Posts tagged "Inc."

The Hanover Insurance Group, Inc. v. Raw Seafoods, Inc. (Lawyers Weekly No. 11-048-17)

NOTICE:  All slip opinions and orders are subject to formal revision and are superseded by the advance sheets and bound volumes of the Official Reports.  If you find a typographical error or other formal error, please notify the Reporter of Decisions, Supreme Judicial Court, John Adams Courthouse, 1 Pemberton Square, Suite 2500, Boston, MA, 02108-1750; (617) 557-1030; SJCReporter@sjc.state.ma.us

15-P-1554                                       Appeals Court

THE HANOVER INSURANCE GROUP, INC.  vs.  RAW SEAFOODS, INC.

No. 15-P-1554.

Suffolk.     September 16, 2016. – April 26, 2017.

Present:  Agnes, Neyman, & Henry, JJ.

Insurance, General liability insurance, Coverage.  Words, “Occurrence.”

Civil action commenced in the Superior Court Department on September 21, 2012.

The case was heard by Christine M. Roach, J., on motions for summary judgment.

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Posted by Stephen Sandberg - April 27, 2017 at 11:41 pm

Categories: News   Tags: , , , , , , ,

Liberty Mutual Insurance Co. v. Peoples Best Care Chiropractic and Rehabilitation, Inc., et al. (Lawyers Weekly No. 12-047-17)

COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT.
1684CV01239-BLS2
____________________
LIBERTY MUTUAL INS. CO.
v.
PEOPLES BEST CARE CHIROPRACTIC AND REHABILITATION, INC.; PLEASANT VALLEY CHIROPRACTIC LLC; and RAGHUBINDER BAJWA, M.D., P.C.
____________________
MEMORANDUM AND ORDER ALLOWING PLAINTIFF’S
MOTION FOR SUMMARY JUDGMENT
This lawsuit concerns the rates that Liberty Mutual Insurance Company pays to chiropractic clinics under Personal Injury Protection (“PIP”) benefit provisions in personal automobile insurance policies. Liberty seeks a declaration that an Illinois court’s final judgment that approved the settlement of a nationwide class action regarding these rates is entitled to full faith and credit in Massachusetts and binds the three Defendants, who did not opt out of the Illinois proceeding and therefore are members of the plaintiff class in that case. Defendant Raghubinder Bajwa, M.D., P.C., was defaulted for failing to answer the complaint. Defendants Peoples Best Chiropractic and Rehabilitation, Inc. (“PBC”) and Pleasant Valley Chiropractic LLC (“PVC”) (collectively, the remaining “Defendants”) oppose Liberty’s request and assert counterclaims seeking to bar Liberty from implementing the settlement.
The Court concludes that Liberty is entitled to summary judgment in its favor on all claims. With respect to Liberty’s affirmative claim, the Court concludes that there is an actual controversy between the parties and that the Illinois final order and judgment is entitled to full faith and credit in Massachusetts courts. In addition, Liberty is entitled to judgment as a matter of law on Defendants’ counterclaims. Defendants sought leave to conduct certain discovery before the Court decided Liberty’s summary judgment motion. The Court denies this request because none of the discovery sought by Defendants concerns any factual issue relevant to whether Liberty is entitled to summary judgment.
1. Factual Background. Liberty was the defendant in a multi-state class action filed in Illinois state court to challenge the way Liberty determines what rates it will pay to chiropractors and other medical care providers under the no-fault PIP
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provisions of personal automobile insurance policies. The Illinois case was captioned Leonon Chiropractic Clinic, P.C. v. Liberty Mutual Insurance Company and docketed as Illinois Circuit Court for St. Clair County, no. 14-L-52.
Liberty compares billed charges for medical treatment to a database of charges that Liberty believes are for similar services provided in the same geographic area. Since 2011 Liberty has done so using data maintained by a non-profit company called FAIR Health, Inc. Liberty generally refuses to pay rates any higher than the 80th percentile of similar charges according to the FAIR Health data. The plaintiffs in the Illinois case claimed that this practice was unlawful.
The parties to the Illinois lawsuit entered into a Stipulation of Settlement in October 2014 that would resolve all claims on behalf of a proposed class. The “settlement class” included subclasses of policyholders, claimants, and medical providers in thirty-eight states, including Massachusetts. The provider subclass consisted of medical care providers that provided PIP-covered treatment from June 25, 2008, through October 31, 2014, and had their requests for reimbursement reduced by Liberty as a result of its use of a computerized database.
The essence of the proposed settlement was that the parties agreed to the method that Liberty would use to determine the reasonableness of charges for covered treatment during the five years after October 31, 2014. The settlement agreement provided that, if the class were certified and the settlement were approved, then the class members would stipulate that Liberty’s determination of the reasonableness of charges for future claims during this five-year period using the agreed-upon method would be lawful, release all claims arising from payments by Liberty made on or before October 31, 2014, and agree not to sue Liberty to contest its determination of the reasonableness of future charges using the agreed-upon method.
After the Illinois court preliminarily approved the settlement, a court-approved notice was sent to each potential class member, including PBC and PVC. This notice was sent to Defendants at the same addresses they used when billing Liberty; it is undisputed that the notice was sent to the correct addresses. Defendants had the opportunity to opt out of the proposed class, but they did not do so.
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At the final settlement hearing, Attorney Brian McNiff (who now represents PBV and PVC in this case) objected to the settlement on the grounds that it was unfair to Massachusetts class members. The Illinois court overruled all objections, certified the proposed class, and approved the settlement in February 2015. That decision was affirmed on appeal in February 2016.
2. Actual Controversy. There is an actual controversy between the parties regarding the enforceability of the Illinois final order that can be resolved by declaring the rights of the parties in accord with G.L. c. 231A.
Since the Illinois class action settlement was approved in February 2015, Defendants have brought more than thirty lawsuits against Liberty in Massachusetts district courts in which Defendants have challenged Liberty’s payment of less than the full face amount of a PIP charge. Liberty contends that such claims are barred by the covenant not to sue in the Illinois class action settlement, and that the final order by the Illinois court is enforceable in Massachusetts under the Full Faith and Credit clause of the United States Constitution. Defendants contend that the final order approving the Illinois class action settlement is not enforceable in Massachusetts and that they are not bound by it.
The fact that Defendants have no pending lawsuits against Liberty does not put an end to the actual controversy regarding whether the Illinois final order is valid and enforceable against Massachusetts class members like the Defendants. Cf. St. George Greek Orthodox Cathedral of Western Mass., Inc. v. Fire Dept. of Springfield, 462 Mass. 120, 124 (2012) (actual controversy existed as to validity of city ordinance regarding automatic fire alarm systems, even if city had not commenced any enforcement action against plaintiff).
Defendants are continuing to provide chiropractic services and thus are quite likely to continue seeking reimbursement from Liberty under PIP benefits provided to Massachusetts drivers. It is evident that Defendants will continue to dispute whether Liberty is entitled to determine the reasonableness of Defendants’ charges using the method that Defendants and all other class members stipulated to in the Illinois proceeding. Indeed, Defendants own counterclaims in this action—in which they claim that Liberty violates Massachusetts law if it complies with the terms of
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the Illinois final order—confirm that there remains a live, actual controversy between the parties.
3. Full Faith and Credit. The undisputed facts show that the Illinois final order and judgment is entitled to full faith and credit in Massachusetts courts and that Defendants, as members of the plaintiff class in the Illinois proceeding, are bound by that order and by the covenant not to sue Liberty.1
“[T]he full faith and credit clause of the United States Constitution, art. IV, § 1, requires Massachusetts courts to recognize a final judgment obtained in another State as long as the judgment-rendering State possessed personal jurisdiction over the parties and jurisdiction over the subject matter of the action in which the judgment was rendered.” Bishins v. Richard B. Mateer, P.A., 61 Mass. App. Ct. 423, 428 (2004). “The Constitution’s Full Faith and Credit Clause is implemented by the Federal Full Faith and Credit Statute, 28 U.S.C. § 1738.” Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 80 (1984). Under that statute, “a judgment entered in a class action, like any other judgment entered in a state judicial proceeding, is presumptively entitled to full faith and credit” in every other court in the United States. Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367, 374 (1996).
3.1. Due Process and Personal Jurisdiction. Defendants’ assertion that it would violate due process for them to be bound by the Illinois final order is without merit. A state court may bind an absent plaintiff in a class action “even if he or she lacks minimum contacts with the forum, so long as basic due process protections are provided.” Moelis v. Berkshire Life Ins. Co., 451 Mass. 483, 486-487 (2008). Due process is satisfied so long as members of a plaintiff class are given notice of the proceeding, an opportunity to opt out of the class, and “an opportunity to be heard and participate in the litigation, whether in person or through counsel.” Philips Petroleum Co. v. Shutts, 472 U.S. 797, 812 (1985).
1 At oral argument Liberty waived the portion of its prayer for relief seeking a declaration that the Illinois final order enjoins Defendants from bringing lawsuits in Massachusetts or elsewhere. It is not at all clear that “a state-court injunction barring a party from maintaining litigation in another State” must be enforced under the Full Faith and Credit Clause. See Baker v. General Motors Corp., 522 U.S. 222, 235-236 & n.9 (1998). But, as Liberty recognized by waiving this prayer for relief, the Court can resolve the current controversy between the parties without reaching that issue.
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The record shows, and the Illinois appellate court found, that all of these due process requirements were satisfied in this case. Both Defendants were given notice of the lawsuit and of the proposed class action settlement. Defendants were told they could opt out of the class, and took no action to do so. They were represented by class counsel. The Illinois court expressly found that the class members received adequate representation. And Defendants had the opportunity to lodge an objection to the proposed settlement, by themselves or through counsel of their choice. Nothing more was required to satisfy due process.
Defendants received adequate notice of the class action. Service of the notice by first class mail to Defendants’ correct address was sufficient because it was “reasonably calculated” to inform Defendants of the pending class action and proposed settlement, and of their opportunity to raise objections. Town of Andover v. State Financial Svcs., Inc., 432 Mass. 571, 574-575 (2000), quoting Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950); accord Phillips Petroleum, 472 U.S. at 812-814 (notice to members of putative class of plaintiffs by first class mail with opportunity to opt out satisfies due process). Liberty is not required to present direct evidence that Defendants in fact received the notice. Id.
Defendants’ complaint that the Illinois court nullified certain opt-out requests by Massachusetts medical providers and their assertion that the court barred Defendants from seeking legal advice from their own lawyers mischaracterizes what actually happened in the Illinois proceeding. In its final order and judgment, the Illinois found that three Massachusetts law firms, including the firm that now represents Defendants in this action, had sent “materially false and misleading” descriptions of the proposed class action settlement to medical providers in Massachusetts. As a remedy, the court invalidated the roughly 500 opt-out notices that had been submitted by Massachusetts providers and ordered that those providers be provided with a curative notice regarding the proposed settlement and given additional time to decide whether they still wished to opt out. Roughly 300 providers who received the curative notice again opted out. None of that affected Defendants, because they had never opted out in the first place. The Illinois court also barred the lawyers from reiterating the substance of any of the particular
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statements that the court specifically found to be false or misleading. Nothing in the Illinois order barred Defendants from speaking with their attorneys, however. Defendants’ assertion that their lawyers were subject to a complete gag order and not allowed to speak with their clients is incorrect.
3.2. Consistency with Massachusetts Law. Defendants’ assertion that the Illinois judgment violates Massachusetts law and therefore is not entitled to full faith and credit in Massachusetts is also without merit.
First, the Illinois settlement does not rewrite the standard Massachusetts Automobile Insurance Policy and thus did not have to be approved by the Massachusetts Commissioner of Insurance. The standard policy provides that PIP benefits include payment of “all reasonable expenses incurred as a result of the accident for necessary medical, surgical, x-ray and dental services.” This coverage is mandated by statute. See G.L. c. 90, § 34A (definition of “personal injury protection”) and § 34M (mandating PIP benefits). An insurer providing PIP benefits is not required to pay whatever amount a medical provider chooses to bill; only reasonable expenses need be paid. Columbia Chiropractic Group, Inc. v. Trust Ins. Co., 430 Mass. 60, 64 (1999); accord Boston Medical Ctr. Corp. v. Secretary of Exec. Office of Health and Human Svcs., 463 Mass. 447, 456-457 (2012) (statute requiring Medicaid program to reimburse hospitals’ “reasonable” costs does not mandate reimbursement of actual but unreasonable costs).
Nothing in the settlement agreement approved in the Illinois judgment modifies Liberty’s obligation under the standard policy to pay “reasonable expenses.” To the contrary, the approved settlement merely reflects an agreement as to how Liberty may go about determining whether payment requests by medical providers are reasonable or not. Nothing in the standard policy or the underlying statute bars an auto insurer and a single medical provider from reaching agreement as to what range of rates both sides consider to be reasonable for purposes of paying PIP benefits. The mere fact that the Illinois judgment resolved a class action, rather than a dispute with a single medical provider, is immaterial.
Second, the stipulation of settlement approved by the Illinois court does not appear to violate G.L. c. 176D, § 3A. The settlement provides that Liberty may
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determine what constitutes a reasonable charge for a covered treatment using any of several different methods, including by paying “the amount authorized by a written PPN or PPO agreement to which the Medical Provider is a party.” The Court agrees with Defendants that, if this provision allowed Liberty to take advantage of low rates that some preferred provider network or organization had negotiated with some insurer other than Liberty, then it would violate § 3A. In relevant part, that statute bars insurers from setting “the price to be paid to any health care facility or provider by reference to the price paid, or the average of prices paid, to that health care facility or provider under a contract or contracts with any other nonprofit hospital service corporation, medical service corporation, insurance company, health maintenance organization or preferred provider arrangement. G.L. c. 176D, § 3A, clause (iii). But the Court construes this provision only as allowing Liberty to hold a medical provider to rates set in a contract between Liberty and a PPN or PPO in which the medical provider is a member. Construed in this manner, the provision does not violate § 3A.
4. Disposition of Counterclaims. The rulings above also dispose of Defendants’ three counterclaims.
In Count I, Defendants claim that the Illinois settlement violates G.L. c. 176D, § 3A, because it allows Liberty to force medical providers to accept payment based on prices paid under contracts with insurers other than Liberty. As explained above, the Court construes the disputed settlement provision only as allowing Liberty to hold medical providers to rates established in contracts to which Liberty is a party. This claim therefore fails as a matter of law.
In Count II, Defendants claim that the Illinois settlement has the effect of rewriting the standard Massachusetts Automobile Insurance Policy and therefore, under G.L. c. 175, § 113A, cannot take effect in Massachusetts unless and until it is reviewed and approved by the Commissioner of Insurance. As discussed above, Defendants mischaracterize the Illinois settlement. The agreement approved by the Illinois court regarding what rates are reasonable does not rewrite the standard policy provision requiring that as part of any PIP benefits Liberty must pay reasonable medical expenses. This claim also fails as a matter of law.
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Finally, in Count III Defendants allege that Liberty violated the Illinois final order “by asserting that it is the provider whose participation in the Class Settlement controls the payment of future benefits.” The Illinois class action was brought on behalf of medical providers. The settlement approved by the Illinois court was a settlement in which Liberty and all participating medical providers (including Defendants) agreed what payment levels would be deemed “reasonable” under PIP benefit provisions in automobile policies. The settlement class approved by the Illinois court included a policyholder subclass, a claimant subclass, and a provider subclass. All members of the provider subclass, including Defendants, are bound by the settlement agreement. Liberty has not violated the Illinois court’s order by accurately explaining what that order provided. This claim also has no merit as a matter of law.
ORDER
Plaintiff’s motion for summary judgment is ALLOWED. Final judgment shall enter dismissing Defendants’ counterclaims with prejudice and also declaring that: (1) the Final Order and Judgment entered in Lebanon Chiropractic LLC v. Liberty Mutual Ins. Co., Illinois Circuit Court for St. Clair County, civil action no. 14-L-521, is entitled to full faith and credit in the courts of the Commonwealth of Massachusetts; and (2) Defendants Peoples Best Care Chiropractic and Rehabilitation, Inc., Pleasant Valley Chiropractic LLC, and Raghubinder Bajwa, M.D., P.C., are bound by the terms of the Lebanon Chiropractic Final Order and Judgment.
April 7, 2017
___________________________
Kenneth W. Salinger
Justice of the Superior Court

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Posted by Stephen Sandberg - April 27, 2017 at 8:06 pm

Categories: News   Tags: , , , , , , , , , , ,

CRA International, Inc. v. Painter (Lawyers Weekly No. 12-039-17)

COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT.
1684CV02417-BLS2
____________________
CRA INTERNATIONAL, INC.
v.
DONALD J. PAINTER
____________________
MEMORANDUM AND ORDER ALLOWING PLAINTIFF’S MOTION FOR JUDGMENT ON THE PLEADINGS AND MOTION TO DISMISS COUNTERCLAIM
This lawsuit arises from CRA International, Inc.’s short-lived employment of Donald J. Painter. CRA seeks a declaration that, because Mr. Painter worked for CRA for less than a year, Painter is contractually obligated to repay his $ 30,000 signing bonus and a $ 900,000 loan, pay all interest that has accrued on that loan, and reimburse CRA for reasonable attorneys’ fees and expenses incurred to collect that loan. Painter asserts that his employment agreement and promissory note were induced by intentional fraud or negligent misrepresentations and are therefore “invalid” and unenforceable. He also asserts a counterclaim for fraud and seeks leave to amend facts alleged in his counterclaim.
The Court concludes that CRA is entitled to the dismissal of Painter’s counterclaim and that Painter’s proposed amendment of his counterclaim would be futile. It also concludes that, given the facts admitted by Painter in his answer and the failure of his fraud in the inducement defense, CRA is entitled to judgment in its favor on its claim for declaratory judgment. The Court will allow CRA’s motion for judgment on the pleadings and to dismiss Painter’s counterclaim, deny Painter’s motion to amend his counterclaim, deny CRA’s motion to strike Painter’s jury demand as moot, and order the entry of a declaratory judgment in CRA’s favor.
1. CRA’s Motion to Dismiss the Counterclaim. Painter’s counterclaim for fraud fails as a matter of law because it does not allege any facts plausibly suggesting that CRA made a false statement of material fact to Painter or that CRA failed to disclose some material information that it had a duty to disclose. See generally Lopez v. Commonwealth, 463 Mass. 696, 701 (2012) (to survive a motion to dismiss under Mass. R. Civ. P. 12(b)(6), a complaint or counterclaim must allege facts that, if true, would “plausibly suggest[] … an entitlement to relief”) (quoting Iannacchino v. Ford
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Motor Co., 451 Mass. 623, 636 (2008), and Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007)). Painter’s proposed amendment to his counterclaim would be futile for the same reasons.
1.1. The Counterclaim Fails to Allege Any Fraud with Particularity. A claim of fraudulent inducement must be alleged with particularity in accord with Mass. R. Civ. P. 9(b). See VMS Realty Inv., Ltd. v. Keezer, 34 Mass. App. Ct. 119, 119-120 (1993). This rule “heightens the pleading requirements placed on plaintiffs who allege fraud and deceit.” Equipment & Systems for Industry, Inc. v. NorthMeadows Constr. Co., Inc., 59 Mass. App. Ct. 931, 932 (2003) (rescript). Thus, “at a minimum,” Painter must support any claim of fraudulent inducement by specifically alleging “the identity of the person(s) making the” allegedly fraudulent “representation, the contents of the misrepresentation, and where and when it took place,” and must also “specify the materiality of the misrepresentation, [his] reliance thereon, and resulting harm.” Id. at 931-932.
Painter’s existing counterclaim is based on two alleged misrepresentations by CRA. Neither is sufficient to support a counterclaim for fraud.
The allegation that CRA told Painter that CRA had “done recent work with a few major clients in the U.S. oil and gas market” is too vague to support Painter’s counterclaim. To state a claim for fraud, a claimant must allege facts plausibly suggesting that the defendant knowingly made a false statement of material fact, that it did so for the purpose of inducing the claimant to act on it, and that the claimant reasonably relied upon that false statement to his detriment. See Masingill v. EMC Corp., 449 Mass. 532, 540 (2007). Vague and general statements cannot constitute an unlawful misrepresentation of fact. Id. at 544 (alleged representation to employee that supervisor will “make you whole” held “too vague” to support a claim for misrepresentation, as a matter of law). It is not reasonable, as a matter of law, to rely upon “vague and indefinite” statements like the one CRA allegedly made regarding recent work. See Martins v. University of Massachusetts Medical School, 75 Mass. App. Ct. 623, 633 (2009).
The further allegation that CRA asked Painter to confirm that he would commit himself to working to grow CRA’s Marakon oil and gas industry consulting
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practice for six to seven years cannot support a counterclaim for fraud. Asking a potential employee about his commitment to a business is not a statement of fact and therefore cannot give rise to a claim for fraud. Cf. Sahin v. Sahin, 435 Mass. 396, 403 (2001) (“statements of opinion or belief as to business operations, made without certainty, do not rise to level of statements of fact and do not constitute fraudulent misrepresentations”).
1.2. The Proposed Amended Counterclaim Would Be Futile. Mr. Painter seeks leave to amend his counterclaim in an attempt to bolster the factual premise for his claim of fraud. The Court will deny this motion because the proposed amendment would be futile, in that the amended counterclaim still could not survive a motion under to dismiss for failure to state a claim upon which relief can be granted. See generally Johnston v. Box, 453 Mass. 569, 583 (2009) (“Courts are not required to grant motions to amend prior [pleadings] where ‘the proposed amendment … is futile.’ ” (quoting All Seasons Servs., Inc. v. Commissioner of Health & Hosps. of Boston, 416 Mass. 269, 272 (1993)); Thermo Electron Corp. v. Waste Mgmt. Holdings, Inc., 63 Mass. App. Ct. 194, 203 (2005) (affirming denial of motion for leave to assert counterclaim that would have been futile); Mancuso v. Kinchla, 60 Mass. App. Ct. 558, 572 (2004) (if amendment to add claim could not survive motion to dismiss, allowing amendment would be exercise in futility).
Painter’s proposed amended counterclaim would augment the factual allegations underlying his counterclaim in two ways. Neither of these additional categories of allegations would state a viable claim for fraud.
First, Painter seeks to allege that CRA withheld material information from him. Specifically, the amended counterclaim would allege that CRA failed to disclose that its prior oil and gas consulting clients were all clients of former CRA employees who no longer worked for the company. It would also allege that CRA failed to disclose material facts regarding the financial condition and performance of its Marakon unit.
These allegations that CRA withheld information from Painter cannot support a claim for fraud because Painter alleges no facts plausibly suggesting that CRA had any duty to disclose that information to Painter. “Fraud by omission requires both concealment of material information and a duty requiring disclosure.” Sahin v. Sahin,
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435 Mass. 396, 402 n.9 (2001). “A duty to disclose exists where ‘(i) there is a fiduciary or other similar relation of trust and confidence, (ii) there are matters known to the speaker that he knows to be necessary to prevent his partial or ambiguous statement of the facts from being misleading, or (iii) the nondisclosed fact is basic to, or goes to the essence of, the transaction.’ ” Knapp v. Neptune Towers Assocs., 72 Mass. App. Ct. 502, 507 (2008), quoting Stolzoff v. Waste Sys. Intl., Inc., 58 Mass. App. Ct. 747, 763 (2003). The amended complaint does not plausibly suggest that any of these circumstances was present here.
The amended counterclaim would not suggest that CRA had a fiduciary or similar relationship with Painter. When a company like CRA tries to recruit an executive like Painter, those negotiations do not establish a fiduciary relationship or some other relationship of trust and confidence that would carry with it a duty on the part of the company to disclose information about its operations and business prospects. Indeed, even once an employment relationship is formed the employer still does not have any fiduciary or other duty to tell its employees or prospective employees information about the employer’s business prospects. See Ross v. Burrage, 233 Mass. 439, 446-448 (1919).
Nor would the amended counterclaim suggest that the allegedly undisclosed information went to the essence of the transaction or caused anything Painter was told to be misleading. According to Painter, CRA made clear that it was not well-established in the United States market for oil and gas consulting firms and that it had no current clients in that market; all that CRA represented was that it had “done recent work with a few major clients in the U.S. oil and gas market.” In Painter’s email communications with CRA before he was hired, which are summarized in the proposed amended complaint and attached to it as exhibits, Painter makes clear he knew that Marakon was not making any money and that Painter would have to land or help land new clients in order to turn it into a profitable business. Painter alleges that he told CRA it would take him at least two years and possibly longer to turn Marakon into a profitable operation.
Since Painter acknowledges that he had years of experience in the field, he “should have inquired” if he was “interested in more specific information.” Knapp,
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72 Mass. App. Ct. at 509. CRA had no affirmative duty to volunteer and provide additional information regarding the weakness of its market position. Id.
Second, Painter also seeks to allege that, during the same conversation when CRA asked Painter to confirm that he would be committed to CRA’s Marakon consulting practice for six to seven years, CRA itself told Painter that it was “definitely committed” to a six to seven year process of growing its oil and gas practice.
These allegations cannot support a claim for fraud because Painter alleges no facts plausibly suggesting that CRA’s stated commitment to its Marakon practice was false when made. To the contrary, the proposed amended counterclaim would allege that in May 2016 CRA “made an abrupt and disappointing decision to dissolve Marakon’s America’s Oil and Gas Practice.” Thus, Painter’s own allegations make clear that CRA changed its mind, not that CRA deliberately misled Painter when it allegedly said in 2015 that it was committed to supporting efforts by Painter to grow the Marakon business.
A plaintiff may base a claim of misrepresentation upon a false promise, rather than a false representation of fact, only if the plaintiff alleges facts plausibly suggesting that that “the promisor had no intention to perform the promise at the time it was made.” See Cumis Ins. Society v. BJ’s Wholesale Club, Inc., 455 Mass. 458, 474 (2009), quoting Yerid v. Mason, 341 Mass. 527, 530 (1960). It is not enough for Painter to allege that CRA promised to keep the Marakon business going and did not keep that commitment, because an “intention not to perform a promise” cannot be inferred merely from later “nonperformance of the promise.” Galotti v. United States Trust Co., 335 Mass. 496, 501 (1957); accord McCartin v. Westlake, 36 Mass. App. Ct. 221, 230 n.11 (1994). “Changing one’s mind is not proof that an earlier statement was false.” Backman v. Smirnov, 751 F. Supp. 2d 304, 316 n.13 (D. Mass. 2010) (Stearns, J.) (applying Massachusetts law).
2. CRA’s Motion for Judgment on the Pleadings on Its Claims. As the plaintiff in this action, CRA may obtain judgment on the pleadings in its favor if, “on the undenied facts alleged in the complaint and assuming as true all the material allegations of fact in the answer, the plaintiff is entitled to judgment as a matter of law.” See United States v. Blumenthal, 315 F.2d 351, 352 (3d Cir.1963); accord, e.g.,
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New Zealand Lamb Co., Inc. v. United States, 40 F.3d 377, 380 (Fed. Cir. 1994). “In other words, if a defendant’s answer admits, alleges, or fails to deny facts which, taken as true, would entitle a plaintiff to relief on one or more claims supported by the complaint, then the plaintiff’s Rule 12(c) motion should be granted.” Lowden v. County of Clare, 709 F. Supp. 2d 540, 546 (E.D. Mich. 2010).1
2.1. Facts Admitted in Painter’s Answer. Mr. Painter has admitted in his answer that the following facts are true.
Painter began interviewing for a job at CRA in March 2015. Ultimately, CRA offered Painter employment as a Vice President in CRA’s Marakon North American management consulting practice, where Painter was to be in charge of building an oil and gas consulting advisory business. Painter accepted CRA’s offer.
CRA and Painter both executed an Offer Letter on or about April 23, 2015. This offer letter stated that Painter’s employment was at will, and that either party could “choose to end the employment relationship at any time and for any reason on sixty days’ written notice. This letter contained an integration clause stating that it “constitutes the entire agreement with respect to this offer of employment with CRA, and supersedes all other prior agreements and understandings, both written and oral, with respect to [Painter’s] employment with CRA.
The offer letter stated that CRA would pay Painter $ 400,000 per year plus a one-time signing bonus of $ 30,000, and that Painter would also be eligible for additional discretionary bonuses. The letter also provided that if Painter’s employment with CRA were to end within twelve months after he first started working at CRA, then Painter would have to repay the entire $ 30,000 signing bonus within thirty days of his departure from CRA.
In addition, the offer letter accepted by Painter provided that CRA would loan Painter $ 900,000 for three years. This was a forgivable loan, with forgiveness conditioned on Painter continuing to be employed by CRA. The offer letter provided that Painter had to repay one-third of the loan principal plus all accrued interest on each of Painter’s first, second, and third anniversaries with CRA, but that those
1 Cf. Smaland Beach Ass’n, Inc. v. Genova, 461 Mass. 214, 228 (2012) (judicial construction of federal rules of civil procedure applies to parallel state rules).
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payments would be refunded and those obligations would be forgiven if Painter was still employed by CRA on each anniversary. It also provided that if Painter’s employment with CRA were to end before the forgiveness of the loan was completed, then Painter would have to repay any remaining unforgiven loan balance, including accrued and unforgiven interest, within thirty days of leaving CRA. In addition, the offer letter provided that if CRA had to initiate collection activities to collect unpaid loan principal or interest, then Painter would be obligated to pay CRA for any reasonable legal fees or expenses incurred to collect the loan. Painter also executed a promissory note reiterating the same obligations to repay unforgiven loan amounts and to compensate CRA for reasonable attorneys’ fees and expenses.
Painter started working for CRA on July 20, 2015. During the spring of 2016 CRA notified Painter that his employment would be terminated. Painter’s employment with CRA ended on July 9, 2016, less than one year after he started working for CRA.
CRA offered Painter a separation package that would include forgiveness of one-third of the $ 900,000 loan principal, all accrued interest on the loan, and the full $ 30,000 signing bonus, in exchange for Painter releasing any claims he may have against CRA. Painter did not accept that offer.
Painter has not repaid the signing bonus or any part of the loan principal or accrued interest.
In June 2016 Painter’s legal counsel sent a demand letter to CRA. The letter asserted that Painter had no obligation to repay his signing bonus or the $ 900,000 loan. It also asserted that CRA had fraudulent induced Painter to join CRA and that Painter had suffered compensable damages as a result.
2.2. CRA Is Entitled to Judgment as a Matter of Law. If Painter’s employment agreement and promissory note are enforceable, then CRA is entitled to recoup the $ 30,000 signing bonus, the $ 900,000 loan, all interest that has accrued on that loan, and any legal fees and expenses that CRA reasonably incurred in collecting the loan principal and interest. Painter concedes that he worked for CRA for less than one year. And the plain terms of the offer letter that Painter accepted provide that Painter must therefore pay or repay these amounts.
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Painter tries to avoid this result by asserting an affirmative defense that CRA fraudulently induced him to enter into this employment agreement in the first place. If Painter had been induced to accept and sign the offer letter by some kind of deliberate fraud, then his employment agreement with CRA would be voidable. See Shaw’s Supermarkets, Inc. v. Delgiacco, 410 Mass. 840, 842 (1991) (“A contract induced by fraudulent misrepresentations is voidable, not void. … The rule applies in the employment context as well.”). As explained above, however, Painter’s counterclaim for fraud fails as a matter of law because Painter does not allege with the requisite particularity that CRA made any fraudulent misrepresentations while recruiting Painter. It necessarily follows that Painter’s affirmative defense of fraudulent inducement fails as a matter of law as well. An affirmative defense of fraudulent inducement must be pleaded with particularity; as a result, “the defense of fraud is not available” to a defendant who fails to state with sufficient particularity “the circumstances constituting fraud.” DiPietro v. Sipex Corp., 69 Mass. App. Ct. 29, 39 (quoting Mass. R. Civ. P. 9(b)), rev. denied, 450 Mass. 1102 (2007).
Nor can Painter avoid his contractual obligations on a theory that he was induced to sign the employment agreement and promissory note by negligent misrepresentations that were not intentionally fraudulent. Painter asserts an affirmative defense that his acceptance of the CRA’s offer was induced by negligent misrepresentations. He was not required to do so with particularity, because under Massachusetts law the heightened pleading requirements of Rule 9(b) do not apply to claims of negligent misrepresentation. See DeWolfe v. Hingham Centre, Ltd., 464 Mass. 795, 798 n.8 (2013) (construing complaint that alleged “material misrepresentation” as stating claim for negligent misrepresentation because “fraud has not been pleaded with sufficient particularity to state a claim for intentional or reckless misrepresentation”). A contract may be voidable if a party was induced to enter into it by a nonfraudulent, negligent misrepresentation of a material fact. See Yorke v. Taylor, 332 Mass. 368, 373-374 (1955); Restatement (Second) of Contracts § 164 and comment b (1981). But Painter’s negligent misrepresentation defense is barred the contractual merger clause, in which Painter agreed that that the written employment agreement superseded any prior understandings with
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respect to Painter’s employment by CRA. Such a provision does not bar a claim or defense of intentional fraud in the inducement, but it does bar claims or defenses of unintentional, negligent misrepresentations of fact. See Sound Techniques, Inc. v. Hoffman, 50 Mass. App. Ct. 425, 429-434 (2000), rev. denied, 433 Mass. 1102 (2001).
In any case, CRA would be entitled to judgment as a matter of law on its affirmative claims as to repayment of the signing bonus and loan even if Painter’s affirmative defenses that he was induced to sign the employment agreement through fraud or negligent misrepresentation were legally viable, which they are not.
Assuming that Painter could prove his affirmative defenses of inducement by fraud or negligent misrepresentation, he could have his entire employment agreement rescinded or he could choose to have the agreement remain in place. But he would not have the option of accepting the parts of the contractual arrangement that he liked and selectively voiding the others. “[U]nless rescinded ‘a voidable contract imposes on the parties the same obligations as if it was not voidable.’” Berenson v. French, 262 Mass. 247, 260-261 (1928), quoting Williston, Contracts, § 15 (1920); accord 27 Williston on Contracts § 69:55 (4th ed. 2003) (though fraud may be a ground to reform a written contract or instrument, fraud perpetrated to induce party to enter into agreement is only ground for rescission, not reformation).
If Painter could prove fraud or negligent misrepresentation in the inducement, he could not rescind his employment agreement with CRA unless he repaid the signing bonus and loan.2 See, e.g., Jurewicz v. Jurewicz, 317 Mass. 512, 517 (1945) (“The plaintiff in rescinding the transaction as voidable for fraud must give up all she received under it.”); Mullen v. Old Colony R. Co., 127 Mass. 86, 89 (1879) (“It is well established that, if a party enters into a contract and in consideration of so doing receives money or merchandise, and afterward seeks to avoid the effect of such contract as having been fraudulently obtained, he must first give back to the other party the consideration received.”).
2 CRA implicitly concedes that Painter would be entitled to retain his $ 400,000 annual salary as fair compensation for his year of work on behalf of CRA. Painter has not claimed or argued that the principle of quantum meruit would also entitle him to keep his $ 30,000 signing bonus or the $ 900,000 loan, which Painter had agreed by contract must be repaid if his employment lasted less than one year.
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In sum, Painter must repay the loan and signing bonus whether his employment agreement is voidable on the ground of fraudulent inducement or not. If Painter had a viable counterclaim for fraud, then he would have a viable defense to CRA’s contract claim for attorneys’ fees and legal expenses. But he would still have to repay the signing bonus and loan. And since the facts alleged by Painter in support of his counterclaim make clear that he has no affirmative defense of inducement by fraudulent or negligent misrepresentation, CRA is entitled to judgment in its favor with respect to its legal fees and expenses as well.
ORDER
Plaintiff’s motion for judgment on the pleadings and motion to dismiss counterclaim is ALLOWED. Defendant’s motion for leave to amend his counterclaim is DENIED as futile. Plaintiff’s motion to strike Defendant’s jury demand is DENIED as moot.
Final judgment shall enter dismissing Defendant’s counterclaim with prejudice and declaring that: (1) Donald J. Painter is obligated to repay to CRA International, Inc., the $ 30,000 signing bonus previously provided to Mr. Painter by CRA; (2) Mr. Painter is also obligated to repay to CRA the $ 900,000 principal amount of CRA’s prior loan to Mr. Painter and is also obligated to pay CRA all accrued interest on that loan amount plus any reasonable attorneys’ fees and other legal expenses that were reasonably incurred by CRA in collecting this loan; and (3) CRA did not engage in unlawful misrepresentation toward Mr. Painter and owes him no compensation for any damages.
April 11, 2017
___________________________
Kenneth W. Salinger
Justice of the Superior Court

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Posted by Stephen Sandberg - April 27, 2017 at 9:23 am

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Suffolk Construction Company, Inc. v. Benchmark Mechanical Systems, Inc., et al. (Lawyers Weekly No. 12-045-17)

COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT.
1384CV01463-BLS2
____________________
SUFFOLK CONSTRUCTION COMPANY, INC.
v.
BENCHMARK MECHANICAL SYSTEMS, INC. and READING CO-OPERATIVE BANK
____________________
MEMORANDUM AND ORDER ALLOWING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
This case arises from Suffolk Construction Company’s mistaken payment of monies to Benchmark Mechanical Systems rather than to Benchmark’s lender, Reading Co-Operative Bank. Suffolk had hired Benchmark as a subcontractor on a large construction project. Benchmark secured a line of credit by assigning to the Bank all money that Benchmark stood to collect from Suffolk under its subcontract. Suffolk mistakenly made payments totaling $ 3,822,500.49 to Benchmark instead of to the Bank. Benchmark held and spent those monies, rather than forward them to the Bank. After Benchmark went out of business, the Bank sued Suffolk. The Supreme Judicial Court ordered Suffolk to pay the Bank the full amount it should have paid under Benchmark’s assignment. See Reading Co-Operative Bank v. Suffolk Constr. Co., 464 Mass. 543, 557 (2013). With statutory interest included, Suffolk paid the Bank a judgment totaling $ 7,640,907.45.
Suffolk brought this action seeking to recover the surplus held by the Bank that was left after the Bank deducted its reasonable costs of collection and the principal and interest owed by Benchmark from the amount paid by Suffolk. In addition, Suffolk asserted common law claims against Benchmark seeking to recover the $ 3,822,500.49 in subcontract payments that Suffolk was compelled to pay a second time to the Bank. The Supreme Judicial Court recently held that Suffolk had stated viable claims against the Bank, but that its claims against Benchmark are barred by the applicable statute of limitations. See Suffolk Constr. Co. v. Benchmark Mechanical Systems, Inc., 475 Mass. 150 (2016).
Suffolk now moves for summary judgment as to its right to collect the surplus of roughly $ 1.35 million being held by the Bank. The Court will ALLOW this motion.
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This resolves all remaining claims. Suffolk and the Bank report that they have settled Suffolk’s claim that the Bank’s costs of collection were unreasonable, and that this settlement will take effect if the Court were to rule (as it does) that Suffolk is entitled to receive the full surplus amount that the Bank owes to Benchmark.
The SJC has held that under the circumstances of this case Suffolk is entitled to equitable subrogation as against Benchmark, meaning that it may “stand in Benchmark’s shoes as to the surplus” held by the Bank. Suffolk Constr., 475 Mass. at 156. This holding is the law of the case, is binding on all parties, and may not be reconsidered now that the case has been remanded to the Superior Court. See City Coal Co. of Springfield, Inc. v. Noonan, 434 Mass. 709, 712 (2001).1 It necessarily follows that Suffolk is therefore the “debtor” for purposes of G.L. c. 106, § 9-608(a)(4), and thus by law is entitled the full amount of the surplus held by the Bank. See Suffolk Constr., 475 Mass. at 155-156. Suffolk’s alternative theories as to why it is entitled to recover the surplus are therefore moot.
Benchmark’s claim that Suffolk owes it $ 964,642.51 for change orders that Benchmark carried out on the project, and that Benchmark should be able to recoup this amount from the surplus held by the Bank, is without merit. The summary judgment record demonstrates that the Bank, as Benchmark’s assignee, settled and resolved these claims against Suffolk. In exchange for a $ 35,000 payment by Suffolk, the Bank (acting as Benchmark’s assignee) executed a settlement agreement providing that this payment “constitutes full and final satisfaction, discharge and payment for any monies owed to Benchmark by Suffolk. The settlement agreement also expressly released “any rights Benchmark may have against Suffolk” arising out of or with respect to any work by Benchmark for Suffolk on this project. This release and settlement agreement did more than merely extinguish any right by Benchmark
1 The Court recognizes that an issue decided on appeal may be reopened by a trial judge after remand “if the evidence on a subsequent trial was substantially different, controlling authority has since made a contrary decision of the law applicable to such issues, or the decision was clearly erroneous and would work a manifest injustice.” Kitras v. Town of Aquinnah, 474 Mass. 132, 146 (2016), quoting King v. Driscoll, 424 Mass. 1, 8 (1996), quoting in turn United States v. Rivera-Martinez, 931 F.2d 148, 151 (1st Cir.), cert. denied, 502 U.S. 862 (1991). None of these circumstances is present here, however.
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to assert a claim directly against Suffolk for further payment; it also extinguished any debt owed to Benchmark by Suffolk.
ORDER
Plaintiff’s motion for summary judgment on the remaining claims is ALLOWED. Final judgment shall enter: (1) in favor of Suffolk Construction Company, Inc., on Counts VII and XI of its amended complaint by (a) Declaring that Suffolk is the equitable subrogee of Benchmark Mechanical Systems, Inc., with respect to the surplus remaining after Reading Co-Operative Bank applied Suffolk’s judgment payment to Benchmark’s outstanding debt to the bank, Suffolk is therefore the “debtor” for purposes of G.L. c. 106, § 9-608(a)(4), and Suffolk is entitled to recover the full amount of that surplus held by the Bank, and (b) Ordering Reading Co-Operative Bank to pay the full amount of that surplus to Suffolk Construction Company, Inc., forthwith; and (2) Dismissing all other remaining claims, counterclaims, and cross-claims with prejudice.
25 April 2017
___________________________
Kenneth W. Salinger
Justice of the Superior Court

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Posted by Stephen Sandberg - April 26, 2017 at 7:04 pm

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CareOne Management, LLC, et al. v. NaviSite, Inc. (Lawyers Weekly No. 12-043-17)

COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT.
1484CV00378-BLS2
1484CV00858-BLS2
____________________
CAREONE MANAGEMENT, LLC and PARTNERS PHARMACY SERVICES, LLC
v.
NAVISITE, INC
CONSOLIDATED WITH
NAVISITE, INC
v.
CAREONE MANAGEMENT, LLC and PARTNERS PHARMACY SERVICES
____________________
MEMORANDUM AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT
These consolidated lawsuits arise from the agreement by NaviSite, Inc., to develop and provide information technology services to CareOne Management, LLC and its affiliate Partners Pharmacy Services, LLC. NaviSite first contracted to provide an array of computerized services to CareOne. Several months later NaviSite contracted to provide a much more limited set of information technology services to Partners. After difficulties and disputes regarding implementation of its contract with CareOne, NaviSite threatened to and then did terminate both contracts.
CareOne and Partners asserted various claims against NaviSite, which in turn sued CareOne. (NaviSite also sued Partners, but Judge Sanders dismissed those claims.) NaviSite and CareOne both move for summary judgment; NaviSite does so on all claims while CareOne’s motion is limited to NaviSite’s claims against it.
The Court concludes that CareOne is entitled to summary judgment on the claims asserted against it by NaviSite, and that NaviSite is entitled to summary judgment on all claims asserted against it by CareOne and Partners. Final judgment will enter declaring the rights of the parties, with respect to the issues in controversy that CareOne and Partners identified in their claim for declaratory judgment, and dismissing all other claims with prejudice.
1. Background.
1.1. Undisputed Material Facts. The following are undisputed facts, as demonstrated in the evidentiary materials submitted by the parties or reasonable
inferences that one could draw from those facts. The Court “must … draw all reasonable inferences” from the evidence presented “in favor of the nonmoving party,” as a jury or judicial fact finder would be free to do at trial. Godfrey v. Globe Newspaper Co., Inc., 457 Mass. 113, 119 (2010). It has done so.
CareOne manages dozens of nursing homes. Partners operates commercial pharmacies that serve patients at more than 500 nursing homes, including those run by CareOne. These two companies are separate legal entities, though both were founded and are run by the same person.
CareOne retained NaviSite in September 2012 to develop, implement, host, and operate new computing services to be used at all of CareOne’s nursing facilities. The system design was to include “virtual desktops” through which CareOne employees could access programs, applications, and data that NaviSite would host on servers located at its facilities. It also included other computer services that would be implemented and hosted by NaviSite. NaviSite agreed that it would transition CareOne from its current IT vendor and begin providing the agreed upon services using NaviSite’s servers no later than January 1, 2013. The parties also agreed that CareOne would pay NaviSite certain upfront fees, but that the majority of the fees were to be billed and paid on a monthly basis for each component service after CareOne accepted delivery of that service. CareOne paid NaviSite roughly $ 580,000 in upfront charges upon signing of the parties’ contract.
The contract between CareOne and NaviSite consists of a number of interrelated documents that were executed at the same time. These parties executed a Master Statement of Work (“SOW”) that described many of the services that NaviSite agreed to provide through a “Third Party Provider.” They also executed a Master Services Agreement” (“MSA”). The SOW provided that it “is governed by and incorporates by reference, the terms and conditions of the” MSA. And these parties executed three detailed “Schedules” providing that NaviSite would provide CareOne with managed hosting services, managed messaging services, and cloud-enabled desktop as a service. These Schedules state that they are incorporated into and part of the MSA. Finally, at the same time these parties executed two sales orders in which
CareOne agreed to pay certain one-time and monthly fees for the managed hosting services. The sales orders state that they are subject to the terms of the MSA.
In November 2012 and December 2012 CareOne and NaviSite executed three more sales orders for email services and for the migration of CareOne’s existing email and SharePoint systems to NaviSite’s servers. These sales orders all state that they are subject to the terms of the MSA.
Separately, in November 2012 Partners and NaviSite executed a sales order for a Citrix production environment. This sales order originally designated CareOne as the purchaser, but it was revised by hand to change the purchaser to Partners. This sales order contains the same language as the others stating that it is subject to the terms and conditions of the MSA between CareOne and NaviSite. Partners admits, in the statement of facts regarding Partners’ claims, that by executing this sales order Partners “consented to the standard terms and conditions in the NaviSite/CareOne Master Services Agreement … as they pertained to Partners … as the ‘Customer’ .”
NaviSite’s work for Partners went fine. NaviSite delivered the implemented the promised services. Partners paid all required up-front fees and was paying all the agreed upon monthly fees.
In contrast, NaviSite’s work for CareOne went poorly. The SOW between these parties provided that NaviSite was to begin hosting and providing CareOne’s computer services no later than January 1, 2013. That did not happen. Implementation of the promised services was repeatedly delayed. Who caused or was responsible for the delays is in dispute. NaviSite blames CareOne and vice versa.
On January 31, 2013—one month after the due date—NaviSite sent an email asking CareOne to accept four of the promised systems. CareOne responded immediately, stating it “cannot accept this environment in its current state” because the computer systems were purportedly incomplete, had not been fully tested, and could not be used by CareOne. As a result CareOne refused to pay NaviSite’s first monthly invoice for January 2013.
NaviSite never sent CareOne any other notice stating that any part of the project was complete and ready for acceptance by CareOne. In April, June, and
August 2013 NaviSite made available test versions of many but not all of the services it had contracted to provide. CareOne informed NaviSite that it had discovered material problems with all of them. CareOne never accepted any of those services and never used them for any purpose other than acceptance testing.
After CareOne refused to pay the January 2013 invoice and rejected the first four services, the parties had further discussions about what it would take for NaviSite to finish implementing the project. CareOne and NaviSite negotiated the only amendment to their contract, which they executed on February 28, 2013. The amendment was called Amendment Number One to the MSA.
The Amendment provided as follows. CareOne agreed to pay NaviSite’s first monthly invoice, for the month of January 2013, by March 31, 2013. In turn, NaviSite agreed that CareOne would receive a credit of twice that amount that would be applied against CareOne’s monthly invoices in months 34, 35, and 36 of the MSA’s term. NaviSite also agreed to deliver an Active Directory Synchronization solution to CareOne by March 3, 2013. The Amendment stated that all terms and conditions of the MSA remained in effect except as otherwise provided in the Amendment.
CareOne paid NaviSite’s monthly invoice for January 2013 as agreed in Amendment Number One; that payment was in the amount of $ 365,169.30. CareOne also paid NaviSite’s invoices for February, March, and April 2013; the payments for those three invoices totaled just over $ 2 million,1 which means that CareOne paid some $ 2.4 million to NaviSite for these four monthly invoices. Thus, including the roughly $ 580,000 in upfront payments made when the contract was first executed, CareOne has paid NaviSite almost $ 3 million.
NaviSite submitted invoices for later months, but CareOne did not pay them. NaviSite was aware that CareOne refused to pay and was disputing the invoices issued after April 2013 because CareOne had still not received or accepted the services that CareOne was billing for.2
1 The summary judgment record shows that CareOne paid $ 587,894 on March 7, 2013, $ 725,438.60 on June 10, 2013, and $ 730,338.60 on June 21, 2013. This is more than what CareOne alleged in ¶ 102 of its amended complaint.
2 NaviSite’s understanding of these facts is confirmed in an internal email circulated within NaviSite on September 5, 2013.
In November 2013 CareOne informed NaviSite that it intended to terminate their Agreement for non-performance and sought to negotiate an orderly transition. NaviSite responded five days later by demanding $ 2.2 million as payment for its monthly invoices for April through September 2013. NaviSite said that if it did not receive payment of that amount within five days it would terminate all services it was providing to Partners.
After Partners successfully migrated its services from NaviSite to another provider, NaviSite finally terminated the contract and stopped providing any services to CareOne or Partners on January 24, 2014.
1.2. Relevant Contract Terms. The Court must construe the parties’ written contracts. Neither side appears to claim that any of the relevant contract documents is ambiguous. “If a contract … is unambiguous, its interpretation is a question of law that is appropriate for a judge to decide on summary judgment.” Seaco Ins. Co. v. Barbosa, 435 Mass. 772, 779 (2002). “Whether a contract is ambiguous is also a question of law.” Eigerman v. Putnam Investments, Inc., 450 Mass. 281, 287 (2007). The Court concludes that the contract documents are unambiguous.
1.2.1. The Original Contract Documents. The parties agreed to allocate the risk of non-performance by NaviSite in several ways that are relevant to the pending claims and counterclaims. This allocation of risk is reflected in terms of the MSA that was executed by CareOne and NaviSite and accepted by Partners when it executed its sales order.
NaviSite agreed to bear much of the risk that it may not be able to deliver systems acceptable to CareOne, by agreeing to accept most of its compensation in the form of monthly recurring payments that would not be due for any service until it was accepted. The contract provides (in MSA §§ 3.1 and 3.3) that NaviSite was not entitled to invoice, and CareOne had no obligation to pay, monthly recurring fees for any service provided by NaviSite until after CareOne had accepted that particular service. NaviSite was required to send CareOne a “Completion Notice” as to each service once it had been fully implemented and was ready for use by CareOne. CareOne would then have ten days to test the service to determine whether it conformed to the agreed-upon specifications. If CareOne notified NaviSite that the
service did not conform to the specifications, then NaviSite would have to use commercially reasonable efforts to fix the problem and submit a new Completion Notice when the service was ready for use. CareOne only had to begin paying the monthly charge for a service if it accepted the service after having received a Completion Notice, or if was deemed to have done so because it did not respond to a Completion Notice within ten days or used the service for purposes other than acceptance testing after receiving a Completion Notice.
CareOne and Partners, in turn, agreed to bear most of the remaining risk that NaviSite might breach its contractual obligations. The MSA placed clear limits on CareOne’s and Partners’ remedies and NaviSite’s liability for any breach of contract.
The contract limits the remedies available to CareOne and Partners for any breach of contract by NaviSite. As relevant here, § 6.4 of the MSA provides that if NaviSite were to breach the contract then CareOne’s or Partners’ “sole and exclusive remedy, and NaviSite’s sole and exclusive liability,” would be as follows: (1) CareOne or Partners could give NaviSite notice of the breach, which would trigger a contractual obligation by NaviSite to work diligently to cure the breach at its expense; (2) CareOne or Partners could obtain a credit against monthly recurring fees for any services affected by the breach of contract; or (3) CareOne or Partners could terminate the contract for any uncured material breach, which would cut off any further obligations by CareOne and Partners to make any payments or doing anything else under the contract.3 The right to terminate the contract for an uncured material breach by the other side is spelled out in MSA § 7.4, which provides that a party could only terminate for an uncured material breach after giving the other side written notice of the claimed breach and at least thirty days to cure the breach.
The contract further limits NaviSite’s potential liabilities in several ways. Section 6.3 bars any claim that NaviSite breached any kind of implied warranty, by specifying that NaviSite did not make and expressly disclaimed any implied warranty of any kind. And § 9.1 provides that neither NaviSite, CareOne, nor Partners shall
3 CareOne and Partners also had the right to seek indemnification of any liability owed to a third-party, to the extent provided under the MSA. No third-party liability is at issue here.
be liable “for any indirect, consequential incidental, special or punitive damages—including, without limitation, loss of use, interruption of business, loss of data or loss of profits—arising out of, or in any way connected with” the parties’ contract.
In addition, the parties agreed to an allocation of the risk that CareOne or Partners might commit a material breach of the contract. Section 7.4 specifies that the failure by CareOne or Partners to pay amounts owed when due would be a material breach, and that NaviSite could terminate the contract if CareOne or Partners failed to make payment after being asked or failed to cure any other material breach. This section also contains an acceleration clause providing that if NaviSite were to terminate a schedule or the whole contract because of an uncured material breach by CareOne or Partners, then the Customer (CareOne or Partners) would have to pay all monthly fees that would have been due through the end of the contract term. The same right to accelerated payment of all monies owed under the contract would also apply if CareOne or Partners terminated the contract in a manner not expressly permitted (e.g., if it terminated for a non-material breach by NaviSite or terminated without giving NaviSite thirty days to cure any material breach). NaviSite has the right (per MSA § 3.2) to be reimbursed for any fees and costs it incurs to collect amounts owed to it under the contrary.
The parties also agreed in MSA § 10.14 that neither side would waive any right under the contract by failing to enforce any provision of it, and that contractual waivers would only be effective if made in writing.
1.2.2. Amendment Number One. The one contract amendment modified the “Completion Notice” requirement and process of the MSA only with respect to NaviSite’s first monthly invoice, which was for January 2013. CareOne agreed to pay that invoice, in exchange for receiving a credit of twice that amount that it could redeem later, even though it had not yet accepted the relevant services.
Nothing in the Amendment eliminated the Completion Notice requirements as a condition precedent to receiving any later monthly payments. That is the only reasonable interpretation of the plain language of Amendment Number One. The Amendment says nothing about eliminating the Completion Notice provisions of the MSA with respect to any monthly invoice for periods after January 2013, or about
CareOne agreeing to pay any other monthly invoices. And the Amendment specifies that, “[e]xcept as provided in this Amendment No. 1, all of the terms and conditions of the Agreement shall remain in full force and effect.”
If the Amendment were ambiguous in this regard, which it is not, then undisputed parol evidence regarding the parties’ negotiations would confirm that the Amendment was not intended to eliminate the condition that CareOne accept each service before having to pay monthly fees for it. In negotiating a possible contract amendment, NaviSite had asked CareOne to commit to timely payment of all future monthly invoices. In response, CareOne’s CTO informed NaviSite that CareOne would not sign the proposed amendment if that meant that CareOne was accepting delivery.4 Five days later NaviSite responded by agreeing to revise the proposed amendment to specify that it did not supersede the MSA.
2. NaviSite’s Claims against CareOne. The Court concludes that CareOne is entitled to summary judgment in its favor on NaviSite’s claims and identical counterclaims for breach of contract and violation of G.L. c. 93A.
2.1. NaviSite’s Contract Claim against CareOne. NaviSite claims that CareOne committed a material breach of the parties’ contract by refusing to pay any monthly invoice for periods after April 2013, that NaviSite had the right under MSA § 7.5 to terminate its contract with CareOne because of this uncured material breach, and that NaviSite is therefore entitled under MSA §§ 3.2 and 7.5 to collect all unpaid amounts owed by CareOne through the effective date of the termination, plus all fees that would have been due under the contract through the end of the contract term, plus all legal fees and costs incurred by NaviSite to collect what it is owed.
CareOne is entitled to summary judgment in its favor on this claim because the undisputed facts indicate that NaviSite never complied with a contractual condition precedent to being able to bill and get paid for the disputed monthly fees. Parties to a contract are free to agree that certain events must occur before one of the parties must carry out some contractual obligation; in law-speak such provisions are
4 The email states: “Please give me a call. Tying the deal of accept delivery now in order to begin invoicing to timely payments is not going to work for us. We will probably have to go back to leaving it as the original then.”
called “conditions precedent.” See generally Massachusetts Mun. Wholesale Elec. Co. v. Town of Danvers, 411 Mass. 39, 45 (1991) (“MMWEC”).
The contract expressly provided (in MSA § 3.1) that NaviSite was not entitled to bill CareOne monthly fees for any service provided by NaviSite until after “Acceptance” of that service by CareOne. Section 3.3 defines a specific process for NaviSite to seek and obtain Acceptance of a service: it had to send a “Completion Notice” informing CareOne in writing that a service has been implemented and is ready for use, and give CareOne ten days to test the service and decide whether to accept or reject it. The summary judgment record shows that NaviSite only sent one Completion Notice, in January 2013, which CareOne promptly rejected. NaviSite never sent another Completion Notice and never obtained Acceptance from NaviSite as that term is define in the contract.
CareOne has no contractual obligation to pay past or future monthly invoice amounts because NaviSite never sought or obtained Acceptance of the services that NaviSite had agreed to provide. Since NaviSite had no contractual right to start billing for those services, it cannot compel CareOne to pay any amount for those services. And, of course, since NaviSite is not entitled to collect any unpaid amounts from CareOne it is also not entitled to collect any legal fees or costs.
NaviSite argues that the MSA did not make Acceptance by CareOne a condition precedent because the contract does not expressly refer to Acceptance as a “condition precedent” or use other sufficiently “emphatic” language to do so. This argument is without merit.
A contract imposes a condition precedent if the contract as a whole makes clear that was the parties’ intent; no particular wording or emphasis is required. MMWEC, supra, at 46 (“[E]mphatic or precise words are not absolutely necessary to create a condition. … In the absence of the usual words, a condition precedent may nonetheless be found to exist if the intent of the parties to create one is clearly manifested in the contract as a whole.”).
Here, the parties agreed (in MSA § 3.1) that NaviSite could only send invoices for monthly fees “beginning on Acceptance of the applicable Services.” That made acceptance a condition precedent to CareOne’s obligation to pay for a service.
Where a contract provides that a party must make payment for services or goods that are accepted or approved, either by the party or by an agreed-upon third-party like an architect, the acceptance or approval is a condition precedent to any duty to make the payment. See F&W Welding Service, Inc. v. ADL Contracting Corp., 587 A.2d 92, 97-98 (1991) (acceptance was condition precedent in contract providing that payment was due within thirty days of acceptance of work); Restatement (Second) of Contracts § 226, illustration 2 (1981) (“A, a tenant of B, promises to pay $ 1,000 for ‘such repairs as an architect appointed by B shall approve.’ The appointment by B of an architect and the architect’s approval of repairs are conditions of A’s duty to pay for repairs.”)
NaviSite also argues that CareOne agreed in the contract amendment to begin paying monthly recurring fees. As discussed above in § 1.2.2 of this decision, that assertion is incorrect. What CareOne agreed to do in the Amendment was to pay the “first monthly recurring invoice for January 2013.” Nothing in the Amendment says that Care Once was agreeing to pay any subsequent monthly recurring fees on services it had not yet accepted. To the contrary, the Amendment specifies that all terms and conditions of the MSA—which necessarily includes the condition precedent of Acceptance—remain in effect except as provided in the Amendment.
Finally, NaviSite asserts that CareOne waived the condition precedent by paying the February, March, and April 2013 invoices without waiting for a Completion Notice and without any Acceptance of the relevant services by CareOne. This argument also fails. The parties agreed by contract (in MSA § 10.14) that “[no failure to … enforce any provision” of the contract “shall be construed as a future waiver” of that provision. Such a “no waiver” provision is enforceable. See Amerada Hess Corp. v. Garabedian, 416 Mass. 149, 154-155 (1993).
