Crown Capital Sec., L.P. v. Endurance Am. Specialty Ins. Co.

• Decision Date: 10 April 2015
• Docket Number: B256241
• Citation: 235 Cal.App.4th 1122,186 Cal.Rptr.3d 1
• Court: California Court of Appeals Court of Appeals
• Parties: CROWN CAPITAL SECURITIES, L.P., Plaintiff and Appellant, v. ENDURANCE AMERICAN SPECIALTY INSURANCE COMPANY, Defendant and Respondent.

235 Cal.App.4th 1122

186 Cal.Rptr.3d 1

CROWN CAPITAL SECURITIES, L.P., Plaintiff and Appellant

v.ENDURANCE AMERICAN SPECIALTY INSURANCE COMPANY, Defendant and Respondent.

B256241

Court of Appeal, Second District, Division 5, California.

Filed April 10, 2015

Jones, Bell, Abbott, Fleming & Fitzgerald, Craig R. Bockman and William M. Turner, Los Angeles, for Plaintiff and Appellant.

Locke Lord, Michael F. Perlis, Richard R. Johnson, and F. Phillip Hosp, Los Angeles, for Defendant and Respondent.

MOSK, Acting P.J.

INTRODUCTION

Customers of a securities firm made claims against that firm based on real estate investments the firm's broker-dealers recommended. An entity that had an interest in and operated each of the real estate investments filed for bankruptcy, and at least some of the real estate investments became debtors in that bankruptcy proceeding. The appointed examiner in the bankruptcy proceeding found that the entity was engaged in a fraudulent “Ponzi scheme.”¹ When the securities firm applied for professional liability insurance, it disclosed one of the customer claims but not the facts that would support other potential customer claims arising out of investments through the same entity as that involved in the disclosed claim. The insurer refused to defend the securities firm against undisclosed claims because the policy's application included an exclusion for nondisclosure of facts that might lead to a claim. In affirming the judgment, we hold that the trial court correctly entered judgment in favor of the insurer on the ground that there was no insurance coverage because all of the undisclosed claims arose out of the same events as the disclosed claim and therefore the facts underlying the undisclosed claims should have been disclosed.

BACKGROUND

On November 10, 2008, DBSI, Inc. (DBSI) and various subsidiaries filed for bankruptcy. On October 19, 2009, a court-appointed examiner filed a “Final Report of the Examiner” with respect to the operation of DBSI.

On October 26, 2009, investor George Bou-Sliman transmitted a letter to plaintiff and appellant Crown Capital Securities, L.P., (Crown Capital), which letter attached a summary of the Final Report of the Examiner (Bou-Sliman Claim). In his letter, Bou-Sliman said, “My investment advisor and friend, Mr. Frank Naylor, discussed his relationship with Crown Capital in honest detail a few years ago. Mr. Naylor was convinced that Crown Capital would do a thorough investigation of any and all investment choices it recommended to it's [sic ] representatives. Frank assured me that we could invest comfortably with this knowledge. [¶] Now, after having lost a sizeable portion of our investment, comes this document describing the principal of DBSI, the operator of a ‘ponzi scheme’. [¶] We believe that your plan was Flawed. (Evidence contained in the enclosed ‘Examiner's Final Report’). This report contains sad evidence contrary to your plan. [¶] We feel a conviction that your company owes us for this flawed investigation resulting in our loss of investment capital.”

The e-mail attached to the Bou-Sliman letter stated, “In short, the Examiner confirmed what we all suspected/feared as being true-that is, DBSI generally (and Douglas Swenson specifically) masterminded at least an eight year long ponzi scheme to defraud and misappropriate funds from investors.” The summary reported, among other things, that DBSI was “burdened by huge high interest debt and master lease payment obligations, excessive insider distributions, and unrestrained losing investments”; DBSI “booked profits from inflated markups of real estate for sale to outside investors”; DBSI used “tenant-in-common ... investor and bond and note money interchangeably and pooled such money to make required payments when they came due”; “Investor funds from all sources were commingled and treated as fungible funds”; DBSI's “guarantees of investments were illusory and were based on the cultivated false appearance that DBSI had substantial value”; and “the marketing claim that ‘no investors had ever lost money’ was also illusory and reflected that newly raised investor funds were being used to pay off existing investors.”

