Petitioner Physicians' Reciprocal Insurers ("PRI") in the above-captioned proceeding.

Transcription

1 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NASSAU x PHYSICIANS' RECIPROCAL INSURERS, ADMINISTRATORS FOR THE PROFESSIONS, INC., Petitioner, Respondent x Index No.: /2017 AFFIRMATION OF ROBERT LEWIN IN SUPPORT OF PHYSICIANS' RECIPROCAL INSURERS' CROSS MOTION TO COMPEL ARBITRATION OF ADMINISTRATORS FOR THE PROFESSIONS, INC.'S COUNTERCLAIMS PURSUANT TO CPLR 7503(a), OR, IN THE ALTERNATIVE, TO DISMISS THOSE COUNTERCLAIMS PURSUANT TO CPLR 3211(a)(7) ROBERT LEWIN, an attorney duly admitted to practice law before the Courts of the State of New York, affirms the following under the penalty of perjury: 1. I am a partner at the law firm of Stroock & Stroock & Lavan LLP, attorneys for Petitioner Physicians' Reciprocal Insurers ("PRI") in the above-captioned proceeding. 2. I submit this affirmation in support of PRI' s cross motion to compel arbitration of Administrators for the Professions, Inc.'s ("AFP") counterclaims pursuant to CPLR 7503(a), or, in the alternative, to dismiss those counterclaims pursuant to CPLR 321 l(a)(7). 3. This affirmation is based on my personal knowledge, documents and prior proceedings in this case.. 4. As this Court is aware, on July 10, 2017, PRI commenced an arbitration against AFP, seeking damages resulting from AFP's misconduct, self-dealing, fraud, and chronic breaches of the Amended and Restated Management Agreement dated January 1, 1999 (the "Management Agreement"), based partially on the July 6, 2017 Order issued by the New York -against of 12

2 Department of Financial Services (the "DFS") regarding In the Matter of Physicians' Reciprocal Insurers (the "DFS Order"). 1 Under the Management Agreement, disputes are to be arbitrated pursuant to American Arbitration Association ("AAA") rules. On July 11, 2017, PRI filed its Verified Petition in this Proceeding, seeking a preliminary injunction in aid of arbitration, and appeared before this Court on an Order to Show Cause (Docket No. 5) seeking a TRO. This Court granted the TRO, which the Court then continued at a subsequent hearing on July 14, 2017 (Docket No. 29), and again as part of its grant of PRI' s injunction by Order on October 18, 2017 (Docket No. 86) On August 23, 2017, AFP interposed counterclaims against PRI in the AAA Arbitration, a true and correct copy of which are attached hereto as Exhibit 1. AFP states in its counterclaims that it seeks an "award against PRI," or, if PRI obtains an award, a "set-off of any award issued against AFP," for: "unjust enrichment for taking AFP's furniture, fixtures, and equipment (approximately $2,250,000)," "leased property paid for by AFP (approximately $300,000)," and "technology licenses paid for by AFP (approximately $809,000)." See id. ~~ 23(i) - 23(iii); "breach of contract" for PRI' s "wrongful termination of the Management Agreement" and "refusal to pay compensation earned by AFP on or before July 6, 2017, the date of the wrongful termination of AFP as PRI's attorney-in-fact." See id. ~~ 23(iv)- 23(v); "tortious interference with contract regarding AFP's benefits plans." See id. ~ 23(vi); "contribution and indemnification for any costs, expenses, damages, and any penalties incurred, or to be incurred by AFP, as a result of the refusal of PRIMMA's Chief Financial Officer to cooperate in concluding AFP's audit." See id.~ 23(vii); and A true and correct copy of the DFS Order is attached to as Exhibit 3 to PRI's Verified Petition (Docket No. 4). 2 For a more complete recitation of the events which precipitated AFP's termination as attorney-in-fact, as well as the events leading up to this Motion to Compel Arbitration, or, in the Alternative, to Dismiss AFP's Counterclaims, PRI respectfully directs the Court to its original filings in the Order to Show Cause proceeding, filed on July 12, 2017 (Docket Nos. 1-22), and PRI's Memorandum of Law in Opposition to AFP's Cross-Motion for Reimbursement, Access to Documents, and Other Relief (Docket No. 53) of 12

