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OLD REPUBLIC INS. CO. v. HANSA WORLD CARGO SERVICE

June 1, 1999

OLD REPUBLIC INSURANCE COMPANY, PLAINTIFF,
v.
HANSA WORLD CARGO SERVICE, INC.; DUFERCO LTD. (U.S.A.); FERCO INTERTRADE, INC.; DUFERCO, INC; DUFERCO STEEL, INC.; DUFERCO TRADING CORP.; DUFERCO STEEL SALES, LTD.; FRANK FINK; AND JOHN CUMMINGS, DEFENDANT.



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

    ORDER

In this diversity action, Plaintiff alleges that Defendants fraudulently schemed to import steel products into the United States without paying anti-dumping*fn1 and countervailing*fn2 duties that the United States Customs Service ("U.S. Customs" or "Customs") levied upon the steel. Presently before this Court are the Duferco Defendants', Defendant Fink's, and Defendant Cummings' objections to the Reports and Recommendations that Honorable Leonard Bernikow, United States Magistrate Judge, issued on March 31, 1998 and September 23, 1998. In those Reports, Magistrate Judge Bernikow addressed Defendants' motion to dismiss Plaintiff's claims pursuant to Federal Rules of Civil Procedure ("Rules") 12(b)(6) and 9(b).

Background

This matter reaches the Court framed as a Rule 12(b)(6) motion. Accordingly, the facts recited herein are drawn predominantly from Plaintiff's amended complaint.

A. Parties:

Plaintiff Old Republic Insurance Company ("ORIC" or "Plaintiff"), a corporation organized under the laws of the Commonwealth of Pennsylvania, has its principal place of business in the Commonwealth of Pennsylvania and is licensed to transact business within the State of New York. See Am.Compl. at ¶ 1. The Secretary of the Treasury of the United States has authorized ORIC to issue United States Customs surety bonds. See id. Defendant Hansa World Cargo Service, Inc. ("Hansa") is incorporated in Michigan and, during the period relevant to this litigation, maintained its principal place of business in Ohio. See id. at ¶ 2.

Until 1982, Defendant Ferco Intertrade, Inc. ("Ferco") was a Delaware corporation authorized to do business in New York. See id. at ¶ 4. Plaintiff contends that on July 15, 1982, Ferco became known as Defendant Duferco Ltd. (USA) ("Duferco USA"). See id. Duferco USA also was a Delaware corporation authorized to do business in New York. See id. at ¶ 3. Plaintiff alleges, however, that in November 1989, Duferco USA filed a Certificate of Termination with the New York Secretary of State but "continued thereafter to conduct business in the County of New York, State of New York." See id.

Defendants Duferco, Inc.; Duferco Steel, Inc.; Duferco Properties, Inc.; Duferco Trading Corp.; and Duferco Steel Sales, Inc. all were Delaware corporations, with their respective principal places of business in New York. See id. at ¶¶ 5-9.*fn3 Plaintiff alleges that "prior to April 22, 1988, defendant Duferco Trading Corp. was known as Duferco Properties, Inc." See id. at ¶ 8.

Defendant Frank Fink ("Fink") is alleged to have been a citizen of the State of Ohio at the time of commencement of this lawsuit, and "an officer, director and/or owner of defendant Hansa" at all times relevant to this litigation. Id. ¶ 13. Plaintiff contends that Fink "was also a licensed Customhouse Broker, with the authority to issue plaintiff's bonds for the benefit of his customers." Id. Defendant John Cummings ("Cummings") is alleged to have been a citizen of the State of California at the time of commencement of this lawsuit, and as "an attorney versed in custom matters," to have worked as "an officer, director and/or owner of defendant Hansa" during the time relevant to this litigation. Id. at ¶ 14.*fn4

Plaintiff asserts that "one or more of the Duferco defendants are or were alter egos of, and/or successors in interest to, defendant Duferco Ltd. (USA)," and thereby, were the means by which Duferco USA continued to do business after its purported dissolution in 1989. See id. at ¶ 11-12. Specifically, Plaintiff asserts that (1) after its alleged termination, Duferco USA maintained offices and a telephone listing in New York, (2) before its own purported dissolution in 1989, Duferco Steel Sales, Inc. was an affiliate of Duferco USA and sold steel products purchased from Duferco USA, (3) Defendants Duferco Steel, Inc. and Duferco Trading Corp. carried on the business of Duferco USA and Duferco Steel Sales, Inc. after their dissolutions, (4) "the same persons acted as officers and/or employees in each of the Duferco defendants," and (5) discovery will reveal substantial additional evidence to support Plaintiff's contention. See id. at ¶ 12.

