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People ex rel Cuomo v. Coventry First LLC

June 30, 2009


The opinion of the court was delivered by: Pigott, J.

This opinion is uncorrected and subject to revision before publication in the New York Reports.

In recent years, an industry has developed in the United States in which investors, known as life settlement providers, buy life insurance policies from policy owners for cash, ultimately receiving the benefits of the policies when the insureds die. An example will illustrate the type of transaction involved. A company that holds a policy insuring the life of an executive who has retired wishes to sell the policy, to avoid paying premiums. A life settlement provider buys the life insurance policy from the company, for an amount exceeding the surrender value offered by the insurer, calculating that the value of the death benefits exceeds the purchase price, transaction costs, and continued premiums.*fn1

Importantly, the life settlement industry purports to employ a competitive auction model. The policy owner -- or the owner's financial advisor or agent -- will often hire a broker to solicit competing bids for the policy from life settlement providers.


In October 2006, the Attorney General of New York State commenced this enforcement action against Coventry First LLC; its parent corporation, Montgomery Capital, Inc.; its executive vice-president, Reid S. Buerger; and an affiliate, The Coventry Group Inc. (collectively "Coventry First"), alleging fraudulent and anticompetitive conduct. The Attorney General alleges that defendants, life settlement providers, engaged in bid-rigging by paying substantial, concealed commissions to life settlement brokers, who in return persuaded their clients to accept defendants' offers, rather than higher bids from rival life settlement providers. The Attorney General also claims that defendants concealed a scheme of "gross offers" whereby brokers were allowed to determine how much of a purchase price paid by defendants they would keep and how much they would pass on to the policy seller. Additionally, falsification of documents is alleged.

The Attorney General seeks damages "on behalf of the owners of life insurance policies who have been damaged by the schemes" and injunctive relief preventing further misconduct. The State's six causes of action are based on (1) Executive Law § 63 (12), (2) General Business Law § 340 et seq. (the Donnelly Act), (3) General Business Law § 352 et seq. (the Martin Act), (4) common law fraud, (5) unjust enrichment, and (6) inducement of breach of fiduciary duty.

Defendants moved to dismiss plaintiff's complaint pursuant to CPLR 3211 (a) (7). In addition, because the contracts entered into by Coventry First and individual policy sellers contained paragraphs providing that contractual disputes and controversies between the parties would be settled by arbitration, defendants filed a motion pursuant to CPLR 7503 (a), seeking to "[c]ompel arbitration of all claims for victim-specific relief."

As relevant to this appeal, Supreme Court denied defendants' motion to compel arbitration and allowed the Attorney General's breach of fiduciary duty cause of action to proceed, along with two others. The court also dismissed the Attorney General's claims to the extent that "they pertain to life settlement transactions that do not involve New York life settlement brokers, New York policy sellers, or alleged misconduct in New York."

The Appellate Division reinstated the common law fraud cause of action, dismissed by Supreme Court, and otherwise affirmed (52 AD3d 345). The same court then granted leave to appeal to this Court, certifying the question whether Supreme Court's order, as modified by the Appellate Division, was properly made. We conclude that it was.

On appeal, defendants challenge the Appellate Division's decision in only two respects: insofar as it affirmed the denial of their motion to compel arbitration and insofar as it allowed the Attorney General's sixth cause of action, alleging inducement of breach of fiduciary duty, to proceed. We address the arbitration question first.


While defendants concede that the State's injunctive claims are not susceptible to arbitration, they insist that the claims for relief specific to particular policy sellers -- claims for rescission of purchase agreements and for restitution -- are subject to arbitration under the sellers' contracts with Coventry First. We have "repeatedly recognized New York's 'long and strong public policy favoring arbitration'" (Stark v Molod Spitz DeSantis & Stark, P.C., 9 NY3d 59, 66 [2007], quoting Matter of Smith Barney Shearson v Sacharow, 91 NY2d 39, 49 [1997]). However, the obligation to arbitrate depends on an agreement to arbitrate; arbitration "is a matter of consent, not coercion" (Salvano v Merrill Lynch, Pierce, Fenner & Smith, Inc., 85 NY2d 173, 182-183 [1995], quoting Volt Information Sciences, Inc. v Board of Trustees of Leland Stanford Junior Univ., 489 US 468, 479 [1989]).

Consent to arbitrate occurs in the most straightforward manner when a party signs a formal agreement to arbitrate. The Attorney General, of course, did not enter into any contract with defendants, agreeing to arbitration. Instead, defendants argue that the Attorney General, by suing on behalf of policy sellers who contracted with Coventry First, has become the "agent or alter ego of the contracting sellers" and is bound by their obligation to arbitrate. They also argue that that obligation is enforceable against the Attorney General pursuant to the Federal Arbitration Act. It is true that courts apply common law principles of contract and agency to determine whether a nonsignatory is bound by an arbitration agreement. However, defendants' arguments fail in light of United States Supreme Court precedent.

In Equal Employment Opportunity Commission v Waffle House, Inc. (534 US 279 [2002]), the Supreme Court held that an agreement between an employer and an employee to arbitrate employment-related disputes does not bar the Equal Employment Opportunity Commission from seeking victim-specific relief, such as backpay, reinstatement, and damages, in an enforcement action alleging that the employer had violated the Americans with Disabilities Act. Waffle House stands for two broad propositions, applicable to the present case. The first is that pro-arbitration policy goals do not require a government agency to give up its statutory enforcement authority in favor of arbitration if it has not consented to do so, because those goals do not "require parties to arbitrate when they have not agreed to do so" (534 US at 293, quoting Volt, 489 US at 478; see 534 US at 288-289, 293-294). The ...

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