Schanker and Hochberg, P.C. v. Berkley Assurance Company

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF NEW YORK

---------------------------------------------------------------X

SCHANKER & HOCHBERG, P.C.,

STEVEN SCHANKER, ESQ., and

R. MARK HOCHBERG, ESQ.,

Plaintiffs, MEMORANDUM AND ORDER

- against - 2:20-cv-5361 (DRH)(ARL)

BERKLEY ASSURANCE COMPANY,

Defendant.

---------------------------------------------------------------X

APPEARANCES

HAMBURGER, MAXSON, YAFFE & McNALLY, LLP

Attorneys for Plaintiffs

225 Broadhollow Road, Suite 301E

Melville, NY 11747

By: Richard Hamburger, Esq.

David N. Yaffe, Esq.

COUGHLIN DUFFY LLP

Attorneys for Defendant

Wall Street Plaza

88 Pine Street, 28th Floor

New York, NY 10005

By: Gabriel E. Darwick, Esq.

HURLEY, Senior District Judge:

INTRODUCTION

Plaintiff Schanker & Hochberg, P.C., Steven Schanker, Esq., and R. Mark

Hochberg, Esq. (collectively “S&H”) brought this insurance coverage action against

Defendant Berkley Assurance Company (“Berkley”) seeking a declaratory judgment

that Berkley must defend and indemnify S&H in an underlying state court litigation,

a mandatory injunction requiring Berkley to do so, reimbursement of their defense

costs and fees to date in the underlying action, and an award of costs and fees incurred

in pursuing this action. Presently before the Court are (i) Berkley’s motion to dismiss

S&H’s fourth cause of action for attorney’s fees and costs pursuant to Federal Rule of

Civil Procedure (“Rule”) 12(b)(6) and (ii) S&H’s motion for partial summary judgment

as to Berkley’s duty to defend pursuant to Rule 56. For the reasons below, Berkley’s

motion is granted in part and denied in part, and S&H’s motion is granted in part

and deferred in part.

BACKGROUND

The following facts are taken from the Complaint, the documents incorporated

by reference, and the undisputed facts in the parties’ Rule 56.1 statements. [DEs 1,

15-1, 15-16].

Schanker & Hochberg, P.C., is a professional corporation incorporated in New

York State with a New York principal place of business. (Compl. ¶ 2 [DE 1]). Steven

Schanker, Esq. and R. Mark Hochberg, Esq. are New York citizens practicing law at

Schanker & Hochberg, P.C. (Id. ¶¶ 3–4). Berkley is an insurance corporation

incorporated in Iowa with an Arizona principal place of business. (Id. ¶ 5).

Berkley issued a lawyers professional liability insurance policy to S&H for the

policy period June 29, 2019 to June 29, 2020. (Id. ¶ 12; see Policy No. VUMA0177701

(the “Policy”), Ex. A [DE 14-3] to Declaration of Gabriel Darwick (“Darwick Decl.”)

[DE 14-2]). Under the Policy, Berkley provides coverage for

those sums [S&H] becomes legally obligated to pay as ‘damages’ because

of an act, error or omission arising out of [S&H’s] ‘legal services’

rendered or that should have been rendered. [Berkley] will have the

right and duty to defend [S&H] against a ‘claim’ seeking those damages.

However, [Berkley] will have no duty to defend [S&H] against any

‘claim’ seeking ‘damages’ for ‘legal services’ to which this insurance does

not apply.

(Policy § I.1.a). “Damages” are “judgments, awards and settlements an insured is

legally obligated to pay as a result of a ‘claim.’” (Id. § VII.3). A “claim” includes civil

proceedings demanding “monetary ‘damages’ arising out of ” S&H’s “legal

service[s]”—but not “demand[s] for equitable or non-pecuniary relief ”—as well as any

“related claims.” (Id. § VII.2, .11). “Legal services” are the “usual and customary

services of a licensed lawyer in good standing.” (Id. § VII.5). The Policy also has

exclusions. In particular, the Policy does not apply to any claim

j. Based on or directly or indirectly arising out of or resulting from:

(1) Any act committed with knowledge of its wrongful nature

or with intent to cause damage;

. . . ; or

(3) Any criminal, fraudulent, or dishonest act.

However, [Berkley] shall defend such allegations against any

insured if it involves a ‘claim’ otherwise covered under this Policy

until final adjudication.

l. For payment of any fine, sanction or penalty of any nature against

any insured[.]

(Policy § I.2.j, .l).

On September 23, 2019, a second amended complaint in a New York State

Supreme Court, New York County action named S&H as defendants, bringing four

causes of action against S&H for violations of the New York False Claims Act

(“NYFCA”). (Compl. ¶ 30; Second Amended Complaint (“Merns Complaint” or “Merns

Compl.”) ¶¶ 257–62, 263–67, 268–72, 283–87, Jillian Merns et. al. v. Estate of Sy

Syms et al., Index No. 14/100299 (N.Y. Sup. Ct., N.Y. Cnty.) (the “Merns Action”), Ex.

D [DE 14-18] to Declaration of David N. Yaffe (“Yaffe Decl.”) [DE 14-14]). The Merns

Complaint alleges S&H “knowingly aided and abetted” certain schemes to defraud

New York State via the “[i] tax returns and records of . . . the Estate [of Sy Syms] and

Marcy Syms, [ii] filings with the Securities and Exchange Commission (“SEC”),

[iii] records and tax returns of [the] Syms Corporation, and [iv] records of the Sy Syms

Foundation.” (Compl. ¶¶ 22–29; Merns Compl. ¶¶ 2–4). Specifically, S&H

“supervised” transactions, “consulted on SEC reporting requirements,” and

“prepared” tax returns. (Merns Comp. ¶ 5; see also id. ¶¶ 7, 41, 51–53, 173–75). S&H

allegedly “billed a quarter of a million dollars for its services.” (Id. ¶ 5). The Merns

plaintiffs seek the NYFCA statutory award of civil penalties and treble damages. (Id.

