USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 97-1306
MT. AIRY INSURANCE COMPANY,
Plaintiff - Appellee,
v.
STEPHEN A. GREENBAUM, ET AL.,
Defendants - Appellants.
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RICHARD T. OSHANA, JONAH JACOB
Defendants - Appellees.
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No. 97-1307
MT. AIRY INSURANCE COMPANY,
Plaintiff - Appellee,
v.
STEPHEN A. GREENBAUM, ET AL.,
Defendants - Appellees.
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JONAH JACOB
Defendant - Appellant.
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APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Richard G. Stearns, U.S. District Judge]
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Before
Boudin, Circuit Judge,
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Hill,* Senior Circuit Judge,
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and Pollak,** Senior District Judge.
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Gary D. Buseck, with whom McDonough, Hacking & Neumeier was
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on brief for appellant Stephen A. Greenbaum.
Robert J. Mailloux, Jr., with whom E. Peter Mullane and
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Mullane, Michel & McInnes were on brief for appellant Jonah
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Jacob.
Jeffrey A. Goldwater, with whom Matthew J. Fink, Michelle M.
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Bracke, Bollinger, Ruberry & Garvey, Carol A. Griffin, Scott
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Douglas Burke and Morrison, Mahoney & Miller were on brief for
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appellee Mt. Airy Insurance Company.
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September 29, 1997
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* Of the Eleventh Circuit, sitting by designation.
** Of the Eastern District of Pennsylvania, sitting by
designation.
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HILL, Senior Circuit Judge. Mt. Airy Insurance Company
HILL, Senior Circuit Judge.
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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
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1 We find no merit in defendants' suggestion, raised for the
first time in their Reply Brief, that we have no jurisdiction to
hear this appeal because the district court made no findings
justifying its exercise of its discretionary declaratory judgment
authority. An insurance company's claim that it has no duty to
defend in another action is the archetypal case for which a
declaratory judgment is appropriate.
2 Other defendants are named in the malpractice action, but are
not parties to this appeal.
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Trust, the Queensbury Realty Trust, Northeast Glen Limited and
Westwood Limited. Also, in 1986, Northeast Realty Investment
Group was incorporated to manage the partnership's real estate
holdings. Jacob's complaint describes these collectively as the
"Business Entities."
All of the Business Entities were operated out of the
offices of the Law Firm and were allegedly funded either with
seed money from Jacob, or with real estate equity and loans which
Jacob, Gold, Oshana and/or Greenbaum co-made and/or co-
guaranteed. The Business Entities either owned real estate
projects outright or they were used to channel borrowed monies
for the acquisition and operation of the real estate projects.
At or about the time that South Copley was formed,
Greenbaum, Oshana and Gold incorporated two close corporations,
South Copley Development Corporation and South Copley Management
Corporation, naming themselves as the sole officers, directors
and shareholders. According to the complaint, Greenbaum, Oshana
and Gold used these two corporations, together with Northeast
Realty Investment Group, as "Related Cash Conduits" "to
improperly funnel fiduciary monies (belonging to the Business
Entities or to Jacob) to each named defendant, either directly
for no reason or disguised in the form of income and/or
reimbursement of expenses."
On August 13, 1986, Jacob, Gold and Oshana executed a
"Mortgage Investors Line of Credit and Collateral Pool Agreement"
(Collateral Pool Agreement) under which the Mortgage Investors
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Corporation (MIC) agreed to extend a five year, $5,000,000 line
of credit secured by the assets of the Business Entities and a
promissory note given by South Copley Limited Partnership. The
term "Collateral Pool" was used because Jacob agreed to sign a
number of anticipatory notes, mortgages, guaranties and other
related security instruments or documents.