3 requiring PRI "along with [] PRIMMA" to "provide AFP with a copy of all of the records, of any kind, that were taken," and, "after the return," requiring PRI to "destroy all copies of taken records that are records of matters other than the books, accounts, and records of PRI," and "all records protected by privilege held by Anthony Bonomo, Carl Bonomo, Gerald Dolman, or a group of these persons." See id. ir Although AFP purported to assert the counterclaims "without prejudice to its right to seek judicial relief for one or more of these claims as not arbitrable," (see id. at if 23), under the AAA Commercial Arbitration Rules (the "Commercial Rules"), the threshold issue of the arbitrability of these claims is reserved for decision by the arbitration panel. A true and correct copy of the Commercial Rules are attached hereto as Exhibit 2. Specifically, the Commercial Rules delegate to the arbitration panel the power to rule on the "arbitrability of any claim or counterclaim." Commercial Rules, R-7(a). Thus, any challenge to the arbitrability of such claims would need to be raised with the arbitrators. 7. AFP filed its Verified Answer and Counterclaim (Docket No. 33) in this Proceeding on September 21, 2017, after the time to challenge AAA jurisdiction had expired. AFP's counterclaims herein are virtually identical to several of the counterclaims that it interposed in the AAA Arbitration. Namely, AFP has asserted the same counterclaims for unjust enrichment, conversion; replevin; and tortious interference that it asserted in the AAA Arbitration. See Verified Answer and Counterclaims (Docket No. 33). 8. For instance, if 38 of AFP's Verified Answer and Counterclaims alleges unjust enrichment stemming from PRI's use of "AFP's property, assets, contract rights, and leasehold interests at the Roslyn and Rochester locations including, but not limited to, AFP's furniture, fixtures, equipment, computer licenses, and office space leased by AFP," while AFP's counterclaims at arbitration also allege "unjust enrichment for taking AFP's furniture, fixtures, and equipment[... ] leased property [... and] taking licenses." See Ex. 1 iii! 23(i) - 23(iii). The -3-3 of 12

4 arbitration unjust enrichment counterclaims, which allege a "taking" of property, are also duplicative of AFP's conversion claim here. See Verified Answer and Counterclaims (Docket No. 33) ~ 48 ("PRI and PRIMMA have taken custody and control of books, records, accounts, and electronically stored information belonging to AFP and have refused to give AFP access to them"). AFP' s arbitration counterclaims also seek the return "of all of the records, of any kind" that are currently in PRI's possession, See Ex. 1 ~ 24, which is duplicative of the replevin counterclaim in the instant Proceeding. See Verified Answer and Counterclaims (Docket No. 33) ~~ Finally, AFP's tortious interference and contribution and indemnification counterclaims, id. ~~ 23(vi) and 23(vii), are essentially restatements of the tortious interference counterclaim in this action, since both stem from the alleged "refusal to allow AFP access to AFP's former Chief Financial Officer" to execute a management representation letter with respect to financial statements; a bold demand given the findings of fraud by the DFS. THIS COURT SHOULD COMPEL AFP TO ARBITRATE ITS COUNTERCLAIMS AGAINST PRI IN THE AAA ARBITRATION WHERE THEY HAVE ALREADY BEEN ASSERTED 9. As previously noted, supra, AFP's counterclaims are arbitrable and, accordingly, are not properly brought here. On August 23, 2017, AFP submitted its counterclaim in the AAA Arbitration, asserting virtually identical counterclaims as alleged here, and seeking identical relief. Ex. 1. In its October 18, 2017 Order, this Court denied AFP's "application that the Court direct Petitioner to provide Respondent with certain records," partially because "AFP has sought that relief in the arbitration and, therefore, the resolution of that issue is for the arbitrator[.]" (Docket No. 86). By the same logic, AFP should not be permitted to pursue its identical counterclaims here, where it has previously alleged them in the arbitration proceeding of 12

