George Cohen Agency, Inc. v. Donald S. Perlman Agency, Inc.

• Decision Date: 25 November 1980
• Citation: 434 N.Y.S.2d 189,51 N.Y.2d 358
• Parties: , 414 N.E.2d 689 GEORGE COHEN AGENCY, INC., Plaintiff, v. DONALD S. PERLMAN AGENCY, INC., et al., Defendants and Third-Party Plaintiffs-Respondents, Continental Casualty Company, Third-Party Defendant-Appellant, et al., Third-Party Defendant.
• Court: New York Court of Appeals Court of Appeals

Page 189

434 N.Y.S.2d 189

51 N.Y.2d 358, 414 N.E.2d 689

GEORGE COHEN AGENCY, INC., Plaintiff, v. DONALD S. PERLMAN AGENCY, INC., et al., Defendants and Third-Party Plaintiffs-Respondents Continental Casualty Company, Third-Party Defendant-Appellant, et al., Third-Party Defendant.

Court of Appeals of New York.

Nov. 25, 1980.

James A. Gallagher, Jr., and Robert A. Faller, Mineola, for third-party defendant-appellant

Joseph L. Forstadt and William J. Robbins, New York City, for defendants and third-party plaintiffs-respondents.

OPINION OF THE COURT

JASEN, Judge.

The significant issues on this appeal are whether CPLR 1007 permits a third-party plaintiff to seek damages in excess of the amount demanded by plaintiff in the main action and whether a third-party claim is maintainable in the face of a simultaneous contention that the third-party plaintiff is completely free from liability to the plaintiff in the main action.

This matter arises out of the transfer of a "portfolio" of insurance business from one insurance agency to another. At issue are the relative rights and liabilities of the buyer, seller, insurance carrier (whose underwriting potential was the stuff transferred) and the attorney who arranged the sale. The instant procedural web was spun about these parties as follows: Plaintiff George Cohen Agency, Inc., the seller, agreed to transfer to defendant-respondents Donald S. Perlman Agency, Inc., and Donald S. Perlman, a specified "portfolio" of insurance business consisting of certain policies issued by Continental Casualty Company. The Perlman Agency and Perlman himself executed promissory notes in payment. These notes, however, were not honored when due. Perlman asserted that the Continental policies were no longer salable because they contravened certain New York Insurance Department regulations and that no payment need be made for the spoiled portfolio. Cohen then sued Perlman for $52,528 on the notes. This is the main action.

In the answer to this main action, and in a counterclaim against Cohen, it was asserted that Cohen, either individually or in concert with Continental and attorney-broker I. Edward Pogoda, attempted to defraud defendants by knowingly inducing them to purchase the worthless package of insurance business. The counterclaim sought rescission or reformation of the contract of sale or, in the alternative, compensatory damages in the amount of $545,000, punitive damages in the amount of $2,500,000, an unspecified amount of money allegedly paid to Cohen, and over $25,000 in attorney's fees.

The same elements of legal damages, as well as indemnity and contribution for any potential liability of Perlman to Cohen, were demanded in third-party actions brought by Perlman against Continental and attorney Pogoda. These third-party actions, brought pursuant to CPLR 1007, were grounded upon the third-party defendants' alleged complicity in a conspiracy to defraud Perlman and upon third-party defendant Pogoda's alleged malpractice and breach of duty as an attorney.

Continental moved to dismiss Perlman's third-party action, contending: (1) that CPLR 1007 does not permit a third-party plaintiff to demand damages in excess of those demanded in the main action; (2) that no third-party action is maintainable where the third-party plaintiff alleges facts which negate liability on the main action; and (3) that recognition of a third-party action would in the circumstances of this case, prejudice Continental by impeding its ability to "remove" the case to Federal court. Special Term denied Continental's motion to dismiss. The Appellate Division unanimously affirmed, 69 A.D.2d 725, 419 N.Y.S.2d 584, as do we.

