Discovery Land Company LLC v. Berkley Insurance Company ( 2023 )

1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 Discovery Land Company LLC, et al., No. CV-20-01541-PHX-ROS 10 Plaintiffs, ORDER 11 v. 12 Berkley Insurance Company, et al., 13 Defendants. 14 15 Plaintiffs Discovery Land Company, LLC (DLC), Discovery Land Enterprises, 16 LLC (DLE), and Taymouth Castle DLC, LLC (TCD) bought a castle in Scotland. In 17 connection with that transaction, Plaintiffs were allegedly defrauded by an attorney out of 18 almost $18 million dollars. Plaintiffs submitted two proofs of loss to their insurers, 19 Defendants Berkley Insurance Company (BIC) and Great American Insurance Company 20 (GAIC). BIC and GAIC both refused to pay for Plaintiffs’ losses. Plaintiffs filed this suit 21 seeking declaratory judgement and claiming breach of contract and bad faith, arguing BIC 22 and GAIC unlawfully refused to indemnify Plaintiffs. The parties filed cross-motions for 23 summary judgment. For the reasons below, the Court will grant summary judgment on 24 Plaintiffs’ claims in favor of Defendants. 25 BACKGROUND 26 Unless otherwise noted, the following facts are undisputed. 27 1. The First Loss: Jones’ Alleged Theft 28 In early April 2018, Plaintiffs decided to purchase the Taymouth Castle, located in 1 Scotland. (DLC SOF at ¶ 34). On April 11, 2018, DLC entered into a “General Terms of 2 Engagement” letter with Jirehouse, a U.K. law firm. (BIC SOF at ¶ 16; Doc. 149-3). DLC 3 later executed a “Specific Engagement Terms” letter related to the purchase of the Castle 4 dated May 24, 2018. (BIC SOF at ¶ 17; Doc. 149-4). The “Specific Engagement Terms” 5 letter specified: “The scope of our engagement is to advise and act on: (a) the purchase of 6 Taymouth Castle, Perthshire, Scotland . . . (c) the purchase of design and development 7 rights and management company for the [Castle]; and (d) the structuring of the [Castle] 8 holding in the most tax efficient way in accordance with the tax laws and regulations of the 9 United Kingdom.” (Doc. 149-4 at 4). The nature of Plaintiffs’ relationship with Jirehouse 10 is highly contested by the parties. Defendants claim Plaintiffs hired Jirehouse to provide 11 legal assistance with the purchase of the Castle. (BIC SOF at ¶¶ 15, 18, 19). Plaintiffs claim 12 they hired Jirehouse to “act as DLC’s partner in effecting the transaction to purchase” the 13 Castle, and that “Jirehouse did not merely serve as legal counsel.” (Doc. 214-2 at ¶ 18). 14 Stephen David Jones (“Jones”) was a solicitor with Jirehouse. (BIC SOF at ¶ 10). 15 Jones recommended (and the “Specific Engagement Terms” letter specified) that DLC use 16 a U.K. company affiliated with Jirehouse, Esquiline Asset Managers Limited (“EAML”), 17 as the entity actually purchasing the Castle, and that after EAML purchased the Castle, 18 EAML would in turn sell the Castle to the River Tay Castle, LLP (“RTC”). (BIC SOF at ¶ 19 22; DLC SOF at ¶ 55; Doc. 149-4 at 4). Plaintiffs argue that EAML was “a Jirehouse 20 entity,” in that Jirehouse owned and controlled it as “part of the Jirehouse family of 21 companies.” (DLC SOF at ¶¶ 52, 53, 56). Defendants dispute that Jirehouse ever had any 22 ownership or control of EAML. (Doc. 210-34 at ¶¶ 52-57 (arguing Plaintiffs’ claim is 23 supported only by hearsay testimony by people who have no personal knowledge of 24 EAML’s ownership)). While the record on this point is not fully developed, there is some 25 evidence the purchase was structured to use EAML as a middleman in this way to obscure 26 the involvement of the John Paul DeJoria Family Trust (“DeJoria Trust”).1 (E.g., Doc. 144- 27 1 There is a dispute about the relationship between the DeJoria Trust and Plaintiff TCD. 28 Michael Meldman is the ultimate beneficial owner of DLC. (GAIC SOF at ¶ 15; Doc. 215- 2 at ¶ 17). Plaintiffs claim TCD was wholly owned by DLE, which in turn is part of DLC. 1 25 at 5). 2 In April 2018, the seller and buyers agreed on a purchase price for the Castle: 3 £9,620,000. (Doc. 149-8 at 5; DLC SOF at ¶ 34). Plaintiff TCD is an entity that was formed 4 in the Spring of 2018. (DLC SOF at ¶ 18). Plaintiffs argue TCD was formed for the express 5 purpose of purchasing and acquiring Taymouth Castle. (DLC SOF at ¶ 18). The DeJoria 6 Trust loaned TCD the necessary funds ($14,050,000) pursuant to an On Demand Loan 7 Note “to finance the acquisition of Taymouth Castle.” (GAIC SOF at ¶ 20; Doc. 215-2 at 8 ¶ 20; Doc. 215-3). TCD then wired the total of $14,050,000 (the purchase price plus an 9 amount intended to cover attorneys’ fees and expenses) to Jirehouse Trustees General 10 Client Account. (BIC SOF at ¶ 23; GAIC SOF at ¶ 21; Doc. 214-2 at ¶ 23). Jirehouse 11 transmitted only a portion of that payment to the Castle seller as a deposit (10% of the 12 purchase price). (BIC SOF at ¶ 23; Doc. 214-2 at ¶ 23). 13 Thereafter, Jones told Plaintiffs that because of “compliance issues” (Doc. 152 at 14 5), Plaintiff would need to provide an additional $9,300,000 to complete the transaction. 15 (BIC SOF at ¶ 27; Doc. 214-2 at ¶ 27). DLC wired the requested $9,300,000 to Jirehouse. 16 (BIC SOF at ¶ 28). Jirehouse then transmitted that $9,300,000 to the Castle seller, 17 completing the sale of the Castle. (BIC SOF at ¶ 29; Doc. 214-2 at ¶ 29). EAML held title 18 to the Castle from December 6, 2018 until December 31, 2018. (DLC SOF at ¶ 60). 19 Thereafter, EAML sold the Castle to RTC. (BIC SOF at ¶ 30; DLC SOF at ¶ 30). 20 Plaintiffs contend Jones stole at least $12,754,185.99 of the first $14,050,000 wire. 21 (BIC SOF at ¶ 31; GAIC SOF at ¶ 22; Doc. 214-2 at ¶ 31). Plaintiffs argue they requested 22 the return of the extra $9,300,000 they had paid, but through early March of 2019, Jones 23 continued to assert there were compliance issues that prevented him from doing so, and 24 (Doc. 215-2 at ¶ 17). However, on April 13, 2018, TCD’s operating agreement was 25 amended to retroactively admit the DeJoria Trust as the controlling member with a 93.77% 26 interest in TCD. (Doc. 210-40). Plaintiffs argue that agreement was rescinded that same day, and that by January 2019, DLE was the only equity member of TCD. (Doc. 215-2 at 27 ¶ 17; DLC SOF at ¶ 79). However, the Certificate of Rescission was apparently never 28 signed by Meldman. (Doc. 213-13 at 22). Defendants further argue there is no support for the contention that DLE was part of DLC. (Doc. 210-34 at ¶ 79). 1 that he would return the funds once the issues were resolved. (Doc. 213-1 at 5). 2 2. The Second Loss: The Dragonfly Loan 3 According to Plaintiffs, Jones was not content with stealing some of the purchase 4 funds. Jones also allegedly benefitted from a fraudulent loan taken out by RTC and secured 5 by the castle. Plaintiffs claim Dragonfly Finance S.A.R.L. (“Dragonfly”), a financial firm 6 with no apparent connection to Plaintiffs, obtained a security interest in the Castle in 7 exchange for extending credit to RTC. (GAIC SOF at ¶ 24). On October 11, 2018, a loan 8 application was signed appearing to bear the signature of Michael Meldman, the ultimate 9 beneficial owner of DLC. (DLC SOF at ¶¶ 63, 65; Doc. 210-8; GAIC SOF at ¶ 15; Doc. 10 215-2 at ¶ 17). Meldman has no recollection of signing the loan application nor did he 11 authorize anyone to sign the application for him. (DLC SOF at ¶¶ 63, 65; Doc. 210-8). 12 Hence, Plaintiffs claim the signature was forged. (DLC SOF at ¶ 66). On January 21, 2019, 13 a Loan Facility Agreement (“Dragonfly loan”) was executed between RTC (signed by John 14 Clark, a director of RTC)2 and Dragonfly. (BIC SOF at ¶¶ 36, 38; Doc. 210-9). Then on 15 February 21, 2019, Clark also executed a “charge” granting Dragonfly a security interest 16 in the Castle for any amounts drawn under the Dragonfly loan. (BIC SOF at ¶ 38; Doc. 17 210-10). Plaintiffs suggest Clark was not acting according to their authority in securing 18 this loan. (See Doc. 149-9 at 5; Doc. 215-2 at ¶ 37). Dragonfly disbursed nearly 5 million 19 pounds under the Dragonfly loan to an account owned by Jirehouse, and Jones apparently 20 then transferred the money for his own use. (GAIC SOF at ¶ 25). 21 RTC defaulted on its payments, and Dragonfly demanded immediate payment. (BIC 22 SOF at ¶ 41). RTC settled with Dragonfly after a dispute over the validity of the Dragonfly 23 loan and Dragonfly security interest, under which RTC agreed to pay nearly 5 million 24 pounds to release the Dragonfly Charge. (BIC SOF at ¶ 42; Doc. 210-25 (“Dragonfly 25 26 2 The parties do not provide any arguments about the role of John Clark, and whether he was connected with the parties. It appears Clark may have been connected to Jones and 27 Jirehouse in some capacity. In BIC’s denial letter, it states Clark was a registered director 28 of EAML. (Doc. 210-28 at 4). In any case, while Clark’s exact relationship to the parties is not clear, it does not affect the Court’s reasoning below. 