Evanston Ins. Co. v. Vantage Benefits Adm'rs, Inc. (In re Vantage Benefits Adm'rs, Inc.), Case No. 18-31351-sgj7

CourtUnited States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Texas
PartiesIn re: Vantage Benefits Administrators, Inc., Debtor. Evanston Insurance Company, an Illinois Corporation, Plaintiff, v. Vantage Benefits Administrators, Inc., et al., Defendant
Docket NumberCase No. 18-31351-sgj7,Adv. Proc. No. 19-03141-sgj
Decision Date13 July 2021

In re: Vantage Benefits Administrators, Inc., Debtor.

Evanston Insurance Company, an Illinois Corporation, Plaintiff,
Vantage Benefits Administrators, Inc., et al., Defendant

Case No. 18-31351-sgj7
Adv. Proc.
No. 19-03141-sgj


Filed: July 14, 2021
July 13, 2021

The following constitutes the ruling of the court and has the force and effect therein described.

Chapter 7

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I. Introduction

The above-referenced action is all about whether there is professional liability insurance coverage for losses suffered by an entity known as Vantage Benefits Administrators, Inc. ("Vantage") and its creditors. Vantage is now a Chapter 7 Debtor, and it acts through a Chapter 7 Trustee, Jeffrey Mims (the "Bankruptcy Trustee").

Pending before the court are four motions for summary judgment: (1) one by the primary insurance carrier Evanston Insurance Company ("Evanston");1 (2) another by an excess carrier, Certain Underwriters at Lloyd's, London and HDI Global Specialty, SE (collectively "Lloyd's");2 (3) another by an additional excess carrier, Landmark American Insurance Company ("Landmark");3 and (4) one by the Bankruptcy Trustee.4 All address whether there is any genuine dispute of material fact regarding the existence of insurance coverage for certain losses that are further described below. The bankruptcy court believes that there is no genuine dispute as to any material fact and that there is no insurance coverage for Vantage and its creditors, as a matter of law, for two reasons. First, the fortuity doctrine appears to preclude coverage because the insureds (i.e., Vantage and its principals) had knowledge of the acts that gave rise to the losses before they applied for the policies. Second, the policies' insuring agreements and exclusions appear to preclude coverage, in that the acts that gave rise to the losses/claim were committed intentionally and knowingly. Therefore, as further set forth below, the bankruptcy court recommends that the

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District Court grant summary judgment in favor of the insurers on the coverage issue and deny the Trustee's motion for summary judgment on the same issues.

II. Background

The above-referenced action started as a Complaint for Rescission and Declaratory Relief filed on February 27, 2018, in the United States District Court for the Northern District of Texas, by Evanston against Vantage and Jeffrey and Wendy Richie (the "Richies"). Vantage was a third-party administrator for various employee benefit plans, such as 401(k) plans. The Richies were the owners and principal officers of Vantage. Shortly before filing this action, Evanston learned that the Richies had been accused of misappropriating millions of dollars from various 401(k) plans under Vantage's administration as part of an intentional scheme. In fact, there were news stories describing an FBI raid of Vantage's offices. Certain parties that had suffered losses due to this alleged misappropriation of assets began making demands and filing lawsuits—hoping that their losses would be covered by insurance. Apparently, to hide their theft of 401(k) plan assets, the Richies issued false account statements and audit reports that misrepresented the value of the plans and the accounts from which they stole. The Richies were later indicted, pleaded guilty, and are now in federal prison relating to their acts at Vantage. It is undisputed that the Richies' scheme of embezzlement was ongoing when Ms. Richie (who had knowledge of the scheme, as she was participating in it) signed the Application for the Primary Policy (the "Application") and took other actions to initiate insurance coverage.

A few weeks after Evanston filed this action, certain creditors forced Vantage into an involuntary Chapter 7 bankruptcy case. The Bankruptcy Trustee then stepped into the shoes of

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Vantage in this action. The Bankruptcy Trustee soon added as third-party defendants in this action the excess carriers, Lloyd's and Landmark, as well as an insurance agent.5

By way of further background, in October of 2017, Evanston issued to Vantage and the Richies (the "Insureds") a Specified Professions Professional Liability Insurance Policy, No. EO869083 (the "Primary Policy") on a "claims-made" basis for the Policy Period of October 15, 2017 to October 15, 2018. The Primary Policy provided a claim limit of liability of $3,000,000 per claim and a $3,000,000 aggregate limit of liability, subject to a $5,000 per claim deductible ($15,000 in the aggregate). Its "Retroactive Date" was October 15, 2015, as set forth in Item 5.A. of the Declarations. Vantage also obtained excess coverage of $5,000,000 from Lloyd's and $2,000,000 from Landmark (the "Excess Policies"). The Excess Policies "followed form" to provide coverage in the same circumstances as those covered by the Primary Policy. The Primary Policy and the Excess Policies will be collectively referred to as the "Policies." Shockingly, Vantage's headquarters was raided by the FBI on October 25, 2017—a mere 10 days after the alleged effective date of these Policies—and it was immediately thereafter that their bad acts began to be apparent.

