United States District Court, D. New Mexico
Maloney Conway Elisabeth Anne Millich Sheehan & Sheehan,
P.A. Albuquerque, New Mexico and Joseph Borders McJessy,
Ching & Thompson, LLC Chicago, Illinois Attorneys for the
Maureen Sanders Sanders & Westbrook, P.C., Attorney for
Defendant Helen Bennett
J. Kennedy Kennedy, Hernandez & Associates, P.C.,
Attorney for Defendant Liane Kerr
Arthur Graham Daniel Ross Rubin New Mexico Regulation and
Licensing Department Santa Fe, New Mexico Attorneys for
Defendant Christopher Moya
Goldberg H. Jesse Jacobus, III Frank T. Davis, Jr. Freedman
Boyd Hollander Goldberg Urias & Ward P.A., Attorneys for
Defendants Cameron Graham, Joseph Perez, Christine Gallegos,
Scott Atkinson, and Charles Reynolds
C. Anderson United States Attorney Brandon Fyffe Assistant
United States Attorney United States Attorney's Office
Attorneys for the United States of America
MEMORANDUM OPINION AND ORDER
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.
Court draws the factual background from the parties'
assertions of undisputed material fact in their summary
judgment motion papers. See MSJ at
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”); 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; 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
The Underlying Class-Action Claims Against Donisthorpe
and Desert State.
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; Moya Response at
Bennett Response ¶ 1, at 3 (not disputing this
fact). 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”)). 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
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.”)). 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). 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).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). 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). 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.
4 (stating this fact)(quoting Plea Tr. at 17:18-18:16, at
5). 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). 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.
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”)). 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). 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). 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). The Client Complaint also seeks
disgorgement of the benefits that Donisthorpe's ex-wife,
Defendant Liane Kerr, wrongly received as a result of
Donisthorpe's theft. See MSJ at 5 (stating this
fact)(citing Client Complaint ¶¶ 178-187, 206-213,
at 26-27, 31-32).
Client Complaint alleges ten claims. See Client
Complaint ¶¶ 151-213, at 27-32. Claim 1 is for
negligence and gross negligence against Desert State,
Donisthorpe, and Ms. Bennett. See Client Complaint
¶¶ 151-156, at 27-28. Claim 2 alleges
breach-of-fiduciary duty against Desert State, Donisthorpe,
and Ms. Bennett. See Client Complaint at 28-29.
Claim 3 alleges conversion against Desert State and
Donisthorpe. See Client Complaint ¶¶
162-166, at 28. Claim 4 alleges violations of the New Mexico
Uniform Trust Code against Desert State, Donisthorpe, and Ms.
Bennett. See Client Complaint ¶¶ 167-171,
at 29. Claim 5 alleges violations of NMUPA against Desert
State, Donisthorpe, and Ms. Bennett. See Client
Complaint ¶¶ 172-177, at 29-30. Claim 6 alleges
violations of the New Mexico Uniform Voidable Transactions
Act, N.M. Stat. Ann. §§ 56-10-14 through 56-10-29,
against Desert State, Donisthorpe, Spectrum Capital Markets,
LLC,  Corazon Cattle Co., LLC, 
Corazon-Pitchford,  Liane Kerr, and Paul A. Donisthorpe,
LLC. See Client Complaint ¶¶ 178-187, at
30-32. Finally, Claim 10 alleges unjust enrichment against
Ms. Kerr. See Client Complaint ¶¶ 205-213,
The Insurance Policy Between Desert State and Evanston
October 10, 2016, Donisthorpe, in his capacity as Desert
State's Chief Executive Officer, applied for professional
liability insurance coverage from Evanston Insurance.
See MSJ at 5 (stating this fact)(citing Application
for Specified Professions Professional Liability Insurance
and Service and Technical Professional Liability Insurance at
1 (dated October 10, 2016), filed July 25, 2019 (Doc.
89-6)(“Application”)). In the Application,
Donisthorpe answered the following question negatively:
Is the applicant or any principal, partner, owner, officer,
director, employee, manager or managing member of the
Applicant or any person(s) or organization(s) proposed for
this insurance aware of any fact, circumstance, situation,
incident or allegation of negligence or wrongdoing, which
might afford grounds for any claim such as would fall under
this proposed insurance?
5-6 (stating this fact)(quoting Application at 3); Bennett
Response at 3. The Policy's Insuring Agreement for
Professional Liability Coverage provides:
The Company shall pay on behalf of the Insured all sums in
excess of the Deductible amount stated in Item 5.A. of the
Declarations, which the Insured shall become legally
obligated to pay as Damages as a result of a Claim first made
against the Insured during the Policy Period or during the
Extended Reporting Period, if exercised, and reported to the
Company pursuant to the Section Claims A., Claims Reporting
1. A Wrongful Act; or
2. A Personal Injury;
Performance of Specified Professional Services rendered or
that should have been rendered by the Insured or by any
person for whose Wrongful Act or Personal Injury the Insured
is legally responsible, Provided:
a. The entirety of such Wrongful Act(s) or Personal
Injury(ies) happens during the Policy Period or on or after
the applicable Retroactive Date stated in Item 5.A. of the
Declarations and before the end of the Policy Period; and
b. Prior to the effective date of this Coverage Part the
Insured had no knowledge of such Wrongful Act(s) or Personal
Injury(ies) or any fact, circumstance, situation or incident,
which may have led a reasonable person in the Insured's
position to conclude that a Claim was likely.
7 (quoting Insurance Policy at 15). The Insurance Policy
defines “insured” persons to include past or
current Desert State officers and directors, as well as
“any past or current employee.” Moya Response
¶ B3, at 4 (stating this fact)(quoting Insurance Policy
at 14); Combined Response at 3 (not disputing this fact).
Under Exclusion P, the Insurance Policy excludes coverage for
“‘any claim . . . [b]ased upon or arising out of
any conversion, misappropriation, commingling or defalcation
of any funds or property.'” MSJ at 8-9 (quoting
Insurance Policy at 20).
The Investigations into Donisthorpe and Desert
Insurance first received notice of circumstances likely to
give rise to claims triggering coverage in March, 2017, when
Ms. Bennett reported that Donisthorpe had mismanaged and
stolen funds belonging to former Desert State clients.
See Client Response ¶ 1, at 3 (stating this
fact)(citing Claim-E0400944-Note27 at 1 (dated March 29,
2017), filed July 26, 2019 (Doc. 92-1)(“Evanston
Memo”)); Combined Reply ¶ III.a, at
3. After Evanston Insurance heard from Ms.
Bennett, Evanston Insurance first considered rescission of
the Insurance Policy. See Client Response ¶ 2,
at 3 (stating this fact)(citing Evanston Memo; Deposition of
Glenn Fischer 101:22-102:3 (taken June 25, 2019), filed July
26, 2019 (Doc. 92-2)(“Fischer Depo.”)); Combined
Reply ¶ III.b, at 4. Shortly after Evanston
Insurance received Ms. Bennett's report, Evanston
Insurance received several claims from individuals who once
were Desert State's clients that corroborated Ms.
Bennett's report. See Client Response ¶ 3,
at 3 (stating this fact)(citing Letter from Daniel Dougherty
Letter to Emily Lukes (dated June 30, 2017), filed July 26,
2019 (Doc. 92-3); Letter from Corbin Hildebrandt to Evanston
Insurance (dated May 25, 2017), filed July 26, 2019 (Doc.
92-4); Ayudando Guardians Inc., et al. v. Desert State
Life Mgmt., et al., No. D-202-cv-2017-03997, Complaint
for Damages Due to Negligence, Gross Negligence, Breach of
Fiduciary Duty, Fraud, Employee Dishonesty, Embezzlement,
Employee Misconduct, Unfair Practices Act Violations, and
Punitive Damages (Second Judicial District Court, County of
Bernalillo, State of New Mexico (filed in state court June 6,
2017), filed in federal court July 26, 2019)(Doc.
