Innovative Hospitality Systems, LLC v. Johnny Abraham

STATE OF LOUISIANA
COURT OF APPEAL, THIRD CIRCUIT

10-217

INNOVATIVE HOSPITALITY SYSTEMS, LLC

VERSUS

JOHNNY ABRAHAM D/B/A/ ABE’S GROCERY

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ON APPLICATION FOR WRIT OF SUPERVISORY
REVIEW FROM THE FOURTEENTH JUDICIAL
DISTRICT COURT, PARISH OF CALCASIEU,
NO. 2008-1677 HONORABLE WILFORD D. CARTER,
DISTRICT JUDGE

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BILLY HOWARD EZELL
JUDGE

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Court composed of Sylvia R. Cooks, Billy Howard Ezell, and Shannon J. Gremillion,
Judges.

Gremillion, J., dissents and assigns written reasons.

WRIT DENIED.

Robert William Collings
Collings & Collings, APLC
3434 Common Street
Lake Charles, LA 70607
(337) 477-4725
Counsel for Defendant/Respondent:
Johnny Abraham D/B/A Abe’s Grocery

Stephen Charles Polito
Stockwell, Sievert, Viccellio, Clements & Shaddock, LLP
P. O. Box 2900
Lake Charles, LA 70602-2900
(337) 436-9491
Counsel for Defendant/Respondent:
Jeff Davis Banc Shares, Inc. D/B/A Jeff Davis Bank & Trust Co.

Wayne Allen Shullaw
P. O. Box 4815
Lafayette, LA 70502-4815
(337) 266-2310
Counsel for Defendant/Respondent:
J. P. Morgan Chase Bank, N.A.

James R. Sutterfield
Sutterfield & Webb, LLC
650 Poydras St., Suite 2715
New Orleans, LA 70130
(504) 598-2715
Counsel for Defendant/Respondent:
Mt. Hawley Insurance Company

Max Jeffrey Cohen
James Thomas Busenlener
Lowe, Stein, Hoffman, Allweiss & Hauver, LLC
701 Poydras Street, #3600
New Orleans, LA 70139
(504) 581-2450
Counsel for Defendant/Applicant:
First Specialty Insurance Corp.

Robert B. Evans, III
Cesar R. Burgos
Gabriel O. Mondino
Burgos & Evans, LLC
3535 Canal Street, 2nd Fl
New Orleans, LA 70119-6135
(504) 488-3722
Counsel for Plaintiff/Respondent:
Innovative Hospitality Systems, LLC

Jason Paul Foote
Chopin, Wagar, Richard & Kutcher, LLP
3850 North Causeway Blvd., Suite 900
Metairie, LA 70002-8130
(504) 830-3838
Counsel for Defendant/Respondent:
Ace Cash Express, Inc.

EZELL, JUDGE.

Innovative Hospitality Systems, LLC, alleged in its petition that in March 2007,

at least 108 of its checks were fraudulently presented for cashing at Abe’s Grocery in

Lake Charles, Louisiana. The applicant, First Specialty Insurance Corporation,

provided a commercial general liability policy for Abe’s. First Specialty filed a motion

for summary judgment asserting that the cashing of these fraudulent checks was not

covered by its policy. The trial court denied First Specialty’s motion. First Specialty

sought supervisory writs from the judgment denying the motion for summary judgment.

This court denied writs. First Specialty then sought relief from the Louisiana Supreme

Court, which remanded the case for briefing, argument, and a full opinion. Innovative

Hospitality Systems, LLC v. Abraham, 10-1285 (La. 11/5/10), ___ So.3d ___. For the

reasons that follow, we deny the writ.

ANALYSIS

The original petition in this suit avers that Abe’s Grocery, in addition to

functioning as a grocery store, also cashed checks and that numerous fraudulent checks

had been negotiated on Innovative Hospitality’s bank account by the various check-

cashing businesses-defendants, including Abe’s. In addition to naming the businesses,

Innovative Hospitality eventually joined the businesses’ insurers, including First

Specialty who provided a commercial general liability (CGL) policy to Abe’s. The suit

also was brought against the banks in which the checks had been deposited by the

various check-cashing businesses; therefore, these banks filed cross-claims against

these businesses and their insurers, including First Specialty.

