Opinion
00 Civ. 9110 (KMW) (HBP)
October 11, 2001
OPINION AND ORDER
I. Introduction
Plaintiff seeks to amend his complaint to assert a claim for "Bad Faith Refusal to Pay Benefits" and a claim for punitive damages and to compel responses to certain document requests. For the reasons set forth below, plaintiff's motion to amend his complaint is denied, and his motion to compel discovery is denied in part and denied in part without prejudice. In the absence of a further order compelling production of the documents in issue or the voluntary production of such documents, defendant is precluded from using the documents that are the subject of this motion in connection with any dispositive motion or at trial.
II. Facts
Plaintiff commenced this action alleging the breach of a disability insurance policy issued to plaintiff by defendant. Plaintiff alleges that in January 1988 he purchased a disability insurance policy from defendant (Complaint ("Comp.") ¶ 7). Among other things, the policy provided that defendant would pay plaintiff $5,000.00 per month in the event that plaintiff became disabled as a result of injury or sickness (Comp. ¶ 9). Plaintiff and defendant subsequently agreed to modify the policy to increase plaintiff's disability benefit to $8,500.00 per month (Comp. ¶ 10).
Plaintiff alleges that he became totally disabled in August 1998 and that he subsequently filed a claim for benefits under the policy (Comp. ¶¶ 15, 18). Defendant allegedly initially admitted plaintiff's disability and paid benefits for December, 1999, January, 2000 and May, 2000 (Comp. ¶ 19). Thereafter, defendant took the position that plaintiff was not disabled and terminated payments to him (Comp. ¶ 20). plaintiff currently seeks to recover the benefit payments due to date.
In addition to denying the material allegations of the complaint, defendant has asserted a counterclaim in which it seeks a declaration that plaintiff is not currently disabled. The counterclaim does not, however, contain an express demand that plaintiff pay back the disability payments he has received to date.
III. Analysis
A. Motion to Amend
Plaintiff first seeks to amend his complaint to assert a claim for "Bad Faith Refusal to Pay Benefits." The proposed amendment alleges:
31. Defendant breached its duty of reasonable care by engaging in a systematic concerted protocol of avoiding its contractual responsibility to . . . disability income insurance policyholders, their families, dependants, and beneficiaries, who comprise a large sector of the general public.
32. Defendant's plan and scheme is to unfairly assess all such claims and to view them with a predisposition toward denial, rather than fairly reviewing them for entitlement to the promised benefits.
33. Defendant's protocol, plan, and scheme is routinely accomplished through the design of training programs for its employees, the implementation of unfair policies and practices regarding claim administration, and its documented performance recognition programs, all in an effort to deliberately avoid paying fully legitimate disability insurance claims, including Plaintiff's claim herein.
34. Defendant's conduct as aforementioned involves high moral culpability and has been systematically conducted solely for profit at the expense of Plaintiff and other members of the general public.
(Proposed Amended Complaint, ¶¶ 31-34, annexed as Exhibit A to the Letter of Eve-Lynn Gisonni, Esq., dated June 29, 2001).
Defendant argues that the proposed amendment does not state a claim for relief and should, therefore, be denied as futile.
The standards applicable to a motion to amend a pleading are well settled and require only brief review. Leave to amend a pleading should be freely granted when justice so requires. Fed.R.Civ.P. 15(a); Foman v. Davis, 371 U.S. 178, 182 (1962); Dluhos v. The Floating Abandoned Vessel, Known as "New York", 162 F.3d 63, 69 (2d Cir. 1998); Gumer v. Shearson, Hammill Co., 516 F.2d 283, 287 (2d Cir. 1974). "Nonetheless, the Court may deny leave if the amendment (1) has been delayed unduly, (2) is sought for dilatory purposes or is made in bad faith, (3) the opposing party would be prejudiced, or (4) would be futile." Lee v. Regal Cruises, Ltd., 916 F. Supp. 300, 303 (S.D.N.Y. 1996), aff'd, 116 F.3d 465 (2d Cir. 1997). Accord American Home Assur. Co. v. Jacky Maeder (Hong Kong) Ltd., 969 F. Supp. 184, 187-88 (S.D.N.Y. 1997). The Court of Appeals has repeatedly noted that the trial court has "broad" discretion in ruling on a motion to amend. Local 802, Associated Musicians v. Parker Meridien Hotel, 145 F.3d 85, 89 (2d Cir. 1998); Krumme v. Westpoint Stevens Inc., 143 F.3d 71, 88 (2d Cir. 1998). See generally Grace v. Rosenstock, 228 F.3d 40, 53-54 (2d Cir. 2000), cert. denied, 121 S.Ct. 1362 (2001).
