Saoud v. Everest Indemnity Insurance Company

564 F.Supp.3d 597

William SAOUD, Patricia Boland-Saoud, and Bill Saoud Financial, LLC, Plaintiffs/Counter-Defendants,

v.EVEREST INDEMNITY INSURANCE COMPANY, Defendant/Counter-Claimant.

Case No. 19-12389

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

Signed September 29, 2021

Douglas Young, Young Insurance Law, Royal Oak, MI, for Plaintiffs/Counter-Defendants.

Stephen P. Brown, Plunkett & Cooney, Bloomfield Hills, MI, for Defendant/Counter-Claimant.

OPINION AND ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT [22] AND DENYING PLAINTIFFS’ MOTION FOR SUMMARY JUDGMENT [21]

LAURIE J. MICHELSON, UNITED STATES DISTRICT JUDGE

In 2017 and 2018, William Saoud, who runs Bill Saoud Financial, LLC, offered some of his clients an investment product called the "1 Global Memorandum of Indebtedness." To oversimplify a bit, 1 Global lent money to businesses that did not want to or could not borrow from traditional banks. (See ECF No. 32, PageID.825.) These businesses repaid 1 Global by giving 1 Global a percentage of their daily revenue. (See id. at PageID.826.) To get the money to loan to the businesses, 1 Global solicited investors. Via the Memorandum of Indebtedness, an investor would agree to loan 1 Global money with the hope that 1 Global would repay the money with high interest. Several of Saoud's clients signed the 1 Global Memorandum of Indebtedness, agreeing to loan 1 Global substantial sums ($260,000 in one instance).

Unfortunately for these clients and for Saoud, 1 Global's operations were not completely legitimate. In fact, 1 Global allegedly used $50 million in investor funds to buy bad credit card debt and 1 Global's CEO allegedly took another $28 million for personal use. By July 2018, 1 Global was bankrupt. And in August 2018, the Securities and Exchange Commission sued 1 Global and its CEO for, among other things, selling unregistered securities. See Sec. & Exch. Comm'n v. 1 Global Capital LLC , No. 18-61991 (S.D. Fla. filed Aug. 23, 2018).

In late 2018, several of Saoud's clients who signed the 1 Global memorandum sued Saoud in state court. (ECF No. 21, PageID.374, 385, 397.) In or around July 2019, three of the lawsuits settled. (Aside from the lawsuits, Michigan's Department of Licensing and Regulatory Affairs pursued administrative remedies against Saoud and the SEC served a subpoena on Saoud. (See ECF No. 21-5, PageID.413; ECF No. 22, PageID.635.))

Around the time that three of the state court lawsuits settled, Saoud, his company, and his wife who worked at the company (the Saouds) filed this federal lawsuit against Everest Indemnity Insurance Company. (ECF No. 1.) Everest had provided the Saouds with professional liability insurance. The Saouds asked this Court to declare that under the insurance policy, Everest was required to reimburse them for the attorney's fees they expended and the settlements they paid in the state court suits. (ECF No. 1, PageID.17–18.) The Saouds also sought coverage for the money they paid defending or resolving administrative proceedings relating to the 1 Global memorandum.

After discovery, both sides filed motions for summary judgment. (ECF Nos. 21, 22.) (Or, to be really precise, Everest filed a motion for judgment on the pleadings that the Court converted into a summary-judgment motion. (See ECF No. 30.))

In addressing these cross motions, the Court found that Everest might be entitled to summary judgment because a policy exclusion applied. See Saoud v. Everest Indem. Ins. Co. , 551 F.Supp.3d 777, 798-99, No. 19-12389 (E.D. Mich. July 28, 2021). The exclusion in question states, "[Everest] shall not be liable to pay any Loss resulting from any Claim against an Insured ... [b]ased upon, attributable to, or arising out of the use of or investment in any security that is not registered with the Securities and Exchange Commission." (ECF No. 22-1, PageID.593, 597 (emphasis added).) Although the insurance policy did not define "security," the Court found that the term should be given the same meaning as "security" in the Securities Act of 1933 and the Securities Exchange Act of 1934 (Securities Acts). Saoud , 551 F.Supp.3d at 795. And under the 1933 Act, a "security" included "any note, ... [or] investment contract," 15 U.S.C. § 77b(a)(1), except for a note that "arises out of a current transaction ... and which has a maturity at the time of issuance of not exceeding nine months," 15 U.S.C. § 77c(a)(3). Similarly, under the 1934 Act, a "security" included "any note, ... [or] investment contract," except for a note that "has a maturity at the time of issuance of not exceeding nine months." 15 U.S.C. § 78c(a)(10). The Court further found that because the 1 Global memorandum was a note, Supreme Court precedent deemed it presumptively a "security" under those two definitions. Saoud , 551 F.Supp.3d at 795-97 (citing Reves v. Ernst & Young , 494 U.S. 56, 65, 110 S.Ct. 945, 108 L.Ed.2d 47 (1990) ). All of this pointed toward granting summary judgment in favor of Everest.

