DECISION AND ORDER
CAROL R. EDMEAD, Judge.
In this insurance declaratory judgment action, Lincoln General Insurance Company ("Lincoln General") seeks, by separate motions, leave to supplement its affirmative defenses and leave to assert a third party action against the lawfirm, O'Melveny and Meyers, LLP ("OMM") which defends plaintiff East 51
This action by East 51
Consequently, plaintiffs commenced this action against the insurers of certain project participants (i.e., Joy Contracting, Inc.'s insurer Lincoln General; Reliance Construction Group's insurers AXIS Surplus Insurance Company ("AXIS") and Interstate Fire and Casualty Company ("Interstate"); and Everest National Insurance Company), claiming that defendants are obligated to provide defense and indemnity in favor of East 51
On February 5, 2013, the Appellate Division of the Supreme Court of New York, First Department ordered that, inter alia, Lincoln General, AXIS and Interstate provided primary coverage to East 51
In support of the instant motion for leave to add the sixth affirmative defense based on the voluntary payment doctrine,
Lincoln General's supplemental seventh affirmative defense is based on Illinois Union's failure to enter into a written letter of engagement pursuant to 22 NYCRR 1215.1.
Lincoln General argues that plaintiffs will not be prejudiced by the Court's grant of leave. Nothing in the additional affirmative defenses will hinder Illinois Union's preparation of its case, or has prevented Illinois Union from taking some measure in support of its positions.
As to leave pursuant to CPLR § 3025(b) to assert claims against OMM as a third party in this action, Lincoln General argues that defense costs charged by OMM were in excess of reasonable defense costs, as evidenced by the rates paid to Illinois Union's panel counsel in the New York area for similar work between and including 2008 and 2010. The panel counsel rate compared to OMM's billed hourly rates supports Lincoln General's allegations that OMM rates were in excess of what is reasonable for similar work in the New York area. Further, there is no written letter of engagement between Illinois Union and OMM for the defense of East 51
No parties will be prejudiced by the Court's granting of leave to file a third party complaint against OMM. Nothing in the third party complaint has hindered or will hinder Illinois Union or East 51
In opposition, Illinois Union argues that Lincoln General's request for leave to assert the voluntary payment doctrine was already litigated and denied by the Court and the First Department. In its October 12, 2012 opposition to plaintiff's summary judgment motion, Lincoln General argued, and later reargued, unsuccessfully, that Illinois Union could not seek reimbursement for its voluntary payment resulting from its election to defend East 51
Further, the seventh affirmative defense lacks merit because no written retainer agreement was required. Since 1979, OMM "has had a long-standing relationship with ACE's Property and Casualty Companies" such as Illinois Union, and "with the family of insurance companies to which Illinois Union belongs: now part of ACE Member Companies." Illinois Union retained OMM to defend ACE's policyholders in asbestos-related personal injury actions, the owner of the Massachusetts Port Authority in hundreds of lawsuits arising from the events of September 11, 2001, ACE's policyholders in numerous sexual molestation cases brought against religious organizations, ACE's insured against class actions under the Fair Credit Reporting Act, and ACE's insured against a suit for reimbursement of attorneys' fees. OMM's hourly rates were the same as those OMM charged Illinois Union and other ACE companies.
As to the proposed third party claims against East 51
Lincoln General has no cause of action against a law firm such as OMM acting as defense counsel, as there is no privity of contract between the law firm and the insurer, and the law firm owes no duty to the insurer in defense of the insured. Thus, Lincoln General cannot ask OMM to pay defense costs which Lincoln General is obligated to pay under its primary policy.
Caselaw holds that there is also no cause of action against OMM based on any alleged breach of fiduciary duty. Lincoln General's claim is that OMM charged too much in defense costs. However, as Lincoln General can only be held liable for reasonable defense costs, and has no liability for unreasonable defense costs, the very basis of Lincoln General's breach of fiduciary duty lacks merit. There can be no defense costs Lincoln General can pursue under the doctrine of equitable subrogation since Lincoln General will only be required to pay reasonable defense costs. Lincoln General's obligation to pay East 51st's defense costs would be rendered a nullity if defense counsel (OMM) reimbursed Lincoln General the payment of reasonable defense. For the same reasons, Lincoln General's proposed claims for disgorgement, restitution, and/or contribution fail.
