Philan Ins. Ltd. v. Frank B. Hall & Co., Inc.

• Decision Date: 17 April 1989
• Docket Number: No. 87 Civ. 4624 (JMW).,87 Civ. 4624 (JMW).
• Citation: 712 F. Supp. 339
• Parties: PHILAN INSURANCE LTD. and Benodet Insurance Ltd., Plaintiffs, v. FRANK B. HALL & CO., INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

712 F. Supp. 339

PHILAN INSURANCE LTD. and Benodet Insurance Ltd., Plaintiffs, v. FRANK B. HALL & CO., INC., et al., Defendants.

No. 87 Civ. 4624 (JMW).

United States District Court, S.D. New York.

April 17, 1989.

Michael D. Brown, Christopher B. Hitchcock, Peter J. Biging, Ohrenstein & Brown, New York City, for plaintiffs.

Steven B. Rosenfeld, Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for Hall defendants.

Charles K. O'Neill, Chadbourne & Parke, New York City, for RBH and RBH Bermuda.

Sol Kroll, Raymond L. Mylott, Jr., Michael T. Walsh, Kroll & Tract, New York City, for Fielding & Partners, and PWS Marine, Ltd.

Ronald E. DePetris, Summit Rovins & Feldesman, New York City, for Carol and Leonard Smith.

Daniel F. Gaven, Palmeri, Gaven & Soberman, New York City, for Keough Kirby and Keough-Kirby Re.

MEMORANDUM AND ORDER

WALKER, District Judge:

Currently before the Court are defendants' motions to dismiss the Amended Complaint on the grounds that the Racketeer Influenced and Corrupt Organizations Act ("RICO")¹ claim not only fails to state claims upon which relief can be granted, Fed.R.Civ.P. 12(b)(6), but also fails to provide the particularity mandated by Rule 9(b) of the Federal Rules of Civil Procedure; and because the Court lacks subject matter jurisdiction over the remaining state law claims, Fed.R.Civ.P. 12(b)(1). Defendants, in brief, argue that plaintiffs hope to transform an alleged garden variety embezzlement of insurance premiums into a multi-million dollar treble damage RICO case.

I. FACTUAL BACKGROUND

The plaintiffs (collectively referred to as "Philan") are two reinsurance companies incorporated in the Cayman Islands. Plaintiffs allege that Leonard Smith, then a vice-president of defendant Frank B. Hall Re ("Hall"), bribed their chief financial officer, Steven Maloney, by offering to divert a percentage of plaintiffs' reinsurance premiums to Maloney's personal account. All told, more than $1 million was allegedly diverted to Smith and Maloney.

Plaintiffs contend that Maloney's role was to "bind" plaintiffs to insurance risks — beyond plaintiffs' capacity to absorb — presented to Maloney by the defendant insurance brokers. Without this conspiracy, allegedly joined later by the remaining co-defendants, plaintiffs contend that the defendants would have remained unable to place these so-called hard to place risks, and thus would not have collected various brokerage commissions.

To accomplish this alleged scheme, Smith and Maloney approached defendant Rollins Burdick Hunter Co. ("RBH"), a Delaware corporation with its principal place of business in Chicago. RBH is engaged in the commercial insurance business through its ownership and operation of subsidiaries such as defendant Rollins Burdick Hunter of Bermuda, Ltd. ("RBH Bermuda"). RBH Bermuda allegedly set up a shell company called Mansion Management Services, Ltd. ("Mansion") to serve as a conduit. Thus, plaintiffs allege, brokers with hard to place business would have their risks accepted by plaintiffs, through Maloney; Smith would then direct these participating brokers to transmit the premium to Mansion or Island Corporate Services, Ltd. ("Island") rather than to plaintiffs; Mansion or Island would then forward 90% of the premiums to plaintiffs, 9% to Smith and Maloney and 1% to itself. Sometime thereafter, Smith terminated his employment with Hall and, along with defendant Keough Kirby Associates, Inc. ("Keough Kirby"), an insurance company incorporated in Rhode Island, formed defendant Keough-Kirby Re, Ltd. ("Keough Kirby Re"), a reinsurance company incorporated in New York. He allegedly continued the conspiracy while at Keough Kirby Re, which helped create Island, the second shell corporation, to facilitate the conspiracy. Defendant Fielding and Partners ("Fielding"), a British insurance broker, allegedly bribed plaintiffs' agents, Smith and Maloney, by consenting to divert premiums to Mansion, Island, and to Smith's and Maloney's personal accounts. Defendant PWS Marine, Ltd. ("PWS"), a British property and casualty insurance broker, allegedly participated in the fraudulent scheme by diverting premiums owed plaintiffs to Maloney and his wife.

The Amended Complaint asserts 15 claims: one RICO count, and 14 state law charges, including common law fraud, breach of fiduciary duty, negligence, and malpractice. The RICO count alone seeks judgment after trebling in excess of $210,000,000. Several of the remaining counts seek $70,000,000 in compensatory damages plus $50,000,000 in punitive damages.