92-6)(“Ayudando Complaint”)); Combined Reply
¶ III, at 3-4 (not disputing this fact). In addition, at
least one lawsuit related to Donisthorpe's and Desert
State's conduct was filed. See Client Response
¶ 7, at 4 (stating this fact)(citing Ayudando
Complaint); Combined Reply ¶ III, at 3-4 (not disputing
this fact). Around the same time, Evanston Insurance hired
James H. Johansen, of Butt Thornton & Baehr P.C. to
provide a coverage opinion regarding the policy in relation
to the notice of circumstances that Ms. Bennett provided, and
the claims made against its insureds. See Client
Response ¶ 7, at 4 (stating this fact)(citing Fischer
Depo., 87:13-88:10; Plaintiff Evanston Insurance
Company's Second Amended Privilege Log at 3 (undated),
filed July 26, 2019 (Doc. 92-7)); Combined Reply ¶ III,
at 3-4 (not disputing this fact).
one month after it hired counsel to provide it with a
coverage opinion, on July 24, 2017, Evanston Insurance sent
Desert State a Notice of Nonrenewal of the Insurance Policy.
See Client Response ¶ 8, at 4 (stating this
fact)(citing Notice of Nonrenewal (dated July 24, 2017),
filed July 26, 2019 (Doc. 92-8)); Combined Reply ¶ III,
at 3-4 (not disputing this fact). Before issuing the Notice
of Nonrenewal to Desert State, Denise Butler, a Professional
Insurance Underwriter for Markel West Insurance Services, had
a discussion with a claims representative for Evanston
Insurance about rescinding the Insurance Policy. See
Client Response ¶ 9, at 4 (stating this fact)(citing
Deposition of Denise Butler at 51:11-18 (taken June 25,
2019), filed July 26, 2019 (Doc. 92-9)(“Butler
Depo.”)); id, at 53:18-54:25; Combined Reply
¶ III.d, at 4.Evanston Insurance took no action to
rescind the Insurance Policy or to notify its insureds that
it was considering rescinding the policy before its June 4,
2018, letter. See Client Response ¶ 10, at 4-5
(stating that Evanston Insurance took no “timely”
action to rescind its Insurance Policy or to notify its
insureds)(citing Butler Depo. 52:5-53:2); Combined
Reply ¶ III, at 3-4 (not disputing this fact).
on the statements that Donisthorpe made at his plea hearing,
Evanston Insurance formally concluded that Donisthorpe made
material misrepresentations on the Application. See
Client Response ¶ 12, at 4 (stating this fact)(citing
Letter to the Acting Receiver of Desert State Life Management
(dated June 4, 2018)), filed June 26, 2019 (Doc. 92-10);
Fischer Depo. at 75:24-76:6 & 101:22-102:11); Combined
Reply ¶ III, at 3-4 (not disputing this fact). Discovery
also revealed that Evanston Insurance does not have any
evidence or basis to believe that any of its insureds, aside
from Donisthorpe, committed fraud or participated in
Donisthorpe's scheme. See Client Response ¶
14, at 4 (stating this fact)(citing Fischer Depo. at
23:12-18; 50:2-11; 103:20-104:14); Combined Reply ¶ III,
at 3-4 (not disputing this fact). Donisthorpe is the only
insured under the policy that Evanston Insurance believes
made any material misrepresentations to Evanston Insurance.
See Client Response ¶ 16, at 4 (stating this
fact)(citing Fischer Depo. at 50:2-11; id. at
101:22-103:19); Combined Reply ¶ III, at 3-4 (not
disputing this fact).
4, 2018, Evanston Insurance offered to rescind the Insurance
Policy based on the material misrepresentations made in the
Application for the Insurance Policy and tendered to Desert
State the premium that Desert State paid for the Insurance
Policy plus interest. See MSJ at 9 (citing Letter
from James H. Johansen to the Acting Receiver of Desert State
Life Management at 2 (dated June 4, 2018), filed July 25,
2019 (Doc. 89-7)(“Letter”)).
Insurance filed its original complaint on July 10, 2018.
See Complaint for Rescission and Declaratory
Judgment, filed July 10, 2018 (Doc. 1). Evanston Insurance
has since filed three amended complaints to add and drop
Defendants -- most recently on February 15, 2019, when it
added Ascending Hope, LLC, CNRAG, Inc., and Decades, LLC, as
Defendants and dropped its claims against Ayudando Guardians,
Inc. See Third Amended Complaint for Rescission and
Declaratory Judgment, filed February 15, 2019 (Doc.
44)(“Third Complaint”). Evanston Insurance seeks
the Insurance Policy's rescission in Count I of the
Complaint. See Third Complaint ¶¶ 46-55,
at 10-11. In Count II, Evanston Insurance requests a
declaration that it has no duty to defend or indemnify claims
arising from Donisthorpe's actions. See Third
Complaint ¶¶ 56-59, at 10-11. Evanston Insurance
now moves for summary judgment on Counts I and II.
See MSJ at 16-17.
Insurance filed for summary judgment on July 25, 2019, and
first argues that the Defendants cannot meet their burden of
showing that they are insured under the Insurance Policy.
See MSJ at 10-11. Evanston Insurance notes that, in
New Mexico, the initial burden is on the insured to establish
coverage under insurance policies, see MSJ at 10,
and that a condition precedent to coverage under Policy
Agreement is that “prior to the effective date of this
Coverage Part the Insured had no knowledge of such Wrongful
act(s) or Personal Injury(ies) or any fact, circumstance,
situation, or incident, which may have led a reasonable
person in the Insured's position to conclude that a Claim
was likely, ” MSJ at 11. Evanston Insurance argues that
there is no coverage under the Insurance Policy, because it
is beyond serious debate that a fiduciary who has over the
course of several years stolen in excess of $4 million
dollars from his disabled clients was aware of Wrongful Acts,
facts, circumstances, situations and incidents which may have
led a reasonable person in the Insured's position to
conclude that a Claim was likely.
MSJ at 11.
Insurance next argues that the Insurance Policy's
Exclusion P, the misappropriation of funds exclusion,
see MSJ at 12-14, bars coverage. According to
Evanston Insurance, this exclusion bars coverage for any
claim “‘[b]ased upon or arising out of any
conversion, misappropriation, commingling or defalcation of
any funds or property.'” MSJ at 12 (quoting
Insurance Policy at 8). Evanston Insurance notes that
Donisthorpe's misappropriation is plainly evident.
See MSJ at 12. Evanston Insurance also argues that
courts interpret the term “‘arising out
of'” broadly in similar insurance policies. MSJ at
13-14 (quoting Insurance Policy at 8). In conclusion,
Evanston Insurance argues that the Client Complaint asserts a
conversion claim and that, because all other causes of action
“flow from Donisthorpe's looting of DSLM client
funds, ” the Client Complaint's claims are barred.
MSJ at 14.
Evanston Insurance argues that it is entitled to summary
judgment because the Insurance Policy is void ab initio.
See MSJ at 14-16. Evanston Insurance notes that, under
New Mexico law, contracts “can be rescinded when it is
discovered that during the formation of the contract,
information material to the contract was withheld or
misrepresented.” MSJ at 14. Evanston Insurance asserts
that it relied on misrepresentations that Donisthorpe made in
the Application. See MSJ at 15. It points
specifically to Donisthorpe indicating on the Application
that he was not aware of any fact, circumstance, situation,
incident or allegation of negligence or wrongdoing which
might afford grounds for any claim. See MSJ at 15.
Evanston Insurance argues that, in light of his subsequent
guilty plea, “the only possible conclusion is that
Donisthorpe withheld and/or misrepresented material
facts.” MSJ at 16.
The Client Response.
former Desert State clients filed a response to the MSJ on
August 8, 2019. The former clients argue first that the Court
should deny Evanston Insurance's MSJ for failure to
comply with D.N.M.L.R-Civ. 56.1(b). See Client
Response at 6-7. This rule requires that motions for summary
judgment include a list of separately numbered paragraphs
containing the undisputed facts and specific evidence
supporting each fact. See Client Response at 6. The
former clients argue that, because the Court has, in the
past, denied a pro se plaintiff's motion for summary
judgment because it did not follow this rule, the Court
should also deny Evanston Insurance's MSJ. See
Client Response at 7 (citing Foti v. Bernalillo Cty. New
Mexico, No. CIV 14-0667 JB/SMV, 2015 WL 1640445 (D.N.M.
