Evanston Ins. Co. v. Desert State Life Mgmt.

• Citation: 434 F.Supp.3d 1051
• Decision Date: 16 January 2020
• Docket Number: No. CIV 18-0654 JB\KK,CIV 18-0654 JB\KK
• Parties: EVANSTON INSURANCE COMPANY, Plaintiff, v. DESERT STATE LIFE MANAGEMENT; Christopher Moya, in his capacity as Receiver for the receivership estate of Desert State Life Management; Paul A. Donisthorpe; L. Helen Bennett; Liane Kerr ; Ayudando Guardians, Inc., a New Mexico Nonprofit Corporation, on behalf of seven protected persons; Joseph Perez; Christine Gallegos, individually and as Guardian of Victor Baldizan, an incapacitated adult; Scott K. Atkinson, as Guardian Ad Litem for Vincent Esquibel, Jr., an Incapacitated Person; and Charles Reynolds, as Conservator for J.W., an Incapacitated Person, and Cameron Graham, as trustee for Andrew Graham, Christopher Moya; Ascending Hope, LLC ; CNRAG, Inc.; and Decades, LLC, Defendants.
• Court: U.S. District Court — District of New Mexico

434 F.Supp.3d 1051

EVANSTON INSURANCE COMPANY, Plaintiff,

v.DESERT STATE LIFE MANAGEMENT; Christopher Moya, in his capacity as Receiver for the receivership estate of Desert State Life Management; Paul A. Donisthorpe; L. Helen Bennett; Liane Kerr ; Ayudando Guardians, Inc., a New Mexico Nonprofit Corporation, on behalf of seven protected persons; Joseph Perez; Christine Gallegos, individually and as Guardian of Victor Baldizan, an incapacitated adult; Scott K. Atkinson, as Guardian Ad Litem for Vincent Esquibel, Jr., an Incapacitated Person; and Charles Reynolds, as Conservator for J.W., an Incapacitated Person, and Cameron Graham, as trustee for Andrew Graham, Christopher Moya; Ascending Hope, LLC ; CNRAG, Inc.; and Decades, LLC, Defendants.

No. CIV 18-0654 JB\KK

United States District Court, D. New Mexico.

Signed January 16, 2020

Ann Maloney Conway, Elisabeth Anne Millich, Sheehan & Sheehan, P.A., Albuquerque, New Mexico and Joseph Borders, McJessy, Ching & Thompson, LLC, Chicago, Illinois, Attorneys for the Plaintiff.

Maureen Sanders, Sanders & Westbrook, P.C., Albuquerque, New Mexico, Attorney for Defendant Helen Bennett.

Paul J. Kennedy, Kennedy, Hernandez & Associates, P.C., Albuquerque, New Mexico, Attorney for Defendant Liane Kerr.

Kevin Arthur Graham, Daniel Ross Rubin, New Mexico Regulation and Licensing Department, Santa Fe, New Mexico, Attorneys for Defendant Christopher Moya.

Joseph Goldberg, H. Jesse Jacobus, III, Frank T. Davis, Jr., Freedman Boyd Hollander Goldberg Urias & Ward P.A., Albuquerque, New Mexico, Attorneys for Defendants Cameron Graham, Joseph Perez, Christine Gallegos, Scott Atkinson, and Charles Reynolds.

John C. Anderson, United States Attorney, Brandon Fyffe, Assistant United States Attorney, United States Attorney's Office, Albuquerque, New Mexico, Attorneys for the United States of America.