Wherefore Clauses).

S&H tendered its defense in the Merns Action to Berkley on October 24, 2019.

(Compl. ¶ 32; Ex. F [DE 15-7] to Yaffe Decl.). Berkley denied coverage on November

18, 2019. (Compl. ¶ 33; Ex. E [DE 14-7] to Darwick Decl.). Following correspondence

in which the parties refused to change their positions, S&H commenced this action

on November 22, 2020. S&H seeks: (1) a declaration that Berkley must defend and

indemnify S&H in the Merns Action, (2) a mandatory injunction requiring Berkley to

defend and indemnify S&H in the Merns Action, (3) damages for S&H’s defense costs

in the Merns Action, and (4) attorney’s fees in this action.

On December 18, 2020, Berkley requested a premotion conference regarding

leave to move to dismiss. [DE 9] In response, and although Berkley had not yet

answered the Complaint, S&H requested a premotion conference regarding leave to

move for summary judgment. [DE 10]. In granting both parties leave to file their

motions, the Court noted that Rule 56(b) permits “a party” to move for summary

judgment “at any time until 30 days after the close of discovery” and the absence of

an overlap between the issues in the proposed motions. (Order dated Jan. 8, 2022).

On April 23, 2021, both motions were submitted.

DISCUSSION

The Court begins with (I) Berkley’s motion to dismiss before turning to

(II) S&H’s motion for partial summary judgment on the duty to defend.

I. Berkley’s Motion to Dismiss

To decide Berkley’s motion to dismiss, the Court proceeds in the following

order: (A) the legal standard on a Rule 12(b)(6) motion and (B) whether S&H’s fourth

cause of action for attorney’s fees and costs should be dismissed.

A. Legal Standard

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.

B. Berkley’s Motion is Granted in Part and Denied in Part

Berkley moves to dismiss S&H’s fourth cause of action for attorney’s fees and

costs—arising from an alleged breach of the implied covenant of good faith and fair

dealing—as duplicative of the third cause of action—breach of contract. Compare

Compl. ¶¶ 47–51 (breach of contract), with id. ¶¶ 52–61 (implied covenant). Berkley

contends the two arise from the same set of facts, namely Berkley’s alleged refusal to

honor its obligations under the Policy. Berkley MTD Opening at 11 [DE 14-1]. In

S&H’s view, Berkley breached the Policy by forcing S&H to “find and retain counsel”

for and to “shoulder the entire significant financial burden” of its defense in the Merns

Action. Compl. ¶ 48. Berkley breached the implied covenant claim, continues S&H,

by “deliberately,” “recklessly,” and “unreasonably” refusing to defend S&H and, as a

result, requiring S&H to incur costs, expenses and attorney’s fees in bringing this

coverage action. Id. ¶¶ 54–55, 59.

“Under New York law, parties to an express contract are bound by an implied

duty of good faith, but breach of that duty is merely a breach of the underlying

contract.” Cruz v. FXDirectDealer, LLC, 720 F.3d 115, 125 (2d Cir. 2013) (quoting

Harris v. Provident Life & Accident Ins. Co., 310 F.3d 73, 80 (2d Cir. 2002)). The two

breaches, however, “are not necessarily duplicative” if they arise from different facts.

D.K. Prop., Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 168 A.D.3d 505, 507 (N.Y.

App. Div., 1st Dep’t 2019) (citing Bi–Economy Mkt., Inc. v. Harleysville Ins. Co. of

N.Y., 10 N.Y.3d 187 (N.Y. 2008)); see Harris, 310 F.3d at 81.

The trial and appellate courts in D.K. Property faced the issue before this Court

and determined the claims arose from different facts. They held the claims were not

duplicative:

In the first cause of action, plaintiff alleges that [its insurer] has

breached its obligations under the policy by refusing to acknowledge

coverage for plaintiff’s property loss, and seeks the coverage it is owed

under the policy. This is fundamentally different from the second cause

of action, which alleges that [the insurer] has breached the implied

covenant of good faith and fair dealing by . . . forcing plaintiff to

bring . . . the instant lawsuit against [the insurer] for a determination

as to coverage under the policy. The relief sought in the second cause of

action is not for coverage under the Policy, but for plaintiff to be made

whole for all of the legal and engineering fees and other costs that it has

allegedly incurred as a result of [its insurer’s] alleged bad faith conduct

and two-year delay in making a determination.

D.K. Prop., Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 59 Misc. 3d 714, 721

(N.Y. Sup. Ct., N.Y. Cnty. 2018), rev’d on other grounds 168 A.D.3d 505 (N.Y. App.

Div., 1st Dep’t 2019). The New York Appellate Division, First Department, despite

reversing on other grounds, observed nonetheless that the trial court was correct in

determining the claims were not duplicative: “The first and second causes of action

plead different conduct by defendant.” 168 A.D.3d at 507 (citing Bi–Economy Mkt.,

Inc., 10 N.Y.3d 187).

But the situation here is not the same as in D.K. Property. Like D.K. Property,

S&H’s breach of contract claim concerns the coverage it is owed in the Merns Action

and S&H’s implied covenant claim concerns its efforts in bringing the instant action.

Unlike D.K. Property, however, S&H uses identical descriptions of the conduct

constituting both breaches: “Defendant’s refusal to honor its obligations to Plaintiffs

under the Policy.” Compare id. ¶ 53, with id. ¶ 48 (identical but adding “and duties”

after “obligations”). Even though S&H amplifies the implied covenant claim by

calling the breach “deliberate[]” and reckless[],” the two claims may still be

duplicative. See N.Y.U. v. Cont’l Ins. Co., 87 N.Y.2d 308, 319–20 (N.Y. 1995).

