The opinion of the court was delivered by: JOHN KOELTL, District Judge
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This is a breach of contract action arising under New York law
brought by the plaintiff Meadowbrook-Richman, Inc. ("MRI")
against various entities including Associated Financial Corp.
("AFC"), Wilshire Investment Corp. ("Wilshire"), United Housing
Preservation Corporation ("United Housing"), Westport Housing
Corporation ("Westport"), and against two individual defendants,
A. Bruce Rozet ("Rozet") and Deane Earl Ross ("Ross"),
(collectively, "AFC Parties") to recover damages for the failure
to pay for various insurance related services provided by MRI. MRI's allegations arise out of the defendants' alleged failure to
pay for services provided pursuant to a retainer agreement for
the year 1995-96 (the "1995-96 Retainer Agreement") and a second
agreement dated July 21, 1991 (the "July 1991 Agreement").
Jurisdiction is based on diversity of citizenship, pursuant to
28 U.S.C. § 1332(a)(1).
The plaintiff asserts five causes of action: (1) a claim for
breach of contract based on the 1995-96 Retainer Agreement; (2) a
claim for breach of contract arising out the July 1991 Agreement;
(3) a claim for indemnification for the legal fees incurred by
MRI as an agent of a disclosed principal, AFC; (4) a claim for
account stated; and (5) a claim for quantum meruit.
The AFC Parties assert counterclaims against MRI and
third-party claims against Richman. As modified by the Joint
Pre-Trial Order, the first five causes of action allege
racketeering by MRI and Richman, together and separately, in
violation of the Racketeer Influenced and Corrupt Organizations
Act ("RICO"), 18 U.S.C. § 1962, arising out of an illegal
kickback scheme from 1992 to 1996 involving insurance funds
covering properties owned or controlled by the AFC Parties. The
sixth cause of action alleges unfair trade practices against MRI
and Richman from 1992 to 1996. The seventh cause of action
alleges conversion or theft of insurance claim funds. The eighth
cause of action alleges fraud, misrepresentation, and deceit. The ninth cause of
action alleges breach of fiduciary duty. The tenth cause of
action alleges spoliation and tampering with evidence. The
eleventh cause of action is for indemnity.
The Court conducted a non-jury trial from January 20, 2004
through January 29, 2004.*fn1 On the first day of trial,
Bruce Rozet, who died before trial, was severed as a defendant.
(Trial Transcript ("Tr.") 2.) Having heard the testimony of the
witnesses and assessed their credibility, and having reviewed the
documentary evidence, the Court makes the following findings of
fact and reaches the following conclusions of law.
1. Meadowbrook-Richman, Inc. ("MRI") was at all relevant times
a licensed insurance broker in New York with its principal place
of business in New York. (Statement of Agreed Facts attached as
Ex. A to Joint Pretrial Order ("SAF").)
2. Polar International Brokerage Corp. ("Polar") is a New York
corporation with its principal place of business in New York. (Id.) Polar is an insurance brokerage firm. (Tr. 41.)
3. Benjamin S. Richman ("Richman") is the president of MRI.
(SAF.) From about 1990 to 1995, Richman was also the Chairman of
the Board of Polar. (Tr. 41-42.)
4. Associated, Financial Corp. ("AFC"), Wilshire Investment
Corp. ("Wilshire"), United Housing Preservation Corporation
("United Housing"), Westport Housing Corporation ("Westport")
(collectively, the "AFC Parties") were related entities. (SAF.)
5. A. Bruce Rozet ("Rozet") and Deane Earl Ross ("Ross") were
the Chairman and President of AFC, respectively. (Id.)
6. AFC is a Delaware corporation owned in part by Management
Assistance Group, Inc. ("MAGI"), which was formed in 1990. (Tr.
502; 692-94; 704.) AFC and MAGI are the umbrella or holding
organizations that, at all relevant times, held the syndicated
limited partnerships that AFC and MAGI created for the benefit of
investors who, through such limited partnerships, own real estate
throughout the United States. (Tr. 703-07.) MAGI owned Westport
and United Housing. (Tr. 705-06.) AFC owned Wilshire. (Tr. 693.)
7. The bulk of the limited partnerships in which Wilshire,
Westport, or United Housing serve as the general partner own housing projects assisted or subsidized under federal
programs administered by the United States Department of Housing
and Urban Development ("HUD"). (Tr. 693.) At all relevant times,
the properties in which Wilshire, Westport, and United Housing
had an interest were worth approximately $1 billion. (Tr. 53.)