MEMORANDUM OPINION AND ORDER

JAMES O. BROWNING, UNITED STATES DISTRICT JUDGE

THIS MATTER comes before the Court on the Plaintiff's Motion for Summary Judgment, filed July 25, 2019 (Doc. 89)("MSJ"). The Court held a hearing on September 5, 2019. The primary issues are: (i) whether, under the Professional Liability Insurance Policy for Specified Professions issued to Desert State, filed July 25, 2019 (Doc. 89-5)("Insurance Policy"), the Defendants can satisfy the condition precedent to coverage that prior to the effective date of the policy, no insured party had knowledge of facts, circumstances, situations or incidents which would lead him or her to conclude that a claim was likely; (ii) whether the Insurance Policy's misappropriation of funds exclusion bars coverage; and (iii) whether Defendant Paul Donisthorpe's misrepresentations on the Application render the Insurance Policy ab initio. The Court concludes that: (i) the Defendants have satisfied all conditions precedent for coverage under the Insurance Policy; (ii) the Insurance Policy's misappropriation of funds exclusion does not exclude coverage for all claims; and (iii) the Insurance Policy is not void ab initio. Accordingly, the Court denies the MSJ.

FACTUAL BACKGROUND

The Court draws the factual background from the parties' assertions of undisputed material fact in their summary judgment motion papers. See MSJ at 3-9;¹ Former Clients of Desert State Life Management's Response in Opposition of Plaintiff's Motion for Summary Judgment ¶¶ 1-16, at 3-5, filed August 8, 2019 (Doc. 98)("Client Response");² Defendant Desert State Life Management's Response to Motion for Summary Judgment ¶¶ A1-4, B1-5, at 3-5, filed August 8, 2019 (Doc. 99)("Moya Response"); Defendant L. Helen Bennett's Response to Plaintiff's Motion for Summary Judgment ¶¶ 1-6, at 3, filed August 8, 2019 (Doc. 100)("Bennett Response"); id., ¶¶ 1-8, at 3-4;³ Plaintiff's Reply to Helen Bennett's Response to Plaintiff's Motion for Summary Judgment ¶¶ A-B, at 4-5, filed August 22, 2019 (Doc. 113)("Reply to Ms. Bennett"); and Plaintiff's Combined Reply to Moya's and to the Former Clients of DSLM's Respective Responses to Plaintiff's Motion for Summary Judgment ¶¶ A-E, at 3-4, filed August 23, 2019 (Doc. 116)("Combined Reply").⁴

1. The Underlying Class-Action Claims Against Donisthorpe and Desert State.

Desert State Life Management is a New Mexico nonprofit trust corporation that acted as a trustee for disabled individuals. See MSJ at 3 (asserting this fact)(citing New Mexico Secretary of State Corporate Records at 2 (dated July 23, 2019), filed July 25, 2019 (Doc. 89-1)("Corporate Records")); Client Response at 1;⁵ Moya Response at 1;⁶ Bennett Response ¶ 1, at 3 (not disputing this fact).⁷ Paul A. Donisthorpe was the Chief Executive Officer of Desert State. See MSJ at 3 (asserting that Donisthorpe was the CEO of Desert State)(citing New Mexico Secretary of State Corporate Records at 2, filed July 25, 2019 (Doc. 89-1)("Corporate Records")).⁸ Desert State provided trustee services and representative payee services to more than seventy-five clients. See MSJ at 3 (stating that Desert State provided trustee payee services)(citing Amended Plea Agreement ¶ 10a, at 5 (dated February 21, 2019), filed July 25, 2019 (Doc. 89-2)("Plea Agreement")).⁹

