Clarendon National Insurance Company et al v. Culley et al

Filing 35

OPINION AND ORDER: The Court has considered the parties' remaining arguments and finds them without merit. Defendants' motion for summary judgment is GRANTED. The Clerk of the Court is instructed to close the motion, close the case and remove it from my docket. (Signed by Judge Harold Baer on 4/25/2012) (cd)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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CLARENDON NATIONAL INSURANCE COMPANY
and CLARENDON AMERICA INSURANCE
COMPANY,

11 Civ. 2629 (HB)
OPINION AND ORDER

Plaintiffs,
-againstJAMES C. CULLEY and JAMES K. CULLEY,
Defendants.
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Before the Court is a motion for summary judgment brought by Defendants James K.
Culley (“Jim Culley”) and James C. Culley (“Chris Culley,” and together with Jim Culley,
“Defendants”). In their complaint, Plaintiffs Clarendon National Insurance Company and
Clarendon America Insurance Company (collectively, “Plaintiffs” or “Clarendon”) allege claims
against Jim Culley and Chris Culley for premiums allegedly guaranteed by Defendants, which
were misappropriated by third-parties. For the reasons set forth below, Defendants’ motion for
summary judgment is GRANTED.
I. BACKGROUND1
Clarendon is an insurance company that stopped issuing policies in 2006. Defs.’ 56.1 ¶ 1;
Pls.’ 56.1 ¶ 1. In 1993, Clarendon contracted with Marion Insurance Agency, Inc. (“Marion”) to
act as Clarendon’s general agent for the issuance of insurance policies, primarily for physical
damage to trucks. Defs.’ 56.1 ¶ 11; Pls.’ 56.1 ¶ 11. Marion was founded by Jim Culley. Defs.’
56.1 ¶ 12; Pls.’ 56.1 ¶ 12. In May 1993, Marion and Clarendon entered into a general agency
agreement (“Marion GAA”). Defs.’ 56.1 ¶ 13; Pls.’ 56.1 ¶ 13. Chris Culley, Jim’s son, began
working at Marion in 1998, Defs.’ 56.1 ¶ 16; Pls.’ 56.1 ¶ 16, and in 2001, became President of
Insurer’s Unlimited, Inc. (“IUI”), Marion’s successor, which began operating in 2000 or 2001.

1

This section is intended for background purposes. Additional facts are discussed where they are relevant.

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Defs.’ 56.1 ¶¶ 17-19; Pls.’ 56.1 ¶¶ 17-19.2 Marion’s transition to IUI occurred because Jim
Culley thought that IUI was a better name than Marion and IUI’s corporate structure made it
easier for employees to become shareholders. Defs.’ 56.1 ¶¶ 20, 21; Pls.’ 56.1 ¶¶ 20, 21.
The parties dispute whether the terms of the Marion GAA governed the IUI relationship
with Clarendon until 2005, Defs.’ 56.1 ¶ 19, or whether Clarendon and IUI entered into a new
general agency agreement in the fall of 2003, which was effective October 1, 2003. Pls.’ 56.1 ¶
19. In September 2003, Jim Culley signed what Defendants characterize as a draft guaranty
(“2003 GAA”); however, neither IUI nor Clarendon signed this document. Defs.’ 56.1 ¶¶ 26, 29;
Pls.’ 56.1 ¶¶ 28-29. One provision of the 2003 GAA required IUI to remit to Clarendon all
premiums due to Clarendon whether or not such premiums were collected by IUI. 2003 GAA ¶
4.2(a). The parties dispute whether the subsequent general agency agreement entered into in
2005 (“2005 GAA”) was merely an “amended and restated version” of the 2003 GAA, Pls.’ 56.1
¶ 33, or was the sole fully executed general agency agreement that replaced the original Marion
GAA, which was signed back in 1993. Defs.’ 56.1 ¶ 33. Chris Culley guaranteed the 2005 GAA.
2005 GAA 43. Both the 2003 GAA and the 2005 GAA contained guarantees stating that the
“Guarantor hereby unconditionally guarantees . . . full and prompt payment of Trust Funds as
and when they are due and payable pursuant to the Agency Agreement.” 2003 GAA 41; 2005
GAA 42. Each of the general agency agreements states that it will be governed by the laws of
New York. Marion GAA 17; 2003 GAA ¶ 9.6; 2005 GAA ¶ 9.6.
IUI was the victim of two separate frauds by third parties, one in Georgia and one in
Texas. Between 1999 and 2002, the owners of Insurance Interchange, one of IUI’s Georgia
wholesalers, stole between $1.6 and $1.9 million. Defs.’ 56.1 ¶ 40; Pls.’ 56.1 ¶ 40. By January
2002, the owners of Insurance Interchange had misappropriated all of the premiums due and
payable to Clarendon in the Georgia fraud. Defs.’ 56.1 ¶ 40; Pls.’ 56.1 ¶ 40. In a separate fraud,
between 2000 and 2004, the owners of a Texas wholesaler misappropriated approximately
$600,000 from IUI. Defs.’ 56.1 ¶ 42; Pls.’ 56.1 ¶ 42. This money was stolen on or before
December 31, 2004. Defs.’ 56.1 ¶ 48; Pls.’ 56.1 ¶ 48. It is undisputed that all the breaches

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Plaintiffs’ 56.1 Statement indicates that IUI began operating on January 1, 2001, while Defendants’ 56.1 Statement
indicates that IUI began operating sometime during 2000 or 2001.

