Friday, May 23, 2008

Default Judgment for Declaratory Relief Denied

Certain Underwriters at Lloyd's of London v. Bellettieri, Fonte & Laudonio, P.C.
(Sup. Ct., Westchester Co., decided 4/28/2008)

We have a new contender for longest plaintiff's name in a caption. Someone call Guiness (the record book people, not the brewers). The plaintiffs' name designation in this case is:

Certain Underwriters at Lloyd's of London Subscribing to Lawyers Professional Liability Policies of Insurance Designated by Policy No. Rpg0001841, and Covering the Periods October 19, 2003 to October 19, 2004, October 19, 2004 to November 18, 2005, November 18, 2005 to November 18, 2006 and November 18, 2006 to November 18, 2007, Plaintiffs
Nice. What's the official NY Style Manual abbreviation for that run-on?

In any event, the long-monikered plaintiffs brought this action for a declaratory relief against the defendant law firm and its three named partners, Bellettieri, Fonte and Laudonio, alleging that four professional liability (lawyer malpractice) policies issued to the law firm from 2003 through 2007 were void ab initio and should be rescinded due to misrepresentations or non-disclosures of material fact in each of the policies' applications. In 2007, Bellettieri pled guilty to bank fraud and mail fraud arising from a "check-kiting" scheme and other fraudulent conduct, admitting to massive thefts of some $20 million, a significant part of which resulted from the siphoning off of monies from bank accounts maintained by the law firm from 2003 through November, 2006. At least three actions had been commenced against Bellettieri, the law firm, Fonte, and Laudonio, and numerous other claims had been made and grievances filed.

The court noted that plaintiffs may have brought this action "in order to short-cut the need to litigate over the 'innocent co-insured' provision" of the policies, defendants Fonte and Laudonio having contended that they were unaware of their partner's crimes, did not complete or sign any of the applications, and were "innocent co-insureds" as to whom the policy could not be rescinded.

Plaintiffs moved for a default judgment against Bellettieri and the law firm, contending that each had been properly served with the complaint. The court found that service had not been properly made on Bellettieri (because although Bellettieri's attorney advised that he had been authorized to accept service of the complaint on behalf of Bellettieri, there was no evidence submitted that Bellettieri knew about his lawyer's representations to that effect), but had been properly made on the law firm.

In denying plaintiffs' motion for a default judgment against the law firm, however, the court cited to established New York case law holding:

[D]eclaratory relief should rarely, if ever, be granted solely upon default and without inquiry by the court into the merits * * * and may not be granted where the judgment would affect the rights of other parties not in default or would affect the rights of non-parties. * * * Plaintiffs have not explained how it is plausible to enter a default judgment declaring that the policies are void as against the Law Firm though litigation must continue as to whether the policies provide coverage as to Fonte and Laudonio. Nor have Plaintiffs explained what effect, if any, a declaratory judgment voiding the policies as to the Law Firm would have if such a judgment has no impact on the rights, if any, of Fonte and Laudonio. A declaratory judgment should not be issued unless it would serve some useful purpose and it not has not been established that a default judgment against the Law Firm only would serve any useful, practical purpose in the absence of an adjudication as to Fonte and Laudonio.

* * * * *

Should Fonte and Laudonio prevail in this action, and a declaratory judgment issue that they are entitled to the protection of the policies issued by Plaintiffs, such a determination would be fundamentally inconsistent with the declaration that Plaintiffs would have the Court issue now as against the defaulting Law Firm that the policies are void. Thus, the granting of a default and severance could lead to fundamentally inconsistent judgments.

* * * * *

The granting of a default and severance could potentially lead to fundamentally inconsistent judgments a result that could impact upon the rights of non-parties. To the extent that a default declaratory judgment as to the Law Firm would have no impact on Fonte and Laudonio or any one else, it would be a meaningless exercise until the balance of this case is heard. On the other hand, to the extent that such a default judgment would impact the rights of Fonte, Laudonio, or the persons suing to recover because of Bellettieri's misconduct, it would not quiet or stabilize the disputed jural relations but only serve to engender further litigation and controversy. Thus, the granting of Plaintiffs' motion would not "serve some practical end".

Default judgments are difficult to obtain in affirmative declaratory judgment actions especially where, as here, not all of the named defendants have defaulted and the interests of the defendants in the policy(ies) at issue are joint.

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