CITATION: TD Bank, N.A. v. Lloyd’s Underwriters, 2016 ONSC 8006

COURT FILE NO.: CV-14-495750

DATE: 20161222

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

TD BANK, N.A.,

Plaintiff

– and –

LLOYD'S UNDERWRITERS" THAT SUBSCRIBE TO POLICY NUMBER MMF/1710, PRIMARY LONDON REFERENCE NUMBER B0509QA025509 AND EXCESS LONDON REFERENCE NUMBERS QA025609, QA025709, QA025809, AND QA025909, ANTARES UNDERWRITING LIMITED FOR ITSELF AND ON BEHALF OF ALL MEMBERS OF LLOYD'S SYNDICATE 1274 (AUL)FOR THE OPERATING YEAR OF 2009, CATLIN SYNDICATE LIMITED FOR ITSELF AND ON BEHALF OF ALL MEMBERS OF LLOYD'S SYNDICATE 2003 (SJC) FOR THE OPERATING YEAR OF 2009, NOVAE CORPORATE UNDERWRITING LIMITED AND/OR NOVAE SYNDICATES LIMITED FOR THEMSELVES AND ON BEHALF OF ALL MEMBERS OF LLOYD'S SYNDICATE 2007 (NVA)FOR THE OPERATING YEAR OF 2009, ACE CAPITAL LIMITED, AVE CAPITAL IV LIMITED, AND ACE CAPITAL V LIMITED FOR THEMSELVES AND ON BEHALF OF ALL MEMBERS OF LLOYD'S SYNDICATE 2488 (AGM) FOR THE OPERATING YEAR OF 2009, BRIT UW LIMITED FOR ITSELF AND ON BEHALF OF ALL MEMBERS OF LLOYD'S SYNDICATE 2987 (BRIT) FOR THE OPERATING YEAR OF 2009, CHAUCER CORPORATE CAPITAL (NO. 3) LIMITED, CHAUCER CORPORATE CAPITAL (NO. 2) LIMITED, AND/OR IRONSHORE CORPORATE CAPITAL LTD. FOR THEMSELVES AND ON BEHALF OF ALL MEMBERS OF LLOYD'S SYNDICATE 4000 (PEM) FOR THE OPERATING YEAR OF 2009, ASPEN INSURANCE UK LIMITED, GREAT LAKES REINSURANCE (UK) PLC, LEXINGTON INSURANCE COMPANY, AIG INSURANCE COMPANY OF CANADA (FORMERLY KNOWN AS AIG COMMERCIAL INSURANCE COMPANY OF CANADA), AIG COMMERCIAL INSURANCE COMPANY OF CANADA, CHARTIS EXCESS LIMITED (FORMERLY KNOWN AS AIG EXCESS LIABILITY INSURANCE INTERNATIONAL LIMITED), ALLIED WORLD ASSURANCE COMPANY LTD., ARCH INSURANCE COMPANY, AXIS SPECIALTY INSURANCE COMPANY, AXIS SPECIALTY LIMITED, CHUBB INSURANCE COMPANY OF CANADA, HOUSTON CASUALTY COMPANY, LIBERTY MUTUAL INSURANCE COMPANY, MARKEL BERMUDA LIMITED (FORMERLY KNOWN AS MAX BERMUDA LTD.) AND OR MAX BERMUDA LTD., XL INSURANCE COMPANY PLC (FORMERLY KNOWN AS XL INSURANCE COMPANY LIMITED) AND OR XL INSURANCE COMPANY LIMITED and ENDURANCE SPECIALTY INSURANCE LTD.

Defendants

W. G. Scott, H. Afarian, for the Plaintiff

G. Luftspring and S. Sasso, for the Defendants Underwriters and Axis

J. Halfnight and A. Juntunen, for the Defendant Liberty Mutual Insurance

P. Green and D. Vaillancourt, for the Defendant AIG

C. Reain and C. Lui, for the Defendant ARCH Insurance

E. Dolden and G. Gill, for the Defendant Allied World

HEARD: December 6-7, 2016

REASONS FOR PARTIAL SUMMARY JUDGMENT

S. F. Dunphy, J.

[1] This is an unusual partial summary judgment motion. The plaintiff TD Bank, N.A. suggests that there is a key point of contention between the parties that can be resolved on a narrow factual record. The issue requires the interpretation of the insurance policy on which its claim is based. It has selected three of the nineteen claims it paid out and seeks indemnity for under its insurance policy as “test cases” because of the clarity of the factual record in those three cases.

[2] TD was sued for its role in a Ponzi scheme orchestrated by a Florida customer of the bank. TD was defendant in nineteen separate law suits. One proceeded to trial. TD lost that case and settled the others soon thereafter. TD is now claiming indemnity under its insurance policy for what it paid out. A very significant issue that separates the parties is whether the phrase “such direct financial loss sustained by the Assured” used in the Policy applies solely to losses by TD of its own funds or whether it may also apply to losses of third party victims of the fraud for funds transferred by them to TD.

[3] The evidence establishes that one or more TD employees, acting as such, knowingly participated in acts of fraud that resulted in the three named victims making transfers of funds to TD. The fraudulent circumstances of the transfers permit me to conclude that TD received those funds as constructive trustee subject to obligations to account in favour of the victims. Instead of discharging its obligations to the victims, TD credited the funds to unrestricted accounts controlled by the mastermind of the fraud. The funds are now gone. The claims of each of the three victims – now paid by TD – was in respect of the loss of the very funds they had transferred to TD as a result of, among other things, the knowing fraud of TD’s employee.

[4] TD claims that such losses are its losses and thus “direct financial losses” described by the preamble to the Policy. .

[5] The insurer defendants maintain that only losses of funds or property of TD in its own right (“first party losses”) are covered by the subject Policy and say that TD’s claim is for what is in reality third party losses of the victims. They also submit that this motion is not an appropriate one for summary judgment in favour of TD and ought instead to be decided in conjunction with all of the other coverage issues and factual disputes raised by the parties in their pleadings. Despite the expressed reservations about partial summary judgment, the defendants nevertheless sought judgment on the “third party loss” issue in their favour.

[6] What makes this motion unique is that TD is seeking partial summary judgment in respect of only three of the nineteen claims it settled and in that case only in the form of a declaration that:

“the financial losses TD sustained because of the involvement of a dishonest former employee of TD, Frank Spinosa, in a fraudulent scheme relating to (i) the Coquina Investors because of the Coquina verdict and judgment, and (ii) TD’s settlement with Razorback Funding LLC, and (iii) TD’s settlement with BFMC Investments LLC, were “direct” within the meaning of the second paragraph of the Preamble …of the Bond which provides, in part, that the Defendant-Underwriters will “make good to the Assured…such direct financial loss sustained by the Assured”.

[7] TD is not seeking judgment on the remaining prerequisites for coverage under the Policy for even these three claims – it has restricted itself to clearing away the first, and in its view most significant of the obstacles to judgment raised by the defendants in their statements of defence.

[8] For the more detailed reasons that follow, I have decided that this case is an appropriate one for partial summary judgment because of and not despite its narrow scope. The issue to be decided is a narrow one. It is a question of interpretation requiring very few findings of fact but is central to the action. The question raised has significant potential to narrow the issues for trial materially. Given the unique features of this case (including findings of fact made in a prior trial) and its early stage, there is no material risk either of duplication or of conflicting judgments. Considerations of efficiency and proportionality favour a decision now. Finally, although protesting the plaintiff’s recourse to partial summary judgment in their arguments, the defendants have advanced as their primary prayer for relief on this motion a request for judgment on the very issue, albeit in their favour. In substance, they are in substance agreeing that the issue is appropriate for summary judgment (as to which see Rule 20.04(2)(b) of the Rules of Civil Procedure).

[7] I also find that TD is entitled to the declaration sought (with some variations) for the reasons that follow. The claim of each of the three named victims was at least in part for funds shown by uncontradicted evidence to have been deposited by them into one or more accounts at TD. The funds have been lost and the accounts closed without satisfying the claims of the victims. TD has thus sustained a direct financial loss within the meaning of the preamble to Section One (A) of the Policy. In so finding, I express no view regarding the applicability of any pleaded Policy exclusions, the precise amount of the direct financial loss sustained by TD in this fashion or any conditions relating to the applicability of the relevant Insuring Clause other than the second paragraph of Section One (A) of the Policy.

Facts and overview

[9] This claim arises from TD having become entangled in a $1.2 billion Ponzi scheme operated by Mr. Scott Rothstein operating through his law firm “Rothstein, Rosenfeldt & Adler, P.A.” (or “RRA”). The Rothstein Ponzi Scheme operated between 2005 until late October 2009 when it unravelled. While there were variations on the theme, the main thrust of the scheme was the sale by Mr. Rothstein to various “investors” of an interest in fictitious settlements of non-existent litigation claims supposedly handled by his law firm. It was represented that clients of RRA were the beneficiaries of the settlements and wished to sell their future payments for a lump sum at a discount. The levels of outright fiction or partial truth represented to the victims varied from instance to instance, with pure fiction being the more predominant scheme.

[10] Mr. Rothstein’s efforts earned him a lavish lifestyle for a period of time but have now resulted in his becoming a permanent guest at a penal institution of the State of Florida where it can reasonably be anticipated he will spend the remainder of his years, having received a 50 year sentence without possibility of parole at the age of 47 years. As is usually the case in such matters, the victims must look elsewhere than to the mastermind of the fraud to seek redress. TD had the singular good fortune to have acquired the bank that provided most of the banking services to Mr. Rothstein and RRA in 2008, about a year before the fraud was discovered.

[11] A number of people found themselves in trouble as a result of the unravelling of the Ponzi scheme run by Mr. Rothstein. One such person was Mr. Frank Spinosa, a Regional Vice President of TD in Florida. Mr. Spinosa was the principal banker in charge of TD’s relationship with Mr. Rothstein and his law firm while the scheme was in operation. In October 2015 Mr. Spinosa entered into a Plea Agreement with the United States of America in relation to a single count of wire fraud and agreed to the terms of a Factual Proffer In Support outlining his role in one instance of fraud involving $2.4 million received from BFMC Investment, LLC. On December 18, 2015, Mr. Spinosa was sentenced to 2 ½ years in prison in connection with that plea. I shall return to Mr. Spinosa’s admissions later.

