Allied World Insurance Co v. James Keating ( 2023 )

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
______________
No. 22-1996
______________
ALLIED WORLD INSURANCE COMPANY; ALLIED WORLD SPECIALTY
INSURANCE COMPANY; ALLIED WORLD NATIONAL ASSURANCE
COMPANY; UNITED STATES FIRE INSURANCE COMPANY,
Appellants
v.
JAMES KEATING; JONATHAN COHEN; JONATHAN P. COHEN, P.A.; SIAN
KEATING
____________
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(No. 2-21-cv-04010)
U.S. District Judge: Honorable Timothy J. Savage
______________
Argued January 23, 2023
______________
Before: SHWARTZ, BIBAS, and FUENTES, Circuit Judges.
(Filed: February 2, 2023)
Jane M. Byrne, Esq.
Timothy C. Cramton, Esq.
Guyon H. Knight, Esq. [ARGUED]
McDermott Will & Emery
One Vanderbilt Avenue
New York, NY 10017
Robert V. Dell’Osa, Esq.
1
Cozen O’Connor
1650 Market Street
One Liberty Place, Suite 2800
Philadelphia, PA 19103
Counsel for Appellant
Patrick T. Henigan, Sr., Esq. [ARGUED]
Eckell Sparks Levy Auerbach Monte
300 West State Street
Suite 300
Media, PA 19063
Counsel for Appellee
______________
OPINION *
______________
SHWARTZ, Circuit Judge.
Allied World Insurance Company and its affiliates sued Sian Keating for
conversion and unjust enrichment. Because Allied’s complaint stated claims against Sian
for conversion and unjust enrichment, we will vacate the order dismissing them but will
affirm the order denying Allied’s motion to compel discovery while the motion to
dismiss was pending.
*
This disposition is not an opinion of the full Court and, pursuant to I.O.P. 5.7,
does not constitute binding precedent.
2
I
A1
According to the operative complaint, Allied, an insurance provider, hired Sian’s
husband, James Keating, to handle surety bond claims. 2 Over the course of his
employment with Allied, James, along with Jonathan Cohen, defrauded Allied. To hide
the money obtained from their fraud schemes, James formed SR5, a company with no
offices, operating agreement, bylaws, legitimate business expenses, or employees, other
than his two minor children. James opened SR5’s bank account two months after he
began working at Allied.
James engaged in four fraud schemes that led to the deposit of funds into the SR5
account. First, from January 2014 to January 2020, James breached his fiduciary duty
and duty of loyalty to Allied by working as a third-party administrator for a competitor
insurance company, which resulted in deposits into the SR5 account totaling
$285,387.67.
Second, for a five-year period beginning in January 2015, James and Cohen
engaged in a kickback scheme in which James hired Cohen’s law firm to perform work
for Allied, and Cohen’s law firm paid at least $331,086.02 into the SR5 account. The law
1
Because we are reviewing an order granting a motion to dismiss under Federal
Rule of Civil Procedure 12(b)(6), we accept the factual allegations in the complaint as
true. Flora v. Cnty. of Luzerne, 776 F.3d 169, 171 n.1 (3d Cir. 2015).
2
To distinguish between James Keating and Sian Keating, we refer to them by
their first names.
3
firm recouped the kickbacks paid to James by overcharging Allied for work performed.
Third, in November 2016, James and Cohen jointly formed Kodiak Asset
Recovery LLC, which James then hired to perform asset searches for Allied. Kodiak
charged Allied at least double the rate of Allied’s existing asset search firm. Over the
course of nearly four years, Allied paid at least $339,950.39 to Kodiak and Kodiak
distributed at least $124,549.22 to James via the SR5 account.
Finally, beginning in late 2017 or early 2018, James created another company,
American Construction. James falsified contracts and invoices purporting to reflect work
American Construction performed for Allied for which Allied then paid American
Construction at least $1,000,750. American Construction then transferred all payments it
received from Allied to James through the SR5 account.
