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Financial Casualty & Surety, Inc. v. Zouvelos

United States District Court, E.D. New York

March 29, 2017

FINANCIAL CASUALTY & SURETY, INC., Plaintiff,
v.
GEORGE ZOUVELOS & ANASTASIA MANCINI, Defendants.

          MEMORANDUM DECISION AND ORDER

          Ann M. Donnelly United States District Judge

         BACKGROUND

         This contract dispute arises out of the issuance of bail bonds. The plaintiff, Financial Casualty & Surety, Inc. ("FCS"), filed this action against the defendants, spouses George Zouvelos and Anastasia Mancini, for breach of contract and breach of fiduciary duty. Through a series of contracts, FCS authorized Zouvelos, then a licensed bail agent, to write FCS-insured bonds. Mancini is a signatory to the final contract, which lists her as Zouvelos' indemnitor. The plaintiff alleges that the defendants misappropriated collateral funds and failed to satisfy bond forfeiture judgments, thereby breaching the terms of their contract. The defendants contend that the final contract is void and unenforceable, that Zouvelos did not breach the terms of any contract with FCS and that, to the extent he did, he shares liability with indemnitors who signed the prior contracts-not Mancini. Additionally, Zouvelos asserts a counterclaim against the plaintiff for money that he claims to be owed pursuant his agreements with FCS. For the reasons that follow, I find in favor of the plaintiff and order the defendants to pay damages in the amount of $242, 665 plus reasonable attorneys' fees and costs of litigation.

         PROCEDURAL HISTORY

         This action has a "lengthy[] and acrimonious[] history, " (Memorandum and Order by Judge Lee Rosenthal, ECF 101), which I recite only in relevant part. FCS filed a complaint against Zouvelos and Mancini in the Southern District of Texas on July 6, 2011. (ECF 1.) On February 1, 2012, the defendants answered the plaintiffs complaint, asserted counterclaims, and moved to transfer the case to the Eastern District of New York, where they reside. (ECF 57.) Judge Lee Rosenthal granted that motion on July 13, 2012. (ECF 101.)[1] The case was assigned to Judge William F. Kuntz, II, who granted the plaintiffs motion dismiss the defendants' counterclaims. (March 27, 2013 Order.) The parties filed dispositive motions, all of which were denied. (Apr. 1, 2014 Order Denying Plaintiffs Motion for Summary Judgment; Order Denying Defendants' Motion to Dismiss and Motion for Summary Judgment, ECF 209; Order Denying Defendants' Motion for Reconsideration, ECF 215.)[2] On January 8, 2015, the plaintiff filed an Amended Complaint. (ECF 198.) This case was assigned to me on November 5, 2015. I held a bench trial on November 14, 16 and 17 of 2016. Thereafter, the parties submitted proposed findings of fact and conclusions of law. (ECF 262, 263.)

         FINDINGS OF FACT

         At trial, witnesses for the plaintiff included Zouvelos, Mancini, and Michael Padilla, who worked at FCS from 2010 to 2015 and ultimately served as its vice president. (Trial Transcript ("TR") 4, 24.) Additionally, the plaintiff introduced business records, collateral receipts, and reports by an attorney and a hearing officer for the New York Department of Financial Services ("NYDFS"). The defendants introduced one exhibit, Padilla's affidavit, and did not call any witnesses.[3]

         I did not find the defendants' testimony to be credible. As explained in greater detail below, Zouvelos and Mancini were evasive, and their testimony was internally contradictory, contrary to the record evidence, and inconsistent with their deposition testimony. (TR 287-88, 301-07, 314-18, 340.) Additionally, in at least one instance, Zouvelos changed his answer to a question only after it was repeated several times. (TR 331-33.)

         In contrast, I credit Michael Padilla's testimony, which was consistent and supported by New York Department of Financial Services (NYDFS) hearing reports and state court records regarding Zouvelos' bail bond business. Moreover, the defendants did not contest many of Padilla's material representations: Mancini affirmed that she signed the contract at issue (TR 311); Zouvelos affirmed that he used his own collateral receipt forms rather than FCS's required forms (TR 316); and both defendants affirmed Zouvelos charged consulting fees and third-party vendor fees against the indemnitors' collateral. (TR 287-89, 328-31, 337.)