Insurance Programs on AFC Properties
8. In 1990, Ross and Rozet had an agreement with Laurence Penn
("Penn") and Penn's company, PL Acquisition, Inc. ("PLA"), giving
Penn, or his companies, control over the placement and
administration of the insurance program for various partnership
properties owned or controlled by Ross and Rozet that were under
the auspices of HUD. (Tr. 45-47; PX 13.) On October 15, 1990, an
agreement between PLA and AFC/MAGI to purchase the exclusive
right to place insurance for the AFC-related properties was
reduced to writing. (PX 13.) By that agreement, PLA acquired the
exclusive right, freely assignable, to place insurance for the
properties for a ten-year period in return for PLA's covenant "to
use its best efforts to administer the insurance needs of the AFC
Parties." (Id. ¶ 3.)
9. In 1989, AFC and MAGI had attempted to sell the interests of
Wilshire, Westport, and United Housing in HUD-assisted properties. At that time, Penn was MAGI's CFO, and he met with
many different investor groups interested in purchasing the
portfolio. (Tr. 971-75.)
10. Penn then created New Communities of America, Inc. ("NCA")
to attempt to purchase the AFC/MAGI portfolio himself. (Tr. 977.)
To raise approximately $1.75 million toward purchasing the
AFC/MAGI properties, Penn sought to sell the exclusive right to
broker insurance for the properties, an assignable right that PLA
had secured in the October 15, 1990 agreement with AFC/MAGI. (Tr.
44-46; 977-81.)
11. Richman was introduced to Penn in 1990. (Tr. 44-45). Penn
and Richman discussed the prospects of assigning PLA's exclusive
right to broker insurance for the AFC/MAGI properties. After
reviewing the AFC insurance account, Richman advised Penn that he
did not believe that Penn would be able to sell or assign his
rights regarding the administration of the AFC insurance program.
(Tr. 48; 980-81.)
12. Penn then authorized Richman to obtain quotes for AFC's
insurance business, because AFC's insurance policies were due for
renewal in March 1991. (Tr. 47; 987-88.)
13. Richman eventually obtained a quote for insuring the AFC
partnership properties through Mid-Atlantic Facilities, a surplus lines broker located in New York City, which brokered the
casualty insurance through the AIG Group and the property
insurance through Lexington of London. (Tr. 50-51.) Richman
arranged for Polar to be the authorized quoting broker on behalf
of AFC. (Tr. 53; 988-89.)
14. The quotes that Richman and Polar obtained for the AFC
properties were approximately $1,000,000 less than the amount
that AFC previously had been quoted. (Tr. 708-09.) Polar was able
to obtain the AFC insurance account for the policy period March
1, 1991 through March 1, 1992. (Tr. 708-09.)
15. Richman divided the responsibilities for servicing the AFC
account as follows: Polar was responsible for marketing the AFC
insurance account to obtain the appropriate insurance, and
oversee billing, day-to-day servicing and general correspondence
by and between the properties, the property managers, the insured
and the additional interested parties (i.e. mortgagees). MRI, on
the other hand, was primarily responsible for administering and
servicing the AFC casualty and property insurance claims. (Tr.
64.)
16. At the time of the award to Polar, Richman approached Penn
with the suggestion that PLA perform the insurance administration services as outlined in Polar's proposal, and Penn
agreed. (Tr. 997.) Penn hired Betty Molavi, as well as Molavi's
full-time assistant and an additional part-time assistant, to
perform PLA's insurance administration services. (Tr. 881-95.)
17. Richman and Penn executed an agreement dated March 5, 1991
(the "Retainer Fee Agreement"). (PX 10; DX 84). The Retainer Fee
Agreement contained the obligations of PLA, MRI, and Polar as to
the services to be provided by each. (Id.) The Retainer Fee
Agreement also memorialized the parties' agreement respecting the
monies that were to be set aside into a self-insured retention
fund ("SIR") for the partial self-insurance claims portions of
the AFC insurance program to be administered by MRI, and a
separate account for payments to PLA of its fees. (Id.)
18. The AFC partnerships were initially charged a total of
approximately $4,300,000 with respect to the March 1991 to March
1992 policy year. (Tr. 68.) Each of the AFC partnerships received
an invoice from Polar for its allocable share of the costs of
insuring the AFC partnership properties. (Tr. 66.)
