In re First Cent. Financial Corp.
| Decision Date | 06 November 2001 |
| Docket Number | Bankruptcy No. 98-12848-608. Adversary No. 99-1215-608. |
| Citation | 269 BR 502 |
| Parties | In re FIRST CENTRAL FINANCIAL CORPORATION, Debtor. Martin Ochs, as Chapter 7 Trustee of First Central Financial Corporation, Plaintiff, v. Martin J. Simon, Saul Erdman, Herbert V. Friedman, Harvey Mass, Andrew W. Attivissimo, Raymond Brancaccio, Joel I. Dollinger, Allan R. Goodman, Harvey S. Jacobs, Joan M. Locascio, Louis Gottlieb, Louis Siracusano, Ralph Drabkin, Joseph Ciorciari, Seymour Uslan, Defendants. |
| Court | U.S. Bankruptcy Court — Eastern District of New York |
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Joseph W. Muccia, Corbin Silverman & Sanseverino, LLP, New York City, for the Superintendent of Insurance for the State of New York.
Martin P. Ochs, Ochs & Goldberg, LLP, New York City, Chapter 7 Trustee.
Norman N. Kinel, Sidley Austin Brown & Wood LLP, New York City, for Martin P. Ochs, Chapter 7 Trustee.
This matter comes before the Court on the motion of Superintendent of Insurance for the State of New York (the "Superintendent"), in his capacity as Liquidator of First Central Insurance Company, to dismiss or stay this adversary proceeding, commenced by the Chapter 7 Trustee, on the grounds that the Chapter 7 Trustee lacks standing to assert claims against certain former officers and directors of the debtor holding company for mismanagement and breaches of fiduciary duty and recovery of fraudulent conveyances. In the alternative, the Superintendent seeks relief from the automatic stay to permit this question to be decided in state court. For the reasons set forth herein, the Superintendent's motion is denied.
This Court has jurisdiction over this core proceeding under 28 U.S.C. §§ 1334(b) and 157(b)(2)(F), (G), (H) and (O) and the Eastern District of New York standing order of reference dated August 28, 1986. This Memorandum Decision constitutes the Court's findings of fact and conclusions of law to the extent required by Fed.R.Bankr.P. 7052.
The relevant facts set forth below are not in dispute (at least as between the Trustee and the Superintendent), except as otherwise indicated. The debtor, First Central Financial Corporation ("FCFC" or "debtor"), is a holding company that owns all of the shares of First Central Insurance Company ("FCIC"), a New York regulated insurance company. (Doc. 1 ¶¶ 5, 25.)1 FCFC and FCIC shared many common officers and directors — ten out of the fifteen defendants in this adversary proceeding were officers and directors of both FCFC and FCIC. (Doc. 1 ¶¶ 9-23, 33.) The remaining five defendants were officers and/or directors of FCFC, but not of FCIC. (Doc. 14 at 9.) On September 6, 1997, the New York State Insurance Department issued a "Report on Examination of the First Central Insurance Company as of December 31, 1996" ("Insurance Department Report"), providing a highly detailed account of the operations of both FCFC and FCIC during the years 1992 through 1996, based on an audit and investigation which lasted over one year. (Doc. 1 ¶ 34.) Among other things, the Insurance Department Report found that FCIC was insolvent, that the officers and directors failed properly to maintain books and records, failed properly to handle, evaluate and process insurance claims, and failed to establish adequate reserves required under applicable insurance laws. (Doc. 1 ¶¶ 35-39; Doc. 24 at 5.) On January 28, 1998, the New York Supreme Court, Nassau County ("state court") entered an order pursuant to N.Y.Ins.Law § 7402 (McKinney 2000) directing the Superintendent to rehabilitate FCIC. (Doc. 1 ¶¶ 6, 26, 31; Affidavit of James Sandnes dated August 9, 2000, Ex. 1(A), 2, hereinafter, "Sandnes Aff.")
