20 Fla. L. Weekly Supp. 54a

Online Reference: FLWSUPP 2001HISCInsurance — Professional indemnity — Declaratory judgment — Comity — First-filed rule — Insurers move to dismiss count of Florida action seeking declaration regarding coverage for punitive damages, brought by plaintiff that was awarded compensatory and punitive damages against an insured auditing firm in a Florida court, based on a prior summary judgment entered in the insurers’ New York declaratory judgment action against the insured, which concluded that New York law governed pursuant to the parties’ stipulation and that punitive damages were not covered by policies under New York law — First-filed rule is not applicable where neither parties nor issues in actions are sufficiently similar to justify imposition of rule — Parties are not sufficiently similar where plaintiff to whom damages were owed was not party to New York case, and insured acted against own interests to detriment of plaintiff’s rights in that case by agreeing that New York law, which recognizes no exception to general rule that punitive damages, are not insurable would control — Issues are not sufficiently similar where choice of law may be different in each action — Further, due process concerns raised by parties’ conduct in New York proceeding are special circumstances that warrant departure from first-filed rule — Due process concerns also preclude giving res judicata effect to New York judgment

THE ESTATE OF GEORGE E. BATCHELOR AND THE BATCHELOR FOUNDATION, INC., Plaintiffs, vs. HISCOX DEDICATED CORPORATE MEMBER LTD.; BRIT UW LIMITED; ACE CAPITAL LTD.; GULF INSURANCE COMPANY UK LTD.; LEXINGTON INSURANCE CO.; LIBERTY MUTUAL INSURANCE EUROPE LTD., AS SUCCESSOR TO LIBERYT MUTUAL INUSRNACE CO. (UK) LTD. AND LIBERTY INTERNATIONAL INSURANCE CO.; QBE INSURANCE (EUROPE) LTD.; ASSICURAZIONI GENERALI S.P.A.; KEMPER INDEMNITY INSURANCE CO.; SWISS RE SPECIALITY INSURANCE (UK) LTD., FORMERLY KNOWN AS GE SPECIALITY INSURANCE (UK) LTD. and BDO SEIDMAN, LLP, Defendants. Circuit Court, 11th Judicial Circuit in and for Miami-Dade County, Civil Division. Case No. 11-27954 CA 15. August 9, 2012. John W. Thornton, Judge.

ORDER DENYING INSURERS’ MOTIONS TO DISMISSDECLARATORY JUDGMENT ACTION (COUNT I)

This matter comes before the Court on Insurer Defendants’ Motions to Dismiss Count I of Plaintiffs’ Complaint, which seeks a declaratory judgment that a jury award of punitive damages, given to Plaintiffs in a previous action against BDO Seidman, is covered under the Policies issued by the Insurers to BDO. On June 29, 2012, following a hearing, this Court reserved ruling on the Insurers’ Motions to Dismiss Count I. Based upon the following analysis, the Insurers’ Motions are denied.

FACTUAL AND PROCEDURAL BACKGROUND

In 2002, The Estate of Batchelor and The Batchelor Foundation, Inc. (jointly referred to as “Batchelor”), filed suit against BDO Seidman, LLP (“BDO”), in the Circuit Court for the Eleventh Judicial Circuit of Florida, Civil Division (the “Original Batchelor Action”), alleging fraud, negligence, and negligent misrepresentation in connection with BDO’s audits of a public company in which Batchelor had invested and which subsequently went bankrupt. After a trial concluding on January 31, 2011, the jury returned a verdict against BDO on both fraud and negligent misrepresentation, awarding Batchelor $36,670,000 in compensatory damages and $55,000,000 in punitive damages. Final judgment was entered on February 16, 2011.

After its post-trial motions were denied, BDO filed a notice of appeal on June 7, 2011. The appeal was docketed on June 9, 2011, and remains pending before the Third District, as the record is still being assembled at this time.

