William Saoud v. Everest Indemnity Ins. Co.

• Court: Court of Appeals for the Sixth Circuit
• Decided: July 14, 2022
• Docket: 21-1621
• Status: Unpublished

Opinion

NOT RECOMMENDED FOR PUBLICATION File Name: 22a0284n.06

No. 21-1621

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT FILED Jul 14, 2022 WILLIAM SAOUD, PATRICIA BOLAND- ) DEBORAH S. HUNT, Clerk SAOUD, and BILL SAOUD FINANCIAL, ) ) LLC, ) ON APPEAL FROM THE UNITED Plaintiffs-Appellants, ) STATES DISTRICT COURT FOR ) THE EASTERN DISTRICT OF v. ) MICHIGAN ) EVEREST INDEMNITY INSURANCE ) COMPANY, ) OPINION Defendant-Appellee. ) )

Before: SILER, McKEAGUE, and LARSEN, Circuit Judges.

LARSEN, Circuit Judge. William Saoud sells insurance-related products. Beginning in

2017, he offered some of his clients a new financial instrument: a Memorandum of Indebtedness

issued by 1 Global Capital, LLC. Unfortunately, the investment opportunity was too good to be

true. 1 Global Capital declared bankruptcy, and the SEC sued the company for alleged violations

of the Securities and Exchange Act. Saoud’s clients also sued him. Saoud sought indemnification

from his insurer, Everest Indemnity Insurance Company, and ultimately filed this lawsuit for a

declaratory judgment and breach of contract. The district court granted summary judgment in

favor of Everest, concluding that the claims related to 1 Global Capital did not fall within the scope

of the insurance policy. We affirm. No. 21-1621, Saoud, et al. v. Everest Indem. Ins. Co.

I.

William Saoud owns Bill Saoud Financial, LLC, which sells insurance-related products,

such as annuities, life insurance, and long-term health care products. Saoud had a professional

liability policy with Everest Indemnity Insurance Company.

In 2017 and 2018, Saoud offered some of his clients an investment product called the

1 Global Memorandum of Indebtedness issued by 1 Global Capital, LLC. Unfortunately, 1 Global

Capital declared bankruptcy soon after, jeopardizing the investments Saoud’s clients had made.

And the SEC sued 1 Global Capital for violations of the Securities and Exchange Act. See SEC

v. 1 Global Capital LLC, No. 18-cv-61991, 2019 WL 1670799, at *1 (S.D. Fla. Feb. 7, 2019).

Several clients sued Saoud and his wife, Patricia, who was also an employee of the firm.

Their complaints generally alleged that the Saouds had falsely represented that the 1 Global

Memorandum of Indebtedness was a secure investment and had sold an unregistered security in

violation of Michigan’s securities laws. On December 13, 2018, pursuant to his professional

liability policy with Everest, Saoud notified Everest’s agent, Lancer Claims Services, of the first

of these lawsuits. Lancer responded that Saoud should hire his own attorney while it investigated

coverage; if Lancer found that the policy covered the claim, Everest would “reimburse [him] for

[his] fees and expenses.” On February 19, 2019, Saoud Financial notified Lancer of two additional

lawsuits filed by clients and of investigations by Michigan’s Department of Licensing and

Regulatory Affairs and the SEC. Saoud Financial claimed expenses of over $100,000. Lancer

and Everest never responded to this notice. Being in “limbo” as to Everest’s position on coverage,

Saoud Financial reached out again to Lancer and notified it of an upcoming mediation, so that

Everest could participate. But the Saouds never heard from Lancer or Everest. The Saouds

eventually settled the lawsuits.

-2- No. 21-1621, Saoud, et al. v. Everest Indem. Ins. Co.

On July 10, 2019, the Saouds and Saoud Financial sued Everest in Michigan state court,

claiming breach of contract and seeking a declaratory judgment. Everest removed the suit to

federal court and finally notified the Saouds that it would not defend or indemnify them for the

lawsuits because, in its view, the claims did not fall within the scope of the policy. The district

court ultimately granted summary judgment to Everest, concluding that a coverage exclusion

applied. The Saouds appeal.

II.

We review the district court’s summary judgment decision de novo. Franklin Am. Mortg.

Co. v. Univ. Nat’l Bank of Lawrence, 910 F.3d 270, 275 (6th Cir. 2018). “[S]ummary judgment

is warranted only if ‘there is no genuine issue as to any material fact’ and ‘the movant is entitled

to judgment as a matter of law.’” Id. (quoting Fed. R. Civ. P. 56(a) and Villegas v. Metro. Gov’t

of Nashville, 709 F.3d 563, 568 (6th Cir. 2013)).

