Minnesota Lawyers Mutual Insurance v. Antonelli, Terry, Stout & Kraus, LLP ( 2009 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 09-1049
MINNESOTA LAWYERS MUTUAL INSURANCE COMPANY,
Plaintiff - Appellant,
v.
ANTONELLI, TERRY, STOUT & KRAUS, LLP; DONALD E. STOUT, Esq.,
Defendants – Appellees,
and
ADRIENNE ANDROS FERGUSON, individually and on behalf of THE
ESTATE OF ANDREW A. ANDROS; EMILY J. ANDROS, individually
and on behalf of THE ESTATE OF ANDREW A. ANDROS; JULIA LYNN
ANDROS, individually and on behalf of THE ESTATE OF ANDREW
A. ANDROS; PENELOPE J. ANDROS, individually and on behalf of
THE ESTATE OF ANDREW A. ANDROS; JOHN S. RICHARDS; ABBAS
YOUSEF; MIRSUL INVESTMENTS S.A.; IMPORTECHNO INTERNATIONAL
INCORPORATED,
Defendants.
Appeal from the United States District Court for the Eastern
District of Virginia, at Alexandria. Liam O’Grady, District
Judge. (1:08-cv-01020-LO-TCB)
Argued: October 28, 2009 Decided: December 4, 2009
Before MOTZ and GREGORY, Circuit Judges, and Benson E. LEGG,
Chief United States District Judge for the District of Maryland,
sitting by designation.
Reversed and remanded by unpublished opinion. Judge Gregory
wrote the opinion, in which Judge Motz and Judge Legg joined.
ARGUED: Danny Mark Howell, SANDS, ANDERSON, MARKS & MILLER,
McLean, Virginia, for Appellant. Lon Arthur Berk, HUNTON &
WILLIAMS, LLP, McLean, Virginia, for Appellees. ON BRIEF: Brian
J. Gerling, HUNTON & WILLIAMS, LLP, McLean, Virginia, for
Appellees.
Unpublished opinions are not binding precedent in this circuit.
2
GREGORY, Circuit Judge:
On December 15, 2008, the United States District Court for
the Eastern District of Virginia dismissed a declaratory
judgment action brought by Appellant Minnesota Lawyers Mutual
Insurance Company (“MLM”). Based on the test this Court set
forth in Nautilus Ins. Co. v. Winchester Homes, Inc., 15 F.3d
371, 377 (4th Cir. 1994), 1 the district court found that the suit
would create unnecessary entanglement with a pending state court
action in Florida, that Florida had a strong interest in the
suit, and that the Florida court could resolve the issue more
efficiently. For the reasons set forth below, we reverse the
decision of the district court and remand for further
proceedings consistent with this decision.
I.
A.
MLM issued a professional liability policy (“the Policy”)
to the Virginia law firm of Antonelli, Terry, Stout & Kraus, LLP
(“the Firm”) for the period October 25, 2007 through October 25,
2008 against “all sums up to the limit of [MLM’s] liability,
1
The section of Nautilus involving the appellate standards
of review was overruled by the Supreme Court in Wilton v. Seven
Falls Co., 515 U.S. 277 (1995). However, the factors
articulated which guide the district court’s exercise of
discretion in a declaratory judgment action remain applicable.
3
which the INSURED may be legally obligated to pay as DAMAGES due
to any CLAIM . . . resulting from the rendering [of] . . .
PROFESSIONAL SERVICES while engaged in the private practice of
law.” (J.A. 24.) 2 On July 25, 2008, a second amended complaint
was filed in Ferguson v. Stout, Case No. 08-09767CA40, a case
pending in the Circuit Court of the Eleventh Judicial District
in Miami-Dade County, Florida. The second complaint, naming the
Firm and one of its partners, Donald Stout, as defendants,
alleged that the Firm and Stout conspired to cheat the Florida
plaintiffs out of valuable rights to patents and technology
(“Wireless Email Technology”).
One cause of action alleges that Stout and the Firm induced
the Florida plaintiffs to give up their interest in the Wireless
Email Technology so that the patents could be transferred to
NTP, Inc., a company controlled by Stout and owned in part by
Stout and members of the Firm. (J.A. 180, 189-90 ¶¶ 68, 96.)
Specifically, the Firm and Stout were retained to provide legal
services to Telefind Corporation and some of its investors.
(J.A. 169-70 ¶¶ 29-30.) Stout “devised a legal strategy that he
2
Citations herein to “(J.A. __)” refer to the contents of
the Joint Appendix filed by the parties in this appeal.
We consolidate and summarize the facts set forth in the
complaint and the Policy; of course, our account of the facts
does not constitute a finding of fact binding any court or party
on remand.
