offices of pest master and bishop california and they had one question where is our four hundred ten thousand dollars it turned out that the agency was owed four hundred ten thousand dollars as a result of a failure to pay payroll in who was the president of past masters was shocked his business was almost destroyed he said he promised i r s he's going to get to the bottom of this particular issue and so he did he looked into it and he found out that his payroll tax company had committed fraud and taken close to four hundred thousand dollars in payroll taxes and spent it on various retailers  shopping network and you know i'm sure that all of us are familiar with the facts you don't need to run through the whole summary maybe you can just jump into the policy language is observed very narrow set of issues we're focused on i want you just focus on the computer fraud provision i think that's your best hope my personal opinion ok so let's hear what you have to say about that i will give us the sort of the wind up that we are already familiar with all right yesterday there be two discussions today you'll hear most of the discussions about first one is computer five as the justices just brought up  this type of coverage in the traveler's policy covers the insured for direct loss caused directly by computer fraud and computer fraud is any use of any computer to fraudulent caza transfer and that is the type of coverage we're going to discuss today the coverage in kind of broad terms covers a specific use of a computer to commit a fraud and so in this particular case we submit that there is no significant difference between those two different phrases travelers in the describe below discussed the universal case and they also discovered discuss the bright point case as some how supportive of this concept of i difference between these two phrases that again don't exist in case law or the policy however these cases are in applicable with respect to the universal case the particular coverage issue was a fraudulent entry into a computer system we have a situation in which it is computer fraud and its use of any computer and the key word is use not entry and therefore the universal case really doesn't apply with respect to the bright point case the travelers in the just court has relied upon we have a discussion about phone cards which the subject of a fraud and these phone card cards were not in the possession the insured at the time of the fraud and as a result it didn't qualify for computer fraud coverage which requires a transfer from the inside to the outside you know i yeah you've laid that out well in your briefs but none of those cases  binding on us here i guess so i didn't i don't really find it all that helpful i guess i'm struggling with this it seems to me that this particular provision that you focused on could be read in one of two ways and could be read to say that the transfer itself has to be an authorized write i think that i want to hear from the defendant but i think that's the way that they say it should be read or it could be read to cover an authorized transfer that was fraudulent induced and i think that's what you're trying to persuade us right that that you're not saying that the actual transfer of the funds from your client's bank account to was a priority one was unauthorized meaning there was a standing i assume that there was an invoice that was sent that was approved b your position is that they never intended to forward the money to the i r s period right and so it was you know it was a fraudulent induced but nonetheless authorized transfer and you think that that's still covered well yes i want to make sure that we have a distin that already means consent yes ok and also trying to open ok and so on and how you interpret consent that it would been later approval subsequent approval well i guess what i'm trying to say is that there was a preconceived plan to misrepresent and commit fraud and as a result that consent if there was any consent or authority was invalid and so all i'm trying to say is if you're going to i want to make sure that we're clear on  said you you know there's no can see there's no dispute that it was authorized well yeah there's no dispute that we said ok however we have to analyze that in the context of the fact that there was a preconceived notion to take our funds and use it in a different w that that's a question for me and that's my best master and part party did they have a contract for services yes and did this not cover would this not have covered these withdrawals that were fraudulent well the unique  circumstance of this case our test master had a written contract with h r connections for various h r consulting issues as time went on this it's our consulting company said hey listen we also do payroll and so there was an oral contract relating to the processing of the payroll and had to do with you know the you know hours or three dollars per paycheck does that set any light on the scope of authorization i mean because i didn't see anything and i think that would be critical t understand you know pest master did not suffer a loss the moment as as you were just discussing the moment the withdrawals were made because it was expecting the money to be withdrawn by priority i mean so and it was right well you know our position past masters position is of course that the actual loss was caused the at the moment that priority one transfer the money from pessimists was it really because at that moment they signed off on it just like there are understanding wasn't like they had and they signed off and after they signed off on it the employee then instead of putting it into the payroll tax account put it into his personal bank account and i know you're trying to argue that this language covers that that i'm having a little bit difficulty scene and i know there's you're trying to focus on the authorization but there's also this direct loss that you have to take into account yes and i think that an example or two would actually help understand that you'll see in the steve leigh expert report which is that you are ten forty through ten forty six a description of how those funds were taken in and that description shows and three separate example actually for that at the moment that a pest