Court Opinion

ID: 2653797
Source: CourtListenerOpinion
Date Created: 2014-02-19 20:20:00.8638+00
Date Added: 2024-06-11T09:11:29.209724
License: Public Domain

UNPUBLISHED

                  UNITED STATES COURT OF APPEALS
                      FOR THE FOURTH CIRCUIT

                              No. 13-1318

CORNERSTONE TITLE & ESCROW, INC.; SEAN ADETULA,

                Plaintiffs – Appellants,

           v.

EVANSTON INSURANCE COMPANY,

                Defendant – Appellee.

Appeal from the United States District Court for the District of
Maryland, at Baltimore.   William M. Nickerson, Senior District
Judge. (1:12-cv-00746-WMN)

Argued:   January 29, 2014                  Decided:   February 19, 2014

Before AGEE, FLOYD, and THACKER, Circuit Judges.

Reversed and remanded by unpublished opinion. Judge Agee wrote
the opinion, in which Judge Floyd and Judge Thacker joined.

Stephan Young Brennan, ILIFF, MEREDITH, WILDBERGER & BRENNAN,
P.C.,   Pasadena,  Maryland, for  Appellants.     Paul  Newman
Farquharson, SEMMES, BOWEN & SEMMES, Baltimore, Maryland, for
Appellee.

Unpublished opinions are not binding precedent in this circuit.
AGEE, Circuit Judge:

     The    Maryland    Attorney    General    sued   Cornerstone      Title    &

Escrow, Inc., alleging that Cornerstone and others engaged in a

scheme to defraud homeowners on the brink of foreclosure.                      In

response,    Cornerstone     sought    coverage     from   its   professional

liability    insurer,    Evanston     Insurance     Company,     but   Evanston

denied any duty to defend under the policy.            Cornerstone and its

owner then filed a breach-of-contract action against Evanston in

the District of Maryland.          That court entered summary judgment

in Evanston’s favor, finding that at least two policy exclusions

barred     coverage    for   the    underlying      action.        Cornerstone

appealed.

     For the reasons explained below, we reverse and remand the

judgment of the district court.            Not all the claims found in the

underlying complaint fall within the two exclusions that the

district court identified, so those two exclusions do not defeat

Evanston’s duty to defend and, by extension, duty to indemnify.

                                      I.

                                      A.

     Evanston    issued      a   “Service     and   Technical    Professional

Liability Insurance” policy to Cornerstone, which provides that

Evanston will pay “the amount of Damages and Claims Expenses . .

. because of any (a) act, error or omission in Professional

                                       2
Services rendered . . . or (b) Personal Injury committed . . .

by [Cornerstone].”          (J.A. 67–68.)       The policy also says that

Evanston will “investigate, defend and settle any Claim to which

coverage    under    this    policy    applies.”        (J.A.        68.)       Taken

together,    these    provisions      require      Evanston     to     defend     and

indemnify Cornerstone for covered claims.

      This case implicates four of the policy’s exclusions:

•     Exclusion (a): applying to claims “based upon or arising
      out of any dishonest, deliberately fraudulent, malicious,
      willful or knowingly wrongful act or omissions committed by
      or at the direction of [Cornerstone].” (J.A. 70.).

•     Exclusion (n): applying to claims “based upon or arising
      out of [Cornerstone] gaining any profit or advantage to
      which [Cornerstone] is not legally entitled.” (J.A. 70.)

•     Exclusion (x): applying to claims “based upon or arising
      out   of   the   actual   or   alleged    theft,    conversion,
      misappropriation, disappearance, or any actual or alleged
      insufficiency in the amount of, any escrow funds, monies,
      monetary   proceeds, or    any   other   assets,    securities,
      negotiable instruments, . . . irrespective of which
      individual,   party,   or   entity   actually    or   allegedly
      committed or caused in whole or part the [excluded act].”
      (J.A. 65.)

•     Exclusion (cc): applying to claims “based upon or arising
      out of the Real Estate Settlement Procedures Act (RESPA) or
      any similar state or local legislation.” (J.A. 66.)