FCIC's failure quickly led to the financial collapse of FCFC. (Doc. 24 at 6.) On March 5, 1998, FCFC filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of New York. (Doc. 1 ¶ 7.) By order dated April 30, 1998, this Court converted FCFC's Chapter 11 case to Chapter 7, and by order dated May 7, 1998 appointed Martin P. Ochs as the Chapter 7 Trustee of FCFC's estate ("Trustee" or "plaintiff'). (Doc. 1 ¶ 8)
On May 4, 1999, the Trustee, on behalf of FCFC's estate, commenced this adversary proceeding against FCFC's former officers and directors, in their capacity as fiduciaries of FCFC, seeking recovery for, inter alia, their breach of fiduciary duty to FCFC ("Trustee's Action"). The Trustee's Complaint asserts that FCFC's officers and directors breached their fiduciary duty to FCFC by committing waste and mismanagement of corporate assets committed to their charge, including waste and mismanagement arising out of their management and control of FCFC and its wholly-owned subsidiaries. (Doc. 1 at ¶¶ 47-75.) The Trustee's Complaint also asserts claims for recovery of fraudulent conveyances by FCFC to the directors and officers of FCFC under 11 U.S.C. §§ 544 and 548 and the New York Debtor and Creditor Law. On March 21, 2000, the Superintendent, on behalf of FCIC's estate, commenced his own action in state court against FCIC's officers and directors ("Superintendent's Action"). The Superintendent's complaint asserts claims for damages suffered by FCIC when FCIC's officers and directors breached their duty to FCIC by, inter alia, wasting corporate assets, issuing illegal dividends, misrepresenting the financial condition of FCIC, and violating New York insurance law. (Doc. 14 at 10.)
The claims asserted in the Superintendent's Action and the Trustee's Action are all covered by a single officer and director liability policy issued by the Great American Insurance Company ("D & O Policy").2 The D & O Policy covers the officers and directors of both FCFC and FCIC and provides an aggregate of $2 million of coverage inclusive of defense costs. (Doc. 24 at 10.) Although the Trustee's Action and the Superintendent's Action are not limited to recovery from the D & O Policy, there is no question that the D & O Policy is regarded by both the Trustee and the Superintendent as a significant potential source of payment of any judgment that may be obtained by either of them. (Doc. 24 at 10.) Consequently, the Superintendent and the Trustee are in a race for the same insurance proceeds.
In an effort to insure that the insurance proceeds will be available as a source of recovery for any judgment obtained in his action, the Superintendent makes the instant motion based on the theory that the causes of action asserted in the Trustee's Action against the officers and directors of FCFC, many of who were also officers and directors of FCIC, belong exclusively to FCIC, and may only be prosecuted by the Superintendent in his capacity as Liquidator of FCIC. The Superintendent seeks dismissal of the Trustee's Action on the grounds that the Trustee lacks standing because the claims asserted in the Trustee's Action are derivative rather than direct. The Superintendent further contends that even if some of the claims asserted in the Trustee's Action are direct, this Court should dismiss or stay the Trustee's Action so as not to interfere with the state court's order of liquidation. The Superintendent alternatively seeks termination of the automatic stay to permit the Superintendent to seek adjudication of the claim ownership issues from the New York state court, and to enforce the order of liquidation.
At the core of the Superintendent's motion to dismiss is this question: Are the claims asserted by the Trustee, as the representative of FCFC's bankruptcy estate, in the Trustee's Action, direct or derivative in nature?
The instant motion to dismiss is governed by Fed.R.Civ.P. 12(b)(6), made applicable in bankruptcy proceedings by Fed. R.Bankr.P. 7012. 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, 102, 2 L.Ed.2d 80 (1957). When determining the sufficiency of the plaintiff's claim, the court "must accept as true all of the factual allegations set out in plaintiff's complaint, draw inferences from those allegations in the light most favorable to plaintiff, and construe the complaint liberally." Gregory v. Daly, 243 F.3d 687, 691 (2d Cir.2001), citing Tarshis v. Riese Org., 211 F.3d 30, 35 (2d Cir.2000). The court's consideration is limited to the assertions made within the four corners of the complaint, to documents attached to the complaint as an exhibit or incorporated in it by reference, to matters of which judicial notice may be taken, or to documents either in plaintiffs' possession or of which plaintiffs had knowledge and relied on in bringing suit. Gregory, 243 F.3d at 691; Brass v. American Film Tech., Inc., 987 F.2d 142, 150 (2d Cir.1993).
The Superintendent argues that, although he is not a party to this adversary proceeding, he has standing to seek its dismissal under § 1109(b) of the Bankruptcy Code, which confers standing upon any "party in interest" to "raise and . . . appear and be heard on any issue in a case under this chapter." 11 U.S.C. § 1109(b). The Trustee disagrees, asserting that § 1109(b) does not confer standing on parties in interest to appear in adversary proceedings, but only to appear in bankruptcy cases. See Term Loan Holder Comm. v. Ozer Group (In re Caldor, Inc.), 2000 WL 546465, at *5 (S.D.N.Y.2000) (); but see, e.g., Sarah R. Neuman Foundation, Inc. v. Garrity (In re Neuman), 124 B.R. 155, 158-60 (S.D.N.Y.1991) (to the contrary). In the alternative, the Superintendent seeks leave to intervene pursuant to Fed.R.Bankr.P. 7024. The Trustee also opposes intervention,...
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