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stemming from these two frauds occurred on or before December 31, 2004. Defs.’ 56.1 ¶ 50;
Pls.’ 56.1 ¶ 50.3
II. DISCUSSION
A. Legal Standard
Summary judgment shall be granted in favor of a movant where “there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.
R. Civ. P. 56(a). A court must resolve all ambiguities and draw all inferences against the moving
party. LaSalle Bank Nat’l Ass’n v. Nomura Asset Capital Corp., 424 F.3d 195, 205 (2d Cir.
2005). The movant bears the burden of establishing the absence of any genuine issue of material
fact. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986). A material fact “might affect the
outcome of the suit under the governing law,” and an issue of fact is genuine “if the evidence is
such that a reasonable jury could return a verdict for the nonmoving party.” Holtz v. Rockefeller
& Co., 258 F.3d 62, 69 (2d Cir. 2001) (citation and quotation omitted). “The party against whom
summary judgment is sought . . . ‘must do more than simply show that there is some
metaphysical doubt as to the material facts . . . . [T]he nonmoving party must come forward with
specific facts showing that there is a genuine issue for trial.’ ” Caldarola v. Calabrese, 298 F.3d
156, 160 (2d Cir. 2002) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S.
574, 586-87 (1986)).
Federal courts sitting in diversity apply the substantive law of the forum state on
dispositive issues. Erie R. Co. v. Tomkins, 304 U.S. 64, 78-80 (1938); Travelers Ins. Co. v. 633
Third Assocs., 14 F.3d 114, 119 (2d Cir. 1994). Procedural matters are governed by federal law.
See Gasperini v. Ctr. For Humanities, Inc., 518 U.S. 415, 427 (1996).
B. There is No Genuine Issue of Material Fact with Respect to whether Clarendon’s
Claims are Barred by the Statute of Limitations
I need not determine whether the 2003 GAA actually formed a valid contract, because
even assuming that it did, Clarendon’s claims against both Jim Culley and Chris Culley are

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Although Plaintiffs’ 56.1 Statement disputes the second portion of paragraph 50, the date of discovery of the
breaches by IUI, it does not dispute that all the breaches had occurred on or before December 31, 2004. See Pls.’
56.1 ¶ 50.

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barred by the applicable statute of limitations.4
1.

Clarendon’s Claims are Time-Barred

The statute of limitations applicable to guarantees is “the six-year period applicable to
contracts generally under CPLR 213.” Am. Trading Co. v. Fish, 42 N.Y.2d 20, 26 (1977), cited
by Kantor v. Mesibov, 824 N.Y.S.2d 755 (Sup. Ct. 2006). As noted above, it is undisputed that
all the breaches from the Georgia and Texas schemes occurred on or before December 31, 2004.
Defs.’ 56.1 ¶ 50; Pls.’ 56.1 ¶ 50.
Clarendon’s argument that it lacked knowledge about the schemes until much later, a
disputed fact, is without merit in any event. Compare Defs.’ 56.1 ¶¶ 41, 45 (noting that IUI sued
for fraud and conversion on the Georgia scheme in 2005 and that Defendants went to New York
in January or February 2005 to inform Clarendon of the Texas scheme), with Pls.’ 56.1 ¶ 50
(noting that Clarendon did not learn of the Texas fraud until May 13, 2005 and Clarendon did not
learn of the Georgia fraud until 2006). “[A] cause of action for breach of contract accrues and
the statute of limitations commences when the contract is breached.” T & N PLC v. Fred S.
James & Co. of NY, 29 F.3d 57, 59 (2d Cir. 1994). “Knowledge of the occurrence of the wrong
on the part of the plaintiff is not necessary to start the Statute of Limitations running in [a]
contract [action].” Id. at 60 (quoting Ely-Cruikshank Co. v. Bank of Montreal, 599 N.Y.S.2d 501,
503 (1993)). Since the breaches at issue in this case on both the Georgia and Texas schemes
occurred on or before December 31, 2004, Clarendon would have had to bring this action on or
before December 31, 2010, at the latest. Instead, this action was not commenced until April 16,
2011. Compl.
2. Clarendon is Not Entitled to Equitable Estoppel or Equitable Tolling
Clarendon contends that the statute of limitations begins “running not from the time of
IUI’s breach but from the time of Clarendon’s discovery of the breach,” Pls.’ Opp. 4, because

