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Odyssey Reinsurance Co. v. Nagby

United States District Court, S.D. California

June 27, 2019

ODYSSEY REINSURANCE COMPANY, a Connecticut corporation, Plaintiff,
RICHARD KEITH NAGBY, et al, Defendants.



         Before the Court is an order to show cause (“OSC”) why Defendant Diane Dostalik, formerly known as Diane Nagby, (“Defendant”) should not be held in contempt of Court. (ECF No. 199 (“December 2018 OSC re Contempt”).) The OSC required that Ms. Dostalik show cause, if any, why the Court should not find her in contempt for violating:

• the injunction order entered on October 4, 2017, (ECF No. 69 (“October 4, 2017 Injunction Order”));
• the injunction order entered on May 4, 2018 (ECF No. 137 (“May 4, 2018 Injunction Order”)); and
• the temporary restraining order entered on August 8, 2018 (ECF No. 172 (“August 8, 2018 TRO”)).

         For the reasons discussed below, the Court holds Defendant Diane Dostalik in civil contempt.

         Also pending before the Court are two temporary restraining orders (“TROs”) issued by the Court on August 8, 2018 and November 7, 2018. (August 2018 TRO; ECF No. 194 (“November 7, 2018 TRO”).) Those orders required Defendant to show cause why preliminary injunctions should not issue having the same terms as the TROs. For the reasons discussed below, the Court grants the preliminary injunctions.


         This action arises out of the judgment entered by the United States District Court for the District of Connecticut in favor of Plaintiff Odyssey Reinsurance Company (“Plaintiff” or “Odyssey”) and against Defendant Cal-Regent Insurance Services Corporation (“Cal-Regent”) in the amount of $3, 200, 000.00 plus interest. (See ECF No. (“Second Am. Compl. or SAC”) ¶¶ 15-17.) Cal-Regent was an insurance agency that underwrote certain insurance risks on behalf of State National Insurance Company (“State National”). (SAC ¶ 18.) Plaintiff in turn reinsured State National for a certain percentage of those risks, ranging from 90%-100%. (Id.) In accordance with a series of reinsurance agreements between the parties, Cal-Regent received a provisional commission-paid in part by Plaintiff-on all policies that it underwrote for State National. (SAC ¶ 19.) At the end of each year, the provisional commissions were adjusted depending on the profitability of the business underwritten by Cal-Regent. (SAC ¶ 20.) Where the provisional commission paid by Plaintiff exceeded the amount to which Cal-Regent was entitled to after the yearly adjustment, Cal-Regent was obligated to pay the difference to Plaintiff. (Id.) By 2013, Cal-Regent owed Plaintiff $2, 740, 802.61 in return commissions, in part due to a lawsuit against State National that settled in February 2013. (SAC ¶¶ 21-23, 25.)

         Plaintiff alleges that by early 2013, Defendants Richard Nagby and Diane Dostalik “understood that the amount of return commissions owing to [Plaintiff] would substantially increase” as a result of the lawsuit. (SAC ¶ 29.) Plaintiff claims that “[a]s the potential effect of the [lawsuit] on Cal-Regent's obligation to pay return commission became clear to the Nagbys, they embarked on a plan to strip Cal-Regent of assets, ” (SAC ¶ 30), which began with the Nagbys forming Pacific Brokers Insurance Services (“PBIS”), a Nevada corporation, (SAC ¶35).

         Plaintiff alleges that Mr. Nagby, with the help of Defendants CTS and David Dostalik, “caused funds otherwise owing to Cal-Regent and/or to its successor PBIS to be transferred to one or more account(s) held in the name of CTS” to conceal funds from creditors including Plaintiff. (SAC ¶¶ 32, 40.7.) Defendant David Dostalik allegedly released to the Nagbys for their benefit, “portions of the funds held by CTS on behalf of Cal-Regent.” (SAC ¶ 33.) Some of the funds were also deposited into the Cal-Regent and PBIS operating accounts to pay creditors, “in order to deceive them as to the true status of Cal-Regent and CTS.” (Id.) “Other funds deposited into the Cal-Regent or PBIS operating accounts were characterized by the Nagbys as loans to those entities, so that payments back to the Nagbys could be characterized as tax-free loan repayments.” (Id.)

