The check won’t be in the mail

Let’s suppose you were overcharged on your electric bill for a number of months.

The overcharge could have been clerical error, a misread meter or some other reason. It really doesn’t matter. What matters is you’ve paid too much and you’d like your money back.

No problem, says the electric company, we’re responsible for this mess. We’ll credit next month’s bill.

But there won’t be a next month’s bill, you say, at least not from you guys. I’m all paid up and I’ve switched to a different electric company.

Well then, we’re very sorry but we only credit bills to make up for overcharges. We don’t send checks. That would cost us a lot of money and besides, the law says we don’t have to.

So you charge off to court and learn, to your astonishment and dismay, that the electric company is right.

Huh? Whaaaatt?

Relax, that’s not the way it really goes for a typical residential electric customer.

But that’s exactly the way it went for a couple of Detroit Edison’s largest customers recently.

Detroit Edison applied to the PSC for a multi-million dollar rate increase. Under MCL 460.6a(1), if the PSC doesn’t act on the application within a certain time, the utility can “self-implement” a rate increase. Later, when the PSC acts, if a smaller-than-requested rate increase is approved, customers are due a refund.

That’s what happened with Detroit Edison’s application in this case. But when refund time came around, Detroit Edison proposed, and the PSC approved, a prospective refund scheme for its “primary customers” (entities that buy lots and lots of electricity) that would give only current primary customers a pro rate share of the refund in the form of a credit on future bills.

Two of Detroit Edison’s “primary customers” complained. Having switched electrical suppliers, they had no Detroit Edison bills upon which a credit could be made. For them, a prospective refund meant no refund at all.

We’re not talking small change. The primary customers were looking for a share in a $26 million refund.

In the Court of Appeals, the Association of Businesses Advocating Tariff Equity (ABATE) sued on behalf of the complaining primary customers.

In a 2-1 decision, Judge David Sawyer, joined by Joel Hoekstra, said the case turns on interpreting a portion of MCL 460.6a(1).

The commission shall allocate any refund required by this section among primary customers based upon their pro rata share of the total revenue collected through the applicable increase … .

That means, according to ABATE, that Detroit Edison must calculate primary customers’ refunds based on their actual overpayment and then refund an amount equal to the actual overpayment.

It might mean that, said the COA majority. But there’s a lot of ambiguity in the statute.

[MCL 460.6a(1)] calls for a “refund” to “customers” and, with respect to “primary customers” requires that the refund be “based upon their pro rata share of the total revenue collected through the applicable increase.” This could be viewed as requiring a “refund” in the traditional sense, i.e., a return of monies previously paid.”

But the majority noted that in Attorney General v. Public Service Comm’n, 215 Mich. App. 356 (1996) and Attorney General v. Public Service Comm’n,  235 Mich. App. 308 (1999), two cases dealing with refunds under MCL 460.6h(13), COA panels ruled that 6h(13):

allowed for an adjustment of future rates and did not require a return of actual monies paid. Thus, within the context of PSC statutes, the term “refund” enjoys a broader meaning. There is nothing in the statute that compels the conclusion that use of the term “refund” means the monies returned to a primary customer must be based on the individual primary customer’s actual overpayment.

Nonetheless, § 6a(1) requires that the refund to “primary customers” be based on “their” “pro rata” share of revenues collected. “Primary customers” could be interpreted to mean the individual primary customers, since the reference is to “primary customers” and not the class of primary customers. Conversely, the absence of the phrase “individual primary customers” allows for the “primary customers” to be viewed and treated as a group. Further, “their pro rata share” could be interpreted to mean the amount of self-implemented increase in rates that each individual customer actually paid. However, the statute could also be read as requiring that all of the primary customers together be given a refund based on all of the primary customers’ pro rata share of the total revenue collected.

When a statute can be reasonably read in differing ways, the COA majority noted, an agency’s interpretation is entitled to deference unless there are “cogent reasons” for not doing so.

There are no cogent reasons to overrule the way the PSC applied the statute, the majority concluded.

