Evanston Insurance Company v. Jasmine Company, Inc. , 702 F.3d 68 ( 2012 )

United States Court of Appeals
For the First Circuit
No. 12-1139
LUCIANO MANGANELLA,
Plaintiff,
v.
EVANSTON INSURANCE COMPANY,
Defendant, Third-Party Plaintiff, Appellant,
v.
JASMINE COMPANY, INC.,
Third-Party Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Richard G. Stearns, U.S. District Judge]
Before
Lynch, Chief Judge,
Selya and Stahl, Circuit Judges.
Harvey Nosowitz, with whom Anderson & Kreiger LLP was on
brief, for appellant.
Anthony R. Zelle, with whom Thomas W. Evans and Zelle
McDonough & Cohen, LLP were on brief, for appellee.
December 14, 2012
STAHL, Circuit Judge. This is the second appeal we have
heard regarding an insurance coverage dispute arising from charges
of sexual harassment brought by a former employee against Luciano
Manganella, the one-time president of Jasmine Company, Inc. See
Manganella v. Evanston Ins. Co., ___ F.3d ___, 2012 WL 5907466 (1st
Cir. Nov. 27, 2012). After Manganella filed an action against
Jasmine's liability insurance provider, Evanston Insurance Co.,
seeking defense and indemnification for the harassment charges,
Evanston filed a third-party complaint against Jasmine itself,
requesting a declaratory judgment that it had no duty to defend or
indemnify Jasmine for the harassment claims. The district court
granted summary judgment on the third-party claims for Jasmine,
holding that Evanston had to both defend and indemnify Jasmine.
Evanston now appeals part of that ruling. As framed by the
parties, the dispute on appeal is whether a finder of fact must
conclude that the conduct underlying the sexual harassment charges
did or did not begin before Jasmine's insurance policy took
effect.1 Accordingly, our opinion is limited to that question and
does not discuss arguments not made by the parties. After careful
consideration, we vacate the judgment below and remand the case to
the district court.
1
The parties did not make certain arguments on appeal that
were available to them under Massachusetts law. We consider the
issues as the parties have presented them. See United States v.
Perazza-Mercado, 553 F.3d 65, 69 n.8 (1st Cir. 2009); Thomas v.
Eastman Kodak Co., 183 F.3d 38, 62 n.15 (1st Cir. 1999).
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I. Facts & Background
Before the events giving rise to this action, Manganella
was the president and sole shareholder of Jasmine, a clothing
retailer that he founded in the 1970s. Donna Burgess, whose sexual
harassment allegations form the underlying claims here, was
Jasmine's human resources manager from 1997 to 2006.
In 1998, a former Jasmine employee, Sonia Bawa, filed
claims of sexual harassment against Jasmine based on Manganella's
conduct. Soon thereafter, Jasmine purchased from Evanston the
Employment Practices Liability Insurance Policy at issue here ("the
Policy"). Jasmine's coverage from Evanston under the Policy
consisted of a series of annually renewed one-year installments
running from April 1999 through April 2006. The Policy covers
damages (including monetary settlements) "which [Jasmine] shall
become legally obligated to pay as a result of [timely made
claims], by reason of any Wrongful Employment Practice." A claim
is a "written charge or lawsuit . . . seeking Damages or other
relief for a Wrongful Employment Practice." A Wrongful Employment
Practice includes, as relevant here, "conduct of an Insured with
respect to . . . [an] employee that allegedly culminated in . . .
violation of any state, federal or local civil rights or anti-
discrimination law and/or fair employment practices law."
Importantly, for a resulting claim to be covered, a Wrongful
Employment Practice must have "happened" in its "entirety" during
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the policy period or after the retroactive date (here, April 28,
1999).
