That Defendant's Claims Against Third Party Claims Arise From Same Factual Circumstances as Complaint Insufficient Basis for a Third-Party Claim if the Third Party is not Alleged to be Liable for Plaintiff’s Claim Against Defendant

On April 5, 2021, Justice Cohen of the New York County Commercial Division issued a decision in J.G. Jewelry PTE. LTD. v. TJC Jewelry, Inc., 2021 NY Slip Op. 31095(U), holding that just because a defendant's claims arise out of the same factual circumstances as the complaint is an insufficient basis for a third-party claim if the third party is not alleged to be liable for plaintiff’s claim against that defendant, explaining:

The Third-Party Complaints fail to meet the requirements for impleader under CPLR 1007. The statute provides that after the service of his answer, a defendant may proceed against a person not a party who is or may be liable to that defendant for all or part of the plaintiff’s claim against that defendant. To implead a party under CPLR 1007, the liability sought to be imposed upon a third-party defendant must arise from or be conditioned upon the liability asserted against the third-party plaintiff in the main action. In Fid. Nat. Tit. Ins. Co. v Altshuler Shaham Provident Funds Ltd., 120 AD3d 1135 [1st Dept 2014], for example, an insurance company sued a policyholder seeking a declaratory judgment that it had properly denied coverage. The policyholder, in turn, filed a third-party complaint against his lawyer, alleging (among other things) that the lawyer had committed legal malpractice. The First Department held that the amended third-party complaint should have been dismissed because the insurance company plaintiff did not make a claim against the defendant for which the third-party defendant is or may be liable.

The cases applying this impleader rule are legion. Despite the liberal pleading rules applicable to third-party complaints, there is no view of the facts upon which the third-party defendants could be liable to Plaintiffs on their claim for conversion against defendants.

Here, Defendants provide no basis for the Third-Party Complaints against the Kriss Brothers. Specifically, Defendants fail to allege that the Kriss Brothers are or may be liable to Defendants for all or part of the plaintiff’s claim against Defendants. Plaintiffs, in the main action, allege (among other things) that the SRK Entities used JGJ as a vehicle to steal tens of millions of dollars from the JDM Entities. In the Third-Party Complaints, meanwhile, Defendants allege that the Kriss Brothers diverted and transferred jewelry and funds in order to defraud Defendants. Indisputably, Defendants’ claims about the Kriss Brothers relate to the same facts underlying the main action. The Kriss Brothers are not, however, proper third-party defendants under CPLR 1007 because there is no view of the facts upon which the third-party defendants could be liable to Plaintiffs.

To be sure, some of the claims in the Third-Party Complaints, pleaded in the alternative should the Court find the existence of a JGJ joint venture, allege that the Kriss Brothers violated duties in connection with Plaintiff JGJ. But these claims are premised on the Kriss Brothers’ alleged breach of fiduciary duties owed to, and damages incurred by, the SRK Entities, not Plaintiff JGJ. And while the Kriss Brothers’ alleged misconduct may ultimately factor into the accounting of JGJ’s profits and losses, those claims still fail to identify any actions on the plaintiff’s part which could give rise to liability for which the third-party defendant could be held accountable. Moreover, Defendants seek damages for their own alleged losses, which are not dependent on their potential liability to Plaintiffs. Therefore, the Third-Party Complaints are improper.

Defendants’ insistence that the Third-Party Complaints are permissible because they arise from the identical facts and circumstances at issue in the main action is unavailing. The fact that Defendants’ claims arise out of the same factual circumstances is insufficient to satisfy the requirements of CPLR 1007, which permits third-party pleadings only against a person not a party who is or may be liable to that defendant for all or part of the plaintiff’s claim against that defendant. Defendants’ apparent view – that a related party may be impleaded even if it is liable for none of the plaintiff’s claim against the defendant in the main action – flatly contradicts the statute.