First Specialty filed a motion for summary judgment claiming that its policy did

not provide coverage for the losses at issue because the losses did not constitute either

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“bodily injury” or “property damage” as defined by the policy. In support of its motion,

First Specialty attached a certified copy of the policy it issued to Abe’s. Abe’s opposed

the motion, not on the basis that any genuine issue of material fact existed, but rather

on the basis that the language of the First Specialty policy afforded coverage for its

loss.

Louisiana Code of Civil Procedure Article 966(B) provides that summary

judgment shall be granted where the pleadings, depositions, answers to interrogatories,

admissions on file and affidavits show that there is no genuine issue of material fact

and that the mover is entitled to judgment as a matter of law. The Louisiana Supreme

Court discussed the standard applicable to appellate review of summary judgments

involving insurance contracts in Robinson v. Heard, 01-1697, pp. 3-4 (La. 2/26/02),

809 So.2d 943, 945:

A reviewing court examines summary judgments de novo under the
same criteria that govern the district court’s consideration of whether
summary judgment is appropriate. Smith v. Our Lady of the Lake
Hospital, Inc., 93-2512 (La.7/5/94), 639 So.2d 730, 750. A reviewing
court thus asks the same questions as does the trial court in determining
whether summary judgment is appropriate: whether there is any genuine
issue of material fact, and whether the mover is entitled to judgment as a
matter of law. Smith, 639 So.2d at 750.

Interpretation of an insurance contract is usually a legal question
that can be properly resolved in the framework of a motion for summary
judgment. Sanchez v. Callegan, 99-0137 (La.App. 1 Cir. 2/18/00), 753
So.2d 403, 405. When the language of an insurance policy is clear and
unambiguous, a reasonable interpretation consistent with the obvious
meaning and intent of the policy must be given. Sanchez, 753 So.2d at
405.

“Summary judgment declaring a lack of coverage under an insurance policy may

not be rendered unless there is no reasonable interpretation of the policy, when applied

to the undisputed material facts shown by the evidence supporting the motion, under

which coverage could be afforded.” Reynolds v. Select Props., Ltd., 93-1480, p. 2 (La.

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4/11/94), 634 So.2d 1180, 1183.

An insurance policy is a contract between the parties and should be
construed employing the general rules of interpretation of contracts set
forth in the Louisiana Civil Code. The parties’ intent, as reflected by the
words of the policy, determine the extent of coverage. La.Civ.Code art.
2045. Words and phrases used in a policy are to be construed using their
plain, ordinary and generally prevailing meaning, unless the words have
acquired a technical meaning. La.Civ.Code art. 2047. An insurance
policy should not be interpreted in an unreasonable or a strained manner
so as to enlarge or to restrict its provisions beyond what is reasonably
contemplated by its terms or so as to achieve an absurd conclusion.
Where the language in the policy is clear, unambiguous, and expressive
of the intent of the parties, the agreement must be enforced as written.
However, if after applying the other rules of construction an ambiguity
remains, the ambiguous provision is to be construed against the drafter
and in favor of the insured.

The purpose of liability insurance is to afford the insured protection
from damage claims. Policies therefore should be construed to effect, and
not to deny, coverage. Thus, a provision which seeks to narrow the
insurer’s obligation is strictly construed against the insurer, and, if the
language of the exclusion is subject to two or more reasonable
interpretations, the interpretation which favors coverage must be applied.

It is equally well settled, however, that subject to the above rules of
interpretation, insurance companies have the right to limit coverage in any
manner they desire, so long as the limitations do not conflict with
statutory provisions or public policy.

Id. (case citations omitted).

The policy provides, “We will pay those sums that the insured becomes legally

obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which

this insurance applies.” The policy defines “property damage” as:

“Property damage” means:

a. Physical injury to tangible property, including all resulting loss of
use of that property. All such loss of use shall be deemed to occur
at the time of the physical injury that caused it; or

b. Loss of use of tangible property that is not physically injured. All
such loss of use shall be deemed to occur at the time of the
“occurrence” that caused it.

