Michael P. Keeley, P.C.

An electronic payments company's insurer must turn over claim files and underwriting materials as they continue to litigate whether the company's roughly $6.8 million loss from two fraud schemes falls within its policy's coverage for "computer fraud," an Iowa federal court ruled Tuesday. Rejecting Hiscox Insurance Co. Inc.'s appeal of Magistrate Judge William Kelly's August discovery order, U.S. District Judge Stephanie Rose said to prevail, Hiscox must show his findings were "clearly erroneous or contrary to law," which is a "demanding standard that gives magistrate judges broad discretion in managing discovery." "Hiscox identifies no legal principle that Judge Kelly misunderstood or misapplied. Rather, the company largely reiterates the same arguments he already considered and rejected," Judge Rose found Tuesday. "Disagreement with a magistrate judge's conclusions, however vigorous, cannot establish clear error." According to court filings, Hiscox filed its action against policyholder Dwolla Inc. in October 2024, seeking a declaration that it owes no coverage under its commercial crime policy that provided up to $5 million per occurrence for losses "resulting directly from computer fraud." As a company that helps facilitate automated clearinghouse, or ACH, transfers between customers and financial institutions, Dwolla had authorized two customers to initiate same-day ACH debits and credits. However, fraudsters "posing" as those two authorized customers initiated fraudulent same-day ACH transfers totalling more than $8.7 million, the declaratory action states. Dwolla then reimbursed originating banks per its agreements with participating financial institutions, suffering a total loss of roughly $6.8 million for which it sought coverage. Dwolla's policy with Hiscox specifically defined "computer fraud" in part as the "use or manipulation of any computer system to make a fraudulent transfer of money … from inside the premises or financial institution premises to a person (other than a messenger) or place outside" such premises. The policy further stated that "computer fraud" does not include any fraudulent transfer of money that required Dwolla, its employees or others acting on Dwolla's behalf to initiate or authorize, aside from a "financial institution," which was separately defined. In the ensuing discovery dispute, Dwolla sought documents concerning how Hiscox previously interpreted such insuring language and handled similar claims in the past. Judge Kelly broadly sided with Dwolla in his August order, which compelled Hiscox to turn over documents relating in part to policy wording, Hiscox's policy interpretation, particular employees involved in developing Hiscox's commercial crime policy and Hiscox's handling of other similar claims. On Tuesday, Judge Rose first agreed that "[e]vidence of an insurer's interpretation of disputed provisions in other contexts may reveal inconsistent positions or shed light on ambiguous terms." She then rejected Hiscox's argument that providing the requested documents would impose an undue burden since the insurer said it maintains roughly a thousand claim files in a system requiring manual review. "Judge Kelly correctly characterized this as an 'outmoded record keeping system,'" Judge Rose said, adding that "[a] party cannot avoid its discovery obligations by choosing inefficient methods of information management." And Hiscox's privacy concerns don't hold water in light of an existing protective order, she said. Judge Rose then further slammed Hiscox's challenge to Dwolla's four separate discovery requests relating to policy wording, interpretation and the insurer's document retention policy, noting the insurer "never presented its current arguments to Judge Kelly." "When opposing requests for production 16, 19, and 20, Hiscox commingled these requests together with its broader objections to prior claims materials, offering only vague objections about 'underwriting and development' materials without explaining what compliance would entail or why it would prove burdensome," she said. As for Dwolla's interrogatory relating to Hiscox's document retention policy, Judge Kelly already found that Hiscox did not make any particular arguments with respect to that interrogatory but instead "lump[ed] interrogatory 25 with arguments concerning requests seeking prior claims material," she highlighted. Though Judge Rose said Hiscox has now provided "detailed arguments about canvassing employees across multiple departments," it should have made such arguments before Judge Kelly. "The court will not permit Hiscox to wait and see 'which way the wind was blowing' before developing its positions," Judge Rose said, quoting the First Circuit's 1988 decision in Paterson-Leitch Co. v. Massachusetts Municipal Wholesale Electric Co. "Such gamesmanship undermines the allocation of responsibilities between magistrate and district judges." "Because Hiscox failed to preserve these arguments, the court need not address them," Tuesday's decision concluded. A representative of Dwolla declined to comment. Representatives of Hiscox did not immediately respond to a request for comment. Hiscox is represented by Michael Keeley of Clark Hill PLC and Kent Gummert of Lederer Weston Craig PLC. Dwolla is represented by Peter Deegan, Todd Rowden, Adam Hollander and Michael Mayerck of Taft Stettinius & Hollister LLP. Hiscox Insurance Co. Inc. v. Dwolla Inc., case number 4:24-cv-00372, in the U.S. District Court for the Southern District of Iowa.