At the time of BDO’s alleged misconduct, BDO had in effect professional indemnity insurance policies (the “Policies”) totaling $200 million issued to BDO by Hiscox Dedicated Corporate Member Ltd., et al. (the “Insurers”). Pursuant to Section I, the Policies indemnified BDO against any claim made against BDO “by reason of any act, error, omission, breach of contract or duty or libel or slander or any allegation thereof. . . .” Under Section III.(3)(a), however, the Policies exclude coverage “to the extent it is uninsurable by law” for “any claim or claims for fines, penalties, punitive or exemplary damages imposed by a judgment or other final adjudication.” The Policies do not include a choice of law clause. On February 18, 2011, Batchelor sent a letter to BDO, offering to settle the case for $95,464,951 (representing $75,464,951 in compensatory damages plus $20,000,000 in punitive damages) and asking that the letter be forwarded to the Insurers. On February 24, 2011, Batchelor sent a letter to the Insurers, stating that if $95 million were not tendered in response to the February 18, 2011 letter, Batchelor would file a third-party bad faith action against the Insurers under Florida Statutes §624.155, and asserting its position that the punitive damage award was covered under the Policies.The Instant Batchelor Action

On September 1, 2011, Batchelor filed the instant four-count civil action against the Insurers and BDO (as a necessary party) in this Court (the “Instant Batchelor Action”), alleging that Florida law governs interpretation of the Policies¹ and seeking a declaratory judgment that the award of punitive damages is covered by the Policies (Count I); and alleging breach of contract and bad faith against the Insurers (Counts II, III, and IV). The only count at issue here is Count I.

On November 10, 2011, the Insurers filed a Motion to Dismiss, inter alia, Count I of Batchelor’s Complaint, arguing that the prior pending New York Action, which addresses precisely this issue of punitive damage coverage and involves substantially similar parties, takes precedence under the first-filed rule and thus Count I must be dismissed or at least stayed pending the New York Action.The Concurrent New York Action

On April 18, 2011, the Insurers filed a declaratory judgment action against BDO in the Supreme Court of New York for the County of New York (the “New York Action”), alleging that New York law governs interpretation of the Policies and seeking a declaration that the Policies do not cover the punitive damage award. On June 15, 2011, the parties in the New York Action (the Insurers and BDO) signed an Agreement to Stay Litigation (the “Stipulation”) pending BDO’s appeal of the Original Batchelor Action, a stay which the Insurers could elect to terminate should Batchelor either attempt to argue before a court that the Policies covered punitive damages or bring a bad faith action against the Insurers. The Stipulation also set forth that any claims between the Insurers and BDO arising out of the Original Batchelor Action would be adjudicated in the Supreme Court of New York and that “[t]he internal substantive law of New York, without regard to New York choice of law rules or principles, shall control the question of whether punitive damages are covered by the Policies.”

On September 2, 2011, one day after Batchelor filed the Instant Batchelor Action and pursuant to the Stipulation Agreement, the stay of the New York Action was terminated. On April 2, 2012, the Insurers filed a Motion for Summary Judgment in the New York Action, arguing that New York law controls and clearly dictates that punitive damages are not insurable as a matter of public policy. On April 27, 2012, BDO filed its Brief in Opposition to the Insurers’ Motion for Summary Judgment, essentially arguing exactly what it argued in its earlier Motion to Dismiss: that the declaratory action is premature pending resolution of the appeal of the Original Batchelor Action. BDO argued that the pendency of the out-of-state appeal precludes the New York court from presuming that the punitive damage verdict conforms with Florida law, and that, until the appeal is resolved, whether the verdict conforms with Florida law is a genuine issue of material fact, therefore making summary judgment inappropriate. On July 27, 2012, following a hearing, the transcript of which this Court has read, the New York court granted the Insurers’ Motion for Summary Judgment, a copy of which this Court has read, finding that, pursuant to the parties’ Stipulation, New York law governed and thus that punitive damages were not covered by the Policies.ANALYSIS

I. The first-filed rule, which would require this Court to show deference to the judgment entered in the first-filed New York Action, should not be applied in this case because the issues and parties are not substantially similar, and, more importantly, the due process concerns raised by the New York proceedings constitute “special circumstances” warranting a departure from the first-filed rule.

Under Florida law, the first-filed rule, also called the principle of priority, requires that a Florida court dismiss or abate proceedings before it when those proceedings involve substantially similar issues and parties as those involved in a previously filed action in a foreign court. As the Third District has explained, “Principles of comity between sovereigns suggest that a court of one state should stay a proceeding pending before it on grounds that a prior-filed case involving substantially that same subject matter and parties is pending in another state’s courts.” Polaris Pub. Income Funds v. Einhorn, 625 So. 2d 128, 129 (Fla. 3d DCA 1993). Indeed, as the Polaris court aptly stated, “The pivotal question is whether the Florida action is so similar in parties and issues as to be unnecessarily duplicative of the prior-filed New York state proceedings.” Id. In a later case, the Third District expanded on its reasoning in Polaris:

Although a trial court has broad discretion to order or refuse a stay of an action pending before it, it is nonetheless an abuse of discretion to refuse to stay a subsequently filed state court action in favor of a previously filed [state] action which involves the same parties and the same or substantially similar issues. This rule is based on principles of comity. Comity principles dictate that an action should be stayed, and a trial court departs from the essential requirements of law by failing to grant such a stay, when the first-filed lawsuit involves substantially similar parties and substantially similar claims.