And contrary to Defendants’ selective reading of the case law, courts have not expanded the scope of CPLR 1007 to sweep in related claims regardless of the third-party defendant’s connection to the liability sought to be imposed in the main action. To be sure, courts have liberalized the claims that may be brought in a third-party action; they have not disturbed, however, the limits CPLR 1007 places on the parties against whom such claims may be brought. The Court of Appeals’ decision in George Cohen Agency, Inc. v Donald S. Perlman Agency, Inc., 51 NY2d 358 [1980] illustrates the difference. In that case, the plaintiff (Cohen) sold a portfolio of insurance business to the defendants (Perlman, to simplify things) in exchange for promissory notes. When Perlman defaulted under the notes, Cohen sued. Perlman, in turn, sought to implead two non-parties (including an insurer, Continental) for their role in knowingly inducing Perlman to purchase the worthless package of insurance business. Perlman’s claims against Continental included indemnity and contribution, but were more broadly grounded upon the third-party defendants’ alleged complicity in a conspiracy to defraud Perlman.

Continental moved to dismiss Perlman’s third-party action on the grounds (1) that CPLR 1007 does not permit a third-party plaintiff to demand damages in excess of those demanded in the main action; (2) that no third-party action is maintainable where the third-party plaintiff alleges facts which negate liability on the main action; and (3) that recognition of a third-party action would in the circumstances of this case, prejudice Continental by impeding its ability to remove the case to Federal court. None of these issues, it must be noted, are present here.

The Court in Cohen permitted the impleader. In doing so, it noted that the language of CPLR 1007 serves only to identify the persons against whom a third-party claim may be brought, but places no limit upon the amount which may be recovered or upon the legal theories which may be asserted as a basis for the claim. So long as the third-party defendant falls within the ambit of CPLR 1007, the third-party plaintiff may then assert claims against it in excess of – and even contradictory to – the main plaintiff’s claims against the defendant. Having successfully brought the new third-party defendant into the lawsuit, in other words, the third-party plaintiff is free to bring in additional claims. But Cohen’s approving nod to the modern spirit of liberal pleading did not erase the basic requirements of CPLR 1007. In fact, the Court’s decision reaffirmed the conditional nature of third-party liability, holding inasmuch as Perlman claims that Continental is responsible in part for any potential liability to Cohen, Perlman may implead Continental, making the insurer a party to the suit. Because Defendants’ fail to make a similar showing here, Defendants’ reliance on Cohen is misplaced.

The other cases on which Defendants rely are similarly unavailing. In JP Morgan Chase Bank, N.A. v Strands Hair Studio, LLC, 84 AD3d 1173 [2d Dept 2011], for instance, Defendants latch on to the court’s finding that the third-party complaint may be based on a theory of liability different from and independent of the cause of action pleaded against the primary defendant. That is true, as far as it goes. Again, CPLR 1007 does not limit the causes of action that may be brought against a third-party defendant. But the third-party defendant first must be successfully brought into the lawsuit (to use Cohen’s words), and that can only happen under CPLR 1007 if the liability sought to be imposed arises from or is conditioned upon the liability asserted against the third-party plaintiff in the main action. Indeed, the trial court in JP Morgan cited that exact language in permitting the third party complaint to stand. And in Gross v DeMeglio, 143 AD2d 609 [1st Dept 1988], another case Defendants cite, the third party plaintiff’s claim sounded in indemnity, even if the particulars went beyond the theory of liability underlying the main action.

In sum, the Third Party Complaints fail to satisfy CPLR 1007. The Court takes no position as to the merits of Defendants’ assertions against the Kriss Brothers, or as to whether they may be able to pursue their claims by seeking leave to amend their existing counterclaims, subject to the requirements of CPLR 3019.

(Internal quotations and citations omitted) emphasis added).

This decision is about a defendant bringing claims against a third-party. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure how to enforce rights you believe you have against another party when you are a defendant in a lawsuit.