Bank Of Ann Arbor v. Everest National Insurance Co

Filing

OPINION filed : AFFIRMED, decision not for publication. Martha Craig Daughtrey, Circuit Judge; Eric L. Clay, AUTHORING Circuit Judge and Jane Branstetter Stranch, Circuit Judge.

Case: 13-1752

Document: 44-2

Filed: 04/23/2014

Page: 1

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 14a0307n.06

FILED

No. 13-1752

Apr 23, 2014
DEBORAH S. HUNT, Clerk
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
BANK OF ANN ARBOR,
Plaintiff-Appellee,
v.
EVEREST NATIONAL INSURANCE
COMPANY,

ON APPEAL FROM THE UNITED
STATES DISTRICT COURT FOR THE
EASTERN DISTRICT OF MICHIGAN

Defendant-Appellant.

BEFORE:

DAUGHTREY, CLAY, and STRANCH, Circuit Judges.

CLAY, Circuit Judge. Everest National Insurance Company (“Defendant”) appeals the
district court’s grant of summary judgment to the Bank of Ann Arbor (“Plaintiff”). Defendant
also appeals the denial of its cross motion for summary judgment and motion for reconsideration.
Defendant argues that the district court erred in refusing to hear a new legal argument it raised
against Plaintiff’s insurance claim for the first time in its motion for reconsideration. Defendant
also contends that the district court erred in not finding that the “loan loss” provision in the bond
excluded coverage of Plaintiff’s claim.

For the reasons set forth below, we disagree and

AFFIRM the district court’s decision to grant Plaintiff’s motion for summary judgment and to
deny Defendant’s motion for summary judgment and motion for reconsideration.

Case: 13-1752

Document: 44-2

Filed: 04/23/2014

Page: 2

No. 13-1752
BACKGROUND
A.

Procedural History
This case involves an insurance coverage dispute.

Defendant issued a Financial

Institution Bond (“Bond”) to Plaintiff on December 22, 2010. Plaintiff contends that a loss it
incurred on October 4, 2011, as a result of a fraudulent wire transfer request, was covered by the
Bond. Defendant disagreed and on January 23, 2012, denied coverage.
Plaintiff filed suit on March 20, 2012, to recover the loss it incurred as a result of the
fraudulent wire transfer request. The parties filed cross motions for summary judgment and the
district court granted Plaintiff’s motion for summary judgment and denied Defendant’s motion.
Defendant subsequently moved for reconsideration of that decision, arguing that the district
court’s opinion rested on palpable defects and errors of law. The district court disagreed and
denied the motion for reconsideration. Defendant timely appealed the district court’s order
denying its motion for summary judgment and granting summary judgment to Plaintiff, as well
as the court’s order denying the motion for reconsideration.
B.

Factual Background
The facts in this case are not being disputed by either side. On December 22, 2010,

Plaintiff purchased a Financial Institution Bond from Defendant.

The Bond offers

indemnification coverage for specific risks typically borne by banks such as losses from robbery
or forgery. The Bond was effective from January 1, 2011 through January 1, 2012. On October
4, 2011, Plaintiff received a wire transfer request for $196,000 via facsimile from an individual
purporting to be its customer (the bank’s actual customer will be referred to hereinafter as the
“true customer” in the interests of privacy and pursuant to a Stipulated Protective Order
regarding the non-disclosure of the customer’s identifying information). The wire transfer

2

Case: 13-1752

Document: 44-2

Filed: 04/23/2014

Page: 3

No. 13-1752
request asked that funds from the true customer’s home equity line of credit (“HELOC”) be
wired to a bank in South Korea.