[12] TD was ultimately named defendant in nineteen actions. One such action – Coquina Investments v. Scott W. Rothstein and TD Bank, N.A. - went to trial before a jury in late 2011. On January 18, 2012 the jury returned a verdict in favour of the plaintiff and awarded compensatory damages of $32 million plus $17.5 million in punitive damages[^1]. The trial judge upheld the award and denied a motion for a new trial on September 28, 2012. On July 29, 2014 the United States Court of Appeal for the 11th Circuit denied TD’s appeal and affirmed the judgment. TD has since paid the judgment in full.

[13] The remaining claims were settled after the jury verdict in Coquina. TD pleads that it paid out USD$443,342,168.45 to settle the claims arising from the Rothstein Ponzi Scheme and USD$46 million in defence costs. TD is not seeking judgment for that amount on this motion. At all events, the Policy under which TD is claiming is limited to $300,000,000 with a rather hefty deductible of $100,000,000. The finer points of loss accounting are not likely to be the main stumbling block in resolving this claim since TD’s out-of-pocket loss arising from involvement with the Rothstein Ponzi Scheme far exceeds the amount for which it has potential coverage.

[14] The plaintiff filed two rather spare affidavits in support of this motion. The two affidavits were largely confined to uncontested facts or to attaching public record documents, largely consisting of findings in the regulatory proceedings or documents relating to the plea arrangements and sentencing of Mr. Rothstein and Mr. Spinosa. Neither affiant was subjected to cross-examination. The defendants declined to file any responding evidence to contradict or explain any of the evidence filed by the plaintiff. Many of the public record documents attached to the affidavits were in fact referenced and relied upon by most of the defendants in their respective statements of defence, thereby incorporating them by reference in their own pleadings in any event.

[15] Given the “best foot forward” principle applicable to motions for summary judgment – to be applied with appropriate reservations for the limited scope of this particular motion (i.e. the defendants are not held to produce responding evidence on matters not raised by the motion itself) – the evidence adduced by the plaintiff can be assumed by me to be largely uncontroversial or admitted unless inherently unreliable by its nature. Where I have reservations about the quality of the evidence produced before me in terms of my ability fairly to form reliable conclusions in the absence of a full trial, I shall so indicate.

[16] Specific information concerning only three of the nineteen claims made against TD was provided by the plaintiff for this motion. TD is of the view that the objective facts relating to these three claims provides a basis on which partial summary judgment may safely proceed. I shall accordingly review the evidence in relation to each.

BFMC and Razorback

[17] BFMC Investment LLC and Razorback Funding LLC were two of thirty-four listed plaintiffs in the Razorback Complaint made against TD in the Florida Circuit Court, a copy of which was attached to the affidavit of Katherine Stubits. BFMC was not a customer of TD Bank while Razorback was.

[18] The Razorback Complaint alleges that BFMC invested $2,400,000 into the Ponzi scheme on October 15, 2009 and that Razorback Funding LLC invested a total of $32,000,000 between October 1, 2009 and October 26, 2009. These two victims were among the last in as the Rothstein Ponzi Scheme unraveled very shortly afterwards. The Complaint pleads that TD was the “epicenter” of the Rothstein Ponzi Scheme as hundreds of millions, if not billions, of Ponzi dollars flowed through RRA’s TD Bank escrow, trust and operating accounts. TD was alleged to have knowingly participated, conspired, substantially assisted and otherwise knowingly aided and abetted in the fraudulent conduct.

[19] The affidavit of Mary Drames confirms that Razorback Funding LLC was a customer of TD who transferred $18,475,000 from its own account at TD to an identified TD RRA account by wire transfer on October 2, 2009 and a further $7,100,000 was received by wire transfer from the same customer for deposit to the same TD RRA account on October 5, 2009.

[20] In October 2015[^2], TD’s former employee Mr. Spinosa entered into a Plea Agreement with the United States of America pursuant to which a “Factual Proffer in Support of Plea Agreement” was signed by him. The Factual Proffer contains general admissions concerning the operation of the Rothstein Ponzi Scheme as well as particulars of the participation of Mr. Spinosa in the investment of BFMC in the scheme. In particular, it admits:

a. The general particulars of the Rothstein Ponzi Scheme in which new investor’s funds were used to fund payments to previous investors in the absence of any underlying security or legitimate investment vehicle and that investors were informed that litigation settlements could be purchased by them at a discount with amounts being paid into trust accounts at TD that would only be used to pay investors although there were no such settlements;

b. Spinosa signed a “Lock Letter” dated October 15, 2009 acknowledging that funds in the referenced account would only be distributed to BFMC’s own account at Colonial Bank;

c. Spinosa knew that the “Lock Letter” contained false and fraudulent representations and that the account was not in fact so restricted;

d. Based in part on the Lock Letter, BFMC invested $2,400,000 on the same day as it received the Lock Letter; and

e. BFMC’s funds were sent to a TD account by wire transfer from Colonial Bank, were held in the designated account and then distributed at the direction of Rothstein for his own benefit or to further his fraudulent scheme by paying investors.

[21] As a result of the Plea Agreement, Mr. Spinosa was sentenced to 30 months (2 ½ years) imprisonment.

[22] The Razorback Complaint alleges that Razorback Funding LLC received a “Lock Letter” signed by Spinosa representing, among other things that “all funds contained in the above referenced account …shall only be distributed to …Razorback” at its TD Bank account. The affidavit of Katherine Stubits attached a copy of the Razorback Lock Letter dated October 1, 2009 in form materially identical to the BFMC Lock Letter which was also attached.

[23] The Razorback Complaint was settled pursuant to the Razorback “Settlement Agreement and Releases” entered into by the parties in March 2012. The affidavit of Mary Drames confirms a wire transfer by TD of the amount of $170,000,000 in payment of the Razorback Settlement on March 12, 2012. Razorback and BFMC were both parties to the settlement. The settlement is a full and final settlement of all claims of the listed plaintiffs including Razorback Funding LLC and BFMC relating to the Ponzi scheme referenced in the action. Other than an allocation of $50,000,000 to attorney fees, the settlement funds are not otherwise allocated between the various plaintiffs in the Settlement Agreement.

[24] I have inferred from the settlement that at least some of the $170,000,000 was allocated and paid to Razorback Funding LLC and BFMC in satisfaction of their claims against TD. I have also inferred that the admissions made by Mr. Spinosa in his Plea Agreement regarding the BFMC Lock Letter, being admissions against interest that resulted in him receiving a prison sentence, may reliably be extended to the contemporary Lock Letter sent to Razorback Funding LLC. In both cases, I find that the interests of justice do not require a trial to establish these facts and that I may reliably make these inferences from the facts proved before me that have not been contested by the defendants with any affirmative evidence.

[25] I therefore find that both Razorback Funding LLC and BFMC transferred funds to TD in reliance upon, among other things, the Lock Letters executed by Mr. Spinosa which Lock Letters Mr. Spinosa knew to contain false and fraudulent information. The letters were not a private gag between Mr. Spinosa and Mr. Rothstein – they were intended to be shown to the victims and were in fact shown to them and relied upon by them. Mr. Spinosa has admitted his actions and been sentenced to significant time in jail in respect of BFMC as a result.

[26] Based on the fraudulent Lock Letters of Mr. Spinosa from August and September 2009 in Coquina (referred to below) plus the admissions of Mr. Spinosa in relation to the slightly later Lock Letter in BFMC – I have inferred that Mr. Spinosa’s admissions may safely be extended to the contemporary and materially identical situation of Razorback Funding LLC that occurred between those two events. None of the defendants have pleaded or provided evidence to suggest a material difference between these three complaints and I find none.

Coquina

[27] Coquina Investments sued TD and Mr. Rothstein in the United States District Court for the Southern District of Florida.

[28] The parties both brought motions for summary judgment seeking to dismiss various elements of the complaint or the affirmative defences filed before trial. The motions were heard before Cooke J. resulting in a decision dated October 19, 2011. Her decision was stated to be based on undisputed facts unless otherwise noted.

[29] The Cooke Decision evidences a “Lock Letter” that Mr. Rothstein asked Mr. Spinosa to sign on August 17, 2009. A further lock letter was signed on September 18, 2009. Copies of both Lock Letters are attached to the Stubits Affidavit. Other than the fact that the first is on RRA letterhead (but counter-signed and agreed to by Mr. Spinosa on behalf of TD), both are materially identical to the Razorback and BFMC Lock Letters.

[30] The Coquina claim proceeded to trial over ten weeks. On January 18, 2012, the jury returned a verdict that found:

As to Count 1(fraudulent misrepresentation):

a. A TD employee or employees made one or more misrepresentations or omissions relating to a material existing fact to Coquina acting within the scope of his or her employment;

b. TD knew at the time it made the misrepresentation or omission that it was false or acted with reckless disregard for its truth or falsity;

c. TD intended to induce Coquina to rely and act upon the misrepresentation or omission; and

d. Coquina relied upon the misrepresentation and suffered damage as a result.

As to Count 2 (aiding and abetting fraud):

e. the existence of the underlying Rothstein fraud against Coquina;

f. that TD had knowledge of the fraudulent representations Mr. Rothstein made to perpetrate the fraud against Coquina;

g. that TD provided substantial assistance to advance commission of the fraud against Coquina; and

h. Coquina was injured in its business or property as a proximate result of TD’s substantial assistance in Mr. Rothstein’s fraud against Coquina.

[31] The jury awarded compensatory damages of $16 million in respect of each of Count 1 and Count 2; it also awarded punitive damages of $17 million in respect of each such count.

[32] TD challenged the jury verdict in a post-trial motion. In reasons dated September 28, 2012, Cooke J. denied TD’s motion for judgment as a matter of law and declined to order a new trial. She found sufficient evidence had been led to support each of the jury’s findings. In particular, she pointed to evidence at trial establishing that Coquina had deposited a total of $37.7 million in RRA accounts at TD.

[33] TD appealed Cooke J.’s ruling. The appeal was denied and the decision of Cooke J. affirmed by the United States Court of Appeal. In its ruling, the appeals court found “the record is replete with evidence that Spinosa, while acting as regional vice-president for TD Bank, knew of and participated in Rothstein’s fraud” (emphasis added). The Court of Appeal referenced evidence that Mr. Spinosa had wire transferred a considerable amount of money to Mr. Rothstein in Morocco when he fled there after his fraud was uncovered.