If a “[c]laim” falls within one of these exclusions, then the

policy “[d]oes [n]ot [a]pply.”         (J.A. 69.)

                                       B.

      In 2008, the Maryland Attorney General sued Cornerstone and

ten   co-defendants,    alleging      that   the    defendants        collectively

                                       3
violated two Maryland statutes: the Protection of Homeowners in

Foreclosure Act and the Consumer Protection Act.                            According to

the     complaint,       the    defendants           violated      these    statutes   by

scheming to “take title to homeowners’ residences and . . .

strip the equity that the homeowners ha[d] built up in their

homes.”       (J.A. 109.)       The complaint identified thirteen specific

property       transactions         in    which        the    defendants,       including

Cornerstone, acted wrongfully; it asked the court for a variety

of relief, including restitution.

      The alleged scheme worked by preying on homeowners close to

losing      their   homes      in   foreclosure. 1           The   “Lewis    Defendants”

marketed foreclosure-consulting services for a fee and, with the

help of a colluding mortgage broker (Thomas), would convince

their       consulting    clients        to   enter     sale-leaseback       agreements.

Under such an agreement, a homeowner would sell her home to the

Lewis Defendants and rent it back.                     The Lewis Defendants pitched

the arrangement as a way to resolve the homeowner’s delinquency

while allowing the homeowner to rebuild her credit and keep her

home.         The   reality     was      much       different.      Once    a   sale   was

consummated, the Lewis Defendants would tell a homeowner that

unspecified closing fees and charges had consumed any equity

        1
       As explained below, we assume that the allegations of the
underlying complaint are true for purposes of determining
whether Evanston owes Cornerstone a duty to defend.

                                                4
proceeds and convince the homeowner to sign her check for the

settlement proceeds back to the Lewis Defendants.                             Then, the

Lewis    Defendants      would        charge     the    homeowner       monthly       rent

payments      that   were     much     higher    than       the    original     mortgage

payments -- driving the homeowner out of her home and ending any

chance for her to repurchase it in the future.

     Cornerstone “provide[d] settlement services for the sale-

leaseback transactions,” and the Attorney General alleged that

Cornerstone     failed      to    “deliver      to    homeowners     the     checks    for

proceeds due to them at settlement or afterwards.”                           (J.A. 116.)

Cornerstone     instead       “deliver[ed]       the    homeowners’        [unendorsed]

checks   to    the   Lewis       Defendants     or     to   Defendant      Thomas,     who

deliver[ed] the checks to the Lewis Defendants.”                           (J.A. 116.)

The complaint alleged that Cornerstone never “disclose[d] [to

the homeowners] the fact that it provide[d] homeowners’ checks

to other parties” (J.A. 116), and alleged that this failure to

disclose   amounted      to      “a   failure    to    state      material    facts”    in

violation of the Maryland Consumer Protection Act.                           (J.A. 129.)

In addition, by acting as the settlement agent, “Cornerstone

participated in and provided substantial assistance to the . . .

[equity-stripping] scheme.”             (J.A. 129.)

     The Attorney General sought to hold Cornerstone responsible

not just for its own alleged failure to disclose, but also for

its co-defendants’ acts.              The Attorney General pled that it was

                                           5
the    defendants’   “concerted     action       that   [made]     the    enterprise

possible”    (J.A.   109),   so     each     defendant       was    “jointly      and

severally liable” for the acts of every other co-defendant (J.A.

124, 130).    Applying this theory, the Attorney General asserted

that   Cornerstone   was   liable    for     a    laundry    list    of    statutory

violations committed by its co-defendants, including:

  •    Failing   to  provide   a  written   foreclosure                   consulting
       contract or written sale-leaseback agreement;

  •    Requiring homeowners to pay a membership                          fee   before
       receiving foreclosure consulting services;

  •    Obtaining an interest in a person’s home while offering
       that same person foreclosure consulting services;

  •    Representing that the services              were     offered      to    save   a
       homeowner from foreclosure;