         This lawsuit boils down to a question of contract interpretation. Based on my review of the evidence presented, including the relevant contracts between the parties, I find that Zouvelos breached the terms of the parties' agreements. Among other things, Zouvelos failed to satisfy bond forfeiture judgments that arose out of FCS-insured bonds that he wrote, did not adequately record his acceptance and dispersal of collateral funds, and used collateral funds to pay third-party vendors-including a company that Mancini owned and operated out of Zouvelos' office-for routine services that were part of his general duties as a bail bondsman. Furthermore, I find that Mancini is jointly liable for damages resulting from the breach because she signed the final contract between the parties and, in so doing, agreed to indemnify Zouvelos for any liability arising out of his bail bond business relationship with the plaintiff.

         I. The Bail Bond Business in New York

         In New York, a criminal defendant who does not have enough money to post bail may seek a bail bond, which requires an obligor to submit a portion of the bail and agree to pay the rest if the defendant fails to appear in court. (TR 25); see also N.Y. Crim. Proc. Law § 520.20-1(a) (McKinney). A bail agent serving as an obligor secures collateral from an indemnitor, generally a friend or family member of the defendant, before posting the bond. (TR 25.) An insurance company bail bond is one in which a bail agent is backed by a surety-obligor. (TR 26) (Pl. Ex. 54, at 2); see also N.Y. Ins. Law §§ 6801, 6802 (McKinney), N.Y. Crim. Proc. Law § 520.20-4(a) (McKinney).

         If a defendant appears in court, surrenders himself to custody, or the criminal action is terminated, the bond is exonerated. (TR 54-55) (Pl. Ex. 54, at 3 (citing N.Y. Crim. Proc. Law §§ 520.20-3, 530.80-1, 170.25-2, 190.75 (McKinney)). This means that the bail agent gets his money back and, in turn, the indemnitor retrieves his collateral minus a "premium" fee, the amount of which is capped, by statute, at 10 percent of the bond. (TR 55, 106, 330); see also N.Y. Ins. Law § 6804 (McKinney).[4] If the defendant does not appear in court, the bond is forfeited and the bail agent may charge the collateral for reasonable costs and fees related to securing the defendant's appearance. (TR 101-03) (Pl. Ex. 54, at 17.)

         II. Michael Padilla's Testimony

         Michael Padilla, who had been in the bail bond business for 34 years, worked at FCS from 2010 to 2015, ultimately serving as a vice president. (TR 4, 24.)[5]

         a. FCS's Business Relationship with Zouvelos

         FCS is a surety company that contracted with Zouvelos, then a licensed bail agent in New York. (TR 25-27.) As such, he had an appointment through New York State to serve as a bail agent, and also had a contract with FCS. (TR 26.) Ultimately, FCS is liable to both courts and indemnitors. If a defendant fails to appear and Zouvelos does not pay the bond forfeiture judgment, the court enters a judgment against the surety. (TR 204-06.) Likewise, if a bail agent fails to return an indemnitor's collateral upon the exoneration of a bond, FCS is liable to the indemnitor. (TR 74.) Under these circumstances, FCS could seek reimbursement from Zouvelos, according to the terms of their contract. (46-47.)

         Padilla testified that FCS required bail agents to adhere to certain procedural requirements, but also granted agents discretion to assess risk and set collateral amounts accordingly. An indemnitor seeking a bond from a bail agent filled out FCS's form application. (TR 29.) If the bail agent determined the indemnitor to be an acceptable credit risk, the indemnitor paid the premium fee and deposited with the bail agent the required amount of collateral, which was generally a percentage of the bond amount. (TR 30.) FCS took a cut of the premium, as did any general agent listed on the contract, and the bail agent would keep the rest. (TR 30-31.)

         Once the indemnitor paid the premium, the parties executed three required bail bond forms: the collateral receipt, the premium receipt, and the power of attorney. (TR 32.) The latter is submitted to the court in order to trigger the release of the defendant; the premium receipt goes either to the defendant or the indemnitor, as verification that he paid the bail agent for his services; and three copies of the collateral receipt are distributed to the indemnitor, the agent, and the surety, respectively. (TR 32-34.)

         FCS retains the pink carbon copy of the collateral receipts, and refers to these documents as "the pinks." (TR 32-34.) FCS relies on the pinks to know how much collateral its agents have collected. (TR 34-35.) Additionally, FCS requires agents to use its bail bond form, as well as other standardized forms including receipt books, indemnitor checklists, applications, and documents for recording real property as collateral. (TR 35.)

