Opinion
13–28100
03-28-2018
Leon J. HOCHHEISER and Leon J. Hochheiser Co., Inc., Plaintiffs, v. Steven ALIN, Pension Design Services, Inc., Danziger & Markhoff, LLP, Alin Pension Group, Inc. and TPA Alliance, LLC, Defendants.
For Plaintiffs: ETTELMAN & HOCHHEISER, P.C., 100 Quentin Roosevelt Blvd, Suite 401, Garden City, New York 11530, Attorneys for Steven Alin, Pension Design Services and Alin Pension Group, Inc.: LAMB & BARNOSKY, LLP, 534 Broadhollow Road, Suite 210, Post Office Box 9034, Melville, New York 11747, Attorneys for Danziger & Markhoff, LLP and TPA Alliance, LLC: GAINES, NOVICK, PONZINI, COSSU & VENDITTI, 11 Martine Avenue, 8th Floor, White Plaines, New York 10606
For Plaintiffs: ETTELMAN & HOCHHEISER, P.C., 100 Quentin Roosevelt Blvd, Suite 401, Garden City, New York 11530, Attorneys for Steven Alin, Pension Design Services and Alin Pension Group, Inc.:
LAMB & BARNOSKY, LLP, 534 Broadhollow Road, Suite 210, Post Office Box 9034, Melville, New York 11747, Attorneys for Danziger & Markhoff, LLP and TPA Alliance, LLC:
GAINES, NOVICK, PONZINI, COSSU & VENDITTI, 11 Martine Avenue, 8th Floor, White Plaines, New York 10606
Sanford Neil Berland, J.
Upon the reading and filing of the following papers in this matter: (1) Amended Notice of Motion, made by defendants Danziger & Markhoff, LLP and TPA Alliance, LLC, dated December 5, 2016, and supporting papers; (2) Opposing Affidavit, made by plaintiffs, dated June 27, 2017; and (3) Replying Affidavits, made by defendants, dated February 13, 2017, and supporting papers; it is,
ORDERED that Mot. Seq. # 005 made by defendants Danziger & Markhoff, LLP and TPA Alliance, LLC seeking dismissal of the first three causes of action of the Amended complaint as against them is granted; and it is further
ORDERED that the parties are directed to appear for a compliance conference on Wednesday, May 2, 2018 at 9:30 A.M. in Part 6 located at 1 Court Street, Riverhead.
As originally filed, this was an action seeking damages, in principal part, for breach of an alleged 2003 oral agreement between plaintiffs—Leon J. Hochheiser and his eponymous financial services firm, Leon J. Hochheiser Co., Inc. ("LJH Co.")—and the original defendants, Steven Alin ("Alin"), an enrolled actuary, and his actuarial services firm, Pension Design Services, Inc. ("PDS"), concerning the sharing of co-called "third-party administration fees" ("TPA fees") paid by insurance companies to Alin and PDS. The original complaint also alleged alternative claims against Alin and PDS for breach of implied agreement and unjust enrichment. According to plaintiffs, the alleged oral agreement required Alin and PDS to pay them half of the third-party TPA fees that Alin and PDS were paid by insurance companies for administering retirement and other employee benefit plans of clients that plaintiffs had originally referred to Alin and PDS for actuarial services related to the formation and maintenance of those plans.
After an arbitration among the original parties was completed and PDS had sold some of its assets—including its name, goodwill and client list, and following the denial of the original defendants' motion for summary judgment, plaintiffs sought and obtained leave (see Order of October 11, 2016, Mayer, J.) to add the asset purchaser, Danziger & Markoff, LLP ("D & M"), and two other defendants, Alin Pension Group, Inc. and TPA Alliance, LLC, as well as four additional causes of action, all against D & M, seeking injunctive and declaratory relief and the appointment of a receiver. Although those additional causes of action—the fourth through seventh causes of action of the amended complaint—allege several species of common law and statutory fraudulent conveyance and transfer claims, all stem from the plaintiffs' allegation that the purchase price paid by D & M for the PDS's assets it acquired was less than "fair consideration"; that the allegedly underpriced sale of its assets left PDS insolvent and unable to continue operating, to meet its obligations or to satisfy a judgment in plaintiffs' favor; and that the asset sale was fraudulent as to plaintiffs and other alleged creditors of PDS and was intended to "hinder, delay or frustrate Plaintiffs in collecting on a judgment on their claims against PDS."
The matter is now before the court on the motion of D & M and another of the added defendants, TPA Alliance, LLC ("Alliance") , pursuant, inter alia, to CPLR 3211(a)(1), (a)(5) and (a)(7) and GOL 5–701 and 5–702, to dismiss the first three causes of action of the amended complaint on the stated ground that neither of the moving parties has had a contractual or any other relationship with plaintiffs concerning TPA fees or any other matter and has no obligation to remit any portion of TPA fees to plaintiffs. For the reasons that follow, the motion is granted.
TPA Alliance, LLC is named in only a single cause of action, the third, which seeks to assert a claim for unjust enrichment.
In addition, the affirmation of counsel for the moving defendants requests dismissal of the fourth cause of action, which alleges that the sale of PDS assets to D & M was designed to defraud plaintiffs and other creditors, pursuant to CPLR 3016(b) for failure to state the circumstances constituting the alleged fraud in sufficient detail. That request is not, however, addressed in the notice of motion or elsewhere in the parties' submissions. In any event, the pleadings, as a whole, contain sufficient detail to apprise the defendant of the alleged particulars upon which the pleaded cause of action is purportedly based (see Wall Street Associates v. Brodsky , 257 AD2d 526, 528–31 [1st Dept. 1999] ; Pen Pak Corp. v. LaSalle Nat'l Bank of Chicago , 240 AD2d 384 [2d Dept 1997] ; Machado v. A. Canterpass, LLC , 115 AD3d 652, 653–54 [2d Dept 2014] ).
