UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

COMMERCE AND INDUSTRY INSURANCE 

COMPANY and AMERICAN INTERNATIONAL 

SPECIALTY LINES INSURANCE COMPANY, 

Plaintiffs, 

-againstU.S. BANK NATIONAL ASSOCIATION, AS 

INDENTURE TRUSTEE FOR THE REGISTERED 

HOLDERS OF FMAC LOAN RECEIVABLES 

TRUSTS 1997-B, 1998-B, 1998-C, 1998-D AND 

2000-A, 

Defendant. 

Civil Action No. 1:07-CV-5731 

(JGK)(RLE) 

(Oral Argument Requested) 

MEMORANDUM OF LAW IN SUPPORT OF 

PLAINTIFFS’ MOTION TO DISMISS

STEPTOE & JOHNSON LLP 

750 Seventh Avenue 

Suite 1900 

New York, New York 10019 

(212) 506-3900 

November 19, 2007 Attorneys for Plaintiffs/Counterclaim Defendants 

American International Specialty Lines Insurance 

Company and Commerce & Industry Insurance 

Company 

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TABLE OF CONTENTS

PAGE

TABLE OF CONTENTS ...................................................................................................................... i 

INTRODUCTION ...........................................................................................................................1 

STATEMENT OF FACTS ..............................................................................................................1 

ARGUMENT...................................................................................................................................3 

I. Applicable Legal Standard.......................................................................................3 

II. U.S. Bank’s Second Claim For Relief Must Be Dismissed Because New 

York Law Does Not Recognize A Cause Of Action For Bad Faith ........................4 

III. U.S. Bank Has No Claim For Punitive Damages ....................................................5 

IV. U.S. Bank Has No Claim For Attorneys’ Fees ........................................................7 

CONCLUSION................................................................................................................................9 

Case 1:07-cv-05731-JGK-RLE Document 21 Filed 11/19/2007 Page 2 of 11
INTRODUCTION

Plaintiffs/counterclaim defendants Commerce and Industry Insurance Company (“C&I”) 

and American International Specialty Lines Insurance Company (“AISLIC”) (collectively, 

“Insurers”) filed their Second Amended Complaint on August 28, 2007, for declaratory relief 

pursuant to 28 U.S.C. § 2201. Insurers seek a determination concerning the scope and nature of 

their obligations, if any, to defendant/counterclaim plaintiff U.S. Bank National Association, as 

Indenture Trustee for the Registered Holders of FMAC Loan Receivables Trusts 1997-B, 1998-

B, 1998-C, 1998-D and 2000-A (“U.S. Bank”), for multiple insurance claims brought under 

Secured Creditor Impaired Property (“SCIP”) insurance policies issued by Insurers. U.S. Bank 

filed an Answer and Counterclaim on October 29, 2007. U.S. Bank’s Counterclaim asserts two 

counts: Breach of Contract (“Count I”) and Bad Faith Refusal to Pay (“Count II”). U.S. Bank 

alleges that Count II provides a basis for its recovery of punitive damages and attorneys’ fees. 

As more fully set forth below, Count II fails to state a claim as a matter of law and should be 

dismissed under Rule 12(b)(6) of the Federal Rules of Civil Procedure. U.S. Bank’s claims for 

punitive damages and attorneys’ fees are similarly defective as a matter of law and must also be 

dismissed. 

STATEMENT OF FACTS

In their suit for declaratory relief, Insurers seek a determination concerning the scope and 

nature of their obligations, if any, to U.S. Bank, under SCIP insurance policies that they issued. 

Declaration of Lara E. Romansic, dated November 19, 2007 (“Romansic Dec.”), Ex. A 

(Complaint) at ¶¶ 1, 2; Ex. B (Answer) at ¶¶ 1, 2. The relevant portion of the SCIP policies 

states that the Insurers provide coverage, subject to all of the policies’ other terms, conditions 

and exclusions, as follows: 

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In the event of Loss arising from a Default by a Borrower on a 

Commercial Real Estate Loan secured by an Insured Property, 

the Company agrees to pay the lesser of either the Outstanding 

Balance, in which case the Company will indemnify the Insured, 

or Clean-Up Costs, in which case the Company will pay on behalf 

of the Insured. For this coverage to apply, On-Site Pollution 

Conditions must first be discovered by the Insured during the 

Policy Period. 

