Dataflow, Inc. v. Peerless Ins. Co.

• Decision Date: 30 September 2014
• Docket Number: 3:11-CV-1127 (LEK/DEP)
• Parties: DATAFLOW, INC.; DATAFLOW, LLC; and DATAFLOW REPROGRAPHICS, LLC, Plaintiffs, v. PEERLESS INSURANCE CO., Defendant.
• Court: U.S. District Court — Northern District of New York

DATAFLOW, INC.; DATAFLOW, LLC; and DATAFLOW REPROGRAPHICS, LLC, Plaintiffs, v. PEERLESS INSURANCE CO., Defendant.

3:11-CV-1127 (LEK/DEP)

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF NEW YORK

September 30, 2014

MEMORANDUM-DECISION and ORDER

I. INTRODUCTION

This matter, which arises out of a dispute regarding an insurance contract, returns to the Court on Plaintiffs Dataflow, Inc. ("Dataflow Inc."), Dataflow, LLC ("Dataflow LLC"), and Dataflow Reprographics, LLC's ("Reprographics") (collectively, "Plaintiffs"), and Defendant Peerless Insurance Co.'s ("Defendant") Motions for summary judgment. Dkt. Nos. 56 ("Defendant's Motion"); 56-36 ("Defendant's Memorandum"); 58 ("Plaintiffs' Motion"); 58-18 ("Plaintiffs' Memorandum"). Both sides filed Responses, and each replied. Dkt. Nos. 66 ("Defendant's Response"); 69 ("Plaintiffs' Response"); 79 ("Plaintiffs' Reply"); 81 ("Defendant's Reply"). For the following reasons, the Court grants in part and denies in part each Motion.

II. BACKGROUND

The material facts of this case are not in dispute. Dataflow Inc., Dataflow LLC, and Reprographics are three related legal entities under the same ownership. Dkt. No. 58-1 ("Plaintiffs' SMF") ¶ 7. Dataflow LLC and Reprographics are the product of smaller businesses acquired by Dataflow Inc. and then reincorporated separately. Id. ¶¶ 8-11. The businesses jointly engage inblueprint and microfilm services in New York and northern Pennsylvania. Dkt. No. 58-6 ("McCormick Affidavit") ¶ 2.

Plaintiffs hired Brian Steele ("Steele") to work in their accounting department in 2000. Pls.' SMF ¶ 13. Steele was promoted to Manager of Accounting of all three entities in 2005. Id. ¶ 14. Plaintiffs claim that Steele, while he held the Manager of Accounting position, stole approximately $1.2 million¹ from Plaintiffs' accounts through various means, including: (1) forging the owners' signature on checks; (2) creating an electronic version of an owner's signature to endorse checks for his personal benefit; (3) signing his own name to negotiate Plaintiffs' checks; (4) directing Plaintiffs' funds directly to his personal accounts using electronic automated clearinghouse transfers; (5) taking money from Plaintiffs' petty cash stores; (6) falsely claiming overtime hours and unused vacation time as time worked; and (7) using Plaintiffs' corporate credit cards to make personal purchases. Id. ¶¶ 20-30. Plaintiffs discovered this series of larcenies in March 2010 when Steele took a medical leave of absence. McCormick Aff. ¶ 20. Steele was promptly fired and charged with felony grand larceny and forgery, to which he pleaded guilty. Id. ¶¶ 20-21.

Some employees perform work for all three Dataflow entities, including the entire accounting department; these employees are compensated through a master account held by Dataflow Inc. Id. ¶ 8. Dataflow Inc., Dataflow LLC, and Reprographics all contribute funds to the master account that are then paid out to employees in a single paycheck. Id. ¶¶ 8-9; see also Dkt No. 58-7 ("McCormick Exhibits") at Exs. 1a, 2, 3. While Steele was a Dataflow employee, his salary was drawn from this master account. McCormick Aff. ¶¶ 8-9. A handful of employees onlyperform work for either Dataflow LLC or Reprographics and are therefore compensated by one paycheck bearing the respective entity's name. Def.'s Resp. SMF ¶ 18.

In October 2007, Plaintiffs bought insurance policies from Defendant for each of the three Dataflow entities. Pls.' SMF ¶ 1. The policies each lasted one year and covered, inter alia, loss resulting from employee dishonesty and theft. Id.. ¶¶ 1-3, 5. The maximum recovery for each instance of employee dishonesty on each policy was $25,000 for Dataflow LLC and Reprographics, and $75,000 for Dataflow Inc. Def.'s SMF ¶ 23. Plaintiffs purchased identical policies in October 2008, and again in October 2009. Pls.' SMF ¶¶ 2-3. After discovering Steele's theft, Plaintiffs filed claims with Defendant seeking coverage for their loss. Id. ¶ 34. Defendant denied Plaintiffs' claims except for one instance of theft from Dataflow, Inc., and paid out the $75,000 maximum for that instance. Id. ¶ 43. Plaintiffs then commenced this action in New York Supreme Court, Broome County, and Defendant removed the action to the Northern District of New York. Dkt. No. 1 ("Removal Petition").

