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CONTINENTAL’S CROSS-MOTION FOR
SUMMARY JUDGMENT; OPPOSITION TO
DILLON’S MOTION; MEMO OF P&AS
CASE NO. 5:10-CV-05238-EJD
TROUTMAN SANDERS LLP
Eileen King Bower, Pro Hac Vice
eileen.bower@troutmansanders.com
55 West Monroe Street, Suite 3000
Chicago, IL 60603-5757
Telephone: 312.759.1920
Facsimile: 312.759.1939
TROUTMAN SANDERS LLP
Peter R. Lucier, Bar No. 246397
peter.lucier@troutmansanders.com
580 California Street, Suite 1100
San Francisco, CA 94104
Telephone: 415.477.5700
Facsimile: 415.477.5710
Attorneys for Defendant
CONTINENTAL CASUALTY COMPANY
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
THOMAS DILLON, as Court-Appointed
Receiver for Vesta Strategies, LLC and
Excalibur 1031 Group, LLC,
Plaintiff,
v.
Continental Casualty Company, an Illinois
Corporation,
Defendant.
Case No. 5:10-CV-05238-EJD
CONTINENTAL CASUALTY
COMPANY’S CROSS-MOTION FOR
SUMMARY JUDGMENT, OPPOSITION
TO DILLON’S POST APPEAL MOTION
FOR SUMMARY JUDGMENT ON THE
2004 POLICY AND MEMORANDUM OF
POINTS AND AUTHORITIES IN
SUPPORT THEREOF
Date: March 30, 2017
Time: 9:00 a.m.
Location: Courtroom 4, 5th Floor
Judge: The Honorable Edward J. Davila
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CASE NO. 5:10-CV-05238-EJD
CONTINENTAL CASUALTY COMPANY’S CROSS-MOTION
FOR SUMMARY JUDGMENT
Defendant, Continental Casualty Company (“Continental”), hereby moves this Court for
an order granting it summary judgment with respect to the complaint of Plaintiff Thomas Dillon,
as Receiver for Vesta Strategies, LLC and Excalibur 1031 Group, LLC. This motion is made
pursuant to Rule 56 of the Federal Rules of Civil Procedure and applicable law. Continental’s
Cross-Motion is based on this Cross-Motion, its Memorandum of Points and Authorities in
support of the Cross-Motion, the concurrently filed Declaration of Eileen King Bower, the
concurrently filed Evidentiary Appendix in Support of Continental Casualty Company’s Cross-
Motion for Summary Judgment, the concurrently filed Continental Casualty Company’s Separate
Statement of Undisputed Material Facts, the concurrently filed Response to Thomas A. Dillon’s
Separate Statement of Undisputed Material Facts and the attached [Proposed] Order, and on all
pleadings and papers filed in this action and any further matters this Court may consider at or
before the hearing on this Motion.
Dated: December 23, 2016 Respectfully submitted,
TROUTMAN SANDERS LLP
By:/s/Eileen King Bower
Eileen King Bower, Pro Hac Vice
Peter R. Lucier, Bar No. 246397
Attorneys for Defendant Continental
Casualty Company
Case 5:10-cv-05238-EJD Document 155 Filed 12/23/16 Page 2 of 32
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TABLE OF CONTENTS
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CONTINENTAL’S CROSS-MOTION FOR
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- i - CASE NO. 5:10-CV-05238-EJD
I. STATEMENT OF THE CASE........................................................................................... 1
II. CONTINENTAL’S EVIDENTIARY OBJECTIONS........................................................ 2
A. Objections To Dillon’s Separate Statement ............................................................ 2
B. Objections To Evidence Proffered By Dillon ......................................................... 3
1. The Newest Declaration of Peter Ye........................................................... 3
2. Objections to Declarations and Exhibits Relied on by Plaintiff ................. 4
III. SUMMARY OF ARGUMENT .......................................................................................... 6
IV. STATEMENT OF RELEVANT FACTS ........................................................................... 8
A. Vesta Strategies, LLC ............................................................................................. 8
B. Vesta’s Business Model .......................................................................................... 9
C. Terzakis’ Wealth And Role In Vesta .................................................................... 10
D. No Effort Was Made To Conceal Loans To Terzakis .......................................... 11
E. Vesta’s Collapse.................................................................................................... 11
F. The 2004 Vesta Policy .......................................................................................... 11
V. RELEVANT LEGAL STANDARDS............................................................................... 12
VI. ARGUMENT .................................................................................................................... 13
A. Continental Is Entitled To Summary Judgment Because Dillon Cannot
Prove A Covered Loss Was Sustained During The 2004 Vesta Policy
Period .................................................................................................................... 13
1. Dillon Fails to Establish That Alleged “Theft” of Client
Exchange Funds in 2004 Resulted in the Loss at Issue ............................ 13
2. The Loss at Issue Does Not Involve Any Exchanger Funds
Deposited Before the Expiration Date of the 2004 Vesta Policy.............. 14
3. Terzakis’ Fraudulent Loans Did Not Result in a Loss During the
Vesta Policy Period ................................................................................... 15
B. Summary Judgment In Favor Of Continental Is Appropriate Because
Dillon Cannot Prove That The Alleged Loss Was Discovered Before
The Discovery Date............................................................................................... 16
1. California Courts Strictly Enforce Discovery of Loss Provisions ............ 16
2. Dillon Fails To Demonstrate That the Adverse Domination
Doctrine Applies to Toll the Discovery Date............................................ 17
a. The Legal and Policy Justifications for Application of the
Doctrine of Adverse Domination Are Absent in this Case ........... 18
(1) The Requisite Element of Adversity is Missing ............... 18
(2) The Nature of the 1031 Industry Precludes Any
Actual Losses to Exchangers from Being Hidden
for a Long-Term Period .................................................... 19
b. Dillon Cannot Meet His Factual Burden to Establish
Adverse Domination ..................................................................... 20
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C. As A Matter Of Law, Dillon Cannot Prove That The Wrongdoers Acted
With The Manifest Intent To Harm Vesta ............................................................ 22
D. As A Matter Of Law, Vesta Failed To Comply With Internal Controls
Requirements......................................................................................................... 24
VII. CONCLUSION................................................................................................................. 25
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TABLE OF AUTHORITIES
CASES PAGE(S)
CONTINENTAL’S CROSS-MOTION FOR
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- iii -
CASE NO. 5:10-CV-05238-EJD
Admiralty Fund v. Peerless Ins. Co.,
143 Cal. App. 3d 379 (Cal. Ct. App. 1983) .......................................................... 16, 17, 18, 19
Auto Lenders Acceptance Corp. v. Gentilini Ford, Inc.,
854 A.2d 378 (N.J. 2004)........................................................................................................ 22
Beal v. Smith,
46 Cal. App. 271 (Cal. Ct. App. 1920) ................................................................................... 18
Beyene v. Coleman Sec. Servs., Inc.,
854 F.2d 1179 (9th Cir. 1988)................................................................................................... 4
Burt v. Irvine Co.
237 Cal. App. 2d 828 (Cal. Ct. App. 1965) ............................................................................ 18
Cal. Union Ins. Co. v. Am. Diversified Savings Bank,
948 F.2d 556 (9th Cir. 1991)....................................................................................... 17, 20, 21
Chevron USA, Inc. v. Cayetano,
224 F.3d 1030 (9th Cir. 2000)................................................................................................. 13
Dade v. DiGuglielmo,
No. 08-217, 2008 U.S. Dist. LEXIS 113337 (E.D. Pa. Mar. 25, 2008).................................. 20
F.S. Smithers & Co., Inc. v. Federal Ins. Co.,
631 F.2d 1364 (9th Cir. 1980)................................................................................................. 16
Fed. Deposit Ins. Corp. v. St. Paul Fire & Marine Ins. Co.,
942 F.2d 1032 (6th Cir. 1991)................................................................................................. 23
Fidelity Savings & Loan Ass’n v. Aetna Life & Cas. Co.,
647 F.2d 933 (9th Cir.1981).................................................................................................... 15
Investors Trading Corp. v. Fid. & Deposit Co. of Md.,
No. 3:02-cv-2176, 2004 U.S. Dist. LEXIS 25906 (N.D. Tex. Dec. 22, 2004) ....................... 23
Issac Upham Co. v. United States Fidelity & Guar. Co.,
59 Cal. App. 606 (Cal. Ct. App. 1922) ................................................................................... 16
Karen Kane, Inc. v. Reliance Ins. Co.,
202 F.3d 1180 (9th Cir. 2000)................................................................................................. 17
Kennedy v. Allied Mut. Ins. Co.,
952 F.2d 262 (9th Cir. 1991)..................................................................................................... 3
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Mathew Enter. v. Chrysler Grp. LLC,
No. 13-cv-04236-BLF, 2016 U.S. Dist. LEXIS 108693 (N.D. Cal. Aug. 2, 2016).................. 2
Mosesian v. Peat, Marwick, Mitchell & Co.,
727 F.2d 873 (9th Cir. 1984)................................................................................................... 20
Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund,
135 S. Ct. 1318 (2015) .............................................................................................................. 2
Orr v. Bank of Am., NT & SA,
285 F.3d 764 (9th Cir. 2002)..................................................................................................... 4
Pacific-Southern Mortgage Trust Co. v. Ins. Co. of N. Am.,
166 Cal. App. 3d 703 (Cal. Ct. App. 1985) ............................................................................ 15
Reiffin v. Microsoft Corp.,
270 F. Supp. 2d 1132 (N.D. Cal. 2003) .................................................................................... 4
Rios v. Scottsdale Ins. Co.,
119 Cal. App. 4th 1020 (Cal. Ct. App. 2004) ......................................................................... 13
Royal Globe Ins. Co. v. Whitaker,
181 Cal. App. 3d 532 (Cal. Ct. App. 1986) ............................................................................ 13
Shoemaker v. Lumbermans Mutual Casualty Co.
