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Known Litigation Holdings, LLC v. Navigators Ins. Co.

United States District Court, D. Connecticut

June 24, 2016

KNOWN LITIGATION HOLDINGS, LLC, Plaintiff,
v.
NAVIGATORS INSURANCE CO., NEW ENGLAND CASH DISPENSING SYSTEMS, Inc., and INTEGRATED MERCHANT SYSTEMS, LLC, Defendants.

          RULING ON CROSS-MOTIONS FOR SUMMARY JUDGMENT AND MOTIONS FOR DEFAULT JUDGMENT

          Janet Bond Arterton, U.S.D.J.

         This litigation began in 2012, when Plaintiff Known Litigation Holdings, LLC ("KLH"), the successor assignee of Domestic Bank, filed a complaint against Defendants Navigators Insurance Company, Navigators Management (UK) Ltd., and Certain Interested Underwriters at Lloyd's of London (collectively "Navigators"), [1] seeking payment on several insurance policies issued by Navigators to New England Cash Dispensing Systems, Inc. ("NECD") and its affiliate, Integrated Merchant Systems, LLC ("IMS"), on which Domestic Bank was the loss payee. Following this Court's ruling [Doc. # 34] on Navigators' motion to dismiss, KLH amended its complaint to include NECD and IMS as defendants, as ordered by this Court. Navigators subsequently filed an answer [Doc. #51] asserting several cross-claim against NECD and IMS.

         When the insolvent NECD and IMS failed to respond, default entered [Doc. ## 70, 71] against them. At that time, KLH moved to intervene in the cross-claims for the purpose Case 3:12-cv-00269-JBA Document 184 Filed 06/24/16 Page 2 of 27 of opposing default judgment against NECD and IMS. The Court permitted [Doc. # 89] KLH to intervene, but denied [Doc. # 99] both KLH's motion to vacate the entry of default and Navigators' motion for default judgment. Navigators now move [Doc. ## 121, 123], once again, for default judgment, as well as for summary judgment on KLH's complaint [Doc. # 165] and on Navigators' cross-claims [Doc. # 168]. KLH moves [Doc. # 164] for partial summary judgment. Oral argument was held on June 22, 2016. For the following reasons, Navigators' Motion for Summary Judgment is granted; Navigators' Motion for Summary Judgment on their Cross-Claims is granted; KLH's Motion for Partial Summary Judgment is denied, and Navigators' Motions for Default Judgment are denied as moot.

         I. Factual Background A. The Courier Agreement

         Non-party Joseph Sarlo formed IMS, an ATM company, in 1997. (2007 Ins. Appl., Ex. Z to Defs.' Loc. R. 56(a) 1 Stmt. [Doc. # 167] at 20.) In 2000, IMS entered into a partnership with a Connecticut telephone company and began operating as NECD, with Mr. Sarlo at its helm as CEO.[2] (See Lowers Loss Report # 3, Ex. 14 to Breitenbach Reply Decl. [Doc. # 176] & Ex. K to Defs.' Loc. R. 56(a) 1 Stmt, at 9; Baker Opp'n Decl. [Doc. # 175-29] 5" 14.) Later that year, Mr. Sarlo reached an agreement with Craig Baker, then-Executive Vice President of Domestic Bank, pursuant to which NECD would service Domestic Bank's ATMs. (Baker Opp'n Decl. ¶ 2, 12.)

         Although initially NECD provided the cash for the ATMs, in 2003, Domestic Bank took over this function. (Lowers Loss Report # 3 at 9-10.) In 2006, NECD entered into a Courier Agreement with Domestic Bank, under which "NECD was required to pick up cash owned by Domestic Bank from Mount Vernon Money Center ['MVMC'], an armored car and cash management service" and transfer the money to ATMs. (Baker Opp'n Decl. f 15.) The Courier Agreement additionally provided that NECD would maintain insurance for any losses of the Bank's money, and that such insurance would name Domestic Bank as the loss payee. (See Courier Agreement, Ex. 2 to Breitenbach Opp'n Decl. [Doc. # 175-12] ¶¶ 2.)

