Knox v. Ironshore Indemnity Inc.

Background

Tessa Knox and Pamela Kassen were female employees of John Varvatos Enterprises, Inc. Varvatos gave male, but not female, sales employees an allowance to buy Varvatos clothing. Knox sued Varvatos, later joined by Kassen, asserting claims under the federal Equal Pay Act, the New York Equal Pay Act, the New York Human Rights Law, and Title VII of the Civil Rights Act of 1964. The court certified the Equal Pay Act matter as a collective action and certified a class under Federal Rule of Civil Procedure 23.

Ironshore had issued a liability policy to an entity affiliated with Varvatos that covered certain employment-practice claims. After Varvatos tendered the defense of the underlying case, Ironshore initially agreed to provide insurance coverage but later notified Varvatos that it would not cover losses from that case.

A jury later found Varvatos liable and awarded damages. The court entered a $3,516,051.23 judgment against Varvatos on March 24, 2020. Knox and Kassen then sued Ironshore under New York Insurance Law § 3420 and the federal Declaratory Judgment Act, seeking to recover from Ironshore. Varvatos filed for Chapter 11 bankruptcy, triggering an automatic stay. The bankruptcy court later lifted the stay only to allow the amount of the claim against Varvatos to be determined.

Rule 12(b)(6) Standard

Ironshore moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not state a legally sufficient claim. In deciding that motion, the court accepted the complaint’s factual allegations as true, drew reasonable inferences for the plaintiffs, and considered certain documents connected to the complaint and public court filings.

New York Direct-Action Requirements

New York’s direct-action statute permits a person with a judgment against an insured party to sue the insurer directly in certain circumstances. The statute requires, among other things, a judgment against the insured, the judgment’s remaining unpaid for at least 30 days after required notice, and the absence of a stay of execution against the insured. The plaintiff must also pursue only the rights available to the insured under the policy.

The court identified at least three unmet requirements:

1. No existing judgment against Varvatos. The court in the underlying case had ordered a new trial on damages unless the plaintiffs accepted a reduced award. No revised judgment had been entered, so the plaintiffs no longer had the required judgment against Varvatos.

2. Stay of execution. Varvatos’s bankruptcy had stayed collection. The bankruptcy court had allowed proceedings only to fix the amount of the claim and had required collection from Varvatos to occur through the bankruptcy case. Because the stay on ultimate collection remained in place, the plaintiffs could not maintain the direct action against Ironshore.

3. Insufficient notice allegations. The plaintiffs alleged only, on information and belief, that Ironshore received notice of the judgment when it was entered. The court held that this did not allege compliance with the statute’s requirement to serve both the insurer and the insured with a copy of the judgment and notice of its entry.

The court also rejected the plaintiffs’ argument that these requirements were merely state procedural rules that did not apply in federal court. It concluded that the direct-action statute was substantive because it created a right to sue an insurer that otherwise did not exist.

Declaratory-Judgment Claim

The court held that the federal Declaratory Judgment Act is procedural and does not create an independent legal claim. Because the plaintiffs had not stated a valid claim under New York’s direct-action statute, they could not use a request for a declaration to bypass that statute’s requirements.

Disposition

The court granted Ironshore’s September 2, 2020 motion to dismiss. It directed the Clerk of Court to enter judgment for Ironshore and close the case.