In re Payroll Exp. Corp., 95 Civ. 4385(SAS).
| Decision Date | 01 October 1997 |
| Docket Number | No. 95 Civ. 4385(SAS).,95 Civ. 4385(SAS). |
| Citation | 216 BR 344 |
| Parties | In re PAYROLL EXPRESS CORPORATION, et al., Debtors. John S. PEREIRA, Esq., as Chapter 11 Trustee of the Estate of Payroll Express Corporation, et al., Plaintiff, v. AETNA CASUALTY & SURETY COMPANY, Federal Insurance Company, Chubb Group of Insurance Companies, and Angus John Roberts, an Underwriter at Lloyd's, London, on behalf of himself and all those other Lloyd's Underwriters subscribing to Insurance Policy Nos. C92163400F and C92163500F, et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
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Robert M. Horkovich, Adam Reeves, Peter J. Andrews, Catherine M. Flanders, Anderson, Kill & Olick, P.C., New York City, NY, for plaintiff.
James M. McCullough, III, Jeffrey M. Winn, Sedgwick, Detert, Moran & Arnold, New York City, NY, for defendant LEU.
Arthur N. Lambert, Alan M. Goldberg, Lambert, Weiss & Pisano, New York City, NY, for defendant Aetna.
This insurance coverage dispute arises from a non-core adversary proceeding originally commenced before the United States Bankruptcy Court for the Southern District of New York on May 1, 1995. Plaintiff John S. Pereira is the Chapter 11 Trustee of the estate of Payroll Express Corporation and Payroll Express Corporation of New York (collectively, "PEC"). He seeks to recover as property of the PEC estate the proceeds of various employee dishonesty and crime insurance policies issued by defendants, and to recover damages resulting from defendants' alleged bad faith denial of coverage under those policies. Defendants Aetna Casualty & Surety Company ("Aetna") and the London Excess Underwriters ("LEU")1 now move for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure, and plaintiff cross-moves for summary judgment against LEU. For the reasons that follow, LEU's motion is granted, plaintiff's cross-motion is denied, and Aetna's motion is partially granted.
A party is entitled to summary judgment when there is "no genuine issue of material fact" and the undisputed facts warrant judgment for the moving party as a matter of law. See Fed.R.Civ.P. 56(c); Celotex v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The burden of demonstrating the absence of a material factual dispute rests on the moving party. See Gallo v. Prudential Residential Svcs., Ltd., 22 F.3d 1219, 1223 (2d Cir.1994). Once that burden is met, the non-moving party must present "significant probative supporting evidence" that a factual dispute exists. Fed.R.Civ.P. 56(e); Anderson, 477 U.S. at 249, 106 S.Ct. at 2510-11.
The court's role is not to try issues of fact, but rather to determine whether issues exist to be tried. See Balderman v. United States Veterans Admin., 870 F.2d 57, 60 (2d Cir. 1989); Donahue v. Windsor Locks Bd. of Fire Comm'rs, 834 F.2d 54, 58 (2d Cir.1987). All ambiguities must be resolved and all inferences drawn in favor of the party against whom summary judgment is sought. See Anderson, 477 U.S. at 255, 106 S.Ct. at 2513-14; Donahue, 834 F.2d at 57, 60. If there is any evidence in the record from which a reasonable inference could be drawn in favor of the non-moving party on a material issue of fact, summary judgment is improper. See Chambers v. TRM Copy Centers Corp., 43 F.3d 29, 37 (2d Cir.1994).
Set forth below are the undisputed facts of this case and those alleged (but not yet proven) by plaintiff. These undisputed facts and factual allegations are drawn from the parties' "Statements of Material Facts Not in Dispute" submitted pursuant to Local Civil Rule 56.1 and from the plaintiff's Conformed Amended Complaint (the "Amended Complaint"), and will serve to place the legal issues raised by the parties' motions in context.2
—The Parties—
Payroll Express Corporation is a New Jersey corporation which formerly maintained a principal place of business at 1257-1265 Durant Street, Elizabeth, New Jersey. See Amended Complaint at ¶ 7; LEU 56.1 Statement at ¶ 1.
Payroll Express Corporation of New York is a related New York corporation which formerly maintained a place of business at 500 Cherry Lane, Floral Park, New York. See Amended Complaint at ¶ 8.
Aetna is a Connecticut corporation. See id. at ¶ 18.
Angus John Roberts ("Roberts") is a British subject who resides in England. Roberts is an underwriter at Lloyd's of London, and is the leading underwriter on the insurance policies that are the subject of this action. See LEU 56.1 Statement at ¶ 2.
— The Business of PEC & the Roles of its Principals & Employees —
Robert M. Felzenberg ("Robert Felzenberg") is the founder, president and chief executive officer of PEC. Robert Felzenberg also owns half of PEC's common stock. See Aetna's 56.1 Statement at ¶ 16.