176 F. Supp. 2d 449, 455 (W.D. Pa. 2001) ............................................................................. 24
Stuart v. UNUM Life Ins. Co. of Am.,
217 F.3d 1145 (9th Cir. 2000)................................................................................................... 4
Yeager v. Bowlin,
693 F.3d 1076 (9th Cir. 2012)............................................................................................... 3, 4
STATUTES
California Insurance Code § 533..................................................................................................... 1
Internal Revenue Code 1031.................................................................................................. passim
OTHER AUTHORITIES
26 C.F.R. § 1.1031(k)-1(g)(4)......................................................................................................... 9
FED. R. CIV. P. 56(a)...................................................................................................................... 13
FED. R. CIV. P. 56(e).................................................................................................................... 4, 5
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FED. R. EVID. 602 ........................................................................................................................ 4, 5
FED. R. EVID. 701 ............................................................................................................................ 5
FED. R. EVID. 901(a).................................................................................................................... 4, 5
FED. R. EVID. 901(b)(1)................................................................................................................... 4
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MEMORANDUM OF POINTS AND AUTHORITIES
Defendant Continental Casualty Company (“Continental”) hereby submits the following
Memorandum of Points and Authorities in opposition to Plaintiff Thomas Dillon’s (“Plaintiff” or
“Dillon”) Post Appeal Motion for Summary Judgment on the 2004 Policy (“Motion”) and in
support of its Cross-Motion for Summary Judgment (“Cross-Motion”).
I. STATEMENT OF THE CASE
This matter is before this Court on remand from the Ninth Circuit. In 2012, the parties
filed cross-motions for summary judgment, in part, on the issue of whether a fidelity bond
insurance policy issued by Continental to Vesta Strategies, Inc. (“Vesta”) provides coverage for
monies allegedly stolen by Vesta’s owners. On March 26, 2014, this Court granted summary
judgment in favor of Continental. Specifically, the Court held that allowing Vesta to recover for
losses allegedly sustained as a result of the theft by its owners would violate California Insurance
Code § 533, which provides in relevant part that an “insurer is not liable for a loss caused by the
willful act of the insured.” (ECF No. 133 [hereinafter “March 2014 Order”].) Although
Continental had raised several alternative bases which would support summary judgment in its
favor,1 having concluded that § 533 was dispositive on the issue of recovery under the policy, this
Court did not address these alternative bases for summary judgment.
Plaintiff appealed the March 2014 Order and argued, for the first time on appeal, that §
533 does not apply to surety contracts and that an endorsement to the policy at issue created a
surety arrangement. On April 22, 2016, the Ninth Circuit issued a memorandum finding that the
relevant policy endorsement created a surety relationship that is exempt from § 533 and reversed
the March 2014 Order. The Ninth Circuit did not address any of the four additional bases upon
which Continental moved for summary judgment and remanded the matter to this Court for
further proceedings. (ECF No. 142 [hereinafter “Ninth Circuit Memorandum”].) The Ninth
1 Continental moved for summary judgment based on the following additional arguments: 1) the
loss alleged was not sustained or discovered during the 2004 Vesta Policy; 2) adverse domination
did not apply such that the discovery period should be tolled; 3) Vesta owners did not act with
“manifest intent” to cause a loss as required by the policy; and 4) Vesta failed to comply with the
Internal Controls provisions of the policy.
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Circuit Memorandum does not impact the Court’s analysis of the issues raised by the parties in
the instant cross-motions for summary judgment.
Dillon requested that the parties be allowed to “re-brief” the issues remaining for
summary judgment and filed its “post appeal” motion for summary judgment on October 28,
2016 (ECF No. 148.) This brief serves as Continental’s opposition to Dillon’s Motion and as
Continental’s brief in support of its Cross-Motion.
II. CONTINENTAL’S EVIDENTIARY OBJECTIONS2
A. Objections To Dillon’s Separate Statement
Dillon’s Motion is supported by a Separate Statement of Undisputed Material Facts
(“Separate Statement”) that fails to comply with the explicit instructions contained in this Court’s
Standing Order for Civil Cases (“Standing Order”). Dillon’s Separate Statement does not provide
a “short and concise statement identifying each claim or defense” to which he contends there is
no genuine issue to be tried. Standing Order, Section IV.B.1. Furthermore, the submission is
replete with alleged “factual” averments that constitute improper argument, opinion or
conclusions, rather than true undisputed facts. As the Supreme Court has noted, “a statement of
fact (‘the coffee is hot’) expresses certainty about a thing, whereas a statement of opinion (‘I think
the coffee is hot’) does not.” Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension
Fund, 135 S. Ct. 1318, 1325 (2015). This Court has chosen to strike portions of a party’s separate
statements of fact that contain impermissible argument, opinion or conclusions that do not
constitute facts. See, e.g., Mathew Enter. v. Chrysler Grp. LLC, No. 13-cv-04236-BLF, 2016
U.S. Dist. LEXIS 108693, at *4 n.3 (N.D. Cal. Aug. 2, 2016) (striking impermissible legal
arguments). Here, Continental requests that this Court strike Dillon’s Separate Statement in its
entirety or, alternatively, strike the following as improper argument, opinion or conclusion: Fact
1, Fact 4, Fact 6, Fact 21, Fact 24, Fact 27, Fact 30, Fact 31, and Fact 48. Further, the first
2 This Court’s Standing Order regarding summary judgment provides that “[o]bjections to
evidence shall be contained within the objecting party’s brief and shall not be filed as a separate
pleading.” See District Judge Edward J. Davila Standing Order for Civil Cases, Section IV.D.
Consistent with this preferred practice, Continental asserts its objections to Dillon’s Separate
Statement herein, as well as its objections to the evidence submitted by Dillon.
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column of Dillon’s Separate Statement is simply his own characterization of his particular factual
averments; Continental objects to each of these statements as improper and requests that the
Court not consider them as part of the record.
B. Objections To Evidence Proffered By Dillon
1. The Newest Declaration of Peter Ye.
In its pre-appeal summary judgment briefs, Continental argued that Dillon lacked any
evidence to prove that Vesta owners took unauthorized loans or “thefts” of Vesta client exchange
funds during the 2004 Vesta Policy period because Vesta failed to maintain any accurate records
which would track client exchange deposits. (ECF No. 80 at p. 15.) In support of this position,
Continental cited to the relevant portions of the deposition transcript of Peter Ye, Vesta’s 30(b)(6)
witness. (Id.) Dillon responded to Continental’s argument with a number of supplemental Ye
declarations that conflicted with Ye’s deposition testimony. (See ECF Nos. 77, 96 and 102.)
Now, Dillon’s Separate Statement includes citations to what is the fifth iteration of the
Declaration of Peter C. Ye, which again contradicts his deposition testimony and should be
stricken as a “sham” declaration. (ECF Nos. 64, 77, 96, 102 and 151.)3
The general rule in the Ninth Circuit is that a “party cannot create an issue of fact by an
affidavit contradicting his prior deposition testimony.” Yeager v. Bowlin, 693 F.3d 1076, 1080
(9th Cir. 2012) (internal citations and quotations omitted). As one court explained in the
summary judgment context, the sham affidavit rule is necessary because “if a party who has been
examined at length on deposition could raise an issue of fact simply by submitting an affidavit
contradicting his own prior testimony, this would greatly diminish the utility of summary
judgment as a procedure for screening out sham issues of fact.” Kennedy v. Allied Mut. Ins. Co.,
952 F.2d 262, 266 (9th Cir. 1991) (internal citations and quotations omitted).
Ye’s prior deposition testimony is at odds with his most recent declaration. During his
3 Notably, Dillon’s Separate Statement is completely devoid of any record citation to the three
different depositions taken of Ye during the course of discovery in this case. Curiously, Dillon
does not cite to a single deposition taken of the declarants on whom he relies in support of his
Motion. This is because many of the declarants’ declarations, like Ye’s Declaration, are
contradicted by their deposition testimony.
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deposition in July of 2012, Ye indicated that there was simply no way to know the source of the
funds allegedly wired to Terzakis in 2004. (SUF4 40.) Ye also indicated under questioning that in
2004, Vesta’s early days, there would be no way to tell if monies in a pooled account were
monies from IAG 1031 or Vesta exchangers. (SUF 41.) Now, over a decade later, Ye purports to
provide insight and documentation to support Dillon’s claim that Terzakis embezzled $9.3 million
of Vesta exchanger funds during the 2004 Vesta Policy period. (Ye Decl., ECF No. 151 at ¶¶ 6-
8, 15-38.) Such assertions demonstrate that Ye’s fifth declaration is clearly a sham and should be
stricken. See, e.g., Yeager, 693 F.3d at 1081 (holding that district court’s invocation of sham
affidavit rule was not abuse of discretion).
