Lerner v. Fleet Bank, N.A.

459 F.3d 273

Isaac LERNER, Eli Lerner, Ballyward Investment Company, Ltd., Jaime Sohacheski, Gaston Limited, Hotel Investors, Inc., Perky Limited, Abraham Rappaport, Esther Rappaport, Moshe Cohn, Establissement Somer, Josef Kohn, Chancery Enterprises, Ltd., Rosdev Developments, Inc., Michael Rosenberg, Bruce Bayroff, Joshua Goldstein, Land Tech Manalapan LLC, Theodore Brodie, Meyer Rosenbaum, Mr Associates LLC, Ilana Blumkin, as Trustee, Emdee Tours, Inc., Alexander Hasenfeld, Inc., Profit Sharing Retirement Plan, Hasenfeld Stein, Inc., Pension Trust, Aeg Agency, Inc., Aaron Garfinkel, Rivka Stein, Aaron Y. Rubinson, Steven B. Rothchild, P.C., Money Purchase Plan, Pinchos Rubinson, Akiva Leiman, Estate of Boruch Rubinson, Chaim and Rachel Lefkowitz, Naftali and Sarah Lipshutz, Mendel and Feigy Lipschutz, Reisel Bergstein, Michael Konig, Esther Wertenteil, Aaron Wertenteil, Teena Rubinfeld, Mark Wertenteil, Morris and Sarah Friedman, the Regal Trade, S.A., Vavel Corp., Chadwick Funding Co., L.P., Allen Sausen and Leonard Sausen, d/b/a Atassco, Keren Hachesed of Monsey, Inc., Geneva Properties, L.L.C., Mt. Pleasant Partners, Herschel Kulefsky, Albert David Pearls & Gems, Inc., Defined Benefit Pension Plan, Chai Properties Corp., Arthur Kurtz, Crestfield Associates, Inc., Weinreb Management, and Howard Mermelstein, Plaintiffs-Appellants, v. FLEET BANK, N.A., Sterling National Bank and Trust Company of New York, and Republic National Bank of New York, Defendants-Appellees.

Docket No. 05-5106 CV.

United States Court of Appeals, Second Circuit.

Argued: April 26, 2006.

Decided: August 8, 2006.

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Edward S. Rudofsky, Zane and Rudofsky (James B. Zane, Eric S. Horowitz, of

counsel), New York, NY, for Plaintiffs-Appellants.

Thomas J. Moloney, Cleary Gottlieb Steen & Hamilton LLP (David Rush, of counsel), New York, NY, for Defendant-Appellee Fleet Bank, N.A.

Allen C. Wasserman, Lord, Bissell & Brook LLP (James DeRose III, of counsel), New York, NY, for Defendant-Appellee Sterling National Bank.

Celia Goldwag Barenholtz, Kronish Lieb Weiner & Hellman LLP (Chaya F. Weinberg-Brodt, of counsel), New York, NY, for Defendant-Appellee Republic National Bank of New York.

Before: WALKER, Chief Judge, KEARSE and SACK, Circuit Judges.

SACK, Circuit Judge.

The plaintiffs are investors who were defrauded by lawyer David Schick in the early 1990s as part of his multi-million-dollar Ponzi scheme. Many of Schick's victims have tried with varying degrees of success to recover some of their lost investments from Schick's estate in bankruptcy, see, e.g., In re Venture Mortgage Fund, L.P., 282 F.3d 185 (2d Cir.2002), and from various banks that allegedly either abetted or failed to detect Schick's activities, see, e.g., Schmidt v. Fleet Bank, 16 F.Supp.2d 340 (S.D.N.Y.1998).

This is the second time we have considered these investors' claims against these defendants. The plaintiffs allege that the defendant banks assisted Schick by failing to report his overdrafts on attorney fiduciary accounts to the state bar for disciplinary action and by evading their reporting duties by misleadingly marking some checks drawn against accounts with insufficient funds as "Refer to Maker." The district court (Frederic Block, Judge) previously dismissed the plaintiffs' attempt to bring these allegations as a claim under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962, and declined to exercise supplemental jurisdiction over their state-law claims. See Lerner v. Fleet Bank, N.A., 146 F.Supp.2d 224 (E.D.N.Y.2001). We affirmed the court's dismissal of the RICO claim because the plaintiffs had failed to plead sufficient facts to show proximate causation under the RICO statute. See Lerner v. Fleet Bank, N.A. (Lerner I), 318 F.3d 113 (2d Cir.), cert. denied, 540 U.S. 1012, 124 S.Ct. 532, 157 L.Ed.2d 424 (2003). But because we concluded that there was an adequate basis for diversity jurisdiction and supplemental jurisdiction over non-diverse parties, we remanded with instructions for the court to decide the plaintiffs' state-law claims.

