{"id":2855,"date":"2015-05-13T15:18:27","date_gmt":"2015-05-13T15:18:27","guid":{"rendered":"https:\/\/www.sblegal.ca\/?post_type=fidelityblog&p=2855"},"modified":"2026-06-23T15:21:32","modified_gmt":"2026-06-23T15:21:32","slug":"taylor-bean-whitaker-u-s-district-court-applies-alter-ego-doctrine-to-deny-coverage-in-respect-of-both-majority-shareholder-and-colluding-subordinate-employees","status":"publish","type":"fidelityblog","link":"https:\/\/www.sblegal.ca\/wordpress\/fidelity-blog\/taylor-bean-whitaker-u-s-district-court-applies-alter-ego-doctrine-to-deny-coverage-in-respect-of-both-majority-shareholder-and-colluding-subordinate-employees\/","title":{"rendered":"Taylor, Bean & Whitaker: U.S. District Court applies Alter Ego doctrine to deny coverage in respect of both Majority Shareholder and Colluding Subordinate Employees"},"content":{"rendered":"
\n

A recent decision of the U.S. District Court for the Middle District of Florida,\u00a0In Re Taylor, Bean & Whitaker Mortgage Corporation<\/em>, provides a helpful illustration of how to assess coverage where an insured\u2019s\u00a0alter ego<\/em>\u00a0allegedly colludes with subordinate employees who are not, themselves, directing minds of the insured.<\/p>\n

The Facts<\/strong><\/h2>\n

The insured, Taylor, Bean & Whitaker Mortgage Corporation (\u201cTBW\u201d), had been a leading wholesale mortgage lending firm, but collapsed in 2009 due to massive fraud directed by its majority shareholder, Lee Farkas. Farkas removed over $87 million from TBW, primarily by siphoning money out of TBW into various entities owned by Farkas and others. TBW alleged that at least two of its employees had assisted Farkas. According to TBW, its treasurer, Desiree Brown, had effected electronic transfers of funds from TBW\u2019s operating accounts to the recipient entities.\u00a0 TBW also alleged that its CFO, Delton De Armas, had set up a \u201cDue From\u201d account, which was used to track the amounts Farkas and Brown had taken from TBW\u2019s operating accounts, and to give the defalcations an air of legitimacy with TBW\u2019s bookkeepers.<\/p>\n

The Lloyds Coverage<\/strong><\/h2>\n

TBW maintained fidelity coverage with certain Lloyds Underwriters. TBW\u2019s bankruptcy trustee submitted a proof of loss for $87 million, asserting that Farkas, Brown and De Armas had committed acts of employee dishonesty.<\/p>\n

The Underwriters sought,\u00a0inter alia<\/em>, a declaration of no coverage arising from the acts of Farkas, Brown and De Armas.\u00a0 As Farkas was the majority shareholder of TBW, the Underwriters determined that he fell within an exception to the definition of \u201cEmployee\u201d, which provided that:<\/p>\n

\u00a0<\/em>It is understood, however, that the term Employee does not include any Major Shareholder of [TBW]<\/em>, nor, except as provided above, any director of [TBW]<\/em>.<\/p><\/blockquote>\n

A Major Shareholder was in turn defined as \u201ca natural person who has or had directly, indirectly or beneficially 25% or more of the outstanding voting shares of [TBW]<\/em>.\u201d<\/p>\n

Can an\u00a0Alter Ego<\/em>\u00a0also be an Employee?<\/strong><\/h2>\n

TBW acknowledged that Farkas, as majority shareholder of TBW, came within this exception. However, TBW pointed to an exclusion in one of the polices, which excluded coverage for:<\/p>\n

\u00a0any loss involving any act of any partner or Major Shareholder of [TBW], except when acting in the capacity of an Employee.<\/em><\/p><\/blockquote>\n

Based on this, TBW contended that a Majority Shareholder could still be considered an Employee for coverage purposes, so long as the individual was \u201cacting in the capacity of an Employee<\/em>\u201d at the time that the dishonest act was committed.<\/p>\n