Mar. 30, 2015)(Browning, J.)).
former Desert State clients attempt to rebut Evanston
Insurance's argument that the insured cannot establish
coverage under the policy in two different ways. First, they
argue that whether the insureds have satisfied the condition
precedent to coverage -- that prior to the effective date of
the Insurance Policy the insured had no knowledge of any
fact, circumstance, situation or incident, which may have led
a reasonable person to conclude that a claim was likely -- is
an entirely new claim, and that, because Evanston Insurance
raised the argument for the first time after the close of
discovery, the Court should reject it. See Client
Response at 7. The former clients note that the United States
Court of Appeals for the Tenth Circuit considers new
arguments made in motions for summary judgment as requests to
amend the complaint. See Client Response at 7. The
former clients argue that the Court must deny the condition
precedent argument where “‘a late shift in the
thrust of the case will prejudice the other party in
maintaining his defense upon the merits.'” Client
Response at 7-8 (quoting Evans v. McDonald's
Corp., 936 F.2d 1087, 1090-91 (10th Cir. 1991)). The
former clients apply Tenth Circuit precedent on the issue to
this case and argue that the new argument will unfairly
prejudice them, because “the window of opportunity for
the parties to conduct discovery has closed, and
Evanston's attempt to raise a new claim at this late
stage of proceedings is unjustified.” Client Response
the former clients dispute the merits of Evanston
Insurance's condition precedent argument. See
Client Response at 8-10. The former clients argue that,
contrary to Evanston Insurance's assertions, Donisthorpe
was not necessarily aware that what he was doing was a
“Wrongful Act” as the Insurance Policy defines
the term. See Client Response at 9. The former
clients argue that, because Evanston Insurance's
representative stated that Donisthorpe believed he could get
away with the fraud if he eventually replaced the money,
Donisthorpe's “knowledge and intent at the time he
engaged in the conduct at issue raises a question of fact
that should not be decided at summary judgment.” Client
Response at 9. Next, the former clients argue that, aside
from Donisthorpe, there is no evidence that any other insured
party participated or knew of the scheme. See Client
Response at 9. The former clients say this fact is
“critical, ” because the Insurance Policy
“does not have any express language that allows
Evanston to deny coverage to all insureds based on fraud
committed by one of them.” Client Response at 9. They
argue that the Insurance Policy also does not have language
permitting Evanston Insurance to impute the fraud of one
insured to other insureds and note that this omission proved
pivotal in a different case where Evanston Insurance
attempted to deny coverage based on an applicant's
fraudulent representations. See Client Response at
10 (citing Evanston Ins. Co. v. Watts, 52 F.Supp.3d
761, 769 (D.S.C. 2014)(Anderson, Jr., J)).
former clients next turn to Evanston Insurance's argument
that Exclusion P denies coverage and argue that the Exclusion
creates an ambiguity that must be resolved in favor of
coverage. See Client Response at 10-13. The former
clients note that there are no provisions in the Insurance
Policy or caselaw in New Mexico explaining how to interpret
“based upon or arising out of, ” Client Response
at 10-11, but in New Mexico, ambiguities must be resolved in
the insured's favor and in favor of coverage.
See Client Response at 11. They argue that their
claim against Desert State under the New Mexico Unfair Trade
Practices Act, N.M. Stat. Ann. §§ 57-12-1 through
57-12-24 (“NMUPA”), does not arise out of
Donisthorpe's fraud, because the claim alleges that
Desert Stated “billed for services and work as though
the services were professional and in the best interests of
Plaintiffs . . . when in fact professional services were not
performed competently or not performed at all, ” and
because it is possible to violate the NMUPA without
committing an intentional tort, like fraud. Client Response
11-12. They similarly argue that their claims against Ms.
Bennett for negligence, gross negligence, breach of fiduciary
duty, and for violating the Uniform Trust Code are not based
upon or arise out of Donisthorpe's actions. See
Client Response at 12. The former clients assert that, based
on New Mexico caselaw which suggests that an insured's
fraud should not void coverage for other insureds, “the
exclusionary language should only be read to bar coverage for
Donisthorpe and not for other insureds.” Client
Response at 12. The former clients argue that their case is
stronger, because there is no evidence that Ms. Bennett or
any other insured knew about Donisthorpe's scheme.
See Client Response at 12.
the former clients argue that insurance policy rescission is
not appropriate in this case, because Evanston Insurance
delayed for too long before attempting to rescind, and
because the innocent insured doctrine prevents
Donisthorpe's conduct from voiding his co-insureds'
interests. See Client Response at 13. In support of
their timeliness argument, the former clients note that,
under New Mexico law, parties seeking to rescind contracts
must promptly and immediately exercise this right.
See Client Response at 13. The former clients argue
that Evanston Insurance's delay in seeking rescission --
six months after Donisthorpe's guilty plea and fifteen
months after it first received notice of claims -- was
neither prompt nor immediate. See Client Response at
14. In support of their innocent insured argument, the former
clients point to New Mexico caselaw and a case from the
United States Court of Appeals for the Fourth Circuit which
hold that fraudulent claims by an insurance applicant do not
cancel coverage for innocent insureds. See Client
Response at 15 (citing Evanston Ins. Co. v. Agape Sr.
Primary Care, Inc., 636 Fed.Appx. 871, 876 (4th Cir.
2016)(unpublished)(per curiam); Delph v. Potomac Ins.
Co., 1980-NMSC-140, ¶ 14, 620 P.2d 1282).
The Moya Response.
Christopher Moya, the receiver for Desert State's
receivership estate, filed a response to the MSJ on August 8,
2019. See Moya Response at 1. Moya first argues that
the Court should deny summary judgment, because parties may
not make new claims in motions for summary judgment.
See Moya Response at 5-8. Moya argues that the Third
Complaint references “solely” the condition
precedent “in the context of allegations of
misrepresentation by DSLM, ” and “does not
instead allege DSLM's knowledge of some wrongful act or
personal injury as an independent grounds for denial.”
Moya Response at 5. Moya also asserts that this claim would
unfairly prejudice him, because discovery is complete,
dispositive motions have been filed, there is no opportunity
for Desert State to either move for summary judgment on this
claim or adequately defend itself from it, and trial is
scheduled soon. See Moya Response at 6.
issue, Moya argues in the alternative that the Court should
deny summary judgment, because Evanston Insurance has not
presented any admissible evidence that any person had
knowledge attributable to Desert State. See Moya
Response at 7. Moya notes that the MSJ merely states that
“‘it is beyond serious debate' that a
‘fiduciary' had knowledge of ‘Wrongful Acts,
facts, circumstances, situations and incidents which may
[have] led a reasonable person in the Insured's position
to conclude that a claim was likely.'” Moya
Response at 7 (quoting MSJ at 11). Further, Moya argues that,
to the extent that Evanston Insurance is referring to
Donisthorpe's knowledge here, Donisthorpe's actions
were criminal, not covered, and thus not likely to result in
a claim. See Moya Response at 7. Moya bolsters his
argument by pointing to New Mexico insurance caselaw's
doctrine of reasonable expectations, which suggests that
courts should interpret an insurance policy in the same way a
hypothetical reasonable insured would. See Moya
Response at 8. Moya argues that, with this reading, the
“provision would warrant that some knowledge other than
this criminal activity was known -- and not necessarily by
Mr. Donisthorpe. DSLM can only speculate on this point, and
Evanston cannot fairly demand DSLM to do so in defense of
this motion.” Moya Response at 8.
next argues that, contrary to Evanston Insurance's
assertions, Desert State's claims arise from wrongful
acts on the insureds' part. See Moya Response
9-11. He states that the Insurance Policy defines
“wrongful act” as a “negligent act, error
or omission in Specified Professional Services.” Moya
Response at 9. Moya says that it is undisputed that
Donisthorpe's actions were not wrongful acts under the
Insurance Policy, because they were intentional and criminal
rather than negligent. See Moya Response at 9. Moya
argues that, while claims based on Donisthorpe's actions
are excluded from coverage, the Insurance Policy does cover
the acts of others at Desert State. See Moya
Response at 10. Moya argues: “But for the errors and
omissions of [Ms. Bennett, Tom Rutherford, and Judy Mahar],
” “some, if not all, of the losses now claimed by
DSLM could have been avoided.” Moya Response at 10.
These individuals did not act intentionally, and Evanston
Insurance, he argues, has not found any evidence that any
other insured acted willfully, intentionally, or
deliberately. Moya Response at 11. Any further limitation of
fault, Moya asserts, is a factual issue that the Court may
not decide at this litigation stage.