A PSC accountant testified that calculating refunds in the manner ABATE suggested “would result in burdensome administrative costs,” costs that would be passed on to others in future ratemaking decisions, the majority observed.

And, the primary customers who chose to switch suppliers would presumably have factored the potential loss of a refund as part of their determination whether switching made economic sense, according to the PSC.

That presumption would have been based on those two cases dealing with 6h(13), said the COA majority.

In his dissent, Judge Henry Saad wasn’t buying any of it.

I strongly dissent because the largest users of electricity who make the move to a Detroit Edison competitor end up losing the most. …

The PSC … justifies its unfair methodology on the self-serving theory that primary customers should have known that the PSC has broad discretion and that it likely would not have granted primary customers a refund (despite the act’s language which seems to guarantee a refund). According to the PSC, primary customers must have factored this in to their decisions to switch electric suppliers and, therefore, did not really lose anything at all by the PSC’s decision not to give them refunds. …

[T]his rationale [is] a form of reasoning backward from a desired result[.]

The case is ABATE v. Michigan Public Service Comm’n (majority opinion) (dissent).

Realtors hope $25B foreclosure settlement will spark housing revival

The following post was written by John Stodder, The Dolan Company National Affairs Correspondent. Dolan is the parent company of Michigan Lawyers Weekly.

With the residential real estate industry shell-shocked from years of a moribund market, its spokespeople can be forgiven for taking a cautious attitude toward this week’s announcement of a $25 billion settlement with five of the nation’s biggest mortgage lenders over flawed and fraudulent foreclosure practices.

The money in the settlement will mostly go to borrowers and homeowners who are underwater. According to the Washington Post, the settlement “will force lenders to revamp how they interact with troubled homeowners and bar them from trying to foreclose on borrowers while simultaneously negotiating mortgage modifications.”

But could the settlement help get the residential market moving again, even in the face of historic low interest rates and plummeting prices?

“We do hope that the resolution will help more lenders with the certainty they need to kick loose more loans,” said Walter Molony, a spokesman for the National Association of Realtors inWashington,D.C. He cautioned, however, that the impact will be limited because the settlement doesn’t help the millions of borrowers with loans owned by Fannie Mae or Freddie Mac.

Eric Berman, communications director for the Massachusetts Association of Realtors, was pleased that the settlement was designed to help more homeowners stay in their homes because that kind of stability slows the ongoing descent of home values in many markets – though the market isn’t as bad, he hastened to add, inMassachusetts as it is in many other areas.

But even there, he said, “Distress sales impact values of homes of people who are not in a distress situation.”

Realtors also hope the settlement “can give lenders the confidence to start up with loan modifications, short sales and principal write-downs,” Berman said. “We’re going to have to wait and see. From our members’ point of view, short sales take forever. The only thing short about a short sale is the definition.”

While realtors continue to ruminate, the blogosphere reacted quickly:

 

• Financial blogger Yves Smith at Naked Capitalism gives “The Top Twelve Reasons Why You Should Hate the Mortgage Settlement.”  She is scathing. “We’ve now set a price for forgeries and fabricating documents: It’s $2,000 per loan,” which, as she points out, for an average loan is “less than the price of the title insurance that banks failed to get when they transferred the loans to the trust.”
• Writing at the Huffington Post, financial reform activist Dennis Kelleher calls the deal a “criminal sell-out,” because the $20 billion in loan forgiveness, though impressive at first blush, only adds up to $20,000 per 1 million homes. According to a Zillow report in November, some 14.6 million home borrowers have fallen into a negative equity position.
• Reuters’ financial blogger Felix Salmon likes the deal because the attorneys general didn’t give up too much and the banks didn’t get too much. Banks only got immunity from suits over the practice of robosigning, but can still be sued over a range of other alleged misdeeds that contributed to the mortgage default crisis.

 

– John Stodder

 

It’s true: ‘True majority’ WCAC decisions no longer required

When the Workers’ Compensation Appellate Commission reviews a magistrate’s decision concerning a comp claim, the long-standing law in Michigan has been that the WCAC must issue a “true majority” opinion — one in which a majority agrees in the result and the reasoning behind it.

Not any longer, the Michigan Supreme Court has ruled.

