United States District Court, S.D. New York
May 27, 2004.
CCC INSURANCE COMPANY, LIMITED and CCC INSURANCE CORPORATION, Plaintiffs, -against- THE BROOKLYN HOSPITAL CENTER Defendant
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
"an immediate acceleration of all obligations" to plaintiffs, and would
cause an immediate notice of termination of insurance coverage.
According to the complaint, defendant failed to settle its debts by May
On May 2, 2003 plaintiffs filed the instant action to recover
defendant's outstanding obligation on the $8 million loan. The complaint states that, "While there exist other
significant disputes between [plaintiffs and defendant], as referenced by
the Standstill Agreement, these disputes are not yet ripe for judicial
determination." This sentence pertains to a provision of the
Shareholders' Agreement governing litigation among parties to the
Agreement. Section 23 of the Agreement states that sixty days notice must
be provided to all parties to the Agreement before any party to the
Agreement commences litigation "of any claim or controversy arising
hereunder or relating hereto." It is the position of plaintiffs that the
loan obligation that forms the basis for the original complaint does not
arise under the Shareholders' Agreement. However, plaintiffs wish to
assert a number of other claims regarding defendant's alleged debts
relating to its participation in the CCC insurance program. Plaintiffs'
position was that these other claims fell within the Shareholders'
Agreement sixty-day notice provision.
Therefore, also on May 2, plaintiffs gave defendant written notice of
plaintiffs' "intention to commence litigation to assert claims and rights
accruing under and related to the Shareholders' Agreement dated
01/11/92." The notice specified that among the claims to be litigated
would be plaintiffs' claim that defendant owed $27 million in arrears to
On May 22, 2003 defendant answered plaintiffs' complaint. Defendant did
not assert any counter-claims or affirmative defenses.
On June 26, 2003 defendant filed an action in Supreme Court, New York
County asserting a variety of claims against plaintiffs, as well as
against CCC Inc. and a number of other individual and corporate
defendants affiliated with the CCC insurance program. That action alleges
that through fraud, negligence, breach of fiduciary duty, and other
wrongful conduct CCC Ltd., CCC Corp., CCC Inc., and other parties caused
defendant's substantial losses in connection with the CCC insurance
program. On July 18, 2003 defendant filed a second action in New York
County Supreme Court against only CCC Ltd., CCC Corp., and CCC Inc.,
seeking equitable relief and an accounting.
On September 12, 2003 defendant moved to dismiss or stay the instant
action so that the entire litigation could be in the state court. On
October 14, 2003 plaintiffs moved to amend their complaint in this Court
to include the claims alluded to in the original complaint as "not yet
ripe" due to the sixty-day notice provision in the Shareholders'
Agreement. Plaintiffs' proposed amended complaint alleges that defendant
owes approximately $36 million in arrears on its SEA TEA, Interest Rate
Assessment, and Exit Charges. Plaintiffs also oppose the motion to
dismiss or stay the present federal action.
I. Defendant's Motion to Dismiss or Stay Defendant moves to dismiss the instant action for lack of subject
matter jurisdiction on the ground that plaintiffs have failed to name an
indispensable, and non-diverse, party, CCC Inc. In the alternative
defendant asks this Court to stay the instant action in favor of the
state court actions.
Fed.R.Civ.P. 19 requires that, if feasible, a party must
be joined in an action if either: (1) the person's absence prevents
complete relief from being accorded among the parties, or (2) the person
claims an interest in the subject of the action and the person's absence
would "as a practical matter impair or impede the person's ability to
protect that interest" or "leave any of the persons already parties
subject to a substantial risk of incurring" multiple or inconsistent
obligations. Fed.R.Civ.P. 19(a). If a party is indispensable under
Rule 19(a), but cannot be joined because the party is non-diverse, the
Court must decide whether the action may proceed with the parties before
the Court, or whether it must be dismissed. Fed.R. 19(b). Defendant
claims that CCC Inc. is an indispensable party under Rule 19.
