not satisfy a $23 million judgment
against them (see Orlikowski, 55 AD3d at 1248).
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CA 12-00803
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IV
Before addressing the merits, we acknowledge plaintiffs’ concern
regarding the viability of an action against SIF in the Court of
Claims as a catalyst for this action. Plaintiffs’ attorney indicated
that plaintiffs have a claim pending against the State of New York and
SIF in the Court of Claims,3 but noted that SIF is not subject to the
provisions of Insurance Law § 3420 (cf. Bowker v NVR, Inc., 39 AD3d
1162, 1163-1164), thus complicating plaintiffs’ efforts to satisfy
their judgment against M&H. On this point, Lang v Hanover Ins. Co. (3
NY3d 350) is instructive:
“Insurance Law § 3420 . . . grants an injured
party a right to sue [a] tortfeasor’s insurer [in
derogation of the common law], but only under
limited circumstances—the injured party must first
obtain a judgment against the tortfeasor, serve
the [insurer] with a copy of the judgment and
await payment for 30 days. Compliance with
[those] requirements is a condition precedent to a
direct action against the insurance company” (id.
at 354; see Insurance Law § 3420 [a] [2]; [b] [1],
[2]; cf. CPLR 3001 [amended in 2008 to provide,
inter alia, that “(a) party who has brought a
claim for personal injury or wrongful death
against another party may maintain a declaratory
judgment action directly against the insurer of
such other party”]; Insurance Law § 3420 [a] [6]
[same]).
The latitude the Insurance Law affords to a claimant to sue a
private insurer of a tortfeasor does not, however, subject SIF to
legal action brought by a claimant, or in this case an indemnitee of
an SIF insured. Indeed, “[SIF] is exempt from the requirements of
Insurance Law § 3420 (a) and (b) due to Insurance Law § 1108 (c)”
(National Union Fire Ins. Co. of Pittsburgh, Pa. v State of New York,
72 AD3d 620, 621, lv denied 16 NY3d 703 [internal quotation marks
omitted]; see Kenmore-Tonawanda School Dist. v State of New York, 38
AD3d 203, 203, lv denied 10 NY3d 702). Plaintiffs thus have a
legitimate concern that, as nonparties to the SIF policy, they lack
standing to sue SIF, and they otherwise have no access to the coverage
contained in the SIF policy by virtue of the intransigence of M&H in
dissolving itself and refusing to seek coverage from SIF (see Miraglia
v State Ins. Fund, 32 Misc 3d 471, 475). That concern explains
plaintiffs’ effort to seek recourse from the Hilgers individually
through this action, and there can be no dispute that M&H’s
dissolution and the Hilgers’ recalcitrance in refusing to seek from
SIF the insurance coverage owed M&H by SIF with respect to the Town
judgment is grossly inequitable and threatens a miscarriage of justice
(see generally Workers’ Compensation Law § 76 [1] [providing that SIF
3
The parties note that the action in the Court of Claims has
been stayed pending the outcome of this litigation.
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CA 12-00803
was created, in part, to provide coverage for common-law
indemnification to employers of injured workers]; 2 Steven Plitt et
al., Couch on Insurance 3d § 31:49 [1995] [“(w)here the contract of
insurance provides for liability to third persons, the insurer and the
insured cannot terminate such a contract by their voluntary action to
the prejudice of a claimants’ rights which have already vested”]).
V
The problem with this appeal, however, lies not in the facts, but
in the law under which plaintiffs seek remuneration from defendants
and the shape in which plaintiffs have cast this action, and that
segue brings us to the merits. Plaintiffs did not move for summary
judgment under any particular statute and, as noted, attack defendants
under two theories: the alleged violation of Business Corporation Law
article 10, and the purported breach of defendants’ fiduciary duty to
plaintiffs to ensure that M&H’s obligations were paid. We conclude
that neither theory has merit.