1 Settlement”)). Plaintiffs maintain DLE and DLC incurred this loss, because DLE owned 2 TCD, which in turn owned RTC. (Doc. 214-2 at ¶ 37). Plaintiffs allege they paid out the 3 settlement agreement on behalf of RTC. (BIC SOF at ¶ 43; Doc. 210-20 at 20-21). 4 Plaintiffs assert they discovered both losses on March 6, 2019. (GAIC SOF at ¶ 26; 5 Doc. 209-8 at 3; 209-9 at 3). 6 3. The Insurance Claims 7 On March 18, 2019, DLC provided notice to BIC and GAIC of the two losses. (DLC 8 SOF at ¶ 76). On March 19, BIC and GAIC respectively acknowledged receipt of 9 Plaintiffs’ notice of loss. (DLC SOF at ¶¶ 77-78). 10 On July 26, 2019, well after the discovery of the losses, DLC retroactively requested 11 the following additional entities be added to the 2019-2020 Policies as insureds: Taymoth 12 [sic] Management (No. 1), LP (US), Plaintiff TCD, The River Tay Management Ltd (UK 13 Entity), Taymouth Management (No. 2) LP (UK Entity), The River Tay Management LLP 14 (UK Entity), the DeJoria Trust, and Plaintiff DLE. (Doc. 210-34 at ¶ 24; DLC SOF at ¶ 15 24). On July 29, 2019, BIC issued Change Endorsement No. 26 adding those names to the 16 2019-2020 Primary Policy; BIC did not request any information about these entities, nor 17 did it require any additional premium. (DLC SOF at ¶¶ 25, 27; Doc. 210-34 at ¶¶ 25, 27).3 18 On July 30, the day after BIC issued Endorsement No. 26, DLC submitted two 19 detailed proofs of loss. (Docs. 210-11 and 210-12). Defendants claim this was the first time 20 Plaintiffs informed them that TCD, RTC, or the DeJoria Trust had sustained losses. (GAIC 21 SOF at ¶ 34). Proof of Loss No. 1 sought coverage for the First Loss (Jones’ alleged theft 22 of the Castle purchase funds in late 2018 and early 2019) under the Employee Theft 23 Insuring Agreement (Section A.1) and the Outside the Premises Insuring Agreement 24 (Section A.5). (BIC SOF at ¶ 73; Doc. 210-11 at 4). Proof of Loss No. 2 sought coverage 25 for the Second Loss (funds taken out under the Dragonfly Loan in late 2018 and early 2019) 26 under the Forgery or Alteration Insuring Agreement (BIC SOF at ¶ 75; Doc. 210-12 at 4). 27 3 DLC also requested additional names be added to the Primary Policy on October 31, 28 2019, and on December 20, 2019; BIC issued Change Endorsement Nos. 30 and No. 31 adding those names. (DLC SOF at ¶¶ 28-32). 1 BIC denied Plaintiffs’ claim for coverage under the Primary Policy on May 21, 2 2020. (BIC SOF at ¶ 80; Doc. 210-28). BIC stated its position was “that this claim does 3 not trigger coverage under any of the Policy insuring agreements.” (Doc. 210-28 at 2). 4 4. The Insurance Policies 5 In early 2018, Defendant BIC issued a Primary Commercial Crime Policy and GAIC 6 issued an Excess Policy, each with a policy period of January 28, 2018 to January 28, 7 2019.4 (BIC SOF at ¶ 1; DLC SOF at ¶¶ 1, 5). BIC subsequently issued an additional 8 Primary Policy, and GAIC issued an additional Excess Policy, each with a policy period 9 of January 28, 2019 to January 28, 2020.5 (DLC SOF ¶¶ 3, 6; BIC SOF at ¶ 1). The 10 Declarations Page of the Primary Policy identifies the “Named Insured” as “Discovery 11 Land Company, LLC.” (BIC SOF at ¶ 2; GAIC SOF at ¶ 2; Doc. 149-2 at 4). The Excess 12 policy also identified the “Named Insured” as “Discovery Land Company” and has a 13 “Single Loss Limit of Liability” of $2,500,000. (GAIC SOF at ¶ 11; Doc. 209-4 at 4)). The 14 Excess Policies follow form in most, but not all, respects, to the Primary Policies. (DLC 15 SOF at ¶ 7; Doc. 210-34 at ¶ 7). 16 On January 31, 2018, DLC provided a list of named insureds to BIC and GAIC, 17 which Defendants incorporated into the 2018-2019 policies. (DLC SOF at ¶¶ 12-13).6 On 18 August 23, 2018, DLC requested to add Taymouth Castle Limited and EAML to the 2018- 19 4 BIC issued Policy No. BCCR-45002757-20, and GAIC issued Policy No. XSC E315871 20 00 00. (BIC SOF at ¶ 1); (DLC SOF at ¶¶ 1, 5). 21 5 BIC issued Policy No. BCCR-45002757-21, and GAIC issued Policy No. XSC E315871 01 00. (DLC SOF ¶¶ 3, 6). 22 6 Plaintiffs argue these policies are so-called “Master Policies” covering all of Discovery 23 Land Company projects worldwide, including all the entities associated with each project/property. (Doc. 214-2 at ¶ 3). GAIC argues the River Tay Castle, LLP, the John 24 Paul DeJoria Family Trust, and Taymouth Castle DLC, LLC were not identified as joint insureds at the time the primary policy was issued, nor at the time of Plaintiffs’ alleged 25 loss. (GAIC SOF at ¶ 4). BIC also argues that River Tay Castle, LLP (“RTC”), the entity 26 which ultimately owned the Castle, was not listed on the Joint Insured Endorsement of the Policy at the time the Policy was issued or at the time of the loss. (BIC SOF at ¶ 3). Because 27 the Court finds the Primary Policy does not cover the losses incurred here, even if relevant 28 parties who suffered the losses were in fact insured under the policies, the Court need not address the issue of which entity was covered and when. 1 2019 Policies as named insureds. (Id. at ¶ 19). BIC issued Change Endorsement No. 25 2 adding these two entities as Named Insureds later that same day. (Id.). Additional entities 3 were retroactively added to the Primary Policy in 2019, after the discovery of the Losses. 4 (See supra). 5 a. BIC’s Primary Policy Provisions 6 Section A.1 of the Primary Policy, titled “Employee Theft,” provides: “We will pay 7 for loss of or damage to ‘money,’ ‘securities’ and ‘other property’ resulting directly from 8 ‘theft’ committed by an ‘employee,’ whether identified or not, acting alone or in collusion 9 with other persons.” (BIC SOF at ¶ 4; Doc. 149-2 at 7 (“Section A.1”). As relevant, the 10 Policy defines “employee” as 11 “any natural person: 12 (a) While in your service and for the first 30 days immediately after 13 termination of service, unless such termination is due to ‘theft’ or 14 any other dishonest act committed by the ‘employee’; 15 (b) Whom you compensate directly by salary, wages or commission; 16 and 17 (c) Whom you have the right to direct and control while performing 18 services for you.” 19 (Doc. 149-2 at 18, paragraph 7.a). The Policy specifies that “employee” does not mean 20 “any agent, broker, factor, commission merchant, cosignee, independent contractor or 21 representative of the same general character not specified in paragraph 7.a.” (Doc. 149-2 22 at 19). 23 Section A.2 of the Primary Policy, titled “Forgery or Alteration,” provides: 24 “We will pay for loss resulting directly from ‘forgery’ or alteration of checks, 25 drafts, promissory notes, or similar written promises, orders or directions to 26 pay a sum certain in ‘money’ that are: 27 (1) Made or drawn by or drawn upon you; or 28 (2) Made or drawn by one acting as your agent; 1 Or that are purported to have been so made or drawn.” 2 (Doc. 149-2 at 7 (“Section A.2”)). 3 Section A.5 of the Primary Policy, titled “Outside the Premises,” specifies that BIC 4 “will pay for”: 5 “(a) Loss of ‘money’ and ‘securities’ outside the ‘premises’ in the care and 6 custody of a ‘messenger’ or an armored motor vehicle company resulting 7 directly from ‘theft’, disappearance or destruction.” 8 (Doc. 149-2 at 8 (“Section A.5”)). The Primary Policy defines “messenger” as “you, your 9 relative, or any of your partners or ‘members’, or any ‘employee’ while having care and 10 custody of property outside the ‘premises’.” (Doc. 149-2 at 19). “Member” is defined as 11 “an owner of a limited liability company represented by its membership interest who, if a 12 natural person may also serve as a ‘manager’.” (Id.)7 The term “partner” is not defined in 13 the policy. (See id.). 14 As relevant, the Primary Policy also provides for some exclusions. Exclusion D.1.a 15 (“Acts Committed by You, Your Partners Or Your Members”) provides that the policy 16 does not cover: 17 “Loss resulting from ‘theft’ or any other dishonest act committed by: 18 (1) You; or 19 (2) Any of your partners or ‘members’; 20 Whether acting alone or in collusion with other persons.” 21 (Doc. 149-2 at 8 (“Exclusion D.1.a”)). 22 Exclusion D.1.c excludes: 23 “Loss resulting from ‘theft’ or any other dishonest act committed by any of 24 your ‘employees’, ‘managers’, directors, trustees or authorized 25 representatives: 26 (1) Whether acting alone or in collusion with other persons; or 27 28 7 “Manager” is defined as “a natural person serving in a directatorial capacity for a limited liability company.” (Doc. 149-2 at 19). 1 (2) While performing services for you or otherwise; 2 Except when covered under [Section] A.1.” 3 (Doc. 149-2 at 9 (“Exclusion D.1.c”)). 4 Exclusion D.3.h applies to Section A.5 (“Outside the Premises”) and specifically 5 excludes “Loss resulting from your, or anyone else acting on your express or implied 6 authority, being induced by any dishonest act to voluntarily part with title to or possession 7 of any property.” (Doc. 149-2 at 11 (“Exclusion D.3.h”). 