With these principles in mind, the Court holds that S&H’s third and fourth

causes of action duplicate each other. See MD3 Holdings, LLC v. Buerkle, 174 A.D.3d

1309, 1311 (N.Y. App. Div., 4th Dep’t 2019) (implied covenant claim “premised on the

same conduct as the breach of contract claim and [] intrinsically tied to the damages

allegedly resulting from a breach of the contract” is duplicative); Sikarevich Fam. L.P.

v. Nationwide Mut. Ins. Co., 30 F. Supp. 3d 166, 171–72 (E.D.N.Y. 2014) (insurer’s

“decision to deny plaintiff coverage is the crux of plaintiff’s [implied covenant]

allegations,” meaning “the same facts, regarding defendant’s compliance with its

contractual obligations, give rise to both claims,” even though insurer allegedly

“exhibited deliberate and reckless indifference”); A.J. Sheepskin Leather &

Outerwear, Inc. v. USF Ins. Co., 2004 WL 503727, at *3 (S.D.N.Y. Mar. 12, 2004)

(implied covenant allegations are duplicative because they “mirror” those for breach

of insurance contract; “both rely solely on the Plaintiff’s conclusory allegations that

the Defendant was obligated to indemnify the Plaintiff for its property losses and

refused to do so”).

Even so, the issue is academic. Were the implied covenant cause of action

improper as its own separate cause of action, an insured still may recover

consequential damages—e.g., legal fees in a coverage action—from insurer’s breach

of contract in bad faith—i.e., deliberately and recklessly. D.K. Prop., Inc., 59 Misc.

3d at 719–20 (citing Acquista v. New York Life Ins. Co., 285 A.D.2d 73, 82 (N.Y. App.

Div., 1st Dep’t 2001)); Sikarevich Fam. L.P., 30 F. Supp. 3d at 172. The relief sought

may still be available regardless of any duplication.

When faced with this situation, some courts have dismissed the implied

covenant claim “without prejudice to a future argument that [the insured] is entitled

to recover consequential damages caused by [the insurer’s] alleged bad faith.” See

Great Lakes Reinsurance (UK) SE v. Herzig, 413 F. Supp. 3d 177, 185 n.1 (S.D.N.Y.

2019). Others have “decline[d] to dismiss the [implied covenant] cause of action[] but

dismisse[d] [any] claim for consequential damages in the [breach of contract] cause of

action.” D.K. Prop., Inc., 59 Misc. 3d at 720. If the Court dismisses the implied

covenant claim, S&H would need to amend its Complaint to reflect the Court’s

decision. Judicial efficiency points the Court to the alternative solution: denying

Berkley’s motion to dismiss but barring S&H’s recovery of consequential damages in

the breach of contract cause of action.1 The surviving fourth cause of action, being

duplicative, retains the availability of such consequential damages.

Accordingly, Berkley’s motion to dismiss is granted in part and denied in part.

It is granted insofar as that S&H may not recover consequential damages on its third

cause of action. It is denied in that S&H’s fourth cause of action survives.

1 Judicial efficiency likewise leads the Court not to dismiss sua sponte S&H’s

causes of action for declaratory judgment and injunctive relief. Berkley MTD

Opening at 2 n.1; S&H MTD Opp. at 2 n.2 [DE 14-19]; Berkley MTD Reply at 1 n.1

[DE 14-22]. “Declaratory judgments and injunctions are remedies, not causes of

action.” Chiste v. Hotels.com L.P., 756 F. Supp. 2d 382, 406–07 (S.D.N.Y. 2010). The

Chiste Court dismissed such causes of action but “deemed [the remedies] added to

[plaintiff’s] ad damnum clause.” Id. Here, S&H’s ad damnum clause already lists

such relief and does not tie them to any particular cause of action. Were the first and

second causes of action dismissed, then, any amended complaint would simply delete

the cause of action headers and merge their factual allegations with those of the

breach of contract claim. Because the Complaint already gives Berkley sufficient

notice as to the nature of S&H’s claims and remedies, the Court declines to dismiss

sua sponte S&H’s first and second “causes of action.”

II. S&H’s Motion for Summary Judgment

S&H moves for partial summary judgment on the issue of Berkley’s duty to

defend in the Merns Action. The Court addresses the issues in the following order:

(A) the prematurity of S&H’s motion; (B) the legal standard on a summary judgment

motion, (C) the application and principles of New York insurance law, (D) the merits

of S&H’s motion, and (E) the scope of the Court’s decision.

A. Prematurity

S&H moved for summary judgment before Berkley answered the Complaint.

Berkley calls the motion premature because its answer “may raise . . . affirmative

defenses concerning compliance with all policy terms, provisions, conditions and/or

other exclusions,” the merits of which require discovery. Berkley SJ Opp. at 4 & n.1

[DE 15-17].

A party may move for summary judgment “at any time until 30 days after the

close of all discovery,” including before a defendant answers the complaint. Fed. R.

Civ. P. 56(b). A nonmovant, however, can respond via “affidavit or declaration, for

specified reasons, [that] it cannot present facts essential to justify its opposition.” Id.

56(d). “The grant of relief pursuant to Rule 56(d) is within the discretion of the

district court.” Walden v. Sanitation Salvage Corp., 2015 WL 1433353, at *2

(S.D.N.Y. Mar. 30, 2015) (citing Cont’l Cas. Co. v. Marshall Granger & Co., LLP, 921

F. Supp. 2d 111, 126–27 (S.D.N.Y. 2013)).

Despite quoting Rule 56(d), Berkley fails to submit an “affidavit or declaration”

specifying any reasons for delaying a summary judgment decision. Id. “The failure

to file an affidavit under Rule 56(d) is itself sufficient grounds to reject a claim that

the opportunity for discovery was inadequate.” Kazolias v. IBEWLU 363, 806 F.3d

45, 54 (2d Cir. 2015) (alterations and internal quotation marks omitted) (quoting

Paddington Partners v. Bouchard, 34 F.3d 1132, 1137 (2d Cir. 1994)).

Relatedly, and even though it has not cross-moved for summary judgment in

its favor, Berkley asks the Court to “award summary judgment to Berkley declaring

it has no duty to defend” S&H. Berkley SJ Opp. at 10. True, “[d]istrict courts are

widely acknowledged to possess the power to enter summary judgment sua sponte.”

