Chaney v. Dreyfus Service Corp.

• Decision Date: 25 January 2010
• Docket Number: No. 08-60555.,08-60555.
• Citation: 595 F.3d 219
• Parties: Mike CHANEY, Commissioner of Insurance for the State of Mississippi, in His Official Capacity as Receiver of Franklin Protective Life Ins. Company, Family Guaranty Life Ins. Company and First National Life Ins. Company of America; Leslie A. Newman, Commissioner of Commerce and Insurance for the State of TN, in her official capacity as Receiver of Franklin American Life Ins. Company; Kim Holland, Insurance Commissioner for the State of Oklahoma, in her official capacity as Receiver of Farmers and Ranchers Life Insurance Company in Liquidation; Julie Benafield Bowman, Insurance Commissioner for the State of Arkansas, in her official capacity as Receiver of Old Southwest Life Insurance Company; Linda Bohrer, Acting Director of the Department of Insurance, Financial Institutions and Professional Registration for the State of Missouri, in her official capacity as Receiver of International Financial Services Life Insurance Company, Plaintiffs-Appellants, v. DREYFUS SERVICE CORP., Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

595 F.3d 219

Mike CHANEY, Commissioner of Insurance for the State of Mississippi, in His Official Capacity as Receiver of Franklin Protective Life Ins. Company, Family Guaranty Life Ins. Company and First National Life Ins. Company of America; Leslie A. Newman, Commissioner of Commerce and Insurance for the State of TN, in her official capacity as Receiver of Franklin American Life Ins. Company; Kim Holland, Insurance Commissioner for the State of Oklahoma, in her official capacity as Receiver of Farmers and Ranchers Life Insurance Company in Liquidation; Julie Benafield Bowman, Insurance Commissioner for the State of Arkansas, in her official capacity as Receiver of Old Southwest Life Insurance Company; Linda Bohrer, Acting Director of the Department of Insurance, Financial Institutions and Professional Registration for the State of Missouri, in her official capacity as Receiver of International Financial Services Life Insurance Company, Plaintiffs-Appellants, v. DREYFUS SERVICE CORP., Defendant-Appellee.

No. 08-60555.

United States Court of Appeals, Fifth Circuit.

January 25, 2010.

Alan Francis Curley (argued); C. Philip Curley, Robinson, Curley & Clayton, P.C., Chicago, IL, for Chaney and Bowman.

Janet G. Arnold, Charles G. Copeland, Copeland, Cook, Taylor & Bush, P.A., Ridgeland, MS, for Chaney and Holland.

Andrew Bolter Campbell, William W. Gibson, Wyatt, Tarrant & Combs, LLP, Nashville, TN, Thomas C. Gerity, Wyatt, Tarrant & Combs, L.L.P., Jackson, MS, for Newman.

Susan B. Loving, Lester, Loving & Davies, Edmond, OK, for Holland.

Steve A. Uhrynowycz, Arkansas Ins. Dept. Liquidation Div., Little Rock, AR, for Bowman.

Douglas J. Schmidt, Husch, Blackwell, Sanders, L.L.P., Kansas City, MO, for Bohrer.

Paul H. Stephenson, III (argued), William F. Goodman, Jr., William Frederick Ray, James Grant Sellers, Watkins & Eager, P.L.L.C., Jackson, MS, for Dreyfus Serv. Corp.

Appeal from the United States District Court for the Southern District of Mississippi.

Before JOLLY, DeMOSS and PRADO, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

I

Plaintiffs, receivers of seven insurance companies (the "Receivers"), appeal the grant of summary judgment in favor of Dreyfus Service Corporation ("DSC"). Throughout the 1990s the insurance companies' assets were looted through a complex fraud scheme perpetrated by the now infamous felon, Martin Frankel. In the underlying suit, the Receivers sought to impose tort and civil RICO liability on DSC, the investment company through which Frankel funneled the insurance companies' funds before moving them to his Swiss bank account. Had DSC properly discharged its duties, the plaintiffs argued, it would have uncovered Frankel's scheme and their losses would have been averted. They also alleged that by deliberately turning a blind eye to Frankel's obviously suspicious activities DSC effectively joined Frankel's conspiracy, thus becoming liable for treble damages under the civil recovery provisions of the Racketeer Influenced and Corrupt Organizations Act ("RICO").

The district court, after thoroughly reviewing New York and federal law, granted summary judgment in favor of DSC on each claim. As to the state tort claims, the court concluded that no duty ran to the insurance companies for eight of the accounts, and that the Receivers could not demonstrate causation for the remaining five. As to the federal RICO claim, the court concluded that a reasonable juror could not find that anyone at DSC was deliberately indifferent to Frankel's money laundering activities.