There is no authority for Lincoln General's claim against OMM based on OMM's charge of a hourly rate higher than other law firms that could have been used by Illinois Union. Any objection to OMM's hourly rates goes to the issue of reasonable defense costs for which Lincoln General is liable. Further, the reasonableness of attorneys' fees is not limited to the hourly rates of panel counsel, and left to the discretion of the Court.
Further, reliance on 22 NYCRR 1215.1 lacks merit for the reasons noted above.
Illinois Union also requests that the Court sanction Lincoln General by ordering it to pay Illinois Union the costs it incurred in opposing the meritless motions, as the Court warned it would do in the event Illinois Union's motion failed.
In reply, Lincoln General argues that the statements in opposition are inaccurate as to what information Illinois Union had disclosed to Lincoln General. Further, under caselaw, Illinois Union's failure to enter into a written retainer with OMM bars Illinois Union from recovering attorneys' fees from other parties. Although this affirmative defense usually applies as a defense to claims wherein a law firm seeks recovery from its client for unpaid legal bills, it is equally applicable to contribution and breach of contract claims. Because Illinois Union did not enter into a written retainer with OMM and because OMM earned fees improperly (via excessive hourly rates and excessive time, and otherwise via collecting defense costs for time or tasks which were not compensable), Lincoln General is not required to pay such defense costs, either in contribution or under a theory of breach of contract.
Illinois Union's violation of 22 NYCRR 1215.1 also supports Lincoln General's claim in equitable subrogation (for disgorgement) against OMM; again, Illinois Union paid the attorneys' fees to OMM and is now seeking reimbursement from Lincoln General (and AXIS, among others) for fees that Lincoln General alleges were improperly earned. The policy behind requiring a written retainer agreement is especially important in the Crane Collapse Litigation, where a party later intends to seek reimbursement of defense costs expended from others.
Without a letter of engagement or written retainer agreement, the scope of work, the attorneys' hourly rates, expense approval and reimbursement practices, and billing practices are largely unknown to parties such as Lincoln General. And, a client is entitled to a disgorgement of attorneys' fees already paid where there is a failure to comply with retainer rules and the fees were improperly earned.
Further, Illinois Union's assertion that its retention of OMM in connection with the Crane Collapse Litigation falls within the exception to the written retainer agreement requirement lacks merit. Even if Illinois Union is excepted from the written retainer agreement rule, the exception does not apply where there is a significant change in the fee charged in the matter. In the Crane Collapse Litigation, there were several significant changes in the fees charged by OMM. For example, on May 28, 2009, Paul Koepff (then an attorney at OMM) wrote to Dennis Hecht and Dennis Madea (Illinois Union) to provide that he and Tom Carruthers (OMM) would be working on a revised budget due to several "unforeseeable events" and "significant new developments" that required "additional work in all phases of the litigation that were not included in the [old] budget." Such developments resulted in a significant change in the fee charged by OMM to Illinois Union in connection with the Crane Collapse Litigation.
In any event, Illinois Union does not fall within the exception. Illinois Union's claim that it has "had a long-standing relationship with ACE's Property and Casualty Companies" and "with the family of insurance companies to which Illinois Union belongs: now part of ACE Member Companies" is too vague to establish that Illinois Union retained OMM for services for the same general kind as previously rendered to and paid for by Illinois Union. And, Illinois Union failed to produce discovery on this issue. Further, coverage lawsuits, toxic tort litigation, sexual molestation cases, debt collection/credit cases and class action litigation are clearly not "the same general kind" of cases as those involved in the Crane Collapse Litigation for which Illinois Union seeks reimbursement from Lincoln General in this action.
Under New York law, the voluntary payment doctrine bars recovery of payments made by a payor with full knowledge of the salient facts surrounding the work for which the payment is made, even if the payment is made under a mistake of law. Illinois Union knew it was paying in excess of its legal obligation because it designated OMM as discretionary counsel, at rates far in excess of the hourly rates it would and does pay other competent firms to handle similar litigation in the New York Metropolitan area. Illinois Union voluntarily paid OMM without ascertaining its legal obligations as to such defense costs, and attempted to recoup such costs from Lincoln General (and others). As Illinois Union voluntarily paid plaintiff in excess of its legal obligations, the voluntary payment doctrine bars Illinois Union's collection of such payments from Lincoln General (and others).
