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BDO Seidman LLP v. Strategic Resources Corp.

February 23, 2010

BDO SEIDMAN LLP, PLAINTIFF-RESPONDENT,
v.
STRATEGIC RESOURCES CORPORATION, ET AL., DEFENDANTS-APPELLANTS.



Order, Supreme Court, New York County (Charles E. Ramos, J.), entered June 17, 2009, which denied defendants' motion to dismiss the complaint, unanimously reversed, on the law, without costs, and the motion granted. The Clerk is directed to enter judgment dismissing the complaint.

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

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

Mazzarelli, J.P., Nardelli, Catterson, DeGrasse, RomÁn, JJ.

603018/08

Defendant Strategic Resources Corporation (SRC) managed the day-to-day operations of non-party Phoenix Four, Inc., a mutual fund. SRC began providing services to Phoenix in or around 1994. At the same time, Phoenix retained plaintiff BDO Seidman (BDO) to provide it with accounting services. Phoenix terminated its relationship with BDO in or about 2002, and it stopped using SRC's services in 2004. In May 2005, Phoenix commenced an action in federal court against SRC alleging that during the time that it managed Phoenix, SRC fraudulently overstated Phoenix's assets, the value of which were directly tied to SRC's compensation. The complaint sought $150 million. In September 2005, Phoenix demanded arbitration against BDO, alleging that in 2000, 2001 and 2002, BDO was negligent in failing to discover SRC's fraud. The arbitration demand initially sought approximately $77 million, but Phoenix subsequently reduced the claim to $37.3 million.

In July 2007, while the arbitration was pending, Phoenix and SRC settled the federal court action. The settlement agreement required SRC to pay Phoenix $12.5 million and for Phoenix to release SRC. The agreement also protected SRC in the event that BDO were to lose the arbitration with Phoenix and seek contribution from SRC. Specifically, the agreement stated: "If the Phoenix Parties settle with BDO or recover a judgment/award against BDO in the BDO Arbitration or through some other proceeding and BDO in turn asserts a claim against the SRC Parties . . . relating to the SRC Parties' . . . involvement with the Phoenix Parties, whether on the basis of contribution, indemnity or any other legal theory or claim, the Phoenix Parties agree that their settlement with or judgment/award against BDO shall be reduced to the full extent necessary to protect the SRC Parties. . . In furtherance of this settlement/judgment/award reduction obligation, the Phoenix Parties shall make payment to BDO to the full extent necessary to give force and effect to the settlement/judgment/award reduction obligation in the event the settlement/judgment/ award is no longer capable of being sufficiently reduced." The agreement further required Phoenix to ask the arbitration panel to fashion a "reasoned award," which apportioned fault between BDO and SRC, so any judgment against BDO could be reduced in accordance with the agreement. Phoenix and BDO jointly requested such a reasoned award.

In its post-hearing submissions to the arbitration panel, Phoenix, anticipating that it would be awarded damages, proposed a methodology for the arbitrators to use to determine by how much the judgment should be reduced to account for SRC's culpability, if any. Phoenix suggested that the arbitrators compare the amount claimed by it in the litigation against SRC ($150 million) with the amount claimed by it in the arbitration against BDO (ultimately $37.3 million). The difference between the two numbers, Phoenix reasoned, represented damage it alleged to have been caused to it solely by SRC. Using the same logic, Phoenix posited that, since it settled the litigation for $12.5 million, "only 3.1 million . . . of the $12.5 million paid by [SRC] could have been in payment of the same injuries asserted in this Arbitration." (In other words, $37.3 million is 25% of $150 million, and 3.1 million is 25% of 12.5 million.)

The arbitrators awarded Phoenix $12,578,166. They stated, in pertinent part, as follows: "The Panel interprets. . . the Settlement Agreement to require that in order for BDO to obtain a judgment reduction in this arbitration, the BDO parties have to obtain an apportionment of fault' between them and the parties BDO claims bore culpability. Thus BDO would have to provide evidence in this proceeding where this Panel could reasonably conclude that [SRC] caused the same injuries as did BDO and what was their contributory share of that cause." After rejecting Phoenix's position that BDO's evidence established that SRC did not share at all in BDO's culpability for Phoenix's loss, the arbitrators stated that they "believe Phoenix has offered a fair and just method for the apportionment issue." The Panel then quoted the portion of Phoenix's post-hearing submissions which laid out the methodology discussed above. The Panel "therefore conclude[d that] it is appropriate . . . to afford [BDO] a judgment reduction of $3,125,000 on the approximately $12.6 million damages award." After adjustments to the award such as for arbitration costs, the total owed by BDO was $11,871,015.43. BDO paid that amount to Phoenix.

