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NATIONAL CREDIT UNION ADMINISTRATION v. LEE FAMILY ASSOC.

United States District Court, S.D. New York


May 11, 2004.

NATIONAL CREDIT UNION ADMINISTRATION etc., Plaintiff, -against- LEE FAMILY ASSOCIATION etc., et al. Defendants

The opinion of the court was delivered by: LEWIS KAPLAN, District Judge

ORDER

Defendant Norman Lee moves to dismiss the eighth, ninth and tenth claims for relief of the amended complaint as against him on the ground that they fail to state a claim upon which relief may be granted.

The amended complaint alleges, inter alia, that the directors of the New York Lee Federal Credit Union (the "Credit Union") breached their fiduciary duties to, converted property of, and defrauded the Credit Union by, among other things, wrongfully transferring Credit Union funds to the Lee Family Association, Ly Canal West Realty Co, ("Ly Canal") and 63A Bayard Inc. ("Bayard"). Construing the complaint in the light most favorable to the plaintiff, Norman Lee was the only shareholder of Bayard, one of three shareholders of Ly Canal, president of Ly Canal, "the officer" of Bayard, and the son of one of the Credit Union directors (who also was a shareholder in Ly Canal), and dominated and controlled both corporations. He is alleged to have received checks aggregating over $630,000 payable to Ly Canal and Bayard from the Credit Union and deposited them to those corporations' accounts notwithstanding that (a) neither company was a member of or maintained an account at the Credit Union, (b) no loan documentation evidencing any loans by the Credit Union to either ever was executed, and (c) the Credit Union never issued interest statements to either company. The amended complaint alleges that he did so in order to shelter funds improperly diverted from the Credit Union and that he personally benefitted from the diversions. On this basis, the eighth, ninth and tenth claims for relief seek to hold Norman Lee liable on theories of aiding and abetting the directors' breaches of fiduciary duty, conversion and fraud.

  The parties agree that the elements of aiding and abetting in substance are the commission of a primary wrong by another and the defendant's substantial assistance in the commission of the primary wrong with knowledge of its wrongful nature. Lee does not dispute, for purposes of this motion, the sufficiency of the complaint in alleging breach of fiduciary duty, conversion and fraud by the Credit Union directors. He argues, however, that the complaint does not sufficiently allege either his knowledge of the wrongful nature of the board's actions or that he lent substantial assistance to them.

  The eighth and ninth claims for relief, neither of which sounds in fraud, are governed by Fed.R.Civ.P. 8. They may not be dismissed unless plaintiff could prove no facts under their allegations under which Lee might be held liable. E.g., Conley v. Gibson, 355 U.S. 41, 45-46(1957). Taking the allegations of the complaint as true and drawing all reasonable inferences from them in plaintiffs favor, as must be done on this motion, the eighth and ninth claims for relief plainly are sufficient.

  Plaintiff concedes that the tenth claim for relief, which alleges aiding and abetting the commission of a fraud, is governed by Fed.R.Civ.P. 9(b), which requires that averments of fraud be made with particularity. The only averment as to Lee which he even inferentially might be said to challenge on Rule 9(b) ground is the assertion that he was aware of the fraud allegedly committed by the Credit Union directors.

  In order to satisfy Rule 9(b), the complaint must state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind. This may be done "either (a) by alleging facts that [the] defendant[] had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Acito v. Imcera Group, 47 F.3d 47, 52 (2d Cir. 1995)

  The amended complaint contains factual allegations more than adequate to give rise to a strong inference of fraud in that they constitute strong circumstantial evidence of conscious misbehavior or recklessness. Lee allegedly controlled Ly Canal and Bayard, neither of which was a member of or maintained an account with the Credit Union. Yet he allegedly took Credit Union checks payable to those entities in amounts aggregating more than $630,000 without executing any loan documentation and, it may be inferred, without knowing of any lawful reason for those payments and then used the money in a manner that personally benefitted him. It alleges further that he assisted in the diversion of funds from the Credit Union. The question whether plaintiff can prove its allegations cannot be resolved on a motion to dismiss the complaint. The Court declines to convert the motion into one for summary judgment and therefore does not consider evidentiary material in resolving the motion. Lee's motion to dismiss or for summary judgment of dismissal is denied.

  SO ORDERED.

  It is ORDERED that counsel to whom this Order is sent is responsible for faxing a copy to all counsel and retaining verification of such in the case file. Do not fax such verification to Chambers.

20040511

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