8 b. GAIC’s Excess Policy 9 GAIC’s Excess Policy provides coverage for loss which “would have been paid 10 under the [underlying policy] but for the fact that such loss exceeds the limit of liability of 11 the Underlying Carrier(s)” and “for which the Underlying Carrier(s) has (have) made 12 payment, and the Insured has collected, the full amount of the expressed limit of the 13 Underlying Carrier’s(s) liability.” (Doc. 209-4 at 4). The underlying policy coverage is the 14 Primary Policy issued by BIC. (GAIC SOF at ¶ 13). 15 5. The Lawsuit 16 Plaintiffs filed suit in June 2020, seeking declaratory judgments against BIC and 17 GAIC that Plaintiffs are entitled to indemnification under the insurance policies, claiming 18 breach of contract against BIC and GAIC, and bad faith against BIC. BIC and GAIC both 19 filed counterclaims seeking rescission of the change endorsements, arguing Plaintiffs 20 fraudulently added entities as joint insureds after they discovered the losses. 21 Plaintiffs filed a motion for partial summary judgment (Doc. 151), arguing coverage 22 exists because the term “partner” as used in the definition of “messenger” in the Primary 23 Policies should be construed to cover Jirehouse and that the forgery of Meldman’s 24 signature on the Dragonfly loan is covered under the policy’s coverage for “forgery.” 25 Plaintiffs also seek summary judgment in their favor on various affirmative defenses and 26 counterclaims. 27 BIC filed a motion for summary judgment (Doc. 145) arguing, with respect to the 28 first loss, (i) there is no coverage under the Employee Theft provision (Section A.1) 1 because Jones was not an “employee”; (ii) there is no coverage under the Outside the 2 Premises provision (Section A.5) because Jirehouse was not Plaintiffs’ “partner”; and (iii) 3 various exclusions apply, preventing coverage. With respect to the second loss, BIC argues 4 there is no coverage under the Forgery or Alteration provision (Section A.2). Lastly, BIC 5 argues they did not act in bad faith. 6 GAIC also moved for summary judgment on all claims asserted against it. (Doc. 7 147). GAIC first argues that the Excess Policy, by its own terms, only applies to losses that 8 are covered under the primary policy, and for which DLC has received full payment from 9 the primary carrier. GAIC further argues the “known loss doctrine” bars coverage, because 10 Plaintiffs already knew TCD had sustained the losses for which it sought coverage when 11 they added TCD as a joint insured. LEGAL STANDARD 12 A court must grant summary judgment if the pleadings and supporting documents, 13 viewed in the light most favorable to the nonmoving party, show “that there is no genuine 14 dispute as to any material fact and the movant is entitled to judgment as a matter of law.” 15 Fed. R. Civ. P. 56(a); see Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). The 16 movant bears the initial responsibility of presenting the basis for its motion and identifying 17 those portions of the record that it believes demonstrates the absence of a genuine dispute 18 of material fact. Celotex, 477 U.S. at 323. The non-moving party must then point to specific 19 facts establishing there is a genuine issue of material fact for trial. Id. When considering a 20 motion for summary judgment, a court should not weigh the evidence or assess credibility; 21 instead, “the evidence of the non-movant is to be believed, and all justifiable inferences are 22 to be drawn in his favor.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). A 23 genuine dispute of material fact exists “if the evidence is such that a reasonable jury could 24 return a verdict for the non-moving party.” Id. at 248. 25 In ruling on a motion for summary judgment, the Court construes the evidence in 26 the light most favorable to the nonmoving party. Barlow v. Ground, 943 F.2d 1132, 1135 27 (9th Cir. 1991). When parties file cross-motions for summary judgment, “the court must 28 rule on each party’s motion on an individual and separate basis, determining, for each side, 1 whether a judgment may be entered in accordance with the Rule 56 standard.” Echanove 2 v. Allstate Ins. Co., 752 F. Supp. 2d 1105, 1107-08 (D. Ariz. 2010) (quoting Fair Housing 3 council of Riverside Cty. v. Riverside Two, 249 F.3d 1132, 1136 (9th Cir. 2001). 4 ANALYSIS 5 1. Primary Policy Coverage 6 Arizona law applies to this case. See Team 44 Restaurants LLC v. Am. Ins. Co., 562 7 F. Supp. 3d 61, 65 (D. Ariz. 2021). In Arizona, courts apply “a rule of common sense” 8 when interpreting insurance policies. First Am. Title Ins. Co. v. Johnson Bank, 372 P.3d 9 292, 300 (Ariz. 2016) (quoting Emps. Mut. Cas. Co. v. DGG & CAR, Inc., 183 P.3d 513, 10 515 (2008)). “Under this rule, words are given their ordinary meaning and read from the 11 perspective of one who ‘is untrained in the law or insurance.’” Team 44 Restaurants LLC, 12 562 F. Supp. 3d at 65 (quoting Aztar Corp. v. U.S. Fire Ins. Co., 224 P.3d 960, 966 (Ariz. 13 Ct. App. 2010)). “Insurance policy provisions must be read as a whole, giving meaning to 14 all terms.” Liberty Ins. Underwriters, Inc. v. Weitz Co., LLC, 158 P.3d 209, 212 (Ariz. Ct. 15 App. 2007). Courts consider “legislative goals, social policy, and [perform an] examination 16 of the transaction as a whole.” Team 44 Restaurants LLC, 562 F. Supp. 3d at 65 (quoting 17 Emps. Mut. Cas. Co., 183 P.3d at 515). If the meaning of a policy remains ambiguous, 18 courts then construe the policy against the insurer. Id. The interpretation of an insurance 19 policy is a question of law. Emps. Mut. Cas. Co., 183 P.3d at 515. 20 a. Whether There is Coverage Under the Employee Theft Insuring 21 Agreement (Section A.1) 22 BIC moves for summary judgment on this issue, arguing there can be no coverage 23 under the Employee Theft Insuring Agreement (Section A.1) because Jones, who allegedly 24 perpetrated the theft, was not Plaintiffs’ “employee.” 25 Section A.1 provides: “We will pay for loss of or damage to ‘money,’ ‘securities’ 26 and ‘other property’ resulting directly from ‘theft’ committed by an ‘employee,’ whether 27 identified or not, acting alone or in collusion with other persons.” (Doc. 149-2 at 7). As 28 relevant, the Policy’s definition of “employee” requires three elements: (i) that Jones was 1 in Plaintiffs’ service; (ii) that Plaintiffs compensated Jones “directly by salary, wages or 2 commission”; and (iii) that Plaintiffs had “the right to direct and control” Jones while he 3 performed services for them. (Doc. 149-2 at 18, ¶ 7.a). BIC argues that none of these 4 requirements are met here, but Plaintiffs argue there is a genuine dispute of material fact 5 as to each of these elements. The requirements that Jones be in Plaintiffs’ service and that 6 Plaintiffs had the right to direct and control his work can be analyzed together. First, 7 however, the Court will look to whether Plaintiffs compensated Jones directly. 8 i. Direct Compensation by Salary, Wages or Commission 9 It is undisputed any payment Plaintiffs paid Jones “flowed through Jirehouse.” (BIC 10 SOF at ¶ 46). BIC argues “direct means direct,” or immediate. Vons Cos. v. Fed. Ins. Co., 11 213 F.3d 489, 492 (9th Cir. 2000). Thus, BIC argues, since Plaintiffs paid Jirehouse, and 12 Jirehouse paid Jones, it was not a “direct” form of compensation. (Doc. 210-1 at 6-7). 13 Plaintiffs, on the other hand, argue the funds they paid to Jirehouse were earmarked for 14 particular purposes, and that Jones was supposed to be paid for the deal at closing out of 15 funds they provided. (Doc. 214-1 at 9). Thus, Plaintiffs argue they were in control of the 16 funds and of the way they were routed to Jones. 17 The analysis begins with reading the phrase “compensate directly” as a plain and 18 ordinary person would. Team 44 Restaurants LLC, 562 F. Supp. 3d at 65. “Direct” is 19 defined as “proceeding from one point to another in time or space without deviation or 20 interruption,” “marked by absence of intervening agency, instrumentality, or influence,” or 21 “stemming immediately from a source.” Merriam-Webster Online, merriam- 22 webster.com/dictionary/direct. It is undisputed Plaintiffs wired the legal fees and purchase 23 price to an account owned by Jirehouse. Jirehouse was then an “intervening agency,” or a 24 “deviation” between Plaintiffs and Jones. The fact that the payments were “earmarked” for 25 the purchase of the Castle, related legal fees, and Jones’ compensation as a matter of law 26 does not mean the payments were “direct” such that it would render Jones an employee of 27 Plaintiffs. 28 Courts in other jurisdictions analyzing the same definition of “employee” in 1 insurance contracts agree. In T.S.I. Holdings, Inc. v. Buckingham, 885 F. Supp. 1457 (D. 2 Kan. 1995), for example, the Court found that where an individual received his paycheck 3 from a parent corporation, he was not “compensated directly” by the wholly owned 4 subsidiary who suffered the loss, even though a portion of the funds used to pay him came 5 from the subsidiary. Id. at 1464. Similarly, in Minnesota, a court granted summary 6 judgment in favor of a defendant insurance company because the person convicted of the 7 underlying theft was employed through a corporate entity that person had established. 