St. Paul Fire and Marine Ins. Co. v. Weiner

• Decision Date: 15 October 1979
• Docket Number: Nos. 77-1399,77-1493 and 77-1554,s. 77-1399
• Parties: ST. PAUL FIRE AND MARINE INSURANCE COMPANY, a Minnesota Corporation, Plaintiff- Appellee, v. Julian S. H. WEINER, Defendant-Appellant. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, a Minnesota Corporation, Plaintiff-Appellee, v. Marvin A. LICHTIG, Defendant-Appellant. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, a Minnesota Corporation, Plaintiff-Appellee, v. Solomon BLOCK, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 864

606 F.2d 864

ST. PAUL FIRE AND MARINE INSURANCE COMPANY, a Minnesota

Corporation, Plaintiff- Appellee, v. Julian S. H. WEINER, Defendant-Appellant.

ST. PAUL FIRE AND MARINE INSURANCE COMPANY, a Minnesota

Corporation, Plaintiff-Appellee, v. Marvin A. LICHTIG, Defendant-Appellant.

ST. PAUL FIRE AND MARINE INSURANCE COMPANY, a Minnesota

Corporation, Plaintiff-Appellee, v. Solomon BLOCK, Defendant-Appellant.

Nos. 77-1399, 77-1493 and 77-1554.

United States Court of Appeals, Ninth Circuit.

Oct. 15, 1979.

Gerry L. Ensley, Abeles & Markowitz, Beverly Hills, Cal.

Barry L. Adamson, Levinson, Buccino & Uffelman, Portland, Or., for defendants-appellants.

Samuel A. Keesal, Jr., Long Beach, Cal., Douglas L. Hemer and Thomas P. Kane-Oppenheimer, Wolff, Foster, Shepard & Donnelly, St. Paul, Minn., for plaintiff-appellee.

Appeal from the United States District Court for the Central District of California.

Before TRASK and TANG, Circuit Judges and McNICHOLS, ^* District Judge.

TANG, Circuit Judge:

The defendants Julian Weiner, Marvin Lichtig, and Solomon Block were accountants who were convicted for their participation in the securities fraud involving Equity Funding Corporation of America. As a result, St. Paul Fire and Marine Insurance Company ("St. Paul") sued the defendants, praying for a declaration that, under the terms of the defendants' professional liability insurance policy, the convictions relieved St. Paul of any further duty to provide legal defense in related civil actions. The district court granted St. Paul's motion for a summary judgment, and the defendants appeal. We reverse.

Weiner, Lichtig, and Block were members of the accounting firm of Wolfson, Weiner, Ratoff and Lapin ("the Wolfson firm"). The Wolfson firm was the independent public accountant for Equity Funding. Weiner was a partner in the firm and in charge of the audits of Equity Funding from 1961 to 1973. Lichtig was a junior partner and supervisor of the field audits of Equity Funding. In May 1969 he left to become an executive with Equity Funding. Block was an employee of the firm and replaced Lichtig as supervisor of field audits when Lichtig left.

During the course of the defendants' employment, the accounting firm maintained a professional liability insurance policy with St. Paul. The policy provided generally that St. Paul would pay damages in the event that the insured became legally obligated on account of professional services rendered. It was first issued on June 15, 1968 and was renewed during the subsequent three years. The entire policy period is from June 15, 1968 to June 15, 1971. The policy provides a total coverage of $1,000,000 per year and includes as insured each partner and employee of the firm.

On March 27, 1973 the New York Stock Exchange ceased trading Equity Funding stock following the commencement of an investigation by the Securities and Exchange Commission (SEC) of the fraudulent acts committed by officers and directors of Equity Funding. Shortly thereafter, numerous civil suits were filed in both federal court and California courts against those connected with the Equity Funding schemes. The civil suits in federal court were eventually consolidated into one action labeled, for convenience, MDL Docket No. 142 and subsequently settled. All of the actions named both the Wolfson firm and the individual partners as defendants. Upon being named a defendant, the Wolfson firm tendered to St. Paul the defense of the actions. St. Paul, with a reservation of rights, agreed to contribute to the defense of the Wolfson firm and also to the defense of the individual defendants.

On November 1, 1973 a criminal indictment was returned against Weiner, Lichtig and Block charging them with violations of federal securities laws. In May 1975, after a lengthy jury trial, Weiner was convicted of ten counts, Lichtig of thirteen counts, and Block of seven counts. The convictions were affirmed by this court in United States v. Weiner, 578 F.2d 757 (9th Cir. 1978), and the Supreme Court denied certiorari. 439 U.S. 981, 99 S.Ct. 568, 58 L.Ed.2d 651 (1978).

