Mt. Airy v. Jacob ( 1997 )


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    UNITED STATES COURT OF APPEALS
    FOR THE FIRST CIRCUIT
    ____________________

    No. 97-1306

    MT. AIRY INSURANCE COMPANY,

    Plaintiff - Appellee,

    v.

    STEPHEN A. GREENBAUM, ET AL.,

    Defendants - Appellants.

    ____________________

    RICHARD T. OSHANA, JONAH JACOB

    Defendants - Appellees.

    ____________________

    No. 97-1307

    MT. AIRY INSURANCE COMPANY,

    Plaintiff - Appellee,

    v.

    STEPHEN A. GREENBAUM, ET AL.,

    Defendants - Appellees.

    ____________________

    JONAH JACOB

    Defendant - Appellant.

    ____________________

    APPEALS FROM THE UNITED STATES DISTRICT COURT

    FOR THE DISTRICT OF MASSACHUSETTS

    [Hon. Richard G. Stearns, U.S. District Judge] ___________________

    ____________________













    Before

    Boudin, Circuit Judge, _____________

    Hill,* Senior Circuit Judge, ____________________

    and Pollak,** Senior District Judge. _____________________

    _____________________

    Gary D. Buseck, with whom McDonough, Hacking & Neumeier was ______________ ______________________________
    on brief for appellant Stephen A. Greenbaum.
    Robert J. Mailloux, Jr., with whom E. Peter Mullane and _________________________ _________________
    Mullane, Michel & McInnes were on brief for appellant Jonah ___________________________
    Jacob.
    Jeffrey A. Goldwater, with whom Matthew J. Fink, Michelle M. ____________________ _______________ ___________
    Bracke, Bollinger, Ruberry & Garvey, Carol A. Griffin, Scott ______ ____________________________ _________________ _____
    Douglas Burke and Morrison, Mahoney & Miller were on brief for _____________ ___________________________
    appellee Mt. Airy Insurance Company.



    ____________________

    September 29, 1997
    ____________________




















    ____________________

    * Of the Eleventh Circuit, sitting by designation.

    ** Of the Eastern District of Pennsylvania, sitting by
    designation.

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    HILL, Senior Circuit Judge. Mt. Airy Insurance Company HILL, Senior Circuit Judge. ____________________

    sought a declaratory judgment that it does not have a duty to

    defend the named defendants in an underlying malpractice action

    against them. The district court granted summary judgment to Mt.

    Airy Insurance Company. This appeal ensued.1

    I.

    Jonah Jacob filed a malpractice action against eight

    attorneys, including Stephen A. Greenbaum, Richard Oshana, Ira A.

    Nagel, Howard S. Fisher, and Gerald A. Hamelburg (the Law Firm).2

    The factual allegations of Jacob's complaint as summarized by the

    district court are as follows. In 1984, Jacob, Greenbaum,

    Oshana, and Richard Gold (not a party) formed a partnership

    styled as South Copley Limited Partnership (South Copley). South

    Copley was created to acquire, develop and manage residential

    real estate. Jacob was a passive investor who entrusted

    Greenbaum, Oshana and the Law Firm with management and oversight

    of these investment business affairs.

    Over the next five years the partnership created four

    trusts and two partnerships to hold title to various projects:

    the Horace Street Trust, the Trenton Street Trust, the Westbridge

    ____________________

    1 We find no merit in defendants' suggestion, raised for the
    first time in their Reply Brief, that we have no jurisdiction to
    hear this appeal because the district court made no findings
    justifying its exercise of its discretionary declaratory judgment
    authority. An insurance company's claim that it has no duty to
    defend in another action is the archetypal case for which a
    declaratory judgment is appropriate.

    2 Other defendants are named in the malpractice action, but are
    not parties to this appeal.

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    Trust, the Queensbury Realty Trust, Northeast Glen Limited and

    Westwood Limited. Also, in 1986, Northeast Realty Investment

    Group was incorporated to manage the partnership's real estate

    holdings. Jacob's complaint describes these collectively as the

    "Business Entities."

    All of the Business Entities were operated out of the

    offices of the Law Firm and were allegedly funded either with

    seed money from Jacob, or with real estate equity and loans which

    Jacob, Gold, Oshana and/or Greenbaum co-made and/or co-

    guaranteed. The Business Entities either owned real estate

    projects outright or they were used to channel borrowed monies

    for the acquisition and operation of the real estate projects.

