Opinion
Civ. No. 92-1651(HL)
August 8, 1995.
Efren T. Irizarry-Colon, Arecibo, PR, Robert G. Post, Coral Gables, FL, Jose L. Gonzalez-Castaner, Gonzalez Castaner, Ortiz Velez Morales Cordero, San Juan, PR, Danilo M. Eboli-Martinez, Axtmayer, Adsuar, Muniz Goyco, San Juan, PR, for Corporacion Insular de Seguros.
Jose A. Reyes-Munoz, pro se.
Francisco M. Lopez-Romo, Old San Juan, PR, Dennis A. Simonpietri-Monefeld, Hato Rey, PR, for Carmen R. Marcano-Sosa and Conjugal Partnership.
Luis F. Abreu-Elias, Hato Rey, PR, Gregorio Lima, Bayamon, PR, for Juan Santiago-Gonzalez.
OPINION AND ORDER
Before the Court is defendant Reyes' motion to dismiss the complaint, the various amendments thereto, and plaintiff's opposition. Dkt. nos. 258, 274, 277, 280, 310 and 329. Defendant Reyes argues that the complaint should be dismissed for lack of jurisdiction for three reasons: (1) because the application of RICO in this case violates the McCarran-Ferguson Act, 15 U.S.C. § 1012, (2) because the Liquidator Court is the proper forum, and (3) because the Court should abstain from hearing this case.
As plaintiff Corporacion Insular de Seguros (CIS) is undergoing liquidation proceedings, the Liquidator is prosecuting this case on behalf of CIS. For convenience, the Court refers to the Liquidator as the plaintiff in this case.
Defendant Reyes also raises the issue of election of remedies. See dkt. no. 329. However, the Court finds that said doctrine does not apply to the case at hand. Therefore, the Court denies defendant's motion as to the issue of election of remedies.
BACKGROUND FACTS
Specifically, the facts concerning the allegation against defendant Reyes are as follows. See Corporacion Insular de Seguros v. Reyes-Munoz, 849 F. Supp. 126, 133-34 (D.P.R. 1994).Fraudulent Transaction Loss: Defrauding of CIS
On October 8, 1992, defendants Reyes, Rivera and Fuentes pled guilty to criminal charges of defrauding CIS. The facts agreed upon in the plea agreements are as follows:
It should be noted that judgment has already been entered in favor of plaintiff in the above-captioned case as against defendants Rivera, Fuentes, Gamalier Reyes, and Torres. The Court did not previously consider plaintiff's claim as against defendants Reyes, Tropi-Car and the conjugal partnership constituted as between Reyes and Marcano because this case was stayed as against defendants Reyes and Marcano until recently and remains stayed as against defendant Tropi-Car.
From on or about October 1, 1991, and continuing to on or about May 1, 1992, the defendants . . . aiding and abetting each other, devised a scheme to defraud "CIS" of money, by means of false and fraudulent representations and false claims by selecting from "CIS" files [sic] claims which, having been previously settled, reflected their status as "closed claims." Having selected the claims, the three defendants working inside "CIS" would assign cash reserves against a previously assigned valid claim number, and authorized the preparation and payment of a fictitious claim for non-existing persons and/or non-existing injuries. These checks would then be given to codefendant RAFAEL FUENTES FERNANDEZ, who was described as counsel of record for the fraudulent claims. This defendant would in turn negotiate the newly issued check and return to the other participants in the scheme, defendants JOSE REYES MUNOZ, MORGAN RIVERA, and JUAN SANTIAGO GONZALEZ, the agreed upon share and retain his own. No legal reason or valid obligation which required the "CIS" to pay for such claims existed at any time relevant to these allegations. (Plaintiff's Exhibit K).
Each defendant pled guilty to mail fraud and to aiding and abetting each other in the commission of said offense. The amended version of the facts state that defendants' defrauding of CIS included the issuance of seven checks totalling $1,401,000.00.
There are also four other checks involved in plaintiff's complaint. Two checks, in the sum total of $25,000.00, were payable to Fuentes. These two checks were issued in connection with claim no. 182179, which was a case pending in Superior Court in Humacao, Civil No. 89-1533. The case was settled, however, and the settlement provision did not provide for attorney's fees and costs. Nevertheless, on the day the settlement check was issued, the two checks totalling $25,000.00 were issued to Fuentes. Reyes, in a sworn statement, admitted that these two checks were issued in order to defraud CIS.
