Clear Blue Specialty Insurance Company v. OZY MEDIA, INC.

Background

Clear Blue Specialty Insurance Company moved under Federal Rule of Civil Procedure 15 for permission to amend its complaint and assert a claim in the nature of statutory interpleader under 28 U.S.C. § 1335. Interpleader is a procedure that allows a party holding money or property subject to competing claims to bring the potential claimants into one case and have them litigate who is entitled to it.

In an earlier order, the court granted in part and denied in part Ozy and Watson’s request for a preliminary injunction and stay of discovery. The court ordered Clear Blue to advance Watson’s defense costs under the Directors and Officers policy and stayed discovery. After that order, Watson’s former defense counsel, Ford O’Brien Landy LLP, sent Clear Blue a notice asserting a charging lien on insurance-coverage advances. Clear Blue also identified at least five other law firms that had represented Watson in separate criminal proceedings in New York and said it did not know whether those firms had been paid.

Clear Blue sought permission to add known claimants as defendants, obtain protection from liability for the disputed claims, require claimants to litigate their rights in this case, and prevent them from bringing other actions against Clear Blue. Watson opposed the motion. Ford O’Brien appeared at the hearing as an interested party with the court’s permission.

Legal standard

Rule 15 generally requires courts to freely allow amendments when justice requires. Courts may deny leave because of undue delay, bad faith, repeated failure to correct deficiencies, prejudice to the opposing party, or futility. An amendment is futile when it could not adequately state a claim or could not survive dismissal. Prejudice to the opposing party carries the greatest weight.

Interpleader has two stages. At the first stage, the court determines whether there is a single fund and adverse claimants. If the action is properly brought, the court later decides the claimants’ respective rights. The first-stage inquiry does not decide the ultimate merits, but a potential adverse claim must be colorable—meaning it must have at least a minimal level of legal and factual support.

Analysis

The court found that three requirements were satisfied: there was a stake consisting of defense-cost benefits under the policy; Clear Blue controlled those benefits; and Clear Blue was free from blame for the dispute. But the court found that the requirement of multiple adverse claims exposing Clear Blue to double or multiple liability was not satisfied.

Ford O’Brien relied on a charging lien under New York Judiciary Law § 475. The court explained that such a lien generally requires the attorney to have appeared in the action that created or produced the fund and to be the attorney of record, or to have obtained a recovery or other affirmative relief in the relevant proceeding. Ford O’Brien was not Watson’s attorney of record in this action. Watson also contended that Ford O’Brien had represented OZY MEDIA, INC. in the underlying criminal proceeding, not Watson. The court held that Ford O’Brien’s submission of two declarations supporting Watson’s preliminary-injunction motion was insufficient to create a charging lien. The court also stated that Ford O’Brien had not obtained a recovery in the underlying criminal proceedings.

The court likewise found that Clear Blue had not shown that Watson’s other former defense firms had colorable claims to the insurance proceeds. Clear Blue only asserted that the firms might have unpaid bills. The court noted that the record showed those firms had not appeared for Watson in this action or placed their names on papers submitted in the case, which ruled out the possibility of a charging lien under the circumstances described.

The court further found prejudice to Watson. Allowing the amendment and interpleader proceeding could delay Watson’s receipt of defense-cost advances and affect his ability to pay defense counsel in the underlying criminal proceeding. The court therefore concluded that amendment would be both futile and prejudicial.

Disposition

The court denied without prejudice Clear Blue’s motion for leave to file an amended complaint asserting an action in the nature of interpleader.