In re Eurospark Industries, Inc.

• Decision Date: 16 January 2003
• Docket Number: Adversary No. 198-1514-260.,Bankruptcy No. 198-21459-260.,Adversary No. 198-1499-260.
• Citation: 288 B.R. 177
• Parties: In re EUROSPARK INDUSTRIES, INC., Debtor. Eurospark Industries, Inc., Debtor-in-Possession, Plaintiff, v. Massachusetts Bay Insurance Company, Defendant. Eurospark Industries, Inc., Debtor-in-Possession, Plaintiff, v. The Underwriters at Lloyds Subscribing to the Risk on Cover No. 97FA0071010A, Cert. No. 970035200A, and The Underwriters at Lloyds Subscribing to the Risk on Cover No. 97FA0032080, Cert. No. FC10328697, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of New York

288 B.R. 177

In re EUROSPARK INDUSTRIES, INC., Debtor.

Eurospark Industries, Inc., Debtor-in-Possession, Plaintiff, v. Massachusetts Bay Insurance Company, Defendant.

Eurospark Industries, Inc., Debtor-in-Possession, Plaintiff, v. The Underwriters at Lloyds Subscribing to the Risk on Cover No. 97FA0071010A, Cert. No. 970035200A, and The Underwriters at Lloyds Subscribing to the Risk on Cover No. 97FA0032080, Cert. No. FC10328697, Defendants.

Bankruptcy No. 198-21459-260.

Adversary No. 198-1499-260.

Adversary No. 198-1514-260.

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

January 16, 2003.

COPYRIGHT MATERIAL OMITTED

Weg & Myers, P.C., By Joshua L. Mallin, Esq., New York City, Special Counsel for Debtor.

Abrams Gorelick Friedman & Jacobson, By Daniel J. Friedman, Esq., New York City, for Defendants.

DECISION ON PLAINTIFF'S MOTION TO COMPEL AND DEFENDANTS — THE UNDERWRITERS AT LLOYDS' CROSS-MOTION FOR DISMISSAL OF THE THIRD CLAIM FOR RELIEF

CONRAD B. DUBERSTEIN, Chief Judge.

This decision concerns two motions made in the above-captioned consolidated adversary proceedings. The plaintiff, the within debtor, Eurospark Industries, Inc. (hereinafter "Eurospark") made a motion to compel the defendant in adversary proceeding No. 98-1499, Massachusetts Bay Insurance Company (hereinafter "Mass Bay"), and the defendants in adversary proceeding No. 98-1514, the Underwriters at Lloyds Subscribing to the Risk on Cover No. 97FA0071010A, Cert. No. 970035200A and the Underwriters at Lloyds Subscribing to the Risk on Cover No. 97FA0032080, Cert. No. FC10328697 (hereinafter "Lloyds"), to produce certain documents demanded by Eurospark in its Fourth Request for Production of Documents pursuant to Fed.R.Civ.P. 26 and 37. Subsequently, Lloyds made a cross-motion seeking to dismiss the third claim of the Amended Complaint filed in adversary proceeding No. 98-1514 (hereinafter "Amended Complaint") for failure to state a claim upon which relief may be granted, pursuant to Fed.R.Civ.P. 12(b)(6), and for failure to plead fraud with particularity, pursuant to Fed.R.Civ.P. 9(b). For the reasons set forth herein, the motion to compel is denied, and the cross-motion to dismiss is granted.

FACTS

Eurospark filed its petition for relief under chapter 11 of the Bankruptcy Code¹ on August 14, 1998. On March 14, 1998, prior to the filing of the petition, an alleged armed robbery took place at Eurospark's jewelry manufacturing facility. (Compl. ¶ 10 (No. 98-1499); Am. Compl. ¶ 14 (No. 98-1514).) At the time of the robbery, Eurospark maintained insurance policies. Lloyds provided Eurospark with two insurance policies for losses arising from theft. (Am. Compl. ¶¶ 8, 10, 11, 13 (No. 98-1514).) In addition, Mass Bay provided Eurospark with an insurance policy for losses arising from business interruption. (Compl. ¶¶ 7, 8 (No. 98-1499).)

The above-captioned adversary proceedings were commenced by Eurospark within its bankruptcy case to recover damages from Lloyds and Mass Bay for breach of their insurance contracts with Eurospark. Eurospark alleges that it performed all its obligations under the insurance policies, that the policies covered the losses that it incurred as a result of the robbery and that Lloyds and Mass Bay breached their insurance contracts with Eurospark by not paying its claims. (Compl. ¶¶ 8, 9, 16, 19 (No. 98-1499); Am. Compl. ¶¶ 9, 10, 12, 13, 22, 29 (No. 98-1514).)

Initially, this court will consider Lloyds' cross-motion to dismiss the third claim in the Amended Complaint, as its disposition affects Eurospark's motion to compel. The third claim of the Amended Complaint alleges breach of the implied covenant of good faith and fair dealing of both property insurance contracts by Lloyds. (Am. Compl. ¶ 40 (No. 98-1514).)

