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CRAIG v. THE BANK OF NEW YORK

United States District Court, Southern District 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 Commissioner or with a court of proper jurisdiction is of no force or effect.

Resignation Letter, Ex. B to Fruchtman Aff.*fn10

3. BNY's Notice of Resignation

a. Notice to James Hilbrant

On October 14, 1991, James Hilbrant, a California surplus lines broker, requested written verification from BNY of an Alpine trust fund with a value of at least $5.4 million. See Hilbrant Letter, Ex. D to Fruchtman Aff. On October 17, 1991, BNY informed Hilbrant that BNY had resigned as trustee and was in the process of returning the trust's assets to Alpine. See 10/17/91 Letter, Ex. E to Fruchtman Aff. On February 1, 1993, Hilbrant sold an Alpine insurance policy to Albert Knoll d/b/a A.G. Knoll Trucking ("A.G. Knoll"). See Def. 56.1 ¶ 23. Approximately two weeks later Black was injured in a car accident in California by an employee of A.G. Knoll. See id.

b. Notice to the NAIC and the California Department of Insurance

On January 28, 1992, Maximiliane Moody, an employee working in the NAIIO division of the NAIC, requested that BNY "certify the existence and value of the [Alpine] Trust Account as soon as possible." See Moody Letter, Ex. F. to Fruchtman Aff. In response, on February 11, 1992, BNY informed the NAIC by letter that it had "resigned as Trustee . . . and returned to Alpine . . . any and all securities tendered to [BNY] to be held [in trust]." Notice Letter to NAIC, Ex. G to Fructman Aff. The NAIC forwarded this letter to the California Department of Insurance three days later. See Def. 56.1 ¶ 27.

II. LEGAL STANDARD

Rule 56 of the Federal Rules of Civil Procedure provides for summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). "An issue of fact is `material' for these purposes if it might affect the outcome of the suit under the governing law[,] [while] [a]n issue of fact is `genuine' if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Konikoff v. Prudential Ins. Co. of Am., 234 F.3d 92, 97 (2d Cir. 2000) (internal quotations and citations omitted).

In assessing the record to determine whether genuine issues of material fact are in dispute, a court must resolve all ambiguities and draw all reasonable factual inferences in favor of the non-moving party. See Parkinson v. Cozzolino, 238 F.3d 145, 149-50 (2d Cir. 2001). "Although the moving party bears the initial burden of establishing that there are no genuine issues of material fact, once such a showing is made, the non-movant must `set forth specific facts showing that there is a genuine issue for trial.'" Weinstock v. Columbia Univ., 224 F.3d 33, 41 (2d Cir. 2000) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986)). However, the non-moving party may not "rest upon . . . mere allegations or denials." St. Pierre v. Dyer, 208 F.3d 394, 404 (2d Cir. 2000). "Statements that are devoid of any specifics, but replete with conclusions, are insufficient to defeat a properly supported motion for summary judgment." Bickerstaff v. Vassar Coll., 196 F.3d 435, 452 (2d Cir. 1999); see also Scotto v. Almenas, 143 F.3d 105, 114 (2d Cir. 1998) ("If the evidence presented by the non-moving party is merely colorable, or is not significantly probative, summary judgment may be granted.") (internal quotations, citations, and alterations omitted).

III. DISCUSSION

BNY moves for summary judgment on four separate grounds. First, BNY asserts that plaintiffs' claims are barred by the statute of limitations. Second, BNY maintains that Craig, as liquidator of Alpine, "steps into Alpine's shoes" and can enforce only those rights that Alpine would have had against BNY if it were still in existence. Thus, BNY argues that Craig cannot establish a prima facie cause of action for breach of fiduciary duty because neither Alpine nor Craig suffered any damages.*fn11 Further, BNY maintains that all contractual or equitable defenses it has against Alpine apply to Craig as well. Third, BNY asserts that the Agreement expressly precludes Black, and any other policy holder or third-party claimant, from suing BNY. Fourth, BNY argues that plaintiffs' claims for equitable relief*fn12 are groundless given that BNY has turned over its entire file relating to the Agreement and the purported trust fund no longer exists.

A. Statute of Limitations

Plaintiffs allege that BNY breached both its fiduciary duties as trustee and the provisions of the Agreement entered into with Alpine. With respect to the breach of fiduciary duty claim, New York applies either a three year or six year statute of limitations, depending upon the substantive remedy sought by the plaintiff. See Bastys v. Rothschild, No. 97 Civ. 5154, 2000 WL 1810107, at *3334 (S.D.N.Y. Nov. 21, 2000); Svenska Finans Int'l v. Scolaro, Shulman, Cohen, Lawler & Bernstein, 37 F. Supp.2d 178, 183-84 (N.D.N.Y. 1999); see also Loenpard v. Santa Fe Indus., Inc., 70 N.Y.2d 262, 266 (1987). A claim alleging a breach of an express trust agreement is subject to a six year statute of limitations. See Klamberg v. Roth, 473 F. Supp. 544, 557 (S.D.N.Y. 1979) (finding a claim for breach of an agreement establishing a retirement trust to be essentially "an action on a contract" and subject to New York's six year period of limitations). Accordingly, the longest statute of limitations period that could be applied to either of plaintiffs' claims is six years.

