Filed: Mar. 29, 2012
Latest Update: Feb. 22, 2020
Summary: UNPUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 10-2404 MINNESOTA LAWYERS MUTUAL INSURANCE COMPANY, Plaintiff - Appellee, v. ANTONELLI, TERRY, STOUT & KRAUS, LLP; DONALD E. STOUT, Esq., Defendants - Appellants, 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. AND
Summary: UNPUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 10-2404 MINNESOTA LAWYERS MUTUAL INSURANCE COMPANY, Plaintiff - Appellee, v. ANTONELLI, TERRY, STOUT & KRAUS, LLP; DONALD E. STOUT, Esq., Defendants - Appellants, 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. ANDR..
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UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 10-2404
MINNESOTA LAWYERS MUTUAL INSURANCE COMPANY,
Plaintiff - Appellee,
v.
ANTONELLI, TERRY, STOUT & KRAUS, LLP; DONALD E. STOUT, Esq.,
Defendants - Appellants,
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: December 6, 2011 Decided: March 29, 2012
Before MOTZ, GREGORY, and KEENAN, Circuit Judges.
Affirmed by unpublished per curiam opinion.
ARGUED: Lon Arthur Berk, HUNTON & WILLIAMS, LLP, McLean,
Virginia, for Appellants. Danny Mark Howell, SANDS ANDERSON,
PC, McLean, Virginia, for Appellee. ON BRIEF: Brian J. Gerling,
HUNTON & WILLIAMS, LLP, McLean, Virginia, for Appellants.
Mikhael D. Charnoff, SANDS ANDERSON, PC, McLean, Virginia, for
Appellee.
Unpublished opinions are not binding precedent in this circuit.
2
PER CURIAM:
Antonelli, Terry, Stout & Kraus, LLP (“the Antonelli Firm”)
and Donald E. Stout, Esq. (“Stout”) (collectively “Appellants”)
seek a declaratory judgment that their insurer, Minnesota
Lawyers Mutual Insurance Co. (“MLM”), has a duty to defend them
in a pending Florida state court action (“the Ferguson action”).
The district court, applying Virginia law, determined that MLM
does not have a duty to defend Appellants because the Ferguson
complaint falls within the insurance policy’s Business
Enterprise Exclusion. We affirm.
I.
This case returns to us after we previously reversed and
remanded the district court’s dismissal of the action. Minn.
Lawyers Mut. Ins. Co. v. Antonelli, Terry, Stout & Kraus, LLP,
355 F. App’x 698 (4th Cir. 2009). We instructed the district
court on remand to “decide[ ] whether the allegations in the
[Ferguson] complaint were within the scope of the insurance
policy.” Id. at 702. To do so, the district court compared the
Ferguson complaint and the insurance policy. The district court
thoroughly described both documents, so we need only briefly
recount the most salient points.
3
A.
According to the Ferguson complaint, in 1986, inventor and
entrepreneur Andrew Andros formed Telefind Corp. in order to
develop and market wireless email technology (“WET”). Telefind
retained Appellants to perform patent prosecutions on its
behalf. Over time, Appellants’ role evolved: from pure
attorneys to equity investors to increasingly immersing
themselves in counseling and managing Telefind’s strategy and
operations.
Telefind received substantial financial backing from a
group of outside investors (“the Richards Investors”). The
Richards Investors lent Telefind $6 million via a loan
convertible to equity through a Panamanian corporation, Flatt
Morris, S.A. The loan agreement specified that Stout would
serve as trustee for Flatt Morris and would “hold all of
Telefind’s intellectual property [both current and prospective]
in trust for the benefit of Flatt Morris . . . in the event that
Telefind defaulted.” Over time, Appellants acquired a majority
equity share of Flatt Morris, including its Telefind assets.
In 1989, Telefind signed a leasing agreement with Computer
Leasco, Inc. (“Leasco”) whereby Leasco provided Telefind with
computers in exchange for a monthly fee and a security interest
in Telefind’s intellectual property. When Telefind fell behind
on its payments, Leasco sued. Around the same time, Telefind
4
began negotiating with AT&T and France Telecom regarding the
potential sale of its WET. Concerned that Leasco might
interrupt these negotiations with a judgment against Telefind,
Stout negotiated a “standstill agreement” with Leasco pending
the outcome of the AT&T and Telecom negotiations.
As the negotiations faltered and Leasco became impatient,
“Stout devised a legal strategy that he told [the] Richards
Investors and Andy Andros would legally protect . . .
