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Quality Plus Services, Inc. v. National Union Fire Insurance Company of Pittsburgh, PA

United States District Court, E.D. Virginia, Richmond Division

January 15, 2002

QUALITY PLUS SERVICES, INC., Plaintiff,
v.
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Defendant.

          MEMORANDUM OPINION

          M. HANNAH LAUCK UNITED STATES DISTRICT JUDGE.

         This matter comes before the Court on four motions:

(1) Defendant National Union Fire Insurance Company of Pittsburgh, PA.'s ("National Union") Motion for Summary Judgment (the "National Union Motion for Summary Judgment"), (ECF No. 20);
(2) Plaintiff Quality Plus Services, Inc.'s ("Quality Plus") Motion for Summary Judgment (the "Quality Plus Motion for Summary Judgment")[1] (ECF No. 22);
(3) Quality Plus's Motion to Exclude Testimony of Defendant's Expert, Robert Anderson, Jr. (the "Motion in Limine"), (ECF No. 24); and,
(4) National Union's Motion to Disqualify Kristie G. Haynes (the "Motion to Disqualify"), (ECF No. 33).

         Quality Plus and National Union filed Cross-Motions for Summary Judgment pursuant to Federal Rule of Civil Procedure 56.[2] Quality Plus and National Union have responded to the Cross Motions, (ECF Nos. 26, 28), and each has replied, (ECF Nos. 31, 30). National Union responded to the Motion in Limine, (ECF No. 27), and Quality Plus replied, (ECF No. 29). Quality Plus responded to the Motion to Disqualify, (ECF No. 38), and National Union replied, (ECF No. 39). These matters are ripe for disposition.

         The Court dispenses with oral argument because the materials before it adequately present the facts and legal contentions, and argument would not aid the decisional process. The Court exercises jurisdiction pursuant to 28 U.S.C. § 1332(a)(1).[3] For the reasons stated below, the Court will deny the Cross Motions for Summary Judgment and the Motion in Limine. The Court will grant the Motion to Disqualify.

         I. Procedural and Factual Background

         In this insurance contract dispute Quality Plus seeks coverage from National Union for five monetary transfers it made based on illegitimate email requests sent to one of Quality Plus's employees. National Union has refused coverage on the ground that the applicable policy provision does not provide coverage and, if it does, several policy exclusions preclude coverage. Before determining that summary judgment would be inappropriate in this matter due to genuine disputes of material fact, the Court sets forth the basic factual and procedural history.

         A. Factual Background[4]

         1. Quality Plus's Losses

         Between December 19, 2017 and January 4, 2018, a Quality Plus employee, Lynne Mann, received several emails purportedly from Aaron Gay, the "founder, President, and Operations Manager of Quality Plus. (Mem. Supp. Quality Plus Mot. Sum. J. Ex. 1 "Gay Declaration" 2, 11, 21, 31, 55, 71, ECF No. 23-1.[5]) Gay, the purported sender of the emails, has the "final approval for all [Quality Plus] invoices" and "make[s] the decisions about who has authority to handle payments for [Quality Plus], including by wire transfer." (Id. 3.)

         The five emails unfolded as follows:

(1) On December 19, 2017, the sender requested that Mann "wire payment for this invoice today." (Gay Decl. 11.) The attached invoice requested a payment of $92, 000.00 to Bonachon Enterprises S.A De C.V for "Supply & Delievery [sic] of new Cummins (as per quotation)." (Id. 15.) The sender sent this email from Gay's email address aarongl@qpsisbest.com. (Id. 12.)
(2) On December 28, 2017, the sender's email to Mann read: "See if you can get this (QPS) invoice payment wired this morning. I did not copy any one on this to avoid a recurrence of messages not delivering. Let me know when the wired [sic] has been initiated." (Id. 21.) The attached invoice requested a payment of $97, 384.00 to Bonachon Enterprises S.A DE C.V for "Supply and Delievery [sic] of new Cummins (as per quotation)." (Id. 23.) The sender sent this email from a different email address than the one used for the December 19, 2017 email. This new email address-aarong1@qpisisbest.com-was similar to Gay's actual email address. (Id. 21.)
(3) On December 29, 2017, on the same email chain as the December 27, 2017 request, the sender transmitted an email to Mann that said: "See if you can get this wire out today and send me the confirmation. Thanks." (Id. 31.) The attached invoice requested a payment of $372, 018.00 to Grand Atlantis Limited for "Mechanical, Electrial [sic], Paintings Supplies (As Per Quotation)." (Id. 45.) The sender sent this email from the same email address as the December 27, 2017 email-aarong1@qpisisbest.com. (Id. 31.)
(4) On January 3, 2018, on a new email thread, the sender directed a message to Mann that read: "Please see if you can get this wire out this morning and reply with the confirmation." (Id. 55.) The attached invoice requested a payment of $558, 623.00 to Hinhinghang Trading Co Limited for "Mechanical, Electrical, Paintings Supplies (As Per Quotation)." (Id. 63.) Similar to the December 27 and 29, 2017 emails, the sender transmitted this email from aarong1@qpisisbest.com. (Id. 55.)
(5) On January 4, 2018, on the same email thread as the January 3, 2018 request, the sender directed Mann to "[s]end me confirmation as soon as the attached invoice have [sic] been paid via wire. Thanks." (Id. 71.) The attached invoice requested a payment of $512, 993.00 to HK Futuolong Co Limited for "Mechanical, Electrical, Paintings Supplies (As Per Quotation)." (Id. 74.) This final request was also sent from the email address aarong1@qpisisbest.com. (Id. 71.)

         The December 19 and 28 transfers requested that Mann send the money to Banco Regional de Monterrey in Mexico. (Id. 3, 5.) The December 29, January 3, and January 4 transfers requested that Mann send the money to three different banks in Hong Kong. (Id. 4-5.) Mann initiated the transfers as requested from Quality Plus's bank. (Mem. Supp. Nat'l Union Mot. Sum. J. Ex. 3 "Mann Deposition" 35, ECF No. 21-3.) Each email contained a signature block purporting to belong to Gay, although several of these signature blocks differed from the others.

         Hannah Stalnaker "another member of [Quality Plus's] accounting personnel, approved four of the five transfers." (Mem. Supp. Quality Plus Mot. Sum. J. 5.) Stalnaker did not approve the December 29, 2017 transfer. (Id.) For that transfer Mann used Stalnaker's approval code to approve the transfer. (Mann Dep. 23.) To do this, Mann stated that she "[i]nitiate[d] the wire and then [went] back in. It was under the same log-in information. And use[d] [Stalnaker's] [code] to approve it." (Id.) Mann then sent an email to Stalnaker saying "[j]ust in case someone asks, you just approved a 372K wire to hong kong.... lol." (Mann Dep. Ex. 23.)[6]

         Quality Plus asserts, and National Union does not dispute, that Gay did not send any of the emails. (Mem. Supp. Quality Plus Mot. Sum. J. 7, ECF No. 23.; see Nat'l Union Resp. Quality Plus Mot. Sum. J. 7, ECF No. 28.)

         On January 4, 2018, Quality Plus discovered the illegitimate transfers. (Mem. Supp. Quality Plus Mot. Sum. J. 6.) Gay declares that he made the discovery "when two separate events occurred nearly simultaneously:" (1) Gay "took a call from an unknown person requesting approval of a wire transfer that [he] had no knowledge of," and, (2) Gay "received a telephone call from Kristie Haynes, [Quality Plus's] General Counsel, in which she advised [Gay] that... Mann informed her that [Mann] had initiated multiple wire transfers that [Gay] knew nothing about." (Id.) In its investigation, Quality Plus "did not find any evidence that any [Quality Plus] employee, including ... Mann and ... Stalnaker, were knowingly involved in the fraud." (Mem. Supp. Quality Plus Mot. Sum. J. 7; see Resp. Quality Plus Mot. Sum. J. 7.)

         In late February 2018, Quality Plus learned "from the Hong Kong police ... that the Hong Kong bank account associated with the January 3, 2018 transfer had been successfully frozen." (Mem. Supp. Quality Plus Mot. Sum. J. 7.) Quality Plus successfully recovered $411, 304.69 from January 3rd transfer. (Id.) The bank accounts associated with the other transfers "had zero balances." (Id. 24.)

