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InComm Holdings, Inc. v. Great American Insurance Co.

United States District Court, N.D. Georgia, Atlanta Division

March 16, 2017

INCOMM HOLDINGS, INC., and INTERACTIVE COMMUNICATIONS INTERNATIONAL, INC., Plaintiffs,
v.
GREAT AMERICAN INSURANCE COMPANY, Defendant.

          OPINION AND ORDER

          WILLIAM S. DUFFEY, JR. UNITED STATES DISTRICT JUDGE

         This matter is before the Court on Defendant Great American Insurance Company's (“GAIC”) Motion for Summary Judgment [26], Plaintiffs InComm Holdings, Inc. and Interactive Communications International, Inc.'s (together, “InComm”) Motion for Partial Summary Judgment [27], and GAIC's Motion for Leave to File a Sur-Reply in Opposition to Plaintiffs' Motion for Partial Summary Judgment [45] (“Motion for Sur-Reply”).

         I. BACKGROUND

         A. Introduction

         This is an insurance coverage dispute involving debit card transactions. InComm, which is in the debit card processing business, had a processing system vulnerability by which a debit card holder could cause credit to be loaded onto their debit card in multiples of the credit amount purchased. The question in this case is whether the credited amounts to which the cardholders were not entitled constitute a loss which GAIC is required to cover under the insurance policy it issued to InComm.

         B. InComm's Debit Card Processing Service

         InComm provides a service enabling consumers to load funds onto prepaid debit cards issued by banks (the “InComm Process”). ([36.1] ¶¶ 1-4).[1]Cardholders can purchase what are known as “chits” to add prepaid funds onto their cards. ([36.1] ¶¶ 4-5; [27.3] at 8). Chits may be purchased from retailers, such as CVS or Walgreens, for the amount of the chit plus a small service fee. ([36.1] ¶¶ 4-5; [27.3] at 8).

         The InComm Process consists of an Interactive Voice Response (“IVR”) system and Application Processing Servers (“APS”). ([36.1] ¶ 19). The IVR uses eight computers that allow a debit card holder, using telephone voice commands or telephone touch-tone codes, to monitor and request transactions on their debit card account. ([36.1] ¶ 20; [27.3] at 29). The cardholder may, for example, call the IVR system on a telephone to check the balance on their card, report a lost or stolen card, or load money from a chit onto their card. ([27.3] at 29). The APS uses computer servers to provide transaction processing for the InComm Process. ([36.1] ¶ 21). When the cardholder calls the IVR system, the cardholder enters a voice or touchtone command, which is processed by the APS system. ([27.3] at 29; [36.1] ¶ 21). After the APS system completes the processing, it communicates the results to the IVR system, which, in turn, reports the results to the cardholder.

         C. Chit Redemptions

         When a cardholder purchases a chit from a retailer, the retailer sends InComm the payment it received for the chit. ([31] at 10-11).[2] InComm holds the transferred funds in an account it maintains at Wells Fargo bank. ([31] at 10; [26.5] at 10-11; [37.2] at 4-17). To redeem the chit, the cardholder calls InComm's IVR system using the telephone number printed on the back of the chit. ([36.1] ¶¶ 6-7; [37.3] ¶ 9).[3] The IVR system prompts the cardholder to provide three pieces of information: (1) the unique pin number printed on the chit, (2) the account number of the debit card, and (3) sometimes, a three-digit security code printed on the debit card. ([37.3] ¶ 10; [36.1] ¶¶ 8-9, 19-20).[4] After the inputted information is verified by the APS system, the value of the chit is made “immediately available” for use on the debit card. ([37.3] ¶ 11; [27.3] at 31; [26.4] at 30; [26.5] at 20).[5]

         After a chit is redeemed, InComm transfers funds-in the amount of the chit-to an account at the bank that issued the prepaid debit card. ([37.3] ¶ 12; [36.1] ¶ 13). The transfer is made as required by InComm's contract with the card issuer. ([37.3] ¶ 12; [31] at 27-29). The funds are maintained in the issuer's bank, for the benefit of the cardholder, until the cardholder uses the card to conduct a transaction. ([37.3] ¶ 15). The issuer then remits, to the seller, funds to pay for the purchase made by the cardholder. ([36.1] ¶ 16; [37.3] ¶ 15; [27.3] at 12; [31] at 12).[6] If the cardholder uses his card to conduct a transaction before InComm wires the funds to the issuer, InComm's wire effectively reimburses the issuer for the payment it made previously to the merchant from which the cardholder made his purchase.[7] InComm is not involved in payments from the issuer to the merchant. ([31] at 12, 18).