5 10. Additionally, although AFP purported in its arbitration counterclaim to reserve its right to contest the arbitrability of its counterclaims in court, it never timely challenged nor objected to the arbitrability of its counterclaims with the AAA. Pursuant to the Commercial Rules, the determination of the arbitrability of counterclaims is reserved for determination by the arbitration panel, and not the Court. See R-7(a) (stating that "[t[he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim") (emphasis added). AFP did not object to the arbitrability of its counterclaims within 14 days, as required by Rule 6 of the Commercials Rules, and, accordingly, has waived any objection as to their arbitrability. Id. at Rules 6(b) and 7(c). 11. While the issue of arbitrability is generally for the court, it is a tenet of New York law that, where the parties' agreement specifically incorporates by reference the AAA rules, the issue of arbitrability is for the AAA arbitration panel, and not the court, to decide. 12. The parties here have a broad arbitration clause, which states "[i]n the event of any dispute or difference of opinion arising under or with respect to this AGREEMENT, the controversy shall be submitted to arbitration." See Verified Petition, Ex (Docket No. 3). Here, each of AFP's counterclaims result from the implementation of the cooperation provision contained in the Management Agreement, which states that AFP shall "subsequent to termination: (a) Cooperate to facilitate the transfer of operations to the successor Attomey-in- Fact of PRI and its subscribers; and (b) Cooperate with PRI towards the end that there will be an orderly transfer of management services functions in respect to PRI's business to a new Attorney-in-Fact." See id. IO(D). Moreover, AFP has availed itself of the arbitral forum by alleging these counterclaims before the AAA, clearly evincing its submission to the arbitrators' -5-5 of 12

6 authority. Accordingly, this Court should compel AFP to arbitrate its counterclaims in the AAA Arbitration pursuant to CPLR 7503(a) Even if this Court was the appropriate forum to determine the arbitrability of the counterclaims asserted by AFP, which is not the case, where counterclaims are inextricably interwoven with claims in the underlying arbitration, they, too, are arbitrable. This is especially true where there is a broad arbitration clause, and the counterclaims have not been specifically excluded from that clause. 14. Due to PRI's broad arbitration agreement with AFP, it is irrelevant that the dispute regarding the cost of the various information technology systems, office furniture and other office equipment at 1800 Northern Boulevard, Roslyn, NY and 1200 C. Scottsville Road, Suite 195, Rochester, New York (the "IT Systems and Equipment") arose after AFP's termination as attorney-in-fact, since the clause survives and remains enforceable to resolve disputes arising out of the Management Agreement even after its termination, irrespective of whether the Management Agreement was terminated by natural expiration, unilaterally, or upon the breach of the contract. In fact, absent clear intent to the contrary, the law assumes that parties intend for an arbitration clause to survive termination of the agreement for subsequent disputes arising thereunder. 15. Here, AFP's counterclaims arise directly out of their continuing contractual obligation to aid in PRI's transition to a new attorney-in-fact. Indeed, AFP's duties to PRI survive their termination pursuant to the terms of the Management Agreement itself. See Verified Petition, Ex. 2 lo(d) (Docket No. 3). Even still, the arbitrability of AFP's In the alternative, this Court should stay this proceeding with respect to the counterclaims asserted by AFP, pending a determination by the AAA Arbitration panel that the counterclaims are, indeed, arbitrable of 12

7 counterclaims is a matter for the arbitrators. Accordingly, this Court should compel AFP to arbitrate its counterclaims in the AAA Arbitration, where they have already been asserted. EVEN IF THIS COURT FINDS THAT AFP'S COUNTERCLAIMS ARE NOT SUBJECT TO ARBITRATION, IT SHOULD DISMISS THEM PURSUANT TO CPLR 3211(a)(7) A. STANDARD ON A MOTION TO DISMISS 16. On a motion to dismiss under CPLR 321 l(a)(7), the only issue is whether the pleadings state a cause of action on their face. AFP' s various counterclaims are facially deficient, and should be dismissed. B. AFP'S UNJUST ENRICHMENT COUNTERCLAIM SHOULD BE DISMISSED 17. The elements of a claim for unjust enrichment are ( 1) the respondent was enriched, (2) at the claimant's expense, and (3) it is against equity and good conscience to permit the respondent to retain what is sought to be recovered. Additionally, a claimant may not seek the equitable remedy obtained through unjust enrichment where they have "unclean hands" - i.e., a claimant is not entitled to equitable relief where it has engaged in inequitable or unconscionable conduct with regards to the matter at issue in the litigation, and the respondent was injured by that conduct. AFP cannot satisfy the second or third elements of its counterclaim, and its past behavior bars unjust enrichment allegations under the doctrine of unclean hands. 18. AFP fails to allege that PRI has been enriched at AFP's expense. Additionally, AFP glosses over the fact that the use of the aforementioned property is a result of AFP's continuing obligations under the Management Agreement with PRI. 19. Regardless, the doctrine of unclean hands bars AFP from obtaining equitable relief where it has engaged in inequitable or unconscionable conduct, such as its flagrant -7-7 of 12