4
told [the Florida plaintiffs] would legally protect Telefind
investors’ interest in” the Wireless Email Technology during
anticipated bankruptcy proceedings. (J.A. 176 ¶ 52.) This
“strategy” involved distinguishing between patents relating to
Wireless Email Technology and patents relating to paging
technology, which is a distinction Stout said was legal. (J.A.
176 ¶¶ 53, 56.) To “implement this strategy,” Stout advised the
plaintiffs not to “document[] any direct ownership interest in
the Wireless Email Technology” to protect it from Telefind’s
creditors. (J.A. 177 ¶ 57.) NTP was formed and patents for the
Wireless Email Technology were transferred to that corporation.
(J.A. 180 ¶ 68.) The complaint alleges that Stout falsely
promised that the Florida plaintiffs would share future benefits
from the technology. Thereafter, NTP sued Research in Motion,
Ltd. for patent infringement, settling that case for $613
million. At that time, the Florida plaintiffs alleged they had
no documented interest in the patents because they had relied
upon Stout’s advice and thus could not share in the settlement.
The plaintiffs then sued the Firm and Stout in Florida.
B.
On August 15, 2008, the Firm provided MLM a copy of the
Second Amended Complaint. After promising to “provide Mr. Stout
and the law firm with a defense to the Complaint” (J.A. 206),
MLM sought a declaratory judgment in district court that there
5
was no duty to defend or indemnify the Firm and Stout against
the Florida claims. Specifically, the declaratory judgment
based on the allegations of the Second Amended Complaint,
asserted that (1) coverage was excluded pursuant to Exclusion 3
of the Policy:
any CLAIM arising out of PROFESSIONAL SERVICES
rendered by any INSURED in connection with any
business enterprise: (a) owned in whole or part; (b)
controlled directly or indirectly; or (c) managed,
[b]y INSURED, and where the claimed DAMAGES resulted
from conflicts of interest with the interest of any
client or former client or with the interest of any
person claiming an interest in the same or related
business or enterprise
(J.A. 26); (2) coverage was excluded based on the Policy’s
Specific Entity Exclusion Endorsement, which excluded any claim
resulting from any act, error or omission arising out of
rendering or failing to render professional services to or on
behalf of NTP; (3) the allegations were not within the Policy’s
coverage because the alleged damages did not result from the
rendering or failure to render professional services, as
required by Part Two of the Policy’s Coverage Section; and (4)
in the alternative, that MLM had no duty to defend Stout because
he failed to comply with the Policy’s requirement of immediate
notice.
On December 15, 2008, the district court dismissed without
prejudice the declaratory judgment action. The court based its
two-page oral decision (J.A. 232-33) on the first three
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“Nautilus factors,” which are used “[t]o determine whether to
proceed with a federal declaratory judgment action when a
parallel state action is pending.” Penn-America Ins. Co. v.
Coffey, 368 F.3d 409, 412 (4th Cir. 2004). The four factors
are:
(1) whether the state has a strong interest in having
the issues decided in its courts; (2) whether the
state courts could resolve the issues more efficiently
than the federal courts; (3) whether the presence of
“overlapping issues of fact or law” might create
unnecessary “entanglement” between the state and
federal courts; and (4) whether the federal action is
mere “procedural fencing,” in the sense that the
action is merely the product of forum-shopping.
United Capitol Ins. Co. v. Kapiloff, 155 F.3d 488, 493-94 (4th
Cir. 1998) (quoting Nautilus, 15 F.3d at 377).
II.
According to the Declaratory Judgment Act, a district court
with proper jurisdiction, “may declare the rights and other
legal relations of any interested party seeking such
declaration, whether or not further relief is or could be
sought.” 28 U.S.C. § 2201(a) (2006). The Supreme Court has
“repeatedly characterized the Declaratory Judgment Act as ‘an
enabling Act, which confers a discretion on the courts rather
than an absolute right upon the litigant.’” Wilton v. Seven
Falls Co., 515 U.S. 277, 287 (1995) (quoting Pub. Serv. Comm’n
of Utah v. Wycoff Co., 344 U.S. 237, 241 (1952)). Therefore,
7
this Court reviews for abuse of discretion the district court’s
decision to not hear a federal declaratory judgment action.
Regarding this discretion,
district courts are not without guidance . . . . We
have explained that a declaratory judgment “is
appropriate when the judgment will serve a useful
purpose in clarifying and settling the legal relations
in issue, and . . . when it will terminate and afford
relief from the uncertainty, insecurity, and
controversy giving rise to the proceeding.”
Kapiloff, 155 F.3d at 493 (quoting Centennial Life Ins. v.