The law has long recognized the need for a procedure whereby one whose responsibility for an alleged legal wrong is to be tested in a lawsuit may bring before the court another who is claimed by the defendant to have a share in that responsibility so that all claims can be resolved in the one forum. The first procedural device commonly used to achieve this end was the common-law method of preserving one's indemnity claim against a third party known as "vouching in" or "vouching to warranty". (See, generally, Hartford Acc. & Ind. Co. v. First Nat. Bank & Trust Co. of Hudson, 281 N.Y. 162, 22 N.E.2d 324; Twelfth Ann. Report of N.Y. Judicial Council, 1946, pp. 197-199; Siegel, New York Practice, § 168, p. 207; Comment, Third-Party Practice in New York, 37 Cornell L. 721-723.) This device, acknowledged to be the forerunner of modern third-party practice, allows a party to bind a potential indemnitor to the result reached in the main action by simply notifying him of the pendency of the action and offering him control of the litigation. No direct judgment is available against the third party when this device is used. However, the procedure at least insures that, under principles of res judicata, the issue of defendant's liability to plaintiff need not be relitigated in a subsequent suit against the third-party indemnitor. Although still available today, this device is little used, for a much more comprehensive device-impleader-has been created by the Legislature.

The first impleader statute appeared in New York in 1922 as section 193 of the former Civil Practice Act. (L. 1922, ch. 624.) The basic language of the impleader statute, with minor changes, has been carried forward to the present day and currently appears as CPLR 1007. ^* Although the basic structure of the statute has changed little over the years, the interpretation of the statute and, thus, its scope has changed greatly.

Early on, the statute was construed narrowly, requiring that a defendant (third-party plaintiff in the jargon of the statute) demonstrate that his third-party claim was identical to the claim upon which he was being sued by plaintiff in the main action. (See, e. g., Nichols v. Clark, MacMullen & Riley, Inc., 261 N.Y. 118, 184 N.E. 729.) This interpretation, as might be expected, severely limited the utility of the device. Indeed, it was not until 1946 when the statute was amended that the effect of this restrictive interpretation was alleviated.

The 1946 amendment (L. 1946, ch. 971) added the following language to the statute: "The claim against such person, hereinafter called the third-party defendant, must be related to the main action by a question of law or fact common to both controversies, but need not rest upon the same cause of action or the same ground as the claim asserted against the third-party plaintiff." (Former Civ. Prac. Act, § 193-a.) This change signaled the end of the so-called "identity" rule. Interestingly, when the impleader statute was transferred to its present place in CPLR 1007, the above sentence was once again deleted. This amendment, however, did not require a return to the old "identity" rule. Rather, the second operative clause of the above sentence was deleted because practice had so changed that it was now "unnecessary" and the first clause was deleted because, if read literally, it narrowed rather than expanded third-party practice-a result not intended by the revisors. (See Sixth Report of Senate Finance Committee Relative to Revision of Civil Practice Act, N.Y.Legis.Doc., 1962, No. 8, p. 159; Norman Co. v. County of Nassau, 63 Misc.2d 965, 314 N.Y.S.2d 44 (Meyer, J.).) Thus, a review of the history of third-party practice in this State seems to disclose a trend toward liberalization and expansion of the availability of impleader. Recognition of this general trend, however, serves only as a starting point for our inquiry, for the scope of the statute remains unclear.

Indeed, the precise questions raised by this appeal-whether a third-party complaint may seek damages in excess of those sought on the main claim and whether such a claim may be maintained where the third-party plaintiff alleges facts which negate liability-have not yet been addressed by this court. They have been addressed by the lower courts in a way which, while it may not be truly inconsistent, certainly evinces a certain difference of opinion on these issues.

On the issue of "excess" damages, many lower courts have limited third-party practice solely to indemnity claims which do not exceed the amount of the main claim. (See, e. g., Carroll Sheet Metal Works v. Mechanical Installations, 201 Misc. 689, 690, 110 N.Y.S.2d 581; Victory Painters & Decorators v. Miller, 198 Misc. 196, 101 N.Y.S.2d 350.) Others have focused upon not only the amount, but also the nature of a third-party claim and the literal language of the statute and have noted that a third-party claim, if it is to be limited to "all or part of the plaintiff's claim against (a third-party plaintiff)" must "rise from" or be conditioned upon or be otherwise based upon the liability to the plaintiff in the main action. (Cleveland v. Farber, 46 A.D.2d 733, 361 N.Y.S.2d 99; Horn v. Ketchum, 27...