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Paraco Gas Corp. v. Travelers Casualty and Surety Co. of America

United States District Court, S.D. New York

September 30, 2014


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For Plaintiff: Robert G. Rafferty, Esq., The Deiorio Law Group, PLLC, Rye Brook, N.Y.

For Travelers Casualty and Surety Company of America, Defendant: Alexis J. Rogoski, Esq., Aron M. Zimmerman, Esq., Boundas, Skarzynski, Walsh & Black LLP, New York, N.Y.

For Carnall Insurance, LLC, Fairfield County Bank Insurance Services, Alice Lara, and Jeffrey Welsch, Defendants: Thomas A. Catalano, Esq., Lester Schwab Katz & Dwyer, LLP, New York, N.Y.

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Plaintiff Paraco Gas Corporation (hereinafter " Paraco" or " Plaintiff" ) brings this Action against Travelers Casualty and Surety Company of America (" Travelers" ), Fairfield County Bank Insurance Services, LLC (formerly known as Carnall Insurance, LLC, and hereinafter " FCBIS" ), Alice Lara (" Lara" ), and Jeffrey Welsch (" Welsch," and with FCBIS and Lara, collectively " the FCBIS Defendants" ).[1] Plaintiff's Second Amended Complaint asserts a number of claims relating to an insurance policy that Paraco purchased from Travelers with the assistance of FCBIS. FCBIS has also asserted several Cross-claims against Travelers, arguing that Travelers made either negligent or fraudulent misrepresentations, violated state law by engaging in unfair trade and deceptive business practices, and breached the implied covenant of good faith and fair dealing with FCBIS. FCBIS further claims that the Policy should be reformed and that FCBIS Defendants are indemnified against suit by Paraco under a prior agreement between FCBIS and Travelers. In the instant Motions, Travelers moves to dismiss both Paraco's Second Amended Complaint and FCBIS's Cross-claims. For the reasons provided herein, these Motions are granted in part and denied in part.


A. Factual Background

Unless otherwise indicated, the following facts are derived from Plaintiff's Second Amended Complaint and accompanying exhibits, ( see Second Am. Compl. (Dkt. No. 15)), and are assumed to be true for the purposes of the Court's consideration of Defendant Travelers's Motions To Dismiss.

In 2009, Plaintiff retained FCBIS to obtain Directors & Officers liability insurance to replace an expiring policy Paraco had with Chubb Insurance Company. (Second Am. Compl. ¶ ¶ 11-12.) Paraco

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provided FCBIS with a copy of its expiring policy, which was also provided to Travelers, ( id. ¶ ¶ 12,14), in connection with Paraco's application for coverage, ( id. ¶ 15), along with a list of shareholders and their respective ownership interests in Paraco, ( id. ¶ 16). This list shows that only one of Paraco's shareholders, the " Grandchildren's Trust" (the " Trust" ) held less than a 5% interest in the company. ( Id. Ex. A, at 15; Second Am. Compl. ¶ 17.)

In the fall of 2009, representatives of FCBIS engaged in a series of communications with Jason E. Hull (" Hull" ), an underwriter employed by Travelers, about a possible insurance policy for Paraco. (Second Am. Compl. ¶ ¶ 4, 18-22.) In these exchanges, Hull provided several different insurance coverage proposals. ( Id. ¶ 18, 21.)

On October 2, 2009, Hull emailed FCBIS to provide " three different options for the [Paraco] account." ( Id. Ex. B, at 10 (" Oct. 2 email" ).) In this email, Hull stated that " [t]he first option has the limits as requested but with a 15k retention[,] [t]he second quote matches Chubb [sic] expiring policy[,] and the third option includes ID fraud." ( Id.) Hull also attached a proposal letter containing a more detailed explanation of each of the three quotes. ( See id. at 1-6.) This document notes an " Ownership Percentage Exclusion" of 5% of the named insured (i.e. Paraco) under the " Private D& O Endorsements" for both the first and second quotes. ( Id. at 6-7.) The same day, FCBIS informed Paraco that Travelers offered a policy that matched the coverage of Paraco's expiring Chubb policy. (Second Am. Compl. ¶ 20.)

On October 20, 2009, Hull provided four proposals for insurance coverage to FCBIS. ( Id. ¶ 21.) This document lists an " Ownership Percentage Exclusion" of 5% of the named insured (i.e. Paraco) under the " Private D& O Endorsements" applicable to the first, second, and fourth quotes. ( See id. Ex. D, at 8-9.) Paraco claims that the " second quote" from Hull's October 2, 2009 email with FCBIS " became the 'first quote' attached [to] Hull's October 20, 2009 letter." (Second Am. Compl. ¶ 22.) Paraco accepted the first quote from Hull's October 20, 2009 letter, ( id. ¶ 23), believing that the policy would provide coverage for suits against Paraco's directors and officers by any of its shareholders, ( id. ¶ 25).

The resulting insurance policy issued by Travelers (the " Policy" ) includes the endorsement titled " Ownership Percentage Exclusion," which had been contained in the proposals. (Travelers's Mem. Ex. 1, at 61.)[2] This endorsement, discussed in greater detail below, excepts from coverage suits brought by or on behalf of owners of 5% or more of Paraco's shares. ( See id.) During the applicable time period in this case, only one Paraco shareholder, the Grandchildren's Trust, owned less than 5% of Paraco's shares. (Second. Am. Compl. ¶ 46.) Paraco asserts that it was unaware that the Policy contained the Ownership Percentage Exclusion at the time of the agreement, but claims Travelers and FCBIS knew about the provision. ( Id. ¶ 26.)