B. Facts:

At all times pertinent to this litigation, Plaintiff ORIC was authorized by U.S. Customs to issue bonds in connection with the importation, entry, and release of goods into United States commerce. See id. at ¶ 17. The bonds, in turn, guaranteed the payment of assessed duties if the importer failed to pay once the entries passed Customs and Customs demanded payment from the importer. See id. Beginning in approximately 1980, ORIC authorized Defendant Fink, a duly licensed customhouse broker, to post ORIC's bonds, including bonds that covered anti-dumping and countervailing duties. See id. at ¶ 19, 22. Shortly thereafter, Fink and Defendant Cummings organized Defendant Hansa to act as importer of record on behalf of foreign steel manufacturers and/or exporters, including Duferco USA. See id. at ¶ 20, 27. ORIC alleges that Fink was aware that it was ORIC's practice to require the posting of collateral to secure anti-dumping and countervailing duty bonds. See id. at ¶ 23. In fact, beginning in the middle of 1982 and then again in March 1983, ORIC's agents reminded Fink that ORIC required that their bonds be fully collateralized before posting. See id.

In late 1983 and early 1984, the United States Commerce Department's International Trade Administration ("ITA") publicly announced a preliminary assessment of anti-dumping and countervailing duties on certain Brazilian steel products. See id. at ¶ 24-25. Almost immediately after the ITA' 1983 determination, on September 12, 1983, Hansa and Duferco USA entered into a contract ("Hansa/Duferco contract" or the "contract")*fn5 agreeing that Hansa would serve as importer of record and, in exchange for a fixed fee per metric ton of steel, assume the risk of liability for the possible increased Custom duties on Duferco USA's imported Brazilian steel. See id. at ¶ 27-29. The contract indicated that while in the past Duferco USA had reimbursed Hansa for all incurred costs and usually paid Hansa in enough time to permit payment to U.S. Customs, because both Hansa and Duferco USA recognized that anti-dumping or countervailing duties may ultimately be assessed on Brazilian steel, Duferco USA wished to avoid any liability for any imposed duties. See id. at ¶ 28-29. The contract, thereby, significantly increased the risk Hansa assumed by acting as Duferco USA's importer of record because Hansa relinquished any right to seek reimbursement from Duferco USA. See id. at ¶ 31.

Despite its increased liability for payment of Customs duties, in each posted bond, Hansa represented to ORIC that it would pay any attached duties for which it served as importer of record. See id. at ¶ 36. Additionally, Defendant Cummings "specifically represented to [ORIC] that its unnamed `clients' had sufficient funds to cover the full amount of any anti-dumping or countervailing duties which might ultimately be assessed." See id. at ¶ 64. Yet, in 1983 and thereafter, Fink, Hansa's alleged co-owner, posted at least fifty six (56) ORIC bonds without collateral for the importation of Brazilian steel on behalf of Duferco USA, contrary to ORIC's underwriting guidelines and explicit instructions. See id. at ¶¶ 34-35. Furthermore, Hansa, although named importer of record on the bonds, had no interest in the imported goods, allegedly had insufficient assets to pay any potentially imposed duties and under the contract, could not look to Duferco USA for reimbursement. See id. at ¶¶ 33, 35.