Telefind[’s] . . . interest in the [WET].” In order to avoid
Telefind’s creditors, Stout recommended placing the WET patents
in a separate legal entity. Stout stressed that the Ferguson
plaintiffs would “lose their entire interest in the [WET] if
they did not follow his advice.”
To implement Stout’s strategy, three ESA Telecommunications
(“ESA”) employees –- a company that Telefind worked with
previously –- filed the WET patents “in their own names as
inventors.” Stout emphasized that Andros and the Richards
Investors could “not have any documented direct ownership
interest in the [WET],” but he assured them that “they would
continue to participate in any benefits associated with the
[WET].” Pursuant to this understanding, the Ferguson
plaintiff’s disavowed their legal interest in the patents. The
ESA employees then assigned the patents to Stout. Finally, in
5
June 1992, Stout created a shell corporation, NTP, Inc., to hold
the WET patents.
The strategy succeeded. Though Leasco eventually obtained
a judgment against Telefind, NTP prevented Leasco from obtaining
any share of the WET patents. NTP’s success was based, in part,
on representations from Andros stating that he had no interest
in the WET. Andros allegedly made these representations based
on Appellants’ assurances that he would continue to retain a
share of any future profits.
In late 2001, ten months after Andros died, NTP filed a
patent infringement action against Research In Motion (“RIM”),
alleging that RIM’s Blackberry system infringed on the WET
patents. In March 2006, RIM settled the suit for $612.5 million
and received a perpetual license. Stout, his partners at the
Antonelli firm, and others apportioned the settlement.
When Andros’s surviving family and the Richards Investors
contacted Stout regarding their share of the RIM settlement,
Stout denied the existence of any such arrangement and refused
to share the settlement. The Ferguson action ensued, asserting,
on the bases of the above facts, claims of breach of fiduciary
duty, breach of contract, unjust enrichment, and promissory
estoppel. In the complaint, the Ferguson plaintiffs do not
challenge NTP’s ownership of the WET patents. They argue only
6
that their implicit understanding with Appellants was that they
would receive a share of any WET profits.
B.
During the relevant period, the Antonelli Firm had a
Professional Liability Insurance Policy (“the Policy”) with MLM
that covered
all sums . . . which the INSURED may be legally
obligated to pay as DAMAGES due to any CLAIM:
(1) arising out of any act, error or omission of the
INSURED or a person for whose acts the INSURED is
legally responsible; and
(2) resulting from the rendering or failing to render
PROFESSIONAL SERVICES while engaged in the private
practice of law . . . .
Applying this language, the district court determined that some
of the “damages alleged in the Ferguson complaint resulted from
[covered] legal services rendered by [Appellants].” It thus
held that, “barring any applicable exclusions, MLM has a duty to
defend [Appellants] in the underlying action.” MLM does not
challenge this conclusion on appeal.
The district court next considered MLM’s argument that the
allegations in the Ferguson complaint triggered the Policy’s
Business Enterprise Exclusion (“BEE”). ∗ The BEE excludes
∗
Before the district court, MLM also argued that it had no
duty to defend because (1) the Ferguson allegations fell within
the Specific Entity Exclusion and (2) Stout failed to provide
adequate notice. The district court did not reach these claims,
however, and MLM does not reassert them on appeal.
7
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,
by any 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 enterprise.
The district court found that the BEE applied because
[Appellants] rendered [professional] services in
connection with the Telefind, Flatt Morris, and NTP
enterprises. Flatt Morris and NTP were both owned,
controlled, or managed by [Appellants]. The damages
alleged in the complaint resulted from a conflict of
interest between [Appellants] and the Ferguson
Plaintiffs, who claimed an interest in NTP, Telefind,
and Flatt Morris.
Appellants challenge this determination.
II.
Appellants first argue that a number of terms within the
BEE are ambiguous, and therefore should be construed in their
favor. Applying such a favorable construction, they contend,
would demonstrate that the Ferguson complaint does not fall
within the BEE. We must reject this argument.