Pilevsky v. Morgans Hotel Group Mgmt., LLC, 961 So. 2d 1032, 1034-35 (Fla. 3d DCA 2007) [32 Fla. L. Weekly D1733a] (internal quotations and citations omitted).

a. The parties in the Instant Batchelor Action and the New York Action are not sufficiently similar to justify application of the first-filed rule.

Although the first-filed rule requires only substantial similarity of parties, rather than identity of parties, given the circumstances of this case, Batchelor’s absence from the New York Action precludes fulfillment of this requirement. The Insurers have presented this Court with case law holding that the rights of third-party beneficiaries are wholly derivative of the rights of the insured. See, e.g., Crabtree v. Aetna Cas. & Sur. Co., 438 So. 2d 102, 105 (Fla. 1st DCA 1983). Whatever rights the insured has with respect to the insurance contract, the third-party beneficiary also has, no more and no less. Id. Thus, theoretically, the absence of Batchelor from the New York Action would be no obstacle to the application of the first-filed rule because BDO’s presence in that Action would ensure that Batchelor’s interests are adequately represented. Here, however, such adequate representation of Batchelor’s interests is impossible because BDO has apparently acted, for reasons unknown to this Court, potentially against its own interests in the New York Action, and therefore against the interests of Batchelor.

As previously noted, on June 15, 2011, the Insurers and BDO reached a Stipulation which agreed, inter alia, that any claims between the Insurers and BDO arising out of the Original Batchelor Action would be adjudicated in the Supreme Court of New York and that “[t]he internal substantive law of New York, without regard to New York choice of law rules or principles, shall control the question of whether punitive damages are covered” by the Policies (emphasis added). In other words, regardless of whether New York choice of law principles dictate that the law of another state, e.g., Florida, should govern the question of punitive damage coverage, the Insurers and BDO here agreed that New York law will govern.

As both the Insurers and Batchelor informed the Court at their previous hearing on the Insurers’ Motion to Dismiss on June 29, 2012, and as the briefs, the hearing transcript, and the court order on the Insurers’ Motion for Summary Judgment in the New York Action have revealed, New York law unequivocally holds that punitive damages are never insurable, regardless of the circumstances of the particular case. Thus, by entering this Stipulation with the Insurers, BDO has apparently, and inexplicably, shot itself in the proverbial foot. Whereas Batchelor has argued in the Instant Batchelor Action that Florida law provides for an exception to the general rule that punitive damages are not insurable, BDO has knowingly agreed to a choice of law which deprived BDO of its strongest argument and practically cemented its defeat on the issue of coverage in the New York Action. The New York court’s opinion, which granted summary judgment in favor of the Insurers, only further proves that BDO’s case was a lost cause in the New York Action.

The fact that a third-party beneficiary’s rights are derivative of the rights of the insured becomes irrelevant when the insured acts against its own interests, to the detriment of its rights. Here, BDO surrendered its right to litigate choice of law.² Although BDO has the right to surrender its own rights, its act of surrender should not act to divest Batchelor of its derivative rights. BDO’s Stipulation with the Insurers should not work to dispossess Batchelor of its right to litigate what will, in all likelihood, prove to be the decisive issue in the case: choice of law.

BDO presumably had an even greater interest in the outcome of the New York Action than did Batchelor. If the punitive damages were found to be uninsurable, BDO would be burdened with paying the punitive damage award itself, whereas Batchelor may still be entitled to the punitive damages from someone regardless of the outcome of the New York Action. And yet BDO may have failed to adequately represent its own interests in the New York Action, let alone the interests of Batchelor. BDO’s argument in its Brief in Opposition to the Insurers’ Motion for Summary Judgment was threadbare, repetitive of its earlier Motion to Dismiss, and contained no substantive arguments. BDO added nothing to its argument at the subsequent hearing. ³ If this Court were to defer to the New York judgment, Batchelor would be denied its right to litigate choice of law.

b. The issues in the Instant Batchelor Action and the New York Action are not sufficiently similar to justify application of the first-filed rule.