On April 20, 2010, Darol Paulsen, on behalf of Crown Capital, executed an “Application for Professional Liability Insurance” from defendant and respondent Endurance American Specialty Insurance Company (Endurance) for a professional liability insurance policy for work performed by its security broker-dealers and investment advisers. Concerning Crown Capital's claims experience, question 9 of the application asked, “Have any claims, suits or proceedings (including without limitation: any shareholder action or derivative suit; or any civil, criminal, or regulatory action, or any complaint, investigation or proceeding related thereto) been made during the past five years against: (a) the Applicant: (b) its predecessors in business; (c) any subsidiary or affiliate of the Applicant; (d) any other entity proposed for coverage; or (e) any past or present principal, partner, managing member, director, officer, employee, leased employee or independent contractor of the Applicant, its predecessors in business, any subsidiary or affiliate of the Applicant or any other entity proposed for coverage?” Paulsen answered that question, “Yes.”

Further concerning Crown Capital's claims experience, question 10 of the application asked, “Is the Applicant (after diligent inquiry of each principal, partner, managing member, director or officer) aware of any fact, circumstance, incident, situation, or accident (including without limitation: any shareholder action or derivative suit; or any civil, criminal, or regulatory action, or any complaint, investigation or proceeding related thereto) that may result in a claim being made against: (a) the Applicant; (b) its predecessors in business; (c) any subsidiary or affiliate of the Applicant; (d) any other entity proposed for coverage; or (e) any past or present principal, partner, managing member, director, officer, employee, leased employee or independent contractor of the Applicant, its predecessors in business, any subsidiary or affiliate of the Applicant or any other entity proposed for coverage?” Paulsen answered that question, “No.”

The application contained the following exclusion (Application Exclusion): “NOTE: It is agreed that any claim or lawsuit against the Applicant, or any principal, partner, managing member, director, officer or employee of the Applicant, or any other proposed insured, arising from any fact, circumstance, act, error or omission disclosed or required to be disclosed in response to Questions 9, 10 and/or 11, is hereby expressly excluded from coverage under the proposed insurance policy. ” The application stated in part that “this Application shall be the basis of the insurance and shall be considered physically attached to and become part of the Policy” if a policy is issued.

When Crown Capital applied for the Endurance professional liability insurance policy, it submitted a loss run report from its previous insurer, Arch Specialty Insurance Company. The loss run report disclosed the Bou-Sliman Claim. On August 3, 2010, Endurance issued to Crown Capital professional liability policy No. PPL10001995400 (Policy), but the term of the policy was from April 1, 2010, to April 1, 2011.

On April 21, 2010, Kurt Bochner, a customer of Crown Capital, through which he invested in DBSI projects, initiated an arbitration entitled Bochner v. McDonald (Bochner Claim) by filing a statement of claim with the Financial Industry Regulatory Authority (FINRA). Crown Capital reported the Bochner claim to Endurance on May 6, 2010.²

On September 7, 2010, Susan Biles, a customer of Crown Capital, through which she invested in DBSI projects, initiated a FINRA arbitration entitled Biles v. Summit Financial Advisors (Biles Claim). On September 21, 2010, Crown Capital reported the Biles Claim to Endurance.

On March 25, 2011, Linda Grana, a customer of Crown Capital through which she invested in DBSI projects, initiated a FINRA arbitration entitled Grana v. Crown Capital Securities (Grana Claim). On April 29, 2011, Crown Capital reported the Grana Claim to Endurance.

Endurance denied insurance coverage to Crown Capital under the Policy for the Bochner, Biles, and Grana Claims, and refused to defend Crown Capital against those claims. Crown Capital brought an action against Endurance, and in its first amended complaint, Crown Capital alleged causes of action for reformation of contract, breach of contract, and bad faith. Within these causes of action, Crown Capital asserted claims for the denial of coverage by Endurance for FINRA arbitrations submitted by other Crown Capital customers concerning investments unrelated to DBSI. Crown Capital ultimately dismissed these claims, and they are not involved in this appeal.

Endurance filed an answer to the first amended complaint, which answer included “counter-claims,” including three causes of action for declaratory relief-one each for the Bochner, Biles, and Grana Claims-seeking a declaration as to each tendered claim that the claim was excluded from coverage under the Policy.

Endurance moved for summary judgment or, alternatively, summary adjudication, on, as relevant here, its declaratory relief cross-claims. The trial court granted Endurance summary adjudication on its cross claims as to the Bochner, Biles, and Grana Claims, ruling that those claims were excluded from coverage under the Policy's Application Exclusion and that there was no potential for coverage. The trial court reasoned that the Final Report of the Examiner that was attached to the Bou-Sliman Claim “disclosed an array of investments under the DBSI umbrella, the failure of which were [sic ] tied to the DBSI activities. [¶] The evidence shows that the Bochner, Biles, and Grana claims all arise out of a ‘fact, circumstance, act, error or omission’ that was previously disclosed.”...