A proposed amendment is futile when it fails to state a claim.Health-Chem Corp. v. Baker, 915 F.2d 805, 810 (2d Cir. 1990) ("Although Fed.R.Civ. p. 15(a) provides that leave to amend should be given freely when justice so requires, where, as here, there is no merit in the proposed amendments, leave to amend should be denied."); Mina Inv. Holdings Ltd. v. Lefkowitz, 184 F.R.D. 245, 257 (S.D.N.Y. 1999); Parker v. Sony Pictures Entm't. Inc., 19 F. Supp.2d 141, 156 (S.D.N.Y. 1998),aff'd in pertinent part, vacated in part on other grounds sub nom.,Parker v. Columbia Pictures Indus., 204 F.3d 326 (2d Cir. 2000); Yaba v. Cadwalader, Wickersham Taft, 931 F. Supp. 271, 274 (S.D.N Y 1996);Prudential Ins. Co. v. BMC Indus., Inc., 655 F. Supp. 710, 711 (S.D.N.Y. 1987) (Although leave to amend should be freely given, "it is inappropriate to grant leave when the amendment would not survive a motion to dismiss."). See generally Dluhos v. Floating Abandoned Vessel known as "New York", supra, 162 F.3d at 69-70. "The proposed Amended Complaint may therefore be scrutinized as if defendant's objections to the amendments constituted a motion to dismiss under Fed.R.Civ.P. 12(b)(6)." Journal Publ'g Co. v. American Home Assur. Co., 771 F. Supp. 632, 635 (S.D.N.Y. 1991).
Judged by this standard, plaintiff's proposed amendment is futile.
Subject matter jurisdiction in this matter is based on diversity of citizenship. The parties' submissions concerning the motion to amend rely exclusively on New York substantive law, and, therefore, I assume that New York law applies to this matter. Thus, I am required by Erie R. Co. v. Tompkins, 304 U.S. 64, 73-77 (1938), "to apply New York law as the New York Court of Appeals would apply it." Goodlett v. Kalishek, 223 F.3d 32, 36 (2d Cir. 2000). See also Hamilton v. Beretta U.S.A. Corp., 264 F.3d 21, ___, 2001 WL 1001284 at *5 (2d Cir. Aug. 30, 2001).
