Court Opinion

ID: 2964864
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:32:21.899304+00
Date Added: 2024-06-11T11:43:02.808840
License: Public Domain

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-