BDO then commenced this contribution action against SRC. The complaint alleged that SRC was liable for 100% of the award BDO paid to Phoenix, since BDO "was found liable to Phoenix in connection with [BDO]'s audits of Phoenix's year-end financial statements for the years 2000-2002 by virtue of the same facts or circumstances as are alleged herein that gave rise to [SRC]'s liability to Phoenix." SRC moved to dismiss the complaint pursuant to CPLR 3211(a)(1), (5) and (7). SRC argued that BDO's contribution claim was barred by General Obligations Law (GOL) § 15-108(b). That section immunizes a settling tortfeasor against contribution claims by non-settling tortfeasors so long as the non-settling tortfeasor's liability is reduced by the greater of the settlement amount or the settling tortfeasor's equitable share of the plaintiff's damages. SRC further contended that collateral estoppel barred BDO from relitigating the issue of what its equitable share of the loss was, since the arbitration panel clearly apportioned liability between SRC and BDO and adjusted the award accordingly.

In opposition to the motion, BDO contended that the arbitrators never determined SRC's equitable share of Phoenix's loss. Accordingly, it argued that collateral estoppel did not bar it from litigating the amount by which its own liability should be reduced. BDO further claimed that, because the reduction of the arbitration award did not reflect the proper apportionment of liability in accordance with GOL 15-108(a), SRC was not entitled to rely on the protections of GOL 15-108(b). Finally, BDO asserted that SRC, in entering into a settlement agreement that expressly contemplated a contribution claim by BDO, waived the protections afforded by GOL 15-108(b).

Supreme Court denied SRC's motion, and it stated: "As is evidently clear by its reasoning, the Panel did not reduce the Award rendered against [BDO] by an amount that was at least equal to [SRC]'s percentage of fault for Phoenix's damages. Rather, the Panel calculated an award reduction based upon reasoning that has no bearing on an equitable share analysis that applies to a contribution share." Accordingly, the court found that collateral estoppel did not bar BDO from litigating the issue of SRC's equitable share of Phoenix's loss, and that GOL 15-108(b) did not apply. In light of these findings, the court deemed the waiver issue raised by BDO to be academic and did not decide it.

GOL 15-108 reflects a balance by the Legislature (see Mitchell v New York Hosp., 61 NY2d 208, 215 [1984]). By enacting subsection (b), it sought to encourage parties to settle claims by providing them with the certainty that all contribution claims against them would be extinguished. By implementing subsections (a) and (c), it granted corresponding benefits to non-settling parties. Subsection (a) reduced the non-settling parties' liability by the greater of (1) the amount stipulated by the release tendered by the injured party to the settling party; (2) the amount of the consideration paid for the release; or (3) the amount of the settling party's equitable share of the damages as set forth in article 14 of the Civil Practice Law and Rules, which codified the doctrine of contribution among joint tortfeasors. Subsection (c) ensured that parties that choose not to settle would not be exposed to contribution claims by the settling tortfeasor.

The statute is intended to work as a unified whole (see Chase Manhattan Bank v Akin, Gump, Strauss, Hauer & Feld, 309 AD2d 173, 180 [2003]). In other words, a settling party can only immunize itself from contribution claims of non-settling parties if the non-settling parties realize the concomitant benefit of having their liability reduced. In all cases, GOL 15-108 only applies where the settling party and the non-settling party or parties are "liable or claimed to be liable in tort for the same injury" (GOL 15-108[a]).

Here, BDO argues that SRC cannot invoke GOL 15-108(b) because the arbitration panel did not attempt, as section 15-108(a) requires, to ascertain SRC's equitable share of BDO's total liability to Phoenix. Indeed, the methodology adopted by the arbitrators may have been flawed. If anything, the 25% ratio derived by comparing the damages demanded by Phoenix in the federal litigation against the damages sought by Phoenix in the arbitration was relevant to ascertaining the extent to which BDO and SRC were responsible for the same injuries in the federal action. It does not appear to be determinative of the extent of SRC's culpability for the injuries alleged in the arbitration. Nevertheless, we ...


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