United States District Court, D. New Mexico
MEMORANDUM OPINION AND ORDER
MATTER comes before the Court on Defendant Cameron
Graham’s Motion to Dismiss Plaintiff’s
Complaint for Declaratory Judgment (ECF No. 11). The
Court, having considered the motion to dismiss, briefs,
pleadings, relevant law and otherwise being fully advised,
concludes that the motion to dismiss should be denied.
LEGAL STANDARD ON A MOTION TO DISMISS
motion to dismiss, the court assesses the legal sufficiency
of the allegations contained within the four corners of the
complaint. Archuleta v. Wagner, 523 F.3d 1278, 1281
(10th Cir. 2008). Rule 8 requires the complaint to contain
"a short and plain statement of the claim showing that
the pleader is entitled to relief." Fed.R.Civ.P.
8(a)(2). The court accepts as true all well-pleaded facts,
viewing them in the light most favorable to the nonmoving
party and allowing all reasonable inferences in favor of the
nonmoving party. Archuleta, 523 F.3d at 1283. The
court "should disregard all conclusory statements of law
and consider whether the remaining specific factual
allegations, if assumed to be true, plausibly suggest the
defendant is liable." Kansas Penn Gaming, LLC v.
Collins, 656 F.3d 1210, 1214 (10th Cir. 2011). The
complaint "does not need detailed factual allegations,
" but “a formulaic recitation of the elements of a
cause of action will not do." Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 555 (2007).
If on a
motion to dismiss matters outside the pleadings are presented
to and considered by the court, the motion generally must be
treated as one for summary judgment. Fed.R.Civ.P. 12(d).
Under Rule 12(d), a court has broad discretion to refuse to
accept the extra-pleading materials and resolve the motion
solely on the pleading itself. See Lowe v. Town of
Fairland, 143 F.3d 1378, 1381 (10th Cir. 1998).
Reversible error may occur if a court considers matters
outside the pleadings but fails to convert the motion to
dismiss into a motion for summary judgment. Id.
conversion is required, however, when the court considers
information that is subject to proper judicial notice or
documents incorporated into the complaint by reference and
central to the plaintiff’s claim, unless their
authenticity is questioned. See Tellabs, Inc. v. Makor
Issues & Rights, Ltd., 551 U.S. 308, 322 (2007)
(“[C]ourts must consider the complaint in its entirety,
as well as other sources courts ordinarily examine when
ruling on Rule 12(b)(6) motions to dismiss, in particular,
documents incorporated into the complaint by reference, and
matters of which a court may take judicial notice.”);
Geinosky v. City of Chicago, 675 F.3d 743, 745 n.1
(7th Cir. 2012) (“A motion under Rule 12(b)(6) can be
based only on the complaint itself, documents attached to the
complaint, documents that are critical to the complaint and
referred to in it, and information that is subject to proper
judicial notice.”); Pace v. Swerdlow, 519 F.3d
1067 (10th Cir. 2008) (explaining that court may properly
consider on motion to dismiss documents central to
plaintiff’s claim and referred to in complaint, where
document’s authenticity is not in dispute); Tal v.
Hogan, 453 F.3d 1244, 1264 n.24 (10th Cir. 2006) (noting
that no conversion is required when a court takes judicial
notice of its own files and records and facts that are matter
of public record). The documents, however, “may only be
considered to show their contents, not to prove the truth of
matters asserted therein.” Tal, 453 F.3d at
1264 n.24 (quotations omitted).
following facts are those set forth in the complaint in the
light most favorable to Plaintiff, as well as the facts set
forth in the exhibits attached to the complaint that are
documents referred to in Plaintiff’s complaint and
central to Plaintiff’s claim or are facts subject to
judicial notice. The Court will not convert Defendant’s
motion to dismiss into one for summary judgment.
State Court Litigation
State Life Management, Inc., (“Desert State”), is
a New Mexico non-profit corporation that provided trustee and
representative payee services to its clients. Compl.
¶¶ 4, 10. Paul Donisthorpe was at all relevant
times the Chief Executive Officer (“CEO”) and
Director for Desert State. Id. ¶ 6. It appears
undisputed that Liane Kerr is Donisthorpe’s spouse.
Compare Def.’s Mot. 4, ECF No. 11,
with Pl.’s Resp., ECF No. 19 (failing to
dispute point). Helen Bennett is a former director of
Desert State. Compl. ¶ 44.
31, 2017, the Financial Institutions Division
(“FID”) filed suit against Desert State and
others in a New Mexico state court. Id. ¶ 11.
The FID alleged that its investigation and analysis of Desert
State’s banking and client account records led it to
believe that from 2006 through the time of its investigation,
more than $4 million in trust investment account funds
managed by Desert State were transferred out of investment
accounts for trusts and out of the accounts of Desert State
and into accounts controlled in whole or in part by
Donisthorpe. Id. ¶ 12. In an August 4, 2017
Order, the state court appointed Christopher Moya,
FID’s Acting Director, as Receiver for the receivership
estate of Desert State. Id. ¶ 5.