8 Network F.O.B., Inc. v. Great Am. Ins. Co. of N.Y., 30 F. Supp. 3d 831, 834 (D. Minn. 9 2014). Thus, the court held, the person convicted of theft was not “compensated directly” 10 by the insured; instead, the “employment relationship . . . flowed through a corporate 11 entity.” Id. at 835. 12 Plaintiffs urge the Court to follow Dataflow, Inc. v. Peerless Ins. Co., 2014 WL 13 4881534, at *4 (N.D.N.Y. Sept. 30, 2014). In that case, the court declined to apply the 14 “categorical rule” of T.S.I. Holdings, and instead looked to other areas of law where “direct 15 compensation” is analyzed using many factors, including degree of control, who deposited 16 the funds, and more. Id. However, that case is distinguishable. There, the individual was 17 paid from a master account that three related corporate entities deposited money into; the 18 court reasoned, “[i]t cannot be the case that the simple combination of funds to create a 19 single paycheck—rather than three separate checks—itself is enough to deem 20 compensation not ‘direct.’” Id. The facts here are materially different. Jirehouse is 21 completely independent of Plaintiffs’ corporations. Plaintiffs wired money to Jirehouse 22 pursuant to the engagement letters. Even if a portion of those funds was paid to Jones upon 23 closing, as Plaintiffs argue, the funds still flowed through Jirehouse. Thus, Jones was not 24 “compensated directly” by Plaintiffs under a plain reading of the policy. 25 Additionally, it is clear Plaintiffs did not compensate Jones by “salary” or “wages.”8 26 8 It is undisputed Plaintiffs did not pay Jones a “salary.” (BIC SOF at ¶ 54). Plaintiffs argue 27 the funds paid to Jirehouse to pay Jones could be interpreted as “wages.” (Doc. 214-1 at 28 9). The Court disagrees. Whether taking the definitions proposed by BIC from Arizona case law (Doc. 210-1 at 7) or considering the meaning of “wage” as an ordinary person 1 The only possible relevant category in the policy is “commission,” since Jones was 2 apparently paid at closing. A “commission” is defined as “a fee paid to an agent or 3 employee for transacting a piece of business or performing a service.” Merriam-Webster 4 Online, merriam-webster.com/dictionary/commission. See also Commission, Black’s Law 5 Dictionary (11th ed. 2019) (defining “commission” as “a fee paid to an agent or employee 6 for a particular transaction, as a percentage of the money received from the transaction.”). 7 Plaintiffs argue they paid Jones a commission out of the total funds wired to Jirehouse after 8 closing. (Doc. 214-1 at 10). However, their evidence does not support that contention. 9 Rather, the funds were paid to Jirehouse and placed in the Client Account, and £300,000 10 in fees and disbursements were taken from that account between June 2018 and closing, 11 apparently to pay Jones. (See Doc. 214-8). (See also Doc. 181-8 at 30 (“we received 12 reconciliation statements from Jirehouse, statement and uses of funds from Jirehouse . . . 13 as the deal is progressing to closing, we get these reconciliation statements to show all the 14 disbursements. And that’s how Jirehouse and other attorneys got paid”); Doc. 149-3 at 6 15 (general engagement letter with Jirehouse) (“You will be required to pay in advance or 16 reimburse us for disbursements incurred on your behalf . . .”)). Even if Jirehouse paid Jones 17 a commission out of the general funds provided by Plaintiffs, nothing was paid to Jones by 18 Plaintiffs directly; in other words, Plaintiffs did not directly pay Jones a commission. 19 ii. In Plaintiffs’ Service and Under Plaintiffs’ Direction and Control 20 Because the Policy’s definition of “employee” is conjunctive, Plaintiffs’ claim for 21 coverage under this provision fails upon the direct compensation requirement alone. 22 However, even if he were “directly compensated,” Jones nevertheless fails to meet the 23 other two requirements of the insurance policy’s definition of “employee”: namely, that he 24 was in Plaintiffs’ service and that he was under Plaintiffs’ direction and control. 25 The parties have pointed to no Arizona authority on the interpretation of these 26 provisions of the definition of “employee” within an insurance policy, and the Court is 27 28 would as Plaintiffs urge, the Court comes to the same conclusion: wiring Jirehouse funds in relation to the engagement letters is not directly paying a “wage” to Jones. 1 aware of none. BIC urges the Court to follow courts in other jurisdictions which look to 2 workers’ compensation law to help define these requirements. (Doc. 142 at 8); Cedar Lake 3 Homeowners Ass’n v. Northwest Empire Cmt. Mgmt., No. 3:14-CV-00599-PK, 2015 WL 4 5970481, at *5 (D. Or. Oct. 13, 2015); Jerome Grp., Inc. v. Cincinnati Ins. Co., 257 F. 5 Supp. 2d 1217, 1226 (E.D. Mo. 2003) (applying Missouri workers’ compensation law to 6 analyze same definition of “employee” in an insurance policy”).9 Plaintiffs urge the Court 7 to ignore that framework and rely on more general “right to control” analysis from the 8 vicarious liability framework. (Doc. 185 at 7). A third possibility exists: at least one other 9 court has analyzed this same definition within an insurance contract and found, reading the 10 insurance policy under its plain and ordinary meaning and without resort to any broader 11 area of law, that “[t]he Court need not look beyond the Policy, which it finds 12 unambiguous.” GRM Mgmt., LLC v. Cincinnati Ins. Co., 259 F. Supp. 3d 411, 417 (E.D. 13 Va. 2017) (finding the company did not “direct and control” the individual performing 14 services because, inter alia, there was an independent contractor agreement, he was not 15 supervised by the company, he did not have a weekly hour requirement and worked on a 16 project basis). 17 Regardless of which analysis the Court undertakes, the Court has no trouble finding 18 Jones was not “directed and controlled” by Plaintiffs as contemplated by the policy 19 language. Plaintiffs did not retain Jones under an employment agreement; rather, Jones was 20 a “Principal/Partner” at Jirehouse, a separate entity. (Doc. 149-4 at 6). Plaintiffs retained 21 Jirehouse for the purpose of acquiring the Castle. (Doc. 149-4 at 2, 4; BIC SOF at ¶ 59). 22 Jones was one of many solicitors working on the Transaction for Plaintiffs. (BIC SOF at 23 ¶ 21). Plaintiffs paid their fees to the Jirehouse law firm’s General Client Account (Doc. 24 214-2 at ¶ 47), and they made no “regular payments” to either Jirehouse or Jones. (BIC 25 9 The factors under this test include: “(1) the extent of control, (2) the actual exercise of 26 control, (3) the duration of the employment, (4) the right to discharge, (5) the method of payment, (6) the degree to which the alleged employer furnished equipment, (7) the extent 27 to which the work is the regular business of the employer, and (8) the employment 28 contract.” Jerome Grp., Inc., 257 F. Supp. 2d at 1226 (quoting Wilmeth v. TMI, Inc., 26 S.W.3d 476, 480 (Mo.Ct.App.2000)). 1 SOF at ¶ 50). Plaintiffs did not report payments to Jirehouse or Jones as salary or wages to 2 the U.K. Government, nor did they withhold any taxes or employers’ liability insurance 3 from its payments made to Jirehouse for Jones’ work. (BIC SOF at ¶¶ 51-52). Jirehouse 4 was responsible for its own insurance. (BIC SOF at ¶ 62). Plaintiffs did not provide any 5 equipment to Jones (BIC SOF at ¶ 60), and Jones and Jirehouse used their own resources 6 and expertise to provide services for Plaintiffs. Plaintiffs could terminate Jirehouse’s 7 representation, but they had no authority to terminate Jones’ relationship with Jirehouse. 8 (BIC SOF at ¶ 61; Doc. 214-2 at ¶ 61). While the General Engagement Letter specified 9 that Jirehouse shall provide “services in accordance with your instructions and our 10 agreement to act upon them,” (Doc. 149-3 at 3), that does not render Jones an employee of 11 Plaintiffs. 12 Rather, the Primary Policy specifies “employee” does not include “any agent, 13 broker, factor, commission merchant, cosignee, independent contractor or representative 14 of the same general character not specified in paragraph 7.a [which includes the definition 15 above].” (Doc. 149-2 at 19). The Specific Engagement Terms Letter specifies Jirehouse is 16 “engaged to act on [Plaintiffs’] behalf” with respect to various parts of the Castle 17 transaction. (Doc. 149-4 at 2). The hallmarks of an independent contractor, representative, 18 or agent relationship are evident here. Plaintiffs retained Jirehouse to navigate purchasing 19 the Castle; Plaintiffs did not hire Jones as an employee. 20 Accordingly, BIC’s motion for summary judgment on the applicability of the 21 Employee Theft Insuring Agreement (Section A.1) will be granted. 