Court Opinion

ID: 1030833
Source: CourtListenerOpinion
Date Created: 2013-07-05 08:21:13.563318+00
Date Added: 2024-06-11T09:57:35.389397
License: Public Domain

UNPUBLISHED

                   UNITED STATES COURT OF APPEALS
                       FOR THE FOURTH CIRCUIT

                               No. 09-1049

MINNESOTA LAWYERS MUTUAL INSURANCE COMPANY,

                 Plaintiff - Appellant,

           v.

ANTONELLI, TERRY, STOUT & KRAUS, LLP; DONALD E. STOUT, Esq.,

                 Defendants – Appellees,

           and

ADRIENNE ANDROS FERGUSON, individually and on behalf of THE
ESTATE OF ANDREW A. ANDROS; EMILY J. ANDROS, individually
and on behalf of THE ESTATE OF ANDREW A. ANDROS; JULIA LYNN
ANDROS, individually and on behalf of THE ESTATE OF ANDREW
A. ANDROS; PENELOPE J. ANDROS, individually and on behalf of
THE ESTATE OF ANDREW A. ANDROS; JOHN S. RICHARDS; ABBAS
YOUSEF; MIRSUL INVESTMENTS S.A.; IMPORTECHNO INTERNATIONAL
INCORPORATED,

                 Defendants.

Appeal from the United States District Court for the Eastern
District of Virginia, at Alexandria.   Liam O’Grady, District
Judge. (1:08-cv-01020-LO-TCB)

Argued:   October 28, 2009                   Decided:   December 4, 2009

Before MOTZ and GREGORY, Circuit Judges, and Benson E. LEGG,
Chief United States District Judge for the District of Maryland,
sitting by designation.
Reversed and remanded by unpublished opinion.      Judge Gregory
wrote the opinion, in which Judge Motz and Judge Legg joined.

ARGUED: Danny Mark Howell, SANDS, ANDERSON, MARKS & MILLER,
McLean, Virginia, for Appellant.     Lon Arthur Berk, HUNTON &
WILLIAMS, LLP, McLean, Virginia, for Appellees. ON BRIEF: Brian
J. Gerling, HUNTON & WILLIAMS, LLP, McLean, Virginia, for
Appellees.

Unpublished opinions are not binding precedent in this circuit.

                                2
GREGORY, Circuit Judge:

      On December 15, 2008, the United States District Court for

the   Eastern   District   of    Virginia   dismissed      a    declaratory

judgment action brought by Appellant Minnesota Lawyers Mutual

Insurance Company (“MLM”).       Based on the test this Court set

forth in Nautilus Ins. Co. v. Winchester Homes, Inc., 15 F.3d

371, 377 (4th Cir. 1994), 1 the district court found that the suit

would create unnecessary entanglement with a pending state court

action in Florida, that Florida had a strong interest in the

suit, and that the Florida court could resolve the issue more

efficiently.    For the reasons set forth below, we reverse the

decision   of   the   district    court     and   remand       for   further

proceedings consistent with this decision.

                                   I.

                                   A.

      MLM issued a professional liability policy (“the Policy”)

to the Virginia law firm of Antonelli, Terry, Stout & Kraus, LLP

(“the Firm”) for the period October 25, 2007 through October 25,

2008 against “all sums up to the limit of [MLM’s] liability,

      1
       The section of Nautilus involving the appellate standards
of review was overruled by the Supreme Court in Wilton v. Seven
Falls Co., 515 U.S. 277 (1995).           However, the factors
articulated which guide the district court’s exercise of
discretion in a declaratory judgment action remain applicable.

                                   3
which the INSURED may be legally obligated to pay as DAMAGES due

to   any     CLAIM       . . .   resulting    from     the    rendering       [of]   . . .

PROFESSIONAL SERVICES while engaged in the private practice of

law.”       (J.A. 24.) 2        On July 25, 2008, a second amended complaint

was filed in Ferguson v. Stout, Case No. 08-09767CA40, a case

pending in the Circuit Court of the Eleventh Judicial District

in Miami-Dade County, Florida.                The second complaint, naming the

Firm       and   one     of    its   partners,     Donald    Stout,     as    defendants,

alleged that the Firm and Stout conspired to cheat the Florida

plaintiffs         out    of    valuable   rights     to    patents     and    technology

(“Wireless Email Technology”).

