Farkas v. National Union Fire Insurance Company of Pittsburgh, PA.
Filing
27
MEMORANDUM OPINION: For the reasons discussed above, Farkas has failed toclearly establish any of the four Winter requirements for a preliminary injunction; therefore, his Motion for a Preliminary Injunction will be denied by an Order that will issue with this Opinion.Signed by District Judge Leonie M. Brinkema on 07/14/11. (yguy)
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L
E
JUL I42011
IN THE UNITED STATES DISTRICT COURT
FOR THE
EASTERN DISTRICT OF VIRGINIA
CLERK, U.S. DISTRICT COURT
Alexandria Division
ALEXANDRIA, VIRGINIA
LEE BENTLEY FARKAS,
Plaintiff,
1:11CV529 (LMB/IDD)
NATIONAL UNION FIRE INSURANCE,
COMPANY OF PITTSBURGH, PA
Defendant.
MEMORANDUM OPINION
Before the Court is plaintiff Lee Bentley Farkas's
("Farkas") Motion for Preliminary Injunction [Dkt. No. 5], in
which he seeks a preliminary injunction requiring defendant
National Union Fire Insurance Company of Pittsburgh, Pa.
("National Union") to continue to pay the attorney's fees and
costs he has incurred, and will continue to incur, in defending
against a criminal prosecution.
For the reasons stated below,
the motion will be denied.
I.
Background
National Union issued a Directors, Officers and Private
Company Liability Insurance policy to Farkas's mortgage company,
Taylor, Bean & Whitaker Mortgage Corp., ("TBW").
an aggregate limit of liability of $5 million.
The policy has
Compl. Ex. A.
The policy will
pay the Loss of each and every Director, Officer or
Employee of the Company arising from a Claim first
made against such Insureds during the Policy Period or
the Discovery Period (if applicable) and reported to
the Insurer pursuant to the terms of this policy for
any actual or alleged Wrongful Act in their respective
capacities as Directors, Officers or Employees of the
Company except when and to the extent that the Company
has indemnified such Insureds.
The Insurer shall, in
accordance with and subject to Clause 8, advance
Defense Costs of such Claim prior to its final
disposition.
Compl. Ex. A 1 1,
The policy defines a "Claim" as:
a civil, criminal, administrative, regulatory or
arbitration proceeding for monetary or non-monetary
relief which is commenced by:
i. service of a complaint or similar proceeding; or
ii. return of an indictment (in the case of a criminal
proceeding); or
iii. receipt or filing of a notice of charges.
Id. U 2(b).
Clause 8 requires National Union to advance
defense costs:
When the Insurer has not assumed the defense of a
Claim pursuant to this Clause 8, the Insurer shall
advance nevertheless, at the written request of the
Insured, Defense Costs prior to the final disposition
of a Claim. Such advanced payments by the Insurer
shall be repaid to the Insurer by the Insureds or the
Company, severally according to their respective
interests,
in the event and to the extent that the
Insureds or the Company shall not be entitled under
the terms and conditions of this policy to payment of
such Loss.
Id. f 8 (emphasis added).
The policy excludes several types of claims from coverage,
Material to this dispute are exclusions for claims:
[4A:] arising out of, based upon or
attributable to the gaining in fact of any
profit or advantage to which an Insured was
not legally entitled;
. . . [and 4C:]
arising out of, based upon or attributable
to the committing in fact of any criminal,
fraudulent or dishonest act, or any willful
violation of any statute, rule or law. Id. %
4.
Farkas was chairman and majority shareholder of TBW, which
filed for bankruptcy in August 2009.
In June 2010, Farkas was
indicted and charged in United States v. Lee Bentley Farkas.
I:10cr200 with multiple counts of conspiracy to commit and
committing bank,
federal law.
wire, and securities fraud, in violation of
Compl. f 17.