III. LEGAL STANDARD

A. Summary Judgment

Summary judgment is proper where "there is no genuine issue as to any material fact," and "the movant is entitled to judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). "An issue of fact is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Niagara Mohawk Power Corp. v. Hudson River-Black River Regulating Dist., 673 F.3d 84, 94 (2d Cir. 2012). If the moving party will not bear the burden at trial, it may, in order to meet its summary-judgment burden of production, either: (1) "submit affirmative evidence that negates an essential element of the nonmoving party's claim"; or (2)"demonstrate to the Court that the nonmoving party's evidence is insufficient to establish an essential element of the nonmoving party's claim." Celotex, 477 U.S. at 330-32 (Brennan, J., dissenting). If the moving party carries its burden of production, the nonmoving party must raise some genuine issue of material fact; "metaphysical doubt as to material facts" is not enough. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). However, the burden of persuasion remains at all times with the moving party, who must affirmatively demonstrate entitlement to judgment as a matter of law. Celotex, 477 U.S. at 332.

B. Insurance Contract Coverage Disputes²

Under New York law, insurance contract disputes are treated as breach of contract claims, with some caveats. See MBIA Inc. v. Fed. Ins. Co., 652 F.3d 152, 158 (2d Cir. 152); Morgan Stanley Grp., Inc. v. New Eng. Ins. Co., 225 F.3d 270, 275 (2d Cir. 2000). To the extent the parties' intent cannot be clearly inferred from the writing of a contract, terms are to be interpreted "according to common speech and consistent with the reasonable expectations of the average insured." Cragg v. Allstate Indem. Corp., 950 N.E.2d 500, 501 (N.Y. 2011). If any ambiguities in the contract terms remain, they must be resolved in favor of coverage. Thomas J. Lipton, Inc. v. Liberty Mut. Ins. Co., 314 N.E.2d 37, 39 (N.Y. 1974).

IV. DISCUSSION

This action centers on several terms in the operative insurance Policies issued by Defendantto Plaintiffs. The parties disagree on: (1) whether Steele was an "employee" of Dataflow LLC and Reprographics; (2) whether Steele's scheme to steal and divert money from Plaintiffs' account constitutes one or multiple instances of employee dishonesty; (3) whether Plaintiffs' losses would nevertheless have been covered under other provisions of the Policies; and (4) whether other terms of the Policies limit Plaintiffs' recovery.

A. "Employee" and "Direct" Compensation

Under the section of the Policies entitled "Employee Dishonesty," Defendant states that it:

will pay for direct loss of or damage to Business Personal Property, including 'money' and 'securities,' resulting from dishonest acts committed by any of your employees acting alone or in collusion with other persons (except you or your partner) with the manifest intent to: (a) Cause you to sustain loss or damage; and also (b) Gain financial benefit (other than salaries, commissions, fees, bonuses, promotions, awards, profit sharing, pensions or other employee benefits earned in the normal course of employment) for: (i) Any employee; or (ii) Any other person or organization.

McCormick Ex. 13a at 93-94. The policies define an "employee," in relevant part, to be

Any natural person: (i) While in your service (and for 30 days after termination of service); and (ii) Whom you compensate directly by salary, wages or commissions; and (iii) Whom you have the right to direct and control while performing services for you.

Id. at 94. Defendant argues that Steele was not directly compensated by Dataflow LLC and Reprographics, and thus he was not their employee under the policies. Def.'s Mem. at 7-13. Plaintiffs argue that because Dataflow LLC and Reprographics contributed to the joint bank account from which Steele's salary was drawn, he qualifies as their employee under the policies. Pls.' Mem. at 7-10.

Whether Steele actually qualifies as an employee of Dataflow LLC and Reprographics turns on whether contributions to the Dataflow Inc.-held bank account can constitute "direct compensation" under the Policies. Defendant cites a case from another jurisdiction finding that theinclusion of "direct" in an insurance policy's definition of "employee" excludes as employers entities that make transfer payments to another company for an individual's services. See T.S.I. Holdings, Inc. v. Buckingham, 885 F. Supp. 1457, 1464 (D. Kan. 1995). Plaintiffs, on the other hand, cite cases from within New York that involved insurance policies not including the word "direct." See Gross Veneer Co. v. Am. Mut. Ins. Co., 424 N.Y.S.2d 743, 743 (App. Div.1980); 175 Check Cashing Corp. v. Chubb Pac. Indem. Grp., 464 N.Y.S.2d 118, 120 (App. Div. 1983); Fortunoff Silver Sales, Inc. v. Hartford Accident & Indem. Co., 459 N.Y.S.2d 866, 866-67 (App. Div.1983).

Defendant maintains that T.S.I. Holdings is not meaningfully distinguishable from the instant case, and that the Court should hold that Steele was not Dataflow's employee. Def.'s Mem. at 10-13. In that case, an employee of a parent corporation was responsible for the finances of the corporation's wholly owned subsidiaries. 885 F. Supp. at 1460. In return, the subsidiaries paid a management fee to the parent corporation, which ostensibly was deposited into the corporation's general funds. Id. The employee then embezzled money from a subsidiary, and both the parent and subsidiary sued their insurance provider for failing to...