Farahzad v. Lawyers Title Insurance Company et al
MEMORANDUM AND ORDER granting 40 Motion to Dismiss. For the foregoing reasons, Defendants' motion to dismiss is GRANTED, and Plaintiff's Complaint is DISMISSED WITH PREJUDICE. The Clerk of the Court is directed to enter judgment consistent with this Memorandum and Order and to mark this matter CLOSED. So Ordered by Judge Joanna Seybert on 9/21/2012. C/ECF (Valle, Christine)
9/21/2012 4:07 pm
U.S. DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
LONG ISLAND OFFICE
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
MEMORANDUM & ORDER
LAWYERS TITLE INSURANCE COMPANY and
FIDELITY NATIONAL TITLE INSURANCE
Christopher P. Ring, Esq.
Tsunis Gasparis Lustig and Ring, LLP
2929 Expressway Drive North
Islandia, NY 11749
Margaret A. Keane, Esq.
Sebastian L. Miller, Esq.
Dewey & LeBouef LLP
1950 University Avenue, Suite 500
East Palo Alto, CA 94303
SEYBERT, District Judge:
Plaintiff Parviz Farahzad (“Plaintiff”) commenced this
Company (“LTIC”) and Fidelity National Title Insurance Company
(“FNT,” and together with LTIC, “Defendants”) asserting state
Defendants removed the action to federal court on
December 28, 2010 on the grounds of diversity jurisdiction, and
on March 10, 2011 this case was transferred to the United States
consolidated pretrial proceedings pursuant to 28 U.S.C. § 1407
by the United State Judicial Panel on Multidistrict Litigation.
On September 30, 2011, Defendants moved to dismiss the Complaint
in the District of South Carolina, and on March 12, 2012 the
action was remanded to the undersigned.
Defendants’ motion to
dismiss is now pending before this Court.
For the reasons that
follow, the Court GRANTS Defendants’ motion.
On June 26, 2008, Plaintiff entered into 1031 Exchange
Agreement (the “Agreement”) with non-party LandAmerica Exchange
intermediary for Plaintiff to facilitate a “like-kind” exchange
pursuant to Section 1031 of the Internal Revenue Code.
The Agreement provided that all communications with LES
be directed to Andrea Levine (Compl. Ex. A. § 9), who, according
to the Complaint, was also an employee of Defendant LTIC (Compl.
LandAmerica Financial Group; however, only LES was a party to
the Agreement (Compl. Ex. A).
The following facts are taken from the Complaint and the
documents attached thereto and referenced therein, including the
docket in In re LandAmerica Financial Group, Inc., No. 08-BK35994 (Bankr. E.D. Va.) [hereinafter “Bankr. Docket”], and are
presumed to be true for the purposes of this Memorandum and
Order. See infra pages 5-6.
Pursuant to the Agreement, on July 8, 2008 Plaintiff
sold a parcel of real property that he owned for investment
purposes and transferred the proceeds, totaling $1,492,355, to
(Compl. ¶¶ 4, 7, 10.)
The Complaint alleges that LTIC:
into an account at Sun Trust Bank commingled with other 1031
exchanges instead of segregating said monies in Chase [Bank] in
Plaintiff Farahzad’s name as instructed in writing by Plaintiff”
(Compl. ¶ 14); (ii) “knew or should have known” that LES had
rate securities that were illiquid as of February 2008 (Compl. ¶
21); and (iii) together with LES, engaged in a Ponzi scheme
whereby they continued to process new 1031 exchange agreements
to cover expenses associated with older 1031 exchange agreements
(Compl. ¶¶ 22-23).
