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CRAIG v. THE BANK OF NEW YORK

April 27, 2001

ROBERT CRAIG AS CO-LIQUIDATOR OF ALPINE ASSURANCE COMPANY, LTD. AND AMARILIS BLACK, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS
v.
THE BANK OF NEW YORK, DEFENDANT.



The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.:

OPINION AND ORDER

Robert Craig as Co-Liquidator of Alpine Assurance Company, Ltd. ("Alpine") and Amarilis Black, on behalf of themselves and all others similarly situated, filed this putative class action against The Bank of New York ("BNY"), alleging that BNY breached the provisions of a Trust Agreement (the "Agreement") between Alpine and BNY.*fn1 Plaintiffs also allege that BNY, as trustee, breached its fiduciary obligations owed to the beneficiaries of the trust.*fn2 Jurisdiction is based on diversity of citizenship pursuant to 28 U.S.C. § 1332.*fn3

BNY now moves for summary judgment under Rule 56(c) of the Federal Rules of Civil Procedure. For the following reasons, BNY's motion is granted.

I. BACKGROUND*fn4

A. The National Association of Insurance Commissioners ("NAIC")

By statute, the insurance commissioners of each state are empowered to protect the interest of the insurance purchasing public in their jurisdiction. See Declaration of John E. Darwood ("Darwood Decl."), Former Manager of the Non-Admitted Insurers Information Office ("NAIIO"), ¶ 7.*fn5 However, because the insurance business tends to be a multistate endeavor, this is often difficult to do. See id. The NAIC was established, in part, to enable the states to regulate multistate insurance transactions more effectively. See id. The NAIC is an association whose membership is comprised of the insurance commissioners from each state. See id. As part of its mandate, the NAIC "collects information about insurance companies, processes this information into a usable form for the insurance regulatory community, and acts as an information clearing house for state insurance investigators." Def. 56.1 ¶ 9.

B. The NAIC Standard Trust Agreement

Most states require that to sell their insurance products off-shore insurance companies must maintain trust accounts in federally insured and regulated banks. See id. ¶ 10. This requirement was intended to guarantee that funds would be available to pay any claims against the company should it falter financially. In response to this requirement, the NAIC drafted a standard trust agreement designed to facilitate the establishment of such trusts. See id.

C. The Alpine Fraud

Alpine was an off-shore insurance company incorporated and domiciled in the Turks and Caicos Islands of the British West Indies. See id. ¶ 3. From 1991 through 1997, Alpine engaged in the solicitation, issuance and delivery of insurance contracts to United States residents. See id. Alpine's policies were sold through surplus lines brokers licensed by various state insurance departments. See id. During this time, however, Alpine was managed by a small group of insurance con artists who engaged in significant fraudulent activities. See Id. ¶ 7. Such activity included using premiums for personal benefit and looting Alpine of its assets, thereby destroying Alpine's ability to pay claims and eventually rendering Alpine insolvent. See id. The Alpine management accomplished this fraud, in part, by providing their purported trusts with inadequate funding and with assets whose values could not be ascertained for insurance regulatory purposes. See id. ¶ 8.

1. The Agreement

On August 15, 1991, BNY entered into a standard trust agreement with Alpine.*fn6 See id. ¶ 14. Under the terms of this Agreement, BNY was to serve as trustee. See id. Pursuant to paragraphs 1.5 and 2.8 of the Agreement, Alpine was required to fund the trust with no less than $5.4 million, which could consist of any combination of cash, readily marketable securities, or letters of credit. On August 30, 1991, Alpine deposited with and instructed BNY to hold in trust 3,200,000 shares of Monoclonal Medical, Inc. ("Monoclonal") stock. See Account Statement, Ex. A to Affidavit of Jack Fruchtman ("Fruchtman Aff."), Vice President and Manager of the Insurance Trust and Escrow Unit in the Corporate Trust Division of The Bank of New York. On September 10, 1991, 500,000 shares of Creative Classics International ("Creative Classics") stock were deposited in the same account.*fn7 See id. BNY then asked the law firm of Emmett, Marvin & Martin ("EMM") to confirm whether the stock was qualified to fund the trust, or more specifically, whether the stock constituted Readily Marketable Securities as defined by paragraph 1.8 of the Agreement.*fn8 See Affidavit of Robert W. Viets ("Viets Aff."), Partner at EMM, ¶ 3. After concluding that neither Monoclonal nor Creative Classics stock were traded on a national or regional security exchange, EMM contacted the SVO for its opinion as to whether the stock constituted Readily Marketable Securities.*fn9 See id. ¶ 4. The SVO orally advised EMM that Alpine had made no application to the NAIC with respect to the stock, and in the absence of an application the NAIC did not consider the stock to be Readily Marketable Securities. See id. In light of this information, EMM advised BNY that the stock deposited by Alpine did not qualify to fund the trust. See id.

2. BNY's Resignation

On September 27, 1991, EMM reviewed the Agreement to determine the "consequences" of Alpine's inadequate funding. See Time Sheets. Three days later, EMM began to draft BNY's resignation letter. See id. On October 1, 1991, Viets and his associate, Stephen Franks, concluded that because of Alpine's inadequate funding, no trust was ever created. See Viets Aff. ¶ ~ 5. The draft resignation letter reflected this conclusion and was forwarded to BNY. See id. At that time, EMM further advised BNY that pursuant to paragraph 3.6 of the Agreement, BNY was entitled to rely on EMM's advice as complete authority for the "basis and method of its resignation [from the trust] . . ." Id. On October 2, 1991, BNY sent its official resignation letter to Alpine, which provided in pertinent part:

Dear Mr. Benton:

We have been orally advised by the Securities Valuation Office of the NAIC that neither the 3,200,000 shares of Monoclonal Medical, Inc. nor the 500,000 Shares of Creative Classics International, which constitute all the securities delivered by Alpine Assurance Ltd. under the above-referenced Agreement . . ., constitutes Readily Marketable Securities as required by the Agreement. Accordingly, no Trust Fund was ever created or now exists.
This letter constitutes our notice of resignation, as Trustee, effective immediately. Given the non-existence of a Trust Fund, we have been advised by our counsel that the requirement that our resignation be delayed pending the acceptance of appointment by a Successor Trustee or the delivery to the Domiciliary ...

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