K.v.g. Properties, Inc. v. Westfield Insurance Company

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 18a0178p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
K.V.G. PROPERTIES, INC.,
Plaintiff-Appellant,
v.
WESTFIELD INSURANCE COMPANY,
Defendant-Appellee.
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No. 17-2421
Appeal from the United States District Court
for the Eastern District of Michigan at Detroit.
No. 2:16-cv-11561—Avern Cohn, District Judge.
Argued: June 7, 2018
Decided and Filed: August 21, 2018
Before: SUTTON, McKEAGUE, and DONALD, Circuit Judges.
_________________
COUNSEL
ARGUED: Gavin J. Fleming, FLEMING YATOOMA & BOROWICZ PLC, Bloomfield Hills,
Michigan, for Appellant. Kurt D. Meyer, GREGORY AND MEYER, P.C., Troy, Michigan, for
Appellee. ON BRIEF: Gavin J. Fleming, FLEMING YATOOMA & BOROWICZ PLC,
Bloomfield Hills, Michigan, Mayer Morganroth, MORGANROTH & MORGANROTH, PLLC,
Birmingham, Michigan, for Appellant. Kurt D. Meyer, GREGORY AND MEYER, P.C., Troy,
Michigan, for Appellee.
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OPINION
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McKEAGUE, Circuit Judge. This insurance-coverage dispute began when some of
KVG’s commercial tenants got caught growing marijuana in their rental units. Unfortunately for
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their landlord, the tenants caused substantial damage to the premises before the police caught up
with them. KVG speedily evicted the tenants and sought coverage from its insurers for nearly
$500,000 in related losses. Westfield denied the claims, prompting this lawsuit. The district
court granted summary judgment to Westfield, reasoning that the damage was excluded by the
policy, and KVG appeals. We AFFIRM.
I
This case arises out of a standard first-party commercial insurance contract. The policy
provides a broad range of coverage, from general physical damage insurance to a “fine arts
floater.” The policy is organized under multiple “Forms,” each with their own insuring
agreements, terms, and exclusions. The claim in this case arose under the Building and Personal
Property Coverage Form (“BPP Policy”). Under this Form, Westfield agreed to pay for “direct
physical loss of or damage to Covered Property . . . caused by or resulting from any Covered
Cause of Loss.” For the purposes of KVG’s claims, a “Covered Cause of Loss” is any “Risk[]
Of Direct Physical Loss.”
This generous insuring agreement is tempered by a litany of exclusions. One such
exclusion states that Westfield “will not pay for loss or damage caused by or resulting from” any
“[d]ishonest or criminal act by you, any of your partners, members, officers, managers,
employees (including leased employees), directors, trustees, authorized representatives or anyone
to whom you entrust the property for any purpose.” The parties refer to this language as the
Dishonest or Criminal Acts Exclusion.
With the basic terms of the policy out of the way, we turn to the facts of this case. KVG,
a commercial landlord, leased several pieces of real property to a group of commercial tenants.
KVG authorized the tenants to use the property for general office or light industrial business. On
October 29, 2015, the U.S. Drug Enforcement Agency raided the premises and caught the tenants
growing lots of marijuana. KVG speedily evicted the tenants, but the damage had already been
done: To accommodate their “business,” the tenants removed walls, cut holes in the roof, altered
ductwork, and severely damaged the HVAC systems. The total cost of repair appears to be
around $500,000.