         Plaintiff also claims that in April 2013, while Cal-Regent's debts remained outstanding, Mr. Nagby and Ms. Dostalik formed PBIS and subsequently “caused Cal-Regent to transfer substantially all of its assets to PBIS, ” including its goodwill and “book of business, ” without receiving reasonably equivalent value in exchange for these assets. (SAC ¶¶ 35-36, 45.) Mr. Nagby and Ms. Dostalik are both Cal-Regent's and PBIS's officers, directors, managers and shareholders. (SAC ¶ 46.) Plaintiff alleges that “PBIS was formed by [Mr. Nagby and Ms. Dostalik] for the specific purpose of continuing the business operations of Cal-Regent under a different name in order to hinder, delay or defraud the creditors of Cal-Regent.” (SAC ¶ 49.)

         In April 2014, Plaintiff filed an action in the District of Connecticut against Cal-Regent to recover the amount owed to Plaintiff in return commissions. (SAC ¶ 12.) In October 2015, the court rendered a judgment in Plaintiff's favor and against Cal-Regent in the amount of $2, 740, 802.61. (SAC ¶ 14.) In November 2015, the court awarded Plaintiff a supplement judgment. (SAC ¶¶ 15-17.) In addition to the October 2015 judgment the court also awarded Plaintiff $459, 197.39, bringing the judgment to a total sum of $3, 200, 000.00 plus interest. (Id.)

         Plaintiff alleges that “three months after oral argument on [Plaintiff's] motion for summary judgment in the Connecticut action and three months before the Judgment was entered, [Mr. Nagby and Ms. Dostalik] caused PBIS to sell substantially all of its assets to AmTrust North America, Inc. (“AmTrust”) for $5 million.” (SAC ¶ 37.) Of the sale proceeds (“the AmTrust proceeds”), AmTrust made an initial payment of $3 million to PBIS. (ECF No. 160-1, ¶¶ 3-4.) The remainder was to be paid in the form of contingent “earn out” payments in three annual installments. (ECF No. 165, Ex. 133, ¶ 3.)

         As the only PBIS shareholders, Mr. Nagby and Ms. Dostalik decided how to allocate the AmTrust proceeds between the two of them during the course of their divorce proceedings. See In re: Marriage of: Diane M. Nagby v. Richard K. Nagby, No. ED80574, in the Superior Court of California, County of San Diego. Per the “Stipulation and Order Re Division of PBIS Sale Proceeds and Outstanding Post-Judgment Issues” signed by the parties in May 2015, the two agreed that Ms. Dostalik would receive $2.5 million of the initial $3 million payment, while Mr. Nagby would receive the remaining $500, 000. See Id. They also agreed that Mr. Nagby would receive the earn out payments. Id.

         On August 4, 2015, Ms. Dostalik received $2.5 million, and Mr. Nagby received $500, 000. (ECF No. 140-3, Ex. 77; ECF No. 160-1, ¶ 14; ECF No. 165, Ex. 133 ¶¶ 2, 5.) In October 2016, AmTrust wired the first earn out payment in the amount of $894.583.19 to a PBIS bank account. (ECF No. 140-3, Ex. 543.) Mr. Nagby received those funds on October 21, 2016. (ECF No. 140-3, Ex. 544.)


         Plaintiff filed the SAC on March 21, 2017, against several defendants including PBIS, Cal-Regent, and the Nagbys under several theories of liability including the Uniform Fraudulent Transfer Act (“UFTA”), California's alter ego and successor liability law, and principles of corporate law. (SAC.)

         On October 4, 2017, the Court granted Plaintiff's motion for the entry of a default judgment against Cal-Regent and PBIS in the amount of $3.2 million plus post-judgment interest. (See ECF No. 68.) The Court also granted Plaintiff a preliminary injunction against the Nagbys, restraining them from the dissipation of the AmTrust proceeds, including “all funds already received in connection with the sale of PBIS to AmTrust, and payments that are hereafter received from AmTrust.” (ECF No. 69 (“October 2017 Injunction Order”.).)

         On October 10, 2017, a stipulated order was entered directing AmTrust to pay into the Court registry the second and third earn out payments. (See ECF No. 74 (“October 2017 Registry Order”).) Plaintiff and AmTrust filed a joint motion to dismiss AmTrust without prejudice. (See ECF No. 84.) The dismissal order required that AmTrust continue to abide by the October 2017 Registry Order. (Id.) AmTrust has now deposited the second and third earn out payments, totaling $958, 017.66, into the Court registry. (See ECF No. 223 (“Pl.'s Opp'n to Mot.-to-Interv.”), 4:15-22.)