The two remaining checks addressed are each in the sum of $35,000.00 and are payable to Reyes and Rivera. These two checks were drawn from a Chicago bank account, which consisted of monies deposited from eleven CIS checks. The latter checks were issued payable to "Market Adjustment Bureau, Inc." (the "Bureau") supposedly to reimburse the Bureau for expenses incurred in adjusting claims. The Bureau, however, had not been involved with the claims. Almost two months later, these eleven checks were deposited; however, they were deposited in the name of CIS, not in the name of the Bureau. On or about July 11, 1990, when defendants Rivera and Reyes caused to be issued the two checks for $35,000.00 in their names, no entry was made and no entry was permitted to be made in the CIS bookkeeping ledger.
Fraudulent Transaction Loss: The Diversion of Funds to Tropi-Car
Defendant Reyes organized and is president of Tropi-Car, a Florida corporation. Reyes, his wife Marcano and his children are the shareholders of Tropi-Car. On May 1, 1992, Tropi-Car purchased a car wash in Tampa, Florida, by making a down-payment of $200,000. Defendants have pled guilty to embezzling monies from CIS. Defendant Reyes used said monies to make the down-payment for the car wash. Reyes has admitted that half of the down-payment came from an embezzled check in the sum of $315,000. Fuentes exchanged said check for four cashier's check, one of which was in the amount of $100,000 and used for the car wash purchase. The remaining $100,000 for the down-payment was withdrawn by Reyes from a bank account consisting solely of embezzled CIS funds.
The Unauthorized Compensation Loss
Since 1989, Reyes and Rivera have received more than $750,000 in excess compensation. Plaintiff alleges that Reyes and Rivera received excess compensation in a sum of approximately $493,970.46 and $267,476.17 respectively. Compensation payments made to Reyes and Rivera were prepared in a sworn statement by a Certified Public Accountant who is the designated internal auditor for plaintiff. Codefendants Reyes and Rivera received the excess compensation, the auditor set forth in his sworn statement, by drawing CIS monies from various bank accounts on which they were signatories.
DISCUSSION I. McCarran-Ferguson Act
Plaintiff brought this action seeking recovery for losses resulting from embezzlement of monies by corporate insiders such as defendant Jose A. Reyes Munoz ("Reyes"). Plaintiff alleges that defendant Reyes acted together with the other corporate insiders and others outside the corporation. Plaintiff brought this action under the Racketeer Influenced and Corrupt Organizations Act ("RICO") and Puerto Rico laws.Defendant argues that plaintiff is using the federal RICO law to obstruct Puerto Rico's regulation of the business of insurance, of Corporacion Insular de Seguros and of the liquidation process of said company. Under the McCarran-Ferguson Act, "[n]o Act of Congress shall be construed to invalidate, impair or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance. . . ." 15 U.S.C. § 1012(b).
To determine whether the RICO law as applied in this case violates the McCarran-Ferguson Act, the Court must apply a four-part test. See, Thacker v. New York Life Ins. Co., 796 F. Supp. 1338, 1341 (E.D.Cal. 1992); Cochran v. Paco, Inc., 606 F.2d 460, 464 (5th Cir. 1979) (citing SEC v. National Sec., Inc., 393 U.S. 453, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969); Elliott v. State Farm Mut. Ins. Co., 786 F. Supp. 487, 493 (E.D.Pa. 1992)); Senich v. Transamerica Premier Ins. Co., 766 F. Supp. 339, 340 (W.D. Pa. 1990).
The first part of the analysis provides that a federal statute is not precluded by the McCarran-Ferguson Act if the statute specifically relates to the business of insurance within the meaning of 15 U.S.C. § 1012(b). . . . Second, a federal statute's application will not be precluded by the McCarran-Ferguson Act unless the state has enacted law for the purpose of regulating insurance activities. . . . Third, a federal statute's application will only be precluded by the McCarran-Ferguson Act if the activities which brought about the cause of action are the "business of insurance" within the meaning of the McCarran-Ferguson Act. . . . Finally, application of the federal statute will be precluded only if it would invalidate, impair, or supersede the state law regulating insurance. . . . All four prongs must be satisfied in order to find a federal statute precluded by the McCarran-Ferguson Act.Thacker, 796 F. Supp. at 1341 (citations omitted).
The third prong requires that the application of RICO will be precluded if the activities which brought about this cause of action fall under the McCarran-Ferguson definition for the "business of insurance." The Supreme Court has devised a three-part test defining the phrase "business of insurance." " [F]irst, whether the practice has the effect of transferring or spreading a policyholder's risk; second, whether the practice is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice is limited to entities within the insurance industry." Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129, 102 S.Ct. 3002, 3009, 73 L.Ed.2d 647 (1982) (emphasis in the original).