On June 16, 2010, Farkas notified
National Union of the indictment, and on August 2, 2010,
National Union responded with a reservation of rights letter, in
which it acknowledged that the indictment started a criminal
proceeding covered under the policy; however, the letter also
quoted Exclusions 4A and 4C, warning that if they were
triggered, all coverage would be precluded.
Ex. A to Opp.
National Union also notified Farkas that the policy required
Farkas to pay a $1 million deductible before National Union
advanced defense costs.
Throughout 2010,
Farkas and National
Union disputed whether Farkas had met the deductible.
On
September 14, 2010, the bankruptcy court authorized National
Union to allocate up to $1 million to Farkas's defense.1
In
1 The bankruptcy court approved up to $3 million in
expenditures, allocating $1 million each to Farkas, and co
conspirators former TBW CEO Paul Allen, and former TBW president
Ray Bowman to cover their defense costs.
December 2010, the parties reached a settlement agreement in
which National Union agreed to advance up to $1 million of
Farkas's defense costs,
subject to a reservation of rights, and
further agreed that defense costs beyond that amount could be
advanced to Farkas subject to bankruptcy court approval.
H 25.
Compl.
To date, National Union has paid approximately $930,000 to
fund Farkas's defense.
Opp. at 5.
On April 4, 2011, Farkas's criminal trial began.
On April 8, 2011,
Id. U 32.
National Union sent Farkas's counsel a letter
advising that the invoices submitted to that time exceeded $1
million by $383,001.93 and that National Union would not advance
funds over $1 million without additional relief from the
bankruptcy court; but that if the bankruptcy court approved
payments greater than $1 million, National Union would make the
payments, once again,
"subject to its complete reservation of
rights" and under the terms and conditions of the December 2010
agreement.2
Ex. C. to Compl.
On April 19, 2011, the jury found Farkas guilty of all 14
2 On May 6, 2011, the bankruptcy court authorized National
Union to advance up to $3 million for Farkas's defense.
The
Court's order also included language preserving National Union's
reservation of rights. "... nothing in this Order shall be
deemed to compel National Union to advance any Defense Costs
under its Policy and National Union specifically reserved its
rights to deny coverage under the terms, conditions, and
exclusions contained in the Policy, to seek recoupment of Defense
Costs previously funded under the Policy as well as to avoid or
rescind the Policy as a result of any omission or misstatements
in connection with the application for the National Union
Policy."
fraud and conspiracy counts that were tried.
convictions, on April 28, 2011,
In light of those
National Union informed Farkas
that the jury's verdict triggered the "in fact" element of
exclusions, 4A and 4C,
and on that basis,
National Union would no
longer fund defense costs and would, under its reservation of
rights, consider seeking reimbursement from Farkas for the
defense costs that it had already advanced.
Ex. D to Compl.
In this civil action against National Union,
Farkas seeks
injunctive relief requiring National Union to reimburse defense
costs through the appeals process and a declaration of the
definition of "final disposition."
Farkas claims that he has
incurred a total of $2,035,288.63 in defense costs through trial
and verdict and, at minimum, seeks the unpaid portion of that
balance.
Alternatively,
Farkas alleges breach of contract and
seeks damages in excess of $2 million.
II.
Discussion
To obtain a preliminary injunction, the movant must
establish that: (1) he is likely to succeed on the merits,
(2) he
is likely to suffer irreparable harm in the absence of
preliminary relief,
(3) the balance of equities tips in his
favor; and (4) an injunction is in the public interest.
Winter
v. Natural Resources Defense Council. 555 U.S. 7 (2008); The Real
Truth About Obama v. FEC. 575 F.3d 342 (4th Cir. 2009), vacated
in part on other grounds at 130 S.Ct. 2371 (2010).
A.
Likelihood of success on the merits
National Union correctly argues that Farkas has failed to
demonstrate that it is likely he will succeed on the merits.
Opp. at 9.