Nov 4

4 min

A Chubb unit must comply with a previous order forcing it to give documents relating to the drafting history of certain policy provisions to Silicon Valley Bank former parent SVB Financial Group in a $73 million private equity fraud coverage dispute, a North Carolina federal court ruled. In an order Monday, U.S. Magistrate Judge Robert T. Numbers II granted a motion to compel compliance filed by Federal Deposit Insurance Corp., the receiver for the bank. Ruling on a second motion to compel filed by the FDIC, the judge ordered Chubb unit Federal Insurance Co. to produce regulatory filings that it claimed were publicly available, but refused to force the insurer to produce an executive for a deposition because the FDIC can instead subpoena him. "Since FDIC-R has prevailed, at least partially, on both motions, it is entitled to recover the expenses, including attorney's fees, incurred in connection with those motions," Judge Numbers said. The bank and its former parent company sued Federal and excess insurer Berkley Regional Insurance Co. in January 2023, after the insurers refused to cover $73 million that the bank was unable to recoup from a fraudster. According to court filings, Florida private equity manager Elliot Smerling used forged documents to defraud SVB into a $150 million line of credit, and then immediately requested $95 million. After Smerling was arrested by the FBI in February 2021, he pled guilty to bank and wire fraud charges and was sentenced to eight years in prison in May 2022. The insurers denied coverage under the policies' extended forgery provision, which covers losses resulting directly from SVB extending credit while relying on any original document, such as a "corporate, partnership or personal guarantee" or a "security agreement," that "bears a forgery" or "is fraudulently materially altered." In January, Judge Numbers ordered Federal to produce documents relating to the underwriting and sale of SVB's policy, the drafting history of the extended forgery provision and the insurer's communications with state regulators regarding the provision. On Monday, the judge said Federal must comply with the court's earlier order compelling it to supplement its responses to the FDIC's request for drafting history documents. According to the order, the insurer must produce documents related to the drafting history of the language used in the extended forgery provision in the financial institution bond policy issued to SVB and other financial institutions from Jan. 1, 2012, to present. Federal must also produce documents related to the drafting history of any other provision or exclusion that the insurer relied on to deny coverage, and documents to or from the Surety Association of America or the Surety & Fidelity Association of America related to the extended forgery provision, the judge said. Federal must also search for and produce regulatory filings that it told the court and the FDIC were publicly available, the judge said. "It appears that what Federal was really confirming was that it filed documents with a public entity and then assumed they were publicly available. That leaves FDIC-R in the same position as it was before the court issued its order," Judge Number said. However, Judge Numbers held that there is no reason for the court to compel Federal to produce Ayo Oshodi, who oversees the insurer's financial institution bonds sold to U.S. banks, for a deposition. The FDIC can require Oshodi's attendance by serving him with a deposition notice and subpoena, and, if the Federal believes it is improper for the FDIC to take Oshodi's deposition, it can seek a protective order, the judge said. "But if [Federal] does not, Oshodi must comply with a properly issued notice and subpoena. Failure to do so may result in sanctions or initiation of contempt proceedings," Judge Numbers said. Representatives of the parties did not immediately respond to requests for comment Tuesday. SVB Financial Group is represented by Amy E. Richardson of HWG LLP and by Keith McKenna, Orrie A. Levy, Nicholas R. Maxwell and Justin V. Javier of Cohen Ziffer Frenchman & McKenna LLP. The FDIC is represented by Kelly Margolis Dagger of Ellis & Winters LLP and by Andrew M. Reidy and Joseph M. Saka of Nossaman LLP. Federal is represented by Scott L. Schmookler, Angela Sullivan and Suzanne R. Walker of Gordon Rees Scully Mansukhani LLP. Berkley is represented by Michael Keeley of Clark Hill PLC and by Heather G. Connor of McAngus Goudelock and Courie LLC. The case is SVB Financial Group et al. v. Federal Insurance Co. et al., case number 5:23-cv-00095, in the U.S. District Court for the Eastern District of North Carolina.