         D. InComm's Relationship with Bancorp

         The dispute here centers on the relationship between InComm and The Bancorp Bank (“Bancorp”), which is governed by contract (the “Bancorp Contract”).[8] InComm is the Program Manager for prepaid debit cards issued by Bancorp. ([37.3] ¶ 34; [37] at 12; [26.6]). As Program Manager, InComm markets and sells Bancorp's cards, and performs various services, including processing services, to support the cards. ([26.6] at 8; [31] at 27; [37] at 12).

         When a cardholder redeems a chit for a Bancorp-issued card, InComm is required by its contract with Bancorp to transfer, within fifteen days, funds representing the dollar amount of the chit credit purchased. ([37.3] ¶ 12). Funds usually are transferred by InComm within twenty-four hours after the chit is redeemed. ([36.1] ¶ 15).[9] The funds are transferred from InComm's account at Wells Fargo to an account at Bancorp (the “Bancorp Account”). The account has a Bancorp tax ID number, and the account name is “The Bancorp Bank, for the benefit of [InComm] as holder[] of the Cardholder Balances for the benefit of Cardholders.” ([26.6] at 11; [41] ¶ 8). The Bancorp Contract provides: “[Bancorp] shall hold all Cardholder Balances in a fiduciary or custodial manner on behalf of [InComm] as holder[] of the Cardholder Balances for the benefit of Cardholders.” ([26.6] at 4). The Bancorp Contract states further (i) that “all Cardholder Balances shall be held in trust for the benefit of the Cardholders, ” (ii) that neither Bancorp nor InComm “shall have an equitable interest in the Cardholder Balances, ” and (iii) that “the Cardholder Balances will not be used for any other purpose.” ([26.6] at 11).[10]

         E. Unauthorized Chit Redemptions

         Debit card holders pay a one-time fee for each InComm chit they purchase. Each chit represents the amount purchased, to be redeemed once. ([36.1] ¶ 30). From November 2013 to May 2014, there was a “code error” in InComm's IVR system. ([37.3] ¶ 21; [36.1] ¶¶ 23, 33). The error permitted chits to be redeemed more than once, essentially allowing cardholders to obtain more chit credit than that to which they were entitled and for which they paid. ([37.3] ¶ 21; [36.1] ¶¶ 23, 33).[11] To obtain multiple redemptions of a single chit, cardholders used more than one telephone simultaneously to access InComm's IVR system to request redemption of the same chit. ([37.3] ¶ 21; [36.1] ¶ 24). The simultaneous redemption requests exploited InComm's coding error, causing the IVR system to send to the APS system (1) a “RedeemReload” request to redeem the chit, followed by (2) a “Reverse” request, which returned the chit to its original, unredeemed status. ([36.1] ¶¶ 27-29). This allowed cardholders to redeem the same chit, multiple times, using the simultaneous phone call scheme. ([36.1] ¶ 26). The offending cardholders obtained an average of 13 redemptions per chit, for a total of 25, 553 unauthorized redemptions involving 1, 933 separate chits. ([36.1] ¶ 37). InComm processed these simultaneous redemption transactions as legitimate, which required Bancorp to make the redeemed funds immediately available to the cardholders, allowing the offending cardholders to use the funds to make purchases. InComm, consistent with its standard practice, wired the funds to Bancorp within twenty-four hours after it processed the redemptions. ([36.1] ¶ 34; [36.1] ¶¶ 35-36; [27.1] at 26). The average unauthorized redemption from a single chit, multiple times redeemed, was $450. ([36.1] ¶ 37). The highest aggregate amount redeemed from a single chit totaled $135, 500. ([37.3] ¶ 30).[12]Ninety percent (90%) of the unauthorized redemptions occurred between April 16, 2014, and May 6, 2014, and totaled approximately $10.3 million. ([43] ¶ 69).[13] On May 6, 2014, InComm fixed the code error in its IVR system. ([37.3] ¶ 23).

