REPORT ON OCA ADVISORY COMMITTEE PROPOSAL PERMITTING PLAINTIFF TO OBTAIN AN INDIRECT RECOVERY AGAINST A THIRD PARTY WHEN THE THIRD PARTY PLAINTIFF IS INSOLVENT (NEW CPLR 1405)

    This proposal would enact a new CPLR 1405¹ to address the limited circumstance in which a plaintiff in a tort action has recovered a judgment against a defendant, the defendant has recovered a third-party judgment against a third-party defendant in contribution or indemnity and the judgment against defendant and third-party plaintiff is unenforceable because of intervening insolvency or other financial disability.

    Under current law, as determined by the Court of Appeals, the defendant and third-party judgment creditor can recover on the third-party judgment only if it has already paid the judgment to plaintiff. Klinger v. Dudley, 41 N.Y.2d 362, 393 N.Y.S.2d 323 (1977). However, the Court of Appeals has permitted a loan to the third-party plaintiff for the sole purpose of paying the third-party judgment, thereby permitting the third-party judgment to be enforced against the third-party defendant, Feldman v. N.Y.C. Health and Hospitals Corp., 56 N.Y.2d 1011, 453 N.Y.S.2d 683 (1982).

    In 1998, the Court of Appeals held that this loan mechanism could not be used if the third-party defendant was an employer, Reich v. Manhattan Boiler & Equipment Corp., 91 N.Y. 2d ?72 676 N.Y.S.2d 1998).

    The Worker's Compensation Law limits an employee's claim for workplace injuries against an employer complying with the law to scheduled benefits available on a no-fault basis. For many years the only exception to this exclusive remedy has been that provided by the Court of Appeals in Dole v. Dow-chemical Co., 30 N.Y.2d 143, 331 N.Y.S.2d 382 (1972), in which it permitted a non-employer defendant to implead the plaintiff's employer as a third-party defendant.

    In Reich, the Court of Appeals held that permitting use of the Feldman loan mechanism where the plaintiff and third-party defendant had an employer-employee relationship would be an impermissible extension of the limited exception created by Dole v. Dow.

    The consequence of Reich is that the chance intervention of the insolvency of the defendant and third-party plaintiff in a Dole v. Dow situation can relieve the employer of a liability that has already been determined and deny any recovery to the employee-plaintiff.

    Prior to 1996, the liability of the employer in the Dole v. Dow situation was entirely a creation of the courts. However cramped the result might be, it might at least be said that the Court of Appeals was the appropriate body to determine the reach of its judicially created exception to what many might have regarded as the clear public policy embodied in the Worker's Compensation Law of no employer liability.

    This changed with the enactment of the Omnibus Worker’s Compensation Reform Act in 1996 in which the legislature explicitly approved the right of contribution from an employer, although with the significant qualification that it would be available only in the case of "grave injury."

    The 1996 Act thus made a major change in the judicially created Dole v. Dow landscape: It is now unquestionably the public policy of the state that employers can be held liable for the grave injuries of their employees, at least when impleaded by a defendant lacking the worker's compensation defense. The legislature having explicitly authorized recovery against the employer in this circumstance, the result in Reach seems clearly out of step with the declared policy of the state. While the judgment in the Reich case was obtained prior to the 1996 legislation, the decision contains no reason to expect any different result in an action for injuries occurring subsequent to the 1996 legislation.

    On a broader front, there is no reason to limit recovery by a plaintiff in a tort case against a third- party defendant after insolvency of the third-party plaintiff to those with the resources to mount a Feldman loan scheme. Once it has been judicially determined that the third-party defendant is liable for some part of plaintiffs' damages, no useful purpose is served by permitting that third party defendant to benefit in any way from the insolvency of the third-party judgment creditor.

    The proposal does not create any new cause of action or permit a plaintiff to join as defendants parties against which he or she would previously have been precluded. It will have practical consequences only when plaintiff has obtained a judgment against a defendant and the defendant has obtained a third-party judgment against a third-party defendant which it impleaded under existing law. If the defendant becomes insolvent and unable to conduct the action before entry of judgment against the third-party defendant, the proposal will not permit plaintiff to take any action to obtain such a judgment.

    The proposal is appropriately limited to tort cases, so that any impact on contractual claims and their possibly unintended consequences are avoided. However, this limitation is contained only in the title of the new CAR 1405 and not in the text of the statute itself. To avoid any uncertainty, this limitation should be contained in the body of the new section. This Committee suggests amending the first sentence of the proposed text to read "In action for personal injuries, damage to property or wrongful death, Eeither as judgment creditor or a judgment debtor...."

    The proposal reinforces the declared policy of the state and will prevent denial of a recovery to injured plaintiffs and exoneration of third-party judgment debtors resulting solely from the insolvency of defendant. For these reasons, this Committee endorses the proposal if it is amended as suggested above.