Under Virginia law, insurance policies and their exclusions
are construed according to contract principles. Seabulk
Offshore, Ltd. v. Am. Home Assur. Co., 377 F.3d 408, 419 (4th
Cir. 2004). Insurers bear the burden of establishing that the
alleged conduct unambiguously falls within the exclusionary
8
language. Fuisz v. Selective Ins. Co., 61 F.3d 238, 242 (4th
Cir. 1995). If a contract contains ambiguities it must be
construed against the insurer, “[b]ut this does not authorize
the court to make a new contract for the parties, nor to adopt a
construction not justified by the language or intent of the
parties.” Res. Bankshares Corp. v. St. Paul Mercury Ins. Co.,
407 F.3d 631, 636-37 (4th Cir. 2005) (quoting Ocean Accident &
Guar. Corp. v. Wash. Brick & Terra Cotta Co.,
139 S.E. 513, 517
(1927)). Thus we must determine whether the BEE unambiguously
applies to the Ferguson complaint pursuant to a reading of the
exclusion that is “reasonable” and avoids “absurd results.”
Transit Cas. Co. v. Hartman’s Inc.,
239 S.E.2d 894, 896 (Va.
1978).
Under the terms of the Policy, the BEE excludes coverage
for claims (1) “arising out of professional services” (2)
rendered “in connection with any business enterprise” (3) owned,
controlled, or managed, by any insured, and (4) resulting “from
conflicts of interest with the interest of any client or former
client.”
There is no dispute that this case “aris[es] out of
professional services” that Appellants provided to the Ferguson
plaintiffs, thereby satisfying the first requirement of the BEE.
Appellants counseled Andros and others to renounce their
interest in the WET patents in order to avoid their creditors.
9
This strategy prevented Leasco from reaching the WET assets, but
also created the circumstances whereby plaintiffs were frozen
out of future profits.
Further, and just as clearly, these “professional services”
were rendered “in connection with [a] business enterprise,”
meeting the second requirement of the exclusion. The phrase “in
connection with” is a common insurance phrase that is given
particularly broad scope. See, e.g., Goldman Paper Stock Co. v.
Richmond, F. & P.R., 212 Va. 293, 296 (Va. 1971) (“in connection
with” broader than “arising out of”); see also Coregis Ins. Co.
v. Am. Health Found., Inc.,
241 F.3d 123, 128-29 (2d Cir. 2001)
(explaining “in connection with” encompasses more than causal
connection); Metro. Prop. & Cas. Ins. v. Fitchburg Mut. Ins.,
793 N.E.2d 1252, 1255 (Mass. App. 2003) (“In connection with”
should “not be construed narrowly but [is] read expansively in
insurance contracts.”) (collecting cases). Moreover, although
the phrase “business enterprise” is not defined by the policy,
there can be little dispute that it encompasses the various
corporations involved here -- Telefind, Flatt Morris, and NTP.
The Ferguson complaint also clearly meets the third
requirement of the exclusion since it alleges that Appellants
owned, controlled, or managed at least Flatt Morris and NTP.
Stout served as a trustee for Flatt Morris, and Appellants
eventually acquired a majority equity interest. Similarly,
10
Stout helped incorporate NTP. NTP had no employees and Stout,
other attorneys at the Antonelli Firm, and their families were
among NTP’s few shareholders.
Finally, the asserted damages surely resulted “from
conflicts of interests.” The defendant attorneys in this case
allegedly obtained complete ownership and control of their
clients’ assets and exploited those assets for personal benefit.
This conduct violates any number of Virginia professional ethics
rules. See, e.g., Va. R. Prof’l Conduct 1.8(a) (“A lawyer shall
not enter into a business transaction with a client or knowingly
acquire an ownership, possessory, security or other pecuniary
interest adverse to a client . . . .”); id. at 1.8(b) (“A lawyer
shall not use information relating to representation of a client
for the advantage of the lawyer or of a third person or to the
disadvantage of the client . . . .”);
id. at 1.8(j) (“A lawyer
shall not acquire a proprietary interest in the cause of action
or subject matter of litigation the lawyer is conducting for a
client . . . .”).
In sum, we find the allegations of the Ferguson complaint
unambiguously fall within the BEE.
III.
Perhaps recognizing the weakness of their contention that
the BEE does not apply, Appellants offer one other argument.
11
They assert that even if this exclusion applies to the Ferguson
complaint on the whole, because the Ferguson plaintiffs “might
prove only the allegations falling within coverage without
proving the allegations within the exclusion, the district court
should have found a duty to defend.” Appellants correctly point
out that insurers are required to defend insureds “if any
allegations may potentially be covered by the policy.” CACI
Int’l, Inc. v. St. Paul Fire & Marine Ins. Co., 566 F.3d 150,
154 (4th Cir. 2009). Under this “potentiality rule,” an insurer
owes a duty to defend if a complaint “alleges facts and
circumstances, some of which would, if proven fall within the
risk covered by the policy.” Va. Elec. & Power Co. v.
