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United States District Court, S.D. New York

June 28, 2005.


The opinion of the court was delivered by: CHARLES HAIGHT, District Judge


Plaintiff Nutmeg Insurance Company ("Nutmeg"), an issuer of errors and omissions liability and financial products insurance, brings this action against defendant Iowa Mutual Insurance Company ("IMIC") seeking declaratory judgments that (1) it is not obligated to reimburse IMIC for Loss or Claims Expenses resulting from IMIC's settlement payment to the Estate of Marquise Henderson ("the Estate") and (2) IMIC's settlement with the Estate does not constitute a "Loss" covered under Nutmeg's contractual obligations to IMIC. Currently before the Court is IMIC's motion, pursuant to Fed.R.Civ.P. 12(b)(2), to dismiss the complaint on grounds of lack of personal jurisdiction and 12(b)(3) for improper venue.


  A. Facts Leading to this Motion

  This litigation between insurers arises out of an automobile accident that occurred on November 14, 1998. While driving drunk, Richard Thompson struck from behind a vehicle occupied by Marquis Henderson, killing him. The decedent's mother, Dessazzar Henderson, acting as special administrator of his estate, filed a suit against Thompson in the Circuit Court of St. Clair County, Illinois. Following a one-day bench trial, the Estate was awarded $1,453,000. Thompson then assigned to the Estate his rights against two insurers, County Mutual Insurance Company and IMIC.*fn1 Both insurers eventually settled with the Estate of Henderson; County Mutual for $1,161,000 and IMIC for $500,000.*fn2

  Before settling with the Estate, IMIC notified Nutmeg — an issuer of financial products insurance — of the claim, and sought coverage under Error and Omissions Policy No. NDE 0102033-98H (the "E&O Policy" or "Policy") which Nutmeg had issued to IMIC. According to this Policy, the Policy Period ran from July 1, 2000 to June 1, 2001. The limit of liability was $3,000,000 for each claim as well as for the Policy in aggregate. Nutmeg denied coverage under the Policy on various grounds, and now seeks a declaratory judgment that it has no liability under the Policy for Loss or Claims Expenses as a result of any claim made by Dessazzar Henderson, as the special administrator for the Estate.

  B. The Parties

  IMIC is a mutual insurance company organized under the laws of the State of Iowa, with its principal place of business in Dewitt, Iowa. IMIC is licensed to do business in eleven states: Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, North Dakota, South Dakota, and Wisconsin. IMIC has never maintained any office or other facility in New York. It is not licensed to do business in, nor does it have any agents in New York.

  Nutmeg is a corporation organized under the laws of the State of Connecticut, with its principal place of business in Hartford, Connecticut. It is in the business of, inter alia, issuing certain policies of errors and omissions liability and financial products insurance. Nutmeg transacts business in the State of New York and avails itself to the laws of the State of New York.

  Both Nutmeg and IMIC hired intermediaries to negotiate the E&O Policy on their behalf. IMIC hired Daniel Molyneaux, an insurance agent for Molyneaux Insurance, based in Davenport Iowa, and licensed to do business in the State of Iowa, while Nutmeg relied on the assistance of Wendy Johnston, agent for Heath Insurance Brokers, Inc. ("Heath"), located in Dallas, Texas. Molyneaux and Johnston negotiated the E&O Policy over the phone.

  Once negotiations were complete, Heath requested that the Reliance Insurance Company of Illinois ("Reliance"), from its offices in New York, underwrite and issue the E&O Policy. This task was performed by Assistant Vice President and Underwriter Jason Hawkins, under the supervision of Assistant Vice President and Underwriter Thomas Iorio, in Reliance's New York office.

  Subsequent to this action, Reliance sold its Financial Products Team to The Hartford, an investment and insurance company with corporate headquarters in Hartford, Connecticut. Nutmeg is a wholly owned subsidiary of The Hartford, and is licensed to act as its agent for purposes of procuring insurance in different states. After the acquisition, Hawkins, on behalf of Nutmeg and as employee of The Hartford, cancelled, rewrote, and reissued the E&O Policy to accommodate the merger of Reliance's Financial Products Team to The Hartford. The material terms of the E&O Policy do not appear to have changed upon reissuance.

  On this motion, IMIC contends that this Court does not have personal jurisdiction over it. Nutmeg contends that personal jurisdiction is proper over IMIC since it entered into a contract (the E&O Policy) with Nutmeg that ultimately was underwritten and issued in New York. IMIC responds that any action taken by Reliance, The Hartford, or Nutmeg with respect to the issuance of the Policy is only reflective of the unilateral activities of plaintiff Nutmeg and do not establish IMIC's presence in New York for purposes of personal jurisdiction.