19. From the amount received from the AFC partnerships, Polar
deducted its fee and commission income (approximately $300,000 for the March 1991-March 1992 policy year), provided MRI
with approximately $1,400,000 to place in the claim reserve
accounts, and remitted the balance (approximately $2,600,000) to
Mid-Atlantic Facilities, which was the broker of record to the
insurance companies and the party responsible to pay the premiums
to the insurance companies. Mid-Atlantic Facilities netted out
its commissions, and remitted the balance to the insurance
companies in payment of premiums for the AFC insurance program
for the first year. (Tr. 68.)
20. As set forth in the Retainer Fee Agreement, the parties
estimated that approximately $1,200,000 would be used to pay
self-insured retentions and deductibles and aggregates of
liability and property claims filed against the AFC-controlled
partnerships, of which $180,000 was initially set aside in the
claim reserve accounts to be remitted to PLA. (Tr. 56-58; PX 10.)
21. Richman originally sought a three-year agreement from PLA,
but was unsuccessful. (Tr. 988; DX 225a.) Instead, Penn, on
behalf of PLA, separately negotiated and executed an extension of
the Retainer Agreement each year with Richman. (Tr. 58.) Penn and
Richman worked out what Penn's company, PLA, would be paid each year under the Retainer Agreement. (Tr.
60-61.)
22. The Retainer Fee Agreement was extended and modified by
letter agreements dated February 8, 1992; March 17, 1993; July 7,
1994; and June 26, 1995. (See PX 39 (7/7/94 Retainer
Agreement); PX 40 (6/26/95 Retainer Agreement).)
23. The fees to be paid PLA increased dramatically over the
years. For the period covering March 1, 1994 to February 28,
1995, Richman was to pay PLA a total of $554,000. The fee
included $300,000 for claims administration services, $204,000
for "expense reimbursement" (which included providing office
space for Richman when he came to California), and $52,000 for
claims services on so-called "Polrich" properties. (PX 39.)
24. In March 1994, the AFC properties were placed into a new
insurance program which used high self-insured retentions in
order to keep premium costs down. The parties agreed that there
would be an aggregate retainer fee in the amount of $479,500
against which any and all commissions earned by Richman or Polar
would be credited. (Tr. 79-80; PX 39.)
1995-96 Retainer Fee Agreement
25. In late June 1995, MRI and AFC executed the 1995/96
extension to the Retainer Fee Agreement covering the 1995 to 1996 policy year. (See PX 40.) Under this agreement, the
aggregate retainer fee was increased from $479,500 to $500,000
per year payable to Richman or Polar. (Id.). The 1995 Retainer
Agreement was signed by PLA, MRI, and Richman. (Id.) Realty
Accounting & Financial Services, Inc. ("RA"), a company of which
Penn was President, also signed the agreement. (Id.) Polar was
offered the opportunity to execute and become a party to this
agreement but chose not to do so. (Tr. 82.)
26. The 1995-96 extension to the Retainer Fee Agreement
provides that the retainer fee "shall be paid solely and only
from the following sources":
100% of any earned commission received by Richman or
Polar from policies of insurance issued to [AFC].
Any positive differential in any of the claim
aggregate funds previously defined.
Any aggregate net self insured fund contribution made
by additional or deleted properties or entities to
the Master Program during the policy year in excess
of aggregate stop requirement.
(PX 40.) The agreement further provides:
Any negative differential will be carried forward to
next year's retainer. The retainer fee shall be
reduced by 50% of reductions in self-insured funds
charged to Meyers and lost at cancellation.
(PX 40.) 27. On October 10, 1995, Richman and Polar terminated the
Polar-MRI agreement, and Richman resigned from his position at
Polar. (Tr. 84.)
28. Following the termination of Richman's relationship with
Polar, AFC requested that Richman and MRI fill the void created
by Polar's refusal to execute the 1995/96 extension of the
Retainer Fee Agreement. (Tr. 84-85.) As a result of discussions
with Ross, Penn and Louis Cicalese ("Cicalese") (a lawyer for
AFC), it was agreed that MRI would render the insurance
administration services formerly performed by Polar through the
balance of the 1995-1996 policy period for the sum of $283,000,
i.e., the remaining balance due under the 1995/96 extension of
the Retainer Agreement, because Polar had previously received
$217,000 of the retainer for that year. (Tr. 85-90.)
29. AFC then decided to conduct an audit of the 1994 claims
reserve accounts because Stanley Kleckner of Polar had informed
AFC that funds were missing from the AFC 1994 claims reserve
account. (Tr. 90.)
