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Federal Insurance Co. v. Benchmark Bank

United States District Court, S.D. Ohio, Eastern Division

January 24, 2018


          Deavers Judge.



         This matter is before the Court upon Defendant Benchmark Bank's Motion to Dismiss Plaintiff's Amended Complaint for Lack of Subject-Matter Jurisdiction and Failure to State a Claim Upon Which Relief Can Be Granted (“Benchmark's Motion to Dismiss”) (Doc. 12). The motion is fully briefed and ripe for disposition. For the following reasons, Benchmark's Motion to Dismiss is GRANTED IN PART and DENIED IN PART.

         I. BACKGROUND

         Plaintiff Federal Insurance Company (“Federal”) is the subrogee of two limited partnerships: Mary Harvin Center Limited Partnership and Boury Lofts Limited Partnership (the “Limited Partnerships”).[1] (Doc. 11, Am. Compl. ¶ 111). The Limited Partnerships are affiliates of non-party The Woda Group, Inc. and its affiliates (“Woda Management”). (Id. ¶ 7).

         On March 28, 2011, Woda Management entered into a Business Online Access Banking Agreement (the “Banking Agreement”) providing Woda Management “with electronic banking access for various commercial accounts under its control.” (Id. ¶ 8). Woda Management established various checking accounts at Benchmark “in the names of separate and distinct corporate entities, including the Limited Partnerships.” (Id. ¶ 10).

         On the same date, Woda Management also entered into an ODFI-ACH Originator Agreement (the “ACH Agreement”) with Benchmark, allowing Woda Management to initiate online ACH transfers for specified accounts listed in Schedule C to the ACH Agreement. (Id. ¶¶ 13, 16). Schedule C does not include and has never included the accounts of the Limited Partnerships. (Id. ¶ 16).

         On March 22, 2016, Woda Management's controller emailed Benchmark and asked that Donna Ferrell, Woda Construction, Inc.'s Director of Accounting, be given access to view and process ACH transfers for Woda Construction, Inc.'s account with Benchmark. (Id. ¶ 36). Inconsistent with these instructions, Benchmark erroneously granted Ferrell ACH access to all of Woda Management's accounts with Benchmark, including the Limited Partnerships' accounts and other accounts not listed on Schedule C of the ACH agreement. (Id. ¶ 38). Ferrell was never authorized by anyone at Woda Management to access, view, or process ACH transfers from the Limited Partnerships' accounts. (Id. ¶ 37).

         Between May 18 and May 25, 2016, unknown third parties used Ferrell's login credentials to initiate a series of unauthorized transfers from the Limited Partnerships' accounts totaling over $600, 000. (Id. ¶ 46). Federal paid the Limited Partnerships $500, 000 for these losses pursuant to a policy of insurance. (Id. ¶ 111). Thus, at this point, the Limited Partnerships remain uncompensated for the over $100, 000 remaining in uninsured losses.

         Initially, the Limited Partnerships filed suit against Benchmark in the Franklin County Court of Common Pleas on July 7, 2016. (Doc. 12-1, State Court Complaint). The state court complaint contained claims for breach of contract, violation of the Ohio Uniform Commercial Code (“UCC”), and negligence. (Id.). On motion by Benchmark, the state court dismissed the negligence claim as barred by the economic loss rule. (Doc. 12-2, State Court Opinion). The state court also ordered the Limited Partnerships to clarify their claim for breach of the ACH Agreement, given their factual allegations suggesting that the Limited Partnerships are not parties to that agreement. (Id.).

         Rather than amend the state court complaint, the Limited Partnerships dismissed the state court action and re-filed their case in this Court on February 15, 2017. (Doc. 1, Compl.). In addition to the breach of contract, UCC, and negligence claims asserted in the state court action, the Limited Partnerships also added claims for violation of various federal statutes and regulations and conversion. (Id.). The Limited Partnerships sought as damages the full amount of $600, 904 withdrawn from their accounts in the unauthorized transactions. (Id.).

         Benchmark moved to dismiss the Complaint, citing lack of either diversity or federal question subject-matter jurisdiction. (Doc. 9, Mot. to Dismiss). The Limited Partnerships responded by filing an Amended Complaint that substituted Federal as the sole plaintiff to establish diversity jurisdiction and supplemented the allegations related to various federal standards. (Doc. 11, Am. Compl.).[2] In the Amended Complaint, Federal seeks only the $500, 000 insurance payment it made to the Limited Partnerships.

