Silverman Neu, LLP v. Admiral Ins. Co., No. 11–cv–05542 (JFB)(AKT).

CourtUnited States District Courts. 2nd Circuit. United States District Court (Eastern District of New York)
Writing for the CourtJOSEPH F. BIANCO
Citation933 F.Supp.2d 463
PartiesSILVERMAN NEU, LLP, Plaintiff, v. ADMIRAL INSURANCE COMPANY, Defendant.
Docket NumberNo. 11–cv–05542 (JFB)(AKT).
Decision Date28 March 2013

933 F.Supp.2d 463

SILVERMAN NEU, LLP, Plaintiff,
v.
ADMIRAL INSURANCE COMPANY, Defendant.

No. 11–cv–05542 (JFB)(AKT).

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

March 28, 2013.


[933 F.Supp.2d 464]


Brian J. Davis, Law Office of Brian J. Davis, Garden City, NY, for Silverman Neu, LLP.

Justin N. Kinney, Coughlin Duffy LLP, New York, NY, for Admiral Insurance Company.


MEMORANDUM AND ORDER

JOSEPH F. BIANCO, District Judge:

Plaintiff Silverman Neu, LLP (“Silverman”), as successor to Chipetine, Neu &

[933 F.Supp.2d 465]

Silverman, LLC (“CNS”) (“plaintiff” or “Silverman/CNS”), brings this action against Admiral Insurance Company (“defendant” or “Admiral”) seeking a declaratory judgment that Admiral had an obligation to defend Silverman/CNS in an underlying class action lawsuit,1 instituted by class representatives Andrew Zimmerman and Kelly Zimmerman on behalf of a group of plaintiffs (the “Zimmerman plaintiffs”), who alleged that CNS's clients engaged in fraud and misrepresentation against the Zimmerman plaintiffs (“Underlying Lawsuit” or “Underlying Action”). Plaintiff also moves for reimbursement of defense costs in the event the Court finds that Admiral was obligated to have defended plaintiff in the Underlying Lawsuit against the Zimmerman plaintiffs.

Admiral cross-moves for summary judgment seeking a declaration that (1) New York law should govern the duty to defend analysis; (2) the claims in the Underlying Action, for which plaintiff raises a duty to defend, do not fall within the scope of the Admiral Policy insuring agreement, the latter of which was issued to CNS; (3) even if the claims in the Underlying Lawsuit are within the scope of the Admiral Policy's insuring agreement, they fall under one or more of its exclusions, including the Wrongful Act Exclusion; (4) the claims in the Underlying Action, assuming they are covered under the Admiral Policy's insuring agreement, also fall within the Policy's Financial Institution Exclusion; and (5) summary judgment in Admiral's favor is warranted.

For the reasons set forth herein, the Court denies Silverman/CNS's declaratory judgment motion in its entirety. The Court grants Admiral's cross-motion for summary judgment, concluding that even if coverage theoretically applies to the Underlying Action's claims, coverage is precluded pursuant to the Wrongful Act Exclusion provision. Given that the Court has determined that Admiral has no duty to defend here, it need not address plaintiff's request for damages arising from the Underlying Lawsuit.

I. Background
A. Factual Background

The Court has taken the facts set forth below from the parties' depositions, affidavits, and exhibits, and from the parties' respective Rule 56.1 Statements of Facts. Upon consideration of a motion for summary judgment, the Court shall construe the facts in the light most favorable to the non-moving party. See Capobianco v. City of New York, 422 F.3d 47, 50 (2d Cir.2005). Unless otherwise noted, where a party's 56.1 Statement is cited, that fact is undisputed or the opposing party has pointed to no evidence in the record to contradict it.2

This case arises out of a class action in which the Zimmerman plaintiffs seek to recover payments made to certain credit counseling companies, including Cambridge Credit Counseling Corp. (“CCCC”) and Cambridge/Brighton Budget Planning Corp. (“Cambridge/Brighton”)—two of CNS's clients—on grounds that these entities engaged in fraud and misrepresentation that injured these customers. (Def.'s 56.1 Statement (“Def.'s 56.1”) ¶¶ 1, 6, 10, 13, 17, 20.) Because details concerning the Underlying Lawsuit are relevant to the current dispute, the Court addresses this action in full.

[933 F.Supp.2d 466]

1. The Lawsuit Stage: The Zimmermans Sue

The Zimmerman plaintiffs filed a complaint (the “Zimmerman Complaint”) against BDO Seidman, LLP (“BDO”), CNS, and Kostin, Ruffkess & Company, LLP (“Kostin”) (collectively, “defendants”) in the United States District Court for the District of Massachusetts. ( Id. ¶ 4.) This action related to two prior actions. One was filed in the United States District Court for the District of Massachusetts (the “Zimmerman Class Action”), alleging violations of the Credit Repair Reorganization Act, 15 U.S.C. § 1679 et seq. (“CROA”); the other case was filed in the Eastern District of New York under a RICO theory of liability (the “Limpert Action”). ( Id. ¶ 5.) The following facts, upon which the parties rely in their briefings and corresponding submissions, are derived from the Zimmerman Complaint.