Background
It appears that Hochheiser's business relationship with Alin and PDS began in the mid–1980s. Initially, the terms of the agreement were oral, with Alin and PDS providing actuarial and administrative services to retirement, pension and other employee benefit plans created and maintained for Hochheiser and LJH Co. clients. In 1997, the four parties entered into a written "Business Succession Agreement," which, among other things, provided for the allocation of fees and the alternative servicing and referring out of clients in the event Alin or Hochheiser, or both, were to become disabled or die. The following year, after Hochheiser had sold his interest in LJH Co. to Highland Capital Holding Corp. ("Highland"), the four signatories to the Business Succession Agreement, together with Highland and an LJH Co. subsidiary, HighCap Benefit Services Corporation of New York, Inc. ("HighCap"), entered into a largely, but not completely, superseding Services Agreement (the "1998 Services Agreement"). Under the terms of the 1998 Services Agreement, PDS agreed to provide actuarial, administrative and other services in connection with the administration of qualified retirement plans of HighCap's clients, for which it was to receive a "PDS Service Fee" billed by PDS to HighCap (according to a schedule annexed to the 1998 Services Agreement) but subject to HighCap's collection of its corresponding HighCap "Service Fee" from those clients. Notably, under Section 2.3(a) of the 1998 Services Agreement, "[a]ny renegotiation of the PDS Service Fee" was to "be evidenced by written document [sic] signed by all parties and attached to... this agreement," with the further requirement that "HighCap Benefit and PDS ... mutually agree in advance on additional fees, if any, for other services in connection with the administration of qualified plans as HighCap Benefit may request from PDS... that are not covered by the PDS fee schedule[.]" In addition to providing for both cause-based and consensual termination, Section 4.1 of the 1998 Services Agreement, at subsection (b), also authorized unilateral termination of the arrangement "upon one hundred eighty (180) days written notice of termination given by either party to the other," while Section 4.2 made clear that the clients serviced by PDS under the agreement were "exclusively clients of HighCap Benefit" and were to be treated as such post-termination, with Article 6 ("Noncompetition Agreement"), among other things, prohibiting Alin or PDS from providing services to or soliciting business from HighCap or LJH Co. clients while the agreement remained in effect and for a period of twenty-four months post-termination (see Section 6.2, "Noncompetition ") . In addition, Article 7 of the 1998 Services Agreement included a merger clause that stated "[t]his agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes any prior written or oral understanding[.]" Article 7 also included a provision stating that "[t]his agreement may be amended only by a writing signed by all parties hereto." Further, Article 7 included an arbitration clause, which recited that "[a]ny controversy or claim arising out of or relating to this Agreement, or breach thereof, shall be settled by mediation and, if necessary, binding arbitration[.]"
In addition, Section 6.3, "Non–Interference ," recited a mutual prohibition against, inter alia , taking "any action that shall cause" a counter-party to "lose" its relationships with its customers, suppliers, employees, officers, agents and others, also during the effectiveness of the 1998 Services Agreement and for twenty-four months post-termination.
In 2005, after Hochheiser resumed ownership of HighCap and LJH Co., the parties, less Highland, entered into a written "Amendment to Agreement" (the "2005 Agreement"). Among other things, the 2005 Agreement removed HighCap from participation in the arrangement—with LJH Co. taking over HighCap's functional role—and shifted to PDS the responsibility for billing and collecting the PDS Service Fee from clients referred to it by LJH Co. and for then "promptly forward[ing]" to LJH Co. the so-called "add-on' fees" specified in the 2005 Agreement's "Schedule A." Apart from those and several other changes, however, the 2005 Agreement explicitly (at Article 7) preserved the terms of the 1998 Services Agreement, including the prohibition against oral modification: "the terms and provisions of the Services Agreement shall remain in full force and effect and may only be amended by an instrument in writing signed by the other party or parties against whom enforcement is sought."
"As adjusted from time to time by the mutual written agreement of the parties."
In addition to these written agreements and the antecedent oral agreement, the existence of which is not contested by the moving defendants, plaintiffs allege that there was another, later oral agreement, made by plaintiffs with Alin and PDS in 2003, pursuant to which Alin and PDS agreed to "share" half of the "TPA fees" paid to Alin and PDS by various insurers, "related to" Hochheiser and LJH Co. clients. Although the precise distinction is neither made nor alleged in the amended complaint, in the memorandum of law submitted on plaintiffs' behalf in opposition to the current motion, plaintiffs' counsel contends that the " ‘subject matter’ of the Services Agreement was the payment of Services Fees and Add–On Fees"—presumably ultimately by Hochheiser's or LJH Co.'s clients or their affected plans—while the "TPA fees" that are the subject of the alleged 2003 oral agreement "were paid by third party insurance companies (not the Clients) and split between the parties based on work performed by each." Hochheiser and LJH Co. allege that for more than nine years, Alin and PDS shared such TPA fees with them but have not done so since April 2013, that is, since well before D & M acquired any of PDS's assets.
Indeed, it appears to be undisputed that in 2013, the business relationship among plaintiffs, on the one hand, and Alin and PDS, on the other, changed. In March of that year, Alin informed Hochheiser that PDS "was about to engage in a sale of certain of its assets to D & M." Then, in a letter dated April 30, 2013, Alin and PDS gave Hochheiser and LJH Co. formal notice of termination effective November 1, 2013. Hochheiser and LJH Co. commenced an arbitration against Alin and PDS, ultimately seeking, inter alia, to recover unpaid add-on and referral fees allegedly due under the parties' written agreement for the period prior to termination; damages for Alin's and PDS's allegedly having continued to service some forty Hochheiser- and PDS-referred clients without plaintiffs' permission and for their own account despite the restrictive covenant that prohibited them from doing so, and from soliciting Hochheiser/LJH Co. clients, for 24 months post-termination; lost life insurance commissions and other amounts that might have been earned by Hochheiser and Co. had clients not remained with PDS; and for injunctive relief. Hochheiser and LJH Co. also brought the current action, seeking $75,000.00 in damages, together with costs, interest and attorneys' fees, for breach of the alleged 2003 oral agreement.
