Prudential Ins. Co. of America v. Dewey Ballantine, Bushby, Palmer & Wood

• Decision Date: 15 August 1991
• Citation: 573 N.Y.S.2d 981,170 A.D.2d 108
• Parties: The PRUDENTIAL INSURANCE COMPANY OF AMERICA, Plaintiff-Appellant-Respondent, v. DEWEY BALLANTINE, BUSHBY, PALMER & WOOD, a law partnership, Defendant-Respondent-Appellant, and Gilmartin, Poster & Shafto, a law partnership, Defendant-Respondent, and Haight, Gardner, Poor & Havens, a law partnership, Defendant-Respondent-Appellant.
• Court: New York Supreme Court — Appellate Division

Page 981

573 N.Y.S.2d 981

170 A.D.2d 108

The PRUDENTIAL INSURANCE COMPANY OF AMERICA Plaintiff-Appellant-Respondent, v. DEWEY BALLANTINE, BUSHBY, PALMER & WOOD, a law partnership Defendant-Respondent-Appellant and Gilmartin, Poster & Shafto, a law partnership, Defendant-Respondent and Haight, Gardner, Poor & Havens, a law partnership, Defendant-Respondent-Appellant.

Supreme Court, Appellate Division, First Department.

Aug. 15, 1991.

W. Neil Eggleston, of counsel (William L. Webber and Thomas A. Isaacson, with him on the brief, Hertzjog, Calamari & Gleason and Howrey & Simon, attorneys), for plaintiff-appellant-respondent.

Alvin M. Stein, of counsel (Barry J. Brett and Daniel S. Greenfeld, with him on the brief, Parker Chapin Flattau & Klimpl, of counsel), for defendant-respondent-appellant Dewey Ballantine, Bushby, Palmer & Wood.

Nancy Ledy-Gurren, of counsel (Deborah Bass, with her on the brief, Bower & Gardner, attorneys), for defendant-respondent Gilmartin, Poster & Shafto.

Robert L. Conason, of counsel (Gair, Gair, Conason Steigman & Mackauf, attorneys), for defendant-respondent-appellant Haight, Gardner, Poor & Havens.

Before SULLIVAN, J.P., and MILONAS, ROSS, KASSAL and RUBIN, JJ.

ROSS, Justice.

The principal issue presented by the appeal and cross-appeals is whether the plaintiff has set forth viable causes of action, alleging legal malpractice, as well as breach of contract, so as to preclude defendants' motion to dismiss, and a motion and cross-motion for summary judgment.

Prudential Insurance Company of America (Prudential), a New Jersey Corporation, doing business in New York State, is engaged in the business of insurance, real estate, financial services, and related businesses.

In 1978, Prudential loaned $150,000,000.00 (the 1978 loan) to the United States Lines (United), a New Jersey Corporation, engaged in the shipping industry, as an owner and operator of merchant vessels. This 1978 loan was secured by, inter alia, a first preferred ship mortgage on a number of United's vessels, including eight Lancer Class vessels (Lancers).

Subsequently, in 1982, United entered into a contract for the construction and acquisition of twelve jumbo container vessels (Econships), for which it needed to obtain financing in excess of $570,000,000.00. Pursuant to the terms of the 1978 loan, United was unable to finance the Econships without first obtaining Prudential's approval, and therefore United sought such consent, as well as Prudential's participation in the Econship financing. Prudential agreed to participate in the new financial arrangements.

Thereafter, in 1983, Prudential and General Electric Credit Corporation (GECC) jointly provided $114,000,000.00 of the $570,000,000.00, needed to finance the Econships. In exchange, Prudential and GECC obtained third preferred ship mortgages on the Econships, and through a trustee, obtained second preferred ship mortgages on the Lancers. As mentioned supra, Prudential, alone, held a first preferred ship mortgage on the Lancers, resulting from the 1978 loan.

When the 1983 financing of the Econships was completed, there was still outstanding a principal of $126,859,753.54 on the 1978 loan, and accordingly Prudential and United agreed to certain changes in that loan agreement. Thereafter, negotiations between those parties resulted in new notes being issued to Prudential in the principal amount of $126,859,753.54, secured by a new single first preferred "fleet" mortgage on the Lancers, plus a fourth preferred ship mortgage on each Econship. Pursuant to the Ship Mortgage Act (see, 46 U.S.C. §§ 921 and 922, which were repealed, effective January 1, 1989), the mortgages were then filed, and recorded with the United States Coast Guard.

United began to experience financial difficulties, and, in 1986, United informed Prudential, GECC and certain of its other key creditors that it anticipated difficulty in meeting its debt obligations. Thereafter, agreements were reached by the parties to restructure the financing of the Econships, as well as the 1978 loan.

It is undisputed that, during the negotiations involved in the 1986 debt restructuring (restructuring), New York law firms represented United, Prudential and GECC, as follows: Gilmartin, Poster and Shafto (Gilmartin) represented United; Dewey, Ballantine, Bushby, Palmer & Wood (Dewey) represented Prudential; and Haight, Gardner, Poor & Havens (Haight) represented GECC. Prudential and Dewey further allege that Haight represented Prudential as "special admiralty counsel."

