In re CONTINENTAL CAPITAL INVESTMENT SERVICES Inc.
| Decision Date | 30 September 2010 |
| Docket Number | Bankruptcy No. 03-3370.,Adversary No. 09-3322. |
| Citation | 439 B.R. 111 |
| Parties | In re CONTINENTAL CAPITAL INVESTMENT SERVICES, INC. and Continental Capital Securities, Inc., Debtors. Thomas S. Zaremba, Trustee, Plaintiff, v. Federal Insurance Company, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Ohio |
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Laurie Avery, Toledo, OH, Thomas V. Gebler, Jr., Margolis Edelstein, Pittsburgh, PA, Michelle J. Sheehan, Reminger & Reminger Co., L.P.A., Cleveland, OH, for Defendant.
John P. Donahue, Perrysburg, OH, Patricia B. Fugee, Toledo, OH, for Plaintiff.
This adversary proceeding is before the court on Plaintiff's Motion to Dismiss Counterclaim [Doc. # 34], Defendant's opposition [Doc. # 36], Plaintiff's reply [Doc. # 38], and Defendant's sur-reply [Doc. # 42]. This action was commenced in connection with an underlying broker-dealer liquidation proceeding brought against Continental Capital Investment Services, Inc. (“CCIS”), and Continental Capital Securities, Inc.(“CCS”), (collectively, “Debtors”). Plaintiff is the liquidation trustee appointed under the Securities Investor Protection Act, 15 U.S.C. § 78aaa, et seq. (“SIPA”). In his complaint, Plaintiff asserts claims for turnover of amounts allegedly owed by Defendant Federal Insurance Company (“Federal”) under a Financial Institution Bond (“Bond”) issued to CCIS in 2002, for breach of contract for failure to timely process and pay claims due under the Bond and to indemnify Plaintiff for certain defense costs, and for breach of Federal's duty of good faith and fair dealing to its insured. In addition to denying any liability as alleged by Plaintiff and asserting numerous affirmative defenses in its Answer, Federal asserts a counterclaim against Plaintiff. The counterclaim seeks “to reverse” a payment made under a Partial Payment Agreement entered into with Plaintiff and demands a money judgment in the amount of $758,700. The parties characterize the counterclaim as seeking rescission of the Partial Payment Agreement.
The following factual allegations are set forth in the Answer and counterclaim. 1 On August 25, 2003, the Securities Investor Protection Corporation (“SIPC”) filed a complaint and application against Debtors in the United States District Court for the Northern District of Ohio. SIPC sought the issuance of a protective decree (“Protective Decree”) adjudicating that the customers of Debtors were in need of protection under SIPA. On September 29, 2003, the District Court entered its order commencing the liquidation proceeding of Debtors, appointing Plaintiff as Trustee and referring the liquidation proceeding to the bankruptcy court. On November 20, 2003, in accordance with SIPA, this court entered an order that required customers who suffered losses to submit their claims to the Trustee (“Customer Claims”). [Doc. # 1, ¶¶ 1 & 2; Doc. # 17, Answer, ¶¶ 1 & 2].
On December 3, 2002, in exchange for the payment of applicable premiums, Federal issued to CCIS a Bond with effective dates of January 1, 2003, to January 1, 2004. The Bond provides certain coverage for loss discovered by the insured during the Bond period, including coverage for loss resulting directly from dishonest or fraudulent acts committed by an employee, subject to the terms, conditions and exclusions contained in the Bond. [Doc. # 17, Answer, ¶¶ 16-18]. The Bond defines “Employee” to mean, inter alia, “a natural person in the service of the Insured, at any of the Insured's offices or premises covered hereunder whom the Insured compensates directly by salary or commissions and whom the Insured has the right to direct and control while performing services for the Insured.” [Id. at ¶ 46].
Following entry of the Protective Decree, the United States of America secured an indictment against William C. Davis, which included charges of theft from the accounts of Debtors' customers and carrying out a Ponzi scheme involving Debtors. [ Id. at ¶ 12]. Judgment was entered against Davis after his plea of guilty as to multiple counts of the indictment. [ Id. at ¶ 13]. Plaintiff has allowed and paid certain Customer Claims that he alleges are the result of Davis's dishonest or fraudulent acts. [ Id. at ¶¶ 15; Doc. # 1, Complaint, ¶ 21].