  To determine whether an out-of-state party is amenable to a suit in a federal district court, the court must apply the standards for personal jurisdiction for the state in which it sits. Arrowsmith v. United Press Int'l, 320 F.2d 219, 223 (2d Cir. 1963). As the plaintiff, Nutmeg has the burden of demonstrating a sufficient factual basis to sustain jurisdiction. Lehigh Valley Indus. v. Birenbaum, 527 F.2d 87 (2d Cir. 1975).

  Plaintiff alleges that this Court has jurisdiction over defendant on the basis of the New York long-arm statute, C.P.L.R. § 302(a)(1), which provides:

(a) Acts which are the basis of jurisdiction. As to a cause of action arising from any of the acts enumerated in this section, a court may exercise personal jurisdiction over any non-domiciliary, or his executor or administrator, who in person or through an agent: 1. transacts any business within the state or contracts anywhere to supply goods or services in the state . . .
  Courts have previously held that actions taken in furtherance of a contract within New York are sufficient to invoke long-arm jurisdiction in the state. In Iroquois Gas Corp v. Collins, 42 Misc.2d 632 (Sup.Ct. Erie County 1964), aff'd, 258 N.Y.S.2d 376 (4th Dept. 1965), defendant's agents "on two separate occasions spent several days in this State in furthering a contract to construct a pipeline across Niagara River." Id. at 635. The New York court found this was sufficient to establish personal jurisdiction over the defendant in the state. Similarly, in New Generation Foods, Inc. v. Spicer's Int'l, 669 F.Supp. 599 (S.D.N.Y. 1987), this Court held that personal jurisdiction was established where two individual defendants "visited Mineola, New York, where they negotiated and executed the fourth and fifth contracts, which are the subject of this dispute." Id. at 600. This was so even though "defendants were only in New York for one day." Id. at 601.

  Moreover, if the material terms of a contract have been negotiated in New York, the fact that the contract in its final form is executed outside the boundaries of the state is not dispositive for jurisdictional analysis. For instance, in Longines-Wittnauer Watch Co. v. Barnes & Reinecke, Inc., 15 N.Y.2d 443, 455, cert. denied, 382 U.S. 905 (1965), the corporate defendant sent key officers to New York to "discuss the terms of the agreement" with plaintiff. After further meetings, defendant executed a written contract in Chicago. When plaintiff sued defendant for a subsequent breach of contract, defendant argued that since the contract was not actually executed in New York, "its activities in this State preliminary and subsequent to the execution of the contract cannot be regarded as amounting to the transaction of `business' under the statute." Id. at 456. The Court disagreed, holding that "even though the last act marking the formal execution of the contract may not have occurred within New York, the statutory test may be satisfied by a showing of other purposeful acts performed by the appellant in this State in relation to the contract." Id. at 457.

  Similarly, the Second Circuit reversed the District Court's dismissal of a complaint for lack of jurisdiction in Liquid Carriers Corp. v. American Marine Corp., 375 F.2d 951 (2d Cir. 1967), where "a high-level agent and officer of American Marine made three separate trips to New York over a period of two months to meet and negotiate with Liquid Carriers in connection with the contract involved in this suit." Id. at 951. This was sufficient to meet the "transacts any business" requirement of C.P.L.R. § 302(a) even though the vice president of the defendant corporation had "returned to New Orleans [to] execute the contract on behalf of American Marine." Id. at 952-53. Thus, if actions are taken within the state in furtherance of a contract — including the negotiation of the contractual terms — this is sufficient to establish jurisdiction over a party. The formal act of contract execution has been deemed nondispositive so long as a foreign party has performed "other purposeful acts" within the state. The final critical question for our purposes, then, is whether jurisdiction exists when the conditions are reversed, so that a contract is formally executed within the state, but no other acts have been taken in New York in furtherance of the contract.

  Several cases, both in this Court and New York State courts, answer that question in the negative. In Green and White Constr. Co. v. Columbus Asphalt Corp., 293 F.Supp. 279 (S.D.N.Y. 1968), defendant, an Indiana based corporation with no ties to New York, entered into a contract with plaintiff, the negotiation of which took place in Indiana. Defendant asserted that the contract was also executed in Indiana, while plaintiff alleged it was signed and executed in New York. That dispute turned out to be moot, as Judge Motley dismissed the complaint for plaintiff's failure to demonstrate personal jurisdiction over the defendant, stating: "Clearly, the fact that plaintiff may have signed the contract in New York is not determinative." Id. at 279.

