Court Opinion

ID: 626330
Source: CourtListenerOpinion
Date Created: 2012-03-29 18:44:53+00
Date Added: 2024-06-11T17:51:15.300125
License: Public Domain

UNPUBLISHED

                   UNITED STATES COURT OF APPEALS
                       FOR THE FOURTH CIRCUIT

                               No. 10-2404

MINNESOTA LAWYERS MUTUAL INSURANCE COMPANY,

                 Plaintiff - Appellee,

           v.

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

                 Defendants - Appellants,

           and

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

                 Defendants.

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

Argued:   December 6, 2011                   Decided:   March 29, 2012

Before MOTZ, GREGORY, and KEENAN, Circuit Judges.

Affirmed by unpublished per curiam opinion.
ARGUED: Lon Arthur Berk, HUNTON & WILLIAMS, LLP, McLean,
Virginia, for Appellants.    Danny Mark Howell, SANDS ANDERSON,
PC, McLean, Virginia, for Appellee. ON BRIEF: Brian J. Gerling,
HUNTON & WILLIAMS, LLP, McLean, Virginia, for Appellants.
Mikhael D. Charnoff, SANDS ANDERSON, PC, McLean, Virginia, for
Appellee.

Unpublished opinions are not binding precedent in this circuit.

                               2
PER CURIAM:

       Antonelli, Terry, Stout & Kraus, LLP (“the Antonelli Firm”)

and Donald E. Stout, Esq. (“Stout”) (collectively “Appellants”)

seek    a   declaratory    judgment     that    their      insurer,    Minnesota

Lawyers Mutual Insurance Co. (“MLM”), has a duty to defend them

in a pending Florida state court action (“the Ferguson action”).

The district court, applying Virginia law, determined that MLM

does not have a duty to defend Appellants because the Ferguson

complaint     falls   within      the       insurance      policy’s    Business

Enterprise Exclusion.      We affirm.

                                      I.

       This case returns to us after we previously reversed and

remanded the district court’s dismissal of the action.                     Minn.

Lawyers Mut. Ins. Co. v. Antonelli, Terry, Stout & Kraus, LLP,

355 F. App’x 698 (4th Cir. 2009).              We instructed the district

court on remand to “decide[ ] whether the allegations in the

[Ferguson]    complaint    were   within     the   scope    of   the   insurance

policy.”     Id. at 702.    To do so, the district court compared the

Ferguson complaint and the insurance policy.               The district court

thoroughly described both documents, so we need only briefly

recount the most salient points.

                                        3
                                            A.

     According to the Ferguson complaint, in 1986, inventor and

entrepreneur Andrew Andros formed Telefind Corp. in order to

develop and market wireless email technology (“WET”).                            Telefind

retained     Appellants       to    perform        patent      prosecutions      on     its

behalf.       Over     time,       Appellants’       role       evolved:    from       pure

attorneys     to     equity        investors        to     increasingly         immersing

themselves in counseling and managing Telefind’s strategy and

operations.

     Telefind      received        substantial       financial       backing     from    a

group   of   outside       investors       (“the    Richards      Investors”).          The

Richards     Investors       lent     Telefind       $6        million    via    a    loan

convertible to equity through a Panamanian corporation, Flatt

Morris,    S.A.      The    loan    agreement       specified      that    Stout      would

serve   as   trustee       for     Flatt    Morris       and    would    “hold    all    of

Telefind’s intellectual property [both current and prospective]

in trust for the benefit of Flatt Morris . . . in the event that

Telefind defaulted.”             Over time, Appellants acquired a majority

equity share of Flatt Morris, including its Telefind assets.

