Opinion
02 Civ. 3628 (NRB)
September 9, 2002
Counsel for Plaintiff: Mark F. Hughes, Jr., Esq., Little Silver, N.J.
Counsel for Defendants: Phillip Silverberg, Esq., Craig Brown, Esq.* Mound, Cotton, Wollan Greengrass, New York, N.Y.
MEMORANDUM AND ORDER
Terrence D. Stradford, Global Implant Dentistry, Inc., Global Surgery Associates, Inc., Center for Osseointegration Trauma, Inc., National Dental Medical Supply Equipment Company, Inc., and Smile Health Center Lab, Inc., (collectively, "plaintiffs") commenced this action by filing a complaint in the Superior Court of New Jersey on January 14, 2002. On March 4, 2002, Zurich Insurance Company, Zurich North American Insurance Company, Zurich-American Insurance Company, and Northern Insurance Company of New York ("Northern") (collectively, "defendants") removed the case to the United States District Court for the District of New Jersey. Defendants then answered the complaint, and also asserted several counterclaims against Dr. Stradford. The District Court, by Memorandum and Order dated May 6, 2002, granted defendants' motion to transfer the case to this Court.
Plaintiffs filed an amended complaint on January 15, 2002.
In the May 6, 2002, Memorandum and Order, District Judge Thompson also denied plaintiffs' motion to enjoin a related action between the parties in the Supreme Court of New York. Stradford v. Zurich Ins. Co., No. 02-588 (AET) (D.N.J. May 6, 2002). Plaintiff's assertion that Judge Thompson "never ruled" on its motion to "stay the parallel case in the Supreme Court of New York," and that the motion is "still pending," is, therefore, incorrect. Letter from Mark F. Hughes to the Court dated August 27, 2002. While we appreciate that plaintiff would prefer not to litigate substantially the same dispute in two fora, we will not revisit Judge Thompson's decision on this issue at this time.
Presently before the Court is counterclaim defendant Terrence Stradford's motion to dismiss the First, Second, Fourth, Sixth, and Seventh Counterclaims against him on the grounds that these Counts fail to plead fraud with specificity, as required by Fed.R.Civ.P. 9(b) ("Rule 9(b)"), Dr. Stradford's motion to dismiss the Fourth and Seventh Counterclaims for failure to state a claim, pursuant to Fed.R.Civ.P. 12(b)(6), and defendants' motion for leave to amend their counterclaims, pursuant to Fed.R.Civ.P. 15(a). For the reasons that follow we grant all three motions.
BACKGROUND
The following discussion does not constitute findings on any questions of fact, but merely attempts to provide the reader with a general understanding of the factual background to the instant motions.
Dr. Stradford is a dentist who maintains an office in Staten Island, New York. As part of his practice, Dr. Stradford engages in dental implant surgery and, for a fee, he trains other dentists to perform dental implant surgery themselves. Defendants are affiliated corporate insurers. Northern issued a policy of insurance bearing number PAS 35380535 (the "Policy") on Dr. Stradford's office effective August 18, 1999, thereby insuring the premises until August 19, 2000. During this term, Dr. Stradford apparently failed to pay the required insurance premiums, and Northern cancelled the Policy from October 10, 1999 to December 13, 1999. On or about December 6, 1999, however, Dr. Stradford submitted a "no claims" letter certifying that he had no losses from October 19, 1999, to that date. He also apparently resumed paying the premiums, and National reinstated the Policy on or about December 14, 1999. Dr. Stradford was notified of the reinstatement on or about January 9, 2000.
He is also the president and sole shareholder of all the plaintiff corporations.
The record is not entirely clear as to which of the related defendant insurance entities issued the Policy and/or investigated Dr. Stradford's claim. As defendants aver, and plaintiffs admit, that Northern issued the Policy, Am. Counterclaims ¶ 5; Answer to Counterclaims ¶ 1, we will assume that Northern issued the Policy and investigated Dr. Stradford's claim thereunder.
