CyrusOne, L.L.C. v. Great Am. Ins. Co. , 2021 Ohio 1971 ( 2021 )

[Cite as CyrusOne, L.L.C. v. Great Am. Ins. Co., 2021-Ohio-1971.]
IN THE COURT OF APPEALS
FIRST APPELLATE DISTRICT OF OHIO
HAMILTON COUNTY, OHIO
CYRUSONE, LLC, : APPEAL NOS. C-200156
C-200162
and : TRIAL NO. A-1504669
CINCINNATI BELL, INC., : O P I N I O N.
Plaintiffs-Appellees/Cross- :
Appellants,
:
vs.
:
GREAT AMERICAN INSURANCE
COMPANY, :
Defendant-Appellant/Cross- :
Appellee. :
Civil Appeals From: Hamilton County Court of Common Pleas
Judgment Appealed From Is: Affirmed
Date of Judgment Entry on Appeal: June 11, 2021
Baker & Hostetler LLP, Ted T. Martin, Robert T. Razzano and Carrie Dettmer Sly,
for Plaintiffs-Appellees/Cross-Appellants,
Eckert Seamans Cherin & Mellott, LLC, F. Joseph Nealon, Michael A. Graziano,
Keating Muething & Klekamp PLL and Rachael A. Rowe, for Defendant-
Appellant/Cross-Appellee.
OHIO FIRST DISTRICT COURT OF APPEALS
BOCK, Judge.
{¶1} These appeals arise from an insurance-claim dispute under a crime-
and-fidelity policy (“the policy”) issued by defendant-appellant/cross-appellee Great
American Insurance Company to plaintiffs-appellees/cross-appellants Cincinnati
Bell, Inc., and CyrusOne, LLC, (collectively, “CyrusOne”). The policy insures against
losses caused by the acts of a “dishonest employee.”
{¶2} CyrusOne submitted a claim under the policy reporting that its
employee, Dennis Scheib, had engaged in an elaborate self-dealing scheme in which
he received “kickbacks” from CyrusOne’s vendors and directly or indirectly passed
the costs of the kickbacks to CyrusOne.
{¶3} After Great American failed to cover the claim, CyrusOne sued, seeking
a declaratory judgment that CyrusOne’s claim was a covered loss under the policy
and alleging bad faith and breach of contract. CyrusOne alleged that its loss stemmed
from Scheib, acting as CyrusOne’s purchasing agent, accepting kickbacks from
vendors in exchange for awarding them construction work and having a financial
interest in several of the vendors to whom Scheib awarded work.
{¶4} The trial court entered judgment in favor of CyrusOne and awarded it
$4,654,560 in damages. Both parties appeal from this judgment.
{¶5} For the following reasons, we affirm the trial court’s judgment.
The Insurance Policy
{¶6} Cincinnati Bell, Inc., CyrusOne’s former parent company, purchased a
crime-protection policy from Great American, which covered losses discovered
during the calendar year 2011. CyrusOne was an insured entity under the agreement.
The policy, subject to a $1,000,000 deductible, covered:
I. Employee dishonesty
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We will pay for loss of, and loss from damage to, money,
securities and other property resulting directly from
dishonest acts committed by an employee, whether
identified or not, acting alone or in collusion with other
persons, with the manifest intent to:
a. Cause you to sustain loss, and also
b. Obtain financial benefit (other than employee
benefits earned in the normal course of
employment, including salaries, commissions, fees,
bonuses, promotions, awards, profit sharing or
pensions) for:
1. The employee; or
2. any person or organization intended by
the employee to receive that benefit.
{¶7} The policy required insureds to bring legal action against Great
American within “two years from the date you discover the loss.” The policy defined
discovery of a loss as “when you first become aware of facts which would cause a
reasonable person to assume that a loss covered by this insurance has been or will be
incurred, even though the exact amount or details of loss may not then be known.”
{¶8} An endorsement to the policy provided that Great American shall pay
“the insured for 50% of the claims expense of the insured on any paid claim up to the
limit of $100,000.”
Scheib’s Self-Dealing Scheme
{¶9} CyrusOne builds and operates datacenters, which are structures that
house electrical components to provide power to computer servers that are then
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OHIO FIRST DISTRICT COURT OF APPEALS
leased or sold to customers. After learning of his scheme, CyrusOne sued Scheib for
breach of fiduciary duty. An arbitration panel, applying Texas law, described the
details of Scheib’s scheme and determined that Scheib had defrauded CyrusOne.