     In 1989, Telefind signed a leasing agreement with Computer

Leasco, Inc. (“Leasco”) whereby Leasco provided Telefind with

computers in exchange for a monthly fee and a security interest

in Telefind’s intellectual property.                     When Telefind fell behind

on its payments, Leasco sued.                    Around the same time, Telefind

                                             4
began negotiating with AT&T and France Telecom regarding the

potential     sale    of     its       WET.          Concerned       that    Leasco      might

interrupt these negotiations with a judgment against Telefind,

Stout negotiated a “standstill agreement” with Leasco pending

the outcome of the AT&T and Telecom negotiations.

     As the negotiations faltered and Leasco became impatient,

“Stout devised        a   legal        strategy      that     he   told     [the]   Richards

Investors     and     Andy       Andros        would       legally     protect       .     .     .

Telefind[’s] . . . interest in the [WET].”                            In order to avoid

Telefind’s creditors, Stout recommended placing the WET patents

in a separate legal entity.                    Stout stressed that the Ferguson

plaintiffs would “lose their entire interest in the [WET] if

they did not follow his advice.”

     To implement Stout’s strategy, three ESA Telecommunications

(“ESA”)     employees       –-     a    company        that    Telefind       worked       with

previously    –-     filed   the        WET    patents      “in    their     own    names       as

inventors.”         Stout    emphasized             that    Andros    and    the    Richards

Investors     could       “not     have       any     documented       direct       ownership

interest in the [WET],” but he assured them that “they would

continue    to    participate          in     any    benefits      associated       with       the

[WET].”          Pursuant        to      this        understanding,         the     Ferguson

plaintiff’s disavowed their legal interest in the patents.                                     The

ESA employees then assigned the patents to Stout.                              Finally, in

                                                5
June 1992, Stout created a shell corporation, NTP, Inc., to hold

the WET patents.

     The strategy succeeded.           Though Leasco eventually obtained

a judgment against Telefind, NTP prevented Leasco from obtaining

any share of the WET patents.          NTP’s success was based, in part,

on representations from Andros stating that he had no interest

in the WET.        Andros allegedly made these representations based

on Appellants’ assurances that he would continue to retain a

share of any future profits.

     In late 2001, ten months after Andros died, NTP filed a

patent infringement action against Research In Motion (“RIM”),

alleging    that    RIM’s   Blackberry     system   infringed     on   the   WET

patents.    In March 2006, RIM settled the suit for $612.5 million

and received a perpetual license.             Stout, his partners at the

Antonelli firm, and others apportioned the settlement.

     When Andros’s surviving family and the Richards Investors

contacted Stout regarding their share of the RIM settlement,

Stout denied the existence of any such arrangement and refused

to share the settlement.       The Ferguson action ensued, asserting,

on the bases of the above facts, claims of breach of fiduciary

duty,   breach     of   contract,   unjust    enrichment,   and    promissory

estoppel.     In    the   complaint,    the   Ferguson   plaintiffs     do   not

challenge NTP’s ownership of the WET patents.               They argue only

                                       6
that their implicit understanding with Appellants was that they

would receive a share of any WET profits.

                                      B.

     During    the    relevant   period,    the    Antonelli    Firm    had   a

Professional Liability Insurance Policy (“the Policy”) with MLM

that covered

     all sums . . . which the INSURED may be legally
     obligated to pay as DAMAGES due to any CLAIM:
     (1) arising out of any act, error or omission of the
         INSURED or a person for whose acts the INSURED is
         legally responsible; and
     (2) resulting from the rendering or failing to render
         PROFESSIONAL SERVICES while engaged in the private
         practice of law . . . .

Applying this language, the district court determined that some

of the “damages alleged in the Ferguson complaint resulted from

[covered] legal services rendered by [Appellants].”                    It thus

held that, “barring any applicable exclusions, MLM has a duty to

defend [Appellants] in the underlying action.”                 MLM does not

challenge this conclusion on appeal.