Over the next five years, MIC advanced various sums
pursuant to the Collateral Pool Agreement. The complaint alleges
that "[t]he management of virtually all of [Jacob's] business
affairs with MIC was, at all times and in all matters material
hereto, in the hands of (and entrusted to) Richard T. Oshana and
Richard Gold, his co-borrowers, co-partner(s), co-beneficiary(s),
co-shareholder(s) and/or trustee(s) in the real estate and
business matters related to the MIC Loan Documents. At all times
material hereto, Defendants Oshana and Greenbaum (as attorneys
working frequently hand-in-glove) and the Law Firm each
represented Plaintiff's interests in and related to the MIC Loans
and the Collateral Pool Agreement, in and related to the various
Business Entities. . . ."
While managing the Business Entities, Jacob alleges
that Greenbaum and Oshana misappropriated funds in the form of
loans, unexplained disbursements and management fees. Jacob also
alleges that Greenbaum and Oshana abused Jacob's trust by taking
advantage of their position as principals of these Business
Entities and as his attorney by concealing the aforementioned
conduct and failing to advise Jacob of these breaches of trust.
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All of the alleged misappropriation occurred through Business
Entities in which Greenbaum and Oshana were officers, directors,
or partners.
Jacob also alleges that Oshana and Gold were forging
his signature to obtain monies from another joint business
venture, and that Greenbaum knew it. He asserts that Greenbaum,
Oshana and Gold treated the assets of these various business
ventures as their own in complete disregard of the rights, duties
and obligations each owed Jacob.
Jacob also alleges that Greenbaum and Oshana's conduct
constitutes legal malpractice in that they stole fiduciary funds
from him and concealed the misappropriation; failed to account
for fiduciary funds, or to segregate Jacob's portion of the funds
from the Business Entities' funds; failed to protect or promote
Jacob's interest in the Business Entities, acting instead in
their own self-interest by misappropriating funds and concealing
the wrongdoing.3
Mt. Airy Insurance Company (Mt. Airy) insures the Law
Firm against malpractice claims and initially agreed to defend,
under a reservation of rights. Upon learning facts demonstrating
that Jacob's claim is not covered by its policy, Mt. Airy filed
this declaratory judgment action. Mt. Airy continued to provide
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3 Jacob's ten-count complaint asserts claims of legal
malpractice, law partnership liability by estoppel, fraud,
negligent misrepresentation, breach of fiduciary duty,
conversion, monies had and received, unfair and deceptive trade
practices, and equitable relief in the form of an accounting,
imposition of a receivership, a permanent injunction, and reach
and apply.
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a defense to the Law Firm until the district court ruled that
Exclusion G of its policy with the Law Firm precludes coverage
for Jacob's claims against it and that Mt. Airy has no duty to
defend.
II.
A liability insurer in Massachusetts has a duty to
defend its insured "if the allegations in the third-party
complaint are reasonably susceptible of an interpretation that
they state or adumbrate a claim covered by the policy terms. . .
." Sterilite Corp. v. Continental Cas. Co., 17 Mass. App. Ct.
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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
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(quoting Lee v. Aetna Cas. & Surety Co., 178 F.2d 750, 751 (2d
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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
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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.,
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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 &
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Wrecking Co. Inc., 35 Mass. App. Ct. 298, 302, 619 N.E.2d 353
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(Mass. App. Ct. 1993). "Exclusions from coverage are to be
strictly construed. . . . Any ambiguity in the somewhat
complicated exclusions must be construed against the insurer."
Sterilite, 17 Mass. App. Ct. at 321 n.10. An ambiguity is said
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to "exist[ ] in an insurance contract when the language contained
therein is susceptible of more than one meaning." Jefferson Ins.
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Co. v. Holyoke, 23 Mass. App. Ct. 472, 474, 503 N.E.2d 474
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(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
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Orchestra, Inc. v. Commercial Union Ins. Co., 406 Mass. 7, 12,
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545 N.E.2d 1156 (Mass. 1989) (quoting Palmer v. Pawtucket Mut.
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Ins. Co., 352 Mass. 304, 306, 225 N.E.2d 331 (Mass. 1967)).