First Fin. Ins. Co. v. Allstate Interior Demolition Corp., 193 F.3d 109, 114–15 (2d Cir.

1999) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 326 (1986)). Pursuant to the

analysis below, such relief is unwarranted. Berkley’s request, however, implicitly

suggests that S&H’s motion is not entirely premature – in other words, the Court

may properly grant partial summary judgment at the present time, before an answer

and without discovery.

Accordingly, S&H’s summary judgment motion is not premature.

B. Summary Judgment Legal Standard

Summary judgment, pursuant to Rule 56, is appropriate only where the

movant “shows that 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). The relevant

governing law in each case determines which facts are material; “[o]nly disputes over

facts that might affect the outcome of the suit under the governing law will properly

preclude the entry of summary judgment.” Anderson v. Liberty Lobby, Inc., 477 U.S.

242, 248 (1986). When making this determination, a court must view all facts “in the

light most favorable” to the non-movant, Tolan v. Cotton, 572 U.S. 650, 656–57 (2014),

and “resolve all ambiguities and draw all permissible factual inferences in favor of

the [non-movant],” Johnson v. Killian, 680 F.3d 234, 236 (2d Cir. 2012) (quoting Terry

v. Ashcroft, 336 F.3d 128, 137 (2d Cir. 2003)). Thus, “[s]ummary judgment is

appropriate [only] where the record taken as a whole could not lead a rational trier

of fact to find for the [non-movant].” Id. (quoting Matsushita Elec. Indus. Co. v. Zenith

Radio Corp., 475 U.S. 574, 587 (1986)) (internal quotation marks omitted).

To defeat a summary judgment motion properly supported by affidavits,

depositions, or other documentation, the non-movant must offer similar materials

setting forth specific facts demonstrating that there is a genuine dispute of material

fact to be tried. Wright v. Goord, 554 F.3d 255, 266 (2d Cir. 2009). The non-movant

must present more than a “scintilla of evidence,” Fabrikant v. French, 691 F.3d 193,

205 (2d Cir. 2012) (quoting Anderson, 477 U.S. at 252), or “some metaphysical doubt

as to the material facts,” Brown v. Eli Lilly & Co., 654 F.3d 347, 358 (2d Cir. 2011)

(quoting Matsushita, 475 U.S. at 586–87), and “may not rely on conclusory allegations

or unsubstantiated speculation,” id. (quoting FDIC v. Great Am. Ins. Co., 607 F.3d

288, 292 (2d Cir. 2010)).

The district court considering a summary judgment motion must also be

“mindful . . . of the underlying standards and burdens of proof,” Pickett v. RTS

Helicopter, 128 F.3d 925, 928 (5th Cir. 1997) (citing Anderson, 477 U.S. at 252),

because the “evidentiary burdens that the respective parties will bear at trial guide

district courts in their determination[s] of summary judgment motions,” Brady v.

Town of Colchester, 863 F.2d 205, 211 (2d Cir. 1988). “[W]here the [non-movant] will

bear the burden of proof on an issue at trial, the moving party may satisfy its burden

by pointing to an absence of evidence to support an essential element of the [non-

movant’s] case.” Crawford v. Franklin Credit Mgmt. Corp., 758 F.3d 473, 486 (2d Cir.

2014) (quoting Brady, 863 F.2d at 210–11) (internal quotation marks omitted).

Where a movant without the underlying burden of proof offers evidence that the non-

movant has failed to establish his claim, the burden shifts to the non-movant to offer

“persuasive evidence that his claim is not ‘implausible.’” Brady, 863 F.2d at 211

(citing Matsushita, 475 U.S. at 587). “[A] complete failure of proof concerning an

essential element of the [non-movant’s] case necessarily renders all other facts

immaterial.” Crawford, 758 F.3d at 486 (quoting Celotex Corp., 477 U.S. at 323

(1986).

C. Choice of Law and Principles of Analyzing Insurance Policies

The Court’s subject-matter jurisdiction arises from the parties’ diversity of

citizenship. The law of New York, the forum state, governs the choice of law analysis.

AEI Life LLC v. Lincoln Benefit Co., 892 F.3d 126, 132 (2d Cir. 2018). Both parties

apply the New York’s substantive law in their briefing and, accordingly, “their

consent concludes the choice of law inquiry. Texaco A/S (Denmark) v. Com. Ins. Co.

of Newark, NJ, 160 F.3d 124, 128 (2d Cir. 1998) (quoting Am. Fuel Corp. v. Utah

Energy Dev. Co., 122 F.3d 130, 134 (2d Cir. 1997)). New York law applies.

Under New York law, the Court’s “role in interpreting a contract is to ascertain

the intention of the parties at the time they entered into the contract.” Evans v.

Famous Music Corp., 1 N.Y.3d 452, 458 (N.Y. 2004). To do so, courts apply the

ordinary “principles of contract interpretation” to insurance agreements, “giv[ing] full

meaning and effect” to all contractual provisions and construing unambiguous

provisions in line with “their plain and ordinary meaning.” Burlington Ins. Co. v. NYC

Transit Auth., 29 N.Y.3d 313, 321 (N.Y. 2017) (internal quotation marks omitted);

White v. Cont’l Cas. Co., 9 N.Y.3d 264, 267 (N.Y. 2007). “Well recognized is the

general rule that ambiguities in an insurance policy are to be construed against the

insurer . . . .” Breed v. Ins. Co. of N. Am., 46 N.Y.2d 351, 353 (N.Y. 1978). “Courts

defining insurance policy terms should keep in mind that under New York law the

‘insurance policy should be read in light of common speech and the reasonable

expectations of a businessperson.’” David Lerner Assocs., Inc. v. Philadelphia Indem.

Ins. Co., 542 Fed. App’x 89, 90 (2d Cir. 2013) (quoting Parks Real Estate Purchasing

Grp. v. St. Paul Fire & Marine Ins. Co., 472 F.3d 33, 42 (2d Cir. 2006)).