Following the defendants' convictions in May, 1975, St. Paul brought the present declaratory relief action for a judgment that the criminal convictions of Weiner, Lichtig, and Block relieved St. Paul of any further duty of defense to them in the pending civil actions because of a clause in the insurance policy that excludes from coverage the liability of an employee for fraud or dishonesty. Alternatively, it sought a declaration that it was not required to provide a separate defense for each defendant, but could discharge its duty by defending the Wolfson firm.

After St. Paul moved for summary judgment, the district court granted the motion on three independent grounds: (1) under the facts as established conclusively by the defendants' criminal convictions, the fraud exclusion of the St. Paul policies operates to exclude from policy coverage all claims against the defendants; (2) the same criminal convictions bring into effect California Insurance Code § 533 and California Civil Code § 1668, which bar insurance indemnification for losses incurred by willful acts of the insured, so that all claims against appellants are barred by law from coverage under the St. Paul policies; (3) even if the duty to defend continues, it is satisfied by St. Paul's defense of the Wolfson firm, rather than the separate defense of the individual defendants.

Primarily because of the district court's undue reliance on the preclusive effect of the defendants' convictions, we find it necessary to reverse and remand for further proceedings.

I Mootness

Counsel for the defendants failed to appear for oral argument. Mr. DeSantis, counsel for Lichtig, alleged that he received no notice of the argument. Mr. Markowitz, representing Weiner and Block, was at the courthouse, but left without explanation prior to the call of the case. ¹ The attorney for St. Paul informed the court at argument that St. Paul had settled its claim with the defendants. Because the defendants' attorneys were not present to explain, we requested further briefing on the issue of mootness.

According to the affidavit submitted by St. Paul, after the settlement of the civil suits, the defendants entered settlement agreements with their other insurance carriers, releasing them from further liability for their defense. However, those settlement agreements apparently fall short of the amount defendants claim they still owe to their counsel for defense of the civil actions. Weiner and Block apparently still claim $7,708.82 from St. Paul, or less than 0.5% Of the more than $1.85 million paid so far to counsel for Weiner and Block for services rendered in the civil actions; the maximum amount that Lichtig may be claiming is $21,775.96, or 2.2% Of the more than $ 1 million paid so far to counsel for Lichtig. Although we agree with St. Paul that the amounts unpaid are insignificant in light of the substantial fees already paid to the defendants' counsel, the fact that some claims remain outstanding is sufficient to make this a "live" controversy.

II Summary Judgment

We note preliminarily that in examining a motion for summary judgment, the district court must determine whether any material factual issues exist which can be resolved only through trial. United States v. Allen, 578 F.2d 236, 237 (9th Cir. 1978). If such issues of fact exist summary judgment cannot be granted. Securities and Exchange Commission v. Koracorp Industries, Inc., 575 F.2d 692 (9th Cir.), Cert. denied 439 U.S. 953, 99 S.Ct. 348, 58 L.Ed.2d 343 (1978).

Because this action was brought in federal district court under diversity jurisdiction, the substantive law of California, the forum state, applies. Gray v. Zurich Insurance Co., 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168 (1966), is the leading California case on the insurer's duty to defend. In Gray, the California Supreme Court set out a number of rules pertinent to the construction of insurance policies. As we shall see, these rules are determinative of the issues raised in the case.

A. Ambiguity

Relying on the exclusionary clause of the insurance policy, St. Paul argues that it was under no duty to defend the defendants because the fraudulent conduct for which they were convicted was excluded from coverage. Yet the policy itself is ambiguous on whether acts of fraud are excluded from the policy. The insuring section of the policy, entitled coverage A, states:

This Insuring Agreement includes as a part of the professional services of an accountant such legal liability arising from any claim or claims which may be brought about or contributed to by reason of: dishonesty, misrepresentation or fraud; . . . .

The very next paragraph sets out the exclusionary clause of the policy. It states:

COVERAGE A DOES NOT APPLY:

1. To the liability of (a) any employee of the named Insured for his dishonesty, misrepresentation or fraud, or (b) any other Insured for his affirmative dishonesty or actual intent to deceive or defraud . . ..

Thus, the district court's assumption that the policy does not cover acts of "dishonesty, misrepresentation or fraud" may be incorrect because the policy appears to include and exclude the identical acts.

In Gray, the California Supreme Court held that the insurer bore the obligation to defend where the policy reasonably leads the insured to expect a defense. Gray, 65 Cal.2d at 275, 54 Cal.Rptr. at 112, 419 P.2d at 176. Where the insurer attempts to avoid the duty by an unclear exclusionary clause, the insured may reasonably expect such a defense. Id. at 268, 54 Cal.Rptr. at 107, 419 P.2d at 171. Any uncertainties as to the application of the clause are resolved in favor of the insured. Id. at 268-72, 54 Cal.Rptr. at 107-09, 419 P.2d at 171-73. Had the terms in the exclusionary clause been more specific than those in the general clause, it might have been possible for the district court...