         B. The Insurance Policies at Issue[3]

         In compliance with the Courier Agreement, in each of February 2007, January 2008, January 2009, and December 2009, Mirza Baig, an NECD employee, submitted an application on behalf of NECD to Navigators for Armored Car Operators' insurance. (See 2007 Ins. Appl.; 2008 Ins. Appl., Ex. AA to Defs.' Loc. R. 56(a) 1 Stmt.; 2009 Ins. Appl., Ex. BB to Defs.' Loc. R. 56(a) 1 Stmt.; 2010 Ins. Appl., Ex. RR to Defs.' Loc. R. 56(a) 1 Stmt.) Each application, completed and signed by Mr. Baig, included the following question and answer: Q: "In the last 6 years have you or any predecessor company suffered a loss or losses, whether covered by insurance or not and if insured whether a claim was paid or not?" A: "No." (Id.)

         Each year, following their receipt of each application, Navigators issued NECD an insurance policy effective for a period of one year, beginning in February 2007, which covered Armored Car Transit Risks, Vault/Premises Risks, and Unarmored Vehicle Transit Risks. (See 2007 Ins. Policy, Ex. DD to Defs.' Loc. R. 56(a) 1 Stmt. & Ex. 7 to Breitenbach Opp'n Decl.; 2008 Ins. Policy, Ex. EE to Defs.' Loc. R. 56(a) 1 Stmt. & Ex. 8 to Breitenbach Opp'n Decl; 2009 Ins. Policy, Ex. FF to Defs.' Loc. R. 56(a) 1 Stmt. & Ex. 9 to Breitenbach Opp'n Decl.; 2010 Ins. Policy, Ex. GG to Defs.' Loc. R. 56(a) 1 Stmt. & Ex. 10 to Breitenbach Opp'n Decl.) Each policy included the following clauses:

This policy covers the liability of the insured, assumed by the contract or otherwise, for loss of or damage to property [the definition of which includes currency] . . . arising from any cause whatsoever, in transit or otherwise, including any act or omission of the insured or any of its employees, or anyone acting in its service ....
It is understood and agreed that the insured will use night depositories of Banking Institutions in the handling of property of certain of its customers and that this policy shall cover the liability of the insured to such customers with respect to such property while the same is in the custody of Banking Institutions operating such night depositories.
It is further understood the insured will keep accurate records of the number and amounts of such deposits and will obtain a receipt from the bank on the next banking day following the use of the night depository....
The insured upon knowledge of any loss, shall give prompt notice thereof to Marshall & Sterling . . . and shall give immediate notice thereof to the public police or other peace authorities having jurisdiction....
Directors & Officers Exclusion Clause: This policy does not cover loss directly resulting from any act(s), or error(s), or omission(s) of Directors or Officers of the Assured except where such Director or Officer is performing acts coming within the scope of the usual duties of an employee of the Assured....
Loss Payment Rider: In the event that the insured is entitled to any payment under this policy, it is agreed that the insured may designate, in writing, a customer to whom payment or any part thereof shall be made. It is further understood and agreed that the insured's designee has no rights under the contract of insurance. The only right conferred is the right to receive direct payment in accordance with this rider .... Potential Designated Customer(s):- Domestic Bank....

(Id.)