master transfer transfer occurred there was a negative balance in the pride one account and so what happened that well we have a direct loss and the situation is that when that money was transferred that money immediately went to pay the obligations of other clients priority one itself whatever it certainly didn't go to the payment of payroll taxes or employee salaries at that point it went to satisfy that that in complete balance you're arguing that when priority one the invoice trying to get the money from from your client that it had at that moment no intention of ever forwarding the money to their us oh yes very much so the intent of that point in time was to use the funds indiscriminately and again that is shown our fraud expert report where we have a situation where the business was losing money before they even met mr van deep and we had a very experienced and smart in the financial world president she had a history of using these funds for personal purposes before and she not only did it at the beginning when they started taking funds from past master but continued on over time so yes that is so innocent can i just ask you to clarify this am i right in thinking that travellers move for summary judgment but you did not cross move for summary judgment that's correct so you think there's a tribal issue that a jury needs to be so what's the yeah the disputed issue of fact that well there's a there's a number of them as you may fraudulent cause a transfer i think there's a situation about one in the l c s in various different facts about whether or not there is a direct loss in this case we have we believe that we have a an invoice and therefore at least authorization to access the pest master account for each and every withdrawal that was made yes yes aro however at the beginning it part of the phrase is actually in the person any use of any computer and so what i'm trying to get at is that this is a broad coverage and the insured should be entitled to a plain meaning review of this coverage of so that he can make a decision whether or not he needs to get more coverage or that he needs to you know have this wrist that's out there and i got to tell you that you know there's an argument that oh you know this will lead to a situation where you need touching of a computer that comes in a fr h transfer so it was a specific computer use that affected the frog i'm still having trouble with your direct loss of tell me give me your best argument direct loss because what happened here is you had agreement with priority that they would do your payroll taxes and it's not like they took the money without you knowing it or without you authorized it there was a signed off for each authorization it's like ok you're taking the money you signed it off you signed off on it then after that you agree that individual who then took the money with it and instead of putting in the payroll tax he put it in his own bank account is that correct so it looks like the district court said that pest master had not sustained a direct loss under either provision because the its alleged loss was entirely contingent on a series of events and decisions including party ones decision to divert the funds in its account to pay its own obligations instead of using them for their agreed upon purpose of paying past masters federal payroll taxes so well why doesn't that reasoning support that there wasn't a direct loss here well first of all you don't know and just request that i reserve a minute at least or do a rebuttal that's all right go ahead proceed not deal with your time and look at the thank you why doesn't it well there's a number of reasons know that the fundamental answer the question is that you know why doesn't a series of events that take place between the cause of the loss and the loss make it not a direct loss my argument is that if you ever did that analysis you would never have a direct loss because there's always different steps that are taken especially in a fraud case where there's multiple elements with the real significance or with the court should focus on is significant intermediate steps and i've got to tell you this is a case not like methodist where we have an investment that takes place four times removed from bernie made off this situation have two parties two parties and one says i'm going to pay your payroll taxes for three dollars a paycheck and doesn't do it so there isn't a whole bunch of steps that result in the loss there's a situation where there's an if previous thing intent to defraud there is a misrepresentation as to how the funds are going to be spent and then there is a taking of that money and then use of it for you funds transfer fraud so i won't go into that so just focusing on the computer fraud professor why can't it be read to say and i'll just put it in my terms and an authorized transfer that was fraud really induced it seems to me that's what we're dealing with here right right ok and then i look at the language and it seems completely that kind of transfer seems to fall right within the language of the policy so to address the question i think there are three clauses in this policy which show why hacking has got to be the incident involved it has to be the invasion of computer well now now it's that let's just read the provision together because doesn't say anything about an evasion of a computer it says they ones computer but in this instance it's actually both to fraudulently cause a transfer and i guess that's what i i stop there and i say to fraudulently cause a transfer well isn't that what happened here if if we credit your opponent's assertion that they're taking the position that at the time the invoice was sent from priority one to past master the priority one folks and never intended to send one penny of the money they were going to get on to the i r s so it's just fraudulent from the very that covered by the plain language of the policy well thankfully that's not correct that was not the situation with priority what was i already one did pay their taxes for two thousand and nine right but which the transfers we're talking about or have ones where the money wasn't sent on and your your opponent is taking the position not that they win but rather that there's a factual dispute as to whether at the