In fact, because choice of law will likely be the decisive factor with regards to punitive damage coverage, choice of law ultimately defines the issue at bar, thereby precluding the issues in these two actions from being sufficiently similar to justify application of the first-filed rule. The issues in these two declaratory judgment actions are seemingly the same: whether the punitive damage award is insurable by law and thus covered by the Policies. These issues, however, are only apparently identical, and this is so precisely because choice of law changes the issue. Under New York law, punitive damages are never insurable, regardless of the basis of liability. Under Florida law, punitive damages may be insurable if based on vicarious liability, as Batchelor now argues. While the Insurers and BDO stipulated that New York law governs interpretation of the Policies in the New York Action, the choice of law in the Instant Batchelor Action has yet to be decided.

The fact that choice of law may be different in the two actions creates two different, albeit more narrowly framed, issues. In the New York Action, the question presented is: whether the punitive damage award is insurable under New York law. In the Instant Batchelor Action, the question presented is: whether the punitive damage is insurable under the applicable law, which has yet to be determined. Because choice of law will ultimately be dispositive on the issue of coverage, the predetermination of choice of law in the New York Action prevents the issues involved from ever being “substantially similar” so as to make the two actions “unnecessarily duplicative.” Thus, the first-filed rule does not apply.

c. The due process concerns raised by the New York proceedings constitute precisely the type of “special circumstances” that warrant a departure from the first-filed rule.

The first-filed rule requires substantial similarity of parties and issues not merely to prevent the entry of inconsistent rulings in indistinguishable cases, promote comity between states, and ensure efficient use of judicial resources, but also, and more importantly, to satisfy a fundamental requirement of due process: the opportunity to be heard. The first-filed rule serves four key goals: consistency, comity, efficiency, and constitutional due process. But of these four, due process is paramount. As previously noted, under Florida law, the “pivotal question” with regards to the applicability of the first-filed rule is whether the second-filed action is “so similar in parties and issues as to be unnecessarily duplicative” of the first-filed action. Polaris, 625 So. 2d at 129. It is an abuse of discretion, absent “special” or “extraordinary” circumstances, such as undue delay, for a trial court to fail to respect the first-filed rule and stay the second-filed action. See, e.g., Hirsh v. DiGaetano, 732 So. 2d 1177, 1177-78 (Fla. 5th DCA 1999) [24 Fla. L. Weekly D1016a]. If a party is denied an opportunity to be heard in the second-filed action and its interests were not adequately represented in the first-filed action, this would not only preclude the two actions from being “unnecessarily duplicative” but would surely constitute a special circumstance justifying departure from the first-filed rule.

Precisely such a situation exists here. Even if the parties and issues in the Instant Batchelor Action and the New York Action were sufficiently similar, at least on paper, to merit application of the first-filed rule, deferring to the New York Court’s judgment here would improperly deny Batchelor its opportunity to be heard, thereby violating its due process rights, because BDO failed to represent Batchelor’s interests in the New York Action. And an action cannot be unnecessarily duplicative of a previously filed action if the interests of a party to the second-filed action were not, in fact, represented in the first-filed action. The mere denial of the opportunity to be heard is not enough, of course, to warrant departure from the first-filed rule. The first-filed rule, after all, does not require exact identity of parties, so there will undoubtedly be cases where parties in the second-filed action are denied an opportunity to be heard. The difference here is that Batchelor was also denied an opportunity to be heard, to have its interests represented, on the choice of law issue in the first-filed action, the New York Action, when it was excluded from the Stipulation.

The first-filed rule requires substantial similarity of parties and issues in order to guarantee that even if a party in the second-filed action is denied an opportunity to be heard on an issue, its interests were still represented in the first-filed action on that issue and thus its argument was heard, albeit vicariously, through another party with similar, if not identical, interests. Here, such representation did not occur. To the possible detriment of itself, and surely to the detriment of Batchelor, BDO agreed that New York law would govern in the New York Action. In granting summary judgment for the Insurers, the New York court stated that New York law governed, per the parties’ Stipulation, without the necessity of conducting its own independent choice of law analysis. Even if Batchelor had intervened in that action, as it had the right to do, such intervention would have been costly and most likely futile, as the Insurers and BDO’s Stipulation would probably have prevented Batchelor from litigating choice of law.

