LePatner v. RSUI Group

• Court: Court of Appeals for the Second Circuit
• Decided: October 10, 2023
• Docket: 22-762
• Status: Unpublished

Opinion

22-762 LePatner v. RSUI Group

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING TO A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

At a stated term of The United States Court of Appeals for the Second Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the 10th day of October, two thousand twenty-three.

PRESENT: JOHN M. WALKER, JR., DENNY CHIN, BETH ROBINSON, Circuit Judges. _________________________________________

LEPATNER AND ASSOCIATES, LLP,

Plaintiff-Appellant,

v. No. 22-762

RSUI GROUP, INC.,

Defendant-Appellee. _________________________________________ FOR APPELLANT: CARL A. SALISBURY, Bramnick, Rodriguez, Grabas, Arnold & Mangan, LLC, Scotch Plains, NJ.

FOR APPELLEE: PATRICK STOLTZ (Neil A. Fox, on the brief), Kaufman Borgeest & Ryan LLP, Valhalla, NY.

Appeal from a judgment of the United States District Court for the

Southern District of New York (Rakoff, J.).

UPON DUE CONSIDERATION WHEREOF, IT IS HEREBY ORDERED,

ADJUDGED, AND DECREED that the judgment entered on March 14, 2022 is

AFFIRMED.

Plaintiff-Appellant LePatner & Associates, LLP (“L&A”), a law firm, sued

insurer RSUI Group, Inc. (“RSUI”) for, among other things, declaratory relief and

breach of contract arising from RSUI’s alleged failure to provide L&A a full and

complete defense in a state court action pursuant to L&A’s professional liability

insurance policy. L&A appeals the district court’s judgment in favor of RSUI

dismissing its complaint with prejudice following the district court's issuance of

a memorandum order denying L&A’s motion for summary judgment and

granting RSUI summary judgment in full. LePatner and Assocs., LLP v. RSUI Grp.,

Inc., No. 21-cv-3890 (JSR), 2022 WL 769614, at *16 (S.D.N.Y. Mar. 14, 2022).

2 We assume the parties’ familiarity with the underlying facts, procedural

history, and arguments on appeal, to which we refer only as necessary to explain

our decision to affirm.

I. BACKGROUND

Attorney Barry LePatner owns L&A as well as a construction management

firm, LePatner Project Solutions, LLC (“LPS”). Only L&A is an insured under the

“Lawyer’s Professional Liability Policy” (the “Policy”) issued by Landmark

American Insurance Company, a wholly owned subsidiary of RSUI. 1

In March 2017, Jamal and Julia Nusseibeh (the “Nusseibehs”) filed an

action in state court against L&A and LPS. The Nusseibehs’ claims arose from an

alleged agreement among the Nusseibehs, L&A, and LPS pursuant to which

L&A and LPS were to provide specified “construction management services,”

and L&A was expected to provide related legal work, in connection with a

partially completed home renovation project in Connecticut. Jt. App’x 187. The

Nusseibehs were dissatisfied with the performance of their original contractor,

York Construction and Development (“York”), and alleged that LePatner had

1 According to the district court, RSUI noted that L&A improperly named RSUI as the defendant in this action. LePatner and Assocs., 2022 WL 769614, at *1 n.2. RSUI has not raised this as an issue on appeal. Depending on the context, in this Order we refer to Landmark and RSUI interchangeably.

3 told them that L&A and LPS were experienced and skilled in resolving problems

in construction projects, could take control of the work started by York, and

could also handle all legal matters that might arise in connection with the

completion of the renovation project. The parties’ agreement, at least in part,

was embodied in a written agreement between LPS and the Nusseibehs for

“project management services” (the “LPS Agreement”). Jt. App’x 513. The LPS

Agreement stated: “It is understood and agreed that this agreement pertains

solely to project management services that do not include the performance of

legal services. In the event that any legal services are requested, they shall be

performed under separate agreement by [L&A].” Id. at 518. The Nusseibehs

terminated the LPS Agreement four and a half months later when, they alleged,

it had become apparent that LPS and L&A were not meeting their obligations.

The Nusseibehs’ complaint alleged that L&A and LPS breached their

contract, engaged in unfair or deceptive practices under the Connecticut Unfair

Trade Practices Act (CUTPA), and were negligent. The complaint ascribed all of

the allegedly actionable conduct relevant to this appeal, including the underlying

agreement, to both L&A and LPS, and sought money damages against both.

4 The specific allegations of breach of contract and negligence were all based on

specified failures to properly perform services described in the LPS Agreement.