30. An audit of the AFC 1994 claims reserve account found that
monies were missing from this account. (Tr. 96-97.) Richman
testified that the missing funds represented unearned commissions by Polar that were subsequently returned to
the AFC 1994 account by Polar. (Id.)
31. Richman agreed that the 1995/96 Retainer Fee Agreement
allowed an "aggregate Retainer fee" to be paid solely from funds
commissions or from any "positive differential" in the SIR
property aggregate accounts. (Tr. 424-25.)
32. The claim aggregate funds for the 1995 policy year are
depleted, having been paid out on claims during the policy year.
(Tr. 1053-54.)
33. There is no evidence in the record showing that any of the
sources of the retainer fee contains funds sufficient to cover
some or all of the $283,000 that MRI claims under the 1995/96
Retainer Fee Agreement. Richman testified that MRI transferred
all of the AFC reserve accounts to RA in August 1995 and that
they contained hundreds of thousands of dollars collectively.
(Tr. 97-98.) But MRI did not establish at trial that there were
funds available in the account for the 1995/96 policy year, from
which the $283,000 would be payable.
34. Pursuant to another written agreement dated July 21, 1991
(the "July 1991 Agreement"), AFC (through PLA) retained Richman
(and MRI) to administer insurance services (defined in the July 1991 Agreement as "public adjuster's services") as
the owner's representative for the properties of the
AFC-controlled partnerships. (PX 20.) The July 1991 Agreement
covered claims in existence after June 28, 1991 and provided that
Richman (or his assign) would receive fees equal to eight (8)
percent of recovered amounts in the settlement of property claims
with insurance companies. (Id.; Tr. 107.)
35. The July 1991 Agreement provided that the 8% fee "will be
included as part of the recovered amount and will leave
sufficient funds, after payment of such fees, to complete all
required repairs and/or replacements as agreed to by the property
owners, mortgagee, HUD, and the insurance company." (PX 20.) The
Agreement further provided that "all costs to the public
adjuster's services will be covered as stated above and will not
require AFC or the property in question to bear any such service
cost." (Id.)
36. The July 1991 Agreement also provided: "There can be no
assurance that HUD will permit the 8% fee on every claim and
where such fee is reduced as a requirement of HUD, you [Richman]
agree to accept HUD's fee limit in full." (PX 20.) The parties
specifically struck out a provision of the agreement that stated "the difference shall be the obligation
of PL or AFC to be paid on demand" (Id.)
37. Penn testified that the purpose of the 8% fee in the July
1991 Agreement was to assure both AFC and the properties that
neither would be at risk for the fees that Richman had
represented he would receive from insurance companies. (Tr.
1152.)
38. Richman did not tell the insurance companies that the
settlements he sought on behalf of the properties included an 8%
fee for which he would later bill the properties. (Tr. 264-65.)
39. Richman's testimony made clear that when he negotiated
insurance settlement amounts on behalf of the properties, he did
not tell the insurance companies that the settlement amounts
would be used, in part, to cover his fees. Once the settlement
proceeds had been forwarded from the insurance companies to MRI
and then to the properties, Richman would submit a bill for MRI's
8% fee to the properties themselves. (Tr. 109-10; 265-71.) Not
surprisingly, faced with the amount the insurance company paid
and MRI's 8% fee, many of the properties often did repairs "with
in-house maintenance people" or "just did a paste and glue kind
of thing." (Tr. 270.) 40. Richman conceded at trial that the July 1991 Agreement
required that HUD approve the 8% fee if MRI was to be entitled to
collect the fee. (Tr. 416-17, 426.)
41. Richman testified that the AFC Parties were the HUD experts
and that he relied on AFC to determine compliance with HUD
regulations. (Tr. 417, 426.)
42. Richman testified at trial that he never sought HUD
approval for the public adjuster's services fee, and that he "had
nothing to do with HUD." (Tr. 417.)
43. The record contains no evidence that Richman either in
his own name or in that of one of his entities ever obtained
the prior written approval of HUD to use insurance proceeds in
any manner or to use insurance proceeds to pay himself or an
affiliate any fee claimed pursuant to the July 1991 Agreement.
Indeed, there is no evidence that HUD approved the 8% fee.
44. The July 1991 Agreement provided that others besides
Richman "the property owners, mortgagee, HUD, and the insurance
company" not Richman alone, were to determine how much money
would be required "to complete all required repairs and/or
replacements." (PX 20.)
45. Richman agreed at trial that before MRI was entitled to the
8% fee under the July 1991 Agreement, "it must be determined whether or not the amount actually received by the
properties was sufficient to repair the ...