Hartford Underwriters Ins. Co. v. Otto

• Decision Date: 07 March 2023
• Docket Number: 21-11599
• Parties: HARTFORD UNDERWRITERS INSURANCE COMPANY, TWIN CITY FIRE INSURANCE COMPANY, HARTFORD FIRE INSURANCE COMPANY, PROPERTY AND CASUALTY INSURANCE COMPANY OF HARTFORD, TRUMBULL INSURANCE COMPANY and HARTFORD CASULATY INSURANCE COMPANY, Plaintiffs, v. David Otto, Defendant.
• Court: U.S. District Court — Eastern District of Michigan

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HARTFORD UNDERWRITERS INSURANCE COMPANY, TWIN CITY FIRE INSURANCE COMPANY, HARTFORD FIRE INSURANCE COMPANY, PROPERTY AND CASUALTY INSURANCE COMPANY OF HARTFORD, TRUMBULL INSURANCE COMPANY and HARTFORD CASULATY INSURANCE COMPANY, Plaintiffs, v. David Otto, Defendant.

No. 21-11599

United States District Court, E.D. Michigan, Southern Division

March 7, 2023

KIMBERLY G. ALTMAN, MAGISTRATE JUDGE.

OPINION AND ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT [16] [18]

NANCY G. EDMUNDS, UNITED STATES DISTRICT JUDGE.

This case stems from a previous civil action before this Court between Plaintiffs and Omega Resources Solutions, LLC, a limited liability company owned solely by Defendant David Otto (the “Initial Lawsuit”). (E.D. Mich. Case #:18-cv-12907.) In the Initial Lawsuit, Plaintiffs alleged that Omega breached a workers compensation insurance policy issued by Plaintiffs and owed an additional $1,374,967 in additional insurance premiums. Omega's attorney withdrew from the case while the Initial Lawsuit was pending because Omega had gone out of business and was no longer able to pay his fees. Omega failed to secure alternate representation and Plaintiffs filed a motion to strike Omega's answer and for default judgment. Plaintiffs' motion was granted after Omega failed to appear at the hearing on the motion. Following entry of default judgment, Plaintiffs sought to pierce the corporate veil of Omega and hold its owner, Defendant David Otto personally liable for the money judgment. The motion was referred to the Magistrate Judge who approved of piercing the corporate veil, but nonetheless recommended that the motion be denied on procedural grounds, because Otto was not a defendant in the Initial Lawsuit.

Following this Court's acceptance of the Magistrate Judge's report and recommendation, Plaintiffs initiated the present lawsuit against Otto seeking to hold him personally liable for the judgment in the Initial Lawsuit. Before the Court are the parties' cross motions for summary judgment. (ECF Nos. 16, 18.) Both motions are fully briefed. (ECF Nos 20-23.) Because the Court finds its decision process would not be significantly aided by oral argument, it declines to hold a hearing. See E.D. Mich. L.R. 7.1(f)(2). For the reasons that follow the Court GRANTS Plaintiffs' Motion for Summary Judgement (ECF No. 16) and DENIES Otto's Motion for Summary Judgment. (ECF No. 18.)

I. Background

A. Plaintiffs and Omega

Defendant David Otto owns or has owned more than a dozen, or perhaps even more than 100 different entities.^[1] One of those entities, Omega Resources Solutions, LLC (“Omega”), was purchased by Otto through his son, Anthony Sabatella, in 2014.^[2] (ECF No. 18-2, PageID.1657.) Until it ceased operating in 2018, Omega was in the business of providing merchandising and product demonstration services for clients at various third-party stores and retail locations nationwide. (ECF Nos. 8, 9.) Omega supplied all its clients' employees and labor for these services. (Id.)

Part of Omega's operation included passing on certain employee costs to its clients, including the cost of premiums for workers' compensation insurance for the employees it supplied. (Id., ECF No. 16-13, PageID.956-58, 983-84.) At Omega's request, Plaintiffs had issued Workers Compensation Insurance Policy No. 42 WE CP3934 (the “Policy”) which provided Omega with workers' compensation insurance coverage for its employees on a nationwide basis from January 1, 2015 until January 1, 2017. (ECF Nos. 8, 9.) Pursuant to the Policy, Omega agreed to pay certain premiums to Plaintiffs which were subject to annual audits. (Id.) The audit results for the 2015-16 and 2016-17 Policy periods showed that Omega owed Plaintiffs $1,374,967 in additional premiums for the insurance coverage provided by the Policy.^[3] (Id.) Plaintiffs billed Omega for this amount. (Id.)

Omega did not remit payment to Plaintiffs. Instead, on December 1, 2017, Omega filed an administrative appeal seeking a review of Plaintiffs' assessment of the additional premiums. (Id.) On May 18, 2018, Omega's counsel filed a motion to withdraw on the grounds that Omega had gone out of business and could not pay his fees. (ECF No. 82.) The administrative law judge granted counsel's motion to withdraw and on July 27, 2018, Omega's administrative appeal was dismissed with prejudice for failure to prosecute. (Id.)