D. Berkley’s Duty to Defend S&H in the Merns Action

“The insured has the initial burden of . . . establish[ing] coverage where it

would not otherwise exist. Once coverage is established, the insurer bears the burden

of proving that an exclusion applies.” Consol. Edison Co. of New York v. Allstate Ins.

Co., 98 N.Y.2d 208, 220 (N.Y. 2002) (internal citation omitted).

1. Coverage

S&H, as Berkley’s insured, bears the burden to establish coverage. “Coverage,”

as defined by the Policy, refers to Berkley’s duty to defend and duty to indemnify:

[Berkley] will pay . . . those sums any insured becomes legally obligated

to pay as “damages” because of an act, error or omission arising out of

[S&H’s] “legal services” rendered or that should have been rendered.

[Berkley] will have the right and duty to defend any insured against a

“claim” seeking those “damages.” However, we will have no duty to

defend any insured against any “claim” seeking “damages” for “legal

services” to which this insurance does not apply.

Policy § I.1.a (“Coverage”). Berkley may refuse to provide a defense “only if it could

be concluded as a matter of law that there is no possible factual or legal basis on

which [Berkley] might eventually be held to be obligated to indemnify [S&H] under

any provision of the insurance policy.” Servidone Constr. Corp. v. Sec. Ins. Co. of

Hartford, 64 N.Y.2d 419, 424 (N.Y. 1985). An underlying complaint is “the significant

and usual touchstone for determining” this duty. Fitzpatrick v. Am. Honda Motor

Co., 78 N.Y.2d 61, 65–66 (N.Y. 1991). Here, the coverage inquiry boils down to

whether the acts alleged in the Merns Complaint arose out of S&H’s “legal services.”

The Policy defines “legal services” as the “usual and customary services of a licensed

lawyer in good standing.” Policy § VII.5.

S&H argues that licensed attorneys regularly perform the acts alleged in the

Merns Complaint: “supervis[ion of]” an estate transaction, “consult[ation] on SEC

reporting requirements,” and preparation of tax returns. S&H SJ Opening at 8–10

[DE 15-13]; see, e.g., Merns Compl. ¶¶ 5, 56, 267. It is indisputable that licensed

attorneys usually and customarily perform these services. See Colton v. United

States, 306 F.2d 633, 637 (2d Cir. 1962) (“There can, of course, be no question that

the giving of tax advice and the preparation of tax returns[,] which unquestionably

constituted a very substantial part of the legal services rendered . . . [,] are basically

matters sufficiently within the professional competence of an attorney . . . .”); Sec.

Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 319 F.R.D. 100, 106 (S.D.N.Y.

2017) (observing that “estate planning-related communications” between a law firm

and client are “unquestionably privileged,” i.e. “made for the purpose of obtaining or

providing legal advice”); Stenovich v. Wachtell, Lipton, Rosen & Katz, 195 Misc. 2d

99, 107 (N.Y. Sup. Ct., N.Y. Cnty. 2003) (finding “no reason to believe that Wachtell

Lipton was hired for any reason other than” to provide “legal advice” concerning, inter

alia, “securities and related filings including public statements” and holding that its

documents “are primarily of a legal character”).

Berkley stresses the allegedly fraudulent manner in which S&H performed

such acts. Because “the acts of fraud are [not] the ‘usual and customary services of a

licensed lawyer in good standing,’” Berkley contends S&H did not provide “legal

services” in so acting. Berkley SJ Opp. at 4–10. Specifically, Berkley draws a

distinction between coverage for damages arising from, on the one hand, “the

professional services (legal services) underlying [] false claims,” and, on the other

hand, “the presentation of false claims” to the Government – the latter for which the

NYFCA imposes liability. Berkley SJ Opp. at 4–10.

Berkley supports its position by devoting an entire section to an observation

made by an Eastern District of Louisiana court:

Every federal circuit faced with the issue has held that coverage under

a professional liability insurance policy is not triggered by claims

asserted under the False Claims Act because such claims are not

predicated on the insured’s professional services that are covered by

such a policy.

Iberiabank Corp. v. Illinois Union Ins. Co. 2019 WL 585288, at *5–6 (E.D. La. Feb.

13, 2019), aff’d, 953 F.3d 339 (5th Cir. 2020) (citing Health Care Indus. Liab. Ins.

Program v. Momence Meadows Nursing Ctr., Inc. (“Momence”), 566 F.3d 689, 695 (7th

Cir. 2009); Zurich Am. Ins. Co. v. O’Hara Reg’l Ctr. for Rehab. (“Zurich”), 529 F.3d

916, 921–23 (10th Cir. 2008); Horizon West, Inc. v. St. Paul Fire & Marine Ins. Co.

(“Horizon West”), 45 Fed. App’x 752, 753–54 (9th Cir. 2002); Jenkins v. St. Paul Fire

& Marine Ins. Co., 8 Fed. App’x 573, 574 (8th Cir. 2001); M/G Transport Servs., Inc.

v. Water Quality Ins. Syndicate (“M/G Transp.”), 234 F.3d 974, 978 (6th Cir. 2000)).

But while this statement reads broadly, the next sentence—the last half of which

Berkley overlooks—narrows the “issue” referenced by that court:

Central to each of these cases is the understanding that the FCA

imposes liability on persons or corporations who knowingly submit false

claims to the government in return for a government-provided benefit –

whether reimbursement or something else.

