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GENERAL ACCIDENT INS. CO. OF AMERICA v. FIDELITY &

October 25, 1984

GENERAL ACCIDENT INSURANCE COMPANY OF AMERICA
v.
FIDELITY AND DEPOSIT COMPANY OF MARYLAND v. FIRST JERSEY NATIONAL BANK, et al.



The opinion of the court was delivered by: POLLAK

 General Accident Insurance Company of America ("General Accident") brought this action against Fidelity and Deposit Company of Maryland ("Fidelity") seeking reimbursement under a blanket bond Fidelity had issued to General Accident. General Accident alleges that it lost over $2,000,000 as a result of a fraud perpetrated on it, in part, by some of its employees. The fraud alleged involved the issuance of drafts by General Accident without a proper basis -- for example, for nonexistent claims, to non-existent policyholders, or for excessive amounts. The drafts were negotiated at a number of different banks, passed through the chain of collection and reached First Pennsylvania Bank. Although the drafts were not drawn directly on an account at First Pennsylvania Bank, they were "payable through" that bank. First Pennsylvania Bank then obtained payment on those drafts from the drawee, General Accident.

 Fidelity filed a third-party complaint against the banks allegedly involved in the collection process. The third-party complaint alleges that if Fidelity is liable to General Accident, Fidelity will be subrogated to General Accident's rights against these banks. Thus, the third-party complaint purports to assert, against the banks, those claims which General Accident could, itself, pursue against the banks in a direct action.

 The banks have also filed cross-claims among themselves. In particular, First Pennsylvania Bank has filed cross-claims against the banks below it on the collection ladder.

 (1) The motion to dismiss Fidelity's third-party claims against New Jersey Bank, N.A., Manufacturers Hanover Trust Company, Chase Manhattan Bank, National State Bank of Elizabeth, Fidelity Union Bank, Valley National Bank, Howard Savings Bank, Meadowlands National Bank, Citibank, N.A., First National Bank of New Jersey, Hudson City Savings Bank, Midlantic National Bank, Edgewater National Bank, Commercial Trust Company of New Jersey, The National Bank of North America, and Washington Savings Bank. This motion has since been joined by First Pennsylvania Bank, N.A., First Jersey National Bank, Ramapo Bank, and the Federal Reserve Bank of Philadelphia.

 (2) The motion to dismiss Fidelity's third-party claims against First Jersey National Bank. This motion has been joined by The Trust Company of New Jersey, First Pennsylvania Bank, and the Federal Reserve Bank of Philadelphia.

 (3) The motion to dismiss Fidelity's third-party claims against Community National Bank and Trust Company which has been joined by The Trust Company of New Jersey and First Jersey National Bank.

 (4) The motion to dismiss First Pennsylvania Bank's cross-claims against New Jersey Bank, N.A., Manufacturers Hanover Trust Company, Chase Manhattan Bank, National State Bank of Elizabeth, Fidelity Union Bank, Valley National Bank, and Howard Savings Bank. That motion has been joined by First Jersey National Bank, Ramapo Bank, and The Trust Company of New Jersey.

 (5) The motion to dismiss First Pennsylvania Bank's cross-claims against First Jersey National Bank which has been joined by Community National Bank and Trust Company.

 (6) The motion to dismiss First Pennsylvania Bank's cross-claims against The Trust Company of New Jersey.

 (7) The motion to dismiss First Pennsylvania Bank's cross-claims against Community National Bank and Trust Company.

 (8) The motion for summary judgment on Fidelity's claims filed by New Jersey Bank, N.A., Manufacturers Hanover Trust Company, Chase Manhattan Bank, National State Bank Bank of Elizabeth, Fidelity Union Bank, Valley National Bank, Howard Savings Bank, Meadowlands National Bank, Citibank, N.A., First National Bank of New Jersey, Hudson City Savings Bank, Midlantic National Bank, Edgewater National Bank, Commercial Trust Company of New Jersey, The National Bank of North America, and Washington Savings Bank. That motion has been joined by Ramapo Bank. *fn2"

 This list of parties and motions is deceptive in its length. The first three motions, although supported by ostensibly distinct briefs, raise identical legal arguments. In fact, the briefs submitted by First Jersey National Bank and Community National Bank and Trust Company are, for the most part, reproductions of the brief submitted by New Jersey Bank, N.A. *fn3" Furthermore, the motions to dismiss the cross-claims of First Pennsylvania Bank rely wholly upon the arguments presented in support of the motion to dismiss the third-party claims of Fidelity. Consequently, I will address the issues raised by all of these motions only once. Following the resolution of those issues, I will consider the arguments asserted in the motion for summary judgment filed by New Jersey Bank, N.A.