Landmark, through RSUI claims specialist Katherine Dowling, agreed to

provide defense and indemnity for L&A in connection with the Nusseibeh action

subject to conditions and a reservation of rights. In its July 2017 coverage letter,

Landmark declined to extend a defense to LPS because LPS was not a covered

entity under the Policy. With respect to L&A’s coverage, Landmark stated that

the Policy limited coverage “to claims alleging negligence in the rendering or

failure to render such professional services as a Lawyer,” and that any claims

in the Nusseibehs’ complaint not arising from L&A’s services as a Lawyer were

not covered. Jt. App’x 113. Landmark reserved the right to deny coverage and

a defense obligation for such claims. It also highlighted Policy exclusions for

claims arising from acts of other entities sharing common facilities with an

insured and claims arising out of violation of consumer protection laws.

With L&A’s assent, Landmark retained attorney Jody Cappello of Winget,

Spadafora & Schwartzberg, LLP (“Winget”) to defend L&A against the

Nusseibehs. Landmark’s engagement email to Winget expressly stated that

because LPS was not covered by the Policy, no “defense for [LPS]” would be

5 provided. LePatner independently retained Winget to represent LPS in the

matter.

In the course of discovery in the underlying action, the Nusseibehs

retained an architectural expert. Winget retained various engineering experts to

rebut the claims and expert opinions expressed by the Nusseibehs’ architectural

expert. Neither side retained a legal expert.

In August 2020, Attorney Cappello informed Dowling that LePatner’s

position was that RSUI was required to pay expert costs and defense fees for the

entire case. In the course of the ensuing email back-and-forth, Dowling

emphasized,

Any work related solely to the construction claims should have been completely separated at the outset. If there was time that applied to both the legal and construction entity, it should have been divided in ½ in the billing. As we stated at the outset, we are not footing the bill for defense of the construction entity. [LPS] engaged your firm separately to defend them in this matter. They should be billed according to that agreement. You will need to discuss that directly with Mr. LePatner, as we are not a party to the agreement.

Jt. App’x 133.

Cappello agreed and said that he had “separated the invoice [for Winget’s

defense fees] into those tasks that were related to defense of the legal entity

[L&A] versus those related to the construction entity [LPS].” Jt. App’x 133.

6 Subsequently, in November 2020, Landmark’s outside coverage counsel,

Kaufman Borgeest & Ryan LLP (“KBR”) responded to a request from L&A to pay

$72,000 for expert fees relating to work performed by CED Technologies

International, Inc. (“CED”). KBR asserted that the expert services in question

were undertaken on behalf of LPS, and thus were not covered expenses under

the Policy. KBR indicated that it would honor its February 2020 agreement,

made “solely as an accommodation,” to pay for 50% of CED’s expert fees,

because CED’s expert analysis on behalf of LPS would collaterally benefit L&A.

Jt. App’x 144.

In that letter, KBR also asserted an “emerging conflict of interest” between

L&A and LPS, and stated that Landmark had terminated its consent to continued

representation of L&A by Cappello. Id. Shortly thereafter when new counsel

entered an appearance for L&A, LePatner emailed that lawyer demanding that

he withdraw his appearance. Several days later, the lawyer withdrew and

Cappello reentered his appearance on behalf of L&A; Cappello continued to

represent both L&A and LPS thereafter.

L&A acknowledges in its complaint that RSUI agreed to pay 50% of

“Claim Expenses,” a term defined by the Policy that includes attorneys’ fees and

7 certain costs. Specifically, RSUI agreed to pay half of the expenses and costs

attributable to the defense of both L&A and LPS. However, with the exception of

certain expert fees, RSUI declined to pay for claim expenses relating solely to the

defense of LPS. In other words, RSUI agreed to allocate half of the expenses and

costs to covered claims and declined to pay the other half.

In June 2021, L&A filed this action seeking in relevant part a declaratory

judgment that RSUI breached its obligation to defend and indemnify L&A in full

and alleging a breach of contract arising from RSUI’s failure to defend and

indemnify L&A for all of the legal fees and costs incurred in defending against

the Nusseibehs’ claims—including those expenses and costs that had been

allocated by counsel to defense of the claims against LPS. 2 The district court’s

summary judgment decision reflects that L&A sought $168,625 in outstanding

defense costs and expert fees that it alleged Landmark had declined to pay in

violation of its duty to defend.

The Nusseibeh action was settled in October 2021.