         On October 27, 2017, the Court entered a judgment as to Cal-Regent and PBIS, including a monetary award against PBIS in the amount of $3, 219, 482.68, the amount owing on the District of Connecticut judgment against Cal-Regent. (ECF No. 82.) On March 5, 2018, the Court certified the judgment as final under Fed.R.Civ.P. 54(b). (ECF No. 105.) No appeal was taken.

         On March 7, 2019, the Court denied a motion to intervene by third party Knight Insurance. (ECF No. 233.) On March 14, 2019, the Court granted a turnover motion in favor of Odyssey and directed payment of the AmTrust proceeds in the Court registry (the second and third earn out payments) to Odyssey. (ECF No. 234.) Knight Insurance has appealed both orders. (ECF Nos. 235, 236.) Mr. Nagby has appealed the order granting Plaintiff's turnover motion. (ECF No. 246.)

         On April 22, 2019, the Court denied in part and granted in part a motion for summary judgment submitted by Defendants David Dostalik and CTS. (ECF No. 253.) Defendants David Dostalik and CTS have appealed the order. (ECF Nos. 263, 264.)

         Pretrial dates have been set, culminating in the final pretrial conference scheduled for July 25, 2019. Trial is scheduled to begin August 19, 2019.

         The Court has issued a series of injunctions and temporary restraining orders requiring Ms. Dostalik to deposit AmTrust proceeds in her possession into the Court registry, starting with the Court's October 4, 2017 Injunction Order. OSC proceedings as to why Ms. Dostalik should not be held in contempt with respect to those orders concluded on June 6, 2019. Below, the Court details the findings of fact and conclusions of law that serve as the basis for this Order holding Ms. Dostalik in civil contempt.


         A. Contempt

         A district court has the inherent power to enforce its orders through civil contempt. See Shillitani v. United States, 384 U.S. 364, 370 (1966). In the Ninth Circuit, a finding of civil contempt is proper when a party disobeys a specific and definite court order by failure to take all reasonable steps within the party's power to comply. See Go-Video, Inc. v. Motion Picture Ass'n of America, 10 F.3d 693, 695 (9th Cir. 1993).

         The party moving the Court to adjudge another of contempt bears the initial burden of showing by clear and convincing evidence that the alleged contemnor has violated a specific and definite order of the Court. See FTC v. Affordable Media, 179 F.3d 1228, 1239 (9th Cir. 1999) (citing Stone v. City and Cty. of San Francisco, 968 F.2d 850, 856 n.9 (9th Cir. 1992)). Upon such a showing, the burden shifts to the alleged contemnor to demonstrate why she was unable to comply. Id.

         The inability to comply may constitute a defense to a charge of civil contempt. Id. (citing United States v. Rylander, 460 U.S. 752, 757 (1983)). In raising this defense, the defendant has the burden of production. Rylander, 460 U.S. at 757. The party asserting the defense “must show categorically and in detail why he is unable to comply.” Affordable Media, 179 F.3d at 1241. “The contempt need not be willful.” In re Dual-Deck Video Cassette Recorder Antitrust Litig., 10 F.3d 693, 695 (9th Cir. 1993) (internal quotation marks and citation omitted). “Contempt sanctions, however, are not warranted where the nonmoving party's action ‘appears to be based on a good faith and reasonable interpretation' of the court's order.” Newmark Realty Capital, Inc. v. BGC Partners, Inc., No. 16-cv-01702-BLF, 2018 WL 2416242, at *2 (N.D. Cal, May 29, 2018) (quoting In re Dual-Deck Video Cassette Recorder Antitrust Litig., 10 F.3d at 695).

         At the contempt hearing, the propriety of the underlying order is not at issue; rather, the question for the Court is whether the alleged contemnor has the present ability to obey the Court's order. See Maggio v. Zeitz, 333 U.S. 56, 69 (1948). “[A] contempt proceeding does not open to reconsideration the legal or factual basis of the order alleged to have been disobeyed and thus become a retrial of the original controversy.” Maggio, 333 U.S. at 69; Rylander, 460 U.S. at 756-57.

         The Court finds that Ms. Dostalik has violated two specific and definite Court orders by failing to take all reasonable steps within her power to comply. See Go-Video, Inc. v. Motion Picture Ass'n of America, 10 F.3d 693, 695 (9th Cir. 1993). Plaintiff's presentation of evidence has revealed several violations of both the October 4, 2017 Injunction Order and the August 8, 2018 TRO.