    At or about the time that South Copley was formed,

    Greenbaum, Oshana and Gold incorporated two close corporations,

    South Copley Development Corporation and South Copley Management

    Corporation, naming themselves as the sole officers, directors

    and shareholders. According to the complaint, Greenbaum, Oshana

    and Gold used these two corporations, together with Northeast

    Realty Investment Group, as "Related Cash Conduits" "to

    improperly funnel fiduciary monies (belonging to the Business

    Entities or to Jacob) to each named defendant, either directly

    for no reason or disguised in the form of income and/or

    reimbursement of expenses."

    On August 13, 1986, Jacob, Gold and Oshana executed a

    "Mortgage Investors Line of Credit and Collateral Pool Agreement"

    (Collateral Pool Agreement) under which the Mortgage Investors


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    Corporation (MIC) agreed to extend a five year, $5,000,000 line

    of credit secured by the assets of the Business Entities and a

    promissory note given by South Copley Limited Partnership. The

    term "Collateral Pool" was used because Jacob agreed to sign a

    number of anticipatory notes, mortgages, guaranties and other

    related security instruments or documents.

    Over the next five years, MIC advanced various sums

    pursuant to the Collateral Pool Agreement. The complaint alleges

    that "[t]he management of virtually all of [Jacob's] business

    affairs with MIC was, at all times and in all matters material

    hereto, in the hands of (and entrusted to) Richard T. Oshana and

    Richard Gold, his co-borrowers, co-partner(s), co-beneficiary(s),

    co-shareholder(s) and/or trustee(s) in the real estate and

    business matters related to the MIC Loan Documents. At all times

    material hereto, Defendants Oshana and Greenbaum (as attorneys

    working frequently hand-in-glove) and the Law Firm each

    represented Plaintiff's interests in and related to the MIC Loans

    and the Collateral Pool Agreement, in and related to the various

    Business Entities. . . ."

    While managing the Business Entities, Jacob alleges

    that Greenbaum and Oshana misappropriated funds in the form of

    loans, unexplained disbursements and management fees. Jacob also

    alleges that Greenbaum and Oshana abused Jacob's trust by taking

    advantage of their position as principals of these Business

    Entities and as his attorney by concealing the aforementioned

    conduct and failing to advise Jacob of these breaches of trust.


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    All of the alleged misappropriation occurred through Business

    Entities in which Greenbaum and Oshana were officers, directors,

    or partners.

    Jacob also alleges that Oshana and Gold were forging

    his signature to obtain monies from another joint business

    venture, and that Greenbaum knew it. He asserts that Greenbaum,

    Oshana and Gold treated the assets of these various business

    ventures as their own in complete disregard of the rights, duties

    and obligations each owed Jacob.

    Jacob also alleges that Greenbaum and Oshana's conduct

    constitutes legal malpractice in that they stole fiduciary funds

    from him and concealed the misappropriation; failed to account

    for fiduciary funds, or to segregate Jacob's portion of the funds

    from the Business Entities' funds; failed to protect or promote

    Jacob's interest in the Business Entities, acting instead in

    their own self-interest by misappropriating funds and concealing

    the wrongdoing.3

    Mt. Airy Insurance Company (Mt. Airy) insures the Law

    Firm against malpractice claims and initially agreed to defend,

    under a reservation of rights. Upon learning facts demonstrating

    that Jacob's claim is not covered by its policy, Mt. Airy filed

    this declaratory judgment action. Mt. Airy continued to provide
    ____________________

    3 Jacob's ten-count complaint asserts claims of legal
    malpractice, law partnership liability by estoppel, fraud,
    negligent misrepresentation, breach of fiduciary duty,
    conversion, monies had and received, unfair and deceptive trade
    practices, and equitable relief in the form of an accounting,
    imposition of a receivership, a permanent injunction, and reach
    and apply.

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    a defense to the Law Firm until the district court ruled that

    Exclusion G of its policy with the Law Firm precludes coverage

    for Jacob's claims against it and that Mt. Airy has no duty to

    defend.

    II.

