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AMERICAN BUYING INSUR. SERV. INC. v. S. KORNREICH

September 30, 1996

AMERICAN BUYING INSURANCE SERVICES, INC., et al., Plaintiffs, against S. KORNREICH & SONS, INC., et al., Defendants.


The opinion of the court was delivered by: KAPLAN

 Lewis A. Kaplan, District Judge.

 This action asserts claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., and for common law fraud, breach of contract, negligent misrepresentation, and conversion. The underlying dispute arises from the creation and operation of an insurance buying program proposed by plaintiffs and to be operated by Kornreich Insurance Services ("KIS"), which is alleged to have "held itself out as a collective entity composed of Kornreich Inc., S.K. Int'l., Kornreich N.J., KIS Fla., Kornreich Life, K.B.C., API and Risk." (Am. Cpt. P 12) All of the above named constituent parts of KIS are defendants in this action, in addition to Preferred Concepts Inc., NIA/Kornreich LLC, Steven L. Grossberg, Matthew R. Kornreich, Morton A. Kornreich, William D. Kornreich, Stuart Farber, Phillip J. Miller, and ten "John Does." KIS "is not a corporation, partnership or other entity recognized as such by any state or other governmental agency" (Am. Cpt. P 5) and is not a defendant in this action.

 The defendants move to dismiss the complaint under FED. R. CIV. P. 12(b)(6) on the ground that plaintiffs have failed to state a claim, and under FED. R. CIV. P. 9(b) on the ground that the RICO predicate acts of mail and wire fraud and the common law fraud cause of action are not pleaded with sufficient particularity.

 Facts

 Robert Sheridan, Marc Sheridan and Beth Sheridan Kurensky, the controlling shareholders of the plaintiff corporations, are in the real estate business and had used KIS as their insurance brokerage to obtain coverage on their individual properties. In December 1990, they contacted Steven L. Grossberg and Morton A. Kornreich of KIS in order to discuss the formation of a real estate insurance buying group, a group that would package individual property owners into a group for insurance purchasing purposes in order to obtain lower premiums. The idea was that KIS would operate the group.

 The agreement provided that plaintiffs were to receive 10 percent of the premiums paid to KIS by customers who were new to the program, and 5 percent of premiums for existing KIS customers who entered the program. In addition, plaintiffs were to receive fees for any new customers that they referred to the program. Defendants were to receive 15 percent of all premiums paid by program participants and, in addition to running all aspects of the program and placing all of the program's insurance through API, KIS represented that it would endeavor to find new program members and admit all qualified customers to the program. KIS further represented that it would provide plaintiffs with regular reports that reflected all new business, premiums paid by clients, the commissions accrued to the accounts of KIS and the plaintiffs, and numerous other details of the program's operation. The plaintiffs' only obligation under the contract was to try diligently to find new participants for the program.

 The payment of commissions to plaintiffs raised an issue under state insurance laws. Grossberg informed them that only licensed brokers could receive commissions out of the premiums paid to the program without disclosing these commissions to customers. He told plaintiffs that any payments made to plaintiffs for work in states in which plaintiffs were not licensed would have to be made as fees and disclosed to the customers. However, plaintiffs never procured any business from states in which they were not licenced.

 Problems with the program began in the fall of 1992, when KIS had trouble gaining renewal for some of the program's coverage, difficulty that continued for the remaining time the program was in operation. Plaintiffs claim that at least one of the instances in which KIS could not "roll over" the policies was caused by an insurer's animus toward KIS due to improper actions it had taken in relation to another matter.

 Plaintiffs claim that program members were forced to pay higher premiums than they would have paid if KIS had renewed the policies in a timely manner. KIS informed plaintiffs that, after May 13, 1994, the policies in the program would have to be placed on an individual basis in order to obtain coverage and that no fees would be paid to plaintiffs for these policies. Plaintiffs argue that this was merely a pretext to avoid paying them their fees and that KIS and its subsidiaries on numerous occasions placed program participant insurance individually in order to deprive plaintiffs of their fees.