The general rule in Florida is that courts will defer to and abide by the agreements made by the contracting parties, including those regarding which state’s law will govern the interpretation of their contract. See, e.g., Baker v. Baker, 622 So. 2d 541, 543 (Fla. 5th DCA 1993) (recognizing the “well-established principle that when contracting parties designate the law of a particular state to govern the contract, the designated law will govern any disputes under the contract); See Floating Docks, Inc. v. Auto-Owners Ins. Co., 82 So. 3d 73, 80 (Fla. 2012) [37 Fla. L. Weekly S63a]; Mazzoni Farms, Inc. v. EI DuPont de Nemours & Co., 761 So. 2d 306, 311 (Fla. 2000) [25 Fla. L. Weekly S446a]; Hirsch v. Hirsch, 309 So. 2d 47, 49-50 (Fla. 3d DCA 1975) (“The principle is well established that when the parties to a contract have indicated their intention as to the law which is to govern the contract, then it will be governed by such law in accordance with the intent of the parties.”).

Although the Insurers argued in their Preliminary Opposition to Batchelor’s Motion for Summary Judgment that the timing of the choice of law agreement, whether it be pre- or post-incident or pre- or post-litigation, is irrelevant, they cited to only one case, a trial court case from New York, Hamilton v. AccuTek, in support of that proposition. The Hamilton court went on to cite federal Third and Fifth Circuit cases that refused, pursuant to established law, to uphold post-litigation choice of law stipulations. The Hamilton court further discussed the matter:

Courts applying New York law have not differentiated between contractual choice of law clauses and post-incident choice of law stipulations, tending also to honor the latter, whether they are express or implied.

. . .

This approach is in keeping with the New York courts’ policy of enforcing stipulations which are “not unreasonable, not against good morals or sound public policy. . . .” New York law treats stipulating litigants like other contracting parties, permitting them “free[dom] to mold the contours of their lawsuit within broad parameters.” The same does not hold true, however, where the results of this private ordering would (1) violate public policy; (2) purport to circumscribe the court’s jurisdiction; or (3) operate to the disadvantage of non-parties. See, e.g., Hong Kong & Shanghai Banking Corp. v. HFH USA Corp., 805 F. Supp. 133, 140 (W.D.N.Y. 1992) (“Where the rights of third parties are implicated, the court should be governed by the ordinary rule that the federal district courts apply the choice of law rules of the state in which they sit.”). Courts decline to enforce parties’ stipulations in these circumstances because honoring them would enable litigants to enter into binding agreements with adverse consequences reverberating beyond the area bounded by their private interests.

Hamilton v. Accu-Tek, 47 F. Supp. 2d 330, 343-44 (E.D.N.Y. 1999) (emphasis added) (most internal citations omitted). Not only does the Hamilton court limit its statement of the general rule regarding choice of law agreements to cases where New York law already applies, but it goes on to list three exceptions to this rule, the third of which is prejudice to non-parties.

The instant case fits perfectly into Hamilton‘s third exception. In accordance with the general rule, a court should enforce the choice of law agreement reached by the Insurers and BDO. Here, the timing of the Stipulation is suspect, precisely because the Stipulation appears purposely calculated to operate to Batchelor’s disadvantage. Here, the timing suggests an ulterior motive. The Insurers and BDO did not agree as to choice of law until June 15, 2011, after Batchelor put punitive damage coverage at issue, and after Batchelor sent a letter to the Insurers on February 24, 2011, stating that Florida law governs interpretation of the Policies and requesting that the Insurers notify Batchelor should they contest coverage of the punitive damage award. On April 18, 2011, after being notified of Batchelor’s position on the coverage issue and choice of law, the Insurers filed the New York Action against BDO. Two months later, and without including Batchelor in the discussion, the Insurers and BDO stipulated that New York law would govern.⁴ Given that such an agreement potentially undermines BDO’s position and disadvantages Batchelor, a nonparty to the New York Action, the Stipulation is both inexplicable, on BDO’s part, and counsels against application of the first-filed rule.⁵

II. In light of the due process concerns which undergird res judicata’s privity requirement and which were raised by the conduct of the parties in the New York proceedings, Batchelor, as a nonparty to the New York Action, should not be bound by the New York judgment.