         According to Padilla, bail agents are not entitled to charge fees against an indemnitor's collateral if the bond in question does not forfeit; under those circumstances, any work an agent does to monitor the defendant-including having a defendant on bail "check in" with the office-is a cost of doing business as a bail agent. (TR 102-03.) Until Padilla met Zouvelos, he had not heard of bail agents charging consulting fees. (TR 103-04.)

         Once or twice a month, agents send reports to FCS, along with the pink collateral receipts. (TR 56.) Agents are supposed to report when bonds are discharged and collateral has been returned. (TR 56-58.) Once the bail agent receives collateral, he is contractually required to deposit the money in a segregated account designated for collateral funds alone. (TR 39-40.)

         b. The Contracts Between FCS and Zouvelos

         From 2008 through 2010, FCS and Zouvelos entered into four agreements by which Zouvelos operated a bail bond service and FCS functioned as an authorized surety for the bonds. (Pl. Ex. 1-4) (TR 27, 42, 44, 111.) Each agreement "supersede[d] and cancel [led] all prior... agreements.. .with respect to or in connection with the subject matter" of the contract. (Pl. Ex. 2 ¶ 33, Ex. 3 ¶ 32, Ex. 4 ¶ 31.)

         Zouvelos' first contract with FCS was a "sub-producer bail bond agreement" dated April 20, 2008. (Pl. Ex. 1.) The contract included Julio Pozo as a general agent and George Zouvelos as sub-producer and indemnitor. (Id.) It remained operative for just 11 days, after which the parties entered into a second contract that described Zouvelos as a "supervising agent, " and replaced Mr. Pozo with Michelle Renshaw as a general agent. (Pl. Ex. 2.) The third contract, dated July 5, 2009, removed Ms. Renshaw's name and listed Zouvelos as the general agent and general agent indemnitor. (Pl. Ex. 3.) The final contract ("2010 contract") listed Zouvelos as a "Producer" and listed defendant Anastasia Mancini, Zouvelos' wife, as a "Producer Indemnitor." (Pl. Ex. 4) (TR 42-46, 111-16, 225.) The agreements were all substantially similar, but not identical.

         The agreements set forth several recordkeeping and accounting requirements that Zouvelos was expected to follow. Zouvelos had discretion to determine the amount of collateral required for each bond, (TR 36) and could write any bond up to $50, 000 without obtaining authorization from FCS. (TR 37-38.) He was responsible for processing each bond application, receiving the applicable fees, maintaining the collateral, and returning the collateral to indemnitors once a bond was exonerated. (TR 119-20) (Pl. Ex. 1 ¶¶ 7-10, Pl. Ex. 2 ¶¶ 7-10; Pl. Ex. 3 ¶¶ 7-10; Pl. Ex. 4 ¶¶ 7-10.)[6] Additionally, the agreements required Zouvelos to retain copies of all collateral receipts, indemnity agreements, and contracts for bail bonds. (TR 29) (Pl. Ex. 1 ¶ 14, Pl. Ex. 2 ¶ 14, Pl. Ex. 3 ¶ 14, Pl. Ex. 4 ¶ 14.) Moreover, he was to maintain three separate bank accounts: one for collateral funds, to be held in a fiduciary capacity for FCS and returned to indemnitors once a bond was exonerated; another for premium funds, which were the profits shared between Zouvelos, FCS, and any other general agent listed on the contract; the third was for Build Up Funds ("BUF")-a percentage of Zouvelos' profits that FCS could seize if Zouvelos' bonds forfeited, in order to cover the cost of the judgments. (Id.) (TR 46-49.)

         The agreements also expressly provided that Zouvelos would indemnify FCS and hold FCS harmless for all losses and liability related to bond forfeiture judgments for bonds that he wrote, (Pl. Ex. 1 ¶ 24, Pl. Ex. 2 ¶ 25, Pl. Ex. 3 ¶ 25, Pl. Ex. 4 ¶ 24), and for losses of collateral attaching to that liability. (Id. ¶ 17; see also Id. ¶¶ 7, 9, 14, 18) (TR 166.) Further, the agreements specified that Zouvelos would comply with all New York laws, (Pl's Ex. 4, ¶ 3) and would indemnify FCS for all costs, expenses, and liabilities FCS sustained in connection with Zouvelos' bail bond business. (Id. ¶¶ 17-20.)