         Benchmark now moves to dismiss the Amended Complaint, pursuant to both Rule 12(b)(1) for lack of subject-matter jurisdiction and Rule 12(b)(6) for failure to state a claim upon which relief can be granted. (Doc. 12).


         A. Standard of review

         Federal Rule of Civil Procedure 12(b)(1) provides for dismissal when the court lacks subject-matter jurisdiction. Without subject-matter jurisdiction, a federal court lacks authority to hear a case. Thornton v. Southwest Detroit Hosp., 895 F.2d 1131, 1133 (6th Cir. 1990). Motions to dismiss for lack of subject-matter jurisdiction fall into two general categories: facial attacks and factual attacks. United States v. Ritchie, 15 F.3d 592, 598 (6th Cir. 1994). A facial attack under Rule 12(b)(1) “questions merely the sufficiency of the pleading, ” and the trial court therefore takes the allegations of the complaint as true. Wayside Church v. Van Buren Cty., 847 F.3d 812, 816 (6th Cir. 2017) (quoting Ohio Nat'l Life Ins. Co. v. United States, 922 F.2d 320, 325 (6th Cir. 1990)). To survive a facial attack, the complaint must contain a short and plain statement of the grounds for jurisdiction. Rote v. Zel Custom Mfg. LLC, 816 F.3d 383, 387 (6th Cir. 2016).

         A factual attack is a challenge to the factual existence of subject-matter jurisdiction. No. presumptive truthfulness applies to the factual allegations. Glob. Tech., Inc. v. Yubei (XinXiang) Power Steering Sys. Co., 807 F.3d 806, 810 (6th Cir. 2015). When examining a factual attack under Rule 12(b)(1), “the court can actually weigh evidence to confirm the existence of the factual predicates for subject-matter jurisdiction.” Glob. Tech., Inc. v. Yubei (XinXiang) Power Steering Sys. Co., 807 F.3d 806, 810 (6th Cir. 2015) (quoting Carrier Corp. v. Outokumpu Oyj, 673 F.3d 430, 440 (6th Cir. 2012)). The plaintiff has the burden of establishing jurisdiction in order to survive the motion to dismiss. DLX, Inc. v. Kentucky, 381 F.3d 511, 516 (6th Cir. 2004); Moir v. Greater Cleveland Regional Transit Auth., 895 F.2d 266, 269 (6th Cir. 1990).

         B. Discussion

         1. Diversity jurisdiction

         Diversity jurisdiction exists over civil actions where the amount in controversy exceeds $75, 000 and is between citizens of different states. 28 U.S.C. § 1332(a)(1). The parties do not dispute that the amount in controversy exceeds $75, 000 or that Federal is a citizen of Indiana and New Jersey while Benchmark is a citizen of Ohio. (Doc. 11, Am. Compl. ¶¶ 2-3). Thus, complete diversity exists as between Federal and Benchmark.

         But Benchmark contends that the citizenship of the Limited Partnerships, as subrogors, must also be considered in the diversity analysis. (Doc. 12, Mot. to Dismiss at 6). As Federal failed to fully plead the citizenship of the Limited Partnerships' general and limited partners, Benchmark contends that Federal has facially failed to establish complete diversity. (Id. at 7-8); see Carden v. Arkoma Assocs., 494 U.S. 185, 195-96 (1990) (federal court must look to citizenship of partnership's limited partners, as well as its general partners, when determining diversity). Further, Benchmark has submitted filings by the Limited Partnerships with various state administrative agencies wherein they admitted that at least some of their partners are Ohio citizens. (Doc. 12-3, Alexander Decl. and attached Annual Reports filed with the Secretaries of State for Kentucky and West Virginia). Federal has not disputed the accuracy of these documents and does not suggest that the Limited Partnerships are not, in fact, Ohio citizens. Thus, if the Limited Partnerships' citizenship must be considered, complete diversity will be lacking and the Court may not exercise subject-matter jurisdiction in this matter on the basis of diversity.

         Benchmark rests the relevance of the Limited Partnerships' citizenship on the theory that the Limited Partnerships are real parties in interest to the damages sought by Federal. (Doc. 12, Mot. to Dismiss at 5-6). It is true that where an insured has been only partially compensated by its insurer for the losses it sustained, only a partial subrogation has occurred, and both the insured and insurer are real parties in interest when considering the total amount of damages. Exec. Jet Aviation, Inc. v. United States, 507 F.2d 508, 514 (6th Cir. 1974). The insurer is the real party in interest to the extent of its payment to the insured (the insured loss) and the insured is the real party in interest to the extent of the remaining damages unreimbursed by the insurer (the uninsured loss). Id.

