Shaut v. Nat'l Cas. Co.

176 N.E.3d 1122

Michael SHAUT, Plaintiff-Appellant,

v.NATIONAL CASUALTY COMPANY, Defendant-Appellee.

No. 110010

Court of Appeals of Ohio, Eighth District, Cuyahoga County.

RELEASED AND JOURNALIZED: July 22, 2021

Michael Shaut Law Office, L.P.A., Michael Shaut, Cleveland, and Thomas I. Monah, for appellant.

Bailey Cavalieri, L.L.C., Sabrina Haurin, and Jolene S. Griffith, Columbus, for appellee.

JOURNAL ENTRY AND OPINION

LARRY A. JONES, SR., J.:

{¶ 1} Plaintiff-appellant, Michael Shaut ("Shaut"), pro se, appeals the trial court's decision to grant summary judgment in favor of defendant-appellee, National Casualty Company ("NCC"). Finding no merit to the appeal, we affirm.

{¶ 2} This case arose after Shaut sought, and was denied, coverage from NCC under a Directors and Officers Liability ("D&O") insurance policy for various matters arising from an alleged employment Ponzi scheme.¹ Beginning in 2015, some current and former employees of two companies, Downing Partners ("Downing") and a wholly owned subsidiary, 3si (also known as Surgical Safety Solutions, L.L.C.), alleged that they had been fraudulently induced into entering employment agreements with and investing in 3si and Downing. The current and former employees alleged that Shaut, an attorney licensed to practice law in the state of Ohio, and others promised employment opportunities in exchange for significant personal investments in the companies. According to the allegations, Shaut and the others had no intention of paying the current and prospective employees for their employment and used their investments to pay the salaries and benefits of other employees.

{¶ 3} With regard to the NCC insurance policies, NCC issued a "Business and Management Indemnity Policy" to 3si effective from February 10, 2015, to February 10, 2016 (the "2015-2016 Policy Period"). The 2015-2016 Policy's declaration page stated, in pertinent part:

THE EMPLOYMENT PRACTICES, DIRECTORS AND OFFICERS AND COMPANY, AND FIDUCIARY COVERAGE SECTIONS OF THIS POLICY, WHICHEVER ARE APPLICABLE, COVER ONLY CLAIMS FIRST MADE AGAINST THE INSURED DURING THE POLICY PERIOD OR, IF ELECTED, THE EXTENDED PERIOD AND REPORTED TO THE INSURER PURSUANT TO THE TERMS OF THE RELEVANT COVERAGE SECTION.

{¶ 4} On February 1, 2016, 3si filed two insurance applications with NCC in connection with its renewal of its D&O insurance. NCC then issued a Business and Management Indemnity Policy to 3si, the "2016-2017 Policy," effective February 10, 2016 to February 10, 2017.

Employees’ Lawsuits

{¶ 5} For ease of discussion, the various lawsuits and other matters are broken down into two categories: lawsuits and demands that were reported to NCC ("Reported Matters") and those that were not ("Unreported Matters").

Unreported Matters

Hassman Lawsuit

{¶ 6} In March 2015, Eric Hassman ("Hassman") filed suit against Downing in Massachusetts alleging he was recruited by Downing to become its Chief Financial Officer and was fraudulently induced to invest $250,000 in exchange for a 1 1/4 percent ownership interest and then unlawfully terminated from his position with the company.

Hawes Lawsuit

{¶ 7} In August 2015, Shane Hawes ("Hawes") emailed Downing and Shaut alleging he was fraudulently induced into investing $250,000 with the company, was owed back wages, and had not received health benefits. In January 2016, Hawes filed suit against Downing, Shaut, and others in Cuyahoga County Common Pleas Court, alleging that he was obligated to invest $250,000 with the company in connection with his employment but, despite being promised a $225,000 annual salary plus benefits, he did not receive several paychecks or the promised benefits. Hawes further alleged that the company and Shaut were engaged in a Ponzi scheme and that employees were only paid when a new employee or investor was brought into the company.

Lehigh Lawsuit

{¶ 8} In September 2015, Scott Lehigh ("Lehigh") filed suit against Downing and 3si in Pennsylvania, alleging that he was provided fraudulent information to induce him into entering into an employment agreement in which he agreed to become executive vice president of North American sales for 3si. He alleged that his employment was contingent upon his investing $250,000 in the company, and he relied on the company's assurance that it had a lucrative contract with a major hospital system that it did not.

Reported Matters

Hilderbrand Lawsuit

{¶ 9} In June 2016, David Hilderbrand and others filed suit against 3si, Shaut, and others in New York, alleging that the defendants perpetrated a Ponzi scheme by fraudulently inducing them into entering into employment agreements requiring a minimum investment of $250,000 in either 3si or Downing. According to the claimants, their investments were used to pay past compensation due to other employees of the defendants and, upon commencing their employment, the claimants failed to receive their promised compensation, reimbursement for expenses, or promised benefits.