Id., Ex. A (Complaint) at ¶ 20. U.S. Bank has made insurance claims on sixty-four (64) insured 

loans that it alleges are in default and for which it alleges “On-Site Pollution Conditions” have 

been discovered at collateral Insured Properties. Id., Ex. B (Answer) at ¶ 39. 

U.S. Bank filed an Answer and Counterclaim on October 29, 2007, disputing the 

Insurers’ denial of coverage under the Policies, see Id., Ex B (Answer) at ¶ 44, and asserting two 

claims for relief: Breach of Contract and Bad Faith Refusal to Pay, see Ex. B (Counterclaim) at 

¶¶ 16-29. The “bad faith” count is the focus of this motion to dismiss. 

At the heart of U.S. Bank’s bad faith claim is a restatement of its breach of contract 

allegations. See id. at ¶ 24 (“[Insurers] have refused to fulfill their obligations and/or delayed the 

performance of their obligations to the [insured] under the Policies.”). U.S. Bank attempts to 

state its bad faith claim by simply declaring that the Insurers’ alleged refusal and/or delay in 

performance was “without reasonable justification,” id. at ¶ 25, and that Insurers “knew or 

recklessly disregarded the lack of reasonable basis for their refusal to perform and/or delay . . . 

performing their obligations,” id. at ¶ 26. U.S. Bank does not plead, however, that Insurers’ 

conduct is actionable as an independent tort separate from its breach of contract claim, nor does 

it allege any “egregious” tortious conduct directed at the public generally. Nevertheless, U.S. 

Bank claims that it is entitled to receive punitive damages and attorneys’ fees due to Insurers’ 

alleged bad faith. Id. at ¶¶ 28, 29. 

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ARGUMENT

I. Applicable Legal Standard

A court applies the same standard in ruling on a motion to dismiss a counterclaim under 

Federal Rule of Civil Procedure 12(b)(6) as it does for a complaint. See, e.g., Bridgeport Music, 

Inc. v. Universal Music Group, Inc., 440 F. Supp. 2d 342, 344 (S.D.N.Y. 2006). Dismissal of a 

counterclaim for failure to state a claim is proper only where “it appears beyond doubt that the 

[non-movant] can prove no set of facts in support of [its] claim would entitle [it] to relief.” Id. 

(quoting Harris v. City of New York, 186 F.3d 243, 247 (2d Cir. 1999) (first alteration in 

original)). In reviewing a Rule 12(b)(6) motion, courts must “accept as true the factual 

allegations of the [counterclaim], and draw all inferences in favor of the pleader.” Mills v. Polar 

Molecular Corp., 12 F.3d 1170, 1174 (2d Cir. 1993) (citation omitted). 

Nevertheless, “the complaint must set forth enough information to suggest that relief 

would be based on some recognized legal theory.” Telsat v. Entm't & Sports Programming 

Network, 753 F. Supp. 109, 111 (S.D.N.Y. 1990). “The District Court has no obligation to 

create, unaided by plaintiff, new legal theories to support a complaint.” Id. (quotation omitted). 

“In practice ‘a complaint . . . must contain either direct or inferential allegations respecting all 

the material elements necessary to sustain a recovery under some viable legal theory.’” Id. 

(quoting Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1106 (7th Cir. 1984)). The court 

“will not credit conclusory statements unsupported by factual allegations or legal conclusions 

presented as factual allegations.” In re IAC/InterActiveCorp Secs. Litig., 478 F. Supp.2d 574, 

585 (S.D.N.Y. 2007). “While the pleading standard is a liberal one, bald assertions and 

conclusions of law will not suffice.” Leeds v. Meltz, 85 F.3d 51, 53 (2d Cir. 1996). 

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U.S. Bank’s claim of bad faith, along with its demand for punitive damages and 

attorneys’ fees, cannot clear the Rule 12(b)(6) threshold, and therefore, the Court must dismiss 

Count II of the Counterclaim and the associated requests for relief. 