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No. 17-2421 K.V.G. Properties, Inc. v. Westfield Ins. Co. Page 3
KVG subsequently filed a claim with Westfield for insurance coverage. After a kerfuffle
between the parties’ respective agents, Westfield denied the claim, finding that several
exclusions applied. KVG then sued Westfield for breach of the insurance agreement, and KVG
removed the case to federal court. See 28 U.S.C. §§ 1332(a)(1), 1441(a). The district court
found that the loss was excluded by the policy and granted Westfield’s motion for summary
judgment. KVG appeals that order. We have jurisdiction under 28 U.S.C. § 1291.
II
We review de novo a grant of summary judgment based on the district court’s
interpretation of a Michigan insurance contract. Stryker Corp. v. XL Ins. America, 735 F.3d 349,
354 (6th Cir. 2012). The Michigan courts engage in a two-step analysis when determining
coverage under an insurance policy: (1) whether the general insuring agreements cover the loss
and, if so, (2) whether an exclusion negates coverage. Auto-Owners Ins. Co. v. Harrington,
565 N.W.2d 839, 841 (Mich. 1997).
The first step of the analysis requires little discussion. The insuring agreements are
written broadly to cover all “Risks of Direct Physical Loss.” Indeed, one would struggle to think
of damage not covered by this language, and this is not a case that tests its boundaries. It is
abundantly clear that the property suffered physical damage, necessarily caused by some risk (or
risks) of direct physical loss.1 The harder question is whether the risks here are not covered
because an exclusion takes them off the table.
Westfield leads with the Dishonest or Criminal Acts Exclusion. In sum, Westfield argues
that KVG’s tenants’ conduct was criminal under either state or federal law and that these acts
1KVG insists that the only relevant risk here is “vandalism” and therefore embarks on a quest to define that
term. But nowhere do the policy’s relevant insuring agreements mention vandalism. Even the Crime & Fidelity
Form referenced by KVG at oral argument makes no mention of vandalism in its insuring agreements. See R. 10-3,
Commercial Crime & Fidelity Form § A.1–A.7, PID 398–99. Instead, vandalism only appears in the policy’s
exclusions, in the exceptions to those exclusions, and in certain specific riders that do not relate to the subject matter
of this case. Id. § D.3.g, PID 401–02 (vandalism is an excluded loss for certain parts of the Crime & Fidelity Form);
id., Special Form § G.2, PID 263 (exception to an exclusion); id. § F.1, PID 263 (rider extending coverage for
property in transit). In any event, this is all irrelevant. The physical damage to the building is covered by the
insuring agreements because of its very nature—regardless of whether it was a result of vandalism.

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were the main cause of KVG’s loss. We agree.2 Therefore, we do not address the merits of the
other exclusions argued by the parties, since the criminal acts here cover all of KVG’s claims
against Westfield. Hunt v. Drielick, 852 N.W.2d 562, 566 (Mich. 2014) (“[C]overage under a
policy is lost if any exclusion within the policy applies to an insured’s particular claims.”).
Under this exception, the core issue is whether the tenants committed a “criminal act”
within the meaning of the policy. In the abstract, this is an interesting question. Cultivating
marijuana is a crime under federal law, see, e.g., 21 U.S.C. § 841(b)(1)(A)(vii), but it is protected
by Michigan law under certain conditions, see Michigan Medical Marihuana Act (“MMMA”),
I.L. No. 1 (2008), Mich. Comp. Laws §§ 333.26421–333.26430.
Under different circumstances, KVG might have a strong federalism argument in favor of
coverage. In diversity cases, we act as faithful agents of the state courts and the state legislature.
See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938) (“There is no federal general common
law. Congress has no power to declare substantive rules of common law applicable in a state
. . . . And no clause in the Constitution purports to confer such a power upon the federal
courts.”). Since the MMMA was passed by ballot initiative, we would exercise even more care,
lest we (as unelected judges) tread directly on the will of the People of the State of Michigan,
who cannot easily correct any error we commit. Exercising the Michigan courts’ common-law
power to interpret public initiatives, we would hesitate before reading a Michigan insurance
policy to bar coverage for a “criminal act” when Michigan law confers criminal and civil
immunity for the conduct at issue. Mich. Comp. Laws § 333.26424(b) (declaring that a person
lawfully cultivating medical marijuana shall not be “subject to arrest, prosecution, or penalty in
any manner, or denied any right or privilege” under state law) (emphasis added). But we need
2We observe that the text of the Dishonest and Criminal Acts Exclusion includes two basic elements:
(1) A dishonest or criminal act, (2) committed by a person in a specified role or by “anyone to whom you entrust the
property for any purpose.” R. 10-3, Special Form § B.2.h, PID 257. The list of roles does not include tenants, and
there is some question about whether this exclusion should apply to someone who obtains “entrustment” by false
pretenses. Compare id. at § B.2.h with id. at § B.2.i (withholding coverage if the insured is induced to part with
property by false pretenses). However, KVG has expressly chosen not to discuss this element or argue it in favor of
reversal. See Reply Br. at 5 (“Importantly, whether the property is entrusted to the tenant is a question that the Court
need not resolve . . . .”). Since we do not answer questions that “merely lurk in the record” and are not asked by the
parties, we express no opinion on this issue. United States v. Lucido, 612 F.3d 871, 876 (6th Cir. 2010).