     The district court next considered MLM’s argument that the

allegations    in    the   Ferguson   complaint   triggered    the     Policy’s

Business Enterprise Exclusion (“BEE”). ∗          The BEE excludes

     ∗
       Before the district court, MLM also argued that it had no
duty to defend because (1) the Ferguson allegations fell within
the Specific Entity Exclusion and (2) Stout failed to provide
adequate notice. The district court did not reach these claims,
however, and MLM does not reassert them on appeal.

                                       7
      any   CLAIM  arising   out  of   PROFESSIONAL SERVICES
      rendered by any INSURED in connection with any
      business enterprise:
      (a) owned in whole or part;
      (b) controlled directly or indirectly; or
      (c) managed,
      by any INSURED, and where the claimed DAMAGES resulted
      from conflicts of interest with the interest of any
      client or former client or with the interest of any
      person claiming an interest in the same or related
      business enterprise.

The district court found that the BEE applied because

      [Appellants]   rendered   [professional]  services   in
      connection with the Telefind, Flatt Morris, and NTP
      enterprises.   Flatt Morris and NTP were both owned,
      controlled, or managed by [Appellants].    The damages
      alleged in the complaint resulted from a conflict of
      interest   between   [Appellants]   and  the   Ferguson
      Plaintiffs, who claimed an interest in NTP, Telefind,
      and Flatt Morris.

Appellants challenge this determination.

                                       II.

      Appellants first argue that a number of terms within the

BEE are ambiguous, and therefore should be construed in their

favor.     Applying such a favorable construction, they contend,

would    demonstrate    that   the    Ferguson   complaint   does   not   fall

within the BEE.      We must reject this argument.

      Under Virginia law, insurance policies and their exclusions

are     construed    according   to     contract   principles.       Seabulk

Offshore, Ltd. v. Am. Home Assur. Co., 377 F.3d 408, 419 (4th

Cir. 2004).     Insurers bear the burden of establishing that the

alleged    conduct     unambiguously     falls   within   the   exclusionary

                                        8
language.       Fuisz v. Selective Ins. Co., 61 F.3d 238, 242 (4th

Cir.   1995).         If    a    contract       contains      ambiguities      it    must     be

construed against the insurer, “[b]ut this does not authorize

the court to make a new contract for the parties, nor to adopt a

construction     not       justified      by     the    language       or   intent     of    the

parties.”       Res. Bankshares Corp. v. St. Paul Mercury Ins. Co.,

407 F.3d 631, 636-37 (4th Cir. 2005) (quoting Ocean Accident &

Guar. Corp. v. Wash. Brick & Terra Cotta Co., 139 S.E. 513, 517

(1927)).       Thus we must determine whether the BEE unambiguously

applies to the Ferguson complaint pursuant to a reading of the

exclusion      that    is       “reasonable”        and      avoids    “absurd      results.”

Transit Cas. Co. v. Hartman’s Inc., 239 S.E.2d 894, 896 (Va.

1978).

       Under the terms of the Policy, the BEE excludes coverage

for    claims    (1)       “arising       out    of    professional          services”       (2)

rendered “in connection with any business enterprise” (3) owned,

controlled, or managed, by any insured, and (4) resulting “from

conflicts of interest with the interest of any client or former

client.”

       There    is    no        dispute   that        this    case     “aris[es]       out    of

professional services” that Appellants provided to the Ferguson

plaintiffs, thereby satisfying the first requirement of the BEE.

Appellants      counseled          Andros       and     others        to    renounce    their

interest in the WET patents in order to avoid their creditors.

                                                9
This strategy prevented Leasco from reaching the WET assets, but

also created the circumstances whereby plaintiffs were frozen

out of future profits.

       Further, and just as clearly, these “professional services”

were    rendered     “in      connection     with    [a]    business    enterprise,”

meeting the second requirement of the exclusion.                     The phrase “in

connection     with”     is    a   common    insurance      phrase   that    is    given

particularly broad scope.            See, e.g., Goldman Paper Stock Co. v.

