David Lerner Assocs., Inc. v. Phila. Indem. Ins. Co.

• Decision Date: 29 March 2013
• Docket Number: No. 12–cv–1609 (JFB)(AKT).,12–cv–1609 (JFB)(AKT).
• Citation: 934 F.Supp.2d 533
• Parties: DAVID LERNER ASSOCIATES, INC., Plaintiff, v. PHILADELPHIA INDEMNITY INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Eastern District of New York

934 F.Supp.2d 533

DAVID LERNER ASSOCIATES, INC., Plaintiff,

v.PHILADELPHIA INDEMNITY INSURANCE COMPANY, Defendant.

No. 12–cv–1609 (JFB)(AKT).

United States District Court,

E.D. New York.

March 29, 2013.

Andrew T. Houghton and Jeffrey Dillon, Sedgwick LLP, New York, NY, for Defendant.

Darren P. Renner and Stephen J. Romano, Keidel, Weldon & Cunningham, LLP, White Plains, NY, for Plaintiff.

MEMORANDUM AND ORDER

JOSEPH F. BIANCO, District Judge.

Plaintiff David Lerner Associates, Inc. (“plaintiff” or “DLA”) brought this action against Philadelphia Indemnity Insurance Company (“defendant” or “Philadelphia”) alleging breach of contract and seeking a declaratory judgment that Philadelphia is obligated to indemnify and defend DLA against claims asserted by FINRA ¹ and private plaintiffs.² These complaints allegethat DLA made misrepresentations regarding shares in real estate investment trusts and failed to conduct adequate due diligence of those trusts.

Philadelphia now moves to dismiss the complaint, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons set forth below, Philadelphia's motion is granted. Specifically, Philadelphia does not have a duty to indemnify or defend DLA in the underlying litigation due to the unambiguous language of the professional services exclusion in the insurance policy, which discharges Philadelphia from defending or indemnifying claims resulting from DLA's performance of “professional services.” More specifically, the underlying lawsuits allege, among other things, that DLA, as the underwriter and sole distributor for the Apple REITs, failed to engage in due diligence in connection with the sale of these financial products. These alleged actions or inactions quintessentially and unambiguously fall within a common-sense understanding of the term “professional services,” which is not defined in the insurance policy itself. In other words, when an underwriter performs due diligence in connection with the sale of financial products, such activity certainly constitutes “professional services” by the plain meaning of the term. This Court's conclusion is consistent with numerous courts in New York, as well as courts in other jurisdictions who have reached the same conclusion under analogous circumstances in states with laws similar to New York in all material respects. Plaintiff cites to no applicable case authority to the contrary. Although plaintiff attempts to point to the definition of “professional” in the context of malpractice law, the New York Court of Appeals itself has emphasized that the term “professional” has many applications in the law, and that the definition of “professional” in malpractice decisions is limited to that particular context. In sum, because the “professional services” exclusion exempts Philadelphia from providing coverage to DLA for these lawsuits, DLA's breach of contract action cannot be maintained, and a declaratory judgment in favor of DLA cannot be issued. Accordingly, dismissal of this lawsuit is warranted.³

I. Background

A. Factual Background

Philadelphia issued Private Company Protection Plus Insurance Policy, Policy No. PHSD577699 (“the policy”) and named DLA as the insured. (Compl. ¶ 8.) The policy was effective from November 30, 2010 to November 30, 2011.

Section I of Part 1 of the policy provides:

INDIVIDUAL LIABILITY COVERAGE

The Underwriter [Philadelphia] shall pay on behalf of the Individual Insured, Loss from Claims made against Individual Insureds during the Policy Period (or, if applicable, during the Extending Reporting Period), and reported to the Underwriter pursuant to the terms of this Policy, for D & O Wrongful Acts, except to the extent the Private Company has indemnified the Individual Insured for such Loss.

A. PRIVATE COMPANY INDEMNITY COVERAGE

The Underwriter shall pay on behalf of the Private Company, Loss from Claims made against Individual Insureds during the Policy Period (or, if applicable, during the Extended Reporting Period), and reported to the Underwriter pursuant to the terms of this Policy, for D & O Wrongful Acts, if the Private Company has indemnified such Individual Insureds for such Loss.

B. PRIVATE COMPANY LIABILITY COVERAGE

The Underwriter shall pay on behalf of the Private Company, Loss from Claims made against the Private Company during the Policy Period (or, if applicable, during the Extended Reporting Period), and reported to the Underwriter pursuant to the terms of this Policy, for a D & O Wrongful Act.

( Id. ¶ 10.) A D & O Wrongful Act is defined by the policy as:

1. act, error, omission, misstatement, misleading statement, neglect, or breach of duty committed or attempted by an Individual Insured in his/her capacity as an Individual Insured; or

2. act, error, omission, misstatement, misleading statement, neglect, or breach of duty committed or attempted by the Private Company; or

3. act, error, omission, misstatement, misleading statement, neglect, or breach of duty committed or attempted by an Individual Insured arising out of serving in his/her capacity as director, officer, governor or trustee of an Outside Entity if such service is at the written request or direction of the Private Company.