{¶10} Scheib’s scheme began shortly after CyrusOne hired him in August
2008 as its director of new construction. Over the next three years, Scheib managed
approximately 21 construction projects. He was responsible for developing a budget
for each project. He ordered the necessary power equipment and air conditioning
units from vendors. Scheib obtained bids from subcontractors for engineering,
electrical, and commissioning work necessary to complete the construction and to
make the datacenters operational.
{¶11} Scheib instructed the vendors and subcontractors (collectively, “the
vendors”) to only communicate with him regarding the construction work—he was to
be their sole contact at CyrusOne as he was responsible for approving invoices from
vendors.
The Vendors
{¶12} During Scheib’s employment, CyrusOne instituted a preferred-vendor
program in which Scheib recommended preferred vendors. CyrusOne could approve
or deny his recommendation. Scheib recommended, and CyrusOne approved, Cabo
Electric, Inc., as a preferred vendor. Jim Stark, one of Cabo Electric’s owners,
testified in his deposition that his company could not compete with another electric
vendor, FSG, whose bids were consistently lower.
{¶13} Cabo Electric was incorporated in January 2009 by Tim Preski and
Stark, friends of Scheib’s. Notably, in that same month, Scheib incorporated his own
company, Cabo Tech. According to Scheib, Cabo Tech received an almost 40 percent
interest in Cabo Electric in exchange for it giving $250,000 to “seed” Cabo Electric.
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Eventually, half of the seed money was returned to Scheib, but he still received 40
percent of Cabo Electric’s profits.
{¶14} Between 2009 and 2011, Scheib awarded Cabo Electric more than $19
million of work on CyrusOne projects. Cabo Electric (as well as Tek Energy, LLC, a
part owner of Cabo Electric) transferred more than $1,500,000 to Scheib and/or his
businesses. Stark testified that although Cabo Electric was making significant
payments to Scheib, he was confident that his company’s bids would be profitable
and that it would not have to dip into any of Scheib’s seed money.
{¶15} K2 Construction (“K2”), a general contractor, was another CyrusOne
vendor. In 2009, K2 presented an initial bid for a CyrusOne project—this bid
included a line item for $170,000 in commissioning. (Commissioning is a quality-
control review to ensure that the equipment installed in the datacenter is performing
at design specifications.) But in its final bid, although the total bid amount stayed the
same, the line item for commissioning had been removed. Other line item amounts
had been increased by a total of $170,000. Despite the commissioning line item
disappearing, Scheib’s company, Datacenter Management Services (“DMS”),
invoiced K2—and K2 paid—$170,000 for purportedly completing commissioning
work. K2’s owner testified that any money he spent on a CyrusOne project, he
recouped it by submitting an invoice to CyrusOne for that amount.
{¶16} Jim McDowell owned Critical Infrastructure Solutions (“CIS”). CIS
was a preferred vendor of CyrusOne. Most of CIS’s equipment sales were to
CyrusOne. Because of that, McDowell reported that when Scheib asked him to cover
the cost of a Mediterranean cruise for Scheib and his wife, CIS did so.
{¶17} McDowell recalled that although he was hesitant, he gave Scheib’s
company, Cabo Tech, a 25 percent interest in CIS in exchange for “collateral,” which
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McDowell said he had not needed for his business. McDowell testified that he only
entered into this arrangement because he did not want to upset Scheib, who directed
CyrusOne’s construction business. During the course of Scheib’s employment with
CyrusOne, CIS gave Scheib and his companies more than $300,000.
{¶18} Critical Mission Corporation, a.k.a. Contract Management Corporation
(“CMC”), a company owned by Tim Preski (Scheib’s friend), was also a preferred
vendor during Scheib’s employment. CMC performed commissioning work for
CyrusOne projects. CyrusOne paid CMC more than $ 1,000,000 for commissioning
work during Scheib’s employment. During this same time, CMC paid Scheib
$99,000. Scheib claimed that this payment was compensation for writing test scripts
for commissioning. But Scheib could not produce documentation (other than his
invoice) that he or DMS had actually performed that work for CMC.
{¶19} Over the course of his employment at CyrusOne, Scheib and his
companies, Cabo Tech and DMS, received approximately $5.6 million from
CyrusOne vendors. Although Scheib contended that some of this money was for work
on projects unrelated to CyrusOne, he could not produce business records to support
his contention.