[34] The affidavit of Mary Drames confirms the payment by TD of the Coquina Judgment in the amount of $67,227,502.15 on February 26, 2015.

[35] I infer from the Jury’s verdict and the decision of Cooke J. upholding it that Coquina deposited funds by wire transfer into RRA accounts at TD that were subsequently lost and that a TD employee had knowledge of the fraud when at least some of such funds were received. I infer from the subsequent appeal judgments that analyzed the evidence before the jury that that Mr. Spinosa was one such employee referenced by the jury and that the Lock Letters were among the fraudulent misrepresentations found to have been made. I also find that it is not in the interest of justice that a trial be required to establish these quite uncontested facts that may reliably be drawn from the record before me.

Rothstein proffer

[36] In January 2010, the United States and Mr. Rothstein entered into a Plea Agreement, which agreement contains an extensive “Statement of Facts”. The Government sought a 40 year sentence for Mr. Rothstein based upon that Plea Agreement, Mr. Rothstein sought a 30 year sentence and sought credit for his voluntary return to the United States and agreement to a plea arrangement. The court agreed with neither, instead imposing a 50 year sentence (without parole).

[37] In my view, the Statement of Facts is a reliable overview of the Rothstein Ponzi Scheme. It is broadly consistent with the descriptions of the scheme contained in the pleadings (including the various statements of defence) and the findings made in the Coquina case. As well, it was a statement against interest of Mr. Rothstein and formed the foundation of a very, very substantial prison sentence being meted out to him.

[38] The Statement of Facts describes the Rothstein Ponzi Scheme in the following terms:

a. Investors were solicited to purchase purported settlement agreements and falsely told that such settlements were available for purchase at a discount;

b. Trust accounts were maintained at financial institutions to give the appearance of legitimacy and security; and

c. Lock letters were created to reflect that the funds in the trust accounts would be distributed only to specific investors whereas instead funds were disbursed among and between the various trust accounts and elsewhere to facilitate, promote and conceal the fraud, to launder proceeds or to enrich Mr. Rothstein or his co-conspirators;

[39] The Statement of Facts also described a separate Ponzi scheme involving actual clients of RRA that is not relevant to this case.

Fidelity Bond

[40] The “Financial Institution Bond” (or “Fidelity Bond” as the parties more frequently describe it) that is the subject matter of this motion and claim is part of a “Bankers Comprehensive Crime, Professional Indemnity and Directors’ and Officers’ Liability Programme” between a syndicate of insurers (the defendants) and The Toronto-Dominion Bank made as of May 1, 2009 and identified as Policy Number MMF/1710. The named insured is The Toronto-Dominion Bank and or associated and subsidiary companies. The plaintiff TD is one such subsidiary.

[41] The Policy is divided into two parts. The first part is further divided into two sections – Section One (A) called “Financial Institution Bond” and Section One (B) called “Financial Institutions Professional Indemnity Policy”. The second part of the Policy is entitled “Directors and Officers Liability Policy and is not relevant to this proceeding. TD’s statement of claim advances claims for recovery under both parts of Section One, but this motion for partial summary judgment concerns only its claim under the Financial Institution Bond in Section One (A). The Financial Institution Bond is subject to a Limitation of Liability of $300,000,000 and a retention amount of $100,000,000.

[42] The parties debated about what to call the first page of Section One (A). Is it a “preamble”? Is it an “Overarching Clause”? I see no magic in titles and will simply quote the relevant portion of it (being the second paragraph):

“NOW WE the Underwriters hereby undertake and agree, subject to the following terms, exclusions, limitations and conditions, to make good to the Assured, as stated in the Insuring Clauses, in excess of the amounts of the deductibles stated to be applicable, such direct financial loss sustained by the Assured and discovered by the Assured during the period of the policy and subject always to the Policy Limits as stated in the Schedule”.

[43] There follow nineteen different Insuring Clauses applicable to this section of the Policy as well as a number of exclusions and definitions.

[44] The plaintiff’s motion concerns only this opening preamble of the Financial Institution Bond, and in particular the meaning of the phrase “such direct financial loss sustained by the Assured” in the context of the claimed loss in the three mentioned cases of Coquina, BFMC and Razorback Funding LLC.

[45] The preamble – for that is the most neutral descriptive of the opening page to Section One (A) of the Policy I have been able to come up with - cannot be construed in the abstract. It is necessary to consider it in the context of a claimed loss to which it may apply. The statement of claim alleges that TD’s loss relating to the three named claims is covered by Insuring Clause No. 1 “Fidelity” and Clause 39.

[46] The relevant portion of Insuring Clause Number 1 reads as follows:

“By reason of and directly caused by dishonest or fraudulent acts by Employees of the Assured wherever committed and whether committed alone or in collusion with others, which dishonest or fraudulent acts are committed by Employees with the intent

(a) to cause the Assured to sustain such loss; or

(b) to obtain an improper personal financial gain for the Employee or another person or entity.”

[47] Clause 39 entitled “Ownership” provides in its relevant part:

“This Policy shall apply to loss of funds or Property (1) owned by the Assured, (2) held by the Assured in any capacity, (3) for which the Assured is legally liable and/or responsible or for which the Assured has instructions to insure.”

Admissions in Pleadings

[48] The plaintiff claimed under both the “Fidelity Bond” in Section One (A) of the Policy and the “Financial Institutions Professional Indemnity Policy”, referred to by the parties as the “Bankers Professional Liability” or “BPL” coverage of Section One (B) of the Policy. The latter section provides coverage for loss resulting from a “Wrongful Act” defined to include negligent error, misstatement, misleading statement, omission, breach of trust and breach of fiduciary duty, among other things. However, the coverage is subject to an exclusion for any Claim “brought about or contributed to in fact by…any dishonest, fraudulent or criminal act or omission of any of the Assureds”. There is also an exclusion for acts of Money Laundering, made potentially relevant by some of the conclusions of the regulatory investigations that were conducted after the Rothstein Ponzi scheme was uncovered.

[49] This motion for summary judgment does not concern the plaintiff’s claim under Section One (B) of the Policy. The relevance of the defendants’ pleadings in respect of this portion of the claim however relates to what is admitted regarding the nature and cause of TD’s loss.

[50] There are a total of nine statements of defence filed by various groupings of the members of the syndicate who collectively underwrote the Policy. Each of these contains a similarly worded admission that the claim of TD was brought about and contributed to by fraudulent, dishonest or criminal acts of the plaintiff and at least three named officers and employees of the plaintiff including Mr. Spinosa. The Antares et al. Statement of Defence pleads that TD “knowingly participated in the Rothstein Scheme”. Similar pleas were found in several of the claims made against TD including the Coquina, and Razorback Complaints.

[51] The statements of defence also admit Rothstein opened and controlled twenty-two trust accounts and four operating accounts with the plaintiff’s predecessor and then the plaintiff. They admit that these accounts received the “stolen funds” of the investors and that the funds deposited into the account were used as part of the Ponzi scheme.

[52] While the pleadings are not specific to each of the nineteen claims settled or paid by TD, I am prepared to infer from these general admissions that the defendants do not contest findings consistent with those pleadings when inferred by me from the evidence in reference to the particulars of the three claims at issue here.

Summary of findings of fact re: three victims’ claims against TD

[53] The foregoing evidence, supplemented by the admissions in the statements of defence of the defendants referenced above, enables me to make the following findings of fact that are common to at least some portion of the claims made by each of the three victims against TD that are referenced in this motion for partial summary judgment (Coquina, BFMC and Razorback):

a. Each of the three was a victim of the Rothstein Ponzi Scheme fraud (the exact amount not being material for this motion, but being larger than $1.00);

b. The Rothstein Ponzi Scheme was fraudulent from its inception as regards these three victims at least: victims were told their funds were to be used to acquire ownership at a discount of the proceeds of a settlement payable at a future time whereas in fact the represented settlements did not exist and were never purchased on behalf of the investor with the funds they were persuaded to “invest”;

c. The funds of the victims invested in the Rothstein Ponzi Scheme were proceeds of fraud from the moment the victims parted with them;

d. Each of them transferred funds representing at least some portion of their “investment” in the Rothstein Ponzi Scheme to TD for the credit of one or more RRA Accounts controlled by Rothstein none of which were restricted by TD to protect the victim’s interest in the funds;

e. One of the three victims (Razorback Funding LLC) transferred funds from its own TD Account to a TD RRA Account while the other two (Coquina and BFMC) transferred their funds to the relevant TD Account of RRA from their own accounts at other financial institutions;

f. Each victim transferred at least some such funds to the relevant in reliance upon, among other things, a fraudulent “Lock Letter” knowingly signed by Spinosa as an officer of TD[^3];

g. At least some funds transferred into the RRA Accounts at TD by each such investor was as a result of fraud in which TD’s employee had knowingly participated and TD, through one or more employees, was aware of the fact of the fraud at the time the funds were received;

h. RRA became bankrupt after the Rothstein Ponzi Scheme was discovered and none of the TD RRA Accounts has any amounts remaining in them;

i. None of the three mentioned victims received back all of the funds they transferred to the relevant RRA Account at TD by reason of the fraud – at least some of such funds were irretrievably lost by reason of having been dissipated at the direction of Mr. Rothstein to maintain the Rothstein Ponzi Scheme or to maintain his lifestyle which withdrawals were permitted by TD;

j. Each of the victims brought claims against TD that included claims for amounts lost arising from deposits made by them to RRA Accounts at TD in circumstances where TD employees including Mr. Spinosa were aware of the fraudulent origin of the deposits by reason of their participation in various ways in the fraud, including by way of the Lock Letters;

k. TD paid funds to settle all of the claims made by each of the named victims against it (again, the precise amount not being material for present purposes); and

l. TD’s loss in these three cases was brought about and contributed to by fraudulent, dishonest or criminal acts of TD’s former employee Mr. Spinosa among others.

