Am. Tooling Ctr., Inc. v. Travelers Cas. & Sur. Co. of Am.

• Decision Date: 13 July 2018
• Docket Number: No. 17-2014,17-2014
• Citation: 895 F.3d 455
• Parties: AMERICAN TOOLING CENTER, INC., Plaintiff-Appellant, v. TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

895 F.3d 455

AMERICAN TOOLING CENTER, INC., Plaintiff-Appellant,

v.TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA, Defendant-Appellee.

No. 17-2014

United States Court of Appeals, Sixth Circuit.

Argued: May 2, 2018

Decided and Filed: July 13, 2018

Rehearing En Banc Denied August 28, 2018

ARGUED: Douglas Young, WILSON YOUNG PLC, Southfield, Michigan, for Appellant. Joel T. Wiegert, MEAGHER & GEER, P.L.L.P., Minneapolis, Minnesota, for Appellee. ON BRIEF: Douglas Young, WILSON YOUNG PLC, Southfield, Michigan, for Appellant. Joel T. Wiegert, Anthony J. Alt, MEAGHER & GEER, P.L.L.P., Minneapolis, Minnesota, for Appellee.

Before: MOORE, CLAY, and KETHLEDGE, Circuit Judges.

KAREN NELSON MOORE, Circuit Judge.

The plaintiff, American Tooling Center, Inc. ("ATC"), is a Michigan company that subcontracts some of its manufacturing work to a vendor in China. Between October 1, 2014 and October 1, 2015, it was insured by the defendant, Travelers Casualty and Surety Company of America ("Travelers"). During this time period, ATC received a series of emails, purportedly from its Chinese vendor, claiming that the vendor had changed its bank accounts and ATC should wire transfer its payments to these new accounts. After ATC had transferred approximately $834,000, it learned that the emails were fraudulent and had been sent by a wrongdoer impersonating its Chinese vendor. ATC therefore sought coverage for its loss under its "Wrap+" business insurance policy ("the Policy"), which it had purchased from Travelers. Travelers denied the claim. ATC sued for breach of contract, both parties moved for summary judgment, and the district court granted summary judgment to Travelers. For the following reasons, we REVERSE the district court’s grant of summary judgment to Travelers, grant summary judgment to ATC, and REMAND for further proceedings consistent with this opinion.

I. FACTS AND PROCEDURE

ATC is a tool and die manufacturer in Michigan that produces stamping dies for the automotive industry. R. 21-3 (Gizinski Dep. at 8) (Page ID #286). The company outsources some of its manufacturing orders. Id. at 19 (Page ID #289). Shanghai YiFeng Automotive Die Manufacture Co., Ltd. ("YiFeng"), a Chinese company, is one of ATC’s vendors. Id. ATC pays its vendors in four separate payments, based on the manufacturing progress of the order. Id. at 36–42 (Page ID #293–95). In order to be paid for the work it has done, YiFeng emails ATC invoices. Id. at 45 (Page ID #296). After receiving an invoice from YiFeng, ATC goes through a multi-step process before it will wire the money to YiFeng.

First, ATC employees verify that YiFeng has completed the necessary steps required by the payment schedule for the next payment. Id. at 48 (Page ID #296). Each week, ATC’s Vice President and Treasurer, Gary Gizinski, reviews a physical spreadsheet of the outstanding accounts payable and determines which bills need to be paid that week. R. 21-3 (Gizinski Dep. at 59–61) (Page ID #299–300). ATC pays YiFeng and its other international vendors via wire transfer. Id. at 62 (Page ID #300). To initiate a wire transfer, Gizinski signs into a banking portal using software on his computer. Id. at 70 (Page ID #302). He manually enters the payee’s name, banking information, and the amount to be wired. Id. at 69, 140 (Page ID #302, 319). After Gizinski submits the wire transfer request, ATC’s Assistant Comptroller must log into the banking portal using his computer to approve it. Id. at 72 (Page ID #302).

This is the procedure for paying invoices that ATC employees followed in the spring of 2015. On March 18, 2015, Gizinski emailed YiFeng employee Jessie Chen requesting that Chen provide ATC all outstanding invoices. R. 21-4 (Proof of Loss at 23) (Page ID #351). An unidentified third party, through means unknown, intercepted this email. Id. at 24 (Page ID #352). This third party, impersonating Chen, then began a correspondence with Gizinski about the outstanding invoices. See, e.g. , id. at 39–40 (Page ID #367-68). On March 27, 2015, the impersonator emailed Gizinski and claimed that, due to an audit, ATC should wire its payments to a different account from usual. Id. at 45 (Page ID #373). YiFeng had previously (and legitimately) informed ATC it had changed its banking details, and ATC had no process for verifying the changed information. R. 21-3 (Gizinski Dep. at 114, 117) (Page ID #313–14). Consequently, Gizinski wired the money to the new account. Id. at 142 (Page ID #320).