Moya argues that the Court should deny summary judgment for
Evanston Insurance with respect to its reliance on the
Application's misrepresentations for two reasons. First,
Moya directs the Court to N.M. Stat. Ann. §
59A-18-11(A), which states: “The insured shall not be
bound by any statement made in an application for a policy
unless a copy of such application is attached to or endorsed
on the policy when issued as part thereof.” Moya
Response at 11. Moya then points to examples in other states
where courts have interpreted similar laws strictly against
insurers and asserts that the insurance broker which Evanston
Insurance used did not attach a copy of Donisthorpe's
Application to the issued policy. See Moya Response
at 12. Second, Moya argues that, because Evanston Insurance
has not offered any evidence that the misrepresentations in
Desert State's Application were material, Evanston
Insurance cannot win rescission at summary judgment based on
material misrepresentations. See Moya Response at
The Bennett Response.
Bennett, a former Desert State director, filed a response to
the MSJ on August 8, 2019. She first argues that the Court
should deny summary judgment for Evanston Insurance's
claims regarding the Application's materially false
representations, because Evanston Insurance's delay bars
rescission, and Ms. Bennett is an innocent insured.
See Bennett Response at 5. Ms. Bennett adopts the
arguments made in the Former Clients of Desert State Life
Management's Motion for Summary Judgment for Rescission
and Declaratory Judgment and Memorandum in Support Thereof,
filed July 26, 2019 (Doc. 92)(“Client MSJ”),
regarding both Evanston Insurance's delay in seeking
rescission and the innocent insured doctrine. See
Bennett Response at 6. On the innocent insured doctrine, Ms.
Bennett adds only that, because the adverse interest
exception prevents imputing an agent's knowledge to the
principal when the agent acts solely for his own benefit and
against the principal's interest, Donisthorpe's
knowledge should not be imputed to Desert State or to any
other insured party. See Bennett Response at 6-7.
Bennett next disputes Evanston Insurance's assertion that
Exclusion P bars her defense. See Bennett Response
at 7. She states that some of the claims against her are
“negligence and negligent supervision claims.”
Bennett Response at 10. Ms. Bennett cites three New York
cases suggesting that there is a duty to defend in similar
situations where the underlying complaint alleges negligence
or negligent supervision. See Bennett Response at
10-11 (discussing Watkins Glen Cent. Sch. Dist. V.
Nat'l Union Fire Ins. Co., 286 A.D.2d 48, 732
N.Y.S.2d 70 (N.Y.App.Div. 2001); Murphy v. Nutmeg Ins.
Co., 5 A.D.3d 358, 360, 773 N.Y.S.2d 413 (N.Y.App.Div.
2004); Gladstein & Isaac v. Phila. Indem. Ins.
Co., 82 A.D.3d 468, 468, 918 N.Y.S.2d 92 (N.Y.App.Div.
Bennett furthers disputes Evanston Insurance's Exclusion
P argument by analyzing the Insurance Policy's language.
See Bennett Response at 12-16. She cites several New
Mexico canons of insurance contract construction requiring,
among other things, that ambiguities in insurance policies be
construed against insurers, exclusionary clauses be narrowly
construed, and coverage clauses be broadly construed.
See Bennett Response at 8 (citing Sanchez v.
Herrera, 1989-NMSC-073, ¶ 2, 783 P.2d 465, 469;
Morton v. Great Am. Ins. Co., 1966-NMSC-206, ¶
9, 419 P.2d 239; Knowles v. United States Auto.
Ass'n, 1992-NMSC-030, ¶ 7, 832 P.2d 394, 396;
United Nuclear Corp v. Allstate Ins. Co.,
2012-NMSC-032, ¶ 15, 285 P.3d 644, 649). She then argues
that Exclusion J and Exclusion P of the Evanston Insurance
policy create an ambiguity that the Court must resolve in
favor of coverage. See Bennett Response at 9.
Exclusion J, she notes, is written more broadly to exclude
claims “based upon or arising out of, or in any way
involving” the underlying bad conduct. Bennett Response
at 12. She also notes that there is an exception to Exclusion
J that adds back coverage for claims based on vicarious
liability for “the conduct of another insured that
constitutes a willful violation of any Statutes or
Regulation.” Bennett Response at 12-13. Bennett argues
that this Exclusion expressly anticipates that some insureds
may be held vicariously liable for other insureds'
misconduct and restores coverage for them. See
Bennett Response at 13. She argues that “the existence
of these two provisions in the same insuring agreement
applicable to the same claims made by Former DSLM clients,
one of which provides coverage while the other excludes it,
creates an ambiguity in the policy which must be read in
favor of coverage for Bennett.” Bennett Response at 14.
Ms. Bennett argues that Exclusion J's language suggests
that it is a “specific provision which overrides the
general provision of Exclusion P, ” and that
“[a]ny other interpretation would render the Exclusion
J exception meaningless and contrary to settled principles of
insurance policy interpretation.” Bennett Response at
14. She supports her argument by asserting that this
interpretation “accords with the reasonable
expectations of the ordinary person, ” by reiterating
that Exclusion P is ambiguous when read cumulatively with
Exclusion J, and that Evanston Insurance has never alleged
that she engaged in any knowing or criminal behavior.
See Bennett Response at 15-16.
The Reply to Ms. Bennett.
Insurance filed a response to Ms. Bennett on August 22, 2019,
and argued, first, that agency law's adverse interest
exception does not apply to this case. See Reply to
Ms. Bennett at 5-8. Evanston Insurance notes that courts
using the adverse interest exception to prevent insurance
policy rescissions do so only in cases of fidelity insurance
policies -- and this Insurance Policy is not a fidelity
policy. See Reply to Ms. Bennett at 5. In further
support of its argument, Evanston Insurance directs the Court
to a case from the United States Court of Appeals for the
Second Circuit, which rejected a similar argument to Ms.
Bennett's, because “[a] principal may not disavow
the act of an agent while simultaneously taking advantage of
the benefits of the fraudulently procured bargain.”
Reply to Ms. Bennett at 6 (quoting Pereira v. Aetna Cas.
& Sur. Co., 186 F.3d 196, 207-08 (2d Cir. 1999), and
citing Restatement (Second) of Agency § 282 cmt. h)).
Finally, Evanston Insurance notes that the policy contains a
clear, unambiguous imputation clause that provides that
Donisthorpe's statements in the Application are imputed
to all insureds. See Reply to Ms. Bennett at 8.
Evanston Insurance argues that the Insurance Policy's
Exclusion J and Exclusion P do not create ambiguities. In
regard to Exclusion P, Evanston Insurance argues that courts
“across the country have overwhelmingly found that such
exclusions apply to both intentional and negligent conduct,
” and directs the Court to several such cases. Reply to
Ms. Bennett at 9-10.
Evanston Insurance argues that exceptions to policy
exclusions like the one in Exclusion J do “not create
coverage nor modify a separate stand-alone exclusion barring
coverage.” Reply to Ms. Bennett at 11. Further,
Evanston Insurance argues that the Insurance Policy is not
“rendered ambiguous simply because there is some
overlap in two policy exclusions.” Reply to Ms. Bennett
The Combined Reply.
Insurance filed a joint reply to Desert State's former
clients and to Moya on August 23, 2019. Evanston Insurance
first apologizes for failing to adhere to D.N.M.LR-Civ.
56.1(b), but noted that its evidence was either the Insurance
Policy or public records. See Combined Reply at 6.
It argues that denying its motion for failing to adhere to
D.N.M.LR-Civ. 56.1(b) “would exalt form over
substance.” Combined Reply at 6.