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Because I conclude that the statute of limitations bars Plaintiffs’ claims, I need not consider Defendants’ remaining
arguments for dismissal, that the 2003 GAA was only a draft and so is not enforceable against Jim Culley and that
the claim against Chris Culley must be dismissed because the alleged obligations are outside the scope of the 2005
GAA. Watson v. Riptide Worldwide, Inc., 11 Civ. 0874, 2012 WL 383946, at *6 (S.D.N.Y. Feb. 7, 2012) (declining
to consider additional arguments after finding that plaintiffs’ claims were barred by the statute of limitations and
equitable tolling was not justified); In re MBIA Inc., 05 Civ. 3514, 2007 WL 473708, at *9 (S.D.N.Y. Feb. 14, 2007)
(“Because plaintiffs’ claims are barred by the statute of limitations applicable to private securities fraud claims, the
court need not consider defendants’ other arguments for dismissal.”).

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Defendants used the first-in-first-out (“FIFO”) accounting method5 to “cover up the unremitted
premium[s] they knew they owed Clarendon.” Id.6 As a result, Clarendon argues that
Defendants are “equitably estopped” from pleading the statute of limitations as a defense. Id. at
23.
“New York appears to use . . . equitable estoppel to cover both the circumstances where
the defendant conceals from the plaintiff the fact that he has a cause of action [and] where the
plaintiff is aware of his cause of action, but the defendant induces him to forego suit until after
the period of limitations has expired.” Pearl v. City of Long Beach, 296 F.3d 76, 82 (2d Cir.
2002) (citation and quotation omitted). Under either theory, Plaintiffs’ argument fails. The latter
circumstance, in which the plaintiff knows of the cause of action, but “the defendant takes active
steps to prevent the plaintiff from suing in time” such as by promising not to plead the statute of
limitations or by some wrongdoing, is clearly not applicable here as no such circumstances are
alleged. Id. at 81 (quoting Cada v. Baxter Healthcare Corp., 920 F.2d 446, 450–51 (7th Cir.
1990)); see Muro v. UBS Fin. Servs., 331 Fed Appx. 886, 887 (2d Cir. 2009) (“[T]he doctrine of
equitable estoppel does not apply . . . because there is no evidence that plaintiff was induced by
fraud, misrepresentation or deception to refrain from filing a timely action.”).
Rather, Plaintiffs’ argument is that the Defendants engaged in “fraudulent concealment
of a cause of action,” a form of equitable estoppel that provides for equitable tolling of the statute
of limitations. Pearl, 296 F.3d at 82. “Under this doctrine, the statute does not begin to run until
the plaintiff either acquires actual knowledge of the facts that comprise his cause of action or
should have acquired such knowledge through the exercise of reasonable diligence.” Cerbone v.
Int’l Ladies’ Garment Workers’ Union, 768 F.2d 45, 48 (2d Cir. 1985) (citation and quotation
omitted). Plaintiffs allege that Defendants’ use of the FIFO accounting method constituted a
breach of fiduciary duty and covered up the Texas and Georgia schemes until May 2005 and

5

FIFO, an accounting method through which the oldest items are recorded as sold first, is one of two accounting
methods permitted under Generally Accepted Accounting Principles (“GAAP”). Last-in-last-out (“LIFO”), in
which the most recently produced items are recorded as sold first, is the other. See William W. Brattona1 and
Lawrence A. Cunningham, Treatment Differences and Political Realities in the GAAP-IFRS Debate, 95 VA. L. REV.
989, 997 (June 2009) (“GAAP permits companies to choose [between FIFO and LIFO]; IFRS [International
Financial Reporting Standards], with its regime of balance sheet primacy, requires FIFO.”).
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Clarendon also argues that Defendants should be equitably estopped from using the statute of limitations defense
because the Georgia and Texas frauds were committed by Defendants’ sub-agents. Pls.’ Opp. 4. Although
Clarendon mentions this argument in the fact section of its brief, it provides no legal explanation as to why, if
applicable, equitable estoppel applies here.