On April 3, the impersonator emailed Gizinski and informed him that "due to some new bank rules in the province," the previous wire transfer was not credited to its account and therefore it would return the payment. R. 21-4 (Proof of Loss at 63) (Page ID #391). The impersonator requested that Gizinski instead wire the money to a different bank account. Id. Gizinski wired the money to this new account on April 8, 2015. R. 23-10 (Apr. 8, 2015 Wire Transfer) (Page ID #736). The impersonator ran this scam two more times and Gizinski wired additional payments of $1575 and $482,640.41 on April 9, 2015 and May 8, 2015. R. 21-4 (Proof of Loss at 3) (Page ID #331). When the real YiFeng demanded payment, ATC realized it had wired the money to an imposter. R. 21-3 (Gizinski Dep. at 166) (Page ID #326). ATC paid YiFeng approximately 50% of the outstanding debt, and agreed that the remaining 50% would be contingent on ATC’s insurance claim. Id. at 126–27 (Page ID #316).

ATC sought recovery for its loss from Travelers, arguing that it fell within the "Computer Fraud" provision of the Policy, but Travelers denied the claim. R. 21-5 (July 8, 2015 Denial Ltr.) (Page ID #459–61); R. 21-6 (Sept. 16, 2015 Appeal Ltr.) (Page ID #463–67); R. 21-7 (Oct. 23, 2015 Affirming Denial Ltr.) (Page ID #469–71). ATC subsequently sued Travelers for breach of contract. R. 1 (Compl.) (Page ID #1–16). After discovery, both parties moved for summary judgment. R. 21 (Pl. Mot. for Summ. J.) (Page ID #170–98); R. 22 (Def. Mot. for Summ. J.) (Page ID #591–623). The district court granted Travelers summary judgment, holding that ATC’s loss was not covered under the Policy. R. 33 (Dist. Ct. Op. at 7–8) (Page ID #969–70). ATC timely appealed. R. 35 (Notice of Appeal) (Page ID #972–73).

II. ANALYSIS

A. Standard of Review

We review de novo a district court’s grant of summary judgment. Luna v. Bell , 887 F.3d 290, 297 (6th Cir. 2018). Summary judgment is proper if the moving party "shows that there is no genuine dispute as to any material fact." FED. R. CIV. P. 56(a). "For this determination, we review all facts in a light that is most favorable to, and draw all reasonable inferences in favor of, the nonmoving party." Byrd v. Tenn. Wine & Spirits Retailers Ass’n , 883 F.3d 608, 613 (6th Cir. 2018) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) ).

The parties agree that Michigan law governs the interpretation of the Policy. Appellant Br. at 4; Appellee Br. at 18. Under Michigan law, the insured has the burden of proving coverage. Pioneer State Mut. Ins. Co. v. Dells , 301 Mich.App. 368, 836 N.W.2d 257, 263 (2013) (citing Solomon v. Royal Maccabees Life Ins. Co ., 243 Mich.App. 375, 622 N.W.2d 101, 103 (2000) ). If the insured demonstrates that the policy provides coverage, then the insurer has the burden of showing that an exclusion provision precludes coverage. Id. (citing Heniser v. Frankenmuth Mut. Ins. Co. , 449 Mich. 155, 534 N.W.2d 502, 510 (1995) ).

B. Coverage

ATC argues that its loss is a result of computer fraud, which is a type of computer crime the Policy covers. Appellant Br. at 5. The Policy states:

F. Computer Crime

1. Computer Fraud

The Company will pay the Insured for the Insured’s direct loss of, or direct loss from damage to, Money , Securities and Other Property directly caused by Computer Fraud .

R. 21-2 (Policy at 27) (Page ID #227) (emphasis in original denoting terms explicitly defined by the Policy). Travelers argues that there is no coverage because: (1) ATC did not suffer a "direct loss"; (2) this is not a case of "Computer Fraud"; (3) the loss was not "directly caused by Computer Fraud." Each of these arguments fails: ATC’s loss is covered by the Policy.

1. ATC Suffered a "Direct Loss"

ATC and Travelers disagree about whether the three wire transfers of money to the impersonator constitute a "direct loss" of ATC’s money. Appellant Br. at 13–14; Appellee Br. at 15–17. ATC argues that it suffered a direct loss the moment it paid $834,107.76 to the impersonator, because it no longer had that money in its bank account. Appellant Br. at 13. In contrast, Travelers argues that the loss did not arise when ATC paid the impersonator—because ATC had already contracted with YiFeng to pay that amount of money for the product it had received—but instead the loss arose later, after the fraud was discovered, when ATC agreed to pay YiFeng at least half of the money still owed. Appellee Br. at 15. At issue is what is meant by the word "direct."

Michigan courts interpret the terms of an insurance policy "in accordance with Michigan’s well-established principles of contract construction." Citizens Ins. Co. v. Pro-Seal Serv. Grp., Inc. , 477 Mich. 75, 730 N.W.2d 682, 685 (2007) (quoting Henderson v. State Farm Fire & Cas. Co. , 460 Mich. 348, 596 N.W.2d 190, 193 (1999) ). If a policy does not define a relevant term "reviewing courts must interpret the terms of the contract in accordance with their commonly used meanings." Id. at 686 (quoting Henderson , 596 N.W.2d at 194 ).

The Michigan Supreme Court has not previously analyzed the meaning of the word "direct" in an insurance policy. But the Michigan Court of Appeals, in an unpublished decision, has done so.¹ In Acorn Investment Co. v. Michigan Basic Property Insurance Ass’n , No. 284234, 2009 WL 2952677, at *2 (Mich. Ct. App. Sept. 15, 2009), Michigan’s appellate court defined a "direct" loss as one resulting from an " ‘immediate’ or ‘proximate’...