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For the purposes of this insurance, electronic data is not tangible property.

As used in this definition, electronic data means information, facts or
programs stored as or on, created or used on, or transmitted to or from
computer software, including systems and applications software, hard or
floppy disks, CD-ROMS, tapes, drives, cells, data processing devices or
any other media which are used with electronically controlled equipment.

First Specialty contends that because Innovative Hospitality and the cross-claim

plaintiffs are seeking to recoup funds withdrawn from Innovative Hospitality’s bank

account, such transactions do not involve physical items; thus, the object of this suit

is to recoup intangible things. Therefore, First Specialty asserts that its policy provides

no coverage under the policy’s express definition of “property damage” as being

limited to tangible things.

The trial court found that since Abe’s paid out cash on the fraudulent checks, this

cash was in fact tangible. Therefore, the trial court held that First Specialty was not

entitled to summary judgment dismissing it from this action because it had failed to

show that the policy did not provide coverage.

The term “tangible property” in such policies carries the same meaning as the

civilian term “corporeal property.” See Massey v. Decca Drilling Co., Inc., 25,973

(La.App. 2 Cir. 12/7/94), 647 So.2d 1196, writs denied, 95-69, 95-411, 95-417 (La.

4/21/95), 653 So.2d 563 and 564.

In South Central Bell Telephone Co. v. Barthelemy, 94-499 (La. 10/17/94), 643

So.2d 1240, the supreme court discussed the meaning of “tangible personal property”

utilizing the civilian property concepts embodied in the Louisiana Civil Code. The

supreme court observed that the Civil Code differentiates between corporeals and

incorporeals in La.Civ. Code art. 461 as follows: “Corporeals are things that have a

body, whether animate or inanimate, and can be felt or touched. Incorporeals are things

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that have no body, but are comprehended by understanding, such as the rights of

inheritance, servitudes, obligations, and right of intellectual property.”

The supreme court, citing La.Civ.Code art. 471, also noted that corporeal

movables are “‘things, whether animate or inanimate, that normally move or can be

moved from one place to another.’” Id. at 1244. The supreme court also recognized

La.Civ.Code art. 473 as defining incorporeal movables as “‘rights, obligations, and

actions that apply to a movable thing . . . .Movables of this kind are such as bonds,

annuities, and interests or shares in entities possessing juridical personality.’” Id.

The supreme court then held that “the civilian concept of corporeal movable

encompasses all things that make up the physical world; conversely, incorporeal, i.e.,

intangibles, encompass the non-physical world of legal rights.” Id.

First Specialty argues that Innovative Hospitality and the co-defendant banks are

seeking to recover incorporeals; that is amounts withdrawn from Innovative

Hospitality’s bank account. First Specialty asserts that Innovative Hospitality does not

have actual dollar bills sitting in a bank; rather, Innovative Hospitality has a right to go

to the bank where it holds an account and ask to withdraw in dollars an amount equal

to its account balance. In countering the trial court’s reasoning that Innovative

Hospitality and the co-defendant banks are seeking reimbursement for the physical

dollars that First Specialty’s insured, Abe’s, paid out on the fraudulent checks, First

Specialty suggests that those dollars were not damaged or destroyed in any fashion so

as to bring the dollar bills within the coverage of its insurance policy. Furthermore,

First Specialty points out that Innovative Hospitality never had ownership of the actual

dollar bills paid out by Abe’s on the fraudulent checks. Instead, the dollars were

simply handed over by Abe’s to those cashing the fraudulent checks. Accordingly,

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First Specialty contends that the trial court’s reasoning for finding coverage was

incorrect.

Innovative Hospitality, on the other hand, contends that its injury occurred when

the fraudulent check and cash were exchanged at Abe’s. In Innovative Hospitality’s

words, “The operative reality of negotiable instruments is that while Abe’s employee

was reaching into its cash drawer. . . . that employee was effectively reaching into

Plaintiff’s bank account.”

At issue in this case is the specific language in the policy: “Loss of use of

tangible property that is not physically injured.” Specifically, damage to the property

is not required. What is required is a “loss of use” of “tangible property”.

