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Federal Deposit Insurance Corp. v. Barth Sullivan Behr

September 17, 2009


The opinion of the court was delivered by: Hon. Hugh B. Scott

AMENDED Report & Recommendation

Before the Court are plaintiff's motions to dismiss the counterclaim by defendants Barth Sullivan Behr, LLP, Laurence Behr and Philip Barth (collectively the "law firm defendants") (Docket Nos. 20*fn1 , 35*fn2 ). Responses to the initial motion were due by October 7, 2008, and reply (if any) was due by October 14, 2008, with this motion deemed submitted (without oral argument) on October 14, 2008 (Docket No. 23). Meanwhile, defendants filed their Amended Answer (Docket No. 27), which plaintiff now addresses in its second motion (Docket No. 35). The Court issued a Report & Recommendation (Docket No. 39) and defendants first filed their Objections to it (Docket No. 41) and then moved for modification of this Report (Docket No. 51). This Court granted defendants' motion to modify (Docket No. 58) and this Court issues this Amended Report consistent with that Order.

Then-plaintiff IndyMac Bank, F.S.B., also moved to substitute the Federal Deposit Insurance Corporation ("FDIC") as Conservator for IndyMac Federal Bank, F.S.B. (Docket No. 24), which was granted in a separate Order (Docket No. 38). For convenience, the term "plaintiff" herein will refer to either the former IndyMac Bank, F.S.B., and its successor the FDIC (unless context requires otherwise where the entity will be specified).


This*fn3 diversity action (alleging breach of UCC presentment, warranties, fraud, aiding and abetting fraud, unjust enrichment, legal malpractice, and conversion) arises from faxed correspondence to a Buffalo law firm seeking its services to collect a purported debt. On December 4, 2007, defendant Xu Yu, on behalf of defendant Taiwan Industries, sent a faxed letter that solicited defendant Laurence Behr and his firm Barth Sullivan Behr, LLP, to collect a debt from defendant Anita Perry allegedly owed to Taiwan Industries, with Behr and his firm retaining a percentage of the amount collected as its legal fees (Docket No. 1, Compl. ¶ 18). Yu claimed that Taiwan Industries was owed by "Anita Perry, Apparels Distributors" $277,750 plus late charges (id. ¶¶ 18, 22). After some investigation, Behr and the firm agreed to represent this client (id. ¶¶ 19-26).

On December 11, 2007, Behr received a check for $245,000 purportedly from the debtor and Behr the next day deposited the fund into the firm's trust account and paid the balance (less the firm's fee) to Taiwan Industries on December 14, 2007 (id. ¶¶ 28-30). According to the law firm defendants, the check cleared on December 14, 2007 (see Docket No. 28, Defs. Memo. at 3).

Plaintiff IndyMac Bank, F.S.B., had issued a home equity line of credit to two of its customers (Docket No. 1, Compl. ¶¶ 15-17). The check deposited by Behr and his firm and proceeds paid out to Taiwan Industries was from that home equity line of credit account issued by plaintiff and not from an Anita Perry. Plaintiff alleges that the home equity line of credit check was fabricated by someone other than plaintiff's borrowers. (Id. ¶¶ 33-34.) On or about January 14, 2008, when it discovered the fraudulent nature of the check, plaintiff returned the check as dishonored to the depositing bank, M&T Bank and notified the law firm defendant that defendants acted wrongfully in a fraudulent check scam. The firm refused to repay the funds to plaintiff. (Id. ¶¶ 32, 33, 35.)

Plaintiff alleges in its Complaint breach of Uniform Commercial Code (or "UCC") presentment warranties, under UCC §§ 4-207, 3-417(1), fraud and fraudulent misrepresentation against the law firm defendants and defendants Perry, Taiwan Industries, and Yu (these defendants collectively the "scheme defendants") (id. ¶¶ 37-43, 44-53, 9). Plaintiff also alleges aiding and abetting and negligence by the law firm defendants, and unjust enrichment and conversion against all defendants (id. ¶¶ 54-57, 62-73, 58-61, 74-77).