Nor did Lincoln General previously litigate this issue, but instead, previously asserted that Illinois Union "acted as a volunteer" by assuming the defense of East 51st and concurrently rejecting the defense of East 51st offered by Lincoln General. Lincoln General sought to bar Illinois Union's ability to recover from Lincoln General the payments Illinois Union made to OMM, and asked the Court to find that Lincoln General had no duty to pay any past defense costs incurred by Illinois Union. Lincoln General's supplemental sixth affirmative defense asserts that "Illinois Union voluntarily paid defense costs under a claim of right to the payments that were in excess of its legal obligation to pay only those costs which were reasonable, [having] full knowledge of all of the facts."
Illinois Union's additional argument that Lincoln General is not in contractual privity with OMM is insufficient to defeat Lincoln General's equitable subrogation claims against OMM. Lincoln General seeks to step into the shoes of Illinois Union and East 51st to assert claims that they have a right to bring for disgorgement and breach of fiduciary duty.
Furthermore, the Court should assess costs against Illinois Union for its frivolous opposition. Illinois Union asserts irrelevant and inapplicable arguments and fails to address the elements of the proposed third party claim and affirmative defenses. In contrast, Lincoln General's motions for leave are supported by facts and by law.
Even if the Court denies Lincoln General leave to file a third party complaint against OMM Lincoln General's motion was not "palpably insufficient" nor "patently devoid of merit."
"It is fundamental that leave to amend a pleading should be freely granted, so long as there is no surprise or prejudice to the opposing party" (Kocourek v Booz Allen Hamilton Inc., 925 N.Y.S.2d 51 [1
Further, the party "opposing a motion to amend a pleading must overcome a presumption of validity in the moving party's favor, and demonstrate that the facts alleged and relied upon in the moving papers are obviously unreliable or insufficient to support the amendment" (Peach Parking Corp. v 346 West 40th Street, LLC, 42 A.D.3d 82, 86 [1st Dept 2007], citing Daniels v Empire-Orr, Inc., 151 A.D.2d 370, 371 [1st Dept 1989]). However, those facts do not need to be proved at this juncture (Daniels v Empire-Orr at 371).
As to the branch of the motion for leave to assert the sixth affirmative defense premised' on the voluntary payment doctrine, this doctrine "bars recovery of payments voluntarily made with full knowledge of the facts, and in the absence of fraud or mistake of material fact or law" (Merchants Mut. Ins. Group v. Travelers Ins. Co., 24 A.D.3d 1179, 806 N.Y.S.2d 813 [4
The law of the case doctrine "precludes parties or their privies from relitigating an issue that has already been decided" (Chanice v. Federal Exp. Corp., 118 A.D.3d 634, 989 N.Y.S.2d 468 [1
Lincoln General previously raised the issue of the voluntary payment doctrine in prior motion papers. Lincoln General argued, in opposition to plaintiffs' summary judgment motion that Lincoln General's duty to defend ended when Illinois Union rejected the defense Lincoln General offered (Pages 1-2, 23). Lincoln General also took the position that Illinois Union voluntarily assumed East 51st's defense after rejecting Lincoln General's assignment of Lester, Schwab, Katz & Dwyer as defense counsel, and choosing to permit OMM to continue defending East 51
By order dated December 16, 2010, this Court rejected Lincoln General's argument, and found Lincoln responsible for defense costs and that Illinois Union had been paying the defense costs of East 51
Lincoln General raised the voluntary payment doctrine on appeal (Page 27-28), and the First Department held that Lincoln General was obligated to defend East 51
Based on the above, Lincoln General previously litigated the issue of whether the voluntary payment doctrine bars plaintiffs' claims as asserted in the proposed sixth affirmative defense.
In any event, the voluntary payment doctrine does not apply since Lincoln General does not assert that Illinois Union was under "no obligation to" to pay for East 51st's defense (see e.g., General Acc. Ins. Co. v. U.S. Fidelity and Guarantee Ins. Co., 193 A.D.2d 135, 602 N.Y.S.2d 948 [3d Dept 1993] (plaintiff did not act as a mere volunteer in providing its insured with a defense and paying the judgment, for it did so only after defendant refused to participate in the defense and denied that its policy covered the accident"); cf. Hertz Corp. v. Government Employees Ins. Co., 250 A.D.2d 181, 683 N.Y.S.2d 483 [1
Further, to the degree Lincoln General's sixth affirmative defense seeks to bar plaintiffs' claims "in part" based on the claim that Illinois Union voluntarily paid plaintiff "in excess" of its legal obligations, which legal obligation includes the duty to pay "reasonable" defense costs, Lincoln General failed to establish that such claim has merit. As conceded by Illinois Union, Illinois Union's claim for reimbursement of defense costs is strictly limited to costs which are found to be "reasonable" and thus, Illinois Union can neither seek nor recover any amounts in excess of what is deemed reasonable. As such, there is no basis to permit a defense to a claim that in essence, does not exist or is not at issue in this case. Any defense costs that are in "excess" of reasonable defense costs are not recoverable. Thus, any claim under the doctrine of voluntary payment to bar Illinois Union's collection of such payments from Lincoln General lacks merit.