Sep 16

3 min

Kirkland & Ellis advised Whirlpool Corporation on its underwritten concurrent public offerings, as well as a concurrent cross-border PIPE investment. In the concurrent public offerings, Whirlpool issued (i) 7,898,550 shares of common stock at a public offering price of $69.00 per share and (ii) $575 million of depositary shares, each representing a 1/20th interest in a share of newly issued 8.50% Series A Mandatory Convertible Preferred Stock at a public offering price of $50.00 per depositary share. Whirlpool also negotiated a private placement with a strategic Chinese investor, pursuant to which Whirlpool will issue 434,782 shares of common stock at a price of $69.00 per share. The public offerings were upsized from the original announcement, and the underwriters have already exercised their greenshoe option in both public offerings. Whirlpool intends to use the net proceeds from the offerings to repay a portion of the amounts outstanding under its revolving credit facility and for general corporate purposes, including strategic investments in vertical integration and automation. The Kirkland team included capital markets lawyers Bob Hayward, Michael Keeley, Ben Richards, Parker Davis, Lauren Au and Jeremy Duvall.

Mar 2

1 min

A U.S. magistrate judge seemed skeptical of an insurer's bid to exclude a witness proffered as a policy expert on financial institution bonds, repeatedly asking Berkley Regional Insurance Co.'s counsel in a Monday hearing why the expert's experience — or lack thereof — should disqualify him. During a North Carolina federal court hearing in Raleigh, Judge Robert T. Numbers II pressed counsel for Chubb unit Federal Insurance Co. and excess insurer Berkley for why a report offered by Ty Sagalow, an expert for SVB Financial Group and the Federal Deposit Insurance Corp., should be stricken from the record, when court filings and Sagalow's deposition suggests he has experience with financial institution bonds, or FIBs — a type of insurance policy that protect banks from criminal acts like employee dishonesty, robbery and forgery. "I'm somewhat struggling with the claim that he lacks any experience with financial institution bonds. I don't think that's supported by the record at all," Judge Numbers said in a hearing on Berkley's motion to strike Sagalow. Judge Numbers was responding to Berkley's counsel, Michael Keeley of Clark Hill PLC, who said that though Sagalow purports to offer knowledge of industrywide customs and practices on FIBs, he faltered when pressed in deposition, failing to recall major trends in the fidelity industry or name individual insurers who've taken positions on FIBs in the way he described. "He wasn't able to produce any coherent responses," Keeley told the judge. Sagalow offered expert opinions for SVB Financial, Silicon Valley Bank's former parent, and the FDIC, now acting as receiver for SVB after its high-profile collapse in early 2023, in the $73 million insurance coverage battle. The issue stems from private equity fund manager Elliot Smerling's use of forged documents to defraud the bank into a $150 million line of credit. Smerling pled guilty to charges in connection with the loan in early 2022, and was later sentenced to eight years in prison. Sagalow's opinions interpreted language in the FIB that Financial issued SVB that would extend coverage under the bond's "extended forgery" agreement. For example, he opined that electronically transmitted documents, like a PDF, satisfy the "original" and "actual physical possession" requirements of the FIB because those terms are not defined. SVB Financial argued that PDF copies constitute "originals" in a bid to satisfy a coverage requirement in the FIB's extended forgery agreement, according to court filings. Federal disputed the claim, saying the bond only applies if the insured obtained the "original" loan documents before extending credit, which it says SVB didn't do. Now, SVB Financial and the FDIC are trying to use Sagalow