{¶ 10} In November 2016, Hilderbrand filed for arbitration against 3si, Shaut, and others, asserting causes of action related to alleged violations of various labor and employment laws and seeking damages related to unpaid wages.

Haufler Lawsuit

{¶ 11} On November 16, 2017, Glenn Haufler filed suit against Shaut, 3si, and others in Massachusetts, alleging he was fraudulently induced to make a $250,000 investment in Downing, that he was part of the same Ponzi scheme as alleged in the Hassman and Lehigh Lawsuits, and that his investment was used to resolve the claims in the Hassman Lawsuit.

Hart Arbitration

{¶ 12} On December 27, 2016, John Hart and others filed for arbitration against 3si, Shaut, and others, alleging that the defendants perpetrated a "fraud and novel Ponzi scheme" involving their inducement into entering employment agreements that conditioned their employment upon making an investment of $150,000-$250,000, in either Downing, 3si, or another related company (CliniFlow Technologies, L.L.C.). The plaintiffs asserted that their investments were used to pay other employees’ back wages, that the defendants failed to pay the plaintiffs their salaries almost immediately upon the commencement of their employment, and that the defendants made numerous material misrepresentations and omissions.

Insurance Claims

{¶ 13} In July 2016, 3si requested coverage from NCC for the Hilderbrand Lawsuit. NCC alleged that, at that time, it was unaware of any pending lawsuits or arbitration matters. In September 2016, NCC informed 3si that NCC would defend 3si and its D&O's in the Hilderbrand Lawsuit subject to a reservation of rights. On March 31, 2017, Shaut emailed NCC stating he had just become aware that NCC was defending 3si in the Hilderbrand Lawsuit and requested coverage. On April 5, 2017, he emailed NCC requesting coverage under the 2016-2017 Policy for the Hawes Lawsuit, Haufler Lawsuit, and Hart Arbitration.

{¶ 14} NCC initially responded that it would defend Shaut in the Hilderbrand Lawsuit subject to a reservation of rights and requested additional information with regard to the other claims because those matters had not been reported to NCC.

{¶ 15} NCC subsequently informed Shaut that there was no coverage for the Reported Matters because the Reported Matters related to "certain" Unreported Matters and constituted a single claim that was first made prior to the 2016-2017 Policy Period, the single claim was not timely reported to NCC under the 2015-2016 Policy, and the 2016-2017 Policy's "Warranty Exclusion" precluded coverage for the Reported Matters.

The Instant Action

{¶ 16} Shaut filed this instant action alleging that NCC breached the 2016-2017 Policy when NCC determined that there was no coverage for the Reported Matters under the policy. He further sought declarations stating that NCC was obligated to indemnify him for any judgments against him in the Reported Matters and asserted a claim for bad faith.

{¶ 17} NCC moved for summary judgment. Shaut moved to compel discovery. The trial court denied his motion. The trial court granted NCC's motion for summary judgment, finding that there was no coverage and that NCC was entitled to summary judgment on Shaut's claim for breach of contract; therefore, his bad-faith claims also failed as a matter of law. The trial court found there were no genuine issues of material fact and that reasonable minds could come to but one conclusion, which was adverse to Shaut; thus, NCC was entitled to judgment as a matter of law.

Assignment of Error

{¶ 18} It is from this order that Shaut filed this pro se appeal, raising the following assignment of error:

I. The Trial Court erred in granting summary judgment to National Casualty Company, Defendant/Appellee, finding no factual issues as to Appellee's duty to defend and indemnify Plaintiff/Appellant, and then dismissing Appellant's bad-faith claims.

Law and Analysis

{¶ 19} We review summary judgment rulings de novo, applying the same standard as the trial court. Grafton v. Ohio Edison Co. , 77 Ohio St.3d 102, 105, 671 N.E.2d 241 (1996). We accord no deference to the trial court's decision and independently review the record to determine whether summary judgment is appropriate.

{¶ 20} Under Civ.R. 56, summary judgment is appropriate when (1) no genuine issue as to any material fact exists; (2) the party moving for summary judgment is entitled to judgment as a matter of law; and (3) viewing the evidence most strongly in favor of the nonmoving party, reasonable minds can reach only one conclusion that is adverse to the nonmoving party.

"Once the moving party demonstrates entitlement to summary judgment, the burden shifts to the nonmoving party to produce evidence related to any issue on which the party bears the burden of production at trial. Civ.R. 56(E)." Mattress Matters, Inc. v. Trunzo , 2016-Ohio-7723, 74 N.E.3d 739, ¶ 10 (8th Dist.).

Contract Coverage — Which State Governs Claims?

{¶ 21} Shaut contends that Ohio law governs the contract; NCC argues that Massachusetts...