The jury's guilty verdict clearly triggered Exclusion
4A, which excludes from coverage claims "arising out of, based
upon or attributable to the gaining in fact of any profit or
advantage to which an Insured was not legally entitled," and
Exclusion 4C, which
excludes from coverage claims "arising out
of, based upon or attributable to the committing in fact of any
criminal, fraudulent or dishonest act, or any willful violation
of any statute, rule or law[.]"
(emphasis added).
Courts have
found that similar exclusions containing the "in fact"
requirement become effective with "some pertinent factual
finding" that the insured's behavior fell within the exclusion.
Virginia Mason Medical Center v.
2007 WL 3473683, at *5
Executive Risk Indem..
(W.D. Wash. Nov.
14,
Inc..
2007); see also Nat'l
Union Fire Ins. Co. v. Continental 111. Corp.. 666 F. Supp. 118 0,
1199-1201 (N.D. 111. 1987).
Some courts have required even less
evidence to trigger an "in fact" exclusion.
Steadfast Insurance Co.
Fed. App'x.
663
(2d Cir.
v.
For example, in
Stroock & Stroock & Lavin,
2004),
L.L.P..
108
the Court found that the "in
fact" exclusion required only that the allegations made against
the insured fall within the exclusion, and in Gardner v. Cumis
Ins. Society. Inc..
582 So. 2d 1094, 1096 (Ala. 1991), the Court
found that an "in fact" exclusion applied even though the insured
had been acquitted of criminal charges.
Under this caselaw,
Farkas's multiple convictions for conspiracy and bank,
wire,
and
securities fraud clearly trigger the policy's "in fact"
exclusions.
To convict Farkas,
the jury had to find that the
evidence of fraud met the high evidentiary standard of "proof
beyond a reasonable doubt."
That finding constitutes far more
than "some pertinent factual finding" of fraudulent conduct and
fully supports the conclusion that exclusions 4A and 4C now
apply,
thereby releasing National Union from any further
obligation to fund Farkas's defense costs.
Despite the jury's finding, Farkas contends that National
Union remains obligated to fund his defense until the appeal of
his criminal conviction is concluded, relying upon the policy's
provision in Clause 8 that defense costs will be provided "prior
to [the claim's]
final disposition."
This argument fails because
it ignores the entire insurance policy.
When read in its
entirety, it is clear that National Union's policy does not
require payment of defense costs for a claim that is not covered
by the policy.
Accordingly, Farkas fails to satisfy the first
Winter element.
B.
Irreparable harm
Farkas argues that he would suffer irreparable harm if his
preliminary injunction is denied because he would be unable to
effectively prepare for his asset forfeiture and sentencing
hearings.3
Farkas also argues that he will be unable to appeal
the jury verdict that has resulted in a sentence of 30 years
imprisonment.
Mot. for Prelim. Injunction at 12.
National Union responds that Farkas has not made a clear
showing that irreparable harm is likely.
is denied,
If insurance coverage
Farkas will be entitled to appellate representation by
the Federal Public Defender or by court-appointed counsel, each
of whom is required to provide competent legal representation.
Opp. at 18.
Farkas has not clearly demonstrated that he would be
irreparably harmed if he were represented by the Federal Public
Defender or court-appointed counsel.
In 2010,
before Farkas
reached a settlement agreement with National Union,
the Court
appointed William B. Cummings, Jr. to be Farkas's attorney under
the Criminal Justice Act,
18 U.S.C.
§ 3006A.
Farkas later
retained Cummings as local counsel and he has remained Farkas's
attorney throughout trial, and has even been retained for this
civil action.
In Pendergest-Holt v.
Lloyd's of London.
Certain Underwriters at
751 F. Supp. 2d 876 (S.D. Tex. 2010),
the
Court faced a similar question about possible irreparable harm
3 This argument is moot as Farkas was sentenced on June 30,
2011 and the forfeiture proceeding also occurred on that day. He
was represented at both proceedings by his present counsel.
July 12, 2011, he filed a Notice of Appeal.
On
when it considered whether coverage was excluded under an "in
fact" determination that the insureds had committed money
laundering.