The Zimmerman Class Action and the Limpert Action were brought by hundreds of thousands of injured debt management plan customers of, among other entities, CCCC and Cambridge/Brighton. ( Id. ¶ 6.) 3,4 In the Zimmerman Class Action, the Massachusetts district court found in favor of the plaintiffs, entering judgment against CCCC and Cambridge/Brighton for $259,085,983 ( id. ¶ 7), representing the amount of money that the Zimmerman Class Action plaintiffs had paid to CCCC and Cambridge/Brighton for their debt management services ( id. ¶ 8). On March 18, 2009, the district court entered a final order in which it established a constructive trust for the full amount of the judgment. ( Id. ¶ 9.)

The Zimmerman Complaint makes several allegations against CCCC and Cambridge/Brighton, for their allegedly wrongful debt management practices, as well as against CNS, for its alleged role in shielding those entities' actions from, and misrepresenting its practices to, the public. In particular, it alleges that CCCC and Cambridge/Brighton held themselves out as non-profit organizations, even though a large portion of their activities were not in furtherance of a tax exempt purpose, making them for-profit organizations. ( See id. ¶ 11 (stating that CCCC and Cambridge/Brighton participated in “ ‘widespread abuse of tax exemptions and non-profit status in the credit counseling and debt management industry’ ” (quoting Affirmation of Brian J. Davis in Supp. of CNS' Mot. for Summ. J. (“Davis Affirmation”) Ex. C ¶ 21)); id. ¶¶ 12–13.) CNS allegedly was aware of this, as to CCCC, because it audited the company and prepared its IRS Form 990 for the 2003 tax year, and as to Cambridge/Brighton, because it audited the company for the 2004 tax year. ( Id. ¶ 13; see also Def.'s Letter of Feb. 11, 2010 (“Def.'s February 2010 Letter”) at 2.) Additionally, the Zimmerman Complaint states that CNS knew that CCCC and Cambridge/Brighton had engaged, or were engaging in, unlawful acts, government lawsuits, and other government investigations prior to preparing the IRS Form 990s. (Def.'s 56.1 ¶ 10; see also Def.'s February 2010 Letter at 2.) This knowledge of these entities' wrongful acts

[933 F.Supp.2d 467]

and representations is, so the Zimmerman plaintiffs claim, attributable to CNS's access to and familiarity with CCCC and Cambridge/Brighton's business and financials. (Def.'s 56.1 ¶ 13.) Despite such awareness, CNS agreed to audit CCCC and Cambridge/Brighton in 2005, preparing, signing, and filing Form 990 returns with the IRS that misrepresented these entities' services. ( Id. ¶¶ 11, 13.)

The Zimmerman Complaint sought two forms of recovery from defendants: (1) recovery of the proceeds from the constructive trust (created in the Massachusetts district court action), from which CNS allegedly was paid monies, and which the Zimmerman plaintiffs assert constitute class assets ( id. ¶ 15); 5 and (2) recovery on account of defendants' violations of the Credit Repair Organizations Act (“CROA”), 15 U.S.C. § 1679 et seq. ( id. ¶ 16). It is this latter form of recovery that goes to the heart of this dispute, namely, whether the allegations supporting the CROA claim are covered under the Admiral Policy such that a duty to defend applies.

Shedding additional light on the CROA recovery issue, the Zimmerman Complaint states that CNS violated CROA when it prepared and filed Form 990 returns that both misstated the nature of these entities to the government and created an effective marketing tool for CCCC and Cambridge/Brighton in promoting their alleged credit improvement services to prospective (and allegedly soon-to-be-defrauded) customers. ( Id. ¶ 17; see also Davis Affirmation Ex. C ¶ 162 (stating that defendants “prepared and filed Forms 990 for CCCC and/or Cambridge/Brighton, which misrepresented the nature of those organizations and which the [ ] [d]efendants used to support their advertising claims and to lure in consumers with promises of credit improvement”); id. ¶ 163 (stating that “[d]efendants by filing Forms 990 each made untrue and misleading statements in violation of 15 U.S.C. § 1679b(a)(3)”); id. ¶ 164 (“Defendants assisted CCCC and Cambridge/Brighton in materially and willfully, knowingly or recklessly misrepresenting information that credit repair organizations are required by the CROA to disclose to consumers and which was material to the establishment of the credit repair organization's liability to consumers under the CROA.”); id. ¶ 165 (alleging that defendants participated in acts or practices that constituted or resulted in fraud or deception on persons in connection with the offer or sale of services of a credit repair organization).)

Attaching a concrete number to such allegations, the Zimmerman Complaint states that the Zimmerman plaintiffs seek statutory damages 6 for defendants' preparing

[933 F.Supp.2d 468]

and filing of CCCC's and Cambridge/Brighton's Form 990 returns and Cambridge/Brighton's 2004 audit report (because no Form 990 was filed for Cambridge/Brighton in that year), the latter of which set forth the annual fees that consumers paid to CCCC and Cambridge/Brighton. (Def.'s 56.1 ¶ 21; see also Davis Affirmation Ex. C ¶ 166.) The amount of recovery sought by plaintiffs against defendants totals $137,528,003.00 (from BDO), $42,776,169.00 (from CNS), and $25,883,026.00 (from Kostin), representing the amounts consumers paid during the years in which defendants...