Ultimately, in an arbitration Award dated October 24, 2014, Hochheiser and LJH Co. were awarded a total of $172,295.00, representing lost referral fees and add-on fees attributable to the forty pension plans that did not follow LJH Co. to service providers other than Alin and PDS for the termination period and for the two-year period post termination, plus certain expenses; but the injunctive relief sought by plaintiffs, as well as over $4 million in damages in lost life insurance commissions and the diminution in the value of LJH Co., was denied. Subsequently, Alin's and PDS's motion for summary judgment dismissing the current action was denied, by Justice Mayer, in a decision and order dated July 8, 2015, on the grounds that issues of fact exist as to the "parties' respective understandings concerning the fee splitting arrangements under their various Agreements and amendments thereto, including the parties' oral agreement under which they began operating in 1987."
For their part, Alin and PDS, along with Alin Pension Group, Inc. ("APG"), have answered the amended complaint, denying that they entered into the alleged 2003 oral agreement with plaintiffs, denying that they have any "legal obligation" to share TPA fees , and invoking the provisions of the 1998 Services Agreement and 2005 Amendment Agreement as barring the oral and implied agreements alleged by Hochheiser and LJH Co. . Alternatively, they allege that if there were an oral or implied agreement as alleged by plaintiffs, it would be unenforceable for want of consideration, was "properly terminated by PDS in or about April 2013," and/or "was terminated by plaintiffs when they stopped referring clients to PDS and instead embarked on a campaign to direct clients of PDS to competing actuarial firms."
The parties' and their respective lawyers' varying and inconsistent use of terminology, particularly with reference to the services that constitute "third-party administration" and the so-called "TPA Fees" that are paid in consideration of such services—is a complicating factor in precisely gauging their respective positions on several key issues. Conventionally, third-party administration fees are amounts that insurance companies pay to other entities to perform tasks, including, but not limited to, claims processing and payment, that would otherwise have to be handled by the insurers' own personnel.
They do not, however, deny that PDS receives TPA fees from some insurance companies and that since April 2013, no portion of such fees has been paid to plaintiffs.
The Current Motion
Defendants D & M and Alliance have not answered the amended complaint but instead have moved to dismiss the first three causes of action of plaintiffs' amended complaint pursuant to CPLR 3211(a)(1), (5) and (7) and General Obligations Law 5–701(1) and 5–701(2), contending that the documentary evidence—including the 1998 Services Agreement, the 2005 Amendment Agreement, the October 24, 2014 arbitration award, the December 2, 2014 Purchase & Sale Agreement between PDS and D & M and the corresponding Bill of Sale and Assignment—and, in many instances, plaintiffs' own allegations—show that they were never in privity with Hochheiser or LJH Co.; that the alleged underlying oral and implied agreements are barred by the terms of the written agreement among plaintiffs, Alin and PDS and by the outcome of the earlier arbitration among them; that they did not in any event assume the liabilities of PDS; that they were not unjustly enriched; and that there was no implied contract between them and plaintiffs. Their attorney has also requested that the fourth cause of action be dismissed pursuant to CPLR 3016(b) for failure to allege with sufficient particularity the claimed fraud in the sale of PDS assets to D & M. Plaintiffs oppose the motion, contending that D & M is liable for breach of both express and implied contracts as successor-in-interest to PDS, that D & M and Alliance have been unjustly enriched by receiving TPA fees from insurers but not sharing them with plaintiffs, and that D & M assumed the liabilities of PDS by engaging in a fraudulent transaction.
"A motion pursuant to CPLR 3211(a)(1) to dismiss based on documentary evidence may be appropriately granted ‘only where the documentary evidence utterly refutes plaintiff's factual allegations, conclusively establishing a defense as a matter of law’ " ( YDRA, LLC v. Mitchell, 123 AD3d 1113, 1113, 1 NYS3d 206, quoting Goshen v. Mutual Life Ins. Co. of NY, 98 NY2d 314, 326, 746 NYS2d 858, 774 NE2d 1190 ; see Whitebox Concentrated Convertible Arbitrage Partners, L.P. v. Superior Well Servs., Inc., 20 NY3d 59, 63, 956 NYS2d 439, 980 NE2d 487 ; Tooma v. Grossbarth, 121 AD3d 1093, 1094—1095, 995 NYS2d 593 ; Biro v. Roth, 121 AD3d 733, 734, 994 NYS2d 168 ). "In order for evidence submitted under a CPLR 3211(a)(1) motion to qualify as ‘documentary evidence,’ it must be ‘unambiguous, authentic, and undeniable’ " ( Cives Corp. v. George A. Fuller Co., Inc., 97 AD3d 713, 714, 948 NYS2d 658, quoting Granada Condominium III Assn. v. Palomino, 78 AD3d 996, 996—997, 913 NYS2d 668 ; see Treeline 1 OCR, LLC v. Nassau County Indus. Dev. Agency, 82 AD3d 748, 752, 918 NYS2d 128 ). "It is clear that judicial records, as well as documents reflecting out-of-court transactions such as mortgages, deeds, contracts, and any other papers, the contents of which are ‘essentially undeniable,’ would qualify as ‘documentary evidence’ in the proper case" ( Fontanetta v. John Doe 1, 73 AD3d 78, 84—85, 898 NYS2d 569, quoting David D. Siegel, Practice Commentaries, McKinney's Cons Laws of NY, Book 7B, CPLR C3211:10 at 21—22).
Similarly, although "[o]n a motion to dismiss pursuant to CPLR 3211(a)(7) for failure to state a claim, [the court] must afford the complaint a liberal construction, accept the facts as alleged in the pleading as true, confer on the nonmoving party the benefit of every possible inference and determine whether the facts as alleged fit within any cognizable legal theory" ( McFadden v. Amodio , 149 AD3d 1282, 1283, 52 NYS3d 538 [2017] ), "[t]his liberal standard, however, will not save allegations that consist of bare legal conclusions or factual claims that are flatly contradicted by documentary evidence or are inherently incredible" ( Hyman v. Schwartz , 127 AD3d 1281, 1283, 6 NYS3d 732 [2015] ).