In July 2005, Manganella sold Jasmine to Lerner New York,
Inc. for approximately $30 million. Manganella and Lerner executed
a stock purchase agreement to effectuate the sale and an employment
agreement under which Manganella would remain Jasmine's president
for three years. Under the stock purchase agreement, $7 million of
the purchase price was placed in escrow, "as security . . . in the
event of" certain types of misconduct by Manganella. A few months
after the sale was completed, Jasmine cancelled the final
installment of the Policy but purchased an extended reporting
period, which allowed for coverage of claims made and reported
during the thirty-six months following the cancellation.
In May 2006, further allegations of sexual harassment by
Manganella prompted Jasmine to hire an outside investigator, Stier
Anderson LLC, which interviewed several employees, including
Burgess; she recounted inappropriate comments that Manganella had
made in the past. On June 22, 2006, as a result of conduct
revealed by the investigation, Manganella was fired. In a letter
to Manganella, Lerner accused him of sexually harassing four female
employees and downloading sexually explicit images on company
computers, all in violation of Lerner's corporate Code of Conduct.
A subsequent arbitration between Lerner and Manganella confirmed
that he had violated the Code of Conduct by harassing several
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female employees. See Manganella, 2012 WL 5907466, at *2
(describing the arbitration).
On March 19, 2007, Burgess filed a charge of
discrimination against Manganella, Lerner, and Jasmine with the
Massachusetts Commission Against Discrimination ("MCAD").
Burgess's MCAD charge alleged that, "[t]hroughout her employment
with Jasmine[], Manganella subjected Ms. Burgess to nearly constant
physical and verbal sexual harassment," including "inappropriate
comments about Ms. Burgess' body, inappropriate touching," and,
eventually, coerced sexual activity on five separate occasions.
Manganella also threatened Burgess (and others) with physical
violence.
Ten days after Burgess filed the MCAD charge, Manganella
notified Evanston of her claims and requested coverage. Less than
two weeks later, Evanston sent a letter to Jasmine, denying
coverage for Burgess's claims on the ground that it was "apparent"
that the harassment alleged by Burgess in the MCAD charge "did not
happen in its entirety subsequent to the Retroactive Date, which is
April 28, 1999," as required for coverage.
In April 2008, Jasmine settled the MCAD charge with
Burgess for $300,000. As part of the settlement, Burgess provided
Jasmine with an affidavit (the "2008 Affidavit") stating that the
"conduct and actions by Mr. Manganella that formed the basis of my
allegations of sexual harassment did not begin until in or about
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October 1999, and then continued throughout my employment."
Burgess's claims against Manganella were settled separately at a
later date.
Manganella filed this action against Evanston in July
2009, seeking (among other things) a ruling that Evanston was
required under the Policy to defend and indemnify Manganella
against Burgess's MCAD charge. Two months later, Evanston filed an
answer and a third-party complaint against Manganella and Jasmine,
asserting that it had no duty to defend or indemnify either
Manganella or Jasmine for Burgess's claims.2
After discovery, Manganella and Evanston cross-moved for
summary judgment on Manganella's coverage claims. The district
court held that Evanston should have at least investigated the MCAD
charge before denying coverage, given that it was aware of certain
facts (including an affidavit that Burgess filed in Bawa's
harassment case) suggesting that Manganella's unlawful conduct may
not have begun prior to the Policy's retroactive date. Manganella
v. Evanston Ins. Co., 746 F. Supp. 2d 338, 346 (D. Mass. 2010).
The court also concluded, however, that the arbitration between
Lerner and Manganella had conclusively established that Burgess's
MCAD charge fell within the Policy's exclusion of claims based on
conduct "committed with wanton, willful, reckless or intentional
2
Evanston initially named Burgess as a defendant in its
third-party complaint, but later voluntarily dismissed its claims
against her.
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disregard" for the laws underlying those claims. See id. at 348.
The district court thus found that the doctrine of issue preclusion
barred Manganella from relitigating that question, and granted
summary judgment for Evanston. Id. at 349. We recently affirmed
that ruling. See Manganella, 2012 WL 5907466, at *8.
In a subsequent summary judgment opinion, the district
court addressed Evanston's third-party claims against Jasmine.