2.2. NaviSite’s Chapter 93A Claim against CareOne. NaviSite also claims that CareOne refused to pay what it owed under the contract, tried to “leverage” this breach to pressure NaviSite to renegotiate the terms of the deal, and thereby committed an unfair trade practice in violation of G.L. c. 93A, § 11.
Since NaviSite’s claim under c. 93A is based solely on and thus “is wholly derivative of” its claims for breach of contract, and the summary judgment record
shows that NaviSite’s contract claim is “legally unsupportable,” CareOne is entitled to summary judgment on the c. 93A claim as well. See Frohberg v. Merrimack Mut. Fire Ins. Co., 34 Mass. App. Ct 462, 465 (1993); accord Private Lending & Purchasing, Inc. v. First American Title Ins. Co., 54 Mass. App. Ct. 532, 539-540 (2002).
3. CareOne’s Claims against NaviSite. The Court concludes that NaviSite is entitled to summary judgment in its favor on all of CareOne’s claims against it.
3.1. Breach of Contract Claims. CareOne claims in Counts 1 and 6 of its amended complaint that NaviSite breached its express contractual obligations by terminating the contract instead of curing its non-performance, and that NaviSite breached the implied covenant of good faith and fair dealing by threatening to terminate its services to Partners in an attempt to pressure CareOne into paying money NaviSite had not earned. CareOne seeks actual damages (apparently meaning repayment of all amounts CareOne had paid to NaviSite) and consequential damages.
NaviSite is entitled to summary judgment on these claims because they are barred by the express contractual limitations on CareOne’s remedies and NaviSite’s liability.5 As explained above in § 1.2.1, CareOne agreed that its remedies for a breach of contract by NaviSite would be limited to seeking a cure of any breach, obtaining a credit against future monthly payments owed under the contract, or terminating the contract and thereby cutting off any further liability to NaviSite. Since CareOne expressly waived any right to seek actual or consequential damages from NaviSite for any breach of contract, NaviSite is entitled to judgment in its favor on these contract claims as a matter of law.
CareOne’s insistence that NaviSite was not ready, willing, and able to perform its obligations under the contract is beside the point. True, NaviSite could not prevail on a claim that CareOne breached the contract if NaviSite were unable to demonstrate that it was ready, willing, and able to perform its parts of the contract. Bulwer v. Mount Auburn Hosp., 473 Mass. 672, 690 (2016); Singarella v. City of Boston, 342 Mss. 385, 387 (1961). But, in the absence of a claim and proof of fraud in
5 The Court reads NaviSite’s legal memoranda as arguing that both of CareOne’s contract claims are barred by the contractual limitations on remedies and liability, and arguing in the alternative that there are additional reasons why CareOne’s implied covenant claim fails as a matter of law.
the inducement that would render the whole contract voidable—which have not been made or proffered in this case—the contractual limitations on CareOne’s remedies and NaviSite’s liability would be enforceable even if NaviSite’s alleged breach of contract came about because it was not able to perform. See Canal Elec. Co. v. Westinghouse Elec. Corp., 406 Mass. 369, 372-375 (1990) (limitation of liability provision in contract between sophisticated commercial entities held enforceable even if exclusive remedy of cure failed of its essential purpose, as parties apparently stipulated); S.M. Wilson & Co. v. Smith Int’l, Inc., 587 F.2d 1363, 1372-1375 (9th Cir. 1978) (limitation of liability provision enforceable even though defendant could not repair machine and thus was unable to perform) (applying California law). The whole point of MSA §§ 6.4 and 9.1 was to limit NaviSite’s liability should it be unable to perform. CareOne cannot avoid the bite of terms it voluntarily agreed to on the ground that NaviSite was indeed unable to perform.
Nor may CareOne avoid the contractual limitations on remedies and liability on the ground that they are unconscionable. A contract is unconscionable only if no honest and fair person in their right mind would agree to it. Waters v. MIN Ltd., 412 Mass. 64, 69 (1992) (“an unconscionable contract is ‘such as no man in his senses and not under delusion would make on the one hand, and no honest and fair man would accept on the other’ ” (quoting Hume v. United States, 132 U.S. 406, 411 (1889), quoting in turn Earl of Chesterfield v. Janssen, 38 Eng. Rep. 82, 100 (Ch. 1750)). There was nothing crazy about allocating the risk of non-performance in the manner agreed to by CareOne.
To demonstrate that a contract provision is unconscionable and therefore unenforceable, a party must demonstrate that, as of “the time of the execution of the agreement, the contract provision could result in unfair surprise and was oppressive to the allegedly disadvantaged party.” Miller v. Cotter, 448 Mass. 671, 680 (2007), quoting Zapatha v. Dairy Mart, Inc., 381 Mass. 284, 293 (1980).
As a sophisticated business entity, CareOne cannot demonstrate that it did not understand and for that reason is now surprised by the reach of MSA §§ 6.4 and 9.1. Cf. Zapatha, supra, at 294 (person with business experience and education cannot claim unfair surprise as to meaning of straightforward contract provision). Although
CareOne claims it was surprised to learn that NaviSite itself did not possess all of the technical expertise needed to supply the services for which CareOne had contracted, that assertion cannot be squared with the plain language of the contract itself. CareOne expressly agreed in the Statement of Work that the services would be provided by “NaviSite through its Third Party Provider.”
Nor can CareOne demonstrate that the limitation of remedy and liability provisions were oppressive as of the time the contract was executed. There is nothing unconscionable about a contract in which “two commercially sophisticated parties” have agreed to limit potential liabilities in order to allocate among themselves the risks of non-performance. Canal Elec., 406 Mass. at 374.
3.2. UCC Claims. CareOne claims in Count 8 that it is entitled to remedies for NaviSite’s alleged breach of contractual obligations either under art. 2 of the Uniform Commercial Code (which governs sales of goods) or under art. 2A of the UCC (which governs leases of goods). See G.L. c. 106, §§ 2-711 through 2-713, 2A-508, and 2A-518 through 2A-520. And CareOne claims in Counts 11 and 12 that it is entitled under art. 2 or art. 2A to remedies for NaviSite’s alleged breach of implied warranties of merchantability and fitness for a particular purpose. See G.L. c. 106, §§ 2-314, 2-315, 2A-212, and 2A-213.
NaviSite is entitled to summary judgment on these claims because the parties’ contract did not involve a sale or lease of goods and thus was not subject to UCC art. 2 or art. 2A. These UCC articles only apply to the sale or lease of “goods,” meaning things that “are movable at the time of identification to the” contract for sale or lease. See G.L. c. 106, §§ 2-102 and 2-105(1), and §§ 2A-102 and 2A-103(1)(h). Contracts to provide services are not covered by art. 2 or art. 2A. See White v. Peabody Constr. Co., 386 Mass. 121, 132 (1982).
Where a contract calls for the provision of services as well as the sale or lease of moveable goods, “the test is whether the predominant factor, thrust, or purpose of the contract” is to provide services (in which case the UCC does not apply) or to sell or lease goods (in which case it does). Cumberland Farms, Inc. v. Drehmann Paving & Flooring Co., 25 Mass. App. Ct. 530, 534 (1988); accord White, supra.
The summary judgment record makes clear that the predominant thrust of this contract was the rendition of services by NaviSite and its subcontractors. The parties said so in their Master Statement of Work, which provides that “NaviSite through its Third Party Provider will provide” a number of specified “services.” Similarly, MSA § 3.1 provides that CareOne’s obligation to make monthly payments would begin on “Acceptance of the applicable Services.” The MSA defines “Services” to mean “the services (including all associated NaviSite-Supplied Software and NaviSite-Supplied Hardware) purchased by” CareOne. Obviously, when a company like CareOne buys information technology services the provider must use computer hardware to provide the services. But CareOne was not purchasing computers that it would then operate on its own; this was not a contract to provide that kind of “turnkey” system.6 Rather, it hired NaviSite to develop, implement, host, and operate sophisticated computing services that would run on computer hardware located at NaviSite’s facilities.
Since the undisputed facts make clear that the predominant thrust of this contract was the provision of services, the UCC is inapplicable. See Mattoon v. City of Pittsfield, 56 Mass. App. Ct. 124, 141-142 (2002).
3.3. Unjust Enrichment Claim. CareOne claims in Count 9 that NaviSite has been unjustly enriched by the roughly $ 2.4 million it received from CareOne for the four monthly invoices for January through April 2013. CareOne correctly concedes in its summary judgment memorandum that this is a claim in the alternative that is only viable if the Court were to “find that the contract is unenforceable, or that it should be rescinded.”
NaviSite is entitled to summary judgment on this claim because the parties’ relationship was established and defined by an enforceable written contract. “Ordinarily, a claim of unjust enrichment will not lie ‘where there is a valid contract that defines the obligations of the parties.’ ”Metropolitan Life Ins. Co. v. Cotter, 464 Mass. 623, 641 (2013), quoting Boston Med. Ctr. Corp. v. Secretary of Executive Office of Health & Human Servs., 463 Mass. 447, 467 (2012). That is because “[a] valid contract defines the obligations of the parties as to matters within its scope,
6 USM Corp. v. Arthur D. Little Systems, Inc., 28 Mass. App. Ct. 108 (1989), which involved the provision of a turnkey system, is therefore inapplicable here.
displacing to that extent any inquiry into unjust enrichment.” Boston Med. Ctr. Corp., 463 Mass. at 467, quoting Restatement (Third) of Restitution and Unjust Enrichment § 2 (2011).
3.4. G.L. c. 93A, § 11. CareOne claims in Count 4 that NaviSite committed an unfair trade practice in violation of G.L. c. 93A, §§ 2 and 11, by threatening to discontinue service to Partners if CareOne did not pay NaviSite an additional $ 2.2 million under the parties’ contract.
NaviSite is entitled to summary judgment on this claim because CareOne has been unable to muster any evidence that it “suffered a ‘loss of money or property’ within the meaning of G.L. c. 93A, § 11,” which is a required element of any business-to-business claim under c. 93A. Lumbermens Mut. Cas. Co. v. Offices Unlimited, Inc., 419 Mass. 462, 468 (1995) (ordering summary judgment for counterclaim defendant), quoting G.L. c. 93A, § 11; accord Frullo v. Landenberger, 61 Mass. App. Ct. 814, 822-823 (affirming summary judgment for defendant), rev. denied, 442 Mass. 1111 (2004).
CareOne has admitted that it did not incur any costs to migrate its users to another information technology vendor after NaviSite threatened to terminate its contract and then carried out that threat.
Although CareOne argues that its employees had to spend time dealing with NaviSite’s threats to terminate its contract, this alleged loss of employee time does not constitute a “loss of money” within the meaning of the statute. Under § 11, “ ‘Money’ means money, not time, and … ‘property’ means the kind of property that is purchased or leased, not such intangibles as a right to a sense of security, to peace of mind, or to personal liberty.” Tech Plus, Inc. v. Ansel, 59 Mass. App. Ct. 12, 20, rev. denied, 440 Mass. 1108 (2003), quoting Baldassari v. Public Fin. Trust, 369 Mass. 33, 45 (1975). A mere loss of time in having to respond to and deal with any consequences of an alleged unfair trade practice is not a “loss of money” within the meaning of § 11. Halper v. Demeter, 34 Mass. App. Ct. 299, 303-304 (1993) (vacating judgment for plaintiff on claim under c. 93A, § 11).
The two Appeals Court decisions cited by CareOne do not hold that loss of time that results in no loss of money is compensable under G.L. c. 93A, § 11. VMark held only that damages for tortious misrepresentation can include compensation for
“hours fruitlessly spent by … employees trying to make the defective computer system work.” See VMark Software, Inc. v. EMC Corp., 37 Mass. App. Ct. 610, 620-621 (1994). The court never reached the issue of whether similar compensation is available under § 11 because it held that awarding such damages would be cumulative and that the plaintiff was not entitled to double or treble damages. Id. In Bump, the plaintiff was a business broker who charged clients for his time; the Appeals Court held that the plaintiff could recover for futile time spent trying to sell a company as a result of defendant’s unfair trade practices was compensable under § 11 because plaintiff’s inability to charge that time to other clients or projects was a loss of money. See Bump v. Robbins, 24 Mass. App. Ct. 296, 312 (1987). CareOne has presented no evidence that it lost money because it was unable to charge employees’ time to other projects.
3.5. Declaratory Judgment. In Count 10, CareOne seeks declaratory judgment regarding whether CareOne is liable to make accelerated payments under the contract now that NaviSite has terminated the contract and whether the contractual limitations on remedies and liability are unconscionable and.
The Court disagrees with NaviSite’s assertion that this claim is moot. NaviSite points that the contract has been terminated and the parties have no ongoing contractual relationship. But there nonetheless remains an actual controversy regarding the enforceability of the disputed contractual provisions and whether NaviSite is entitled to collect any more money from CareOne under the contract. The mere fact that there is no uncertainty regarding future relations among the parties does not moot the actual controversy regarding claims of past liability. See FMR Corp. v. Boston Edison Co., 415 Mass. 393, 396 (1993) (grant of summary judgment on plaintiff’s claims ended any obligation by defendant’s insurer to provide a defense, but did not moot defendant’s claims against insurer for past defense costs).
Since CareOne has standing and there is an actual controversy between the parties regarding their rights and obligations under their contract, the Court is obligated to declare the rights of the parties rather than dismiss this claim. See, e.g., Attorney General v. Kenco Optics, Inc., 369 Mass. 412, 418 (1976); Gennari v. City of Revere, 23 Mass. App. Ct. 979 (1987) (rescript). The Court will order the entry of
declaratory judgment consistent with its legal rulings regarding the failure of NaviSite’s contract claims against CareOne and the enforceability of the contractual limitations on remedies and liability.
4. Partners’ Claims against NaviSite. Finally, the Court concludes that NaviSite is also entitled to summary judgment in its favor on all of Partners’ claims. Although the claims asserted by Partners are in many respects quite similar to those by CareOne, the Court addresses them separately to make clear its resolution of NaviSite’s separate motion for summary judgment against Partners’ claims.
4.1. Breach of Contract. In Counts 1 and 5 of its amended complaint, Partners asserts claims for breach of express contractual obligations and breach of the implied covenant of good faith and fair dealing. These claims fail as a matter of law for the same reasons that CareOne’s very similar claims fail, as discussed above in § 3.1 of this decision. Even assuming that Partners had mustered any evidence that it suffered any compensable damages, which NaviSite contests, these claims would be barred by the contractual limitations on remedies and liability set forth in MSA §§ 6.4 and 9.1. 7
4.2. UCC Contract Remedies. Partners’ claim under the UCC in Count 7 fails as a matter of law because the party did not contract for the sale or lease of goods, as discussed above in § 3.2 of this decision.
The sales order signed by Partners establishes that the predominant thrust of this contract was the rendition of services by NaviSite and its subcontractors. Partners agreed to pay a one-time fee of $ 39,867.60 to cover hardware and software installation costs. It also agreed to pay $ 74,711.72 every month throughout the life of the contract for NaviSite to monitor and manage specified information technology “services.” The contract did not call for NaviSite to deliver a “turnkey” system that Partners would run on its own. To the contrary, Partners was hiring NaviSite to provide information technology services. The UCC does not apply to such a contract
7 The Court reads NaviSite’s legal memoranda as arguing that both of Partners contract claims are barred by the contractual limitations on remedies and liability, and arguing in the alternative that there are additional reasons why CareOne’s implied covenant claim fails as a matter of law.
because it is not predominantly for the sale or lease of goods. See, e.g., White, 386 Mass. at 132; Mattoon, 56 Mass. App. Ct. at 141-142.
4.3. G.L. c. 93A, § 11. Partners’ claim under c. 93A, § 11, in Count 3 fails for the reasons discussed above in § 3.4 of this decision: Partners has no evidence that it suffered any loss of money as a result of any alleged unfair trade practices. NaviSite has convincingly demonstrated that Partners ended up saving money as a result of NaviSite’s termination of the contract because Partners incurred no out-of-pocket cost to migrate to a new vendor and the total amount charged by the new vendor was less than what Partners would have owed NaviSite under their contract. In its memorandum in opposition, Partners does not even argue that it suffered a “loss of money” within the meaning of c. 93A, § 11.
4.4. Tortious Interference. Partners claims in Count 2 that NaviSite intentionally interfered with Partners’ contractual relationships with more than 500 long term care facilities by threating to stop providing service to Partners in an attempt to pressure CareOne into paying more.
NaviSite is entitled to summary judgment on this claim because there is no evidence that it actually interfered with a contract or other advantageous relationship. There is no evidence that NaviSite conduct other caused one or more of Partners’ clients to breach their contract with Partners, or that NaviSite did anything that prevented Partners from continuing to service any of its customers.
To make out its claim for tortious interference with contractual relations, Partners must prove that: (1) Partners had a contract with a third party; (2) NaviSite knowingly interfered with that contract either by inducing the third party to break the contract or by preventing Partners from performing its contractual obligations; (3) NaviSite’s interference with the contract was improper in motive or means; and (4) Partners was harmed as a result. See Weiler v. PortfolioScope, Inc., 469 Mass. 75, 84 (2014); Shafir v. Steele, 431 Mass. 365, 369 (2000).
Partners argues that, under Shafir, it can prove the second or “interference” element of this claim by proving that NaviSite “caused the performance of Partners’ contract with its customers … to be more expensive and more burdensome,” even if it
has no evidence that the claimed additional burden caused either Partners or its customer to stop performing the contract. That is incorrect. Partners misreads Shafir.
In Shafir, the Supreme Judicial Court broadened the tort of interference with contracts under Massachusetts law, but not in a way that helps Partners. Prior cases held, consistent with Restatement (Second) of Torts § 766, that to prove this tort the plaintiff must show that “the defendant knowingly induced” a third party “to break” its contract with the plaintiff. See, e.g., G.S. Enters., Inc. v. Falmouth Marine, Inc., 410 Mass. 262, 272 (1991). Shafir adopted § 766A of the Restatement, and held that it is just as tortious to interfere with a contract by making the plaintiff’s own performance more expensive or burdensome and thereby “preventing the plaintiff from performing” his contractual obligations. 431 Mass. at 369. But the SJC did not eliminate the element of interference that caused some party to the contract not to perform its obligations. Id. at 369-370.
If a defendant deliberately makes it more burdensome and difficult to carry out a contract, but that attempted interference never causes any party not to perform their contractual obligations, then the defendant has not committed the tort of intentionally interfering with contractual relations. See Anzalone v. Massachusetts Bay Transp. Auth., 403 Mass. 119, 123 (1988) (supervisor’s deliberate mistreatment of employee, including forcing him to suffer noxious fumes and work in a close room hotter than 100 degrees Fahrenheit, held not to constitute tortious interference because employment contract obligations were fully performed).
4.5. Declaratory Judgment. In Count 10, Partners seeks the same declaration of rights as CareOne. For the reasons stated above in § 3.5 of this decision, Partners is entitled to a declaration of the parties’ rights on the topics identified in this claim.
ORDER
CareOne Management, LLC’s motion for summary judgment on the claims and counterclaims against it by NaviSite, Inc. is ALLOWED.
NaviSite’s for summary judgment in its favor on the claims against or by CareOne is DENIED IN PART with respect to NaviSite’s claims against CareOne and ALLOWED IN PART with respect to CareOne’s claims against NaviSite.
The motion by NaviSite for summary judgment in its favor on the claims against it by Partners Pharmacy Services, LLC is ALLOWED.
Final judgment shall enter (1) declaring that neither CareOne Management, LLC, nor Partners Pharmacy Services, LLC, has any obligation to further perform or to make any accelerated payments under their contracts with NaviSite, Inc., the parties’ Master Services Agreement is not voidable, and the limitation on liability and exclusive remedies provisions in the parties’ contracts are valid and enforceable; and (2) dismissing all other claims and counterclaims with prejudice.
April 24, 2017
___________________________
Kenneth W. Salinger
Justice of the Superior Court