Plaintiffs' current and proposed claims are contractual in nature,
governed by agreements pertaining to the loan and the Shareholders'
Agreement. CCC Inc. is not a party to any of the agreements under which
plaintiffs' claims are being asserted, and appears to have no claim
against defendant under them. Nor does it appear that CCC Inc. is in any sense the "real" party in
interest in this action. Notwithstanding the fact that plaintiffs and CCC
Inc. are closely related, plaintiffs are independent entities with which
defendant entered into agreements that are now the subject of the instant
action. CCC Inc. is not required for resolution of plaintiffs' rights.
Defendant claims that CCC Inc. is liable, along with plaintiffs, for
wrongfully preventing defendant from obtaining sufficient insurance
coverage and mismanaging the CCC insurance program. This does not by
itself render CCC Inc. an indispensable party to the instant action.
However, defendant is free to assert its claims against CCC Inc. in a
third-party complaint. Notwithstanding the fact that there is no
diversity of citizenship between defendant and CCC Inc., the Court would
still have jurisdiction over defendant's third-party claims under the
doctrine of supplemental jurisdiction. The supplemental jurisdiction
statute provides that where the Court has original jurisdiction over a
case or controversy, the Court also has jurisdiction over any claim that
is "so related to claims in the action within such original jurisdiction
that they form part of the same case or controversy under
Article III." 28 U.S.C. § 1367 (a). Lack of diversity does not defeat
supplemental jurisdiction over a claim, as long as the non-diverse party
is not brought in by the original plaintiff. See Viacom International v. Kearney, 212 F.3d 721, 726-28 (2d Cir.
Finally, defendant suggest that the Court should exercise its
discretion to decline to exercise jurisdiction over any third-party
claims that arguably come within the Court's supplemental jurisdiction,
pursuant to 28 U.S.C. § 1367(c). Defendant argues that its state law
claims against non-diverse defendants "substantially predominate" over
the claims over which this Court has original jurisdiction. See
28 U.S.C. § 1367(c)(2). While it is clear that the original
complaint's allegations regarding the loan are only a small part of the
larger controversy between the parties, this does not mean that
defendant's potential third-party claims "predominate" over the issues
raised by plaintiffs. Plaintiffs have properly invoked this Court's
diversity of citizenship jurisdiction with a substantial claim against
defendant, and their proposed amended complaint would bring before this
Court the full breadth of the dispute between the parties. Under those
circumstances, it is proper for the Court also to exercise jurisdiction
over any third-party claims defendant wishes to assert.
As for defendant's alternative request that the instant action be
stayed in deference to the state court proceedings, the Court declines to
do so. The only "exceptional circumstance" to which defendant points that
would require this Court to abstain from adjudicating a case properly
before it is the risk of piecemeal litigation in state and federal court. This danger is
easily obviated by this Court retaining jurisdiction, and defendant, if
it chooses to do so, asserting its state court claims as third-party
claims in this action. Such an outcome is utterly reasonable, given that
the instant action was commenced two months before defendant filed in
state court. Moreover, the state court actions are apparently in only the
most nascent stages of discovery, with preliminary document production
having commenced, and no depositions yet taken. There is every indication
that any discovery that has already occurred will be equally useful if
defendant chooses to pursue its state court claims as third-party claims
in this Court.
In sum, plaintiffs' claims against the defendant for nonpayment of the
loan and other matters raised by the proposed amended complaint come
within the diversity of citizenship jurisdiction of this Court. Under the
circumstances here, the Court believes that plaintiffs should not be
deprived of the benefits of such jurisdiction. Therefore, defendant's
motion to dismiss or stay this action is denied.
II. Plaintiffs' Motion to Amend the Complaint
Plaintiffs move to amend their complaint to add causes of action
arising under the Shareholders' Agreement that, for reasons already
discussed, were not ripe for adjudication at the time this action was
filed. Under Fed.R.Civ.P. 15(a), "a party may amend the party's pleading only by leave of the court or
by written consent of the adverse party; and leave shall be freely given
when justice so requires." Here there is no prejudice to defendant by
allowing plaintiffs to amend the complaint. Defendant has been on notice
of the scope of plaintiffs' proposed additional claims since at least May
2, 2003, when this action was filed. Therefore, plaintiffs' motion is
Defendant's motion to dismiss or stay is denied. Plaintiffs' motion to
amend the complaint is granted.
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