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Bank Leumi USA v. Kloss

United States District Court, D. New Jersey

September 13, 2018

BANK LEUMI USA, Plaintiff,



         This matter comes before the Court by way of Defendants Edward J. Kloss and Kloss Company's motion to dismiss Bank Leumi's Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) and New Jersey's Entire Controversy Doctrine. (ECF No. 13). Plaintiff has submitted opposition, (ECF No. 19), and Defendants have submitted a reply thereto, (ECF No. 21). The Court has read the parties' submissions and considers this matter without oral argument in accordance with Federal Rule of Civil Procedure 78. For the reasons set forth below, the Court grants Defendants' motion to dismiss.

         I. BACKGROUND[1]

         This action arises out of a series of loans made by Bank Leumi to Munire Furniture Company, Inc. ("Munire Furniture"), which allegedly resulted in losses to Bank Leumi of over $11 million. (Compl. ¶ 1). On March 11, 2011, Bank Leumi agreed to provide Munire Furniture with a revolving line of credit of $15 million. (Compl. ¶ 15). As part of the loan approval process, Munire Furniture disclosed that it had an existing loan with a remaining balance of $1.5 million from Kloss. (Compl. ¶ 15.). As a pre-condition of the loan to Munire Furniture, Bank Leumi required that Kloss enter into a subordination agreement to forego any claims, demands, and "all interest" accrued from the loan to Munire Furniture. (Compl. ¶¶ 17-18). At the time Kloss signed the subordination agreement, "there was an additional outstanding loan that Kloss had made to Munire Furniture in the amount of $300, 000.00 with an interest rate of 25%" that had not been disclosed. (Compl. ¶ 24). Kloss also allegedly accepted interest payments on both of its loans to Munire Furniture despite the clause in the subordination agreement prohibiting Kloss from doing so. (Compl. ¶28).

         On November 12, 2013, Bank Leumi and Munire Furniture entered into an amended credit agreement, which increased the credit available to Munire Furniture from $15 million to $17 million. (Compl. ¶ 39). In order to secure this credit increase, Kloss reaffirmed and ratified the subordination agreement. (Compl. ¶ 40). Bank Leumi contends that, once again, Kloss "knowingly failed to disclose" the $300, 000 loan and an additional "temp loan" and continued to accept interest payments on all loans. (Compl. ¶¶ 43, 46). Around January 2014, CoMetrics Lenders Advisory Services, LCC found that Munire Furniture had falsely reported its financial condition to Bank Leumi. (Compl ¶¶ 52-53). Accordingly, Bank Leumi declared the loan note due and demanded immediate payment in full of the balance of $16, 990, 003.30. (Compl. ¶ 55).

         On September 18, 2014, Bank Leumi commenced an action in the United States District Court for the District of New Jersey against Munire Furniture and Munir Hussain-the president and controlling shareholder of Munire Furniture-seeking damages and a writ of replevin. (Compl. ¶ 56). That case is currently stayed because Munire Furniture and Hussain filed voluntary petitions for relief in the United States Bankruptcy Court for the District of New Jersey. (Compl. ¶¶ 57-59). On November 3, 2014, Defendants filed Proofs of Claim in the bankruptcy proceeding. (Compl. ¶ 60). In their Proofs of Claim, Defendants disclosed the existence of the $300, 000 loan and the acceptance of loan repayments. (Compl. ¶¶ 61 63). Upon discovering that Defendants accepted payments on the loans, Bank Leumi "demanded that the Defendants reimburse it for the improper payments that they had accepted." (Compl. ¶ 65).

         Soon thereafter, Defendants filed a complaint in Passaic County Superior Court against Bank Leumi, Hussain, and other individuals, ("the Passaic Action"). (Compl. ¶ 66). Defendants asserted that Bank Leumi was negligent in failing to detect the fraud committed by Munire Furniture and that it was unjustly enriched when it recovered monies from Munire Furniture following the bankruptcy. (Compl. ¶ 67). Bank Leumi filed a pre-answer motion to dismiss and, on June 29, 2017, Judge Liliana S. De-Avila-Silebi granted Bank Leumi's motion and dismissed the action against Bank Leumi with prejudice. (Compl. ¶¶ 68 69).

         Bank Leumi then filed this action against Defendants, alleging that Defendants breached the terms of the subordination and affirmation agreements as well as claims of fraud, fraudulent inducement, and declaratory judgment against Defendants, and claims of aiding and abetting, unjust enrichment, and tortious interference (all in the alternative) against Kloss Company. (Compl. ¶¶ 70-129). Defendants now move to dismiss Bank Leumi's Complaint under the entire controversy doctrine.


         "[Application of the Entire Controversy Doctrine . . . does not 'defeat the subject matter jurisdiction of a federal court." Rycoline Prods., Inc. v. C & W Unlimited, 109 F.3d 883, 886 (3d Cir. 1997) (quoting Livera v. First Nat'l State Bank of N.J., 879 F.2d 1186, 1190 (3d Cir. 1989)). Rather, an affirmative defense based on the doctrine "could properly be the grounds for a motion to dismiss for failure to state a claim upon which relief can be granted pursuant to Fed R. Civ. P. 12(b)(6)." Id. at 886.

         To withstand a motion to dismiss for failure to state a claim, a "complaint must contain 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)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. at 678 (citing Twombly, 550 U.S. at 556). "The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id. (quoting Twombly, 550 U.S. at 556).

         To determine the sufficiency of a complaint under Twombly and Iqbal in the Third Circuit, the Court must take three steps. "First, it must 'tak[e] note of the elements a plaintiff must plead to state a claim.' Second, it should identify allegations that, 'because they are no more than conclusions, are not entitled to the assumption of truth.' Finally, '[w]hen there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief." Connelly v. Lane Constr. Corp., 809 F.3d 780, 787 (3d Cir. 2016) (quoting Iqbal, 556 U.S. at 675, 679) (citations omitted). "In deciding a Rule 12(b)(6) motion, a court must consider only the complaint, exhibits attached to the complaint, matters of public record, as well as undisputedly authentic documents if the complainant's claims are based upon these documents." Mayer v. Belichick, 605 F.3d 223, 230 (3dCir. 2010).

         III. ANALYSIS

         The entire controversy doctrine is an affirmative defense that is waived unless pleaded or otherwise raised in a timely manner. Paramount Aviation Corp. v. Agusta,178 F.3d 132, 137 (3d Cir. 1999). Like traditional res judicata, the entire controversy doctrine is intended to prevent piecemeal litigation by requiring the assertion of all claims arising from a single controversy in one action. Prevratil v. Mohr,145 N.J. 180, 190 (1996). The doctrine "bars a subsequent action only when a prior action based on the same transactional facts has been tried to judgment or settled." Allstate N.J. Ins. Co. v. Cherry Hill Pain and Rehab Inst.,389 N.J.Super. 130, 140 (App. Div. 2006) (quoting Arena v. Borough of Jamesburg,309 N.J.Super. 106, 111 (App. Div. 1998)). The doctrine's purposes are to "encourage comprehensive and conclusive litigation determinations, to avoid fragmentation of litigation, and to promote party fairness and judicial economy and efficiency." K-Land Corp. No. 28 v. Landis Sewerage Auth., 173 N.J. 59, 70 (2002) (quoting Pressler, Current N.J. Rules, comments 1 & 2 on R. 4:30A (2002)). In applying the doctrine, "the central consideration is whether the claims . . . arise from related facts or the same transaction or series of transactions." DiTrolio v. Antiles,142 N.J. 253, 267 (1995). The doctrine is an equitable one, based on ...

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