  Similarly, there was no jurisdiction over the defendant in a breach of contract action in Standard Wine & Liquor Co. v. Bombay Spirits Co., 20 N.Y.2d 13 (Ct.App. 1967), where the corporate defendant had no contacts in New York but entered into a contract with plaintiff, and "plaintiff was the last to sign [the contract], one of the officers doing so in New York." Id. at 15. The Court held "it is not determinative that the plaintiff signed the contract in New York." Id. at 17 (citations omitted). See also Amstar Corp. v. SS Alexandros, 457 F.Supp. 717 (S.D.N.Y. 1978) (holding, in an action for damage to a shipment of cargo loaded in Guatemala and discharged in Philadelphia, that the mere fact that the subcharter agreement was executed in New Your was not sufficient to satisfy the transaction of business test for personal jurisdiction).


  Based on this precedent, a nonresident defendant may be subject to long-arm jurisdiction based on the "transacts any business" clause of N.Y.C.P.L.R. § 302(a)(1) if the defendant negotiated for and executed a contract in New York. Furthermore, the mere act of negotiating for a contract within the state may, in certain instances, be sufficient to establish jurisdiction, regardless of where the contract is finally issued. On the other hand, the execution of a contract within the state, standing alone, is insufficient to support long-arm jurisdiction, when the parties (or their agents) negotiated for the contract outside of state borders.

  These rules are not mere technicalities, but reflect the underlying rationale behind long-arm jurisdiction. When a person or entity has entered into the State of New York (physically or otherwise) in order to negotiate the terms of a contract with another party, that party has purposefully established significant contact with the state, availed itself of the benefits conferred by its laws, and consequently may fairly and reasonably be subjected to the state's jurisdiction in respect of litigation that may arise out of the contract.

  On the other hand, if New York State is merely the place in which a contract was unilaterally executed in its final form — after all of the material terms of the contract had previously been negotiated by nonresident the parties in other states — it would be unfair and prejudicial to subject a party to the contract to New York jurisdiction, since in those circumstances the party has not established any purposeful contract with the state or availed itself of the benefit of its laws. Such a grant of personal jurisdiction could also give future parties an incentive to issue a fully negotiated contract in a particular state solely for forum-shopping purposes.

  The terms of IMIC's E&O Policy were negotiated by Molyneaux, who spoke on the telephone with Johnston. Molyneaux was in Iowa and Heath in Texas at all times during the course of negotiations. There is no evidence that Molyneaux or anyone else acting as agent or representative for IMIC had any contact with Hawkins, Iorio, or any other agent or representative of Nutmeg in New York. Under these circumstances, it is clear that the E&O Policy was solely issued in New York, but negotiated for elsewhere. IMIC has not transacted any business within the state, and therefore New York's long-arm jurisdiction does not reach it.

  Plaintiff's reliance on Parke-Bernet Galleries, Inc. v. Franklyn, 308 N.Y.S.2d 337 (1970), is misplaced. In that case, plaintiff, a prominent auction house based in New York, sued the individual defendant for non-payment for two paintings for which defendant had been the highest bidder at an auction. Defendant was a resident of California and moved to dismiss the case for lack of personal jurisdiction. However, prior to and over the course of the auction, defendant had sent a letter to plaintiff in New York as well as a telegram, and had the plaintiff keep an open telephone line on the night of the auction, during which defendant made several phone calls from California to plaintiff and his employee in the course of bidding. The Court ruled that though "never actually present," the defendant was nevertheless an "active participant" in the auction and therefore found the defendant subject to New York jurisdiction with respect to the cause of action arising out of the auction. Id. at 338.

  In this case, there is no evidence that IMIC or any of its employees or agents had any contact with any Nutmeg employee or agent in New York. It cannot be said that IMIC was an active participant in Hawkins's performance in underwriting and issuing the E&O Policy. At most, IMIC was an active participant in the negotiation of the terms of the Policy with Nutmeg's intermediary in Texas. But IMIC has not demonstrated any action that indicates its intention to avail itself of the benefits of New York law or to subject itself to New York jurisdiction.

  Because I dismiss this case for lack of personal jurisdiction, I need not and do not reach defendant's alternative argument concerning improper venue.


  For the foregoing reasons, I conclude that defendant Iowa International Insurance Company is not subject to personal jurisdiction in this Court. Accordingly the Clerk is directed to dismiss the complaint. Because the dismissal is on jurisdictional grounds, it is without prejudice.


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