In the case at hand, plaintiff alleges that defendants, who were both corporate insiders at CIS and outsiders, violated RICO by fraudulently issuing and processing checks and using the mail system in order to embezzle said funds. The conduct by defendants that plaintiff is targeting with its civil RICO suit does not involve the spreading or transferring of the policyholder's risk. Nor does it involve the relationship between the policyholder and the insurance company. Defendants conduct had nothing to do with the selling of insurance policies to the public. Rather, defendants' conduct involved defrauding of the insurance company itself and its stockholders by making false claims. Finally, defendants' conduct was not limited to entities within the insurance industry. As noted above, the defrauding of CIS involved outsiders, such as defendant Fuentes. Accordingly, the Court finds that defendants' scheme to defraud an insurer through the activities conducted by defendants is not within the definition of the "business of insurance."
The fourth prong of the McCarran-Ferguson Act test is also not satisfied here because the application of RICO in this case does not invalidate, impair, or supersede the comprehensive Puerto Rico statutes regulating insurance companies and the liquidating of insolvent insurance companies. This RICO claim does not conflict with any Puerto Rico law enacted to regulate the business of insurance. And, as seen in the Liquidator's opposition to defendant's motion, the Liquidator finds that it is in the interest of the liquidation proceeding against CIS to pursue this RICO action. Accordingly, as the situation at hand does not fit the four-part test which would require the preclusion of RICO by the McCarran-Ferguson Act, the Court shall deny defendant Reyes' motion to dismiss as to this issue.
II. Proper Forum
Defendant also argues that the Liquidator Court, and not this Court, has proper jurisdiction over this matter. The Liquidator has made the decision to continue the RICO action in this case. Nothing in the Insurance Code prohibits the Liquidator from continuing with prosecution of this case. Under P.R. Laws Ann. tit. 26, § 4018(1), the Liquidator may proceed with lawsuits in the name of the insurer, whether the law suit be in a Commonwealth court or other court, such as the United States District Court for the District of Puerto Rico. Accordingly, defendant Reyes' claim that the Superior Court of Puerto Rico has exclusive jurisdiction over the insolvency proceeding of CIS and therefore this RICO action is unavailing.
Defendant argues that the CIS liquidation order issued by the Superior Court of Puerto Rico served as an injunction against this Court's jurisdiction over the above-captioned case and mandated a remand of said case to the superior court. However, "a state court cannot enjoin federal proceedings." General Atomic Co. v. Felter, 434 U.S. 12, 17, 98 S.Ct. 76, 78, 54 L.Ed.2d 199 (1977). Moreover, under the Insurance Code, the Liquidator is granted the authority to proceed with lawsuits in the name of the insurer in any court. Therefore, the Court shall deny defendant Reyes' motion as to defendant's proper forum argument.
III. Abstention
Finally, defendant argues that this Court should abstain from this case. Under Burford, federal courts should abstain in order to permit the "independence of state governments in carrying out their domestic policy." Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943) (holding that federal jurisdiction was improper when used to review a Texas commission's determination to regulate and conserve the pumping of oil and gas in Texas). Relevant factors to consider in determining whether or not to abstain include:
(1) whether the suit is based on a cause of action which is exclusively federal . . .; (2) whether the suit requires the court to determine issues which are directly relevant to the liquidation proceedings or state policy in the regulation of the insurance industry; (3) whether state procedures indicate a desire to create special state forums to regulate and adjudicate these issues . . .; and (4) whether difficult or unusual state laws are at issue. . . .Grimes v. Crown Life Ins. Co., 857 F.2d 699, 704-05 (10th Cir. 1988).
Defendant also argues for abstention under the Younger doctrine. However, as plaintiff is not attempting to enjoin an ongoing state proceeding, this doctrine is entirely irrelevant.
The above-captioned case is based on a federal statute: RICO. Plaintiff's claim that defendants undertook a scheme of embezzlement and fraud does not require this Court to determine issues which are directly relevant to the liquidation proceedings or state policy in the regulation of the insurance industry. Nothing in the Insurance Code indicates that there was the desire to create special state forums in which to regulate and adjudicate fraudulent schemes by the insurance company officers to defraud the insurance company. And finally, there are no state law issues in the above-captioned case. Therefore, the Court shall not abstain. WHEREFORE, based on the foregoing reasons, the Court hereby denies defendant Reyes' motion to dismiss.
IT IS SO ORDERED.