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AEROPULSE, INC. v. ARMSTRONG & BROOKS

June 8, 1990

AEROPULSE, INC., PLAINTIFF,
v.
ARMSTRONG & BROOKS, LTD., DAVID E. FLATOW AND FLATOW AND COMPANY, INC. D/B/A D.E.F. BROKERAGE FACILITY, INC., DEFENDANTS.



The opinion of the court was delivered by: Korman, District Judge.

Plaintiff is a manufacturer of air pollution equipment. In late 1984, pursuant to a bid it wished to submit to the State of Colorado, plaintiff was required to obtain a surety bond to guarantee its payment and performance. Plaintiff's Vice President of Operations, John B. Hamblin, contacted Bruce Allen to seek his assistance in obtaining the bond. Allen was "an insurance producer" who advised clients "on how to deal with surety companies, how to deal with surety agents, what documents are necessary to present themselves to surety companies and [placed] some surety bonds directly with insurance facilities." Allen Deposition at 11-12.

After speaking with Hamblin, Allen contacted three or four "surety facilities," including Armstrong and Brooks ("A & B"), to request their assistance in procuring a surety bond for plaintiff. Id. at 33-34. A "surety facility," as defined by Allen, "is not a surety company although it is a source for surety bonds." Id. at 12. A & B eventually obtained a commitment for the bond from the Union Indemnity Insurance Company. A & B claims that it advised Allen that, in addition to the manual premium set by the New York State Insurance Department, it would charge a fee for the services it performed in placing the bond. Flatow Affidavit, June 19, 1989, at Paragraph 9. It also claims that Allen "clearly knew that of the $17,910 paid by plaintiff $6,709 went to Union Indemnity as gross premium (to include commissions) and $11,201 was A & B's service fee charge," id., but Allen denies this. Allen Deposition at 49; Allen Affidavit at Paragraph 4.

When Allen told Hamblin that the price of the bond would be thirty dollars per thousand dollars worth of coverage, totalling $17,910.00, Hamblin responded that the amount was much higher than plaintiff had previously paid for insurance. Hamblin Deposition at 20, 26-27. Allen explained that bonding companies were not interested in providing bonds for companies of the size and net worth of plaintiff and that the only alternative available to plaintiff was to obtain the bond through A & B. Hamblin Deposition at 20, 60; see Allen Deposition at 34-35. Allen instructed Hamblin to send the check for payment directly to A & B. Hamblin Deposition at 31.

Because plaintiff needed the bond quickly, it sent a check in the amount of $17,910.00 before it received a billing invoice from A & B. Plaintiff's Memorandum in Opposition to Summary Judgment at Exhibit 12; Transcript of Oral Argument, October 20, 1989, at 9, 15. The invoice that eventually arrived stated that the payment was for the bond premium and a service fee, but did not specify the amounts of the two charges. Plaintiff's Memorandum in Opposition to Summary Judgment at Exhibit 9; Hamblin Deposition at 29. Plaintiff won the bidding and eventually completed the job without default.

In or about April 1985, plaintiff was notified by the New York State Insurance Department that the Union Indemnity Insurance Company, which had issued the surety bond, was being liquidated. Hamblin Deposition at 32. Hamblin telephoned A & B and requested the return of the full amount paid since it would not be bonded. He was told by an A & B employee that he would have to contact Union Indemnity to obtain a refund. Hamblin then called Union Indemnity and again asked for the return of the "17,900 and some odd dollars back." Id. at 33. Hamblin testified that he was told by an employee that "the only thing you might get back if it goes through is the cost of what we charged for securing the bond which was 2300 and some dollars." Id. Hamblin subsequently obtained a copy of the cancelled check, upon which he discovered that A & B had remitted only $2,357.00 to Union Indemnity in payment of the premium. Id. at 33-34.

Plaintiff telephoned A & B a second time to ask why it had charged plaintiff more than fifteen thousand dollars to place the bond. Hamblin Deposition at 82. Upon receiving an unsatisfactory response, plaintiff informed the New York State Insurance Department by letter dated March 6, 1986 of the details of its transaction with defendants. Appendix to Plaintiff's Reply Memorandum in Support of its Motion for Class Certification at Exhibit I.

After a three year investigation of their business practices, a hearing officer of the Department of Insurance found that defendants had repeatedly violated New York Insurance Law § 2119 when they "issued billings to their clients which lumped together both the premium and the service fee as a single charge" without obtaining a signed memorandum specifying the amount of the service fee as required by the statute. Findings of Fact, Opinion and Decision of the New York State Insurance Department, In the Matter of the Application and/or Licenses of DEF Brokerage Facility, Inc., et al., April 21, 1989, at 7.*fn1 The hearing officer characterized the dispute and the purpose of the Insurance Law as follows:

    The respondents' testimony that they rendered
  substantial services and that their clients
  willingly paid the service fees, is unrebutted in
  the record. On the other hand, the requirements
  of § 2119 are for the benefit of the consumer
  client, particularly the persons in the substandard
  market, those who are declined coverage in the
  standard market where only the manual premium is
  usually charged, who are most vulnerable to service
  fee charges to obtain the surety bond. They cannot
  obtain contracts to work without supplying a bond
  and are at the mercy of the respondents. The
  statute does not prohibit the imposition of service
  charges by brokers; it requires only that the
  client be informed of that charge and that he
  consent in writing to it.