 I. MOTIONS TO DISMISS

 Unfortunately, in their rush to move this litigation to prompt resolution, the parties have overlooked the substantial restrictions upon the court's authority to dismiss claims solely on the basis of the pleadings. As a result, most of the arguments raised in these motions suffer from the same defect -- they seek a legal determination that Fidelity's claims are groundless although such a legal determination is impossible without further factual development.

 A. Standard for Determination of a Motion to Dismiss

 Before I address the theories upon which these motions are based, it is appropriate to note the legal standard applicable to a motion to dismiss pursuant to Rule 12(b)(6).

 
[A] complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.

 Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 102, 2 L. Ed. 2d 80 (1957). Professors Wright and Miller, in their treatise on federal civil procedure, describe the analysis in similar terms.

 
The question therefore is whether in the light most favorable to plaintiff, and with every doubt resolved in his behalf, the complaint states any valid claim for relief.

 5 C. Wright and A. Miller, Federal Practice and Procedure § 1357 at 601 (1969) (footnotes omitted).

 Thus, the question before me is not whether Fidelity will prevail against the third-party defendants. That is a matter which is properly resolved upon the basis of proof, not merely upon the pleadings.

 
As a practical matter, a dismissal under Rule 12(b)(6) is likely to be granted in the unusual case in which plaintiff includes allegations that show on the face of the complaint that there is some insuperable bar to relief. In other words, dismissal is justified only when the allegations of the complaint itself clearly demonstrate that plaintiff does not have a claim. . . .
 
The complaint also is subject to dismissal under Rule 12(b)(6) when its allegations indicate the existence of an affirmative defense, but the defense must clearly appear on the face of the pleading.

 5 C. Wright & A. Miller, Federal Practice and Procedure § 1357 at 604-06 (1969).

 B. Items Considered on Motion to Dismiss

 The motions to dismiss assume that the allegations in both the complaint filed by General Accident against Fidelity and the third-party complaint filed by Fidelity against the banks should be considered in determining whether Fidelity's claims are viable. As a result, many of the arguments presented for dismissal of the third-party complaint rely upon "facts" presented in General Accident's complaint which, according to the third-party defendants, show that Fidelity's claims are legally unsupportable or are barred by certain affirmative defenses.

 General Accident's complaint against Fidelity is appended to the third-party complaint. But that fact alone is not sufficient to tie Fidelity to the specific allegations made by General Accident. Nor does the fact that Fidelity's third-party claims are based upon its right to subrogation to General Accident's claims against the third-party defendants necessarily bind Fidelity to General Accident's pleadings. The allegations in the General Accident complaint are not proven facts by which all parties would be bound but merely General Accident's averments of its view of the circumstances surrounding this case. Third-party defendants have cited no authority for the proposition that Fidelity or any other party should necessarily be bound by the pleadings filed by another party over which it has no control.

 Of course, it is possible for one party to incorporate into its pleadings the pleadings of another party. Federal Rule of Civil Procedure 10(c) states:

 
Statements in a pleading may be adopted by reference in a different part of the same pleading or in another pleading or in any motion. A copy of any written instrument which is an exhibit to a pleading is a part thereof for all purposes.