2. Objections to Declarations and Exhibits Relied on by Plaintiff.
Many of the declarations and exhibits proffered by Plaintiff in connection with his Motion
are objectionable for various reasons under the Federal Rules of Evidence, Federal Rules of Civil
Procedure and Northern District of California Civil Local Rule 7-5. A trial court may only
consider admissible evidence in ruling on a motion for summary judgment. FED. R. CIV. P. 56(e);
Beyene v. Coleman Sec. Servs., Inc., 854 F.2d 1179, 1181 (9th Cir. 1988). This includes proof
that the witness has “personal knowledge” of the matters testified to in his or her declaration.
FED. R. EVID. 602; Stuart v. UNUM Life Ins. Co. of Am., 217 F.3d 1145, 1154 (9th Cir. 2000).
Exhibits must also be deemed “authentic.” FED. R. EVID. 901(a). A document must be
authenticated by a witness who wrote it, signed it, used it, or saw others do so. FED. R. EVID.
901(b)(1); Orr v. Bank of Am., NT & SA, 285 F.3d 764, 774 n.8 (9th Cir. 2002). Similarly, the
Northern District’s Local Rules allow a court to disregard improperly supported materials and/or
strike those materials. Reiffin v. Microsoft Corp., 270 F. Supp. 2d 1132, 1144 (N.D. Cal. 2003)
(noting that “[p]ursuant to Civ LR 7-5(b), the court may strike all or part of any declaration that
fails to comply with the terms of Civ LR 7-5.”).
Dillon now relies on declarations which include inadmissible testimony and exhibits that
violate the most fundamental rules of evidence in the following ways:
4 Citations to individual facts from Continental Casualty Company’s Moving Separate Statement
of Undisputed Materials Facts will be cited with the short form, “SUF __.”
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Contain statements that are speculative conclusions rather than factual assertions and thus
lack personal knowledge required by FED. R. EVID. 602 and fail to comply with FED. R.
CIV. P. 56(e) and Local Rule 7-5, which require that a declaration be made on personal
knowledge and show affirmatively that the declarant is competent to testify to the matters
stated therein. See, e.g., Dillon Decl., ECF No. 150 at ¶¶ 5, 27, 31, 32; Ye Decl., ECF No.
151 at ¶¶ 2-5, 16-17, 20-21, 28, 33, 36, 51-52, 54; Terzakis Decl., ECF No. 63 at ¶¶ 7, 24-
25; Woo Decl., ECF No. 66 at ¶¶ 3-6; Carlos Decl., ECF No. 65 at ¶ 8.
Constitute inadmissible lay opinion testimony. FED. R. EVID. 701. See, e.g., Dillon Decl.,
ECF No. 150 at ¶¶ 5, 27, 31, 32; Terzakis Decl., ECF No. 63 at ¶ 4.
Constitute improper conclusions and argument. Civil L.R. 7-5(b). See, e.g., Dillon Decl.,
ECF No. 150 at ¶¶ 27, 31, 32; Ye Decl., ECF No. 151 at ¶¶ 2, 3, 4, 50-55; Woo Decl.,
ECF No. 66 at ¶¶ 4-5; Carlos Decl., ECF No. 65 at ¶ 8.
Are not sufficiently authenticated by the declarants. FED. R. EVID. 901(a). See, e.g., Ye
Decl., ECF No. 151 at ¶ 52, Exh. 14.
Continental requests that these statements and exhibits be stricken and not considered by this
Court in ruling on the parties’ cross-motions for summary judgment.
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III. SUMMARY OF ARGUMENT
In this action, Dillon seeks to recover fro
providing employee dishonesty coverage, in effect from January 9, 2004 through August 15, 2004
(the “2004 Vesta Policy”). The 2004 Vesta Policy provides coverage for covered loss resulting
from employee dishonesty. Significantly, the 2004 Vesta Policy only applies to loss discovered
no later than October 15, 2004 (the “Discovery Date”). Here, the loss Dillon seeks to recover is
directly tied to monies initially deposited with Vesta by various exchanger clients s
2007 that were not returned to those clients within 180 days as promised.
clearly identifies the transactions that form the basis of his claim, as reflected in the deposits
below:5
These basic and undisputed fac
have been sustained or discovered during the 2004 Vesta Policy period. This is because the funds
that comprise the alleged loss were not deposited with Vesta until years after the 2004 Vesta
Policy expired. Because no loss took place during the 2004 Vesta Policy period, no loss could
have been discovered on or before the Discovery Date, and Dillon’s claim fails as a matter of law.
5 The Timeline reflects examples of 2007 and 2008 deposits contained in Dillon’s Proof of Loss.
A complete listing of the deposits made in 2007 and 2008 is set forth in Dillon’s Proof of Loss,
App. Exh. 9 at APP 0777.
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m Continental under a single fidelity bond
ts reveal that the loss Dillon seeks to recover could not
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tarting in June
Dillon’s Proof of Loss
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Dillon argues that Vesta’s owners had been misappropriating client exchange funds for
many years, and he devotes the majority of his Motion to trying to prove that Vesta owners
committed “thefts” of client exchange funds totaling over $9 million while the 2004 Vesta Policy
was in effect. As an initial matter, Dillon cannot prove this claim because he relies solely on the
inadmissible evidence contained in the sham Ye Declaration. Moreover, the 2004 Vesta Policy
does not provide coverage for “thefts” taking place during the policy period. Rather, the policy
applies to covered loss resulting from employee dishonesty if the loss is discovered on or before
the Discovery Date. Dillon’s claim fails because he cannot demonstrate that alleged “thefts” of
client funds in 2004 resulted in the loss at issue in this case. Here, the loss is directly tied to client
exchange funds first deposited with Vesta in 2007 and 2008, years after the 2004 Vesta Policy
expired. Vesta’s owners could not have stolen those funds before they were deposited and, as a
result, no loss could have been sustained or discovered by the Discovery Date.
In an attempt to fit the proverbial square peg into a round hole, Dillon advances a
convoluted legal theory that is simply not supported by the facts or California law. First, in his
complaint, Dillon contends that alleged “thefts” of client funds by Vesta in 2004 created some
sort of “deficit” in a fictitious “trust res” that resulted in the loss at issue. He then goes on to
argue that the Discovery Date should be equitably tolled because Vesta was adversely dominated
by its owners and could not have discovered the “deficit” until Dillon was appointed Receiver.
Both of these arguments fail as a matter of law.
With respect to Dillon’s first contention, there are no facts demonstrating that a deficit
was created in 2004. The undisputed facts confirm that Vesta’s owners employed an illegal
business model in which owner John Terzakis (“Terzakis”) took unauthorized loans of client
exchange funds and used them for his other real estate businesses. Vesta only held client
exchange funds for 180 days. From its inception in 2004 through 2008, Vesta funded open
exchanges with monies received from other client exchangers and/or with monies from owner
Terzakis. While Terzakis’ actions were not legal, they did not create a “deficit” at Vesta in 2004
because Terzakis had sufficient assets from his real estate businesses to fund any open client
exchanges and he used his funds for that purpose. Because client funds had to be returned within
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180 days of deposit, the notion that a deficit would be hidden or undiscoverable for years is
ludicrous. Any type of deficit would have been easily discovered because client funds had to be
returned within 180 days of deposit.
Dillon’s second argument is similarly meritless and there is no basis for tolling the
Discovery Date. There was no loss to discover prior to the Discovery Date, as the loss is directly
tied to client exchange funds first deposited with Vesta in 2007 and 2008. Moreover, the legal
and factual justifications that California courts have found fundamental to the application of
adverse domination are absent in this case.
Finally, even if the facts supported the theory that Vesta was somehow adversely
dominated – and they do not – tolling the Discovery Date does not provide Dillon with any basis
for pursuing coverage under the 2004 Vesta Policy. Dillon has failed to prove that the alleged
wrongdoers acted with the requisite “manifest intent” to cause a loss or that Vesta complied with
the internal controls requirements of the 2004 Vesta Policy.
Rather than offering credible, admissible evidence to meet his burden of proof, Plaintiff
takes aim at Continental, accusing it of being complicit in the “theft” of exchange funds (Dillon
Mot., ECF No. 148 at p. 20) as well as condoning the actions of Terzakis, Robert Estupinian
(“Estupinian”) and Ye (id. at p. 14). These assertions are nothing more than red herrings meant to
distract the Court from the real facts and issues in this case. Put simply, Plaintiff’s Motion is a
sideshow that does nothing to overcome the unavoidable truth that Plaintiff’s claim fails as a
matter of law.
IV. STATEMENT OF RELEVANT FACTS6
A. Vesta Strategies, LLC
Vesta was created on or about January 9, 2004 and was owned by Terzakis and
Estupinian. (SUF 14, 15.) Estupinian acted as the Chief Executive Officer of Vesta and ran the
day-to-day operations of the company from California with Ye and Ginny Hillig (“Hillig”). (SUF
6 Plaintiff’s Motion does not set forth a Statement of Relevant Facts. Instead, Dillon merely
concedes this Court’s “judicial familiarity with the detailed facts of this insurance coverage case
as set out in Docket 133, the Order Granting Continental’s Motion for Summary Judgment.”