time the request for the approval was made whether they never intended to send the money on and it seems to me that's probably right you're certainly disputing that they're taking the position that there was a fraudulent and ten at the outset and so why wouldn't we send this on for trial on that issue because papers and but there's no difference between those two formulations the well let's use the universal american cases in the example that involved a very different coverage but it was computer fraud coverage but the computer fraud covered universal american  the fraudulent entry of electronic data into a computer ok the fraudulent entry of electronic that into a computer the court there said exactly that it required the manipulation of the computer not the manipulation of a human being now what plaintiff would do in this situation is simply read the fraudulent entry of electronic data into a computer as this entry of fraudulent data into a computer and that's two different things terminate one is determined by the use of the machine to fraudulently cause effect to eight the other is determined by the quality of data that goes into that machine whether it's corrupted or whether it's permissions and that is the same as here court to another case which just came out in january of two thousand and sixteen it is a state court case opinion out of illinois it is in title craft chemical company versus federal insurance company decided the two thousand and sixteen illinois circuit lexus won in that case to help again with computer fraud different policy provision in that case but the the covered event was the unauthorized entry of electronic data into a computer the court went through that and found that what was prohibited was unauthorized access to the computer the invasion of a computer by someone not authorized to do so and that court went through the two cases that it relied on in reaching its conclusion universal american and it found that the unauthorized entry of data into a computer was the same as the fraudulent entry of electronic data into the computer it also cited favorably the district court opinion here in pest master and it said that the fraudulent cause of transfer was the equivalence of unauthorized entry and fraudulent entry in other words it is the manipulation of the machine the adverb fraudulently modifies the verb because it does not i not an adjective that modifies the transfer yes you can have fraudulent transfers in a number of different situations but in order to have one fraudulent only cause i either fraudulent entry the unauthorized entry you need have access to that machine and that's why this is tougher or i'm sorry that's why this is not covered so i think you know it in terms of that we also have to look at other phrases used in the policy as the justice said the direct loss provision in this case what is the direct loss of what we have trouble figuring out the direct loss because i why would we send that than to the jury as a material fact well no it's i think the direct loss is very clear the direct direct means immediate so that is the immediate loss that you suffer so let me just take take the best factual scenario for the plaintiffs here which is that at the time per the one send the invoice let's say it was for eighteen thousand dollars so are you having trouble hearing me at that time priority one the folks at party one do not intend to send one penny of that money to the i r s they they already form the intent we're going to get this eighteen thousand dollars under false pretenses we're going to keep it and use it to pay our mortgage or whatever else they were doing right so as soon as past master sends the eight hundred thousand dollars that money's gone there's no there's no intervening event that's going to occur they've already right so there's just take that faction that scenario and explain why the direct last position that we're if we're talking about direct loss in the media first of all we've conflated a couple different things here if the fraud is really the cause of the loss not computer fraud but the fraud that we're talking about from pest master that started earlier so that there is no direct loss there is no immediate loss because it takes some time for them to engineer and it hit the money hits priority one account they've already decided we are not going to forward this money on to the i r s so why isn't that a direct and very immediate loss to postmaster right that has mr has a contractual right from priority one to have those taxes paid those taxes were not paid that same day the taxes went into a non segregated account it could have been that ms brand's whalen decided that day i'm going to pay these taxes instead of the moment priority one got the money they never intended to send one penny of it to their us ok so forget about all of these other scenarios that you tried to spin out your brief about well the taxes weren't due for a few more days and maybe they were still debating whether they're going to send the money loss but what was the cause of that loss these the clause has to be read in conjunction remember it's a direct loss directly caused by computer fraud so in other words what was the direct cause of the direct loss and it was the provision of money by authorized money by a past master to priority one it was done pursuant to their contract let me ask you i've found unless you have it seems like in pes mr statement of additional facts i think it's at our six one five paragraph sixty one past master stated that priority with true eleven thousand nine hundred ninety one dollars and eighty nine cents that was never signed off on by past master and never appeared in any invoice so and i know it's eleven thousand versus the other amounts of money but it looks like that was never signed off on and never appeared in any invoice from the bleeding it wasn't addressed they didn't really how i found that viewing the evidence the evidence of that fact in the light most favorable to pet mass pest bester why wouldn't there be coverage for that amount again because of the fact that a computer was not invaded well but here you make a interesting argument based on the fact that you know it was  not authorized i mean we have to look at the authorization on all these other ones