Newbro v. Freed
| Decision Date | 09 January 2006 |
| Docket Number | No. 03 Civ. 10308(PKC).,03 Civ. 10308(PKC). |
| Citation | 409 F.Supp.2d 386 |
| Parties | Michael David NEWBRO, Plaintiff, v. Lance FREED and Judith Fisher Freed, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Anthony Paduano, Leonard Weintraub, Paduano & Weintraub, L.L.P., New York, William R. Decoste, Morrison, Cohen, Singer & Weinstein, LLP, New York, NY, for Michael David Newbro.
Leonard Steiner, Steiner & Libo, Beverly Hills, CA, for Lance Freed, Judith Fisher Freed.
Ronald A. Nimkoff, Nimkoff Rosenfeld & Schechter, LLP, New York, NY, for Deborah Loeffler.
Plaintiff Michael David Newbro and defendants Lance Freed and Judith Fisher Freed each utilized Todd Eberhard, a now convicted thief, as their financial consultant. When the Freeds noticed an unaccounted shortfall in their account balance, they questioned Eberhard about the discrepancy. Eberhard told the Freeds that he had placed several trades on their behalf, but they were not yet reflected on the account statements. Thereafter, Eberhard transferred $1,120,000 from Newbro's account into the Freeds' accounts, thereby covering the shortfall. The direct transfer from Newbro's account into the Freeds' account is reflected on the face of both parties' account statements. Neither Newbro nor the Freeds are alleged to have been knowing participants in Eberhard's crimes.
In a complaint filed December 31, 2003, Newbro brought suit against the Freeds on three legal theories: conversion, unjust enrichment and fraud. Jurisdiction is invoked by reason of diversity of citizenship and an amount in excess of the jurisdictional threshold. 28 U.S.C. § 1332. At an early stage of this proceeding, defendants moved to dismiss for lack of personal jurisdiction and also under Rule 12(b)(6), Fed. R.Civ.P., on the ground that, in their view, the claims for conversion and fraud failed to state a claim for relief. I granted the parties a sixty-day period to conduct discovery on the factual predicate for personal jurisdiction and denied defendants' motion to dismiss the two claims. Newbro v. Freed, 2004 WL 691392 (S.D.N.Y. Mar.31, 2004). I subsequently determined that there was a basis for personal jurisdiction over the Freeds under CPLR 302(a)(1). Newbro v. Freed, 337 F.Supp.2d 428 (S.D.N.Y.2004). I also denied the Freeds' motion to transfer the action to the Central District of California under 28 U.S.C. § 1404(a). Id.
Despite the asserted existence of legal theories that would permit Newbro to proceed against the Freeds, it remains the case that Newbro and the Freeds were victims of Eberhard's crimes. In view of the foregoing, this Court has encouraged efforts at compromise between the parties but to no avail. See Order of May 5, 2005.
Discovery is closed and the plaintiff has moved for summary judgment on two of this three claims: conversion and unjust enrichment. Defendants have moved for summary judgment dismissing the two claims on which the plaintiff has moved, as well as the third claim for fraud. Defendants also have moved to dismiss the complaint, pursuant to Rule 19(a), Fed.R.Civ. P., for failure to join an indispensable party — a trustee appointed pursuant to Securities Investor Protection Act of 1970 ("SIPA"), 15 U.S.C. § 78eee.
For the reasons explained below, I conclude that the trustee appointed pursuant to SIPA is not an indispensable party and that the plaintiff is entitled to summary judgment against the defendants on the conversion and unjust enrichment claims. The defendants are entitled to summary judgment dismissing the fraud claim.
For the purposes of these motions, I have accepted as true only those facts that have not been disputed. Where multiple inferences may be drawn from a fact, I have drawn only the inference most favorable to the non-movant.
Plaintiff and defendants maintained brokerage accounts that were managed by Todd Eberhard through Clearing Services of America, Inc. ("CSA"), a brokerage, firm. The Pershing Division of Donaldson, Lufkin & Jenrette Securities Corporation ("Pershing") served as the clearing broker for the accounts plaintiff and defendants maintained with CSA. (Newbro Decl. ¶ 2; L. Freed Decl. ¶ 9) In April 2001, defendants noticed that over $1 million was missing from their CSA accounts. (L. Freed Decl. ¶ 17) When contacted by defendants, Eberhard told them that he had placed several trades on their behalf and that the funds would not reappear for some time. (J. Freed Decl. ¶ 3; L. Freed Decl. ¶ 17)
It is undisputed that, on July 25, 2001, Eberhard made two wire transfers out of Newbro's account and into accounts held by defendants. (Newbro Decl. ¶¶ 5-6; Def. Resp. to Pl. 56.1 ¶¶ 10-11) One transfer was for the even amount of $1 million and the second transfer was of $120,000. (Newbro Decl. ¶¶ 5-6; Def. Resp. to Pl. 56.1 ¶¶ 10-11) Eberhard accomplished the transfers through forged letters of authorization. (Newbro Decl. ¶ 8; Newbro Decl. Exs. D, E and F) Newbro's account statement reflected, "customer authorized transfers" to account "3HR-667916" and "3HR-652587", which are Freed-related account numbers. (Newbro Decl. Ex. B; Def. Resp. to Pl. 56.1 ¶¶ 10-11).