In Succession of Franklin, 42,496 (La.App. 2 Cir. 10/17/07), 968 So.2d 811, the

court held that an “uncashed check” was an incorporeal movable. The court reasoned

that the check represented the bank’s obligation to pay the funds, but was not the funds

themselves. Obviously, the funds themselves are corporeal movables or tangible

property.

Once Abe’s Grocery presented cash in exchange for the check, the check was

converted into actual funds which were corporeal movables. It was at this point that

any responsibility Abe’s Grocery may have attached. This action resulted in a loss of

use of funds to Innovative Hospitality. It is ridiculous to argue that Innovative

Hospitality has not lost actual cash as a result of the cashing of fraudulent checks. The

funds in its bank account are actual funds deposited at the bank by Innovative

Hospitality. As a result of Abe’s Grocery cashing the checks, Innovative Hospitality

Systems suffered a “loss of use” of its cash money, a corporeal movable and therefore,

tangible property. See Succession of Miller, 405 So.2d 812 (La.1981); Succession of

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Walker, 533 So.2d 70 (La. App. 3 Cir. 1988), writ denied, 536 So.2d 1254 (La.1989).

If Abe’s Grocery is held responsible for this loss, it will be for the loss of cash money

it handed over in cashing the fraudulent checks.

We find that the CGL policy of insurance issued by First Speciality to Abe’s

Grocery provides coverage for the type of claims asserted in this case. Therefore, we

find no error in the trial court’s ruling denying First Specialty’s motion for summary

judgment.

WRIT DENIED.

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STATE OF LOUISIANA

COURT OF APPEAL, THIRD CIRCUIT

10-217

INNOVATIVE HOSPITALITY SYSTEMS, LLC

VERSUS

JOHNNY ABRAHAM, ET AL.

GREMILLION, Judge, dissenting.

Innovative Hospitality Systems, LLC, alleged in its petition that in March

2007, at least 108 of its checks were fraudulently presented for cashing at Abe’s

Grocery in Lake Charles, Louisiana. The applicant, First Specialty Insurance

Corporation, insured Abe’s. It filed a motion for summary judgment asserting that

the cashing of these fraudulent checks was not covered by its policy. The trial court

denied First Specialty’s motion. First Specialty sought supervisory writs from the

judgment denying the motion for summary judgment. This court denied writs. First

Specialty then sought relief from the Louisiana Supreme Court, which remanded the

case for briefing, argument and a full opinion. Innovative Hospitality Systems, LLC

v. Abraham, 10-1285 (La. 11/5/10), ___ So.3d ___. In support of its motion, First

Specialty attached a certified copy of the policy it issued to Abe’s. Abe’s opposed

the motion, not on the basis that any genuine issue of material fact existed, but rather

on the basis that the language of the First Specialty policy afforded coverage for its

loss. The policy provides, “We will pay those sums that the insured becomes legally

obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which

this insurance applies.” The policy defines “property damage” as:

“Property damage” means:

a. Physical injury to tangible property, including all resulting loss of
use of that property. All such loss of use shall be deemed to occur

at the time of the physical injury that caused it; or

b. Loss of use of tangible property that is not physically injured. All
such loss of use shall be deemed to occur at the time of the
“occurrence” that cause it.

For the purposes of this insurance, electronic data is not tangible
property.

As used in this definition, electronic data means information, facts or
programs stored as or on, created or used on, or transmitted to or from
computer software, including systems and applications software, hard
or floppy disks, CD-ROMS, tapes, drives, cells, data processing devices
or any other media which are used with electronically controlled
equipment.

First Specialty contends that because Innovative Hospitality and the cross-

claim plaintiffs are seeking to recoup funds withdrawn from Innovative Hospitality’s

bank account, such transactions do not involve physical items; thus, the object of this

suit is to recoup intangible things. Therefore, First Specialty asserts that its policy

provides no coverage under the policy’s express definition of “property damage” as

being limited to tangible things.