Insurance next dives into the substantive arguments. In
response to Moya and the former clients' arguments about
making a new claim, Evanston Insurance notes that its
“original complaint and every subsequent amended
complaint not only quoted the full text of the condition
precedent but also asserted that the failure to satisfy the
condition barred coverage” and argues that its briefs
satisfied the notice pleading requirement. Combined Reply at
Insurance then advances its argument that, because
Donisthorpe had knowledge of circumstances that could give
rise to claims, the other insureds cannot meet their burden
of establishing coverage under the second condition
precedent. See Combined Reply at 11. It first notes
that the Insurance Policy's definition of
“insured” includes “[a]ny past or current
principal, partner, officer, director, trustee or shareholder
of the Named Insured . . . solely while acting on behalf of
the Named Insured and within the scope of their
duties.” Combined Reply at 8. Evanston Insurance argues
that, because of the word “any” in the
definition, Donisthorpe's knowledge is imputed to the
rest of the insureds. See Combined Reply at 8-9. It
then argues that Moya's and the former clients'
argument that Donisthorpe had no knowledge of “Wrongful
Acts” under the policy “strains credulity,
” and “ignores the common-sense conclusion”
that, because Donisthorpe was aware of his embezzlement, his
colleagues were negligent in failing to discover it or
implement preventative controls. Combined Reply at 9. Of
Donisthorpe's knowledge, Evanston Insurance says that a
“reasonable person” aware of the same
circumstances “would conclude that a Claim was likely,
” and directs the Court to Tenth Circuit precedent
suggesting that the insureds' subjective belief is
irrelevant. Combined Reply at 10-11 (citing Cohen-Esrey
Real Estate Servs. v. Twin City Fire Ins. Co., 636 F.3d
1300, 1303, 1304 (10th Cir. 2011)). Evanston Insurance
concludes its Reply by arguing that the term “arising
out of” in Exclusion P is not ambiguous, and that
“it is beyond reasonable debate” that the
underlying claims arise out of Donisthorpe's illegal
commingling and misappropriation. Combined Reply at 12.
The Sept. 5, 2019, Hearing.
Court held a hearing on the MSJ and other motions on
September 5, 2019. See Clerk's Minutes at 1,
filed September 5, 2019 (Doc. 127). The Court quickly turned
to the MSJ and suggested that all parties address the
MSJ's three arguments sequentially. See
Transcript of Motion Hearing at 4:3-20 (Court)(taken
September 5, 2019), filed October 3, 2019 (Doc.
139)(“Tr.”). The Court then allowed Evanston
Insurance to make an opening statement. See Tr. at
Argument Regarding the Policy's Condition Precedent
Insurance began argument on the MSJ by discussing the
Insurance Policy's second condition precedent to
coverage, which conditions coverage on the insured having no
knowledge of wrongful acts that are likely to lead to a
claim. See Tr. at 5:16-6:16 (Borders). After the
Court asked Evanston Insurance how it could show that at
least some of the insureds did not have knowledge,
see Tr. at 6:4-7 (Court), Evanston Insurance argued
that the definition of “insured” suggests that it
means “any insured, ” which distinguishes it from
innocent insured cases, Tr. at 6:8-7:6 (Borders). Evanston
Insurance then cited Miller v. Monumental Life Ins.
Co., 761 F.Supp.2d 1123 (D.N.M. 2009)(Browning, J.), for
the proposition that excluding language in an insuring
agreement does not shift the burden of establishing coverage
to the insurance company. See Tr. at 7:7-8:8
(Borders). It then argued that Donisthorpe cannot show that
he did not know about circumstances likely to lead to claims
under the Insurance Policy, see Tr. at 8:20-9:6
(Borders), and directed the Court to
Copeland-Williams, for further proof, see
Tr. at 9:7-18 (Borders).
then argued in opposition to Evanston Insurance's
position. See Tr. at 10:20-25 (Court, Rubin). Moya
first argued that “the so-called condition
precedent” is a new argument. Tr. at 11:6-7 (Rubin).
See Tr. at 11:4-12:10 (Rubin). He noted that
“there was mention of negligence in the application,
not in the policy, ” and that the Court cannot conflate
the two documents. Tr. at 16:3-4 (Rubin). After the Court
asked about the Insurance Policy's language, see
Tr. at 12:19-21 (Court), Moya stated that there are not
enough facts before the Court to decide who had what
knowledge, see Tr. at 13:6-8. Moya then cited
Redux, Ltd. v. Commercial Union Insurance Co., 1995
WL 88251 (D. Kan. Feb. 7, 1995)(Lungstrum, J.), to argue
that, under the Insurance Policy's language, the burden
to show knowledge shifts to the insurance company.
See Tr. at 13:23-14:23 (Rubin).
Bennett then argued in response to Evanston Insurance.
See Tr. at 16:17-18 (Court, Sanders). She first read
the Insurance Policy's definition of
“insured” to the Court. See Tr. at
16:22-17:15 (Sanders). Pressed on how Evanston
Insurance's arguments fail, Ms. Bennett pointed to the
phrase “[t]he Company shall pay on behalf of the
Insured . . . ” in the Insuring Agreement's first
line as evidence that the Court should not read “the
Insured” as “any Insured.” Tr. at 18:8-20:8
(Sanders, Court). Ms. Bennett then noted that Exclusion J
uses both “the Insured” and “any Insured,
” which she argued is evidence that “every time
the word ‘insured' is used in the policy, it
doesn't mean everybody all together.” Tr. at
20:25-21:7 (Sanders). In response to a question from the
Court about cases supporting and opposing her reading of
“insured, ” Ms. Bennett stated that cases
involving a duty of good faith and fair dealing support her
reading, and that she does not recall seeing any supporting
Evanston Insurance's reading. See Tr. at
former Desert State clients then argued in response to
Evanston Insurance. See Tr. at 24:3-4 (Court,
Davis). The former clients first argued that the Court should
dismiss the motion for failing to follow D.N.M.LR-Civ.
56.1(b). See Tr. at 23:5-25:21 (Davis). On
“the actual dispute, ” Tr. at 25:23 (Davis), the
former clients argued that Evanston Insurance is presenting a
new claim, because Evanston Insurance never took the position
that Insurance Policy creates a condition precedent. Tr. at
25:22-26:10 (Davis). They noted that the Insurance Policy
explicitly states certain conditions precedent to coverage
and thus “Evanston clearly knows how to create a
condition precedent to coverage if they wanted to do
so.” Tr. at 26:11-13 (Davis). After expressing
agreement with the other Defendants' arguments on this
subject, the former clients then argued that the innocent
insured doctrine should apply to this situation for public
policy reasons, because other courts have applied the
doctrine in similar circumstances with ambiguous insurance
policies. See Tr. at 26:25-27:16 (Davis). The former
clients cited Stettin v. Nat'l Union Fire Ins. Co. of
Pittsburgh, Pa., 861 F.3d 1335 (11th Cir. 2017), as the
case most supportive of their argument. See Tr. at
27:17-28:17 (Court, Davis).
Insurance then rebutted the responses of Moya, Bennett, and
the former Desert State clients. See Tr. at 28:22
(Borders). Evanston Insurance first discussed two cases that
it said supported its interpretation of the Policy.
See Tr. at 29:13-30:16 (Borders)(citing
Copeland-Williams and Am. Nat'l Prop. &
Cas. Co. v. Clendenen, 238 W.Va. 249, 264 n.12 (W.Va.
2016))(Borders). The Court asked when the Insurance Policy
would ever pay off if Evanston Insurance's reading is
correct, see Tr. at 31:6-8 (Court), and Evanston
Insurance stated it would pay off “all the time,
” because, although the Insurance Policy does not cover
theft, like a fidelity policy, it covers negligent
investments. Tr. at 31:9 (Borders). See Tr. at
31:10-32:10 (Borders). As to Exclusion J's language,
Evanston Insurance argued that its choice of words
“distinguish that for purposes of criminal or
intentional wrongful acts that one insured's conduct
isn't going to be imputed to another[.]” Tr. at
33:7-9. In rebutting Moya's argument that there are not
enough facts regarding the insureds' knowledge to support
summary judgment, Evanston Insurance cited Thames v.
Evanston Ins. Co., No. 13-CV-425-PJC, 2015 WL 7272214
(N.D. Okla. Nov. 17, 2015)(Clear, Mag. J.), to show that,
comparatively, the parties have more than enough information
about Doninsthorpe's knowledge. See Tr. at
32:24-33:24 (Borders). Evanston Insurance then apologized for
not numbering its facts, but noted that all “were
either a matter of public record and I believe one letter
that one of the other parties submitted in their
evidence.” Tr. at 34:3-6. It then stated that its
argument on the condition precedent to coverage was not new,
but that the briefing “was clear from the get-go that
this is one of the bases for denial of coverage.” Tr.
at 35:12-14. Next, Evanston Insurance distinguished the cases
Moya cites regarding the burden of proof. See Tr. at
36:23-37:15 (Borders). Finally, Evanston Insurance argued
that the innocent insured doctrine is largely specific to
arson and does not apply to unambiguous insurance policies.