The account statement for one Freed account (3HR-667916) reflects a July 25, 2001 "customer authorized transfer" from account 3HR-663246 (Newbro's account) in the amount of $1 million; a second Freed account (3HR-65287) reflects a "customer authorized transfer" from account 3HR-663246 in the amount of $120,000. (Weintraub Decl. Exs. C and D)
After these transfers, Eberhard assured defendants that their accounts now reflected the appropriate balances. (L. Freed Decl. ¶¶ 20-21; J. Freed Decl ¶ 3) Despite these assurances, defendants immediately transferred their funds to accounts with a different broker. (L. Freed Decl. ¶¶ 22-23, Ex. C) Defendants now contend that they had no reason at the time to suspect that the transferred funds belonged to someone else. (J. Freed Decl. ¶ 3; L. Freed Decl. ¶ 17) Nevertheless, it is undisputed that, within a few months of the transfer, defendants retained an attorney to investigate the source of the funds. (J. Freed Decl. ¶ 4; L. Freed Decl. ¶¶ 21, 23; Steiner Decl. ¶ 4) On November 19, 2001, Leonard Steiner, counsel for the Freeds, wrote to Eberhard about the funds that had been "transferred into the Freed account from another Clearing Services of America account, no. 3HR663246." Steiner requested that Eberhard provide him with the "name and address of the account holder of account no. 3HR663246". On December 10, 2001, Eberhard responded to Steiner's letter with the explanation that the funds had been transferred into and out of various accounts because the Freeds were in the process of seeking a divorce. (Steiner Decl. Ex. B) In February 2003, Steiner received the name of the account holder from CSA, but no additional information. (Steiner Decl. ¶ 9, Ex. E) In a letter dated July 28, 2003, plaintiff's counsel contacted Steiner to claim the $1,120,000 that had been improperly transferred to his clients. (Steiner Decl. ¶ 11, Ex. F)
In the meantime, Eberhard had been charged in an indictment with several counts of securities violations and mail fraud. (Def. 56.1 ¶ 8) On September 8, 2003, the Securities Investor Protection Corporation filed a liquidation proceeding against CSA pursuant to SIPA. (Steiner Decl., Ex. I) Paragraph II of the order commencing the liquidation proceeding named Thomas K. Vandiver as trustee for the liquidation and business of CSA. (Steiner Decl., Ex. I) On September 14, 2004, Eberhard pled guilty to the criminal charges. United States v. Eberhard, 2005 WL 2172031, *1-*2 (S.D.N.Y. Sept.12, 2005). U.S. District Judge Robert W. Sweet sentenced Eberhard to 160 months imprisonment. Id.
A federal court sitting in diversity applies the choice of law principles of the forum state. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). On issues of substantive law, New York courts employ the "paramount interest" test that gives "controlling effect to the law of the jurisdiction which has the greatest concern with, or interest in, the specific issue raised in the litigation...." Neumeier v. Kuehner, 31 N.Y.2d 121, 127, 335 N.Y.S.2d 64, 286 N.E.2d 454 (1972). It is undisputed the claims arose out of the criminal acts of a New York broker that he committed while working in New York on accounts that were opened and maintained in New York. (Newbro Decl. ¶¶ 5-6; Def. Resp. to Pl. 56.1 ¶¶ 10-11) Neither party has advocated applying the laws of any other state to this case. Therefore, this Court will apply New York law to the issues raised in this case.
Summary judgment "shall be rendered forth with if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). It is the initial burden of a movant on a summary judgment motion to come forward with evidence on each material element of his claim or defense, demonstrating that he or she is entitled to relief. A fact is material if it "might affect the outcome of the suit under the governing law ..." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The evidence on each material element must be sufficient to entitle the movant to relief in its favor as a matter of law. Vermont Teddy Bear Co., Inc. v. 1-800 Beargram Co., 373 F.3d 241, 244 (2d Cir.2004).
When the moving party has met this initial burden and has asserted facts to demonstrate that the non-moving party's claim cannot be sustained, the opposing party must "set forth specific facts showing that there is a...
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