In Evanston's Motion for Summary Judgment (the "Evanston MSJ"), Evanston asks the court to determine that there is no genuine dispute of material fact and to rule, as a matter of law, on various issues as to the Primary Policy: (1) first, that it was properly canceled for nonpayment of the initial premium (and therefore provided no coverage for any matter whatsoever); (2) alternatively, that it was properly rescinded on the basis of a materially false Application (and

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therefore provided no coverage for any matter whatsoever); and/or (3) even if not canceled or rescinded, the Primary Policy does not provide any coverage for the claims of the Bankruptcy Trustee and other Vantage creditors that arose out of the Richies' years-long multimillion-dollar embezzlement scheme.

The Bankruptcy Trustee, meanwhile, brought his own motion for partial summary judgment (the "Trustee MSJ")—expanding the issues to include the Excess Policies. The Bankruptcy Trustee, through the Trustee MSJ, asks the court to construe each of the Policies' coverage provisions and declare that the Policies, in fact, covered intentional actions and breaches of fiduciary duties under the Employment Retirement Income Security Act of 1974 ("ERISA").

The excess coverage providers next waded in with their own motions for summary judgment in response to the Trustee MSJ. First, Lloyd's filed a Response and Motion for Partial Summary Judgment on the Trustee's request for declaratory relief (Count I of Trustee's First Amended Third-Party Complaint) and the Trustee's breach of contract claim against Lloyd's (Count II).6 Second, Landmark filed a Response and Cross-Motion for Partial Summary Judgment on ERISA and Policy-based claims.7 (Collectively, the "Excess Policies MSJs"). These Excess Policies MSJs largely echo the arguments of Evanston on the coverage issues.

Upon studying the Evanston MSJ in particular, the bankruptcy court determined that efficiency would be served if the issues presented therein were bifurcated, and the court first considered two gating issues. Those gating issues were: (a) whether the Primary Policy was rescinded as a matter of law, based on undisputed facts; and/or (b) whether the Primary Policy was canceled as a matter of law, based on undisputed facts. On April 6, 2021, the bankruptcy court

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entered an Order denying summary judgment on these two gating issues.8 There seemed to be legal problems with these cancellation/rescission arguments such that summary judgment was not appropriate for Evanston on these issues. Thus, this Report and Recommendation addresses the remaining issues in Evanston's MSJ, as well as the Excess Policies MSJs, and the Trustee's MSJ. As set forth below, the bankruptcy court believes that summary judgment should be granted on the Evanston MSJ; granted on the Excess Policies MSJs; and denied on the Trustee MSJ. As later explained, this will dispose of most of this action—only the claims in this action against the insurance broker HWP will survive.

III. Undisputed Material Facts

The Debtor, Vantage, was founded in or about 1997 and was a full-service third-party administrator specializing in corporate benefit programs.

The Richies co-owned and operated Vantage.9 Mr. Richie was the President and Chief Executive Officer, and Ms. Richie was the Vice-President of Administration. She conducted Vantage's financial transactions.10

On December 16, 2016, an employee of Vantage discovered that Ms. Richie had stolen over $6 million from two retirement plans. The employee informed Mr. Richie, and later that same day, Ms. Richie admitted to Mr. Richie that she had stolen retirement funds.11

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On October 10, 2017, Ms. Richie signed the application for the Primary Policy (the "Application") on behalf of Vantage.12 The Application required her to disclose known facts or circumstances that might give rise to a claim under the Primary Policy ("Question 2") and former or pending regulatory proceedings against Vantage or its principals ("Question 4").13 She disclosed no facts, circumstances, or actions.14 The Application contained an "Application Exclusion" that purported to allow Evanston to rescind the Primary Policy if the insureds made false statements in the Application.15

The Primary Policy purported to become effective on October 15, 2017.16 The Excess Policies purported to become effect on October 15, 2017, as well and "followed form" in all respects with the Primary Policy.

On October 25, 2017, the FBI raided Vantage's headquarters and...

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