[54] I am of the view that the forgoing conclusions of fact are reliable and may fairly be made based on the record before me. They are all entirely consistent with the defendants’ pleadings, the last finding being an express admission. The interest of justice does not require that I make these determinations only after a trial. To the contrary, the evidence in favour of each finding is clear, compelling and quite uncontested. Admissions made against interest by Mr. Spinosa and Mr. Rothstein have resulted in each receiving lengthy prison sentences. The findings of the jury in Coquina are res judicata and beyond challenge. While the decisions of the Cooke J. and the United States Court of Appeal do not entail the making of findings of fact per se, the reference in those decisions to the evidence that was before the jury to sustain the verdicts reached by it is relevant and may be accorded appropriate weight by me.

[55] The defendants did suggest in oral argument that the record was not sufficiently clear to establish that the funds invested by Coquina in the scheme were sent to TD Accounts. They did not actually deny that this was the case and of course led no evidence to suggest the contrary. The evidence of TD as the host of the relevant accounts that received investor funds attracted by the Rothstein Ponzi Scheme – including for Coquina - is uncontradicted. Evidence of transfers into TD accounts was before the Coquina jury and cited as a basis supporting that decision when the verdict was reviewed by the United States Court of Appeal. It was also so found by the SEC in regulatory proceedings pleaded and relied upon by the defendants. I can see no basis not to draw the inference that TD received the victim’s funds in the three instances before me. I so find.

Issues to be decided

[56] Has TD proved a “direct financial loss sustained” by it in any or all of the three instances alleged?

[57] Is this an appropriate case to grant partial summary judgment in the form requested?

Analysis and discussion

(a) Has TD proved a “direct financial loss sustained” by it in any or all of the three instances alleged?

(i) Principles of Interpretation

[58] The parties are in broad agreement as to the principles of interpretation to be applied in construing the Fidelity Bond, even if each draws different conclusions from the process. I have found the following passages derived from the jurisprudence cited before me to be helpful in the present context:

a. “a fundamental principle of contractual interpretation is that a contract must be construed as a whole”: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para. 64;

b. “It is a cardinal rule of the construction of contracts that the various parts of the contract are to be interpreted in the context of the intentions of the parties as evident from the contract as a whole… Where there are apparent inconsistencies between different terms of a contract, the court should attempt to find an interpretation which can reasonably give meaning to each of the terms in question. Only if an interpretation giving reasonable consistency to the terms in question cannot be found will the court rule one clause or the other ineffective”: BG Checo International Ltd. v. British Columbia Hydro and Power Authority, 1993 CanLII 145 (SCC) at para. 9;

c. “A clause cannot be interpreted in isolation from its surrounding context, or without due regard to the meaning ascribed by the parties to the words that they used”: Highway Victims Indemnity Fund v. Federal Fire Insurance Co. of Canada, 1979 CanLII 221 (SCC) at p. 293-294; and

d. “in the construction of contracts, the normal rules of construction lead a court to search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entry into the contract. Consequently, literal meaning should not be applied where to do so would bring about an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted. Where words may bear two con­structions, the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would promote the inten­tion of the parties”: Consolidated-Bathurst v. Mutual Boiler, 1979 CanLII 10 (SCC) at p. 901.

[59] The defendants suggest that I cannot interpret Section One (A) of the Policy without having the “full factual matrix” of all of the Insuring Clauses before me and, in particular, a full appreciation of the position of the defendants in denying the claims of TD for coverage under Section One (B) thereof.

[60] If by “full factual matrix” the defendants mean the full factual matrix of the entire claim notwithstanding the limited scope of the issues before me, I disagree. The factual matrix needed to interpret the contract is primarily the factual matrix that existed at the time the contract was entered into, not the unique factual matrix of a particular claim arising subsequently. The factual matrix necessary to apply the contract clearly requires knowledge of the facts underlying a particular claim being made in the context of the meaning emerging from the interpretation process. How much of the “full” claim is needed to apply to a particular determination that is made will depend entirely upon the circumstances.

[61] In the case of an insurance contract, the surrounding context is often less relevant to understanding coverage clauses because the terms of these tend to be governed more by standard form policy language than by individually negotiated clauses: Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37 at para. 27-32.

[62] The insurer defendants have not introduced any evidence of underwriting intent or indeed of any circumstances surrounding the negotiation of any particular clause found in the Policy. In my view, I have more than enough evidence of the general context of the Policy to undertake the task of construing one provision of it.

[63] A full appreciation of exactly how and where Mr. Rothstein dissipated the proceeds of this fraud from the RRA accounts at TD into which the victims transferred their funds may well be crucial information to understand a claim made under other provisions of the Policy. That issue is not before me. However, such a forensic exercise it is of no relevance to deciding the narrow question before me on this motion based on the manner in which I have construed the Policy. The accounts into which the funds were deposited were under the control of Mr. Rothstein and none were restricted in favour of the victims. All of the funds have in fact been transferred out of the relevant accounts without fully satisfying the fraud claims of these three victims that tainted the receipt of those funds. An accounting will be necessary to establish the amount of the loss, but the subsequent use of the funds once placed in the wrong-doer’s control does not assist in establishing the fact of the loss.

[64] Further, it does not logically follow that a claim that is unsuccessfully advanced under one provision of the Policy is presumed to fail under all others any more than it follows that a claim that qualifies under one section cannot also succeed under another. The Policy itself contemplates that a given loss may be covered by more than section of the Policy. The Master Declarations provide that:

“It is understood and agreed that in the event of loss covered under more than one Section of this Policy only one retention, being the greater, shall apply; in such event, coverage shall not be cumulative as to amount and only the total of one Limit of Liability shall apply.”

(ii) Context of the Preamble

[65] The second paragraph of Section One (A) of the Policy (abridged to remove portions not relevant to the issue under consideration) reads as follows:

NOW WE the Underwriters hereby undertake and agree, subject to the following terms, exclusions, limitations and conditions, to make good to the Assured, as stated in the Insuring Clauses … such direct financial loss sustained by the Assured ….

[66] The parties set about the task of interpreting the foregoing preamble in two entirely different ways.

[67] For the plaintiff, the preamble is the “overarching coverage grant”. Each of the nineteen different “Insuring Clauses” builds on and is, in effect, a sub-set or instance of this overarching coverage grant from which each flows and on which each depends. The analogy suggested by TD is that of a trunk of a tree with the Insuring Clauses being the branches. Following this approach, the meaning of “such direct financial loss sustained by the Assured” is to be interpreted consistent with all of the Insuring Clauses as well as other clauses of general import such as Clause 39 (discussed below). Words are to be presumed to bear a similar meaning throughout and, consistent with Consolidated-Bathurst, an interpretation that produces an absurdity or internal contradiction is not to be preferred over one that achieves a harmonious and commercially reasonable interpretation.

[68] A consideration of the nineteen Insuring Clauses shows that a number of them quite expressly provide for coverage for legal liability of the Assured arising from losses initially sustained by third parties. The Policy cannot have intended to grant coverage of such risks in the Insuring Clauses while simultaneously denying coverage under the preamble (as not being “direct financial loss sustained by the Assured”) consistent with the Consolidated-Bathurst approach. None of the Insuring Clauses employs “notwithstanding” language to the effect that coverage is extended notwithstanding the “direct financial loss” limitation in the preamble. Therefore, an interpretation of “direct financial loss sustained by the Assured” that can be read harmoniously with each of the Insuring Clauses is to be preferred.

[69] For the defendant insurers, the task is undertaken entirely differently and with a quite different outcome. The language of “subject to the following terms, exclusions, limitations and conditions” (emphasis added) means for the defendants that the Insuring Clauses are construed independently of the preamble should they conflict with it. Any of the Insuring Clauses that expressly or by necessary implication includes coverage for liability of the Assured for losses sustained by a third party is simply an instance of one of the terms that the preamble is “subject to” and is of no relevance to understanding the meaning of “such direct financial loss sustained by the Assured”. The Policy is not an “all hazards” policy covering any liability arising from employee misconduct. Canadian and American courts have recognized that fidelity bond coverage of the sort provided by the Policy is “essentially a first-party coverage that protects the insured’s own assets from various dishonesty risks including employee dishonesty, but does not provide third-party liability coverage for such risks”.

[70] While I concur with the defendants’ overall submission that Section One of the Policy cannot be construed as if it were intended to be a complete “all hazards” policy encompassing any and all liability arising from employee misconduct, the plaintiff’s approach appears to me to be closer to the mark.

[71] Even if the Policy is not an “all hazards” policy, the language of the Policy does not presume the application of an a priori exclusion of “third party liability” presumption either. It is the words of the Policy that I must construe.

[72] The only sensible way to read the preamble is that the phrase “such direct financial loss sustained by the Assured” refers to losses arising by reason of the risks “as stated in the Insuring Clauses”. All but one of the Insuring Clauses reads as a clause and not as a complete sentence[^4], clearly indicating the requirement that each must be read together with the preamble to create a single sentence having a consistent meaning. The “preamble” is an integral part of each and every one of the Insuring Clauses – neither is capable of being read intelligibly in the absence of the other[^5]. In this regard, the plaintiff’s analogy to a tree trunk and its branches is apposite.

[73] The natural and grammatical reading of the preamble supports this approach and requires that – at least prima facie – “such direct financial loss” is to be read as being a common characteristic of each of the Insuring Clauses and its interpretation therefore should, so far as reasonably practicable, be consistently applied and applicable to each without creating disharmony or absurd outcomes.

[74] For the sake of convenience, I have restated Section One (A) of the Financial Institution Bond by deleting portions not relevant to the issue before me and replacing “as stated in the Insuring Clause” with the relevant the text of Insuring Clause Number 1 (the principal Insuring Clause relied upon by the plaintiff for purposes of this motion) in order to re-state the coverage provided as a coherent sentence:

“NOW WE the Underwriters hereby undertake and agree, subject to the following terms, exclusions, limitations and conditions, to make good to the Assured …such direct financial loss sustained by the Assured [b]y reason of and directly caused by dishonest or fraudulent acts by Employees of the Assured …”.