Unjust Enrichment and Breach of Implied Contract
In addition to alleging, in the first cause of action of their amended complaint, that they have an express oral contract with Alin and PDS to share TPA fees paid to Alin and PDS by insurers for third-party administration services performed by Alin and PDS for those insurers in connection with benefit plans of clients previously referred by plaintiffs—for the breach of which plaintiffs claim Alin, PDS and D & M are liable (discussed infra ), plaintiffs claim, in their second cause of action, that they are the beneficiaries of an implied contract with Alin and PDS, and, by extension, D & M, to share such fees. Alternatively, they claim, in their third cause of action, that to "prevent injustice," they are entitled "to recover the amount related to Alin, PDS, D & M, APG and Alliance's collection of TPA Fees related to the Clients" that plaintiffs referred to Alin and PDS.
With respect to implied contracts, it has been said that
"The courts recognize by the language of their opinions two classes of implied contracts. The one class consists of those contracts which are evidenced by the acts of the parties and not by their verbal or written words—true contracts which rest upon an implied promise in fact. The second class consists of contracts implied by the law where none in fact exist—quasi or constructive contracts created by law and not by the intentions of the parties... A quasi or constructive contract rests upon the equitable principle that a person shall not be allowed to enrich himself unjustly at the expense of another. In truth, it is not a contract or promise at all. It is an obligation which the law creates, in the absence of any agreement, when and because the acts of the parties or others have placed in the possession of one person money, or its equivalent, under such circumstances that in equity and good conscience he ought not to retain it, and which ex aequo et bono belongs to another. Duty, and not a promise or agreement or intention of the person sought to be charged, defines it. It is fictitiously deemed contractual, in order to fit the cause of action to the contractual remedy"
Miller v. Schloss , 218 NY 400, 113 NE 337 [1916]. See Friar v. Vanguard Holding Corp., 78 AD2d 83, 87, 434 NYS2d 698, 701 [2d Dept 1980]. Here, the implied contract alleged by plaintiffs is of the first type, based, they assert, upon "the parties' course of conduct, course of dealing and course of performance over the past 7 years, and their mutual understanding of the respective obligations of the parties." According to plaintiffs, under this implied contract,
"payment of the Shared [TPA] Fees(s) was required to continue for the entire duration that each Client retained Alin and PDS's services to provide Third–Party Administration, and could only be terminated for new clients, consistent with other longstanding principles in effect between the parties, namely 180 days written notice; ...."
Amended Complaint, Paragraph 34 (emphasis added). The implied contract alleged by plaintiffs, however, runs afoul of the statute of frauds of General Obligations Law 5–701. While it might be argued that the prong of the alleged implied contract that imposed an obligation upon plaintiffs to refer "new clients" to Alin and PDS somehow falls outside the statute of frauds because that obligation could be terminated upon 180 days written notice, the alleged corresponding obligation of Alin and PDS, and by extension, D & M, to pay so-called "Shared Fees" for plans of previously referred clients is, as alleged in by plaintiffs, potentially perpetual, enduring, according to Hochheiser and LJH Co., for so long as clients, once referred, choose to retain the services of Alin and PDS, thereby obligating them, in turn, to accept TPA assignments from insurers in order to comply with the claimed undertaking to remit half of all such the fees to plaintiffs. As is evident from the October 24, 2014 arbitration award, plaintiffs ceased referring new clients to Alin and PDS well before PDS's assets were sold to D & M; rather, it is the alleged implied contractual liability for fees associated with the plans of those previously-referred clients that plaintiffs are pursuing in this action, and that prong of the alleged implied contract clearly falls within the scope of the prohibition of General Obligations Law 5–701. See Apostolos v. R.D.T. Brokerage Corp., 159 AD2d 62, 64—65, 559 NYS2d 295 [1st Dept 1990] ("[I]f the terms of the agreement provide that it is not within the defendant's power to terminate his obligation without thereby breaching the agreement, the Statute of Frauds must apply"); ( Zupan v. Blumberg , 2 NY2d 547 (1957) ; Martocci v. Greater NY Brewery , 301 NY 57 [1950] ). Nor can any contention that the alleged contract was implied in fact or that the claim is based upon past performance exempt plaintiffs' implied contract claim from the bar of the statute of frauds embodied in General Obligations Law 5–701 (see generally Valentino v. Davis , 270 AD2d 635, 638, 703 N.Y.S.2d 609 [3d Dept 2000] ; see also American Fed. Group v. Rothenberg, 136 F3d 897, 910 [2d Cir 1998] ; Ellis v. Provident Life & Acc. Ins. Co., 3 F Supp 2d 399, 409 [SDNY 1998], aff'd, 172 F3d 37 [2d Cir 1999] ). The alleged implied contract claim is thus barred and unenforceable.
Plaintiffs' unjust enrichment claim also is untenable. It is well settled that "[t]o prevail on a claim of unjust enrichment, a party must show that (1) the other party was enriched, (2) at that party's expense and (3) that it is against equity and good conscience to permit [the other party] to retain what is sought to be recovered" ( Citibank, N.A. v. Walker , 12 AD3d 480, 787 NYS2d 48 [2d Dept 2004] ). The crux of plaintiffs' unjust enrichment claim is that Alin and PDS, in the first instance, and then D & M as their alleged successor and Alliance as a sometime recipient, reaped a benefit, in the form of TPA fees paid by insurance companies for work performed by Alin, PDS, D & M and Alliance for those insurers, as a result of plaintiffs' earlier referral of clients to Alin and PDS. In an effort to fit within the unjust enrichment rubric, plaintiffs characterize the referring of clients to Alin and PDS, and derivatively to D & M and Alliance, as an "expense" that they would have incurred without compensation, and from which defendants would be freely profiting, absent disgorgement. However, and as movants correctly assert, the existing written agreements among plaintiffs, Alin and PDS expressly provided both for the referral of clients to PDS and Alin by plaintiffs and for plaintiffs receiving compensation for doing so, in the form of robust add-on and other fees. Indeed, in the separate arbitration among plaintiffs, Alin and PDS, plaintiffs were successful in obtaining an award not only for such fees due for the period prior to formal termination of the 1998 Services Agreement, as amended by the 2005 Amendment Agreement, but for the two-year period following formal termination as well. Thus, the equitable predicate required for an unjust enrichment claim is wanting. (See, e.g., Citibank, N.A. v. Walker , 12 AD3d 480, 787 NYS2d 48 [2d Dept 2004].)