In Findley v. DaimlerChrysler Corp., a workers’ comp magistrate denied a benefits claim. The WCAC affirmed. The WCAC’s decision consisted of a lead opinion by one commissioner. The second commissioner concurred in the result only, without adopting the facts found in the lead opinion or making findings of his own. A third commissioner dissented.

The Michigan Court of Appeals vacated the WCAC decision. Citing MCL 418.274(8) and Aquilina v. General Motors Corp., 403 Mich. 206 (1978), the COA ruled in Findley, that “a true majority decision is one in which at least a majority of the commissioners agree regarding the material facts and the ultimate outcome.”

In making its ruling, the COA turned aside the defendant’s argument that Aquilina was good law when the Workers’ Compensation Appellate Board (the predecessor to the WCAC) reviewed cases de novo but the review standard now is “substantial evidence,” so true majorities are no long necessary.

Importantly, however, our review of the WCAC’’s findings remains the same as our previous review of the WCAB’s findings — we must determine if any competent evidence exists to support the WCAC’s findings. … Thus, the mere fact that the WCAC’s standard for reviewing a magistrate’s decision has changed since Aquilina was decided is simply not relevant to whether competent evidence supports the WCAC’s findings. And, in determining whether any competent evidence exists to support the WCAC’s findings, “we cannot discharge our reviewing responsibilities unless a true majority reaches a decision based on stated facts.” … To allow otherwise would be to corrupt the integrity of the administrative process. … Accordingly, the true-majority requirement articulated in Aquilina continues to be valid.”

Not true, ruled the MSC in a 4-3 order released late Friday. The MSC reversed the COA and reinstated the WCAC’s decision:

In contrast with the statutory mechanism in place at the time Aquilina was decided, the WCAC is now required to treat as conclusive the factual findings of the magistrate where those findings are “supported by competent, material, and substantial evidence on the whole record.” MCL 418.861a(3). Because the WCAC must now give deference to the magistrate’s factual determinations, and may no longer engage in de novo fact finding, a WCAC decision does not require a “true majority” “decision based on stated facts.”

Justice Michael Cavanagh, joined by Justice Marilyn Kelly, dissented.

Although the 1985 legislative amendments brought reforms to the Worker’’s Disability Compensation Act, as the Court of Appeals recognized, the review function of appellate courts remains the same. See, e.g., Holden v Ford Motor Co, 439 Mich 257, 262 (1992). And, even after the legislative amendments, this Court has generally recognized the importance of a “carefully constructed opinion by the WCAC” in facilitating appellate review. … Thus, under the facts of this case, I do not believe that the Court of Appeals clearly erred in applying Aquilina where, as in Aquilina, a commissioner in the majority did not issue a separate opinion but, instead, concurred only in the result reached by the lead opinion.

Cavanagh would have denied leave to appeal. Justice Diane Hathaway would have granted leave to appeal.

Two counties sue MERS for transfer taxes

The Lansing State Journal reports this morning that Ingham and Branch counties have sued Mortgage Electronic Registration Systems Inc., and a number of banks and mortgage companies, for unpaid transfer taxes on properties MERS purchased at foreclosure sales and later transferred to financial institutions.

According to Ingham County Register of Deeds Curtis Hertel Jr., although MERS buys the properties, when it later transfers ownership, it claims a transfer tax exemption for tranactions valued less than $100. Hetel believes that the county and state are owed “millions of dollars” in unpaid transfer taxes over the past decade.

From the LSJ:

Just what, exactly, MERS owns and the rights that ownership gives it have become contested questions as the foreclosure crisis has continued.

The company may claim to hold title to tens of millions of U.S. mortgages, but it invests no money in those loans and holds no interest in the debt underlying them.

For that reason, Michigan’s Court of Appeals ruled earlier this year that the company could not foreclose by advertisement, that is, could not foreclose without taking the case before a judge.

“There are some really profound contradictions built into the DNA of the MERS system,” said Christopher Peterson, a professor at the University of Utah’s S.J. Quinney College of Law, who has written on MERS.