(Dillon Mot., ECF No. 148 at p. 1.)
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19, 28.) At the time of Vesta’s creation in 2004, Ye was manager of operations. (SUF 22.)
Eventually, Ye was promoted to Vice President of Operations at Vesta. (SUF 22.) Ye reported to
Estupinian and Hillig, the President of Vesta, who eventually married Estupinian in November
2004. (SUF 20-21.) Estupinian, Hillig and Ye were signatories on Vesta bank accounts. (SUF
25.) Although Terzakis had an ownership interest in Vesta, he did not get involved in the day-to-
day operations of the business. (SUF 28-29.)
B. Vesta’s Business Model
Vesta was at least the third iteration of a Qualified Intermediary (“QI”) owned by Terzakis
and Estupinian, who had both held ownership interests in another QI, IAG, which later became
IAG 1031 (SUF 18.) The purpose of a QI business is to take possession of and hold client
exchanger funds so that the client/exchanger could avoid paying capital gains tax when buying
and selling investment property pursuant to Section 1031 of the Internal Revenue Code (“Section
1031”). (SUF 34.) Section 1031 permits an owner of property to defer the capital gains tax that
would be due upon sale, provided the proceeds (that is, the exchange funds) are timely applied to
purchase “Replacement Property.” 26 U.S.C. § 1031(a) (hereinafter “IRC”). Property owners
seeking tax-deferred treatment have 180 days from the date of the sale of their “Relinquished
Property” to identify a “Replacement Property” and close on the purchase. IRC § 1031(b)(3). In
order to defer the tax, Exchangers are not permitted to take possession of sale proceeds, but
instead must have a QI take possession of the exchange funds. 26 C.F.R. § 1.1031(k)-1(g)(4).
The QI business model established at IAG was adopted by IAG 1031 and eventually
implemented by Vesta. (SUF 34.) Ye, Plaintiff’s Rule 30(b)(6) witness, explained how the
model worked. After an exchanger entered into an exchange contract with Vesta, the proceeds
from the sale of the exchanger’s investment property would be wired by the title company into a
“sub account” at Borel Bank. (SUF 35-36.) Notably, Ye testified that Vesta continued to use
IAG 1031’s accounts at Borel Bank until approximately August 2004. (SUF 42.) Thus, to the
extent Vesta took possession of client exchange funds prior to that time, monies were deposited
into accounts in the name of IAG 1031. Shortly after being deposited into the sub account, the
monies would almost immediately be swept into a pooled checking account. (SUF 38.) Once the
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monies were swept into pooled accounts, there was no way to identify an individual exchanger’s
monies. (SUF 40.)
Terzakis admits that he misappropriated client exchange funds in a practice he described
as taking “loans” from the exchange funds deposited with Vesta. (SUF 44, 52-53.) He would
instruct either Estupinian or Ye to transfer funds from QI accounts into accounts that were either
in Terzakis’ name or that of one of his business entities. (SUF 45.) Ye would then direct wire
transfers from QI pooled accounts to Terzakis. (SUF 46.)
When client redemptions were due – within 180 days of deposit – monies from the pooled
accounts would be wired to the title company handling the exchanger’s transaction. (SUF 47.) If
the pooled accounts did not have sufficient funds to close a transaction, Terzakis would fund the
transaction by wiring monies from his accounts to the title company for the exchanger. (SUF 48.)
C. Terzakis’ Wealth And Role In Vesta
While Vesta operated out of California, Terzakis lived in the Chicago area and ran a
successful real estate business, Single Site Solutions (“Single Site”), from Willowbrook, Illinois.
(SUF 27.) From the late 1990s through at least 2007, Terzakis had hundreds of millions of
dollars in assets and his personal net worth was in excess of $43 million. (SUF 49.) All of his
assets were in real estate. (SUF 50.)
In his deposition, Terzakis confirmed that he had no involvement in daily business
operations of Vesta and was not involved in its regular activities. (SUF 28-29.) He understood
that Estupinian, Hillig and Ye handled the daily business operations at Vesta, and he assumed that
Hillig was responsible for communicating with insurers on behalf of Vesta. (SUF 28, 31.)
Terzakis became involved in and funded QIs because he saw QIs as a form of “mezzanine
financing” which allowed him to borrow exchange funds for his real estate investments without
having to go to a bank or other financial institution. (SUF 52.) From the inception of IAG
through 2008, Terzakis admitted that he took “loans” of exchanger funds from his QIs, including
Vesta. (SUF 44.) Terzakis testified that he did not believe taking “loans” of exchanger funds was
wrong until sometime in 2008 when the “legal issues” arose. (SUF 53.) He further testified that
he intended to pay back all such loans and that he never intended to cause a loss to Vesta by
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taking loans of exchange funds. (SUF 54-55.) In fact, Terzakis believes he paid back millions of
dollars per year to Vesta in interest payments. (SUF 56, 58.)
D. No Effort Was Made To Conceal Loans To Terzakis
No effort was made to conceal that Terzakis was taking unauthorized loans of exchanger
funds from Vesta. (SUF 59-61.) Terzakis stated that he directed Ginny Heisserer, one of his
employees at Single Site, to document every transaction and to create a paper trail of notes or
other memos or documents to memorialize the transactions. (SUF 62.) For example, Terzakis
testified that a promissory note was prepared for “each and every” loan he took of exchanger
funds from IAG and Vesta through at least 2005. (SUF 57.) Terzakis specifically discounted any
notion that the loans of exchanger funds were concealed, noting that there was “no attempt to try
to hide” loans of exchange funds “from Ginny [Hillig]” from the early 2000s through 2008 and
that “everybody at Vesta and Single knew that [he was] taking loans of exchanger funds.” (SUF
60-61.) Moreover, Kristine Carlos, a Vesta employee, testified that Estupinian voluntarily told
her about the loans of exchanger funds to Terzakis. (SUF 63.)
E. Vesta’s Collapse
The real estate market collapsed in or shortly before 2008. Because all of Terzakis’
personal assets were in real estate, his personal net worth (comprised of real estate assets)
plummeted “overnight” and became negative very quickly. (SUF 50-51.) Neither Vesta nor
Terzakis had assets to fund open client exchangers monies, and Vesta collapsed in 2008. (SUF
64.) At that time, Vesta was unable to fund approximately $11 million in Vesta client exchange
funds that had been deposited with Vesta in 2007 and 2008. (SUF 65.) Those amounts comprise
the loss for which Dillon seeks recovery in this case. (SUF 65-66.) Specifically, Dillon’s Proof of
Loss identifies sixteen Vesta clients, or “exchangers,” who allegedly deposited money with Vesta
between 6/29/2007 and 6/25/2008 totaling $11,649,822.54. (SUF 65.)
F. The 2004 Vesta Policy
Plaintiff seeks coverage under the 2004 Vesta Policy. The 2004 Vesta Policy was
originally issued to “IAG 1031, LLC.” (SUF 1.) In March of 2010, pursuant to Hillig’s request,
the 2004 Vesta Policy was amended to list “Vesta Strategies, LLC” as the “named insured,”
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effective January 9, 2004. (SUF 2.) The 2004 Vesta Policy provides first party crime coverage,
i.e., coverage to the named insured (Vesta) for loss to “covered property” resulting directly from a
“covered cause of loss,” defined to mean “Employee Dishonesty.” (SUF 5.) “Employee
Dishonesty” is defined to mean “dishonest acts committed by an ‘employee,’ . . . with the
manifest intent to cause [Vesta] to sustain a loss.” (SUF 6.) The 2004 Vesta Policy provides that
Continental will pay for “loss that you sustained prior to the effective date of termination or
cancellation of this insurance, which is discovered by you (Vesta) no later than 60 days from the
date of the termination or cancellation.” (SUF 10.) This means that the covered loss must be
sustained by August 15, 2004 and discovered no later than October 15, 2004. (SUF 11.)
Additionally, the 2004 Vesta Policy includes three endorsements relating to the business
of being a QI for a tax-deferred exchange of property intended to qualify under Internal Revenue
Code 1031 (“1031 Exchange”). (SUF 7-9.) Specifically, Endorsement No. 1 modifies the
policies so that property covered includes property held in a financial institution account of a
transaction involving the named insured as a QI for a 1031 Exchange, but the endorsement
specifically states that “this insurance is for [the insured’s] benefit only. It provides no rights or
benefits to any other person or organization.” (SUF 7.) A second endorsement sets forth
“Internal Controls Requirements,” which includes certain requirements with which an insured
must comply before recovering for a loss involving a 1031 Exchange, including, but not limited
to, maintaining the proceeds from a single exchange transaction (specifically identified in some
manner so as to provide a clear paper trail) in a financial institution account segregated from the
insured’s operating funds. (SUF 9.) Finally, an endorsement entitled “Include Owners and
Partners for Losses Involving Client Property” modifies the policies, in pertinent part, so that the
exclusion related to “Acts Committed by You or Your Partners” would not apply to losses
involving the funds of client/exchangers while the insured was acting as a QI in a 1031 Exchange.
(SUF 8.)