TPA fees are not commissions but are fees paid by insurers for third-party administration services performed at their behest and for their benefit. In an affidavit (sworn to September 5, 2014) that was tendered, prior to the amendment of the complaint, in opposition to the original defendants' motion for summary judgment, and which the plaintiffs now cite in opposition to the current motion, Hochheiser averred that "as part of the TPA agreement, LJH Co. agreed that it would perform certain services," and recited a list that included the types of services that LJH Co. had, according to Hochheiser, agreed to perform. In addition, attached to that affidavit (as Exhibit "B") was a June 18, 2012 email from Alin to Hochheiser in which Alin advised Hochheiser of his need, "ASAP," for "a list of your services that justify your receipt of the TPA fees, ....." The amended complaint, however, does not recite the provision of such services by Hochheiser and LJH Co. as a component of the alleged oral contract and, although the amended complaint alleges that "in March 2013, Alin and PDS informed Hochheiser and LJH Co. that the business of PDS was going to be sold to D & M," that "since April 2013, Alin and PDS have refused to pay Hochheiser and LJH Co." a share of the TPA fees, and (in the first cause of action) that
Hochheiser and LJH Co. have duly performed all of their obligations pursuant to the Agreement and have sent Clients to Alin and PDS for which Alin, PDS, D & M APG and Alliance continue to provide Third Party Administration, ...
(Amended Complaint, Paragraph 24), there is no allegation in the amended complaint that Hochheiser or LJH Co. performed any of the agreed services after that date or that they were doing so at the time of the asset sale to D & M or at any time thereafter. Thus, there does not appear to be any allegation in the amended complaint that plaintiffs performed any of the services with respect which they are claiming a share of the TPA fees that they allege were received by defendants or that any person or entity other than defendants performed any of those services.
Breach of Oral Contract
In the amended complaint's first cause of action, plaintiffs assert a claim for monetary damages against Alin, PDS and D & M for breach of the alleged express 2003 oral contract between Hochheiser and LJH Co., on the one hand, and Alin and PDS, on the other. Much like the implied contract alleged in their second cause of action, plaintiffs claim that the oral contract called for Alin and PDS to share with them fifty percent of the third-party administration fees that insurers paid to Alin and PDS for third-party administration services provided by Alin and PDS to those insurers with respect to plans of clients of Hochheiser and LJH Co. for which "actuarial and other related services, including Third Party Administration," were "outsourced" to Alin and PDS by Hochheiser and LJH Co. In contrast, however, to the existing-client prong of the implied contract alleged by plaintiffs in their second cause of action, under the alleged oral contract, "the parties" had "agreed that the Agreement would terminate, consistent with other similar agreements the parties entered into"—presumably, the 1998 Services Agreement and 2005 Amendment Agreement—"upon 180 days written notice." (Amended Complaint, Paragraph 15.) But in contrast to those written agreements, which, as was held in the arbitration, contained restrictive covenants that, among other things, prevented Alin and PDS from separately soliciting plan administration business from or providing plan administration services to LJH Co. clients during the term of the written agreements and for twenty-four months post termination "except on behalf of or for the benefit of LJH," plaintiffs do not allege that their asserted oral agreement with Alin and PDS contained any restriction on Alin and PDS themselves soliciting third party administration business from and providing third party administration services to insurance companies in connection with plans of LJH Co. clients or others. This distinction is important because it presumably plays a role—whether independently or in conjunction with other factors—in plaintiffs' contention that the sharing of TPA fees paid to Alin and PDS by insurers was not a component of the consideration received by plaintiffs for referring clients to Alin and PDS under the written agreements, the compensation and other provisions of which could only be modified in writing, as well as perhaps helping to explain why plaintiffs contend that the 2013 termination of those agreements and the expiration did not also terminate the alleged oral agreement and the obligations it imposed.
As used in the amended complaint, "third party administration"—or "TPA"—"services" is sometimes used to refer to administrative services required to be performed for the plans themselves at their or their owners' expense and sometimes to refer to administrative services performed for the insurers associated with those plans and at the insurers' expense. According to plaintiffs, the alleged oral contract addressed only the latter, while the arbitration addressed only the former.
Plaintiffs allege that the oral agreement was made by Hochheiser and LJH Co. with Alin and PDS "in or about" 2003, that is, while the 1998 Services Agreement was still in effect and, thus, during the period when it was HighCap, not Hochheiser or LJH Co., that, contractually at least, was "outsourcing" the actuarial and related work to Alin and PDS. Although plaintiffs go on to allege, in the amended complaint, that "[s]ince 2005, Hochheiser and LJH Co. have sent numerous clients to Alin and PDS for Third Party Administration," and that "[a]s a result, for more than nine years, Alin and PDS have performed under the Agreement ..." (Amended Complaint, Paragraph 16), the amended complaint offers no indication of the rationale that led to the alleged making of the oral agreement some two years prior to the amending of the 1998 Services Agreement and the withdrawal of HighCap from the arrangement.
In any event, plaintiffs do not contend that D & M was itself a party to the alleged 2003 oral contract that they allegedly entered into with Alin and PDS. Rather, plaintiffs predicate their claim that D & M bears liability for allegedly breaching their claimed oral contract with Alin and PDS—by "withholding payment of the Shared fees for which Alin, PDS, D & M, APG and Alliance have been and continue to be paid TPA Fees related to the Clients" [sic] that had been the subject of previous outsourcing by plaintiffs—upon their further allegation that "D & M is a successor-in-interest to PDS, having purchased PDS from Alin in or about November 2014." (Amended Complaint, Paragraph 26.) The December 2, 2014 purchase and sale agreement and bill of sale, which D & M has offered in support of its motion to dismiss this cause of action (as well as the second and third causes of action), however, show that the transaction was between D & M and PDS, not Alin, and was structured not as a corporate merger or stock acquisition but as a purchase of specifically enumerated assets by D & M, which—at least by the terms of the operative instruments—assumed none of the liabilities that are asserted in this action. Such asset-only purchases are common, of course, and as the Second Department has written, "[t]he purchaser of a corporation's assets ordinarily does not, as a result of the purchase, become liable for the debts of its predecessor" ( AT & S Transp., LLC v. Odyssey Logistics & Tech. Corp., 22 AD3d 750, 752, 803 NYS2d 118 (2005), quoting Schumacher v. Richards Shear Co. , 59 NY2d 239, 244–245 [1983] ).
