City of New York v. Britestarr Homes, Inc.

• Citation: 150 Misc.2d 820,570 N.Y.S.2d 882
• Parties: The CITY OF NEW YORK, Plaintiff, v. BRITESTARR HOMES, INC., Oak Point Associates, J. Max Corp., J.D. Jovent, Inc., Jack Maticic, David Norkin, Michael McLaughlin, Lloyds Bank PLC, the land and improvements thereon known as 400 Oak Point Avenue, Block 2604, Lot 74, described as the Oak Point Railroad Yard, County of Bronx, City of New York, et al., Defendants.
• Decision Date: 30 April 1991
• Court: New York Supreme Court

Page 882

570 N.Y.S.2d 882

150 Misc.2d 820

The CITY OF NEW YORK, Plaintiff, v. BRITESTARR HOMES, INC., Oak Point Associates, J. Max Corp.,

J.D. Jovent, Inc., Jack Maticic, David Norkin, Michael

McLaughlin, Lloyds Bank PLC, the land and improvements

thereon known as 400 Oak Point Avenue, Block 2604, Lot 74,

described as the Oak Point Railroad Yard, County of Bronx,

City of New York, et al., Defendants.

Supreme Court, Bronx County,

Part IA 6.

April 30, 1991.

Sherrill Kurland, of counsel, Victor A. Kovner, Corp. Counsel, New York City, for plaintiff.

Howard S. Weiss, Howard E. Druckman and Jerome Becker, of counsel; Davidoff & Malito, New York City, for all defendants except Lloyds Bank PLC.

LEWIS R. FRIEDMAN, Justice.

Plaintiff moves to restore the notice of pendency, previously cancelled by this court, on the ground that the surety is not authorized to post the undertakings which the defendants have posted.

In this action the City seeks, inter alia, an injunction (1) prohibiting the storage of certain material on defendant's property, (2) preventing the operation of an illegal construction waste transfer station and (3) requiring removal of the waste on the grounds that its presence violates the New York City Nuisance Abatement Law (Administrative Code of City of New York §§ 7-703[f], 7-703[l]. Plaintiff filed a notice of pendency as authorized by Administrative Code section 7-706[e]. However, this court, by order entered July 16, 1990, permitted the cancellation of the notice of pendency conditioned on defendants' posting a $200,000 undertaking pursuant to CPLR 6515, beginning promptly to remove the material from the site, posting a $2,000,000 performance bond to guarantee the removal of unprocessed material and posting a $200,000 performance bond to guarantee the removal of processed material.

On September 12, defendants served and filed the undertakings and performance bonds referred to in the July 16 order. The bonds were all issued by Athens Bonding Company of Dallas, Texas ("Athens"). Plaintiff expressed no objections to the bonds when they were posted. The notice of pendency was cancelled on September 12.

The instant motion, made on December 4, is based on plaintiff's allegations that Athens, which is not licensed to do an insurance business in New York, was not authorized to issue the bonds. In February 1990 the Texas Commissioner of Insurance issued a cease and desist order which, inter alia, prohibits Athens "as an insurer" from "soliciting or issuing of guarantee bonds, surety or performance bonds". Plaintiff argues that the bonds are invalid because the order prohibits Athens from issuing the bonds filed here. ¹

Defendants contend that the motion is untimely under CPLR 2506, since it was made more than 10 days after the bonds were received by plaintiff. Defendants also contend that the bonds are valid. The case presents several questions, not resolved in the reported cases, concerning the scope of CPLR 2506 and the efficacy of out-of-state surety bonds.

Article 25 is one of the most used, but least cited, provisions of the CPLR. Whenever a court orders the posting of an undertaking in a specified amount, counsel correctly assumes that the posting of a surety company bond is sufficient. Indeed, that is the thrust of CPLR 2502(a)(1). Problems arise, as in the case at bar, where a party questions the validity of the named surety. CPLR 2506 and 2507 provide a simple procedure, derived from longstanding, pre-CPLR, practice (Civ.Prac.Act §§ 151, 955, 1104, 1526; Code of Civ Proc [1876] §§ 690, 1335, 1703, 3274, 3275; Code of Civ Proc [1848] §§ 210, 241, 341; see, Lowande v. Eisenberg Farms, 285 N.Y. 742, 34 N.E.2d 902), which allows a test of whether the bond is sufficient. Undertakings must be served upon the adverse party and filed with the clerk (CPLR 2505). If a certificate of qualification pursuant to Insurance Law section 1111 is not filed with the undertaking, ² a party challenging the validity of the bond may, within ten days of receipt of a copy of the bond, simply serve a notice of exception to the undertaking, (CPLR 2506[a]. That notice shifts to the proponent of the bond the burden of moving to justify the surety, within ten days of service of the notice of exceptions (CPLR 2507[a]; see, Liddy v. Long Island City, 102 N.Y. 726, 7 N.E. 904). If the proponent of the bond fails to make a timely motion "the undertaking shall be without effect", except that the surety remains liable until a new undertaking is posted (CPLR 2507[b]; see, Manning v. Gould, 90 N.Y. 476). If no exception is taken within the ten days, the undertaking is allowed (CPLR 2507[b]; see, Travis v. Travis, 48 Hun. 343, 1 N.Y.S. 357; Hicksville Hall Corp. v. Haber, 43 Misc.2d 512, 251 N.Y.S.2d 632). As the paucity of cases suggests, the notice of exception procedure is almost never invoked.