you know they were signed off on by by pest master but this one was not signed off on by pest master so how was it authorized your honor i don't i don't know the facts of that i'm sorry i well i just assumed i was if you don't know the facts assume there was some money so that they didn't authorize because you made a point to say well they authorized they signed off on the invoice they signed off on this invoice so basically you know they knew about it and so therefore you know it was wrong if that's i don't know but if what you're saying is that they somehow invaded their computer without their authority and took that money that yes i would assume that would be covered but that i don't think they've ever alleged that i don't think there's ever been an allegation of unauthorized use of monies when i asked the question of that i really can't address that it's just there's been no allegation of theft the allegations have been the nonpayment of taxes remember the last year is the money they had to pay the i r s so that the money that was paid to the i r s was the was the focus of the claim and that money was the money that was supposed to be transmitted by priority one through their contract to the i r s that's the loss in question here and  money was money was obtained by purdy one for other purposes for example child support payments things of that nature correct all authorized as far as as we know and are concerned we say all authorized  i've never seen evidence of anonymous arrives transaction there have been allegations that money is missing but i've never seen an authorized transaction where money was transferred i think there is at least one so for that amount so i was just curious what effect that might happen if there effect would be it would depend on whether or not that was that was invasion of a computer certainly if i could just sum up the what we're looking at to to address the court's question regarding what's covered this type of scam has been going on since the beginning of time i mean you don't need a computer to do this i can come to you i can look at you i can promise you anything if you give me your money and you do maybe my charisma maybe my i'm just very convincing that happens we have a little bit of technology now i have some writing so maybe i can write you a letter and convince you to give me your money and you do now we've progressed i have the mail i can send you a letter now we have a telephone i can call you on the telephone and convince you to send me your money because i'm going to do something but i don't we go through telegraph fa computer the question is this is this really comes down to caviar enter why would the insurance company essentially be the guarantor of all commercial transactions undertaken by the insured why would travelers provide coverage for this ancient scam which has been going on for years under the name of computer from it makes no sense what is covered here is exactly what we've said which is supported by the universal american case which is cited by the bright point case by the way the bright point case is exactly the same language that we use here fraudulent we cause the transfer yeah but so is that that owns case you know equally non binding it's exactly the same way when they come out and the only space is different because they use the proximate cause standard instead of directly cost which is immediate remember directly caused i think is a zero sum game it's the immediately preceding events which takes place so in this case immediately preceding event which took place was the payment of taxes to the i r s which they thought they had already paid i just am not persuaded on that point i mean i hear what you're saying about the  does i do question travelers sanity in putting this provision in here because it does seem to be way way too broad but the remedy obviously is tell your client to redraft the preview this is a smartphone if i were to call you and say i've got widgets i want to sell you for five dollars less than widget you could buy anywhere and you agree you're going to use those which is in your manufacturing process so you say sure let's do it i'll buy a thousand  i say send me the money and i'll send you a thousand widgets well this is a computer right and i have in your words fraud actually caused the transfer i don't think that's true i have caused a fraudulent transfer but i haven't fraudulently caused the transfer because i didn't actually use your phone you know so that's that's i think the distinction here and i think my time's up and thank you thank you for  an extra minute i just want to highlight a couple things from the discussion below and that was the universal case and the craft chemical case of course that entire discussion depends upon a different type of coverage it was a fraudulent entry into a computer system coverage ok and so you can art what is the use of the computer here to fraudulently cause a transfer there's a couple uses one is the transfer of the actual misrepresentation the invoice itself the invoices you know you would say there would be liability under this policy even if the payments were sent through the mail yes and i also believe that part and parcel of this fraud was the a c h transfer its any use of a computer to further a fraudulent transfer that's correct ok and as as just as what for to discuss that the remedy is simple the prevailing of computers in society has been going on for a long time all travelers would have to do is say specify the use they could change it to entry they could change the unauthorized access they could do a variety of things all we're asking in this case your honor is i believe that we have sufficient facts to creech create tribal issues and one of them was highlighted by this court itself concerning a just disputed fact about whether or not a given transfer was on the right and you argue that i asked you that question yes whether any on authorized access and you said no yes it will your honor the front different questions that i was unaware of that's that's the that's the  answer and so therefore just to conclude we are asking the court to reverse the decision of the district court and allow past master to go before a jury and prove its case to get coverage thank you for your time thank you