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Posted by Stephen Sandberg - April 26, 2017 at 3:29 pm

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Holyoke Mutual Insurance Company in Salem, et al. v. Vibram USA, Inc. (Lawyers Weekly No. 12-031-17)

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COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CIVIL ACTION
NO. 15-2321 BLS1
HOLYOKE MUTUAL INSURANCE COMPANY IN SALEM and MARYLAND CASUALTY COMPANY
vs.
VIBRAM USA, INC.
MEMORANDUM OF DECISION AND ORDER
ON CROSS-MOTIONS FOR SUMMARY JUDGMENT ON RECOUPMENT AND RECOVERY OF DEFENSE COSTS
INTRODUCTION
This action arises out of a coverage dispute between the plaintiff insurance companies, Holyoke Mutual Insurance Company in Salem (Holyoke)1 and Maryland Casualty Company (Maryland) (individually an Insurer, and collectively the Insurers), and the defendant, Vibram USA, Inc. (Vibram). Each of the insurers issued commercial general liability policies to Vibram (or its affiliate) (the Policies).2 An action was filed against Vibram in the United States District Court for the Western District of Washington at Tacoma captioned: Tefere Abebe Bikila, and others, v. Vibram, case no. 3:15-cv-05082-RBL (the Underlying Action). Vibram asserted coverage under the Policies and tendered defense of the Underlying Action to the Insurers. The
1 Holyoke has been replaced as a plaintiff in this action by its successor, Country Mutual Insurance Company. For consistency, the court will continue to refer to it as Holyoke in this Memorandum of Decision and Order.
2 Holyoke issued policies to Vibram for several years, while Maryland issued policies to an affiliate of Vibram,Vibram Five Fingers, LLC. It is not necessary to distinguish between Vibram and its affiliate for the purposes of this motion, and the court will refer to them collectively as Vibram. Additionally, for purposes of this motion the relevant policy language in all of the policies is identical, and is it also unnecessary to distinguish among policy years. The court will therefore simply refer to the Holyoke and Maryland policies collectively as the Policies.
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Insurers each sent a “reservation of rights” letter to Vibram in which they agreed to provide its defense to the claims asserted in the Underlying Action, but also maintained that coverage did not exist under the Policies and reserved their rights to bring a declaratory judgment action and seek reimbursement for defense costs advanced. The Insurers then filed this declaratory judgment action seeking a declaration that the claims asserted against Vibram in the Underlying Action are not covered under the Policies; Vibram counterclaimed for a declaration that they are. In a Memorandum of Decision and Order on Cross-Motions for Summary Judgment and Partial Summary Judgment originally issued on August 17, 2016 (the Decision), this court held that the Policies do not provide coverage for the claims asserted against Vibram in the Underlying Action and, accordingly, there is no duty to defend.
The case is now before the court on cross-motions for summary judgment addressing the issues of recoupment of defense costs advanced or, conversely, recovery of defense costs incurred before the court rendered the Decision but left unpaid—issues of first impression in Massachusetts. The Insurers contend that since the claims asserted in the Underlying Action were not insured under the Policies, they are entitled to recoup the defense costs that they previously paid Vibram. Vibram, in turn, maintains that it is entitled to recover defense costs already incurred, but still unpaid, as of the date the Decision issued. For the reasons that follow, each party’s motion is allowed, in part, and denied, in part.
ADDITIONAL BACKGROUND
None of the facts necessary to resolve these cross-motions are in dispute.
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Because the Insurers sent reservation of rights letters to Vibram, Vibram exercised its right to control its defense of the Underlying Action and retained its own counsel.3 Vibram’s counsel kept the Insurers informed concerning the status of the Underlying Action and forwarded copies of pleadings to them. By August 17, 2016, the date the Decision issued, Vibram had sent the Insurers invoices for defense costs totaling $ 1,272,212.57 and the Insurers had collectively reimbursed Vibram $ 667,901.71—$ 472,216.80 from Holyoke and $ 195,684.91 from Maryland. Vibram last received a payment from the Insurers on July 18, 2016. Neither Insurer informed Vibram why it did not pay the full amount of the invoices.4
As relevant to the issues raised by the pending motions, the Policies provide that the Insurers “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘personal and advertising injury’ to which this insurance applies. We have the right and duty to defend the insured against any ‘suit’ seeking those damages. However, we will have no duty to defend the insured against any ‘suit’ seeking damages for personal and advertising injury’ to which this insurance does not apply.” The Policies also state that the Insurers “will pay, with respect to any claim we investigate or settle, or any ‘suit’ against any insured we defend: . . . All expenses we incur . . . .”
DISCUSSION
Recoupment
In Metro. Life Ins. Co. v. Cotter, 464 Mass. 623 (2013) (Cotter), the Supreme Judicial Court (SJC) was called upon to decide if a disability insurer could recoup from its insured benefit
3 See, e.g., Northern Sec. Ins. Co. Inc. v. Another 1, 78 Mass. App. Ct. 691, 694-695 (2011).
4 At oral argument, counsel for the Insurers stated that invoices were still being processed for payment when the Decision issued, and the Insurers elected to withhold payment.
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payments made under a reservation of rights after a court determined that the insured’s benefits claim was not covered. In considering that claim for recoupment, the SJC noted that, with respect to liability policies:
We have not addressed whether an insurer may seek reimbursement for the costs of a defense undertaken pursuant to a unilateral reservation of rights. We note that other jurisdictions are split as to the validity of such claims. See Perdue Farms, Inc. v. Travelers Cas. & Sur. Co., 448 F.3d 252, 258 (4th Cir.2006), and cases cited (“jurisdictions differ on the soundness of an insurer’s right to reimbursement of defense costs”).
Based on the theory that insurers are in the business of analyzing and allocating risk, and thus in a better position to do so, courts in some jurisdictions have declined to allow liability insurers to bring reimbursement claims for the costs of defense. See Texas Ass’n of Counties County Gov’t Risk Mgt. Pool v. Matagorda County, 52 S.W.3d 128, 135 (Tex.2000). See, e.g., Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools, Inc., 246 S.W.3d 42, 45–47 (Tex.2008) ( “imposing an extra-contractual reimbursement obligation places the insured in a highly untenable position”); United States Fid. v.United States Sports Specialty, 270 P.3d 464, 470–471 (Utah 2012) (“The right of an insurer to recover reimbursement from its insured distorts the allocation of risk unless it has been specifically bargained for”).
Id. at 641 n.21. This question is squarely before this court in this case.
While acknowledging that there are divergent views on the right of recoupment in cases such as this, in which a court has entered a declaratory judgment that none of the claims alleged in the complaint are covered under the Policies, the Insurers maintain that the majority of jurisdictions permit recoupment. Perhaps, the most frequently cited case for the proposition that defense costs advanced under a reservation of rights may be recovered is Buss v. Superior Court, 16 Cal. 4th 35 (Cal.App. 1997). In a more recent decision, the California Supreme Court reaffirmed its holding in Buss with the following comments:
As Buss explained, the duty to defend, and the extent of that duty, are rooted in basic contract principles. The insured pays for, and can reasonably expect, a defense against third party claims that are potentially covered by its policy, but no more. Conversely, the insurer does not bargain to assume the cost of defense of claims that are not even potentially covered. To shift these costs to the insured does not upset the contractual
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arrangement between the parties. Thus, where the insurer, acting under a reservation of rights, has prophylactically financed the defense of claims as to which it owed no duty of defense, it is entitled to restitution. Otherwise, the insured, who did not bargain for a defense of noncovered claims, would receive a windfall and would be unjustly enriched.
. . .
As Buss further noted, “[n]ot only is it good law that the insurer may seek reimbursement for defense costs as to the claims that are not even potentially covered, but it also makes good sense. Without a right of reimbursement, an insurer might be tempted to refuse to defend an action in any part — especially an action with many claims that are not even potentially covered and only a few that are — lest the insurer give, and the insured get, more than they agreed. With such a right, the insurer would not be so tempted, knowing that, if defense of the claims that are not even potentially covered should necessitate any additional costs, it would be able to seek reimbursement.”
Though these comments were made in the context of “mixed” actions [including covered and uncovered claims], they apply equally here. An insurer facing unsettled law concerning its policies’ potential coverage of the third party’s claims should not be forced either to deny a defense outright, and risk a bad faith suit by the insured, or to provide a defense where it owes none without any recourse against the insured for costs thus expended. The insurer should be free, in an abundance of caution, to afford the insured a defense under a reservation of rights, with the understanding that reimbursement is available if it is later established, as a matter of law, that no duty to defend ever arose.
Scottsdale Ins. Co. v. MV Transportation, 36 Cal. 4th 643, 655 (Cal.App. 2005) (Internal citations and quotations omitted). In this case, the Insurers make the same arguments that the California Supreme Court describes in Scottsdale.
Vibram, however, points the court to a recent, unreported decision of the United States District Court in Massachusetts that reaches an opposite conclusion: Welch Foods Inc. v. Nat’l Union Fire Ins. Co., No. 09-12087-RWZ 2011 WL 576600 (D. Mass. Feb. 9, 2011). In that case, like this one, the District Court found that claims in an underlying action were not covered by the liability policy and then addressed the insurer’s claim for recoupment of defense costs paid under a reservation of rights. The District Court acknowledged the holding and reasoning of Buss, but rejected the California Supreme Court’s opinion in favor of a more recent decision by the
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Pennsylvania Supreme Court, American & Foreign Ins. Co. v. Jerry’s Sport Center, Inc., 2 A.3d 526 (2010) (Jerry’s), which appears to be the most frequently cited case by those courts that have recently held that under these circumstances there is no right to recoup.
In Jerry’s, the Pennsylvania Supreme Court began with an exhaustive review of the competing lines of cases permitting and rejecting claims for recoupment of defense costs by liability insurers. Id. at 536-537. It then reflected on the very broad duty to defend (broader than the duty to indemnify) that exists under Pennsylvania, a duty that it describes in very much the same way as Massachusetts appellate courts describe the duty that liability carriers owe their insureds under Massachusetts law. See Id. at 540-541, compare Decision at 5-6. The Court then found that the answer to the question before it: is the insurer entitled to recover defense costs advanced before it obtained a declaratory judgment of no coverage, lay in the language of the policy itself:
We agree with Insured that whether a complaint raises a claim against an insured that is potentially covered is a question to be answered by the insurer in the first instance, upon receiving notice of the complaint by the insured. Although the question of whether the claim is covered (and therefore triggers the insurer’s duty to defend) may be difficult, it is the insurer’s duty to make that decision. See Shoshone First Bank, 2 P.3d at 516 (holding that the insurer must make the decision about whether there is a duty to defend). Insurers are in the business of making this decision. The insurer’s duty to defend exists until the claim is confined to a recovery that the policy does not cover. . . .Where a claim potentially may become one which is within the scope of the policy, the insurance company’s refusal to defend at the outset of the controversy is a decision it makes at its own peril. . . .
In some circumstances, an insurance company may face a difficult decision as to whether a claim falls, or potentially falls, within the scope of the insurance policy. However, it is a decision the insurer must make. If it believes there is no possibility of coverage, then it should deny its insured a defense because the insurer will never be liable for any settlement or judgment. See Shoshone, 2 P.3d at 510 (stating that where an insurer believes there is no coverage, it should deny a defense at the beginning). This would allow the insured to control its own defense without breaching its contractual obligation to be defended by the insurer. If, on the other hand, the insurer is uncertain about coverage, then it should provide a defense and seek declaratory judgment about coverage. Id.
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In a declaratory judgment action to determine whether a claim is covered, the court resolves the question of coverage. . . . The court’s role in the declaratory judgment action is to resolve the question of coverage to eliminate uncertainty. If the insurer is successful in the declaratory judgment action, it is relieved of the continuing obligation to defend. The court’s resolution of the question of coverage does not, however, retroactively eliminate the insurer’s duty to defend the insured during the period of uncertainty.
. . .
An examination of the insurance contract between the parties reveals that under the policy, [the Insurer] was obliged to pay damages because of bodily injury, and had the “right and duty to defend the insured against any ‘suit’ seeking those damages.” . . . . The policy further provided that it had no duty to defend the insured against any suit seeking damages for bodily injury to which the insurance does not apply. Pursuant to the contractual language, therefore, [the Insurer] had the right and the duty to defend covered claims for bodily injury against Insured, and no duty to defend non-covered claims.
It was not immediately apparent whether the claim against Insured for bodily injury was or was not covered. It was immediately apparent, however, that the claim might potentially be covered. . . . Facing uncertainty about coverage, [the Insurer] appropriately activated its right and met its duty to defend under the policy when it was presented with a claim that may or may not have been covered. At the same time, [the Insurer] appropriately exercised its right to seek a declaration that it had no duty to defend.
The trial court’s subsequent declaratory judgment determination that the claim was not covered relieved [the Insurer] of having to defend the case going forward, but did not somehow nullify its initial determination that the claim was potentially covered. . . .
We therefore reject [the Insurer’s] attempt to define its duty to defend based on the outcome of the declaratory judgment action. The broad duty to defend that exists in Pennsylvania encourages insurance companies to construe their insurance contract broadly and to defend all actions where there is any potential coverage. . . .
Where the insurance contract is silent about the insurer’s right to reimbursement of defense costs, permitting reimbursement for costs the insurer spent exercising its right and duty to defend potentially covered claims prior to a court’s determination of coverage would be inconsistent with Pennsylvania law. It would amount to a retroactive erosion of the broad duty to defend in Pennsylvania by making the right and duty to defend contingent upon a court’s determination that a complaint alleged covered claims, and would therefore narrow Pennsylvania’s long-standing view that the duty to defend is broader than the duty to indemnify.
. . .
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Moreover, [the Insurer’s] contractual obligation to pay for the defense arose as a consequence of the rules of contract interpretation. It is undisputed that the policy did not contain a provision providing for reimbursement of defense costs under any circumstances. Thus, the right [the Insurer] attempts to assert in this case, the right to reimbursement, is not a right to which it is entitled based on the policy
Id. at 541-544.
This court, like the District Court in Welch, finds that the Pennsylvania Supreme Court’s decision in Jerry’s comports with Massachusetts law. In Massachusetts, the insurer’s duty to defend arises when the underlying complaint “show[s] only a possibility that the liability claim falls within the insurance coverage. There is no requirement that the facts alleged in the complaint specifically and unequivocally make out a claim within the coverage.” Sterilite Corp. v. Continental Cas. Co., 17 Mass.App.Ct. 316, 319 (1983). Even in cases in which the insurer may believe that coverage is unlikely under the terms of the policy, it has financial incentives to provide a defense. If it is determined in a separate action brought by the insured (or the insurer) that coverage existed, the insurer will be responsible for paying the insured’s costs of establishing a right to a defense, even if the denial of coverage was made in good faith. See Hanover Ins. Co. v. Golden, 436 Mass. 584, 588 (Mass. 2002). Of course, a bad faith refusal to provide a defense could constitute a violation of chapter 93A and expose the insurer to multiple damages. See Boston Symphony Orchestra, Inc. v. Commercial Union Ins. Co., 406 Mass. 7 (Mass. 1989) and Boyle v. Zurich American Ins. Co., 472 Mass. 649, 661 (2015). In consequence, when in doubt, an insurer has an economically sound and self-interested reason to provide a defense under a reservation of right until the coverage issue can be resolved.
With those basic tenets of Massachusetts law in mind, we turn to the language of the contracts that define the parties’ rights and obligations, in this case the Policies. See, e.g., Hakim v. Massachusetts Insurers’ Insolvency Fund, 424 Mass. 275, 280 (1997) (“The interpretation of
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an insurance contract is no different from the interpretation of any other contract, and we must construe the words of the policy in their usual and ordinary sense.”) There is simply nothing in the Policies that provides a right to recoup defense costs that the Insurers have advanced because they concluded that it was in their economic interest to do so. The court rejects the argument relied upon in Buss and its progeny that to deny recovery of defense costs will give insureds more than they bargained for, i.e., partial payment for the cost of defending claims that were not covered by the policies that they purchased. The court finds the reasoning of Jerry’s more persuasive: “In some circumstances, an insurance company may face a difficult decision as to whether a claim falls, or potentially falls, within the scope of the insurance policy. However, it is a decision the insurer must make.” Jerry’s, 2 A.3d at 543.
In this case, if the Insurers had refused to provide a defense, they would have incurred no liability to Vibram because the claims in the Underlying Action were not within the coverage provided. However, they determined in the exercise of their considered judgment that it was better to provide a defense and file an action for declaratory judgment. “It is undisputed that the [the Policies] did not contain a provision providing for reimbursement of defense costs under any circumstances. Thus, the right [the Insurers] attempt[] to assert in this case, the right to reimbursement, is not a right to which [they are] entitled based on the [Policies].” Id. at 544. Knowing that there is a risk that they would decide to provide a defense in cases in which they were uncertain as to whether a claim was covered because the claim was novel or the law unclear, the Insurers could have addressed the right of recoupment in their Policies; they didn’t. The court ought not insert a policy provision that the parties did not agree upon.
In Jerry’s, the Pennsylvania Court addressed two other arguments advanced by the Insured in this case. First, a reservation of rights letter cannot create additional rights for the
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Insurer not found in the contract. “[P]ermitting reimbursement by reservation of rights, absent an insurance policy provision authorizing the right in the first place, is tantamount to allowing the insurer to extract a unilateral amendment to the insurance contract.” Id. and cases there cited. The court finds this reasoning consistent with existing Massachusetts precedent.
In Joint Underwriting Ass’n v. Goldberg, 425 Mass. 46 (1997), the insurer defended its insured under a reservation of rights. After a jury returned an adverse verdict against the insured in the underlying action and while appeals were pending, the insurer settled the underlying action. It then sought reimbursement for the cost of the settlement. The SJC held that even if the claims asserted against its insured in the underlying action were not covered, the insurer had no right to recover. The reservation of rights letter did not provide a right of recovery, it only permitted the insurer to defend without waiving its right to deny an obligation to cover an adverse judgment. While the insured’s personal counsel had urged the insurer to settle, no agreement was ever reached that the insured would reimburse the insurer. The SJC noted that the insurer had settled the claims to protect its own interests, as it was concerned about liability under chapter 93A that could, in theory, treble damages, if its refusal to settle were found unreasonable. As the insurer had no contractual right to reimbursement, it had no basis to demand it.
The instant case obviously does not involve a claim to recover an amount paid by an insurer in settlement of a claim, but Goldberg does stand for the general proposition that when an insurer provides payments that benefit the insured, but also avoid a perceived risk of exposure to even greater loss to the insurer, the reservation of rights letter does not support a claim for reimbursement. A right to reimbursement must be found in a contract.
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In Jerry’s, the Pennsylvania Supreme Court also rejected the insurer’s claim that it was entitled to recoupment under a theory of unjust enrichment. 2 A.2d at 545. In this case, the Insurers point to the SJC’s decision in Cotter and the careful consideration that the SJC gave to the disability insurer’s argument that it could recover benefit payments under an equitable claim for restitution. Although, in Cotter, the SJC rejected the disability insurer’s claim, the Insurers argue that liability policies are different and the Restatement (Third) of Restitution and Unjust Enrichment, § 35(1) supports their right of recovery.5
In Cotter, the SJC addressed the insurer’s equitable claim as follows:
“A quasi contract or a contract implied in law is an obligation created by law ‘for reasons of justice, without any expression of assent and sometimes even against a clear expression of dissent.’ ” Salamon v. Terra, 394 Mass. 857, 859 (1985), quoting 1 A. Corbin, Contracts § 19 (1963). “Restitution is an equitable remedy by which a person who has been unjustly enriched at the expense of another is required to repay the injured party.” Keller v. O’Brien, 425 Mass. 774, 778 (1997), citing Salamon v. Terra, supra. “The fact that a person has benefited from another ‘is not of itself sufficient to require the other to make restitution therefor.’ … Restitution is appropriate ‘only if the circumstances of its receipt or retention are such that, as between the two persons, it is unjust for [one] to retain it.’ ” Keller v. O’Brien, supra, quoting Restatement of Restitution § 1 comment c (1937), and citing National Shawmut Bank v. Fidelity Mut. Life Ins. Co., 318 Mass. 142, 146 (1945).
A determination of unjust enrichment is one in which “[c]onsiderations of equity and morality play a large part.” Salamon v. Terra, supra. A plaintiff asserting a claim for unjust enrichment must establish not only that the defendant received a benefit, but also that such a benefit was unjust, “a quality that turns on the reasonable expectations of the parties.” Global Investors Agent Corp. v. National Fire Ins. Co., 76 Mass.App.Ct. 812, 826 (2010), quoting Community Builders, Inc. v. Indian Motorcycle Assocs., Inc., 44 Mass.App.Ct. 537, 560 (1998). “The injustice of the enrichment or detriment in quasi-contract equates with the defeat of someone’s reasonable expectations.” Salamon v. Terra, supra. The party seeking restitution has the burden of proving its entitlement thereto. J.A. Sullivan Corp. v. Commonwealth, 397 Mass. 789, 796 (1986); Hayeck Bldg. & Realty Co. v. Turcotte, 361 Mass. 785, 789 (1972), citing Andre v. Maguire, 305 Mass. 515, 516 (1940).
5 In Cotter, the SJC appeared to adopt the principles set out in Restatement (Third) of Restitution and Unjust Enrichment, § 35(1) and found that Goldberg did not preclude the possibility that an insurer could recover payments made under a reservation of right, but as explained below held that the insurer must still prove that retention of the payments would be unjust.
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We have allowed claims for restitution in circumstances involving fraud, bad faith, violation of a trust, or breach of a duty; in “business torts” such as unfair competition and claims for infringement of trademark or copyright; and in some circumstances, as here, in disputes arising from quasicontractual relations. See Keller v. O’Brien, supra at 778–779. In order to prevail on its claim for reimbursement of disability insurance benefits it paid to Cotter under a reservation of rights, MetLife must establish not only that Cotter received a benefit, which is not disputed, but also that such a benefit was unjust.
Cotter, 464 Mass. at 644. The court found that Cotter’s retention of the disability benefit payments was not unjust.
Clearly, the facts of Cotter, in which the insurer sought to recover benefit payments made to an individual, were more compelling for the insured than those of the present case, which involves a commercial dispute between an insurer and a large company. Nonetheless, liability policies are also sold to individuals (e.g., auto and homeowners policies) and small family businesses, as well as to manufacturing companies like Vibram. In order to prove that it is unjust for an insured to retain defense costs advanced in respect of a third-party claim under a reservation of rights, an insurer must do more than prove that a court ultimately held that the claims were uncovered. Otherwise, the insurer is, in effect, using equitable principles to insert a reimbursement provision into the liability policy that does not exist. If a policy holder demands coverage of a third-party claim that is clearly not covered under the policy, the insurer can reject it. If a policy holder engaged in misrepresentations or other wrongful conduct (for example, acting in concert with a third-party claimant to make an uncovered claim appear covered), retention of defense costs might well be “unjust.” However, a good faith demand for a defense under a liability policy, which the insurer decides is likely enough to be valid that it will tender a defense under a reservation of rights, does not make retention of those defense costs unjust. Claims of unjust enrichment ought not be used to imply rights that the parties have not included
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in the written contract that defines their relationship and covers the subject matter in dispute. See Kennedy v. B.A. Gardetto, Inc. 306 Mass. 212 (1940).
Recovery of Unpaid Defense Costs
Vibram seeks to recover expenses for defense of the Underlying Action incurred up to the date that the court held that the claims asserted in the Underlying Action were not covered by the Policies. It argues that in all cases in which a defense is provided under a reservation of rights, the duty to defend continues “until a declaratory judgment of no coverage is entered and that it does not retroactively disappear, even if no coverage is found.” Vibram asserts that Metropolitan Property & Casualty Ins. Co. v. Morrison, 460 Mass.352 (2011) (Morrison) established this principle. The court disagrees. Rather, Morrison teaches that the duty to defend ends when there is no longer any chance that the facts alleged in an underlying action can support a covered claim. That will often, but certainly not always, be when a declaratory judgment resolves a coverage dispute.
Morrison involved claims allegedly covered by a homeowner’s insurance policy. Briefly stated, the policy holders’ son (covered under the policy) had injured a police officer while resisting arrest. The son pled guilty to various criminal charges, and the police officer filed suit against the son alleging negligent and reckless conduct. The insurer, Metropolitan, disclaimed any obligation to provide indemnity or a defense, but did bring a declaratory judgment action seeking to establish no coverage. The son did not answer the police officer’s complaint, and a default judgment entered against him in the underlying personal injury action. On appeal, the coverage issue turned on (1) an interpretation of a policy provision that excluded coverage for
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bodily injury resulting from intentional and criminal acts and (2) whether the entry of a default judgment in the underlying personal injury action, before a judgment of no coverage entered in the declaratory judgment action, established that the police officer’s injury was the result of negligence, as alleged in the complaint, and therefore a covered claim.
The SJC began by restating the well-established principle that the “insurer’s duty to defend is independent from, and broader than, its duty to indemnify.” Id. at 351. It then went on to explain that “the duty to defend is determined based on the facts alleged in the complaint, and on facts known or readily knowable by the insurer . . . . However, when the allegations in the underlying complaint lie expressly outside the policy coverage and its purpose, the insurer is relieved of the duty to investigate or defend the claimant.” Id. (internal quotations and citations omitted). Or, stated somewhat differently, when the allegations of the complaint do not “roughly sketch a claim covered by a liability policy,” there is no duty to defend. Id.
In support of its position, Vibram quotes the following statement from Morrison: “‘a declaratory judgment of no coverage, either by summary judgment or after trial, does not retroactively relieve the primary insurer of the duty to defend; it only relieves the insurer of the obligation to continue to defend after the declaration.’ 14 G. Couch, Insurance, supra at s. 200: 48, at 200-65 to 200-66.” Id. at 352. Vibram, however, omits the very next sentence in the opinion: “Where material facts as to the duty to indemnify are in dispute, an insurer has a duty to defend until the insurer establishes that no potential for coverage exists. Id. at 200-21.” Id. In other words, where it can be established that there is no coverage under the policy because there are no material facts necessary to determine the coverage issue in dispute, or because, even assuming all of the allegations in the underlying complaint are true, no coverage exists, there is no duty to defend. Indeed, in Morrison, the SJC remanded the case to the Superior Court to
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determine whether Metropolitan owed its insured “a duty to defend at the time of the default judgment.” The SJC instructed the trial judge to determine whether by that point the facts establishing no coverage were already known and undisputed. Clearly, the SJC was teaching that this was the time at which the duty to defend terminated, even if Metropolitan did not obtain its declaratory judgment until later.
Moreover, the rationale underlying the decision in Jerry’s, and other similar cases, would be impaired if a duty to defend arose whenever an insured asserted a disputed right to coverage. In those cases, the courts held that the insurer had no right to recoup defense costs when a declaratory judgment entered that established that a third-party complaint did not assert a covered claim, because it was initially up to the insurer to decide whether to, in effect, hedge its bets and provide a defense when it was unsure of coverage: “In some circumstances, an insurance company may face a difficult decision as to whether a claim falls, or potentially falls, within the scope of the insurance policy. However, it is a decision the insurer must make. If it believes there is no possibility of coverage, then it should deny its insured a defense because the insurer will never be liable for any settlement or judgment.” Jerry’s, 3 A.2d at 542. If an insurer is bound to provide a defense whenever there is any chance that a policy might be interpreted to provide coverage, because of a dispute about policy terms not alleged facts, the predicate for following the principle outlined in Jerry’s is missing.
The court has found a single case in which a court ruled that a dispute concerning a question of law, resolved in favor of the insured, could nonetheless give rise to a duty to defend. In Hugo Boss Fashions, Inc. v. Federal Ins. Co., 252 F.3d 608 (2001), the insurer rejected its insured’s claims of coverage for a trademark infringement case filed against it and declined to provide a defense. The insured brought a declaratory judgment action seeking to establish
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coverage and, while it was pending, settled the underlying trademark suit. The coverage case preceded to trial before a jury, which returned a verdict for the insured, both as to coverage and a duty to defend, and judgment entered for the insured. On appeal, the Second Circuit Court of Appeals reversed the District Court’s judgment that the trademark suit was a covered claim. It held that the policy was unambiguous, as the term “trademarked slogans” had a specific meaning and, in consequence, the policy did not cover the underlying claim.
In a split decision the Court of Appeals, nonetheless, found a duty to defend. It held that “there are situations in which a legal uncertainty as to insurance coverage gives rise to (an at least temporary) duty to defend.” Id. at 622. (Emphasis in original) The majority explained that there was sufficient “legal uncertainty (what does “trademarked slogan” mean)” to require the insurer “to undertake a defense of Hugo Boss until the uncertainty surrounding the term was resolved.” Id. In other words, although it concluded that the term “trademarked slogan” had only one reasonable meaning, the possibility that a court might find it ambiguous gave rise to a duty to defend.
Justice Sotomayor (then an associate justice of the Second Circuit) dissented from this latter holding. She concluded that the majority’s discussion of the duty to defend “finds no basis in New York law.” Id. at 626. She went on to explain that:
The majority errs in confusing two types of uncertainty. The first is cognizable under New York law, the second is not. The first concerns the period during which the underlying action is pending when the insurer must defend the insured against any allegations that, if proven, would result in indemnification. This type of uncertainty is a well-established element of New York insurance law and is unquestioned here. The majority attempts to read a second category of “uncertainty” into New York law, however, concerning how a court might rule on the scope of policy terms. No such “uncertainty” is recognized under New York law apart from that arising from an “ambiguous” policy term.
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Id. at 627. Anticipating to some extent the reasoning that the Pennsylvania Supreme Court adopted in Jerry’s, Justice Sotomayor’s dissent went on to point out:
In order to determine its duties under a policy, insurers are, as a matter of course, called upon to survey the relevant law and scrutinize the language of the policy to judge whether its terms are unambiguous. Insurers may err in their judgment concerning the unambiguity of a policy term but are given strong incentives to decide these questions correctly. If they do not, they can be forced to defend a costly coverage action or, if the finding of unambiguity was so far off the mark that “no reasonable [insurance] carrier would, under the given facts, be expected to assert it,” Sukup v. State, 227 N.E.2d 842, 844 (N.Y. 1967), insurers can face even greater liabilities for breaching their duty of good faith.
All of this assumes that we entrust insurers with the initial decision concerning whether policy terms are unambiguous. In the case of a policy that uses a legal term of art, this inquiry requires a determination of whether that term of art is unambiguous. . . . And yet, the majority wants to deny Federal the opportunity to reach the same conclusion we have reached. It is difficult to understand why we should discourage Federal or any other insurer from making such determinations that are, in any case, subject to review and even sanction if erroneous.
Id. at 628-629 (Emphasis supplied).
Turning to the present case, first, this court’s coverage Decision did not turn on whether some term of art used in the Policies was potentially ambiguous. The precise question before the court: would a liability policy providing coverage for an Advertising Injury cover a claim based on the unauthorized use of a famous person’s name to sell a product, in this case a shoe, had not previously been decided in Massachusetts, or very many other courts. However, this court’s Decision did not turn on whether any particular term of art used in the Policies was potentially ambiguous, but rather applied legal precedent to the interpretation of a series of policy provisions.
Additionally, the reasoning of Justice Sotomayer’s dissent appears far more compelling with respect to the issues raised here than the majority opinion. In the first instance, it is for the insurer to decide whether any of the allegations in the complaint, if proved, could support a claim
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covered by the policy. If it declines to provide a defense, it faces potential liabilities that will likely exceed the cost of the defense. However, if it elects not to defend the third-party claim, and its decision was correct as a matter of law, how could there ever have been a duty to defend?
The case now before the court does provide an additional confounding fact. The Insurers initially did agree to advance defense costs, but had not paid all outstanding invoices when the Declaratory Judgment of no coverage issued. Whether the insurer stopped paying because it became more convinced of the validity of its coverage position or because it was just slow in processing invoices does not appear to raise a disputed issue of fact material to this case. The relevant question is whether having initially agreed to pay for Vibram’s defense, while prosecuting this declaratory judgment action, the Insurers are bound to continue to advance defense costs until this case is resolved. On the record before this court, it concludes that they are not.
While not perfectly analogous, the court notes that in Herbert A Sullivan, Inc. v. Utica Mutual Ins. Co., 439 Mass. 387, 395 (2003), the insurer initially provided a defense to its insured under a general liability policy because one count of a multicount complaint alleged negligence. However, after the plaintiff in the underlying action amended its complaint and eliminated the negligence count, the insurer no longer had a duty to defend. The court finds that there is nothing inherent in an insurer’s initial decision to provide a defense that precludes it from changing its mind, even while the declaratory judgment action is still pending.
The court can envision cases in which an insured may have relied on the insurer’s initial decision and adopted a course of action in responding to the third-party claim such that it would suffer damage if the insurer discontinued the defense before the declaratory judgment action was resolved. For example, this might arise in situations in which the insurer is not only advancing
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defense costs but actively providing the defense. However, this is not such a case. Upon receipt of the reservation of rights letter, Vibram exercised its right to retain its counsel of choice and to control its own defense, which given the amount of fees generated in a rather brief time was robust. There are no facts in the summary judgment record suggesting that the Insurers should be equitably estopped from discontinuing the advancement of defense costs, if the Policies permit them to do so. The court finds that, on these facts, the Insurers were permitted to change their mind with respect to advancing defense costs, as they were under no contractual obligation to pay them. The insured has neither a contractual or equitable claim for payment of unpaid costs of defense incurred up to the date the Decision issued.6
ORDER
For the foregoing reasons, the Insurers’ motion for summary judgment is DENIED, to the extent that it seeks to establish a right to recoup defense costs previously advanced,and otherwise ALLOWED; and Vibram’s motion for summary judgment is DENIED, to the extent it seeks to establish a right to recover any additional defense costs from the Insurers, and otherwise ALLOWED. Final judgment shall enter dismissing the counterclaims and declaring that the plaintiff insurance companies do not have a duty to defend the defendant Vibram in the
6 Vibram argues that the provision in the Policies that states “[the Insurers] will pay, with respect to any claim we investigate or settle, or any ‘suit’ against any insured we defend: . . . All expenses we incur . . . .” requires payment of all defense costs through the date the Decision issued. Clearly, this policy term only provides that when the Insurers defend a claim they have to pay all costs that they incur. Presumably, when an insured receives a reservation of rights letter and elects to control its own defense, that provision requires reimbursement of all defense expenses incurred by the insured, at least all reasonable expenses. But, it does not create an independent duty to defend a claim, or pay for the defense of a claim, that the Insurers have decided not to defend. The duty to defend is determined under other policy provisions.
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Underlying Action or indemnify it for any loss sustained in respect thereto. No party shall recover damages, and each party shall bear its own costs.
_______________________
Mitchell H. Kaplan
Justice of the Superior Court
Dated: March 20, 2017

