Mt. Airy v. Jacob

• Court: Court of Appeals for the First Circuit
• Decided: October 1, 1997
• Docket: 97-1306
• Status: Published

Opinion

USCA1 Opinion

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.



                                         -2-



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.



                                         -3-



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


-4-



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.


-5-



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.



                                         -6-



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
          __________________


-7-



(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."



                                         -8-



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



                                         -9-



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.  


-10-



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
          _____________________


-11-



(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


-12-



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


-13-



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.



                                         -14-



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.  
                                                ________


-15-