Northbrook Prop. & Cas. Ins. Co.,
475 S.E.2d 264, 265 (Va.
1996).
Appellants hypothesize that the Ferguson plaintiffs may
prove allegations that trigger coverage, but not the BEE. For
example, the Ferguson plaintiffs may prove that Appellants
provided professional services by advising their clients how to
avoid their creditors, but may fail to show that these services
were rendered “in connection with any business enterprise” or
resulted “from conflicts of interest.” In essence, Appellants
argue that the Ferguson action may amount to merely a claim for
legal malpractice. We reject this hypothesis.
12
Virginia’s potentiality rule requires us to examine the
complaint and determine whether any potential judgment under
that complaint would fall within the Policy. See CACI Int’l,
566 F.3d at 155. This process does not disregard the actual
allegations that are made. See, e.g., Nationwide Mut. Ins. Co.
v. Overlook, LLC,
785 F. Supp. 2d 502, 533 (E.D. Va. 2011)
(refusing insured’s attempt to pick out certain allegations
because “every claim in the underlying . . . complaint
implicates the defective drywall as the basis for the claim, or
the cause of the resulting damages. Thus every claim implicates
the Pollution Exclusion.”).
In the Ferguson complaint, each cause of action is premised
on an agreement between plaintiffs and Appellants that they
would share any WET proceeds. As both parties acknowledged at
oral argument, because the plaintiffs consented to every initial
step of Appellants’ strategy, if Appellants had shared the WET
proceeds with the Ferguson plaintiffs, there would be no loss
for the Ferguson plaintiffs to recover. Without any potential
loss, there can be no duty to defend. See Va. Elec. & Power,
475 S.E.2d at 265-66 (explaining insurer has no duty to defend
where there is no possibility that insurer will be required to
indemnify insured). Thus because the breach of the agreement is
central to any potential recovery, Appellants cannot obtain a
defense by having a court assume plaintiffs will fail to prove
13
the heart of their allegations. Rather, we must evaluate the
Ferguson complaint presuming that plaintiffs will prevail. In
doing so, we conclude that MLM has no duty to defend because the
BEE applies. See Part II, supra; see also AES Corp. v.
Steadfast Ins. Co.,
715 S.E.2d 28, 33 (Va. 2011) (“The gravamen
of [the] nuisance claim is that the damages sustained were the
natural and probable consequences of AES’s intentional
emissions.”);
Fuisz, 61 F.3d at 243 (“[I]f the Terex complaint
only permits Terex to recover upon proof that Fuisz specifically
intended to cause the company injury, then Selective has no duty
to defend Fuisz.”).
Appellants’ heavy reliance on Parker v. Hartford Fire Ins.
Co., 278 S.E.2d 803 (Va. 1981), is misplaced. The policy at
issue in Parker specifically excluded intentional torts, and the
underlying complaint alleged a “willful” trespass. The Supreme
Court of Virginia determined that the action was nonetheless
covered by the policy because the pleadings could also support a
claim of “unintentional” trespass.
Id. at 804 (citing
Chesapeake & O. R. Co. v. Greaver,
66 S.E. 59, 60 (Va. 1909)).
Appellants seek to stretch Parker too far. Parker is premised
on a unique feature of Virginia trespass law -- when a landowner
alleges intentional trespass but “fails to sustain this
allegation, the owner is still entitled to recover actual
damages on proof of the unintentional trespass.”
Id. at 804.
14
Parker thus stands for the principle that alternative causes of
action that give rise to a duty to defend include both those
explicitly alleged and those implied by law. In this case,
however, Appellants have cited no authority, and we have found
none, demonstrating that any of the Ferguson causes of action
implicitly create a claim for legal malpractice that might fall
within the Policy.
Appellants’ reliance on authority finding a duty to defend
where some alternative allegations fall within the policy is
also unavailing. Cases considering alternatively worded
complaints do not look to any conceivable cause of action. They
require that the complaint actually asserts the claim. See,
e.g., Fuisz, 61 F.3d at 245 (avoiding intentional act exclusion
because “each of the four causes of action” alleged “reckless
disregard” in addition to “actual malice”). Given that the
Ferguson complaint does not assert legal malpractice as an
alternative theory, we will not infer such potential liability.
IV.
For the foregoing reasons, the judgment of the district
court is
AFFIRMED.
15