November 27, 2017, a Criminal Information was filed against
Donisthorpe in federal court alleging that from 2006 through
2016 Donisthorpe, the sole owner and operator of Desert
State, knowingly and unlawfully schemed to defraud clients by
taking and converting approximately $4.8 million of client
funds from Desert State client trust accounts to himself for
his own use. Id. ¶¶ 13-14. The same day,
on November 27, 2017, Donisthorpe entered a Plea Agreement
and pled guilty to wire fraud and money laundering.
Id. ¶¶ 15-19. In the plea agreement,
Donisthorpe admitted that from 2009 through 2016 he knowingly
and intentionally obtained money and property by means of
materially false and fraudulent pretenses and representations
by transferring client funds from individual client accounts
ultimately to accounts for his own use. See id.
lawsuits followed by former Desert State clients. See Id
. ¶¶ 20, 46. Among them, Cameron Graham, as
the trustee for Andrew Graham, (“Graham”),
id. ¶ 7, filed a class action suit (the
“Graham Class Action Litigation”) on behalf of
himself and others similarly situated against Desert State,
Donisthope, and Bennett. Id. ¶ 20(g). The other
lawsuits were consolidated and dismissed without prejudice on
July 24-25, 2018, to permit them to pursue their claims
through the Graham Class Action Litigation. Id.
Insurance and the federal lawsuit
April 16, 2012, CEO Donisthorpe signed a proposal to obtain a
policy of insurance from Plaintiff The Cincinnati Insurance
Company (“Plaintiff” or “Cincinnati”)
for Desert State. See Compl. Ex. 3, ECF No. 1-3 at
55-58. Donisthorpe sought renewals of insurance from
Cincinnati in April 2013 and April 2016. See Id . at
49-54. Cincinnati issued a Non-Profit Organization Blue Chip
Policy Number BCN-0007591 for insurance (“the
Policy”) to Desert State with a policy period from
April 17, 2016 to April 17, 2019. Compl. ¶¶ 1, 21,
ECF No. 1; Compl. Ex. 3, ECF No. 1-3 at 4 of 58. The
continuity date listed in the Policy is April 17, 2012.
Compl. Ex. 3, ECF No. 1-3 at 4 of 58.
March 28, 2017, Helen Bennett notified Cincinnati by email of
wrongful acts under the Policy, specifically about
allegations that Donisthorpe had been stealing money from
client accounts for his own personal use. See Compl.
¶ 44. On April 17, 2018, Cincinnati cancelled the
Policy. Compl. ¶ 21; Compl. Ex. 4, ECF No. 1-4. Bennett
and Desert State sought coverage from Cincinnati for coverage
and defense. Compl. ¶ 47. Donisthorpe did not seek
coverage for any of the lawsuits and Cincinnati has not
defended Donisthorpe. See Id . ¶¶ 50, 56.
On September 5, 2018, Cincinnati notified the FID and Moya
that it was denying coverage to Desert State and Donisthorpe
for the Graham Class Action Litigation, as well as to for the
other lawsuits that had been dismissed. Id. ¶
54. The letter also advised that Cincinnati would defend
Desert State for the Graham Class Action Litigation under a
reservation of rights to the withdrawal of the defense upon a
judicial determination that it has no duty to defend or
indemnify Desert State. Id. ¶ 55.
October 22, 2018, Plaintiff filed a declaratory judgment
action before this Court under the Court’s diversity
jurisdiction seeking a determination that the Policy does not
cover any loss and defense costs incurred by Desert State and
Donisthorpe. Id. ¶¶ 2, 8. Plaintiff named
Desert State, Moya, Donisthorpe, and Graham. Compl.
¶¶ 4-7. At the time Cincinnati filed its
declaratory judgment action, only Graham was the named party
in the Graham Class Action Litigation. See Graham
Class Action Compl., ECF No. 19-1. The complaint, however,
stated that Graham “will fairly and adequately protect
the interests of the Class that he seeks to represent.”
Id. ¶ 57.
asserts that Donisthorpe and Desert State, when answering
questions in the application form for the policies, answered
negatively to questions in the proposals whether the
organization or anyone proposed for insurance was aware of
any fact, circumstance, or situation that could result in a
claim being filed against the organization or was aware of
any act, error, or omission giving a reason to suppose might
afford valid grounds for a future claim. See Compl.
¶ 25. Cincinnati claims that Donisthorpe and Desert
State also did not disclose any fact, circumstance or
situation in response to question 4 of the Prior
Knowledge/Warranty Declarations and warranted as true that
there was no fact, circumstance or situation indicating the
probability of a claim or action. Id. Based on the
admissions in Donisthorpe’s plea agreement, Cincinnati
contends that he knew at the time he signed the application
that he had committed acts of wire fraud and money laundering
and had made other materially false and fraudulent
representations, so his representations in the applications
were false and the proposal contained material
nondisclosures. See Id . ¶¶ 26-27.
