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OLD REPUBLIC INS. CO. v. HANSA WORLD CARGO SERVICE
June 1, 1999
OLD REPUBLIC INSURANCE COMPANY, PLAINTIFF,
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.
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).
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.
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
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.
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
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.
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
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
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.
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
The term "`de novo determination' has an accepted meaning in the law.
It means an independent determination of a controversy that accords no
deference to any prior resolution of the same controversy." Raddatz, 447
U.S. at 690, 100 S.Ct. 2406 (Stewart, J., dissenting); Greene, 956 F.
Supp. at 514 (citations omitted). Therefore, employing a de novo review,
a district court must make a "fresh consideration" of the magistrate
judge's conclusions and apply "no presumption of validity . . . to the
magistrate's findings or recommendations." 14 James Wm. Moore Et Al.,
Moore's Federal Practice § 72.11[a] at 72-44 (3d ed. 1997). If the
district court disagrees with the magistrate judge's proposals, or any
part of them, "[t]he district judge is free to substitute his or her own
view for that of the magistrate judge without making any threshold
finding." Id. at 72-44 to 72-45. Further, while the district court is not
required to take additional evidence regarding a party's objections to
the magistrate judge's recommendations, it is required to review the
record of the proceedings before the magistrate judge. See id. Thus, in
making its determination, "[t]he district judge may accept, reject, or
modify the recommended decision, receive further evidence, or recommit
the matter to the magistrate judge with instructions." Fed.R.Civ.P.
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 ...