Summary
explaining that defaulting on a contract is not a claim for property damage caused by an occurrence
Summary of this case from Westfield Ins. Co. v. Nautilus Ins. Co.Opinion
05 Civ. 0023 (RMB), 05 Civ. 0190 (RMB).
February 9, 2006
DECISION AND ORDER
I. Introduction
On or about January 4, 2005, ePlus Group, Inc. ("Plaintiff' or "ePlus") filed a complaint against Banc of America Leasing and Capital, LLC ("BoA"), GMAC Commercial Finance LLC ("GMAC") and Travelers Property Casualty Company of America ("Travelers") (collectively "Defendants"), requesting declaratory judgment that ePlus is not liable to BoA and GMAC for losses suffered as a result of ePlus' defaulted computer leasing transactions with Cyberco Holdings, Inc. ("Cyberco") and that Travelers is obliged to indemnify and defend ePlus against suits by BoA and GMAC, where the computers under lease turned out to be "nothing more than empty cases with fans and lighting installed to make them appear as though they were actual servers." (See Complaint, filed on January 4, 2005 ("ePlus' Complaint"), ¶¶ 21-23; Travelers' Rule 56.1 Statement, dated November 11, 2005 ("Travelers' Rule 56.1 Stmt."), ¶ 32.)
On or about February 28, 2005, ePlus agreed voluntarily to dismiss BoA, without prejudice, from this action. (See Notice of Voluntary Dismissal, dated February 28, 2005.)
On or about November 14, 2005, Travelers moved, pursuant to Federal Rule of Civil Procedure ("Fed.R.Civ.P.") 56, for summary judgment, arguing that this insurance coverage action is a "`square peg/round hole' attempt to secure, under a general liability policy, reimbursement for [ePlus'] loan defaults." (See Travelers' Memorandum of Law in Support of Motion for Summary Judgment, dated November 14, 2005 ("Def. Mem."), at 8.) On or about December 7, 2005, ePlus filed a cross-motion for summary judgment and an opposition to Travelers' motion, arguing that "analysis of the liability policy provisions and cases interpreting such policies shows that GMAC and BoA have filed covered claims, obliging Travelers to defend and indemnify ePlus." (See ePlus' Memorandum of Law In Support of Cross-Motion For Summary Judgment and in Opposition To Travelers Motion For Summary Judgment, dated December 7, 2005 ("Pl. Mem."), at 1.) Travelers submitted a reply on December 21, 2005. (See Travelers' Reply Memorandum, dated December 21, 2005 ("Def. Reply") at 1.) ePlus filed a sur-reply on January 3, 2006. (See ePlus' Reply Memorandum, dated January 3, 2006 ("Pl. Reply"), at 1.)
For the reasons set forth below, Travelers' motion for summary judgment is granted, and ePlus' cross-motion is denied.
II. Background
On August 25, 2003 and August 31, 2004, Travelers issued commercial general liability ("CGL") policies to ePlus, covering the period from July 31, 2003 through July 31, 2005 ("CGL Policies"). (See Travelers' Rule 56.1 Stmt. ¶¶ 1-3, 11.) The CGL Policies extend defense and indemnification protection for "sums that the insured becomes legally obligated to pay as damages because of `bodily injury' or `property damage' . . . caused by an `occurrence.'" (See, e.g., Commercial General Liability Coverage Form, attached to the Declaration of Andrew M. Premisler, Esq., dated November 11, 2005, as Exhibit A-1, at 1.) The CGL Policies define "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." (See, e.g., id. at 10.) The CGL Policies cover claims that the insured accidentally caused "property damage," defined as "[p]hysical injury to tangible property, including all resulting loss of use of that property . . . or . . . [l]oss of use of tangible property that is not physically injured." (See, e.g., id. at 11.)
All "Exhibit" references in this Order refer to the Exhibits attached to the Declaration of Andrew M. Premisler, Esq., dated November 11, 2005, unless otherwise specified.