 Plaintiffs maintain that defendants sought to defraud them throughout the life of the program and even before the signing of the contract. They claim that customers of TUF, a brokerage unit of KIS, were included in the program but that KIS failed to pay plaintiffs the agreed fees on that business. In addition, plaintiffs claim that KIS prepared and mailed them statements which falsely reported the amount of fees due plaintiffs under the pretext of giving the customers a fee discount to secure new business. Furthermore, it is claimed that KIS failed to pay the full fees owing to plaintiffs from customers of PCI.

 Essentially, plaintiffs accuse defendants of not accurately reporting the status of the program to them in the required status reports and of failing to deliver copies of policies to customers, in violation of the contract. Plaintiffs claim that defendants did this in order to cover up the fact that they were not: (1) paying plaintiffs the fees that plaintiffs were entitled to, (2) including in the program all customers that should have been included; (3) disclosing plaintiffs' fees to customers; and (4) placing all of the coverage that program participants had paid premiums for, while representing that they had placed such coverage.

 Discussion

 Standing

 In order to bring a civil RICO claim, a plaintiff must allege: (1) a violation of Section 1962; (2) an injury to business or property; and (3) causation of the injury by the violation. Hecht v. Commerce Clearing House, Inc., 897 F.2d 21, 23 (2d Cir. 1990). Defendants argue that plaintiffs can not demonstrate injury to their business or property, and so their claim must be dismissed. The Court disagrees.

 Defendants claim that the agreement between KIS and plaintiff American Buying Corp. ("AB") was illegal under the New York Insurance Law, so that any claims for damages that AB may have against KIS under that contract would be unenforceable. Absent an enforceable claim for damages, defendants argue, plaintiffs can not satisfy the injury requirement.

 Without ruling on the legality of the contract under New York law, the Court rejects defendants' claim that illegality of the contract necessarily would preclude plaintiffs from proving damages. Under Conley v. Gibson, 355 U.S. 41, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957), a complaint should not be dismissed unless it is clear that the plaintiff could prove no set of facts that would entitle it to relief. Even if the contract in this case were held to violate New York law, there are a number of reasons why plaintiffs nevertheless might be entitled to damages.

 Defendants argue that plaintiffs are entitled to no benefit from the contract, and therefore should have no claim for damages. Plaintiffs' RICO claims, however, sound in tort, not contract. The predicate acts that plaintiffs allege are mail and wire fraud. The damages resulting from these causes of action are not measured exclusively, if at all, by the benefit of the bargain method. See W. PAGE KEETON, ET AL., PROSSER AND KEETON ON TORTS § 110, at 767-68 (5th ed. 1984) (discussing plaintiffs' damages as "out-of-pocket," including special and other damages, which are different from "loss-of-bargain" damages, which defendant in this case assumes are the only damages available). Plaintiffs may be able to prove out-of-pocket losses distinct from the fees that they were to receive under the contract. *fn1" In consequence, plaintiffs may be entitled to damages measured in a manner that would not give them the benefit of an allegedly illegal bargain. The fact that the plaintiffs might have been defrauded out of insurance coverage when KIS falsely reported that it had placed policies in 1991-1994 could give rise to a claim for damages for fraud separate from the fees due under the contract. (Am. Cpt. P 55j) Likewise, plaintiffs allege that the program lost insurers and paid higher premiums than were necessary due to KIS' fraudulent acts. (Am. Cpt. P 39) Such a claim would give rise to damages apart from the fees owed under the contract. Thus the complaint alleges numerous factual situations which, if proven, would entitle the plaintiffs to recovery under their tort claims absent the contract.

 Defendants' claim is flawed also because they overstate the inflexibility of the rule prohibiting enforcement of illegal contracts. While it is true that courts generally will not enforce an illegal contract, there are myriad exceptions to this principle, of which plaintiffs might prove a ...


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