Turning first to the alleged violation of Business Corporation
Law article 10, we note that Business Corporation Law § 1007 (a)
provides that, at any time after dissolution, a “corporation may give
a notice requiring all creditors and claimants . . . to present their
claims in writing” (emphasis added). The failure to provide such
notice would allow a creditor with an unlitigated claim that
preexisted dissolution to sue the dissolved corporation even after
dissolution (see § 1006 [a] [4]; [b]; see also Matter of Ford v
Pulmosan Safety Equip. Corp., 52 AD3d 710, 711; Stop-Fire, Inc. v Fire
Equip. Mfg. Corp., 47 AD2d 591, 591-592). Here, however, the Town’s
claim against M&H was the subject of litigation at the time of M&H’s
dissolution and thus could not be barred by the Business Corporation
Law even if notice of the dissolution had been provided to plaintiffs
by M&H (see § 1007 [b]). Consequently, plaintiffs’ contention with
respect to the harm flowing from the defendants’ alleged violation of
the Business Corporation Law is of no moment.
We next turn to plaintiffs’ allegation that defendants breached a
fiduciary duty to plaintiffs in failing to ensure that M&H’s
obligations were paid upon its dissolution. Plaintiffs’ contention
that defendants’ refusal to ask for coverage for M&H under the SIF
policy constitutes a failure to act in good faith, although almost
certainly accurate, is likewise not actionable in this context.
Pursuant to Business Corporation Law § 715 (h), “[a]n officer shall
perform his duties as an officer in good faith and with that degree of
care with which an ordinarily prudent person in a like position would
use under similar circumstances.” An action against an officer for
misconduct, however, is circumscribed by Business Corporation Law §
720, which limits the relief available in such an action to an
accounting (see § 720 [a] [1]), the setting aside of an unlawful
conveyance, assignment or transfer of corporate assets (see § 720 [a]
[2]), and the enjoinder of a proposed unlawful conveyance, assignment
or transfer of corporate assets (see § 720 [a] [3]). Indeed, Business
Corporation Law § 720 “may not be utilized to obtain a money judgment
in an action at law” (Ali Baba Creations v Congress Textile Printers,
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CA 12-00803
41 AD2d 924, 924). Inasmuch as plaintiffs’ contentions concerning
defendants’ violation of Business Corporation Law article 10 and
breach of fiduciary duty lack merit, we conclude that the court erred
in granting that part of plaintiffs’ motion with respect to
defendants.
VI
Our inquiry, however, does not end at this juncture. Plaintiffs
correctly note that Business Corporation Law § 1008, which is entitled
“[j]urisdiction of supreme court to supervise dissolution and
liquidation,” vests Supreme Court with broad powers to “make all such
orders as it may deem proper in all matters in connection with the
dissolution or the winding up of the affairs of the corporation” (§
1008 [a]). Included in those powers is the authority to “suspend or
annul the dissolution or continue the liquidation of the corporation
under the supervision of the court” (id.), as well as the ability to
determine the validity of the dissolution (see § 1008 [a] [1]); to
determine the validity of any claims presented against the corporation
(see § 1008 [a] [3]); to determine the liability of an officer for the
liabilities of the corporation (see § 1008 [a] [5]); and to make
orders with respect to the payment, satisfaction or compromise of
claims against the corporation (see § 1008 [a] [6]).
Moreover, “the court may at any stage of a case and on its own
motion determine whether there is a nonjoinder of necessary parties”
(Matter of Lezette v Board of Educ., Hudson City School Dist., 35 NY2d
272, 282), and under the circumstances of this case M&H is a necessary
party (see CPLR 1001 [a]; see generally Matter of Jim Ludtka Sporting
Goods, Inc. v City of Buffalo School Dist., 48 AD3d 1103, 1104, lv
denied 11 NY3d 704). We therefore remit the matter to Supreme Court
to allow it to join M&H as a necessary party (see CPLR 1001 [b];
cf. CPLR 1003), convert the action to a special proceeding pursuant to
Business Corporation Law § 1008 (see CPLR 103 [c]; see also Port
Chester Elec. Constr. Corp. v Atlas, 40 NY2d 652, 653-654) and
exercise its authority under that statute, which includes the power to
force M&H to seek coverage from SIF with respect to the Town judgment
(see Business Corporation Law § 1008 [a] [8]).
In view of our determination, and regardless of our sentiments
with respect to the equities, we do not address the parties’ remaining
contentions, except to note that, for the reasons set forth herein,
the court properly denied those parts of the Hilgers’ cross motion
seeking summary judgment dismissing the complaint against defendants.
VII
Accordingly, we conclude that the judgment should be modified by
denying plaintiffs’ motion in its entirety, and we remit the matter to
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Supreme Court for further proceedings in accordance with this opinion.
Entered: March 22, 2013 Frances E. Cafarell
Clerk of the Court