Plaintiff asserts that all parties to the Hansa/Duferco contract, being experienced in customs matters,*fn6 "knew or should have known that the party that would ultimately pay any duties assessed would be Hansa's bonding company (Old Republic), and not Hansa," because "it was virtually certain that Hansa would default on its obligations to Old Republic and U.S. Customs." Id. at ¶ 32, 36. ORIC explains that the fee that Hansa was to receive under the Hansa/Duferco contract was insufficient for Hansa to pay any anti-dumping or countervailing fees ultimately assessed. See id.*fn7 ORIC further argues that no bonding company aware of the Hansa/Duferco contract

  would have permitted its bonds to be posted on behalf
  of Hansa, which had no financial stake in the imported
  merchandise, which had insufficient assets to pay the
  duties which might be assessed, and which, under its
  contract with Duferco was excluded from looking to its
  customer for reimbursement.

Id. at ¶ 33. Indeed, ORIC states that it did not discover the existence of the Hansa/Duferco contract until after the initiation of this lawsuit in 1992. See id. at ¶ 33.

Between February and October 1988 and between June and September 1989, the United States Department of Commerce assessed anti-dumping and countervailing duties respectively on the imported Brazilian steel. See id. at ¶¶ 41-42. U.S. Customs sent a bill for these increased duties to Defendant Hansa, and when Hansa failed to pay these assessed duties, Customs demanded payment from ORIC as surety on the bonds. See id. at ¶ 43. ORIC paid the majority of these demands, and as of the date of the amended complaint, March 25, 1997, ORIC paid $2,066,244.91 and claimed it may have to pay an additional $31,388.27 in liquidated anti-dumping and/or countervailing duties under its bonds for the imported Brazilian steel. See id. at ¶¶ 44-45.

C. Procedural History:

On January 8, 1992, ORIC commenced the instant litigation, asserting ten claims for relief against Defendants: (1) reimbursement of the money plus interest that ORIC paid to U.S. Customs on Defendants' behalf, (2) indebtedness of the money paid plus interest; (3) indemnity of the money paid, (4) unjust enrichment of the money paid plus interest, (5) violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO") in the execution of Defendants' scheme, (6) conspiracy to violate RICO, (7) intentional misrepresentation on the grounds that Defendants knowingly and falsely represented to ORIC that they would pay, any assessed duties on the steel and that they had provided collateral for ORIC's. bonds, (8) breach of fiduciary duty against Defendant Fink, (9) injunction forcing Defendants to pay the amounts that U.S. Customs demanded, and (10) declaratory relief for a judicial determination of the parties' respective rights and duties with respect to payment of the claims that U.S. Customs asserted. See Old Republic Ins. Co. v. Hansa World Cargo Serv., Inc., 170 F.R.D. 361, 369 (S.D.N.Y. 1997). On July 24, 1992, Defendants filed a motion to dismiss pursuant to Rule 12(b)(6) and for. sanctions pursuant to Rule 11. See id.

On February 26, 1997, this Court ruled on Defendants' motion to dismiss and for sanctions. See id. This Court dismissed with prejudice Plaintiff's two claims arising under RICO and claims for injunctive and declaratory relief, and denied Plaintiff's motion for sanctions. See id. at 389. This Court also dismissed without prejudice Defendants' claims of reimbursement, indebtedness, indemnity, unjust enrichment, and intentional misrepresentation, holding that plaintiff failed to sufficiently state the elements of those claims or to allege facts satisfying those elements. See id. at 384-85. This Court granted Plaintiff thirty days to amend these claims in a manner consistent with the February 26, 1997 opinion. See id.

On March 25, 1997, Plaintiff filed its amended complaint against Defendants, raising five claims for relief. First, because Hansa was obligated under applicable suretyship law to reimburse Plaintiff for the paid and payable Customs duties, amounting respectively to $2,066,244.91 and $31,388.27, and Dufero USA is Hansa's alleged principal, Plaintiff seeks reimbursement from Hansa and Duferco USA, jointly and severally, for the payment of those duties. See Am.Compl. at ¶¶ 46-50. Second, because, equity obligates Hansa to indemnify Plaintiff for the paid and payable duties, and Duferco USA is Hansa's alleged principal, Plaintiff seeks indemnification from Hansa and Duferco USA, jointly and severally. See id. at ¶¶ 51-55. Third, because Fink breached the fiduciary duty that he owed to ORIC as its licensed customhouse broker when he posted ORIC's bonds, Plaintiff seeks compensatory damages for the duties that it paid and punitive damages in the amount of $5,000,000. See id. at ¶¶ 56-61. Fourth, because Hansa and Cummings misrepresented to ORIC that Hansa was capable of paying and would pay any assessed duties, Plaintiff seeks compensatory damages from the Hansa Defendants for the duties that it paid and punitive damages in the amount of $5,000,000. See id. at ¶¶ 62-67. Fifth, because Hansa's wrongful acts unjustly enriched Duferco USA, Plaintiff seeks recovery of all paid and payable duties. See id. at ¶¶ 68-70.