V. RELEVANT LEGAL STANDARDS
Under Federal Rule of Civil Procedure 56(a), summary judgment shall be granted “if the
movant shows that there is no genuine dispute as to any material fact and the movant is entitled to
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judgment as a matter of law.” FED. R. CIV. P. 56(a). Where, as here, both parties move for
summary judgment, the Court must evaluate each side’s motion on its own merits and draw all
inferences in favor of the non-moving party. Chevron USA, Inc. v. Cayetano, 224 F.3d 1030,
1037 n.5 (9th Cir. 2000). The policyholder bears the initial burden of proving coverage under an
insurance policy, and the insurer bears the burden to show that an otherwise covered claim falls
within an exclusion. Royal Globe Ins. Co. v. Whitaker, 181 Cal. App. 3d 532, 537 (Cal. Ct. App.
1986). If the policyholder cannot make its threshold showing, then the insurer is entitled to
summary disposition. Rios v. Scottsdale Ins. Co., 119 Cal. App. 4th 1020, 1025-27 (Cal. Ct. App.
2004). As set forth below, summary judgment should be granted in favor of Continental because
Dillon cannot meet his burden of proving coverage based on the undisputed facts.
VI. ARGUMENT7
A. Continental Is Entitled To Summary Judgment Because Dillon Cannot Prove
A Covered Loss Was Sustained During The 2004 Vesta Policy Period
1. Dillon Fails to Establish That Alleged “Theft” of Client Exchange Funds
in 2004 Resulted in the Loss at Issue.
Dillon contends that the sham Ye Declaration supports his claim that over $9 million in
Vesta funds were stolen by Vesta’s owners during the 2004 Vesta Policy period. This claim is
simply not supported by the undisputed facts developed during discovery, and Ye’s new sham
Declaration is not admissible to contradict those facts. Moreover, Dillon fails to prove that any
alleged “thefts” resulted in the loss at issue here or in any loss discovered on or before the
Discovery Date.
As reflected in Continental’s Separate Statement and Statement of Facts, Vesta
commingled client exchange funds and allowed owner Terzakis to take unauthorized “loans”
from those funds to use for his own real estate business. (SUF 38, 41, 42, 44.) Vesta’s record
keeping was so poor that it is impossible to now prove where client deposits made in 2004 were
7 The points raised by Continental are alternative in nature. If this Court agrees with any of
Continental’s arguments, Continental is entitled to the entry of summary judgment in its favor on
the claim contained in Dillon’s Complaint.
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funneled or how much Terzakis may have taken in unauthorized or fraudulent “loans” during that
time. (SUF 35-41.) The undisputed facts reveal that, although Vesta was created in January
2004, it did not open any bank accounts in its own name until August 2004. (SUF 24.) To the
extent Vesta took possession of client exchange funds while the 2004 Vesta Policy was in effect,
the monies would have been deposited and commingled with IAG 1031 exchange funds in
existing bank accounts held by IAG 1031. (SUF 23-24, 42.) As Ye testified, there would be no
way to determine if any monies wired to Terzakis during the 2004 Vesta Policy period were
monies deposited while IAG 1031 acted as a QI or whether such monies were deposited while
Vesta acted as a QI. (SUF 40-41.) Because Terzakis and Estupinian failed to make any effort to
separate the business and bank accounts of IAG 1031 and Vesta, at least during the time the 2004
Vesta Policy was in effect, there is simply no evidence to support how much Terzakis may have
taken in fraudulent loans during the relevant time period. As a result, Dillon cannot demonstrate
that a covered loss took place during the 2004 Vesta Policy period and his claim necessarily fails
as a matter of law. Therefore, Continental is entitled to summary judgment in its favor.
2. The Loss at Issue Does Not Involve Any Exchanger Funds Deposited
Before the Expiration Date of the 2004 Vesta Policy.
While Dillon goes to great lengths to show that “thefts” of client exchanger funds took
place during the 2004 Vesta Policy period, he fails to make the critical connection between such
alleged “thefts” and the loss at issue. From its creation, Vesta relied on both the inflow of funds
from new 1031 Exchanges as well as Terzakis’ own personal wealth to fund the completion of
existing 1031 Exchanges. (SUF 47-48.) As new clients continued to deposit funds and Terzakis
had sufficient funds available when needed to complete a 1031 Exchange, Vesta was able to meet
all of its existing 1031 Exchange obligations. It was not until 2008, when the real estate market
came to halt, that Vesta was unable to secure new exchange proceeds and Terzakis’ personal net
worth rapidly depreciated such that open exchanges could not be funded. (SUF 47-48, 64.)
Indeed, the first exchanger deposit Dillon seeks coverage for did not take place until June of
2007. (SUF 66.) These undisputed facts are fatal to Dillon’s claim.
The 2004 Vesta Policy does not provide coverage for mere “thefts.” Instead, the policy
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only provides coverage for a “covered loss” resulting directly from a covered cause of loss (e.g.,
employee dishonesty). (SUF 5.) In other words, the “thefts” alleged by Dillon could not, by
themselves, constitute a loss. Thus, even if “thefts” took place during the 2004 Vesta Policy
period (something Dillon is unable to prove with admissible evidence), coverage would only
apply to loss resulting from such “thefts” and to the extent the loss was sustained during the 2004
Vesta Policy period and discovered before the Discovery Date. (SUF 1, 5, 10-11.) Here, the loss
at issue is comprised of monies first deposited with Vesta in 2007 and 2008, thus making it
impossible for Dillon to prove that loss of those monies was sustained and discovered before the
Discovery Date. For this reason alone, Dillon’s claim fails as a matter of law and summary
judgment should be granted in favor of Continental.
3. Terzakis’ Fraudulent Loans Did Not Result in a Loss During the Vesta
Policy Period.
The fraudulent loans provided to Terzakis by Vesta do not constitute covered loss under
the terms of the 2004 Vesta Policy. Courts in California and the Ninth Circuit have rejected the
argument that a loss occurs when fraudulent loans are taken. Rather, a loss only results when the
fraudulent loan is unable to be repaid. In other words, courts have rejected the notion that a loss
occurs simultaneously with a fraudulent loan. See, e.g., Fidelity Savings & Loan Ass’n v. Aetna
Life & Cas. Co., 647 F.2d 933, 936-37 (9th Cir.1981) (finding fraudulent loans did not constitute
loss because company was not in “hopeless and irretrievable insolvency”); Pacific-Southern
Mortgage Trust Co. v. Ins. Co. of N. Am., 166 Cal. App. 3d 703, 701-11 (Cal. Ct. App. 1985)
(holding that a loan made by the insured because of fraudulent misrepresentations by the
insured’s president does not necessarily result in a loss under a fidelity bond when a potential loss
may never materialize). The underlying reasoning inherent in these decisions is that the mere
dispersal of a fraudulent loan does not constitute a loss under a fidelity bond policy because the
loan may eventually be paid back and no loss would occur.
Applying the same reasoning to this case is appropriate based on the undisputed facts.
Similar to the loans at issue in Fidelity and Pacific-Southern, Terzakis took unauthorized loans of
exchanger funds from Vesta. (SUF 44.) Terzakis testified that promissory notes were prepared
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for any loans taken during the 2004 Vesta Policy and that each loan was meticulously
documented. (SUF 57-62.) Moreover, he made substantial interest payments to Vesta. (SUF 56,
58.) Terzakis was also hardly in a state of “hopeless and irretrievable insolvency” when he took
loans of exchange funds. With a net worth in excess of $43 million, Terzakis had more than
enough assets to pay the loans prior to the real estate markets demise, and he used his own funds
when necessary to fund open client exchanges. (SUF 48-49.) When Terzakis misappropriated
client funds in the form of unauthorized loans, no loss occurred unless or until Terzakis failed to
pay them back. Any purported “thefts” of exchanger funds during the 2004 Vesta Policy did not
result in a loss and certainly did not result in the loss at issue because there is no evidence to
suggest that any client funds deposited with Vesta during the 2004 Vesta Policy period were
unpaid. Therefore, Dillon is not able to prove that Vesta sustained a loss while the 2004 Vesta
Policy was in effect and summary judgment should be entered in favor of Continental.
B. Summary Judgment In Favor Of Continental Is Appropriate Because Dillon
Cannot Prove That The Alleged Loss Was Discovered Before The Discovery
Date
As discussed above, Dillon is unable to prove that a covered loss occurred during the 2004
Vesta Policy period. Accordingly, whether a loss was “discovered” before the Discovery Date, or
whether adverse domination should apply is moot because, without a covered loss, there would be
nothing to discover and report to Continental. Nonetheless, Dillon’s claim also fails because no
loss was discovered before the 2004 Vesta Policy’s Discovery Date.
1. California Courts Strictly Enforce Discovery of Loss Provisions.
Dillon has failed to make any showing that Vesta complied with the discovery of loss
provision in the 2004 Vesta Policy. Courts in California have “long recognized the validity of
discovery of loss provisions in fidelity insurance policies.” Admiralty Fund v. Peerless Ins. Co.,
143 Cal. App. 3d 379, 384 (Cal. Ct. App. 1983) (citing F.S. Smithers & Co., Inc. v. Federal Ins.
Co., 631 F.2d 1364, 1367 (9th Cir. 1980) (applying California law)); Issac Upham Co. v. United
States Fidelity & Guar. Co., 59 Cal. App. 606, 608 (Cal. Ct. App. 1922). As this Court
previously noted, these clauses are “strictly enforce[d] . . . so that neither difficulty in discovering
insured losses nor employee concealment excuse the insured’s performance.” (ECF No. 43 at p.
