Morgan Stanley Group v. New England Ins.
| Decision Date | 01 August 1999 |
| Docket Number | Docket Nos. 99-7304,No. 592,592 |
| Citation | 225 F.3d 270 |
| Parties | (2nd Cir. 2000) MORGAN STANLEY GROUP INC. and MORGAN STANLEY & CO. INCORPORATED, Plaintiffs-Appellants-Cross-Appellees, v. NEW ENGLAND INSURANCE CO. and ITT NEW ENGLAND MANAGEMENT CO., INC., Defendants-Appellees-Cross-Appellants. (L), 99-7324(XAP)-- |
| Court | U.S. Court of Appeals — Second Circuit |
Appeal from a judgment of the United States District Court for the Southern District of New York (Stein, J.) dismissing policyholder's indemnification claims in respect of two settlements. Affirmed in part (as to one claim), and (as to the other claim) vacated and remanded for further proceedings consistent with this opinion.
On the insurer's cross-appeal from a summary judgment order declaring that the later (less exhausted) of two insurance policies provides coverage for any successful indemnification claim, vacated and remanded for further proceedings consistent with this opinion. [Copyrighted Material Omitted] JAMES W.B. BENKARD, New York, NY (Nancy B. Ludmerer, James C. Maroulis, Davis Polk & Wardwell, New York, NY, on the brief), for Plaintiffs-Appellants-Cross-Appellees.
LOUIS G. ADOLFSEN, New York, NY (S. Dwight Stephens, Melito & Adolfsen P.C., New York, NY, on the brief), for Defendants-Appellees-Cross-Appellants.
Before: MESKILL, JACOBS and LEVAL, Circuit Judges.
Beginning in 1984, New England Insurance Co. and ITT New England Management Co., Inc. (collectively, "New England") issued and renewed policies of insurance to Morgan Stanley Group, Inc. and Morgan Stanley & Co., Inc. (collectively, "Morgan Stanley"), providing claims-made coverage for "investment counselors errors and omissions." The borrower and two purchasers of participation interests in a failed real estate loan sued Morgan Stanley for its role in promoting the transactions. Morgan Stanley gave notice of one claim in 1986, and of two others in 1987. After settling the two 1987 claims, Morgan Stanley demanded indemnification from New England under its 1987 policy. New England declined coverage.
Morgan Stanley commenced this diversity action in the United States District Court for the Southern District of New York (Stein, J.). Among other defensive positions, New England contended that Morgan Stanley's role in the transactions was not as an investment counselor, and that the notice of the 1986 claim amounted to notice of circumstances giving rise to the 1987 claims as well (so that the largely-exhausted 1986 policy would respond (to the extent of limits remaining) to any coverage owed in respect of the 1987 claims).
The district court (i) initially granted summary judgment in favor of Morgan Stanley declaring that the 1987 policy would respond if Morgan Stanley was entitled to any indemnification; and (ii) later granted judgment, after a bench trial, dismissing Morgan Stanley's complaint on the ground that the loss did not arise from Morgan Stanley's role as an investment counselor.
On appeal, Morgan Stanley points to two provisions in the insurance contracts that Morgan Stanley characterizes as ambiguous and contends should be construed in its favor under the doctrine of contra proferentem.
New England cross-appeals, arguing that any recovery on Morgan Stanley's indemnification claims should be charged against the 1986 policy.
As to one of the claims for indemnification, we affirm judgment in favor of New England; as to the other, we vacate the judgment and remand for further proceedings consistent with this opinion. As to the cross-appeal, we vacate the district court's decision that the 1987 insurance policy responds in coverage and remand for further fact-finding.
New England's claims-made errors and omissions ("E&O") policies indemnify for "[l]oss which the Insured shall become legally obligated to pay, from any claim made against the Insured during the Policy Period, by reason of any actual or alleged negligent act, error or omission committed in the scope of the Insured's duties as investment counselors." The term "investment counselors" is undefined. The insurer has no duty or right to defend, but must reimburse "[c]osts and expenses incurred in the defense of any claim for which coverage is provided hereunder."
The coverage was issued for policy year 1984 and was renewed annually without relevant modification. The two policies at issue in this appeal are: FW000186, for policy period March 5, 1986 to March 5, 1987 (the "1986 policy"); and FW000262, for policy period March 5, 1987 to March 5, 1988 (the "1987 policy").