“When the financial institutions try to use MERS as a tool to foreclose on your house, they will commonly represent that MERS has an ownership stake that justifies allowing them to do that,” he said, “but when they talk to the county register of deeds offices about whether or not they have to pay fees or taxes, they claim not to have the ownership interest.”

The LSJ reports that counties in six other states have filed similar suits.

Bowling alley immunity bill rolls on

When Michigan’s smoking ban was enacted, bowling alley patrons who smoked, like all other smokers who frequent bars, restaurants and other public places, had to start trooping outside to have a cigarette.

Now, it’s a hassle to take off your bowling shoes and put on your street shoes for a quick puff. Bowling alley operators say most bowlers leave their bowling shoes on when they go outside and light up.

The problem is that when coming back in, bowlers might track in moisture and debris on the bottom of their bowling shoes. This can lead to hazardous footing conditions, which, in turn, can lead to serious slip-and-fall injuries while swinging a heavy bowling ball. Such injuries lead to personal-injury suits.

Bowling alley proprietors, like all business owners, are interested in limiting their liability exposure whenever possible.

SB 281 helps them do just that. From the Senate Fiscal Agency analysis of the bill:

The bill would create the “Bowling Center Act” to require a bowling center operator to post a specific notice about the danger of wearing bowling shoes outside, and provide the operator with immunity from civil liability for injuries to a bowler due to a slip and fall inside the bowling center that resulted from outside use of bowling shoes.

Specifically, the bill would require a bowling center operator to post a notice in a conspicuous place near each entrance to and exit from a bowling center. The notice would have to read:

“Bowling shoes are specialized footwear and are not intended to be worn outside a bowling center because the bowling shoes may be affected by substances or materials such as snow, ice, rain, moisture, food, or debris. Such substances or materials on bowling shoes that have been worn outside a bowling center may cause the person wearing the bowling shoes to slip, trip, stumble, or fall on the floor or alley surfaces in the bowling center.”

If an operator posted the required notice, the operator would not be civilly liable for injuries to a bowler resulting from a slip, trip, stumble, or fall inside the bowing center solely caused by a substance or material on the bowler’s bowling shoes that was acquired outside the bowling center immediately before the bowler entered or re-entered the bowling center.

The bill cleared the Senate on a 30-8 vote early this year. The House Judiciary Committee is holding a hearing on the bill today.

House Judiciary Committee mulls mortgage fraud bills

Tomorrow, the Michigan House Judiciary Committee will consider legislation that cracks down on individuals and institutions engaged in residential mortgage fraud.

The committee meets Sept. 8 to consider a bipartisan, 16-bill package for referral to the Committee on Banking and Financial Services.

Sponsors of the legislation are not fooling around.

For example, under HB 4487, lenders face a 15-year felony for fraud during the lending process or when filing mortgage documents afterward, or for failing to disburse funds as promised in a loan commitment.

HB 4488 stiffens penalties for using false pretenses in connection with real estate transactions — the bigger the fraud (as measured by the transaction’s value), the longer the prison term.

Other bills in the package deal with fraud by notaries public and amending sentencing guidelines related to mortgage-fraud crimes.

Listed below are the bills, links to the text and other information, the primary sponsors, and thumbnail descriptions of the legislation.