8 violations of the Management Agreement and New York law, as outlined in the DFS Order. AFP has failed to show that PRI obtained a benefit that in equity and good conscience it should not have obtained, because it rightfully belonged to another. C. AFP'S BREACH OF CONTRACT COUNTERCLAIM FAILS AS A MATTER OF LAW, SINCE THERE IS NO AGREEMENT BETWEEN THE PARTIES, WHO HA VE YET TO EVEN AGREE ON A PRICE 20. A contract is not binding on the parties unless they are in agreement with respect to all material terms, including the payment amount. AFP has not alleged that the parties have agreed upon a price. Thus, AFP cannot "accept PRI's offer to pay." Verified Answer and Counterclaims (Docket No. 33) at~ For the same reasons, PRI's statement at the TRO hearing that it would compensate AFP for the use of the IT Systems and Equipment is not a binding agreement absent an agreement on the price. PRI will live up to its representation and compensate AFP once the parties can reach an agreement over the purchase price and the form of payment-setoff is clearly appropriate here 4 -and, if they cannot, the matter is subject to arbitration. D. AFP'S PROMISSORY ESTOPPEL COUNTERCLAIM SHOULD BE DISMISSED BECAUSE PRl'S USE OF THE IT SYSTEMS AND EQUIPMENT WAS ORDERED BY THIS COURT, AND WAS NOT BASED ON PRl'S ALLEGED REPRESENTATIONS TO AFP 22. The elements of a cause of action for promissory estoppel are a clear and unambiguous promise, reasonable and foreseeable reliance by the party to whom the promise is made, and an injury stained in reliance on that promise. AFP's counterclaim for promissory estoppel should be dismissed, since AFP offers only conclusory allegations that it "reasonably 4 Regardless, any amount PRI owes AFP for use of the IT Systems and Equipment is inarguably dwarfed by the sums AFP owes PRI for, inter alia, its past and continuing satisfaction of AFP's financial obligations. Accordingly, compensation for the IT Systems and Equipment would be subject to an offset - which AFP acknowledged exist in its Arbitration Counterclaim. Ex. 1 if of 12

9 relied, to its detriment, on the promises and representation of PRI that PRI would pay the reasonable costs of PRI's and PRIMMA's use of AFP's property, assets, contract rights, and leasehold interests at the Roslyn and Rochester locations including, but not limited to, AFP's furniture, fixtures, equipment, computer licenses, and office space leased by APP." Verified Answer and Counterclaims (Docket NO. 33) at if Yet, APP cannot establish that it detrimentally relied on PRI' s statements that it would compensate APP for the use of the IT Systems and Equipment. APP did not rely on PRI's representations in permitting PRI to use the IT Systems and Equipment, since AFP's compliance was induced by Court Order and not by any representation by PRI. Moreover, APP cannot sustain this cause of action for the additional reason that there is a lack of detrimental reliance. PRI has stated that it will compensate APP, as evidenced by its initial statements and further willingness to engage in good faith discussions with APP after the TRO Hearing. Finally, APP has not alleged that PRI made a false representation or concealed a material fact, as required. E. AFP'S CONVERSION COUNTERCLAIM FAILS DUE TO ITS LACK OF SPECIFICITY, AND IGNORES AFP'S CONTINUING OBLIGATIONS UNDER SECTION lo(c) OF THE MANAGEMENT AGREEMENT 24. To establish a cause of action to recover damages for conversion, a claimant must show legal ownership or an immediate superior right of possession to a specific thing, and must show that the respondent exercised an unauthorized dominion over that specific thing to the exclusion of the claimant's rights. 25. APP claims that "PRI and PRIMMA have taken custody and control of the books, records, accounts, and electronically stored information belonging to APP and have refused to give APP access to them." See AFP's Answer with Counterclaims (Docket No. 33) if of 12