         1. Defendant Violated the October 4, 2017 Injunction Order

         a. October 4, 2017 Injunction Order

         On October 4, 2017, the Court ordered that Ms. Dostalik is:

Preliminary enjoined and restrained from directly or indirectly: (a) Transferring, assigning, disposing of or commingling any funds or property received in connection with the sale of PBIS to AmTrust, including but not limited to all “earn out” distributions collected or to be collected from AmTrust.

(October 4, 2017 Injunction Order, 2:15-23) (emphasis added).

         The Court also ordered Ms. Dostalik to:

deposit in the registry of the Court by October 11, 2017 all funds already received in connection with the sale of PBIS to AmTrust, and payments that are hereafter received from AmTrust or its agent within 24 hours of receipt.

(Id. at 2:24-27) (emphasis added).

         Finally, the Court warned that any act “in violation of the terms of [the] Order may be considered and prosecuted as contempt of this Court.” (Id. at 3:6-7.)

         b. Defendant Failed to Deposit At Least $176, 263.13 in AmTrust Proceeds into the Court Registry

         The Court finds that on October 4, 2017, Ms. Dostalik had in her possession at least $176, 263.13 in AmTrust Proceeds and failed to deposit these funds into the Court registry, in violation of the October 4, 2017 Injunction.

         Ms. Dostalik initially received the $2.5 million payment in connection with the sale of PBIS to AmTrust on August 4, 2015 through an incoming wire transfer.[1] (See Pl. Ex. 91A.) The testimony of Plaintiff's expert witness, Mr. Brian Bergmark, demonstrates what happened to the AmTrust proceeds from its initial deposit on August 4, 2015 to October 4, 2017, when the Court entered its Order. (See generally ECF No. 229 (“Tr. of OSC Hr'g on May 20, 2019” or “Tr. May 20, 2019”), 3-54.) Mr. Bergmark testified that in conducting his analysis of the $2.5 million, he relied on a method called proportional or allocation tracing.[2] (Id. at 17:9-12.) Mr. Bergmark explained that as the $2.5 million was transferred throughout Ms. Dostalik's various bank accounts or used to pay for expenses, he kept track of “two separate buckets of monies, ” one that consisted of AmTrust money and the other that consisted of personal funds. (Id. at 16:20-17:8.) With this tracing, Mr. Bergmark at all times tracked the proportion or percentage of each account balance consisting of AmTrust proceeds. (Id. at 18-2019:13.) When money was transferred between accounts, Mr. Bergmark preserved the “character” of the funds, whether AmTrust or personal, to ensure that the percentage of AmTrust funds in each account remained accurate. (Id. at 20:16-22:2.) When money was used to pay for expenses, Mr. Bergmark attempted to characterize the type of expense as an AmTrust withdrawal or personal in nature. (Id. at 17:14-18:18.) He then subtracted the expense from the AmTrust funds or personal funds in the account accordingly. (Id.) Mr. Bergmark emphasized that for this part of the analysis, he was always “conservative, ” and would subtract expenses from the AmTrust money unless he could clearly identify that it was personal in nature. (Id.)

         Mr. Bergmark analyzed nine of Ms. Dostalik's bank accounts to trace the initial $2.5 million deposit:

• Bank of the West Personal Checking (0019)
• Bank of the West Personal Money Market (0001)
• Wells Fargo Personal Checking (9396)
• Wells Fargo Personal Savings (9984)
• Wells Fargo Green Tree Funding LLC Checking (1268)
• Wells Fargo Green Tree Funding LLC “Additional” Checking (9404)
• Wells Fargo Green Tree Funding LLC Savings (9976)
• Chase Nevada Cactus Growers LLC Checking (6375)
• Chase Nevada Cactus Growers LLC Savings (7150)

(Id. at 14:5-15:11.) The $2.5 million was originally deposited into Bank of the West Personal Checking (0019) on August 4, 2015. (Pl. Ex. 91A; Tr. May 20, 2019, 15:20-16:4.) For the next two years, the money was disbursed throughout Ms. Dostalik's nine accounts. (Pl. Exs. 91, 93, 149.) From the date of the initial deposit to October 4, 2017, Mr. Bergmark testified that the total aggregate balance of the nine accounts was never less than 97% AmTrust proceeds. (Tr. May 20, 2019, 42:24-43:12.)

         As of October 4, 2017, three[3] of Ms. Dostalik's accounts had balances consisting of both ...

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