• HB 4462 – Rep. Marty Knollenberg (R-Troy) – Crimes; forgery; forging or uttering and publishing a real estate document; prohibit, and provide for penalties and remedies.
• HB 4478 – Rep. Lisa Lyons (R-Alto) – Criminal procedure; sentencing guidelines; sentencing guidelines for forgery and uttering and publishing of real estate instruments; enact.
• HB 4487 – Rep. David Nathan (D-Detroit) Financial institutions; generally; residential mortgage fraud; prohibit.
• HB 4488 – Rep. Brandon Dillon (D-Grand Rapids) – Crimes; fraud; value thresholds for crime of false pretenses; revise.
• HB 4489 – Rep. George Darany (D-Dearborn) – Criminal procedure; sentencing guidelines; sentencing guidelines for crime of false pretenses; revise to reflect increased penalties.
• HB 4490 – Rep. Mark Meadows (D-East Lansing) – Criminal procedure; statute of limitations; certain crimes relating to real property; revise statute of limitations.
• HB 4491 – Rep. Rashida Tlaib (D-Detroit) – Occupations; notaries public; penalties for notary public violations; clarify, and increase.
• HB 4492 – Rep. Rashida Tlaib (D-Detroit) – Criminal procedure; sentencing guidelines; sentencing guidelines for notary public violations; enact.
• HB 4495 – Rep. John Walsh (R-Livonia) – Criminal procedure; sentencing guidelines; sentencing guidelines for crime of mortgage fraud; enact.
• SB 43 – Sen. Tupac Hunter (D-Detroit) – Financial institutions; generally; crime of residential mortgage fraud; establish.
• SB 44 – Sen. Tupac Hunter (D-Detroit) – Criminal procedure; sentencing guidelines; sentencing guidelines for crime of mortgage fraud; enact.
• SB 249 – Sen. Darwin Booher (R-Evart) – Crimes; fraud; value thresholds for crime of false pretenses; revise.
• SB 250 – Sen. Darwin Booher (R-Evart) – Criminal procedure; sentencing guidelines; sentencing guidelines for crime of false pretenses; revise to reflect increased penalties.
• SB 251 – Sen. Mike Nofs (R-Battle Creek) – Criminal procedure; statute of limitations; certain crimes relating to real property; revise statute of limitations.
• SB 252 – Sen. James Marleau (R-Lake Orion) – Occupations; notaries public; penalties for notary public violations; increase.
• SB 253 – Sen. John Gleason (D-Flushing) – Criminal procedure; sentencing guidelines; sentencing guidelines for notary public violations; enact.

Deposit law challenge canned

A law requiring unique Michigan markings on returnable beverage containers does not, on its face, violate the federal Commerce Clause, according to Western District Judge Gordon Quist.

A suit filed by the American Beverage Association against several state officials claims the law unfairly limits interstate commerce.

The Michigan-specific markings enable deposit-return machines to recognize that the container was purchased in Michigan. The state argues that the law is necessary to prevent situations like this one:

All kidding aside, deposit-return fraud is no small matter, wrote Quist:

[A]lthough it has never been stated with precision how many bottles are fraudulently redeemed each year, Plaintiff does not deny that the problem exists, and Defendants have presented sufficient evidence that estimates the scope of fraud to be, conservatively, 10 million dollars per year.

Yet to be determined in the litigation: whether burden imposed on the beverage manufacturers outweighs the benefits that the state obtains from the unique-marking requirement.

The case is American Beverage Ass’n v. Synder, et al.

$14.7M use tax case: What is the value of employee feedback?

How much is employee feedback valued?

Is it a pointless exercise or a useful tool? There are endless debates around the water cooler and in the boardroom about this one.

How much is employee feedback valued for tax purposes?

The Michigan Department of Treasury and Ford Motor Co. are duking this one out in court.

Our story:

Ford Motor Co. leased vehicles to its own employees and retirees, and those of Ford’s subsidiaries.

Here’s how it worked in the late 1990s and early 2000s: Ford sold vehicles to its financing arm, Ford Credit. Ford Credit, in turn, leased the vehicles back to Ford at a yearly lease rate of 28.8 percent of the wholesale delivered price. Ford then subleased the vehicles to the employees and retirees at 20.8 percent of the wholesale delivered price.

But along with the apparently good deal the sublessees were getting, there was a small obligation.

Every now and then, they had to fill out a vehicle quality and performance report, a checklist of 35 items that took a few minutes to complete. The leases required this. The leases also stated that if you didn’t fill out the form when requested, you’d be in default of the lease.

Ford said most of the employed sublessees filled out the reports on company time.

Ford was required to pay Michigan use tax on the lease program based on the vehicles’ prices. The treasury department figured the price at the 28.8 percent lease rate. Ford claimed the 20.8 percent rate applied.

