Knight v. HE Yerkes and Associates, Inc.

• Decision Date: 16 December 1987
• Docket Number: No. 87 Civ. 0702 (PKL).,87 Civ. 0702 (PKL).
• Citation: 675 F. Supp. 139
• Parties: Frederick W.A. KNIGHT, Plaintiff, v. H.E. YERKES AND ASSOCIATES, INC., Defendant. H.E. YERKES AND ASSOCIATES, INC., Third-Party Plaintiff, v. Robert Francis O'LEARY, Third-Party Defendant.
• Court: U.S. District Court — Southern District of New York

675 F. Supp. 139

Frederick W.A. KNIGHT, Plaintiff, v. H.E. YERKES AND ASSOCIATES, INC., Defendant.

H.E. YERKES AND ASSOCIATES, INC., Third-Party Plaintiff, v. Robert Francis O'LEARY, Third-Party Defendant.

No. 87 Civ. 0702 (PKL).

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

December 16, 1987.

Weg & Myers, P.C., New York City (Dennis T. D'Antonio, Carl A. Formicola, of counsel), for plaintiff.

Wilson, Elser, Moskowitz, Edelman & Dicker, New York City, (Philip J. Walsh, James M. Kaplan, Maura E. Mahon, of counsel), for defendant and third-party plaintiff.

Killarney Rein Brody & Fabiani, New York City (John V. Fabiani, of counsel), for third-party defendant.

OPINION & ORDER

LEISURE, District Judge:

Plaintiff Frederick W.A. Knight ("Knight"), a resident of Thailand, brought this action seeking $34,000,000 from defendant H.E. Yerkes and Associates, Inc. ("Yerkes") for breach of an agreement to procure proper insurance coverage for plaintiff's personal property. Yerkes filed a third-party complaint against Robert Francis O'Leary ("O'Leary") alleging that O'Leary is liable for any judgment obtained by Knight against Yerkes.

Two motions are now before the Court. First, Yerkes has moved for an order pursuant to Local Rule 39 or section 8501 of the New York Civil Practice Law to compel Knight to post a bond as security for costs. Second, O'Leary has moved to dismiss the third-party complaint. For the reasons stated below, both motions are granted.

FACTUAL BACKGROUND

Between 1976 and 1979, Knight purchased 222 antique statues in Thailand for approximately $65,000. In 1980, a Thai appraiser hired by Knight valued the collection at $20,205,000. In April of 1981, the same appraiser revised his estimate to $27,000,000, and then to $30,307,000 in September of the same year. The appraiser was to receive 5% of the selling price as compensation for his services. The appraiser died, however, shortly after his last appraisal.

In the meanwhile, Knight had transported the statues from Thailand to Singapore, and in 1980 requested that O'Leary, an insurance broker, obtain a policy of insurance covering the statues for a voyage from Singapore to Holland. O'Leary in turn requested that Yerkes obtain proper insurance. Yerkes determined that the St. Paul Fire & Marine Insurance Company would be interested in insuring a portion of the twenty million dollar risk on the condition that the statues be inspected by an expert of their choosing. Knight did not pursue the coverage with St. Paul.

In February of 1981, Knight obtained coverage of $20,205,000 from London underwriters through the insurance brokerage firm of Hogg Robinson & Gardner Mountain (Marine) Ltd. ("Hogg Robinson") for shipment of the statues from Singapore to Holland. In May of 1981, after receiving the first revised estimate from his appraiser, Knight requested and obtained through Hogg Robinson an additional $10,000,000 in coverage.

In June 1981, however, Robert Jensen, Knight's broker at Hogg Robinson, received two anonymous telephone calls informing him that Knight was about to perpetrate a fraud. The lead underwriters of the insurance then demanded that a random sample of the statues be inspected before the voyage from Singapore to Holland. The appraiser retained by the insurance underwriters concluded that the statues were "grossly overvalued and, in some, if not all cases, replicas." Affidavit of James M. Kaplan, Esq., in Support of Motion to Compel Posting of Security for Costs, sworn to on May 28, 1987, ¶ 8 (hereinafter "Kaplan Aff."). The appraiser's report concluded that "the evidence currently available to underwriters suggests that the proper value of the consignment is nominal only (possibly approximately one pct. of the value declared)." Id. The policy procured through Hogg Robinson was then cancelled.

Knight again contacted O'Leary and requested Yerkes to obtain coverage in the amount of $30,000,000 in the United States for a voyage from Singapore to Marseilles and then Paris. The coverage was procured, but the statues were not shipped during the period of coverage and the policy lapsed. In October of 1982, Knight again approached Yerkes through O'Leary and requested that Yerkes re-obtain $30,300,000 in insurance for a voyage from Singapore to Greece, where a purchaser of the statues was located. Yerkes succeeded in obtaining insurance for the voyage.