         2. The Pertinent Policy Provisions

         National Union issued the Private Edge Plus Policy No. 01-406-01-90 to Quality Plus for the term of April 1, 2017 to April 1, 2018 (the "Policy"). (Compl. Ex. A "The Policy," ECF No. 1-1.) The Crime Coverage Section of the Policy, which includes coverage for Funds Transfer Fraud, contains a $1, 000, 000 per occurrence limit of liability with a $10, 000 deductible. (Id. 4.)

         Quality Plus asserts that coverage exists under the Policy's Funds Transfer Fraud Provision.[7] This Provision states: "The Insurer will pay for loss of Funds resulting directly from a Fraudulent Instruction directing a financial institution to transfer, pay or deliver Funds from the Insured's Transfer Account." (The Policy 27.) The Policy defines a Fraudulent Instruction, in pertinent part, as: "an electronic, computer, telegraphic, cable, teletype, telefacsimile, telephone or written instruction initially received by the Insured which purports to have been transmitted by an Employee but which was, in fact, fraudulently transmitted by someone else without the Insured's or the Employee's knowledge or consent." (Id. 29 (bold in original).)

         National Union maintains that coverage does not exist under the Funds Transfer Fraud Provision. If the Court does find that coverage exists under the provision, National Union avers that three exclusions preclude coverage: (1) the Indirect Loss Exclusion; (2) the Fund's Transfer Fraud Exclusion; and, (3) the Employee's Acts Exclusion.[8] (Am. Answer 12-17, ECF No. 19.) The Indirect Loss Exclusion states:

         (f) Indirect Loss

Loss that is an indirect result of an Occurrence covered by this Crime Coverage Section including, but not limited to, loss resulting from:
(i) the Insured's inability to realize income that the Insured would have realized had there been no loss of or damage to Money, Securities or Other Property;
(ii) payment of damages of any type for which the Insured is legally liable; provided, however, the Insurer will pay compensatory damages arising directly from a loss covered under this Crime Coverage Section; or
(iii) payment of costs, fees or other expenses the Insured incurs in establishing either the existence or the amount of loss under this Crime Coverage Section.

         (The Policy 32 (bold in original).) The Policy defines Occurrence, in pertinent part, as

(1) an individual act or event;
(2) the combined total of all separate acts or events whether or not related; or
(3) a series of acts or events whether or not related; Committed by the same person acting alone or in collusion with other persons, or not committed by any person, during the Policy Period shown in the Declarations, except as provided under Condition 6(a)(xv) or 6(a)(xvi).[9]

(Id. 30.) The second exclusion upon which National Union relies is the Fund's Transfer Fraud Exclusion that states, in pertinent part, that: "Insuring Agreement I.G., "FUNDS TRANSFER FRAUD," of this Crime Coverage Section does not apply to:... (b) Loss due to: (i) unintentional errors or omissions; or (ii) voluntary giving or surrendering of property in a purchase or exchange, whether legitimate or fraudulent." (Id. 34-35 (bold in original).) Finally, the third exclusion upon which National Union relies, the Employee's Acts Exclusion, states:

(c) Acts Of Employees, Managers, Directors, Trustees Or Representatives Loss resulting from Theft or any other dishonest act committed by any of the Insured's Employees, Managers, directors, trustees or authorized representatives:
(i) whether acting alone or in collusion with other persons; or
(ii) while performing services for the Insured or otherwise; except when covered under Insuring Agreement 1.A. of this Crime Coverage Section.

(Id. 31 (bold in original).)

         In addition to the Policy exclusions, National Union asserts that the Policy's Territory Condition precludes coverage. This Condition states that "This Crime Coverage Section covers loss that the Insured sustains resulting directly from an Occurrence taking place within the United States of America (including its territories and possessions), Puerto Rico and Canada." (Id. 43 (bold in original).) Finally, if the Court finds that Quality Plus is entitled to coverage, National Union maintains that Quality Plus's recovery should be reduced by the Policy's Recovery Provision, which states:

         RECOVERIES

(1) Any recoveries, whether effected before or after any payment under this Crime Coverage Section, whether made by the Insurer or the Insured, shall be applied net of the expense of such recovery:
(a) First, to the Insured in satisfaction of the Insured's covered loss in excess of the amount paid under this Crime Coverage Section;
(b) Second, to the Insurer in satisfaction of amounts paid in settlement of the Insured's claim;
(c) Third, to the Insured in satisfaction of any Deductible Amount; and
(d) Fourth, to the Insured in satisfaction of any loss not covered under this Crime Coverage Section.
(2) Recoveries do not include any recovery:
(a) from insurance, suretyship, reinsurance, security or indemnity taken for the Insurer's benefit; or
(b) of original Securities after duplicates of them have been issued.