On November 26, 2008, both LandAmerica Financial Group
and LES filed voluntary petitions for Chapter 11 Bankruptcy in
the United States Bankruptcy Court for the Eastern District of
Although LandAmerica Financial Group and LES filed separate
petitions (see Bankr. Docket Entry No. 1 (LandAmerica Financial
Group’s petition); In re LandAmerica 1031 Exchange Services,
Inc., No. 08-BK-35995 (Bankr. E.D. Va. 2008), Docket Entry No. 1
(LES’s petition)), the two cases were jointly administered under
Docket No. 08-BK-35994 (see Bankr. Docket Entry No. 31 (order of
Financial Group sold LTIC to Defendant FNT.
(Compl. ¶ 16; see
also Bankr. Docket Entry No. 1017.)
A joint Chapter 11 plan (the “Plan”) was submitted to
the Bankruptcy Court on September 9, 2009.
The Bankruptcy Court
held a Plan confirmation hearing on November 18, 2009 and issued
an order confirming the Plan three days later on November 23.
“regarding his 1031 claim against LES, leaving a balance of
$1,132,858.84” (Compl. ¶ 26).
On October 8, 2010, Plaintiff commenced this action
contract/negligence” (Compl. ¶¶ 14-18) and the other for “fraud
and conversion” (Compl. ¶¶ 19-32).
Defendants have moved to dismiss on the grounds that:
(1) Plaintiff lacks standing, (2) the claims are barred under
the doctrine of res judicata, and (3) the Complaint fails to
Plaintiff’s claims are barred by res judicata,3 the Court will
not address the merits of Defendants’ other arguments.
Standard of Review
“[t]wo working principles.”
Ashcroft v. Iqbal, 556 U.S. 662,
678, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009); accord Harris v.
Mills, 572 F.3d 66, 71-72 (2d Cir. 2009).
First, although the
recitals of the elements of a cause of action, supported by mere
conclusory statements, do not suffice.”
Iqbal, 556 U.S. at 678
(citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, S.
Ct. 1955, 167 L. Ed. 2d 929 (2007)); accord Harris, 572 F.3d at
Second, only complaints that state a “plausible claim for
relief” can survive a Rule 12(b)(6) motion to dismiss.
556 U.S. at 679 (citing Twombly, 550 U.S. at 556).
whether a complaint does so is “a context-specific task that
requires the reviewing court to draw on its judicial experience
and common sense.”
Id. (citation omitted); accord Harris, 572
F.3d at 72.
The Court notes that Plaintiff did not address Defendants’ res
judicata argument in his Opposition.
In deciding a motion to dismiss, the Court is confined
to “the allegations contained within the four corners of [the]
Pani v. Empire Blue Cross Blue Shield, 152 F.3d 67,
71 (2d Cir. 1998).
This has been interpreted broadly to include
document on which the Complaint heavily relies, and anything of
which judicial notice may be taken, see Chambers v. Time Warner,
Inc., 282 F.3d 147, 152-53 (2d Cir. 2002); Kramer v. Time Warner
Inc., 937 F.2d 767, 773 (2d Cir. 1991), including the Bankruptcy
docket, see Vaughn v. Consumer Home Mortg. Co., 470 F. Supp. 2d
248, 256 n.8 (E.D.N.Y. 2007) (“[C]ourts may take judicial notice
Consideration of matters beyond those just
enumerated requires the conversion of the Rule 12(b)(6) motion
to dismiss into one for summary judgment under Rule 56.
R. CIV. P. 12(d); see also Kramer, 937 F.2d at 773.
“Dismissal under [Rule] 12(b)(6) is appropriate when a
preclusion . . . as
defense and it is clear from the face of the complaint, and
matters of which the court may take judicial notice, that the
plaintiff’s claims are barred as a matter of law.”
Inc. v. Roll Int’l, 231 F.3d 82, 86 (2d Cir. 2000).
Commercial Corp. v. Nelson, Mullins, Riley & Scarborough (In re
Varat Enters., Inc.), 81 F.3d 1310, 1315 (4th Cir. 1996) (citing
Brown v. Felsen, 442 U.S. 127, 132, 99 S. Ct. 2205, 60 L. Ed. 2d
767 (1979)); see also EDP Med. Computer Sys., Inc. v. United
To determine whether res judicata bars a subsequent
action, the Court must consider whether:
“1) the prior decision
was a final judgment on the merits, 2) the litigants were the
same parties, 3) the prior court was of competent jurisdiction,
and 4) the causes of action were the same.”