CyrusOne’s Discovery of Loss
{¶20} In the fall of 2010, CyrusOne’s president, Dave Ferdman, became
suspicious about Scheib’s activities as director of construction when he learned that
Scheib had invested a substantial sum of money, inconsistent with his salary, in a
real estate venture. CyrusOne hired Premier Protection Group (“Premier”) to
investigate Scheib to determine if he was engaged in self-dealing or using his
employment with CyrusOne to enrich himself. CyrusOne permitted Premier to place
a recording device in Scheib’s office to secretly record his conversations.
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{¶21} Sharon White Ellis, a CyrusOne human-resources employee, testified
that she had listened to the recordings. She recalled that the conversations were
difficult to understand and that she had heard nothing to demonstrate that Scheib
had been acting improperly. She testified that she believed that she gave the tapes to
her replacement when she left the company. CyrusOne could not locate the
recordings.
{¶22} In May 2011, Premier reported to CyrusOne that Scheib’s repeatedly
awarding work to Cabo Electric created an appearance of collusion between Scheib
and Tim Preski, the owner of Cabo Electric. But Premier noted, “due to the very
limited scope of the investigation and without additional investigative processes, this
hypothesis cannot be supported.”
{¶23} CyrusOne reported Premier’s findings to Cincinnati Bell, which then
initiated its own investigation into Scheib’s activities. Cincinnati Bell retained a law
firm and an accounting firm, KPMG, to investigate whether Scheib was receiving
kickbacks and/or bribes from vendors.
{¶24} On Cincinnati Bell’s law firm’s advice, CyrusOne contacted the United
States Postal Inspector to inform him that it suspected Scheib potentially was
involved in illegal activity in which he used the mail. CyrusOne sought the
Inspector’s assistance with the investigation to cut down on its time and costs
investigating Scheib. The United States Postal Inspector declined to participate.
{¶25} On August 4, 2011, Bryan O’Connell from KPMG sent the following
email to Cincinnati Bell’s general counsel:
Here are examples of what we have pulled together
relating to subcontracting and payments which go back
to Dennis’ business Datacenter Management Services
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OHIO FIRST DISTRICT COURT OF APPEALS
(DMS). We believe that this may be the principal
scheme and we have begun to identify this scenario
during his employment with CyrusOne among the
documents and data we are analyzing. We are focused
on identifying other examples of this currently. Let us
know what questions you have.
{¶26} Attached to the email was documentation showing that CMC had paid
Scheib for commissioning work that he had performed on a CyrusOne project before
he began his employment with CyrusOne. O’Connell testified that at the time that he
had sent this email, KPMG had not yet identified any examples of payments from
vendors to DMS or Scheib during Scheib’s employment with CyrusOne. Further,
O’Connell testified that KPMG had not reached a conclusion as to whether Scheib’s
activities had been detrimental to CyrusOne.
{¶27} On August 24, 2011, CyrusOne terminated Scheib’s employment.
Following his termination, CyrusOne began interviewing its vendors and other
employees and learned the extent of Scheib’s scheme.
The Insurance Claim
{¶28} CyrusOne notified Great American of its potential claim in September
2011. CyrusOne indicated on its third proof of loss submitted to Great American that
CyrusOne had discovered the loss, at the earliest, on August 23, 2011.
{¶29} Tracey Archbold, the adjustor assigned to CyrusOne’s claim, testified
that although she had initially communicated incorrect information to CyrusOne
about coverage under the policy, she accurately communicated what documentation
was needed to support a covered loss. Further, she testified that Great American
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OHIO FIRST DISTRICT COURT OF APPEALS
granted CyrusOne several time extensions to gather and submit information to
support the claim.
{¶30} Archbold testified that she remembered receiving an email from Jerry
Douglas, the underwriter of the policy, which said in part, “Cannot afford another
one this year. Save Me!” But Archbold testified that the comment was not relevant to
her investigation of CyrusOne’s claim and she ignored it. Douglas testified the
comment was “tongue-in-cheek” and not a serious request.
{¶31} At trial, Robert Berens, Cincinnati Bell’s risk management consultant,
confirmed that Great American had granted CyrusOne several extensions of time to
submit evidence demonstrating its loss.
{¶32} Thomas Maloney, the vice-president of Great American’s crime
division, testified that Great American consistently and repeatedly told CyrusOne
that it could demonstrate a covered loss by providing inflated invoices from vendors.