In New York it is well established that claims accrue upon breach, not when an alleged breach is discovered. See T & N PLC v. Fred S. James & Co. of New York, Inc., 29 F.3d 57, 58-60 (2d Cir. 1994) ("Under New York law, a cause of action for breach of contract accrues and the statute of limitations commences when the contract is breached."); see also Bastys, 2000 WL 1810107, at *34 ("With respect to accrual, the rule in New York is that if a breach of fiduciary duty claim is not based upon fraud, the statute of limitation begins to run upon the breach, and not when the plaintiff discovers the breach.").*fn13 However, when an action involves an alleged breach by a trustee, the period of limitations does not begin to run until the trustee clearly and openly repudiates its obligations as trustee. See In re Barabash, 31 N.Y.2d 76, 80 (1972). Furthermore, in light of the circumstances of a particular case, the trustee must make such repudiation known to the beneficiaries of the trust. See id.

The essence of the Complaint is that BNY accepted nonconforming assets (the stock) to fund the trust, failed to compel Alpine to turn over conforming assets, and then improperly resigned as trustee and returned the stock to Alpine in violation of the Agreement. See Compl. ¶ 27-28, 30-33. Accordingly, the last act of BNY's purported breach occurred on November 7, 1991, when BNY returned the stock to Alpine without following the specified procedures set forth in the Agreement. Because this act occurred more than six years prior to the filing of this Complaint, the following questions must be answered: (1) when did BNY repudiate its role as trustee?; and (2) was BNY's repudiation sufficient to trigger the running of the statute of limitations?

1. BNY's Repudiation

BNY asserts that it repudiated its role as trustee on at least three occasions:

1. On October 2, 1991, BNY notified Alpine that no trust existed and it was immediately resigning as trustee. After BNY received no response from Alpine, it returned the stock to Alpine on November 7, 1991.

2. On October 17, 1991, BNY notified Hilbrant that it had resigned as trustee and was returning the stock to Alpine.

3. On February 11, 1992, BNY notified the NAIC of its resignation as trustee and its return of the stock to Alpine. On February 14, 1992, the NAIC forwarded this letter to the California Department of Insurance.

Memorandum of Law in Support of The Bank of New York's Motion for Summary Judgment at 9. BNY sufficiently repudiated its obligations as trustee on each of these occasions but surely no later than February 11, 1992, when it gave notice of its resignation to the NAIC.

a. BNY's Notice of Resignation to the NAIC

BNY's letter to the NAIC reads as follows:

Dear Mr. Moody:

This letter is to advise you of the status of the above-referenced Agreement (the "Agreement"). We have resigned as Trustee thereunder and returned to Alpine Assurance, Ltd. any and all securities tendered to us to be held thereunder.

Notice Letter to NAIC (emphasis added). This letter is clear and unambiguous. It states in no uncertain terms that BNY no longer considered itself trustee and it had returned the stock deposited in the trust back to Alpine. By resigning as trustee, BNY clearly repudiated its obligation to administer the trust. See In re Jacob's Estate, 12 N.Y.S.2d 605, 606 (2nd Dep't 1939) (stating that it is well established that the "statutory period . . . does not begin to run until the administrator has openly repudiated his obligation to administer the estate.")

Plaintiffs argue that this repudiation was insufficient to trigger the running of the statute of limitations. They contend that the limitations period would only be triggered when BNY: (1) gave notice of its repudiation to all of the beneficiaries; or (2) complied with the appropriate resignation procedures set forth in paragraph 3.9 of the Agreement.*fn14 See Plaintiffs' Memorandum of Law in Opposition to The Bank of New York's Motion for Summary Judgment ("Pl. Mem.") at 18. Plaintiffs are wrong on both counts.

First, under New York law, a trustee's repudiation must be "clear and made known to the beneficiaries viewed in the light of the circumstances of the particular case." In re Barabash, 31 N.Y.2d at 80 (emphasis added). While the statute of limitations generally will not commence until a trust's beneficiaries receive notice of the trustee's repudiation, the particular circumstances of this case require an exception to the general rule. This action does not involve a typical trust agreement involving a limited number of beneficiaries. It involves a commercial trust whose beneficiaries more likely than not are unaware of its existence. Plaintiffs' argument that BNY was obligated to give notice to every policyholder and possible third-party claimant to an Alpine insurance policy is tenuous at best. Accepting plaintiffs' proposition would require BNY to give notice of its resignation to everyone in the United States (or for that matter, the world). This is clearly impossible.