  •    Failing to disclose the nature of the foreclosure services
       provided,   the  material   terms   of  the  sale-leaseback
       agreement, the terms of the rental agreement that followed,
       and the terms of any subsequent repurchase;

  •    Failing to disclosure specific terms of the sale-leaseback
       agreements that statutes require to be disclosed;

  •    Failing to provide several statutorily required forms and
       notices in connection with the foreclosure counseling and
       the sale-leaseback agreements;

  •    Failing   to  determine whether  the  borrower has   the
       reasonable ability to make lease payments and repurchase
       her home;

  •    Misleading consumers about whether they are entitled to
       proceeds of settlement and whether those proceeds would be
       placed in escrow accounts;

  •    Taking consumers’ settlement checks; and

                                      6
  •   Recording land deeds and encumbering properties before the
      homeowners’ rescission period expired.

      Cornerstone sought coverage under the policy from Evanston,

requesting    that        Evanston      defend          Cornerstone       against       the

complaint and indemnify it for any liability.                         Evanston denied

coverage.    Although      Cornerstone           denied   the     Attorney      General’s

allegations, it eventually agreed to a settlement in which it

agreed to pay $100,100 in restitution.

                                            C.

      In March 2012, Cornerstone sued Evanston, alleging that the

insurer   breached        both   its    duty       to    defend    and    its    duty    to

indemnify    under    the    policy.            Cornerstone       moved   for    summary

judgment on the duty-to-defend issue and Evanston responded by

filing its own cross-motion for partial summary judgment.                           Among

other things, Evanston argued that the Attorney General’s suit

fell within policy exclusions (a), (n), (x), and (cc) and thus

no duty to defend, or indemnify, arose.

      The district court granted Evanston’s motion for partial

summary   judgment,       denied     Cornerstone’s         cross-motion,         and    sua

sponte    entered     judgment         on    Cornerstone’s         duty-to-indemnify

claim.    Of relevance here, the court concluded -- based on the

“gravamen”    of    the    complaint        --    that    the     Attorney      General’s

complaint “only alleged conduct that meets exclusions of the

                                            7
policy—(n) and (x), at minimum[.]”                 Cornerstone Title & Escrow,

Inc. v. Evanston Ins. Co., No. WMN-12-746, 2013 WL 393286, at

*3,    *7   (D.   Md.    Jan.    30,     2013).          The   court    stated      that

misappropriation        and   illegal      gains   were    “precisely”       what    the

Attorney General alleged in his complaint against Cornerstone.

Id.    at   *7.     Therefore,       the    district       court    concluded       that

Evanston had no duty to defend and, consequently, no duty to

indemnify, but did not address exclusions (a) or (cc).

       Cornerstone filed this timely appeal, over which we have

jurisdiction under 28 U.S.C. § 1291.

                                           II.

       The district court decided this case on summary judgment,

and we review that decision de novo.                       See Turner v. United

States, 736 F.3d 274, 280 (4th Cir. 2013).                         In doing so, we

apply “the same legal standards as the district court and view[]

all the facts and reasonable inferences therefrom in the light

most   favorable    to    the    non     moving    party,”     Cornerstone.          Id.

“Summary judgment is appropriate if the movant shows that there

is no genuine dispute as to any material fact and the movant is

entitled    to    judgment      as   a   matter     of    law.”        Id.   (internal

quotation marks and citation omitted).

                                           8
                                             III.

       As    the    parties         agree,    Maryland       law    applies        to    this

diversity      case.          The     district       court    focused     on       the     law

concerning the duty to defend, correctly reasoning that Evanston

would have no duty to indemnify if it had no duty to defend,

because the duty to defend is broader.                       See Cowan Sys., Inc. v.

Harleysville Mut. Ins. Co., 457 F.3d 368, 372 (4th Cir. 2006).

       In    Maryland,    the        duty    to     defend    “should     be       construed

liberally in favor of the policyholder,” Pac. Emp’rs Ins. Co. v.