to circumvent the plain language of the bond and have him paint a copy as an original document, according to the insurer's court filings. However, Judge Numbers said there seems to be instances in which Sagalow has experience with FIBs across a near 40-year career in the insurance industry, noting executive roles with American International Group Inc. or working as head of National Union's underwriting department. "Why is that not the kind of experience that would allow him to opine on … whether an electronic document can qualify as an original?" Judge Numbers asked. Stepping in for the FDIC, Joseph M. Saka of Nossaman LLP said Sagalow satisfies experience, education, knowledge and other requirements of Rule 702 of the Federal Rules of Evidence. "There's nothing unique about FIBs that makes all of his other experiences irrelevant," Saka said. Keeley countered, arguing that Sagalow admitted in his deposition that while he oversaw underwriters and drafted endorsements, he never underwrote a single FIB himself, instead working at the "50,000 foot" level. Zeroing in on Sagalow's deposition, Keeley said the expert couldn't offer evidence for his opinions or answer basic questions on standard industry forms. Sagalow also said he was unsure if he had heard of the Fidelity Law Association, described by Berkley in court filings as a "leading" industry association dealing with claims against FIBs and commercial crime insurance. "He has no clue what the custom is in the FIB industry," Keeley said. In a bid to show why Sagalow's report is inadequate, Keeley said FIBs are "unlike any other insurance product out there," as insurers are covering losses from criminal acts and having to underwrite by evaluating the risk of loss from social engineering crimes or fraudulent loans. Judge Numbers asked for evidence that shows how not knowing about certain things, like the Fidelity Law Association's scholarly journal, should disqualify Sagalow; in other words, how the judge should assess the materiality of what Sagalow doesn't know. Federal Insurance Co. counsel Scott L. Schmookler of Gordon Rees Scully Mansukhani LLP stepped in to say it's incumbent on SVB Financial and the FDIC to lay the foundations for Sagalow's expertise, not on the insurers to show why the report is insufficient. When one looks at Sagalow's deposition as a whole, it's clear these are his personal views rather than an assessment of industry standard, Schmookler said. Sagalow also couldn't point to a single insurer who treated a PDF as an "original" in FIB policy language. But Saka said Sagalow isn't there to offer an opinion on every single insurer, rather industry custom as a whole. He pointed out that though Berkley and Federal spent a lot of time poking holes in Sagalow's deposition, their own experts had similar shortcomings in deposition. "The criticisms they're offering collapse under the weight of their own record," Saka said. The parties also briefly touched on the FDIC's motion to substitute Sagalow for another expert, Lazarus Goanos, citing the former's health conditions. Judge Numbers noted expert disclosure deadlines have passed, but added the substitution motion depends in part on how he rules on the motion to strike. SVB Financial Group is represented by Amy E. Richardson of HWG LLP and by Keith McKenna, Orrie A. Levy, Nicholas R. Maxwell and Justin V. Javier of Cohen Ziffer Frenchman & McKenna LLP. The FDIC is represented by Kelly Margolis Dagger of Ellis & Winters LLP and by Andrew M. Reidy and Joseph M. Saka of Nossaman LLP. Federal Insurance Company is represented by Scott L. Schmookler, Angela Sullivan and Suzanne R. Walker of Gordon Rees Scully Mansukhani LLP. Berkley is represented by Michael Keeley and Holly Naehritz of Clark Hill PLC and by Heather G. Connor of McAngus Goudelock and Courie LLC. The case is SVB Financial Group et al. v. Federal Insurance Co. et al., case number 5:23-cv-00095, in the U.S. District Court for the Eastern District of North Carolina.