We agree with the district court except for one aspect: New York law does impose on DSC a duty—in this case running only to the named subaccounts—to ensure that the transactions it processes on behalf of its customers are authorized. We believe the Receivers have raised fact questions sufficient to survive summary judgment as to whether this duty was properly discharged by DSC's reliance on the insurance companies' actions and Frankel's representations, and whether a breach of this duty caused the insurance companies' losses. The district court was correct, however, in concluding that the Receivers have not stated a viable theory of recovery in tort as to the remaining accounts held in the name of LNS. There is no evidence that DSC knew or ought to have known that the funds it processed on behalf of LNS were, in fact, fiduciary. The district court was also correct in finding the plaintiffs' RICO allegations are without merit, as there is no evidence that anyone at DSC knew or purposely contrived to avoid knowing that Frankel was engaged in money laundering.

We therefore affirm the judgment of the district court as to the tort claims against the LNS accounts and the RICO claims. We vacate the district court's judgment as to the tort claims against the named subaccounts and remand for further proceedings.

II

From 1989 to 1991, Frankel fraudulently solicited $11 million for investment in a venture he called Creative Partners. He quickly dissipated $5 million of those funds for his personal use. In order replenish the funds so as to avoid detection, Frankel began searching for a bank to purchase and loot, engaging John Jordan, a Tennessee lawyer, and John Hackney, a Tennessee businessman. When that proved unsuccessful, the parties contrived a scheme to purchase and loot insurance companies. They recruited, among others, accountant Gary Atnip to assist in the plan.

Before acquiring his first insurance company, Frankel anonymously purchased a registered broker-dealer firm called Liberty National Securities, Inc. ("LNS"). Because the SEC had imposed a lifetime ban on Frankel for prior fraudulent activities, Frankel enlisted yet another co-conspirator to act as the figurehead of LNS and required him to keep the company registered and in good standing with the SEC and NASD. With LNS in place, Frankel moved to acquire his first insurance company, purchasing Franklin American Corporation ("FAC"), parent company of the Franklin American Life Insurance Company ("FAL"). Frankel then positioned his co-conspirators in key management positions. Hankney was made the president, chief executive officer, and chairman of the board of directors of both FAC and FAL; Atnip became both companies' chief financial officer; and Jordan served as both companies' counsel. Each understood the purpose of the purchase was to loot FAL; each was paid well for his continuing participation. With the companies' management in on the scheme, all Frankel had to do was have Hackney liquidate the company's existing portfolio, put LNS in charge of investing the company's liquid assets, and transfer the money to his personal account while LNS fabricated monthly statements reflecting holdings in U.S. Treasury bonds. Within a year, Frankel caused, through the series of transfers discussed below, nearly $25 million of FAL's assets to be liquidated and sent to a Swiss account under his control. All the while Frankel's cohorts led FAL's employees and customers and state insurance regulators to believe that FAL's assets were being invested in U.S. Treasury securities through LNS.

Frankel, however, did not stop there. In 1993, Frankel routed the proceeds from looting FAL back through FAC, causing FAC to purchase a second insurance company: Family Guaranty Life (FGL). Frankel's co-conspirators were again placed in key management positions, LNS began "managing" FGL's assets, and Frankel started liquidating and siphoning off assets into his Swiss account. This same pattern was repeated five more times. In 1994 and 1995, Frankel had FAC purchase Farmers and Ranchers Life Insurance Company (FRL), International Financial Services Life Insurance Company (IFS), and Protective Services Life Insurance Company, which was renamed Franklin Protective Life Insurance Company (FPL). In 1998, a Frankel-created holding company, International Financial Corporation (IFC), purchased First National Life Insurance Company of America (FNL). In 1999, FAL purchased Old Southwest Life Insurance Company (OSL).

Dreyfus Service Corporation (DSC), a registered broker-dealer and the provider of shareholder services for the Dreyfus family of mutual funds, became an instrument of the scheme—unknowingly—in 1994 as part of the process by which Frankel transferred funds from the insurance companies to his personal account in Switzerland. Shortly after purchasing FGL, Frankel, using the alias Eric Stevens, opened two accounts with DSC. The first, a retail money market account, was opened by Frankel on behalf of LNS, Inc.—an alias for Liberty National Securities, Inc.—upon completion of a written application. This allowed Frankel to trade in various Dreyfus mutual funds with LNS, Inc. as the registered shareholder. Frankel funded this initial account with $1.1 million from FGL's Tennessee bank accounts. One day later, he redeemed all but $15 and had the proceeds wired to a New York bank and ultimately to his Swiss bank account. This pattern of large purchases from the insurance companies' bank accounts and rapid redemptions to Frankel's personal accounts abroad would continue throughout Frankel's relationship with DSC.

A few months later, Frankel closed his retail account and opened his second account, a "master account," also in the name of LNS, Inc. but this time in DSC's institutional cash management fund. Through this master account, Frankel was permitted to open subsidiary subaccounts in which shares were registered either in the name of LNS, Inc. or in a name other than that of the master account holder. Between October 1994 and May 1999 Frankel opened twelve such subaccounts. Five bore the name of LNS, Inc. Two designated "International Financial Corporation" as the registered shareholder, using its taxpayer identification number and address. The remaining five were opened using the initials, taxpayer identification numbers, and addresses of the insurance companies.¹ Shares purchased in...