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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
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4 Indemnification, of course, is another issue. Exclusion A of
the policy disclaims any responsibility to pay "any claim that
results in final adjudication against any Insured that the
Insured has committed any criminal, dishonest, fraudulent or
malicious act, errors, omissions or personal injuries."
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The policy contains an Exclusion G which precludes
coverage for:
any claim arising out of or in connection
with the conduct of a business enterprise
other than the Named Insured (including
the ownership, maintenance or care of any
property in connection therewith) which
is owned by any Insured or in which any
Insured is a partner, or which is
directly or indirectly controlled,
operated or managed by any Insured either
individually or in a fiduciary capacity;
Mt. Airy argues that, because Jacob's claims involve
losses connected with independent businesses owned, controlled,
or managed by the Insureds, the claims are excluded. The
defendants, joined by Jacob, argue that, because at least some
claims in the Jacob complaint allege breach of fiduciary duty,
Mt. Airy has an unqualified duty to defend. The defendants also
contest that Exclusion G applies to exclude all claims raised by
Jacob's complaint.
The district court held, as a matter of law, that all
of Jacob's claims come within Exclusion G. We review this
judgment de novo. Alan Corp. v. Int. Surplus Lines Ins. Co., 22
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F.3d 339, 341-42 (1st Cir. 1994).
IV.
Exclusion G applies to any of Jacob's claims which
arise out of, or are in connection with, the conduct of any
business which is owned in whole or in part by any Insured or
which any Insured controls, operates or manages. Defendants
argue that Exclusion G is inapplicable because Jacob's claims
arise out of an alleged breach of their fiduciary duty to Jacob
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as his lawyers rather than out of their roles as partners,
officers, directors, shareholders or trustees of their joint
business ventures as his partners, officers, directors,
shareholders or trustees of the joint business ventures.
Defendants' argument that the duty to defend is
triggered by allegations of legal malpractice misses the mark.
Exclusion G does not even come into play unless the allegations
charge legal malpractice, because coverage under the policy is
limited to malpractice. "There will always be an attorney-client
relationship when these exclusions are at issue. Absent an
attorney-client relationship, the insuring agreement does not
apply and the language of the specific exclusions does not come
into play. [Defendants'] contention would create an illogical
result; the policy exclusions would be rendered entirely
meaningless and of no effect." Senger v. Minnesota Lawyers Mut.
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Ins. Co., 415 N.W.2d 364, 368 (Minn. App. 1987). See also
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Potomac Ins. Co. v. McIntosh, 804 P.2d 759, 762 (Ariz. App.
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1990).
Defendants also argue that the Exclusion's requirement
that the claim "arise out of or in connection with" the conduct
of a controlled business enterprise should be interpreted to mean
that the only acts excluded are those which are the proximate
cause of the alleged loss. If attorney negligence, rather than
the conduct of the business, is the proximate cause of the loss,
they argue, the exclusion is inapplicable.
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The argument ignores the plain language of Exclusion G
which excludes coverage for any claim arising out of or in
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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
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(S.D. Ohio 1992); Morris v. Valley Forge Ins. Co., 805 S.W.2d 948
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(Ark. 1991); and Niagara Fire Ins. Co. v. Pepicelli, 821 F.2d 216
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(3d Cir. 1987). In Clauder, the policy exclusion required that
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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
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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,
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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.
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Liberty Mut. Ins. Co., 40 Mass. App. Ct. 722, 726, 667 N.E.2d 295
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(Mass. App. Ct. 1966) (the term "arising out of" is much broader
than the term "caused by," particularly in the context of an
exclusionary clause in an insurance policy). See also Murdock v.
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Dinsmoor, 892 F.2d 7, 8 (1st Cir. 1989) ("arising out of"
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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
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claim which arises out of or in connection with a business
venture controlled, operated or managed by any Insured or in
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which the Insured has an interest as an owner or a partner. This
includes all claims sounding in malpractice if the allegations
charge wrongdoing in connection with a business in which the
Insured has such an interest.