The insureds sought a stay of the court's decision
pending appeal.
The district court concluded that the insureds
could not establish irreparable harm because they could apply for
an appellate attorney under the Criminal Justice Act.
Similarly,
Farkas has failed to demonstrate that such court-appointed
counsel would be inadequate.
Accordingly, Farkas has not
established that it is likely he would be irreparably harmed if
the preliminary injunction were denied.
C.
Balance of equities
Farkas argues that the "balance of hardships" favors him
because he faces an unquantifiable harm, whereas National Union
could recoup the money that it advanced to him if Farkas
ultimately loses his appeal.
Mot.
for Prelim. Injunction at 14.4
National Union correctly responds that Farkas has not
established that the balance of equities tips in his favor.
at 21.
Opp.
National Union has already advanced $930,000 for
Farkas's defense.
Farkas's assets have been frozen and he faces
significant forfeiture and restitution orders, which are likely
to deplete all his financial resources, leaving National Union
with little realistic chance to recover any funds that it has
4 Farkas used an outdated preliminary injunction standard
and ignores the Winter test, which weighs the "balance of
equities" rather than "balance of hardships."
already paid for Farkas's defense costs.
For these reasons
Farkas has failed to establish that the balance of equities tips
in his
D.
favor.
Public interest
Lastly,
Farkas argues that a preliminary injunction would be
in the public interest because allowing insurers to withhold
payment before the final disposition of a case would result in a
serious hardship to insureds and defeat the very purpose of their
director and officer insurance.
Moreover, allowing insurers to
stop payment increases the chances that insureds would be
convicted.
Farkas also argues there is a strong interest in
enforcing valid contracts.
National Union responds that a preliminary injunction under
these facts would harm the public interest because it would
require insurers to continue paying defense costs long after it
became clear that an exclusion applies.
Opp. at 23.
National
Union argues that such an outcome could harm innocent co-insureds
who might rightly be entitled to defense costs, and lastly, that
Farkas has access to competent legal representation under the
Criminal Justice Act.
The jury verdict provides abundant support for National
Union's determination that Exclusions 4A and 4C apply.
It would
not be in the public interest to require an insurer to continue
to provide coverage for claims explicitly excluded from the
10
insurance contract.
To require an insurance company to continue
to provide coverage for an excluded claim would increase the cost
of insurance and cause insurers to be more hesitant to offer
liability coverage for corporate directors and officers.
For
these reasons, Farkas has not demonstrated that a preliminary
injunction would be in the public interest.
The Court is keenly aware that it is actually the attorneys
who have been representing Farkas who are at the greatest risk of
suffering a loss if a preliminary injunction is not granted.
These attorneys, who worked aggressively on Farkas's behalf, are
owed approximately $1 million for their work and expenses to
date.
Although one could argue that counsel proceeded at their
own risk in taking on this case, knowing that the bankruptcy
court might not approve further dispersal of funds and that
National Union was reserving its rights, it would still be unfair
for them not to be paid, at least enough to cover all their
expenses.
By agreeing to be retained, these attorneys provided a
public service by saving scarce Criminal Justice Act funds.
Defense counsel, however, are not the plaintiff in this civil
action and have no standing to sue National Union as they are not
parties to the insurance contract.
The government has seized or frozen most of Farkas's assets
and will be moving to use those recovered assets to provide
restitution to the many victims of Farkas's fraudulent activity.
11
Defense counsel should be included among those to whom some
reimbursement is made from those funds.
This issue will be taken
up with the prosecutors in United States of America v. Lee
Bentley Farkas.
I:10cr200.
III.
Conclusion
For the reasons discussed above,
Farkas has failed to
clearly establish any of the four Winter requirements for a
preliminary injunction; therefore, his Motion for a Preliminary
Injunction will be denied by an Order that will issue with this
Opinion.
Entered this II
day of July, 2011.
Alexandria, Virginia
/s/
Leonie M. Brinkema
United States District Judge
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