Associated Indus. Ins. Co. v. Wachtel Missry LLP
| Decision Date | 08 September 2022 |
| Docket Number | 21 Civ. 3624 (LGS) |
| Parties | ASSOCIATED INDUSTRIES INSURANCE COMPANY, INC., Plaintiff, v. WACHTEL MISSRY LLP, et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Plaintiff Associated Industries Ins. Co., Inc. (“AIIC”) seeks a declaratory judgment that it is not obligated to defend or indemnify Defendants Wachtel Missry LLP (the “Firm”) and Howard Kleinhendler, a former partner at the Firm, in connection with malpractice claims asserted against Defendants in the Eastern District of New York. Plaintiff moves for judgment on the pleadings on Count III of the Complaint and dismissal of the Firm's counterclaims. For the reasons stated below, Plaintiff's motion is granted, subject to the parties' affirmative defenses.
The following facts are taken from the SAC and documents attached to it. Lively v. WAFRA Inv. Advisory Grp., Inc., 6 F.4th 293, 306 (2d Cir. 2021). The facts are construed in the light most favorable to Defendants as the non-moving party and presumed to be true for the purpose of this motion. Id. at 299 n.1.
On or about October 23, 2018, AIIC issued Policy AES1058242 01 (the “Policy”) to the Firm for the Policy Period October 19, 2018, to October 19, 2019. The Policy includes liability limits of $5,000,000 per claim and $5,000,000 in the aggregate, and a self-insured retention of $100,000 per claim.
The Policy's Insuring Agreement A provides, “The Company shall pay Damages and Claim Expenses . . . that the Insured shall become legally obligated to pay as a result of a Claim made against the Insured for a Wrongful Act.” The Policy defines Insured to include, among others, “the Named Insured” -- here, the Firm -- and “any individual . . . who was a partner . . . of the Named Insured, but solely while acting within the scope of their duties as such on behalf of the Named Insured in rendering Professional Services.” The Policy defines Professional Services, as:
services . . . provided by any Insured to others as a lawyer, mediator, arbitrator or notary public but solely for services on behalf of the Named Insured or Predecessor Firm designated in the Declarations; or . . . performed by any Insured as an administrator, conservator, receiver, executor, guardian, trustee, or in any other fiduciary capacity, but only if the act or omission in dispute is in the rendering of services ordinarily performed as a lawyer and then only to the extent that such services are on behalf of and inure to the benefit of the Named
Insured or any Predecessor Firm designated in the Declarations.”
The Policy defines a Wrongful Act as “any actual or alleged negligent act, error, or omission committed or attempted in the rendering or failing to render Professional Services by any Insured on behalf of the Named Insured, including but not limited to Personal Injury.”
The Policy contains an exclusion stating that the Policy “shall not apply to any Damages or Claims Expenses incurred with respect to any Claim . . . based upon or arising out of any actual or alleged activities of an Insured as, or an Insured acting in, the capacity as . . . an officer, director, partner, trustee or employee of a pension, welfare, profit sharing, mutual or investment trust or fund, charitable organization, corporation or business enterprise, other than the Named Insured” (the “Business Enterprise Exclusion”).
In December 2019, representatives of Allan Applestein and the Diatomite Corporation of America (together, the “Applestein Plaintiffs”) commenced a lawsuit against Defendants. See Applestein v. Kleinhendler, No. 20 Civ. 1454 (E.D.N.Y.) (the “Applestein Lawsuit”).[1] The Applestein Plaintiffs allege that Applestein engaged Kleinhendler and the Firm in 2010 and that the relationship continued until the spring of 2019.
In 2013, Applestein, then 81 years old, decided to sell approximately 1,000 acres of land in Richmond County, Virginia, referred to by the parties as the “Fones Cliffs Land.” Applestein “sought the legal advice . . . of his trusted attorneys Kleinhendler and the [] Firm to handle the transaction and represent him in connection with this effort.” The Applestein Plaintiffs allege that Kleinhendler held himself out as a partner in the Firm and used his Firm email address and signature block on his emails when communicating with Applestein, thus creating “actual and apparent agency.”