We must determine, then, whether an insured attorney
played a role as an officer, shareholder, director, trustee or
partner in every Business Entity about which Jacob complains.
The district court found the undisputed facts to be that either
Greenbaum or Oshana did play such a role.
Greenbaum and Oshana were partners in South Copley,
shareholders and officers of South Copley Development
Corporation, and shareholders and officers of South Copley
Management Corporation. Oshana was a shareholder and officer of
Northeast Realty Investment Group, while Greenbaum was a
director. Oshana was a beneficiary of Horace Street Trust; a
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trustee and beneficiary of Trenton Street Trust; a trustee and
beneficiary of the Westbridge Trust; a trustee and beneficiary of
Queensbury Realty Trust; a partner in Northeast Glen Limited; and
a partner in Westwood Limited. Greenbaum served as a trustee and
beneficiary of Horace Street Trust; and as a partner in Northeast
Glen Limited.
The parties do not dispute that Greenbaum qualifies as
an "Insured" under the policy at all relevant times. There is a
dispute, however, as to Oshana's status after May 8, 1988.
Greenbaum attests that Oshana was terminated from the Law Firm on
that date. Oshana disputes this fact.
If Oshana was not an Insured after May of 1988, he has,
of course, no coverage at all under the policy for his acts after
that date. The Law Firm argues, however, that its coverage would
be revived for malpractice claims arising after May 1988 and in
connection with business entities to which Oshana is their only
link.
A dispute on a fact necessary to the resolution of a
motion for summary judgment precludes its entry. We hold,
however, that the district court correctly reasoned that under
the undisputed facts of this case, Oshana's status after May of
1988 is irrelevant to the issue of coverage.
The facts are that either Greenbaum or Oshana played a
role or had an interest in each and every business venture about
which Jacob complains. In each case these interests began prior
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to May 1988 and continued uninterrupted until Jacob uncovered the
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scheme. Jacob's claims all arise in connection with these
business schemes, all of which began prior to Oshana's leaving
the firm, whenever that was.
The issue, in fact, is not whether Greenbaum or Oshana
had an interest in each Business Entity for the entire period
alleged in the complaint. The relevant inquiry is whether the
claim arises out of the conduct of a Business Entity to which
Greenbaum or Oshana had the requisite relationship at the time
the conduct began.
For example, although an alleged misappropriation from
the 11 Horace Street Trust may have occurred after May 1988, the
scheme began as early as May 1985, and continued uninterrupted
until Jacob discovered it in 1990. Greenbaum was a director and
Oshana a beneficiary of the trust at its inception.5 Similarly,
the defendants attempt to separate the forged notes executed to
obtain Collateral Pool funds, arguing that claims related to
these notes are covered because Oshana was no longer an Insured
at the time. It was in 1986, however, that the alleged
misappropriation and forgery first began. The fact that Oshana's
alleged misconduct continued uninterrupted until Jacob discovered
it does not negate the applicability of the Exclusion. The claim
still arises out of the conduct of a business enterprise in which
an Insured was a partner at the time the conduct began.
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5 In fact, it is undisputed that Greenbaum was a Trustee and
Beneficiary of the Trust from its formation in 1985 through 1990.
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Jacob's complaint alleges an integrated ongoing scheme
of deception and misappropriation that began while Oshana was
still an Insured. If, out of hundred of individual transactions,
some might not fall under Exclusion G if they occurred
independently, that fact is irrelevant. An additional act of
wrongdoing at the tail end of the scheme does not create coverage
for conduct which began at a time when the Insureds had the
requisite relationship with the Business Entities.
V.
Jacob's claims only allege wrongdoing by Insureds in
connection with businesses in which they had an interest.
Exclusion G of the Mt. Airy policy excludes coverage for such
claims. Mt. Airy, therefore, has no duty to defend appellants.
The judgment of the district court is affirmed.
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