{¶33} John Retinger, Great American’s assistant vice-president of claims,
testified that in kickback schemes he had investigated (more than ten), the insured’s
loss was at least the amount of the kickback; otherwise, it would not “make sense.”
Commissioning
{¶34} Jim Hatem, who replaced Scheib as director of construction at
CyrusOne, testified at trial. During Scheib’s tenure, Hatem had worked as a general
contractor on about 33 percent of CyrusOne’s datacenter projects that Scheib had
managed. Based on his experience, the trial court declared Hatem an expert on
commissioning and datacenter construction.
{¶35} Hatem testified that commissioning must be completed by an
independent third party for it to have value. He reiterated no one having a stake in
the completion of a project—such as the owner of a datacenter or vendors who
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OHIO FIRST DISTRICT COURT OF APPEALS
supplied and installed the equipment—should perform commissioning. Thus, Hatem
opined that any commissioning work performed by DMS technically had no value
because it was performed by an interested party.
{¶36} Hatem testified that commissioning usually takes approximately 20 to
25 people a week to complete. He testified that he had observed Scheib purportedly
commission a CyrusOne project in only two days, and therefore, the datacenter could
not have been properly commissioned.
{¶37} But McDowell, the owner of CIS, testified in his deposition that he saw
five or six CMC employees commission a CyrusOne project and that those employees
had worked “crazy-long hours.”
Amount of Loss
{¶38} At trial, Scott Bayley, a certified fraud examiner and public accountant,
testified as CyrusOne’s expert. Bayley reported that he had 35 years of experience in
forensic accounting, valuation, and economic-damage analysis. Further, he had
experience investigating kickback schemes.
{¶39} Bayley, who also provided expert testimony at CyrusOne and Scheib’s
arbitration, testified that Scheib and his companies had received at least $5,654,560
in kickbacks from vendors while Scheib was employed at CyrusOne. Bayley’s
flowchart, which detailed the flow of money (and the specific amount) from each
vendor to Scheib and his business, was admitted into evidence.
{¶40} Bayley testified that Scheib’s kickback scheme directly harmed
CyrusOne by inflating the costs of construction above fair value. Bayley explained
that under accepted economic theory, a kickback scheme necessarily involves
inflating the vendor’s price for the good or service above fair value by at least the
amount of the kickback or bribe. Therefore, Bayley opined that the $5.6 million
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OHIO FIRST DISTRICT COURT OF APPEALS
“represents a loss to CyrusOne as a result of purposeful inflation.” He defined
“purposeful inflation” as “inflating the invoices so that the kickbacks can be paid to
[Scheib], and the vendor can still make the profit that they desire to make.”
{¶41} In reaching his opinion, Bayley stated that he had relied on Scheib’s
tax returns, the tax returns of the vendors in which Scheib had maintained a
financial interest, bank records (including cancelled checks), construction records,
including invoices and electronic mail correspondence, and testimony from other
witnesses. For example, he relied on Stark’s testimony that to be profitable as a
vendor of CyrusOne, Stark had to “include [in the bids] the amounts that they were
paying to Mr. Scheib.”
{¶42} Bayley also testified that Scheib had received $310,000 worth of gifts
from vendors, including a luxury car, a Mediterranean cruise, and construction of a
pool house at Scheib’s home. He testified that this was a loss to CyrusOne as well.
{¶43} Finally, Bayley testified that from the time he was initially contacted
about Scheib’s activities in 2013, he had invoiced CyrusOne $202,791.48 for his
services.
Trial Court Judgment
{¶44} Before trial, the trial court granted summary judgment in favor of
Great American on CyrusOne’s bad-faith claim and in favor of CyrusOne on Great
American’s affirmative defense that CyrusOne “failed to cooperate” in the
investigation of the claim. Further, the trial court accepted the CyrusOne/Scheib
arbitration panel’s findings about the details of Scheib’s scheme and its conclusion
that Scheib had defrauded CyrusOne. Finally, the trial court ruled that “to show a
covered loss, CyrusOne must demonstrate that it sustained an actual depletion of
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funds, and the amount of money Scheib received from his schemes does not provide
proof in and of itself that CyrusOne suffered depletion in its assets.”