See Tr. at 37:16-38:9 (Borders).
Argument Regarding Exclusion P's
Insurance then turned to its argument that Exclusion P bars
coverage under the Policy. See Tr. at 38:18
(Borders). It argued that the Insurance Policy is not
ambiguous and that “courts across the country reading
this exact same language” have agreed that the language
is not ambiguous. Tr. at 39:5-6 (Borders). Evanston Insurance
then discussed these cases. See Tr. at 39:7-44:2
(Borders)(discussing BancInsure, Inc. v. F.D.I.C.,
796 F.3d 1226, 1239 (10th Cir. 2015); Am. Nat'l Prop.
& Cas. Co. v. United Specialty Ins. Co., 592
Fed.Appx. 730 (10th Cir. 2014)(unpublished); Bethel
v. Darwin Select Ins. Co., 735 F.3d 1035 (8th Cir.
2013); Murray v. Greenwich Ins. Co., 533 F.3d 644
(8th Cir. 2008); Johnson v. Atl. Cas. Ins. Co., No.
13-CV-1002S, 2015 WL 5021953 (W.D.N.Y. Aug. 24,
2015)(Skretny, J.); Nationwide Mut. Ins. Co. v. The
Overlook, LLC, 785 F.Supp.2d 502 (E.D. Va.
2011)(Davis, J.); and Am. Family Mut. Ins. Co. v. Am.
Girl, Inc., 673 N.W.2d 65 (2004)).
responded to Evanston Insurance by first arguing that the
Court does not have sufficient facts before it to decide the
issue on summary judgment. See Tr. at 44:16-45:15
(Rubin). After conceding that Donisthorpe's plea
agreement and plea colloquy were under oath, see Tr.
at 46:5-7 (Rubin), Moya argued that his submitted affidavit
nevertheless creates factual disputes, see Tr. at
Bennett responded to Evanston Insurance by discussing the
adverse interest exception. See Tr. at 47:1-11. Ms.
Bennett argued that Donisthorpe's actions “were
certainly for his own benefit” and “not for the
benefit of DSLM, ” because lying on the insurance
Application “would be leading DSLM to a result of
having no insurance.” Tr. at 48:3-9 (Sanders). Ms.
Bennett further argued that Exclusion P does not apply to
her, because “Evanston has not fulfilled its burden of
proof to justify summary judgment being granted pursuant to
Exclusion P because there are no facts presented to the Court
that she herself has engaged in any conversion,
misappropriation, commingling, or the defalcation of funds or
property.” Tr. at 48:25-49:5 (Sanders). She then argued
that Exclusion P is ambiguous when read next to Exclusion J.
See Tr. at 50:2-51:3 (Sanders). In response to the
Court, Bennett cited Watkins Glen Central School District
v. National Union Fire Insurance Co., and Murphy v.
Nutmeg Insurance Co., as cases that courts decided
differently than the many cases Evanston Insurance cite.
See Tr. at 51:25-53:17 (Sanders). Ms. Bennett
concluded by arguing that the claims against her do not arise
from “any alleged commingling, ” Tr. at 53:17
(Sanders), and that New Mexico principles of insurance
contract interpretation require Courts to read coverage
provisions broadly and exclusion provisions narrowly,
see Tr. at 53:18-54:1 (Sanders).
former clients began their response to Evanston Insurance by
joining Moya and Ms. Bennett's arguments. See
Tr. at 54:9-10 (Davis). Next, the former clients argued that
“the facts before the Court do not allow that sort of
imputation of wrongdoing from Mr. Donisthorpe to the other
insureds under the policy.” Tr. at 55:7-9 (Davis). They
pointed to Evanston Insurance's concession in its MSJ
that there are no New Mexico cases interpreting the phrase
“based upon or arising out of, ” and argued that,
as a result, the language “must be construed here and
it must be construed in favor of the coverage and in favor of
the insureds.” Tr. at 56:4-6 (Davis).
Insurance responded first to Ms. Bennett, and it argued that
the cases that she cites are inapposite, because they
interpret different policy exclusions. See Tr. at
56:15-57:4 (Borders). Evanston Insurance then cited
Northland Ins. Co. v. Stewart Title & Guar. Co.,
327 F.3d 448, 451 (6th Cir. 2003), as a more applicable case,
see Tr. at 57:4-58:10 (Borders), and it argued that
the negligence claims against Ms. Bennett arise from
Donisthorpe's commingling, see Tr. at 58:11-59:2
(Borders). Evanston Insurance then argued that Ms.
Bennett's adverse interest exception argument does not
address its argument concerning Exclusion P. See Tr.
at 59:3-59:16 (Borders). On the Moya Affidavit, Evanston
Insurance argued that it stated legal conclusions and that it
would soon move to strike it. See Tr. at 59:22-60:8
(Borders). Evanston Insurance concluded its argument on this
topic by clarifying that, while no New Mexico court had
interpreted “arising out of” or “based
upon” in the context of a similar exclusion, the Tenth
Circuit had discussed what the language meant in other
circumstances, and the Court should follow its guidance.
See Tr. at 60:20-61:14 (Borders).
Argument Regarding the Timeliness of
Insurance then addressed its third argument: that the policy
is void ab initio, because Donisthorpe made
misrepresentations in the Application. See Tr. at
61:17. It began by arguing that the innocent insured doctrine
does not apply here, because the Insurance Policy has
language that imputes one insured's knowledge to others.
See Tr. at 61:17-62:16 (Borders). It then discussed
the application attachment process it generally follows and
noted that Desert State's agent failed to attach a copy
of the application. See Tr. at 62:17-63:7 (Borders).
Evanston Insurance argued that, because the fault is Desert
State's, the Defendants' attachment arguments are
“simply a red herring.” Tr. at 64:15 (Borders).
Evanston Insurance next discussed the timeliness of its
decision to rescind, and it first argued that it could not
rescind based merely on allegations of wrongdoing.
See Tr. at 64:16-24 (Borders). Evanston Insurance
stated that it first learned of Donisthorpe's
misrepresentation “in December of . . . 2017.”
Tr. at 64:4 (Borders). It then noted that, under New Mexico
law, a party asserting waiver has the burden of establishing
it, and that courts “should not infer waiver from
doubtful or dubious acts.” Tr. at 65:20-21 (Borders).
Evanston Insurance argued that the two cases on which the
former Desert State clients rely did not support a rescission
waiver here, because “we took no action that would give
anyone a clear indication that we intended to waive our
policy defenses, ” and because “we tendered the
consideration.” Tr. at 67:3-5 (Borders); id.
at 67:11-12 (Borders). Next, it argued that “the only
other argument they can possibly have” is that Evanston
Insurance is estopped from rescinding the policy, Tr. at
67:14-15 (Borders), and that law from New Mexico and other
states in the Tenth Circuit do not permit creating coverage
by estoppel, see Tr. at 67:16-68:13 (Borders).
Evanston Insurance argued that courts apply the adverse
interest exception only in cases where theft or embezzlement
is the risk against which the Insurance Policy insures.
See Tr. at 69:14-70:13 (citing Everest Nat'l
Ins. Co. v. Tri-State Bancshares, Inc., 2016 WL 5062155
(W.D. La. Aug. 2, 2016)(Foote, J.)). Further, Evanston
Insurance cited Pereira v. Aetna Cas. & Sur.
Co., 186 F.3d 196, for the holding that a
“principal may not disavow an act of an agent while
simultaneously taking advantage of the benefits of the
fraudulently procured bargain.” Tr. at 72:5-8
(Borders)(quoting 186 F.3d at 208). Evanston Insurance
concluded by citing Bird v. Penn. Cent. Co., 341
F.Supp 291 (E.D. Pa. 1972)(Lord, III, C.J.), for the same
holding. See Tr. at 72:25-73:7 (Borders).
responded first by arguing that, while the New Mexico law
governing attachment of insurance policies is ambiguous, it
applies to Evanston Insurance, and Evanston Insurance never
supplied a copy of the Insurance Policy. See Tr. at
74:9-74:20 (Rubin). Moya then argued that the Insurance
Policy was a new policy rather than a renewal and that the
Court should “look at substance over form on that
point.” Tr. at 75:11-12 (Rubin). Moya concluded by
reiterating that there are no facts on the record showing
that there was any misrepresentation on the Application.