[75] The same exercise could be undertaken with respect to each of the seventeen other relevant Insuring Clauses. However, some of the Insuring Clauses extend coverage in circumstances that unambiguously refer to losses of or liability to third parties. A non-exhaustive list of examples include:

• Insuring Clause 3B (“by reason of any Property in the possession of any customer of the Assured…being lost, whether or not the Assured is legally liable for the loss thereof…”);

• Insuring Clause 4 (“by reason of loss of or damage to furnishings….provided that the Assured is the owner of such office, furnishings…or is liable for such loss or damage…”);

• Insuring Clause 9 (“By reason of loss of subscription, conversion, redemption or deposit privileges through the misplacement or loss of Property” where “Property” includes “any other tangible items of personal property and chattels…for which the Assured is legally liable”); and

• Insuring Clause 12 (“loss directly resulting from the Assured having, in good faith, for its own account or for the account of others…acquired, sold…or assumed liability on the faith of any Uncertificated Security…”).

[76] The defendants suggest that these other clauses are mere “straw men” and readily concede that indemnity for third party liability is provided by a number of the Insuring Clauses that are not relevant to this particular claim. However, they maintain that “direct financial loss” must exclude third party liability in all cases where the particular Insuring Clause does not expressly include it. In my view, the approach suggested by the defendants is essentially circular since it presumes the starting point. There are a number of ways of construing “direct financial loss” and excluding third party liability claims in all cases is by no means the only one. Consequential damages such as lost profits of the bank or third parties, for example, are the most obvious form of “indirect” loss that might quite naturally have been the contrast intended when employing the phrase “such direct financial loss” and such an interpretation would require no case-by-case reading of the Insuring Clauses looking for third party claim “exceptions” to an unstated general rule.

[77] I shall be referring to Clause 39 of the Policy in more detail below, but this clause provides that the Policy applies to “loss of funds …held by the Assured in any capacity” and Clause 39 applies to the entire Policy, including Insuring Clause 1 and the preamble. The reference in Clause 39 to the loss of funds held “in any capacity” is certainly broad enough in scope to encompass a loss of funds held by TD as constructive trustee in respect of which TD had obligations to account to third parties for their use and does not support a general presumption against third party losses is applicable as contended for by the defendants.

(iii) Relevance of US jurisprudence

[78] The parties placed before me a large body of United States jurisprudence dealing with financial institution fidelity bonds. The defendants submit that this body of jurisprudence establishes that fidelity bonds are not intended to cover third party liability and that my construction of the preamble ought therefore to proceed from that same premise.

[79] I shall not attempt to reconstruct a blow-by-blow account of the volumes of cases and learned articles placed in front of me by both sides. It is apparent to me that the US jurisprudence has evolved from a standard form of policy used for financial institution insurance that is materially different from the Policy under consideration in this case.

[80] There are good reasons why this is so. The regulatory regime governing the business of banking in the United States is quite different from the regime in Canada and it is to be expected that insurance policies would evolve to suit the precise requirements of regulators in each jurisdiction even if there are also similarities.

[81] It is also apparent to me that the case law on the whole “first party” vs. “third party” liability controversy in the United States is still quite divided. The controversy is far from settled. I simply do not find a selective and out-of-context use of US jurisprudence concerning a matter that is not settled law in that jurisdiction to be of any particular assistance to me here.

(iv) Protection of Assets (Banks) Regulation

[82] In Canada, s. 10 of the Protection of Assets (Banks) Regulations, SOR/92-352 made under the Bank Act S.C. 1991, c. 46 requires a bank to “acquire and at all times maintain one or more bonds … to indemnify the bank for any loss in respect of assets owned or held by that bank arising out of a dishonest or criminal act of an officer or employee of that bank”.

[83] It seems to me reasonable to approach the task of interpreting the Policy from the perspective of considering that the parties would more likely than not have been seeking to employ policy language that complied with the insurance requirements of the law governing the Assured than to employ language that did not. If the language used is reasonably capable of being read consistently with the requirements of this regulation, that interpretation is likely to have been the intended one absent evidence of contrary intent.

[84] It is significant that the Protection of Assets (Banks) Regulation requires indemnification for “any” loss in respect of assets owned “or held” by that bank and “arising out of” a dishonest act. This language is quite broad and does not suggest an intent to exclude from the regulation an obligation to secure coverage for losses of third party assets held by the bank arising from dishonest acts of an employee. The expression “owned or held” strongly suggests that assets of third parties held by the bank in some capacity other than simple ownership is contemplated.

[85] While the Protection of Assets (Banks) Regulation cannot be applied so as to overrule the express stipulations of the Policy, it unquestionably forms part of the commercial context in which the Policy was acquired and may validly be considered in interpreting the Policy as part of that context.

(v) Application of Clause 39

[86] Like the preamble, Clause 39 applies to the entire Policy, including Insuring Clause 1. I repeat the wording of this short clause for convenience:

“Ownership

Clause Number 39

This Policy shall apply to loss of funds or Property (1) owned by the Assured, (2) held by the Assured in any capacity, (3) for which the Assured is legally liable and/or responsible or for which the Assured has instructions to insure. This Policy shall be for the sole use and benefit of the Assured named in the Declarations.”

[87] The “Ownership Clause” is an odd duck in the context of the Policy. It is neither an exclusion clause nor is it an Insuring Clause per se. In my view, the preamble must be read “subject to” and thus harmoniously with Clause 39. If Clause 39 provides, “this Policy applies” to the loss of funds of each of the three victims that were transferred to TD, then it cannot be contended that such a loss is simultaneously excluded for failing to be a “direct financial loss sustained by” TD. Applying the well-known principles of Consolidated-Bathurst, the interpretation producing the unreasonable result is not to be favoured over the one that produces a reasonable one. If the phrase “direct financial loss sustained by” TD can be read harmoniously with Clause 39 that is the interpretation to be preferred over one that sets the two in conflict.

[88] Can it be said that the loss claimed by TD arising from the claims of the three victims is a “loss of funds or Property (1) owned by the Assured, (2) held by the Assured in any capacity, (3) for which the Assured is legally liable and/or responsible or for which the Assured has instructions to insure”?

[89] Firstly, it must be established that there has been a “loss of funds or Property”. TD received funds from each victim that were in fact transmitted as a result of fraud. Those funds were credited to accounts of RRA maintained by TD bearing no restriction in favour of the victims. RRA is bankrupt and TD no longer holds any funds in the relevant RRA accounts. Mr. Rothstein has admitted the dissipation of the proceeds of the fraud, including the fraud perpetrated on these three victims. While the victims may have received some funds back from the RRA accounts before the fraud was discovered or from the bankruptcy trustee on account of claims filed afterwards, they did not receive back all of the funds on which their claim was based. The evidence before me establishes that there has been a loss of at least some of the funds initially transferred by the victims to TD. It is not necessary to establish where the funds did go as long as it can be established where the funds did not go (to the victims). That fact is established here and on uncontradicted evidence. These circumstances establish a loss of funds or Property.

[90] In order to fit within Clause 39, however, the loss of funds or property must be connected to the Assured TD in one of the three listed ways. TD submits that the loss in relation to these three victims fits into each of the three categories in Clause 39. While only one “fit” is required to bring Clause 39 to bear, on the facts of this case I must agree with the plaintiff. I shall examine each relationship between TD and the loss stipulated by Clause 39 separately below.

“owned by the Assured”

[91] Upon receipt of the funds transferred from each victim, TD “owned” the funds in the sense that the legal ownership of the funds vested in TD when received. It held them in a banker-customer relationship vis-à-vis RRA when the funds were credited to RRA: Vuckovich v. Royal Bank of Canada, 1998 CanLII 2398 (ON CA). TD’s capacity as legal owner of the funds does not exclude the existence of other beneficial interests in the funds arising from the circumstances under which the funds were received. TD owned legal title to the funds received from the victims and upon which some portion of each of their claims is based.

“held by the Assured in any capacity”

[92] The facts as found by me firmly establish that the funds received by TD were in fact proceeds of fraud. Mr. Rothstein has admitted his fraudulent scheme and the connection of the Coquina, BFMC and Razorback Funding LLC transfers to that scheme is well established on uncontradicted evidence.

[93] No leap of logic is needed to attribute Mr. Rothstein’s knowledge of the fraud he masterminded to his own firm (RRA) in respect of the receipt of funds from victims placed into accounts controlled by him. The uncontested facts point unavoidably to a constructive trust being established over the funds from the moment they left the victim’s possession pursuant to the fraud imposed upon each recipient of the funds with sufficient knowledge of the status of the funds. Since the funds were placed into an RRA account at TD and Mr. Rothstein certainly had the requisite knowledge, the RRA accounts into which the funds were placed were also subject to a constructive trust in favour of the victim that could only be discharged by the return of the funds to the victims.

[94] In the case of all three victims, at least some transfers to TD were made in reliance upon Lock Letters that were instances of knowing fraud by Mr. Spinosa. In the case of Coquina, there were further findings of the employee’s knowledge of and participation in the Rothstein Ponzi Scheme and fraudulent misrepresentations to the victims. That evidence is sufficient for me to find that the affected transfers received by TD were impressed with a constructive trust in favour of the victims. The requisite knowledge of fraud has been proved in the case of at least some of the transfers to TD made by these three victims.

[95] As a result, TD had an obligation as constructive trustee to account for the funds received to the transferors under the described circumstances. Crediting those funds to an unrestricted RRA account controlled by Mr. Rothstein did not discharge TD’s obligations to the victims. TD also had an obligation by virtue of its knowledge to have denied assistance to RRA in the breaching its own obligations as constructive trustee which it similarly violated by failing to restrict Mr. Rothstein’s access to the RRA account into which the received funds were credited. In this case TD’s status fits both the doctrine of knowing receipt of misappropriated trust funds and the doctrine of knowing assistance in breach of trust: Air Canada v. M & L Travel Ltd., 1993 CanLII 33 (SCC) at S.C.R. pp. 809-811; Citadel General Assurance Co. v. Lloyds Bank Canada, 1997 CanLII 334 (SCC) at para. 25-52 and Jer v. Royal Bank of Canada, 2014 BCCA 116 at para. 70-86.

[96] The end result is that TD held at least some portion of the funds that were lost in the capacity of a constructive trustee for the benefit of the victim transferors and thus satisfies the criterion of “held … in any capacity” in Clause 39.

“for which the Assured is legally liable and/or responsible or for which the Assured has instructions to insure”

[97] The Assured TD was held legally liable for, among other things, the loss of the very funds received in Coquina.