The defendants move to dismiss on several grounds. First, defendants claim that plaintiffs have not adequately pleaded their RICO count. As their predicate acts, plaintiffs assert violations of the mail and wire fraud statute, 18 U.S.C. §§ 1341 and 1343; commercial bribery, N.Y.Penal Law § 180.03; and transportation of stolen money, 18 U.S.C. § 2315. Defendants argue that no predicate act is adequately pleaded. The fraud claims, defendants assert, fail pursuant to Rule 9(b) for lack of particularity; the bribery count similarly fails because it does not provide the requisite factual basis to establish the elements of the crime; and the transportation of stolen money charge also fails to plead facts to establish the necessary elements of the crime alleged.

Defendants also argue that plaintiffs have failed to identify the person or persons who allegedly committed the acts prohibited by RICO—a necessary element of any RICO claim.² Defendants argue further that if the Court dismisses the RICO count, then the state law claims should be dismissed for lack of subject matter jurisdiction and the Court should not retain pendent jurisdiction over them.

II. DISCUSSION

The Court will not review exhaustively each argument made by each party; the papers in this case have become more than a little unwieldy — the Amended Complaint alone has 120 paragraphs — resulting in part from plaintiffs' filing an unauthorized second memorandum in opposition, which in turn invited a series of letters from the various counsel for defendants. For present purposes, on defendants' motion to dismiss, the Court will focus, as it should, on various paragraphs in the Amended Complaint itself.

A. The RICO Count:

Plaintiffs allege jurisdiction based on 28 U.S.C. §§ 1331, 1332, 1337, 18 U.S.C. §§ 1964(a) and (c), as well as principles of ancillary and pendent jurisdiction. See Amended Complaint ¶ 1.³ Because this Court concludes, as explained below, that complete diversity does not exist, plaintiffs' sole basis for jurisdiction remains their single RICO count. See Am.Comp. ¶¶ 1-56. As a preliminary matter, the Court notes that nothing in the recent Second Circuit en banc opinions in Beauford, et al. v. Helmsley, et al., 865 F.2d 1386 (2d Cir. 1989), or its criminal counterpart, United States v. Indelicato, 865 F.2d 1370, decided the same day, alters the Court's analysis of the RICO count in this case.⁴ The Court first turns its attention to that count, and will examine, in turn, each predicate act as pleaded.

1. Mail and wire fraud:

If fraud is alleged as a predicate act in a RICO claim, it must be alleged with the particularity required by Fed.R.Civ.P. 9(b). Royal Anchor, Inc. v. Tetra Finance (HK) Ltd., 1986 Transfer Binder CCH Fed.Sec.L.Rep. ¶ 92,432 at 92,647, 1986 WL 735 (S.D.N.Y.1986). Rule 9(b) serves at least three important purposes: first, it ensures that a defendant is aware of the actions upon which the allegations of fraud are based; second, it helps protect a defendant's reputation by preventing insufficient allegations of fraud; and third, it prevents strike suits. DiVittorio v. Equidyne Extractive Industries, 822 F.2d 1242, 1247 (2d Cir.1987). The Amended Complaint must state the content of the statement as well as the time, place, and speaker for each statement. DiVittorio, 822 F.2d at 1247; Luce v. Edelstein, 802 F.2d 49, 54 (2d Cir.1986).

The complaint must include "a definitive identification of the respects in which alleged nondisclosures or misstatements were false, misleading or inaccurate, or what omissions were made, and why the statements were believed to be misleading." Decker v. Massey-Ferguson, Ltd., 534 F.Supp. 873, 877 (S.D.N.Y.1981), aff'd in part, rev'd in part, 681 F.2d 111 (2d Cir.1982). Moreover, "fraud pleadings generally cannot be based on information and belief ... On the other hand, fraud allegations may be so pleaded as to facts peculiarly within the opposing party's knowledge; even then, however, the allegations must be accompanied by a statement of facts upon which the belief is founded." Stern v. Leucadia National Corporation, Inc., 844 F.2d 997, 1003 (2d Cir.1988) (citations omitted). Although Rule 9(b) permits state of mind to be pleaded generally, the Second Circuit has held that some basis for fraudulent intent must be alleged. See Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 50 (2d Cir.1987), cert. denied, ___ U.S. ___, 108 S.Ct. 698, 98 L.Ed.2d 650 (1988) ("These factual allegations must give rise to a `strong inference' that the defendants possessed the requisite fraudulent intent").

This Court requires a strong showing from plaintiffs because, as the Second Circuit has explained, "It is a serious matter to charge a person with fraud and hence no one is permitted to do so unless he is in a position and is willing to put himself on record as to what the alleged fraud consists of specifically." Segal v. Gordon, 467 F.2d 602, 607 (2d Cir.1972) (citation omitted).

Plaintiffs have failed to plead fraud with the requisite particularity. The Amended Complaint before the Court is pleaded almost exclusively on information and belief. Moreover, plaintiffs have not convinced the Court that the necessary facts are "peculiarly within" defendants' knowledge, nor have they provided an adequate statement of facts upon which their belief is founded, a particularly striking deficiency given the unusual...