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10, App. Exh. 11, APP 1059); see also Karen Kane, Inc. v. Reliance Ins. Co., 202 F.3d 1180,
1190 (9th Cir. 2000) (applying California law and recognizing that discovery of loss provisions
are generally valid and strictly enforceable).
Courts have justified the strict enforcement of these provisions on public policy grounds.
Admiralty Fund, 143 Cal. App. 3d at 387. As further justification, courts have explained that
discovery of loss provisions provide insurance companies with a degree of certainty with regard
to their reserve needs, the ability to calculate premiums and encourage insureds to use due
diligence to make their claims. Id. at 386. Only under the rarest of circumstances may this
general rule be set aside. Cal. Union Ins. Co. v. Am. Diversified Savings Bank, 948 F.2d 556, 565
(9th Cir. 1991) (interpreting California law). Where, as here, the uncontroverted facts establish
that the discovery of the loss for which the insured seeks coverage did not occur within the
allotted timeframe, it is appropriate for the court to summarily rule in favor of the insurer. See,
e.g., id. at 564-65 (affirming summary resolution in favor of the fidelity insurer where record was
devoid of evidence that a non-wrongdoing employee had knowledge of dishonest acts).
2. Dillon Fails To Demonstrate That the Adverse Domination Doctrine
Applies to Toll the Discovery Date.
Tacitly conceding that he has no proof that anyone at Vesta ever discovered the loss
before the Discovery Date, Dillon asks this Court to take the extraordinary step of setting aside
the policy terms by tolling the Discovery Date through an unprecedented extension of the
doctrine of adverse domination. Extending adverse domination to this case is inappropriate for
two main reasons. First, as set forth below, the legal and policy justifications for adverse
domination are missing here. Second, Dillon’s theory is based on an argument that Vesta was
adversely dominated such that “thefts” in the form of allegedly fraudulent loans could not be
discovered by non-wrongdoing employees. The facts reveal that Vesta’s business activities were
not hidden or undisclosed and easily could have been discovered by non-wrongdoing employees
during the relevant discovery period. As a result, Dillon is unable to toll the Discovery Date and
summary judgment should be entered in favor of Continental.
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a. The Legal and Policy Justifications for Application of the Doctrine of
Adverse Domination Are Absent in this Case.
This case does fit within the narrow scope of the adverse domination doctrine.
Traditionally, courts have applied adverse domination to toll the statute of limitations for claims
by shareholders against wrongdoing directors or officers of a corporation. See, e.g., Admiralty
Fund, 143 Cal. App. 3d at 388-89; Burt v. Irvine Co. 237 Cal. App. 2d 828, 867-68 (Cal. Ct. App.
1965); Beal v. Smith, 46 Cal. App. 271, 279 (Cal. Ct. App. 1920). The legal and policy
underpinnings for the application of adverse domination focus on two major factors: (1) that the
wrongdoers in question acted adversely to the company; and (2) the losses in question could
remain hidden indefinitely from the claimants. The uncontroverted facts establish that these
factors are not met.
(1) The Requisite Element of Adversity is Missing.
A fundamental factor underlying previous applications of the doctrine of adverse
domination has always been adversity between the wrongdoers and the affected company (or,
more precisely, its owners or shareholders). For example, the only California case in which a
theory of adverse domination was found to even potentially apply to toll a discovery period of a
fidelity bond policy, Admiralty Fund, involved mutual fund shareholders asserting the doctrine
based on the malfeasance of certain officers of the fund. The court in Admiralty Fund concluded
that adverse domination could be applied in large part because the nature of the mutual fund
created a position of adversity between the shareholders that owned the fund and the officers that
controlled the daily operations. 143 Cal. App. 3d. at 388. As the court stated, “[i]f in fact the
dishonest president and other high ranking officers controlled the Funds’ operations to such an
extent as to preclude discovery, the tolling of a discovery-of-loss provision should be
considered.” Id. at 389. Put simply, adverse domination is only considered in California when
the allegedly dominant wrongdoers and the owners were adverse – i.e., not the same people.
By contrast, the alleged wrongdoers in this case, Terzakis and Estupinian, owned 100% of
Vesta. (SUF 15-18.) There was no adversity between Terzakis and Estupinian on the one hand
and Vesta on the other. Rather, the owners and the alleged wrongdoers are identical. Because
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there was no adversity between the owners and the wrongdoers, there can be no adverse
domination.
While Terzakis and Estupinian may well have been adverse to the client exchangers, that
fact is not material to this analysis, as the exchangers are not analogous to the shareholders in
Admiralty. Unlike the shareholders in Admiralty, who owned the fund and therefore were parties
to the fidelity policies at issue, the exchangers here had no right to pursue a claim under the 2004
Vesta Policy. Indeed, the 2004 Vesta Policy expressly provides that it does not convey any rights
to third parties. (SUF 7.) The shareholders in Admiralty would have lost the right to pursue a
claim but for the application of adverse domination. Admiralty, 143 Cal. App. 3d at 387-88. In
contrast, the exchangers never had a right to pursue a claim under the 2004 Vesta Policy in the
first place. Extending the doctrine in this case would ignore the unambiguous language of the
policy, which clearly provides no benefit the third-parties. Neither Admiralty nor any other
authority supports such a result.
(2) The Nature of the 1031 Industry Precludes Any Actual Losses to
Exchangers from Being Hidden for a Long-Term Period.
As explained, the logic for justifying application of the adverse domination doctrine
breaks down if applied to benefit non-owners of the supposedly dominated entity. Setting this
problem aside, other key principles supporting this doctrine reveal its inapplicability to the 1031
Exchange industry and, more specifically, this case. In Admiralty, the court gave weight to the
fact that the defalcating officers had the inherent ability to conceal losses arising from fraud
flowing from their management of the fund. Admiralty, 143 Cal. App. 3d at 388-89. Because the
officers had control over the Fund’s assets for an indefinite period, the shareholders could not
have discovered losses due to dishonesty “until the wrongdoers relinquished control of the Funds’
[sic] operations.” Id.
In contrast, the nature of the 1031 Exchange industry does not pose the same risk of losses
remaining hidden indefinitely. Under the Internal Revenue Code, 1031 Exchanges must close
within 180 days. Thus, unlike mutual fund shareholders, individual exchangers would be in a
position to discover if their monies were lost or misappropriated within six months of deposit. In
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other words, if the exchanger’s money was not returned within 180 days of deposit, as required
by Section 1031, the exchanger would know about it. This is yet another reason why adverse
domination is inappropriate in this context.
b. Dillon Cannot Meet His Factual Burden to Establish Adverse
Domination.
Even if adverse domination was potentially appropriate under these circumstances – and it
is not – the record conclusively demonstrates that Dillon cannot satisfy his burden of proof to
establish adverse domination. Continental notes that Dillon’s initial burden is to demonstrate that
Vesta was adversely dominated prior to October 15, 2004—the end of the discovery of loss
period. This is because a person’s conduct cannot breathe new life into a discovery of loss period
that has already ended. In the statute of limitations context, if a claimant is unable to show that
the reason for tolling the statute of limitations occurred before the statute of limitations expired, a
court cannot toll the limitations period because of after the fact conduct. See, e.g., Dade v.
DiGuglielmo, No. 08-217, 2008 U.S. Dist. LEXIS 113337, at *8 (E.D. Pa. Mar. 25, 2008) (noting
after the fact conduct cannot toll already expired statute of limitations period). This same
reasoning applies equally to the discovery of loss period. Dillon then must demonstrate with
admissible facts that Vesta continued to be adversely dominated so as to continue to toll the
discovery of loss period. Here, the factual record before the Court fails to support such a finding
and, as a result, Plaintiff’s adverse domination claim fails as a matter of law.
The case law in California and the Ninth Circuit reveals that Dillon lacks the requisite
facts to support his adverse domination claim. In Mosesian v. Peat, Marwick, Mitchell & Co.,
727 F.2d 873, 879 (9th Cir. 1984), the Ninth Circuit adopted the “complete domination” standard
as the appropriate test for applying adverse domination. Under that test, Dillon must show “full,
complete and exclusive control in the directors or officers charged.” Id. In California Union, the
Ninth Circuit recognized that the adverse domination exception to the usually strict enforcement
of discovery clauses in insurance policies only applies “under certain circumstances.” California
Union, 948 F.2d at 565. Thus, it is not enough for Dillon to show that no employee could have
prevented the losses in question, nor that no employee actually appreciated the legal significance
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of the dishonest acts which caused the loss. Rather, Dillon must provide evidence that precludes
even the possibility that “there were non-wrongdoing employees who could have discovered the
losses.” Id. (emphasis added). Like the plaintiff in California Union, Dillon cannot meet that
requirement.