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Posted by Stephen Sandberg - April 6, 2017 at 5:20 am

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Aiguier v. Financial Industry Regulatory Authority, Inc., et al. (Lawyers Weekly No. 12-029-17)

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COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CIVIL ACTION
NO. 16-02491 BLS I
DUSTIN AIGUIER
v.
FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC., CUSTOMER 1-W, CUSTOMER 1-H, CUSTOMER 2, CUSTOMER 3, CUSTOMER 4-W, and
CUSTOMER 4-H
and
THE SECURITIES DIVISION OF THE OFFICE OF THE SECRETARY OF STATE, intervener
MEMORANDUM OF DECISION AND ORDER ON THE DEFENDANTS’ MOTIONS TO DISMISS
INTRODUCTION
This case, once again, raises the issue of whether, or pursuant to what standard, the Superior Court may adjudicate a claim made by a registered representative of a securities broker-dealer that he is entitled to have records of customer complaints expunged from the data bases maintained by defendant Financial Industry Regulatory Authority, Inc. (FINRA). Plaintiff Dustin Aiguier was formerly a registered representative of New York Life Securities LLC (NYLife). While with NYLife, four complaints were lodged against him by six of his customers (including two sets of spouses) (collectively, the Customers). The plaintiff has filed a complaint which he styles: “Amended Petition for an Order of Expungement of Customer Dispute Information from the Central Registration (CRD System)” (the Complaint). In addition to FINRA, the Complaint also names the Customers as defendants (although the plaintiff seeks no relief with respect to them). The Securities Division of the Office of the Secretary of the
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Commonwealth has intervened in this action as a defendant on the ground that it is a primary regulator of the securities industry in Massachusetts and is responsible for protecting the public’s interest in access to information concerning customer complaints. The case is now before the court on all of the defendants’ motions to dismiss the Complaint. They move for dismissal asserting that: (a) the Superior Court lacks subject matter jurisdiction (Mass.R.Civ.P. 12(b)(1)) and (b) the Complaint fails to state a claim on which relief may be granted (Mass.R.Civ.P. 12(b)(6)). For the reasons that follow, their motions are allowed.
FACTUAL BACKGROUND
The court will begin by summarizing the relevant factual allegations in the Complaint, assumed to be true for purposes of this motion, as well as relevant information contained in attachments to the Complaint, to the extent necessary to address the issues raised by the defendants’ motions. It will then describe the regulatory framework relevant to this dispute.
The Plaintiff’s relationship to NYLife and the Customer Complaints
The plaintiff was a registered representative of NYLife until June 3, 2015, when he was discharged. Four written complaints against him were submitted to NYLife by his customers, each involved the sale of annuities. NYLife settled each of the claims without an arbitration proceeding being commenced. As required by FINRA rules, it reported the claims and settlements to FINRA, and a description of each claim and the settlement, as well as the plaintiff’s response to each claim, are available to the public on FINRA’s BrokerCheck website. The complaints are reported in BrokerCheck in the following order: the first was received on September 10, 2015 and settled for $ 40,229.37; the second was received on August, 13, 2015
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and settled for $ 95,961.16; the third was received on July 28, 2015 and settled for $ 12,286.78; and the fourth was received on January 1, 2013 and settled for $ 8,500.
After the plaintiff left NYLife, its representatives solicited customer complaints against him. Three of these complaints were the result of this solicitation, which was in some way related to a pyramid scheme engaged in by a NYLife management employee.
The disclosures regarding the first three claims and settlements are false and misleading.1 As to the fourth, the plaintiff followed all rules and procedures in the sales process, NYLife found that he had not engaged in any wrong doing, and the settlement was made in the interest of good customer relations.
FINRA
FINRA is a private, not-for-profit corporation organized under the laws of Delaware. It is a self-regulatory organization (SRO) registered with the Securities and Exchange Commission (the SEC). Under federal securities law, as an SRO, it plays a central role in the regulation of the securities industry. As applicable to this case, FINRA is required to “establish and maintain a system for collecting and retaining registration information” for representatives of broker-dealers. See 15 U.S.C. §§78o-3(i)(1)(A) and (i)(5). In forms approved by the SEC, FINRA collects, among other items, “information about registered personnel, including customer complaints . . . .” See SEC Release No. 34-71959, 79 Fed. Reg. 22734 (Apr. 17, 2014); see also Desiderio v. Nat’l Ass’n Sec. Dealers, 191 F.3d 198, 201 (2nd Cir. 1999) (“the SEC . . . must approve all [FINRA’s] rules and regulations”). The complaints are recorded in an electronic
1 There is an allegation in the Complaint that a manager at NYLife “improperly recognizes revenues prematurely and then reverses them subsequently.” The court has difficulty understanding how this allegations ties to the plaintiff’s allegations that three of the claims are false and misleading. The complaint contains additional allegations concerning records and reports that allegedly establish that the Customer claims are false or misleading, but these allegations are not material to any issue raised by the motions to dismiss.
4
database called the Central Registration Depository (CRD) which FINRA maintains in compliance with federal securities law and an agreement with the state securities regulators in all 50 states. The federal securities law requires that this complaint information, as well as other data, be available to the public. See 15 U.S.C. § 78o-3(i)(1)(B) (“A registered securities association shall . . . establish and maintain a . . . a readily accessible electronic or other process, to receive and promptly respond to inquiries regarding . . . registration information on its members and their associated persons.”). FINRA fulfills this obligation with an on line internet resource which it calls BrokerCheck. The four customer complaints lodged against the plaintiff, as well as information concerning the reason that NYLife discharged him, are available to the public on BrokerCheck together with the plaintiff’s response to each complaint.
FINRA has promulgated Rule 2080, which addresses the means by which information concerning a broker that exists in the CRD may be expunged. It states, in relevant part:
(a) Members or associated persons seeking to expunge information from the CRD system arising from disputes with customers must obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief.
(b) Members or associated persons petitioning a court for expungement relief or seeking judicial confirmation of an arbitration award containing expungement relief must name FINRA as an addition party and serve FINRA with all appropriate documents unless this requirement is waived pursuant to subparagraph (1) or (2) below.
(1) Upon request, FINRA may waive the obligation to name FINRA as a party if FINRA determines that the expungement relief is based on affirmative judicial or arbitral finding that:
(A) The claim allegation or information is factually impossible or clearly erroneous;
(B) The registered person was not involved in the alleged investment related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
5
(C) The claim, allegation or information is false.
(2) If the expungement relief is based on judicial or arbitral findings other than those described above, FINRA, in its sole discretion and under extraordinary circumstances, also may waive the obligation to name FINRA as a party if it determines that:
(A) The expungement relief and accompanying findings on which it is base are meritorious; and
(B) The expungement would have no material adverse effect on investor protection, the integrity of the CRD system or regulatory requirements.
FINRA has also promulgated Rules 12805 and 13805 which set out the manner in which an arbitration panel is to address matters of expungement that are brought before it. These Rules direct the panel to:
(a) Hold a recorded hearing session (by telephone or in person) regarding the appropriateness of expungement. This paragraph will apply to cases, . . . , even if a customer did not request a hearing on the merits;
(b) In cases involving settlements, review settlement documents and consider the amount of payments made to any party and any other terms and conditions of a settlement;
(c) Indicate in the arbitration award which of the Rule 2080 grounds for expungement serve(s) as the basis for its expungement order and provide a brief written explanation of the reason(s) for its finding that one or more Rule 2080 grounds for expungement applies to the facts of the case;
(d) Assess all forum fees for the hearing session in which the sole topic is the determination of the appropriateness of the expungement request against the parties requesting expungement relief.
See September 2015, FINRA Notice to Arbitrators and Parties on Expanded Expungement
Guidance.
6
DISCUSSION
The defendants argue that the Superior Court does not have jurisdiction to adjudicate the plaintiff’s claim. The complaint does not allege the basis for the court’s jurisdiction. It also does not indicate whether the plaintiff’s claim arises under the common law or a state or federal statute or regulation. Rather, following the factual allegations, the Complaint simply asks that the “Court enter an order pursuant to FINRA Rule 2080 expunging Disclosure” of the four Customer complaints against him that are disclosed in BrokerCheck. This seems to presume that this court has subject matter jurisdiction under Rule 2080 to adjudicate a dispute between the plaintiff and FINRA. It does not.
This court addressed this same issue in Hundley v. Financial Industry Regulatory Authority, Inc., CA No. 14-2523-BLS 1 (Sup.Ct., May 15, 2015). In that case the court noted that Rule 2080 was only a procedural directive that told a registered representative to obtain an order from a court of competent jurisdiction, but not the basis on which such a court would adjudicate a dispute between a registered representative and another party concerning whether the registered representative was entitled to expungement.2 Subpart (b) of Rule 2080 only explains the circumstances under which the associated person should, or need not, name FINRA as a party to the case, but offers no guidance as to who the adverse party would be in addition to FINRA, which is only the custodian of records created by the broker-dealer. In Hundley, this court provided the following explanation of why Rule 2080 cannot be the basis for jurisdiction in the Superior Court.
2 Indeed, Rule 2080 seems to assume that, in many instances, arbitrators or a court would have already adjudicated the grounds for expungement before the court order referenced in this rule is sought. See Section (b)(1) “Upon request, FINRA may waive the obligation to name FINRA as a party if FINRA determines that the expungement relief is based on affirmative judicial or arbitral finding that . . . “ and Section (b)(2) “If the expungement relief is based on judicial or arbitral findings other than those described above, . . . .”
7
It seems doubtful that FINRA, a private Delaware corporation, could promulgate a rule for its members that had the effect of directing a state court to hold a particular kind of hearing or to make particular types of findings in aid of the administration of FINRA’s data base. Indeed, in cases such as the one before the court where the customer lost interest in pursuing his claim after expressing his displeasure with Hundley to his employer, it is difficult to see how this court could adjudicate the issues necessary to make the type of findings that the arbitration panel is directed to make in Rule 12805. Rule 12805 authorizes the panel to consider a representative’s request for expungement even when the complaining customer has not filed a claim, in order to provide a forum in which a broker could request relief in the nature of expungement [even when the customer was uninterested in the proceeding]. This rule seems to envision an abbreviated telephone hearing, adequate under some circumstances to rule on a request for expungement. The Superior Court generally sits to adjudicate disputes between adverse parties and relies on the adversary system for the presentation of cases. What would the Superior Court do if FINRA waived Hundley’s obligation to name it as a defendant? Could it allow Hundley to file a complaint in which there is no party defendant? Or perhaps Hundley should be required to name his customer as a defendant even though all the customer did was complain to SAI about Hundley’s conduct more than six years ago?
In the present case, NYLife settled with the customers after investigating the claims and no arbitration proceeding was begun. Nonetheless, the result is the same. The customers have no financial interest in the outcome of the claims the plaintiff asserts in the Complaint and may well be disinterested in whether BrokerCheck reports their complaints against him or not. Indeed, the Complaint does not purport to state a claim against any Customer or request any relief from the Customers. The court finds no basis on which they can be included as defendants in this case. It appears that NYLife has paid for an attorney to represent them and move for dismissal of the Complaint, but the court has grave concerns about naming a person as a defendant in a case in which no claim is asserted against him/her, thereby putting that person to the potential expense of retaining counsel to explain the nature of the proceeding and what if anything he/she must do in response to being served with a summons and complaint.
In Hundley, this court then went on to comment on a decision by a Federal District Court in a similar case:
8
In In the Matter of Lickless, 2011 WL 2471022 (N.D. Cal., June 22, 2011) the broker filed a complaint in a California state court seeking expungement of information concerning him in the CRD. FINRA removed the case to Federal court. The District Court, however, concluded that “[t]here is nothing in the [Securities] Act, rules or regulations that provide substantive criteria as to when expungement is appropriate. . . .While FINRA Rule 2080 addresses expungement, it only sets forth procedures, not a substantive duty.” Id. at 4. Therefore, the District Court held that the complaint for expungement raised no question of Federal law, and it remanded the case to the California state court for lack of Federal jurisdiction. This court agrees with the Federal court’s conclusion: Rule 2080 creates no legal obligation or duty for the court to enforce.
Since Lickless was decided, three other Federal District Courts have also concluded that Rule 2080 does not create either Federal jurisdiction or give rise to a question of Federal law and therefore, as courts of limited jurisdiction, they lacked jurisdiction to hear cases in which registered representatives sought expungement of customer complaints. See Spalding v. FINRA, 2013 WL 1129396 (N.D. Ga., Mar. 19, 2013); Doe v. FINRA, 2013 WL 6099270 (C.D. Ca., Nov. 19, 2013); Flowers v. FINRA, 2015 WL 9487450 (S.D. Ca., Sept. 24, 2015). While the Massachusetts Superior Court is a court of general jurisdiction, each of these cases supports this court’s view that Rule 2080 does not create any substantive rights for a court to enforce or a private cause of action in which a registered representative could bring an action against some unidentified party, in addition to FINRA, so that his right to expungement could be adjudicated in an adversary proceeding. The court does not have subject matter jurisdiction to decide a case putatively brought under Rule 2080.
Although not mentioned in the Complaint, at oral argument the plaintiff stated that he was not proceeding under a right established by Rule 2080 (or any other statute), but rather under the Superior Court’s general equitable jurisdiction. In Hundley, the court addressed this possible basis for jurisdiction as well, even though it was not raised by the plaintiff in that case. It began by noting, that, in Lickless, after the Federal District Court remanded the case to the California Superior Court, that court dismissed it. The plaintiff registered representative appealed, and the
9
Court of Appeal reversed. See Lickliss v. Financial Industry Regulatory Authority, 208 Cal App. 4th 1125 (2012). Again, in Hundley, this court considered the implications of that opinion:
The Court of Appeal held that Lickliss did not only invoke Rule 2080 in requesting expungement, but also the court’s equitable powers. It noted, as had the Federal court, that Rule 2080(b)(1) is a procedural rule that governs when FINRA may waive the requirement that it be a party to court proceedings for expungement. The Court of Appeal commented that the facts alleged in the complaint supported Lickliss’ contention that the customer complaints against him were very old and stale. It then held as follows: “Exercising that right [to seek expungement] under a rule that provides no substantive criteria for delivering the remedy of expungement, Lickliss called upon the court’s inherent equitable powers to weigh the equities favoring expungement against the detriment to the public should expungement be granted. This is enough to pass demurrer.” Id. at 1135. There does not appear to be any record of what happened to Lickliss’ case thereafter.
As it did in Hundley, this court does not find that, under Massachusetts law, a court of general jurisdiction has the inherent equitable authority “to weigh equities favoring expungement against the detriment to the public should expungement be granted.” Indeed, the court has found no Massachusetts case in which a court has ordered expungement of a record maintained by a private entity. If FINRA had created a specific right to expungement in its rules, and then refused to expunge records when a registered representative allegedly had met all of the criteria for expungement, the registered representative might well be able to state a claim in the nature of breach of contract that could be adjudicated in a state court. As explained above, Rule 2080 does not do that.
If the court treats FINRA as if it were a government agency (it is certainly heavily regulated by the SEC), the court’s authority to order expungement, in the absence of a statute expressly prescribing that remedy is very limited. In Vacaro v. Vacaro, 425 Mass. 153 (1997), the Supreme Judicial Court addressed the question of whether a probation record recording the entry of a chapter 209A restraining order could be expunged on the motion of the defendant, when the order was vacated. The SJC reviewed the statutory scheme that required retention of c.
10
209A records, but limited public access to them. It then explained that expungement was generally available only in two circumstances: (1) when the statutes that direct that certain records be kept also grant a court the power to expunge them (Id. at 157); and (2) when the government’s retention of a record violates a person’s due process rights.3 As noted, there is no statute, regulation or FINRA rule that directs expungement, rather Rules 2080, 12805, and 13805 only provide a mechanism for arbitration of a registered representative’s request that records be expunged.
Turning to the due process argument, the plaintiff is unable to establish that FINRA (if it constitutes a government actor in this regard) has violated the plaintiff’s due process rights. FINRA is not alleged to have taken any action in this case other than posting on BrokerCheck information that was provided to it by NYLife that reflects that the plaintiff’s customers made written complaints against him and NYLife settled the claims. FINRA played no role in the assertion of the complaints or their resolution. There is no allegation that FINRA took some action to cause NYLife to discharge the plaintiff or to prevent him from acting as a registered representative for some other broker-dealer. At worst, the posting of this information on a publicly available database might impair the plaintiff’s reputation among potential customers. However, proving an injury to reputation is insufficient to establish a due process violation under either the United States Constitution or Article 12 of the Massachusetts Declaration of Rights. As the SJC explained in Vacaro: “The United States Supreme Court has held that a person’s
3 Expungement of Chapter 209A orders has also been ordered where the wrong person was identified as the party defendant. See Commonwealth v. Alves, 86 Mass. App. Ct. 210 (2014). However, in the Complaint, the plaintiff alleges that the Customers were his customers at NYLife. Expungement has also been ordered where a restraining order entered as a result of a fraud on the court. See Commonwealth v. Adams, 65 Mass. App. Ct. 725 (2006). No court has played any role in the posting of the Customer complaints on BrokerCheck. It may also be noted that in the Appeals Court’s recent decision J.S.H. v. J.S., No. 15-P-1607 (March 1. 2017), the Court held that the “argument that the records should be expunged because there was insufficient legal or factual basis for the c. 258 order to have issued is without merit.” Slip Op. 4. That is, at best, what the plaintiff alleges in this case, i.e., the Customer complaints did not have any merit.
11
reputation is not a protected liberty interest under the Fourteen Amendment to the United States Constitution unless ‘a right or status previously recognized by state law [is] distinctly altered or extinguished.’ Paul v. Davis, 424 U.S. 693, 711 (1976).” Id. at 160; see also n. 8 (“This analysis is referred to as the ‘stigma plus’ test for determining whether an injury to an individual’s reputation constitutes a deprivation of [protected] liberty or property interest.”). The SJC held that it would follow the teaching of Paul “in deciding whether art. 12 has been violated.” Id. at 161.
At oral argument, the plaintiff argued that he can meet the “stigma plus” test because he is now a registered representative of another broker-dealer, but subject to special supervision under a consent order that he entered into with the Securities Division. The plaintiff’s argument answers itself. He is subject to special conditions under a “consent order” that he agreed to enter into in connection with an adjudicatory proceeding before the Securities Division of the Office of the Secretary of State conducted pursuant to G.L. c. 110A, § 207A, with rights of appeal to the Superior Court under G.L. c. 30A, § 14. Even if that proceeding and consent order are related to any of the Customer complaints reported in BrokerCheck, he is not subject to any limitations in his work as a registered representative because they were reported in BrokerCheck. Indeed, he would have had to disclose those complaints when he applied for association with a new broker-dealer on Form U4 whether or not they were available to the public on BrokerCheck. And, if he wished to litigate the validity of any Customer complaint in that proceeding, he had a forum affording him due process in which to do so.
At argument, the plaintiff also placed great reliance on Police Comm’r of Boston v. Municipal Court of Dorchester Dist., 374 Mass. 640 (1978), but the case is not helpful to him. In that case, the SJC held that “a Juvenile Court [has the power] to issue appropriate orders
12
[including expungement] ancillary to their existing statutory and common law jurisdiction.” Id. at 661 and n. 15. It explained that “where a juvenile proceeding has been terminated due to the absence of any evidence of delinquency, expungement would seem justified. . . . The power of a court in such circumstances is not dependent on its possession of general equity powers, but is an incident of and ancillary to the court’s original jurisdiction.” Id. at 662. (Internal citatations omitted, emphasis added) Police Comm’r of Boston does not support the plaintiff’s contention that the Superior Court has some free standing equitable jurisdiction to adjudicate a case in which a party claims that, on balance, equities favor the expungement of a record maintained by a state agency where no statute provides a right to seek expungment under identified standards and there is no due process violation associated with their retention.
Moreover, the plaintiff has an adequate remedy at law. Under FINRA rules 12805 and 13805, the plaintiff has the right to demand arbitration of his claim that the records of the Customer complaints should be expunged. In such an arbitration the adverse party would be NYLife, an entity with an obvious interest in contesting the allegations concerning its conduct averred in the Complaint, but which is not a defendant in this case. A review of the Complaint clearly demonstrates that the party against whom all of the plaintiff’s factual allegations are directed is NYLife, which allegedly solicited three of the Customers to lodge complaints against the plaintiff in connection with a vaguely described pyramid scheme perpetrated by the manager of its Boston office. Of course, the plaintiff cannot name NYLife as a defendant in this action because his application to be a registered representative of NYLife on Form U4, the uniform application for securities industry registration, includes a provision in which the applicant “agrees to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer.” A court ought not reach to find equity jurisdiction to adjudicate a claim against
13
FINRA, which is only the record custodian, as a means to circumvent the arbitration provisions that govern the resolution of claims that the plaintiff asserts against NYLife.4
Accordingly, this court holds that it does not have jurisdiction in equity to consider the plaintiff’s claim for expungement. And, even if equitable jurisdiction existed, the facts alleged, if true, would not support an order of expungement, and, therefore, the Complaint fails to state a claim.
ORDER
For the foregoing reasons, the defendants’ motions to dismiss are ALLOWED. Final Judgment shall enter dismissing the Complaint.
______________________
Mitchell H. Kaplan
Justice of the Superior Court
Dated: March 10, 2017
4 It may be noted that the plaintiff served the manager of NYLife with a subpoena to appear at a deposition on October 13, 2016, before the Amended Petition for Expungement was even filed on November 2, 2016, well knowing that FINRA would move to dismiss it. The court entered an order that the deposition not go forward until after the motion to dismiss was heard.