         The 2010 agreement specified that Zouvelos and Mancini were "fully liable to [FCS] for the bonds written by, as well as the acts and/omissions of, Producer [Zouvelos], Producer's employees, and independent contractors." (Id. ¶ 1.) Additionally, the contract provided that Zouvelos and Mancini were "liable to [FCS] for all liabilities, claims, and demands, without limitation, which arise from or relate to bail bond Powers of Attorney entrusted to [Zouvelos] by [FCS]...." (Id.) As with the prior contracts, the final contract expressly superseded all other agreements regarding Zouvelos' agency appointment with FCS. (Id. ¶31.)

         c. FCS's Discovery of a Collateral Shortfall

         FCS became concerned about Zouvelos' business operations in April of 2009, when Zouvelos transferred to FCS a lump sum of $600, 000 in collateral funds. (TR 50-52) (Pl. Ex. 15.) Padilla testified that it was typical for bail agents to transfer collateral funds to FCS periodically, but that Zouvelos' transfer was atypical because he provided no information about the origin or breakdown of the collateral funds; in other words, FCS could not determine which indemnitors contributed to this $600, 000 figure, or in what amounts. (TR 50-61.)

         In May of 2010, after he had been working for FCS for approximately five months, Padilla went to New York so that he could meet Zouvelos, investigate these collateral reporting and return problems, and add Mancini-who married Zouvelos in February of 2010- to the contract as an indemnitor. (TR 61-63, 112-14.) Padilla testified that it was his regular business practice to include spouses as indemnitors for agency contractors so that in the event of a dispute, the contractors could not hide agency assets under a spouse's name. (TR 112-14.) While in New York, Padilla gave Zouvelos a contract for both defendants to sign and return to FCS. (TR 233-34.)

         Padilla discovered that Zouvelos did not use FCS's required pink collateral receipt forms to track his receipt or dispersal of collateral. (TR 58.) During his visit to Zouvelos' offices, Padilla examined Zouvelos' records and found four spreadsheets that included information about Zouvelos' bond files. (TR 68-73.) He took Zouvelos' accounting spreadsheets and other records back to FCS, so that he could consolidate the information into one spreadsheet that tracked all of Zouvelos' collateral liability. (Pl. Ex. 18A) (TR 68-73, 272-76.) When he compared this spreadsheet with the information FCS had on record from the pinks, (Pl. Ex. 14), he found that the records were inconsistent. (TR 165-67.)

         Additionally, Padilla discovered that Zouvelos had a practice of charging third-party vendor fees and "consulting" fees against indemnitors' collateral funds. (TR 58-59, 81-82.) These third-party vendors included Mancini's company, New York Cut Slips and Transcripts ("NYCT"). (Id.) For example, one collateral request form indicated that the indemnitor put up $2700 in collateral, but Zouvelos requested that only $1600 be returned to the indemnitor. (TR 75-77) (Pl. Ex. 36.) According to the form, Zouvelos claimed the rest of the money as fees for "confirming] bail exoneration" and for "defendant contractual [failure to appear] inquiries." (TR 76.) These fees were assessed on top of Zouvelos' premium fee of $860. (TR 76-77.) When Padilla questioned Zouvelos, he claimed that he entered into private contracts with defendants and their indemnitors, and that the contracts authorized him to charge the collateral in this manner. (TR 80-81.)

         Padilla also noticed cases in which Zouvelos charged these fees even though the bond did not forfeit. (TR 101, 155.) He testified that he was confused by this practice. He did not understand why Zouvelos "ha[d] to hire a bounty hunter" or other third party vendor if the defendant made all required appearances. (TR 101.) Padilla explained that any cost of "going to monitor" defendants was "just part of doing business" and he had "never seen anybody get charged for it." (TR 103-04; 80-86.)

         At the direction of FCS president Robert Sabo, Padilla seized $190, 000 in collateral funds from Zouvelos. (Pl. Ex. 15) (TR 65-66.) At that point, FCS took over responsibility for returning collateral to indemnitors after bonds were exonerated. (TR 104-05, 132-33, 263-64) (Pl. Ex. 36.) In August of 2010, FCS president Robert Sabo terminated FCS's relationship with Zouvelos. (TR 236-37.)[7] Although Zouvelos was no longer writing bonds for FCS, he continued to submit collateral request forms in order to close out existing bonds as they were exonerated. (TR 118-19.) Based on these forms, FCS became aware that there would be a collateral shortfall: that is, that Zouvelos was disbursing more collateral than he took in. (See, e.g., Pl. Ex. 7, 10) (TR. 84-85.) Padilla tried to obtain Zouvelos' bond files in order to address the discrepancies in his records, but Zouvelos reported that the bond files were destroyed in 2009, when a pipe containing sodium bromide burst over certain files, causing the ink to disappear. (TR 98-101 .)[8] Additionally, Padilla requested a copy of the private contract that Zouvelos executed with defendants and their indemnitors, but Zouvelos refused to turn it over. (TR 80, 81, 87-88.)