Eig,   864 A.2d 240,    248     (Md.    Ct.    Spec.     App.    2004),       and   it

attaches “when there exists a potentiality that the claim could

be covered by the policy,” id. (emphasis in original; internal

quotation      marks     omitted).             Even    a     slim      possibility         can

constitute a “potentiality.”                 Compare Walk v. Hartford Cas. Ins.

Co., 852 A.2d 98, 106 (Md. 2004) (defining a potentiality as “a

reasonable potential that the issue triggering coverage will be

generated at trial” (quotation marks omitted)), with Litz v.

State Farm Fire & Cas. Co., 695 A.2d 566, 572 (Md. 1997) (“If

there is a possibility, even a remote one, that the plaintiffs’

claims      could   be   covered       by    the    policy,    there     is    a    duty    to

defend.”).         And “any doubts about the potentiality of coverage

must be resolved in favor of the insured.”                      Cowan Sys., 457 F.3d

at 372.

                                              9
       To    determine    whether       the    insurer     must    defend,      Maryland

courts ask two questions: “(1) what is the coverage and what are

the defenses under the terms and requirements of the insurance

policy? [and] (2) do the allegations in the [underlying] tort

action      potentially    bring       the    tort    claim     within    the    policy’s

coverage?”       Id. (alterations in original).                  “The first question

focuses upon the language and requirements of the policy, and

the second question focuses upon the allegations of the tort

suit.”      St. Paul Fire & Marine Ins. Co. v. Pryseski, 438 A.2d
282, 285 (Md. 1981).

                                              A.

       In answering the first question noted above, “[i]nsurance

contracts      are    treated     as    any    other     contract,       and    [Maryland

courts] measure such an agreement by its terms.”                         United Servs.

Auto. Ass’n v. Riley, 899 A.2d 819, 833 (Md. 2006).                              We must

construe the policy as a whole, and a word should be accorded

“its    usual,       ordinary    and    accepted        meaning    unless       there    is

evidence that the parties intended to employ it in a special or

technical sense.”         Clendenin Bros., Inc. v. U.S. Fire Ins. Co.,

889 A.2d 387, 393 (Md. 2006) (quotation marks omitted).                                 “In

addition,      [Maryland        courts]       examine     the     character      of     the

contract, its purpose, and the facts and circumstances of the

parties at the time of execution.”                   Cole v. State Farm Mut. Ins.

                                              10
Co., 753 A.2d 533, 537 (Md. 2000) (quotation marks omitted).

“[I]f    no    ambiguity       in    the    terms     of    the    insurance       contract

exists, a court will enforce those terms.”                              Nat’l Union Fire

Ins. Co. of Pittsburgh v. David A. Bramble, Inc., 879 A.2d 101,

109 (Md. 2005).             But “if an insurance policy is ambiguous, it

will be construed liberally in favor of the insured and against

the insurer as drafter of the instrument,” Dutta v. State Farm

Ins. Co., 769 A.2d 948, 957 (Md. 2001) (quotation marks omitted;

emphasis in original), at least if extrinsic evidence cannot

resolve the ambiguity, Clendenin Bros., 889 A.2d at 394.                                    We

must find policy language ambiguous if it “suggests more than

one meaning to a reasonably prudent layperson.”                          State Farm Mut.

Auto. Ins. Co. v. DeHaan, 900 A.2d 208, 226 (Md. 2006).

      In   interpreting           the   insurance         contract,      we    should     take

special    care      to   interpret        exclusion       provisions         narrowly.    See

Megonnell v. United Servs. Auto. Ass’n, 796 A.2d 758, 772 (Md.

2002).        “[S]ince       exclusions      are     designed      to    limit     or   avoid

liability, they will be construed more strictly than coverage

clauses       and    must    be     construed        in    favor    of    a     finding     of

coverage.”          Id. (quotation marks omitted).                 And, in all cases,

the   insurer        bears    the    burden     of    showing      that       an   exclusion

applies.       See Prop. & Cas. Ins. Guar. Corp. v. Beebe-Lee, 66
A.3d 615, 624 (Md. 2013); see also Trice, Geary & Myers, LLC v.