James and Sian allegedly used funds from the SR5 account for personal expenses
such as a kitchen remodel, golf club memberships, electronics, their children’s college
funds, and cash withdrawals. SR5 also paid James and Sian’s two minor children a
“salary” in 2018 and 2019, which totaled $18,880. Compl. ¶ 87. In addition, Sian
personally accepted at least $10,350 in checks from the SR5 account, including two
checks for $2,000 each that were purportedly for “work” performed, id. at ¶ 88, which,
Allied asserts, confirm that Sian “was aware” that James used SR5 “for illicit purposes.”
Id. at ¶ 89. Sian also used the SR5 account to pay a credit card bill and claimed SR5’s
profits as personal income on her tax returns.
B
4
Relevant here, Allied sued Sian for conversion and unjust enrichment. Sian
moved to dismiss under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). While
this motion was pending, Allied served discovery requests on Sian. Sian failed to
respond, and Allied filed a motion to compel.
The District Court denied Allied’s motion to compel and thereafter granted Sian’s
motion to dismiss, finding that it had subject matter jurisdiction, but that Allied failed to
state a claim for conversion or unjust enrichment. Allied World Ins. Co. v. Keating, No.
21-cv-04010, 2022 WL 742442, at *1 (E.D. Pa. Mar. 11, 2022). The Court concluded
that the conversion claim failed because Allied’s funds were commingled with funds
from other sources in the SR5 account, such that the funds Sian received were not
traceable to Allied. Id. at *3. The Court also dismissed the unjust enrichment claim,
finding (1) due to the commingling of funds, Allied could not establish that it conferred a
benefit on Sian; (2) even if Sian received a benefit from Allied, she was at most a
“passive recipient,” such that it would not be unconscionable for her to retain this benefit,
and (3) because Allied asserted an unjust enrichment claim against James and Cohen as
well, any recovery against Sian would constitute a double recovery for Allied. Id. at *4.
Allied appeals. 3
3
Allied dismissed its claims against James, Cohen, and Cohen’s firm.
5
II 4
A
We first address the conversion claim. Conversion is defined as “the deprivation
of another’s right of property in, or use or possession of, a chattel, or other interference
therewith, without the owner’s consent and without lawful justification.” Hranec Sheet
Metal, Inc. v. Metalico Pittsburgh Inc., 107 A.3d 114, 119 (Pa. Super. Ct. 2014) (citation
omitted). “Identifiable funds are deemed a chattel for purposes of conversion.” Pioneer
Com. Funding Corp. v. Am. Fin. Mortg. Corp., 855 A.2d 818, 827 n.21 (Pa. 2004). A
claim of conversion “does not rest on proof of specific intent to commit a wrong,” and
therefore “a good faith purchaser of goods from a converter is also a converter and must
answer in damages to the true owner.” Hranec Sheet Metal, Inc., 107 A.3d at 119
(citation omitted).
The District Court dismissed Allied’s conversion claim against Sian because
“Allied has not and cannot allege that the money Sian received from the SR5 account
4
The District Court had jurisdiction pursuant to 28 U.S.C. § 1332(a)(1). We have
jurisdiction pursuant to 28 U.S.C. § 1291. We exercise plenary review of a district
court’s order granting a motion to dismiss for failure to state a claim, Burtch v. Milberg
Factors, Inc., 662 F.3d 212, 220 (3d Cir. 2011), and must determine whether the
complaint, construed “in the light most favorable to the plaintiff,” Santomenno ex rel.
John Hancock Tr. v. John Hancock Life Ins. Co., 768 F.3d 284, 290 (3d Cir. 2014)
(citation and quotation marks omitted), “contain[s] sufficient factual matter, accepted as
true, to ‘state a claim to relief that is plausible on its face,’” Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). The
parties agree that Pennsylvania law governs the claims against Sian.
