Derivative Claims; Implied Indemnity; Trustees’ Implied Duties; Near-Privity
By: Jared Fitzpatrick | Staff Writer
In 2013, the New York State Workers’ Compensation Board (the “Board”) brought suit against the trustees of HITNY, a then-insolvent group self-insured trust (the “Trust”) and later added Defendant UHY, an accounting firm that audited the Trust’s financial statements. In 1999, New York health care employers formed the Trust and contracted with Compensation Risk Managers, LLC (“CRM”) to administer it. When the Trust was rendered insolvent, the Board became the Trust’s administrator and successor in December 2007, giving it authority to sue the trustees. In an effort to recover for the Trust’s outstanding liability, former members of the Trust filed suit against CRM, the action was stayed by CRM’s bankruptcy and then discontinued in 2013. In 2017, the Court dismissed eight of the Board’s nine claims, notably (a) confirming the implied duty of trustees to maintain a trust’s solvency and (b) enforcing the need for specific conduct linking an auditor and non-client to establish near-privity. The Board alleged five causes of action against the trustees: (1) breach of fiduciary duty; (2) negligence; (3) gross negligence; (4) negligent misrepresentation; and (5) implied indemnity. The Board also alleged four causes of action against UHY: (1) negligence; (2) implied indemnity; (3) breach of contract; and (4) negligent misrepresentation because UHY intentionally understated the Trust’s claims liability to attract new members.
- Claims Against CRM and the Trustees
The Board’s complaint alleged that CRM caused the Trust’s insolvency by, inter alia, misrepresenting the Trust’s financial status to members and failure to administer the trust in accordance with law. Additionally, the Board claimed that the trustees neglected their duty to manage the trust competently—partly by failing to monitor CRM and UHY—and maintain the Trust’s solvency.
The Court dismissed the breach of fiduciary duty, negligence and gross negligence causes of action for lack of standing; these three are derivative claims that can be brought only by an individual member of the Trust to vindicate the whole. However, the Trust’s individual members were stripped of standing to sue when the Board—acting as successor to the Trust—filed suit against the trustees. Additionally, the Court held the three-year statute of limitations barred the fourth claim for negligent misrepresentation.
The Court did not dismiss the implied indemnity claim. The trustees argued they were bound neither by statute nor by contract to preserve the Trust’s solvency. The Court rejected this argument and noted a shared duty between the trustees and members of the Trust to maintain the Trust’s solvency, upholding the Third Department’s reasoning that the Workers’ Compensation Law implies such a duty.
- Claims against UHY:
The Court dismissed the negligence claim against UHY for lack of standing. The court also dismissed the implied indemnity claim, holding that claim inapplicable to professionals performing services for the Trust.
The Court dismissed the remaining two claims against UHY because the Board failed to allege a relationship of near-privity between UHY and the Trust’s members. Specifically, the complaint failed to satisfy the third element of the tripartite test announced in Credit Alliance Corp v. Arthur Andersen & Co.,which requires that the plaintiff establish near-privity between UHY and the Trust’s members. To establish near privity, the Board would have to establish specific conduct of UHY linking it to the members. The Court clarified that neither the audits themselves nor UHY’s knowledge that the Trust’s members would rely on the audits sufficed; rather, the Court clarified that the complaint must allege direct dealings between the accountant and the non-client. The Court rejected the Board’s alternative privity argument that the members were third-party beneficiaries to the agreement between UHY and the Trust.
New York State Workers’ Compensation Bd. v. Compensation Risk Mgrs., LLC, 12/14/17 (Platkin, J.)