Trial date delayed in $300-million banker’s commercial coverage dispute

A trial in an Ontario coverage dispute lawsuit, on a Big 5 bank’s $300-million commercial claim, is being pushed back from its originally-scheduled start date of Sept. 13, 2021.

Toronto Dominion Bank is suing a group of insurers, including six Lloyd’s syndicates, for breach of contract arising from denial of coverage. Allegations against the insurers have not been proven in court.

It all began in Florida in about 2005. That was when lawyer Scott Rothstein started a four-year Ponzi scheme in which investors lost over US$1 billion. Rothstein was using Commerce Bank, which was later bought by TD. In 2010, Rothstein was sentenced to 50 years in jail in Florida. Meanwhile, TD was named by 19 defendants in lawsuits in the United States. Former employees of TD’s Florida bank were involved in the Ponzi scheme. Victims alleged TD was vicariously liable for its own employee’s role in the scheme.

Instead of depositing the funds to the bank in the manner investors were promised, Rothstein was actually using funds from new investors to pay off old investors, ABC News reported earlier.

The U.S. Securities and Exchange Commission reports that one group of investors were told that a trust account set up with TD, by Rothstein, had a balance of $20 million, when in fact the balance was at or near zero.

TD paid out more than US$433.3 million to settle lawsuits in the United States, plus an additional US$46 million in legal defence costs, Ontario court records indicate.

In 2009, TD Bank had $300 million in coverage, with a $100-million deductible, on a banker’s comprehensive crime, professional indemnity and directors’ and officers’ liability program. That policy includes coverage for employee dishonesty or fidelity.

The insurers denied the claim, essentially arguing the intent of fidelity coverage is to transfer the risk to a client’s own assets from employee dishonesty but not to provide third-party liability insurance for employee dishonesty. So TD took those insurers to court in Ontario in 2015.

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One of TD’s arguments is that the money the Ponzi scheme victims lost was in fact a “direct financial loss” to TD.

In Toronto-Dominion Bank, N.A. v. Lloyd’s Underwriters, released in 2016 by the Ontario Superior Court of Justice, Judge Sean Dunphy ruled that the loss of money on the Ponzi scheme was a “direct loss” to TD.

But in a 2017 decision, the Court of Appeal for Ontario found that Justice Dunphy ought not to have made his finding in a summary decision. Instead, the case should have gone to trial, the appeal court ruled. TD was not successful in applying for leave in 2018 to appeal to the Supreme Court of Canada.

So the case is now back in the hands of the Ontario Superior Court of Justice, which scheduled a trial to start in September 2021.

But in TD Bank v. Lloyd’s Underwriters, released Feb. 16, 2021, Justice Andrew Sanfilippo ruled that the trial will not start Sept 13 as originally scheduled. Justice Sanfilippo did schedule a case management conference for May 6, 2021.

Now examinations for discovery are underway. But the parties are alleging that opposing parties are refusing to answer questions during the discovery process.

In civil lawsuits, there is normally a discovery process before trial so that each party can learn about opposing parties’ evidence in advance. The aim is to narrow the issues for trial, help the parties reach a settlement and make the trial itself more efficient.

In 2020, the insurers brought a motion to compel TD Bank to answer more than 500 questions the insurers say the bank had refused to answer during discovery. TD brought its own motion asking the court to compel some of the insurers to answer questions that TD says they refused to answer. TD later applied to withdraw that motion without prejudicing TD’s right to re-file the same motion.

In a case management conference on Feb. 12, 2021, lawyers for TD Bank and the defendant insurers discussed several steps necessary to prepare the lawsuit for trial, including completing examinations for discovery no later than April 30.

“In projecting basic timelines for each of these steps, it became clear to all that the currently scheduled trial date of September 13, 2021, was simply not realistic. There was no manner of scheduling that would allow this action to be ready for trial on that date,” Justice Sanfilippo wrote in his ruling released Feb. 16, 2021.

The defendant insurers originally named by TD Bank included Six Lloyd’s syndicates managed by Antares Underwriting, Catlin, Novae, Ace Capital, Brit UW Limited and Chaucer Corporate Capital. Other insurers on risk for that $300-million policy include: Aspen; Great Lakes Reinsurance (UK) PLC; Lexington Insurance Company, AIG; Allied World; Arch Insurance Company; Axis; Chubb Insurance Company Of Canada; Houston Casualty Company; Liberty Mutual Insurance Company; Max Bermuda Ltd; XL Insurance Company Plc; and Endurance Specialty Insurance Ltd.

Reuters reported earlier that then-Florida lawyer Rothstein sold investors stakes in what Rothstein said were settlements of potential lawsuits over sexual harassment or whistleblower claims.

The Securities and Exchange Commission reported earlier that Rothstein told investors the purported plaintiffs were willing to sell their periodic payments to investors at a discount in exchange for one lump-sum payment. But in reality, the legal settlements were fake and the plaintiffs and defendants were not real, SEC said in a 2012 news release. Rothstein opened 22 attorney accounts at the Florida bank owned by TD.

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