Here, Dillon’s alleged loss, which non-wrongdoing employees were supposedly precluded
from discovering, was the unauthorized loans of exchange funds taken by Terzakis. To prevail,
Dillon must demonstrate that Terzakis and Estupinian exercised such full, complete, and
exclusive control over Vesta that they made it impossible for any non-wrongdoing employee to
discover Terzakis’ loans of exchange funds. Such a showing is impossible based on the
undisputed facts developed during the course of discovery in this case.8
Because Terzakis’ loans of exchange funds was such a routine part of the normal
operations of Vesta, Dillon’s argument that discovery of these loans was impossible does not
stand up to the slightest of scrutiny. The undisputed facts shows that Terzakis’ loans were not,
and could not, have been hidden from non-wrongdoing employees. The practice of borrowing
exchange funds was made, documented, and serviced openly and within view of the company at
large. (SUF 59-62.) In fact, Terzakis admitted that there was no attempt to hide the fact that he
was taking loans of exchanger funds:
[Ms. Bower]: Q. Did you feel the need to keep it - - keep it a secret
from Ginny that you were taking loans of exchanger funds?
[Mr. Terzakis]: A. A secret?
Q. Correct.
A. There was no secret about what I was doing anywhere, in my
office, through documentations, tax returns.
Q. This is something that everybody knew, everybody at Vesta and
Single Site know that - - that you were taking loans of exchanger
funds; right?
A. Yes, ma’am.
Q. There was no attempt to hide it from anybody; right?
A. Nope.
(SUF 59.) Thus, Terzakis’ deposition testimony makes clear that the transfers were open and
8 In support of his adverse domination theory, Dillon makes the outrageous, ad hominem attack
that Continental “knowingly assist[ed]” in Terzakis and Estupinian’s adverse domination of
Vesta. (Dillon Mot., ECF No. 148 at p. 20.) Of course, Dillon points to no facts to support this
contention.
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obvious to anyone in the company, and thus, anyone at Vesta could have discovered them. (SUF
61.) Indeed, at least one non-wrongdoing employee, Kristine Carlos, admitted to learning about
the transfers of exchanger funds to Terzakis from Estupinian. (SUF 63.)
Because a non-wrongdoing employee could have discovered Vesta’s alleged “thefts”
during the 2004 Vesta Policy period or before the Discovery Date, Dillon’s theory of adverse
domination does not apply and the discovery of loss provisions must be strictly construed in favor
of Continental. The undisputed facts simply cannot support a finding that it was impossible for
non-wrongdoing employees to discover the alleged loss, and as a result Plaintiff’s theory of
adverse domination fails.
C. As A Matter Of Law, Dillon Cannot Prove That The Wrongdoers Acted With
The Manifest Intent To Harm Vesta
Continental is entitled to summary judgment for the additional reason that no reasonable
juror could conclude that the wrongdoers acted with the requisite “manifest intent” to cause Vesta
a loss. The 2004 Vesta Policy requires that, in order for there to be coverage, the employee act
with the “manifest intent” to “cause [Vesta] to sustain loss.” (SUF 6.) Therefore, to demonstrate
there is coverage for the loss at issue, Dillon must prove that Terzakis obtained unauthorized
loans during the 2004 Vesta Policy period with the “manifest intent” to cause Vesta to sustain a
loss.
While no California court has analyzed the meaning of “manifest intent” in this context,
courts in other jurisdictions have generally applied one of three approaches: the specific intent
approach, the substantial certainty approach, and the objective standard. Auto Lenders
Acceptance Corp. v. Gentilini Ford, Inc., 854 A.2d 378, 389 (N.J. 2004). The most favored test is
the specific intent test (adopted in the Second, Third, Fourth, and Fifth Circuits), which focuses
on “‘whether the actor in question specifically intended the resulting loss to the employer in
question.’” Id. at 389-90. If this Court elects not to apply the specific intent approach, the other
commonly applied standard is the substantial certainty approach. See id. at 390. This “‘standard
is satisfied either by proof of the employee’s desire to cause a loss or by proof that the loss was
‘substantially certain’ to result.’” Id. (internal citation omitted) (emphasis in original). Lastly,
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the objective test, which is the least utilized by courts “focus[es] on the natural consequences of
an actor’s conduct ... but d[oes] not necessarily focus on the actor’s actual state of mind.” Id. at
389. Under any of these three tests, no reasonable juror could conclude that the wrongdoers in
this case manifested intent to cause Vesta to sustain a loss.
As a threshold matter, it defeats logic to find that Vesta’s co-owners, Terzakis or
Estupinian, intended to cause a loss to their own company. Under such circumstances, courts
have acknowledged that it is “highly unlikely that [the employee] had the ‘manifest intent’ to
cause a significant injury to an entity in which he had a major financial stake.” Fed. Deposit Ins.
Corp. v. St. Paul Fire & Marine Ins. Co., 942 F.2d 1032, 1037 (6th Cir. 1991); see also Investors
Trading Corp. v. Fid. & Deposit Co. of Md., No. 3:02-cv-2176, 2004 U.S. Dist. LEXIS 25906, at
*4 (N.D. Tex. Dec. 22, 2004) (finding that “where the employee’s manifest intent is to make
money, not to cause the employer to lose money, the operative language of the fidelity bond is not
invoked”). Given their ownership stake in the company, there is a logical presumption that
neither Terzakis nor Estupinian intended to cause Vesta a loss. Indeed, Terzakis explicitly
testified that it was never his intent to cause a loss to Vesta by taking loans of exchange funds.
(SUF 54.)
Moreover, Terzakis testified that he intended to pay back the funds he borrowed from the
exchange accounts at Vesta. (SUF 55.) His testimony in that regard is corroborated by evidence
that he did, in fact, make substantial payments to Vesta (including interest) and meticulously
documented each loan. (SUF 56-58, 62.) In Shoemaker v. Lumbermans Mutual Casualty Co., the
court relied, in part, upon an employee’s executed affidavit in which he denied having any intent
to cause the insured a loss to hold that the “manifest intent” requirement in an employee
dishonesty policy was not met. 176 F. Supp. 2d 449, 454-56 (W.D. Pa. 2001) (noting term
“‘intent’ means ‘purposefully,’ i.e., the employee must have acted ‘with the specific purpose,
object or desire’ to cause the loss to the insured”) (emphasis in original). Here, the undisputed
evidence demonstrates that Terzakis did not have the requisite “specific purpose, object or desire”
to cause a loss to Vesta. Id. Terzakis’ express and demonstrated intention was to repay the
borrowed Exchange Funds. (SUF 55-58, 62.) Moreover, throughout 2004 and until at least 2006,
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Terzakis’ net worth was approximately $43 million. (SUF 49.) Clearly, Terzakis had the
financial means to repay every penny of the exchange funds he had taken during the 2004 Vesta
Policy period.
There is simply no evidence in the present action that the wrongdoers had the “manifest
intent” to “cause [Vesta] to sustain loss” during the 2004 Vesta policy period. Because Dillon is
unable to establish the “manifest intent” requirement to coverage, Continental is entitled to
summary judgment.
D. As A Matter Of Law, Vesta Failed To Comply With Internal Controls
Requirements
Finally, Dillon’s claim against Continental fails because Vesta did not comply with the
internal controls requirements set forth in the 2004 Vesta Policy, which provides in pertinent part
as follows:
Proceeds from the relinquished property or properties of a single
exchange transaction will be held in a financial institution account
segregated from the intermediary’s operating funds, and each
single exchange transaction shall be identified by a specific file
number or like tracking tool so as to provide a clear paper trail
for each transaction or series of related transactions.
(SUF 9) (emphasis added).
Vesta unquestionably failed to maintain a clear paper trail for each single exchange
transaction. Indeed, this failure is the essence of the financial scheme that Dillon alleges took
place. In the Complaint, Dillon alleges that clients’ deposits “were initially placed into
segregated accounts opened for the specific purpose of receiving a client’s individual exchange
funds” and asserts that this practice satisfied the condition in the 2004 Vesta Policy. (App. Exh.
1, APP 0010-11 at ¶ 31.) In that same paragraph, however, Dillon acknowledges that the
segregated accounts were a mere sham used “to mislead clients” in believing their “money was
safe” and to “conceal the Ponzi scheme.” (Id.) Exchange funds only stayed in the individual
accounts momentarily before being swept into a “pooled ‘wire account.’” (Id., APP 0011 at ¶ 32.)
Once in the pooled account, each client’s deposit was commingled with other clients’ deposits as
well as “lulling payment” made back into the pooled account. (Id.) The testimony of Ye
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comports with the allegations made in Dillon’s Complaint, as he testified that exchanger’s funds
would initially be deposited into a sub-account at Vesta only to be quickly swept into a pooled
account. (SUF 39.) As Ye explained, throughout the 2004 Vesta Policy period, the pooled
account held an indistinguishable mixture of both IAG 1031 exchange funds and Vesta exchange
funds. (SUF 40-41.) Thus, rather than maintain a clear paper trail, Vesta did the opposite by
obscuring the path of each client’s funds to conceal the ongoing scheme. Vesta also violated the
Internal Controls Requirement by failing to require countersignatures for the release of funds
related to 1031 exchangers. (SUF 43.) The 2004 Vesta Policy stated that a “[c]ountersignature
[was] required for the release of all funds.” (SUF 9.) In his 30(b)(6) deposition, Vesta’s
corporate representative Ye, testified that Vesta did not comply with this requirement. (SUF 43.)
Because Vesta failed to comply with the Internal Controls Requirements as mandated under the
policy, it cannot recover under the 2004 Vesta Policy.