Richmond, F. & P.R., 212 Va. 293, 296 (Va. 1971) (“in connection

with” broader than “arising out of”); see also Coregis Ins. Co.

v. Am. Health Found., Inc., 241 F.3d 123, 128-29 (2d Cir. 2001)

(explaining “in connection with” encompasses more than causal

connection); Metro. Prop. & Cas. Ins. v. Fitchburg Mut. Ins.,

793 N.E.2d 1252, 1255 (Mass. App. 2003) (“In connection with”

should “not be construed narrowly but [is] read expansively in

insurance contracts.”) (collecting cases).                      Moreover, although

the phrase “business enterprise” is not defined by the policy,

there   can    be   little      dispute     that    it    encompasses      the    various

corporations involved here -- Telefind, Flatt Morris, and NTP.

       The    Ferguson        complaint     also     clearly    meets       the    third

requirement of the exclusion since it alleges that Appellants

owned, controlled, or managed at least Flatt Morris and NTP.

Stout   served      as   a    trustee     for    Flatt     Morris,   and    Appellants

eventually     acquired        a   majority      equity    interest.        Similarly,

                                            10
Stout helped incorporate NTP.      NTP had no employees and Stout,

other attorneys at the Antonelli Firm, and their families were

among NTP’s few shareholders.

     Finally,   the    asserted   damages     surely   resulted    “from

conflicts of interests.”     The defendant attorneys in this case

allegedly   obtained   complete   ownership   and   control   of   their

clients’ assets and exploited those assets for personal benefit.

This conduct violates any number of Virginia professional ethics

rules.   See, e.g., Va. R. Prof’l Conduct 1.8(a) (“A lawyer shall

not enter into a business transaction with a client or knowingly

acquire an ownership, possessory, security or other pecuniary

interest adverse to a client . . . .”); id. at 1.8(b) (“A lawyer

shall not use information relating to representation of a client

for the advantage of the lawyer or of a third person or to the

disadvantage of the client . . . .”); id. at 1.8(j) (“A lawyer

shall not acquire a proprietary interest in the cause of action

or subject matter of litigation the lawyer is conducting for a

client . . . .”).

     In sum, we find the allegations of the Ferguson complaint

unambiguously fall within the BEE.

                                  III.

     Perhaps recognizing the weakness of their contention that

the BEE does not apply, Appellants offer one other argument.

                                   11
They assert that even if this exclusion applies to the Ferguson

complaint on the whole, because the Ferguson plaintiffs “might

prove    only        the    allegations         falling      within       coverage       without

proving the allegations within the exclusion, the district court

should have found a duty to defend.”                        Appellants correctly point

out    that    insurers         are     required      to     defend       insureds      “if     any

allegations may potentially be covered by the policy.”                                        CACI

Int’l, Inc. v. St. Paul Fire & Marine Ins. Co., 566 F.3d 150,

154 (4th Cir. 2009).               Under this “potentiality rule,” an insurer

owes    a     duty     to    defend      if     a    complaint       “alleges         facts    and

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

risk    covered        by    the      policy.”         Va.       Elec.    &    Power     Co.    v.

Northbrook      Prop.       &    Cas.    Ins.       Co.,    475    S.E.2d      264,    265     (Va.

1996).

       Appellants          hypothesize        that    the        Ferguson      plaintiffs       may

prove allegations that trigger coverage, but not the BEE.                                       For

example,       the     Ferguson        plaintiffs          may    prove       that    Appellants

provided professional services by advising their clients how to

avoid their creditors, but may fail to show that these services

were rendered “in connection with any business enterprise” or

resulted “from conflicts of interest.”                            In essence, Appellants

argue that the Ferguson action may amount to merely a claim for

legal malpractice.              We reject this hypothesis.