22 b. Whether There is Coverage Under the Outside the Premises Insuring 23 Agreement (Section A.5) 24 Even though Jones was not Plaintiffs’ “employee,” coverage may still exist under a 25 separate provision regarding losses of funds while in the custody of a “messenger.” Under 26 the “Outside the Premises” provision, the Policy specifies that BIC “will pay for”: “Loss 27 of ‘money’ and ‘securities’ outside the ‘premises’ in the care and custody of a ‘messenger’ 28 or an armored motor vehicle company resulting directly from ‘theft’, disappearance or 1 destruction.” (Doc. 149-2 at 8). The Primary Policy defines “messenger” as “you, your 2 relative, or any of your partners or ‘members’, or any ‘employee’ while having care and 3 custody of property outside the ‘premises’.” (Doc. 149-2 at 19). “Member” is defined as 4 “an owner of a limited liability company represented by its membership interest who, if a 5 natural person may also serve as a ‘manager’.” (Id.)10 The term “partner” is not defined in 6 the policy. (See id.). 7 Plaintiffs move for summary judgment on this issue and argue that under the plain 8 meaning of “partner,” Jirehouse was Plaintiffs’ partner in purchasing the castle, so the loss 9 should be covered. Plaintiffs argue “partner” is broadly defined as “one associated with 10 another especially in an action,” and Jirehouse was associated with Plaintiffs in the action 11 of purchasing the Castle. (Doc. 214-1 at 3). Thus, Plaintiffs argue, Jirehouse was Plaintiffs’ 12 partner such that the loss is covered under this provision. 13 BIC cross-moves for summary judgment and argues Plaintiffs’ losses are not 14 covered under the Outside the Premises Insuring Agreement (Section A.5) because 15 Jirehouse was not Plaintiffs’ “partner,” and was therefore not a “messenger” under this 16 policy. BIC argues the term “partner” refers to someone who jointly owns and carries on a 17 business for profit. (Doc. 210-1 at 13 (quoting Black’s Law Dictionary)). BIC urges the 18 Court to read the term “partner” in context: in the Policy, it appears eighteen times, always 19 next to “member” or “manager,” both of which are defined terms referring to corporate 20 membership and management. 21 First, the “plain and ordinary meaning” of the word “partner” is not always so broad 22 as Plaintiffs argue. Plaintiffs chose to highlight one definition provided by Merriam- 23 Webster but failed to mention the next: “a member of a partnership especially in a 24 business.” Merriam-Webster Online, merriam-webster.com/dictionary/partner.11 It does 25 not take specialized legal or insurance knowledge to understand that the word “partner” 26 10 “Manager” is defined as “a natural person serving in a directatorial capacity for a limited 27 liability company.” (Doc. 149-2 at 19). 28 11 Both definitions are also present in Black’s Law Dictionary, as Plaintiffs point out in response to Defendants’ brief. (Doc. 214-1 at 4). 1 may be referring to a partner in a business sense. 2 The Outside the Premises Insuring Agreement protects from loss of money or 3 securities while “in the care and custody of a ‘messenger’ or an armored motor vehicle 4 company.” Plaintiffs rely on a Tenth Circuit case for the proposition that “messenger” is 5 “not a legal term of art representing a special, recognized status such as the words ‘agent’ 6 or ‘bailee.’” United Bank of Pueblo v. Hartford Acc. & Indem. Co., 529 F.2d 490, 494 (10th 7 Cir. 1976). However, the policy at issue there protected from loss of property “in the 8 custody of any of the Employees or partners of the Insured . . . or of any other person or 9 persons acting as messenger.” Id. “Messenger” was not defined in that policy, so the Court 10 reasoned that “messenger”—placed after and separate from the specific categories or 11 “employees” and “partners”—was meant to be a general term. Here, however, “messenger” 12 is defined by the policy; there is no reason to impute the Tenth Circuit’s analysis under the 13 particular insurance policy at issue in United Bank of Pueblo to dictate that “messenger” 14 must always be a broad, general term. 15 Moreover, “context matters.” Caraco Pharm. Labs., Ltd. v. Novo Nordisk A/S, 566 16 U.S. 399, 413-14 (2012). And Arizona courts “often interpret doubtful words by referring 17 to accompanying words.” Goldberger v. State Farm Fire and Casulaty Co., 448 P.3d 302, 18 305 (Ariz. Ct. App. 2019) (citing Estate of Braden ex rel. Gabaldon v. State, 266 P.3d 349, 19 352 (Ariz. 2011)). “Messenger” is defined as “you, your relative, or any of your partners 20 or ‘members’, or any ‘employee’ while having care and custody of property outside the 21 ‘premises’.” (Doc. 149-2 at 19). Each of those categories—other than “partner”—have 22 specific, identifiable corporate connections with the insured that go beyond mere 23 “association,” as Plaintiffs argue should suffice. Reading “partner” in this context, common 24 sense dictates a “partner” must also have a specific, identifiable connection with the 25 insured. Additionally, the term “partners” is not found in isolation, but is situated within 26 the clause, “any of your partners or ‘members,’” suggesting a closeness in identity or 27 meaning to “members.” And a “member” is defined as “an owner of a limited liability 28 company represented by its membership interest.” (Id.). Under a common sense reading of 1 this provision, there is no reason to read “partner” as broadly as Plaintiffs’ urge. 2 Plaintiffs also argue EAML, the entity which first purchased the Castle, was “part 3 of the Jirehouse family of companies,” rendering Jirehouse the “initial purchaser” which 4 held title for nearly a month. (Doc. 152 at 10-11). Thus, Plaintiffs argue, Jirehouse had an 5 ownership interest in the Castle and was Plaintiffs’ “partner” in the transaction. But 6 Plaintiffs’ attempt to elide the corporate entities here does not render Jirehouse Plaintiffs’ 7 partner. There is a clear dispute about whether EAML is a Jirehouse affiliate. The Specific 8 Engagement Letter states Jirehouse entered into an exclusivity agreement with the Castle’s 9 seller “on behalf of a special purpose vehicle employed on [Plaintiffs’] behalf as a front- 10 facing buyer for the transaction, [EAML] and affiliated to this firm [sic] . . . .” (Doc. 149- 11 4 at 3). Ultimately, whether EAML was affiliated with Jirehouse is immaterial. Even if 12 Jirehouse were affiliated with EAML, Jirehouse itself had no stake in the Castle. Jirehouse 13 shared no risk, and reaped no profit beyond legal fees, from the business venture of 14 purchasing the Castle. (See BIC SOF at ¶¶ 67; Doc. 214-2 at ¶ 67). And nothing in the 15 record suggests that EAML (or Jirehouse) made any profit from the temporary ownership 16 of the Castle. The fact that Jirehouse facilitated the transaction through EAML as a special 17 purpose vehicle, even if EAML is affiliated with Jirehouse, does not make Jirehouse 18 Plaintiffs’ partner in the transaction. 19 Finding that Jirehouse was Plaintiffs’ partner in this transaction would be like saying 20 a real estate agent is a partner in every house sale because she earns a commission. Indeed, 21 reading “partner” within the definition of “messenger” to be as broad as Plaintiffs argue 22 might render Barclays, where Jirehouse’s general client account was located, a “partner” 23 of Plaintiffs as well. Such a reading defies common sense. Mutual benefits certainly flow 24 from business arrangements between two entities like this, where one hires another to help 25 facilitate a transaction; but retaining Jirehouse for the project of purchasing the Castle does 26 not make Jirehouse a “partner” in the purchase under the insurance policy.12 27 12 Plaintiffs also point to the fact that Jirehouse’s own insurer stated, “the extent to which 28 the Jirehouse entities were in reality a solicitors’ firm undertaking legal work or whether their principal business was that of capital finance/private equity is currently the subject of 1 Accordingly, BIC’s Motion for Summary Judgment on this issue is granted; 2 Plaintiffs’ is denied.13 c. Whether the second loss is covered by the “Forgery or Alteration” 3 Insuring Agreement (Section A.2) 4 Plaintiffs believe coverage exists for the fraudulent loan secured by the castle based 5 on a provision regarding losses due to forgery. Section A.2 provides coverage for “loss 6 resulting directly from ‘forgery’ or alteration of checks, drafts, promissory notes, or similar 7 written promises, orders or directions to pay a sum certain in ‘money’” that are (i) Made 8 or drawn by or drawn upon you; or (ii) Made or drawn by one acting as your agent; Or that 9 are purported to have been so made or drawn.” (Doc. 149-2 at 7). The Policy defines 10 “forgery” as “the signing of the name of another person or organization with intent to 11 deceive; it does not mean a signature which consists in whole or in part of one’s own name 12 signed with or without authority, in any capacity, for any purpose.” (Doc. 149-2 at 19). 