The CGL Polices excluded coverage of, among other things, damage to "property [ePlus] own[s], rent[s] or occup[ies]." (See, e.g., id. at 3.) The CGL Policies also excluded damage to "`[ePlus'] product' arising out of it or any part of it," including "[a]ny goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by" ePlus and "[w]arranties or representations made at any time with respect to fitness, quality, durability, performance or use of' ePlus' product. (See id. at 3, 11.)
On March 3, 2004, ePlus and Cyberco entered into a lease agreement, pursuant to which ePlus agreed to lease certain computer equipment, described in four schedules executed between March and October 2004, to Cyberco. (See Lease Agreement No. MIC107, dated March 3, 2004 ("Lease Agreement"), Exhibit V.)
In March through October 2004, ePlus entered into three loan transactions with GMAC "to finance the acquisition costs" of purchasing the computer equipment described in three of the schedules executed by ePlus and CyberCo. (See Loan and Security Agreement, dated March 25, 2004, Exhibit E-1 ("March 25, 2004 Loan Agreement") at 3; Loan and Security Agreement, dated September 22, 2004, Exhibit E-3; Loan and Security Agreement, dated October 6, 2004, Exhibit E-5.) Among other things, ePlus represented and warranted that: "[t]he equipment has been fully paid for and [ePlus] has clear title thereto. The Equipment has been delivered to, installed, and accepted by [Cyberco]." (See, e.g., March 25, 2004 Loan Agreement at 3,7.) ePlus also warranted that its "owns and is assigning all of its rights, title, and interest in, to, and under the Agreement and the other Collateral to the Lender, free and clear of any liens, claims and encumbrances." (See id. at 7.)
On or about October 1, 2001, BoA and ePlus entered into a similar loan agreement to finance the acquisition of additional computer equipment. (See Financing Program Agreement, dated October 1, 2001, Exhibit F-1, at 1.) As part of the agreement, ePlus represented and warranted that it had "title to all Equipment" and that: "the relevant Equipment . . . (i) conform[s] to applicable specifications and all warranties, whether express or implied; [and] (ii) are as described in the Contract, invoice, and purchase order. . . ." (See Lessor Representations and Warranties, Exhibits F-1, at C-1.)
In early December 2004, BoA and GMAC notified ePlus that ePlus had defaulted on its loans and was in violation of its warranties. (See Travelers' Rule 56.1 Stmt. ¶¶ 21-22.) GMAC brought suit against ePlus in New York State Court on January 4, 2005, alleging breach of the loan agreements. (See Complaint, dated January 4, 2005 ("GMAC Complaint").) BoA brought suit against ePlus (which is apparently still pending in the Circuit Court of Fairfax County, Virginia) on May 10, 2005, alleging, among other things, breach of contract and constructive fraud. (See Complaint, filed May 10, 2005 ("BoA Complaint".) BoA later amended its complaint to include a claim for negligent misrepresentation. (See Travelers' Rule 56.1 Stmt. ¶ 30.)
The case was subsequently removed to this Court on January 7, 2005.
ePlus tendered the underlying claims set forth in the GMAC Complaint and the BoA Complaint to Travelers, which disclaimed liability. (See, e.g., Letter From Richard E. Hirschoff to Eric Westrate, dated May 18, 2005, Exhibit O, at 640 ("There is no coverage for this lawsuit under the General Liability policy . . . [because] [t]he claim in question is based on allegation that [BoA] is owed certain monies arising out of a leasing/loan transaction.").)
III. Legal Standard
Federal Rule of Civil Procedure 56(c) provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c); see Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). All reasonable inferences must be drawn in favor of the non-moving party. Allen v. Coughlin, 64 F.3d 77, 79 (2d Cir. 1995). The nonmoving party "must do more than simply show that there is some metaphysical doubt as to the material facts. . . . [T]he nonmoving party must come forward with specific facts showing that there is a genuine issue for trial."Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986) (internal quotation marks and citations omitted). A genuine issue of material fact exists if "a reasonable jury could return a verdict for the nonmoving party."Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
When cross-motions for summary judgment are made, the standard is the same as that for individual motions. See Morales v. Quintel Entm't, Inc., 249 F.3d 115, 121 (2d Cir. 2001). The court must consider each motion independently of the other. See Morales, 249 F.3d at 121.