As a threshold matter, it should be noted that the Court's July 8, 2015 Decision & Order (Mayer, J.) is not an impediment to consideration of the current motion. That Decision & Order denied Alin's and PDS's motion for summary judgment on the ground that there were "questions of fact as to the parties' respective understandings concerning the fee splitting arrangement under their various Agreements and amendments thereto, including the parties' oral agreement under which they started operating in 1987." At issue there, in primary part, was whether the written agreements, as amended, governing the sharing of the fees charged by Alin and PDS for the actuarial and related services they provided to plans created for or maintained by clients initially referred by Hochheiser, LJH Co. and/or HighCap, by their terms or by operation of law, including General Obligations Law 15–301, precluded the alleged oral agreement that plaintiffs claimed required Alin and PDS to share the fees paid by certain insurers for the third-party administration services that Alin and PDS provided to those insurers in connection with plans of Hochheiser, LJH Co. and/or HighCap clients. The question at this juncture, in contrast, as presented by the CPLR 3211(a)(1), (5) and (7) motion of D & M, which was not yet a party to this action at the time the July 8, 2015 Decision & Order was rendered, is whether, in the context of the factual uncertainties surrounding the original parties' respective understandings, it can now be determined whether plaintiffs have stated, or can state, a cause of action against D & M for breach of the alleged oral agreement as successor in interest to PDS within the context of, and as further informed by, the additional documentary evidence that has been submitted, including the December 2, 2014 purchase and sale agreement and bill of sale and the October 24, 2014 arbitration Award.
In response to D & M's showing, Hochheiser and LJH Co. argue, in effect, that the court should look past the ostensible structure of the transaction and, despite the express terms of the instruments by which it was effected, treat D & M as "successor in interest" to Alin and PDS with respect to the obligations of the alleged oral agreement and the liability for its purported breach. Typically, however, "[i]n order to be a ‘successor in interest,’
a party must continue to retain the same rights as the original owner without a change in ownership. There must be a change in form only and not in substance. It does not include a transfer from one party to another ( Northrop v. Smith , 9 NYS 802, 803 ). In the case of corporations, the term ‘successor in interest’ ordinarily indicates statutory succession ( Automatic Strapping Mach. Co. v. Twisted Wire & Steel Co. , 159 App Div 656, 659, 144 NYS 1037, 1040 ) as, for instance, when the corporation changes its name but retains the same property.
City of New York v. Tpk. Dev. Corp., 36 Misc 2d 704, 706, 233 NYS2d 887, 890 [Sup Ct, Kings Co. 1962]. Nonetheless, the courts have recognized that there are limited circumstances in which, even in the absence of a formal assumption of liabilities, a party that has nominally acquired only assets of another entity may nonetheless be treated as taking on some or all of its liabilities, as well. Such judicially transferred liabilities for the most part have been described as sounding in tort. Thus, as the Court of Appeals stated in its oft-cited opinion in Schumacher v. Richards Shear Co. , 59 NY2d 239, 245, 451 NE2d 195, 198 (1983) :
It is the general rule that a corporation which acquires the assets of another is not liable for the torts of its predecessor ( 19 CJS, Corporations, § 1380 ; 15 Fletcher's Cyclopedia Corporations [rev ed], § 7122). There are exceptions and we stated those generally recognized in Hartford Acc. & Ind. Co. v. Canron, Inc. 43 NY2d 823, 825, 402 NYS2d 565, 373 NE2d 364, supra. A corporation may be held liable for the torts of its predecessor if (1) it expressly or impliedly assumed the predecessor's tort liability, (2) there was a consolidation or merger of seller and purchaser, (3) the purchasing corporation was a mere continuation of the selling corporation, or (4) the transaction is entered into fraudulently to escape such obligations.
In Schumacher , the plaintiff, Schumacher, was injured by an allegedly defectively designed and manufactured shearing machine that Richards Shear Company had manufactured and sold to Wallace Steel, plaintiff Schumacher's employer. Schumacher sued both Richards Shear and the Logemann Brothers Company, which had acquired substantially all of Richards Shear's assets—including the exclusive right to manufacture and sell Richards Shear products and improvements and to use the Richards Shear name—four years after Wallace Steel purchased the machine and some ten years prior to Schumacher's accident. Although the Court of Appeals concluded that there were issues for the jury concerning whether Logemann, by virtue of selling Wallace Steel replacement parts for the machine, periodically offering to service the machine and having knowledge of the machine's whereabouts, had a duty to warn Wallace Steel that the machine's lack of a safety guard rendered it dangerously defective and was negligent for failing to do so, it rejected Schumaker's attempt to hold Logemann strictly liable as a "successor in interest" to Richards Shear:
.... The only arguable basis upon which plaintiffs can predicate a finding of successor liability is to characterize Logemann as a "mere continuation" of Richards Shear Company. The exception refers to corporate reorganization, however, where only one corporation survives the transaction; the predecessor corporation must be extinguished (see McKee v. Harris–Seybold Co., 109 NJ Super 555, 264 A.2d 98 ; Ladjevardian v. Laidlaw–Coggeshall, Inc., 431 F Supp 834, 839 ). The cases cited by plaintiff do not hold otherwise ( Cyr v. Offen & Co., 1 Cir., 501 F 2d 1145 ; Turner v. Bituminous Cas. Co., 397 Mich 406, 244 NW2d 873, supra ). Since Richards Shear survived the instant purchase agreement as a distinct, albeit meager, entity, the Appellate Division properly concluded that Logemann cannot be considered a mere continuation of Richards Shear.