The parties agree that Michigan law governs the policy. Under Michigan law, courts

employ a two-part analysis to determine an insurance policy’s coverage: “First, it must be

determined whether ‘the policy provides coverage to the insured,’ and, second, the court must

‘ascertain whether that coverage is negated by an exclusion.’” Hunt v. Drielick, 852 N.W.2d 562,

565 (Mich. 2014) (quoting Heniser v. Frankenmuth Mut. Ins. Co., 534 N.W.2d 502, 510 (Mich.

1995)).

Like the district court, we believe that this case can be resolved based on the policy’s

“Unregistered Security Exclusion.”1 That provision excludes coverage for any claim “[b]ased

upon, attributable to, or arising out of the use of or investment in any security that is not registered

1 Therefore, we need not address whether the lawsuits against the Saouds were based on the Saouds’ “professional services” as insurance agents under the policy. -3- No. 21-1621, Saoud, et al. v. Everest Indem. Ins. Co.

with the Securities and Exchange Commission.” Below, the parties disputed whether the 1 Global

Memorandum of Indebtedness was a “security” within the meaning of the exclusion. Saoud v.

Everest Indem. Ins. Co., 551 F. Supp. 3d 777, 794 (E.D. Mich. 2021). The district court explained

that a “note” is presumed a “security” under the Securities Acts and concluded that the 1 Global

Memorandum of Indebtedness was a “note.” Id. at 796 (citing Reves v. Ernst & Young, 494 U.S.

56, 65 (1990)). The court also confirmed, after ordering supplemental briefing, that the 1 Global

Memorandum of Indebtedness was a “security” because it was not a note that matured in nine

months or less and, even if it was, the 1 Global Memorandum of Indebtedness was not “commercial

paper.” Saoud v. Everest Indem. Ins. Co., 564 F. Supp. 3d 597, 602–05 (E.D. Mich. 2021).

In this court, the Saouds raise just one argument in response: They argue that the

“Unregistered Security Exclusion” applies only if the complaints alleged that the Saouds sold

“securities” that were required to be registered with the SEC. According to the Saouds, the

complaints alleged only that the 1 Global Memorandum of Indebtedness was a security under

Michigan law, not federal. So the Saouds conclude that the Security Exclusion does not apply.

But the district court deemed this argument forfeited because it was presented too late.

Saoud, 564 F. Supp.3d at 601. The Saouds failed to raise this argument in their motion for

summary judgment, reply brief, or response to Everest’s motion for summary judgment. Instead,

the Saouds first raised this argument in their supplemental briefing, even though the district court

had directed the parties to brief only whether the 1 Global Memorandum of Indebtedness was a

“security” and had admonished the parties that “[n]o other issues may be addressed.” Saoud, 551

F. Supp. 3d at 799. We cannot say that the district court abused its discretion by finding a forfeiture

under these circumstances. See AES-Apex Emp’r Servs., Inc. v. Rotondo, 924 F.3d 857, 867 (6th

Cir. 2019). By not properly raising this issue below, the Saouds forfeited it. See Am. Bank, FSB

-4- No. 21-1621, Saoud, et al. v. Everest Indem. Ins. Co.

v. Cornerstone Cmty. Bank, 733 F.3d 609, 615 (6th Cir. 2013). And the Saouds develop no other

argument that the “Unregistered Security Exclusion” does not apply.2

The Saouds instead argue that waiver or estoppel should preclude Everest’s reliance on the

“Unregistered Securities Exclusion” because Everest failed to timely disclaim coverage. In limited

circumstances, Michigan courts prohibit insurers from raising defenses to coverage that they could

have raised earlier. See Kirschner v. Process Design Assocs., Inc., 592 N.W.2d 707, 709 (Mich.

1999). But this doctrine usually cannot “broaden the coverage of a policy to protect the insured

against risks that were not included in the policy or that were expressly excluded from the policy.”

Id. at 709–10 (citing Ruddock v. Detroit Life Ins. Co., 177 N.W. 242, 248 (Mich. 1920)). Michigan

courts do recognize an exception when “the inequity of forcing the insurer to pay on a risk for

which it never collected premiums is outweighed by the inequity suffered by the insured because

of the insurance company’s actions.” Lee v. Evergreen Regency Coop. & Mgmt. Sys., Inc., 390

N.W.2d 183, 186 (Mich. Ct. App. 1986). Such cases generally involve an insurance company that

“has either misrepresented the terms of the policy to the insured or defended the insured without

reserving the right to deny coverage.” Id. (citations omitted).

The Saouds seek to invoke this exception, relying on Meirthew v. Last, 135 N.W.2d 353

(Mich. 1965). See Lee, 390 N.W.2d at 186 (citing Meirthew as an example in which the equities

favored the insured). In Meirthew, the defendant’s insurer represented the defendant in a tort suit.

