Manganella v. Evanston Ins. Co.

• Decision Date: 27 November 2012
• Docket Number: No. 12–1137.,12–1137.
• Citation: 700 F.3d 585
• Parties: Luciano MANGANELLA, Plaintiff, Appellant, v. EVANSTON INSURANCE COMPANY, Defendant, Third–Party Plaintiff, Appellee, v. Jasmine Company, Inc., Third–Party Defendant.
• Court: U.S. Court of Appeals — First Circuit

700 F.3d 585

Luciano MANGANELLA, Plaintiff, Appellant,

v.EVANSTON INSURANCE COMPANY, Defendant, Third–Party Plaintiff, Appellee,

v.Jasmine Company, Inc., Third–Party Defendant.

No. 12–1137.

United States Court of Appeals,First Circuit.

Nov. 27, 2012.

Bruce S. Barnett, with whom Daniel E. Rosenfeld and DLA Piper LLP were on brief, for appellant.

Harvey Nosowitz, with whom Anderson & Krieger LLP was on brief, for appellee.

Before LYNCH, Chief Judge, SELYA and STAHL, Circuit Judges.

STAHL, Circuit Judge.

This insurance coverage dispute arises from charges of sexual harassment brought by a one-time employee against appellant Luciano Manganella, the former president of Jasmine Company, Inc. Manganella sought a defense to and indemnity for the harassment claims from appellee Evanston Insurance Co., Jasmine's liability insurance provider. The district court ruled that Manganella was not entitled to coverage from Evanston because, under the doctrine of issue preclusion, a prior arbitration between Manganella and the purchaser of his business conclusively established that Manganella's conduct fell within an exclusion to Evanston's insurance policy. After careful consideration, we affirm.

I. Facts & Background

Before the events giving rise to this action, Manganella was the president and sole shareholder of Jasmine, a clothing retailer that he founded in the 1970s. Donna Burgess, whose sexual harassment allegations against Manganella form the underlying claims here, was Jasmine's human resources manager from 1997 to 2006.

In 1998, a former Jasmine employee, Sonia Bawa, filed claims of sexual harassment against Jasmine based on Manganella's conduct. Soon thereafter, Jasmine purchased from Evanston the Employment Practices Liability Insurance Policy at issue here (the “Policy”). Jasmine's coverage from Evanston under the Policy consisted of a series of annually renewed one-year installments. The Policy covers any “claim” that seeks “relief for a Wrongful Employment Practice” and is made and reported to Evanston during the policy period or an extended reporting period. A Wrongful Employment Practice includes, as relevant here, “conduct of an Insured with respect to ... [an] employee that allegedly culminated in ... violation of any state, federal or local civil rights or anti-discrimination law and/or fair employment practices law.” For a resulting claim to be covered, a Wrongful Employment Practice must have “happened” in its “entirety” during the policy period or after the retroactive date (here, April 28, 1999). Importantly, one of the Policy's exclusions (the “Disregard Exclusion”) bars coverage for claims based on “conduct ... committed with wanton, willful, reckless or intentional disregard of any law or laws that is or are the foundation for the Claim.”

In July 2005, Manganella sold Jasmine to Lerner New York, Inc. for approximately $30 million. Manganella and Lerner executed a stock purchase agreement (“SPA”) to effectuate the sale and an employment agreement under which Manganellawould remain Jasmine's president for three years. Under the SPA, $7 million of the purchase price was placed in escrow, “as security ... in the event of a Major Employment Breach” by Manganella. A “Major Employment Breach” is a breach of the employment agreement that arises from, among other things, a refusal to comply with any “significant” policy of Lerner's. A few months after the sale was completed, Jasmine cancelled the final installment of the Policy, but purchased an extended reporting period, which allowed for coverage of claims made and reported during the thirty-six months following the effective date of the cancellation.

In May 2006, further allegations of sexual harassment by Manganella prompted Jasmine to hire an outside investigator, Stier Anderson LLC, which interviewed several employees, including Burgess; she recounted inappropriate comments that Manganella had made in the past. On June 22, 2006, as a result of conduct revealed by the investigation, Manganella was fired. In a letter to Manganella, Lerner accused him of committing multiple Major Employment Breaches by sexually harassing four female employees and downloading sexually explicit images on company computers, all in violation of Lerner's Code of Conduct. Lerner demanded that Manganella agree to release the escrowed $7 million.

One week later, Lerner invoked the SPA's arbitration clause, contending that Manganella had forfeited the escrowed funds by committing a Major Employment Breach. The arbitration panel held ten days of hearings and received extensive written and oral argumentation. The panel issued its ruling in April 2007, finding that Manganella had “sexually propositioned several women employees and inappropriately touched and propositioned one of these employees,” in willful violation of Lerner's corporate Code of Conduct. The panel explained: “We find, despite his protestations to the contrary, that [Manganella] was well acquainted with the Company's policy on sexual harassment and other acts of inappropriate conduct. We find thus that he did not comply with the policy and that his refusal was willful.”