{¶45} After trial on the remaining claims, the trial court found that CyrusOne
had suffered a loss of $5,654,560 and, after subtracting the $1 million policy
deductible, awarded CyrusOne $4,654,560. The trial court asked CyrusOne to submit
a judgment entry for the court’s signature. CyrusOne asked the court to increase its
award to $5,952,401, which included $5,654,560 from its loss from kickbacks,
$1,197,070 paid by CyrusOne to CMC for fictional commissioning, and $100,000 in
expenses it incurred investigating the claim. The trial court declined to alter its
award and entered judgment awarding CyrusOne $4,654,560.
{¶46} Both parties appealed.
Great American’s Appeal
I. The damage award was supported by competent, credible evidence
{¶47} Great American’s first assignment of error asserts that the trial court
erred by entering judgment in favor of CyrusOne and awarding it $4,654,560 in
damages.
{¶48} The standard of review following a civil bench trial is whether the trial
court’s judgment is against the manifest weight of the evidence as supported by
competent, credible evidence. Downtime Rebuild, LLC v. Trinity Logistics, Inc.,
2019-Ohio-1869, 135 N.E.3d 1253, ¶ 12 (1st Dist.), citing Eastley v. Volkman, 132
Ohio St.3d 328, 2012-Ohio-2179, 972 N.E.2d 517. Under a manifest-weight-of-the-
evidence review, “every reasonable intendment and every reasonable presumption
must be made in favor of the judgment and the finding of facts.” Id., citing Eastley at
¶ 21.
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{¶49} When reviewing a trial court’s decision under a manifest-weight-of-
the-evidence standard, appellate courts review the entire record, weigh the evidence
and all reasonable inferences, consider the credibility of the witnesses, and
determine whether the trial court “clearly lost its way and created a manifest
miscarriage of justice.” Fischoff v. Hamilton, 1st Dist. Hamilton No. C-120200, 2012-
Ohio-4785, ¶ 11.
{¶50} The insurance policy stated that it covered a loss of money caused by
the dishonest acts of the insured’s employee, regardless of whether the employee acts
alone or in collusion with other persons, if those acts cause the insured to sustain a
loss and the employee (or some person or entity the employee designates) obtains a
financial benefit.
{¶51} Great American maintains that CyrusOne failed to prove it had
sustained a loss under the policy because it failed to demonstrate that its vendors
had passed along the cost of any kickbacks or bribes to CyrusOne in the form of
inflated bids or invoices. We disagree. CyrusOne’s expert, a CPA and certified fraud
examiner, provided unrebutted testimony that the invoices or bids submitted by
vendors to CyrusOne were inflated by at least the amount of the kickbacks and that
Scheib had received more than $5,000,000 in kickbacks. Bayley’s testimony
supports the trial court’s determination that CyrusOne sustained a loss under the
policy.
{¶52} First, Bayley traced payments from CyrusOne to its vendors and then
from the vendors directly to Scheib and his businesses. He testified that Scheib and
his companies had received at least $5,654,560 in kickbacks from vendors during his
employment with CyrusOne. Scheib’s tax statements support this testimony. Scheib
admitted in his deposition that he had received millions of dollars from CyrusOne
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OHIO FIRST DISTRICT COURT OF APPEALS
vendors, but he claimed some of it was for work performed on projects unrelated to
CyrusOne construction. Despite making this claim, Scheib could not provide any
documentation—work records, time sheets, etc.—that he had performed any work on
any project unrelated to CyrusOne. Notably, Bayley testified that after Scheib’s
employment with CyrusOne ended, so did his receipt of money from CyrusOne
vendors.
{¶53} Next, Bayley testified, based on his experience investigating kickback
schemes and under accepted economic theory, that a vendor who pays a kickback
inflates its bid above fair value by at least the amount of the kickback. (Great
American’s assistant vice-president of claims agreed with this opinion.) As Bayley
explained at trial, if Scheib had been an honest employee, he would have negotiated
the price for the goods or services down to the fair-value amount without tacking on
the amount of the kickback, which would have saved CyrusOne money. Instead,
Scheib was “dishonest” and chose not to negotiate a lower price for CyrusOne.
Instead, he kept a kickback for himself, thereby causing CyrusOne to spend more
money. After testifying to the amount of kickbacks that Scheib had received, Bayley
opined that CyrusOne had suffered a $5.6 million loss due to the “purposeful
inflation” of the vendors’ invoices and/or bids. This unrebutted testimony
competently and credibly connected Scheib’s receipt of $5.6 million in kickbacks as
equal to—or less as—the financial loss suffered by CyrusOne.