Less than ten days later, Dr. Stradford filed a claim on the Policy. Dr. Stradford notified Northern that, "[o]n January 17, 2000, [he] returned to his office from his vacation and found water dripping from frozen pipes and extensive water damage to his personal property and the interior of his office." Am. Compl. ¶ 3A. He further notified Northern that certain dental implants, worth more than $100,000, which had apparently been stored in his office, "had become wet and [therefore] ruined." Id. ¶ 3B. Dr. Stradford submitted a claim under the Policy for $151,154.74, and Northern made payments to Dr. Stradford in this amount. After receiving these payments, Dr. Stradford "submitted a revised claim under the Policy totaling $1,385,456.70, consisting of $168,000.00 for property damage, and a business interruption claim of $1,209,456.70." Am. Counterclaims ¶ 14.
According to plaintiffs, "dental implants, once they become wet prior to implantation, cannot be sterilized [and the] manufacturer will not warrant the sterility of such wet implants." Am. Compl. ¶ 4F.
The so-called "business interruption claim" is comprised of $652,256.70 in "[l]ost gross income," $557,200.00 in "[n]egative impact on [Dr. Stradford's] practice," and $8,000 in accountant's charges. Am. Compi. ¶ 4X.
Northern continued to investigate Dr. Stradford's claimed loss. Accordingly, Northern demanded that Dr. Stradford submit to a deposition under oath concerning his claim, and a deposition was scheduled for June 28, 2000. See Policy at 18 ("[w]e may examine any insured under oath . . . about any matter relating to . . . the claim"). The deposition was adjourned, according to defendants, because Dr. Stradford failed to timely submit documents. Am. Counterclaims ¶ 16. The deposition was finally commenced on July 19, 2000, but, at the end of the day, the following colloquy occurred between counsel for the insurer and Dr. Stradford:
According to plaintiffs, the "real reason for the delay was the apparent failure of counsel [for Northern] to read what had been submitted to him and the desire to deny the claim of the Plaintiffs." Answer to Counterclaim ¶ 9.
Q: Just, you know, as I said, we're not going to be able to finish today. Let me just cover one more thing.
A: I didn't know I had that much stuff.
Q: Well, it's multiple copies. You know what? The time is now — it's almost 20 to 5. We've been going pretty much straight with a very short lunch break since approximately 10:25. We're going to cease today. And I'm going to be talking to Dr. Stradford about rescheduling to continue and complete the examination under oath on another date. The examination for today's session is now concluded.
Transcript of Examination Under Oath of Terrance Stradford, DDS, taken on July 19, 2000, at 210:15-211:4 (emphasis supplied). Despite numerous requests from his insurer, Dr. Stradford has not submitted to any further examinations under oath. By letter dated January 31, 2001, Northern disclaimed coverage for Dr. Stradford's claim and demanded the return of the $151,154.74 it had already paid. To date, Dr. Stradford has not returned this sum to Northern.
Slightly less than one year later, plaintiffs commenced this suit seeking $1,385,456.70 on the Policy, less the $151,154.74 already paid, or $1,234,301.96. Defendants ccunterclaimed, asserting, inter alia, that Dr. Stradford "knowingly and willfully devised a scheme and artifice . . . to defraud defendants and obtain money by false pretenses and representations," and seeking the return of the $151,154.74, punitive damages, and investigation expenses. Am. Counterclaims ¶ 22. Dr. Stradford now moves, inter alia, to dismiss those counterclaims that are based in fraud for failure to state their claims with sufficient "particularity" under Rule 9(b), and to dismiss certain other counterclaims for failure to state a claim.
DISCUSSION
Rule 9(b) provides, "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally." Here, defendants' counterclaims succeed in alleging facts that "give rise to a strong inference of fraudulent intent" as required by the second sentence of Rule 9(b). Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. e1994). The timing of Dr. Stradford's claim, just ten days after the Policy was reinstated, his alleged refusal to cooperate with National's investigation of his claim, and the size of his claim can fairly be said to satisfy this requirement.