                                             11
Camico Mut. Ins. Co., 459 F. App’x 266, 274 (4th Cir. 2011)

(unpublished) (applying Maryland law).

                                              B.

       In   answering      the     second      question,         courts    evaluate     the

“causes     of   action    actually        alleged     by   the    plaintiff      in    [the

underlying] lawsuit.”              Reames v. State Farm Fire & Cas. Ins.,

683 A.2d 179, 186 (Md. Ct. Spec. App. 1996); see also Sheets v.

Brethren Mut. Ins. Co., 679 A.2d 540, 542 (Md. 1996) (“[W]e must

assume that the facts in the [underlying] complaint are true.”).

We do not consider the merits of the underlying suit at the

duty-to-defend stage; “the underlying tort suit need only allege

action that is potentially covered by the policy, no matter how

attenuated,       frivolous,       or   illogical      that      allegation      may    be.”

Sheets, 679 A.2d      at     544      (emphasis      in     original).           The

policyholder       --   but    not      the    insurer      --    may     also   introduce

extrinsic evidence at this step to establish a potentiality of

coverage.        Aetna Cas. & Sur. Co. v. Cochran, 651 A.2d 859, 866

(Md. 1995).

       Finally, and critically, if the complaint at issue contains

some    covered     claims       and    some       non-covered      claims,      then   the

insurer must defend the entire action.                      See Perdue Farms, Inc.

v. Travelers Cas. & Sur. Co. of Am., 448 F.3d 252, 258 (4th Cir.

2006) (“Under Maryland’s comprehensive duty to defend, if an

                                              12
insurance policy potentially covers any claim in an underlying

complaint, the insurer . . . must typically defend the entire

suit, including non-covered claims.”).

       With these basic principles in mind, we consider each of

the parties’ exclusion-related arguments.

                                          IV.

                                          A.

       Evanston first argues that exclusion (n), sometimes called

the personal-profits exclusion, defeats coverage.                        In its view,

exclusion    (n)     applies   whenever        an   underlying        action    suggests

that   the   policyholder      gained      an    illegal      benefit    or     superior

position.          Evanston    contends         that   the      Attorney       General’s

complaint alleged such an advantage because Cornerstone did not

deliver the settlement checks to the selling homeowners, thereby

taking part in an equity-stripping scheme.

       Even if we were to adopt Evanston’s reading of the relevant

exclusion, we do not agree with its view of the complaint.                           Our

disagreement leads us to conclude that exclusion (n) does not

bar coverage to Cornerstone.

       The Attorney General’s complaint did not allege that any

particular        “profit”    or    “advantage”        inured     to    Cornerstone’s

benefit,     as    exclusion       (n)   requires.       To     the    contrary,     the

complaint alleged that all the relevant benefits and funds went

                                          13
to the Lewis Defendants and, perhaps, Thomas.                         It was the Lewis

Defendants,       after       all,     who        “stripped”        the     equity        from

homeowners’ homes by contriving false fees and other reasons to

obtain the homeowners’ settlement proceeds.                         Evanston admits as

much.      (See    Evanston’s        Br.     17   (“The     result    of        this    scheme

allowed the Lewis Defendants to wrongfully take the homeowners’

equity.” (emphasis added)).)                 Although Cornerstone collected the

settlement proceeds, the complaint does not suggest that it ever

retained them.         See Perdue Farms, 448 F.3d at 256 n.3 (finding

personal-profits        exclusion       inapplicable          where       the    underlying

plaintiffs      “never       alleged       that     [the     defendant]         gained        any

advantage from its unlawful conduct”).                       There is no allegation

that    Cornerstone         should     not    have     collected          the    settlement

proceeds     because,       as   a     settlement          agent,    the    company           was

required to do so.           Cf. Obligation of Title Insurance Companies

to Conduct Annual Review of Settlement Agents, 85 Md. Op. Att’y

Gen. 306, 315 (2000) (“Funds are normally escrowed as a part of

a real estate settlement.”).                  While the homeowners’ equity and

money   might     be   an    illegal       profit    or     advantage      that        went    to

someone after settlement, those assets went to parties other

than “the Insured” under the terms of Cornerstone’s policy with

Evanston.