( Id. ¶ 11.) However, the policy was modified by endorsement to include a “Professional Services Exclusion” which provides:

With respect to coverage under Part 1, the Underwriter shall not be liable to make any payment for Loss in connection with any Claim made against the Insured based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving the Insured's performance of or failure to perform professional services for others.

It is provided, however, that the foregoing shall not be applicable to any derivative action or shareholder class action Claim alleging failure to supervise those who performed or failed to perform such professional services.

( Id. ¶ 54.) The term “professional services” is not defined in the policy.

DLA, a New York corporation, is a privately held broker-dealer that operates branches in New York and Florida and employs approximately 370 registered representatives. ( See Compl. Ex. C, Am. Compl. and Request for Expedited Hearing (“FINRA Compl.”) ¶ 9.) A real estate investment trust (“REIT”) is a company that owns and operates income-producing real estate, and DLA served as the Managing Dealer for the Apple REIT offerings. (Compl. ¶¶ 17–18.)

On May 27, 2011, The Financial Industry Regulatory Authority (“FINRA”) filed a complaint in a disciplinary proceeding against DLA, alleging that since January 2011, DLA sold over $300 million worth of shares in a REIT by misrepresenting the value of those shares, while failing to perform adequate due diligence. (Compl. Ex. B, Complaint ¶¶ 1–3.) On December 13, 2011, FINRA filed an amended complaint against not only DLA but also David Lerner individually, containing substantively the same allegations, but additionally alleging that DLA sold over $442 million worth of shares in a REIT. (Compl. Ex. C, FINRA Compl. ¶¶ 1–2.) FINRA also alleged that DLA targeted senior citizens and/or unsophisticated investors. ( Id. ¶¶ 1, 17.)

Between June 17 and June 28, 2011, three class actions were filed against DLA, David Lerner, and other defendants, all arising out of the same facts as detailed in the FINRA Complaint. ( See Compl. Ex. D, Kowalski v. Apple REIT Ten, Inc., et al., No. 11–cv–2919 (E.D.N.Y.); Compl. Ex. E, Kronberg v. David Lerner Assocs., Inc., et al., No. 11–cv–3558 (D.N.J.); Compl. Ex. F, Leff v. Apple REIT Ten, Inc., et al., No. 11–cv–3094 (E.D.N.Y.).) On December 13, 2011, these actions were consolidated in the Eastern District of New York in front of Judge Matsumoto. ( See Stipulation and Order Regarding Consolidation, Lead Plaintiff, Lead Counsel and Scheduling, In re Apple REITs Litig., No. 11–cv–2919 (KAM)(JO) (E.D.N.Y. Dec. 13, 2011), ECF No. 78.) On February 16, 2012, another individual lawsuit was filed, and subsequently consolidated in the action in front of Judge Matsumoto. ( See Compl. Ex. H, Brody v. David Lerner Assocs., Inc., et al., No. 12–cv–782 (E.D.N.Y.).)

DLA notified Philadelphia, a Pennsylvania corporation, of the regulatory action and the private class action so that it could be indemnified for the costs of defending the lawsuits. (Compl. ¶ 53). However, Philadelphia denied coverage, and notified DLA that its acts and omissions were not covered by the policy due to the professional services exclusion. ( Id. ¶ 54.)

B. Procedural Background

Plaintiff filed the complaint in this diversity action on April 3, 2012. Defendant filed a motion to dismiss the complaint on July 17, 2012. Plaintiff submitted an opposition to the motion to dismiss on August 31, 2012, and defendant replied on September 14, 2012. The Court held oral argument on October 26, 2012.

II. Standard of Review

In reviewing a motion to dismiss pursuant to Rule 12(b)(6), the Court must accept the factual allegations set forth in the complaint as true and draw all reasonable inferences in favor of the plaintiff. See Cleveland v. Caplaw Enters., 448 F.3d 518, 521 (2d Cir.2006); Nechis v. Oxford Health Plans, Inc., 421 F.3d 96, 100 (2d Cir.2005). “In order to survive a motion to dismiss under Rule 12(b)(6), a complaint must allege a plausible set of facts sufficient ‘to raise a right to relief above the speculative level.’ ” Operating Local 649 Annuity Trust Fund v. Smith Barney Fund Mgmt. LLC, 595 F.3d 86, 91 (2d Cir.2010) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). This standard does not require “heightened fact pleading of specifics, but only enough facts to state a claim to relief that is plausible on its face.” Twombly, 550 U.S. at 570, 127 S.Ct. 1955.

The Supreme Court clarified the appropriate pleading standard in Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), setting forth a two-pronged approach for courts...