The version of the Use Tax Act in effect at the time, MCL 205.92(f) (later amended by 2004 PA 172), defined “price” as “the aggregate value in money of anything paid or delivered, or promised to be paid or delivered, by a consumer to a seller in the consummation and complete performance of the transaction by which tangible personal property or services are purchased or rented for storage, use, or other consumption in this state … ”

In other words, the sublessees were providing some value by filling out the required reports, and that value was part of the vehicle’s price.

But what’s the value?

It’s peanuts, said Ford in the Court of Claims. It shouldn’t even figure into the price. There’s virtually no effort involved in filling out the report. But, if you insist on a value, let’s have a hearing to figure it out.

It’s $14,727,220.41, said the treasury department. That’s the difference between the 28.8 percent and the 20.8 percent lease rates. No need for a hearing, just do the math.

The Court of Claims liked the treasury department’s approach better.

Not so fast, said the Michigan Court of Appeals. Both positions are wrong.

The use tax act, said the COA, plainly requires us to put a price tag on filling out the vehicle reports. That can’t be ignored.

But figuring the price on the difference between the lease rates isn’t the way to do it:

When the services required under the sublease agreements are given a monetary value equal to the difference between the lease and the sublease rates, an illogical result is reached: because the lease and sublease rates are a percentage of the wholesale delivery prices of the vehicles, identical services provided by the sublessees receive different monetary values.

In other words, it is illogical that the services provided by a sublessee of a luxury vehicle would have a significantly higher monetary value than the services provided by a sublessee of an economy car. …

For example, the difference between the lease rate and the sublease rate for an $86,000 Range Rover is $6,880, while the difference between the lease rate and the sublease rate for an $8,653 Ford Focus is $692.

So, how much is employee feedback valued?

We’ll find out on remand.

The case is Ford Motor Co. v. Dep’t of Treasury.

SBM director waxes on effects of ‘beyond bad’ state of state at annual meeting

In her report to attendees of the 2010 Solo & Small Firm Institute — as part of the 2010 State Bar of Michigan annual meeting in Grand Rapids — Janet Welch, executive director of the State Bar of Michigan, was upfront about having bad news and good news.

First, the bad, which is the “beyond bad” state of the state, something that affects the court system and, in turn, lawyers.

The state’s per average capital income is the best way to measure how things stand in Michigan, she said, but there are grim numbers involved. In 1970, Michigan was 13th in the nation, but in 2000 it dropped to 19th, and in 2008, sank to 38th.

And citing the House Fiscal Agency’s ranking of Michigan in income growth, “We’re not only dead last, but we’re so far beyond 49th, we can’t even see 49th.”

For that, she turned to the SBM’s Judicial Crossroads Taskforce, a 13-month-old initiative to study and recommend ways for the court system to be saved and advanced in the wake of declining state revenues.

Though the task force’s final meeting isn’t for another few weeks, and the report’s results aren’t public yet, Welch weighed in on what could be recommended.

“In broadest terms, I think their report will call for a court system that’s simpler, more flexible, and more based on evidence-based results,” she said. “It will recognize that in some areas of the states we have more judges than needed, and in other areas, we don’t have enough. And it will say that we will need to measure that by an objective, evidence-based measure.”

One question the task force has asked is whether there’s something the court system can do to handle business disputes that can be perceived as friendly to the business community to help them feel better about staying in Michigan and, in effect, encourage other businesses to come here.

For that, she said, one committee in the task force is recommended a three-year private business docket in three of the biggest Michigan counties, where two or three judges would handle all business cases. She noted that other states that have tried such a program have had great results.

Finally, she said that the task force believes cost savings can only happen with better information systems in court, particularly via statewide e-filing in all state courts.

“The tools exist right now to make the court system more convenient, more accessible, more efficient … . We’re wasting money by not spending money to make that happen,” she said.

So, wasn’t there something mentioned about good news?

Well, Welch did say that the state of the SBM is “good — truly good.”

Given the reserves that SBM has built up by managing the way it delivers services to its members, and based on the current rate of consumption, she said that the SBM won’t have to raise dues for another eight more years.

That’s relief for a state where more and more lawyers are struggling professionally, but where dues are in the bottom percentage compared to other states. Welch pointed to that the fact there is no mandatory continuing legal education requirements as another advantage of practicing in Michigan.