       We also observe that exclusion (n) would not apply because

the underlying complaint did not allege illegal profiteering by

                                             14
Cornerstone.            Instead,          the     complaint         alleged         illegal       conduct

that produced incidental gains.                          Put another way: the Attorney

General could have succeeded on its claims against Cornerstone

without showing that Cornerstone received a single dollar or any

other advantage, legal or illegal.                            In fact, many of the claims

for which Cornerstone was allegedly jointly and severally liable

did       not   involve        money      at     all,    but    instead            alleged    wrongful

disclosures         and    misrepresentations.                  (See          J.A.    109    (defining

Cornerstone as a “Foreclosure Rescue Defendant”); J.A. 126-30

(listing        actions        for    which       all    Foreclosure           Rescue       Defendants

were       responsible).)              Cf.       Fed.    Ins.       Co.       v.     Kozlowski,         792
N.Y.S.2d 397,      403     (N.Y.         App.     Div.       2005)       (explaining         that

personal-profits exclusion did not relieve insurer of duty to

pay       defense      costs      where         underlying          actions          also    contained

allegations         relating         to     “alleged      misstatements              and    omissions”

that were “archetypical of claims that encompass both excluded

and covered behavior”).                         The underlying nondisclosure claims,

at    a    minimum,       do    not       “arise    out       of”    the      illegal        profit      or

advantage itself, so those allegations of the complaint do not

fall within the exclusion.                        Perdue Farms, 448 F.3d at 256 n.3

(“[T]he alleged ERISA violations do not ‘aris[e] out of’ illegal

profiteering,          because         29      U.S.C.     §    1140       proscribes         specified

conduct,        not    profit.”);           see    also       Brown       &    LaCounte,          LLP    v.

Westport        Ins.      Corp.,          307 F.3d 660,        664      (7th        Cir.    2002)

                                                   15
(distinguishing between cases involving “allegations of breaches

of fiduciary duty where the dispute concerned the illegality of

the actions taken or profits received” and case involving an

“unequivocal[]     alleg[ation]     that      [the    defendant]     reaped     an

illegal profit”).

     Though Evanston argues otherwise, it makes no difference

that Cornerstone received fees for the settlement services that

it provided at closing when the houses were conveyed to the

Lewis     Defendants.        The   complaint      does      not    allege     that

Cornerstone overcharged or that it failed to provide bona fide

settlement services.         Under the plain terms of exclusion (n),

Cornerstone’s receipt of legally justified funds does not defeat

policy    coverage.     See,   e.g.,    St.    Paul   Mercury      Ins.   Co.   v.

Foster, 268 F. Supp. 2d 1035, 1045 (C.D. Ill. 2003) (finding

personal-profits exclusion inapplicable where policyholder might

have been “legally entitled to retain” the funds in question).

More importantly, as the district court held in an unchallenged

ruling and as Evanston acknowledged at argument, the Attorney

General’s complaint did not seek damages for the “consideration

or   expenses    paid   to   [Cornerstone]      for    services     or    goods.”

Cornerstone, 2013 WL 393286, at *5 (alteration in original).

Because    the   Attorney    General’s      claims    did    not    touch     upon

Cornerstone’s settlement fees, those fees could hardly have been

a “profit” or “advantage” that spurred the underlying claim.

                                       16
See, e.g., Axis Reinsurance Co. v. Telekenex, Inc., 913 F. Supp.
2d 793, 803 (N.D. Cal. 2012) (finding personal-profits exclusion

did   not        bar    coverage     for       spoliations            sanction        even       though

spoilative        act    might     have        also       provided          business    advantage,

where court did not premise the sanction on the act creating the

advantage); In re Donald Sheldon & Co., Inc., 186 B.R. 364, 369

(S.D.N.Y. 1995) (holding that exclusion did not apply where the

“alleged     personal       profits        .    .     .    were       not    the    basis    of     the

liability for which recovery was sought”).