The Court rejected this argument. After considering the case law on the\u00a0alter ego<\/em>\u00a0doctrine, the Court concluded that:<\/p>\n

\u00a0\u2026 [the] Underwriters established that Farkas dominated and controlled the corporation to such an extent that the corporation\u2019s independent existence was in fact nonexistent; Farkas became an alter ego of the corporation. \u2026 For this reason, Farkas was not TBW\u2019s employee nor did he act in an employee capacity when he looted TBW\u2019s property. Accordingly, any losses caused by his dishonest acts are not covered by the bonds in question.<\/em><\/p><\/blockquote>\n

Collusion of Subordinate Employees with\u00a0Alter Ego<\/em><\/strong><\/h2>\n

TBW had a clever argument in reserve. While Farkas may not have been an \u201cEmployee\u201d, Brown and De Armas certainly were Employees at the time that they had assisted Farkas with his defalcations. As such, TBW reasoned, its losses were due to\u00a0their\u00a0dishonest acts. The Court rejected TBW\u2019s argument, accepting the Underwriters\u2019 position that allowing indemnity in such circumstances would effectively nullify the\u00a0alter ego<\/em>\u00a0doctrine, and was also contrary to public policy:<\/p>\n

\u00a0The Court is faced with a very unusual situation where a majority shareholder, an alter ego of the corporation, initiates dishonest acts, directs his subordinate\u2019s involvement, and the subordinate renders her assistance in the fraudulent scheme. TBW claims that Farkas directed all of the transfers that caused its losses. Over time, the embezzlement on Farkas\u2019 behalf became part of Brown\u2019s duties. The Court believes that allowing coverage under these circumstances is not proper. \u2026 allowing TBW to recover for losses caused by its alter ego\u2019s fraudulent or dishonest conduct only because its alter ego used his corporation\u2019s employee as an instrumentality in the fraudulent scheme would still essentially allow TBW to recover for its own fraudulent or dishonest acts.<\/em><\/p>\n

\u00a0<\/em>In addition, it would be inconsistent with public policy against allowing one to insure against one\u2019s own thefts, dishonest acts or intentionally inflicted damage. See Cal. Union\u2026 (\u201c[T]here is a public policy against permitting a corporation to collect insurance for the defalcations of its alter ego.\u201d). \u2026<\/em><\/p><\/blockquote>\n

Thus, TBW could not recover for any losses caused by the dishonest acts of the employees committed at Farkas\u2019 direction.<\/p>\n

Conclusion<\/strong><\/h2>\n

Taylor, Bean & Whitaker\u00a0<\/em>is useful to fidelity insurers in reinforcing the intended parameters of the\u00a0alter ego<\/em>\u00a0doctrine. The Court\u2019s reasoning and conclusions with respect to Farkas\u2019 falling outside the definition of \u201cEmployee\u201d are fairly straightforward. However, the Court\u2019s application of the\u00a0alter ego<\/em>\u00a0doctrine (and public policy considerations) in respect of Brown and De Armas demonstrates a willingness to critically assess the substantive claim advanced by the insured, and to ascertain whether it simply involves an attempt to draw an artificial distinction between the acts of an\u00a0alter ego<\/em>\u00a0and the acts of colluding subordinate employees. It is not uncommon for an\u00a0alter ego<\/em>\u00a0to have some form of \u201cassistance\u201d in effecting a fraud;\u00a0Taylor, Bean & Whitaker\u00a0<\/em>indicates that such assistance should not enable an insured to nullify the\u00a0alter ego<\/em>\u00a0doctrine where it would otherwise apply.<\/p>\n

In Re Taylor, Bean & Whitaker Mortgage Corporation<\/em>, 2015 WL 728493 (M.D.Fla.)<\/p>\n<\/div>\n

<\/div>\n","protected":false},"excerpt":{"rendered":"

A recent decision of the U.S. District Court for the Middle District of Florida,\u00a0In Re Taylor, Bean & Whitaker Mortgage Corporation, provides a helpful illustration of how to assess coverage where an insured\u2019s\u00a0alter ego\u00a0allegedly colludes with subordinate employees who are not, themselves, directing minds of the insured. 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