6
belonged to Allied.” Keating, 2022 WL 742442, at *3. 5 The Court reached this
conclusion based upon the incorrect assumption that the funds Sian received were
commingled with lawfully obtained funds. Accepting, as we must, the facts alleged in
the complaint as true, the only sources of funds in the SR5 account were: (1) payments
from Allied’s competitor; (2) payments from Cohen’s firm as part of the kickback
scheme; (3) payments that Allied paid to Kodiak for overcharged asset searches; and
(4) payments from Allied to American Construction based on fake invoices.
Furthermore, the complaint: (1) suggests that the work James performed for the
competitor insurance company was in breach of his duties to Allied, such that any income
from that competitor belonged to Allied; and (2) explains that the kickback payments
from Cohen’s firm belonged to Allied because “the value of these payments should have
inured to Allied [] in the form of reductions in the Cohen [firm]’s fees,” Compl. ¶ 48.
There is also no allegation that Kodiak or American Construction obtained funds from
any source other than Allied. Thus, viewing the facts in the light most favorable to the
plaintiff, Allied has plausibly pleaded that all funds in the SR5 account belong to Allied
and that they were not commingled with other funds.
Even if the funds were commingled, the District Court erred in concluding that
the commingling of funds defeats a conversion claim at the pleading stage. Both
5
Because Allied has not pleaded that the funds were commingled, we need not
address whether a bona fide purchaser defense applies to the conversion of funds in a
commingled account.
7
Pennsylvania courts and this Circuit have established tracing rules for such situations, 6
and it is premature at this stage to rule that tracing is required or cannot be performed.
See e.g., Tenco Excavating, Inc. v. First Sealord Sur., Inc., 78 A.3d 1181, 1186 (Pa.
Commw. Ct. 2013) (finding that although Tenco’s claims might fail under the tracing
rules, it would be “premature” to dismiss those claims at the preliminary objections
stage); City of Farrell v. Sharon Steel Corp., 41 F.3d 92, 102-03 (3d Cir. 1994)
(remanding to give the parties the opportunity “to develop the facts” to allow for the
application of the tracing rules). This is particularly relevant here, where Allied has
pleaded that the funds in the SR5 account belonged to Allied and are “specific and
readily identifiable” through financial records. Compl. ¶ 215.
Accordingly, the District Court erred in dismissing the conversion claim.
B
We next examine the unjust enrichment claim. To prevail on an unjust enrichment
claim, a plaintiff must demonstrate: “(1) a benefit conferred on the defendant by the
6
“In attempting to trace funds, the rule in Pennsylvania is ‘first in, first out,’”
Tenco Excavating, Inc. v. First Sealord Sur., Inc., 78 A.3d 1181, 1185 (Pa. Commw. Ct.
2013) (quoting Commonwealth Land Title Ins. Co. v. Doe, 577 A.2d 1358, 1360 (Pa.
Super. Ct. 1990)), meaning we assume that “the funds first deposited are the funds first
withdrawn,” In re Mushroom Transp. Co., Inc., 227 B.R. 244, 255 (Bankr. E.D. Pa.
1998). This approach has been modified by two presumptions, which together are known
as the “lowest intermediate balance rule.” Tenco, 78 A.3d at 1186 (citation omitted); see
also In re Columbia Gas Sys. Inc., 997 F.2d 1039, 1063-64 (3d Cir. 1993). First, “if the
[tortfeaser] has a choice of withdrawing from a commingled account either converted
funds or legitimate funds, it will be presumed that he withdrew legitimate funds.” Tenco,
78 A.3d at 1186. Second, “once the proceeds of the converted funds are spent, new
deposits made are not treated as replenishing” those funds. Id.8
plaintiff; (2) appreciation of such benefit by the defendant; and (3) acceptance and
retention of such benefit under circumstances such that it would be inequitable for the
defendant to retain the benefit without payment to the plaintiff.” EBC, Inc. v. Clark
Bldg. Sys., Inc., 618 F.3d 253, 273 (3d Cir. 2010) (citing AmeriPro Search, Inc. v.
Fleming Steel Co., 787 A.2d 988, 991 (Pa. Super. Ct. 2001)). “[A] claimant must show
that the party against whom recovery is sought either wrongfully secured or passively
received a benefit that it would be unconscionable for her to retain.” Sovereign Bank v.