She said the secret is being tech savvy, thus saving administrative costs where they count, and SBM members’ volunteer time helping offset things. An example of the latter, she added, is the launch of the Master Lawyer Section, which will replace the Senior Lawyers Section, and will allow the more experienced members of the bar to participate in pro bono programs and mentoring for younger attorneys.

Also, something she said that’s of “critical” importance is the upcoming triennial economics of law practice survey, which will be sent to bar members in October via e-mail and the SBM website.

Welch pointed to the Michigan Supreme Court’s 2008 Smith v. Khouri attorney fee ruling, for which the Court said the SBM’s previous survey was the most important resource in determining award of attorney fees.

But the Court also cited limitations within the survey, so Welch said the SBM has streamlined the new survey, which will be tailored in two different forms — one for private practice members, the other for all other members. The results will be published in early 2011, and there will be drawings and giveaways to help bolster participation.

Check back on our blog for more from the 2010 State Bar meeting.

In their opinions

Instead of carving out an exception to this exclusion, this theory of interpretation would create a virtual, if not complete, exclusion of the exclusion.

6th U.S. Circuit Court of Appeals Judge Jeffrey S. Sutton’s response in TMW Enterprises, Inc. v. Federal Insurance Co. to an insurance claimant’s argument that coverage was due for water damage, which was not an excluded peril, caused by faulty workmanship, for which coverage was excluded.

TMW bought a condominium building. As later discovered by TMW’s renovators, it needed some work, $3.9 million worth, to fix structural problems caused when the original builder “improperly constructed exterior walls, leaving them vulnerable to water infiltration.”

No problem, said TMW as it filed an insurance claim against its $10 million policy with Federal.

Problem, Federal replied. The policy excludes damages for faulty workmanship.

No problem, said TMW. It wasn’t the workmanship that caused the damage, it was the water that came into the building due to the faulty workmanship. And, we notice, water damage is not an excluded peril, so please pay up.

Problem, said Sutton.

As an “all-risk” policy, this insurance policy basically covers everything unless specifically excluded. That means the number of possibilities for last-in-time “but for” causes of damage are limited only by the imagination of the reader.

What if a roof contains a flawed design (think Frank Lloyd Wright, see Essex Ins. Co. v. Fidelity & Guar. Ins. Underwriters, Inc., 282 F. App’x 406, 409 (6th Cir. 2008)), and it leaks water into the house, which ruins one of the floors? But for the water, no damage to the floor would have occurred. Yet the contract does not exclude damages caused by “water.” Coverage?

What if faulty construction allows humid summer air to enter the building, which rusts metal fixtures? But for the exposure to the summer air, no damage to the fixtures would have occurred. Yet the contract does not exclude damages caused by “air.” Coverage?

What if a poorly constructed ceiling beam falls, smashing the floor below? But for the force of gravity, no damage to the floor would have occurred. Yet the contract does not exclude damages caused by “gravity.” Coverage?

As in each of these examples, so too here: The very risk raised by the flawed construction of a building came to pass.

To say that the risk was not covered because other elements or natural forces were the last causative agents of the damage, though to be sure utterly foreseeable causes of the damages, is to eliminate the exclusion.
It is exceedingly strange to “think that a single phenomenon that is clearly an excluded risk under the policy was meant to become compensable because in a philosophical sense it can also be classified as water damage.” Aetna Cas. & Sur. Co. v. Yates, 344 F.2d 939, 941 (5th Cir. 1965) (Friendly, J., sitting by designation).

But all is not lost for TMW, said Sutton.

As the district court viewed the dispute, the identification of the faulty workmanship exclusion, together with undisputed factual evidence that there was a “but for” causal relationship between the damages and this exclusion, meant that summary judgment for Federal was in order.

In view of the reality that the “ensuing loss” clause, under either way of looking at it, does not permit Federal to deny coverage for losses not proximately caused by faulty workmanship, and in view of the fact that TMW did not appear to have an opportunity to seek coverage for such losses, we think TMW should be given an opportunity to do so on remand.