Troutman Sanders Wins Insurance Coverage Dispute in California Federal Court Proving that Crime Really Doesn’t Pay

Troutman Sanders Wins Insurance Coverage Dispute in California Federal Court Proving that Crime Really Doesn’t Pay

By Eileen King Bower

Troutman Sanders recently obtained summary judgment on behalf of Continental Casualty Company in an insurance coverage dispute in the Northern District of California, [enhanced version available to subscribers]. In this case, the plaintiff, a court-appointed receiver for the policyholders, sought to recover approximately $20 million dollars under four commercial crime insurance policies that were issued by Continental. Summary judgment was granted on March 26, 2014.

Vesta Strategies, LLC (“Vesta”) and Excalibur 1031 Group, LLC (“Excalibur”) were Qualified Intermediaries (“QIs”) in the business of conducting tax-free exchanges of property pursuant to 26 U.S.C. § 1031, [enhanced version available to subscribers]. Vesta and Excalibur were owned by John Terzakis and Robert Estupinian who allegedly misappropriated and diverted approximately $20 million in exchange funds for their own personal use and gain. Terzakis and Estupinian allegedly hid their theft by using the incoming deposits from new clients to fund the escrows of older clients, while simultaneously diverting millions of dollars to their own personal bank accounts and business ventures. The scheme collapsed in July 2008, coincidental with the cooling of the real estate market.

As the Court Appointed Receiver for Vesta and Excalibur, the plaintiff, Thomas Dillon, made claims under the Continental Policies for the benefit of Vesta and Excalibur Exchangers who deposited exchange funds and lost approximately $20 million. The plaintiff contended that Continental was liable for the losses sustained by thefts of exchange funds which allegedly occurred during each Continental policy period.

Continental argued that it was entitled to summary judgment in its favor with respect to the Vesta Policy because any recovery would violate public policy against insuring the willful wrongdoing of an insured. Specifically, Continental argued that Terzakis and Estupinian’s willful conduct could be imputed to Vesta because they were acting within the course of their employment. The plaintiff argued that recovery under the Vesta policy was proper notwithstanding this willful conduct because any insurance proceeds would benefit Vesta Exchangers and not the alleged wrongdoers. In its opinion, the Court agreed with Continental and found that Terzakis and Estupinian’s willful conduct was appropriately ascribed to Vesta. In so deciding, the Court found that public policy against insuring willful conduct did not allow recovery even when recovery would primarily benefit innocent victims rather than the insured.

With respect to the Excalibur policies, the Court determined that there was no covered loss because Excalibur did not hold any exchange funds during the time the Excalibur policies were in force, thereby precluding recovery. Accordingly, it ruled that summary judgment in Continental’s favor was proper.

Eileen King Bower from Troutman Sanders’ Chicago Office acted as lead counsel. John (“Jack”) R. Gerstein from Troutman Sanders’ Washington D.C. Office, William P. Pipal from Troutman Sanders’ Chicago Office and Ryan C. Tuley from Troutman Sanders’ Orange County Office also represented Continental in the case.

© TROUTMAN SANDERS LLP. ADVERTISING MATERIAL. These materials are to inform you of developments that may affect your business and are not to be considered legal advice, nor do they create a lawyer-client relationship. Information on previous case results does not guarantee a similar future result. Follow Troutman Sanders on Twitter.


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