See Tr. at 75:13-76:2 (Rubin).
Bennett first apologized for discussing the adverse interest
exception earlier in the hearing and said that the arguments
she raised earlier applies here. See Tr. at
76:24-77:5 (Sanders). Ms. Bennett then directed the Court to
Everest National Insurance Co. v. Tri-State Bancshares,
Inc., 2016 WL 5062155, and BancInsure, Inc. v.
F.D.I.C., 796 F.3d at 1239, which held that the adverse
interest exception applied against an insurance company's
claim for rescission. See Tr. at 77:6-78:18
(Sanders). Bennett then noted that the cited case was decided
in part on public policy grounds and predicted that New
Mexico's public policy would allow the adverse interest
exception to apply here. See Tr. at 78:19-79:8
(Sanders). Next, Ms. Bennett argued that Evanston Insurance
would still be attempting to rescind the contract if Ms.
Bennett, rather than Donisthorpe, had filled out the
Application and that “the Court should not condone that
kind of an argument.” Tr. at 80:5-7 (Sanders). Finally,
Ms. Bennett cited Puget Sound National Bank v. St. Paul
Fire and Marine Insurance Co., 645 P.2d 1122
(Wash.Ct.App. 1982), where an insured successfully asserted
the adverse interest exception against the insurer.
See Tr. at 80:8-16 (Sanders).
former clients began by clarifying that they are not
attempting to seek a waiver to create coverage. See
Tr. at 80:24-81:5 (Davis). They then provided a timeline,
based on facts learned from discovery, that describes when
Evanston Insurance learned about Donisthorpe's fraud.
See Tr. at 81:17-83:5 (Davis). After discussing
Evanston Insurance's “cavalier attitude toward
their discovery obligations, ” Tr. at 83:23-24 (Davis),
and the Court's comments at the February Motion to
Dismiss hearing, see Tr. at 84:8-19 (Davis), the
former clients argued that the record became worse for the
plaintiff during discovery, see Tr. at 84:20-85:18
(Davis). The former clients then turned to N.M. Stat. Ann.
§ 59A-18-11 and argued that the statute's first
sentence concerns when an Application's statement binds
an insured, while the statute's second two sentences
discuss whether the application itself is admissible.
See Tr. at 86:1-87:7 (Davis). Desert State's
former clients concluded by arguing that the insurance
application was not admissible under the law. See
Tr. at 87:8-20 (Davis).
Court then allowed Evanston Insurance to make any final
argument. See Tr. at 87:23-25 (Court). Evanston
Insurance began by stating that Donisthorpe
“certainly” had knowledge about his lie on the
application. Tr. at 88:17 (Borders). It then stated that New
Mexico law allows for rescission regardless whether a
misrepresentation is innocent. See Tr. at 88:19-89:7
(Borders). Evanston Insurance next argued that the public
policy considerations Ms. Bennett discussed apply to fidelity
coverage for embezzlement and not to the Insurance Policy
here. See Tr. at 89:8-85:2 (Borders). It then stated
that the Insurance Policy's language is unambiguous: the
representations of Donisthorpe are Ms. Bennett's
representations too, regardless whether she read it.
See Tr. 85:3-90:1 (Borders). Evanston Insurance
concluded the hearing by expressing sympathy for
Donisthorpe's fraud's victims but stated that
“the type of insurance coverage that was provided by
this policy doesn't cover” their claims. Tr. at
REGARDING SUMMARY JUDGMENT
56(a) of the Federal Rules of Civil Procedure states:
“The court shall grant summary judgment if the movant
shows that there is no genuine dispute as to any material
fact and the movant is entitled to judgment as a matter of
law.” Fed.R.Civ.P. 56(a). “The movant bears the
initial burden of ‘show[ing] that there is an absence
of evidence to support the nonmoving party's
case.'” Herrera v. Santa Fe Pub. Sch., 956
F.Supp.2d 1191, 1221 (D.N.M. 2013)(Browning, J.) (quoting
Bacchus Indus., Inc. v. Arvin Indus., Inc., 939 F.2d
887, 891 (10th Cir. 1991)(alteration in Herrera v. Santa
Fe Pub. Sch.)). See Celotex Corp. v. Catrett,
477 U.S. 317, 323 (1986)(“Celotex”).
Before the court can rule on a party's motion for summary
judgment, the moving party must satisfy its burden of
production in one of two ways: by putting evidence into the
record that affirmatively disproves an element of the
nonmoving party's case, or by directing the
court's attention to the fact that the non-moving party
lacks evidence on an element of its claim, “since a
complete failure of proof concerning an essential element of
the nonmoving party's case necessarily renders all other
facts immaterial.” Celotex, 477 U.S. at
323-25. On those issues for which it bears the burden of
proof at trial, the nonmovant “must go beyond the
pleadings and designate specific facts to make a showing
sufficient to establish the existence of an element essential
to his case in order to survive summary judgment.”
Cardoso v. Calbone, 490 F.3d 1194, 1197 (10th Cir.
2007)(internal quotations and brackets omitted).
Plustwik v. Voss of Nor. ASA, No. 2:11CV00757 DS,
2013 WL 1945082, at *1 (D. Utah May 9, 2013)(Sam,
J.)(emphasis added). “If the moving party will
bear the burden of persuasion at trial, that party must
support its motion with credible evidence -- using any of the
materials specified in Rule 56(c) -- that would entitle it to
a directed verdict if not controverted at trial.”
Celotex, 477 U.S. at 331 (Brennan, J.,
dissenting)(emphasis in original). Once the movant meets
this burden, rule 56 requires the nonmoving party to
designate specific facts showing that there is a genuine
issue for trial. See Celotex, 477 U.S. at 324;
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256
(1986)(“Liberty Lobby”). In American
Mechanical Solutions, LLC v. Northland Piping, Inc., 184
F.Supp.3d 1030 (D.N.M. 2016)(Browning, J.), the Court granted
summary judgment for the defendant when the plaintiff did not
offer expert evidence supporting causation or proximate
causation in its breach-of-contract or
See 184 F.Supp.3d at 1075-78. The Court reasoned
that the plaintiff could prove neither the breach-of-contract
claim's causation requirement nor the
proximate-causation requirement with mere common knowledge,
and so New Mexico law required that the plaintiff bolster its
arguments with expert testimony, which the plaintiff had not
provided. See 184 F.Supp.3d at 1067, 1073, 1075,
1079. The Court determined that, without the requisite
evidence, the plaintiff failed to prove “an essential
element of the nonmoving party's case, ” rendering
“all other facts immaterial.” 184 F.Supp.3d at
1075 (internal quotation marks omitted)(quoting Plustwik
v. Voss of Nor. ASA, 2013 WL 1945082, at *1). Thus, if a
plaintiff has the burden of proof, and the plaintiff has no
competent evidence, the defendant may move, without any
competent evidence itself, past the plaintiff's lack of
competent evidence, and secure summary judgment.
See, e.g., Celotex, 477 U.S. at
323-25 (providing that summary judgment is proper where a
plaintiff lacks evidence on an essential element of its
case); Am. Mech. Sols., LLC v. Northland Piping,
Inc., 184 F.Supp.3d at 1075 (granting summary judgment
because plaintiff lacked evidence on causation); Morales
v. E.D. Entyre & Co., 382 F.Supp.2d 1252, 1272
(D.N.M. 2005)(Browning, J.)(granting summary judgment because
plaintiff lacked competent evidence that defendants
defectively manufactured an oil distributor). A conclusory
assertion that the plaintiff lacks evidence is insufficient,
however, to secure summary judgment; the defendant must make
some evidentiary showing that the plaintiff lacks competent
evidence. See Halley v. Huckaby, 902 F.3d 1136, 1143
(10th Cir. 2018)(stating that summary judgment may be
warranted if the movant notes a lack of evidence for an
essential element of the claim). See also 11 James
Wm. Moore et al., Moore's Federal Practice
§ 56.40[b][iv], at 56-109 to -111 (3d ed. 2018).
party opposing a motion for summary judgment must “set
forth specific facts showing that there is a genuine issue
for trial as to those dispositive matters for which it
carries the burden of proof.” Applied Genetics
Int'l, Inc. v. First Affiliated Sec., Inc., 912 F.2d
1238, 1241 (10th Cir. 1990). See Vitkus v. Beatrice
Co., 11 F.3d 1535, 1539 (10th Cir. 1993)(“However,
the nonmoving party may not rest on its pleadings but must
set forth specific facts showing that there is a genuine
issue for trial as to those dispositive matters for which it
carries the burden of proof.” (internal quotation marks
omitted)). Rule 56(c)(1) provides: “A party asserting
that a fact . . . is genuinely disputed must support the
assertion by . . . citing to particular parts of materials in
the record, including depositions, documents, electronically
stored information, affidavits or declarations, stipulations
(including those made for purposes of the motion only),
admissions, interrogatory answers, or other materials . . .
