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Norguard Insurance Co. v. Lopez

United States District Court, E.D. New York

January 24, 2017

NORGUARD INSURANCE COMPANY, a Pennsylvania Insurance Company, Plaintiff,
MANUEL ESTUARDO LOPEZ, an undocumented person, and NATURAL IMAGES LANDSCAPING, INC., a New York corporation, Defendant.

          Russo & Toner, LLP Attorneys for Plaintiff NorGuard Insurance Company By: Steven R. Dyki, Esq.

          Harfenist Kraut & Perlstein, LLP Attorneys for Defendant Natural Images Landscaping, Inc. By: Steven J. Harfenist, Esq.

          Dell & Dell, PLLC Attorneys for Defendant Manuel Estuardo Lopez By: Joseph G. Dell, Esq.


          HURLEY, Senior District Judge

         Plaintiff NorGuard Insurance Company (“Plaintiff” or “NorGuard”) commenced this action seeking a declaratory judgment that (1) it is not obligated to defend or indemnify defendant Natural Images Landscaping, Inc. (“NIL”) in a claim for worker's compensation benefits made by defendant Manuel Estuardo Lopez (“Lopez”); (2) it is not obligated to pay medical expenses, indemnity payments or workers' compensation benefits to Lopez; and (3) the worker's compensation and employer's liability policies of insurance issued by NorGuard to NIL for the periods June 12, 2013 to June 12, 2014 and June 12, 2014 to June 12, 2015 are rescinded and cancelled ab initio. NorGuard also asserts claims for fraud and civil conspiracy. Presently before the Court is NIL's motion to dismiss the complaint in its entirety, NIL's motion for Rule 11 sanctions, NorGuard's motion for a default judgment against Lopez, and Lopez's cross-motion to vacate the default noted against him. For the reasons set forth below, NIL's motion to dismiss is granted in part and denied in part, NIL's motion for sanctions is denied, NorGuard's motion for a default judgment is denied and the claims against Lopez are dismissed.


         The following allegations are taken from the Complaint:

         A.The Application for and Issuance of the Insurance Policy

         On or about May 8, 2013, NIL submitted an application for worker's compensation and employer's liability insurance to NorGuard. The application for insurance required NIL to state whether it (1) paid cash to its employees; (2) performed work at elevation differentials over 15 feet in height; and (3) performed tree trimming and pruning work that involved the use of ladders. In each instance, NIL through its “agents” or “authorized representatives” answered that it did not. Those representations are alleged to be false because NIL did, in fact, pay cash wages to its employees, including Lopez, and its employees both performed work at elevations over 15 feet and used ladders to perform tree trimming and pruning work. Each of these representations were material to NorGuard because they affected either the potential amount of any losses, the potential for fraudulent claims, and/or the ability to verify claims. (Compl. ¶¶ 18-51.)

         In reliance on NIL's representations, NorGuard issued policies of workers' compensation and employer's liability insurance to NIL with effective dates of June 12, 2013 to June 12, 2014 and June 12, 2014 to June 12, 2015 (collectively the “Policy”). Had it known that these representations were false, NorGuard would not have issued the Policy. (Compl. ¶¶ 52-54.)

         B. NIL's and Lopez' Avoidance of Federal and State Laws

         According to the Complaint, Lopez violated a number of federal and state statutes by, among other things, illegally entering the United States, concealing his immigration status, falsely claiming to be a United States citizen, using a fraudulent visa, committing social security fraud, committing identity theft, and failing to report income and pay federal and state income taxes. (Compl. ¶¶ 55-90.)[1] Additionally, NorGuard violated those federal laws which preclude the knowing employment of illegal aliens. (Compl. ¶¶ 91-93.) NorGuard claims that NIL and Lopez colluded to avoid the referenced federal and state laws and in furtherance of that scheme NIL made the aforementioned misrepresentations concerning cash payments, elevation and ladder use. (Compl. ¶¶ 94-107.)

         C. Lopez's Claim for Workers' Compensation Benefits

         On May 7, 2015, Lopez was seriously injured while working for NIL when he fell while assisting in the removal of a tree from premises located in Peconic, New York. He then filed a claim for workers' compensation benefits with the Workers' Compensation Board of the State of New York. It is alleged that at the time of his injury he was an employee or independent contractor performing work for NIL and was using a ladder to perform tree trimming and pruning work at a height of over 15 feet and was being paid his wages in cash. (Compl. ¶¶ 108-117.)

         D. NorGuard's Notice of Disclaimer and Recission of the NIL Policy

         On June 5, 2015, NorGuard sent correspondence to both NIL and Lopez disclaiming coverage under the Policy for the Lopez's accident, returning the premium paid by NIL, “rescinding and voiding the policy ab initio” and stating that the disclaimer and rescission did not affect the duty of NIL to provide Workers' Compensation benefits to Lopez. (Compl. ¶¶ 118-19.)

