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February 2015

Chicago Partners Secure Summary Judgment in $87 Million Fraud Case

Gordon & Rees Chicago partners Randall Marmor, Scott Schmookler and Craig Jacobson secured summary judgment on behalf of Underwriters, in Certain Underwriters at Lloyd’s, London v. Taylor Bean & Whitaker Mortgage Corp., 2015 WL 728493 (M.D.Fla. February 19, 2015).

In 2009, criminal authorities raided Taylor Bean & Whitaker, the largest independent warehouse mortgage lender in the U.S. Since 2002, TBW had orchestrated one of the largest bank fraud schemes in this country’s history. Spearheaded by TBW’s owner, Lee Farkas, and other senior company officers, TBW engaged in multiple schemes from which TBW derived a $3.5 billion benefit. TBW declared bankruptcy and filed notices of claim under financial institution bonds that cover loss resulting from dishonest acts by employees. TBW claimed that Farkas withdrew more than $87 million from TBW, for his own benefit and for the benefit of other employees. The insurers rescinded the bonds and TBW filed a counterclaim for coverage.

The court entered summary judgment in favor of the insurers and against TBW.  In so ruling, the court addressed whether a majority shareholder qualifies as an “Employee” under a financial institution bond and whether coverage may be triggered by proof that other employees facilitated the shareholder's fraud. 

The court ruled that the insurers had established that Farkas, the person who orchestrated the fraud, dominated and controlled TBW and thus was the alter ego of the corporation.  As such, the court held Farkas was not an “Employee” of the insured, as required for coverage, but rather his actions were those of the corporation itself. A fidelity bond covers loss resulting from dishonest acts of an employee, not from the insured’s own dishonest acts.

The court also rejected TBW’s arguments that the bonds should nonetheless cover loss resulting from the fraud of the other senior officers of TBW.  The court found there was no showing that the officers acted without Farkas’ knowledge and direction and that the officers were merely the instrumentality of Farkas’ fraudulent scheme. The court held that an insured cannot avoid the alter ego doctrine by implicating other employees in the fraud.  In essence, the court held that a scheme directed by a majority shareholder is not covered, even if it involves collusion with traditional employees.

Craig A. Jacobson
Randall I. Marmor
Scott L. Schmookler