(Id. (bold in original).)

         3. Quality Plus's Request for Coverage

         On January 5, 2018, Quality Plus notified National Union of its losses. (Gay Decl. 6.) On February 2, 2018, Quality Plus "filed with National Union the required sworn Proof of Loss." (Id.) On March 19, 2018, Quality Plus "received National Union's coverage denial letter by email." (Id.)

         B. Procedural History

         Approximately four months after it received National Union's coverage denial letter, Quality Plus filed suit in this Court requesting that the Court "declare the rights of the parties under the Policy" and asserting a breach of contract cause of action. (Compl. 8-9, ECF No. 1.) National Union answered, denying that coverage existed and asserting several affirmative defenses, including that several Policy exclusions preclude coverage.

         The Court held an Initial Pretrial Conference with Counsel for both Quality Plus and National Union and scheduled a final pretrial conference and a bench trial. Several months later, Quality Plus and National Union filed the Cross Motions for Summary Judgment. Quality Plus also filed the Motion in Limine and National Union filed the Motion to Disqualify.

         "Due to the Parties' disagreement concerning the necessity of a trial [in the Cross-Motions for Summary Judgment], and to conserve judicial resources and resources of the Parties, the Court continued generally the final pretrial conference ... and the bench trial." (May 3, 2019 Order 2, ECF No. 37.) The Court took the motions under advisement.

         The Court now turns to those motions. It will first discuss the Cross-Motions for Summary Judgment, which it cannot grant at this stage of the proceedings due to disputed material facts. The Court will then turn to the Motion in Limine and the Motion to Disqualify.

         II. Cross-Motions for Summary Judgment

         A. Standard of Review: Rule 56

         Summary judgment under Rule 56 is appropriate only when the Court, viewing the record as a whole and in the light most favorable to the nonmoving party, determines that there exists no genuine issue of material fact, and that the moving party is entitled to judgment as a matter of law. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-24 (1986); Liberty Lobby, 477 U.S. at 248-50. "The interpretation of an insurance policy is a question of law that is particularly well suited for summary judgment." Minn. Lawyers Mut. Ins. Co. v. Protostorm LLC, 197 F.Supp.3d 876, 882 (E.D. Va. 2016) (citing St. Paul Fire & Marine Ins. Co. v. Jacobson, 826 F.Supp. 155, 157 (E.D. Va. 1993), affd, 48 F.3d 778 (4th Cir. 1995)).

         "A fact is material if the existence or non-existence thereof could lead a [finder of fact] to different resolutions of the case." Thomas v. FTS USA, LLC, No. 3:13cv825, 2016 WL 3653878, *4 (E.D. Va. June 30, 2016) (citing Liberty Lobby, 477 U.S. at 248). Once a party has properly filed evidence supporting its motion for summary judgment, the nonmoving party may not rest upon mere allegations in the pleadings, but instead must set forth specific facts illustrating genuine issues for trial. Celotex Corp., 477 U.S. at 322-24. The parties must present these in the form of exhibits and sworn affidavits. Fed.R.Civ.P. 56(c).

         A court views the evidence and reasonable inferences drawn therefrom in the light most favorable to the nonmoving party. Liberty Lobby, 477 U.S. at 255. Whether an inference is reasonable must be considered in conjunction with "competing inferences to the contrary." Sylvia Dev. Corp. v. Calvert Cty.,48 F.3d 810, 818 (4th Cir. 1995). Nonetheless, the nonmoving "party is entitled 'to have the credibility of his [or her] evidence as forecast assumed.'" Miller v. Leathers, 913 ...


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