    A liability insurer in Massachusetts has a duty to

    defend its insured "if the allegations in the third-party

    complaint are reasonably susceptible of an interpretation that

    they state or adumbrate a claim covered by the policy terms. . .

    ." Sterilite Corp. v. Continental Cas. Co., 17 Mass. App. Ct. _______________ _____________________

    316, 318, 458 N.E.2d 338 (Mass. App. Ct. 1983). This is true

    even if the claim is baseless, as "it is the claim which

    determines the insurer's duty to defend." Id. at 324 n.17 ___

    (quoting Lee v. Aetna Cas. & Surety Co., 178 F.2d 750, 751 (2d ___ ________________________

    Cir. 1949)). Furthermore, under Massachusetts law, if an insurer

    has a duty to defend one count of a complaint, it must defend

    them all. Aetna Cas. & Surety Co. v. Continental Cas. Co., 413 ________________________ ____________________

    Mass. 730, 732 n.1 (1992).

    There is, on the other hand, no duty to defend a claim

    that is specifically excluded from coverage. While the insured

    bears the initial burden of proving that a claim falls within the

    grant of coverage, Camp Dresser & McKee, Inc. v. Home Ins. Co., ___________________________ _____________

    30 Mass. App. Ct. 318, 321, 568 N.E.2d 631 (Mass. App. Ct. 1991),

    the insurer "bears the burden of demonstrating that the exclusion

    applies." Great Southwest Fire Ins. Co. v. Hercules Building & ______________________________ ___________________

    Wrecking Co. Inc., 35 Mass. App. Ct. 298, 302, 619 N.E.2d 353 __________________


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    (Mass. App. Ct. 1993). "Exclusions from coverage are to be

    strictly construed. . . . Any ambiguity in the somewhat

    complicated exclusions must be construed against the insurer."

    Sterilite, 17 Mass. App. Ct. at 321 n.10. An ambiguity is said _________

    to "exist[ ] in an insurance contract when the language contained

    therein is susceptible of more than one meaning." Jefferson Ins. ______________

    Co. v. Holyoke, 23 Mass. App. Ct. 472, 474, 503 N.E.2d 474 ___ _______

    (Mass. App. Ct. 1987) (citations omitted). "[W]here the language

    permits more than one rational interpretation, that most

    favorable to the insured is to be taken." Boston Symphony ________________

    Orchestra, Inc. v. Commercial Union Ins. Co., 406 Mass. 7, 12, _______________ __________________________

    545 N.E.2d 1156 (Mass. 1989) (quoting Palmer v. Pawtucket Mut. ______ _______________

    Ins. Co., 352 Mass. 304, 306, 225 N.E.2d 331 (Mass. 1967)). ________

    III.

    Under the Mt. Airy policy with the Law Firm, coverage

    is provided for claims arising out of professional services

    rendered by an "Insured." The policy defines "Insured" to

    include "any lawyer . . . who was or is a partner, officer,

    director, or employee of the [Law Firm], but only as respects

    professional services rendered on behalf of the Named Insured . .

    . ." There is no dispute that a defense is owed under the policy

    unless some exclusion applies.4


    ____________________

    4 Indemnification, of course, is another issue. Exclusion A of
    the policy disclaims any responsibility to pay "any claim that
    results in final adjudication against any Insured that the
    Insured has committed any criminal, dishonest, fraudulent or
    malicious act, errors, omissions or personal injuries."

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    The policy contains an Exclusion G which precludes

    coverage for:

    any claim arising out of or in connection
    with the conduct of a business enterprise
    other than the Named Insured (including
    the ownership, maintenance or care of any
    property in connection therewith) which
    is owned by any Insured or in which any
    Insured is a partner, or which is
    directly or indirectly controlled,
    operated or managed by any Insured either
    individually or in a fiduciary capacity;

    Mt. Airy argues that, because Jacob's claims involve

    losses connected with independent businesses owned, controlled,

    or managed by the Insureds, the claims are excluded. The

    defendants, joined by Jacob, argue that, because at least some

    claims in the Jacob complaint allege breach of fiduciary duty,

    Mt. Airy has an unqualified duty to defend. The defendants also

    contest that Exclusion G applies to exclude all claims raised by

    Jacob's complaint.