With regard to the claims for reimbursement and indemnification, Plaintiff asserts that Hansa was acting as the agent of Duferco USA, Hansa's undisclosed principal. See id. at ¶ 37. ORIC maintains that Duferco USA effectively supervised Hansa with respect to the posting of ORIC's bonds, arguing that Duferco USA exercised complete control over the importation of the steel. See id. Furthermore, as noted, Plaintiff also seeks relief on these two claims from the other Duferco Defendants, contending that these other companies acted as "alter egos of, and/or succesor[s] in interest to, defendant Duferco Ltd. (USA)." Id. at ¶ 11.

This Court thereafter ordered the Clerk of the Court to refer this case to a magistrate judge for pretrial and initial case management and for dispositive motions. The C1erk of the Court assigned the case to Honorable Leonard Bernikow. Defendants reasserted their motion to dismiss the amended complaint pursuant to Rule 9(b) and/or 12(b)(6). Motion papers from Plaintiff and Defendants followed.

On March 31, 1998 Magistrate Judge Bernikow issued a Report and Recommendation, granting in part and denying in part Defendants' motion to dismiss. See Report and Recommendation of Magistrate Judge Leonard Bernikow, March 31, 1998 (the "3/31/98 Report"). Magistrate Judge Bernikow recommended that Plaintiff's claims of reimbursement and indemnification should be dismissed with prejudice. See id. at 29. He further recommended that the motion to dismiss ORIC's claims of breach of fiduciary duty against Defendant Fink and of fraud against the Hansa Defendants should be denied. See id. at 29-30. Magistrate Judge Bernikow also recommended that this Court find that the complaint should neither be dismissed on venue grounds nor on statute of limitations grounds. See id. at 24, 29.

Thereafter, by letter dated April 8, 1998, which Magistrate Judge Bernikow construed as a Local Civ.R. 6.3 motion, Plaintiff sought reconsideration of the recommendation to dismiss the claims for reimbursement and indemnification. See Report and Recommendation of Magistrate Judge Leonard Bernikow, September 23, 1998 (the "9/23/98 Report"). Pursuant to that letter, Magistrate Judge Bernikow reexamined his former recommendation on those two claims and issued a second Report and Recommendation on September 23, 1998. In that Report, Magistrate Judge Bernikow granted ORIC's motion for reconsideration and withdrew that part of the 3/31/98 Report recommending dismissal of ORIC's claims for reimbursement and indemnification. See id. at 32. He also advised that this Court should award Plaintiff discovery limited to Defendants' capacity to be sued and their corporate relationships, particularly with respect to Plaintiff's corporate successor liability theory, noting that Plaintiff's corporate alter ego theory lacked merit. See id. at 15-24. Additionally, Magistrate Judge Bernikow suggested that this Court grant Defendants' motion to dismiss with regard to Plaintiff's claim for unjust enrichment. See id.*fn8

Plaintiff and Defendants submitted written objections to both the 3/31/98 Report and the 9/23/98 Report. In response to the 3/31/98 Report, Defendant Cummings alleged that the statute of limitations bars Plaintiff's fraud claim and that ORIC failed to plead fraud against him with specificity. See Memorandum of Law of Defendant John P. Cummings in Supp. of Motion of Objection to the Report and Recommendation of Magistrate Judge Leonard Bernikow, April 20, 1998 ("Cummings Mem.").*fn9 Defendant Cummings letter in furtherance of his objections, dated April 22, 1998, was untimely, and this Court will not consider it. Defendant Fink, in answer to the 3/31/98 Report, similarly asserted that the statute of limitations bars Plaintiff's fraud claim and that ORIC failed to plead fraud against him with specificity. See Notice of Motion of Defendant Frank Fink in Resp. to Objections of Plaintiff and Defendant Cummings, April 30, 1998 ("Fink Mem."). Fink also argued that venue is improper and that he did not breach his fiduciary duty to ORIC. See id.

