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Evanston Insurance Co. v. Desert State Life Management

United States District Court, D. New Mexico

January 16, 2020

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.

          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., Attorney for Defendant Helen Bennett

          Paul J. Kennedy Kennedy, Hernandez & Associates, P.C., 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., 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 Attorneys for the United States of America

          MEMORANDUM OPINION AND ORDER

         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 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).[22]

         The 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, [23] Corazon Cattle Co., LLC, [24] Corazon-Pitchford, [25] 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, at 31-32.

         2. The Insurance Policy Between Desert State and Evanston Insurance.

         On 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”)).[26] 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?

         MSJ at 5-6 (stating this fact)(quoting Application at 3); Bennett Response at 3.[27] 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 provision,

         By reason of:

1. A Wrongful Act; or
2. A Personal Injury;

         In the 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.

         MSJ at 7 (quoting Insurance Policy at 15).[28] 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).[29]

         3. The Investigations into Donisthorpe and Desert State.

         Evanston 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.[30] 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.[31] 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).

         Approximately 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.[32]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);[33] Combined Reply ¶ III, at 3-4 (not disputing this fact).

         Based 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).

         On June 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”)).[34]

         PROCEDURAL BACKGROUND

         Evanston 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.

         1. The MSJ

         Evanston 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.

         Evanston 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.

         Finally, 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.

         2. The Client Response.

         Several 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.)).

         The 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 at 8.

         Second, 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)).

         The 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.

         Last, 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).

         3. The Moya Response.

         Defendant 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.

         On this 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.

         Moya 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.

         Finally, 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 13.

         4. The Bennett Response.

         Ms. 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.

         Ms. 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. 2001)).

         Ms. 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.

         5. The Reply to Ms. Bennett.

         Evanston 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.

         Next, 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.

         Last, 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 at 12.

         6. The Combined Reply.

         Evanston 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.

         Evanston 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 7.

         Evanston 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.

         7. The Sept. 5, 2019, Hearing.

         The 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 4:20-22 (Court).

         a. Argument Regarding the Policy's Condition Precedent to Coverage.

         Evanston 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).

         Moya 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).

         Ms. 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 22:3-23:10 (Sanders).

         The 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).

         Evanston 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).

         b. Argument Regarding Exclusion P's Applicability.

         Evanston 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)[35]; 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)).

         Moya 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 46:11-20.

         Ms. 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).

         The 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).

         Evanston 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).

         c. Argument Regarding the Timeliness of Rescission.

         Evanston 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).

         Moya 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).

         Ms. 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).

         The 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).

         The 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 90:20-21 (Borders).

         LAW REGARDING SUMMARY JUDGMENT

         Rule 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).[36] 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 breach-of-the-implied-warranty-of-merchantability claims. 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 breach-of-the-implied-warranty-of-merchantability claim's 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[1][b][iv], at 56-109 to -111 (3d ed. 2018).

         The 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)).

         Nor can 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)).

         To deny 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)).

         When 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.

         There 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 Lobby).

         The Tenth Circuit applied this doctrine in Thomson v. Salt Lake County, 584 F.3d 1304 (10th Cir. 2009), and explained:

[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).

         To allege a claim for relief, rule 8 of the Federal Rules of Civil ...


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