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12 practice notes
  • Great Am. Ins. Co. v. Houlihan Lawrence, Inc., No. 19-CV-1055 (KMK)
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • March 27, 2020
    ...involved an exclusion that was broader than the one at issue here. (Pl.'s Opp'n 6.) See Silverman Neu, LLP v. Admiral Ins. Co. , 933 F. Supp. 2d 463, 469 (E.D.N.Y. 2013) (noting that the policy at issue excluded "any liability based in whole or in part on any knowingly wrongful, dishonest, ......
  • 7951 Albion, LLC v. Clear Blue Specialty Ins. Co., 2:19-cv-7309 (DRH) (AKT)
    • United States
    • United States District Courts. 2nd Circuit. United States District Court (Eastern District of New York)
    • July 9, 2021
    ...Exclusion suffices to bar coverage, the Contracted Security Exception is not analyzed. Silverman Neu, LLP v. Admiral Ins. Co. , 933 F. Supp. 2d 463, 479 (E.D.N.Y. 2013) (Bianco, J.) (declining to address "Financial Institution Exclusion" where "Wrongful Act Exclusion" barred coverage).II. I......
  • 7951 Albion, LLC v. Clear Blue Specialty Insurance Company, 2:19-cv-7309 (DRH) (AKT)
    • United States
    • United States District Courts. 2nd Circuit. United States District Court (Eastern District of New York)
    • July 9, 2021
    ...Exclusion suffices to bar coverage, the Contracted Security Exception is not analyzed. Silverman Neu, LLP v. Admiral Ins. Co., 933 F.Supp.2d 463, 479 (E.D.N.Y. 2013) (Bianco, J.) (declining to address “Financial Institution Exclusion” where “Wrongful Act Exclusion” barred coverage). II. Ind......
  • Cent. Mut. Ins. Co. v. Willig, No. 1:13–cv–1134 (GLS/CFH).
    • United States
    • United States District Courts. 2nd Circuit. United States District Court of Northern District of New York
    • June 27, 2014
    ...Estate, and, therefore, the entirety of the Underlying Complaint fits within the Exclusion. See Silverman Neu, LLP v. Admiral Ins. Co., 933 F.Supp.2d 463, 475–79 (E.D.N.Y.2013) (holding that a “Wrongful Act” exclusion in an insurance policy was “stated in clear and unmistakable language, is......
  • Request a trial to view additional results
12 cases
  • Great Am. Ins. Co. v. Houlihan Lawrence, Inc., No. 19-CV-1055 (KMK)
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • March 27, 2020
    ...involved an exclusion that was broader than the one at issue here. (Pl.'s Opp'n 6.) See Silverman Neu, LLP v. Admiral Ins. Co. , 933 F. Supp. 2d 463, 469 (E.D.N.Y. 2013) (noting that the policy at issue excluded "any liability based in whole or in part on any knowingly wrongful, dishonest, ......
  • 7951 Albion, LLC v. Clear Blue Specialty Ins. Co., 2:19-cv-7309 (DRH) (AKT)
    • United States
    • United States District Courts. 2nd Circuit. United States District Court (Eastern District of New York)
    • July 9, 2021
    ...Exclusion suffices to bar coverage, the Contracted Security Exception is not analyzed. Silverman Neu, LLP v. Admiral Ins. Co. , 933 F. Supp. 2d 463, 479 (E.D.N.Y. 2013) (Bianco, J.) (declining to address "Financial Institution Exclusion" where "Wrongful Act Exclusion" barred coverage).II. I......
  • 7951 Albion, LLC v. Clear Blue Specialty Insurance Company, 2:19-cv-7309 (DRH) (AKT)
    • United States
    • United States District Courts. 2nd Circuit. United States District Court (Eastern District of New York)
    • July 9, 2021
    ...Exclusion suffices to bar coverage, the Contracted Security Exception is not analyzed. Silverman Neu, LLP v. Admiral Ins. Co., 933 F.Supp.2d 463, 479 (E.D.N.Y. 2013) (Bianco, J.) (declining to address “Financial Institution Exclusion” where “Wrongful Act Exclusion” barred coverage). II. Ind......
  • Cent. Mut. Ins. Co. v. Willig, No. 1:13–cv–1134 (GLS/CFH).
    • United States
    • United States District Courts. 2nd Circuit. United States District Court of Northern District of New York
    • June 27, 2014
    ...Estate, and, therefore, the entirety of the Underlying Complaint fits within the Exclusion. See Silverman Neu, LLP v. Admiral Ins. Co., 933 F.Supp.2d 463, 475–79 (E.D.N.Y.2013) (holding that a “Wrongful Act” exclusion in an insurance policy was “stated in clear and unmistakable language, is......
  • Request a trial to view additional results

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