Id. (internal quotation marks omitted) (emphasis added); see Berkley SJ Opp. at 5

(omitting the emphasized text). In Iberiabank, and each of its cited circuit cases, the

insured submitted its own documents to obtain a government-provided benefit for

itself. 2019 WL 585288 at *5–6 (bank submitted certifications to participate in

Federal Housing Administration’s “Direct Endorsement program,” which “insures

approved lenders against losses on mortgage loans made to buyers of single-family

homes”); see also Momence, 566 F.3d at 691, 694–95 (nursing center submitted cost

reports to obtain reimbursement from Medicare); Zurich, 529 F.3d at 921–23 (nursing

center submitted invoices to obtain reimbursement from Medicare); Horizon West, 45

Fed. App’x at 753–54 (nursing homes submitted bills and certifications “to maintain

eligibility for Medicare and Medicaid payment”); Jenkins, 8 Fed. App’x at 574 (doctor

submitted claims for reimbursement from Healthcare Finance Administration); M/G

Transp., 234 F.3d at 975–76, 978 (coal transporter’s records hid “violations of the

Clean Water Act so that it could obtain payment from the United States” and could

“conceal, avoid, or decrease an obligation to pay money to the United States for fines

or clean-up costs”).

By contrast, the Merns Complaint alleges S&H assisted the Estate of Sy Syms,

Marcy Syms, the Syms Corporation, and the Sy Syms Foundation’s documents so

those entities and individual could obtain a government-provided benefit. E.g., Merns

Compl. ¶ 2. Stated otherwise, S&H worked on its clients’ documents to obtain a

government-provided benefit for its clients. S&H billed its clients (the Merns co-

defendants) for these services; it did not seek government reimbursement. Merns

Compl. ¶ 41 (citing Ex. E to Merns Compl.). The Merns Complaint equivocates on

whether S&H in fact “submitted” any document to the government. While some

allegations contend “[d]efendants filed,” e.g., Merns Compl. ¶ 6, others identify

specific defendants, e.g., id. ¶ 7 (Marcy Syms). None specifically identify S&H.

The Iberiabank Court differentiated the “conduct that lay at the heart” of the

False Claims Act allegations from the insured’s “core lines of business.” 2019 WL

585288, at *7–8. For mortgagees, government certifications as to loan underwriting

procedures were ancillary to underwriting loans to clients, id.; for healthcare

providers, “the bill is [a concomitant] effect of the service provided[,] not part of the

service itself,” Horizon West, 45 Fed. App’x at 754 (internal quotation marks omitted);

and for a coal transporter, record-keeping allegations expressly disconnected from

any Clean Water Act liability2 were not environmental pollution allegations, M/G

Transp., 234 F.3d at 978. Essentially, each False Claims Act action sprang from

conduct collateral to the professional services each insured provided. Yet the Merns

Complaint springs from conduct (“supervis[ing]” transactions, “consult[ing] on SEC

reporting requirements,” and “prepar[ing]” tax returns) inseverable from the

professional services a law firm offers. Hence the Merns Complaint limiting S&H’s

involvement to “knowingly aid[ing] and abet[ting]” false submissions. Merns Compl.

¶ 52 (alleging one estate transaction was reported to the SEC “in consultation with”

S&H (emphasis in original)).

Berkley posits that finding coverage in the first instance here is contrary to the

terms of the Policy. Not so – rather, it retains meaning otherwise lost. If allegedly

fraudulent actions are not covered because they are not “legal services,” then

Exclusion j.(3) contains meaningless surplusage. See Policy § I.2.j.(3). There is no

2 The M/G Transp. plaintiff “expressly reserved potential Clean Water Act

liability for the United States.” 234 F.3d at 978

need to exclude “fraudulent[] or dishonest” acts if “no coverage [over them] existed in

the first instance.” See Barbulescu v. Cara, 191 A.D.2d 407, 408 (N.Y. App. Div., 2d

Dep’t 1993); McMahon v. Bos. Old Colony Ins. Co., 67 A.D.2d 757, 758 (N.Y. App.

Div., 3d Dep’t 1979) (“[B]efore the need for an exclusion arises, there must first be

coverage within the defined scope of the policy.”).

Nor would a finding of coverage here, if made, signify that “the acts of fraud

[may be] the ‘usual and customary services of a licensed lawyer in good standing.’”

Berkley SJ Opp. at 8–9. By that logic, so would a finding of coverage for legal

malpractice. After all, lawyers in good standing do not usually and customarily

engage in legal malpractice. But Berkley admits policies like its own do cover claims

of legal malpractice. See Berkley SJ Opp. at 8–9. S&H’s actions as fraudulent or

malpractice color the manner in which they were performed. That gloss bears not on

whether the actions themselves—e.g., consulting on SEC reporting requirements—

constitute legal services.

The Policy extends coverage to S&H in the Merns Action unless an exclusion

dictates otherwise.

2. Exclusions

“Before an insurance company is permitted to avoid policy coverage, it must

satisfy the burden which it bears of establishing that the exclusions or exemptions

apply in the particular case, and that they are subject to no other reasonable

interpretation.” Dean v. Tower Ins. Co. of New York, 19 N.Y.3d 704, 708 (N.Y. 2012)

(alterations omitted) (quoting Seaboard Sur. Co. v. Gillette Co., 64 N.Y.2d 304, 311

(N.Y. 1984)). Berkley thus bears the burden of demonstrating that an exclusion

absolves it from defending S&H in the Merns Action. Berkley points to three

exclusions: those involving any claim

j. Based on or directly or indirectly arising out of or resulting from:

(1) Any act committed with knowledge of its wrongful nature

or with intent to cause damage;

. . . ; or

(3) Any criminal, fraudulent, or dishonest act.