In 1985, Fourth and Broadway Associates, Ltd. ("Fourth & Broadway") secured a loan commitment for funds it planned to use to acquire and renovate a commercial building in downtown Los Angeles. Savings Investment Service Corp. ("Siscorp") made the loan commitment and sold participation interests in it to other financial institutions. Morgan Stanley presented that investment opportunity to Whitestone Savings, F.A. ("Whitestone") and The Banking Center ("TBC") (collectively, the "banks"). Whitestone eventually purchased a $10 million participation interest from Siscorp, and TBC purchased a $5 million interest.
Several material misrepresentations by Siscorp came to light before the participation interests were fully sold, as a result of which the loan could not be funded, and the Fourth & Broadway project failed.
In 1987, Whitestone and TBC filed separate lawsuits against Morgan Stanley alleging that Morgan Stanley provided false and incomplete information about the investment. The banks alleged, inter alia, negligence and fraud. Whitestone also alleged breach of fiduciary duty. TBC's claim alleged in addition that Morgan Stanley represented, contrary to fact, that TBC's $5 million participation interest was purchased from a separate $12 million participation interest acquired by Morgan Stanley for its own account, rather than directly from Siscorp.
Following substantial discovery, and a denial of Morgan Stanley's motion for summary judgment in the TBC action, Morgan Stanley settled with Whitestone for $3.7 million and with TBC for $2.1 million.
After settling with the banks, Morgan Stanley sought indemnification from New England for the amount of the settlements, as well as $4.3 million in legal defense costs. Morgan Stanley contended that it had acted as an "investment counselor" to the banks in connection with the failed Fourth & Broadway loan and that the losses were therefore covered under the 1987 policy. New England disclaimed coverage.
In this ensuing breach of contract suit, the parties advance competing interpretations of the insurance policy's coverage clause. The terms of their controversy is neatly summarized by Judge Stein:
Morgan Stanley contends that the term "investment counselor" was meant to cover all instances in which Morgan Stanley provided investment advice to a customer, regardless of the underlying relationship between Morgan Stanley and the customer. New England, however, urges that the term "investment counselor" should be interpreted to cover only those instances in which Morgan Stanley has a contract with a client pursuant to which it provides that client with investment advice for a fee.
Morgan Stanley Group v. New England Ins. Co., 36 F. Supp. 2d 605, 609-10 (S.D.N.Y. 1999) ("Morgan Stanley II"). The district court held that the policy was ambiguous because the term was susceptible of at least the two reasonable interpretations offered by the parties. See Morgan Stanley Group v. New England Ins. Co., 7 F. Supp. 2d 297, 300 (S.D.N.Y. 1998) ("Morgan Stanley I"). The court therefore denied the parties' cross-motions for summary judgment and their subsequent motions for reconsideration. See id. at 300, 301.
The parties also cross-moved for an order declaring which of the two policies would respond to Morgan Stanley's claims (if covered). New England contended that the loss (if any) should be charged against the 1986 policy; Morgan Stanley argued for coverage under the 1987 policy. This matters financially because a large unrelated loss has reduced the remaining limits of the 1986 policy, whereas the 1987 limits ($5 million excess of $1 million deductible per act or set of interrelated acts, $3 million aggregate deductible) are largely intact. The district court agreed with Morgan Stanley and concluded that the 1987 policy would respond to the claims if they are covered. See Morgan Stanley I, 7 F. Supp. 2d at 301.
The court conducted a two-day bench trial in which it heard extrinsic evidence as to what the parties meant by the term "investment counselors." The court (i) rejected New England's interpretation as overly narrow, (ii) rejected Morgan Stanley's interpretation as overly broad, and (iii) construed the term "investment counselors" to include only "instances in which Morgan Stanley engaged in an independent analysis of an investment and provided that analysis to a customer." Morgan Stanley II, 36 F. Supp. 2d at 611. Because the court found that Morgan Stanley adduced no evidence that it had made such an independent analysis of the Fourth & Broadway loan, the court granted judgment in favor of New England. See id. at 611-14.
Morgan Stanley posits two ambiguities in the insurance contracts. First, the term "investment counselors" is subject to competing, reasonable interpretations. Second, although the policy is clear that there is coverage for errors and omissions whether actual or alleged, and that there is coverage for such acts or omissions when Morgan Stanley actually acts as an investment counselor, it is unclear whether there is also coverage when Morgan Stanley is alleged to have acted in that role when in fact it has not....
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