Bellefonte Re Ins. Co. v. Argonaut Ins. Co.

• Decision Date: 04 May 1984
• Docket Number: No. 82 Civ. 8068,82 Civ. 8069.,82 Civ. 8068
• Parties: BELLEFONTE RE INSURANCE COMPANY, Plaintiff, v. ARGONAUT INSURANCE COMPANY, Defendant. UNIVERSAL REINSURANCE COMPANY, Plaintiff, v. ARGONAUT INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Southern District of New York

586 F. Supp. 1286

BELLEFONTE RE INSURANCE COMPANY, Plaintiff, v. ARGONAUT INSURANCE COMPANY, Defendant.

UNIVERSAL REINSURANCE COMPANY, Plaintiff, v. ARGONAUT INSURANCE COMPANY, Defendant.

Nos. 82 Civ. 8068, 82 Civ. 8069.

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

May 4, 1984.

Miller, Singer, Michaelson & Raives, P.C., New York City, for plaintiffs; Robert M. Raives, Lawrence I. Brandes, Clifford H. Schoenberg, Steven S. Honigman, New York City, of counsel.

Butler, Rubin, Newcomer, Saltarelli & Boyd, Winston & Strawn, Chicago, Ill., Donovan Leisure Newton & Irvine, New York City, for defendants; James J. Rubin, of counsel.

OPINION

ROBERT L. CARTER, District Judge.

Both plaintiffs in these consolidated actions, Bellefonte Re Insurance Company ("Bellefonte") and Universal Reinsurance Company ("Universal"), contracted separately to reinsure defendant, Argonaut Insurance Company ("Argonaut"), on business generated by one of defendant's managing general agents, Resources Facilities, Inc. ("RFI"). Subsequently, the parties became embroiled in a controversy over the validity of the reinsurance contracts and over plaintiffs' liability to defendant under those contracts. These disputes were settled by written agreements,¹ both of which contained substantially identical mutual covenants not to sue. The parties promised not to commence any litigation on claims

arising from or relating to any act, omission to act or transaction which occurred prior to the execution of this Agreement in connection with any and all matters arising out of the dispute regarding the ... contracts of reinsurance.²

Nevertheless, five years after the Bellefonte-Argonaut settlement and six years after the Universal-Argonaut settlement, plaintiffs brought suit to rescind the reinsurance contracts ab initio on the ground that information material to the risks reinsured was not disclosed at the time the contracts were negotiated. Specifically, plaintiffs alleged that defendant had not informed them that Argonaut had employed RFI only after soliciting a letter from a third party that purported to indemnify Argonaut for any loss which resulted from the business generated by RFI. Plaintiffs also alleged that defendant had failed to disclose that an Argonaut vice-president, Frank Rovere, recommended that Argonaut not contract with RFI because the honesty of RFI's president was suspect.

Acknowledging the apparent bar of the covenants not to sue, plaintiffs sought, in the same complaints, judgment rescinding the settlement agreements or, alternatively, a holding that the covenants did not bar suits premised on the non-disclosure of material facts. Plaintiffs argued, first, that the settlements had been fraudulently induced. They alleged no new misrepresentation in connection with the negotiation or execution of the agreements, but contended that the same failure to disclose material information which entitled them to recission of the reinsurance contracts tainted the settlement agreements as well. In addition, plaintiffs argued that the "dispute regarding the ... contracts of reinsurance" did not concern defendant's alleged failure to disclose the indemnification letter or the Rovere recommendation, and therefore that the covenants not to sue did not bar suit to rescind the reinsurance contracts on that particular ground.

In an opinion dated January 27, 1984,³ the court granted defendant's motion for summary judgment dismissing the complaint. The court ruled that the covenants not to sue expressed, in clear and unambiguous language, the parties' intention that there be no further litigation concerning the validity of, or the parties' liability under, the contracts of reinsurance, regardless of whether a claim was based on non-disclosure of material facts at the time the reinsurance contracts were negotiated, or any other theory. Because defendant was not obliged to admit to such non-disclosure in order to negotiate a settlement, and its failure to do so was the only fraud alleged in the procurement of the settlement, the court also rejected plaintiffs' claim that they were defrauded into settling.

Presently before the court is defendant's motion for summary judgment on its counterclaims, alleging that plaintiffs breached the covenants not to sue contained in the settlement agreements by suing for recission of the reinsurance contracts. As all plaintiffs' claims were dismissed, defendant has incurred no loss from the alleged breach save the cost of defending the suit. It is these litigation expenses, including attorney's fees, that defendant seeks to recover.

At early common law, a covenant not to sue, unlike a release, was no defense to a suit brought in breach of the covenant. The covenantee's only remedy was a suit for damages in which he could recover any amount that had been recovered against him in the breaching action. The obvious inefficiency of this two step process led the courts of equity to enjoin suits prohibited by a covenant not to sue, and the law courts eventually came to allow the covenant to be pleaded as a bar. See 4 Corbin on Contracts § 932 at 744 (1951). Thereafter, suits seeking damages for the breach of a covenant not to sue became rare, and few cases have considered whether a defendant who has successfully interposed a covenant not to sue as a bar to an action against him may recover his litigation expenses as damages for the breach. Some of the courts that have addressed the question have held that attorney's fees and other incidental costs of litigation are not recoverable absent express statutory or contractual authorization. Child v. Lincoln Enterprises, Inc., 51 Ill.App.2d 76, 200 N.E.2d 751, 754 (4th Dist.1964). Others, notably the Sixth Circuit in Anchor Motor Freight v. International Brotherhood of Teamsters, Local 377, 700 F.2d 1067, 1071-72 (6th Cir.1983), cert. denied, ___ U.S. ___, 104 S.Ct. 81, 78 L.Ed.2d 92 (1983), have held that the traditional reluctance to award fees and costs is inapplicable to a suit involving breach of a contract whose sole aim is to bar suit because litigation expenses are not recovered incidentally in such a case, but as the only measure of actual damages incurred by the aggrieved party.

The Universal and Bellefonte settlement agreements are governed by California and New York law respectively.⁴ The parties have not cited, nor has the court found, any case from either jurisdiction which states the law on this question. In Artvale, Inc. v. Rugby Fabrics Corp., 363 F.2d 1002 (2d Cir.1966), however, when the Second Circuit confronted the issue, although it declined to state whether it relied on state or federal law, it found that "nothing in New York law would lead us to a decision different from that we would independently reach." Id. at 1007. Accord...