A partner in the Haight firm states, in an affidavit, "[i]t was necessary for a multitude of documents to be drafted, circulated and executed in ... [connection with the restructuring], and [therefore] document drafting was shared among the different partys' [sic] law firms ..." (see, Record on Appeal (RA), at 61) [material in brackets added].

The restructuring of the 1978 loan was accomplished through Amendment No. 1986-1 (Amendment), amending the Financing and Security Agreement executed in 1978. Our examination of the preliminary statement on the first page of this Amendment indicates that it correctly states that the outstanding principal amount remaining, as to the 1978 debt, was "$92,885,000.00" (see, RA, at 270). Further, as a Corollary to the Amendment, Prudential and United also executed an amendment to the first preferred "fleet" mortgage on the Lancers held by Prudential, and this document was identified as Amendment No. 1 (Corollary).

Our examination of the subject Corollary (see, for a copy, RA, at 290-303) indicates an error, in that it (see, RA, at 297) reflects that Prudential's mortgage had an outstanding balance of $92,885.00 rather than the correct amount of $92,885,000.00. Haight's staff prepared this Corollary containing the approximately ninety-two million dollar error, and it admits that the "typographical error ... [occurred] on a word processor in ... [Haight's] office ..." (see, RA, at 64-65).

None of the parties or their counsel detected the typographical error before the closing took place, on April 14, 1986, and thereafter, on April 15, 1986, the Amendment and Corollary were filed and recorded with the United States Coast Guard.

Subsequently, in November 1986, United filed bankruptcy petitions in the United States Bankruptcy Court for the Southern District of New York. Following United's bankruptcy filing, in May 1987, Prudential sought to have the Bankruptcy Court lift the automatic stay, in order that Prudential could foreclose on its $92,885,000.00 first preferred "fleet" mortgage on the Lancers. United, as well as some of the other creditors of United, opposed, claiming that Prudential's interest in those vessels was only in the recorded amount of $92,885.00.

Although the Bankruptcy Court lifted the stay, as to five Lancers in New York Harbor, permitting Prudential to arrest and pursue foreclosure on those vessels, that Court did not permit Prudential to retain the proceeds from the sale of those vessels. Thereafter, in March 1988, Prudential and debtor United reached an agreement, by which United abandoned its opposition, to Prudential's claim of a first preferred "fleet" mortgage in the amount of $92,885,000.00, in exchange for a 17.5% share of the amounts Prudential would receive from the sale of the Lancers. By order, dated March 24, 1988, Bankruptcy Court approved this Prudential/United settlement.

During August 1987, Prudential commenced in rem foreclosure proceedings on its interest in the Lancers in the United States District Court for the Northern District of New York, and, in that Court, GECC, as a creditor of United, moved for partial summary judgment, declaring Prudential's mortgage to be invalid for any amount over $92,885.00. Subsequently, this matter was transferred to the United States District Court for the Southern District of New York, where Prudential cross-moved for summary judgment, declaring the value of its mortgage to be $92,885,000.00. The District Court denied GECC's motion, and granted Prudential's cross-motion (see, Prudential Ins. Co. of America v. American Lancer, S.S., 686 F.Supp. 469 (1988)). GECC appealed, and the United States Court of Appeals for the Second Circuit affirmed (see, Prudential Ins. Co. of America v. American Lancer, S.S., 870 F.2d 867 (1989)).

While we find it clear from the record that both United (see, RA, at 121-122) and GECC (see, RA, at 122) knew that the correct amount of Prudential's mortgage interest in the Lancers was $92,885,000.00 rather than $92,885.00, under the peculiarities of the Bankruptcy and Maritime Law those parties could challenge the amount of that mortgage, even though they had actual knowledge of the facts (see, 1978 Bankruptcy Code, 11 USC § 506(c), and 46 U.S.C. Appendix § 922). United, as debtor-in-possession, claimed in its Adversary Proceeding, in Bankruptcy Court, that "as a hypothetical creditor holding an unsatisfied execution under section 544(a)(2) of the Bankruptcy Code, it may avoid $92,792,115.00 of the First Mortgage, preserving the benefit of the avoided transfer for its estate and creditors under section 551 of the Bankruptcy Code ... [United] asserts that such portion of the First Mortgage was not properly recorded by Prudential because of the typographical error which reduced the amount of the First Mortgage to $92,885.00 from $92,885,000.00 ... [United] has asserted that the reduced amount, which appears in the Coast Guard's index of mortgage documents and on the Vessels' documents constitutes the extent to which Prudential's First Mortgage is properly recorded under the Ship Mortgage Act ..." (see, RA, at 990-991) [material in brackets added]. Further, GECC claimed, in its litigation against Prudential, "that the figure $92,885.00, the amount recorded on the Lancer vessel documents, controls. GECC [in addition] claims that the provisions of 46 U.S.C. § 922 must be strictly construed, and that any...