2 The district court dismissed as duplicative L&A’s claim for breach of the duty of good faith and fair dealing, LePatner and Assocs., LLP v. RSUI Grp., Inc., 2021 WL 4555761 (S.D.N.Y. Oct. 4, 2021). L&A’s claim that RSUI breached its duty to indemnify L&A under the Policy was resolved prior to the district court’s summary judgment ruling. Neither of those claims is before us in this appeal.

8 Following discovery and briefing, the district court denied L&A’s motion

for summary judgment and granted summary judgment to RSUI. The court first

considered whether RSUI is obligated to pay for LPS’s defense costs, LePatner and

Assocs., 2022 WL 769614, at * 6, concluding that it is not. The court recognized

that New York law requires an insurer to defend against all claims alleged in the

complaint, “even those that appear not to be covered or potentially meritless.”

Id. at 7. But it concluded that none of the cases L&A relied upon suggests that

“the duty to defend requires an insurer to defend a non-insured against non-

covered claims, even if they are part of the same lawsuit.” Id.

The court reasoned that even though the Nusseibehs’ complaint in the

underlying lawsuit was directed against both L&A and LPS, the claims for fees

and costs arose principally from the construction and project management

services. Most of the allegations underlying the breach of contract, CUTPA, and

negligence counts concerned failures by LPS to fulfill its obligations under the

LPS Agreement. The CUTPA count was not covered pursuant to a Policy

exclusion of claims arising out of an alleged violation of consumer protections

laws. Because i) the complaint’s allegations were largely directed at LPS, ii) LPS

and L&A are distinct entities, and iii) only L&A is covered by the Policy,

9 Landmark was not obligated to pay all the expenses and costs of defending the

Nusseibeh suit.

Moreover, the district court reasoned that the L&A Policy covered only

liability incurred in providing legal services, and the Nusseibehs’ complaint

largely related to construction and project management services that did not fall

within the scope of coverage under the Policy. In addition, two other Policy

exclusions precluded coverage for acts by a non-insured entity in LPS’s position.

Finally, the court rejected L&A’s argument that RSUI wrongly interfered

with L&A’s defense by, among other things, failing to affirmatively inform L&A

that it had a right to retain independent counsel, trying to appoint separate

counsel in December 2020, and directing L&A’s counsel to communicate with

Landmark’s coverage counsel. The court rejected the suggestion that

Landmark’s conduct was wrongful, but also concluded that L&A had not shown

that it suffered any harm to its defense as a result of the various cited acts.

II. DISCUSSION

On appeal, L&A emphasizes that “New York law does not permit an

insurer to compel its insured to share in the defense of an underlying action

when at least one of the claims in the action is potentially covered.” L&A argues

10 that the Nusseibehs’ complaint expressly alleged that L&A, as well as LPS,

breached various obligations and engaged in various negligent or unfair acts in

implementing their agreements with the Nusseibehs. In L&A’s view, these

allegations were sufficient to trigger Landmark’s duty to defend L&A, and the

district court erred in concluding that Landmark’s duty to defend did not require

the payment of all the costs and expenses of defending the Nusseibeh suit,

including those claims arising from construction and project management

services. In addition, L&A argues that the district court applied an unreasonably

narrow definition of “professional services” under the Policy and reiterates that

RSUI interfered with L&A’s representation.

We review a district court’s grant of summary judgment without

deference, viewing the facts in the light most favorable to the non-moving party.

Pilgrim v. Luther, 571 F.3d 201, 204 (2d Cir. 2009). We apply the “same standard

as the district court: summary judgment is appropriate where there exists no

genuine issue of material fact and, based on the undisputed facts, the moving

party is entitled to judgment as a matter of law.” D’Amico v. City of New York, 132

F.3d 145, 149 (2d Cir. 1998); Fed. R. Civ. P. 56(a). And we may affirm the district

11 court’s determination based on any ground supported in the record. Freedom

Holdings, Inc. v. Cuomo, 624 F.3d 38, 49 (2d Cir. 2010).

Under New York law, an insurer’s duty to defend arises when the

allegations in the complaint state a cause of action that gives rise to a reasonable

possibility of recovery under the policy. See Cont'l Cas. Co. v. Rapid-Am. Corp., 80

N.Y.2d 640, 648, 609 N.E.2d 506 (1993); Colon v. Aetna Life & Cas. Ins. Co., 66

N.Y.2d 6, 8 (1985). This generally means an insurer’s duty to defend is broader

than its duty to indemnify. See Goldberg v. Lumber Mutual Casualty Ins. Co., 297

N.Y. 148, 154, 177 N.E.2d 131 (1948). Any ambiguity in the policy “must be

resolved in favor of the insured and against the insurer.” Westview Assocs. v.