Manganella v. Evanston Ins. Co., No. 09-cv-11264-RGS, 2011 WL
5118898 (D. Mass. Oct. 28, 2011). The court reiterated its earlier
holding that Evanston had a duty to at least investigate the MCAD
charge before denying coverage. Id. at *6-7. Because Evanston had
breached the duty to defend, it had "the burden of proving that
[Burgess's] claim was not within its policy's coverage." Id. at *7
(quoting Polaroid Corp. v. Travelers Indem. Co., 610 N.E.2d 912,
922 (Mass. 1993)) (internal quotation mark omitted). Evanston
failed to carry that burden. Addressing the issues as framed by
the parties, the district court found no genuine dispute of
material fact as to whether the conduct underlying Burgess's MCAD
charge had begun prior to the Policy's retroactive date of April
28, 1999. See id. at *5-6. In the district court's view, Evanston
had at most produced a "shard of allegedly contradictory evidence"
in the form of an interview memorandum and interrogatory answers
filed in connection with the MCAD proceeding, in which Burgess
characterized some of Manganella's pre-April 1999 remarks as
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offensive in hindsight. Id. at *5. The district court did not
consider these statements sufficient to create a factual dispute as
to the scope of Burgess's harassment claims. The court thus
"determined that Evanston is liable under the Policy for the costs
of defending and settling the Burgess claim," and granted summary
judgment for Jasmine. Id. at *8.3 Evanston now appeals the ruling
that summary judgment was properly entered against it, and that in
consequence it must reimburse Jasmine for the settlement with
Burgess (but not the holding that it must cover Jasmine's defense
costs).
II. Analysis
We review a grant of summary judgment de novo, Baker v.
St. Paul Travelers Ins. Co., 670 F.3d 119, 125 (1st Cir. 2012), and
will affirm if there is no genuine dispute as to any material fact
and the movant is entitled to judgment as a matter of law, see Fed.
R. Civ. P. 56(a). "Where, as here, we are presented with
cross-motions for summary judgment, we 'must view each motion,
3
In summarizing its findings, the district court suggested
that the evidence as to whether Burgess's claims were covered was
"in equipoise." 2011 WL 5118898, at *7. Seizing on this phrase,
and other ostensible errors in the district court opinion, Evanston
moved for reconsideration, asserting that the court's language
showed that it had improperly weighed the evidence and failed to
draw inferences in Evanston's favor. The district court denied
that motion, explaining that, although "the word 'equipoise' was
not well chosen," the evidence "provides no basis on which a
'fair-minded jury' could return a verdict for [Evanston] on the
coverage issue." Manganella v. Evanston Ins. Co., No.
09-cv-11264-RGS (D. Mass. Nov. 22, 2011) (electronic order).
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separately,' in the light most favorable to the non-moving party,
and draw all reasonable inferences in that party's favor."
OneBeacon Am. Ins. Co. v. Commercial Union Assur. Co. of Can., 684
F.3d 237, 241 (1st Cir. 2012) (quoting Estate of Hevia v. Portrio
Corp., 602 F.3d 34, 40 (1st Cir. 2010)). Because the parties
reasonably agree that Massachusetts law governs the Policy, we
apply that law. See Bird v. Centennial Ins. Co., 11 F.3d 228, 231
n.5 (1st Cir. 1993); cf. Saint Consulting Grp., Inc. v. Endurance
Am. Specialty Ins. Co., Inc., 699 F.3d 544, 550 (1st Cir. 2012)
(applying Massachusetts law to an insurance policy where all
parties assumed that it applied and the insured corporation was
based in Massachusetts).
The dispositive question here, as presented to us, is
whether there is any material issue of fact as to whether the
conduct giving rise to Burgess's MCAD charge began after the
Policy's retroactive date of April 28, 1999. Because the Policy
covers only damages (including settlement payments) paid on claims
"by reason of" any Wrongful Employment Practice that "happened" in
its "entirety" after the retroactive date, the parties agree that
Evanston must reimburse Jasmine for its settlement with Burgess
only if the course of harassing conduct from which her claims arose
began after that date. As the district court concluded (and as
Evanston does not dispute on appeal), Evanston's initial failure to
investigate and defend the MCAD charge means that it now bears the
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burden of proving that the charge lies beyond the Policy's
coverage. See Polaroid Corp., 610 N.E.2d at 922.