Corbett, 124 F.3d
In the Second Circuit, the Court must also consider
“whether an independent judgment in a separate proceeding would
‘impair, destroy, challenge, or invalidate, the enforceability
or effectiveness’ of the reorganization plan.”
Sure-Snap Corp. v. State St. Bank & Trust Co., 948 F.2d 869,
typically “viewed as an aspect of the test for identity of the
causes of action.”
Here, there is no doubt that the Bankruptcy Court’s
confirmation order constitutes a final judgment on the merits by
a court of competent jurisdiction.
See Celli v. First Nat’l
Bank of N. N.Y. (In re Layo), 460 F.3d 289, 294 (2d Cir. 2006);
In re Frank’s Nursery & Crafts, Inc., No. 04-BK-15826, 2006 WL
2385418, at *5 (Bankr. S.D.N.Y. May 8, 2006).
At issue, then,
is whether there is identity of parties and identity of claims.
Identity of Parties
bankruptcy proceeding is considered a party to the proceeding.
See Ledford v. Brown (In re Brown), 219 B.R. 191, 194 (B.A.P.
6th Cir 1998) (“Courts have held in the context of bankruptcy
participants in the bankruptcy proceedings are barred by the
doctrine of res judicata from asserting matters they could have
proceeding, whether named parties or not, are barred by res
during the course of the bankruptcy proceeding.” (citing In re
Micor-Time Mgmt. Sys., Nos. 91-2260, 91-2261, 1993 WL 752, at *4
(6th Cir. Jan. 12, 1993)), rev’d on other grounds, 410 B.R. 697
(N.D. Ala. 2009); Newby v. Enron Corp. (In re Enron Corp. Sec.,
Derivative & ERISA Litig.), No. MDL-1446, 2008 WL 3509840, at
*2, (S.D. Tex. July 25, 2008) (holding that defendants were
bound by the confirmed reorganization plan under principles of
proceeding” (citing Corbett, 124 F.3d at 89)).
Here, both Plaintiff4 and Defendants5 were participants
in the bankruptcy proceeding, and therefore, for the purposes of
Identity of Claims
Claims are identical for the purposes of the Court’s
res judicata analysis if they “could have or should have [been]
raised before confirmation of a bankruptcy plan.”
In re Varat,
81 F.3d at 1315 (citations omitted); see also Sure-Snap, 948
F.2d at 873-74 (stating that res judicata “bars re-litigation
proceeding, but of ‘any other admissible matter’ which could
Revenue v. Sunnen, 333 U.S. 591, 597, 68 S. Ct. 715, 92 L. Ed.
(See, e.g., Bankr. Docket Entry No. 745 (notice of appearance
in the Bankruptcy Court filed on Plaintiff’s behalf); Bankr.
Docket Entry No. 2570 (indicating that Plaintiff was served with
notice of the confirmation hearing); Compl. ¶ 26 (Plaintiff, by
his own admission, received $359,496.16 from the bankruptcy
(See, e.g., Bankr. Docket Entry Nos. 65 (notice of appearance
in the Bankruptcy Court filed on behalf of FNT); Bankr. Docket
Entry No. 3706 (motion filed by LTIC); Bankr. Docket Entry No.
3724 (application filed by LTIC’s counsel for permission to
appear pro hac vice).)
Whether a claim could have or should have been
raised in the earlier proceeding “depends in part on whether the
present in the first.”
NLRB v. United Techs. Corp., 706 F.2d
1254, 1260 (2d Cir. 1983); see also Corbett, 124 F.3d at 89.