BNY's letter to the NAIC unequivocally gave notice of its repudiation of its obligations as trustee, and was in fact forwarded to the California Department of Insurance on February 14, 1992. See Def. 56.1 ¶ 27. BNY never provided the NAIIO with any quarterly statements certifying the existence and value of the purported trust as required by paragraph 2.14 of the Agreement and the NAIC acknowledged that BNY was not on its "Quarterly Listing" in a letter to the California Department of Insurance dated January 21, 1993. See 1/21/93 Letter, Ex. C to Affirmation of Daniel Mollin, Attorney for BNY. Moreover, the NAIC did not disseminate the information regarding BNY's resignation to other state insurance departments because it was notified that Alpine had established a second trust with Ameritrust. See note 14, supra.

As conceded by plaintiffs, the NAIC, an association whose membership is comprised of the insurance commissioners from each state, was established to "collect[] information about insurance companies, process[] this information into usable form by the insurance regulatory community, and act[] as an information clearing house for state insurance regulators." Def. 56.1 ¶ 9. The NAIIO, a division within the NAIC, was responsible for reviewing the assets deposited into the trusts established by off-shore insurance companies.*fn15 See Darwood Decl. ¶ 4. In light of these circumstances, BNY's notice of resignation to the NAIC was a sufficient repudiation to trigger the running of the statute of limitations.

Second, although the issue of BNY's compliance with the resignation procedures set forth in paragraph 3.9 of the Agreement would be relevant in determining whether a breach has occurred, it is not dispositive for statute of limitations purposes, which only require "proof of a repudiation which is clear and made known to the beneficiaries viewed in the light of the circumstances of the particular case." In re Barabash, 334 N.Y.2d at 893. Accordingly, plaintiffs' claims are time barred.

B. BNY's Alternative Grounds For Summary Judgment

In addition to being time barred, plaintiffs' claims fail for the following reasons:

1. As Liquidator Craig Has No Greater Rights Than Alpine

Under New York law the general rule is that the "liquidator of an insurance company `stands in the shoes' of the insolvent, gaining no greater rights than the insolvent had." In the Matter of the Liquidation of Union Indemnity Ins. Co. of New York, 89 N.Y.2d 94, 109 (1996) (quoting Stephens v. American Home Assurance Co., 811 F. Supp. 937, 947 (S.D.N.Y. 1993), vacated and remanded on other grounds, 70 F.3d 10 (2d Cir. 1995)); see also Bohlinqer v. Zanger, 306 N.Y. 228, 234 (1954); Resolution Trust Corp. v. Massachusetts Mut. Life Ins. Co., 93 F. Supp.2d 300, 309 (W.D.N.Y. 2000). While Craig does have standing to sue as Alpine's successor, his claims are barred for several reasons.

First, Alpine received notice of BNY's repudiation by letter dated October 2, 1991. Thus, Craig's claims are time barred. Second, because BNY returned the stock to Alpine, Alpine did not suffer any damages. Without any proof of damages to Alpine, Craig's claims for breach of fiduciary duty and breach of the trust agreement must fail. See Whitney v. Citibank, N.A., 782 F.2d 1106, 1115 (2d Cir. 1986) (the elements of a breach of fiduciary duty claim are: a breach by a fiduciary of obligations to another; defendant's knowing participation in the breach; and damages suffered by the plaintiff as a result of the breach); Harsco Corp. v. Sequi, 91 F.3d 337, 348 (2d Cir. 1996) (the elements of a breach of contract claim are: the existence of an agreement; due performance of the contract by plaintiff; breach of the agreement by defendant; and damages). Third, Alpine's illegal and fraudulent conduct effectively bars Craig's claims. See Smith v. Long, — N.Y.S.2d —, 2001 WL 282406, at *2 (4th Dep't Mar. 21, 2001) ("`[U]nclean hands in participating in a course of conduct of deception and deceit is an effective bar' to causes of action to enforce the agreement that results from that deception and deceit.") (citation omitted).

2. Black and the Class She and Craig Purport to Represent Lack Standing to Sue

Paragraph 3.2 of the Agreement states that the "[t]rustee's duties and responsibilities shall be determined solely by the express provisions of this Agreement and no other duties or responsibilities shall be implied." Paragraph 2.5 of the Agreement states:

No Policyholder or Third Party Claimant shall have any right of any nature or description under this Agreement to seek to enforce a Claim or otherwise bring an action against the Trustee in respect of any assets of the Trustee or of any assets other than those in the Trust Fund. No Policyholder or Third Party Claimant, even after its claim has become a Matured Claims may require an accounting from the Trustee or inquire into the administration of the Trust, question any of the Trustee's acts or omissions or otherwise enforce this agreement, the sole right of such Policyholder or Third Party Claimant under this Agreement being to receive the amount of its Claim after it has become a Matured Claim from the assets then in the Trust Fund and available for such payment under this agreement.

Together, these provisions make clear that policyholders and third-party claimants are prohibited from bringing any claims against BNY other than claims against the assets in the trust fund. As there are no assets in the trust fund, Black and the putative class she and Craig purport to represent lack standing to sue.*fn16

IV. CONCLUSION

For the reasons stated above, BNY's motion for summary judgment is granted and this case is dismissed. The Clerk of the Court is directed to close this case.


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