[98] In the case of BFMC and Razorback Funding LLC, there is no conclusive jury verdict to rely upon to establish TD’s liability for the funds. However, the evidence supports a finding of a constructive trust upon receipt of the funds, rendering TD legally liable and/or responsible to the transferor/victims for the return of the funds. That liability to the victims could neither be discharged nor superceded by subsequent misappropriations of the funds by Mr. Rothstein that TD had an obligation but failed to prevent.

[99] These conclusions involve no “floodgates” extension of banker responsibility but are simple corollaries of the very specific and explicit findings of fraud in relation to Mr. Spinosa in this case.

[100] Finally, given the demonstrated fraud of one or more TD employees that preceded and was a cause if not “the” cause of the transfer of funds to TD, the loss is one “arising out of a dishonest or criminal act of an officer or employee of that bank” that was required to be insured against by s. 10 of the Protection of Assets (banks) Regulation.

[101] I find that at least the portion of TD’s losses arising from transfers received from each of Coquina, BFMC and Razorback Funding LLC made following delivery of the Lock Letters[^6] satisfies Clause 39 of the Policy for these reasons.

(vi) Are the losses in respect of any of the three claims “direct financial losses”

[102] I return now to the central question before me. Is the plaintiff able to identify a “direct financial loss” as described in the preamble in respect of the three identified claims that it has satisfied (whether by settlement or judgment)? In my view it has.

[103] The evidence in relation to each of the three victim’s claims has satisfied me that, in the case of each victim, TD received at least some transfers of funds from them subject to a constructive trust. This is so by reason of the role of its employee Mr. Spinosa in generating the deposit and knowingly facilitating the fraud perpetrated on the victims. The conduct includes fraudulent Lock Letters found in each of the three cases. Further evidence of direct participation and knowledge of the fraud was found in Coquina. The precise amount received by TD as constructive trustee from each is not established at this point and is not relevant to the interpretation point I am considering providing at least some funds from each victim came with this equitable obligation attached as I have found.

[104] TD’s duty, as constructive trustee, would have been to safeguard the deposits and ensure they were used solely for the purpose of returning them to the victims. No other use of the funds would discharge a constructive trustee. Instead of discharging that obligation, the actions of TD’s employee resulted in the funds being credited to an unrestricted account at the disposition of Mr. Rothstein and his firm. Funds that TD had an obligation to safeguard were instead credited to “the rogue”. That misappropriation resulted in an immediate loss to TD. Subsequent recoveries of some of the misappropriated funds may have mitigated TD’s loss to a degree, but that does not alter the fact that the loss occurred immediately upon the funds being credited to an unrestricted account contrary to TD’s obligations as constructive trustee.

[105] Because the funds were placed in an unrestricted account, Mr. Rothstein was able to use them as he saw fit – whether it was for the maintenance of the Rothstein Ponzi Scheme or to maintain his own lifestyle as illustrated in his plea bargain proffer.

[106] This case has a number of close parallels with the case of Iroquois Falls Community Credit Union Limited v. Co-operators General Insurance Company, 2009 ONCA 364. In Iroquois Falls, a credit union claimed under a fidelity bond in respect of a loss brought about by employee misconduct. The credit union employee had made unauthorized loans to relatives and others. One of the means the employee used to avoid detection of the loans was to remove cash from the vault and use it to make deposits that purported to service the unauthorized loans. The insurers argued that no money actually left the door and that the loss of the credit union was not a direct loss because the loss was contingent on realizations of the loan and security. The fidelity bond in question was similar to Insuring Clause 1 in the present case, but without the overall preamble under consideration here. Jurianz J.A. (at para. 37) found that the removal of cash from the vault resulted in a direct loss even though the funds never actually left the credit union but were placed in a drawer to be re-deposited to the credit of the unauthorized loans subsequently:

“I cannot accept the Insurers' characterization of Simmons' acts as merely transferring funds internally between the Credit Union's accounts. There was both a physical removal of cash from the vault and a deposit of actual cash in the members' accounts. The Insurers' submission attempts to meld these two separate and independent transactions into one. It fails to recognize that the first transaction was complete at the moment that Simmons walked out of the vault with the unauthorized cash. The Credit Union suffered a direct loss to its cash position from that transaction in much the same way that the King sustains a direct loss when robbed by Robin Hood, even though Robin Hood later gives the money to peasants to pay their taxes to the King.”

[107] I find Jurianz J.A.’s analysis of the contrast between direct and indirect losses in Iroquois Falls to be instructive. TD suffered a loss of funds as soon as its employee’s actions resulted in the establishment of an unrestricted credit under the control of Mr. Rothstein in favour of his law firm RRA instead of a restricted account used to satisfy its obligations as constructive trustee to the victims. Thereafter, every transaction in the relevant RRA account simply placed the means of recovering the lost funds further and further beyond TD’s control but did not affect the existence of the initial loss. These separate transactions cannot be melded into one. Mr. Spinosa’s actions resulted in a loss of the funds by TD just as surely as if he had walked into the vault, removed the cash himself and handed it to Mr. Rothstein in person instead of allowing him to access the money at his leisure from an unrestricted account.

[108] TD’s obligations to the victims remained undischarged for so long as the funds subject to a constructive trust were not returned to them.

[109] A consideration of the exclusions contained in the Policy also provides me with additional comfort that “direct financial loss sustained by” TD in this case extends to the loss of funds deposited by the victims in the circumstances found here. While I cannot fall into the logical fallacy of finding that that which is not excluded by the Policy must be included, a consideration of the language used to exclude certain risks and perils provides instructive background to a consideration of the overall intent of the policy and the background against which the construction of the particular clause or phrase is to be undertaken.

[110] Exclusion “O” excludes indemnity for loss “resulting directly or indirectly from one or more dishonest or fraudulent acts of any of the Employees of the Assured, except when covered under Clause Number 1”. This does not lead to the conclusion that Clause Number 1 necessarily includes losses arising indirectly from fraudulent acts, but it certainly does not close the door to that conclusion either.

[111] Exclusion “S” excludes indemnity “for indirect or consequential loss of any nature”, an exclusion that supports the interpretation that the use of the word “direct” in the preamble is intended primarily to contrast with such consequential losses rather than to focus attention on whether the loss in question entails liability of the Assured to a third party as the defendants suggest.

[112] Finally, Exclusion “U” excludes indemnity for “loss resulting directly or indirectly from any parting of title to money or property, including debiting or crediting of any account, by reason of any trick, artifice, fraud, false representation or other fraudulent devices except when covered under Insuring Clause Number 1…”. The loss in this case arising from the crediting of the RRA account with unrestricted access to the funds received is specifically not excluded. Once again, this does not necessarily lead to the conclusion that Clause Number 1 includes such indemnity.

[113] Accordingly, I find that the plaintiff is entitled to judgment declaring that some of the funds transferred to TD by each of the three named victims was received by TD subject to a constructive trust in favour of the victims and TD suffered a direct financial loss within the meaning of the second paragraph of Section One (A) of the Policy when such funds were placed at the disposition of persons other than the three victims in an unrestrictedaccount. The precise amount of funds that meet this description has not yet been established nor have I considered or ruled upon any other issues relating to the Insuring Clauses or other pleaded exceptions under the Policy.

(b) Is this an appropriate case to grant partial summary judgment in the form requested?

[114] There is little doubt that this motion seeks to stretch the outer limits of what can be accomplished with partial summary judgment. Does it go too far?

[115] Rule 20.01(1) of the Rules of Civil Procedure permits a plaintiff to move “for summary judgment on all or part of the claim in the statement of claim” at any time after the defendant has served its statement of defence. Rule 20.04(2)(a) of the Rules of Civil Procedure provides that the court “shall grant summary judgment if the court is satisfied that there is no genuine issue for trial with respect to a claim or defence” (emphasis added).

[116] The Court of Appeal released its decision in Canadian Imperial Bank of Commerce v. Deloitte & Touche, 2016 ONCA 922 after argument was completed on this motion. I contacted the parties and invited them to make additional written submissions on the issue of partial summary judgment in light of the court’s decision in that case. These have been received and considered.

[117] Hoy J.A. in CIBC described the decision as illustrating “a potential danger when a party brings a motion for partial summary judgment” (at para. 1). It is incumbent upon me to be satisfied that I have appreciated those dangers adequately and have weighed them appropriately in relation to the benefits.

[118] In CIBC, the motions judge found that he could decide the question of the existence of a tort duty of care in an auditor’s negligence action separate and apart from the claim made in contract or the claim for reckless or fraudulent misrepresentation. He found that the duty of care was not proved because the “indeterminate liability” concern had not been adequately negated. While Hoy J.A. agreed that the legal claims were in fact separate and distinct, the factual matrix required to determine each of them involved very substantial factual issues in common, giving rise to a substantial risk of inconsistent findings. She also found that the ruling by way of partial summary judgment accomplished little by way of simplifying the pending (and scheduled) trial of the action. Finally, and in my view quite critically, she disagreed with fundamental aspects of the analysis of the motions judge leading to the legal conclusion that there was no duty of care owed in that case, providing guidance and analysis for the benefit of the trial judge in relation to that issue. Her conclusion that the “indeterminate liability” issue finding could not stand was very importantly premised upon the lack of a record sufficiently complete to enable that finding to be made.

[119] In my view, CIBC should certainly be viewed as an amber light if not a flashing red light to be considered before proceeding with any partial summary judgment motion. In considering whether there is a genuine issue for trial raised, careful consideration of the adequacy of the record relative to the relief requested, the potential overlap in findings of fact required to determine the issue relative to the remaining issues left for trial and the degree the determination promotes the objects of efficiency and proportionality must be undertaken.

[120] A counterpoint to the CIBC decision can be found in the Iroquois Falls decision. In Iroquois Falls, the motions judge had granted summary judgment of the claim. While Jurianz J.A. allowed the appeal and sent the matter back for trial, he did so on grounds that inferences necessary to satisfy certain conditions of the fidelity bond should best be made at trial but expressly found it appropriate to make a definitive determination of the fidelity bond interpretation issue raised rather than leaving that issue to be re-argued at trial (at para. 8):

I do not accept the Insurers' submission that the motion judge should have left the interpretation of the bond to trial. In determining whether there was a genuine issue for trial, the motion judge had to apply the bond to the uncontested facts before him. Nor am I persuaded that this court, after deciding that the action should proceed to trial, should leave the bond to the trial judge to interpret on a full record. The bond's interpretation was hotly contested and the trial judge's conclusions would likely be appealed to this court. Deciding the contentious issues of the bond's interpretation that are completely argued before us and will inevitably arise again at trial will contribute to the efficiency of the trial that must take place.