       One cause of action alleges that Stout and the Firm induced

the Florida plaintiffs to give up their interest in the Wireless

Email Technology so that the patents could be transferred to

NTP, Inc., a company controlled by Stout and owned in part by

Stout and members of the Firm.                     (J.A. 180, 189-90 ¶¶ 68, 96.)

Specifically, the Firm and Stout were retained to provide legal

services         to   Telefind       Corporation    and     some   of   its    investors.

(J.A. 169-70 ¶¶ 29-30.)                Stout “devised a legal strategy that he

       2
       Citations herein to “(J.A. __)” refer to the contents of
the Joint Appendix filed by the parties in this appeal.

     We consolidate and summarize the facts set forth in the
complaint and the Policy; of course, our account of the facts
does not constitute a finding of fact binding any court or party
on remand.

                                             4
told    [the    Florida      plaintiffs]    would    legally       protect       Telefind

investors’      interest      in”   the   Wireless    Email    Technology         during

anticipated         bankruptcy   proceedings.        (J.A.    176     ¶   52.)       This

“strategy” involved distinguishing between patents relating to

Wireless       Email    Technology        and    patents    relating        to     paging

technology, which is a distinction Stout said was legal.                            (J.A.

176 ¶¶ 53, 56.)         To “implement this strategy,” Stout advised the

plaintiffs not to “document[] any direct ownership interest in

the Wireless Email Technology” to protect it from Telefind’s

creditors.      (J.A. 177 ¶ 57.)          NTP was formed and patents for the

Wireless Email Technology were transferred to that corporation.

(J.A.   180     ¶    68.)     The   complaint     alleges     that    Stout       falsely

promised that the Florida plaintiffs would share future benefits

from the technology.             Thereafter, NTP sued Research in Motion,

Ltd.    for    patent       infringement,       settling    that     case    for     $613

million.       At that time, the Florida plaintiffs alleged they had

no documented interest in the patents because they had relied

upon Stout’s advice and thus could not share in the settlement.

The plaintiffs then sued the Firm and Stout in Florida.

                                           B.

       On August 15, 2008, the Firm provided MLM a copy of the

Second Amended Complaint.            After promising to “provide Mr. Stout

and the law firm with a defense to the Complaint” (J.A. 206),

MLM sought a declaratory judgment in district court that there

                                            5
was no duty to defend or indemnify the Firm and Stout against

the   Florida       claims.     Specifically,           the     declaratory      judgment

based   on     the    allegations      of     the      Second      Amended    Complaint,

asserted that (1) coverage was excluded pursuant to Exclusion 3

of the Policy:

      any   CLAIM  arising   out of  PROFESSIONAL SERVICES
      rendered by any INSURED in connection with any
      business enterprise: (a) owned in whole or part; (b)
      controlled directly or indirectly; or (c) managed,
      [b]y INSURED, and where the claimed DAMAGES resulted
      from conflicts of interest with the interest of any
      client or former client or with the interest of any
      person claiming an interest in the same or related
      business or enterprise

(J.A.   26);    (2)    coverage       was    excluded      based     on    the   Policy’s

Specific Entity Exclusion Endorsement, which excluded any claim

resulting      from    any    act,    error       or    omission      arising       out   of

rendering or failing to render professional services to or on

behalf of NTP; (3) the allegations were not within the Policy’s

coverage because the alleged damages did not result from the

rendering      or     failure    to     render         professional        services,      as

required by Part Two of the Policy’s Coverage Section; and (4)

in the alternative, that MLM had no duty to defend Stout because

he failed to comply with the Policy’s requirement of immediate

notice.

      On December 15, 2008, the district court dismissed without

prejudice the declaratory judgment action.                         The court based its

two-page     oral     decision       (J.A.       232-33)      on     the    first     three

                                             6
“Nautilus factors,” which are used “[t]o determine whether to

proceed    with    a   federal    declaratory      judgment     action      when   a

parallel state action is pending.”                 Penn-America Ins. Co. v.