{¶54} Lastly, Great American contends that even if there was competent,
credible evidence that CyrusOne had suffered a financial loss, the trial court erred in
determining the amount of that loss. Great American argues that the bank
statements and checks admitted into evidence to support the loss only amount to
$2,418,526.94. But Bayley testified that his opinion was not based solely on bank
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OHIO FIRST DISTRICT COURT OF APPEALS
records, but on Scheib’s tax documents as well. His personal and business tax
records demonstrate that he received an additional $3,000,000 from vendors during
his employment with CyrusOne. This documentary evidence, combined with Scheib’s
testimony that all money he received during the relevant timeframe came from
vendors of CyrusOne (although he maintains that it was for work unrelated to
CyrusOne projects), is competent, credible evidence of the amount of CyrusOne’s
loss.
{¶55} Because competent, credible evidence supports the trial court’s
conclusion about CyrusOne’s amount of loss, Great American’s first assignment of
error is overruled.
II. CyrusOne’s loss was discovered after August 8, 2011
{¶56} In its second assignment, Great American contends that the court
erred when it determined that CyrusOne’s claim was not barred by the policy’s two-
year contractual period of limitations. The parties agree that if CyrusOne had
discovered its loss prior to August 8, 2011, then its claim would be barred by the
policy’s contractual period of limitations.
{¶57} The policy defines “discovery of loss” as “occur[ing] when you first
become aware of facts which would cause a reasonable person to assume that a loss
covered by this insurance has been or will be incurred even though the exact amount
or details of loss may not then be known.”
{¶58} Great American, citing Am. Mut. Share Ins. Corp. v. CUMIS Ins. Soc.,
Inc., 10th Dist. Franklin No. 08AP-576, 2009-Ohio-364, maintains that CyrusOne
discovered its loss no later than August 4, 2011, the date that KPMG sent Cincinnati
Bell documentation that a CyrusOne vendor had sent DMS a payment for
commissioning work and reported that KPMG believed that “this may be the
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OHIO FIRST DISTRICT COURT OF APPEALS
principal scheme” used by Scheib. This argument fails. The payment from the vendor
to DMS occurred before Scheib’s employment with CyrusOne. Further, O’Connell
confirmed that as of August 4, 2011, KPMG had not identified any payments going
from vendors to Scheib and his companies during Scheib’s employment and
confirmed that KPMG had not yet reached a conclusion as to whether any of Scheib’s
activities were detrimental to CyrusOne.
{¶59} CUMIS is distinguishable from this case. At issue in CUMIS was when
an employer first discovered a loss, thus triggering its duty to notify the insurer. In
CUMIS, an employee had made questionable financial transactions. Id. at ¶ 2. After
he was terminated, his employer entered into a supervisory agreement with a credit
union and two other entities. Id. at ¶ 3. The supervisory agreement did not allege that
the employee had committed fraud, but did name concerning facts, such as the
employee paying expenses that appeared personal, failing to provide a full
accounting of checks he wrote, and making preferential loans to risky investors. Id.
at ¶ 3-4. The CUMIS policy defined when discovery occurs as “when you first become
aware of facts which would cause a reasonable person to assume that a loss of a type
covered under this Bond has been or will be incurred.” Id. at 20. The court held that
the insured discovered the loss no later than when the parties entered into the
supervisory agreement.
{¶60} The employer in CUMIS had facts showing that its employee’s
dishonesty had caused a loss. But here, evidence supports the trial court’s conclusion
that CyrusOne did not have any facts that showed that Scheib had engaged in self-
dealing when he was a CyrusOne employee until after August 8, 2011. While KPMG’s
email correspondence may have caused CyrusOne to suspect that Scheib may be
engaged in improper activity, it did not yet know that Scheib’s activities were
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OHIO FIRST DISTRICT COURT OF APPEALS
“dishonest” and detrimental to the company. CyrusOne only gained that knowledge
after Scheib was terminated and CyrusOne had started contacting and interviewing
its vendors.
{¶61} Under a manifest-weight-of-the-evidence review, the trial court is
afforded wide deference. Based upon our review of the record, we conclude that there
is competent, credible evidence to support the court’s finding that CyrusOne had not
discovered its loss before August 8, 2011. The second assignment of error is
overruled.
III. CyrusOne did not prejudice Great American’s investigation
{¶62} In its final assignment, Great American argues that the trial court
erred by entering summary judgment in favor of CyrusOne on Great American’s
“failure to cooperate” defense.