13 The only document Plaintiffs assert was forged is the Loan Application; Plaintiffs 14 do not assert any signature on the Dragonfly Charge or Dragonfly Facility was forged. (See 15 BIC SOF ¶¶ 86-88). Rather, John Clark, a director of RTC, executed the Facility 16 Agreement and the Charge that ultimately resulted in the loan and the security interest in 17 the castle. (BIC SOF at ¶¶ 36, 38). Plaintiffs’ Proof of Loss included an affidavit indicating 18 Clark did not have the authority to sign these agreements. (Doc. 149-9 at 5). However, 19 Plaintiffs make no additional arguments, nor do they offer additional facts, regarding the 20 director Clark’s role in securing the loan on behalf of RTC. Thus, the only document at 21 issue here, under the Forgery provision, is the Loan Application. 22 23 ongoing investigation.” (DLC SOF at ¶ 59). Plaintiffs argue this comment suggests 24 Jirehouse was Plaintiffs’ partner in the Castle purchase. However, this statement does not change the analysis of the language and applicability of the Primary Policy. 25 13 Because the Court finds Jirehouse was not Plaintiffs’ “partner,” the Court need not 26 address the parties’ argument about whether the property was in Jirehouse’s “care and custody” while situated in a Barclay’s bank account. Additionally, because the Policy does 27 not cover the loss under this insuring agreement, the Court need not reach whether 28 Exclusion D.1.c (authorized representative exclusion) or Exclusion D.3.h (voluntarily parting with funds due to dishonest act exclusion) apply. 1 The first issue is whether the loan application was a “written promise” under this 2 provision at all. BIC argues a loan application is not a “written promise” that is “similar” 3 to checks, drafts, or promissory notes. (Doc. 210-1 at 17). The loan application is not a 4 “promise” at all, BIC argues, because by definition it is a request for a loan rather than a 5 guarantee to repay it. BIC further argues a loan application is not “similar to a check, draft, 6 or promissory note” because those terms all refer to negotiable instruments; a loan 7 application is not the same type of document, nor does it have the same legal or financial 8 effect. (Doc. 210-1 at 17-18). 9 Plaintiffs urge the Court to look at the transaction as a whole, analyzing all of the 10 documents together as a single instrument, rather than focusing on the one forged document 11 at issue. (Doc. 214-1 at 10-11). Plaintiffs argue that under such analysis, the forged loan 12 application together with the fraudulently submitted due diligence materials constituted a 13 written promise to repay the Dragonfly Loan secured by the Castle, because without the 14 forged loan application, the ultimate loan would not have issued. (Doc. 214-1 at 11). 15 Plaintiffs principally rely on Omnisource Corp. v. CAN/Transcon. Ins. Co., 949 F. Supp. 16 681 (N.D. Ind. 1996) for the proposition that the transaction’s documents should be 17 considered holistically. In that case, Omnisource submitted an application for a line of 18 credit along with an agreement for an irrevocable letter of credit. Id. at 683. The 19 application/agreement provided that the letter of credit would be available upon 20 presentation of a sight draft (a negotiable instrument) accompanied by various supporting 21 documents. Id. The sight draft was not forged, but the various supporting documents were. 22 Id. The court in that case found that “construed together, these documents constitute a 23 covered instrument” under a policy substantially similar to the one at issue here. Id. at 687. 24 In Omnisource, however, the rationale for bundling the documents was that they 25 had to be presented together for the bank to pay out on the line of credit; the sight draft 26 would have been “useless without the supporting documents,” which were forged. Id. at 27 688. Plaintiffs essentially argue Dragonfly would not have ultimately issued the loan 28 without the original loan application, meaning the loan application must be considered 1 together with the later documentation. (Doc. 198 at 7-8). But in Omnisource, the documents 2 had to be presented together in order to get the pay out on the line of credit; it was not a 3 multi-step process, but multiple documents that were part of a single step. Here, by 4 contrast, the loan application was submitted many months before the Dragonfly Facility 5 agreement and Charge, and it had a different purpose and a different legal effect than the 6 later documents. Cf. Metro Fed. Credit Union v. Fed. Ins. Co., 607 F. Supp. 2d 870, 875 7 (N.D. Ill. 2009) (applying Illinois law to find that documents executed at different times, 8 and for different—though related—purposes, should not be construed as a single 9 instrument). 10 And “[b]y its own terms . . . the forgery endorsement only insures against losses 11 from forgeries of written promises, orders, or directions to pay a sum certain that are 12 ‘similar,’ meaning of the same nature as checks, drafts, promissory notes . . . namely, 13 negotiable instruments made or drawn by [the insured].” AIMS Ins. Program Managers 14 Inc. v. Nat’l Fire Ins. Co. of Hartford, No. 1 CA-CV-20-0032, 2021 WL 408874, at *3 15 (Ariz. Ct. App. Feb. 4, 2021). And it is clear that applications for credit are not negotiable 16 instruments or documents with the same—or even similar—effect. The loan application 17 was just that: an application, upon which no legal or financial obligations issued.14 18 And even if the Court were to assume the forged loan application was somehow 19 covered by this policy, the loss Plaintiffs incurred did not result “directly” from the forgery 20 as required by the policy. “‘[D]irect’ means ‘direct.’” Vons Cos., Inc. v. Fed. Ins. Co., 212 21 F.3d 489, 492 (9th Cir. 2000).15 Here, Plaintiffs allege only the signature on the application 22 was forged; however, it is undisputed that John Clark, a director of RTC, executed the 23 Facility Agreement and the Charge that ultimately resulted in the loan and the security 24 interest in the castle. (BIC SOF at ¶¶ 36, 38). Thus, the loss did not result directly from the 25 forged application. Rather, the forged application was submitted; RTC executed the loan 26 14 Additionally, as Defendants argue, there was no “sum certain” identified in the loan 27 application. (Doc. 210-1 at 20). 28 15 The Policy further excluded “indirect loss,” or “[l]oss that is an indirect result of an ‘occurrence’ covered by this Policy.” (Doc. 149-2 at 9). 1 Facility and Charge months later; Dragonfly disbursed nearly 5 million pounds to RTC 2 under the Loan Facility Agreement to an account owned by Jirehouse, and Jones allegedly 3 transferred the money for his own use; RTC defaulted on its payments, and Dragonfly 4 demanded immediate repayment. Only at that point did Plaintiffs incur a “loss” when RTC 5 entered into the Dragonfly Settlement, under which RTC agreed to pay nearly 5 million 6 pounds to release the Dragonfly Charge, and for which Plaintiffs apparently footed the bill. 7 Thus, even if Plaintiffs DLE and DLC ultimately incurred a loss from paying out the 8 Dragonfly Settlement on behalf of RTC, as they contend, that loss cannot be said to have 9 “directly” resulted from the forged loan application itself.16 Cf. Sperling & Slater, P.C. v. 10 Hartford Cas. Ins. Co., 2012 WL 6720611, at *4 (N.D. Ill. Dec. 27, 2012) (collecting 11 cases); id. (“Courts have repeatedly held that employee dishonesty provisions do not cover 12 losses suffered by a third-party that the insured subsequently reimburses because they are 13 not direct losses. Rather, they are subsequent liabilities incurred by the insured.”). 14 Accordingly, Plaintiffs’ motion for summary judgment on this issue is denied. BIC’s 15 motion for summary judgment will be granted. 16 2. GAIC’s Motion for Summary Judgment 17 GAIC argues it is entitled to summary judgment based on various arguments the 18 Court need not reach. GAIC’s Excess Policy provides coverage for loss which “would have 19 been paid under the [underlying policy] but for the fact that such loss exceeds the limit of 20 liability of the Underlying Carrier(s)” and “for which the Underlying Carrier(s) has (have) 21 made payment, and the Insured has collected, the full amount of the expressed limit of the 22 Underlying Carrier’s(s) liability.” (Doc. 209-4 at 4). Because the Court finds there was no 23 coverage under the primary policy issued by BIC, there is no coverage on the excess policy. 24 (See Doc. 209-1 at 7). Accordingly, GAIC’s motion for summary judgment will be granted 25 for all claims against it. 26 // 27 16 BIC argues Exclusion D.1.c (authorized representative exclusion) would preclude 28 coverage for the second loss as well. (Doc. 210-1 at 16 n.11). But because the Policy does not cover the loss in the first place, the court will not address this argument. 