         E. Proceedings on Lopez' Workers' Compensation Claim before the Board

         The following allegations are taken from the additional materials submitted by the parties.

         The Workers' Compensation Board (the “Board”) held a hearing on Lopez's claim for benefits on July 22, 2015. As noticed, the purpose of the hearing was to resolve the period and extent of Lopez' disability, whether the employer had notice, and the causal relationship of the accident to the injury and the rate of compensation to be paid to Lopez. (Harfenist Declar., Ex. D.) NorGuard was represented by counsel at the hearing and raised several defenses, including the alleged misrepresentations made by NIL and took the position that “the policy . . . was voided based upon the fact of a material misrepresentation by the employer. As a result of same, [NorGuard] would not have coverage in connection with this accident.” NorGuard's counsel also asserted that Lopez has unclean hands as “[b]y accepting cash wages he was avoiding paying taxes . . . .” (Harfenist Declar., Ex. E at pp. 2 & 8.) The ALJ conducting the hearing, inter alia, made the following ruling and findings: (1) Lopez had established a neck injury; (2) directed NIL to obtain separate counsel; (3) placed the Uninsured Employer Fund (“UEF”) on notice because NorGuard was alleging a voided policy; (4) noted that Lopez was alleging that NorGuard was engaging in dilatory tactics by raising a frivolous controversy; and (5) directed NorGuard to conduct an independent medical examination of Lopez on the causal relationship between his claim and neck injury. (Id. at p. 20; Harfenist Declar., Ex. F.) In addition, another hearing was scheduled for August 24, 2015. (Id.)[2]

         At the continued hearing on August 24, 2015, the attorney representing NorGuard restated its defense as follows:

Judge, we are asserting that there is no coverage or employer/employee relationship. We are asserting that coverage was essentially voided as soon as the employer as well as the employee misrepresented himself in a fraudulent manner on the basis that both the employer was violating his agreement with the insurance company and the employee has unclean hands by accepting cash wages, employing an illegal alien and doing so with intent to defraud the federal government of taxes and immigration law. So, we are asserting that based on these facts coverage has been voided, and, therefore, coverage falls under the UEF in this case.

(Harfenist Declar., Ex. H at p. 3). Lopez' attorney then argued that NorGuard's position was contrary to well-settled law, to which NorGuard's counsel responded:

With regards to the case law that counsel cited, the case law does specifically mention in the opinion that this is based on the misrepresentation of the employer, however, in this case we would like to differentiate it as well in this case as the claimant as well [sic] has unclean hands in this case. The claimant is an illegal citizen [sic] and has been taking advantage of cash wages, specifically, to avoid tax reporting and immigration status. Therefore, we would maintain that this to [sic] be differentiated from that case law as the claimant has unclean hands.

(Id. at p. 5). After dismissing NorGuard's allegations regarding Lopez's alleged non-payment of taxes and taking testimony from Lopez on the existence of employer/employee relationship, the ALJ made the following findings:

I'm establishing the injury to the neck. There's no contradicting medical evidence. I'm not agreeing with the argument by the carrier that they believe that they can retroactively void their policy and thereby make it the responsibility of the Uninsured Employer Fund. I provided carrier Counsel with a decision. It is the decision in the matter of Jesus Cruz, [17 A.D.3d 19] wherein it's outlined specifically that it's against public policy to do so. So I am finding the proper carrier to be NorGuard.

(Id. at pp. 19-20). The written Notice of Decision issued after the August 24, 2015 hearing contained the following: “AWARD: The employer or insurance carrier is directed to pay the following awards, less payments already made by the employer or carrier, for the periods indicated below, unless employer or carrier files an application within 30 days after the date on which the decision was duly filed and served.” (Harfenist Declar., Ex. I.) NIL reports (and NorGuard does not dispute) that NorGuard did not appeal this decision.

         On December 14, 2015, a Notice of Decision was filed regarding a hearing held on December 9, 2015. Among other things, it held in abeyance NorGuard's application pursuant to N.Y. Workers Comp. Law § 25(1)(f).[3] (Dyki Declar. Ex. 2.)

         No further information regarding the Workers' Compensation proceeding is included in the motion papers.


         NorGuard commenced this action on August 27, 2015. On October 6, 2015, it moved for certificates of default against both NIL and Lopez, which certificates were granted by the Clerk of Court on October 7, 2015. On October 14, 2015, NIL sought a pre-motion conference for its proposed motion to vacate the certificate of default. A pre-motion conference was held and NorGuard was directed to file a letter advising the Court whether it consented to vacatur, and if not, the pre-motion conference letter would be deemed the motion and Plaintiff should file its opposition. Plaintiff did not consent to vacatur and filed opposing papers. By Order dated November 23, 2015, NIL's motion to vacate the certificate of default was granted. Thereafter, on March 4, 2016, it filed a motion to dismiss and a motion for sanctions.