The New York Court of Appeals' most comprehensive discussion of the situations in which an insurer's refusal to pay first party benefits will support both punitive damages and tort claims is contained in New York Univ. v. Contimental Ins. Co., 87 N.Y.2d 308, 662 N.E.2d 763, 639 N.Y.S.2d 283 (1995). In that case, the Court of Appeals set forth a four-part test to determine when such a claim can be asserted. After noting that damages for a breach of contract are ordinarily limited to the damages required to remedy the breach alone and that punitive damages "are available only in those limited circumstances where it is necessary to deter defendant and others like it from engaging in conduct that may be characterized as `gross' and `morally reprehensible,' and of `"such wanton dishonesty as to imply a criminal indifference to civil obligations,"'" 87 N.Y.2d at 315-16, 662 N.E.2d at 767, 639 N.Y.S.2d at 287, the Court stated:
We set forth in the decision the pleading elements required to state a claim for punitive damages as an additional and exemplary remedy when the claim arises from a breach of contract. They are: (1) defendant's conduct must be actionable as an independent tort; (2) the tortious conduct must be of the egregious nature set forth in Walker v. Sheldon, 10 N.Y.2d 401, 404-405, 223 N.Y.S.2d 488, 179 N.E.2d 497, supra, (3) the egregious conduct must be directed to plaintiff; and (4) it must be part of a pattern directed at the public generally (Rocanova, 83 N.Y.2d at 613, 612 N.Y.S.2d 339, 634 N.E.2d 940, supra). Where a lawsuit has its geneis in the contractual relationship between the parties, the threshold task for a court considering a defendant's motion to dismiss a cause of action for punitive damages is to identify a tort independent of the contract.87 N.Y.2d at 316, 662 N.E.2d at 767, 639 N.Y.S.2d at 287 (emphasis added). Accord Crucible Materials Corp., v. Aetna Cas. Sur. Co., No. 97-CV-759 (HGM) (GJD), 1998 WL 404239 at *5 (N.D.N.Y. July 15, 1998);MaGee v. Paul Revere Life Ins. Co., 954 F. Supp. 582, 588 (E.D.N.Y. 1997). The Court in New York Univ. went on to note that "where a party is merely seeking to enforce its bargain, a tort claim will not lie." 87 N.Y.2d at 316, 662 N.E.2d at 768, 639 N.Y.S.2d at 288. At least one court has interpreted the requirement of "a tort independent of the contract" to mean that New York does not recognize a separate claim for bad faith denials of insurance claims. American Nat'l Fire Ins. Co. v. Mirasco, Inc., 143 F. Supp.2d 372, 377 (S.D.N Y 2001).
Judged by these standards, plaintiff's motion to amend his complaint must be denied. The claim that plaintiff seeks to add merely alleges that defendant breached its contract intentionally, pursuant to an alleged policy of breaking disability insurance contracts in order to avoid the payment of full benefits. Assuming the truth of these allegations, they do not allege a tort independent of the contract and are, therefore, indistinguishable from similar allegations found to be insufficient inNew York Univ. v. Continental Ins. Co., supra, 87 N.Y.2d 308, 662 N.E.2d 763, 639 N.Y.S.2d 283 and Rocanova v. Equitable Life Assur. Soc'y, 83 N.Y.2d 603, 634 N.E.2d 940, 612 N.Y.S.2d 339 (1994).
In an effort to establish that the proposed claim alleges a tort independent of the contract, plaintiff argues:
In defining an insurance company's duty to defend its insured, the Court of Appeals opined:
The very nature of a contractual obligation, and the public interest in seeing it performed with reasonable care, may give rise to a duty of reasonable care in performance of the contract obligations, and the breach of that independent duty will give rise to a tort claim [(see, Sommer v. Federal Signal Corp., 79 N.Y.2d 540, 583 N.Y.S.2d 957, 593 N.E.2d 1365)]. Where a party has fraudulently induced the plaintiff to enter into a contract, it may be liable in tort, [(see, Channel Master Corp. v. Aluminum Ltd. Sales, 4 N.Y.2d 403, 406-407, 176 N.Y.S.2d 259, 151 N.E.2d 833; see also Deerfield Communications Corp. v. Chesebrouph-Ponds. Inc., 68 N.Y.2d 954, 510 N.Y.S.2d 88, 502 N.E.2d 1003)], or where a party engages in conduct outside the contract but intended to defeat the contract, its extraneous conduct may support an independent tort claim [(see, North Shore Bottling Co. v. Schmidt Sons, 22 N.Y.2d 171, 179, 292 N.Y.S.2d 86, 239 N.E.2d 189; Rich v. N.Y. Cent. Hudson Riv. R.R. Co., 87 N Y 382)].New York University, 87 N.Y.2d at 316.
Plaintiff's proposed Amended Complaint satisfies the first pleading element of bad faith by alleging the breach of Defendant's good faith duty to Plaintiff to perform its contractual obligations with reasonable care, separate and apart from its contractual relationship (¶¶ 28 and 34).