         As a result, when there has been a partial subrogation and when the full amount of loss (both insured and uninsured) is sought from the defendant, a court properly examines the citizenship of both the insurer and the insured. This was the factual background of the cases cited by Benchmark. Travelers Prop. & Cas. Co. of Am. v. Stresscrete, Inc., No. 10-2693-CM, 2011 U.S. Dist. LEXIS 47656, at *3 (D. Kan. May 3, 2011); Pepsico do BRASIL, LTDA v. Oxy-Dry Corp., 534 F.Supp.2d 846, 848 (N.D. Ill. 2008) (“Although total subrogation (which is absent here) results in focusing solely on the subrogee's citizenship for diversity purposes, partial subrogation forces a look at both subrogee and subrogor. . . .”).

         In contrast, while this case presents an example of partial subrogation, Federal's Amended Complaint seeks only the insured loss-the $500, 000 it paid to the Limited Partnerships under their insurance policy-and does not seek the remaining $100, 904 in uninsured losses. As a result, the Limited Partnerships are not real parties in interest to the damages sought in this action. This case is thus distinguishable from the Stresscrete and Pepsico cases that required consideration of both the insured's and insurer's citizenship. The Court was unable to locate any authorities requiring consideration of both the insured's and insurer's citizenship when only one of the interests was at issue in the action. Therefore, the only relevant citizenship for diversity purposes is that of Federal and Benchmark.

         Benchmark also makes a passing reference to the Limited Partnerships being “indispensable parties” without whom a “full and fair adjudication of this matter” cannot be made. (Doc. 15, Reply in Supp. of Mot. to Dismiss at 2). While the Limited Partnerships may qualify as “necessary” parties under Federal Rule of Civil Procedure 19(a), they are not indispensable parties such that the present action cannot fairly continue in their absence under Rule 19(b). Baker v. Minnesota Min. & Mfg. Co., 99 F. App'x 718, 723-24 (6th Cir. 2004) (partial subrogee is not an indispensable party and may recover whatever it is owed in a separate action); United States v. Aetna Cas. & Sur. Co., 338 U.S. 366, 382 & n. 19 (1949) (insurer that is partially subrogated to the rights of an insured is a necessary, but not indispensable, party; basic rules on party joinder in the subrogation setting mean that tortfeasors “may have to defend two or more actions on the same tort.”).

         In sum, the only relevant citizenship for diversity purposes is that of Federal and Benchmark. Because Federal has alleged, and Benchmark does not dispute, the existence of complete diversity as between these two parties, the Court can properly exercise diversity jurisdiction over this matter.

         2. Federal question jurisdiction

         Only one of Federal's claims, Count 4, has any relation to federal statutes, regulations, or other authorities. Federal alleges that as an FDIC-regulated bank, Benchmark is subject to, and in violation of,

the applicable statutes, regulations and supervisory policies of the FDIC and is required to follow applicable statutes, regulations and supervisory policies of the FDIC concerning the safe and sound operation of its online banking operations, including but not limited to 12 CFR § 337.1, et seq.; 12 CFR Part 30; Appendix A and B; 12 CFR § 364.100, et seq.; 12 CFR § 326, et seq.; and, 12 CFR § 326.1, et seq.

(Doc. 11, Am. Compl. ¶ 139). Federal also alleges that Benchmark failed to follow several guidelines issued by the Federal Financial Institutions Examination Council for banking security standards. (Id. ¶¶ 29, 31, 33, quoting Supplement to Authentication in an Internet Banking Environment, June 28, 2011 available at (“FFIEC Guidance”)).

         Benchmark argues that these allegations are insufficient to create a federal question to confer jurisdiction under 28 U.S.C. § 1331 (granting jurisdiction to district courts over “all civil actions arising under the Constitution, laws, or treaties of the United States.”). While the Court is inclined to agree, it is not necessary to resolve this issue because the Court has already determined it has subject-matter jurisdiction on the basis of diversity. Further, the Court finds these arguments better addressed under the framework for Rule 12(b)(6) infra for failure to state a cognizable claim.

         Accordingly, to the extent Benchmark seeks dismissal for lack of subject-matter jurisdiction under Rule 12(b)(1), Benchmark's motion is DENIED.


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