1 3. Whether Plaintiffs Made any Fraudulent Misrepresentations Adding TCD as 2 a Joint Insured 3 Plaintiffs move for summary judgment on BIC’s Sixteenth, Seventeenth, and 4 Eighteenth Affirmative Defenses and Counterclaims I and II, and GAIC’s Fifth 5 Affirmative Defense and Counterclaims I and II. All these claims and defenses concern the 6 putative rescission of the amendment adding TCD and DeJoria Trust as insureds after 7 Plaintiffs learned of the losses. They are governed by common law and Ariz. Rev. Stat. § 8 20-1109; under that statute, an insurer cannot refuse to provide coverage for a loss under a 9 policy because of a misrepresentation, omission, concealment of facts, or incorrect 10 statement in the application for the insurance policy unless “(1) the misrepresentation is 11 fraudulent; (2) the misrepresentation is ‘material either to the acceptance of the risk, or to 12 the hazard assumed by the insurer,’ and (3) the ‘insurer in good faith would . . . not have 13 issued the policy . . . if the true facts had been made known to the insurer as required either 14 by the application or the policy or otherwise.’” James River Ins. Co., 523 F.3d at 920-21 15 (quoting Ariz. Rev. Stat. § 20-1109). 16 Because the Court finds no coverage under the plain language of the Policy, it is 17 unclear whether the Defendants’ counterclaims require resolution. If the putative rescission 18 is somehow relevant regarding other losses, the effectiveness of the rescission may be best 19 litigated in the context of those losses. The parties will be required to file a joint statement 20 setting forth whether those counterclaims remain pending. Accordingly, Plaintiffs’ motion 21 for summary judgment on this issue will be denied without prejudice. 22 4. Plaintiffs’ Bad Faith Claims 23 Lastly, BIC moves for summary judgment on Plaintiffs’ bad faith claims. “An 24 insurance contract is not an ordinary commercial bargain; ‘implicit in the contract and the 25 relationship is the insurer's obligation to play fairly with its insured.’” Zilisch v. State Farm 26 Mut. Auto. Ins. Co., 995 P.2d 276, 279 (2000) (quoting Rawlings v. Apodaca, 726 P.2d 27 565, 570 (1986)). “Although an insurer may challenge a claim for which coverage is ‘fairly 28 debatable,’ it commits the tort of insurance bad faith when it ‘intentionally denies, fails to 1 process or pay a claim without a reasonable basis.’” Fidelity Nat’l Title Ins. Co. v. Osborn 2 III Partners LLC, 483 P.237, 250 (Ariz. Ct. App. 2021) (quoting Zillisch, 995 P.2d at 279). 3 An insurer may breach the duty of good faith “even if the policy does not provide 4 coverage.” Lloyd v. State Farm Mut. Auto. Ins. Co., 943 P.2d 729, 737 (Ariz. Ct. App. 5 1996). To prevail on a claim of bad faith, the insured must show (1) in “the investigation, 6 evaluation, and processing of the claim, the insurer acted unreasonably,” and (2) the insurer 7 “either knew or was conscious of the fact that its conduct was unreasonable.” Zilisch, 995 8 P.2d at 280. See also Demetrulias v. Wal-Mart Stores Inc., 917 F. Supp. 2d 993, 1004 (D. 9 Ariz. 2013) (quoting Clearwater v. State Farm Mut. Auto. Ins. Co., 792 P.2d 719. 723 10 (Ariz. 1990)) (“Arizona employs a two-pronged test that has an objective and subjective 11 component. First is the objective inquiry: did the insurer act unreasonably toward the 12 insured? . . . Second is the subjective: did the insurer act ‘knowingly or with reckless 13 disregard as to the reasonableness of its actions?’”). Arizona’s two-prong test applies to 14 “both the insurer’s evaluation of the claim and the insurer’s claims handling process.” 15 Temple v. Hartford Ins. Co. of Midwest, 40 F. Supp. 3d 1156, 1165 (D. Ariz. 2014). 16 Examples of unreasonable actions include failure to “immediately conduct an adequate 17 investigation,” failure to “act promptly in paying a legitimate claim,” and “lowballing 18 claims.” Demetrulias, 917 F. Supp. 2d at 1104 (quoting Zilisch, 995 P.2d at 276). 19 Plaintiffs argue BIC acted in bad faith both by failing to complete an adequate 20 investigation and by unreasonably delaying investigations into their claims. BIC, on the 21 other hand, argues that in Arizona, “[a]n insurance company’s failure to adequately 22 investigate only becomes material [to a bad faith claim] when a further investigation would 23 have disclosed relevant facts,” but that no new facts relevant to Plaintiffs’ claims were 24 raised through the extensive discovery in this matter, meaning their investigation was 25 reasonable and adequate. (Doc. 210-1 at 23) (quoting Carlson v. Independent Order of the 26 Foresters, 2017 WL 957283, at *7 (D. Ariz. Mar. 13, 2017)). 27 The first question is whether BIC objectively acted unreasonably by failing to 28 conduct an adequate investigation. Zilisch, 995 P.2d at 280. Plaintiffs’ arguments on this 1 issue primarily concern BIC’s decision to hire an attorney investigator, Mr. Oliva, to 2 investigate the claims. Plaintiffs argue BIC hired Mr. Oliva because he had previously 3 helped BIC out of a coverage dispute. (Doc. 214-1 at 22). Plaintiffs argue BIC adjusters 4 did not review their documents at all, but relied on the coverage analysis produced by Mr. 5 Oliva. (Doc. 214-1 at 22).17 However, Plaintiffs cite no case law supporting the assertion 6 that an insurer acts in bad faith by hiring an external investigator to help assess claims.18 7 The investigation was thorough, the investigator reviewed thousands of pages of Plaintiffs’ 8 documents, and Plaintiffs point to no evidence that BIC failed to conduct an adequate 9 investigation. (Doc. 214-2 at ¶ 78). On the contrary, it appears BIC relied on the same 10 material facts that are relevant in this litigation in reaching its coverage decision. See Aetna 11 Cas. And Sur. Co. v. Superior Court In and For Cnty. of Maricopa, 778 P.2d 1333, 1336 12 (Ariz. Ct. App. 1989) (citing Pace v. Ins. Co. of N. Am., 838 F.2d 572, 584 (1st Cir. 1988)) 13 (“An insurance company's failure to adequately investigate only becomes material when a 14 further investigation would have disclosed relevant facts.”). BIC did not fail to adequately 15 investigate Plaintiffs’ claims. 16 The second question is whether BIC objectively and unreasonably delayed its 17 investigation of Plaintiffs’ claims. BIC argues they came to a decision within ten months 18 of receiving the Proofs of Loss, but does not otherwise respond to Plaintiffs’ arguments 19 about delaying the investigation. (Doc. 195 at 10). Plaintiffs, on the other hand, argue they 20 21 17 Plaintiffs also point to an error in the declination letter: the letter states that Plaintiff’s asserted Jones (not Jirehouse) was Plaintiffs’ partner, even though Plaintiffs never took 22 that position. However, one isolated error does not support the argument that the entire 23 declination or investigation was conducted in objectively unreasonable bad faith. 18 Additionally, while Plaintiffs argue BIC’s choice of Mr. Oliva was strategically designed 24 to help them avoid coverage based on his past experience, the record does not as a matter of law support that contention. The record shows that BIC hired Mr. Oliva because he was 25 “a national attorney” who “handles claims across the country” who has “fidelity expertise,” 26 and that BIC was familiar with his work from successfully defeating a motion to dismiss with his help after denying coverage on a claim in Virginia. (Doc. 214-19 at 24). The fact 27 that BIC retained Mr. Oliva in part because he had previously helped them in a situation 28 where they denied coverage does not necessarily suggest BIC was objectively unreasonable in hiring him to assess Plaintiffs’ claims. 1 notified BIC of the loss on March 18, 2019, and provided two detailed Proofs of Loss on 2 July 30, 2019, but that no one reviewed them until August 19, 2019. (Doc. 185 at 22). 3 Plaintiffs claim the delay was because BIC had to hire an attorney investigator, Mr. Oliva, 4 to look into the claim because they lacked the resources to do so themselves, and that the 5 delay violated BIC’s own internal standards and A.A.C. R20-6-801 (which requires 6 investigation within 30 days after notification of claim, unless investigation cannot 7 reasonably be completed in that time).19 On December 20, 2019, Plaintiffs asked BIC to 8 execute a nondisclosure agreement before producing documents for their review, and they 9 argue BIC delayed in executing the agreement such that the production of documents could 10 not happen until February 13, 2020. (Doc. 214-1 at 22). In March of 2020, Plaintiffs and 11 Defendants met virtually, and Plaintiffs contend that Defendants only asked “limited” 12 questions and did not discuss coverage of Plaintiffs’ claims during the meeting. BIC then 13 denied Plaintiffs’ claims on May 21, 2020. (BIC SOF at ¶ 80). 14 Plaintiffs did provide a “notice” of loss in March 2019, but provided no details until 15 July 30, 2019, when they submitted their Proofs of Loss. (Docs. 210-11 and 210-12). 