Guar. Nat’l Ins. Co., 95 N.Y. 2d 334, 340 (2000).

To determine whether the insurer has a duty to defend, courts compare the

allegations of the complaint with the language of the insurance policy. See, e.g.,

IBM Corp. v. Liberty Mut. Ins. Co., 363 F.3d 137, 144 (2d Cir. 2004). The duty to

defend generally applies if the pleadings allege a covered occurrence, “even

though facts outside the four corners of those pleadings indicate that the claim

may be meritless or not covered.” Fitzpatrick v. Am. Honda Motor Co., 78 N.Y.2d

61, 63 (1991).

12 We conclude, based on the four corners of the complaint and the language

of the Policy, that RSUI was under no duty to defend LPS because the Policy

covers only professional services provided as a lawyer, and the Nusseibehs’

complaint alleges no claim against L&A (or LPS) falling within that scope of

coverage.

The Policy provided liability coverage to L&A for “Damages and

associated Claim Expenses arising out of a negligent act, error, [or]

omission . . . in the rendering of or failure to render Professional Services as a

Lawyer . . . .” Jt. App’x 800. The Policy defines “Professional Services” to mean

“only services performed for others by an Insured such as an escrow agent,

lawyer, notary public, administrator, conservator, executor, guardian, guardian

ad litem, arbitrator, mediator, trustee, and title insurance agent.” Id. at 805. The

Policy creates an obligation “to defend any Claim against an Insured seeking

Damages to which this Policy applies, even if any of the allegations of the Claim

are groundless, false[,] or fraudulent.” Id. at 800.

We accept for purposes of the duty-to-defend analysis that the Nusseibehs’

complaint alleges that L&A, as well as LPS, breached various duties in the course

of implementing the alleged Agreement with the Nusseibehs—even though L&A

13 was not a party to the written LPS Agreement. Still, we have not identified any

allegations in the complaint that fall within the scope of coverage under the

Policy. As the district court recognized, insofar as Count II alleges a claim under

CUTPA, claims within that count are excluded from the Policy pursuant to an

endorsement that expressly excludes coverage for claims “arising directly, or

indirectly, out of any actual or alleged violation of consumer protection laws . . .

.” Id. at 816.

Counts I and III, respectively alleging breach of contract and negligence,

rest on the same allegations: that L&A and LPS failed to fulfill their obligations

“under the LPS Agreement.” None of the claims specified in Counts I and III

implicates professional legal services provided by L&A. This is clear from the

complaint itself. The complaint invokes L&A’s and LPS’s duties under the LPS

Agreement in connection with each alleged act or omission supporting the

Nusseibehs’ claims. And the LPS agreement, attached to and incorporated into

the Nusseibehs’ complaint, notes that it “pertains solely to project management

services that do not include the performance of legal services.” Id. at 518 (emphasis

added).

14 Because L&A’s alleged breaches of duty under the Nusseibehs’ complaint

involve only acts or omissions under the LPS Agreement, which by definition are

non-legal and therefore fall outside the scope of L&A’s coverage under the

Policy, Landmark was not obliged to pay legal and expert expenses associated

with defense of those claims. We thus affirm the district court’s judgment for

RSUI on L&A’s duty-to-defend claim.

We likewise affirm the district court’s judgment for RSUI with respect to

L&A’s allegations that Landmark interfered with L&A’s defense in various ways.

Landmark’s insistence that L&A’s defense counsel not include services for LPS in

its bills was not improper in light of the above analysis. Any conflict in L&A’s

representation—and we do not conclude that one existed—arose not from

Landmark’s reservation of rights but from LPS’s decision to independently retain

the same lawyer that represented L&A pursuant to the Policy. L&A cites no

authority for the suggestion that KBR, Landmark’s coverage counsel, could not

properly ask Attorney Cappello to communicate with KBR rather than directly

with its client Landmark in order to share information about the Nusseibeh case

(other than privileged information that might be adverse to coverage). And, like

the district court, we see no evidence of harm from any claimed interference.

15 Landmark sought to substitute its own chosen counsel to conduct L&A’s

defense, but after L&A protested, it changed course within days. And L&A not

only assented to representation by Attorney Cappello; it chose to continue that

representation even after Landmark said it would seek alternate counsel for

L&A.

* * *

We have considered L&A’s remaining arguments and conclude that they

are without merit. The district court’s judgment is AFFIRMED.

FOR THE COURT: Catherine O’Hagan Wolfe, Clerk of Court