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Posted by Stephen Sandberg - April 4, 2017 at 10:24 am

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Bassett, et al. v. Triton Technologies, Inc., et al. (Lawyers Weekly No. 12-032-17)

COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT.
1684CV03475-____________________ BLS2
LAURA BASSETT, JAMIE ZALINSKAS, ALYSSA WRIGHT, and
ALEXIS CRAMER, on behalf of themselves and all others similarly situated
v.
TRITON TECHNLOGIES_, _I_N_C__.,_ S__. _J_A_Y__ N__A_L__L_I , and ANDREW S. BANK
MEMORANDUM AND ORDER DENYING
DEFENDANTS’ MOTION TO DISMISS COUNT III
Plaintiffs claim that they and other employees of Triton Technologies, Inc.,
are owed unpaid wages. Part of their claim, in Count III of the complaint, is that
Triton breached its statutory obligation, as a business that sells goods at retail,
to pay employees who work on Sunday “one and one-half times the employee’s
regular rate.” See G.L. c. 136, § 6(50). Defendants move to dismiss Count III under
Mass. R. Civ. P. 12(b)(1) and 12(b)(6). They argue that Plaintiffs lack standing to
bring this claim, and the Court therefore lacks subject matter jurisdiction to hear it,
because the Legislature did not create any private right of action to enforce the
Sunday pay statute. This framing of the issues is not quite right; the jurisdictional
question of whether a plaintiff has standing is separate and distinct from whether
they have stated a viable claim. In any case, both parts of Defendants’ argument are
without merit. The Legislature created a private right of action under the Wage Act
to enforce all of an employer’s legal obligations to pay wages earned by an employee.
That right of action encompasses claims for non-payment of extra wages earned by
working on a Sunday. And Plaintiffs have standing because they are seeking
payment of wages they say are owed but have not been paid by Triton.
1. Framing the Issues. Defendants mistakenly conflate the question of
whether there is a private right of action to recoup unpaid Sunday premium pay
with the separate issue of whether particular plaintiffs have standing to assert, and
thus a court has the power to resolve, such a claim against a particular defendant.
Whether a complaint states a cognizable cause of action goes to the ultimate
merits of the claim. If a plaintiff asserts a statutory rather than a common law
claim, as in this case, a motion to dismiss on the ground that the plaintiff has no
– 2 –
valid cause of action is still an assertion that the plaintiff has not alleged facts
plausibly suggesting that the plaintiff is entitled to relief. See Swartz v.
Department of Banking and Ins., 376 Mass. 593, 600 (1978); Whitehall Co. Ltd. v.
Merrimack Valley Distributing, 56 Mass. App. Ct. 853, 853-856 (2002). Indeed, the
specific question raised by this motion to dismiss—whether an employee can bring a
private right of action under the Wage Act to enforce a duty created to employees
created by some other statute—concerns a Rule 12(b)(6) issue of whether the
plaintiff has stated a viable claim. See Massachusetts State Police Commissioned
Officers Ass’n v. Commonwealth, 462 Mass. 219, 220-221 (2012). And if a claim is
dismissed under Rule 12(b)(6) that will “operate[] as a dismissal on the merits …
with res judicata effect,” thereby barring the plaintiff from ever reasserting claim.
Mestek, Inc. v. United Pacific Ins. Co., 40 Mass. App. Ct. 729, 731, rev. denied,
423 Mass. 1108 (1996), quoting Isaac v. Schwartz, 706 F.2d 15, 17 (1st Cir. 1983).
In contrast, a challenge to standing, like all questions of subject matter
jurisdiction, “goes to the power of the court to hear and decide the matter.” Ginther
v. Commissioner of Ins., 427 Mass. 319, 322 n.6 (1998). “[A] plaintiff must establish
standing in order for a court to decide the merits of a dispute or claim.” HSBC Bank
USA, N.A. v. Matt, 464 Mass. 193, 199 (2013). A dismissal on the ground that the
plaintiff lacks standing therefore resolves only one issue, “the absence of subject
matter jurisdiction” over that particular claim; it “is not an adjudication on the
merits” and does not bar the same plaintiff from bringing other claims regarding
the same dispute. Bevilacqua v. Rodriguez, 460 Mass. 762, 779-780 (2011).
Defendant’s assertion that Plaintiffs lack standing because they have no
private right of action to enforce the Sunday premium pay statute “confuses the
merits of the plaintiffs’ claim with the standing inquiry.” See Cayuga Nation v.
Tanner, 824 F.3d 321, 332 (2d Cir. 2016). “The threshold question whether
[a plaintiff] has standing is different than the ultimate merit of [its] allegations.”
Hoffman v. Bd. of Zoning Appeal of Cambridge, 74 Mass. App. Ct. 804, 809, rev.
denied, 455 Mass. 1104 (2009). Thus, “the existence of a private right of action is an
issue ‘separate and distinct’” from the issue of standing … and ‘is not
jurisdictional.’ ” Mulhall v. UNITE HERE Local 355, 618 F.3d 1279, 1293 (11th Cir.
– 3 –
2010), quoting The Wilderness Society v. Kane County, Utah, 581 F.3d 1198, 1215
(10th Cir. 2009), and Northwest Airlines, Inc. v. County of Kent, Michigan, 510 U.S.
355, 365 (1994); accord, e.g., National R.R. Passenger Corp. v. National Ass’n of R.R.
Passengers, 414 U.S. 453, 455-456 & 465 n.13 (1974); Louisiana Landmarks Soc.,
Inc. v. City of New Orleans, 85 F.3d 1119, 1122 n.3 (5th Cir. 1996); Liberty Nat. Ins.
Holding Co. v. Charter Co., 734 F.2d 545, 553 n.19 (11th Cir. 1984).
2. Private Right of Action. The statutory right of action created under
the Wage Act encompasses claims that an employee who worked on a Sunday has
not been paid the higher wage required under G.L. c. 136, § 6(50). Defendants’
assertion that Plaintiffs have no private right of action to enforce the Sunday pay
law is therefore without merit.
The Massachusetts Wage Act imposes a statutory obligation upon employers
to make timely payment of all wages earned by their employees. It provides that
“[e]very person having employees in his service shall pay weekly or biweekly each
such employee the wages earned by him….” G.L. c. 149, § 148. “When an employee
‘has completed the labor, service, or performance required of him … he has “earned”
his wage.’ ” Fernandes v. Attleboro Hous. Auth., 470 Mass. 117, 125 n.6 (2014),
quoting Awuah v. Coverall N. Am., Inc., 460 Mass. 484, 492 (2011). “The purpose of
the Wage Act is ‘to prevent the unreasonable detention of wages.’ ” Melia v. Zenhire,
Inc., 462 Mass. 164, 170 (2012), quoting Boston Police Patrolmen’s Ass’n v. City of
Boston, 435 Mass. 718, 720 (2002).
The Wage Act requires prompt payment of all wages earned by an employee,
including higher wages earned under G.L. c. 136, § 6(50), for work on Sundays.
Section 148 applies to all wages earned, whether the obligation to pay the wage is
solely a function of a private contractual arrangement or arises in whole or in part
under a statute. A failure to pay one and one-half times an employee’s regular wage
when such bonus pay is required by statute is therefore a violation of the Wage Act.
See Drive-O-Rama, Inc. v. Attorney General, 63 Mass. App. Ct. 769, 769-770 (2005)
(failure to pay time and a half for work on legal holidays, as required by G.L. c. 136,
§ 13, violated the Wage Act).
– 4 –
The Legislature has expressly authorized employees to sue their employer for
violating the Wage Act by not paying earned wages. Under G.L. c. 149, § 150,
“[a]n aggrieved employee has a private cause of action to recover ‘wages’ wrongfully
withheld or detained by the employer. Fraelick v. PerkettPR, Inc., 83 Mass. App.
Ct. 698, 704–05 (2013). The Legislature amended § 150 in 1993 to “authorize[e] a
private right of action, including provisions for treble damages and attorney’s fees
and costs,” Lipsitt v. Plaud, 466 Mass. 240, 246 (2013).
Since Plaintiffs have an explicit right to sue for violations of the Wage Act,
and failure to pay wages for work on Sundays as required by G.L. c. 136, § 6(50), is
a violation of the Wage Act, the private right of action created by G.L. c. 149, § 149,
allows Plaintiffs to sue for non-payment of the higher wages they claim to have
earned for working on Sundays.
It is irrelevant that Plaintiffs may not be able to enforce other aspects of the
statute that governs commercial operations on Sundays. Defendants correctly note
that Plaintiffs could not seeking an injunction barring an employer from doing
business on Sundays in violation of the so-called blue laws, because that
enforcement power is reserved by statute to the Attorney General. See Local 1445,
United Food & Commercial Workers Union v. Police Chief of Natick, 29 Mass. App.
Ct. 554 (1990), rev. denied, 409 Mass. 1102 (1991). But that is beside the point.
Plaintiffs are not seeking an injunction that would force Triton not to open on
Sundays. They are seeking payment of wages earned by working on a Sunday.
Plaintiffs may do so by asserting a cause of action under G.L. c. 149, § 150.
3. Standing. To the extent that Defendants are actually challenging
Plaintiffs’ standing, rather than merely seeking dismissal on the theory that
Plaintiffs have not stated a claim for Sunday pay upon which relief can be granted,
that part of the motion to dismiss is without merit as well.
Where a defendant asserts that the allegations of a complaint demonstrate
that the plaintiff has no standing, that motion will fail if the facts alleged in the
complaint plausibly suggest that the defendant owed a legal duty to the plaintiff,
breached that duty, and the plaintiff suffered injury as a result; breach of legal duty
– 5 –
causing injury is generally all that is needed to have standing. See Sullivan v. Chief
Justice for Admin. & Mgmt. of the Trial Court, 448 Mass. 15, 21-23 (2007).
The allegations of the complaint show that Plaintiffs and the putative class
members have standing to assert their Sunday wage claim. Plaintiffs have alleged
facts plausibly suggesting that Triton owed a duty to pay Plaintiffs one and one-half
times their regular hourly wage when they worked on Sunday, that Triton breached
that duty, and that Plaintiffs and the putative class members were injured as a
result. They have also alleged facts plausibly suggesting that the individual
Defendants are personally liable for Triton’s alleged breach of the Wage Act. Cf.
G.L. c. 149, § 148 (“officers or agents having the management” of corporation “shall
be deemed to be the employers of the corporation” for purposes of Wage Act); Cook
v. Patient Edu, LLC, 465 Mass. 548, 549, (2013) (under § 148, corporate officer or
manager “who ‘controls, directs, and participates to a substantial degree in
formulating and determining’ the financial policy of a business entity” is personally
liable for non-payment of wages) (quoting Wiedmann v. The Bradford Group, Inc.,
444 Mass. 698, 711 (2005). Nothing more is required to show that Plaintiffs have
standing to assert the Sunday wage claim set forth in Count III of the complaint.
ORDER
Defendants’ partial motion to dismiss Count III is DENIED.
March 6, 2017
___________________________
Kenneth W. Salinger
Justice of the Superior Court

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Posted by Stephen Sandberg - April 4, 2017 at 3:15 am

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Holyoke Mutual Insurance Company in Sale,, et al. v. Vibram USA, Inc. (Lawyers Weekly No. 12-031-17)

