Farahzad v. Lawyers Title Insurance Company et al

Filing 59

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)

FILED 
CLERK 

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
---------------------------------------X
PARVIZ FARAHZAD,
Plaintiff,
-against-

MEMORANDUM & ORDER
10-CV-6010(JS)(AKT)

LAWYERS TITLE INSURANCE COMPANY and
FIDELITY NATIONAL TITLE INSURANCE
COMPANY,
Defendants.
---------------------------------------X
APPEARANCES
For Plaintiff:
Christopher P. Ring, Esq.
Tsunis Gasparis Lustig and Ring, LLP
2929 Expressway Drive North
Islandia, NY 11749
For Defendants:

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
action
Suffolk

on

October

County

8,

2010

against

in

New

York

Defendants

State

Lawyers

Supreme
Title

Court,

Insurance

Company (“LTIC”) and Fidelity National Title Insurance Company
(“FNT,” and together with LTIC, “Defendants”) asserting state
law

claims

conversion.

for

breach

of

contract,

negligence,

fraud,

and

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

District

Court

for

the

District

of

South

Carolina

for

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.
BACKGROUND1
On June 26, 2008, Plaintiff entered into 1031 Exchange
Agreement (the “Agreement”) with non-party LandAmerica Exchange
Services

(“LES”),

whereby

LES

agreed

to

act

as

a

qualified

intermediary for Plaintiff to facilitate a “like-kind” exchange
pursuant to Section 1031 of the Internal Revenue Code.
Ex. A.)

(Compl.

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.
¶

10).

Both

LES

and

LTIC

were

subsidiaries

of

non-party

LandAmerica Financial Group; however, only LES was a party to
the Agreement (Compl. Ex. A).

1

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.
2

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
LES.

(Compl. ¶¶ 4, 7, 10.)

(i) wrongfully

instructed

The Complaint alleges that LTIC:

LES

to

“deposit

Plaintiff’s

monies

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
invested

Plaintiff’s

(and

other’s)

escrowed

funds

in

auction

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
Virginia

(the

pursuant

to

“Bankruptcy
an

order

of

Court”).2
the

On

Bankruptcy

2

December
Court,

22,

2008,

LandAmerica

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
joint administration)).
3

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.
(Bankr.

Docket

Plaintiff’s
December

Entry

filing

22,

Nos.

a

2009

2634,

claim

he

2666.)

with

received

the

As

a

result

of

Bankruptcy

Court,

on

$359,496.16

under

the

Plan

“regarding his 1031 claim against LES, leaving a balance of
$1,132,858.84” (Compl. ¶ 26).
On October 8, 2010, Plaintiff commenced this action
against

LTIC

asserts

and

two

FNT

causes

seeking
of

$1,132,858.84

action:

one

in

damages.

He

for

“breach

of

contract/negligence” (Compl. ¶¶ 14-18) and the other for “fraud
and conversion” (Compl. ¶¶ 19-32).
DISCUSSION
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
state

a

claim

upon

which

relief

4

may

be

granted.

Because

Plaintiff’s claims are barred by res judicata,3 the Court will
not address the merits of Defendants’ other arguments.
I.

Standard of Review
In

Court

deciding

applies

a

Rule

12(b)(6)

“plausibility

“[t]wo working principles.”

motions

standard,”

to

which

dismiss,
is

guided

the
by

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).
Court

must

accept

“inapplicable

to

all

allegations

legal

as

conclusions;”

First, although the

true,

this

thus,

“tenet”

is

“[t]hreadbare

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
72.

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).

Iqbal,

Determining

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.

3

The Court notes that Plaintiff did not address Defendants’ res
judicata argument in his Opposition.
5

In deciding a motion to dismiss, the Court is confined
to “the allegations contained within the four corners of [the]
complaint.”

Pani v. Empire Blue Cross Blue Shield, 152 F.3d 67,

71 (2d Cir. 1998).
any

document

documents

This has been interpreted broadly to include

attached

to

the

Complaint,

incorporated

in

the

Complaint

any
by

statements
reference,

or
any

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
of

court

Reg’l

records.”);

Transp.

Auth.,

(collecting cases).

see

also

Anderson

v.

337

F.3d

201,

n.4

205

Rochester-Genesee
(2d

Cir.

2003)

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.

See FED.

R. CIV. P. 12(d); see also Kramer, 937 F.2d at 773.
“Dismissal under [Rule] 12(b)(6) is appropriate when a
defendant

raises

claim

preclusion . . . as

an

affirmative

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).