The request contained the true customer’s name and

handwritten signature, email address, home address, telephone number, and all of the necessary
account information.
In order to prevent fraud, Plaintiff’s established practice is to compare the signature on
such a wire transfer request to the signature maintained in its file and to confirm the request by
telephoning the true customer. Plaintiff followed these procedures upon receiving this particular
fax request. Plaintiff confirmed that the signature on the faxed wire transfer request was the
same as the signature in the true customer’s file. Plaintiff then called the telephone number in
the file to verify the request with an individual who identified himself as the true customer.
After completing the verification procedure, Plaintiff, in good faith and in reliance on the
instructions and signature on the wire transfer request, transferred $196,000 from the true
customer’s HELOC to an account at Korea Exchange Bank in Seoul, South Korea. (R. 15,
Affidavit of Patti Judson, at 347–48.)
Two days later, Plaintiff received a second faxed wire transfer request from the same
individual purporting to be the true customer. The request this time was for $98,000 and again
asked that the funds be transferred from the HELOC account to the same account in South
Korea. This second wire transfer request was received by an employee who coincidentally
happened to know the true customer personally and questioned why he would want to wire
money to South Korea. A review of the true customer’s file revealed that on September 30,
2011, Plaintiff had received an email from an individual identifying himself as the true customer
inquiring how to change his telephone number on record with the Bank. Plaintiff had informed
the sender that such requests must be in writing. Later that same day, Plaintiff received another

3

Case: 13-1752

Document: 44-2

Filed: 04/23/2014

Page: 4

No. 13-1752
email purportedly from the true customer with an attached signed formal, written request to have
his telephone number changed. After comparing the signature on the letter request to the
signature in the true customer’s file, Plaintiff changed the telephone number in its files.
Upon discovering that the contact information had been changed just a few days before
the first wire transfer, Plaintiff immediately contacted the true customer at the older number and
learned that he had not made either wire transfer request. Accordingly, the second request was
not honored and Plaintiff contacted local law enforcement to assist in the investigation. Plaintiff
repaid the $196,000 that was fraudulently transferred from the true customer’s HELOC account
to the imposter’s account in South Korea.
On October 4, 2011, after completing its investigation, Plaintiff notified Defendant of the
above facts and requested coverage for the $196,000 wire transfer.

Plaintiff’s request to

Defendant was timely and satisfied the requirements for the submission of a claim under the
terms of the Bond. On January 23, 2012, Defendant denied coverage to Plaintiff on two grounds.
First, Defendant asserted that a rider to the Bond precluded coverage. Second, Defendant
asserted that the loss was excluded under the “loan loss” provision in Section 2(e) of the Bond.
The only contention between the parties in this case is whether the Bond covers Plaintiff’s claim.
DISCUSSION
Standard of Review
We review a district court’s grant or denial of summary judgment de novo. Discount
Tobacco City & Lottery, Inc., v. United States, 674 F.3d 509, 521 (6th Cir. 2012). Likewise, we
review the district court’s denial of Defendant’s motion for reconsideration of the summary
judgment ruling de novo. Med. Mut. of Ohio v. k. Amalia Enters. Inc., 548 F.3d 383, 389–90
(6th Cir. 2008). However, the district court’s “refusal to consider evidence produced for the first

4

Case: 13-1752

Document: 44-2

Filed: 04/23/2014

Page: 5

No. 13-1752
time on a motion to reconsider will be reversed only if the refusal constitutes an abuse of
discretion.” Id. (quoting Sommer v. Davis, 317 F.3d 686, 691 (6th Cir. 2003)).
Summary judgment is appropriate if the pleadings, the discovery, and the disclosure
materials on file, and any affidavits “show [] that there is no genuine issue as to any material fact
and that the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). An issue
of fact is “genuine” if the evidence is such that a reasonable person could return a verdict for the
non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). After the moving
party has satisfied its burden, the burden shifts to the non-moving party to set forth “specific
facts showing that there is a genuine issue for trial.” Matsushita Elec. Indus. Co. v. Zenith Radio
Corp., 476 U.S. 574, 587 (1986).
This court views all evidence in the light most favorable to the non-moving party, and
draws all reasonable inferences in its favor. See id.; Hoover v. Walsh, 682 F.3d 481, 492 (6th
Cir. 2012) (citing Bazzi v. City of Dearborn, 658 F.3d 598, 602 (6th Cir. 2011)); Bletz v. Gribble,
641 F.3d 743, 757 (6th Cir. 2011) (“In reviewing the district court’s decision, we view all facts
in a light most favorable to the non-moving party and draw inferences in favor of the nonmovant.”).
For the purposes of this appeal, there is no genuine dispute as to a material fact. Both
parties agree that Plaintiff received a wire transfer request via facsimile from an imposter
purporting to be its true customer and $196,000 was subsequently wired from the true customer’s
HELOC to an overseas account in South Korea. The only issue on appeal is whether the Bond
covers the type of loss alleged by Plaintiff.
I.

