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PHILAN INS. LTD. v. FRANK B. HALL

October 9, 1990

PHILAN INSURANCE LTD., AND BENODET INSURANCE LTD., PLAINTIFFS,
v.
FRANK B. HALL & CO., INC., FRANK B. HALL RE OF NEW YORK, INC., FRANK B. HALL RE INTERNATIONAL, INC., FRANK B. HALL RE DE MEXICO, S.A., ROLLINS BURDICK HUNTER CO., ROLLINS BURDICK HUNTER OF BERMUDA, LTD., KEOUGH-KIRBY ASSOCIATES, INC., KEOUGH KIRBY RE LTD., FIELDING JUGGINS MONEY & STEWART LTD., TRADING AS FIELDING AND PARTNERS, PWS MARINE LIMITED, LEONARD SMITH, STEPHEN MALONEY, AND MONROE BIRNBERG, DEFENDANTS.



OPINION AND ORDER

OJ  ROBERT P. PATTERSON, Jr., District Judge.

By use of RICO claims, plaintiffs seek to invoke this Court's jurisdiction for the third time. Defendants, in separate motions, move for an order dismissing the Second Amended Complaint on several grounds. This Court (Walker, J.), dismissed plaintiffs' First Amended Complaint in an Opinion and Order dated April 17, 1989, invoking Rules 12(b)(1), 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure. Philan Ins. Ltd. v. Frank B. Hall & Co., 712 F. Supp. 339 (S.D.N.Y. 1989). Judge Walker granted leave to replead, but admonished plaintiffs that if they chose to replead, the court would strictly scrutinize the Second Amended Complaint for compliance with those rules. Id., 712 F. Supp. at 346.

I. FACTS

The plaintiffs Philan Insurance Ltd. ("Philan") and Benodet Insurance Ltd. ("Benodet") are two reinsurance companies incorporated in the Cayman Islands. The circumstance underlying plaintiffs' claims is that defendant Leonard Smith, then a vice-president/account executive and a director of defendant Frank B. Hall Re*fn1 International, Inc. ("Hall Re International"), and defendant Steven Maloney, chief operating officer and treasurer of both plaintiffs and treasurer of their parent Bridgton Distributing Company, engaged in a scheme from 1983 through 1986 to divert to Smith's and Maloney's personal accounts 10 per cent of payments intended by the ceding insurers to be paid to plaintiffs as reinsurance premiums.

The Second Amended Complaint alleges that the purpose of the scheme was to embezzle 10% of the premium payments for Smith and Maloney, and also to earn commission income for the Hall companies on reinsurance business placed with plaintiffs that plaintiffs would not have accepted absent the conspiracy. In total, Smith and Maloney are alleged to have diverted more than $1 million to themselves.

Smith and Maloney allegedly falsely represented to a principal shareholder of plaintiffs' parent and a director of plaintiff that the insurance brokerage firm of Frank B. Hall & Co., Inc. ("Hall") had agreed to act as plaintiffs' underwriting managers and consultants, and that by utilizing Hall, plaintiffs would be able to attract business. It is alleged that "[i]n truth and in fact, Hall and its various subsidiaries never agreed to act as underwriting managers or consultants for plaintiffs and, in fact, acted as reinsurance intermediaries (i.e., agents) for ceding insurers placing business with reinsurers like plaintiffs." Second Amended Complaint ¶ 29(b).*fn2

The fraudulent scheme involved alleged diversions of the premiums, received by the Hall entities allegedly in a fiduciary capacity for plaintiffs, to "conduit" off-shore corporations creating "the appearance of an insurance `manager,'"*fn3, see Second Amended Complaint ¶ 32, which would (1) deduct the 10 percent to be stolen by Smith and Maloney and transfer those sums to their accounts, and (2) transfer the remainder of 90%, as premiums to plaintiffs, whose principals apparently believed the plaintiffs were receiving payment in full.