The law firm defendants filed their Answer with cross-claims and a counterclaim (Docket No. 7; see also Docket No. 27, Am. Ans.). Pertinent to plaintiff's present motion, these defendants allege prima facie tort against plaintiff by dishonoring the disputed check causing the firm's client account to be in arrears for $147,000 for about four months (Docket No. 7, Ans. ¶¶ 65-73; see also Docket No. 27, Am. Ans. ¶¶ 65-74). To date, the scheme defendants have yet to appear in this action.

This case was referred to the undersigned on August 10, 2008 (Docket No. 10), and a scheduling conference was set for October 28, 2008, for this case (Docket No. 11).

Plaintiff's Motion to Dismiss the Counterclaim

Plaintiff next moved to dismiss the counterclaim, arguing that the counterclaim fails to state a claim (Docket Nos. 20, 22, Pl. Brief at 3-10). First, plaintiff contends that the law firm defendants lack standing to challenge the wrongful dishonor of the check since these defendants were not "customers" under the UCC (Docket No. 22, Pl. Br. at 3-4), and, second, that there was no wrongful dishonor of that check (id. at 5-6). Further, plaintiff states that the law firm defendants cannot show the elements of a prima facie tort, in particular they cannot show disinterested malevolence and they failed to allege special damages (id. at 6-9). Plaintiff concludes that, even if the counterclaim was plausible, these defendants are not entitled to any form of damages (id. at 9-10).

These defendants filed their Amended Answer*fn4 while this motion to dismiss the counterclaim was pending. They modify*fn5 and amplify their allegations regarding their demands that plaintiff withdraw the dishonor of the check at issue (id. ¶¶ 69-74). They now allege that plaintiff dishonored the check in January 14, 2008, long after the expiration of time for a lawful dishonor, causing the firm to suffer an arrears in its trust account of $147,000 for approximately four months (id. ¶ 68). They allege that plaintiff failed to withdraw the dishonor or to offer any justification up to May 10, 2008, when the time for offering such a justification expired (id. ¶ 71), noting that between January 14 and May 10, 2008, plaintiff never made a demand for return of any funds (id. ¶ 72). The law firm defendants claim special damages of $400 incurred in borrowing while this arrearage existed in its trust account and the costs of being compelled to respond to an investigation by the New York State Attorney Grievance Committee (id. ¶ 73; cf. Docket No. 7, Ans. ¶ 72 (general discussion of damages arising from dishonor)). "By reason of the intentional and willful nature of plaintiff's conduct, evincing a high degree of moral turpitude and demonstrating such wanton dishonesty as to imply a criminal indifference to civil obligations," these defendants conclude that plaintiff should be liable for punitive damages (Docket No. 27, Am. Ans. ¶ 74; cf. Docket No. 7, Ans. ¶ 73). They contend that the Amended Answer alleges a cause of action for prima facie tort (Docket No. 28, Defs. Memo. at 6-10), in particular, that they allege suffering special damages (id. at 7) and that plaintiff's actions were solely motivated by an intent to harm defendants (id. at 7). They contend that the "plausibility" of these assertions are questions of fact and not suitable for decision on a motion to dismiss (id. at 8), but without discussing motion to dismiss case law following Bell Atlantic Corp. v. Twombly, 550 U.S. 554 (2007), discussed below in the standards analysis.

Plaintiff replies that the amended counterclaim still fails to allege a plausible cause of action (Docket No. 34, Pl. Reply Memo. at 3, 6-8). Plaintiff denies that these defendants are entitled to punitive damages under this counterclaim (id. at 8-9) and the FDIC as conservator of new IndyMac is not liable for the counterclaim since it is not one of the type of claims assumed by the FDIC, the liability remains with old IndyMac (id. at 9-10). ...

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