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Horowitz v. American International Group

September 30, 2010

ROBERT AND HARLENE HOROWITZ, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
v.
AMERICAN INTERNATIONAL GROUP, INC., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Honorable Paul A. Crotty, United States District Judge

USDC SDNY DOCUMENT

MEMORANDUM OPINION & ORDER

Defendants American International Group, Inc. ("AIG") and other affiliated companies*fn1 (together "AIG") move to dismiss the Plaintiffs' claims and to strike their class action allegations. Plaintiffs Robert and Harlene Horowitz ("Horowitzs"), who also sue on behalf of other claimed to be similarly situated, purchased AIG's homeowners' insurance policy with coverage for Fraud SafeGuard Events ("Policy"). The Policy provides coverage for "the loss of money [or] securities.up to the applicable Limits of Insurance shown in the schedule, resulting directly from fraud, embezzlement, or forgery perpetrated against [the policyholders] or [the policyholders'] family member[s] during the Policy Period."

The Horowitzs and other policy owners invested funds with Bernard L. Madoff Investment Securities ("Madoff" or "BMIS"), anticipating that he would invest their money in the "greatest bull market in history." (Second Amended Complaint ("2d Am. Compl.") ¶ 8.) As we now know, Madoff was a consummate fraudster whose Ponzi scheme makes all similar prior schemes seem like small beer. The Horowitzs were more fortunate than most, however, as they made withdrawals from BMIS that exceeded their original investment by over $225,000. Nonetheless, they filed a claim with the AIG Defendants, on the basis that they made their investment with the reasonable expectation that it would yield earnings, not just a return on capital. They filed a claim based on the balances shown in their last account statement-over $8.5 million-which would result in the payment of the full fraud policy limits of $30,000. Defendants rejected the claim because the Plaintiffs had experienced no loss in that they had withdrawn a greater sum than they had deposited.

Upon Defendants' rejection of their claim, Plaintiffs initiated the present action. Plaintiffs' second amended version of its complaint asserts six claims: (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, (3) unjust enrichment, (4) declaratory relief as to Plaintiffs' loss; (5) declaratory relief as to the fact and consequences of Defendants' inability to determine the date when Madoff's Ponzi scheme began; and (6) declaratory relief as to statutes of limitation and repose, doctrines of laches, and similar statutes. In a word, Plaintiffs seek payment of the insurance policy up to its limits and an obliteration of all impediments to recovery.

The terms of the Policy, however, are clear and unambiguous. The Policy was not breached as Plaintiffs did not experience a loss within the meaning of the Policy contract language. Since there is no liability on the contract, Plaintiffs' additional claims must be dismissed as well. Plaintiffs' arguments to the contrary are rejected. Finally, since there is no bona fide claim on the merits, the motion to strike the class action allegations is moot.

I. Facts*fn2

Effective October 1, 2008, Plaintiff Robert Horowitz owned a homeowner's insurance policy with protection for Fraud SafeGuard through Defendants AIG Private Client Groups, now a division of Chartis Inc., and American International Insurance Company of California. Inc. ("AIICC"). (Carlinsky Decl. Ex. A, at A-1.) Plaintiff Harlene Horowitz was a co-insured under the Policy. Mr. Horowitz was a customer of BMIS since approximately 1997 and a customer of BMIS through a Revocable Trust called the Horowitz Family Trust ("Trust") since approximately August 2003. Mr. and Mrs. Horowitz both are trustees, trustors, and beneficiaries of the Trust and pursuant to its terms were entitled to remove all of its funds at will. (2d Am. Compl. ¶ 3.)

Defendant AIG is the parent company to various entities, including all of the other named Defendants. (Id. ¶ 13.) Defendant AIICC is a wholly owned subsidiary of AIG and an insurance company that writes personal lines of insurance through AIG's Personal Lines Pool, made up primarily of private passenger auto, homeowners', and other personal lines products. Substantially identical Policies were issued by AIICC and/or other AIG subsidiary companies to all other Class members.*fn3 (Id. ¶ 14.)

AIG Fraud SafeGuard coverage insures against "loss[es] of money*fn4 [or] securities"*fn5 resulting "directly from fraud, embezzlement, or forgery." The Policy defines fraud to include "[a]ny.intentional perversion of truth by someone other than you or a family member perpetrated in order to induce you or a family member to part with something of value." The sales brochure for the fraud coverage further states that it will "secure your important assets-money, securities, personal property, jewelry and collectibles[-against] today's sophisticated criminals and new risks." (Id. ¶ 25.) The Policy lists several exclusions, including "any loss that is an indirect result of any fraud guard event including but not limited to: (a) [the policyholder's] inability to realize income that [he or she] would have realized had there been no loss or damage to money, securities, or other property." (Carlinsky Decl. Ex. A, at A-40.) While the Plaintiffs assert that they paid more than $11,400 in premiums for coverage of up to $30,000 per event, these payments were for the entire homeowner's policy. (Id. ¶ 7.) The cost for the Fraud SafeGuard endorsement was only $115. (Mem. in Supp. Mot. to Dismiss at 6 n.10.)