         The unauthorized redemptions caused InComm to transmit $11, 477, 287 to various debit card issuers. Of this total, $10, 796, 039 was wired to Bancorp, $664, 683 to NetSpend, $16, 115 to American Express, and $450 to other card issuers. ([27.3] at 8). In May 2014, InComm deactivated the Bancorp-issued cards that were used to make the unauthorized redemptions. ([41] ¶ 5). Bancorp currently maintains, in its account, $1, 880, 769 of the wrongfully redeemed funds. ([41] ¶ 5; [27.3] at 8). InComm has not asked Bancorp to return the funds. ([43] ¶¶ 55, 72).[14]

         F. InComm's Insurance Claim for the Unauthorized Redemptions

         InComm is insured by GAIC under a policy covering a variety of risks (the “Policy”). The Policy provides for the following coverage:

Computer Fraud
[GAIC] will pay for loss of, and loss from damage to, money, securities and other property resulting directly from the use of any computer to fraudulently cause a transfer of that property from inside the premises or banking premises:
a. to a person (other than a messenger) outside those premises; or
b. to a place outside those premises.

([37.3] ¶ 1 (the “Computer Fraud Provision”)). The Policy defines “premises” as “the interior of that portion of any building you occupy in conducting your business.” ([26.3] at 12). The Policy defines “banking premises” as “the interior of that portion of any building occupied by a banking institution or similar safe depository.” ([37.3] ¶ 3).

         The Policy limits coverage to $10 million “per occurrence, ” subject to a $500, 000 deductible “per occurrence.” ([26.3] at 5; [36.1] ¶ 39).[15] “Occurrence” is defined as “all loss or losses caused by: (1) an act, or series of related acts; involving one or more persons; (2) an act or acts involving a person or group of persons acting together; or (3) an act or event, or a series of related acts or events, not involving any identifiable person.” ([37.3] ¶ 6). The Policy also provides that “[GAIC] will not pay for any loss or damage in any case of fraud or concealment or misrepresentation of a material fact committed by you or any other insured, at any time, and relating to coverage under this Policy.” ([26.3] at 36).

         InComm “began investigating the duplicate redemptions at 3:30 p.m. on May 6, 2014; discovered the programming error an hour later; and corrected [the error] ¶ 5:47 p.m. on the same day.” ([36] at 16; see [36.10] at 2).[16] On May 23, 2014, InComm notified GAIC of its claimed losses resulting from the unauthorized chit redemptions. ([36.1] ¶ 41; [43] ¶ 59). On July 21, 2014, InComm submitted its sworn proof of loss to GAIC. ([43] ¶ 60). On May 12, 2015, GAIC denied InComm's claim, including because (1) InComm's alleged loss did not result from “‘the use of any computer' to access the IVR system, which is designed to be accessed by telephone, ” (2) “[n]o funds or property were automatically transferred as a result of the chit cards being reloaded, ” (3) and “[InComm's] losses resulted from multiple, separate occurrences, none of which exceed [$500, 000].” ([36.1] ¶ 46; [27.5] at 94-95, 98).

         G. Procedural History

         On July 28, 2015, InComm filed its Complaint [1], asserting claims for breach of contract (Count 1), bad faith under O.C.G.A. § 33-4-6 (Count 2), and declaratory judgment (Count 3). Count 1 alleges that, in violation of the Policy, GAIC “wrongfully and unlawfully refused to provide coverage for InComm's loss resulting from the Reload Chit Fraud.” (Compl. ¶ 56). Count 2 claims InComm is entitled, under O.C.G.A. § 33-4-6, to attorney's fees and a “50 percent penalty” because GAIC's “refusal to provide coverage for InComm's loss constitutes a frivolous, unfounded, and bad faith refusal to pay.” (Compl. ¶¶ 63, 65). Count 3 asks the Court to issue an order declaring that (1) InComm's losses are covered under the Policy, (2) “[n]o exclusion, condition or other term in the Policy bars or negates coverage, ” and (3) GAIC is “obligated to pay its $10 million Limit of Insurance to InComm.” (Compl. ¶ 70).

