August 26, 2005.
ISAAC LERNER, ELI LERNER, BALLYWARD INVESTMENT COMPANY, LTD., JAIME SOHACHESKI, GASTON LIMITED, HOTEL INVESTORS, INC., PERKY LIMITED, ABRAHAM RAPPAPORT, ESTHER RAPPAPORT, MOSHE COHN, ESTABLISSEMENT SOMER, JOSEPH KOHN, CHANCERY ENTERPRISES, LTD., ROSDEV DEVELOPMENTS, INC., AND MICHAEL ROSENBERG, Plaintiffs,
FLEET BANK, N.A., STERLING NATIONAL BANK AND TRUST COMPANY OF NEW YORK, AND REPUBLIC NATIONAL BANK OF NEW YORK, Defendants. BRUCE BAYROFF, JOSHUA GOLDSTEIN, LAND TECH AT MANALPAN LLC, THEODORE BRODIE, MEYER ROSENBAUM, MR ASSOCIATES LLC, ILANA BLUMKIN, AS TRUSTEE, EMDEE TOURS, INC., ALEXANDER HASENFELD, INC., PROFIT SHARING RETIREMENT PLAN, HASENFELD STEIN, INC, PENSION TRUST, AEG AGENCY, INC., AARON GARFINKEL, RIVKA STEIN, AARON Y. RUBINSON, STEVEN B. ROTHCHILD, P.C. MONEY PURCHASE PLAN, PINCHOS RUBINSON, AKIVA LEIMAN, ESTATE OF BORUCH RUBINSON, CHAIM AND RACHEL LEKOWITZ, NAFTALI AND SARAH LIPSHUTZ, MENDEL AND FEIGY LIPSCHUTZ, REISEL BERGSTEIN, MICHAEL KONIG, ESTHER WERTENTEIL, AARON WERTENTEIL, TEENA RUBINFELD, MARK WERTENTEIL, MORRIS AND SARAH FRIEDMAN, THE REGAL TRADE, S.A., VAVEL CORP., CHADWICK FUNDING CO. L.P., ALLEN SAUSEN AND LEONARD SAUSEN, D/B/A ATASSCO, KEREN HACHESED OF MONSEY, INC., GENEVA PROPERTIES, L.L.C., MT. PLEASANT PARTNERS, HERSCEL KULEFSKY, ALBERT DAVID PEARLS & GEMS, INC., DEFINED BENEFIT PENSION PLAN, CHAI PROPERTIES CORP., ARTHUR KURTZ, CRESFIELD ASSOCIATES, INC., WEINREB MANAGEMENT AND HOWARD MERMELSTEIN, Plaintiffs, v. FLEET BANK, N.A., STERLING NATIONAL BANK AND TRUST COMPANY OF NEW YORK, AND REPUBLIC NATIONAL BANK OF NEW YORK, Defendants.
The opinion of the court was delivered by: FREDERIC BLOCK, District Judge
Plaintiffs in two companion actions are investors who were
defrauded into giving millions of dollars to David Schick
("Schick"), an attorney and businessman; Schick deposited a
portion of those funds into escrow accounts held by defendants
Fleet Bank, N.A., Sterling National Bank and Trust Company of New
York, and Republic National Bank of New York (collectively
"defendants" or "banks"), and thereafter drew numerous checks
from those accounts at times when there were insufficient funds
to cover the checks. Plaintiffs claim that defendants are liable
for plaintiffs' losses because they failed to report the bounced
checks to the Lawyers' Fund for Client Protection of the State of
New York ("Lawyers' Fund"). Plaintiffs contend that, as a result,
Schick was permitted to perpetuate his scheme for a protracted
period of time; i.e., had the banks reported the insufficient
funds, Schick's fraudulent scheme would have been revealed
earlier and plaintiffs' losses would have been curtailed.
Initially, the plaintiffs in both actions raised Racketeer
Influenced and Corrupt Organizations Act ("RICO") and state-law
claims. The Court dismissed plaintiffs' RICO claims for lack of
standing and declined to exercise supplemental jurisdiction over
the state-law claims. See Lerner v. Fleet Bank, N.A.,
146 F. Supp. 2d 224, 226, 231 (E.D.N.Y. 2001). The Second Circuit
affirmed the dismissal of the RICO claims but vacated the Court's
declination to exercise supplemental jurisdiction. See Lerner v.
Fleet Bank, N.A., 318 F.3d 113, 117, 124-25 (2d Cir. 2003). It
explained that the plaintiffs in Action 1 were diverse from the
defendants; thus diversity jurisdiction provided an independent
basis for subject matter jurisdiction, and the circuit court advised that although
there was no diversity jurisdiction in Action 2, "judicial
economy might best be served by exercising supplemental
jurisdiction over the [Action 2] state-law claims" "[b]ecause the
district court must adjudicate identical issues in [Action
1]. . . ." Id. at 124-25, 130. At a status conference held
on June 18, 2003, the Court made a determination to exercise
supplemental jurisdiction over the state-law claims in Action 2
and consolidated the two Actions. See Docket No. 65.