The Court finds that there is identity of claims in the present
First, the alleged facts giving rise to Plaintiff’s
claims--namely that, pursuant to a 1031 exchange agreement with
The Court, before discussing what claims Plaintiff could have
brought in the bankruptcy proceeding, finds a brief discussion
of the jurisdiction of the bankruptcy court worthwhile. The
Bankruptcy Code provides that bankruptcy judges may enter final
judgments in “all core proceedings arising under title 11, or
arising in a case under title 11.” 28 U.S.C. § 157(b)(1).
Bankruptcy courts may also hear issues that are related to noncore proceedings, but they are generally limited to making
recommendations to the district court. Id. § 157(c)(1). The
Second Circuit has held that for the purpose of res judicata
there is no distinction between core and non-core proceedings;
in other words, res judicata will be determined by analyzing
whether a present claim--regardless of whether it would have
been characterized as core or non-core by the bankruptcy court-is related to the same facts or transactions raised in the
bankruptcy proceeding such that it could have, and therefore
should have, been raised there. See Sure-Snap, 948 F.2d at 87375; see also Plotner v. AT&T Corp., 224 F.3d 1161, 1172-73 (10th
Cir. 2000) (collecting cases). Accordingly, the Court need not
decide whether Plaintiff’s claims herein would have constituted
core or non-core proceedings in the bankruptcy court as it has
no relevance to the Court’s analysis.
inaccessible after the auction rate securities market was seized
See, e.g., In re LandAmerica Fin. Grp., Inc., No.
08-BK-35994, 2009 WL 1269578, at *15 (Bankr. E.D. Va. May 7,
Court determining that the funds held by LES pursuant to 1031
exchange agreements were considered property of the bankruptcy
Second, as all of Plaintiff’s claims arise out of the
Agreement with LES--an agreement to which Defendants were not
parties--Plaintiff is seeking to recover against LTIC (and FNT
and LTIC’s successor-in-interest based on a theory of alter-ego
The Bankruptcy Court, in summarizing the underlying facts,
stated, in relevant part:
In the ordinary course of its business, LES
invested certain of the exchange funds that
it received from its former customers and
which it had deposited in [its account with
Sun Trust Bank].
Some of the invested
exchange funds received by LES are now held
in the form of illiquid auction rate
securities as a result of the unprecedented
recent and rapid economic decline.
consequence, LES does not have the ability
from a liquidity standpoint to fund all the
exchanges it is contractually obligated to
complete within the time parameters that
requires . . . .
Id. at *4 n.4.
(See Pl. Opp. 7-8.)
Therefore, although Plaintiff
has not named LES as a defendant in this action, his claims
against Defendants will necessarily involve an analysis of LES’s
Constructors, Inc. v. City of Burlington (In re S.G. Phillips
Constructors, Inc.), 45 F.3d 702, 705 (2d Cir. 1005) (“[N]othing
. . . than
debtor . . . .”
effectively challenge the Plan, which was based, at least in
pursuant to an order of the Bankruptcy Court, issued LandAmerica
Financial Group 3,176,260 shares of its own common stock–-which,
when liquidated, were available for distribution to creditors,
including Plaintiff, in the Plan.
(See Bankr. Docket Entry No.
Thus, to allow Plaintiff’s present claims against FNT
would potentially impair the Plan, because, had those claims
been properly raised during the bankruptcy proceeding, the Plan
likely would have been structured differently.
See Sure Snap,
On February 12, 2009 the stock was trading at $18.24 per share,
which means that FNT had contributed to the estate an asset
worth over $24 million.
948 F.2d at 876 (holding that it would impair the effectiveness
of a reorganization plan to allow claims that, if raised when
they should have been, may have resulted in the bankruptcy court
structuring the disposition of assets and schedule of payment
inconsistent with the bankruptcy court’s decision).
dismiss is GRANTED, and Plaintiff’s Complaint is DISMISSED WITH
The Clerk of the Court is directed to enter judgment
/s/ JOANNA SEYBERT______
Joanna Seybert, U.S.D.J.
21 , 2012
Central Islip, New York
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