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November 2006, respectively. Equitable tolling is commonly applied in the context of breach of
fiduciary duty claims. See, e.g., Menke v. Glass, 898 F. Supp. 227, 232-33 (SDNY 1995) (tolling
the statute of limitations until the plaintiffs had actual or constructive knowledge of the breach).
The complaint in this case, unlike the complaints in the three cases cited by Plaintiffs for the
proposition that tolling due to Defendants’ alleged breach of fiduciary duty is appropriate, does
not include any claim for breach of fiduciary duty. See Pls.’ Opp. 23 (citing cases). I am at a loss
to divine, and Plaintiffs fail to explain, how the use of the FIFO accounting method amounted to
a breach of fiduciary duty that violated the terms of the general agency agreements. There is
nothing in those agreements that dictates the acceptable accounting method or prohibits FIFO.7
Indeed, Plaintiffs failed to even plead breach of fiduciary duty in their claims, to say nothing of
the fact that FIFO is a generally accepted accounting method. See supra n.5. Equitable tolling is
not appropriate.
3. The Purported Waiver of the Statute of Limitations is Invalid
Clarendon also argues that Defendants waived their statute of limitations defense in that
both the 2003 GAA and the 2005 GAA waived “any right to interpose a defense based upon any
statute of limitations or claim of laches.” See Pls.’ Opp. 21; 2003 GAA 41 ¶ 1; 2005 GAA 42 ¶
1. Although unconditional guarantees may bar the assertion of certain affirmative defenses, see,
e.g., Bank of N.Y. v. Tri Polyta Fin. B.V., 01 Civ. 9104, 2003 WL 1960587, at *4 (S.D.N.Y. Apr.
25, 2003), they must conform to New York’s General Obligations Law (“GOL”) § 17-103(1),
which provides several caveats which run afoul of Plaintiffs’ theory. John J. Kassner & Co. v.
N.Y., 46 N.Y.2d 544, 550 (1979); see also GOL § 17-103(3) (“A promise to waive, to extend, or
not to plead the statute of limitation has no effect to extend the time limited by statute for
commencement of an action or proceeding for any greater time or in any other manner than that
provided in this section, or unless made as provided in this section.”).
First, as to the 2003 GAA, the causes of action had not accrued in their entirety at the
time that document was signed by Jim Culley, assuming a valid contract was even formed. More
importantly, the waivers in both the 2003 GAA and 2005 GAA were indefinite, rather than for a
7

Plaintiffs vaguely allude to the use of FIFO as a violation of the general agency agreement, although precisely
which agreement is not clear. Pls.’ Opp. 4 (noting that the use of FIFO was a “violation of the GAA”). Plaintiffs
state that the use of FIFO violated a provision of the GAA requiring IUI “to pay all billed but uncollected premium
to Clarendon 90 days after it was due,” Pls.’ Opp. 20, (a provision contained in both the 2003 and 2005 GAA) but
fail to explain why the use of FIFO caused Defendants to violate this provision or how this might otherwise
constitute a breach of their fiduciary duty.

6

period of time qual to or shorter than the original statute of limitations. 2003 GAA 4111; 2005
GAA 4211.

everal courts have concluded that an agreement to waive the statute of limitations

that fails to co ply with GOL § 17-103(1) is not enforceable. T & N PLC, 29 F.3d at 62
(concluding

t agreement extending the statute of limitations indefinitely was "invalid and

unenforceable'); Bayridge Air Rights, Inc. v. BUtman Constr. Corp., 80 N.Y.2d 777, 779-80
(1992) ("As th present agreement purported to extend the limitations period to an indefinite date
in the future' contravention of the six-year maximum provided by the statute, it cannot be
enforced acco 'ng to its terms.,,).8 I see no reason why my conclusion should be any different
here, where th re was an indefinite statute of limitations waiver in a Guaranty as part of a general
ent, which is merely a specific type of contract. The waivers of the statute of
e 2003 GAA and 2005 GAA are unenforceable. 9

III. CONCLUSION
has considered the parties' remaining arguments and finds them without merit.
tion for sununary judgment is GRANTED. The Clerk of the Court is instructed

Defendants'

to close the m tion, close the case and remove it from my docket.

SOORDERE •

()J:zo

April
2
New York, N York

HAROLD AER, JR.

United States District Judge

• Even if I were t
maximum allows
Plaintiffs still wo
Bayridge. 80 N.
was lawful).

instead extend the statule of limitations period from the date ofthe later 2005 OAA to the
Ie by statute, six years, the latest date for filing this action would have been March 2011 and the
Id have been too late. In any event, for me to rewrite this contract would likely be error. See
2d at 780 (rejecting plaintiff's request that the court rewrite the agreement so that the extension

The cases cited y Plaintiffs are not to the contrary. The fll'St case, Sterling National Bank v. Biaggi, 849 N.y.s.2d
521 (I st Dep't 20 8), did not need to reach the issue of whether an indefinite waiver was permissible because the
court beld that th re was no triable issue of material filet. To the extent the court did hold that a complete, indefinite
waiver of a statut oflimitations defense was valid, the court would appear to be in error as the authority it cited did
not so hold and t re was contrary binding authority. The second, Federal Deposit Insurance Corp. v. Schwartz, 432
N.Y.S.2d 899, 90 (2d Dep't 1980). does not mention a waiver of a statule of limitations defense at alL

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!

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