Defendant’s motion for reconsideration
Federal Rule of Civil Procedure 59(e) permits a party to file a motion to alter or amend a

judgment. The Sixth Circuit has determined, however, that a motion to alter or amend judgment
5

Case: 13-1752

Document: 44-2

Filed: 04/23/2014

Page: 6

No. 13-1752
may be granted only: “(1) to correct a clear error of law; (2) to account for newly discovered
evidence or an intervening change in the controlling law; or (3) to otherwise prevent manifest
injustice.” CGH Transp. Inc. v. Quebecor World, Inc., 261 F. App’x. 817, 823 (6th Cir. 2008)
(citing GenCorp, Inc. v. Am. Int'l Underwriters, 178 F.3d 804, 834 (6th Cir. 1999)).
It is well-settled that “parties cannot use a motion for reconsideration to raise new legal
arguments that could have been raised before a judgment was issued.” Roger Miller Music, Inc.
v. Sony/ATV Publ'g, 477 F.3d 383, 395 (6th Cir. 2007). Additionally, reconsideration motions
cannot be used as an opportunity to re-argue a case. Furthermore, a party may not introduce
evidence for the first time in a motion for reconsideration where that evidence could have been
presented earlier. See, e.g., Sommer, 317 F.3d at 691; CGH, 261 F. App’x. at 824 (affirming
denial of reconsideration and stressing: “It is hard to imagine how an affidavit from one of
[plaintiff’s] own witnesses would have been previously unavailable to [plaintiff], and [plaintiff]
has not explained why it failed to introduce this evidence in opposition to summary judgment.”).
Defendant’s letter denied Plaintiff coverage based on two reasons: 1) the
Electronic/Computer Systems Rider and 2) the “loan loss” provision in Section 2(e) of the Bond.
Neither reason cited by Defendant in the denial letter mentioned the language contained in
Agreement D of the Bond, mentioned the word “original,” or addressed in any manner whether a
faxed instruction is covered by the Bond. Agreement D of the Bond, entitled “Forgery or
Alteration,” guarantees coverage of any:
“Loss resulting directly from the Insured having, in good faith, paid or transferred any
Property in reliance on any Written Original. . .
(4) Withdrawal Order [or]
(6) instruction or advice purportedly signed by a customer of the Insured. . .which
(a) bears a handwritten signature of any maker, drawer or endorser which
6

Case: 13-1752

Document: 44-2

Filed: 04/23/2014

Page: 7

No. 13-1752
is a Forgery….”
Defendant in its motion for reconsideration raised for the first time the argument that the
Bond only covers losses resulting from reliance on a forged wire transfer if Plaintiff had actual
physical possession of the “Original” instrument on which the forgery appeared. Defendant
argues that it is undisputed that Plaintiff relied on a faxed wire transfer request. And since a fax
is a reproduction of a document fed into a fax machine by the sender, it is by definition not an
Original and thus not the first rendering or archetype of a document. Therefore, Defendant
concludes that the faxed wire transfer request was not covered by the Bond.
Defendant made no mention of this argument regarding the language contained in
Agreement D in any of its pleadings prior to the district court’s entry of judgment. Defendant
did not raise this issue in its Answer or in either of its two briefs in district court. Instead,
Defendant focused solely on the “loan loss” exclusion in section 2(e) of the Bond as the reason
the district court should deny Plaintiff coverage under the Bond. Not until the district court
entered its judgment did Defendant raise a defense based on the language contained in
Agreement D. As a result, the district court did not abuse its discretion when it refused to
entertain this new argument which should have, and could have been raised earlier.
In response, Defendant cites Carolina Casualty to support its contention that this Court
should entertain this legal argument even if it was not raised earlier. Carolina Cas. Ins. Co. v.
Canal Ins. Co., 13-3610, 2014 WL 114667 (6th Cir. Jan. 14, 2014). Defendant argues that this
case holds that new legal arguments can be raised in this Court, even if those arguments were
“not squarely presented” below. Id. at *2. Defendant is wrong because in Carolina Casualty
this Court held that waiver did not apply when the lower court rested its holding on the new legal
issue before the court. Id. In the instant case, however, the lower court did not rest its holding