Poston, 88 F.3d 255, 256 (4th Cir. 1996)) (alterations in
original).
III.
MLM argues that the district court erred in concluding that
it would be necessary to find facts being litigated in the
pending Florida proceeding, thus creating unnecessary
entanglement in violation of the third Nautilus factor.
According to MLM, the court was only being asked to interpret
the contractual language of the insurance policy to determine
whether the allegations before the state court fell within the
Policy. Thus, entanglement would not occur. Indeed, MLM
asserts that entanglement could not occur because Virginia law
does not permit the court to look beyond the allegations. MLM
further claims that because the district court was fundamentally
mistaken about what could be litigated under Virginia law, it
8
also erred in its analysis of the remaining Nautilus factors.
We agree.
A.
MLM first argues that the district court misapplied our
decision in Coffey when it found that the declaratory judgment
action would lead to entanglement with the Florida suit due to
overlapping issues of fact. This Court in Coffey found that
“[u]nder Virginia law, an insurer’s duty to defend arises
‘whenever the complaint against the insured alleges facts and
circumstances, some of which, if proved, would fall within the
risk covered by the policy.’” Coffey, 368 F.3d at 413 (quoting
Brenner v. Lawyers Title Ins. Corp., 397 S.E.2d 100, 102 (Va.
1990)). This principle is referred to as the “four corners
rule.” See Travelers Property Cas. Ins. Co. v. Bruner, No.
3:07CV463-HEH, 2007 WL 3143333, at *2 (E.D. Va. Oct. 25, 2007).
Based on the four corners rule, this Court found that “the duty-
to-defend question . . . [does] not require the district court
to resolve factual questions at all. It need only decide such
coverage by comparing what [the plaintiff] has alleged in the
state court action with the language of the [provider’s]
insurance policy.” Coffey, 368 F.3d at 413. Therefore, “there
is no duty to defend ‘if it appears clearly that the insurer
would not be liable under its contract for any judgment based
upon the allegations.’ Brenner, 397 S.E.2d at 102 (emphasis
9
added).” Id. The district court was being asked only to
“decide the scope of the contractual language” of the insurance
policy, and it was “not necessary to resolve” factual issues
“before defining the scope of the contract’s” exclusion clause
at issue. Id. at 414.
Here, the district court faced the same question at issue
in Coffey: whether the allegations before the state court fell
within the scope of Exclusion Three or the Specific Entity
Exclusion of the Policy and whether those same allegations
sought damages “resulting from the rendering or failure to
render professional services.” 3 With this question, the district
court committed the same error as the district court did in
Coffey. It presumed that determining the duty to defend depends
on the actual outcome of the state litigation. Instead, the
district court, following Virginia law, should have decided
whether the allegations in the state complaint were within the
scope of the insurance policy. Therefore, the district court
3
In fact, the counsel representing MLM stated before the
court that “[i]f it is not set forth in the pleadings so clearly
that it’s outside the policy, then we have a duty to defend
because the duty to defend means that there is a potentiality
based on the pleadings coverage under the policy. And that is
the start and end of the inquiry. We are not allowed, we are
not permitted as a matter of law to go beyond that.” (J.A. 229-
30.)
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erred when it found that determination of facts was necessary,
or even possible, in order to determine MLM’s duty to defend.
The Firm and Stout argue that “MLM is forcing the Antonelli
Law Firm and Mr. Stout to prove the contrary—to prove precisely
what the Florida claimants allege—or to forfeit any possibility
of MLM’s coverage.” (Appellees’ Br. 15.) This assertion rests
on the false premise that proving the facts underlying the
Florida suit is necessary. Instead, the district court is bound
by Virginia law to take the pleadings in the state suit as true
and apply those against the insurance policy. Essentially, this
task involves the interpretation of contractual language and
nothing more. Thus, no entanglement with the facts and issues
in the state proceeding would have occurred.
Regarding the remaining three Nautilus factors, only two
were relied upon by the district court: “(1) whether the state
has a strong interest in having the issues decided in its courts
[and] (2) whether the state courts could resolve the issues more
efficiently than the federal courts[.]” Kapiloff, 155 F.3d at
493-94. The district court erred in analyzing these factors
because it was fundamentally mistaken about what could be
litigated under Virginia law, as we have determined above. The
district court found that “Florida has a strong interest in the
issues that are to be decided there. The case is about . . .
legal malpractice, fraud perpetrated . . . and that advice given
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to clients.” (J.A. 232.) The court also found that Florida
courts could resolve the issue more efficiently, thus avoiding
piecemeal litigation.