135 N.W.2d at 354. The three-year litigation ended in a jury verdict for the plaintiff. Id. When

the plaintiff sought payment from the insurer, the insurer disclaimed liability, invoking a “Risk

Excluded” clause it had never before mentioned. Id. The Michigan Supreme Court held that the

2 The Saouds also suggest that the district court erred in finding that the 1 Global Memorandum of Indebtedness is a “security.” But this argument is forfeited because it is undeveloped. United States v. Presley, 18 F.4th 899, 902 n.2 (6th Cir. 2021). -5- No. 21-1621, Saoud, et al. v. Everest Indem. Ins. Co.

insurer was estopped from asserting the exclusion because it had taken over the defense of the

litigation without providing the insured with timely notice “of the policy defense or defenses the

insurer had in mind.” Id. at 356; see also Fire Ins. Exch. v. Fox, 423 N.W.2d 325, 326–27 (Mich.

Ct. App. 1988) (collecting cases) (describing the “general rule” that “an insurer which undertakes

the defense of an insured while having actual or constructive knowledge of facts which would

allow avoidance of liability will be deemed to have waived its right to avoid coverage unless

reasonable notice is served to the insured of the possible disclaimer of liability”).

Meirthew is inapposite. Everest never represented the Saouds in the underlying litigation

and therefore never controlled the Saouds’ litigation strategy to their detriment. Nor have the

Saouds provided any evidence of actual prejudice from Everest’s delay in informing the Saouds

that it would neither defend nor indemnify them. Instead, they argue that prejudice should be

presumed. But Michigan caselaw affords such a presumption only “when an insurer undertakes

to defend its insured without reservation of rights, continues to defend although it possesses

sufficient information concerning a possible policy exclusion, and subsequently gives notice of its

intent to deny coverage.” Multi-States Transp., Inc. v. Mich. Mut. Ins. Co., 398 N.W.2d 462, 465

(Mich. Ct. App. 1986). This is not one of those cases. So no presumptive prejudice applies, and

Everest did not waive the right to raise the exclusion.

Finally, the Saouds appear to argue that, even if Everest had no duty to indemnify, it

nonetheless had a duty to defend. How so? Because the duty to defend is broader than the duty

to indemnify, see Auto-Owners Ins. Co. v. City of Clare, 521 N.W.2d 480, 487 (Mich. 1994), and,

the Saouds claim, the allegations in the underlying lawsuits arguably came within the scope of the

agreement. Indeed, the duty to defend is not “limited by the precise language of the pleadings”

nor “limited to meritorious suits and may even extend to actions which are groundless, false, or

-6- No. 21-1621, Saoud, et al. v. Everest Indem. Ins. Co.

fraudulent, so long as the allegations against the insured even arguably come within the policy

coverage.” Detroit Edison Co. v. Mich. Mut. Ins. Co., 301 N.W.2d 832, 835 (Mich. Ct. App.

1981). So the Saouds say that Everest had to promptly defend them against the lawsuits even if

the claims weren’t ultimately covered by the policy. We disagree.

The Saouds are right that the duty to defend applies where suits even arguably fall within

the scope of the agreement. But that is because, until there is “sufficient factual development,” it

will usually be difficult to “demonstrate[] that none of the claims fall within the policies.” See

S. Macomb Disposal Auth. v. Am. Ins. Co., 572 N.W.2d 686, 711 (Mich. Ct. App. 1997); accord

City of Willoughby Hills v. Cincinnati Ins. Co., 459 N.E.2d 555, 558 (Ohio 1984). For example,

“[a]n insurer has a duty to defend, despite theories of liability asserted against any insured which

are not covered under the policy, if there are any theories of recovery that fall within the policy.”

Detroit Edison, 301 N.W.2d at 835.

But contrary to the Saouds’ argument, “the duty to defend is not an unlimited one.”

Meridian Mut. Ins. Co. v. Hunt, 425 N.W.2d 111, 114 (Mich. Ct. App. 1988). “The insurer is not

required to defend against claims for damage expressly excluded from policy coverage.” Id.;

accord Consol. Med. Servs. v. Travelers Prop. Cas., No. 220846, 2001 WL 637447, at *2 (Mich.

Ct. App. May 25, 2001). In other words, there is no duty to defend if there is no duty to indemnify

as a matter of law. Couch on Insurance § 200:12 (3d ed.), Westlaw (database updated June 2022).

Here, all the claims against the Saouds were premised on the same unregistered security. So both

the duty to defend and the duty to indemnify turn on whether the “Unregistered Security

Exclusion” applies. Because the exclusion applies, Everest had no duty to defend.

***

We AFFIRM.

-7-