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not face that difficult issue today, because no reasonable jury could find that KVG’s tenants
complied with Michigan law.
Ultimately, the insurer bears the burden of proving facts showing that an exclusion
applies. Hunt, 852 N.W.2d at 565. However, federal courts may grant summary judgment to the
party with the burden of proof if any reasonable jury would return a verdict in that party’s favor.
Cockrel v. Shelby Cty. Sch. Dist., 270 F.3d 1036, 1056–57 (6th Cir. 2001). In such a case, there
is no need for trial because the dispute is “so one-sided that one party must prevail as a matter of
law.” Maben v. Thelen, 887 F.3d 252, 263 (6th Cir. 2018) (quoting Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 251–52 (1986)). Faced with a properly supported motion for summary
judgment, the non-movant may force a trial by “set[ting] forth specific facts showing that there is
a genuine issue for trial,” but its threadbare assertion of a material dispute does not make it so.
See Maben, 887 F.3d at 263; Adcor Indus., Inc. v. Bevcorp, LLC, 252 F. App’x 55, 61 (6th Cir.
2007).
Here, the record contains evidence that KVG itself claimed, in Michigan court, that its
tenants violated the law. In its eviction pleadings against each tenant, KVG repeatedly claimed
that the “[t]enant illegally grew marijuana” in the unit and stated that the “[i]llegal growing of
marijuana” was a “continuing health hazard.” These pleadings were signed by KVG’s lawyer,
who sought and obtained immediate possession of the premises under Michigan’s summary
eviction statute. Mich. Comp. Laws § 600.5714(d) (permitting summary eviction in limited
circumstances, including when the tenant is causing a “continuing health hazard”). Pleadings are
binding legal documents that can be admitted as evidence against that party in subsequent
proceedings. Barnes v. Owens-Corning Fiberglas Corp., 201 F.3d 815, 829 (6th Cir. 2000); Fed.
R. Evid. 801(d)(2).
Furthermore, neither party disputes that federal agents raided the premises as part of a
criminal investigation. At the time of the raids, federal officials were operating under guidance
from the Deputy Attorney General stating that they should not prioritize “individuals whose
actions are in clear and unambiguous compliance with existing state laws providing for the
medical use of marijuana.” DAVID W. OGDEN, MEMORANDUM FOR SELECTED U.S. ATTORNEYS
(Oct. 19, 2009); see also JAMES M. COLE, MEMORANDUM FOR U.S. ATTORNEYS (June 29, 2011).

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Though the guidance did not purport to halt all federal inquiry into marijuana growing that
complied with state law, it did set priorities for federal law enforcement’s limited resources.
Whether one agrees with these memoranda or not, we do not lightly presume that the DEA
ignored them when deciding to raid KVG’s property. Thus, the fact of the raid itself has some
tendency to show that the tenants were not “in clear and unambiguous compliance” with
Michigan law. See id.; Fed. R. Evid. 401.
Taken together, these facts are sufficient to meet Westfield’s prima facie case of proving
a criminal act by the preponderance of the evidence. It thus falls to KVG to identify record
evidence suggesting that its tenants complied with the Michigan Medical Marihuana Act. See
Maben, 887 F.3d at 263. It has not done so. Instead, KVG speculates that its tenants could have
been complying with Michigan’s marijuana laws. But it is well-established in our case law that a
party may not avoid summary judgment by resorting to “speculation, conjecture, or fantasy.”
Lewis v. Philip Morris Inc., 355 F.3d 515, 533 (6th Cir. 2004); see also Anderson, 477 U.S. at
252–53 (requiring more than a “scintilla” of evidence). Trials exist to resolve concrete factual
disputes, not to satiate the endless imagination of trial lawyers. In the absence of any evidence
of legality, Rule 56 requires us to concede to Westfield’s evidence of illegality.
One final matter deserves discussion. At oral argument, KVG took the position that
Westfield could not invoke the Dishonest or Criminal Acts Exclusion unless the tenants had been
convicted. KVG cited no authority for this assertion, and we cannot find any as well. The policy
says “criminal act,” not “crime” or “criminal conviction.” A fugitive from justice may properly
be deemed a criminal by the person he harms, even though the State cannot prove it beyond a
reasonable doubt. We doubt the Michigan Supreme Court would read such an onerous
“conviction requirement” into a standard commercial insurance contract, and we accordingly
decline to do so in the complete absence of state authority providing otherwise.
III
The policy’s insuring agreements cover the damage here, but Westfield has proven that
the Dishonest or Criminal Acts Exclusion applies. Therefore, the district court did not err in
granting Westfield’s motion for summary judgment, and we AFFIRM that decision.

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