Between 2013 and 2015, several potential deals to sell the Fones Cliffs Land fell through. By 2015, Applestein's health was in decline. The Applestein Plaintiffs allege that Kleinhendler saw Applestein's compromised state as an opportunity. Beginning in or around 2015, Kleinhendler allegedly convinced Applestein to pursue rezoning of the Fones Cliffs Land so that it could be developed as an elaborate mixed-use project that would include, among other things, townhomes, a golf course, and a hotel. Eventually, Kleinhendler allegedly made a pitch to Applestein that instead of selling the Fones Cliffs Land to another buyer or developing it himself, Applestein should sell it to Kleinhendler and let Kleinhendler develop it -- but “did not advise Applestein of the inherent conflicts of interests in such a transaction.” The Applestein Plaintiffs also allege that, because of Applestein's “major neurocognitive disorder,” Applestein could not independently evaluate whether there were conflicts.
In 2017, Kleinhendler organized an entity -- Virginia True Corporation (“Virginia True”) -- to purchase the Fones Cliffs Land, allegedly preparing all the documentation, “all the while continuing to represent Applestein.” The Applestein Plaintiffs allege that, ”
Kleinhendler allegedly advised Applestein that the Fones Cliffs Land deal should be structured as a seller-financed transaction in which Applestein would receive a cash payment of $5 million at closing and finance the remaining balance of $7 million through a loan from Applestein to Virginia True to be evidenced by an unsecured promissory note -- rather than a mortgage. Kleinhendler also made an express promise, via a “side letter,” not to encumber the Fones Cliffs Land without Applestein's prior approval.
In or around April 2017, Kleinhendler traveled to Florida to have the contract for sale, promissory note, the side letter and other necessary transaction documents signed by Applestein. At that time, the Applestein Plaintiffs allege that Kleinhendler “witnessed Applestein's patent inability to feed himself, wipe his face, or concentrate for any length of time, or otherwise conduct legal or financial business” but “still went forward with the deal and, on April 27, 2017, accepted the papers signed by his elderly, infirm, and unaware client,” consummating the sale by Applestein of the Fones Cliffs Land to Kleinhendler's company, Virginia True.
At or around closing, Kleinhendler also persuaded Applestein to lend him an additional $500,000. The loan was evidenced by a $500,000 promissory note executed by HK Consulting Group, LLC, a New Jersey limited liability company that operates from Kleinhendler's home address. No security was given for the loan, and Kleinhendler did not guarantee its repayment. The Applestein Plaintiffs allege that Kleinhendler and the Firm represented Applestein in connection with the making of, and documentation associated with, the $500,000 loan.
Despite the side letter, the Applestein Plaintiffs allege that, on April 27, 2017, Kleinhendler signed a conflicting agreement with two equity investors in Virginia True, the Cipollones, that provided them the right to convert their $5 million equity investment in Virginia True into debt secured by a mortgage on the Fones Cliffs Land if they did not receive a return of their investment within eighteen months. The Cipollones later converted their equity in Virginia True to debt, and received a note for $5 million and a deed of trust.
The operative complaint in the Applestein Lawsuit asserts four causes of action against Kleinhendler and the Firm in connection with the Fones Cliffs Land transactions: legal malpractice, breach fiduciary duty, elder abuse and fraud.
Prior to commencement of the Applestein Lawsuit, the Applestein Plaintiffs made a presuit demand on the Firm. On or about August 21, 2019, the Firm timely gave AIIC notice of that pre-suit demand. On or about June 19, 2020, AIIC sent a letter to the Firm setting forth AIIC's coverage position with respect to the Applestein Lawsuit. AIIC stated that “[w]ithout waiver of this position or any of its rights, [AIIC] will defend Wachtel . . . under a reservation of rights.” After exhaustion of the self-insured retention on the Policy, AIIC began defending the Firm in the Applestein Lawsuit. This action followed.
On April 23, 2021, AIIC commenced this action, asserting five claims of relief against Defendants and seeking a declaratory judgment that the Policy does not provide coverage for, or require Associated to defend, the Firm or Kleinhendler.
On September 7, 2021, the Firm filed its answer, asserting four counterclaims against AIIC and twelve affirmative defenses. The Firm's counterclaims seek (1) a declaratory judgment that AIIC has a duty to defend the Firm in the Applestein Lawsuit; (2) monetary damages for breach of contract for AIIC's refusal to pay all of its attorneys' fees and costs in the Applestein Lawsuit; (3) a declaratory judgment that AIIC has a duty to indemnify the Firm in the Applestein Lawsuit; and (4) monetary damage for “anticipatory breach”...
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