Plaintiff submitted a Proof of Loss to Federal and has submitted various Customer Claims to Federal for indemnification under the Bond. [Answer ¶¶ 22 & 23]. The Proof of Loss submitted to Federal states that Plaintiff “believes that the losses described are the direct result of dishonesty and fraudulent acts of CCIS employee(s) including, but not limited to, Davis.” [ Id. at ¶ 77]. In response, Federal conducted an investigation of the claim. The investigation included requests for various documents related to the claimed loss from Plaintiff, including any and all information and documents that supported payment of claims pursuant to SIPA and that supported the claim that Davis was formerly an “Employee” of CCIS as that term is defined by the Bond. [ Id. at ¶¶ 74-76]
In reliance upon the representations made by CCIS and its representatives that Davis was, at all relevant times, an employee of CCIS and upon the documents provided, Federal entered into a Partial Payment Agreement (“Partial Payment Agreement” or “Agreement”) pursuant to which it accepted certain Customer Claims as covered losses under the Bond and paid $758,700 to Plaintiff. [ Id. at ¶¶ 78-80]. The Agreement provides in relevant part as follows:
1. Federal shall pay the Trustee Seven Hundred Fifty-eight Thousand Seven Hundred Dollars ($758,700.00) (“Partial Payment”) which sum constitutes the Covered Customer Claims less the deductible and the Trustee agrees to a reduction in Federal's Aggregate Limit of Liability by the amount of the Partial Payment to One Million Two Hundred Forty-one Thousand Three Hundred Dollars ($1,241,300.00).
2. Other than the reduction in the Aggregate Limit of Liability specified above, the Parties agree that the Partial Payment shall not in any way affect any of the Parties' rights, remedies, claims or defenses under the Bond, including, but not limited to, Not-Covered Losses, any Future Claim Submissions, and the applicability of any deductible.
[Doc. # 1, Complaint, ¶ 25 & attached Ex. H, p. 4; Doc. # 17, Answer, ¶¶ 25, 79].
After execution of the Agreement, Plaintiff provided information to Federal that establishes the status of Davis as an independent contractor with CCIS rather than an employee. [Answer, ¶ 81]. Because Davis was not an employee of CCIS, there is no coverage under the Bond for any of the claimed loss since it was not “resulting directly from dishonest or fraudulent acts committed by an Employee.” [ Id. at ¶ 82]. The payment by Defendant pursuant to the Agreement was made pursuant to a mutual mistake of fact or a misrepresentation of material facts.
Plaintiff brings his motion under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted. Federal Rule of Civil Procedure 8(a)(2) provides that a claim for relief must contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” In deciding a Rule 12(b)(6) motion to dismiss, “the court must construe the complaint in the light most favorable to the plaintiff, accept all factual allegations as true, and determine whether the complaint ‘contains enough facts to state a claim to relief that is plausible on its face.’ ” United States v. Ford Motor Co., 532 F.3d 496, 502 (6th Cir.2008) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1974, 167 L.Ed.2d 929 (2007)). While Rule 8(a)(2) does not require a complaint to set out detailed factual allegations, “conclusory allegations or legal conclusions masquerading as factual allegations will not suffice.” Bishop v. Lucent Technologies, Inc., 520 F.3d 516, 519 (6th Cir.2008). Rather, “to survive a motion to dismiss, the complaint must contain either direct or inferential allegations respecting all material elements to sustain a recovery under some viable legal theory.” Id.
The United States Supreme Court recently explained the “plausibility” standard first set forth in Twombly:
A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a “probability requirement,” but it asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are “merely consistent with” a defendant's liability, it “stops short of the line between possibility and plausibility of ‘entitlement to relief.’ ”
....
Determining whether a complaint states a plausible claim for relief will ... be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense. But where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but it has not “show[n]”-“that the pleader is entitled to relief.”
Ashcroft v. Iqbal, --- U.S. ----, 129 S.Ct. 1937, 1949-50, 173 L.Ed.2d 868 (2009).
As discussed more fully below, Plaintiff's motion is based, in part, on a number of affirmative defenses to the counterclaim. While a complaint or a counterclaim does not fail to state a claim simply because some defense is potentially available, dismissal under Rule 12(b)(6) is appropriate where “the facts establishing the defense are definitively ascertainable from the complaint [or counterclaim] and the other allowable sources of information.” Nisselson v. Lernout, 469 F.3d 143, 150 (1st Cir.2006); see New England Health Care Employees Pension...
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