However, [Berkley] shall defend such allegations against any

insured if it involves a ‘claim’ otherwise covered under this Policy

until final adjudication.

l. For payment of any fine, sanction or penalty of any nature against

any insured;

Policy § I.2. Proceeding in reverse order, the Court addresses Exclusion l first before

turning to those in j.(1) and j.(3).

a. Exclusion l: Payment of Any Fine, Sanction, or

Penalty

Defendants liable for an NYFCA violation must pay the government “a civil

penalty” between $6,000 and $12,000 “plus three times the amount of all damages,

including consequential damages,” it sustained. N.Y. State Fin. Law § 189(1). The

statute “evinces a broad[] punitive goal of deterring fraudulent conduct against” New

York. Berkley SJ Opp. at 10–12 (internal quotation marks omitted) (quoting State ex

rel. Grupp v. DHL Exp. (USA), Inc., 19 N.Y.3d 278, 287 (N.Y. 2012)). Its attendant

treble damages language, in Berkley’s view, “do[es] not provide compensation for the

actual harm inflicted.” Id. (quoting Harvardsky Prumyslovy Holding, A.S.-V

Likvidaci v. Kozeny, 117 A.D.3d 77, 81 (N.Y. App. Div., 1st Dep’t 2014)). And, Berkley

argues, because New York law distinguishes a penalty from damages by examining

whether a reward compensates a harm, it follows that the NYFCA’s award is a

“penalty” – triggering Exclusion l’s preclusion of coverage for claims for “payment of

any . . . penalty.” Policy § I.2.l.

S&H rejoins by citing New York Court of Appeals precedent holding that the

“penalty and damages scheme of the [NYFCA] does not compel a conclusion that the

statute is penal.” People ex rel. Schneiderman v. Sprint Nextel Corp., 26 N.Y.3d 98,

114 (2015) (internal quotation marks omitted).

The Court need not belabor its analysis because the New York Court of Appeals

has since addressed this issue in J.P. Morgan Securities. Inc. v. Vigilant Ins. Co., 2021

WL 5492781 (N.Y. Nov. 23, 2021). Reviewing its precedent, the court observed it had

already determined that “where a sanction has both compensatory and punitive

components, it should not be characterized as punitive in the context of interpreting

insurance policies.” Id. (citing Zurich Ins. Co. v. Shearson Lehman Hutton, 84 N.Y.2d

309, 312–13 (N.Y. 1994)). It continued by noting New York law had “consistently”

construed the term “penalty” as “non-compensatory, purely punitive monetary

sanctions.” Id. at *4–5. Because a “disgorgement” payment to the SEC served, “at

least in part,” a compensatory purpose, a reasonable insured “at the time of

contracting”—there, in 2000—would have understood that such a payment was not a

“penalty” under its insurance contract. Id. at *6.

Here, the NYFCA’s “penalty scheme may be rationally connected to the

nonpunitive purposes of allowing the government to be made whole.” Sprint Nextel,

26 N.Y.3d at 114. Specifically, the NYFCA’s treble damages award reflects, at least

in part, “compensatory, nonpunitive aims” – meaning its penalty scheme is not purely

punitive. Id.; see Borden v. 400 E. 55th St. Assocs., L.P., 24 N.Y.3d 382, 397 (N.Y.

2014) (recognizing the first third of a treble damages award “is a compensatory form

of relief”). Because S&H and Berkley’s Policy post-dates that in J.P. Morgan

Securities, a reasonable insured would have understood at the time of contracting

that Exclusion l’s use of “penalty” did not encompass an NYFCA award. See 2021 WL

5492781, at *4.

Exclusion l therefore does not apply.

b. Exclusions j.(1) and j.(3)

Exclusion j.(1) and j.(3) drop coverage for knowingly wrongful, fraudulent, or

dishonest acts. Berkley contends the Merns Complaint “alleges nothing but” such

acts and quotes several allegations that expressly use fraud-related terminology.

Berkley SJ Opp. at 14–16 (citing Merns Compl. ¶¶ 4, 50–52, 155–75). S&H does not

deny that the Merns Complaint “alleges[] the law firm, Schanker and Hochberg, P.C.

(and Steven Schanker, Esq. and H. Mark Hochberg, Esq.)” engaged in “some of the

schemes to defraud.” S&H SJ Opening at 9 (emphasis removed) (quoting Merns

Compl. ¶ 4). The Court need not determine whether either subsection applies to

exclude coverage for the Merns Complaint because, even if one or both did, Exclusion

j’s safe harbor provision reinstates Berkley’s duty to defend.

Under the safe harbor provision, Berkley must “defend such allegations . . . if

it involves a ‘claim’ otherwise covered under this Policy until final adjudication.”

Berkley reads this to revive coverage only where a complaint also pleads a cause of

action other than one premised on “fraudulent or dishonest conduct, such as a claim

for negligence.” Berkley SJ Opp. at 21. “Without the phrase ‘otherwise covered,’”

Berkley says, Exclusion j “would bar a duty to defend a multi-count suit alleging

covered negligence and non-covered fraud.” Id. This reasoning does not dovetail with

the tenets of New York insurance law. “If any of the claims against an insured

arguably arise from covered events, the insurer is required to defend the entire

action.” Town of Massena v. Healthcare Underwriters Mut. Ins. Co., 98 N.Y.2d 435,

443 (N.Y. 2002) (quoting Frontier Insulation Contrs. v Merchants Mut. Ins. Co., 91

N.Y.2d 169, 175 (N.Y. 1997)). A multi-count suit bringing covered negligence claims

alongside non-covered fraud claims would impose a defense duty on Berkley

regardless of Exclusion j’s applicability.

To S&H, Berkley must “defend claims based on ‘such allegations’” because they

are “otherwise covered”: they “arise out of covered ‘legal services’ [and] they seek

‘damages’ covered by the Policy.” S&H SJ Opening at 14–20, 16 n.5 (internal citations

omitted); S&H SJ Reply at 6–9 [DE 15-20]. The Court agrees that the NYFCA claims

are “otherwise covered.” The term “otherwise” here means “except for what has just

been mentioned.” Otherwise, Black’s Law Dictionary (11th ed. 2019); see Otherwise,

Oxford English Dictionary (3d ed. 2004) (“in other circumstances; if not; else”).

Applied here: if, except for Exclusion j, a claim is covered, Berkley must defend S&H.

By consequence, were another exclusion besides Exclusion j applicable, the claim

would not be “otherwise covered,” and S&H would lose the benefit of the safe harbor.

As above, coverage exists in the first instance, Exclusion l does not apply, and no

other exclusion is brought to the Court’s attention. The safe harbor is available to

S&H.