Barbara Felzenberg is the wife of Robert Felzenberg, and owns the remaining half of PEC's common stock. See id.
George Gillmore ("Gillmore") is a partner in the New Jersey accounting firm of Gillmore, Gillmore & Graham. Between 1972 and 1992, Gillmore and his firm provided professional accounting services to PEC. See id. at ¶ 30. Howard Messer ("Messer") is a certified public accountant who had been employed by Samuel Klein & Co. and who subsequently maintained his own accounting firm. See id. at ¶ 36.
PEC operated a payroll check cashing service from approximately 1967 through May, 1992. During this time, its customers included both private and public employers in New York and New Jersey. See Amended Complaint ¶¶ 35-36.
In the general course of business, PEC entered into agreements with its customers whereby, in advance of the customers' paydays, those customers would transfer funds into PEC bank accounts including those at Chase Manhattan Bank, United Jersey Bank, and National Westminster Bank ("NatWest" New Jersey). These funds were commingled with deposits of other customers and were used by PEC to handle the on-site distribution of cash in exchange for the endorsed payroll checks of the customers' employees. See id. at ¶ 37. See generally Payroll Express Corp. v. The Aetna Casualty & Surety Co., 659 F.2d 285, 287 (2d Cir.1981) (describing business of PEC).
After funds were transferred from customers to PEC accounts, PEC withdrew cash from its accounts and packaged those cash funds at its offices in preparation for onsite distribution. On the pay-days, PEC employees transported the cash funds to its customers' work sites, where they were distributed in exchange for endorsed payroll checks. See Amended Complaint at ¶ 38. PEC was required to return the endorsed payroll checks to each customer by depositing those checks directly into specific accounts designated by the customers. See id. at ¶ 39.
PEC was also required to return to each customer any funds intended to be used to cash employee payroll checks that were not actually used to cash such checks (the "unused funds"). See id. at ¶ 40.
— The Alleged Defalcations of PEC Employees —
As early as the mid-1980's, Robert Felzenberg and Barbara Felzenberg began to divert PEC funds for their own benefit and to at least four other companies they controlled. See Aetna's 56.1 Statement at ¶ 46.
These funds were used, inter alia, to fund the Felzenberg-controlled companies, to acquire various securities, to purchase jewelry and other personal items for the Felzenbergs' personal enjoyment, and to cover PEC's cash flow needs. See id. at ¶¶ 46, 48-50.
Plaintiff alleges that in the fiscal years 1990, 1991 and 1992, PEC suffered approximately $3.5 million each year in operating losses in addition to, and as a result of, these conversions. Plaintiff further alleges that in the fiscal years 1988 and 1989, PEC suffered approximately $2 million each year in operating losses in addition to, and as a result of, these conversions. See Amended Complaint ¶¶ 123-24.
Plaintiff alleges that, prior to July, 1991, one of the ways funds were diverted from PEC was by failing to return unused funds in a timely manner. Rather, plaintiff claims, these funds were transferred from PEC with no intention of returning them. See id. at ¶¶ 129-130.
To perpetuate this conduct, Robert Felzenberg, Gillmore and other PEC employees (the "defalcating employees") began inflating the account balances at the United Jersey Bank and NatWest New Jersey through a check-kiting scheme. Plaintiff claims this scheme was effected by the defalcating employees by depositing into a PEC account at one bank worthless checks drawn on a PEC account from the other bank. See Aetna's 56.1 Statement at ¶ 50.
Plaintiff alleges that to reduce the likelihood of detection by the two banks, the defalcating employees drew and deposited numerous checks for small amounts each day, rather than one check for a large amount. At the height of the scheme, plaintiff claims, the defalcating employees deposited over $20 million of worthless checks into the PEC accounts at both banks. See Amended Complaint at ¶¶ 140-142.
Plaintiff alleges that during the period of the check-kiting scheme, the monthly bank service fees charged to PEC by the banks increased from approximately $20,000 per month to approximately $100,000 per month. See id. at ¶ 143.
Plaintiff alleges that Robert Felzenberg provided the banks with fraudulent financial statements to conceal the check-kiting scheme. Plaintiff also claims that these financial statements were prepared by Gillmore and audited by Messer. See id. at ¶¶ 148-150.
Plaintiff alleges that the fraudulent financial statements falsely represented PEC's financial condition, and concealed the fact that its liabilities greatly outweighed its realizable assets. See id. at ¶ 54 (...
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Olympia Mtge. Corp. v. Certain Underwriters at Lloyd's, London, Select Ins. Co., 2009 NY Slip Op 32623(U) (N.Y. Sup. Ct. 10/29/2009)
...affidavit (or declaration) to establish materiality of the insured's misrepresentations in the application (see In re Payroll Express Corp., 216 BR 344, 357 [SD NY 1997], affd 186 F3d 196 [2d Cir 1999]). The Payroll Express case, however, was decided under New Jersey law (id. at 358), and, ......