Id. at 6-7. The hearing officer then ordered respondents to make restitution of the service fees paid by their clients in the amount of $3.2 million and to pay the maximum penalties provided by law in lieu of the revocation of their licenses on the grounds that "they are untrustworthy to act as insurance agents and/or brokers within the meaning and intent of Section 2110 of the Insurance Law. . . ." Id. at 9.

This decision was adopted by the Superintendent of the Department of Insurance on May 4, 1989, id. at 11, and was subsequently affirmed by the Appellate Division. Montuori v. Corcoran, App. Div., 557 N.Y.S.2d 313 (1st Dep't 1990). The Appellate Division found that:

    The Superintendent's determination, that
  petitioners violated Insurance Law § 2119(c)(1), by
  improperly collecting service fees from contractors
  for procuring surety bonds for them without
  obtaining a signed memorandum specifying the amount
  of the service fee, is supported by substantial
  evidence and rationally based.
    In view of the 759 offenses found to have been
  committed by petitioners, the penalty imposed,
  namely revocation of petitioners' licenses unless
  they make restitution and pay $2,500 each in
  civil penalties, is neither shocking to one's
  sense of fairness, nor disproportionate to the
  offense.

Id. (citations omitted).

While its complaint was pending with the Department of Insurance, plaintiff filed the present class action. It alleged that A & B violated the Racketeer Influenced and Corrupt Organizations Act ("RICO"). It also alleged common law claims for fraud, money had and received, unjust enrichment, breach of contract, breach of fiduciary duty and negligent misrepresentation, and a private cause of action under New York Insurance Law § 2119(c) and (d).

Defendants move for summary judgment on the ground that the evidence is insufficient to support a claim for common law or mail and wire fraud and, hence, plaintiff's RICO claim cannot be sustained as a matter of law. Defendants also invoke the doctrine of abstention with respect to plaintiff's common law claims on the ground that they are based on a violation of New York Insurance Law § 2119. According to defendants, abstention is warranted because "the very same questions . . . are currently under review by the [state courts]" and because a decision on these claims would "interfere with state efforts to maintain a coherent policy in an area of comprehensive state regulation." Defendants' Memorandum in Support of Summary Judgment at 41. Moreover, defendants seek summary judgment as to plaintiff's claims against David E. Flatow in his individual capacity and Flatow and Company, Inc. d/b/a DEF Brokerage Facility, Inc., on the ground that plaintiff is unable' allege any conduct by or communications with these defendants which would have given rise to any of the causes of action asserted in the complaint.

Discussion

A. The Motions Directed to the Fraud and RICO Causes of Action

Plaintiff alleges that defendants' conduct constitutes common law fraud because A & B failed to disclose the amount of its commission. Plaintiff reasons that A & B, as fiduciaries of its insured, had a duty to disclose "all material facts which could affect Aeropulse's decision [to obtain insurance through them]." Plaintiff's Memorandum in Opposition to Summary Judgment at 13. Defendants move for summary judgment on this claim because the evidence fails to establish that plaintiff reasonably relied upon the amount of A & B's service fee in its decision to purchase the surety bond.

Under New York law, "[t]he elements of a cause of action for fraudulent concealment are: (1) relationship between the parties that creates a duty to disclose; (2) knowledge of the material facts by the party bound to make such disclosures; (3) nondisclosure; (4) scienter; (5) reliance; and (6) damage." DuPont v. Brady, 646 F. Supp. 1067, 1075 (S.D.N Y 1986), rev'd on other grounds, 828 F.2d 75 (2nd Cir. 1987), on remand, 680 F. Supp. 613 (S.D.N.Y. 1988). A relationship that creates a duty to disclose arises where, as alleged here, "the parties enjoy a fiduciary relationship." Aaron Ferer & Sons Ltd. v. Chase Manhattan Bank, 731 F.2d 112, 123 (2nd Cir. 1984); see Ettinger v. Merrill Lynch, Pierce, Fenner & Smith, 835 F.2d 1031, 1033 (3rd Cir. 1987); 68 N.Y.Jur.2d Insurance § 441 (1988).

Even assuming that A & B willfully concealed the amount of its service fee in order to defraud plaintiff, plaintiff has failed to come forward with evidence establishing that, had it known the amount of the service fee, it would have refused to obtain the surety bond through A & B. Plaintiff concedes that its Vice-President of Operations, John Hamblin, knew that plaintiff was being charged a service fee by A & B to procure the bond and he did not ask for a breakdown of the amounts of the premium and service fee before mailing a check to A & B for payment. Hamblin Deposition at 28, 75. Although Hamblin first testified that A & B misled him "after the fact" as plaintiff was "charged an exorbitant amount to procure this bond once we found out what [A & B] paid for the bond," id. at 53, he later admitted that he did not think that he had been misled. Id. at 79. He also denied knowledge of anyone at A & B having made a false statement, either in writing or orally, to himself or to anyone else at Aeropulse. Id. at 77.

Perhaps the crucial testimony by Hamblin on the issue of whether the alleged fraudulent omission affected plaintiff's conduct was the following exchange at his deposition:

  Q. Do you believe that there was any material
  fact that Armstrong and Brooks

  omitted to tell you prior to your obtaining the
  surety bond?
  A. They certainly omitted telling me how much
  their charges were and how much the bond was
  going to cost them. They did not give me a
  breakdown of what the $17,900 was, how that would
  be allocated.

Q. Did you ever ask them for such a breakdown?

A. I did not.

Q. Did Bruce Allen ever give you a breakdown?

A. He did not.

Q. Did you ever ask him for a ...


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