Connors v. Lexington Ins. Co.

• Decision Date: 12 August 1987
• Docket Number: No. CV 85-1381.,CV 85-1381.
• Citation: 666 F. Supp. 434
• Parties: Cornelius CONNORS, Individually and as representative of a Class of persons similarly situated, Plaintiff, v. LEXINGTON INSURANCE COMPANY, Southeastern Risk Specialists, Inc., J.F. Gassie, Emery-Richardson, Inc., and Robert D. Putvin, Defendants.
• Court: U.S. District Court — Eastern District of New York

666 F. Supp. 434

Cornelius CONNORS, Individually and as representative of a Class of persons similarly situated, Plaintiff, v. LEXINGTON INSURANCE COMPANY, Southeastern Risk Specialists, Inc., J.F. Gassie, Emery-Richardson, Inc., and Robert D. Putvin, Defendants.

No. CV 85-1381.

United States District Court, E.D. New York.

August 12, 1987.

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Lawrence Milberg, Milberg, Weiss, Bershad, Specthrie & Lerach, New York City, for plaintiff.

Darrell K. Fennell, Fennell & Minkoff, New York City, for defendants Lexington Ins. Co. and Southeastern Risk Specialists, Inc.

David A. Boyar, D'Amato & Lynch, New York City, for defendants, Emery-Richardson, Inc., J.F. Gassie and Robert D. Putvin.

MEMORANDUM AND ORDER

GLASSER, District Judge:

Plaintiff Cornelius Connors commenced this action on April 12, 1985 on behalf of himself and all others similarly situated against defendants Lexington Insurance Company, Emery-Richardson, Inc., J.F. Gassie, and Robert D. Putvin, alleging violations of section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder (Count One), common law fraud and deceit (Count Two), and violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968 (Count Three). On July 15, 1985, plaintiff filed an amended class action complaint. On May 23, 1986, the parties consented to the filing of a second amended complaint adding Southeastern Risk Specialists, Inc. as an additional defendant.¹

Currently before the Court are defendants' motion to dismiss pursuant to rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure,² plaintiff's motion for class certification pursuant to rule 23(c)(1) of the Federal Rules of Civil Procedure, and plaintiff's motion for a change of venue to the Southern District of Florida pursuant to 28 U.S.C. § 1404(a). For the reasons set forth below, defendants' motions to dismiss are denied and plaintiff's motion for a change of venue is granted. In view of the pending class certification motion in an action virtually identical to this one in the Southern District of Florida, this Court will not reach plaintiff Connors' class certification motion but will instead leave it to the consideration of the transferee court in the expectation that the two actions will be consolidated.

I. BACKGROUND

Plaintiff's allegations, which the Court must accept as true on a motion to dismiss, are essentially as follows: plaintiff is a member of a purported class of thousands of persons who participated in a "Buy Back, Redelivery, Rebate Program" (the "Program") sponsored by International Gold Bullion Exchange ("IGBE"), a company that engaged in, and advertised itself extensively in prominent newspapers as having expertise in, the business of marketing gold and silver ("precious metals"). Under this Program, which was developed in August 1982, customers such as plaintiff sent to IGBE either the purchase price of precious metals, which IGBE then used to buy precious metals on the market for each customer's account, or precious metals already owned by the customer. In either case, IGBE promised to store the metals, in specie and unencumbered, in its safe deposit vault; to provide insurance from Lexington Insurance Company ("Lexington") "guaranteeing and insuring the safety" of the customer's precious metals; to pay to each customer 1½% of the value of his or her metal each month for at least three months; and to continue these payments as long as the customer desired or, at the end of the three-month period or thirty days' notice thereafter, to deliver the metals to the customer.

Sometime in 1982, IGBE entered into a contract of insurance with Lexington, assertedly "to create the impression that it was complying with its obligations" under the Program as described to the public. Complaint ¶ 20. This insurance was placed through Emery-Richardson ("Emery"), a Florida insurance consultant and agency that allegedly acted as Lexington's duly authorized agent in the transactions at issue. Emery, in turn, approached Southeastern Risk Specialists, Inc. ("Southeastern") to obtain the requested insurance coverage from Lexington for IGBE. Southeastern, which has its principal place of business in Georgia and is an intermediary broker engaged in the business of obtaining insurance required by its clients, also allegedly acted as Lexington's duly authorized agent in these transactions. The insurance obtained from Lexington was to be "administered and supervised" by Emery and Emery was assigned to be a liaison with IGBE on behalf of Lexington and Southeastern.