                                                12
      Virginia’s      potentiality       rule    requires      us   to   examine      the

complaint    and     determine    whether       any   potential      judgment        under

that complaint would fall within the Policy.                        See CACI Int’l,

566 F.3d at 155.         This process does not disregard the actual

allegations that are made.              See, e.g., Nationwide Mut. Ins. Co.

v. Overlook, LLC, 785 F. Supp. 2d 502, 533 (E.D. Va. 2011)

(refusing    insured’s     attempt       to    pick    out     certain       allegations

because     “every    claim      in    the     underlying       .   .    .    complaint

implicates the defective drywall as the basis for the claim, or

the cause of the resulting damages.                Thus every claim implicates

the Pollution Exclusion.”).

      In the Ferguson complaint, each cause of action is premised

on   an   agreement    between        plaintiffs      and    Appellants       that   they

would share any WET proceeds.                 As both parties acknowledged at

oral argument, because the plaintiffs consented to every initial

step of Appellants’ strategy, if Appellants had shared the WET

proceeds with the Ferguson plaintiffs, there would be no loss

for the Ferguson plaintiffs to recover.                      Without any potential

loss, there can be no duty to defend.                       See Va. Elec. & Power,

475 S.E.2d at 265-66 (explaining insurer has no duty to defend

where there is no possibility that insurer will be required to

indemnify insured).       Thus because the breach of the agreement is

central to any potential recovery, Appellants cannot obtain a

defense by having a court assume plaintiffs will fail to prove

                                          13
the heart of their allegations.                     Rather, we must evaluate the

Ferguson complaint presuming that plaintiffs will prevail.                                 In

doing so, we conclude that MLM has no duty to defend because the

BEE   applies.             See   Part    II,   supra;    see     also       AES    Corp.   v.

Steadfast Ins. Co., 715 S.E.2d 28, 33 (Va. 2011) (“The gravamen

of [the] nuisance claim is that the damages sustained were the

natural        and     probable         consequences      of      AES’s       intentional

emissions.”); Fuisz, 61 F.3d at 243 (“[I]f the Terex complaint

only permits Terex to recover upon proof that Fuisz specifically

intended to cause the company injury, then Selective has no duty

to defend Fuisz.”).

      Appellants’ heavy reliance on Parker v. Hartford Fire Ins.

Co., 278 S.E.2d 803 (Va. 1981), is misplaced.                               The policy at

issue in Parker specifically excluded intentional torts, and the

underlying complaint alleged a “willful” trespass.                            The Supreme

Court of Virginia determined that the action was nonetheless

covered by the policy because the pleadings could also support a

claim     of     “unintentional”          trespass.         Id.        at    804    (citing

Chesapeake & O. R. Co. v. Greaver, 66 S.E. 59, 60 (Va. 1909)).

Appellants seek to stretch Parker too far.                        Parker is premised

on a unique feature of Virginia trespass law -- when a landowner

alleges        intentional        trespass      but     “fails     to       sustain    this

allegation,          the    owner   is    still     entitled      to    recover       actual

damages on proof of the unintentional trespass.”                             Id. at 804.

                                               14
Parker thus stands for the principle that alternative causes of

action that give rise to a duty to defend include both those

explicitly alleged and those implied by law.               In this case,

however, Appellants have cited no authority, and we have found

none, demonstrating that any of the Ferguson causes of action

implicitly create a claim for legal malpractice that might fall

within the Policy.

       Appellants’ reliance on authority finding a duty to defend

where some alternative allegations fall within the policy is

also    unavailing.      Cases       considering   alternatively     worded

complaints do not look to any conceivable cause of action.               They

require that the complaint actually asserts the claim.                   See,

e.g., Fuisz, 61 F.3d at 245 (avoiding intentional act exclusion

because “each of the four causes of action” alleged “reckless

disregard”   in   addition    to   “actual   malice”).    Given   that    the

Ferguson   complaint   does    not    assert   legal   malpractice   as    an

alternative theory, we will not infer such potential liability.

                                      IV.

       For the foregoing reasons, the judgment of the district

court is

                                                                  AFFIRMED.

                                      15