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Hartford Fire Insurance Co. v. Aaron Industries, Inc.

United States District Court, N.D. Illinois, Eastern Division

January 8, 2020

Hartford Fire Insurance Company, Plaintiff/Counter-Defendant,
v.
Aaron Industries, Inc., Defendant/Counter-Claimant.

          MEMORANDUM OPINION AND ORDER

          Manish S. Shah, United States District Judge.

         Plaintiff Hartford Fire Insurance Company insured some of defendant Aaron Industries Inc.'s machinery. While that machinery was being stored by a third party, someone sold it to a scrap metal company. Aaron filed a claim requesting reimbursement for the loss but Hartford denied coverage, saying the policy excluded losses sustained as the result of dishonest acts committed by anyone to whom covered property had been entrusted. Aaron pointed to an exception to the exclusion that applied if the act was committed by a “sales customer, ” but Hartford said the third party was not a sales customer and filed this declaratory action seeking a determination of its rights and obligations under the policies. Aaron counterclaimed for declaratory relief, breach of contract and bad faith, and both parties filed motions for summary judgment. Because that third party was a “rental or sales customer” under the policies, Aaron's motion is granted and Hartford's is in part denied. But because Hartford's denial was not vexatious or unreasonable, Hartford is entitled to judgment in its favor on Aaron's bad-faith claim.

         I. Legal Standards

         Summary judgment is appropriate if there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a). The moving party must show that, after “construing all facts, and drawing all reasonable inferences from those facts, in favor of the non-moving party, ” United States v. P.H. Glatfelter Co., 768 F.3d 662, 668 (7th Cir. 2014), a “reasonable jury could not return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The moving party is also entitled to summary judgment when the “nonmoving party has failed to make a sufficient showing on an essential element of her case with respect to which she has the burden of proof.” Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). These same rules apply equally to cross-motions for summary judgment, Blow v. Bijora, Inc., 855 F.3d 793, 797 (7th Cir. 2017), and I may consider evidence from one motion when deciding the other. Torry v. City of Chicago, 932 F.3d 579, 584 (7th Cir. 2019).

         In deciding a motion for summary judgment that calls for the interpretation and application of a contract in a declaratory judgment action, when the terms of the contract are “clear and unambiguous, ” the contract should be construed and applied according to its literal terms. Elkhart Lake's Rd. Am., Inc. v. Chicago Historic Races, Ltd., 158 F.3d 970, 972 (7th Cir. 1998). Although insurers have the burden of proving that an exclusion applies, the insured has the burden “to prove that an exception to the exclusion applies.” Best Craft, LLC v. St. Paul Fire & Marine Ins. Co., 611 F.3d 339, 347 (7th Cir. 2010); Varlen Corp. v. Liberty Mut. Ins. Co., 924 F.3d 456, 460 n.2 (7th Cir. 2019).

         II. Facts

         Aaron is in the business of buying and selling new and used machinery. [44] ¶ 3; [36-1] at 8:20-9:5.[1] Hartford issued Aaron an insurance policy that covered “direct physical ‘loss'” to some of their machinery. [47] ¶¶ 5-6; [1-1] at 136. That policy contains an exclusion for any loss “caused directly or indirectly by or resulting from any … [e.] Dishonest or criminal acts, including conversion and theft” committed by, among others, “[a]nyone, other than a carrier for hire or rental or sales customer, to whom [Aaron] release[s] or entrust[s]” any of the covered property, “including their employees, for any purpose.” [44] ¶ 6; [47] ¶ 7; [1-1] at 138-39. The exclusion applies whether or not such persons “are acting alone or in collusion with others, ” id., but does not apply to “acts of conversion and theft committed by [Aaron's] rental or sales customers or carrier(s) for hire.” Id.

         As part of a joint venture with Reich Brothers Equipment LLC, Aaron bought thirteen barges, each of which contained six stainless steel tanks (seventy-eight tanks in all). [44] ¶ 7; [47] ¶ 9; [36-2] at 9. Aaron's vice president of sales, Michael Cohen, then retained a one-man brokering operation (Joseph Garza of JNG Enterprise Inc., [44] ¶ 8; [47] ¶ 12) who eventually participated in discussions involving Aaron, Reich, Ryan Cheramie, and Ocean Marine Contractors. [44] ¶ 9; [47] ¶ 13. In an email, Garza said that Cheramie was the “COO” of Ocean Marine Contractors. [36-3] at 1. Cohen says that he does not remember Cheramie's title, but that Cheramie was one of two contacts that one of Cohen's associates had at Ocean Marine Contractors. [36-1] at 42:16-43:7. Cohen received an insurance certificate that showed that Ocean Marine Contractors was insured under the same policy as Ocean Marine Recycling LLC and a number of other entities with similar names, such as Ocean Marine Contractors (Scrap Division) LLC and Cheramie Commercial Rentals LLC. [36-1] at 44:2-24; [36-4].

