MEADOWBROOK-RICHMAN, INC. v. ASSOCIATED FINANCIAL CORP.

The opinion of the court was delivered by: JOHN KOELTL, District Judge

OPINION and ORDER

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.

  FINDINGS OF FACT

  The Parties

  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.)

  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.

  The July 1991 Agreement

  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 ...