7

Case: 13-1752

Document: 44-2

Filed: 04/23/2014

Page: 8

No. 13-1752
on the fact that a fax was an Original within the meaning of the Bond. The lower court rested its
holding on the fact that section 2(e) of the Bond did not preclude coverage of Plaintiff’s claim.
Accordingly, this case can be distinguished from Carolina Casualty.
In addition to federal rules, state law precludes Defendant from raising new legal
arguments denying coverage on appeal. Michigan law holds that, “[a]s a general rule, once an
insurance company has denied coverage to an insured and stated its defenses, the company has
waived or is estopped from raising new defenses.” City of Warren, Mich. v. Int'l Ins. Co. of
Hannover, Ltd., 524 F. App’x 254, 259 (6th Cir. 2013) (citing Lee v. Evergreen Regency Coop.
& Mgmt. Sys., Inc., 390 N.W.2d 183, 185 (Mich.Ct.App.1986)).

“Because waiver is an

intentional relinquishment of a known right, an insurer will be held to waive a coverage defense
if the insurer is aware of the facts supporting the defense.” Bristol W. Ins. Co. v. Whitt, 406 F.
Supp. 2d 771, 781 (W.D. Mich. 2005) (citing S. Macomb Disposal Auth. v. Mich. Mun. Risk
Mgmt. Auth., 526 N.W.2d 3, 4 (Mich.Ct.App.1994)); LeDuff v. Auto Club Ins. Ass'n, 536 N.W.2d
812, 815 (Mich.Ct.App.1995).
Defendant’s letter denied Plaintiff coverage for two reasons, neither of which has
anything to do with the language of Insuring Agreement D or mentions the word “original.”
Defendant never addressed in its denial letter whether a faxed instruction is covered by the Bond.
Rather, Defendant’s letter believed that Plaintiff’s loss would have been covered under the Bond
and specified two reasons for denial: the Electronic/Computer Systems Rider and the “loan loss”
exclusion in Section 2(e).
Defendant as the insurer that drafted the policy is familiar with all of the nuances of its
policy. It not only drafted the policy, but enforces it on a frequent basis. It was in possession of
the policy and had the opportunity to fully review all of its terms prior to deciding whether to pay

8

Case: 13-1752

Document: 44-2

Filed: 04/23/2014

Page: 9

No. 13-1752
or deny the claim. Defendant read the terms of the policy and decided that it had two bases upon
which to deny the claim: 1) the Electronic/Computer Systems Rider and 2) the “loan loss”
exclusion. From the denial letter to all its pleadings in district court, Defendant relied on these
two arguments as to why Plaintiff’s claim was not covered by the Bond. It was only in its
motion for reconsideration after the district court denied its motion for summary judgment and
granted Plaintiff’s motion for summary judgment that Defendant introduced this new argument
that the language contained in Agreement D excludes Plaintiff’s claim. Since Defendant used its
motion for reconsideration as an opportunity to re-argue the case and introduce a new argument
that could have been presented earlier, the district court did not abuse its discretion in denying
Defendant’s motion for reconsideration.
II.

The “Loan Loss” exclusion in the Bond
Defendant argues that section 2(e) of the Bond precludes coverage for Plaintiff’s loss.

Section 2(e) reads that “[t]his bond does not cover:
(e) loss resulting directly or indirectly from the complete or partial nonpayment
of, or default upon any Loan or transaction involving the Insured as a lender or
borrower, or extension of credit, including the purchase, discounting or other
acquisition of false or genuine accounts, invoices, notes, agreements of Evidences
of Debt, whether such Loan transaction or extension was procured in good faith or
through trick, artifice, fraud, or false pretenses, except when covered under
Insuring Agreements (A), (E) or (G).”
Section 1(m) also reads that “[a]s used in this bond:
(m) Loan means all extensions of credit by the Insured and all transactions
creating a creditor relationship in favor of the Insured and all transactions by
which the Insured assumes an existing creditor relationship.”
Defendant contends that the loss Plaintiff suffered as a result of the fraudulent wire transfer
request was from the extension of credit and is therefore excluded from coverage. However, the
clear meaning of section 2(e) is that Defendant will not cover a loss resulting from a customer
default on a loan or extension of credit made by Plaintiff. The loss in this case did not result
9