IV. Analysis
Choice of Law
Travelers argues that, "while there appears to be no material difference between New York and Virginia law on the issues at hand," the Court should apply Virginia law, because "Virginia is the state with the most significant contact," including being "where the insured is principally located and where the policy was issued." (Def. Mem. at 8-9.) ePlus argues that because there is "no difference in the law of Virginia and New York," the Court should "follow New York law." (Pl. Mem. at 13.)
Virginia has the most significant contacts (including, among other things, where the insured resides and where the relevant insurance policies were issued), and the Court will, therefore, apply Virginia law. See Indosuez int'l Fin. B.V. v. Nat'l Reserve Bank, 98 N.Y.2d 238, 245 (2002) ("New York choice of law principles require a court to apply the law of the state with the most significant relationship with the particular issue in conflict."). "Occurrence"
Because there is no material difference between the relevant New York law and Virginia law, Travelers would be entitled to summary judgment under either state's law.
Travelers argues that "a breach of contract is not an accident or occurrence covered by a commercial general liability policy" and that "the purpose and intent of a general liability insurance policy is to protect the insured from liability for essentially accidental injury to the person or property of another rather than coverage for disputes between parties to a contractual undertaking." (Def. Mem. at 10, 13 (internal citations omitted).) ePlus counters that a breach of contract can give rise to an "occurrence" under a CGL policy because "New York law has long recognized that there can be coverage under [commercial general liability] policies for breach of warranty suits." (Pl. Mem. at 14.) ePlus also argues that Cyberco's fraudulent conduct can be deemed an "occurrence" under the CGL policies, because Cyberco's "intentional misbehavior is an accidental occurrence from the point of an unknowing insured." (Pl. Mem. at 16.)
An "occurrence" within the meaning of the CGL Policies means an "accident," or "an event that takes place without one's foresight or expectation; an undesigned, sudden, and unexpected event."Harris v. Bankers Life Cas. Co., 278 S.E.2d 809, 810 (Va. 1981). A "garden variety" breach of contract claim, as presented here, does not involve an "occurrence." See Jakobson Shipyard, Inc. v. Aetna Cas. Sur. Co., 775 F. Supp. 606, 610 (S.D.N.Y. 1991) ("the Court envisions no reasonable construction of `occurrence' that would encompass allegations of breach of contract without rendering the definition of `occurrence' meaningless."), aff'd, 961 F.2d 387 (2d Cir. 1992); Pulte Home Corp. v. Fid. Guar. Ins. Co., No. 210454, 2004 WL 516216, at *5 (Va. Cir.Ct. 2004) (finding that an insured's "failure to satisfy its obligations under . . . sales contracts" does not constitute an "accident"); Pavarini Constr. Co. v. Cont'l Ins. Co., 759 N.Y.S.2d 56, 57 (N.Y.App. Div. 2003) ("The claim . . . was essentially for breach of contract and, as we have observed, a contract default . . . is not to be equated with an `accident.'"); Boiler Brick Refractory Co. v. Maryland Cas. Co., 168 S.E.2d 100, 102 (Va. 1969) (holding that a CGL policy "covers tort liability for `damages because of injury to or destruction of property,' not damages resulting from assumed or imposed contractual liability."); see also Hotel Roanoke Conference Ctr. Comm'n v. Cincinnati Ins. Co., 303 F. Supp. 2d 784, 786 (W.D. Va. 2004).
ePlus unpersuasively cites several cases where the insured breached a contract by supplying defective products that caused damage to a third party's property. (See Pl. Mem. at 14-16; Pl. Reply at 2-3.)