{¶63} We review a grant of summary judgment de novo. Grafton v. Ohio
Edison Co., 77 Ohio St.3d 102, 105, 671 N.E.2d 241 (1996). Summary judgment is
appropriately granted when there are no genuine issues of material fact, the party
moving for summary judgment is entitled to judgment as a matter of law, and the
evidence, when viewed in favor of the nonmoving party, permits only one reasonable
conclusion, which is adverse to that party. State ex rel. Howard v. Ferreri, 70 Ohio
St.3d 587, 589, 639 N.E.2d 1189 (1994).
{¶64} CyrusOne moved for summary judgment on Great American’s defense
that CyrusOne had failed to cooperate in the investigation of its claim and that this
failure materially prejudiced Great American’s investigation. It was undisputed that
CyrusOne had permitted Premier to secretly record Scheib’s office activity and that
these recordings were not turned over to Great American.
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{¶65} In support of its motion for summary judgment, CyrusOne offered the
deposition testimony of Sharon White Ellis, a former human-resources employee.
Ellis testified that she had listened to a few of the tapes and that they were difficult to
understand. She does not remember what she did with the tapes, but that she may
have given them to her replacement when she left the company.
{¶66} Great American, although it had the opportunity to depose all the
people who were involved with the recording of Scheib’s office, did not present any
evidence that anything on the recordings was material to its investigation of
CyrusOne’s claim.
{¶67} The only evidence presented to the court was that the tapes had not
demonstrated any dishonest activity by Scheib. Moreover, CyrusOne did not
terminate Scheib after reviewing these tapes. Instead, it continued his employment
for another year. Accordingly, we conclude that reasonable minds could only find
that the failure to turn over these recordings did not materially prejudice Great
American’s investigation of CyrusOne’s claim.
{¶68} The third assignment of error is overruled.
CyrusOne’s Cross-Appeal
I. Great American acted in good faith in processing the claim
{¶69} In its first and second assignments of error, respectively, CyrusOne
contends that the trial court erred by granting Great American’s motion, and denying
its own motion, for summary judgment on its bad-faith claim.
{¶70} In its summary-judgment motion, Great American argued that
CyrusOne could not demonstrate that Great American had acted in bad faith in
processing CyrusOne’s claim. In support, Great American points to letters it had sent
to CyrusOne setting forth how it could prove a covered loss under the policy—by
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OHIO FIRST DISTRICT COURT OF APPEALS
submitting evidence demonstrating that CyrusOne had overpaid for goods or
services or that CyrusOne had paid for work that had not been performed. Further,
Great American pointed to the fact that it had granted several extensions to the
contractual period of limitations so that CyrusOne would have more time to gather
and submit proof of a covered loss.
{¶71} In Ohio, an insurance company has a fiduciary duty to act in good faith
toward its insured in carrying out its duties under the contract and fails to exercise
good faith when it refuses to pay a claim without “reasonable justification.” Zoppo v.
Homestead Ins. Co., 71 Ohio St.3d 552, 644 N.E.2d 347 (1994).
{¶72} CyrusOne disagreed with Great American as to what constituted a
covered loss under the policy. CyrusOne believed that because the arbitration panel,
in its lawsuit against Scheib, had found that Scheib had received more than
$5,000,000 in kickbacks from vendors, this in and of itself demonstrated a covered
loss under the policy. Therefore, CyrusOne argued that Great American did not have
a reasonable justification to deny its claim and instead had an improper financial
incentive to do so.
{¶73} In support of that argument, CyrusOne pointed to the “Save Me” email
sent from the underwriter to the claims adjuster, the underwriter’s letter to
CyrusOne inaccurately explaining a loss provision in the policy, and Great
American’s employee-pay structure in which employees in the claims division
received bonuses based upon the performance of their division.
{¶74} Although this is circumstantial evidence of a financial incentive to
deny the claim, that does not negate Great American’s good-faith handling of the
claim. Great American accurately described, in several letters to CyrusOne, the type
of proof necessary to demonstrate a covered loss. In addition, it was undisputed that
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OHIO FIRST DISTRICT COURT OF APPEALS
Great American granted several extensions of time for CyrusOne to gather and
submit the necessary proof.