II. U.S. Bank’s Second Claim For Relief Must Be Dismissed Because New York Law 

Does Not Recognize A Cause Of Action For Bad Faith

Accepting all of U.S. Bank’s allegations as true and drawing all reasonable inferences in 

its favor, U.S. Bank’s “Bad Faith Refusal to Pay” claim, upon which it bases its demand for 

punitive damages and attorneys’ fees, fails as a matter of law. New York does “not recognize 

the tort of bad faith denial of insurance coverage, whether based in tort or contract.”1 Cont’l 

Info. Sys. Corp. v. Fed. Ins. Co., Civ. No. 02 Civ. 4168 (NRB), 2003 U.S. Dist. LEXIS 682, at *8 

(S.D.N.Y. Jan. 16, 2003); see also Polidoro v. Chubb Corp., 354 F. Supp. 2d 349, 352 (S.D.N.Y. 

2005) (“Plaintiff’s claim for bad-faith conduct in handling insurance claims is not legallycognizable under New York law.”); USAlliance Fed. Credit Union v. CUMIS Ins. Soc'y, Inc.,

346 F. Supp. 2d 468, 470 (S.D.N.Y. 2004) (noting that “an independent tort action for bad faith 

denial of insurance coverage is not recognized in New York.”).2

1 New York courts do, however, recognize a separate claim for bad faith where the duty 

to defend or settle is implicated. See, e.g., Greenidge v. Allstate Ins. Co., 446 F.3d 356, 361-62 

(2d Cir. 2006); see also Pavia v. State Farm Mut. Auto. Ins. Co., 82 N.Y.2d44 (1993). This type 

of bad faith claim is not implicated here because the coverage sought by U.S. Bank does not 

provide liability coverage or any obligation to defend anything, see Romansic Dec., Ex. B 

(Counterclaim) at ¶ 8, and U.S. Bank makes no allegation to the contrary, see id. at ¶¶ 17-21, 24-

27 (making no claim that Insurers have a duty to defend). 

2 New York law applies to the Court’s analysis of Count II of U.S. Bank’s Counterclaim, 

given that five of the six policies at issue contain a choice of law clause providing for the 

application of New York law. See Romansic Dec., Ex. B (Counterclaim) at ¶ 7, SCIP Policy 

Nos. 5296738, 5295859, 5295865, 7788373, 7788374; see also In re IAC/InterActiveCorp Secs. 

Litig., 478 F. Supp.2d 574, 585 (S.D.N.Y. 2007) (“Materials that a court may properly consider 

on a motion to dismiss include any written instrument attached to [the complaint] as an exhibit or 

any statements or documents incorporated in it by reference....”) (alteration in original). 

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This court dismissed a bad faith claim made under similar circumstances in Wiener v. 

Unumprovident Corp., 202 F. Supp. 2d 116 (S.D.N.Y. 2002). In Wiener, the plaintiff, Ruth 

Wiener, sued an insurance company from which she had purchased disability insurance because 

the company no longer considered her totally disabled as defined in the policies and had 

terminated payment of benefits. Among other claims, Wiener sought damages for bad faith 

denial of insurance coverage. Wiener crafted her bad faith claim as an independent cause of 

action and alleged that the defendants “denied her . . . benefits without a reasonable basis and in 

reckless disregard of their obligations under her insurance policy.” Id. at 123. The court 

dismissed Wiener’s bad faith claim because “New York does not recognize bad faith denial of 

coverage as an independent tort.” Id. at 124. The court also found that Wiener had failed to state 

a claim for punitive damages under New York law because she “failed to state an underlying tort 

cause of action.” Id.

U.S. Bank makes a similar argument to support its bad faith claim, alleging that Insurers 

refused to perform or delayed performance of their obligations under the insurance policies 

“without reasonable justification,” Romansic Dec., Ex. B (Counterclaim) at ¶ 24, and that 

Insurers “knew or recklessly disregarded the lack of reasonable basis for their refusal to perform 

and/or delay ... performing their obligations,” id. at ¶ 25. However, U.S. Bank’s claim fails for 

the same reason that Wiener’s claim failed – a claim for bad faith refusal to pay is clearly not 

recognized under New York law. Accordingly, Count II of U.S. Bank’s Counterclaim must be 

dismissed. 