(Letter of Eve-Lynn Gisonni, Esq., dated August 24, 2001 at 3 (bracketed material in original quoted, but omitted from Gisonni Letter)).
The fundamental flaw in plaintiff's argument is that it equates "may" in the first sentence of the passage quoted from New York Univ. with "will always." This is clearly not what the Court of Appeals intended, since such an interpretation would make every breach of contract a tort and would create an exception that would swallow the holdings in both New York Univ., supra, and Rocanova, supra. In support of the first sentence of the quoted passage, the Court of Appeals cited Sommer v. Federal Signal Corp., 79 N.Y.2d 540, 551, 593 N.E.2d 1365, 1369, 583 N.Y.S.2d 957, 961 (1992), in which the Court of Appeals held that a central-station fire alarm company owed its customers a duty of reasonable care independent of its contractual obligations. However the Court of Appeals explained at length in New York Univ. that Sommer does not stand for the proposition that this independent duty of care exists in all contracts:
The alarm company's duty, separate and apart from its contract obligations, arose from the very nature of its services — to protect people and property from physical harm (see, Prosser Keeton, op. cit., § 92, at 656-657). Noting the catastrophic consequences that could flow from defendant's failure to perform its contractual obligations with due care, we cited the municipality's fire-safety regulations as reflecting the public interest in the careful performance of the fire alarm services contract. We did not, however, suggest that statutory provisions necessarily or generally impose tort duties independent of contractual obligations.
To be sure, the provisions of the Insurance Law reflect State policy that insurers must deal fairly with their insureds and the public at large. But governing the fiscal interests of insureds is simply not in the same league as the protection of the personal safety of citizens. As compared to the fire-safety regulations cited in Sommer, the provisions of the Insurance Law are properly viewed as measures regulating the insurer's performance of its contractual obligations, as an adjunct to the contract, not as a legislative imposition of a separate duty of reasonable care (see, Insurance Law § 2601[c]; § 109[b]). We recognized this in Rocanova when we held that Insurance Law § 2601 does not give rise to a private cause of action (see Rocanova v. Equitable Life, 83 N.Y.2d, at 614, 612 N.Y.S.2d 339, 634 N.E.2d 940, supra). If the statute does not permit a private right of action in favor of an insured, a fortiori, it cannot be construed to impose a tort duty of care flowing to the insured separate and apart from the insurance contract.87 N.Y.2d at 317-18, 662 N.E.2d at 768, 63 N.Y.S.2d at 288 (emphasis added). Thus, the public interest that exists in seeing some contracts performed with reasonable care does not necessarily exist with respect to all contracts and certainly does not exist with respect to the disability policy in issue here.
Thus, even if I make the extremely generous assumption that the other elements of the New York Univ. test are satisfied, plaintiff's failure to allege a tort independent of the contract is fatal to his proposed new claim.
Plaintiff cites the recent decision by the Appellate Division, First Department in Acquista v. New York Life Ins. Co., No. 2227, 2001 WL 752640 at *4 (1st Dep't July 5, 2001) in which the Court recognized that damages beyond ordinary breach of contract damages could be recovered for an insurer's bad faith refusal to pay first-party benefits. Like New York Univ. and Rocanova, Acquista involved a claim that an insurer had, in bad faith, failed to perform its contractual obligations and that the insurer should, therefore, be answerable in tort. The Appellate Division agreed with plaintiff in Acquista and concluded that the dismissal of plaintiff's tort claim constituted error. There does not appear to be any basis on which to distinguish Acquista from Rocanova and New York Univ.. Since Acquista is contrary to the decisions of the Court of Appeals, the authorities cited on page 5, above, require that I disregard Acpuista in favor of the controlling authority from the Court of Appeals.
Since plaintiff's proposed amendment is futile and would not survive a motion to dismiss, plaintiff's motion to amend his complaint must be denied.
B. Motion to Compel
Next, plaintiff seeks to compel production of documents responsive to Items 10, 11, 12, 15, 16, 17, 24, 26 and 29 of his First Request for production of documents. These items request the following documents:
Item 10: Defendant's memoranda, manuals, notices and correspondence concerning the processing of disability insurance claims.