      Finally, Evanston has not persuaded us that some undefined

personal         benefit    flowed       to      Cornerstone            merely       because        the

Attorney     General        sought       restitution             as    a     remedy     under      the

complaint.         To be sure, a restitution award sometimes suggests

that the defendant enjoyed some gain, as “restitution [in the

Consumer Protection Act context] aims at disgorgement of unjust

enrichment, not compensation for damages.”                                  Consumer Prot. Div.

v. Morgan, 874 A.2d 919, 953 (Md. 2005).                                    But in a case that

involves         “concerted      action”        --        that    is,        a   case      like     the

underlying         action     here       --      the       restitution             award     doesn’t

necessarily aim to disgorge benefits from particular defendants.

Instead, the award serves to disgorge the benefits going to the

scheme      as     a    whole.       A     conspiring            Consumer          Protection      Act

defendant will therefore face potential restitution anytime any

of    his    co-conspirators             enjoyed           some       benefit.             Id.    (“As

                                                 17
tortfeasors acting in concert are responsible for the damages

each caused, so too are Consumer Protection Act violators who

act in concert responsible for the unjust enrichment each gained

at   the    consumers’    expense.”).       A    defendant      who   enjoyed    no

personal gain could still be ordered to pay restitution if he

were part of a broader concerted action that produced benefits

to     a   fellow    co-defendant.        See,    e.g.,    State      v.    Cottman

Transmissions Sys., Inc., 587 A.2d 1190, 1201 (Md. Ct. Spec.

App. 1991) (ordering defendant to pay restitution where another

party received improper fees but defendant “indirectly” assisted

other party in deception); see also J.P. Morgan Secs. Inc. v.

Vigilant Ins. Co., 992 N.E.2d 1076, 1082-83 (N.Y. 2013) (finding

that       personal-profit     exclusion         would    not      apply      where

disgorgement        payment   made   by    defendant      “did     not     actually

represent the disgorgement of [the defendant’s] own profits,”

but rather “represented the improper profits acquired by third-

part[ies]”).        The restitution request therefore does not serve

as any guarantee of personal gain on Cornerstone’s part.

       In sum, the personal-profits exclusion –- exclusion (n) --

does not defeat Evanston’s duty to defend and the district court

erred in granting partial summary judgment to Evanston in that

regard.

                                      18
                                  B.

     Alternatively, Evanston references the Attorney General’s

allegations that Cornerstone misdirected settlement checks and

maintains that exclusion (x) also bars coverage.       This improper

delivery, it says, amounts to conversion. 2       Evanston’s argument

suffers from a fatal flaw: the improper delivery seen here did

not amount to conversion.

     In Maryland, the payee of a check (here, the homeowner)

must receive the check before he or she can bring a conversion

action based on a misuse or improper delivery of it.         See Md.

Code Ann., Comm. L. § 3-420(a) (“An action for conversion of an

instrument may not be brought by . . . a payee or indorsee who

did not receive delivery of the instrument either directly or

through delivery to an agent or a co-payee.”).        Where the payee

has not received the check, the payee retains a cause of action

against the drawer (in this case, Cornerstone) for the liability

reflected in the check, but, at least at that point in time,

cannot   bring   a   conversion   action.   See    Jackson   v.   2109

Brandywine, LLC, 952 A.2d 304, 321 (Md. Ct. Spec. App. 2008).

In this case, Cornerstone allegedly misdirected the settlement

checks before they ever reached the hands of the homeowners.

     2
       On appeal, Evanston invokes only the conversion portion of
the exclusion.

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Thus,     the     necessary          element       of    delivery      for      a       Maryland

conversion action to the payee was absent at the time of the

allegedly wrongful transfer by Cornerstone.