As to the branch of the motion for leave to assert the seventh affirmative defense premised on Illinois Union's failure to comply with 22 NYCRR 1215.1, it is uncontested that this section requires an "attorney who undertakes to represent a client and enters into an arrangement for, charges or collects any fee from a client" to provide a "written letter of engagement before commencing the representation, or within a reasonable time thereafter (i) if otherwise impracticable or (ii) if the scope of services to be provided cannot be determined at the time of the commencement of representation. For purposes of this rule, where an entity (such as an insurance carrier) engages an attorney to represent a third party, the term "client" shall mean the entity that engages the attorney. Where there is a significant change in the scope of services or the fee to be charged, an updated letter of engagement shall be provided to the client.
Here, it is undisputed that there is no written retainer agreement between Illinois Union and OMM (see Exhibit H at p. 12, Answer to Interrogatory No. 9 ("the retention of OMM resulted from discussions over a number of days"); Exhibit M at p. 17, Response to Requests for Production No. 17 ("to the best of Illinois Union's knowledge, there are no written contracts, agreements, or retainer agreements between OMM and any other party relating to the crane collapse litigation"); Exhibit M at p. 18, Response to Request for Production No. 19 ("Illinois Union is not aware of any  written contracts, agreements or retainer agreements" between Illinois Union and OMM between and including 2006 to 2010 for work to be performed in the New York Metropolitan Area")).
However, Lincoln General failed to establish the merit of its claim that a violation of 22 NYCRR 1215.1 is a viable defense to plaintiffs' claim to recover counsel fees incurred in defense of East 51
Therefore, while the exception to 22 NYCRR 1215.1, which is found in 22 NYCRR 1215.2
Lincoln General's equitable subrogation claims for disgorgement and breach of fiduciary duty, and alternatively for restitution and contribution lack merit.
First, for the reasons above, Lincoln General's third party claim against OMM premised on the purported violation of 22 NYCRR 1215.1. lacks merit. Again, an unintentional failure of counsel to provide a written engagement in a non-matrimonial matter does not preclude counsel to a fee based on quantum meruit (Matter of Feroleto, supra).
The higher rate charged by OMM is neither a "wrongdoing," nor a wrongdoing for which Lincoln General will be duty bound to pay.
As to Lincoln General's claim against OMM for equitable subrogation for breach of fiduciary duty, disgorgement, and alternatively for restitution and contribution, such claim lacks merit.
"Subrogation is the principle by which an insurer, having paid losses of its insured, is placed in the position of its insured so that it may recover from the third party legally responsible for the loss" (Kumar v. American Tr. Ins. Co. (49 A.D.3d 1353 [4th Dept 2008]). It is "an equitable doctrine [that] entitles an insurer to `stand in the shoes' of its insured to seek indemnification from third parties whose wrongdoing has caused a loss for which the insurer is bound to reimburse" (Federal Ins. Co. v North Am. Specialty Ins. Co., 47 A.D.3d 52, 847 N.Y.S.2d 7 ).
Lincoln General's claims premised on equitable subrogation lacks merit.
Lincoln General failed to assert sufficient "wrongdoing" on the part of OMM, or cite any authority for the position that the fees charged by OMM, in and of themselves, constitute "wrongdoing" under any theory of law, let alone under the theory of equitable subrogation. Here, Illinois Union retained OMM to defend East 51
To apply the doctrine as urged by Lincoln General, Lincoln General, as the an insurer, who is duty bound to pay "losses" (defense costs) of its insured (East 51st), seeks to be "placed in the position of its insured" East 51
As acknowledged by Lincoln General, the doctrine of equitable subrogation allows it to "step into the shoes" of Illinois Union and/or East 51
Lincoln General contends that to disallow it from proceeding against OMM "under the principles of equitable subrogation would completely absolve OMM from liability associated with its actions which deviated from fiduciary standards, and would place the loss for such deviation on Lincoln General and the co-primary insurers." However Lincoln General alleges no specific conduct constituting a breach of fiduciary obligations. Again, it bears repeating that Lincoln General concedes that it does not claim that OMM committed malpractice.