VII. CONCLUSION
Based on the foregoing, Continental respectfully requests that its Motion for Summary
Judgment be granted and that Dillon’s Motion for Summary Judgment be denied. Pursuant to
Civil L.R. 7-2(c) and 5-1(g), Continental has attached a [Proposed] Order to this Cross-Motion.
Dated: December 23, 2016 Respectfully submitted,
TROUTMAN SANDERS LLP
By: /s/ Eileen King Bower
Eileen King Bower
Peter R. Lucier
Attorneys for Defendant Continental
Casualty Company
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DEC. OF EILEEN KING BOWER ISO
CONTINENTAL’S CROSS-MOTION FOR
SUMMARY JUDGMENT
CASE NO. 5:10-CV-05238-EJD
TROUTMAN SANDERS LLP
Peter R. Lucier, Bar No. 246397
peter.lucier@troutmansanders.com
580 California Street, Suite 1100
San Francisco, CA 94104
Telephone: 415.477.5700
Facsimile: 415.477.5710
TROUTMAN SANDERS LLP
Eileen King Bower, Pro Hac Vice
eileen.bower@troutmansanders.com
55 West Monroe, Suite 3000
Chicago, IL 60603
Telephone: (312) 759-1920
Facsimile: (312) 759-1939
Attorneys for Defendant
CONTINENTAL CASUALTY COMPANY
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
THOMAS DILLON, as Court-Appointed
Receiver for Vesta Strategies, LLC and
Excalibur 1031 Group, LLC,
Plaintiff,
v.
CONTINENTAL CASUALTY
COMPANY, an Illinois corporation,
Defendant.
Case No. 5:10-CV-05238-EJD
DECLARATION OF EILEEN KING
BOWER IN SUPPORT OF
CONTINENTAL CASUALTY
COMPANY’S CROSS-MOTION FOR
SUMMARY JUDGMENT AND IN
OPPOSITION TO DILLON’S POST
APPEAL MOTION FOR SUMMARY
JUDGMENT ON THE 2004 POLICY
Date: March 30, 2017
Time: 9:00 a.m.
Location: Courtroom 4, 5th Floor
Judge: The Honorable Edward J. Davila
Case 5:10-cv-05238-EJD Document 155-1 Filed 12/23/16 Page 1 of 3
TROUTMAN SANDERS LLP
580 CALIFORNIA STREET, SUITE 1100
SAN FRANCISCO, CA 94104
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DEC. OF EILEEN KING BOWER ISO
CONTINENTAL’S CROSS-MOTION FOR
SUMMARY JUDGMENT
- 1 - CASE NO. 5:10-CV-05238-EJD
DECLARATION OF EILEEN KING BOWER
I, EILEEN KING BOWER, declare as follows.
1. I am licensed as an attorney in the State of Illinois, and am a partner in the
Chicago, Illinois office of Troutman Sanders LLP. The matters set forth in this declaration are
based on my own personal knowledge and my review of the pertinent records in this matter. If
called upon to do so, I would testify consistently with the matters set forth herein.
2. Troutman Sanders LLP is counsel of record for Defendant Continental Casualty
Company (“Continental”) in the above-captioned matter.
3. I am providing this Declaration in connection with Continental’s Cross-Motion for
Summary Judgment and Opposition to Dillon’s Motion for Summary Judgment.
4. A true and correct copy of the Complaint, ECF Docket No. 1, is attached to the
concurrently filed Continental Casualty Company’s Evidentiary Appendix in Support of its
Cross-Motion for Summary Judgment (the “Appendix”) as Exhibit 1.
5. Exhibit 2 to the Appendix is a true and correct copy of a document that was
contained in Continental’s files and was produced to the Plaintiff in discovery, BATES labeled
CNA 0227.
6. The deposition of John Terzakis took place on June 5, 2012 and July 12, 2012. A
true and correct copy of the transcript of that deposition is attached to the Appendix as Exhibit 3.
7. A true and correct copy of Deposition Exhibit 40 from the deposition of John
Terzakis is attached to the Appendix as Exhibit 4.
8. The Rule 30(b)(6) deposition of Peter Ye took place on January 24-25, 2012. A
true and correct copy of the transcript of that deposition is attached to the Appendix as Exhibit 5.
9. The deposition of Peter Ye took place on July 11, 2012. A true and correct copy
of the transcript of that deposition is attached to the Appendix as Exhibit 6.
10. The deposition of Susan Woo took place on June 11, 2012. A true and correct
copy of the transcript of that deposition is attached to the Appendix as Exhibit 7.
11. The deposition of Kristine Carlos took place on June 12, 2012. A true and correct
copy of the transcript of that deposition is attached to the Appendix as Exhibit 8.
Case 5:10-cv-05238-EJD Document 155-1 Filed 12/23/16 Page 2 of 3
TROUTMAN SANDERS LLP
580 CALIFORNIA STREET, SUITE 1100
SAN FRANCISCO, CA 94104
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DEC. OF EILEEN KING BOWER ISO
CONTINENTAL’S CROSS-MOTION FOR
SUMMARY JUDGMENT
- 2 - CASE NO. 5:10-CV-05238-EJD
12. I received a letter from Thomas Dillon dated June 11, 2010 with the subject line
“Vesta Strategies, LLC and Excalibur 1031 Group, LLC Proof of Loss” (the “June 11, 2010 Proof
of Loss”). A true and correct copy of the June 11, 2010 Proof of Loss is attached to the Appendix
as Exhibit 9.
13. A true and correct copy of Deposition Exhibit 46 from the deposition of John
Terzakis is attached to the Appendix as Exhibit 10.
14. A true and correct copy of the Court’s 7/14/2011 Order denying Defendant’s
Motion to Dismiss, Docket No. 43, is attached to the Appendix as Exhibit 11.
15. A true and correct copy of Deposition Exhibit 8 from the Rule 30(b)(6) deposition
of Peter Ye is attached to the Appendix as Exhibit 12.
16. Exhibit 13 to the Appendix contains true and correct copies of documents from
Continental’s files and produced to Plaintiff in discovery, BATES labeled CNA 0199 and CNA
0212.
17. A true and correct copy of Dillon’s Response to Continental’s First Set of
Requests for Admission is attached to the Appendix as Exhibit 14.
18. A true and correct copy of Deposition Exhibit 41 from the deposition of John
Terzakis is attached to the Appendix as Exhibit 15.
19. The deposition of Ginny Estupinian took place on June 10, 2012. A true and
correct copy of the transcript of that deposition is attached to the Appendix as Exhibit 16.
I declare under the penalty of perjury under the laws of the United States of America that
the foregoing is true and correct. Executed this 23rd day of December 2016 at Chicago, Illinois.
Eileen King Bower
20092092
Case 5:10-cv-05238-EJD Document 155-1 Filed 12/23/16 Page 3 of 3
TROUTMAN SANDERS LLP
580 CALIFORNIA STREET, SUITE 1100
SAN FRANCISCO, CA 94104
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[PROPOSED] ORDER GRANTING
CONTINENTAL’S MOTION FOR SUMMARY
JUDGMENT
CASE NO. 5:10-CV-05238-EJD
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
THOMAS DILLON, as Court-Appointed
Receiver for Vesta Strategies, LLC and
Excalibur 1031 Group, LLC,
Plaintiff,
v.
CONTINENTAL CASUALTY
COMPANY, an Illinois corporation,
Defendant.
Case No. 5:10-CV-05238-EJD
[PROPOSED] ORDER GRANTING
DEFENDANT CONTINENTAL
CASUALTY COMPANY’S CROSS-
MOTION FOR SUMMARY JUDGMENT
Date: March 30, 2017
Time: 9:00 a.m.
Location: Courtroom 4, 5th Floor
Judge: The Honorable Edward J. Davila
Case 5:10-cv-05238-EJD Document 155-2 Filed 12/23/16 Page 1 of 2
TROUTMAN SANDERS LLP
580 CALIFORNIA STREET, SUITE 1100
SAN FRANCISCO, CA 94104
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[PROPOSED] ORDER GRANTING
CONTINENTAL’S MOTION FOR SUMMARY
JUDGMENT
2 CASE NO. 5:10-CV-05238-EJD
The Motion of Defendant Continental Casualty Company (“Continental”) for Summary
Judgment was heard by this Court on March 30, 2017. The Court, having carefully considered
Continental’s cross-motion, as well as all documents filed in support of and in opposition to that
motion and the oral argument relating to that motion, finds that the material facts as set forth in
Continental’s motion are undisputed. The Court further finds, as a matter of law, that Plaintiff,
Thomas Dillon (“Dillon”), cannot recover under the insurance policy issued by Continental to
Vesta Strategies, LLC for each of the reasons set forth in Continental’s motion. Accordingly, the
Court finds that Continental is entitled to judgment as a matter of law.
Therefore, IT IS ORDERED THAT:
(1) Continental’s Cross-Motion for Summary Judgment is GRANTED;
(2) Dillon’s Post-Appeal Motion for Summary Judgment on the 2004 Policy is DENIED;
(3) Summary Judgment is entered in favor of Defendant Continental and against Plaintiff
Thomas Dillon; and
(4) Plaintiff’s Complaint in this action is dismissed with prejudice.
Dated:
Edward J. Davila
United States District Court Judge
29825119v1
Case 5:10-cv-05238-EJD Document 155-2 Filed 12/23/16 Page 2 of 2