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David H. Marion, Receiver Civil Action For Bentley Financial Services, Inc. v. Hartford Fire Insurance

January 26, 2012

DAVID H. MARION, RECEIVER CIVIL ACTION FOR BENTLEY FINANCIAL SERVICES, INC.
v.
HARTFORD FIRE INSURANCE



The opinion of the court was delivered by: Goldberg, J.

MEMORANDUM OPINION

Plaintiff, David H. Marion, in his capacity as receiver for Bentley Financial Services, Inc., ("BFS"), has filed suit against Defendant, Hartford Fire Insurance Co., seeking coverage under a fidelity bond. Plaintiff's claims pertain to alleged losses suffered by BFS in connection with the fraudulent activity of Robert Bentley, BFS's President and controlling shareholder. As a result of his scheme, Bentley was convicted of mail fraud and related offenses, and was subsequently sentenced to 55 months imprisonment.

Before the Court are the parties' cross motions for summary judgment and Defendant's motion for leave to amend its pleadings. Because I conclude that Plaintiff has failed to show that BFS suffered a loss within the meaning of the fidelity bond, Defendant's motion for summary judgment will be granted, and Plaintiff's cross motion for summary judgment will be denied. Defendant's motion for leave to amend will be denied as moot.

I. FACTUAL AND PROCEDURAL HISTORY

Unless otherwise indicated, the facts below are undisputed.*fn1 BFS is a Pennsylvania corporation established by Bentley as an investment firm specializing in the brokering of bank-issued certificates of deposit ("CDs"). (Compl. ¶¶ 13, 29.) Generally, such investment firms are "responsible with connecting CDs available for purchase from banks with particular investors" and facilitating the purchase of CDs by investors. Marion v. TDI Inc., 591 F.3d 137, 141 (3d Cir. 2010). Bentley was the President and controlling shareholder of BFS. (Pl.'s Resp., Ex. 1 ¶ 3) ("Bentley Certification of Facts.")*fn2 In 1994, Bentley created Entrust Group ("Entrust"), a sole proprietorship, to act as custodian of the CDs brokered by BFS.*fn3 (Bentley's Certification of Facts ¶ 4; Trial Tr., May 25, 2006, p. 90.)

From approximately June 1996 until on or about October 23, 2001, Bentley orchestrated a Ponzi scheme which "involved the sale by BFS of privately-issued, unregistered BFS notes and obligations" to numerous individual and institutional investors who believed they were purchasing bank-issued, FDIC-insured CDs. (Bentley Certification of Facts ¶ 8.) BFS's clients were not informed that the CDs allegedly purchased by BFS and held by Entrust were often not backed by actual CDs, but were instead unsecured BFS notes. (Id. ¶ 10.) In some instances, when real CDs were involved, BFS would sell the same CD to multiple investors.(Id.) On other occasions, BFS's clients were not informed that the CDs that they were allegedly purchasing were callable CDs, which meant that a bank could close out the CD before the stated maturity date on a client's investment contract. This increased the risk that BFS would not be able to pay principal and interest to clients as the payments came due. See(Trial Tr., May 25, 2006, pp. 105-108) (explaining the concept of callable CDs and how callable CDs affected BFS's ability to meet its payment obligations to its clients).

From the beginning of the scheme, the amount of BFS's liabilities exceeded the value of the assets in the underlying Entrust portfolio, and BFS's ability to meet its obligations depended on its ability to attract new investors. (Bentley Certification of Facts ¶ 11.) Because BFS only had liabilities, and Entrust held all the assets, BFS "had no capital or source of funds other than funds received from the BFS investors and earnings on such funds[.]" (Id. ¶ 12); see id. ¶ 14(a) ("[T]he sole source of funds used to purchase assets in the receivership was funds of BFS investors and earnings on those funds; the assets of the receivership estates were derived from BFS investor funds; and the receivership estates should be used to reimburse the BFS investors"). Thus, BFS had to rely on investor funds held in the Entrust accounts to pay salaries, commissions, and other expenses. (Id. ¶ 11.) By May 10, 2002, BFS's liabilities to its clients "exceeded cash, cash equivalents and CD assets held by BFS and Entrust . . . by approximately $18 million without regard to timing and present value issues[.]" (Def.'s Mot., Ex. 2 at 8.) As noted previously, this scheme ultimately resulted in Bentley's conviction for fraud.

On October 24, 2001, after the SEC filed suit against Bentley, BFS, and Entrust, Plaintiff was named as Receiver by the Honorable Jay C. Waldman. See(Pl.'s Resp., Ex. 17.) Plaintiff now seeks indemnification under a fidelity bond insuring BFS against losses resulting from employee dishonesty or fraud.*fn4 (Compl. ¶ 25.)

The fidelity bond in question was issued by Hartford on October 9, 1999, naming BFS and Entrust as insureds. The bond was renewed twice to extend coverage through October 9, 2004. (Compl. ¶¶ 15, 17.) Pursuant to the terms of the bond, coverage automatically terminated on October 24, 2001, upon the appointment of Plaintiff as Receiver for BFS. (Fidelity Bond, Conditions and Limitations § 12: Termination or Cancellation.)The fidelity bond provides indemnification for covered losses discovered during the bond period up to a limit of $2,000,000, less a $10,000 deductible. (Compl. ¶¶ 2, 19.)

Plaintiff submitted a proof of loss to Hartford on June 22, 2002 seeking indemnification for BFS's alleged losses in the full amount provided for in the bond, less the $10,000 deductible. (Compl. ¶¶ 28, 67.) The relevant provisions of the bond state:

Insuring Agreement (A) of the fidelity bond indemnifies the insured, BFS, for:

Loss resulting directly from dishonest or fraudulent acts committed by an Employee acting alone or in collusion with others.

Such dishonest or fraudulent acts must be committed by the Employee with ...


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