16 Additionally, they submitted these claims one day after retroactively adding Plaintiff TCD 17 as a “joint insured” under the policies. (DLC SOF at ¶¶ 24, 25, 27). Any delay between 18 March and the end of July is squarely not attributable to BIC. Cf. Demetrulias, 917 F. Supp. 19 2d at 1005 (where insurer did not have the information, because doctor faxed information 20 to the wrong office, insurer was not liable for bad faith because of a delay). Plaintiffs 21 complain about the three weeks that passed after the proofs of loss before BIC reviewed 22 their claims, but taking three weeks to preliminarily assess complex, multimillion dollar 23 claims is not objectively unreasonable. (See Doc. 214-20 at 9 (in response to question about 24 what was happening between July 30 and August 19, 2019, BIC adjuster Ms. Gurka 25 26 19 BIC argues the Arizona Administrative Code cited by Plaintiffs to establish an unreasonable delay is inapplicable, because “[t]he provisions are expressly not a standard 27 of conduct against which an insurer’s conduct in handling an individual claim is to be 28 measured for creating a claim for relief.” Melancon v. USAA Ca. Inc. Co., 174 Ariz. 344, 347 (Ariz. 1992). 1 explained, “I was performing a coverage analysis. I was continuing to investigate coverage. 2 There was a lot of material submitted. It was quite dense material so I was synthesizing it 3 and analyzing it.”)).20 On August 28, 2019, Ms. Gurka alerted Plaintiffs that BIC had hired 4 an attorney investigator because of the possible travel involved in investigating the claims, 5 and that they are “working toward completing our investigation as quickly as possible.” 6 (Doc. 214-20 at 11). Neither Plaintiffs nor Defendants explain what happened during 7 September and October. On October 21, 2019, Mr. Oliva reached out to Plaintiffs and 8 explained that he had been hired to investigate the claims because BIC did not have time 9 to “look at them in depth.” (Doc. 72-3 at 14). Accordingly, the parties have pointed to no 10 evidence to suggest any delay in beginning the investigation was unreasonable; rather, the 11 evidence suggests BIC was working to assess these claims and to promptly hire an 12 investigator. Compare Zilisch, 995 P.2d at 280-81 (finding bad faith for delay where 13 insurer insisted on seeing a non-existent report as a “pretext to drag out the claims process” 14 and did not evaluate a claim for ten months after receiving the demand despite having all 15 of the records available). 16 Plaintiffs also allege BIC unreasonably delayed the investigation by not promptly 17 signing a nondisclosure agreement they requested. On November 20, 2019, Mr. Oliva sent 18 a detailed request for documents from Plaintiffs to aid his investigation. (Doc. 72-3 at 22- 19 25). At this point, Plaintiffs provided some but not all of the requested information, and on 20 December 20, 2019, Plaintiffs sent a proposed nondisclosure agreement to Mr. Oliva. 21 (Docs. 181-12, 181-13). It appears there may have been a slight delay based on a 22 typographical error Plaintiffs made in Mr. Oliva’s email address when sending him the 23 nondisclosure agreement. (See Doc. 72-3 at 42 (January 15, 2020 email from Mr. Oliva 24 acknowledging receipt, identifying spelling error, and sending agreement back to Plaintiffs 25 with proposed edits)). Plaintiffs then responded to Mr. Oliva’s suggested edits on January 26 20, 2020. (Doc. 72-3 at 36-37). Mr. Oliva executed the NDA by February 3, 2020. (Doc. 27 20 Ms. Gurka also explained she was unable to open the virtually submitted document son 28 July 31st, when she received them, because they were password protected, so she had to wait for the hard copy documents to arrive to review them. (Doc. 214-20 at 10). 1 72-3 at 36). On February 13, 2020, Plaintiffs sent the remaining information and documents 2 to Mr. Oliva. (Doc. 181-15). There is no evidence suggesting either BIC or Mr. Oliva was 3 purposefully or unreasonably delaying signing the nondisclosure agreement. Indeed, there 4 were back and forth edits to the agreement, and the dates show constant forward progress 5 on negotiating and executing the agreement that was first requested on December 20, 2019 6 and executed by February 2, 2020. Additionally, Plaintiffs requested the nondisclosure 7 agreement and were responsible for at least part of the delays (e.g., not sending the 8 nondisclosure agreement until a month after Mr. Oliva’s request for documents, the 9 typographical error made when sending it to him, and the ten days that passed after Mr. 10 Oliva executed the document). 11 Plaintiffs lastly complain they did not have a meeting with BIC until March, “nearly 12 a year after [they] submitted their first notice of the losses.” (Doc. 214-1 at 22).21 Neither 13 Plaintiffs nor Defendants specifically explain what happened to this investigation after that 14 meeting in March, April, and May 2020, but BIC’s denial letter was sent on May 21, 2020. 15 (BIC SOF at ¶ 80; Doc. 210-28).22 Plaintiffs have not pointed to any evidence suggesting 16 this final delay was objectively unreasonable. 17 Moreover, even if BIC was objectively unreasonable in its investigation (either in 18 its adequacy or its timing), Plaintiffs fail to provide any admissible evidence demonstrating 19 BIC’s subjective knowledge or disregard for any unreasonable behavior. See Montoya 20 Lopez v. Allstate Ins. Co., 282 F. Supp. 2d 1095, 1101 (D. Ariz. 2003) (finding, in addition 21 to no objective evidence of unreasonable delay, no evidence of subjective 22 unreasonableness). Because BIC moves for summary judgment on this issue, the Court 23 draws all inferences in favor of Plaintiffs; however, Plaintiffs cannot survive summary 24 judgment based on speculation alone. See Centeno v. Am. Liberty Ins. Co., 2019 WL 25 21 Meanwhile, however, Mr. Oliva had asked Plaintiffs to find a date to meet as early as 26 January 30, 2020, before the nondisclosure agreement had been signed, and on February 12, had to ask Plaintiffs again to confirm a meeting date of March 9, which Plaintiffs 27 confirmed on February 14. (Doc. 72-3 at 32-36). 28 22 March, April, and May 2020 were unusual times and some delay in processing insurance claims during that time is not surprising. 1 4849548, at *6 (D. Ariz. Oct. 1, 2019) (granting defendant’s motion for summary judgment 2 because plaintiff’s “speculative and conclusory evidence . . . lacks the probative value to 3 raise a genuine issue of material fact regarding [defendant’s] intent”). See also Hill v. 4 Walmart Inc., 32 F.4th 811, 818 (9th Cir. 2022) (holding, under California law, that because 5 “[plaintiff’s] argument amounts to mere speculation that [defendant] was acting in bad 6 faith,” it was “insufficient to defeat summary judgment”). Compare Martin v. Great Lakes 7 Reinsurance (U.K.), P.L.C., 2010 WL 94120, at *5 (D. Ariz. Jan. 6, 2010) (denying 8 summary judgment because plaintiff presented evidence that defendant consciously 9 disregarded a reputable estimate and threatened to withdraw an unreasonably low offer of 10 settlement if not accepted within seven days).23 BIC’s motion for summary judgment on 11 bad faith will be granted. 12 CONCLUSION 13 Plaintiffs’ two losses are not covered under the plain and ordinary reading of the 14 relevant sections of the Primary Policy. Thus, Plaintiffs’ Motion for Partial Summary 15 Judgment will be denied, and BIC’s and GAIC’s motions will be granted as to all of 16 Plaintiffs’ claims. The parties are to file a Joint Statement indicating whether Defendants’ 17 counterclaims are still pending in light of this ruling. 18 Accordingly, 19 IT IS ORDERED Plaintiffs’ Motion for Partial Summary Judgment (Doc. 151) is 20 DENIED. 21 23 BIC also argues that Plaintiffs suffered no damages from any allegedly unreasonable 22 investigation, essentially barring this claim. Indeed, “an element of bad faith, like any other 23 tort, is causation and damages.” Demetrulias, 917 F. Supp. 2d at 1010. Plaintiffs vigorously contend they suffered damages from BIC’s delay, but they have provided no admissible 24 evidence to support that claim. Plaintiffs’ statement of facts asserts that they “suffered economic, consequential, and general damages” as “a direct and proximate result of BIC’s 25 bad faith,” and that they have “not received the benefits of the Primary Policies and have 26 been forced to incur costs and expend resources to pursue recovery.” (Doc. 214-2 at ¶ 89). However, their only citation to support their assertion of damages is their own amended 27 complaint. (Id.). Additionally, it is unclear what damages Plaintiffs contend resulted from 28 the alleged bad faith delay in assessing their claims, rather than simply from the ultimate denial of coverage. 1 IT IS FURTHER ORDERED Defendant BIC’s Motion for Partial Summary Judgment (Doc. 145) is GRANTED. 3 IT IS FURTHER ORDERED Defendant GAIC’s Motion for Summary Judgment 4|| (Doc. 147) is GRANTED. 5 IT IS FURTHER ORDERED within 14 days from this Order, the Parties shall file || either a Joint Statement or Separate Statements addressing whether Defendants’ rescission || counterclaims are still pending. 8 Dated this 14th day of March, 2023. 9 fo . Honorable Roslyn ©. Silver 2 Senior United States District Judge 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -31-