.” Fed.R.Civ.P. 56(c)(1)(A). It is not enough for the
party opposing a properly supported motion for summary
judgment to “rest on mere allegations or denials of his
pleadings.” Liberty Lobby, 477 U.S. at 259.
See Abercrombie v. City of Catoosa, 896 F.2d 1228,
1231 (10th Cir. 1990); Otteson v. United States, 622
F.2d 516, 519 (10th Cir. 1980)(“[O]nce a properly
supported summary judgment motion is made, the opposing party
may not rest on the allegations contained in his complaint,
but must respond with specific facts showing the existence of
a genuine factual issue to be tried.” (citation and
internal quotation marks omitted)).
a party “avoid summary judgment by repeating conclusory
opinions, allegations unsupported by specific facts, or
speculation.” Colony Nat'l Ins. v. Omer,
No. 07-2123-JAR, 2008 WL 2309005, at *1 (D. Kan. June 2,
2008)(Robinson, J.)(citing Fed.R.Civ.P. 56(e); Argo v.
Blue Cross & Blue Shield of Kan., Inc., 452 F.3d
1193, 1199 (10th Cir. 2006)(McConnell, J.)). “In
responding to a motion for summary judgment, ‘a party
cannot rest on ignorance of facts, on speculation, or on
suspicion and may not escape summary judgment in the mere
hope that something will turn up at trial.'”
Colony Nat'l Ins. v. Omer, 2008 WL 2309005, at
*1 (quoting Conaway v. Smith, 853 F.2d 789, 794
(10th Cir. 1988)).
a motion for summary judgment, genuine factual issues must
exist that “can be resolved only by a finder of fact
because they may reasonably be resolved in favor of either
party.” Liberty Lobby, 477 U.S. at 250. A mere
“scintilla” of evidence will not avoid summary
judgment. Vitkus v. Beatrice Co., 11 F.3d at 1539
(citing Liberty Lobby, 477 U.S. at 248). Rather,
there must be sufficient evidence on which the fact finder
could reasonably find for the nonmoving party. See
Liberty Lobby, 477 U.S. at 251 (quoting Schuylkill
& Dauphin Improvement Co. v. Munson, 81 U.S. (14
Wall.) 442, 448 (1871)(“Schuylkill”));
Vitkus v. Beatrice Co., 11 F.3d at 1539.
“[T]here is no issue for trial unless there is
sufficient evidence favoring the nonmoving party for a jury
to return a verdict for that party. If the evidence is merely
colorable or is not significantly probative, summary judgment
may be granted.” Liberty Lobby, 477 U.S. at
249 (citations omitted). Where a rational trier of fact,
considering the record as a whole, cannot find for the
nonmoving party, “there is no ‘genuine issue for
trial.'” Matsushita Elec. Indus. Co. v. Zenith
Radio Corp., 475 U.S. 574, 587 (1986)(quoting First
Nat'l Bank of Ariz. v. Cities Serv. Co., 391 U.S.
253, 289 (1968)).
reviewing a motion for summary judgment, the court should
keep in mind certain principles. First, the court's role
is not to weigh the evidence but to assess the threshold
issue whether a genuine issue exists as to material facts
requiring a trial. See Liberty Lobby, 477 U.S. at
249. Second, the ultimate standard of proof is relevant for
purposes of ruling on a summary judgment, such that, when
ruling on a summary judgment motion, the court must
“bear in mind the actual quantum and quality of proof
necessary to support liability.” Liberty
Lobby, 477 U.S. at 254. Third, the court must resolve
all reasonable inferences and doubts in the nonmoving
party's favor and construe all evidence in the light most
favorable to the nonmoving party. See Hunt v.
Cromartie, 526 U.S. 541, 550-55 (1999); Liberty
Lobby, 477 U.S. at 255 (“The evidence of the
non-movant is to be believed, and all justifiable inferences
are to be drawn in his favor.” (citation omitted)).
Fourth, the court cannot decide any issues of credibility.
See Liberty Lobby, 477 U.S. at 255.
are, however, limited circumstances in which the court may
disregard a party's version of the facts. This doctrine
developed most robustly in the qualified immunity arena. In
Scott v. Harris, 550 U.S. 372 (2007), the Supreme
Court of the United States concluded that summary judgment is
appropriate where video evidence quite clearly contradicted
the plaintiff's version of the facts. See 550
U.S. at 378-81. The Supreme Court explained:
At the summary judgment stage, facts must be viewed in the
light most favorable to the nonmoving party only if there is
a “genuine” dispute as to those facts. Fed. Rule
Civ. Proc. 56(c). As we have emphasized, “[w]hen the
moving party has carried its burden under Rule 56(c), its
opponent must do more than simply show that there is some
metaphysical doubt as to the material facts . . . . Where the
record taken as a whole could not lead a rational trier of
fact to find for the nonmoving party, there is no
‘genuine issue for trial.'” Matsushita
Elec. Industrial Co. v. Zenith Radio Corp., 475 U.S.
[at] 586-587 . . . (footnote omitted). “[T]he mere
existence of some alleged factual dispute between
the parties will not defeat an otherwise properly supported
motion for summary judgment; the requirement is that there be
no genuine issue of material fact.”
Anderson v. Liberty Lobby, Inc., 477 U.S. [at]
247-248 . . . . When opposing parties tell two different
stories, one of which is blatantly contradicted by the
record, so that no reasonable jury could believe it, a court
should not adopt that version of the facts for purposes of
ruling on a motion for summary judgment.
That was the case here with regard to the factual issue
whether respondent was driving in such fashion as to endanger
human life. Respondent's version of events is so utterly
discredited by the record that no reasonable jury could have
believed him. The Court of Appeals should not have relied on
such visible fiction; it should have viewed the facts in the
light depicted by the videotape.
Scott v. Harris, 550 U.S. at 380-81 (alterations in
Scott v. Harris)(emphasis in Liberty
Tenth Circuit applied this doctrine in Thomson v. Salt
Lake County, 584 F.3d 1304 (10th Cir. 2009), and
[B]ecause at summary judgment we are beyond the pleading
phase of the litigation, a plaintiff's version of the
facts must find support in the record: more specifically,
“[a]s with any motion for summary judgment,
‘[w]hen opposing parties tell two different stories,
one of which is blatantly contradicted by the record, so that
no reasonable jury could believe it, a court should not adopt
that version of the facts[.]'” York v. City of
Las Cruces, 523 F.3d 1205, 1210 (10th Cir. 2008)(quoting
Scott, 550 U.S. at 380); see also Estate of
Larsen ex rel. Sturdivan v. Murr, 511 F.3d 1255, 1258
(10th Cir. 2008).
Thomson v. Salt Lake Cty., 584 F.3d at 1312 (second
alteration in Thomson v. Salt Lake Cty., third and
fourth alterations in York v. City of Las Cruces).
“The Tenth Circuit, in Rhoads v. Miller, [352
Fed.Appx. 289 (10th Cir. 2009)] explained that the blatant
contradictions of the record must be supported by more than
other witnesses' testimony.” Lymon v. Aramark
Corp., 728 F.Supp.2d 1222, 1249 (D.N.M. 2010)(Browning,
J.), aff'd, 499 Fed.Appx. 771 (10th Cir. 2012).
allege a claim for relief, rule 8 of the Federal Rules of