We begin with Burgess's MCAD charge, which describes in
general terms the progression of Manganella's harassing conduct
from offensive remarks and unwelcome touching to coerced sexual
activity. As to when the harassment began, the charge reports only
that Burgess began working at Jasmine in 1997 and that Manganella
harassed Burgess "[t]hroughout her employment" there. Thus, the
charge lends some support to Evanston's theory that the Wrongful
Employment Practice from which Burgess's claims arose included pre-
April 1999 conduct; taken literally, the word "throughout" would
mean that Burgess was harassed beginning on day one of her
employment, i.e., in 1997. That said, the word could also be read
to indicate simply that the harassment was pervasive. Indeed, we
note that the charge, even when describing particular instances of
harassment, is simply not specific as to dates. Thus, we turn to
the other evidence to shed more light on the conduct that gave rise
to Burgess's claims.
The parties vigorously dispute the significance of
various statements in which Burgess has described certain pre-April
1999 sexual comments by Manganella as offensive or unwelcome, or as
intended to soften her up for later, more egregious conduct. For
example, during her 2006 interview with Stier Anderson, she
reported that Manganella had made unwelcome sexual advances toward
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her "since early in her employment" and explained that she felt
that he had "tried to manipulate her from the beginning." In March
2009, in response to an interrogatory in the MCAD action that asked
her to identify each instance of harassment that she experienced,
Burgess related, among other things, that "[w]hen [she] first began
working for Jasmine[], Mr. Manganella would make off-color comments
on taking Viagra and about his sexual relations with his wife."
She explained that these comments made her "uncomfortable" but that
she "did not feel personally threatened by them." Similarly, at a
2011 deposition in this action, Burgess testified that Manganella
had made sexual comments in 1997; at the time, they made her
uncomfortable but she did not find them threatening. By 1999,
however, she viewed the comments as threatening in hindsight and
felt that they had been intended to set her up.
Considered in the light most favorable to Jasmine, none
of these statements necessarily shows that the conduct giving rise
to Burgess's MCAD charge began before April 28, 1999. That
Manganella's early comments made Burgess "uncomfortable" does not,
without more, establish that they contributed to the hostile
environment that resulted in the MCAD charge. This conclusion
would be consistent with Burgess's statement, in a November 1998
affidavit she submitted in Bawa's discrimination case, that "at no
time" had Burgess "ever witnessed or heard from anyone associated
with the company . . . that Mr. Manganella committed any acts of
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sexual harassment directed towards Ms. Bawa or others." Likewise,
that Burgess offered Manganella's comments as part of her answer to
an interrogatory asking her to list instances of sexual harassment
does not necessarily show that her claims arose in part from these
comments, given that she went on to clarify that she did not find
the comments threatening, which could suggest that they did not
contribute to the hostile environment that gave rise to her claims.
Conversely, when viewed in the light most favorable to
Evanston, these statements could support the inference that the
harassing conduct giving rise to Burgess's claims did include
Manganella's pre-April 1999 remarks. That Burgess did not feel
"threatened" by Manganella's comments at the time they were made --
or did not believe that she was aware of sexual harassment on his
part at the time, as stated in the 1998 affidavit -- does not
necessarily mean that those remarks did not ultimately contribute
to a hostile, sexually harassing work environment. "Incidents of
sexual harassment serious enough to create a work environment
permeated by abuse typically accumulate over time, and many
incidents in isolation may not be serious enough for complaint."
Cuddyer v. Stop & Shop Supermarket Co., 750 N.E.2d 928, 937 (Mass.