[121] In the result, by reason of Jurianz J.A.’s guidance, partial summary judgment was effectively granted and confirmed on the narrow question of fidelity bond interpretation while the other issues requiring broader factual inquiry were left to the trial judge.

[122] Iroquois Falls demonstrates that there are cases where interpretation of a legal issue may successfully be severed from the full fact-finding mission of a trial and may promote the interests of efficiency. The fact that the legal issue for decision in this case bears such remarkable parallels to the issue appropriately tackled and decided by the court in Iroquois Falls argues quite strongly that this may be such a case.

[123] I propose to address the question of appropriateness of considering or granting partial summary judgment by examining each of the three criteria discussed in CIBC and Iroquois Falls being (i) appropriateness of the factual record; (ii) potential for overlap in findings and (iii) efficiency.

(i) Appropriateness of factual record

[124] The defendants alleged that there that there are six issues relevant to the determination of this motion that require additional exploration before I can be in a position to decide the question raised by this motion.

[125] I shall consider each of these issues in turn to assess whether I find an appropriate factual record developed before me. I do so having regard to the “best foot forward” principle. If the evidence before me is adequate and appears reliable, I may refer to it unless the defendants have placed sufficient evidence before me to rebut the inference I might otherwise draw or to undermine the reliability of the evidence itself.

“What intentional and/or conscious role Spinosa played in effecting Rothstein’s fraud”

[126] The record before me is replete with allegations of what role Mr. Spinosa played in the perpetration of the Rothstein Ponzi Scheme. There were at least two other employees who are also alleged to have played a material role. The role of TD employees alleged was not limited to the Lock Letters that were in evidence in the case of each of the three victims whose claims against TD underlie this motion.

[127] It is indeed a live issue as to what other conduct may form the basis for attributing to TD liability as constructive trustee for other deposits received. Those issues are not developed on the record before me.

[128] To support the conclusion I have reached in interpreting the Policy, I was required to find circumstances leading to the conclusion that some of the funds received by TD from the three victims were received impressed with a constructive trust in favour of the victims that TD was bound to discharge. This has been fully established in the case of the three victims based on the factual record referenced. More knowledge of more circumstances that would also justify the conclusion of constructive trust attaching to the same funds at the same time is not required. The factual record does not require more reasons to come to the same conclusion in order to be complete.

[129] The actions or intentions of Mr. Spinosa and the other employees may well be critical to establishing a right to indemnity for some or all of the other sixteen claims. His actions and intentions in the case of these three victims are known with sufficient precision to rule. No greater record is needed.

“Whether, when, and how RRA withdrew funds from its TD accounts over the years leading up to the discovery of Rothstein’s scheme”

[130] The evidentiary record before me is indeed silent on the particulars of when and how RRA or Mr. Rothstein withdrew funds in the “years prior” to the discovery of the scheme. I fail to see how “years prior” is of anything but the most peripheral of relevance. Coquina, Razorback Funding LLC and BFMC – the only claims considered on this motion - all concern Lock Letters and transfers to TD made in the last months. The Lock Letters in the case of Razorback Funding LLC and BFCM both date from October 2009; Coquina’s Lock Letters date from August and September 2009 but the jury’s finding of fraud against TD is broader than just the Lock Letters.

[131] The forensic examination of what became of the funds transferred to TD by the three victims and credited to RRA’s accounts has nothing to do with the existence of a loss and everything to do with establishing the amount of that loss. This motion does not ask me to make any determinations on the amount of the loss and accordingly a sufficient record to do so is not required here.

[132] It is established before me that the victims did not receive the return of all of the funds transferred to TD as a result of the fraud. It is established before me that RRA became bankrupt and that the relevant accounts were under the control of Mr. Rothstein who is now serving a fifty-year prison term and has been made the object of a very significant restitution order and having admitted in his own plea bargain that he used the funds to sustain the fraud or for his own lifestyle. These facts are sufficient to establish that TD continued to have liability to the victims in respect of the deposits made at the time it settled the claims or paid the Coquina verdict. The forensic exercise proposed by the defendants is irrelevant to the “third party liability” question before me.

“Whether TD was wrong to debit RRA’s accounts in connection with its withdrawals”

[133] This question is either a repetition of the previous one or it is irrelevant. Whether TD was “right” or “wrong” to have debited RRA’s accounts is a matter between TD and RRA (a bankrupt and not part of this case). The loss giving rise to TD’s liability here was having credited the funds to RRA, under the control of Mr. Rothstein, despite having undischarged responsibilities to the victims as constructive trustee. Thereafter, the activity in the account is relevant only to the extent it establishes some of the funds were returned to the victims in reduction of their claim. That limited forensic exercise has not been undertaken here in any event and would be left to an accounting if and when the plaintiff establishes the other conditions to coverage and resists claims to apply exclusions. For the limited purposes of his motion, the record was appropriate.

“How RRA used the funds that it withdrew”

[134] This is a simple restatement of the second factual question (“whether, when and how RRA withdrew funds”) and has the same answer. It is relevant to the question of the amount of the loss but not to the existence of loss. The interpretation question decided by me requires only that I find that TD had a “loss” of at least $1.00. The factual record is adequate for that determination to be made.

“The amount of funds deposited by Coquina Investments”

[135] The record before me establishes that at least some of the Coquina loss that gave rise to the verdict against TD was in respect of funds deposited into RRA accounts at TD by Coquina. Establishing that at least some funds fit this description is sufficient foundation for me to assess the “direct financial loss” question raised by the motion in respect of those funds. The amount of funds affected is a comparatively simple accounting exercise that would have to be completed in order to proceed to full judgment. Only partial summary judgment is sought here.

“Whether Rothstein’s use of the funds deposited by Coquina was inconsistent with his promises regarding how those funds would be used”

[136] This particular question raised by the defendants is a puzzling one. If Mr. Rothstein used the funds deposited by Coquina consistent with the promises he made, the jury verdict would not have been justified and Mr. Rothstein’s current zip code ought to be changed forthwith. The fact of the matter is that Mr. Rothstein admitted his involvement in the fraud, he admitted his misappropriation of the investor funds, the jury in Coquina found in favour of “the existence of the underlying Rothstein fraud against Coquina”. If the defendants have evidence to support the contention that Coquina was not the result of fraud, they had a positive obligation to bring that to my attention (and to plead it). It is far from clear that the defendants could even seek to make such an allegation given the principles of res judicata (applicable to the parties and those in privy with them).

[137] Having considered each of the six areas of factual inquiry alleged by the defendants to be insufficiently developed on the record before me to decide the question, I find that none of them is relevant to the question I have been asked to determine. The factual record before me is quite adequate and appropriate to make the very limited findings needed in order to interpret the Policy on the narrow question raised.

(ii) Potential for overlap in findings

[138] I have made very specific findings limited to the facts necessary to conclude that a constructive trust attached to funds transferred by the three victims to TD. The findings made by me are not applicable to any other transfers of funds because I have no evidence of the circumstances surrounding any other transfers of funds to TD. Having found that the funds were received subject to a constructive trust - leaving to trial to determine precisely how much of the funds received meets the description I have given – there is no prospect of an overlap in findings between summary judgment and trial. The identified transfers – and no others - are identified as having given rise to a constructive trust in favour of the victims for all purposes of this case. I can conceive of no area for overlap and none has been pointed out to me.

[139] I can see no realistic risk of overlap on the narrow issues determined here.

(iii) Considerations of efficiency, proportionality and expense

[140] I am of the view that determining the “first party liability” issue raised at this early stage will promote the object of securing the “just, most expeditious and least expensive determination of every civil proceeding” as required by Rule 1.04(1) of the Rules of Civil Procedure.

[141] The issue identified for resolution is a significant one to the action. Its determination would simplify the factual inquiries needed to be made at trial. The proposed forensic exercise of tracing each dollar in and out of the relevant RRA TD accounts over several years, for example, may become largely if not entirely irrelevant. Thousands of transactions in the RRA accounts at TD involving $2 billion or more in total have been identified as needing examination were that exercise to be undertaken.

[142] The efficiency of the process is a matter I have given considerable thought to. It is clear that any decision made by me on the merits of this one issue raised will very likely be appealed. In any instance of partial judgment being granted – whether it is on a discrete part of the claim or dismissing a material defence – there is the risk of creating an inefficient and disjointed process. It is clearly not desirable to have multiple trials of the same claim nor is it desirable that the same claim should generate multiple trips to the Court of Appeal (or beyond) before all issues raised by it are finally disposed of.

[143] In my view, the risks of inefficiency are quite muted here. The claim is at an early stage. It is being case managed. The time out to trial on all issues raised by this case will certainly be beyond the time required to hear an appeal of this ruling on a discrete but important issue. There will be plenty of opportunity to co-ordinate the management of this case towards trial (if necessary) with any pending appeal. Should it be determined, for example, that the complete forensic exercise is needed for trial, there will be plenty of opportunity to manage that issue. For that issue at least, the identification of the documents needed appears to be far less onerous than the task of undertaking the forensic deep dive into them.

[144] It is also relevant that the parties here are large and sophisticated institutions. The resolution of this issue in this fashion raises no access to justice concerns. There is certainly some risk of increased costs. Those costs will not impede the ability of any party to pursue this case and, of course, costs are an adequate remedy for increased costs.

(iv) Other considerations: consent?

[145] Rule 20.04(2)(b) of the Rules of Civil Procedure provides another avenue for considering summary judgment if the parties agree to have part of the claim determined by summary judgment providing the court is also satisfied that it is appropriate to grant summary judgment.

[146] The defendants’ objection to proceeding to a decision on the question has been quite equivocal. While suggesting the record before me lacks evidence of important facts, the defendants’ joint factum concludes with an unequivocal request for judgment in their favour on this issue.

[147] The “Order Requested” section of the defendants’ joint factum was as follows:

“For all the above reasons, the Insurers respectfully request an Order denying TD’s summary judgment, with costs, on the basis that TD has not shown it suffered any “direct financial loss” within the meaning of that term as used in the preamble”(emphasis added).”