We find, however, that the counterclaims do not satisfy the first sentence of Rule 9(b), which requires that the "time, place, and nature of the [alleged] misrepresentations" be disclosed to the party accused of fraud. Ross v. Bolton, 904 F.2d 819, 823 (2d Cir. 1990). Here, defendants' counterclaims simply fail to identify the statement made by Dr. Stradford that they claim to be false. Thus, it is unclear from the face of the counterclaims whether defendants assert that Dr. Stradford's claimed losses are improperly inflated, that Dr. Stradford's office never even flooded, or that the offices flooded, but not during the term of the Policy. In essence, defendants claim that Dr. Stradford lied, but fail to identify the lie.
The "primary purpose" of Rule 9(b) is to afford a litigant accused of fraud "fair notice of the claim and the factual ground upon which it is based." Id. Here, defendants' counterclaims fail to provide Dr. Stradford with fair notice of precisely which statement, or which aspect of his claim on the Policy, they allege to be false. The counterclaims are therefore insufficient under Rule 9(b), and must be dismissed.
Nevertheless, it is the usual practice in this Circuit, when there was no prior opportunity to replead, to grant a litigant who has suffered a dismissal under Rule 9(b) leave to amend so that he may conform his pleadings to the Rule. Luce v. Edelstein, 802 F.2d 49, 56 (2d Cir. 1986);see also Fed.R.Civ.P. 15(a) ("leave [to amend] shall be freely given when justice so requires"). Indeed, defendants have already moved for leave to amend and submitted a proposed amended pleading. See Brown Decl. Ex. H (proposed Second Amended Answer and Counterclaims). This pleading cures the defects we found in the counterclaims dismissed above because it makes clear that defendants allege that Dr. Stradford's office was flooded at a time when he permitted the Policy to lapse, and that Dr. Stradford "misrepresented the date of the loss in an effort to bring the date of loss within the coverage period." Proposed Sec. Am. Answer ¶¶ 27-29. Accordingly, we hereby grant defendants leave to amend their counterclaims.
While defendants have already amended their counterclaims once, they did so before receiving notice that Dr. Stradford intended to challenge their claims on Rule 9(b) grounds. In such a circumstance, we see no reason to dismiss defendants' counterclaims with prejudice. The better course, we believe, is to give defendants a chance to properly conform their counterclaims to the requirements of Rule 9(b)
Finally, Dr. Stradford moved for dismissal of the Fourth and Seventh Counts against him for failure to state a claim. See Fed.R.Civ.P. 12(b)(6). He has offered persuasive arguments in support of his motion, Pl.'s Mem. at 5-6, and defendants have not offered any opposition thereto. Dr. Stradford's motion to dismiss these Counts is, therefore, granted.
CONCLUSION
For the reasons stated above, Dr. Stradford's motion to dismiss the First, Second, Fourth, Sixth, and Seventh Counterclaims against him is granted. Defendants are granted leave to serve their proposed Second Amended Answer and Counterclaims, in substantially the same form as presented to the Court, see Brown Decl. Ex. H, except that the Fourth and Seventh Counterclaims may not be pleaded again, as those fail to state a claim. Fed.R.Civ.P. 12(b)(6). Such service is to be effected no later than September 17, 2002.Furthermore, defendants have requested permission to move for summary judgment pursuant to Fed.R.Civ.P. 56(b). See Letter from Philip C. Silverberg to the Court dated August 16, 2002. Defendants assert that plaintiffs breached their contractual obligations under the Policy by failing to cooperate in the investigation of the claim, and that this breach precludes plaintiffs from recovering on the Policy. Defendants' request is hereby granted, and their motion is to be served by September 27, 2002. Plaintiffs' opposition, if any, is to be served by October 18, 2002, and defendants' reply, if any, is to be served by November 1, 2002.