Finally, and perhaps most significantly, summary judgment for the Insurers on the coverage issue in the New York Action does not have res judicata effect in the Instant Batchelor Action; it does not bind Batchelor. Under Florida law, “[w]henever res judicata is asserted, the court in the second forum is bound to give the former judgment the same preclusive effect that the rendering court would give it. Indeed that general principle is so well established as to need no further elucidation.” Andujar v. Nat’l Prop. & Cas. Underwriters, 659 So. 2d 1214, 1216 (Fla. 4th DCA 1995) [20 Fla. L. Weekly D1894a]. That being the case, this Florida court must give the New York judgment the same preclusive effect that a New York court would give it, i.e., the same preclusive effect that New York law would give it.

New York law on issue and claim preclusion is generally settled. As explained by its highest court, the New York Court of Appeals:

Collateral estoppel, an equitable doctrine, is based upon the general notion that a party, or one in privity with a party, should not be permitted to relitigate an issue decided against it.

. . .

Privity, it has been observed, is an amorphous concept not easy of application. Generally, a nonparty to a prior litigation may be collaterally estopped by a determination in that litigation by having a relationship with a party to the prior litigation such that his own rights or obligations in the subsequent proceeding are conditioned in one way or another on, or derivative of the rights of, the party to the prior litigation.

D’Arata v. New York Cent. Mut. Fire Ins. Co., 564 N.E.2d 634, 637 (N.Y. 1990) (citing Green v. Santa Fe Indus., 514 N.E.2d 105, 108 (N.Y. 1987)) (internal citations omitted). In applying New York collateral estoppel principles to the facts of the case before it, the Court in D’Arata went on to conclude that under New York’s applicable insurance laws:

[An injured party] is permitted to maintain a direct action against the insurer on the policy. In doing so, [the injured party] “stands in the shoes” of the insured and can have no greater rights than the insured. [The injured party], by proceeding directly against [the insurer], does so as subrogee of the insured’s rights and is subject to whatever rules of estoppel would apply to the insured.

D’Arata, 564 N.E.2d at 637.

Although these excerpts from D’Arata suggest that an injured party is a privy of an insured for purposes of collateral estoppel, the New York Court of Appeals has also addressed the concept of privity more broadly with an eye toward the due process concerns that undergird it. In fact, in Green v. Santa Fe Industries, Inc., the New York Court of Appeals opinion, and only case to which the D’Arata court cites in defining privity, the Court defines privity in a way that illuminates its purpose: “Generally, to establish privity the connection between the parties must be such that the interests of the nonparty can be said to have been represented in the prior proceeding.” Green v. Santa Fe Indus., Inc., 514 N.E.2d 105, 108 (N.Y. 1987).⁶ This definition of privity makes clear that with regards to a prior judgment’s potential preclusive effect on a nonparty, privity is essentially a requirement of due process, a requirement that the nonparty has been given an opportunity to be heard and its interests previously represented before it is summarily turned away at the courtroom doors. It stands to reason, then, that whether privity exists in a particular case will depend in part on the particular facts of that case. While an insured may represent the interests of the injured party in an action against the insurer, such is not always the case and thus the application of res judicata or collateral estoppel against the injured party in a subsequent action on the same issue may not always be appropriate. The D’Arata court was very careful to note that “[c]ollateral estoppel. . .is grounded on concepts of fairness and should not be rigidly or mechanically applied.” D’Arata, 564 N.E.2d at 636.

In light of the due process concerns undergirding res judicata’s privity requirement, Batchelor should not be bound by the New York judgment. The first-filed rule is implicated only while the two actions are still pending. Now that the New York Action has been determined, the issue has become whether the New York ruling has res judicata effect on Batchelor in the Instant Batchelor Action. Under controlling New York law, the answer to that question is no. Batchelor was not a party in the New York Action. Because its interests were not represented in that action, Batchelor is also not a privy of BDO. Although the Insurers argue, as they did with respect to the first-filed rule’s applicability, that Batchelor waived its right to contest res judicata by not intervening in the New York Action, this argument fails. While it is true that Batchelor had the right to intervene in the New York Action, it is also true that no party is required to perform a futile act. Given the Insurers and BDO’s choice of law stipulation, Batchelor’s intervention in the New York Action would almost certainly have been one such futile act. When New York unequivocally prohibits punitive damage coverage, and the contracting parties have already stipulated to New York law, Batchelor’s decision not to enter a losing battle should not act as a waiver of its right to contest the potential res judicata effect of the New York judgment. Although Batchelor’s interests with respect to coverage theoretically aligned with BDO’s interests in the New York Action, they were not represented in fact. Thus, despite the ultimate resolution of the New York Action, the New York judgment cannot bind Batchelor or this Court in the instant case.