On November 27, 2017, Donisthorpe pled guilty to a two-count federal felony information charging him with wire fraud and money laundering. See MSJ at 15 (stating this fact)(citing Transcript of Plea Hearing 21:13-22 (taken November 27, 2017)(Court, Donisthorpe), filed July 26, 2019 (Doc. 90-1)("Plea Tr.")).¹⁰ From at least 2009 through 2016, Donisthorpe violated a duty of trust to Desert State clients by transferring client funds from individual client investment accounts to accounts he controlled, thus converting those client funds to his own use. See MSJ at 3 (stating this fact)(citing Plea Agreement ¶ 10(b), at 6).¹¹ Donisthorpe made the fraudulent transfers knowing that he was not entitled to the funds, knowing that the clients were not informed of the transfers, and knowing that the clients would not have approved of the transfers if they had been informed. See MSJ at 3 (stating this fact)(citing Plea Agreement ¶ 10(c), at 6-7).¹² Donisthorpe presented false and fraudulent investment and disbursement reports to the Desert State board of directors and presented materially false and fraudulent documents to the New Mexico Regulation and Licensing Department -- Financial Institutions Division to conceal the fact that he had fraudulently obtained client funds. See MSJ at 3 (stating this fact)(citing Plea Agreement ¶ 10(c), at 6-7).¹³ Donisthorpe spent the illegally obtained funds on personal items including business ventures, his home mortgage, the mortgage for a vacation home, vehicles, credit card expenditures, and IRS debts. See MSJ at 3-4 (stating this fact)(citing Plea Agreement ¶ 10(d), at 7).¹⁴ In his plea agreement, Donisthorpe also admitted to violating federal statutes. See Bennett Response ¶ 7, at 4 (stating this fact)(citing Plea Agreement ¶ 10(c)); Reply to Ms. Bennett at 3-4 (not disputing this fact). At the plea hearing, Donisthorpe reaffirmed his guilt, stating:

I was in fact in charge of a trust company here in Albuquerque named Desert State Life Management and was responsible for assets of accounts therein. And from the period of time from 2009 to 2016, I did knowingly and intentionally obtain money and property through materially false and fraudulent pretenses and representations, transferring these funds to an account that I controlled personally. I presented -- I basically presented false and materially incorrect investment and distribution, unfortunately, to these clients, and I do admit that I fraudulently obtained client funds through this scheme. I spent these monies on personal assets, including other business ventures, a home mortgage and other expenditures that had no relation to these accounts.

MSJ at 4 (stating this fact)(quoting Plea Tr. at 17:18-18:16, at 5).¹⁵ The Honorable Laura Fashing, United States Magistrate Judge for the United States District Court for the District of New Mexico, finding Donisthorpe competent and his guilty plea to be knowing, voluntary, and supported by sufficient evidence, adjudged Donisthorpe guilty of wire fraud and money laundering. See MSJ at 4 (stating this fact)(citing Plea Tr. at 22:2-7, at 7).¹⁶ On June 27, 2019, the Court sentenced Donisthorpe to 144 months in prison, ordered him to pay $6,834,952.46 in restitution and imposed a $4,812,857.00 money judgment against him. See MSJ at 4 (stating this fact)(quoting Judgment as to Paul A. Donisthorpe (dated February 22, 2019), filed in this case June 27, 2019 (Doc. 89-4)("Judgment")).¹⁷

Donisthorpe's embezzlement scheme generated multiple demands for restitution and lawsuits by Desert State's former clients, and all of these matters are now consolidated into a proposed class action: Graham v. Desert State Life Management, No. D-202-cv-2018-04655 (Second Judicial District Court, County of Bernalillo, State of New Mexico, filed June 20, 2018). See MSJ ¶ 9, at 4-5 (stating this fact)(citing Amended Class Action Complaint (filed in state court December 17, 2018), filed in federal court July 25, 2019 (Doc. 89-4)("Client Complaint")).¹⁸ The Client Complaint's allegations mirror the admissions from Donisthorpe's guilty plea. See MSJ at 5 (stating this fact)(citing Client Complaint ¶¶ 30-31, at 5).¹⁹ The Client Complaint alleges that Donisthorpe and Desert State diverted at least $4,900,000.00 from Desert State clients. See MSJ at 5 (stating this fact)(citing Client Complaint ¶ 48, at 7).²⁰ In addition to suing Donisthorpe and Desert State for conversion, Desert State's former clients also sue Donisthorpe, Desert State, and former director and defendant Helen Bennett for negligence, breach of fiduciary duty, and violating the New Mexico Uniform Trust Code, N.M. Stat. Ann. §§ 46A-1-01 through 46A-1-113. See MSJ at 5 (stating this fact)(citing Client Complaint ¶¶ 151-171, at 23-25).²¹ The Client Complaint also seeks disgorgement of the benefits...