2001). Thus, a reasonable factfinder could conclude that
Manganella's offensive sexual comments, while perhaps "not . . .
serious enough for complaint" when made, were ultimately part of
the broader pattern of harassing, unlawful conduct that gave rise
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to Burgess's claims. See id. at 941 ("A hostile work environment
constitutes a pattern of sexual harassment . . . that, by its very
nature, often is apparent only in hindsight."). That conclusion
would find support in the fact that Burgess answered an
interrogatory asking about instances of sexual harassment by
identifying these comments (albeit with the clarification discussed
above), and in her statements that Manganella had set her up and
"tried to manipulate her from the beginning."4
So far, then, we have a stalemate. Considering the two
motions separately and drawing all reasonable inferences in favor
of the non-movant, see OneBeacon, 684 F.3d at 241, we do not
believe that the undisputed facts entitle either party to judgment
as a matter of law. Rather, the MCAD charge and Burgess's various
descriptions of Manganella's sexual comments support the sort of
"conflicting yet plausible inferences" that make summary judgment
improper. See Desmond v. Varrasso (In re Varrasso), 37 F.3d 760,
764 (1st Cir. 1994); see also Coyne v. Taber Partners I, 53 F.3d
454, 457 (1st Cir. 1995) (explaining that "when the facts support
plausible but conflicting inferences on a pivotal issue in the
case, the judge may not choose between those inferences at the
summary judgment stage").
4
We note these descriptions by Burgess not because her
subjective understanding of the scope of her claims controls the
question before us, but rather because the effect of Manganella's
remarks on Burgess may be relevant to whether those remarks
contributed to the hostile environment from which her claims arose.
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Nor do we believe that this stalemate is broken by
Burgess's 2008 Affidavit, which states that the "conduct and
actions by Mr. Manganella that formed the basis of [Burgess's]
allegations of sexual harassment did not begin until in or about
October 1999, and then continued throughout [her] employment."
Although we do not agree with Evanston that Preferred Mutual
Insurance Co. v. Gamache, 675 N.E.2d 438 (Mass. App. Ct.), aff'd,
686 N.E.2d 989 (Mass. 1997), requires us to entirely disregard the
affidavit,5 we do understand Evanston's concern over the prospect
of claimants and insureds colluding against insurers by swapping
such statements for settlement money. More importantly, the
affidavit is not admissible because it is not relevant to any issue
before us on this appeal. The affidavit goes to Burgess's
subjective intent, but her subjective intent is not relevant.
Further, even if the 2008 Affidavit were relevant here,
it could not provide a basis for summary judgment in Jasmine's
5
Evanston argues that Gamache stands for the proposition
that "characterizations of the underlying claim agreed to by the
insured and the claimant in settling the underlying claim have no
weight in subsequent coverage litigation." That case, however,
simply declined to give preclusive effect to a stipulation between
a claimant and an insured in a subsequent action between the
insured and the insurer. See 675 N.E.2d at 444 n.10. Because the
stipulation was not material to the underlying judgment, it lay
outside the long-standing Massachusetts rule that "[w]here an
action against the insured is ostensibly within the terms of the
policy, the insurer . . . is bound by the result of that action as
to all matters therein decided which are material to recovery by
the insured in an action on the policy." Miller v. U.S. Fid. &
Cas. Co., 197 N.E. 75, 77 (Mass. 1935); accord Lodge v. Bern, 101
N.E.2d 748, 749 (Mass. 1951); see Gamache, 675 N.E.2d at 444 n.10.
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favor because a reasonable factfinder could disbelieve it. Our
decision in another insurance coverage dispute, Blanchard v.