Coffey, 368 F.3d 409, 412 (4th Cir. 2004).                    The four factors

are:

        (1) whether the state has a strong interest in having
        the issues decided in its courts; (2) whether the
        state courts could resolve the issues more efficiently
        than the federal courts; (3) whether the presence of
        “overlapping issues of fact or law” might create
        unnecessary “entanglement” between the state and
        federal courts; and (4) whether the federal action is
        mere “procedural fencing,” in the sense that the
        action is merely the product of forum-shopping.

United Capitol Ins. Co. v. Kapiloff, 155 F.3d 488, 493-94 (4th

Cir. 1998) (quoting Nautilus, 15 F.3d at 377).

                                        II.

        According to the Declaratory Judgment Act, a district court

with    proper    jurisdiction,     “may     declare   the    rights      and   other

legal     relations     of    any       interested     party        seeking      such

declaration,      whether    or   not    further     relief    is    or    could   be

sought.”     28 U.S.C. § 2201(a) (2006).               The Supreme Court has

“repeatedly characterized the Declaratory Judgment Act as ‘an

enabling Act, which confers a discretion on the courts rather

than an absolute right upon the litigant.’”                    Wilton v. Seven

Falls Co., 515 U.S. 277, 287 (1995) (quoting Pub. Serv. Comm’n

of Utah v. Wycoff Co., 344 U.S. 237, 241 (1952)).                         Therefore,

                                         7
this Court reviews for abuse of discretion the district court’s

decision     to    not    hear    a    federal       declaratory      judgment     action.

Regarding this discretion,

      district courts are not without guidance . . . . We
      have   explained   that   a  declaratory   judgment “is
      appropriate when the judgment will serve a useful
      purpose in clarifying and settling the legal relations
      in issue, and . . . when it will terminate and afford
      relief    from   the    uncertainty,   insecurity,  and
      controversy giving rise to the proceeding.”

Kapiloff,     155    F.3d    at       493    (quoting       Centennial      Life   Ins.    v.

Poston,      88    F.3d    255,   256       (4th     Cir.    1996))    (alterations        in

original).

                                              III.

      MLM argues that the district court erred in concluding that

it   would    be    necessary     to        find   facts     being    litigated     in    the

pending       Florida        proceeding,             thus        creating     unnecessary

entanglement        in     violation         of      the    third     Nautilus     factor.

According to MLM, the court was only being asked to interpret

the contractual language of the insurance policy to determine

whether the allegations before the state court fell within the

Policy.       Thus,       entanglement         would       not   occur.      Indeed,      MLM

asserts that entanglement could not occur because Virginia law

does not permit the court to look beyond the allegations.                                 MLM

further claims that because the district court was fundamentally

mistaken about what could be litigated under Virginia law, it

                                               8
also erred in its analysis of the remaining Nautilus factors.

We agree.

                                           A.

        MLM first argues that the district court misapplied our

decision in Coffey when it found that the declaratory judgment

action would lead to entanglement with the Florida suit due to

overlapping issues of fact.                This Court in Coffey found that

“[u]nder      Virginia   law,   an    insurer’s         duty    to    defend   arises

‘whenever the complaint against the insured alleges facts and

circumstances, some of which, if proved, would fall within the

risk covered by the policy.’”              Coffey, 368 F.3d at 413 (quoting

Brenner v. Lawyers Title Ins. Corp., 397 S.E.2d 100, 102 (Va.

1990)).       This principle is referred to as the “four corners

rule.”        See Travelers Property Cas. Ins. Co. v. Bruner, No.

3:07CV463-HEH, 2007 WL 3143333, at *2 (E.D. Va. Oct. 25, 2007).

Based on the four corners rule, this Court found that “the duty-

to-defend question . . . [does] not require the district court

to resolve factual questions at all.                   It need only decide such

coverage by comparing what [the plaintiff] has alleged in the

state     court   action    with     the        language   of   the     [provider’s]

insurance policy.”         Coffey, 368 F.3d at 413.             Therefore, “there

is no duty to defend ‘if it appears clearly that the insurer

would not be liable under its contract for any judgment based

upon    the    allegations.’    Brenner,         397   S.E.2d   at    102   (emphasis

                                           9
added).”        Id.         The   district    court       was   being    asked      only   to

“decide the scope of the contractual language” of the insurance

policy, and it was “not necessary to resolve” factual issues

“before defining the scope of the contract’s” exclusion clause

at issue.       Id. at 414.