The safe harbor does not reinstate coverage in its entirety. The Policy’s usage

of coverage embraces a duty to “pay” and “defend” claims. Policy § I.1. The safe

harbor’s plain terms resurrect solely Berkley’s defense duty. Id. § I.2.j (“[W]e shall

defend such allegations . . . .”). Berkley must defend the claim “until final

adjudication.” Should S&H be found liable, however, Berkley has no duty to

indemnify S&H.

In line with its interpretation of the Merns Complaint and the Policy, the Court

will grant partial summary judgment to S&H on a portion of its duty to defend claim

– namely, that the Merns Complaint triggers Berkley’s defense duty under the

Policy’s plain terms.

E. Scope of the Court’s Decision

Rule 56(a) entitles a party to move for, and a court to grant, partial summary

judgment on a “claim or defense – or [a] part of each claim or defense.” Fed. R. Civ.

P. 56(a) (emphasis added); see id. advisory committee’s note to 2010 Amendment

(“Partial summary judgment” subdivision caption “describe[s] disposition of less than

the whole action,” “mak[ing] clear” that “summary judgment may be requested not

only as to an entire case but also as to a claim, defense, or part of a claim or defense.”

(emphasis added)); Hamblin v. Brit. Airways PLC, 717 F. Supp. 2d 303, 306–09

(E.D.N.Y. 2010); see Servicios Especiales Al Comercio Exterior v. Johnson Controls,

Inc., 791 F. Supp. 2d 626 (E.D. Wis. 2011). “A district court may grant partial

summary judgment ‘to streamline the litigation process by narrowing the triable

issues.’” Cangemi v. United States, 2017 WL 1274060, at *12 (E.D.N.Y. Mar. 31,

2017) (quoting D’Iorio v. Winebow, Inc., 68 F. Supp. 3d 334, 356 (E.D.N.Y. 2014)).

The question on summary judgment required the Court to interpret

unambiguous policy language – a task addressing a “pure question of law.” Chachkes

v. David, 2021 WL 101130, at *5 (S.D.N.Y. Jan. 12, 2021); see Burlington Ins. Co., 29

N.Y.3d at 321 (“[T]he interpretation of [unambiguous provisions of an insurance

contract] is a question of law for the court.”); Allianz Ins. Co. v. Lerner, 416 F.3d 109,

115 (2d Cir. 2005) (“Under New York law, the interpretation of an insurance policy

generally presents a question of law.”). “[W]here, as here ‘the issue to be decided is

limited to a pure question of law, such as the interpretation of unambiguous contract

language, summary judgment may be appropriate’” before discovery is taken.

Chachkes, 2021 WL 101130, at *5 (quoting MCC Non Ferrous Trading Inc. v. AGCS

Marine Ins. Co., 2015 WL 3651537, at *3 (S.D.N.Y. June 8, 2015)); see Weaver v. Axis

Surplus Ins. Co., 639 Fed. App’x 764 (2d Cir. 2016) (affirming “a pre-discovery award

of summary judgment” because “the interpretation of an insurance contract, a

question of law,” established that the insurance “[p]olicy excluded coverage for

defense of the [underlying] action”).

“It is well-settled that ‘save where extrinsic evidence is relevant, the

comparison of a complaint (allegedly triggering a duty to defend) with an insurance

policy is ordinarily treated as a matter of law.’” David Lerner Assocs., Inc. v.

Philadelphia Indem. Ins. Co., 934 F. Supp. 2d 533, 545 (E.D.N.Y.) (Bianco, J.), aff’d,

542 Fed. App’x 89 (2d Cir. 2013). The David Lerner Associates Court, for example,

granted an insurer’s Rule 12(b)(6) motion because the unambiguous policy language

eliminated the insurer’s defense duty notwithstanding the lost chance to take

discovery into the applicability of exclusions. Id. at 545–46. No discovery would

clarify “what the underlying complaints make apparent” nor change “the common

understanding and meaning” of policy terms. Id.

The same is true here. Discovery would not inform the Court’s reading of the

Merns Complaint (which is not vague or conclusory) or the Policy (which is

unambiguous). The Court’s decision on partial summary judgment extends only so

far as this question of law: whether the Policy’s plain terms require Berkley to defend

S&H in the Merns Action.

But the Court’s determination that it does, see supra, adjudicates only a part

of the duty to defend claim, see Fed. R. Civ. P. 56(a). It is not dispositive; Berkley

may yet have no defense duty. Berkley proposes affirmative defenses to be fleshed

out in fact discovery—e.g., in particular, S&H’s satisfaction of policy conditions and

prior knowledge”—that, if applicable, would nullify Berkley’s obligation despite the

Policy’s plain terms. See Berkley SJ Opp. at 4 & n.1. Accordingly, the answer to the

question of whether Berkley must defend S&H is deferred until Berkley has had an

opportunity to conduct discovery into these defenses and to brief their merits. See

Fed. R. Civ. P. 56(d) (“If a nonmovant . . . cannot present facts essential to justify its

opposition, the court may: (1) defer considering the motion or deny it; (2) allow time

to obtain affidavits or declarations or to take discovery; or (3) issue any other

appropriate order.”).

CONCLUSION

For the reasons discussed above, Berkley’s motion to dismiss is granted in part

and denied in part. S&H’s fourth cause of action arising from the breach of the

covenant of good faith and fair dealing survives, but it may not recover consequential

damages on its third cause of action for breach of contract.

The Court grants in part and defers adjudicating in part S&H’s summary

judgment motion. The Policy’s plain terms require Berkley to defend S&H in the

Merns Action. Before the Court orders Berkley to do so, Berkley shall have an

opportunity to take discovery into affirmative defenses that depend on facts beyond

the meaning of the Policy’s plain terms – i.e., S&H’s “satisfaction of policy conditions

and prior knowledge.”

Berkley shall answer the complaint within thirty (30) days of this Order.

SO ORDERED.

Dated: Central Islip, New York s/ Denis R. Hurley

March 4, 2022 Denis R. Hurley

United States District Judge