Lewis Liman at a 2016 Federal Bar Council Event in New York City. Photo: Jack McCoy.
A Manhattan federal judge has invalidated a restraining notice that barred an insurer from paying defense costs for a corporate officer who was slapped with a $3.3 million judgment for failing to pay off a 2016 loan.
The ruling found that the notice, served by plaintiff KLS Diversified Master Fund on insurer Liberty Special Markets, could not be used to prevent counsel for defendant Sean McDevitt from being paid for their work on the civil case.
In a 24-page opinion, U.S. District Judge Lewis J. Liman of the Southern District of New York said that McDevitt was covered by a director-and-officer liability policy, which required his insurer to pay defense costs directly to counsel and thus did not constitute a debt that could be attached as a property interest under the New York Civil Practice Law and Rules.
"McDevitt did not elect to assume the defense. He left it to LSM to select counsel to defend against the claim," Liman wrote in a Jan. 25 opinion. "The default under the Policy applies—LSM has both the right and the duty to defend against the claim. Any costs incurred in the defense run directly from LSM to counsel; they do not run through McDevitt."
The ruling came as a win for Meltzer, Lippe, Goldstein & Breitstone, a Mineola firm that served as special counsel to McDevitt since December.
"Judgment creditors serving restraining notices on the insured's D & O carrier as a tactic to prevent defense counsel from being paid and possibly forcing counsel to withdraw will not succeed where the D & O carrier retains the defense counsel and pays defense costs directly to defense counsel," the Meltzer Lippe team said in a statement.
Attorneys from Ballard Spahr, who represent KLS in the litigation, did not immediately provide a comment on Monday afternoon.
In December 2020, Liman found McDevitt, the former CEO and chairman of Florida-based Sensei Inc., liable for reneging on a promise to personally guarantee a loan from KLS to float the struggling firm. The earlier ruling also found "willful or intentional misrepresentations" and failure to disclose litigation that impacted the firm's ability to repay the money.
Last April, Liman entered an order requiring McDevitt to pay $3.3 million in damages, plus $1.1 million attorney's fees and costs.
McDevitt has since appealed to the U.S. Court of Appeals for the Second Circuit, though his defense attorneys from Wood Smith Henning & Berman have claimed to be owed about $200,000 in unpaid legal fees.
The case is captioned KLS v. McDevitt.
Tom McParland
Tom McParland of New York Law Journal can be contacted at [email protected]. Follow him on Twitter @TMcParlandALM.