     Here, the district court faced the same question at issue

in Coffey:       whether the allegations before the state court fell

within    the    scope       of   Exclusion       Three    or   the     Specific     Entity

Exclusion       of    the    Policy   and     whether       those     same     allegations

sought    damages      “resulting      from       the     rendering      or    failure     to

render professional services.” 3              With this question, the district

court committed the same error as the district court did in

Coffey.     It presumed that determining the duty to defend depends

on the actual outcome of the state litigation.                                Instead, the

district    court,       following     Virginia         law,    should       have   decided

whether the allegations in the state complaint were within the

scope of the insurance policy.                    Therefore, the district court

     3
       In fact, the counsel representing MLM stated before the
court that “[i]f it is not set forth in the pleadings so clearly
that it’s outside the policy, then we have a duty to defend
because the duty to defend means that there is a potentiality
based on the pleadings coverage under the policy.    And that is
the start and end of the inquiry.    We are not allowed, we are
not permitted as a matter of law to go beyond that.” (J.A. 229-
30.)

                                             10
erred when it found that determination of facts was necessary,

or even possible, in order to determine MLM’s duty to defend.

       The Firm and Stout argue that “MLM is forcing the Antonelli

Law Firm and Mr. Stout to prove the contrary—to prove precisely

what the Florida claimants allege—or to forfeit any possibility

of MLM’s coverage.”       (Appellees’ Br. 15.)          This assertion rests

on   the   false   premise   that    proving    the   facts   underlying     the

Florida suit is necessary.          Instead, the district court is bound

by Virginia law to take the pleadings in the state suit as true

and apply those against the insurance policy.              Essentially, this

task   involves    the   interpretation    of   contractual     language     and

nothing more.      Thus, no entanglement with the facts and issues

in the state proceeding would have occurred.

       Regarding the remaining three Nautilus factors, only two

were relied upon by the district court:               “(1) whether the state

has a strong interest in having the issues decided in its courts

[and] (2) whether the state courts could resolve the issues more

efficiently than the federal courts[.]”               Kapiloff, 155 F.3d at

493-94.     The district court erred in analyzing these factors

because    it   was   fundamentally     mistaken      about   what   could    be

litigated under Virginia law, as we have determined above.                   The

district court found that “Florida has a strong interest in the

issues that are to be decided there.              The case is about . . .

legal malpractice, fraud perpetrated . . . and that advice given

                                      11
to clients.”       (J.A. 232.)         The court also found that Florida

courts could resolve the issue more efficiently, thus avoiding

piecemeal litigation.

       In support of its use of the state interest and efficiency

factors, the district court relied on this Court’s decision in

New Wellington Fin. Corp. v. Flagship Resort Dev. Corp., 416

F.3d 290 (4th Cir. 2005).            In New Wellington, while a suit was

pending against it in New Jersey state court based on an alleged

violation    of    New      Jersey   law,     New    Wellington,     a    Virginia

corporation,      sought     a   declaratory        judgment   in   the   Western

District of Virginia that no agency relationship existed between

the parties and that it owed no money to the state plaintiffs.

Id. at 292.       “The parties agree[d] that the conduct underlying

the two cases [was] identical.”               Id. at 293.       This Court then

used   several    of   the   Nautilus    factors      to   uphold   the   district

court’s   decision     to    dismiss    the   declaratory      judgment    action.

Id. at 297-98.     Specifically, we found that

       First, we agree with the district court that New
       Jersey has a strong interest in having the dispute
       resolved in its courts. The conduct at issue in these
       two suits involves and concerns New Jersey companies,
       writing letters from New Jersey, regarding loans for
       New Jersey property.      In addition to the parties,
       actions,   and   property    implicated, [the]   . . .
       complaints in the New Jersey suit exclusively involve
       claims based in New Jersey state law, several of which
       can fairly be called complex . . .