In December 2008, Madoff revealed that his investment advisory business, BMIS, was a fraud and "all just one big lie," "basically, a giant Ponzi scheme." (Carlinsky Decl. Ex. D, at 4) For years, Madoff had been "paying returns to certain investors out of the principal received from other, different, investors." (Id.) In other words, he "paid investors with money that wasn't there." (Id.) Madoff estimated approximately $50 billion of losses from this fraud. According to the Second Amended Complaint, Madoff has since denied that it was always a Ponzi scheme. (2d Am. Compl. ¶ 27.) Plaintiffs now emphasize that the date the Ponzi scheme began is unknown and still in dispute. (Id. ¶ 5) Their original complaint and Madoff's testimony indicate that the Ponzi scheme began in the early 1990s, but Judge Denny Chin commented during the sentencing hearing that the fraud (though perhaps not the commingling) may have begun even earlier. (Complaint ¶ 3; Carlinsky Decl. Ex. E, at 25; Carlinsky Decl. Ex. N, at 43.) On December 11, 2008, Madoff was arrested and charged with securities fraud. (2d Am. Compl. ¶ 28.) On March 12, 2009, he pleaded guilty to 11 criminal counts (Id. ¶ 29) and, on June 29, 2009, was sentenced to 150 years in prison. (Carlinsky Decl. Ex. N, at 49.)

Plaintiffs deposited $4,327,230.55 into their BMIS account and withdrew $4,553,000.00 for a net gain of $225,769.45. (Carlinsky Decl. Ex. H, at H-8.) The final balance reflected in the last BMIS statement received by the Plaintiffs, dated November 30, 2008, was over $8.5 million. Plaintiffs filed a claim with AIICC for the full amount of their final balance. (2d Am. Compl. ¶¶ 30, 31.)

By letter dated February 18, 2009, Defendants, through an AIG Private Client Group Claims Analyst writing on behalf of AIICC, denied coverage on the ground that their accountants determined that certain "investment account(s) exceed the amount of.capital contributions. Any alleged gains, growth, or appreciation of.capital contributions are the subject of the Madoff Fraud scheme [and] are not covered by the Policy. Accordingly, [there is] no covered loss." (Id. ¶ 32.) Then, by letter dated May 6, 2009, Defendants, through an AIG Private Client Group Claims Analyst writing on behalf of AIICC, applied exclusions for loss arising out of a business or professional service engaged in by the insured or a family member; any guarantee of the financial performance of any financial instrument or investment vehicle; indirect loss resulting from any fraud guard event, including, but not limited to, an inability to realize income that would have realized had there been no loss or damage to money [or] securities.; and investment loss due to corporate fraud (loss due to the change in value of securities issued by a business where the loss results from fraud by the business which issued the securities). (Id. ¶ 41.) Plaintiffs assert that Defendants also pointed to an exclusion for losses "caused by the confiscation, destruction, or seizure of property by any governmental or public entity or their authorized representative." (Id. ¶ 39.)

In an August 21, 2009 article from the New York Post, AIG spokeswoman Christine Pretto stated that "we declined the [P]laintiffs' claim because they received more money from Madoff through withdrawals in their account than they had deposited." (2d Am. Compl. ¶ 42.) In the same article, Ms. Pretto also stated that the company "has paid out hundreds of eligible policyholders who suffered Madoff-related losses pursuant to this coverage." (Id.)

II. Procedural History

Plaintiffs Robert and Harlene Horowitz commenced this action on August 19, 2009 on behalf of a proposed class of all AIG policyholders in the United States who lost money due to Madoff's Ponzi scheme during the time they held an AIG homeowner's insurance policy with AIG Fraud SafeGuard coverage. (Complaint ¶ 35.) On September 22, 2009, Plaintiffs filed a First Amended Complaint, and on January 7, 2010, they filed a Second Amended Complaint. The class is now defined as all policyholders who had an account with [BMIS] on December 10, 2008, or any feeder fund, fund of funds, or other fund that had an account with BMIS on December 10, 2008, and who were insured under a homeowner's insurance policy with coverage for Fraud SafeGuard Events.underwritten or sold by any of the Defendants or any of their affiliated companies where the defined Policy Period encompassed the Madoff fraud. (2d Am. Compl. ¶ 3.) Plaintiffs have raised six claims in the Second Amended Complaint. See supra at 2.

Defendants filed their motion to dismiss the Second Amended Complaint and motion to strike the class allegations on January 22, 2010.

III. Analysis

A. Motion to Dismiss

Under Rule 12(b)(6), the Court must assume that all facts alleged in the complaint are true and draw all reasonable inferences in favor of the plaintiff. Kassner v. 2nd Ave. Delicatessen Inc., 496 F.3d 229, 237 (2d Cir. 2007). Asserting legal conclusions is not sufficient. While they provide a framework, they must be supported by factual allegations. Ashcroft v. Iqbal, __ U.S. __, 129 S.Ct. 1937, 1949-50 (2009). To avoid dismissal, the complaint must contain "enough facts to state a claim to relief that is plausible on its face," that is to say, facts that "nudge[] [the plaintiff's] claims across the line from conceivable to plausible." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). ...


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