On remand, the district court again granted the defendants' Rule 12(b)(6) motion to dismiss, concluding that because all of the plaintiffs' state-law claims include an allegation on the element of proximate causation, the dismissal of the plaintiffs' RICO claim for lack of proximate cause required that the state-law claims be dismissed on the same grounds. We disagree. A plaintiff must make a different showing of proximate cause — one that is often more difficult to make — when bringing suit under the RICO statute than when bringing a common-law cause of action. Our finding of a failure of the allegations of proximate cause under RICO does not, therefore, necessarily imply a similar finding for the plaintiffs' state-law claims.

We conclude that each plaintiff who actually had funds on deposit with the defendants Fleet Bank, N.A. ("Fleet"), Sterling National Bank and Trust Company of New York ("Sterling"), or Republic National Bank of New York ("Republic") has stated a claim against that bank or those banks for negligence and for aiding and abetting breach of fiduciary duty under New York law. We therefore vacate the judgment of the district court insofar as it dismissed those claims. We affirm the district court's dismissal of each of the plaintiffs' claims against any such defendant in which the plaintiff did not have funds on deposit. We also affirm (with one exception) the dismissal of the plaintiffs' claims for fraud and commercial bad faith.

BACKGROUND

We outlined the substance of David Schick's fraudulent scheme in Lerner I:

Schick convinced investors that he had devised a no-risk scheme for generating a high return on their investments. Schick would bid on distressed mortgage pools at auctions by the Resolution Trust Company, the Federal Deposit Insurance Company ("FDIC"), and other banking institutions. Upon being awarded the bid, he would immediately try to re-sell the mortgage pool to another buyer for a quick profit. The acceptance of his bid was subject to a ninety-day due diligence period, so Schick assured his investors that if he was unable to find a buyer within the ninety-day time period, he would be able to rescind his original purchase without incurring any penalty. Schick's plan was apparently foolproof — except, he explained to the investors, in order to make this scheme work, Schick had to prove to the FDIC that he could complete the purchase. He would therefore be required to deposit substantial sums of cash as evidence of his good faith. This is where Schick's potential investors came in.

To convince wary investors that their money would be secure, Schick agreed to deposit the entrusted funds in escrow accounts covered by restrictive provisions. Lerner v. Fleet Bank, N.A., 146 F.Supp.2d 224, 225-27 (E.D.N.Y.2001). He also entered into escrow agreements with the investors that stated: "Escrow Agent are attorneys [sic] admitted to practice in the State of New York and shall act as fiduciary in accordance with the relevant provisions of the Judiciary Law and all other ethical or legal standards for attorneys admitted to practice in the State of New York and expressly agrees that the only person who shall be entitled to, or have any right or interest in the Escrow Deposit shall be the Depositor." Armed with these guarantees, and relying on the fact that Schick was an attorney in good standing with the New York bar, the investors turned their money over to Schick for deposit in the defendant banks. Ultimately, however, these escrow agreements provided little protection against Schick's unscrupulous conduct. Before the investors discovered his fraud, Schick had raided the accounts repeatedly and managed to steal approximately $82 million.

Id. at 117-18 (brackets in original).

The plaintiffs based their RICO claims primarily on the banks' failure to report Schick's overdrafts on his attorney fiduciary accounts to the Lawyers' Fund for Client Protection of the State of New York, as required by New York law. New York's Disciplinary Code requires that "[a] lawyer who is in possession of funds belonging to another person incident to the lawyer's practice of law, shall maintain such funds in a banking institution within the State of New York which agrees to provide dishonored check reports" to the Lawyers' Fund. See N.Y. Comp.Codes R. & Regs. tit. 22, § 1200.46(b)(1). Each of the defendants had entered into one or more agreements with the Lawyers' Fund, in which they agreed to report all checks drawn by attorneys on "special," "trust," "escrow," or "IOLA"¹ accounts that were dishonored for insufficient funds. See id. at § 1300.1.

The Lawyers' Fund uses these reports of checks dishonored for insufficient funds, known colloquially as "bounced" checks, to initiate disciplinary proceedings against lawyers who mishandle client funds. A check on a client account that is dishonored for insufficient funds is often evidence that a lawyer has improperly commingled client funds, in violation of his or her fiduciary duties. See generally ABA Model Rules for Trust Account Overdraft Notification, R.2, available at http://www.abanet.org/cpr/clientpro/orule2.html (last visited June 24, 2006).

In support of their RICO claim, the plaintiffs alleged primarily that the banks engaged in a conspiracy to corrupt the Lawyers' Fund. After we affirmed dismissal of that claim and remanded to the district court for its consideration of the plaintiffs' state-law claims, the court instructed the plaintiffs to submit an amended complaint that pared down their many state-law claims. The plaintiffs' second amended complaint replaced the portion of the original complaint addressing the state-law causes of action. But the first 147 pages of the earlier complaint, which described the factual background of the allegations,...