         On July 15, 2016, GAIC filed its Motion for Summary Judgment, seeking summary judgment on all of InComm's claims. GAIC argues that InComm's losses are not covered under the Policy because “(1) the alleged computer fraud did not cause a covered transfer of property to occur; (2) InComm's losses did not result directly from the alleged computer fraud; (3) the third parties at issue did not engage in computer fraud, as defined by the policy; and (4) InComm's losses involved multiple occurrences, none of which exceed [$500, 000].” ([26.1] at 6). GAIC also contends that InComm did not provide timely notice of its alleged loss, and that InComm made material misrepresentations to GAIC under the Policy regarding the amount of its loss.

         On July 15, 2016, InComm filed its Motion for Partial Summary Judgment, seeking summary judgment on its claims for breach of contract and declaratory judgment. InComm claims the Policy provides coverage because InComm's loss resulted from the use of a computer to fraudulently transfer money from InComm to the cardholders that made multiple redemptions of a single chit. InComm seeks a declaration that the Policy covers its losses and that GAIC's failure to provide coverage constitutes a breach of the Policy.[17]

         II. LEGAL STANDARD FOR SUMMARY JUDGMENT

         “Summary judgment is appropriate where the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Ahmed v. Air France-KLM, 165 F.Supp.3d 1302, 1309 (N.D.Ga. 2016); see Fed.R.Civ.P. 56. “An issue of fact is material if it ‘might affect the outcome of the suit under the governing law.'” W. Grp. Nurseries, Inc. v. Ergas, 167 F.3d 1354, 1360 (11th Cir. 1999) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). “An issue of fact is genuine ‘if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.'” Id. at 1361 (quoting Anderson, 477 U.S. at 248).

         The party seeking summary judgment “bears the initial responsibility of informing the district court of the basis for its motion, and identifying [materials] which it believes demonstrate the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). “The movant[] can meet this burden by presenting evidence showing there is no dispute of material fact, or by showing that the nonmoving party has failed to present evidence in support of some element of its case on which it bears the ultimate burden of proof.” Graham v. State Farm Mut. Ins. Co., 193 F.3d 1274, 1281-82 (11th Cir. 1999). The moving party need not “support its motion with affidavits or other similar materials negating the opponent's claim.” Celotex, 477 U.S. at 323. Once the moving party has met its initial burden, the nonmoving party must demonstrate that summary judgment is inappropriate by designating specific facts showing a genuine issue for trial. Graham, 193 F.3d at 1282. The nonmoving party “need not present evidence in a form necessary for admission at trial; however, he may not merely rest on his pleadings.” Id. “[T]he mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact.” Anderson, 477 U.S. at 247-48.

         “If the evidence presented by the non-moving party is merely colorable, or is not significantly probative, summary judgment may be granted.” Apcoa, Inc. v. Fid. Nat. Bank, 906 F.2d 610, 611 (11th Cir. 1990) (internal quotation marks omitted) (quoting Anderson, 477 U.S. at 250). The party opposing summary judgment “must do more than simply show that there is some metaphysical doubt as to the material facts . . . . Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial.” Scott v. Harris, 550 U.S. 372, 380 (2007) (internal quotation marks omitted) (quoting Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986)); cf. Miller v. Kenworth of Dothan, Inc., 277 F.3d 1269, 1275 (11th Cir. 2002) (a party is entitled to summary judgment if “the facts and inferences point overwhelmingly in favor of the moving party, such that reasonable people could not arrive at a contrary verdict” (quoting Combs v. Plantation Patterns, 106 F.3d 1519, 1526 (11th Cir. 1997) (internal quotation marks omitted))).

         “At the summary judgment stage, facts must be viewed in the light most favorable to the nonmoving party only if there is a ‘genuine' dispute as to those facts.” Scott, 550 U.S. at 380. “When opposing parties tell two different stories, one of which is blatantly contradicted by the record, so that no reasonable jury could believe it, a court should not adopt that version of the facts for purposes of ruling on a motion for summary judgment.” Id. “[C]redibility determinations, the weighing of evidence, and the drawing of inferences from the facts are the function of the jury.” Graham, 193 F.3d at 1282. “The nonmovant need not be given the benefit of every inference but only of every reasonable inference.” Id.

Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial. In such a situation, there can be “no genuine issue as to any material fact, ” since a complete failure of proof ...

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