         C. The Conspiracy and Its Aftermath

         In February 2010, nearly four years after signing the Courier Agreement, Domestic Bank learned that the Government was investigating MVMC. (Baker Opp'n Decl. ¶ 38.) Concerned, Mr. Baker met with Mr. Sarlo on February 23, 2010, at which time Mr. Sarlo allegedly confessed that a great deal of Domestic Bank's money was missing. (Id. ¶ 39.) Mr. Sarlo and several other NECD employees, namely, Mirza Baig, Gary Vestuti, and John DeMilo, subsequently pled guilty to one count of conspiracy to commit bank fraud, in violation of 18 U.S.C. §§ 1349, 1344, and were found jointly and severally liable for restitution in the amount of $4, 805, 540. (See Sarlo Judgment, Ex. O to Defs.' Loc. R. 56(a) 1 Stmt.; DeMilo Judgment, Ex. JJ to Defs.' Loc. R. 56(a) 1 Stmt; Vestuti Judgment, Ex. MM to Defs.' Loc. R. 56(a) 1 Stmt; Baig Judgment, Ex. E to Defs.' Loc. R. 56(a) 1 Stmt.)

         On March 31, 2010, Norman Jay Bolotow, secretary and counsel to Domestic Bank, wrote to Mr. Sarlo on behalf of Domestic Bank to notify him that NECD's ATMs were short more than $4, 805, 540 and to demand immediate reimbursement of that amount. (Bolotow Ltr. Mar. 2010, Ex. 11 to Breitenbach Opp'n Decl. at 2.) Domestic Bank also contacted Marshall & Sterling, the broker through which NECD had obtained its insurance policies, to notify it of the loss. (Baker Opp'n Decl. ¶ 43.)

         In response, in June 2010, Lowers & Associates, on behalf of Navigators, commenced an investigation into the claimed losses. (See generally Lowers Reports, Ex. 14 to Breitenbach Reply.) On August 31, 2010, Lowers & Associates, again on behalf of Navigators, issued a Reservation of Rights letter, in which it stated that its "preliminary investigation reveals that one or more of the [following] policy terms may apply . . . and that there may be no coverage under the policy based on a violation of policy conditions or because of the applicability of a policy exclusion": the night depositories/record-keeping clause, the notice clause, the cooperation clause, the directors and officers exclusion clause, and the loss payment rider. (Reservation of Rights Ltr., Ex. 12 to Breitenbach Opp'n Decl.) Three months later, on November 29, 2010, Lowers & Associates/Navigators sent NECD/Domestic Bank a "notice of rescission" and "disclaimer of coverage" in which they asserted that Navigators had "determined that the policies issued to [NECD] and [IMS] ... are subject to rescission on account of material misrepresentations" and violations of the clauses listed in the reservation of rights letter. (Rescission Ltr., Ex. 13 to Breitenbach Opp'n Decl.) This litigation ensued.

         D. Timing of the Conspiracy

         The record is somewhat unclear as to when the conspiracy between Mr. Sarlo, Mr. Baig, Mr. Vestuti, and Mr. DeMilo began, and when Mr. Sarlo in particular learned about it. By KLH's telling, the conspiracy began in 2006 or 2007, [4] [see 2d Am. Compl. f 47 ("Upon information and belief, the scheme to defraud Domestic Bank and its implementation against Domestic Bank by NECD, IMS and/or their respective principals, employee and/or agents was ongoing and continuous from 2006 through at least February 23, 2010 and possibly thereafter . .. ."); Pl.'s Mem. Supp. Mot. Summ. J. [Doc. # 164-15] at 8 ("Starting around 2007, some of NECD/IMS's employees . . . began diverting Domestic Bank cash intended to refill ATMS to themselves for their personal use."[5])), but Mr. Baker avers that Mr. Sarlo did not learn about it until "much later" (see Pl.'s Loc. R. 56(a)2 Stmt. [Doc. # 175] ¶¶ 9, 10 (citing Baker Opp'n Decl. ¶¶ 35-37)).