10 However, PRI continues to be willing to provide AFP with requested records and other information that belong to AFP. 5 This willingness to cooperate with AFP was noted by the Court in- and formed part of the basis for- the October 18, 2017 Order denying AFP's application for, inter alia, an order that PRI provide certain records. (Docket No. 86). The Court "declin[ ed] to issue such a directive, both because AFP has sought that relief in the arbitration and, therefore, the resolution is for the arbitrator, and in consideration of the affirmation of counsel that PRI has provided, and continues to provide, AFP with records." See id. at Additionally, AFP does not identify a single document to which it requires access and only makes general statements about categories of documents to which it says it requires access. See, e.g., Verified Answer and Counterclaim (Docket No. 33) (vaguely alleging conversion of "books, records, accounts, and electronically stored information belonging to AFP," without more). 27. Moreover, AFP has failed to identify specific, allegedly-converted property, or that the use of such property is unauthorized in light of this Court's Orders and AFP's contractual obligations under section 1 O(C)( c) of the Management Agreement. F. AFP'S REPLEVIN COUNTERCLAIM FAILS AS A MATTER OF LAW BECAUSE IT LACKS SPECIFICITY 28. In its allegations for replevin, AFP again offers only vague demands for the return of"books, records, accounts, and electronically stored information." See Verified Answer and Counterclaim (Docket No. 33) ~ Yet, a party alleging a cause of action in replevin must 5 Even AFP's attorneys have acknowledged, at the hearing before this Court on October 6, 2017, "I think in PRI's response, PRI will certainly make discrete documents available and have made discrete documents available to AFP." Tr. 26:25-27: of 12

11 establish that the defendant is in possession of certain property of which the plaintiff claims to have a superior right. Additionally, replevin is a remedy to recover a specific, identifiable item of personal property. 29. Accordingly, where, as here, APP has not specifically identified the property it wishes to recover, an action for replevin cannot stand. Moreover, APP has not established the necessary element that PRI's possession of the IT Systems and Equipment is wrongful. G. AFP'S COUNTERCLAIM FOR "TORTIOUS INTERFERENCE" SHOULD BE DISMISSED, BECAUSE IT HAS NOT IDENTIFIED A SPECIFIC CONTRACT OR RELATIONSHIP THAT PRI HAS INTENTIONALLY INDUCED A THIRD PARTY TO BREACH 30. In its counterclaim for tortious interference, APP asserts that PRI has refused "access to AFP's former Chief Financial Officer," and that APP therefore "will be prevented, among other things, from executing a management representation letter to the auditor of the benefit plans, without which the audit of the benefit plans cannot be completed." See Verified Answer and Counterclaims (Docket No. 33) iii! Yet, these allegations lack the specificity required to sustain this cause of action. 31. A cause of action for tortious interference requires proof of (1) the existence of a valid contract between plaintiff and a third party; (2) defendant's knowledge of that contract; (3) the defendant's intentional procuring of the breach; and (4) damages. Even where the elements of tortious interference have been satisfied, economic interest is a defense to an action for tortious interference with a contract unless there is a showing of malice of illegality. 32. APP has identified neither a contract that PRI has induced a third party to breach, nor a business relationship with which PRI has interfered. In light of these wholly of 12

12 unsubstantiated allegations involving contracts with unnamed third parties, this Court should dismiss this counterclaim. 6 CONCLUSION 33. For all of the foregoing reasons, I respectfully urge the Court to grant PRI's motion to compel AFP to arbitrate its counterclaims in the AAA Arbitration where they have already been asserted, or, alternatively, to dismiss AFP's counterclaims because they fail to state a cause of action. Dated: New York, New York October 27, 2017 By: ---+/-,-1-~,../~~(d-----r--~~--"--="'--'-,--- Robert Lewin STROOCK & STROOCK & LAV AN LLP 180 Maiden Lane New York, NY Telephone (212) rlewin@stroock.com Attorneys for Petitioner 6 The gravamen of this counterclaim appears to be AFP's demand that its former CFO sign management representation letters concerning AFP's financial statements for its employee benefit plans. Given the fraudulent conduct findings in the DFS Order, PRI can hardly require this individual to sign such letters. See Order and Decision (Oct. 18, 2017) (Docket No. 83) at 10. Clearly, there is no tortious interference here of 12