59 NY2d at 45(emphasis added).
Although there have been instances in which the bases for extending a seller's obligations to an asset-purchasing entity have been applied outside the tort context, such instances are rare and invariably have involved a quantum of continuity of business ownership and management interest among the seller and the purchaser and other involved individuals or businesses, as well as the transfer to the purchaser of contractual or other economically beneficial jural rights previously possessed by the seller. For example, in AT & S Transp., LLC v. Odyssey Logistics & Tech. Corp., 22 AD3d 750, 752, 803 NYS.2d 118, 120 [2d Dept 2005], a CPLR 7503 proceeding to compel arbitration, the petitioner, AT & S Transportation, had previously sold substantially all of its assets, including the rights to "MetaFreight," a line of commercial transportation and shipping software products it had developed, to AT & S Acquisition Corp., which, among other things, had agreed, as part of the transaction, to make royalty payments to AT & S Transportation. Rely Software, Inc., AT & S Acquisition Corp.'s parent, guaranteed payment of the purchase price. Subsequently, Odyssey Logistics & Technology Corp. purchased substantially all of the assets of both AT & S Acquisition Corp. and Rely, including the rights to the MetaFreight software, which constituted AT & S Acquisition Corp.'s and Rely Software, Inc's "major asset." ( AT & S Transportation, LLC v. Odyssey Logistics & Technology Corp. , 2004 WL 5265171 [Sup Ct Westchester County 2004], aff'd , 22 AD3d 750 [2d Dept 2005] ) Alleging that it had not been paid the minimum royalties due under its agreement with Odyssey, AT & S Transportation commenced an arbitration, but Odyssey rejected the demand, contending that it was not bound by that agreement's arbitration clause. AT & S Transportation's CPLR 7503 petition followed.
The Second Department affirmed the trial court's finding that the second transaction—among AT & S Acquisition, Rely and Odyssey—constituted a "de facto" merger and that Odyssey was, therefore, bound by the arbitration clause in the prior purchase and sale agreement. In doing so, the Appellate Division, quoting from the First Department's 2001 decision in Fitzgerald v. Fahnestock & Co., infra, articulated the four "hallmarks," or "factors," that the courts of this state weight in assessing whether a transaction that does not meet the requirements for a true statutory merger should, nonetheless, be characterized as a "de facto merger" for purposes of extending responsibility from the directly responsible entity to a deemed "successor in interest," as follows:
"[c]ontinuity of ownership; cessation of ordinary business and dissolution of the predecessor as soon as possible; assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the acquired corporation; and, a continuity of management, personnel, physical location, assets, and general business operation" ( Fitzgerald v. Fahnestock & Co., 286 AD2d 573, 574, 730 NYS2d 70 ). These factors are analyzed in a flexible manner that disregards mere questions of form and asks whether, in substance, it was the intent of the successor to absorb and continue the operation of the predecessor (see Nettis v. Levitt, 241 F3d 186 ; City of New York v. Pfizer & Co., 260 AD2d 174, 688 NYS2d 23 ).
AT & S Transp., LLC v. Odyssey Logistics & Tech. Corp., 22 AD3d 750, 752, 803 NYS2d 118, 120 [2d Dept 2005]. Analyzing the transaction among AT & S Acquisition, Rely and Odyssey in that way, the Second Department affirmed the trial court's determination, holding that the petitioner had "presented sufficient evidence to establish all four factors needed to demonstrate the existence of a de facto merger":
Pursuant to the transfer agreement between Odyssey, Rely, and Acquisition Corp., in consideration for the transfer of shares of Odyssey stock, substantially all of the assets of Rely and Acquisition Corp. were purchased or licensed by Odyssey. The real property of the predecessor corporation was transferred or assumed by Odyssey. Odyssey offered employment to its predecessor's employees, hired two of its predecessor's management personnel, assumed the contracts of independent contractors, agreed to honor the predecessor's customer service contracts, and received the predecessor's business insurance policy. Moreover, pursuant to the transfer agreement, Rely could no longer use its trade name and the transaction was deemed a liquidation of Rely. Furthermore, upon liquidation, the shares of Odyssey stock were to be distributed to Rely's preferred stockholders. The fact that Rely did not immediately liquidate is not dispositive. So long as the acquired corporation is shorn of its assets and has become, in essence, a shell, legal dissolution is not necessary before a finding of a de facto merger will be made (see Fitzgerald v. Fahnestock & Co. , supra at 576; Ladenburg Thalmann & Co. v. Tim's Amusements 275 AD2d 243, 248 [2000] ).
22 AD3d at 752–53 (emphasis added). See also MBIA Ins. Corp. v. Countrywide Home Loans, Inc. , 40 Misc 3d 643, 657, 965 N.Y.S.2d 284, 297 [Sup Ct NY County 2013] ; Cargo Partner AG v. Albatrans, Inc., 352 F3d 41, 45–46 [2d Cir 2003] ("the doctrine of de facto merger in New York does not make a corporation that purchases assets liable for the seller's contract debts absent continuity of ownership"); Washington Mut. Bank, F.A. v. SIB Mortg. Corp., 21 AD3d 953, 954, 801 NYS2d 821, 822 [2d Dept 2005] ; In re New York City Asbestos Litig., 15 AD3d 254, 256 [1st Dept 2005].