{¶75} The two parties disagreed about whether the loss was covered and
what proof was required to show a loss. But this is not enough to show a bad-faith
denial of the claim. We find that Great American did not act arbitrarily or
capriciously in denying coverage. This claim involved a complicated financial scheme
and ultimately required expert testimony to demonstrate a loss. Because there was a
legitimate dispute as to coverage, Great American processed CyrusOne’s claim in
good faith.
{¶76} We overrule CyrusOne’s first and second assignments of error.
II. Damage award for commissioning is unsupported
{¶77} In its third assignment of error, CyrusOne contends that the trial court
erred by not including in its judgment CyrusOne’s loss of at least $1,197,841 caused
by fictional commissioning. We are unpersuaded.
{¶78} First, CyrusOne’s contention that the court intended to award damages
for fictional commissioning is undermined by the trial court’s refusal to award an
additional amount after CyrusOne asked it to do so when submitting the final
judgment entry for signature. The trial court meant to enter the award as it is.
{¶79} Second, CyrusOne’s argument that the $1.2 million should have been
included in the trial court’s award of damages because the commissioning work was
fictional also fails. CyrusOne points to Jim Hatem’s testimony that although
commissioning should take at least a week and requires between 20 and 25
employees, he only observed CMC perform commissioning for two or three days with
only four or five employees. However, Hatem admitted that he was only on site for a
few construction projects when commissioning was being done. Additionally,
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OHIO FIRST DISTRICT COURT OF APPEALS
McDowell testified that he had seen CMC on site to perform commissioning and said
that CMC employees worked some “crazy, long hours.”
{¶80} CyrusOne argues that even if commissioning work had been
performed, it had no value because it was performed by a nonindependent entity—
CMC’s owner also owned Cabo Electric, the preferred electrical vendor on CyrusOne
projects. Although Hatem testified that commissioning had no value if performed by
a nonindependent entity, the trial court was free to disregard this testimony or give it
little weight, especially given the undisputed fact that CyrusOne’s datacenters, all
commissioned by CMC, were in operation with paying customers leasing the
equipment. Therefore, the court could have reasonably concluded that CMC’s
commissioning services did have some value to CyrusOne and that a damage award
was not warranted.
{¶81} Although the trial court stated in its decision that CyrusOne’s
payments for fictional commissioning was “clearly a loss to CyrusOne,” this
statement was made in the context of the overall kickback scheme and not as a
separate finding in support of an additional damage award.
{¶82} An award of $1.2 million in damages for “fictional” commissioning is
unwarranted because there was conflicting testimony about whether commissioning
work was performed and there was no testimony as to whether CyrusOne had
overpaid for any commissioning work. The trial court’s choice to reject CyrusOne’s
request to include these damages was supported by competent, credible evidence.
{¶83} Accordingly, the third assignment of error is overruled.
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OHIO FIRST DISTRICT COURT OF APPEALS
III. Award for claim expenses was unsupported
{¶84} In its final assignment of error, CyrusOne argues that the trial court
erred by failing to award it $100,000 for claim expenses it had incurred in proving
its loss under the policy.
{¶85} The policy contains an endorsement, which provides coverage for 50
percent of claims expenses up to a limit of $100,000. Under the endorsement,
“claims expenses means reasonable expenses incurred by the Insured in establishing
the existence and amount of any direct loss.”
{¶86} At trial, Bayley testified that since 2013 (when he was hired by
CyrusOne for the arbitration proceeding) he had invoiced CyrusOne $202,719.48 for
his services. Although the invoices were submitted into evidence, it is unclear how
much time was spent in preparation for litigation (arbitration, depositions, and trial)
versus forensic-accounting work to establish the existence and amount of loss. In
addition, there was no testimony at trial regarding the breakdown of Bayley’s work.
As such, there was inadequate evidence presented to support a $100,000 award for
reasonable claim expenses. The fourth assignment of error is overruled.
Conclusion
{¶87} To find a judgment against the manifest weight of the evidence, this
court had to determine that the trial court clearly lost its way and created a manifest
miscarriage of justice that required reversal. This is not one of those rare cases
warranting a conclusion that the trial court’s judgment is contrary to the manifest
weight of the evidence. The trial court properly entered judgment for CyrusOne in
the amount of $4,564,560. Accordingly, the trial court’s judgment is affirmed.
Judgment affirmed.
ZAYAS, P.J., and BERGERON, J., concur.
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OHIO FIRST DISTRICT COURT OF APPEALS
Please note:
The court has recorded its own entry on the date of the release of this opinion.
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