In January 1983, the statues were loaded on board the ALIAKMON RUNNER in Singapore. On February 7 or 8, 1983, the ship sank in the Indian Ocean, and the statues were lost. Knight sought to make a claim on the insurance that had been placed for him by Yerkes, but the underwriters declined coverage and sought to void the policy ab initio. Knight commenced a suit against the underwriters in which the Hon. Constance Baker Motley, District Court Judge of this Court, granted summary judgment to the underwriters and dismissed the complaint after finding that Knight had materially misrepresented the risk involved. Knight v. U.S. Fire Insurance Co., 651 F.Supp. 477 (S.D.N.Y. 1986). The Court of Appeals for the Second Circuit affirmed Chief Judge Motley's decision, Knight v. U.S. Fire Insurance Co., 804 F.2d 9 (2d Cir.1986), cert. denied, ___ U.S. ___, 107 S.Ct. 1570, 94 L.Ed.2d 762 (1987), and Knight then commenced the instant action alleging that Yerkes had breached its agreement to procure proper and effective insurance.

I. YERKES' MOTION FOR SECURITY FOR COSTS

Section 8501(a) of the New York Civil Practice Law provides:

Except where plaintiff has been granted permission to proceed as a poor person or is the petitioner in a habeas corpus proceeding, upon motion by the defendant without notice, the court or a judge thereof shall order security for costs to be given by the plaintiffs where none of them is a domestic corporation, a foreign corporation licensed to do business in the state or a resident of the state when the motion is made.

N.Y.Civ.Prac.Law § 8501 (McKinney 1981). Rule 39 of the Local Rules of this Court provides:

The court, on motion or in its own initiative, may order any party to file an original bond for costs or additional security for costs in such amount and so conditioned as it may designate. For failure to comply with the order the court may make such orders in regard to non-compliance as are just, and among others the following: an order striking out pleadings or staying further proceedings until the bond is filed or dismissing the action or rendering a judgment by default against the non-complying party.

Civil Rule 39 of the United States District Courts for the Southern and Eastern Districts of New York.

Becasue this is a diversity action, this Court must apply the substantive law of the state in which it is sitting. Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). But as the Court of Appeals for the Second Circuit has recently noted, "in diversity actions, federal courts are `not bound to follow state rules on security for costs where a federal local rule granting discretion is applicable,' although they may look to state rules for guidance." Atlanta Shipping Corp., Inc. v. Chemical Bank, 818 F.2d 240, 251 (2d Cir.1987) (quoting Rapol v. Henry R. Jahn & Son Inc., 84 F.R.D. 42, 45 (S.D.N.Y. 1979)). Section 8501 of the New York CPLR is therefore not binding on this Court, but in looking to that statute for guidance, the Court finds that plaintiff should be required to file a bond for costs pursuant to Local Rule 39.

Plaintiff is a resident of Thailand, and if defendant prevails in this litigation, collection of costs would likely prove difficult. By plaintiff's own admission, he has "incurred substantial expenses in maintaining an action brought by his former counsel to recover more than $90,000 in allegedly unpaid fees and disbursements and his property has been the subject of attachment proceedings." Affidavit of Carl A. Formicola, Esq., in Opposition to Motion to Compel Posting of Security for Costs, sworn to on August 18, 1987, ¶ 17. Against this background, the Court believes that there is a substantial risk that plaintiff would be unable to pay defendant's costs should defendant prevail, and that plaintiff should therefore be required to file a bond for costs.

Defendant requests that the amount of the bond be set at $25,000 because Yerkes will have to depose persons in London, Singapore, Greece and Thailand as well as in the United States. Memorandum of Law in Support of Motion to Compel Posting of Security for Costs at 8. Defendant points out that 66 separate depositions were taken in the prior action by Knight against the underwriters. Kaplan Aff. ¶ 14. Plaintiff contends that it has provided copies of forty depositions to defendant's counsel, Formicola Aff. ¶ 11, and that these depositions should be available to Yerkes for impeachment purposes and perhaps also for Yerkes' case-in-chief. Plaintiff's Memo at 8-9.¹ But the issue in this case, whether Yerkes breached its agreement to procure proper insurance is not the same issue as in the prior action.

In light of the substantial number of depositions that will likely take place and the location of some of those depositions, it is clear that defendant will incur substantial costs in the defense of this action. There appears to be a considerable risk that plaintiff will be unable to pay defendant's costs should the defendant ultimately prevail. The plaintiff is therefore ordered to file a bond in the amount of $15,000 as security for costs. Failure to file the bond within twenty days may result in an order striking out the complaint or staying further proceedings until the bond is filed as provided in Local Rule 39.

II. O'LEARY'S MOTION TO DISMISS THE THIRD-PARTY COMPLAINT

On April 16, 1987, Yerkes filed a third-party complaint against O'Leary "for all sums that may be adjudged against defendant H.E. Yerkes & Associates, Inc. in favor of plaintiff Frederick W.A. Knight." Third-Party...