It is evident that key elements of the four-factor analysis articulated by the Second department in AT & S Transp., LLC are absent from the transaction that took place between PDS and D & M. As a threshold matter, the essential element of continuity of ownership of the "business," however defined, is wanting—D & M is a law firm, and there is not, nor could there be, any allegation that PDS itself or Alin is a member of that law firm or has any ownership interest in it or exercises any control over it. As the Second Department made emphatic in Washington Mut. Bank, F.A. v. SIB Mortg. Corp., supra , 21 AD3d at 954 quoting Cargo Partner AG, supra at 47, and citing New York City Asbestos Litigation, 15 AD3d 254 [1st Dept 2005], "in non-tort actions, ‘continuity of ownership is the essence of a merger,’ " and without such continuity, no finding of de facto merger can be made. Thus, in Washington Mut. Bank, F.A. v. SIB Mortg. Corp., the court held that employing the co-owner of the judgment debtor, an inactive mortgage brokerage, to operate a branch of the defendant, also a mortgage broker, at the same location the judgment debtor had previously occupied and with many of the same employees as the judgment debtor did not render the arrangement a de facto merger or the defendant the successor in interest to the judgment debtor, even though the employee-manager had agree to insure the defendant against any losses it might incur, because there was no continuity of ownership of the judgment debtor's business. 15 AD3d at 954. Indeed, even where the liability sought to be extended sounds in tort, continuity of ownership is a critical element necessary to any finding of de facto merger. As the court explained in In re New York City Asbestos Litig., supra:
The first criterion, continuity of ownership, exists where the shareholders of the predecessor corporation become direct or indirect shareholders of the successor corporation as the result of the successor's purchase of the predecessor's assets, as occurs in a stock-for-assets transaction. Stated otherwise, continuity of ownership describes a situation where the parties to the transaction "become owners together of what formerly belonged to each" ( Cargo Partner AG v. Albatrans, Inc., 352 F.3d 41, 47 [2d Cir.2003] [applying New York law] ). It has been held that, because continuity of ownership is "the essence of a merger," it is a necessary element of any de facto merger finding, although not sufficient to warrant such a finding by itself ( id. at 46—47 ).
In re New York City Asbestos Litig.,supra , 15 AD3d at 256. Here, the amended complaint is devoid of any allegation of continuity of ownership in the sale of PDS assets to D & M, and the transactional documents show that there was none.
Likewise, as the transactional documents submitted on the current motion show, the only PDS liabilities explicitly assumed by D & M were leases for a copier, postage meter and software. And, although D & M explicitly acquired PDS's goodwill, client list and contact information and ownership of the PDS name, by the terms of the asset purchase agreement, it kept PDS's offices for only a brief period, reimbursing PDS for rental costs for that period, did not acquire PDS's accounts receivable, and, although it apparently entered into consulting agreements with Alin and another individual with the same surname, it merely reserved the right, but did not obligate itself, to extend offers of employment, to former PDS employees. Further, while the agreement called for PDS to change its name, it was not required to dissolve and there is no allegation that it did so. Of particular significance, at least so far as the transactional documents reveal, D & M did not acquire—by assignment, assumption or otherwise—any remunerative service or other agreements or contracts that PDS may have had with clients, insurers or any other entities, nor did it agree to assume any obligation PDS may have had to service any clients or other entities or individuals. Hence, the predicate for deeming D & M's acquisition of enumerated assets of PDS a "de facto" merger are not met.
Indeed, the decision in the arbitration shows that the only undisputed remunerative contractual agreement that ....The only other agreement referenced anywhere in the pleadings is the alleged 2003 oral agreement, the existence of which Alin and PDS deny and which D & M and Alliance disclaim any involvement in.
Nor, in the absence of some quantum of continuity of ownership interest, does plaintiffs' contention that the transaction—including the alleged inadequacy of the consideration paid by D & M for the PDS assets it acquired—was "designed to defraud Plaintiffs and other creditors" and to "frustrate their ability to collect on a judgment against PDS" afford sufficient basis for extending successor-in-interest liability to D & M. Ample remedies are available, see, e.g. , Article 10 of the Debtor & Creditor Law, to creditors whose interests are adversely impacted by asset transfers that are made for inadequate consideration or are otherwise wrongful —remedies plaintiffs have invoked in other causes of action asserted in their amended complaint. Indeed, plaintiffs have not cited to a single case in which a New York court has extended contractual liability to an asset purchaser in any setting in which continuity of ownership interest was wanting , much less where, as is also the case here, plaintiffs' recourse, in the event they are successful on the merits of their claims against the original defendants and on their common law and statutory fraudulent conveyance claims, will not be limited to an allegedly "denuded" corporate shell but will also include the transferred assets, or their value, in the hands of D & M as well as the individual contractual duties—and liability—that they allege Alin shared with PDS. Thus, whatever the wisdom may be for expanding the bounds of successor-in-interest liability beyond its traditional limits and those small exceptions that have up to now been recognized by the courts and the legislature where the plaintiff would otherwise be without recourse or remedy, see, e.g., Marie T. Reilly, Making Sense of Successor Liability, 31 Hofstra L. Rev. 745, 793—94 (2003), that is not the case here. Hence, plaintiffs' contention that D & M can somehow be treated as a successor in interest to PDS responsible as such for breach of plaintiffs' alleged oral agreement with Alin and PDS is unsustainable.
"[I]f the transfer constitutes, either in fact or as a matter of law, a fraud upon the creditors of the other corporation, the creditors defrauded by the transfer may, in equity, follow the property into the hands of the new corporation and subject it to the satisfaction of their claims, or hold the new corporation liable to the extent of its value." 15 Fletcher Cyc. Corp. § 7125 (September 2017 update) (citations omitted).
See cases cited in footnote 2, supra .
In AT & S Transp., LLC v. Odyssey Logistics & Tech. Corp., 22 AD3d 750, 752, 803 NYS2d 118, 120 [2d Dept 2005], s upra, stock of the acquiring company, Odyssey, was given as consideration for the acquisition of the assets of the selling entity and of its parent, Rely, and upon Rely's subsequent liquidation, the Odyssey stock was distributed to Rely's preferred shareholders.
This determination is equally dispositive of any contention by plaintiffs that D & M stands as a successor in interest to PDS with respect to their claims for breach of an implied agreement and for unjust enrichment.
Accordingly, the motion by defendants Danziger & Markhoff, LLP and TPA Alliance, LLC seeking dismissal of the first three causes of action of the Amended complaint as against them, pursuant, inter alia , to CPLR 3211(a)(1), (a)(5) and (a)(7) and General Obligations Law 5–701, is granted
This constitutes the Decision and Order of the Court.