Item 11: Documents concerning the training of the individuals who had any involvement with plaintiff's claim for disability benefits.
Item 12: Documents used by any health care professional in connection with any presentation to the individuals who had any involvement with plaintiff's claim for disability benefits.
Item 15: Documents concerning the compensation of individuals who had any involvement with plaintiff's claim for disability benefits.
Item 16: Defendant's balance sheets and profit and loss statements for 1996 through 2001.
Item 17: Documents disclosing the number of disability claims defendant has disputed since 1996.
Item 24: Documents distributed to or used by defendants claim handlers with respect to the guidelines for handling disability insurance claims.
Item 26: Complaints filed with the New York State Insurance Department concerning defendant from 1996 through 2001.
Item 29: "Consumer Action Notices" relating to complaints made by holders of disability policies for 1997 and 1998.
Defendant has submitted an affidavit stating that none of the documents enumerated in the foregoing requests were utilized in any way in making the benefit determination at issue in this action and, therefore, argues that the documents sought in these requests are irrelevant and their production would be unduly burdensome. Since a party who successfully argues in discovery that documents are irrelevant cannot subsequently affirmatively use the same documents at trial, I assume that if plaintiff's motion is denied, defendant is consenting to the entry of an Order precluding it from using the documents enumerated in the foregoing requests at trial.
The issue in this case is whether plaintiff is "disabled" within the meaning of his disability policy. If he is not "disabled," the fact that defendant may have wrongfully denied disability benefits to the majority of other claimants, the content of defendant's training materials and any compensation programs defendant may have for its employees will not make plaintiff "disabled." Similarly, if plaintiff is "disabled," the outcome of other claims, the content of defendant's training materials and the compensation programs for defendant's employees will not make him any less "disabled." Thus, the documents sought are almost entirely irrelevant because they do not tend to establish or negate any fact material to the case.
Plaintiff claims that the documents are relevant to the issues of motive and credibility. In general, motive is immaterial to a claim for breach of contract. Schwartz v. Victory Container Corp., 294 F. Supp. 866, 868 (S.D.N.Y. 1969). Motive may be material if there is a colorable claim that the breach of contract is of such severity that it will support a claim for punitive damages. Such breaches, however, are extremely rare. As noted by Magistrate Judge Katz:
Under New York law, punitive damages may be recovered on a breach of contract claim in only limited circumstances: where they are necessary to vindicate a public right; where a defendant has engaged in egregious conduct that can be characterized as "gross" and "morally reprehensible;" or where a defendant's conduct may be characterized by "such wanton dishonesty as to imply a criminal indifference to civil obligations." See Bonnie Co. Fashions. Inc., 945 F. Supp. at 711 (quoting New York Univ. v. Continental Ins. Co., 87 N.Y.2d 308, 316, 639 N.Y.S.2d 283, 287, 662 N.E.2d 763 (1995)); see also China Trust Bank of New York v. Standard Chartered Bank. PLC, 981 F. Supp. 282, 289 (S.D.N.Y. 1997) (on a claim for punitive damages for breach of contract, a plaintiff must prove that the wrongdoer: (1) acted maliciously, wantonly or with a recklessness that betokens an improper motive or vindictiveness; (2) engaged in outrageous or oppressive intentional misconduct; or (3) acted with recklessness or wanton disregard of safety or rights).
