United States District Court, W.D. Texas, Austin Division
HIGHTOWER UNITED STATES MAGISTRATE JUDGE.
the Court are Defendant Zurich American Insurance
Company's Opposed Motion to Compel Examination under Oath
and to Abate Lawsuit, filed on April 15, 2019 (Dkt. No. 13);
Plaintiff AXO Staff Leasing, LLC's Response, filed on
April 22, 2019 (Dkt. No. 14); and Defendant Zurich's
Reply, filed on April 26, 2019 (Dkt. No. 18). On August 30,
2019, the District Court referred the above motion and
related filings to the undersigned Magistrate Judge for
resolution pursuant to 28 U.S.C. § 636(b)(1)(B), Federal
Rule of Civil Procedure 72, and Rule 1(d) of Appendix C of
the Local Rules of the United States District Court for the
Western District of Texas (“Local Rules”).
lawsuit is an insurance coverage dispute between insurer
Zurich American Insurance Company (“Zurich”) and
named insured AXO Staff Leasing, LLC (“AXO”). AXO
is a Texas limited liability company that was in the business
of providing “temporary and permanent staffing for
companies, processing payroll, withholding income taxes, and
managing other similar human resources functions as
requested” from 2010 through 2017. Dkt. No. 1-2 at
¶ 8. In October 2012, AXO purchased a commercial
insurance policy from Zurich that included a Staffing
Industry Crime Coverage Policy providing coverage for
“Your Employee's Dishonest Acts.”
See Exh. A to Dkt. No. 13 (hereinafter “the
Policy”) at § A.1(a). The Policy defined
“Dishonest Act” to include
“embezzlement” by an “employee.”
Id. at ¶ G.10. The Policy had a $5 million
limit and was effective from October 26, 2012 through October
26, 2017. Dkt. No. 1-2 at ¶ 10.
January 13, 2017, Mathew Marchant, the President of AXO, was
notified by the Internal Revenue Service Criminal
Investigation Division that AXO's Chief Financial
Officer, John Herzer, was under criminal investigation.
See Exh. B to Dkt. No. 1-2. The IRS notified
Marchant that AXO had failed to file quarterly tax returns
and pay payroll taxes from 2010 to 2017. See Dkt.
No. 1-2 at ¶ 14. AXO alleges that after Marchant
confronted Herzer regarding the IRS criminal investigation,
Herzer confessed that “instead of paying over the taxes
owed by AXO, he had embezzled the money for personal
use.” Id. at ¶ 15. AXO promptly
terminated Herzer. Several months later, AXO went out of
business. Id. at ¶ 19.
notified Zurich of the embezzlement on January 25, 2017.On
May 12, 2017, AXO filed a Proof of Loss with Zurich, alleging
that AXO “was the victim of its Chief Financial
Officer's ‘dishonest acts,' which resulted in
at least $3.6 million in losses through embezzlement, and has
become liable for at least $4.9 million in penalties and
interest for the CFO's willful non-payment of payroll
taxes (and the underlying tax, at least $9.7 million, remains
unpaid).” See Exh. E to Dkt. No.1-2 at p. 1.
AXO also notified Zurich that “[i]t may also be
necessary for AXO Group LLC to supplement this claim for loss
because of the still-developing nature of the IRS
investigation and assessment of penalties and
August 23, 2017, through its attorney, Zurich sent AXO a
Reservation of Rights letter summarizing the terms of the
Policy and raising questions as to whether Herzer was an
“Employee” as defined in the Policy. See
Exh. F to Dkt. No. 1-2 at p. 6. Zurich noted that the Policy
“expressly provides that ‘Employee' does not
(i) any broker, factor, commission merchant, consignee,
contractor or other agent or representative of the same
general character, or
(ii) any natural person who is authorized by you to sign your
checks or make withdrawals from your bank accounts without
the countersignature of another natural person similarly
authorized by you. This does not apply to any natural person
described under paragraph 11.c.
Id. (quoting the Policy at § 11). Zurich asked
AXO to clarify whether Herzer “was in fact authorized
to sign AXO's checks or make withdrawals from its bank
accounts without the countersignature of another natural
person similarly authorized by AXO.” Id. at p.
7. In addition, Zurich formally requested the following:
REQUEST FOR EXAMINATION UNDER OATH:
Under the circumstances, Zurich requests an examination under
oath of AXO, by and through Mr. Marchant, as provided for in
the Policy. Please let us know a date, time and location for
the examination that is convenient for you and Mr. Marchant.
In that regard, Zurich would appreciate it if in advance of
the examination you would provide me with documents relating
to the issue of whether Mr. Herzer was authorized to sign
AXO's checks or make withdrawals from its bank accounts
without the countersignature of another natural person
similarly authorized by AXO. This would include the account
agreements with AXO's banks and related signature cards.
Also, please send me the application(s) that AXO submitted to
obtain the Policy. In addition, if AXO intends to supplement
its Proof of Loss, Zurich asks that AXO do so prior to the
examination under oath.
Id. at p. 9.
February 15, 2018, AXO responded to the Reservation of Rights
Letter disputing the coverage issues and contending that
Herzer met the definition of employee under section 11.c of
the Policy, which defines an employee as:
Any natural person who is your director, officer, manager or
trustee while such person is engaged in handling
“funds” or “other property” of any
“employee benefits plan” owned, controlled or
operated by you, or any natural person who is a director,
officer, manager, employee or trustee of an “employee
benefits plan”, provided the “employee benefits
plan” is listed as a Named Insured under this Coverage
Policy at 11.c. AXO also informed Zurich that its forensic
accountants were still working to reconstruct AXO's
bookkeeping records into a reconciled accurate form. Dkt. No.
1-2 at ¶ 24.
14, 2018, AXO informed Zurich in a letter that it had
completed its forensic accounting and delivered its report to
Zurich contending that Herzer embezzled $4, 730, 702 from
AXO. Id. at ¶ 25. AXO further suggested that
“it would be an appropriate time to begin discussing
the sworn examination of Matthew Marchant.” Exh. G to
Dkt. No. 1-2.
2, 2018, Zurich's attorney responded to AXO's letter
stating that “Zurich would like to proceed with the
examination under oath, but only after ...