 This language distinguishes between "pleadings" and "instruments." Instruments are documents which have some legal effect of their own. Pleadings, on the other hand, are not facts or even evidence of the existence of facts but are merely one party's allegations of fact. While instruments such as contracts, leases, bonds, and letters, when appended to a pleading become "a part thereof for all purposes" and, thus, may override a pleading if such instruments contradict that pleading, prior pleadings are treated quite differently. For all or part of a prior pleading to be incorporated in a later pleading, the later pleading must specifically identify which portions of the prior pleading are adopted therein. A party may not be deemed to have admitted the allegations of a prior pleading merely by attaching that pleading to his own. The later pleading must adopt specific portions or all of the earlier pleading "with a degree of clarity which enables the responding party to ascertain the nature and extent of the incorporation." Heintz & Co. v. Provident Tradesmens Bank & Trust Company, 29 F.R.D. 144 (E.D.Pa.1961) (attaching the original complaint to the third-party complaint did not incorporate the original complaint so as to prevent dismissal of the third-party complaint for failure to state a claim). Therefore, in ruling on the present motions to dismiss, I will determine the viability of Fidelity's claims solely by reference to the allegations of the third-party complaint and those portions of the original complaint which are specifically adopted by Fidelity's pleading. *fn4"

 C. Choice of Law

 Apparently, the fraudulent scheme of which General Accident complains occurred primarily in New Jersey and Pennsylvania. The parties to this action include General Accident, a Pennsylvania corporation; Fidelity, a Maryland corporation; and a number of banks, many of which are incorporated under the federal banking laws but whose principal places of business include New Jersey, New York, Florida and Pennsylvania. Apart from these "facts," I have been provided with no information from which I can divine which states have a significant relationship to the issues in this dispute warranting the application of their substantive law. Under these circumstances, which state's law is applicable to a particular legal issue is not beyond dispute. Because, when faced with a motion to dismiss, I must resolve all doubts in favor of the non-moving party, unless it is clear that Fidelity's allegations could not state a valid claim under the laws of any of the potentially interested states, I cannot grant a motion to dismiss with regard to that claim.

 D. Federal Rule of Civil Procedure 11

 Third-party defendants contend that the entire third-party complaint should be stricken for failure to comply with Federal Rule of Civil Procedure 11. That rule states, in pertinent part:

 
The signature of an attorney or party constitutes a certificate by him that he has read the pleading, motion, or other paper; that to the best of his knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal or existing law, and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation. . . . If a pleading, motion or other paper is signed in violation of this rule, the court, upon motion or upon its own initiative, shall impose upon the person who signed it, a represented party, or both, an appropriate sanction . . .

 Third-party defendants suggest that Fidelity has failed to satisfy Rule 11 because Fidelity is unwilling to adopt the allegations in General Accident's complaint as its own and apparently has no basis outside of General Accident's complaint for its claim against the third-party defendants. In addition, third-party defendants note that Fidelity appears to suggest in its third-party complaint that it does not intend to be bound by the allegations in that complaint. They contend that such a position clearly violates Rule 11's requirement that all pleadings be based upon "reasonable inquiry" and that they be "well grounded in fact."

 Upon careful review of the third-party complaint, I conclude that Fidelity has satisfied both the letter and spirit of Rule 11. The third-party complaint states that the allegations contained therein are the result of a review of the original complaint and the attachments thereto as well as a series of discussions with officials at General Accident. Third-party complaint at para. 4. Thus, Fidelity has made some investigation of the facts supporting its claims against the banks and is not acting solely upon the information in the original complaint.

 Although it might have been preferable for Fidelity to have conducted a more detailed, first-hand investigation of the facts surrounding the dispute before filing the third-party complaint, Fidelity was constrained both by Rule 11 and the local rules of this court which prescribe that a third-party complaint be filed within ninety days of the filing of the third-party plaintiff's answer to the original complaint. Rule 11 does not contemplate that a party will conduct such a thorough investigation that discovery will be unnecessary. It is designed to deter the filing of claims and motions for which there is no basis in fact or law. E.g., Schneider v. Austin, 94 F.R.D. 44 (S.D.N.Y.1982). Under all of these circumstances, I cannot conclude that the extent of Fidelity's investigation of the facts supporting its third-party complaint was insufficient under Rule 11.