As a part of their scheme, Smith and Maloney allegedly first contacted John Lorhan, the president and director of defendant Rollins Burdick Hunter (Bermuda) Ltd. ("RBH Bermuda"), a wholly-owned subsidiary of defendant Rollins Burdick Hunter Company ("RBH"), and outlined the scheme to him. Lorhan allegedly provided a subsidiary of RBH Bermuda, Mansion Management Services, Ltd. ("Mansion"), to serve as the "conduit" corporation, with the understanding that in return Mansion would receive 1%, of the premiums received by Smith and Maloney as a fee.

Under this arrangement, it is alleged that Maloney acting on plaintiffs' behalf would accept from brokers certain reinsurance business, and Smith, acting for Hall Re International, would direct the brokers to transmit the premium to Mansion rather than to plaintiffs; Mansion would then forward 90% of the premiums to plaintiffs, 9% to Smith and Maloney and 1% to itself. The complaint sets forth a number of payments received by Mansion in the form of wire transfers from New York into its account at the Bank of Bermuda.

The Second Amended Complaint further alleges that Smith also induced employees of two London reinsurance brokers, defendants Fielding and Partners ("Fielding") and PWS Marine Limited ("PWS"), to take part in the scheme. Callum Stewart, a director of Fielding, and Brian Sounes, the managing director of PWS, are alleged to have diverted to Mansion premiums collected by them on plaintiffs' behalf. Fielding and PWS allegedly thereby received fees for premiums that those companies otherwise would not have earned. Later, plaintiffs allege, Peter Leddy, Fielding's Chief Financial Officer, agreed to send the 10 per cent of the premiums directly into an account at the Bank of Bermuda, the MTM Trust Account, controlled by Maloney. Thereafter, it is alleged that in a meeting between Brian Sounes and Maloney "An agreement similar to the one Smith and Maloney reached with Fielding was also reached with defendant PWS." Second Amended Complaint ¶ 46.

The Second Amended Complaint further alleges that thereafter, in or about November, 1984, Smith resigned from Hall Re International and, with Maloney and Keough-Kirby Associates, Inc. ("Keough-Kirby"), formed Keough Kirby Re Ltd. ("Keough Kirby Re"), a reinsurance intermediary. Smith and Maloney allegedly continued the conspiracy while at Keough Kirby Re, which included the formation in the Cayman Islands, and utilization, of Island Corporate Services, Ltd. ("Island"), another "conduit" corporation posing as an insurance manager. Unlike Mansion, which received the entire premium owed to plaintiffs and then diverted 10% to Smith, Maloney and itself, Island allegedly received 10%, only of each premium, the remainder being sent directly to the plaintiffs.

Smith, through his influence with the Hall defendants, is alleged to have produced a substantial amount of reinsurance business for plaintiffs from Union Indemnity Insurance Company of New York ("Union"), a wholly-owned subsidiary of Hall. In return, defendant Monroe Birnberg, president of Union, allegedly demanded and received a portion of the diverted 10% of premiums in excess of $100,000.

Finally, it is also alleged that Maloney and Smith met with Francisco Martinez del Rio, Chief Financial Officer of another Hall subsidiary, Hall Mexico, who agreed to divert 10% of plaintiffs' reinsurance premiums through Island, and to conceal the diversions.

Based on these allegations, plaintiffs assert eight claims: two RICO counts and six state law counts, including common law fraud, conversion, breach of fiduciary duty, and negligence.

II. DISCUSSION

Plaintiffs' pleading has again resulted in an avalanche of motion papers from the defendants. As will become evident, the Court does not reach every issue raised by the papers.

1.  Subject Matter Jurisdiction over the claims against Hall
    Mexico, PWS, Fielding and RBH Bermuda

Hall Mexico, PWS, Fielding and RBH Bermuda argue that this Court does not have subject matter jurisdiction over plaintiffs' claims against them because all of their alleged conduct is acknowledged to have occurred entirely outside ...


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