Cincinnati states that it relied on the material false
statements, representations, omissions, and warranties, and
that it would not have issued the Policy had the correct
information been disclosed. See Id . ¶¶
the filing of the federal complaint, the plaintiffs in the
Graham Class Action Litigation filed an amended complaint.
See Pl.’s Mot., Ex. A, ECF No. 11-1. The
Amended Complaint added four new plaintiff/class
representatives and added Kerr, among other defendants.
Compare Id . at 1-4, with Class Action
Compl., ECF No. 19-1 at 1-2. The current claims in the Graham
Class Action Litigation as relevant to the parties in this
case are for negligence and gross negligence against Desert
State, Donisthorpe, and Bennett (Claim 1), breach of
fiduciary duty against Desert State, Donisthorpe, and Bennett
(Claim 2), conversion against Desert State and Donisthorpe
(Claim 3), violations of the New Mexico Uniform Trust Code
against Desert State, Donisthorpe, and Bennett (Claim 4),
violations of the New Mexico Unfair Practices Act against
Desert State, Donisthorpe, and another, (Claim 5), violations
of the New Mexico Uniform Voidable Transactions Act against
Desert State, Donisthorpe, Kerr, and others (Claim 6), and
unjust enrichment against Kerr (Claim 10). See Am.
Compl. 22-32, ECF No. 11-1. Cincinnati is not a party to the
Graham Class Action Litigation. See Id . at 2-4. The
state court lawsuit does not allege Bennett knew of
Donisthorpe’s diversion of funds or that she
intentionally participated in the diversion, but rather that
she exercised little to no oversight of the actions of
Donisthorpe or Desert State and failed in her duties as the
director of Desert State. See Id . at 15-17.
Defendant Graham (“Defendant” or
“Graham”) filed a motion to dismiss the
declaratory judgment action (ECF No. 11). Defendant offers
multiple reasons for why the Court should dismiss this case.
Defendant argues the Court should decline to exercise its
discretion to consider this case because it would not settle
the issue of Cincinnati’s insurance obligations and is
better left for the state court. He contends that a judgment
would not bind approximately 77 former clients who have not
been named in this federal action, nor would it bind Bennett
and Kerr. Graham also contends that, should the Court reach
the merits, the Court should dismiss the complaint on
numerous grounds. First, Defendant asserts Plaintiff has no
right to avoid its obligations under the policy because it
failed to promptly return the premiums Desert State paid.
Defendant additionally contends Cincinnati cannot avoid its
coverage duties because of Bennett’s and
Donisthorpe’s wrongs, and accordingly, it must provide
coverage for Desert State’s vicarious liability for
those wrongs. Defendant argues that the various contractual
provisions upon which Cincinnati relies do not cancel its
obligation to provide Desert State coverage.
The Policy terms
to the Policy, in consideration of the payment of premiums
and “in reliance on all statements in the
‘proposal’ and all other information
provided”, Cincinnati agreed to “pay on behalf of
the ‘insureds’ all ‘loss’ which they
shall be legally obligated to pay resulting from any
‘claim’ first made during the ‘policy
period’ … for a ‘wrongful
act.’” Compl. Ex. 3, ECF No. 1-3 at 6 of 58.
Cincinnati also agreed to the duty to defend the insureds
against any such claim. Id. As relevant here, the
Policy defined “insureds” as the
“organization;” “Directors, officers and
trustees;” and “Employees, volunteers and
members”. Id. at 8 of 58. The Policy further
defined “Directors, officers and trustees” to
mean “[a]ll persons who were, now are, or shall become
a duly elected or appointed director, officer or trustee of
the ‘organization’…” and the
“lawful spouse … of a director, officer or
trustee, but only to the extent such person is a party to any
‘claim’ solely in such person’s capacity as
a spouse … of a director, officer or trustee …
and only if the ‘claim’ seeks damages recoverable
from … property transferred from the director, officer
or trustee to the spouse….” Id. The
named insured is Desert State. Id. at 3 of 58.
relies on the following Policy provisions when seeking a
declaration that it has no duty to defend or indemnify the
lawsuits and demands and that the Policy does not provide
coverage for and Cincinnati has no duty to defend or
indemnify any of the “claims” emanating from the
facts, circumstances, and situations admitted by Donisthorpe
in his plea of guilty. See Compl. ¶¶
Warranty Declaration 4 Exclusion (Count I)
4 of the April 16, 2012 proposal states:
No fact, circumstance or situation indicating the probability
of a claim or action against which indemnification would be
afforded by the proposed insurance is now known by any
person(s) or entity(ies) proposed for this insurance other
than that which is disclosed in this Proposal. It is agreed
by all concerned that if there be knowledge of any such fact,
circumstance, or situation, any claim ...