After the issuance of the 9/23/98 Report, the Duferco Defendants provided objections maintaining that no facts support Plaintiff's theories of agency, corporate successor liability, or corporate alter ego liability. See Duferco Mem. Plaintiff's only objections regarded Magistrate Judge Bernikow's original recommendation to dismiss ORIC'S claims of reimbursement and indemnification. Because the 9/23/98 Report, reversing those determinations, has rendered Plaintiff's objections moot, this Court need not consider them.

Discussion

This Court now turns to the objections to the 3/31/98 Report and the 9/23/98 Report. Before resolving these issues, this Court will first set forth the legal standards that govern the instant opinion and order.

I. Relevant Legal Standards:

The appropriate legal standards for purposes of this Opinion and Order are those that control: (1) a district court's review of a magistrate judge's recommendation and (2) a motion to dismiss for failure to state a claim upon which relief can be granted pursuant to Rule 12(b)(6). This Court will review each of these standards individually. Furthermore, because this litigation arose under this Court's diversity jurisdiction, this Court applies the substantive law of the forum state, New York. See Old Republic, 170 F.R.D. at 375 (citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941).

A. Standard for Reviewing A Magistrate Judge's Recommendations

Statute empowers magistrate judges to preside over pretrial matters on a district judge's appointment. See 28 U.S.C. § 636(b)(1)(A); Fed.R.Civ.P. 72. Where, as here, a Magistrate Judge is "assigned without consent of the parties to hear a pretrial matter dispositive of a claim or defense of a party . . . [t]he magistrate judge shall enter into the cord a recommendation for the matter, including proposed findings of fact where appropriate." Fed.R.Civ.P. 72(b).

Under Rule 72(b) and 28 U.S.C. § 636(b)(1)(A), a district court evaluating a magistrate judge's recommendation is permitted to adopt those portions of the recommendation to which no "specific, written objection" is made, as long as those sections are, not clearly erroneous. Fed. R. Civ.P. 72(b); Thomas v. Arn, 474 U.S. 140, 149, 106 S.Ct. 466, 88 L.Ed.2d 435 (1985); Greene v. WCI Holdings Corp., 956 F. Supp. 509, 513 (S.D.N.Y. 1997) (citations omitted); aff'd, 136 F.3d 313 (2d Cir.); cert. denied, ___ U.S. ___, 119 S.Ct. 448, 142 L.Ed.2d 402 (1998). Where a party makes a "specific written objection" within "[ten] days after being served with a copy of the [magistrate judge's] recommended disposition," Fed.R.Civ.P. 72(b); the district court is required to make a de novo determination regarding those parts of the report. See United States v. Raddatz, 447 U.S. 667, 676, 100 S.Ct. 2406, 65 L.Ed.2d 424; Greene, 956 F. Supp. at 513 (citations omitted).*fn10

B. Rule 12(b)(6) Standard

In reviewing the pleadings on a motion to dismiss for failure to state a claim upon which relief, can be granted pursuant to Rule 12(b)(6), a court looks only to the four corners of the complaint and evaluates the legal viability of the allegations contained therein. See Fed.R.Civ.P. 12(b)(6); Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991), cert. denied, 503 U.S. 960, 112 S.Ct. 1561, 118 L.Ed.2d 208 (1992); Kramer v. Time Warner, Inc., 937 F.2d 767, 773 (2d Cir. 1991). "[A] district court must limit itself to facts stated in the complaint or in documents attached to the complaint as exhibits or incorporated in the complaint by reference." Kramer, 937 F.2d at 773; accord Kopec v. Coughlin III, 922 F.2d 152, 155-56 (2d Cir. 1991); Fonte v. Board of Managers of Continental Towers Condominium, 848 F.2d 24, 25 (2d Cir. 1988).*fn11 If a ...


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