6

Conopco,

II.

Res Judicata
It

judicata

is

applies

well-settled
in

the

that

bankruptcy

“[t]he

doctrine

context.”

of

First

res
Union

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
States,

480

MacDonald
1997).

F.3d

Moving

621,

624-25

(2d

Servs.,

Inc.,

124

Cir.
F.3d

2007);
82,

Corbett

87-88

(2d

v.
Cir.

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.”
at 88.

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.”

Id. (quoting

Sure-Snap Corp. v. State St. Bank & Trust Co., 948 F.2d 869,
875-76

(2d

Cir.

1991)).

This

last

inquiry,

however,

is

typically “viewed as an aspect of the test for identity of the
causes of action.”

Id.

Here, there is no doubt that the Bankruptcy Court’s
confirmation order constitutes a final judgment on the merits by

7

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.
A.

Identity of Parties
For

res

judicata

purposes,

a

participant

in

a

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
matters

that

not

only

formally

named

parties,

but

all

participants in the bankruptcy proceedings are barred by the
doctrine of res judicata from asserting matters they could have
raised

in

Laddin

v.

(Bankr.

the

bankruptcy

Belden

N.D.

Ala.

(In

re

2009)

proceedings.”
Verilink
(“All

(collecting

Corp.),

408

participants

B.R.

in

a

cases));
420,

429

bankruptcy

proceeding, whether named parties or not, are barred by res
judicata

from

asserting

matters

that

could

have

been

raised

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

8

bound by the confirmed reorganization plan under principles of
res

judicata

because

they

“participated

in

the

bankruptcy

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
the

Court’s

res

judicata

analysis,

were

parties

to

that

proceeding.
B.

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
not

just

of

those

claims

which

were

brought

in

a

prior

proceeding, but of ‘any other admissible matter’ which could
have

been

brought,

but

wasn’t”

(quoting

Comm’r

of

Internal

Revenue v. Sunnen, 333 U.S. 591, 597, 68 S. Ct. 715, 92 L. Ed.

4

(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
court).)
5

(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).)
9

898 (1948)).

Whether a claim could have or should have been

raised in the earlier proceeding “depends in part on whether the
same

transaction

issue,

whether

claims,

and

or

the

whether

connected
same

evidence

the

present in the first.”

series

facts

is

of

transactions

needed

essential

to

is

at

to

support

both

the

second

were

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
case.6
First, the alleged facts giving rise to Plaintiff’s
claims--namely that, pursuant to a 1031 exchange agreement with
LES,

his

money

was

held

at

Sun

6

Trust

Bank

and

invested

in

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.
10

auction

rate

securities

which

were

rendered

illiquid

and

inaccessible after the auction rate securities market was seized
in

February

proceeding.

2008--were

central

to

the

Bankruptcy

Court

See, e.g., In re LandAmerica Fin. Grp., Inc., No.

08-BK-35994, 2009 WL 1269578, at *15 (Bankr. E.D. Va. May 7,
2009)

(summary

judgment

decision

rendered

by

the

Bankruptcy

Court determining that the funds held by LES pursuant to 1031
exchange agreements were considered property of the bankruptcy
estate).7
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

7

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.
As a
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
§ 1031
of
the
Internal
Revenue
Code
requires . . . .
Id. at *4 n.4.
11

liability.

(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
liability
belongs

to
in

Plaintiff--an
the

analysis

Bankruptcy

which

Court.

without

See

S.G.

a

doubt

Phillips

Constructors, Inc. v. City of Burlington (In re S.G. Phillips
Constructors, Inc.), 45 F.3d 702, 705 (2d Cir. 1005) (“[N]othing
is

more

directly

. . . than

the

at

the

core

quantification

debtor . . . .”

(internal

of
of

bankruptcy
all

quotation

administration

liabilities
marks

and

of

the

citation

omitted)).
Finally,

a

judgment

in

Plaintiff’s

favor

would

effectively challenge the Plan, which was based, at least in
part,

on

FNT’s

purchase

of

LTIC.

FNT,

in

purchasing

LTIC

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.
918.)8

(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.
8

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.
12

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
differently,

even

if

the

claims

were

not

technically

inconsistent with the bankruptcy court’s decision).
CONCLUSION
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.

/s/ JOANNA SEYBERT______
Joanna Seybert, U.S.D.J.
Dated:

September
21 , 2012
Central Islip, New York

13