Without question, had plaintiff timely invoked CPLR 2506, defendants would be required to justify the bond. Plaintiff instead made the instant motion which seeks in part to compel defendants to justify pursuant to CPLR 2507. Insofar as the motion contends that defendants were required to comply with CPLR 2507, it is the wrong procedure and is patently untimely. However, CPLR 2508 permits a party, at any time, to move upon notice to the parties and surety, for "a new or additional undertaking, a justification or rejustification of sureties, or new or additional sureties." Clearly CPLR 2508 by its terms permits a party to move for justification. One commentator, though, believes that "[t]ardy attacks on the sufficiency of a surety are not the mission of CPLR 2508" (2A Weinstein-Korn-Miller, New York Civ Prac p 2506.06). Indeed, the drafters of the CPLR clearly intended to the contrary. "Should a party wish to move directly to set aside an undertaking or except to sureties he may move under proposed rule 123.8" (Third Preliminary Report of the Advisory Committee on Civil Practice, 1959 NY Legis Doc No. 17, at 433). Nothing in the legislative history supports the conclusion that the motion procedure may not be used at any time without proof of unusual circumstances. Of course, the motion procedure differs from the notice of exception route; the burdens of going forward and of ultimate persuasion are different. The movant must show a need for justification and does not gain the effect of automatic invalidity if the proponent of the bond fails to proceed. There is no reason, therefore, to deny the motion out of hand as untimely. The court will construe the instant motion as properly invoking CPLR 2508.

The remaining questions concern the legality of an out-of-state, or "foreign" (Insurance Law § 107[21], surety bond, when the Insurance Department of the company's state of domicile has issued an order to cease and desist from the writing of insurance and surety bonds. This requires an analysis of the rights of foreign insurance companies to issue surety bonds on New York risks.

New York has a comprehensive scheme of regulation of insurance companies to protect the public and the policy holders. Any person who "does an insurance business" in the state is required to be licensed (Insurance Law § 1102[a]. Insurance Law § 1101[a], [b][1][B] provide that the writing of a surety bond, even if done by mail from outside the state, is the "doing of an insurance business". However, section 1101[b][2] provides an exception for "the following acts or transactions effected by mail from outside the state by an unauthorized foreign or alien insurer duly licensed to transact the business of insurance in and by the laws of its domicile * * * (E) transactions with respect to policies of insurance on risks located or resident within or without this state * * * which policies are principally negotiated, issued and delivered without this state in a jurisdiction in which the insurer is authorized to do an insurance business."

Defendants contend that pursuant to that exception Athens need not be licensed by New York in order to write these policies from outside the state.

The defendants do not meet the threshold of showing that Athens is duly licensed to transact an insurance business under the laws of Texas, which is apparently the state of its domicile. The February 1990 cease and desist order issued by the Texas Commissioner of Insurance adopted the factual findings submitted by the Staff. Those findings include that Athens "is not incorporated under the laws of the State of Texas and is not licensed under the State Board of Insurance." The Commissioner, therefore, found that Athens and its principals "are unauthorized persons engaging in the business of insurance in violation of TEX.INS.CODE art. 1.14-1 * * *." This court is bound by the finding that Athens is not licensed in Texas (cf. CPLR 4540). The issue, therefore, is not, as defendants argue, whether Texas Insurance Code article 1.14-1 permits Athens to write policies on out-of-state risks, but rather, whether defendants have shown that Athens' policies come within the narrow exception to New York's licensing law. Clearly defendants have not shown that Athens is "duly licensed to transact * * * insurance" as required by the first branch of Insurance Law § 1101[b][2].

The policies also fail to meet the second branch of the exception. On its face, Insurance Law section 1101[b][2][E] is internally inconsistent. That is, while subdivision b requires only that the exempted activity be "effected by mail", subdivision E requires that policies be "principally negotiated, issued and delivered" outside the state. In People v. British & American Casualty Co., 133 Misc.2d 352, 359, 505 N.Y.S.2d 759, the court concluded that the exception applies only to policies physically delivered outside the state. Justice Glen's careful analysis was based on the intent of the Legislature to regulate the mail order insurance business, the rules permitting a limited definition of the term "deliver" in the highly...