The opinion of the court was delivered by: THOMAS GRIESA, Senior District Judge
This is an action for breach of contract by plaintiffs CCC Insurance
Company, Limited ("CCC Ltd.") and CCC Insurance Corporation ("CCC Corp.")
against defendant Brooklyn Hospital Center.
Defendant moves to dismiss or, in the alternative, to stay the action
in deference to a closely related state court proceeding. Plaintiffs move
to amend their complaint. For the reasons set forth, defendant's motion
is denied and plaintiffs' motion is granted.
CCC Ltd. is a corporation organized and existing under the laws of
Bermuda. CCC Corp. is a wholly owned subsidiary of CCC Ltd., organized
and existing under the laws of Barbados. Both corporations, together with
a New York corporation named Combined Coordinating Council, Inc. ("CCC
Inc."), were formed in the 1980s by defendant and six other New York
hospitals, for the purpose of providing medical malpractice liability insurance and related
benefits for the hospitals. CCC Ltd. was incorporated in 1983 to provide
insurance to the seven hospitals, which were its sole shareholders. CCC
Inc. was incorporated in 1985 for the purpose of providing certain risk
assessment and management services to the insurer and the hospitals.
Although the submissions on the motions describe in some detail the
unique regulatory context for this insurance arrangement, it is not
necessary to set forth these details at this stage. However, a
description of the roles and obligations of the various participants in
the CCC insurance program is necessary to understand the issues presented
by the motions.
In January 1991 the hospitals, including defendant, executed a
Shareholders' Agreement. This Agreement codified the hospitals' status as
shareholders in CCC Ltd., as well as any successor companies or
subsidiaries, and codified a number of conditions and obligations in
connection with the CCC insurance program. In particular, the Agreement
stated that the shareholders intended to create a self-insurance fund.
The Agreement stated that the program would be structured such that "each
[shareholder] shall bear the costs of its own losses and expenses,
without any material pooling thereof."
The CCC insurance program was maintained as a self-insurance fund by
the use of several mechanisms that are at issue in the instant action. Section 12 of the Shareholders' Agreement
established a Separate Experience Account ("SEA") for each hospital
shareholder. Each SEA contained the balance of premiums paid and interest
earned on each shareholder's premiums, minus claims and expenses paid by
Another mechanism that ensured that each shareholder would be
responsible for its own losses was the Target Equity Account ("TEA").
According to the proposed amended complaint, certain. government
regulations required that the CCC insurance program maintain a positive
balance of equity. Therefore, the program established a target equity
level, that would be maintained by setting aside an amount equal to 10%
of the sum allocated by the program to pay its losses. Each hospital
shareholder contributed to the target equity level on a pro
rata basis by paying funds into a TEA.
Also relevant to the instant action is a reinsurance program instituted
as part of the CCC insurance program in 1999. The proposed amended
complaint states that funding of this program was calculated based on an
actuarial assumption regarding the premiums that would be paid by the
shareholders, and the interest that would be earned on those premiums
over a period of time. According to the proposed amended complaint, each
shareholder agreed to pay a pro rata share of any shortfall in
the reinsurance funding through an "Interest Rate Assessment." The final aspect of the CCC insurance program relevant to the instant
action is the section of the Shareholders' Agreement pertaining to
withdrawal of a shareholder from the program. Section 7 of the
Shareholders' Agreement mandated the payment of "Exit Charges" upon
withdrawal of a shareholder from the program. These Exit Charges were to
be assessed in order to compensate remaining shareholders for the
increased costs incurred by the loss of a shareholder from the program.
In addition to the above insurance-related provisions, the CCC
insurance program also provided for loans to the hospital shareholders.
As will be described in more detail, the original complaint in this
action relates only to a loan made to defendant by plaintiffs. The
proposed amended complaint relates more broadly to defendant's role in
the CCC insurance program, of which the loan is only a small part.
The original complaint alleges that in December 1995 defendant borrowed
$8 million from CCC Corp. To secure this loan, defendant executed a
promissory note in favor of CCC Corp., and pledged 92,143 shares of its
stock in CCC Ltd. to CCC Corp. The promissory note and pledge agreement
provided that $4 million of the principal on the note was payable on or
before December 31, 2000, and that the balance was due on December 31,
2005. The promissory note also provided that if, for any reason defendant
withdrew from the CCC insurance program, such withdrawal would constitute an event of default and would cause the note to become
due and payable in quarterly installments.
Defendant apparently made payments on the loan for some period of time.
However, the original complaint states that in June 2002 defendant's
senior management changed, and defendant advised plaintiffs that it would
no longer make insurance premium payments or payments on its outstanding
loan obligation. The original complaint alleges that on June 30, 2002
defendant owed plaintiffs approximately $1.3 million on the loan.
On November 13, 2002 plaintiffs issued a notice of default to defendant
for nonpayment of its insurance premiums. On December 20, 2002 plaintiffs
and defendant entered into a "Standstill Agreement" whereby defendant's
participation in the CCC insurance program would continue while the
parties negotiated for defendant's payment of its outstanding
obligations. The Standstill Agreement provided that failure by defendant
to enter into a settlement of its debts by May 1, 2003 would result in