Plaintiffs filed the Initial Lawsuit alleging breach of contract shortly after the dismissal of the administrative appeal. On May 20, 2019, this Court entered a default judgment against Omega in the amount of $1,409,814, inclusive of interest. (ECF No. 84.) But Plaintiffs' efforts to collect the judgment were unsuccessful. Plaintiffs served writs for garnishment seeking payment of the Judgment from several banks Omega was thought to have done business with, but these writs were returned unexecuted as Omega either did not hold accounts at those banks or the accounts had been closed. (ECF Nos. 8, 9.) Otto states that according to Omega's records, Omega's bank accounts were closed on April 5, 2018. (ECF No. 18-7.) This was during the pendency of Omega's administrative appeal and one month before Omega's counsel withdrew on the grounds that Omega had gone out of business.

(ECF No. 9, PageID.441.) These arguments are irrelevant here as the Court has already entered judgment in favor of Plaintiffs in the Initial Lawsuit. (See Initial Lawsuit, E.D. Mich. Case No. 18-cv-12907, ECF No. 14.)

B. Post-Judgment Discovery

After Plaintiffs were unable to collect the judgment directly from Omega's accounts, they conducted post-judgment discovery, including taking several depositions, to determine if they could collect the Judgment and from where. Plaintiffs first deposed Otto as Omega's sole member and CEO. (See ECF No. 16-12.) Although the banking information Plaintiffs received showed that Otto was the sole individual authorized to write checks from Omega, (Id. at PageID.838), Otto generally disclaimed knowledge of any specific financial transactions when he was questioned and instead deferred to Michael Zybura, the director of finance for another of Otto's entities, America's Back Office. (ECF No. 16-12, PageID.830, 839-42.)

At his deposition, Zybura testified that he is responsible for accounting, finance, taxes, and compliance for all of Otto's entities, including Omega. (ECF No. 16-13, PageID.913-14.) He stated he handles the money “exactly how it was done before [he] got there” and that he does what Otto tells him to do. (Id. at PageID.933.)

According to his testimony, Zybura is paid by AES Human Capital Resources Inc., another of Otto's companies, but he is also part of Otto's overall management company, America's HR Department Inc. (Id. at PageID.930.) At Otto's direction, Zybura manages all of Otto's companies on a “consolidated basis.” (Id. at PageID.933, 953.) According to Zybura, this means that the intercompany accounts should balance, but from company to company, the balance sheets are not necessarily accurate. (Id. at PageID.933, 950, 953, 955, 960, 989-90.) According to Zybura, since Otto owns all the companies and the entire operation is run in a consolidated manner, there are no written contracts between each individual entity and the management company. (Id. at PageID.932-33.) As the management company operates and incurs expenses, Zybura pulls money from each operating entity as he needs it, usually in $10,000 increments. (Id. at PageID.933.) Zybura testified that the amount of money taken for management fees from each entity is dependent upon the amount of money in each entity's operating account-if a certain entity has a large amount of money in its account, Zybura could take more money from that entity to cover the management fees of the entire Otto operation. (Id. at PageID.940.)

During his deposition, Zybura reviewed Omega's December 31, 2017 balance sheet and Omega's February/March 2018 profit and loss statement with counsel for Plaintiffs. (ECF No. 16-13, PageID.948.) Though Zybura prepared the balance sheet, he stated he did not trust those numbers to be accurate since he did the accounting for all Otto entities on a consolidated basis. (Id. at PageID.953, 989-90.) Regardless, a line item on Omega's balance sheet identified $460,956 as accrued workers' compensation insurance premiums. (Id. at PageID.956.) Zybura testified that this amount was collected from clients, but was kept in a general operating account and not remitted to the workers' compensation carriers. (Id. at 956-57.) He stated that the decision not to remit the premiums collected was made by Otto. (Id. at PageID.957.)

The profit and loss statement showed that Omega billed its clients $1,662,251 for workers compensation premiums, but that it only paid Plaintiffs $646,000. (Id. at PageID.983-84.) According to Zybura, the balance retained from the money collected was considered Omega's workers' compensation profit. He testified: “David Otto has a number in mind of how much gross profit he wants to make on an annual basis for each client employee and he will price the business accordingly. It could be all admin (sic) fees. He could mark up the Workers' Comp (sic). There's work involved there. He could mark up the state unemployment. And those are typically [Otto's] three profit areas.” (Id. at PageID.985.)

Before Omega completely wound down, but after Plaintiffs had billed the company for the additional premiums, Omega emptied its bank accounts by making payments to other Otto entities. (Id. at PageID.969-70.) Some money was transferred to America's Back Office, the company that would service Omega's former clients going forward (Id. at PageID.970), and $2.6 million dollars in management fees and $443,539 in...