The contract of insurance was allegedly entered into to enable IGBE to issue a Depository Vault Receipt to each Program participant representing that the participant's specific precious metals would be maintained under the care, custody, and control of IGBE in its vault and would be insured by Lexington. Acting as Lexington's duly authorized agent and at the behest of IGBE, Emery provided to IGBE Certificates of Insurance that corresponded to each Depository Vault Receipt. Each Certificate of Insurance was signed by the president of Emery, J.F. Gassie, or by another duly authorized officer of Emery. The certificates were reviewed and approved by Southeastern, acting as Lexington's duly authorized agent.

Relying on defendants' misrepresentations and in ignorance of the fact that the underlying insurance policy specifically excluded insurance coverage for theft, conversion, or other dishonest acts by IGBE or its principals, plaintiff purchased from and/or entrusted to IBGE precious metals in August and December 1982. After sending the metal or purchase price, plaintiff received from IGBE a confirming invoice, a Certificate of Ownership signed by IGBE, a Depository Vault Receipt, and a Certificate of Insurance signed by Gassie on behalf of Emery.

IGBE, however, did not use the moneys mailed to it by plaintiff or other class members to purchase precious metals for them and did not safely store the precious metals in its vault; instead, IGBE converted approximately $80,000,000 in funds and precious metals entrusted to it by the over 20,000 Program participants. IGBE, which had insufficient capital to carry out the program, is now insolvent and bankrupt. Lexington has repudiated and disclaimed the insurance coverage, asserting that the exclusion clause bars any right of plaintiff and class members to recover under the policy.

II. MOTIONS TO DISMISS

Defendants move to dismiss pursuant to rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. With respect to Count One, defendants assert that the complaint suffers from the following defects: the Program as described does not constitute or involve a security within the meaning of the federal securities laws; plaintiff has failed to allege the element of "in connection with" as required by section 10(b) and rule 10b-5; plaintiff has failed to establish loss causation and transaction causation; plaintiff has failed to establish a basis for the imposition of liability against defendants as aiders and abettors; plaintiff has failed to allege securities fraud with the requisite particularity; and defendants Lexington and Southeastern assert that plaintiff has failed to allege a basis for the imposition of liability against them under the doctrine of respondeat superior. With respect to Count Two, Lexington and Southeastern assert that the complaint is defective in failing to allege the law upon which plaintiff is relying and all defendants assert that plaintiff has failed to allege fraud with the requisite particularity. With respect to Count Three, defendants assert that the complaint does not state a claim because: defendants cannot be both the "enterprise" and the "person" within the meaning of RICO; plaintiff has failed to establish two acts of racketeering activity; and plaintiff has failed to establish that defendants committed two acts of racketeering activity.

Bearing in mind that on a motion to dismiss, plaintiff's complaint must be read with "great generosity," Yoder v. Orthomolecular Nutrition Institute, Inc., 751 F.2d 555, 558 (2d Cir.1985) (citing Conley v. Gibson, 355 U.S. 41, 47-48, 78 S.Ct. 99, 102-103, 2 L.Ed.2d 80 (1957)), and that the Court must accept as true the material allegations in the complaint and construe them in the light most favorable to the plaintiff, and that the complaint may not be dismissed "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief," Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957); accord Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984), the Court concludes that defendants' motions to dismiss must be denied for the reasons set forth below.

III. THE SECURITIES COUNT

Plaintiff asserts that defendants violated section 10(b) and rule 10b-5. Specifically, plaintiff asserts that the Certificates of Insurance provided by defendants to IGBE for mailing to plaintiff and the class were misleading in that they omitted the material fact that the underlying insurance policies provided no insurance coverage for the purpose for which they were issued, to assure the safety of the customers' precious metals. The Certificates did not include a specific reference to the exclusion and did not have a copy of the underlying policy attached to them. The purpose of the insurance policy and the promise of insurance coverage was to persuade purchasers to believe that their investments were safe. Defendants were aware of IGBE's scheme and knew that the representations regarding insurance and the mailing of the Certificates of Insurance were integral to IGBE's ability to extract millions of dollars from Program participants. Defendants also knew that Program...