CONCLUSION

In order to satisfy the constitutional requirements of due process, this Court declines to apply either the first-filed rule or res judicata and will permit Batchelor to litigate both choice of law and coverage. The Insurers’ Motion to Dismiss the declaratory action presently before this Court is DENIED. Any stay currently in effect as to Count I is hereby lifted.

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¹Batchelor argues that punitive damages are insurable under Florida law if certain conditions are met.

²Counsel for BDO in the Instant Batchelor Action advised this Court at the hearing on June 27, 2012, that he was not BDO’s attorney in the New York Action and therefore did not know why BDO entered the Stipulation with the Insurers. Counsel also advised this Court at the hearing that BDO was merely observing the Instant Batchelor Action because its hands were tied by the Stipulation with the Insurers in the New York Action. In other words, because the Stipulation stated that the New York courts and New York law would determine the punitive damage coverage issue, BDO could not participate in the Instant Batchelor Action to argue anything to the contrary.

³At the New York Action hearing on the Insurers’ Motion for Summary Judgment (and in BDO’s opposition brief), BDO argued that the New York Action was premature pending the appeal of the Original Batchelor Action before Florida’s Third District Court of Appeal, essentially repeating the argument it made in its earlier Motion to Dismiss (which, according to BDO, will be appealed). BDO argued that the pendency of the out-of-state appeal precludes the New York Court from presuming that the punitive damage verdict conforms with Florida law, and that, until the appeal is resolved, whether the verdict conforms with Florida law is a genuine issue of material fact, thereby making summary judgment inappropriate. In support of this argument, BDO relied on a very brief excerpt from a Delaware trial court opinion. Even the New York Court repeatedly noted, at the hearing, how threadbare and cursory the Delaware court’s analysis was.

With regards to the insurability of an out-of-state judgment, the controlling New York cases are Home Insurance Co. and Zurich, which hold that New York courts should generally presume that a foreign state’s judgment was made in accordance with that state’s laws. Although BDO conceded that these two cases govern, it attempted to distinguish its case by arguing that the out-of-state verdicts at issue in Home Insurance Co. and Zurich had already been affirmed at the intermediate appellate level; whereas the verdict in the Original Batchelor Action was still on its first appeal and Florida trial courts do not create binding precedent. As both the Insurers and the New York Court noted, the verdict at issue in Home Insurance Co. was, in fact, also on appeal to the foreign state’s highest court when New York Court presumed its validity. This fact alone substantially undermines BDO’s argument and suggests that the pendency of an appeal is irrelevant.

⁴The Insurers and BDO also agreed to stay the New York Action at that time. This could suggest, as Batchelor argues, that the Insurers filed the New York Action not to litigate the coverage issue expediently, but merely to take advantage of the first-filed rule (i.e., forum shopping with an additional guarantee) and ensure that a New York court would decide the coverage issue and that New York law governed. The Stipulation, after all, did permit the Insurers to terminate the stay should Batchelor seek a ruling on punitive damages coverage. When Batchelor filed the Instant Batchelor Action on September 1, 2011, the Insurers terminated the stay of the New York Action the very next day.

⁵The Insurers assert in their Reply to Batchelor’s Supplemental Filing in Opposition to the Insurers’ Motion to Dismiss that the Insurers did not “pressure” BDO to agree to New York law, but rather that BDO knew from its negotiations with the Insurers on these Policies, from the facts surrounding execution of the Policies, and from previous litigation with the Insurers involving the same policy language, that New York law would control and so decided to stipulate as such, apparently in order to avoid needless and costly litigation of an uncontestable issue. However, regardless of BDO’s motives behind stipulating to choice of law, the fact remains that this Stipulation effectively denied Batchelor any representation of its interests in the New York Action, thereby raising due process concerns in the Instant Batchelor Action.

⁶The Green court’s use of the qualifier “generally” is apparently with reference to the other, nontraditional type of privity: “In addition to the conventional privity found in the foregoing cases, courts have also precluded parties from raising claims previously litigated when the party to be precluded can be said to have controlled the conduct of the prior action to further his own interests.” Green, 514 N.E.2d at 108. This unconventional type of privity is clearly not at issue in the present case. Batchelor had no control over the conduct of the New York Action, nor does any party claim as such.

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