Thereafter, the plaintiffs in both actions filed a combined
Second Amended Complaint, alleging the following state-law
claims: negligence, fraud, breach of fiduciary duty, aiding and
abetting Schick's breach of fiduciary duty, and commercial bad
faith. Defendants now each move to dismiss all of these claims
pursuant to Rule 12(b)(6). For the reasons set forth below,
defendants' motions are granted.
The following sets forth the pertinent facts, which are taken
from the Second Amended Complaint.
In 1992 Schick began marketing investment
opportunities based upon mortgage flip transactions.
Schick's "original intentions were good" and "his
modus operandi was not criminal;" however, due to
"unrelated losses stemming from a 1988 `problem'
which came back to `haunt' him," he began to use
fraudulent means to stay afloat. [Second] Am. Compl.
¶ 3. The essence of Schick's scheme to defraud was
the marketing of risk-free investments with high,
short-term yields. In this regard, Schick purported
to bid on distressed mortgage pools at auctions and
sales conducted by the Resolution Trust Company,
Federal Deposit Insurance Corporation, and other
banking institutions. Schick explained to prospective
investors that after being awarded a bid to purchase a mortgage
pool subject to at least a ninety-day due diligence,
he could re-sell the same pool to a "take-out buyer"
for a substantial profit (between twelve and twenty
percent), subject to a due diligence period of fewer
than ninety days. [Id. ¶ 141]. Schick assured them
that if the take-out buyer declined to purchase the
pool, Schick could rescind the original purchase
within his own ninety-day due diligence window, thus
avoiding any risk of loss.
However, Schick told the putative investors that in
order to close on a bid he was required to deposit
substantial sums of cash as evidence of his ability
to complete the purchase. Schick misrepresented to
the investors that their investments would be
protected in escrow accounts covered by restrictive
provisions during the due diligence period, including
a requirement that funds could not be withdrawn
without the signature of plaintiffs' representative.
Using these fraudulent promises as well as his status
in the community, Schick successfully induced
numerous individuals and entities to invest millions
Lerner, 146 F.Supp.2d at 226.*fn1
B. Governing New York Regulations Regarding Attorney Escrow
Several regulations govern the responsibilities and obligations
of attorneys maintaining attorney escrow accounts and the banking
institutions within which they are maintained. In particular,
pursuant to Disciplinary Rule 9-102(B) of the Code of
Professional Responsibility ("DR 9-102(B)"), as codified at
22 N.Y. Comp. Codes R. & Regs. ("N.Y.C.R.R.") § 1200.46, attorneys
may not misappropriate client funds and must maintain those funds
in separate accounts. As the rule states: (1) A lawyer who is in possession of funds belonging
to another person incident to the lawyer's practice
of law, shall maintain such funds in a banking
institution within the State of New York which agrees
to provide dishonored check reports in accordance
with the provisions of Part 1300 of the joint rules
of the Appellate Divisions. Banking institution means
a state or national bank, trust company, savings
bank, savings and loan association or credit union.
Such funds shall be maintained, in the lawyer's own
name, or in the name of a firm of lawyers of which he
or she is a member, or in the name of the lawyer or
firm of lawyers of whom he or she is employed, in a
special account or accounts, separate from any
business or personal accounts of the lawyer or
lawyer's firm, and separate from any accounts which
the lawyer may maintain as executor, guardian,
trustee or receiver, or in any other fiduciary
capacity, into which special account or accounts all
funds held in escrow or otherwise entrusted to the
lawyer or firm shall be deposited.
(2) A lawyer or the lawyer's firm shall identify the
special bank account or accounts required by
paragraph (1) of this subdivision as an "Attorney
Special Account," or "Attorney Trust Account," or
"Attorney Escrow Account," and shall obtain checks
and deposit slips that bear such title. Such Title
may be accompanied by such other descriptive language
as the lawyer may deem appropriate, provided that
such additional language distinguishes such special
account or accounts from other bank accounts that are
maintained by the lawyer or the lawyer's firm.
Attorneys who misuse escrow accounts are subject to disciplinary
proceedings. See 22 N.Y.C.R.R. 1200.46(h).
Furthermore, pursuant to the Dishonored Check Reporting Rules
For Attorney Special, Trust and Escrow Accounts:
(a) Special bank accounts required by
[22 N.Y.C.R.R. § 1200.46] shall be maintained only in banking
institutions which have agreed to provide dishonored
check reports in accordance with the provisions of
this section. (b) An agreement to provide dishonored check reports
shall be filed with the Lawyer's Fund for Client
Protection, which shall maintain a central registry
of all banking institutions which have been approved
in accordance with this section, and the current
status of such agreement.
(c) A dishonored check report by a banking
institution shall be required whenever a properly
payable instrument is presented against an attorney
special, trust or escrow account which contains
insufficient available funds, and the banking
institution dishonors the instrument for the reason.
* * *
(h) Every lawyer admitted to the Bar of the State of
New York shall be deemed to have consented to the
dishonored check reporting requirements of this
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