BJ’s Wholesale Club, Inc., 533 F.3d 162, 180 (3d Cir. 2008) (quoting Torchia v. Torchia,
499 A.2d 581, 582 (Pa. Super. Ct. 1985)). Courts have found that even “a passive and
innocent party” is unjustly enriched where she “furnished no consideration for the receipt
of the [benefit].” See, e.g., Torchia, 499 A.2d at 583-84 (citation omitted); Crossgates
Realty, Inc. v. Moore, 420 A.2d 1125, 1128 (Pa. Super. Ct. 1980) (“It is clear that a
showing of knowledge or wrongful intent on the part of the benefited party is not
necessary in order to show unjust enrichment.”).
None of the grounds the District Court relied upon require dismissal. First,
because we must accept the factual allegations as true and view them in the light most
favorable to Allied, we cannot assume that the funds Sian received (or benefitted from)
were commingled with lawfully obtained funds.
Second, the complaint alleges Sian knew that the money from the SR5 account
was the result of James’s fraudulent activities and thus she was not an unwitting, “passive
recipient” of the funds. Allied points to two checks that Sian received from SR5 for
9
“work performed” in 2018, Compl. ¶ 88, which plausibly demonstrate Sian’s knowledge
of the fraudulent scheme since there would be no work to perform for an allegedly sham
company. Because these allegations, taken as true, show Sian was aware of the
illegitimate source of the funds and furnished no consideration for the receipt of such
funds, Allied has plausibly alleged that it would be inequitable for Sian to retain Allied’s
money. 7
Third, as Sian conceded at oral argument, see Oral Argument at 21:57-22:28,
Allied World Ins. Co. v. Keating (Jan. 23, 2023) (No. 22-1996),
https://www2.ca3.uscourts.gov/oralargument/audio/22-
1996AlliedWorldOInsuranceCov.JamesKeating.mp3, the possibility that Allied could
recover the funds directly from James and Cohen, and that any recovery against Sian
“would constitute a double recovery for Allied,” Keating, 2022 WL 742442, at *4, are
issues for the district court to resolve after a determination on liability, see Hayes v.
Gross, 982 F.2d 104, 109 (3d Cir. 1992) (allowing claim to proceed as long as “double
recovery is not inherent in plaintiff’s theory of the case,” and explaining that “the district
court will be required to evaluate the prospect of double recovery in the specific fact
context presented by plaintiff’s case on damages”); see also Nadendla v. WakeMed, 24
7
Even if Sian was only a “passive recipient” of the funds, unjust enrichment
claims may proceed even against unwitting parties. See, e.g., Torchia, 499 A.2d at 583-
84.
10
F.4th 299, 308 n.6 (4th Cir. 2022) (stating that “the double recovery issue need not be
addressed at the Rule 12(b)(6) stage of the proceeding”).
Thus, the District Court incorrectly dismissed the unjust enrichment claim.
C
The District Court acted within its discretion when it denied Allied’s motion to
compel Sian to respond to discovery. See Camiolo v. State Farm Fire & Cas. Co., 334
F.3d 345, 354 (3d Cir. 2003). The order denying the motion to compel noted that Sian’s
motion to dismiss was then pending. While the District Court could have required
discovery to proceed, it was reasonable to limit discovery while a Rule 12(b)(6) motion
was pending, since the outcome of such a motion could impact whether and the extent to
which discovery is permitted. See, e.g., Neitzke v. Williams, 490 U.S. 319, 326-27
(1989) (explaining that the purpose of Rule 12(b)(6) is to “streamline[] litigation by
dispensing with needless discovery and factfinding”). Accordingly, the District Court did
not abuse its discretion in denying the motion to compel. 8
III
For the foregoing reasons, we will vacate the District Court’s order dismissing the
claims against Sian and affirm its order denying Allied’s motion to compel.
8
Because we will vacate the order dismissing the claims against Sian, the District
Court has the authority to order that discovery proceed.
11