    The district court held, as a matter of law, that all

    of Jacob's claims come within Exclusion G. We review this

    judgment de novo. Alan Corp. v. Int. Surplus Lines Ins. Co., 22 _______ __________ ___________________________

    F.3d 339, 341-42 (1st Cir. 1994).

    IV.

    Exclusion G applies to any of Jacob's claims which

    arise out of, or are in connection with, the conduct of any

    business which is owned in whole or in part by any Insured or

    which any Insured controls, operates or manages. Defendants

    argue that Exclusion G is inapplicable because Jacob's claims

    arise out of an alleged breach of their fiduciary duty to Jacob

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    as his lawyers rather than out of their roles as partners,

    officers, directors, shareholders or trustees of their joint

    business ventures as his partners, officers, directors,

    shareholders or trustees of the joint business ventures.

    Defendants' argument that the duty to defend is

    triggered by allegations of legal malpractice misses the mark.

    Exclusion G does not even come into play unless the allegations

    charge legal malpractice, because coverage under the policy is

    limited to malpractice. "There will always be an attorney-client

    relationship when these exclusions are at issue. Absent an

    attorney-client relationship, the insuring agreement does not

    apply and the language of the specific exclusions does not come

    into play. [Defendants'] contention would create an illogical

    result; the policy exclusions would be rendered entirely

    meaningless and of no effect." Senger v. Minnesota Lawyers Mut. ______ ______________________

    Ins. Co., 415 N.W.2d 364, 368 (Minn. App. 1987). See also _________ ________

    Potomac Ins. Co. v. McIntosh, 804 P.2d 759, 762 (Ariz. App. _________________ ________

    1990).

    Defendants also argue that the Exclusion's requirement

    that the claim "arise out of or in connection with" the conduct

    of a controlled business enterprise should be interpreted to mean

    that the only acts excluded are those which are the proximate

    cause of the alleged loss. If attorney negligence, rather than

    the conduct of the business, is the proximate cause of the loss,

    they argue, the exclusion is inapplicable.




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    The argument ignores the plain language of Exclusion G

    which excludes coverage for any claim arising out of or in ___

    connection with the conduct of a business entity in which an

    Insured has an interest. The cases cited by defendants are not

    to the contrary. See Clauder v. Home Ins. Co., 790 F. Supp. 162 ___ ________________________

    (S.D. Ohio 1992); Morris v. Valley Forge Ins. Co., 805 S.W.2d 948 ______ _____________________

    (Ark. 1991); and Niagara Fire Ins. Co. v. Pepicelli, 821 F.2d 216 _____________________ _________

    (3d Cir. 1987). In Clauder, the policy exclusion required that _______

    the claim arise out of work performed for a business entity in

    which the lawyer had a pecuniary or beneficiary interest, an

    exclusion that is narrower that Exclusion G. The lawyer was

    accused of selling an estate asset to a company in which he had

    an interest without disclosing that fact to his client. 790 F.

    Supp. at 164-65. The Morris court held that application of a ______

    similar exclusion depended on whether the attorney represented

    his own company, the client, or both. 805 S.W.2d at 952. Here,

    Jacob's complaint alleges that Greenbaum and Oshana were, at

    best, representing both their companies and Jacob, and, at worst,

    representing their companies to Jacob's detriment. In Pepicelli, _________

    the attorney's interest in another business was not at issue; the

    plaintiff rather alleged negligence on the part of his law firm

    in its handling of the plaintiff's insurance claim. 821 F.2d at

    220-21.

    Furthermore, the law of Massachusetts is contrary to

    defendants' position. See New England Mut. Life Ins. Co. v. _________________________________

    Liberty Mut. Ins. Co., 40 Mass. App. Ct. 722, 726, 667 N.E.2d 295 _____________________


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    (Mass. App. Ct. 1966) (the term "arising out of" is much broader

    than the term "caused by," particularly in the context of an

    exclusionary clause in an insurance policy). See also Murdock v. ________ _______

    Dinsmoor, 892 F.2d 7, 8 (1st Cir. 1989) ("arising out of" ________

    ordinarily held to mean "originating from," "growing out of,"

    "flowing from," "incident to," or "having connection with").

    Exclusion G extends to include all claims in connection with the

    conduct of an Insured's business entities.