         Ultimately, FCS stopped reimbursing Zouvelos for any third-party fees charged against the collateral. (TR 80, 104, 132-133).[9] Instead, for each collateral request, FCS sent checks made out to indemnitors for the amount that Zouvelos claimed they were due, but held the remainder that was supposedly owed the third party vendor, and requested that Zouvelos submit documentation confirming that he delivered the checks to the indemnitors. (TR 104-06, 132-33) (Pl. Ex. 36.) In some cases, FCS obtained documentation directly from courts. (TR 121-22.)

         FCS received phone calls and letters from indemnitors who claimed Zouvelos would not release the collateral checks to them, (TR 106-107, 269) and in some cases issued checks directly to these individuals. (Pl. Ex. 37) (TR 131-32, 269.)

         d. The NYDFS Investigation

         In the summer of 2011, Padilla and Mandi Krasney of FCS met with Michael S. Formichelli, an NYDFS attorney, and Juan Pena, an NYDFS investigator. (TR 89.) Mr. Formichelli and Mr. Pena informed the FCS representatives that NYDFS received "numerous complaints" about Zouvelos' failure to return collateral. (TR 90.) NYDFS provided FCS with a copy of the private contract that Zouvelos used with defendants and indemnitors. (TR 80, 87-91; 240.) Padilla testified that this was the first he had seen the contract; previously, Zouvelos refused to provide a copy because he contended that it "had nothing to do with FCS." (TR 88-89.)

         Padilla testified that NYDFS was "looking [to FCS] to make the indemnitors whole on their collateral." (TR 90.) NYDFS asked FCS to conduct an audit of Zouvelos' business, but Zouvelos refused to cooperate. (TR 91-93.)

         e. Padilla's Damages Calculations

         FCS has tried to calculate the collateral shortfall in this case, despite the fact that Zouvelos has provided no reliable records and has stopped sending FCS collateral return requests. (TR 189) (Pl. Ex. 25.)[10] In the course of this litigation, Judge Rosenthal ordered the defendants to provide additional information about the cash collateral they held, so that FCS could "reconcile and disburse" the collateral to the proper recipients. (ECF 39) (TR 134-35.) In response, Zouvelos provided FCS with a spreadsheet ("Zouvelos' Collateral Spreadsheet") that lists bond numbers, defendants' names, the amount paid on the bond, fees charged against the collateral, and whether/how much of the collateral was returned to the indemnitors. (Pl. Ex. 18B) (TR 134-35.) Padilla reviewed Zouvelos' spreadsheet and found it to be inaccurate. (TR 136, 158-74.) Additionally, the plaintiff introduced several collateral request forms and collateral receipts that contradicted the information on the spreadsheet. (Pl. Ex. 24, 27-51) (TR 148-149, 152, 176.)

         Generally, FCS is able to track the collateral received and disbursed by its bail agents based on the pink collateral receipts that the agents are directed to use. According to the pinks that Zouvelos submitted to FCS, he received a total of $1, 839, 010 in cash collateral from indemnitors on FCS bonds. (Pl. Ex. 14) (TR 54-55, 166.) This figure is incorrect, however, since-as discussed above-Zouvelos did not use the pinks.

         Padilla compared Zouvelos' Collateral Spreadsheet (Pl. Ex. 18B) and the collateral requests he submitted to FCS, and found that Zouvelos withheld collateral from indemnitors, wrongfully charged fees against indemnitors' collateral and, in some cases, returned more collateral than the indemnitor initially deposited, thereby causing a collateral shortfall. (TR 138-72.) Padilla determined that Zouvelos misappropriated collateral submitted by the following indemnitors:

1. Joann Rivera (Pl. Ex. 24);
2. Francisco Aurich (Pl. Ex. 27);
3. Telisha Mathews (Pl. Ex. 28);
4. Steve Asian (Pl. Ex. 29);
5. Attareb Yasina (Pl. Ex. 30) (TR ...

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