         Mr. Sarlo, himself, however, told Navigators' investigator, Don Mark Lowers, that "sometime during 2005-2006 he was told by his Vault Manager Baig that whatever NECD operating monies Sarlo thought was in the vault wasn't even close to what was actually there, " and that Mr. Sarlo, upon learning this, "agreed to" let Mr. Baig "cover-up" the losses. (Lowers Loss Report # 3 at 10.) As discussed below, Mr. Baker's testimony to the contrary is not competent evidence to create a dispute of material fact on this point because, as Navigators argue, it is not based on personal knowledge. See Fed. R. Civ. P. 56(c)(4) ("An affidavit or declaration used to support or oppose a motion must be made on personal knowledge, set out facts that would be admissible in evidence, and show that the affiant or declarant is competent to testify on the matters stated."). Mr. Baker admitted in his deposition testimony that he had no personal knowledge of the conspiracy or of any of the allegations about the conspiracy that appear in Mr. Sarlo's Information, including when the conspiracy began and when Mr. Sarlo became involved with it. (See Baker Dep., Ex. H to Defs.' Loc. R. 56(a) 1 Stmt, at 69-73.)

         Because KLH presents no other evidence to dispute Mr. Sarlo's statement, the Court assumes, for the purpose of ruling on these motions, that Mr. Sarlo and Mr. Baig began to participate in the conspiracy no later than 2006.

         II. Discussion[6]

         A. Evidentiary/Procedural Disputes

         Before the Court can reach the merits of these motions, there are a number of evidentiary and procedural issues raised by the parties that must be addressed.[7] These include: the admissibility of Mr. Baig's memorandum in aid of sentencing submitted to the Court in his criminal case; the admissibility of Mr. Sarlo's statements to Mr. Lowers of Lowers & Associates; the admissibility of Mr. Baker's statements in his Declarations; and the effect of the entry of default against NECD and IMS at this juncture.[8] The Court addresses these issues in turn.[9]

         1. Mr. Baig's Sentencing Memorandum

         Navigators contend that Mr. Baig's statements in his sentencing memorandum in his underlying criminal case are admissible here as either judicial admissions or statements against interest. (Defs.' Mem. Supp. Mot. Summ. J. [Doc. # 166] at 15-16.) KLH disputes both claims. (See Pl.'s Opp'n at 21-24.)

         a. Judicial Admissions

         Judicial admissions are "'formal concessions ... by a party or counsel that have the effect of withdrawing a fact from issue and dispensing wholly with the need for proof of the fact.'" Hausler v. JP Morgan Chase Bank, N.A., 127 F.Supp.3d 17, 36 (S.D.N.Y. 2015) (quoting Hoodho v. Holder, 558 F.3d 184, 191 (2d Cir. 2009)). When a party makes a judicial admission, " through, for example, "[f] actual assertions in pleadings and pretrial orders, " AMEX Assurance Co. v. Caripides, 179 F.Supp.2d 309, 323 (S.D.N.Y. 2002), "that party 'normally is bound [by that admission] throughout the course of the proceeding, '" Hausler, 127 F.Supp.3d at 37 (quoting Bellefonte Re Ins. Co. v. Argonaut Ins. Co., 757 F.2d 523, 528 (2d Cir. 1985)).

         However, as Plaintiff argues, courts in this Circuit have generally found that "a judicial admission only binds the party that makes it in the action in which it is made, not 'in separate and subsequent cases.'"[10] Hausler, 127 F.Supp.3d at 37 (quoting Am. Tissue, Inc. v. Donaldson, Lufkin & Jenrette Sec. Corp., 351 F.Supp.2d 79, 96 (S.D.N.Y. 2004)); see also Fed. Treasury Enter. Sojuzplodoimport v. Spirits Infl B. V., 56 F.Supp.3d 383, 387 n.22 (S.D.N.Y. 2014) ("[A] party's assertion of fact in a pleading is a judicial admission by which it normally is bound throughout the course of the proceeding, [sic] it is not considered binding in a subsequent proceeding." (internal quotation marks omitted)). As such, KLH is not bound by judicial admissions made by Mr. Baig in his underlying criminal case.

         b. Statements ...


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