In support of its use of the state interest and efficiency
factors, the district court relied on this Court’s decision in
New Wellington Fin. Corp. v. Flagship Resort Dev. Corp., 416
F.3d 290 (4th Cir. 2005). In New Wellington, while a suit was
pending against it in New Jersey state court based on an alleged
violation of New Jersey law, New Wellington, a Virginia
corporation, sought a declaratory judgment in the Western
District of Virginia that no agency relationship existed between
the parties and that it owed no money to the state plaintiffs.
Id. at 292. “The parties agree[d] that the conduct underlying
the two cases [was] identical.” Id. at 293. This Court then
used several of the Nautilus factors to uphold the district
court’s decision to dismiss the declaratory judgment action.
Id. at 297-98. Specifically, we found that
First, we agree with the district court that New
Jersey has a strong interest in having the dispute
resolved in its courts. The conduct at issue in these
two suits involves and concerns New Jersey companies,
writing letters from New Jersey, regarding loans for
New Jersey property. In addition to the parties,
actions, and property implicated, [the] . . .
complaints in the New Jersey suit exclusively involve
claims based in New Jersey state law, several of which
can fairly be called complex . . .
Second, the New Jersey state court can resolve
the matter more efficiently. . . . Besides the parties
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present in New Jersey and absent here, it is easy to
believe that the New Jersey state court could resolve
the New Jersey state law issues alleged by Flagship
and Atlantic Palace more efficiently than could a
federal court sitting in Virginia.
Id.
The district court’s reliance on New Wellington is
misplaced for several reasons. First, in New Wellington, a
district court in Virginia was being asked to decide issues of
New Jersey law. We therefore appropriately determined that the
application of out-of-state law, combined with missing parties,
allowed the district court to reasonably exercise its discretion
not to hear the action. In contrast, here the U.S. District
Court for the Eastern District of Virginia was asked to
interpret Virginia law, and the pending suit is in Florida. It
is unreasonable to conclude that a Florida state court is a
better arbiter of Virginia law than the Eastern District of
Virginia. The Eastern District of Virginia has found that it
“is accustomed to applying Virginia law in declaratory judgment
actions.” Penn-America Ins. Co. v. Mapp, 461 F. Supp. 2d 442,
451 (E.D. Va. 2006). Additionally, this Court found in Coffey
that state interest is strongest when it is applying its own law
and that the efficiency concern is not present when “the
contractual coverage issue will not be decided by the state
. . . case.” 368 F.3d at 414. Florida has no strong interest
in the coverage issue to be determined under Virginia law, and
13
the fundamental issue of whether the allegations in state court
trigger the duties to defend and indemnify will not be decided
in the Florida litigation.
Second, in New Wellington, the district court was asked to
decide the same issues at play in the state court based on
identical conduct. 416 F.3d at 293. Namely, New Wellington
“sought a declaratory judgment [in federal court] that no agency
relationship existed between the parties” based on the exact
same conduct underlying the state suit. Id. at 292. In the
state suit, the parties Flagship and Atlantic Palace sought to
prove that New Wellington was their agent in order to succeed on
their claims. Id. at 293. The overlap between the two cases
raised efficiency concerns. In the case before this Court
today, such efficiency concerns are not present. While the
conduct of Stout underlies both the Florida suit and the
declaratory judgment action, the Florida suit is an action
involving fraud, contract law, and possibly malpractice. In the
declaratory judgment action, these issues were not before the
district court. The district court was only faced with a
contractual coverage issue. Piecemeal litigation would
therefore not result from the district court deciding the
coverage issue because the scope of coverage is not at issue in
the state proceeding. Thus, the district court erred in relying
14
on the Nautilus factors of state interest and efficiency to
dismiss MLM’s declaratory judgment action.
B.
The Firm and Stout argued before the district court that
even if the duty to defend is able to be determined before a
determination in the state suit, this could not be done for the
duty to indemnify. We disagree.
“The insurer’s obligation to defend is broader than its
obligation to pay.” Brenner, 397 S.E.2d at 102. Consequently,
in the absence of any assertions in the state court proceeding
that could result in damages covered under the Policy, there
cannot be a duty to defend, and thus no duty to indemnify. This
Court has spoken on this point directly:
Although an insurer’s duty to indemnify will depend on
resolution of facts alleged in the complaint, no such
factfinding is necessary if there is no duty to defend
because the allegations, even when taken as proved,
would fall outside the policy’s coverage.
Coffey, 368 F.3d at 413. Therefore, the district court erred in
failing to find that it may be able to resolve the duty to
indemnify after deciding the duty to defend.
IV.
Because the district court abused its discretion by
dismissing MLM’s declaratory judgment action based on the
Nautilus factors, we reverse the decision of the district court
15
and remand for further proceedings consistent with this
decision.
REVERSED AND REMANDED
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