Under New York law, punitive damages are not normally recoverable for ordinary breach of contract claims because the purpose of such damages is to vindicate public rights, not to remedy private wrongs. See Merritt Meridian, 95 F.3d at 160-61; Bonnie Co. Fashions. Inc., 945 F. Supp. at 711 (punitive damages not appropriate remedy in breach of contract cases); Rocanova v. Equitable Life Assur. Soc'y, 83 N.Y.2d 603, 612, 612 N.Y.S.2d 339, 342, 634 N.E.2d 940 (1994)). Punitive damages are available only in the rare instances where it is necessary to deter defendants and others like them from engaging in morally reprehensible conduct. New York Univ., 87 N.Y.2d at 315, 639 N.Y.S.2d at 287, 662 N.E.2d 763.Lovely Peoples Fashion Inc. v. Magna Fabrics, Inc., 95 Civ. 8450 (AGS) (THK), 1998 WL 422482 at *8 (S.D.N.Y. July 22, 1998). See also Wright v. Carleton College, 00 Civ. 3335 (AKH), 2000 WL 1474408 at *3 (S.D.N.Y. Oct. 4, 2000); Miller v. European Am. Bank, 921 F. Supp. 1162, 1167-68 (S.D.N.Y. 1996). See generally Manning v. Utilities Mut. Ins. Co., 254 F.3d 387, 400 (2d Cir. 2001).
Although New York appears to have left open the possibility of recovering punitive damages in some contract actions, it has squarely held that punitive damages cannot be recovered on the basis of the existing or proposed allegations in this case. In Rocanova v. Equitable Life Assur. Soc'y, supra, 83 N.Y.2d 603, 634 N.E.2d 940, 612 N.Y.S.2d 339, the plaintiff sought to recover punitive damages from his disability insurer.
Rocanova's complaint specifically refer [red] to 124 disputes between Equitable and other policyholders in support of his assertion that Equitable systematically ignored claimholders, lied, invented artificial disputes, filed groundless lawsuits, and otherwise wrongfully and deliberately evaded claims and withheld moneys, all for the purpose of defrauding claimholders of interest on moneys withheld and extorting principal from claimholders through fear and intimidation.83 N.Y.2d at 611, 634 N.E.2d at 942, 612 N.Y.S.2d at 341. The New York Court of Appeals affirmed the dismissal of plaintiff's claim for punitive damages, stating:
A complaint does not state a claim for compensatory or punitive damages by alleging merely that the insurer engaged in a pattern of bad-faith conduct. The complaint must first state a claim of egregious tortious conduct directed at the insured claimant. Only then does an alleged pattern of badfaith conduct attain legal significance insofar as it demonstrates that a public wrong would be vindicated by the award of punitive damages.83 N.Y.2d at 615, 634 N.E.2d at 945, 612 N.Y.S.2d at 344. In this case, as in Rocanova, there is no allegation of "egregious" conduct toward plaintiff; as in Rovanova, the plaintiff here alleges only an improper failure to pay disability insurance benefits. Since the claims inRocanova were found to be insufficient to sustain a claim for punitive damages, plaintiff's claim here is similarly deficient. Accordingly, to the extent plaintiff seeks discovery of documents concerning defendant's motive, the discovery is immaterial.
Plaintiff's argument that the documents are relevant to credibility issues may have slightly more merit. To the extent, if at all, that the documents sought bear on the interpretation of the terms of plaintiff's disability policy, they may be directly relevant to the issues in the case or, alternatively, to credibility. For example, any inconsistencies in the defendant's interpretation of contract terms would be relevant to a determination of the true meaning of those terms.
However, at this point it is impossible to determine whether there are any disagreements between the parties concerning the interpretation of plaintiff's disability policy, and, thus, it is impossible to determine if there are any issues as to which some of the documents sought might be relevant. Accordingly, I conclude that the most appropriate course is to deny plaintiff's motion to the extent that its seeks documents relevant to any issue of interpretation, without prejudice to renewal if there is a genuine dispute concerning the interpretation of contract terms. Counsel for the parties are directed to confer forthwith to determine if any such disputes do exist.
IV. Conclusion
Accordingly, for all the foregoing reasons, plaintiff's application to amend his complaint is denied in all respects. Plaintiff's application to compel production of documents is denied to the extent that it seeks production of documents relevant to motive; it is denied without prejudice to renewal, to the extent, if at all, the documents requested bear on the interpretation of the terms in plaintiff's disability policy. The parties are directed to confer forthwith to determine if there is any genuine dispute concerning the interpretation of the terms in plaintiff's disability policy.
SO ORDERED.