But the Court could not fully resolve the summary judgment motions. In particular, it did not have enough information to decide whether the 1 Global memorandum fell within the carveout provided by the Securities Acts, i.e., whether the memorandum had "a maturity at the time of issuance of not exceeding nine months." See Saoud , 551 F.Supp.3d at 797. One problem was that no party had supplied the Court with copies of the 1 Global memoranda that Saoud offered his clients; so the Court had no way to know how long they took to mature. See id. Second, courts had construed the nine-month exception to only encompass "commercial paper." See id. at 798 (citing cases). And so if the 1 Global memorandum was not commercial paper, it would not fall within the exception for a second, independent reason. But the parties had provided the Court no briefing or evidence on whether the memorandum was "commercial paper." See id.

The Court thus ordered supplemental briefing. In particular, "[t]he parties [were] to brief and present evidence on the following: (1) whether any of the 1 Global memoranda that gave rise to the underlying proceedings ‘ha[d] a maturity at the time of issuance of not exceeding nine months,’ and, if so, (2) whether any of those short-term notes were ‘commercial paper.’ " Saoud , 551 F.Supp.3d at 799. "No other issues may be addressed by the parties’ briefs or supplemental evidence," the Court directed. Id.

The parties have filed their supplemental briefs, but the Saouds have not followed that last direction. They attempt to insert a new argument that was not adequately raised during the summary judgment briefing. In particular, they point out that the policy exclusion is for "Claim[s] ... [b]ased upon, attributable to, or arising out of the use of or investment in any security that is not registered with the Securities and Exchange Commission." (ECF No. 22-1, PageID.593, 597). So in the Saouds’ view, the exclusion applies only if the state court complaints claimed that Saoud sold a security that was required to be registered with the SEC. (ECF No. 33, PageID.853–858.) Yet, according to the Saouds, the state court complaints did not make that claim—instead they claimed violations of Michigan's securities laws. (Id. at PageID.856.) It follows, in the Saouds’ view, that the policy exclusion does not preclude indemnification for the state court settlements and attorney's fees. (See id. at PageID.853–858.)

This argument is forfeited. When the parties initially filed their motions for summary judgment, the Saouds filed three briefs: an opening and a reply brief in support of their motion for summary judgment and a response brief to Everest's motion. And in these briefs, the Saouds made several arguments for why the unregistered-security exclusion did not apply. (ECF No. 21, PageID.349–352; ECF No. 26, PageID.677–683; ECF No. 29, PageID.763–764.) Yet at no point did they argue that the exclusion was inapplicable because the state court complaints did not allege that Saoud sold a security that was required to be registered with the SEC. And in its prior opinion, the Court proceeded past this threshold issue. Accordingly, the Court deems the argument forfeited (in addition to being beyond the scope of the permitted supplemental briefing).

True, where an argument is obviously correct, deeming it forfeited might result in a miscarriage of justice. Cf. In re Morris , 260 F.3d 654, 664 (6th Cir. 2001) (discussing exceptions to rule that arguments not raised in the district court are forfeited on appeal). As such, the Court will examine the Saouds’ interpretation of the unregistered-securities exclusion—but only to decide whether it is obviously correct.

The Saouds make several arguments for why, in their view, the unregistered-security exclusion applies only if the state court complaints alleged that the 1 Global memorandum was a security that needed to be registered with the SEC. For one, they point out that other policy exclusions use the phrase "actual or alleged" (e.g., "[Everest] shall not be liable to pay any Loss resulting from any Claim against an Insured ... based upon, attributable to, or arising out of any actual or alleged price fixing"), whereas the unregistered-security exclusion does not use "actual or alleged." (Compare ECF No. 22-1, PageID.595, with ECF No. 22-1, PageID.597.) And the Saouds point out that some of the other exclusions expressly exclude coverage for state law violations (e.g., "violation[s] of [ERISA] ... or any similar provisions of any federal, state, local or statutory law or common law" (ECF No. 22, PageID.594)), whereas the unregistered-security exclusion does not mention state law (ECF No. 33, PageID.855). In the Saouds’ view, both of these textual differences show that the unregistered-security exclusion is narrow and that it does not apply unless the state court plaintiffs claimed that they were offered or sold a security not registered with the SEC. (ECF No. 33, PageID.855,...