III. U.S. Bank Has No Claim For Punitive Damages

U.S. Bank’s claim for punitive damages also fails as a matter of law. A counterclaim 

cannot “state a claim for . . . punitive damages by alleging merely that the insurer engaged in a 

pattern of bad-faith conduct.” Rocanova v. Equitable Life Assurance Soc’y, 83 N.Y.2d 603, 615 

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(1994). Rather, a plaintiff must plead the following four elements to sustain a claim for punitive 

damages: (1) that defendant’s conduct is actionable as an independent tort; (2) that the tortious 

conduct is of an egregious nature; (3) that the egregious conduct is directed at plaintiff; and (4) 

that defendant’s conduct is a part of a pattern that is directed at the public generally. New York 

Univ. v. Cont’l Ins. Co., 87 N.Y. 2d 308, 316(N.Y. 1995). 

The “threshold task” for a court considering a motion to dismiss a cause of action for 

punitive damages is to “identify a tort independent of the contract.” Id. Therefore, “[i]f a court 

cannot identify an independent tort in the plaintiff’s pleadings, the claim for punitive damages 

must be dismissed.” Bono v. Monarch Life Ins. Co., Civ. No. 05-cv-281S, 2006 U.S. Dist. 

LEXIS 22990, at *14 (W.D.N.Y. Mar. 26, 2006) (citing Rocanova, 83 N.Y.2d at 615). As 

explained above, a claim for bad faith denial of coverage can never be an independent cause of 

action. Cont’l Info. Sys. Corp. 2003 U.S. Dist. LEXIS 682, at *12 (noting that the tort 

underlying a punitive damages claim must be “independent of plaintiff’s claim of bad faith”). 

For example, in Bono v. Monarch Life Ins. Co., the court examined whether the plaintiff 

had sufficiently pled an independent claim for intentional or negligent inflection of emotional 

distress. 2006 U.S. Dist. LEXIS 22990, at *10-15. Finding that the plaintiff’s emotional distress 

claim could not survive a Fed. R. Civ. P. 12(c) motion for judgment on the pleadings and finding 

no other tort independent of plaintiff’s contract claim, the court ruled that the plaintiff could not 

recover punitive damages. Id. at *14-15. 

As a matter of law, U.S. Bank has failed to state an underlying tort cause of action 

independent of its breach of contract claim upon which its punitive damages can be grounded. 

As the discussion above demonstrates, it is clear that U.S. Bank may not rely on its bad faith 

claim to support its claim of punitive damages. Further, U.S. Bank has failed to assert any other 

allegations that the Insurers engaged in tortious conduct. Even if the court were to examine the 

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allegations underlying its bad faith claim, the allegations do not give rise to an independent tort, 

as they simply restate its breach of contract claim. See New York Univ., 87 N.Y.2d at 316 

(“where a party is merely seeking to enforce its bargain, a tort claim will not lie”). In addition to 

failing to identify an independent tort, U.S. Bank has also neglected to allege that such tort was 

“egregious” or that the conduct was “part of a pattern directed at the public generally.” Id.

Accordingly, U.S. Bank’s claim for punitive damages should be dismissed as a matter of law.

IV. U.S. Bank Has No Claim For Attorneys’ Fees

In Count II, U.S. Bank claims that it is entitled to attorneys’ fees because the Insurers 

“breached the Policies in bad faith.” See Exhibit B, Counterclaim at ¶12. However, U.S. Bank 

is prohibited, as a matter of law, from seeking recovery of attorneys’ fees. “Under New York 

law, it is ‘well settled that an insured cannot recover his legal expenses in a controversy with a 

carrier over coverage, even though the carrier loses the controversy and is held responsible for 

the risk.’” Employers Mut. Cas. Co. v. Key Pharms., 75 F.3d 815, 824 (2d Cir. 1996) (per 

curiam) (quoting Sukup v. State, 19 N.Y.2d 519, 522 (1967)). 

Two limited exceptions to this rule exist. The first exception, not applicable here, arises 

only “[where] a policyholder has been cast in a defensive posture by its insurer in a dispute over 

the insurer’s duty to defend.” Id. (emphasis added) (citing rule established by Mighty Midgets, 

Inc. v. Centennial Ins. Co., 47 N.Y.2d 12 (1979)). This exception has not been expanded to 

insurance disputes that involve the duty to indemnify. Liberty Surplus Ins. Corp. v. Segal Co.,

420 F.3d 65, 68 (2d Cir. 2005). Here, neither U.S. Bank’s Counterclaim, nor Insurers’ 

declaratory judgment action involves a dispute over the duty to defend. See Romansic Dec. Ex. 