The cases cited by Lincoln General do not warrant a different result. In Kumar v. American Tr. Ins. Co. (49 A.D.3d 1353 [4th Dept 2008]), plaintiffs (assignees of the insured) sued the insured's insurer for bad faith, and in turn, the insurer brought a third party action against the insured's counsel alleging that the damages were caused by negligence and malpractice of counsel. The Fourth Department rejected the attorneys' argument in support of dismissal that the absence of privity defeated the third party complaint. The Court held that the parties were not foreclosed from proceeding under the principle of equitable subrogation, as the "pleadings raise serious issues involving ethical considerations." The Court then noted that the third party complaint "alleges that the loss sustained by" the insured "resulted from the malpractice" of counsel in failing to appear and defend the insured.
The absence of any allegation by any party to this litigation that OMM committed malpractice, or any "wrongdoing" precludes application of Kumar, even assuming that such case has precedential and controlling authority over this Court.
Likewise, Allstate Ins. Co. v. American Transit Ins. Co. (977 F.Supp. 197 [EDNY 1997]) does not avail Lincoln General. Allstate, citing to First Department caselaw, Hartford Accident and Indem. Co. (61 N.Y.2d 569, 573 [1st Dept 1984]) and Great Atlantic Insurance Company v. Weinstein (125 A.D.2d 214, 214-15, 509 N.Y.S.2d 325 [1st Dept 1986])
In any event, even assuming Lincoln General alleged that OMM committed malpractice, an equitable subrogation claim premised on such assertion is not viable under First Department under the facts as asserted (see e.g, Federal Ins. Co. v North Am. Specialty Ins. Co., 47 A.D.3d 52, 847 N.Y.S.2d 7  (holding that insurer "Federal's fifth cause of action, asserted against [attorney] Rivkin as subrogee of [insured] Galaxy, is also without merit since Galaxy has not suffered any loss" as a result of any "wrongdoing by any party for the recovery of which Federal can be subrogated"; "Galaxy did not sustain any damages as a result of Rivkin's failure to raise antisubrogation. . . ."; Galaxy's damages in incurring a liability were the result of its own wrongdoing in violating the Labor Law; Federal concedes the reasonableness of the settlement; Thus, Federal's payment of the loss was a result of its own insured's wrongdoing, and not a result of wrongdoing by any third party for which Federal can seek recompense as Galaxy's subrogee. As is obvious, the only loss for which Federal seeks recovery is its own loss.)).
As to both parties' requests for sanctions, "[t]he court, in its discretion, may award . . . costs . . . resulting from frivolous conduct . . . under 22 NYCRR § 130-1.1" (Grayson v. New York City Dept. of Parks and Recreation, 99 A.D.3d 418, 952 N.Y.S.2d 8 [1
Lincoln General's application for sanctions against Illinois Union for its purported "frivolous opposition" is unwarranted. Contrary to Lincoln General's contention, Illinois Union's claim that the voluntary payment was previously addressed and that the exception to the retainer requirement are not without merit. Illinois Union addressed the equitable subrogation and it cannot be said that its conduct during discovery was undertaken to delay or prolong the resolution of this action, or lacked merit. Thus, the court declines to sanction Illinois Union.
However, Illinois Union's request for sanctions in the form of costs in defending both motions is warranted, as the motions were without merit in law. First, Lincoln General provided no caselaw on its motions in chief to support its claims that the newly discovery material supported the specific proposed affirmative defenses and third party claims against OMM. Second, it has been previously determined that the voluntary payment doctrine lacked merit, and the purported newly discovered facts did not alter its inefficacy, as discussed above. The fact that no retainer agreement exists between Illinois Union/East 51
Based on the foregoing, it is hereby
ORDERED that the motions by Lincoln General Insurance Company for leave to supplement its affirmative defenses (motion 016) and leave to assert a third party action against the lawfirm, O'Melveny and Meyers, LLP (motion 017), and for costs and sanctions against Illinois Union, is denied; and it is further
ORDERED that Illinois Union's application for costs and fees associated with defending the instant motions is granted; and it is further
ORDERED that the issue of attorney's fees incurred by Illinois Union in defending the instant motions is severed and referred to a Special Referee to hear and determine; and it is further
ORDERED that counsel for plaintiff shall serve a copy of this order with notice of entry on all parties and the Special Referee Clerk, Room 119M, within 30 days of entry to arrange a date for the reference to the Special Referee.
This constitutes the decision and order of the Court.