 Furthermore, Fidelity's partial reliance upon material in the original complaint or in exhibits to that document does not require Fidelity to adopt the allegations of the original complaint in their entirety in order to satisfy the Federal Rules of Civil Procedure. Obviously, the allegations in the third-party complaint must state valid claims to withstand the present motions. However, Fidelity has not asserted that it is in some manner exempted from the general principle that all litigants are bound by their pleadings. Fidelity has merely averred that many of the allegations of the third-party complaint are based upon its "information and belief." Pleading on the basis of information and belief is generally permitted under the Federal Rules of Civil Procedure and

 
is a practical necessity. How else can a pleader avoid the appearance of perjury when he is without direct personal knowledge regarding one or more of the allegations necessary to his claim and therefore must plead on less certain footing? Pleading on information and belief is a desirable and necessary expedient when matters that are necessary to complete the statement of a claim are not within the knowledge of plaintiff but he has sufficient data to justify interposing an allegation on the subject. . . . The same is true whenever the pleader must rely on information furnished him by others.

 5 C. Wright & A. Miller, Federal Practice and Procedure § 1225 at 156 (1969). Thus, Fidelity's statement that it is pleading on the basis of information and belief is consistent with its previous statement that the knowledge which forms the basis for the third-party complaint is derived primarily from discussions with personnel at General Accident. Consequently, there is no basis for the imposition of sanctions under Rule 11.

 E. Fraud

 Certain third-party defendants named in the fraud and conspiracy counts of the third-party complaint -- Counts V and VI -- argue that the third-party complaint fails to plead the factual basis for these claims with the specificity called for by Federal Rule of Civil Procedure 9(b). Those counts of the third-party complaint allege that the so-called "Knowledgeable Banks" -- First Jersey National Bank, Community National Bank and Trust, and The Trust Company of New Jersey -- are liable to Fidelity (as the subrogee of General Accident) for fraud, deceit, conversion and bad faith and that these banks were parties to a conspiracy to defraud General Accident.

 In particular, the third-party complaint states that authorized agents of these banks accepted the fraudulently obtained drafts, paid those drafts and presented the drafts to banks along the chain of collection for ultimate payment by General Accident. Fidelity alleges that those agents of the Knowledgeable Banks knew, at the time they received these drafts, that the drafts had been obtained by fraudulent means, or that the drafts were presented over fraudulent endorsements, or that the person presenting the drafts for payment did not have good title to the drafts. The drafts in question are identified in the third-party complaint as those listed in the Amended Proof of Loss which was attached as an exhibit to General Accident's complaint. Fidelity further alleges that the conspiracy and/or fraudulent scheme began in 1979 and the existence of this conspiracy is evidenced by the fact that many of the drafts presented to these banks for payment were presented by the same individual and that many drafts were approved for payment by the same bank officer.

 Rule 9(b) of the Federal Rules of Civil Procedure states:

 To prove fraud, a party must establish the following: (1) that defendant made representations to him with regard to material facts; (2) that those representations were false; (3) that the defendant knew that the representations were false at the time they were made; (4) that the representations were made with the intent that they would be acted upon; (5) that the person to whom the representations were made reasonably believed that the representations were true; (6) that that person relied upon those representations to his detriment. In order to plead fraud with specificity, it is usually necessary to allege the time, place and content of the misrepresentations and damages.

 However, it is not necessary to plead detailed evidentiary matter to make out a valid fraud claim. 2A Moore's Federal Practice para. 9.03 (1984). See also id. at para. 8.17[6] (notice pleading is all that is necessary for conspiracy claims). "All that is required is that the circumstances constituting the alleged fraud be pleaded with sufficient definiteness so as to advise the adversary of the claim which he must meet." Cottman Transmission Systems, Inc. v. Dubinsky, 95 F.R.D. 351, 352 (E.D.Pa.1982). The specificity requirements of Rule 9(b) must be balanced against pleadings standard established in Rule 8 which directs that the pleadings present "a short and plain statement of the claim." Therefore, if the fraud allegedly involved a course of conduct over an extended period of time or a series of transactions, it is not necessary to recite, in detail, the facts of each transaction of the fraudulent scheme. E.g., Kimmel v. Peterson, 565 F. Supp. 476 (E.D.Pa.1983).

 Fidelity's third-party complaint fully satisfies these requirements. Although the allegations are based upon "information and belief," which is not generally specific enough to satisfy Rule 9(b), such allegations are acceptable if the allegations are accompanied by a statement of the facts upon which the belief is founded. Id. at 482. The third-party complaint does this and presents quite detailed allegations of the circumstances surrounding the alleged fraud and ...


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