1
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CIVIL ACTION
NO. 15-2321 BLS1
HOLYOKE MUTUAL INSURANCE COMPANY IN SALEM and MARYLAND CASUALTY COMPANY
vs.
VIBRAM USA, INC.
MEMORANDUM OF DECISION AND ORDER
ON CROSS-MOTIONS FOR SUMMARY JUDGMENT ON RECOUPMENT AND RECOVERY OF DEFENSE COSTS
INTRODUCTION
This action arises out of a coverage dispute between the plaintiff insurance companies, Holyoke Mutual Insurance Company in Salem (Holyoke)1 and Maryland Casualty Company (Maryland) (individually an Insurer, and collectively the Insurers), and the defendant, Vibram USA, Inc. (Vibram). Each of the insurers issued commercial general liability policies to Vibram (or its affiliate) (the Policies).2 An action was filed against Vibram in the United States District Court for the Western District of Washington at Tacoma captioned: Tefere Abebe Bikila, and others, v. Vibram, case no. 3:15-cv-05082-RBL (the Underlying Action). Vibram asserted coverage under the Policies and tendered defense of the Underlying Action to the Insurers. The
1 Holyoke has been replaced as a plaintiff in this action by its successor, Country Mutual Insurance Company. For consistency, the court will continue to refer to it as Holyoke in this Memorandum of Decision and Order.
2 Holyoke issued policies to Vibram for several years, while Maryland issued policies to an affiliate of Vibram,Vibram Five Fingers, LLC. It is not necessary to distinguish between Vibram and its affiliate for the purposes of this motion, and the court will refer to them collectively as Vibram. Additionally, for purposes of this motion the relevant policy language in all of the policies is identical, and is it also unnecessary to distinguish among policy years. The court will therefore simply refer to the Holyoke and Maryland policies collectively as the Policies.
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Insurers each sent a “reservation of rights” letter to Vibram in which they agreed to provide its defense to the claims asserted in the Underlying Action, but also maintained that coverage did not exist under the Policies and reserved their rights to bring a declaratory judgment action and seek reimbursement for defense costs advanced. The Insurers then filed this declaratory judgment action seeking a declaration that the claims asserted against Vibram in the Underlying Action are not covered under the Policies; Vibram counterclaimed for a declaration that they are. In a Memorandum of Decision and Order on Cross-Motions for Summary Judgment and Partial Summary Judgment originally issued on August 17, 2016 (the Decision), this court held that the Policies do not provide coverage for the claims asserted against Vibram in the Underlying Action and, accordingly, there is no duty to defend.
The case is now before the court on cross-motions for summary judgment addressing the issues of recoupment of defense costs advanced or, conversely, recovery of defense costs incurred before the court rendered the Decision but left unpaid—issues of first impression in Massachusetts. The Insurers contend that since the claims asserted in the Underlying Action were not insured under the Policies, they are entitled to recoup the defense costs that they previously paid Vibram. Vibram, in turn, maintains that it is entitled to recover defense costs already incurred, but still unpaid, as of the date the Decision issued. For the reasons that follow, each party’s motion is allowed, in part, and denied, in part.
ADDITIONAL BACKGROUND
None of the facts necessary to resolve these cross-motions are in dispute.
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Because the Insurers sent reservation of rights letters to Vibram, Vibram exercised its right to control its defense of the Underlying Action and retained its own counsel.3 Vibram’s counsel kept the Insurers informed concerning the status of the Underlying Action and forwarded copies of pleadings to them. By August 17, 2016, the date the Decision issued, Vibram had sent the Insurers invoices for defense costs totaling $ 1,272,212.57 and the Insurers had collectively reimbursed Vibram $ 667,901.71—$ 472,216.80 from Holyoke and $ 195,684.91 from Maryland. Vibram last received a payment from the Insurers on July 18, 2016. Neither Insurer informed Vibram why it did not pay the full amount of the invoices.4
As relevant to the issues raised by the pending motions, the Policies provide that the Insurers “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘personal and advertising injury’ to which this insurance applies. We have the right and duty to defend the insured against any ‘suit’ seeking those damages. However, we will have no duty to defend the insured against any ‘suit’ seeking damages for personal and advertising injury’ to which this insurance does not apply.” The Policies also state that the Insurers “will pay, with respect to any claim we investigate or settle, or any ‘suit’ against any insured we defend: . . . All expenses we incur . . . .”
DISCUSSION
Recoupment
In Metro. Life Ins. Co. v. Cotter, 464 Mass. 623 (2013) (Cotter), the Supreme Judicial Court (SJC) was called upon to decide if a disability insurer could recoup from its insured benefit
3 See, e.g., Northern Sec. Ins. Co. Inc. v. Another 1, 78 Mass. App. Ct. 691, 694-695 (2011).
4 At oral argument, counsel for the Insurers stated that invoices were still being processed for payment when the Decision issued, and the Insurers elected to withhold payment.
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payments made under a reservation of rights after a court determined that the insured’s benefits claim was not covered. In considering that claim for recoupment, the SJC noted that, with respect to liability policies:
We have not addressed whether an insurer may seek reimbursement for the costs of a defense undertaken pursuant to a unilateral reservation of rights. We note that other jurisdictions are split as to the validity of such claims. See Perdue Farms, Inc. v. Travelers Cas. & Sur. Co., 448 F.3d 252, 258 (4th Cir.2006), and cases cited (“jurisdictions differ on the soundness of an insurer’s right to reimbursement of defense costs”).
Based on the theory that insurers are in the business of analyzing and allocating risk, and thus in a better position to do so, courts in some jurisdictions have declined to allow liability insurers to bring reimbursement claims for the costs of defense. See Texas Ass’n of Counties County Gov’t Risk Mgt. Pool v. Matagorda County, 52 S.W.3d 128, 135 (Tex.2000). See, e.g., Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools, Inc., 246 S.W.3d 42, 45–47 (Tex.2008) ( “imposing an extra-contractual reimbursement obligation places the insured in a highly untenable position”); United States Fid. v.United States Sports Specialty, 270 P.3d 464, 470–471 (Utah 2012) (“The right of an insurer to recover reimbursement from its insured distorts the allocation of risk unless it has been specifically bargained for”).
Id. at 641 n.21. This question is squarely before this court in this case.
While acknowledging that there are divergent views on the right of recoupment in cases such as this, in which a court has entered a declaratory judgment that none of the claims alleged in the complaint are covered under the Policies, the Insurers maintain that the majority of jurisdictions permit recoupment. Perhaps, the most frequently cited case for the proposition that defense costs advanced under a reservation of rights may be recovered is Buss v. Superior Court, 16 Cal. 4th 35 (Cal.App. 1997). In a more recent decision, the California Supreme Court reaffirmed its holding in Buss with the following comments:
As Buss explained, the duty to defend, and the extent of that duty, are rooted in basic contract principles. The insured pays for, and can reasonably expect, a defense against third party claims that are potentially covered by its policy, but no more. Conversely, the insurer does not bargain to assume the cost of defense of claims that are not even potentially covered. To shift these costs to the insured does not upset the contractual
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arrangement between the parties. Thus, where the insurer, acting under a reservation of rights, has prophylactically financed the defense of claims as to which it owed no duty of defense, it is entitled to restitution. Otherwise, the insured, who did not bargain for a defense of noncovered claims, would receive a windfall and would be unjustly enriched.
. . .
As Buss further noted, “[n]ot only is it good law that the insurer may seek reimbursement for defense costs as to the claims that are not even potentially covered, but it also makes good sense. Without a right of reimbursement, an insurer might be tempted to refuse to defend an action in any part — especially an action with many claims that are not even potentially covered and only a few that are — lest the insurer give, and the insured get, more than they agreed. With such a right, the insurer would not be so tempted, knowing that, if defense of the claims that are not even potentially covered should necessitate any additional costs, it would be able to seek reimbursement.”
Though these comments were made in the context of “mixed” actions [including covered and uncovered claims], they apply equally here. An insurer facing unsettled law concerning its policies’ potential coverage of the third party’s claims should not be forced either to deny a defense outright, and risk a bad faith suit by the insured, or to provide a defense where it owes none without any recourse against the insured for costs thus expended. The insurer should be free, in an abundance of caution, to afford the insured a defense under a reservation of rights, with the understanding that reimbursement is available if it is later established, as a matter of law, that no duty to defend ever arose.
Scottsdale Ins. Co. v. MV Transportation, 36 Cal. 4th 643, 655 (Cal.App. 2005) (Internal citations and quotations omitted). In this case, the Insurers make the same arguments that the California Supreme Court describes in Scottsdale.
Vibram, however, points the court to a recent, unreported decision of the United States District Court in Massachusetts that reaches an opposite conclusion: Welch Foods Inc. v. Nat’l Union Fire Ins. Co., No. 09-12087-RWZ 2011 WL 576600 (D. Mass. Feb. 9, 2011). In that case, like this one, the District Court found that claims in an underlying action were not covered by the liability policy and then addressed the insurer’s claim for recoupment of defense costs paid under a reservation of rights. The District Court acknowledged the holding and reasoning of Buss, but rejected the California Supreme Court’s opinion in favor of a more recent decision by the
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Pennsylvania Supreme Court, American & Foreign Ins. Co. v. Jerry’s Sport Center, Inc., 2 A.3d 526 (2010) (Jerry’s), which appears to be the most frequently cited case by those courts that have recently held that under these circumstances there is no right to recoup.
In Jerry’s, the Pennsylvania Supreme Court began with an exhaustive review of the competing lines of cases permitting and rejecting claims for recoupment of defense costs by liability insurers. Id. at 536-537. It then reflected on the very broad duty to defend (broader than the duty to indemnify) that exists under Pennsylvania, a duty that it describes in very much the same way as Massachusetts appellate courts describe the duty that liability carriers owe their insureds under Massachusetts law. See Id. at 540-541, compare Decision at 5-6. The Court then found that the answer to the question before it: is the insurer entitled to recover defense costs advanced before it obtained a declaratory judgment of no coverage, lay in the language of the policy itself:
We agree with Insured that whether a complaint raises a claim against an insured that is potentially covered is a question to be answered by the insurer in the first instance, upon receiving notice of the complaint by the insured. Although the question of whether the claim is covered (and therefore triggers the insurer’s duty to defend) may be difficult, it is the insurer’s duty to make that decision. See Shoshone First Bank, 2 P.3d at 516 (holding that the insurer must make the decision about whether there is a duty to defend). Insurers are in the business of making this decision. The insurer’s duty to defend exists until the claim is confined to a recovery that the policy does not cover. . . .Where a claim potentially may become one which is within the scope of the policy, the insurance company’s refusal to defend at the outset of the controversy is a decision it makes at its own peril. . . .
In some circumstances, an insurance company may face a difficult decision as to whether a claim falls, or potentially falls, within the scope of the insurance policy. However, it is a decision the insurer must make. If it believes there is no possibility of coverage, then it should deny its insured a defense because the insurer will never be liable for any settlement or judgment. See Shoshone, 2 P.3d at 510 (stating that where an insurer believes there is no coverage, it should deny a defense at the beginning). This would allow the insured to control its own defense without breaching its contractual obligation to be defended by the insurer. If, on the other hand, the insurer is uncertain about coverage, then it should provide a defense and seek declaratory judgment about coverage. Id.
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In a declaratory judgment action to determine whether a claim is covered, the court resolves the question of coverage. . . . The court’s role in the declaratory judgment action is to resolve the question of coverage to eliminate uncertainty. If the insurer is successful in the declaratory judgment action, it is relieved of the continuing obligation to defend. The court’s resolution of the question of coverage does not, however, retroactively eliminate the insurer’s duty to defend the insured during the period of uncertainty.
. . .
An examination of the insurance contract between the parties reveals that under the policy, [the Insurer] was obliged to pay damages because of bodily injury, and had the “right and duty to defend the insured against any ‘suit’ seeking those damages.” . . . . The policy further provided that it had no duty to defend the insured against any suit seeking damages for bodily injury to which the insurance does not apply. Pursuant to the contractual language, therefore, [the Insurer] had the right and the duty to defend covered claims for bodily injury against Insured, and no duty to defend non-covered claims.
It was not immediately apparent whether the claim against Insured for bodily injury was or was not covered. It was immediately apparent, however, that the claim might potentially be covered. . . . Facing uncertainty about coverage, [the Insurer] appropriately activated its right and met its duty to defend under the policy when it was presented with a claim that may or may not have been covered. At the same time, [the Insurer] appropriately exercised its right to seek a declaration that it had no duty to defend.
The trial court’s subsequent declaratory judgment determination that the claim was not covered relieved [the Insurer] of having to defend the case going forward, but did not somehow nullify its initial determination that the claim was potentially covered. . . .
We therefore reject [the Insurer’s] attempt to define its duty to defend based on the outcome of the declaratory judgment action. The broad duty to defend that exists in Pennsylvania encourages insurance companies to construe their insurance contract broadly and to defend all actions where there is any potential coverage. . . .
Where the insurance contract is silent about the insurer’s right to reimbursement of defense costs, permitting reimbursement for costs the insurer spent exercising its right and duty to defend potentially covered claims prior to a court’s determination of coverage would be inconsistent with Pennsylvania law. It would amount to a retroactive erosion of the broad duty to defend in Pennsylvania by making the right and duty to defend contingent upon a court’s determination that a complaint alleged covered claims, and would therefore narrow Pennsylvania’s long-standing view that the duty to defend is broader than the duty to indemnify.
. . .
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Moreover, [the Insurer’s] contractual obligation to pay for the defense arose as a consequence of the rules of contract interpretation. It is undisputed that the policy did not contain a provision providing for reimbursement of defense costs under any circumstances. Thus, the right [the Insurer] attempts to assert in this case, the right to reimbursement, is not a right to which it is entitled based on the policy
Id. at 541-544.
This court, like the District Court in Welch, finds that the Pennsylvania Supreme Court’s decision in Jerry’s comports with Massachusetts law. In Massachusetts, the insurer’s duty to defend arises when the underlying complaint “show[s] only a possibility that the liability claim falls within the insurance coverage. There is no requirement that the facts alleged in the complaint specifically and unequivocally make out a claim within the coverage.” Sterilite Corp. v. Continental Cas. Co., 17 Mass.App.Ct. 316, 319 (1983). Even in cases in which the insurer may believe that coverage is unlikely under the terms of the policy, it has financial incentives to provide a defense. If it is determined in a separate action brought by the insured (or the insurer) that coverage existed, the insurer will be responsible for paying the insured’s costs of establishing a right to a defense, even if the denial of coverage was made in good faith. See Hanover Ins. Co. v. Golden, 436 Mass. 584, 588 (Mass. 2002). Of course, a bad faith refusal to provide a defense could constitute a violation of chapter 93A and expose the insurer to multiple damages. See Boston Symphony Orchestra, Inc. v. Commercial Union Ins. Co., 406 Mass. 7 (Mass. 1989) and Boyle v. Zurich American Ins. Co., 472 Mass. 649, 661 (2015). In consequence, when in doubt, an insurer has an economically sound and self-interested reason to provide a defense under a reservation of right until the coverage issue can be resolved.
With those basic tenets of Massachusetts law in mind, we turn to the language of the contracts that define the parties’ rights and obligations, in this case the Policies. See, e.g., Hakim v. Massachusetts Insurers’ Insolvency Fund, 424 Mass. 275, 280 (1997) (“The interpretation of
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an insurance contract is no different from the interpretation of any other contract, and we must construe the words of the policy in their usual and ordinary sense.”) There is simply nothing in the Policies that provides a right to recoup defense costs that the Insurers have advanced because they concluded that it was in their economic interest to do so. The court rejects the argument relied upon in Buss and its progeny that to deny recovery of defense costs will give insureds more than they bargained for, i.e., partial payment for the cost of defending claims that were not covered by the policies that they purchased. The court finds the reasoning of Jerry’s more persuasive: “In some circumstances, an insurance company may face a difficult decision as to whether a claim falls, or potentially falls, within the scope of the insurance policy. However, it is a decision the insurer must make.” Jerry’s, 2 A.3d at 543.
In this case, if the Insurers had refused to provide a defense, they would have incurred no liability to Vibram because the claims in the Underlying Action were not within the coverage provided. However, they determined in the exercise of their considered judgment that it was better to provide a defense and file an action for declaratory judgment. “It is undisputed that the [the Policies] did not contain a provision providing for reimbursement of defense costs under any circumstances. Thus, the right [the Insurers] attempt[] to assert in this case, the right to reimbursement, is not a right to which [they are] entitled based on the [Policies].” Id. at 544. Knowing that there is a risk that they would decide to provide a defense in cases in which they were uncertain as to whether a claim was covered because the claim was novel or the law unclear, the Insurers could have addressed the right of recoupment in their Policies; they didn’t. The court ought not insert a policy provision that the parties did not agree upon.
In Jerry’s, the Pennsylvania Court addressed two other arguments advanced by the Insured in this case. First, a reservation of rights letter cannot create additional rights for the
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Insurer not found in the contract. “[P]ermitting reimbursement by reservation of rights, absent an insurance policy provision authorizing the right in the first place, is tantamount to allowing the insurer to extract a unilateral amendment to the insurance contract.” Id. and cases there cited. The court finds this reasoning consistent with existing Massachusetts precedent.
In Joint Underwriting Ass’n v. Goldberg, 425 Mass. 46 (1997), the insurer defended its insured under a reservation of rights. After a jury returned an adverse verdict against the insured in the underlying action and while appeals were pending, the insurer settled the underlying action. It then sought reimbursement for the cost of the settlement. The SJC held that even if the claims asserted against its insured in the underlying action were not covered, the insurer had no right to recover. The reservation of rights letter did not provide a right of recovery, it only permitted the insurer to defend without waiving its right to deny an obligation to cover an adverse judgment. While the insured’s personal counsel had urged the insurer to settle, no agreement was ever reached that the insured would reimburse the insurer. The SJC noted that the insurer had settled the claims to protect its own interests, as it was concerned about liability under chapter 93A that could, in theory, treble damages, if its refusal to settle were found unreasonable. As the insurer had no contractual right to reimbursement, it had no basis to demand it.
The instant case obviously does not involve a claim to recover an amount paid by an insurer in settlement of a claim, but Goldberg does stand for the general proposition that when an insurer provides payments that benefit the insured, but also avoid a perceived risk of exposure to even greater loss to the insurer, the reservation of rights letter does not support a claim for reimbursement. A right to reimbursement must be found in a contract.
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In Jerry’s, the Pennsylvania Supreme Court also rejected the insurer’s claim that it was entitled to recoupment under a theory of unjust enrichment. 2 A.2d at 545. In this case, the Insurers point to the SJC’s decision in Cotter and the careful consideration that the SJC gave to the disability insurer’s argument that it could recover benefit payments under an equitable claim for restitution. Although, in Cotter, the SJC rejected the disability insurer’s claim, the Insurers argue that liability policies are different and the Restatement (Third) of Restitution and Unjust Enrichment, § 35(1) supports their right of recovery.5
In Cotter, the SJC addressed the insurer’s equitable claim as follows:
“A quasi contract or a contract implied in law is an obligation created by law ‘for reasons of justice, without any expression of assent and sometimes even against a clear expression of dissent.’ ” Salamon v. Terra, 394 Mass. 857, 859 (1985), quoting 1 A. Corbin, Contracts § 19 (1963). “Restitution is an equitable remedy by which a person who has been unjustly enriched at the expense of another is required to repay the injured party.” Keller v. O’Brien, 425 Mass. 774, 778 (1997), citing Salamon v. Terra, supra. “The fact that a person has benefited from another ‘is not of itself sufficient to require the other to make restitution therefor.’ … Restitution is appropriate ‘only if the circumstances of its receipt or retention are such that, as between the two persons, it is unjust for [one] to retain it.’ ” Keller v. O’Brien, supra, quoting Restatement of Restitution § 1 comment c (1937), and citing National Shawmut Bank v. Fidelity Mut. Life Ins. Co., 318 Mass. 142, 146 (1945).
A determination of unjust enrichment is one in which “[c]onsiderations of equity and morality play a large part.” Salamon v. Terra, supra. A plaintiff asserting a claim for unjust enrichment must establish not only that the defendant received a benefit, but also that such a benefit was unjust, “a quality that turns on the reasonable expectations of the parties.” Global Investors Agent Corp. v. National Fire Ins. Co., 76 Mass.App.Ct. 812, 826 (2010), quoting Community Builders, Inc. v. Indian Motorcycle Assocs., Inc., 44 Mass.App.Ct. 537, 560 (1998). “The injustice of the enrichment or detriment in quasi-contract equates with the defeat of someone’s reasonable expectations.” Salamon v. Terra, supra. The party seeking restitution has the burden of proving its entitlement thereto. J.A. Sullivan Corp. v. Commonwealth, 397 Mass. 789, 796 (1986); Hayeck Bldg. & Realty Co. v. Turcotte, 361 Mass. 785, 789 (1972), citing Andre v. Maguire, 305 Mass. 515, 516 (1940).
5 In Cotter, the SJC appeared to adopt the principles set out in Restatement (Third) of Restitution and Unjust Enrichment, § 35(1) and found that Goldberg did not preclude the possibility that an insurer could recover payments made under a reservation of right, but as explained below held that the insurer must still prove that retention of the payments would be unjust.
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We have allowed claims for restitution in circumstances involving fraud, bad faith, violation of a trust, or breach of a duty; in “business torts” such as unfair competition and claims for infringement of trademark or copyright; and in some circumstances, as here, in disputes arising from quasicontractual relations. See Keller v. O’Brien, supra at 778–779. In order to prevail on its claim for reimbursement of disability insurance benefits it paid to Cotter under a reservation of rights, MetLife must establish not only that Cotter received a benefit, which is not disputed, but also that such a benefit was unjust.
Cotter, 464 Mass. at 644. The court found that Cotter’s retention of the disability benefit payments was not unjust.
Clearly, the facts of Cotter, in which the insurer sought to recover benefit payments made to an individual, were more compelling for the insured than those of the present case, which involves a commercial dispute between an insurer and a large company. Nonetheless, liability policies are also sold to individuals (e.g., auto and homeowners policies) and small family businesses, as well as to manufacturing companies like Vibram. In order to prove that it is unjust for an insured to retain defense costs advanced in respect of a third-party claim under a reservation of rights, an insurer must do more than prove that a court ultimately held that the claims were uncovered. Otherwise, the insurer is, in effect, using equitable principles to insert a reimbursement provision into the liability policy that does not exist. If a policy holder demands coverage of a third-party claim that is clearly not covered under the policy, the insurer can reject it. If a policy holder engaged in misrepresentations or other wrongful conduct (for example, acting in concert with a third-party claimant to make an uncovered claim appear covered), retention of defense costs might well be “unjust.” However, a good faith demand for a defense under a liability policy, which the insurer decides is likely enough to be valid that it will tender a defense under a reservation of rights, does not make retention of those defense costs unjust. Claims of unjust enrichment ought not be used to imply rights that the parties have not included
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in the written contract that defines their relationship and covers the subject matter in dispute. See Kennedy v. B.A. Gardetto, Inc. 306 Mass. 212 (1940).
Recovery of Unpaid Defense Costs
Vibram seeks to recover expenses for defense of the Underlying Action incurred up to the date that the court held that the claims asserted in the Underlying Action were not covered by the Policies. It argues that in all cases in which a defense is provided under a reservation of rights, the duty to defend continues “until a declaratory judgment of no coverage is entered and that it does not retroactively disappear, even if no coverage is found.” Vibram asserts that Metropolitan Property & Casualty Ins. Co. v. Morrison, 460 Mass.352 (2011) (Morrison) established this principle. The court disagrees. Rather, Morrison teaches that the duty to defend ends when there is no longer any chance that the facts alleged in an underlying action can support a covered claim. That will often, but certainly not always, be when a declaratory judgment resolves a coverage dispute.
Morrison involved claims allegedly covered by a homeowner’s insurance policy. Briefly stated, the policy holders’ son (covered under the policy) had injured a police officer while resisting arrest. The son pled guilty to various criminal charges, and the police officer filed suit against the son alleging negligent and reckless conduct. The insurer, Metropolitan, disclaimed any obligation to provide indemnity or a defense, but did bring a declaratory judgment action seeking to establish no coverage. The son did not answer the police officer’s complaint, and a default judgment entered against him in the underlying personal injury action. On appeal, the coverage issue turned on (1) an interpretation of a policy provision that excluded coverage for
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bodily injury resulting from intentional and criminal acts and (2) whether the entry of a default judgment in the underlying personal injury action, before a judgment of no coverage entered in the declaratory judgment action, established that the police officer’s injury was the result of negligence, as alleged in the complaint, and therefore a covered claim.
The SJC began by restating the well-established principle that the “insurer’s duty to defend is independent from, and broader than, its duty to indemnify.” Id. at 351. It then went on to explain that “the duty to defend is determined based on the facts alleged in the complaint, and on facts known or readily knowable by the insurer . . . . However, when the allegations in the underlying complaint lie expressly outside the policy coverage and its purpose, the insurer is relieved of the duty to investigate or defend the claimant.” Id. (internal quotations and citations omitted). Or, stated somewhat differently, when the allegations of the complaint do not “roughly sketch a claim covered by a liability policy,” there is no duty to defend. Id.
In support of its position, Vibram quotes the following statement from Morrison: “‘a declaratory judgment of no coverage, either by summary judgment or after trial, does not retroactively relieve the primary insurer of the duty to defend; it only relieves the insurer of the obligation to continue to defend after the declaration.’ 14 G. Couch, Insurance, supra at s. 200: 48, at 200-65 to 200-66.” Id. at 352. Vibram, however, omits the very next sentence in the opinion: “Where material facts as to the duty to indemnify are in dispute, an insurer has a duty to defend until the insurer establishes that no potential for coverage exists. Id. at 200-21.” Id. In other words, where it can be established that there is no coverage under the policy because there are no material facts necessary to determine the coverage issue in dispute, or because, even assuming all of the allegations in the underlying complaint are true, no coverage exists, there is no duty to defend. Indeed, in Morrison, the SJC remanded the case to the Superior Court to
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determine whether Metropolitan owed its insured “a duty to defend at the time of the default judgment.” The SJC instructed the trial judge to determine whether by that point the facts establishing no coverage were already known and undisputed. Clearly, the SJC was teaching that this was the time at which the duty to defend terminated, even if Metropolitan did not obtain its declaratory judgment until later.
Moreover, the rationale underlying the decision in Jerry’s, and other similar cases, would be impaired if a duty to defend arose whenever an insured asserted a disputed right to coverage. In those cases, the courts held that the insurer had no right to recoup defense costs when a declaratory judgment entered that established that a third-party complaint did not assert a covered claim, because it was initially up to the insurer to decide whether to, in effect, hedge its bets and provide a defense when it was unsure of coverage: “In some circumstances, an insurance company may face a difficult decision as to whether a claim falls, or potentially falls, within the scope of the insurance policy. However, it is a decision the insurer must make. If it believes there is no possibility of coverage, then it should deny its insured a defense because the insurer will never be liable for any settlement or judgment.” Jerry’s, 3 A.2d at 542. If an insurer is bound to provide a defense whenever there is any chance that a policy might be interpreted to provide coverage, because of a dispute about policy terms not alleged facts, the predicate for following the principle outlined in Jerry’s is missing.
The court has found a single case in which a court ruled that a dispute concerning a question of law, resolved in favor of the insured, could nonetheless give rise to a duty to defend. In Hugo Boss Fashions, Inc. v. Federal Ins. Co., 252 F.3d 608 (2001), the insurer rejected its insured’s claims of coverage for a trademark infringement case filed against it and declined to provide a defense. The insured brought a declaratory judgment action seeking to establish
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coverage and, while it was pending, settled the underlying trademark suit. The coverage case preceded to trial before a jury, which returned a verdict for the insured, both as to coverage and a duty to defend, and judgment entered for the insured. On appeal, the Second Circuit Court of Appeals reversed the District Court’s judgment that the trademark suit was a covered claim. It held that the policy was unambiguous, as the term “trademarked slogans” had a specific meaning and, in consequence, the policy did not cover the underlying claim.
In a split decision the Court of Appeals, nonetheless, found a duty to defend. It held that “there are situations in which a legal uncertainty as to insurance coverage gives rise to (an at least temporary) duty to defend.” Id. at 622. (Emphasis in original) The majority explained that there was sufficient “legal uncertainty (what does “trademarked slogan” mean)” to require the insurer “to undertake a defense of Hugo Boss until the uncertainty surrounding the term was resolved.” Id. In other words, although it concluded that the term “trademarked slogan” had only one reasonable meaning, the possibility that a court might find it ambiguous gave rise to a duty to defend.
Justice Sotomayor (then an associate justice of the Second Circuit) dissented from this latter holding. She concluded that the majority’s discussion of the duty to defend “finds no basis in New York law.” Id. at 626. She went on to explain that:
The majority errs in confusing two types of uncertainty. The first is cognizable under New York law, the second is not. The first concerns the period during which the underlying action is pending when the insurer must defend the insured against any allegations that, if proven, would result in indemnification. This type of uncertainty is a well-established element of New York insurance law and is unquestioned here. The majority attempts to read a second category of “uncertainty” into New York law, however, concerning how a court might rule on the scope of policy terms. No such “uncertainty” is recognized under New York law apart from that arising from an “ambiguous” policy term.
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Id. at 627. Anticipating to some extent the reasoning that the Pennsylvania Supreme Court adopted in Jerry’s, Justice Sotomayor’s dissent went on to point out:
In order to determine its duties under a policy, insurers are, as a matter of course, called upon to survey the relevant law and scrutinize the language of the policy to judge whether its terms are unambiguous. Insurers may err in their judgment concerning the unambiguity of a policy term but are given strong incentives to decide these questions correctly. If they do not, they can be forced to defend a costly coverage action or, if the finding of unambiguity was so far off the mark that “no reasonable [insurance] carrier would, under the given facts, be expected to assert it,” Sukup v. State, 227 N.E.2d 842, 844 (N.Y. 1967), insurers can face even greater liabilities for breaching their duty of good faith.
All of this assumes that we entrust insurers with the initial decision concerning whether policy terms are unambiguous. In the case of a policy that uses a legal term of art, this inquiry requires a determination of whether that term of art is unambiguous. . . . And yet, the majority wants to deny Federal the opportunity to reach the same conclusion we have reached. It is difficult to understand why we should discourage Federal or any other insurer from making such determinations that are, in any case, subject to review and even sanction if erroneous.
Id. at 628-629 (Emphasis supplied).
Turning to the present case, first, this court’s coverage Decision did not turn on whether some term of art used in the Policies was potentially ambiguous. The precise question before the court: would a liability policy providing coverage for an Advertising Injury cover a claim based on the unauthorized use of a famous person’s name to sell a product, in this case a shoe, had not previously been decided in Massachusetts, or very many other courts. However, this court’s Decision did not turn on whether any particular term of art used in the Policies was potentially ambiguous, but rather applied legal precedent to the interpretation of a series of policy provisions.
Additionally, the reasoning of Justice Sotomayer’s dissent appears far more compelling with respect to the issues raised here than the majority opinion. In the first instance, it is for the insurer to decide whether any of the allegations in the complaint, if proved, could support a claim
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covered by the policy. If it declines to provide a defense, it faces potential liabilities that will likely exceed the cost of the defense. However, if it elects not to defend the third-party claim, and its decision was correct as a matter of law, how could there ever have been a duty to defend?
The case now before the court does provide an additional confounding fact. The Insurers initially did agree to advance defense costs, but had not paid all outstanding invoices when the Declaratory Judgment of no coverage issued. Whether the insurer stopped paying because it became more convinced of the validity of its coverage position or because it was just slow in processing invoices does not appear to raise a disputed issue of fact material to this case. The relevant question is whether having initially agreed to pay for Vibram’s defense, while prosecuting this declaratory judgment action, the Insurers are bound to continue to advance defense costs until this case is resolved. On the record before this court, it concludes that they are not.
While not perfectly analogous, the court notes that in Herbert A Sullivan, Inc. v. Utica Mutual Ins. Co., 439 Mass. 387, 395 (2003), the insurer initially provided a defense to its insured under a general liability policy because one count of a multicount complaint alleged negligence. However, after the plaintiff in the underlying action amended its complaint and eliminated the negligence count, the insurer no longer had a duty to defend. The court finds that there is nothing inherent in an insurer’s initial decision to provide a defense that precludes it from changing its mind, even while the declaratory judgment action is still pending.
The court can envision cases in which an insured may have relied on the insurer’s initial decision and adopted a course of action in responding to the third-party claim such that it would suffer damage if the insurer discontinued the defense before the declaratory judgment action was resolved. For example, this might arise in situations in which the insurer is not only advancing
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defense costs but actively providing the defense. However, this is not such a case. Upon receipt of the reservation of rights letter, Vibram exercised its right to retain its counsel of choice and to control its own defense, which given the amount of fees generated in a rather brief time was robust. There are no facts in the summary judgment record suggesting that the Insurers should be equitably estopped from discontinuing the advancement of defense costs, if the Policies permit them to do so. The court finds that, on these facts, the Insurers were permitted to change their mind with respect to advancing defense costs, as they were under no contractual obligation to pay them. The insured has neither a contractual or equitable claim for payment of unpaid costs of defense incurred up to the date the Decision issued.6
ORDER
For the foregoing reasons, the Insurers’ motion for summary judgment is DENIED, to the extent that it seeks to establish a right to recoup defense costs previously advanced,and otherwise ALLOWED; and Vibram’s motion for summary judgment is DENIED, to the extent it seeks to establish a right to recover any additional defense costs from the Insurers, and otherwise ALLOWED. Final judgment shall enter dismissing the counterclaims and declaring that the plaintiff insurance companies do not have a duty to defend the defendant Vibram in the
6 Vibram argues that the provision in the Policies that states “[the Insurers] will pay, with respect to any claim we investigate or settle, or any ‘suit’ against any insured we defend: . . . All expenses we incur . . . .” requires payment of all defense costs through the date the Decision issued. Clearly, this policy term only provides that when the Insurers defend a claim they have to pay all costs that they incur. Presumably, when an insured receives a reservation of rights letter and elects to control its own defense, that provision requires reimbursement of all defense expenses incurred by the insured, at least all reasonable expenses. But, it does not create an independent duty to defend a claim, or pay for the defense of a claim, that the Insurers have decided not to defend. The duty to defend is determined under other policy provisions.
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Underlying Action or indemnify it for any loss sustained in respect thereto. No party shall recover damages, and each party shall bear its own costs.
_______________________
Mitchell H. Kaplan
Justice of the Superior Court
Dated: March 20, 2017

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Posted by Stephen Sandberg - April 3, 2017 at 4:31 pm

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A.L. Prime Energy Consultant, Inc. v. Massachusetts Bay Transportation Authority (Lawyers Weekly No. 12-027-17)

COMMONWEALTH OF MASSACHUSETTS

SUFFOLK, ss.SUPERIOR COURT

CIVIL ACTION

  1. 1677CV01366

A.L. PRIME ENERGY CONSULTANT, INC.

vs.

MASSACHUSETTS BAY TRANSPORTATION AUTHORITY

MEMORANDUM OF DECISION AND ORDER ON

DEFENDANT’S MOTION TO DISMISS

In July 2016, defendant Massachusetts Bay Transportation Authority (MBTA) terminated its two-year fuel supply agreement with plaintiff A.L. Prime Energy Consultant, Inc. (Prime). The MBTA explained that thetermination was made pursuant to its exercise of a contractual right that permitted termination for convenience.The MBTA terminated the contract in order to take advantage of cost savings it believed it could achieve by purchasing fuel through the Commonwealth’s existing statewide fuel contract.  Prime alleges that the MBTA abused its discretion when it invoked the termination for convenience provision and that therefore the MBTA is liable for breach of contract and breach of the covenant of good faith and fair dealing.  The matter is now before the Court on the MBTA’s motion to dismiss pursuant to Mass. R. Civ. P. 12(b)(6).  For the reasons that follow, the motion is DENIED.

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Posted by Stephen Sandberg - March 31, 2017 at 8:34 pm

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