         In the interim, NorGuard sought permission to file a motion for a default judgment against Lopez and the Court directed that said motion be filed on or before June 30, 2016. On June 29, 2016, a notice of appearance and request for extension of time to answer was filed by Lopez. The next day NorGuard filed its motion for a default judgment. Pursuant to a Scheduling Order issued by the Court, Lopez filed opposition to the motion for default judgment and a cross-motion to vacate his default and permit the filing of an answer.


         A. Motion to Dismiss Standard of Review

         In deciding a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), a court should “draw all reasonable inferences in Plaintiff[‘s] favor, assume all well-pleaded factual allegations to be true, and determine whether they plausibly give rise to an entitlement to relief.” Faber v. Metro. Life Ins. Co., 648 F.3d 98, 104 (2d Cir. 2011) (internal quotation marks omitted). The plausibility standard is guided by two principles. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007)); accord Harris v. Mills, 572 F.3d 66, 71-72 (2d Cir. 2009).

         First, the principle that a court must accept all allegations as true is inapplicable to legal conclusions. Thus, “threadbare recitals of the elements of a cause of action supported by mere conclusory statements, do not suffice.” Iqbal, 556 U.S. at 678. Although “legal conclusions can provide the framework of a complaint, they must be supported by factual allegations.” Id. at 679. A plaintiff must provide facts sufficient to allow each named defendant to have a fair understanding of what the plaintiff is complaining about and to know whether there is a legal basis for recovery. See Twombly, 550 U.S. at 555.

         Second, only complaints that state a “plausible claim for relief” can survive a motion to dismiss. Iqbal, 556 U.S. at 679. “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a ‘probability requirement, ' but asks for more than a sheer possibility that defendant acted unlawfully. Where a complaint pleads facts that are ‘merely consistent with' a defendant's liability, it ‘stops short of the line' between possibility and plausibility of 'entitlement to relief.' ” Id. at 678 (quoting Twombly, 550 U.S. at 556-57) (internal citations omitted); see In re Elevator Antitrust Litig., 502 F.3d 47, 50 (2d Cir. 2007). Determining whether a complaint plausibly states a claim for relief is “a context specific task that requires the reviewing court to draw on its judicial experience and common sense.” Iqbal, 556 U.S. at 679; accord Harris, 572 F.3d at 72.

         In considering a motion to dismiss pursuant to Rule 12(b)(6), a court is generally limited to the complaint and documents attached thereto. See Fed. R. Civ. P. 12(d); Nakahata v. N.Y.-Presbyterian Healthcare Sys., Inc., 723 F.3d 192, 202 (2d Cir. 2013). A court “‘may also consider matters of which judicial notice may be taken.'” Apotex Inc. v. Acorda Therapeutics, Inc. - F.3d -, 2016 WL 2848911, *5 (2d Cir. May 16, 2016) (quoting Staehr v. Hartford Fin. Servs. Grp., Inc., 547 F.3d 406, 425 (2d Cir. 2008)); see Bristol v. Nassau County, 2016 WL 2760339 (E.D.N.Y. May 12, 2016) (“On a motion to dismiss, consideration is limited to the factual allegations in plaintiff's amended complaint, which are accepted as true, to documents attached to the complaint as an exhibit or incorporated in it by reference, to matters of which judicial notice may be taken, or to documents either in plaintiff's possession or of which plaintiff had knowledge and relied on in bringing suit.”) (internal quotation marks omitted).

         It is appropriate for a court considering a motion to dismiss to “take judicial notice of records of state administrative procedures, as these are public records.” Evans v. The New YorkBotantical Garden, 2002 WL 31002814, at *4 (S.D.N.Y. Sept. 4, 2002). Records of the Workers Compensation Board, including transcripts and decisions, “are analogous to a ‘state administrative procedure' and thus may be considered on a motion to dismiss.” Dutton v. Swissport USA, Inc., 2005 WL 1593969, at *1, n.1 (E.D.N.Y. July 1, 2005); cf. Foster v. Diop, 2013 WL 1339408, at n.5 (E.D.N.Y. Mar. 13, 2013) (considering transcripts of a parole revocation hearing on a motion to dismiss); Holmes v. Fresh Direct, 2015 WL 4885216 (E.D.N.Y. Aug. 5, 2015) (taking judicial notice of EEOC proceedings); see generally Int'l Star Class Yacht Racing Ass'n v. Tommy Hilfiger U.S.A., Inc., 146 F.3d 66, 70 (2d Cir.1998) (Courts ...

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