Both BoA and GMAC have sued ePlus alleging causes for breach of contract and breach of warranty relating to ePlus' alleged failure to make timely payments under loan agreements, not for property damage. ePlus' efforts to recast the underlying actions as anything other than loan defaults (see Pl. Mem at 16), is unavailing. See Pulte Home Corp., 2004 WL 516216, at *5;Pavarini Constr. Co., 759 N.Y.S.2d at 57. And, BoA's addition of a negligent misrepresentation claim does not alter this analysis, as this claim sounds in contract. See, e.g., Richmond Metro. Auth. v. McDevitt St. Bovis, Inc., 507 S.E.2d 344, 347 (Va. 1998). Plaintiff is therefore not entitled to indemnification and defense by Travelers for these claims. Exclusions
Because the Court holds that there has not been an "occurrence," it need not decide whether the property damage and causation requirements of the CGL Policies have been met, although there is some doubt that ePlus would be able to establish these requirements. See Nat'l Union Fire Ins. Co. v. Pep Boys, 759 N.Y.S.2d 42, 45-47 (N.Y.App.Div. 2003);Firemen's Fund Ins. Co. v. Nat'l Bank, 849 F. Supp. 1347, 1355-1357 (N.D. Cal. 1994).
Assuming arguendo that BoA and GMAC's (contract) claims could properly be deemed an "occurrence," the CGL Policies appear to exclude coverage.
Travelers argues persuasively that, even if the Court were to find an occurrence, "there are at least two provisions that . . . exclude coverage." (See Def. Mem. at 17.) First, Travelers contends that the computer equipment in question was owned by ePlus and, therefore, is not covered by the CGL policies. (See Def. Mem. at 18.) Second, Travelers argues that ePlus may not obtain coverage for property damage to its own product, which it has sold, handled, or distributed. (See Def. Mem. at 17.) ePlus counters that it never owned the computer equipment, because, among other things, its "role was solely to arrange secured financing for Cyberco to acquire the servers" and the agreements with Cyberco were "secured installment sales, rather than leases," (Pl. Mem. at 11-12, 20.)
Words in an insurance contract are to be given their ordinary meaning. See Salzi v. Virginia Farm Bureau Mutual Ins. Co., 556 S.E.2d 758, 760 (Va. 2002); 2619 Realty, LLC v. Fid. Guar. Ins. Co., 756 N.Y.S.2d 564, 565-566 (N.Y.App.Div. 2003). "Reasonable policy exclusions not in conflict with statute[s] will be enforced; to be effective, the exclusionary language must clearly and unambiguously bring the particular act or omission within its scope." Salzi, 556 S.E.2d at 760 (internal citations omitted); see 2619 Realty, LLC, 756 N.Y.S.2d at 565-566.
The CGL Policies contain clear exclusions for property ePlus owns, rents or occupies. (See Travelers' Rule 56.1 Stmt. ¶ 8). This exclusion would likely include the computer equipment that served as collateral for ePlus' loans. See Salzi, 556 S.E.2d at 760. ePlus purchased this equipment with money borrowed from GMAC and BoA. (See, e.g., March 25, 2004 Loan Agreement; Lease Agreement at 003858 ("The Assets shall at all times be and remain the sole and exclusive property of [ePlus] . . . [Cyberco] shall have no right, title or interest in the Assets outside of the leasehold interest created by the Schedule.").) In fact, ePlus specifically represented that it "paid for" and had "clear title" to the equipment. (See, e.g., March 25, 2004 Loan Agreement at 3, 7.)
ePlus' UCC Financing Statement seems to make clear that the lease agreement with Cyberco, dated March 3, 2004, was "intended . . . to be a true lease." (See Declaration of Andrew M. Premisler, Esq., dated December 21, 2005, at GMAC 001442.)
Similarly, the computer equipment would likely fall within the exclusion for ePlus' "product," which includes property that ePlus has sold, handled, or distributed. (See Travelers' Rule 56.1 Stmt. ¶ 8); see also Frontier Insulation Contract, Inc. v. Merchants Mut. Ins. Co., 91 N.Y.2d 169, 177 (1997).
V. Conclusion and Order
For the reasons stated herein, Defendant Travelers' motion for summary judgment [39] is granted, and Plaintiff ePlus' cross-motion [51] is denied.