Case: 13-1752

Document: 44-2

Filed: 04/23/2014

Page: 10

No. 13-1752
from the nonpayment of a loan. It was a loss as a result of a fraudulent wire transfer request by
someone other than the true customer.
The purpose of the “loan loss” exclusion is to exclude from coverage credit risks that are
within the expertise of the financial institution, while still protecting the financial institution from
insurable risks. In other words, insurance companies use these provisions to exclude losses that
are the result of bad loans that a financial institution should have known better than to enter into.
Hudson United Bank v. Progressive Cas. Ins. Co., 284 F. Supp. 2d 249, 252 (E.D. Pa. 2003).
The rationale for financial institutions relying upon their own business judgment and risk
tolerance makes sense. The financial institution should bear the loss associated with credit
decisions it makes from which it hopes to profit.
People’s State Bank v. American Cas. Co. of Reading, Pa., 818 F. Supp 1073 (E.D. Mich.
1993), involved a dishonest bank employee who filled out loan applications in the name of
unsuspecting or unknown persons, signed promissory notes using the false applicant’s name, and
then directed the proceeds from the loans either to himself, the accounts of others or to make
payments on fraudulent loans he had previously created. The bank made a claim under the bond,
and the insurance company denied the claim on the basis of the “loan loss” exclusion, which was
identical to the loan loss exclusion in this case.
The district court stated that the insurance company’s argument for exclusion under the
“loan loss” provision was “convoluted” because “[a] simple reading of the language of exclusion
(e) makes it abundantly clear that the losses incurred by [the bank] do not fall under this term of
the fidelity bond. Exclusion (e) applies to losses that arise from the ‘complete or partial nonpayment of, or default upon, any Loan or transaction involving the Insured as a lender or
borrower, or extension of credit . . .’” Id. at 1077.

10

Case: 13-1752

Document: 44-2

Filed: 04/23/2014

Page: 11

No. 13-1752
The court went on to find that the “transactions [did] not constitute loans under the
definitions set forth in the bond.” Id. After reciting the bond’s definition of the term “loan,”
which, exactly like the Bond at issue here, was defined as all “extensions of credit,” and the term
“letter of credit,” which, exactly like the Bond at issue here, was defined as “an engagement in
writing by a bank or other person made at the request of a customer,” the court held that because
the loans were not made at the request of a customer, they did not constitute loans as defined by
the fidelity bond and were not excepted from coverage. Id. at 1077–1078 (emphasis in original).
In addition, the court held that even if the dishonest transactions were found to constitute
loans, the bank’s losses nonetheless fell outside the purview of the “loan loss” provision because
they did not result from “the complete or partial non-payment of, or default upon, any Loan,” as
the “loan loss” provision required. Id. at 1078. Therefore, the court denied the insurance
company’s motion for summary judgment based upon the “loan loss” exclusion.
Similarly, the “loan loss” exclusion is inapplicable here because the risk in this case had
nothing to do with the Bank making a poor credit decision, improperly valuing collateral or the
risk of utilizing poor credit policies or practices. Rather, the risk at issue in this case was the risk
of forgery. Plaintiff purchased and paid premiums for insurance that covered, among other
things, losses resulting from forgery. The plain language of the Bond covers forgeries. (R. 12-2,
Bond, at 198.) Plaintiff understood that it was not insured for losses resulting from defaulted
loans or other extensions of credit when a customer failed to repay monies owed, even if the
customer engaged in fraudulent conduct.
In conclusion, Plaintiff did not lose $196,000 as a result of a giving out a loan or
extension of credit. Plaintiff lost $196,000 because an individual forged the signature of its true
customer and thereby managed to get $196,000 transferred from the true customer’s HELOC to

11

Case: 13-1752

Document: 44-2

Filed: 04/23/2014

Page: 12

No. 13-1752
an account in South Korea which resulted in the money being stolen. The plain language of the
Bond covers this type of loss and the exclusion in section 2(e) clearly does not apply.
CONCLUSION
For the foregoing reasons, we AFFIRM the district court’s decision to grant Plaintiff’s
motion for summary judgment and to deny Defendant’s motion for summary judgment and
motion for reconsideration.

12