    In summary, Exclusion G precludes coverage for any ___

    claim which arises out of or in connection with a business

    venture controlled, operated or managed by any Insured or in ___

    which the Insured has an interest as an owner or a partner. This

    includes all claims sounding in malpractice if the allegations

    charge wrongdoing in connection with a business in which the

    Insured has such an interest.

    We must determine, then, whether an insured attorney

    played a role as an officer, shareholder, director, trustee or

    partner in every Business Entity about which Jacob complains.

    The district court found the undisputed facts to be that either

    Greenbaum or Oshana did play such a role.

    Greenbaum and Oshana were partners in South Copley,

    shareholders and officers of South Copley Development

    Corporation, and shareholders and officers of South Copley

    Management Corporation. Oshana was a shareholder and officer of

    Northeast Realty Investment Group, while Greenbaum was a

    director. Oshana was a beneficiary of Horace Street Trust; a


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    trustee and beneficiary of Trenton Street Trust; a trustee and

    beneficiary of the Westbridge Trust; a trustee and beneficiary of

    Queensbury Realty Trust; a partner in Northeast Glen Limited; and

    a partner in Westwood Limited. Greenbaum served as a trustee and

    beneficiary of Horace Street Trust; and as a partner in Northeast

    Glen Limited.

    The parties do not dispute that Greenbaum qualifies as

    an "Insured" under the policy at all relevant times. There is a

    dispute, however, as to Oshana's status after May 8, 1988.

    Greenbaum attests that Oshana was terminated from the Law Firm on

    that date. Oshana disputes this fact.

    If Oshana was not an Insured after May of 1988, he has,

    of course, no coverage at all under the policy for his acts after

    that date. The Law Firm argues, however, that its coverage would

    be revived for malpractice claims arising after May 1988 and in

    connection with business entities to which Oshana is their only

    link.

    A dispute on a fact necessary to the resolution of a

    motion for summary judgment precludes its entry. We hold,

    however, that the district court correctly reasoned that under

    the undisputed facts of this case, Oshana's status after May of

    1988 is irrelevant to the issue of coverage.

    The facts are that either Greenbaum or Oshana played a

    role or had an interest in each and every business venture about

    which Jacob complains. In each case these interests began prior _____

    to May 1988 and continued uninterrupted until Jacob uncovered the


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    scheme. Jacob's claims all arise in connection with these

    business schemes, all of which began prior to Oshana's leaving

    the firm, whenever that was.

    The issue, in fact, is not whether Greenbaum or Oshana

    had an interest in each Business Entity for the entire period

    alleged in the complaint. The relevant inquiry is whether the

    claim arises out of the conduct of a Business Entity to which

    Greenbaum or Oshana had the requisite relationship at the time

    the conduct began.

    For example, although an alleged misappropriation from

    the 11 Horace Street Trust may have occurred after May 1988, the

    scheme began as early as May 1985, and continued uninterrupted

    until Jacob discovered it in 1990. Greenbaum was a director and

    Oshana a beneficiary of the trust at its inception.5 Similarly,

    the defendants attempt to separate the forged notes executed to

    obtain Collateral Pool funds, arguing that claims related to

    these notes are covered because Oshana was no longer an Insured

    at the time. It was in 1986, however, that the alleged

    misappropriation and forgery first began. The fact that Oshana's

    alleged misconduct continued uninterrupted until Jacob discovered

    it does not negate the applicability of the Exclusion. The claim

    still arises out of the conduct of a business enterprise in which

    an Insured was a partner at the time the conduct began.



    ____________________

    5 In fact, it is undisputed that Greenbaum was a Trustee and
    Beneficiary of the Trust from its formation in 1985 through 1990.

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    Jacob's complaint alleges an integrated ongoing scheme

    of deception and misappropriation that began while Oshana was

    still an Insured. If, out of hundred of individual transactions,

    some might not fall under Exclusion G if they occurred

    independently, that fact is irrelevant. An additional act of

    wrongdoing at the tail end of the scheme does not create coverage

    for conduct which began at a time when the Insureds had the

    requisite relationship with the Business Entities.

    V.

    Jacob's claims only allege wrongdoing by Insureds in

    connection with businesses in which they had an interest.

    Exclusion G of the Mt. Airy policy excludes coverage for such

    claims. Mt. Airy, therefore, has no duty to defend appellants.

    The judgment of the district court is affirmed. ________


























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