        Even if we could overlook this basic issue and assume that

the     Cornerstone’s          act     of    “improper       delivery”       fell        within

exclusion (x), we would still find that other allegations in the

Attorney General’s complaint are not within the ambit of that

exclusion and therefore the duty to defend is triggered.                                     For

instance,        the   underlying           complaint       faults      Cornerstone          for

failing     to    disclose       certain         facts.         And,   as    we     have     now

previously       described,          the     underlying         complaint     attempts        to

impose liability on Cornerstone for acts of its co-defendants

that have no connection at all to misdirected checks.                                      Among

other things, the Attorney General sought to hold Cornerstone

responsible for acts such as failing to make required statutory

disclosures, recording deeds prematurely, and making misleading

statements       about    the        services     that     the    defendants         provided.

Those      claims        do      not        arise        from      theft,       conversion,

misappropriation,          or    any        of    the     other    acts      described        in

exclusion       (x),     and    consequently            require    coverage         under    the

policy.

       At argument, Evanston pressed two other points that we need

only     briefly       address.             First,      Evanston       evoked       a    notion

reminiscent of the one that the district court adopted –- that

                                                 20
the “gravamen” of the underlying complaint should decide whether

it warrants coverage.             But as we have already discussed, the

well-established rule in Maryland says otherwise.                       Where covered

and uncovered claims arise in the same action, the insurer must

defend, regardless of what the gravamen of the action might be.

See, e.g., Cont’l Cas. Co. v. Bd. of Educ. of Charles Cnty., 489
A.2d 536, 542 (Md. 1985); Back Creek Partners, LLC v. First Am.

Title Ins. Co., 75 A.3d 394, 400 (Md. Ct. Spec. App. 2013);

Zurich Ins. Co. v. Principal Mut. Ins. Co., 761 A.2d 344, 348

(Md. Ct. Spec. App. 2000); Balt. Gas & Elec. Co. v. Commercial

Union Ins. Co., 688 A.2d 496, 512 (Md. Ct. Spec. App. 1997).

Indeed, in Utica Mutual Insurance Co. v. Miller, 746 A.2d 935,

941–42 (Md. Spec. Ct. App. 2000), the Court of Special Appeals

of Maryland found that an underlying complaint triggered the

duty to defend even though the “gravamen” of that complaint was

plainly       excluded,      where   other       claims    were   not.          Second,

Evanston questioned whether Cornerstone faced a genuine prospect

of liability from the acts of its co-defendants.                         As should be

clear by now, we need not answer that question to determine

whether the insurer must defend.                    The insurer has a duty to

defend    a    covered    claim      even    when    the    claim   can    be    called

“frivolous.”       Back Creek Partners, 75 A.3d at 400.

     In short, exclusion (x) also does not defeat Evanston’s

duty to       defend   the    Attorney      General’s      suit   and    the   district

                                            21
court erred in awarding Cornerstone partial summary judgment in

that regard.

                                       C.

     Evanston suggests that we affirm on alternative grounds,

particularly that exclusions (a) and (cc) exclude coverage.                     As

noted earlier, the district court did not address these policy

exclusions.      “Although     we    are    not    precluded    from   addressing

[alternative     grounds       for    affirmance],       we     deem    it    more

appropriate to allow the district court to consider them, if

necessary, in the first instance on remand.”                    Q Int’l Courier

Inc. v. Smoak, 441 F.3d 214, 220 n.3 (4th Cir. 2006); see also

United States ex rel. Carter v. Halliburton Co., 710 F.3d 171,

184 (4th Cir. 2013) (“The district court did not reach this

argument,     having   found    grounds      for    dismissal    elsewhere.     We

decline to address this issue for the first time on appeal.”).

Accordingly, we will remand the case for further proceedings so

that the district court can address the parties’ arguments as to

exclusions (a) and (cc) in the first instance.

                                       V.

     For these reasons, we reverse the district court’s grant of

summary     judgment   to   Evanston        on    the   duty-to-defend       issue.

Because the district court’s decision on the duty-to-indemnify

                                       22
matter rested solely on its erroneous duty-to-defend decision,

we must reverse that decision as well.    We direct the district

court to enter partial summary judgment in Cornerstone’s favor

on the duty-to-defend issue as to exclusions (n) and (x).      We

remand for further proceedings consistent with this opinion.

                                            REVERSED AND REMANDED

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