         Aaron, Reich, and JNG eventually entered into an agreement. See [44] ¶¶ 12- 13; [47] ¶¶ 17-18; [36-6]. According to that agreement, Aaron and Reich would loan $75, 000 to JNG and, in return, JNG would provide logistics for transporting the barges to Ocean Marine Contractors's facility in Louisiana. [36-6] at 1. Once the barges had arrived, Ocean Marine Contractors would remove the tanks and store them for five years. Id. In return, Ocean Marine Contractors would be allowed to dismantle and retain ownership of the barges that had carried the tanks to their facility. Id. See also [44] ¶¶ 12, 13; [47] ¶ 18. No. one from Ocean Marine Contractors signed the agreement. [36-6].

         Shortly after that agreement was signed, [2] the barges and tanks made their way down the Mississippi River to Louisiana. [44] ¶ 13; [47] ¶ 19. Aaron and Hartford agree that by that point, Aaron had entrusted the tanks to Ocean Marine Contractors. [44] ¶ 11. In May and June of 2016, Aaron and Reich sent employees to the facility to inspect the tanks. [47] ¶ 20. No. problems were reported. Id. The tanks were completely removed from the barges by that August, [47] ¶ 21, and in December of 2016, while Aaron and Reich were actively trying to sell the tanks, Cheramie made an offer on behalf of Ocean Marine Recycling LLC to buy all seventy-eight tanks for $978, 120. [47] ¶ 22; [36-8]. Aaron and Reich rejected the offer. [47] ¶ 22.

         Unbeknownst to Aaron, the vast majority of the tanks were subsequently dismantled and sold during the time they were supposed to be safely stored at Ocean Marine Contractors's facility. [44] ¶ 14.

         In March of 2018, Aaron and Reich filed suit in Louisiana against Ocean Marine Contractors, Ocean Marine Recycling, JNG and others, alleging that they had illegally misappropriated sixty-six of the seventy-eight tanks. [47] ¶¶ 28-30. In those pleadings, Aaron alleges that Cheramie directed the dismantling and sale of the tanks, [36-7] ¶ 35, and that the funds obtained from the sale of the scrap metal went to Ocean Marine Recycling and Cheramie personally. Id. ¶ 41. One of Cheramie's filings in that action largely confirmed that version of the events, [39-7] at 2, and attached a sworn declaration from Cheramie. Id. at 12-15. In that declaration, Cheramie says he is an authorized and duly appointed representative of both Ocean Marine Contractors and Ocean Marine Recycling, that Ocean Marine Recycling purchased all of the barges (and the tanks) from JNG in April of 2016, that Cheramie thereafter directed a scrap metal buyer to scrap the tanks, that Cheramie had the buyer make their check out to Cheramie's personal account because Cheramie's bank was the only bank that would accept the buyer's checks, and that after depositing the money he quickly transferred it back to Ocean Marine Recycling's account. [39-7] at 12 ¶¶ 2, 8-9, 11-15.

         Aaron notified Hartford of the loss at around the same time it filed suit in Louisiana, [44] ¶ 17, and Hartford denied coverage a few months later. [44] ¶ 18. Hartford acknowledged receipt of documents showing that Cheramie and Ocean Marine Recycling received money for scrap metal that was sold during the fall and winter of 2017-2018, [39-4] at 1, and Hartford noted that during an inspection a “crew member told the Aaron employee that Ryan Cheramie instructed them to cut up the tanks to sell for scrap.” [39-4] at 2. Hartford asserted that, although Ocean Marine Recycling's “work crews may have dismantled the tanks, ” and although Ocean Marine Recycling “may have received the funds from the sale of the scrap, ” all of that had been “done at the direction of Ryan Cheramie, to whom Aaron had entrusted the property.” [39-4] at 3. Hartford denied coverage because “the conversion and theft of the tanks [was] a dishonest or criminal act committed by someone to whom Aaron entrusted the property.” Id. at 3. Hartford reasoned that Cheramie's offer to purchase the tanks was not enough to make him a sales customer and that any relationship that existed between Aaron, Cheramie, Ocean Marine Contractors, and Ocean Marine Recycling was “that of a bailee, not a sales customer.” [39-4] at 3.

         Hartford never determined on whose behalf Cheramie was acting when he allegedly directed the dismantling of the tanks. See [39-4]; [39-10] at 95:20-102:3. Hartford initially made little or no effort to determine whether Cheramie was acting on behalf of Ocean Marine Contractors, himself, or some other entity when he dismantled the tanks, but Hartford's position was that it did not matter which person or entity committed the act; acts committed by any of them of them would have fallen under the exclusion. Id. After someone brought up the sales-customer exception to the exclusion, Hartford asked for more documents, received those documents, reviewed them, and decided that it had enough proof that the exclusionary clause applied. Id. at 102:17-103:4.

         Hartford then initiated this lawsuit, seeking declaratory relief. [1] at 5.[3] Aaron counterclaimed, alleging breach of contract, bad faith in violation of Illinois law, 215 Ill. Comp. Stat. 5/155, and, in the alternative, declaratory relief. [10] at 11-14. Hartford moves for summary judgment on its declaratory relief claim, [35] at 1, and Aaron's bad faith claim. Id.; [36] at 7. Aaron moves for summary judgment on Hartford's ...


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