            Second, the New Jersey state court can resolve
       the matter more efficiently. . . . Besides the parties

                                        12
      present in New Jersey and absent here, it is easy to
      believe that the New Jersey state court could resolve
      the New Jersey state law issues alleged by Flagship
      and Atlantic Palace more efficiently than could a
      federal court sitting in Virginia.

Id.

      The      district     court’s     reliance       on        New    Wellington     is

misplaced      for    several   reasons.        First,      in    New   Wellington,      a

district court in Virginia was being asked to decide issues of

New Jersey law.         We therefore appropriately determined that the

application of out-of-state law, combined with missing parties,

allowed the district court to reasonably exercise its discretion

not to hear the action.               In contrast, here the U.S. District

Court    for    the     Eastern    District      of    Virginia         was   asked     to

interpret Virginia law, and the pending suit is in Florida.                             It

is unreasonable to conclude that a Florida state court is a

better   arbiter       of   Virginia   law    than    the    Eastern       District     of

Virginia.       The Eastern District of Virginia has found that it

“is accustomed to applying Virginia law in declaratory judgment

actions.”       Penn-America Ins. Co. v. Mapp, 461 F. Supp. 2d 442,

451 (E.D. Va. 2006).            Additionally, this Court found in Coffey

that state interest is strongest when it is applying its own law

and   that     the    efficiency      concern    is    not       present      when    “the

contractual      coverage     issue    will   not     be    decided      by   the    state

. . . case.”         368 F.3d at 414.         Florida has no strong interest

in the coverage issue to be determined under Virginia law, and

                                         13
the fundamental issue of whether the allegations in state court

trigger the duties to defend and indemnify will not be decided

in the Florida litigation.

     Second, in New Wellington, the district court was asked to

decide the same issues at play in the state court based on

identical conduct.          416 F.3d at 293.              Namely, New Wellington

“sought a declaratory judgment [in federal court] that no agency

relationship existed between the parties” based on the exact

same conduct underlying the state suit.                        Id. at 292.          In the

state suit, the parties Flagship and Atlantic Palace sought to

prove that New Wellington was their agent in order to succeed on

their claims.         Id. at 293.         The overlap between the two cases

raised    efficiency      concerns.         In    the    case    before      this    Court

today,    such    efficiency      concerns       are    not    present.        While    the

conduct    of     Stout   underlies       both     the    Florida       suit    and    the

declaratory      judgment       action,    the    Florida       suit    is     an   action

involving fraud, contract law, and possibly malpractice.                            In the

declaratory judgment action, these issues were not before the

district    court.        The    district       court    was    only    faced       with   a

contractual       coverage       issue.           Piecemeal       litigation          would

therefore       not   result     from     the    district       court    deciding      the

coverage issue because the scope of coverage is not at issue in

the state proceeding.           Thus, the district court erred in relying

                                           14
on   the   Nautilus     factors   of   state   interest    and   efficiency     to

dismiss MLM’s declaratory judgment action.

                                        B.

      The Firm and Stout argued before the district court that

even if the duty to defend is able to be determined before a

determination in the state suit, this could not be done for the

duty to indemnify.       We disagree.

      “The insurer’s obligation to defend is broader than its

obligation to pay.”        Brenner, 397 S.E.2d at 102.            Consequently,

in the absence of any assertions in the state court proceeding

that could result in damages covered under the Policy, there

cannot be a duty to defend, and thus no duty to indemnify.                    This

Court has spoken on this point directly:

      Although an insurer’s duty to indemnify will depend on
      resolution of facts alleged in the complaint, no such
      factfinding is necessary if there is no duty to defend
      because the allegations, even when taken as proved,
      would fall outside the policy’s coverage.

Coffey, 368 F.3d at 413.          Therefore, the district court erred in

failing to find that it may be able to resolve the duty to

indemnify after deciding the duty to defend.

                                        IV.

      Because     the    district      court   abused     its    discretion     by

dismissing      MLM’s    declaratory     judgment   action       based   on    the

Nautilus factors, we reverse the decision of the district court

                                        15
and   remand   for   further   proceedings   consistent   with   this

decision.

                                              REVERSED AND REMANDED

                                 16