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In May 2010, Paraco shareholder Robert Armentano filed suit against Plaintiff in New York State Supreme Court, alleging a breach of fiduciary duty by Paraco's directors and officers (the " Armentano Action" ). ( Id. Ex. E) Armentano, who owned more than 5% of Paraco, ( id. ¶ ¶ 42, 46), brought his action on " on behalf of 'all other shareholders of Paraco [that were] similarly situated,'" ( id. ¶ 45). Paraco notified Travelers of the Armentano Action and requested Travelers defend and indemnify Paraco, ( id. ¶ 43), but Travelers asserted that the Policy did not cover the Armentano Action, presumably because of the Ownership Percentage Exclusion, ( id. ¶ 44). This dispute forms the basis for the instant Action.

B. Procedural Background

Paraco filed a Complaint in the Supreme Court of the State of New York, Westchester County, on June 18, 2012, and served the same on Defendants on June 22, 2012. ( See Notice of Removal (Dkt. No. 1).) Defendants subsequently removed to this Court on July 19, 2012. ( See id.) Paraco twice amended the Complaint, first on December 18, 2012, ( see Dkt. No. 11), and then again on March 8, 2013, ( see Second Am. Compl.). In the Second Amended Complaint, Paraco claims that the Policy should be reformed on grounds of either mutual mistake or fraud, and that Paraco deserves damages due to Travelers's negligent misrepresentations. Paraco also requests that the Court declare that the existing Policy covers the Armentano Action. Finally, Paraco asserts claims against the FCBIS Defendants for breach of fiduciary duty and for making false or misleading statements that led to Paraco's damages, but these claims are not at issue here.

On March 13, 2013, Defendant Travelers moved to dismiss Paraco's Second Amended Complaint, ( see Dkt. No. 16), and filed a Memorandum of Law in Support of its Motion, ( see " Travelers's Mem." (Dkt. No. 17)). Paraco filed a Memorandum of Law in Opposition to Travelers's Motion, ( see " Paraco's Mem." (Dkt. No. 14)), to which Travelers later replied, ( see " Travelers's Reply Mem." (Dkt. No. 18)). Lastly, on July 15, 2013, Paraco filed a Supplemental Memorandum of Law in Opposition to Travelers's Motion. ( See " Paraco's Supp. Mem." (Dkt. No. 34).)

On April 17, 2013, the FCBIS Defendants filed an Answer to Paraco's Second Amended Complaint in which they raise several affirmative defenses and assert five cross-claims against Travelers. ( See " FCBIS Cross-cl." (Dkt. No. 23).) Specifically, the FCBIS Defendants claim that (a) Travelers made either negligent or fraudulent misrepresentations; (b) Travelers engaged in unfair trade and deceptive business practices in violation of state law; (c) the Policy should be reformed to delete the ownership exclusion at issue in this suit; (d) the FCBIS Defendants are indemnified under a prior agency agreement with Travelers; and (e) Travelers breached the implied covenant of good faith and fair dealing in its agency agreement with the FCBIS Defendants. ( See id.) On July 15, 2013, Travelers filed a Motion to Dismiss these Cross-claims, ( see Dkt. No. 27), along with a supporting memorandum of law, ( see " Travelers's Cross-claim Mem." (Dkt. No. 28)). The FCBIS Defendants filed a Memorandum of Law in Opposition to Travelers's Motion to Dismiss the Cross-claims, (" FCBIS Mem." (Dkt. No. 32)), along with supporting Declarations from Thomas Catalano, ( see " Catalano Decl." (Dkt. No. 29)), Alica Lara, (Lara Decl.), and Jeffrey Welsch, (Welsch Decl.). Defendant Travelers filed a Reply Memorandum of Law in response to the FCBIS Defendants' filings. (" Travelers's Cross-claim Reply Mem." (Dkt. No. 33).)

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A. Standard of Review

In considering a defendant's motion to dismiss pursuant to Rule 12(b)(6), the Court is required to construe the factual allegations contained in the complaint as true and draw all reasonable inferences in favor of the plaintiff. See Ruotolo v. City of New York, 514 F.3d 184, 188 (2d Cir. 2008) (" We review de novo a district court's dismissal of a complaint pursuant to Rule 12(b)(6), accepting all factual allegations in the complaint and drawing all reasonable inferences in the plaintiff's favor." (internal quotation marks omitted)); Gonzalez v. Caballero, 572 F.Supp.2d 463, 466 (S.D.N.Y. 2008) (same). Moreover, " [i]n adjudicating a Rule 12(b)(6) motion, a district court must confine its consideration to facts stated on the face of the complaint, in documents appended to the complaint or incorporated in the complaint by reference, and to matters of which judicial notice may be taken." Leonard F. v. Isr. Disc. Bank of N.Y., 199 F.3d 99, 107 (2d Cir. 1999) (internal quotation marks omitted); see also ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (noting that the court " may consider any written instrument attached to the complaint, statements or documents incorporated into the complaint by reference, legally required public disclosure documents filed with the SEC, and documents possessed by or known to the plaintiff and upon which it relied in bringing the suit" (citing Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000))).

The Supreme Court has held that " [w]hile a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell A. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (second alteration in original) (citations omitted). Instead, the Court has emphasized that " [f]actual allegations must be enough to raise a right to relief above the speculative level," id., and that " once a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint," id. at 563. Plaintiffs must allege " only enough facts to state a claim to relief that is plausible on its face." Id. at 570. But if a plaintiff has " not nudged [his or her] claims across the line from conceivable to plausible, the[] complaint must be dismissed." Id.; see also Ashcroft v. Iqbal, 556 U.S. 662, 679, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (" Determining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense. But ...

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