Nov 10

5 min

A U.S. magistrate judge seemed skeptical of an insurer's bid to exclude a witness proffered as a policy expert on financial institution bonds, repeatedly asking Berkley Regional Insurance Co.'s counsel in a Monday hearing why the expert's experience — or lack thereof — should disqualify him. During a North Carolina federal court hearing in Raleigh, Judge Robert T. Numbers II pressed counsel for Chubb unit Federal Insurance Co. and excess insurer Berkley for why a report offered by Ty Sagalow, an expert for SVB Financial Group and the Federal Deposit Insurance Corp., should be stricken from the record, when court filings and Sagalow's deposition suggests he has experience with financial institution bonds, or FIBs — a type of insurance policy that protect banks from criminal acts like employee dishonesty, robbery and forgery. "I'm somewhat struggling with the claim that he lacks any experience with financial institution bonds. I don't think that's supported by the record at all," Judge Numbers said in a hearing on Berkley's motion to strike Sagalow. Judge Numbers was responding to Berkley's counsel, Michael Keeley of Clark Hill PLC, who said that though Sagalow purports to offer knowledge of industrywide customs and practices on FIBs, he faltered when pressed in deposition, failing to recall major trends in the fidelity industry or name individual insurers who've taken positions on FIBs in the way he described. "He wasn't able to produce any coherent responses," Keeley told the judge. Sagalow offered expert opinions for SVB Financial, Silicon Valley Bank's former parent, and the FDIC, now acting as receiver for SVB after its high-profile collapse in early 2023, in the $73 million insurance coverage battle. The issue stems from private equity fund manager Elliot Smerling's use of forged documents to defraud the bank into a $150 million line of credit. Smerling pled guilty to charges in connection with the loan in early 2022, and was later sentenced to eight years in prison. Sagalow's opinions interpreted language in the FIB that Financial issued SVB that would extend coverage under the bond's "extended forgery" agreement. For example, he opined that electronically transmitted documents, like a PDF, satisfy the "original" and "actual physical possession" requirements of the FIB because those terms are not defined. SVB Financial argued that PDF copies constitute "originals" in a bid to satisfy a coverage requirement in the FIB's extended forgery agreement, according to court filings. Federal disputed the claim, saying the bond only applies if the insured obtained the "original" loan documents before extending credit, which it says SVB didn't do. Now, SVB Financial and the FDIC are trying to use Sagalow to circumvent the plain language of the bond and have him paint a copy as an original document, according to the insurer's court filings. However, Judge Numbers said there seems to be instances in which Sagalow has experience with FIBs across a near 40-year career in the insurance industry, noting executive roles with American International Group Inc. or working as head of National Union's underwriting department. "Why is that not the kind of experience that would allow him to opine on … whether an electronic document can qualify as an original?" Judge Numbers asked. Stepping in for the FDIC, Joseph M. Saka of Nossaman LLP said Sagalow satisfies experience, education, knowledge and other requirements of Rule 702 of the Federal Rules of Evidence. "There's nothing unique about FIBs that makes all of his other experiences irrelevant," Saka said. Keeley countered, arguing that Sagalow admitted in his deposition that while he oversaw underwriters and drafted endorsements, he never underwrote a single FIB himself, instead working at the "50,000 foot" level. Zeroing in on Sagalow's deposition, Keeley said the expert couldn't offer evidence for his opinions or answer basic questions on standard industry forms. Sagalow also said he was unsure if he had heard of the Fidelity Law Association, described by Berkley in court filings as a "leading" industry association dealing with claims against FIBs and commercial crime insurance. "He has no clue what the custom is in the FIB industry," Keeley said. In a bid to show why Sagalow's report is inadequate, Keeley said FIBs are "unlike any other insurance product out there," as insurers are covering losses from criminal acts and having to underwrite by evaluating the risk of loss from social engineering crimes or fraudulent loans. Judge Numbers asked for evidence that shows how not knowing about certain things, like the Fidelity Law Association's scholarly journal, should disqualify Sagalow; in other words, how the judge should assess the materiality of what Sagalow doesn't know. Federal Insurance Co. counsel Scott L. Schmookler of Gordon Rees Scully Mansukhani LLP stepped in to say it's incumbent on SVB Financial and the FDIC to lay the foundations for Sagalow's expertise, not on the insurers to show why the report is insufficient. When one looks at Sagalow's deposition as a whole, it's clear these are his personal views rather than an assessment of industry standard, Schmookler said. Sagalow also couldn't point to a single insurer who treated a PDF as an "original" in FIB policy language. But Saka said Sagalow isn't there to offer an opinion on every single insurer, rather industry custom as a whole. He pointed out that though Berkley and Federal spent a lot of time poking holes in Sagalow's deposition, their own experts had similar shortcomings in deposition. "The criticisms they're offering collapse under the weight of their own record," Saka said. The parties also briefly touched on the FDIC's motion to substitute Sagalow for another expert, Lazarus Goanos, citing the former's health conditions. Judge Numbers noted expert disclosure deadlines have passed, but added the substitution motion depends in part on how he rules on the motion to strike. SVB Financial Group is represented by Amy E. Richardson of HWG LLP and by Keith McKenna, Orrie A. Levy, Nicholas R. Maxwell and Justin V. Javier of Cohen Ziffer Frenchman & McKenna LLP. The FDIC is represented by Kelly Margolis Dagger of Ellis & Winters LLP and by Andrew M. Reidy and Joseph M. Saka of Nossaman LLP. Federal Insurance Company is represented by Scott L. Schmookler, Angela Sullivan and Suzanne R. Walker of Gordon Rees Scully Mansukhani LLP. Berkley is represented by Michael Keeley and Holly Naehritz of Clark Hill PLC and by Heather G. Connor of McAngus Goudelock and Courie LLC. The case is SVB Financial Group et al. v. Federal Insurance Co. et al., case number 5:23-cv-00095, in the U.S. District Court for the Eastern District of North Carolina.

Nov 10

5 min