DISCUSSION

I. Lloyds' Cross-Motion to Dismiss

A. Standard of Review under Fed.R.Civ.P. 12(b)(6)

Lloyds' cross-motion to dismiss is governed by Fed.R.Civ.P. 12(b)(6)². In their cross-motion, Lloyds' alleges that the third claim in Eurospark's Amended Complaint fails to satisfy the pleading requirements for a claim for punitive damages arising from a breach of contract under New York law. Lloyds makes their cross-motion to dismiss pursuant to Fed.R.Bankr.P. 7012(b), which, in turn, makes Fed.R.Civ.P. 12(b) applicable in adversary proceedings.

The standard for a motion to dismiss under Fed.R.Civ.P. 12(b)(6) was pronounced by the U.S. Supreme Court in Conley v. Gibson. Therein, the Supreme Court stated that "a complaint should not be dismissed for failure to state a claim 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, 2 L.Ed.2d 80 (1957). When examining the complaint for sufficient facts to constitute a claim, the court must "contru[e] the complaint liberally, accepting all factual allegations in the complaint as true, and drawing all reasonable inferences in the plaintiff's favor." Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir.2002). In addition, "[a] complaint will not be dismissed merely because a plaintiff's allegations do not support the particular legal theory advanced in the complaint," as the allegations need only "provide a basis for relief under any possible theory." Magee v. Nassau County Med. Ctr., 27 F.Supp.2d 154, 160 (E.D.N.Y.1998).

The scope of materials which the court may consider on a motion to dismiss is limited. The court may look to the following:" `documents attached to the complaint as an exhibit or incorporated in it by reference, ... matters of which judicial notice may be taken, or ... documents either in plaintiffs' possession or of which plaintiffs had knowledge and relied on in bringing suit.'" Chambers, 282 F.3d at 153 (citing Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir.1993)). The scope of what may be considered is limited because a motion to dismiss determines only the legal sufficiency of the complaint; it does not weigh the merits of plaintiff's claims. See In re Ski Train Fire in Kaprun, Austria on November 11, 2000, 230 F.Supp.2d 392, available at No. MDL 1428, 2002 WL 1870065, at *1 (S.D.N.Y. Aug.14, 2002). If the court desires to consider materials beyond the four corners of the complaint, it must convert the motion to one for summary judgment. See Fed.R.Civ.P. 12(b); Chambers, 282 F.3d at 152.

Federal policy favors allowing a plaintiff whose complaint is dismissed to replead. See generally Fed.R.Civ.P. 15(a) (providing that leave to amend the pleading "shall be freely given when justice so requires"). The policy embodied by the federal rules favors deciding cases on the basis of their merits as opposed to their technical defects. See Swierkiewicz v. Sorema N.A., 534 U.S. 506, 514, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002) ("`The Federal Rules reject the approach that pleading is a game of skill in which one misstep by counsel may be decisive to the outcome and accept the principle that the purpose of pleading is to facilitate a proper decision on the merits.'" (quoting Conley, 355 U.S. at 48, 78 S.Ct. 99)); Fed.R.Civ.P. 8(f) ("All pleadings shall be so construed as to do substantial justice."). In as much as a decision to dismiss for failure to state a claim is based on the legal insufficiency of the complaint and does not reach the merits of a claim, the court will often allow the plaintiff an opportunity to state a legally sufficient claim in an amended complaint. See Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 48 (2d Cir.1991); 5A Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1357 (2d ed. 1990 & Supp.2002). Leave to amend the complaint should not be granted, however, if the amendment would be futile. See Lucente v. Int'l Bus. Machs. Corp., 310 F.3d 243, 258 (2d Cir.2002). An amendment is futile if it would not be capable of withstanding a motion to dismiss. See id.

B. Standard for Federal Court Determining State Law

This court must look to New York law in order to evaluate the legal sufficiency of Eurospark's third claim for relief. The third claim for relief alleges damages resulting from Lloyds' breach of an insurance contract. The parties are not in dispute that the law of the state of New York governs their contract. See Krumme v. Westpoint Stevens Inc., 238 F.3d 133, 138 (2d Cir.2000) ("`[I]mplied consent ... is sufficient to establish choice of law.'" (quoting Tehran-Berkeley Civil & Envtl. Eng'rs v. Tippetts-Abbett-McCarthy-Stratton, 888 F.2d 239, 242 (2d Cir.1989))).

When a federal court needs to decide an issue of state law, it must do so in the way the state's highest court would. See Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938) (noting the lack of uniformity in the administration of state laws that resulted when a federal court sitting in diversity exercised independent judgment in matters of general jurisprudence instead of applying the state law as declared by its highest court); Baker v. Health Mgmt. Sys., Inc., 298 F.3d 146, 149 (2d Cir.2002) ("`[W]e are obligated to apply New York law as determined by its highest court.'" (quoting Hamilton v. Beretta U.S.A. Corp., 264 F.3d 21, 29 (2d Cir.2001))). The federal court should be careful to be true to the reasoning the highest state court has adopted or would adopt, regardless of whether the federal court agrees with it. See West v. Am. Tel. & Tel. Co., 311 U.S. 223, 237, 61 S.Ct. 179, 85 L.Ed. 139 (1940) ("[I]t is the duty of the [federal courts] ... to ascertain from all the available data what the state law is and apply it rather than to prescribe a different rule, however superior it may appear ...."); Maska U.S., Inc. v. Kansa Gen. Ins. Co., 198 F.3d 74, 80 (2d Cir.1999) ("`[F]ederal courts are not free to develop their own notions of what should be required by the public policy of the state, but are bound to apply the state law as to these requirements.'" (quoting ...