[148] The primary relief sought by the defendants on this motion goes well beyond asking me to just say no to the plaintiff’s motion. It is of course well established that when the court declines to grant summary judgment at the instance of one party, the court may be in a position to grant the reciprocal decision in favour of the responding party if the findings of fact made to dismiss the motion are also sufficient to dismiss the claim in whole or in part. The primary relief sought be the defendants is for me to declare that the loss claimed by the plaintiff is not a direct financial loss, thereby establishing the validity of the defence they have pleaded on the interpretation of Section One (A) of the Policy. Having invited me to rule on the question, the defendants cannot tie my hands and suggest that I can only rule on the matter if I do so in their favour. If the facts before me are sufficient to rule that there is no “direct financial loss” shown as the defendants invite me to do, then they are sufficient to rule that there is.

[149] Whether the defendants’ position amounts to formal consent within the meaning of Rule 20.04(2)(b) of the Rules of Civil Procedure or is simply an admission that there are no genuine issues for trial on the issue before me is a distinction without a difference.

[150] I find that this is an appropriate case to grant partial summary judgment.

Disposition

[151] I find that I must revise somewhat the form of declaration TD has sought in granting partial summary judgment in order to ensure that it corresponds precisely to my ruling. The three instances placed before me have all involved Lock Letters, adequate proof of the reliance by the victims upon such Lock Letters in making transfers to TD, proof that the Lock Letters were fraudulently created and signed knowing of that intended reliance, proof that the accounts into which the funds were credited were controlled by Mr. Rothstein and left unrestricted by TD and proof that such accounts were all fully depleted by subsequent withdrawals that did not discharge TD’s obligations to the victims as constructive trustee of the funds received. This is not the only way in which TD could receive funds as constructive trustee subject to an obligation to account for and return them to the victim. It is, however, the way that was demonstrated to me in evidence for at least some portion of the claims of these three victims. My ruling on the law is confined to the factual situation before me – it will be a mixed question of law and fact as to whether other circumstances involving other deposits are should be treated in a similar fashion having regard to the interpretation I have given here to the question of “such direct financial loss sustained by the Assured”.

[152] Accordingly, I find that TD has sustained direct financial losses within the meaning of the second paragraph of Section One (A) of the Policy because:

a. It received transfers of funds (the “deposits”) from each of Coquina Investments, Razorback Funding LLC and BFMC Investments LLC (the “victims”) that were deposited into one or more accounts of its customer RRA controlled by Mr. Rothstein;

b. Some portion of such deposits were made by the victims in reliance upon, among other things, fraudulent Lock Letters knowingly executed by an employee of TD acting as such and intended by him to be given to them for such purpose;

c. By reason of these findings, TD received such funds subject to a constructive trust in favour of the victim transferors; and

d. The funds so deposited were subsequently permitted by TD to be withdrawn by RRA or Mr. Rothstein and used for purposes other than to return them to the defrauded victims.

[153] In making the foregoing determination, I have not determined that the remaining conditions of coverage under Insuring Clause 1 or any other Insuring Clause have been satisfied on the facts of this case nor have I ruled upon the applicability of any other exclusions or conditions of coverage apart from the limited determination made in respect of “such direct financial loss sustained by the Assured” in the context of the Policy. In addition, the task of quantifying the amount of deposits that satisfy the description upon which my ruling has been based has not yet been undertaken although I have been satisfied that at least some of the claims settled (or paid post-verdict) with these three victims do.

[154] I have reserved costs on two prior motions to date. I reserve costs on this motion as well but will receive written submissions from the parties if desired on (i) whether costs ought to be awarded on this or prior motions at this time; (ii) if so, the amount of costs to be awarded and to whom. I shall leave the parties to work out a timetable for submissions and expect self-discipline to ensure reasonable size limits are adhered to in such case. I should be contacted within 45 days if there is a request to receive submissions with an indication of the agreed timetable (or a request for a brief telephone case conference in the unlikely event a timetable cannot be agreed upon).

[155] It goes without saying that this difficult but important motion has been exceptionally well prepared and presented by all sides. I would like in particular to thank counsel for all of the defendants for their exemplary work in coordinating their efforts in both written and oral submissions so as to reduce duplication and enhance efficiency.

S.F. Dunphy, J.

Date: December 22, 2016

CITATION: TD Bank, N.A. v. Lloyd’s Underwriters, 2016 ONSC 8006

COURT FILE NO.: CV-14-495750

DATE: 20161222

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

TD BANK, N.A.,

Plaintiff

– and –

LLOYD'S UNDERWRITERS" THAT SUBSCRIBE TO POLICY NUMBER MMF/1710, PRIMARY LONDON REFERENCE NUMBER B0509QA025509 AND EXCESS LONDON REFERENCE NUMBERS QA025609, QA025709, QA025809, AND QA025909, ANTARES UNDERWRITING LIMITED FOR ITSELF AND ON BEHALF OF ALL MEMBERS OF LLOYD'S SYNDICATE 1274 (AUL)FOR THE OPERATING YEAR OF 2009, CATLIN SYNDICATE LIMITED FOR ITSELF AND ON BEHALF OF ALL MEMBERS OF LLOYD'S SYNDICATE 2003 (SJC) FOR THE OPERATING YEAR OF 2009, NOVAE CORPORATE UNDERWRITING LIMITED AND/OR NOVAE SYNDICATES LIMITED FOR THEMSELVES AND ON BEHALF OF ALL MEMBERS OF LLOYD'S SYNDICATE 2007 (NVA)FOR THE OPERATING YEAR OF 2009, ACE CAPITAL LIMITED, AVE CAPITAL IV LIMITED, AND ACE CAPITAL V LIMITED FOR THEMSELVES AND ON BEHALF OF ALL MEMBERS OF LLOYD'S SYNDICATE 2488 (AGM) FOR THE OPERATING YEAR OF 2009, BRIT UW LIMITED FOR ITSELF AND ON BEHALF OF ALL MEMBERS OF LLOYD'S SYNDICATE 2987 (BRIT) FOR THE OPERATING YEAR OF 2009, CHAUCER CORPORATE CAPITAL (NO. 3) LIMITED, CHAUCER CORPORATE CAPITAL (NO. 2) LIMITED, AND/OR IRONSHORE CORPORATE CAPITAL LTD. FOR THEMSELVES AND ON BEHALF OF ALL MEMBERS OF LLOYD'S SYNDICATE 4000 (PEM) FOR THE OPERATING YEAR OF 2009, ASPEN INSURANCE UK LIMITED, GREAT LAKES REINSURANCE (UK) PLC, LEXINGTON INSURANCE COMPANY, AIG INSURANCE COMPANY OF CANADA (FORMERLY KNOWN AS AIG COMMERCIAL INSURANCE COMPANY OF CANADA), AIG COMMERCIAL INSURANCE COMPANY OF CANADA, CHARTIS EXCESS LIMITED (FORMERLY KNOWN AS AIG EXCESS LIABILITY INSURANCE INTERNATIONAL LIMITED), ALLIED WORLD ASSURANCE COMPANY LTD., ARCH INSURANCE COMPANY, AXIS SPECIALTY INSURANCE COMPANY, AXIS SPECIALTY LIMITED, CHUBB INSURANCE COMPANY OF CANADA, HOUSTON CASUALTY COMPANY, LIBERTY MUTUAL INSURANCE COMPANY, MARKEL BERMUDA LIMITED (FORMERLY KNOWN AS MAX BERMUDA LTD.) AND OR MAX BERMUDA LTD., XL INSURANCE COMPANY PLC (FORMERLY KNOWN AS XL INSURANCE COMPANY LIMITED) AND OR XL INSURANCE COMPANY LIMITED and ENDURANCE SPECIALTY INSURANCE LTD.

Defendants

REASONS FOR PARTIAL SUMMARY JUDGMENT

S. F. Dunphy, J.

Released: December 22, 2016

[^1]: Punitive damages are not part of this claim – TD claims only the compensatory damages paid.

[^2]: Execution dates between October 1 and October 6, 2015.

[^3]: Mr. Spinosa expressly admitted knowing of reliance on the admittedly fraudulent Lock Letter only in the case of BFMC. I infer from the identical nature of the Lock Letters in Razorback and Coquina, Mr. Spinosa’s admission of the nature of the Rothstein Ponzi Scheme, the admissions by the defendants of the contribution of employee fraud to the causation of TD’s losses, the Coquina verdict and the evidence before the jury found able to support that verdict by Cooke J. and the United States Court of Appeal that all three victims may be presumed to have relied upon the fraudulent Lock Letters received by them in making at least some of their investments into the Rothstein Ponzi Scheme and that such reliance was known to TD through one or more of its employees when some funds were received from them. I do not need to find that all of the Coquina investments – totaling more than $37 million – were sent in reliance upon the Lock Letters. Based upon the jury verdict and the Lock Letters, it is sufficient to find as I do that at least some portion of the investment that underlies the Coquina judgment rendered was in reliance on the Lock Letters. At all events, $16 million in compensatory damages was awarded against TD based on fraudulent misrepresentation, it matters little whether it was the Lock Letters in particular or the various meetings attended by Mr. Spinosa the evidence of which is discussed in the decision of Cooke J. upholding the jury verdict or of the United States Court of Appeals upholding Cooke J. The Securities and Exchange Commission also made express findings of intended reliance on the lock-letters in its consent ruling referred to by the defendants in their statements of defence.

[^4]: Each of the nineteen Insuring Clauses begins with “by reason of” or “loss resulting” (or similar language) such that they read as clauses rather than sentences. The exception is Insuring Clause 10 relating to Court Costs and Attorney Fees – a derivative coverage applying where another coverage also applies.

[^5]: Insuring Clause 10, being derivative of other Insuring Clauses, is an exception to this that is not relevant to this analysis.

[^6]: I do not exclude other transfers being included based on other proved fraudulent conduct or knowledge of fraudulent conduct. Indeed, this is precisely what was found by the jury in Coquina. The Lock Letters are simply the common denominator of all three claims being considered and the evidence of each is sufficient to satisfy me that they can be characterized as fraudulent misrepresentations relied upon in relation to subsequent transfers by each of the victims.