B (Counterclaim) at ¶ ¶ 17-21, 24-27 (making no claim that Insurers have a duty to defend); Ex. 

A (Complaint) at ¶ ¶ 20 (citing the SCIP language relevant to the dispute, which does not include 

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a duty to defend), 51, 53. Therefore, as a matter of law, the generally applicable New York law 

prohibiting recovery of attorneys’ fees applies to the declaratory judgment action. 

The second exception arises when a plaintiff makes “a showing of such bad faith in 

denying coverage that no reasonable carrier would, under the given facts, be expected to assert 

it.” Sukup, 19 N.Y.2d at 522. Under New York law, there is a “strong presumption” against a 

finding of bad faith to support an award of attorneys’ fees. Hugo Boss Fashions, Inc. v. Fed. Ins. 

Co., 252 F.3d 608, 624 (2d Cir. 2001). This presumption against bad faith liability can be 

rebutted only by evidence establishing that the insurer’s refusal to perform its obligations was 

based on “more than an arguable difference of opinion,” and exhibited “a gross disregard for its 

policy obligations.” Id. at 625 (quoting Sukup, 19 N.Y.2d at 522). 

As a matter of law, however, U.S. Bank may not recover attorneys’ fees based on its bad 

faith claim in Count II of its Counterclaim because U.S. Bank has not alleged an independent 

tort. See Edwards v. Great N. Ins. Co., Cv. No. 03 CV 2947(NG)(RML) 2006 U.S. Dist. LEXIS 

50683, at *27 (E.D.N.Y. July 18, 2006) (“Since the tort-based claims are dismissed, [plaintiff] 

cannot recover attorney’s fees.”); Core-Mark Int'l, Corp. v. Commonwealth Ins. Co., Civ. No. 05 

Civ 183 (WHP) 2005 U.S. Dist. LEXIS 14312, at *11 (S.D.N.Y. July 19, 2005) (“Dismissal of 

the bad faith claim also necessitates dismissal of the demand for . . . attorneys' fees”). Further, 

U.S. Bank may not recover attorneys’ fees based on its breach of contract claim in Count I of the 

Counterclaim, as it has failed to make any allegations that rebut the “strong presumption” against 

a finding of bad faith as the concept applies to the award of attorneys’ fees. U.S. Bank has not 

claimed that Insurers’ denial of coverage amounts to “more than an arguable difference of 

opinion between carrier and insured over coverage” or that Insurers have exhibited a “gross 

disregard” for its obligations under the policies. Sukup, 19 N.Y.2d at 522. Therefore, as a matter 

of law, U.S. Bank has no basis for recovery of attorneys’ fees, and its claim should be dismissed. 

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CONCLUSION

For the foregoing reasons, the Insurers respectfully request that the Court grant their 

Motion to Dismiss for failure to state a claim as to Count II of U.S. Bank’s Counterclaim. 

Dated: New York, New York STEPTOE & JOHNSON LLP 

 November 19, 2007 

By: ____/s/ John D. Lovi________________ 

John D. Lovi (JL-5928) 

Lara E. Romansic (LR-9236) 

 750 Seventh Avenue, 19th Floor 

 New York, New York 10019 

 (212) 506-3900 

 (212) 506-3950 (fax) 

-andRoger Warin 

 Harry Lee 

 Andrew Racca 

Steptoe & Johnson LLP 

1330 Connecticut Avenue, NW 

Washington, DC 20036 

(202) 429-3000 

(202) 429-3902 (fax) 

Attorneys for Plaintiffs/Counterclaim Defendants 

American International Specialty Lines Insurance 

Company and Commerce & Industry Insurance 

Company 

Of Counsel: 

Scott Davis 

David Timmins 

Gardere Wynne Sewell LLP 

1601 Elm Street 

Suite 3000 

Dallas, Texas 75201 

(214) 999-3000 

(214) 999-4667 (fax) 

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