The trial court and the majority found that since Abe’s paid out cash on the

fraudulent checks, this cash constitutes Innovative Hospitality’s loss; therefore, First

Specialty was not entitled to summary judgment dismissing it from this action

because it had failed to show that the policy did not provide coverage.

The term “tangible property” in such policies carries the same meaning as the

civilian term “corporeal property.” See Massey v. Decca Drilling Co., Inc., 25,973

(La.App. 2 Cir. 12/7/94), 647 So.2d 1196, writs denied, 95-69, 95-411, 95-417

(La.4/21/95), 653 So.2d 563 and 564. Louisiana Civil Code Article 461 reads, in

pertinent part, “Corporeals are things that have a body, whether animate or inanimate

and can be felt or touched.” First Specialty correctly argues that Innovative

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Hospitality and the co-defendant banks are seeking to recover incorporeals, that is

amounts withdrawn from Innovative Hospitality’s bank account. Innovative

Hospitality does not have actual dollar bills sitting in a bank; rather, it has a right to

go to its bank and ask to withdraw in dollars an amount equal to its account balance.

In countering the trial court’s reasoning that Innovative Hospitality and the

co-defendant banks are seeking reimbursement for the physical dollars that First

Specialty’s insured, Abe’s, paid out on the fraudulent checks, First Specialty suggests

that those dollars were not damaged or destroyed in any fashion so as to bring the

dollar bills within the coverage of its insurance policy. Furthermore, First Specialty

points out that Innovative Hospitality never had ownership of the actual dollar bills

paid out by Abe’s on the fraudulent checks. Instead, the dollar bills were simply

handed over by Abe’s to those cashing the fraudulent checks. Accordingly, First

Specialty contends that the trial court’s reasoning for finding coverage was incorrect.

Innovative Hospitality, on the other hand, contends that its injury occurred

when the fraudulent check and cash were exchanged at Abe’s. In Innovative

Hospitality’s words, “The operative reality of negotiable instruments is that while

Abe’s employee was reaching into its cash drawer. . . that employee was effectively

reaching into Plaintiff’s bank account.” I disagree. The Louisiana Commercial Laws,

La.R.S. 10:1-101, et seq., govern the exchange of negotiable instruments. The first

bank to take a negotiable instrument, even if it is also the payor bank, is defined as

the Depositary Bank. La.R.S. 10:4-105(2). The “Payor Bank” is the bank that is the

drawee of the draft. La.R.S. 10:4-105(3). Between those banks lie “Intermediary

Banks.” La.R.S. 10:4-105(4). At every step along the path between the presentment

of the check and the withdrawal from the payor’s account one finds duties imposed

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on those who receive the check. See La.R.S. 10:3-412, et seq. The funds the check

represents are taken from the indorser’s account until the check is cleared. The funds

from the drawer’s account are routed into the account of the last holder.

Until Abe’s bank presented the fraudulent check to Innovative Hospitality’s

bank, and that bank then honored the check and debited Innovative Hospitality’s

account, Innovative Hospitality still had the use of those funds. Innovative

Hospitality did not lose cash, but the right to use its funds.

Innovative Hospitality makes the valid point that a check is also considered a

corporeal. However, it is not making a claim for the damage to the check. It is

making a claim for funds that were fraudulently withdrawn from its checking account.

It has been further suggested that because the policy states that First Specialty

insures against “[l]oss of use of tangible property that is not physically injured,” the

loss experienced by Innovative Hospitality is covered. I believe the “loss of use”

coverage does not apply. Our colleagues on the first circuit held that “loss of use”

coverage did not extend to compensate a business for its employee’s embezzlement

of funds. Jim Carey Dist. Co., Inc. v. Zinna, 589 So.2d 526 (La.App. 1 Cir. 1991).

I agree with that analysis.

CONCLUSION

The miscreants who stole and forged checks drawn on Innovative Hospitality’s

account withdrew cash. The cash, however, was not what Innovative Hospitality lost.

It lost the right to use its funds on deposit with its bank. The loss did not consist of

tangible property. As such, First Specialty, as the insurer of Abe’s Grocery, does not

afford Abe’s coverage for that loss. I would grant First Specialty’s application for

writs and make that grant peremptory.

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