The panel also found, however, that Lerner had failed to give Manganella notice of and an opportunity to remedy these violations, as required by the SPA. Consequently, the panel awarded Manganella the escrowed funds, along with interest and attorneys' fees. The arbitration award was confirmed by a federal court in August 2007. Manganella v. Lerner N.Y., Inc., 07–cv–06250–RJH (S.D.N.Y. Aug. 7, 2007)(order confirming arbitration award).

On March 19, 2007 (roughly a month before the arbitration ended), Burgess filed a charge of discrimination against Manganella, Lerner, and Jasmine with the Massachusetts Commission Against Discrimination (“MCAD”). The MCAD charge alleged that, “[t]hroughout her employment with Jasmine[ ], Manganella subjected Ms. Burgess to nearly constant physical and verbal sexual harassment,” including “inappropriate comments about Ms. Burgess'[s] body, inappropriate touching,” and, eventually, coerced sexual activity on five separate occasions. Manganella also “made sexual comments about other women in Ms. Burgess'[s] presence,” and threatened Burgess (and others) with physical violence.

Ten days after Burgess filed the MCAD charge, Manganella notified Evanston of her claims and requested coverage under the Policy. Less than two weeks later, Evanston replied, denying coverage for Burgess's claims on the ground that it was “apparent” that the harassment alleged in her MCAD charge “did not happen in its entirety subsequent to the [April 28, 1999] Retroactive Date,” as required for coverage. Evanston's letter also adverted, without elaboration, to the Disregard Exclusion.

Manganella filed this action against Evanston in July 2009, seeking a ruling that Evanston was required under the Policy to defend and indemnify him against Burgess's MCAD charge. He also alleged breaches of contract, breach of the duty of good faith and fair dealing, and violations of Mass. Gen. Laws chs. 93A, § 9 and 176D, all stemming from Evanston's refusal to defend and indemnify him. After discovery, Manganella and Evanston cross-moved for summary judgment. The district court held that Evanston should have at least investigated the MCAD charge before denying coverage, given that it was aware of certain facts suggesting that Manganella's unlawful conduct may not have begun prior to the Policy's retroactive date. Manganella v. Evanston Ins. Co., 746 F.Supp.2d 338, 346 (D.Mass.2010). The court also concluded, however, that the conduct described in Burgess's MCAD charge fell within the Policy's Disregard Exclusion. The court found that the arbitration panel's determination that Manganella had harassed his employees (including Burgess) in willful violation of Lerner's Code of Conduct also established that, for purposes of the Disregard Exclusion, Manganella acted “with wanton, willful, reckless or intentional disregard of” the Massachusetts sexual harassment law underlying Burgess's MCAD charge. Id. at 347–48. The district court thus held that the doctrine of issue preclusion barred Manganella from relitigating that question, and granted summary judgment for Evanston. Id. at 349.¹ Manganella now appeals that ruling.

II. Analysis

We review a grant of summary judgment de novo. Baker v. St. Paul Travelers Ins. Co., 670 F.3d 119, 125 (1st Cir.2012). Likewise, “[w]e review de novo the district court's application of the doctrine of issue preclusion because ‘[t]he applicability vel non of preclusion principles is a question of law.’ ” Keystone Shipping Co. v. New Eng. Power Co., 109 F.3d 46, 50 (1st Cir.1997) (second alteration in original) (quoting Monarch Life Ins. Co. v. Ropes & Gray, 65 F.3d 973, 978 (1st Cir.1995)).

The crux of this appeal is whether the district court properly applied the doctrine of issue preclusion to bar Manganella from litigating whether the Policy's Disregard Exclusion applies to the conduct alleged in Burgess's MCAD charge. As described above, the district court held that the arbitration between Lerner and Manganella had decided, in the affirmative, the crucial question of whether Manganella's acts, as alleged by Burgess, were committed with wanton, willful, reckless, or intentional disregard for the Massachusetts sexual harassment law that formed the basis for her claims against him. 746 F.Supp.2d at 348. Although the parties dispute whether Massachusetts or federal preclusion principles govern this question, we need not resolve that quarrel because we see no material difference in how the two standards would apply here. See Keystone Shipping, 109 F.3d at 51 (noting that “our cases apply the same traditional preclusion principles that would control in a Massachusetts court”).

Issue preclusion (also called collateral estoppel) “prevents a party from relitigating issues that have been previously adjudicated.” Rodríguez–García v....