Peerless Insurance Co., 958 F.2d 483 (1st Cir. 1992), illustrates
why. There, the crucial question was whether Paul, who shot the
claimant, Blanchard, with a pellet gun, intended to reside in his
parents' home in the future (which would make him a "resident" for
the purposes of their homeowners' insurance policy). See id. at
484, 486. This court reversed a grant of summary judgment for the
insurer that was based in part on Paul's deposition testimony that
he had no intention of returning to his parents' home, explaining:
"State of mind" testimony from the putative
"covered person" may raise inherent
credibility concerns insofar as it supports
limitations on third-party beneficiary
coverage in the somewhat unusual circumstances
where the financial interests of an insurer
and its insured are aligned. Blanchard
specifically points to undisputed evidence
from which a jury might reasonably infer that
Paul's statements as to his subjective intent
were motivated by self-interest. Were a jury
to credit Blanchard's evidence, it would be
entitled to infer that Paul did not harbor the
intent to which he testified on deposition.
Id. at 490-91.6 Here, of course, it is not the insured and insurer
whose financial interests are aligned, but rather the claimant and
the insured. Nevertheless, the same credibility concerns are
6
The relevant evidence in Blanchard suggested that Paul
had a motive to dissemble about his intention to return to his
parents' home because their insurance premiums would increase if
the claimant prevailed against the insurer in the action on the
parents' policy. See 958 F.2d at 490 n.10.
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present here; Burgess provided Jasmine with the 2008 Affidavit as
a condition of the settlement in which she received $300,000.
Moreover, as explained above (and as was true in Blanchard, see id.at 490 n.10), there is other evidence in the record that, when
construed in Evanston's favor, would suggest that Burgess's
subjective intent was not as she subsequently described it in the
2008 Affidavit. Thus, even if the affidavit were relevant here, we
would set it aside for the purposes of resolving Jasmine's motion
because a reasonable factfinder could refuse to credit it. See id.
at 491 (giving the disputed statements "no weight" in resolving the
summary judgment motion of the party relying on them).7
In sum, we hold that neither party is entitled to summary
judgment. As described above, the remaining evidence before us can
support the sort of divergent but plausible inferences as to a key
issue that make summary judgment unavailable. See Desmond, 37 F.3d
at 764. Indeed, we believe that, on this record and as the issues
have been framed, the question of when the harassing conduct that
gave rise to Burgess's claims began is a quintessential question
for a factfinder.
One final point warrants brief mention: our conclusion
that neither party is entitled to summary judgment is not affected
7
The same would not be true, of course, for the purposes
of resolving Evanston's motion, because the "evidence of the
non-movant is to be believed." See Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 255 (1986). Here, though, the 2008 Affidavit
is not relevant and thus does not impact our decision anyway.
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by the fact -- emphasized by Evanston -- that the Policy defines
"Wrongful Employment Practice" to mean conduct that "allegedly
culminated in" a violation of law. Certainly, drawing all
inferences in Evanston's favor, one could see the evidence
discussed above as establishing that Manganella's pre-April 1999
remarks were part of a single course of sexually harassing conduct
that "culminated in" the events at the heart of Burgess's
harassment claims. But, as we have already explained, when all
inferences are drawn in Jasmine's favor, it is possible to see
these comments as simply separate from the Wrongful Employment
Practice that gave rise to Burgess's MCAD charge. And Evanston has
not attempted to show that "an objectively reasonable insured,
reading the relevant policy language," Finn v. Nat'l Union Fire
Ins. Co. of Pittsburgh, Pa., 896 N.E.2d 1272, 1277 (Mass. 2008)
(citation omitted), would expect the phrase "allegedly culminated
in" to bar coverage of Burgess's claims even if those claims arose
from a Wrongful Employment Practice that did not encompass
Manganella's early comments. Further, to the extent that this
phrase is ambiguous, we construe that ambiguity "against the
insurer . . . and in favor of the insured." GRE Ins. Grp. v.
Metro. Bos. Hous. P'ship, Inc., 61 F.3d 79, 81 (1st Cir. 1995)
(citing Hazen Paper Co. v. U.S. Fid. & Guar. Co., 555 N.E.2d 576,
583 (Mass. 1990)). Thus, the Policy's use of "culminated in" does
not entitle Evanston to summary judgment.
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III. Conclusion
For the foregoing reasons, we vacate the judgment below
and remand for further proceedings consistent with this opinion.
No costs are awarded.
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