Mt. Airy Ins. Co. v. Greenbaum

• Decision Date: 30 July 1997
• Docket Number: Nos. 97-1306,97-1307,s. 97-1306
• Citation: 127 F.3d 15
• Parties: MT. AIRY INSURANCE COMPANY, Plaintiff-Appellee, v. Stephen A. GREENBAUM, et al., Defendants-Appellants. Richard T. Oshana, Jonah Jacob, Defendants-Appellees. MT. AIRY INSURANCE COMPANY, Plaintiff-Appellee, v. Stephen A. GREENBAUM, et al., Defendants-Appellees. Jonah Jacob, Defendant-Appellant. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 15

127 F.3d 15

MT. AIRY INSURANCE COMPANY, Plaintiff-Appellee, v. Stephen A. GREENBAUM, et al., Defendants-Appellants.

Richard T. Oshana, Jonah Jacob, Defendants-Appellees.

MT. AIRY INSURANCE COMPANY, Plaintiff-Appellee, v. Stephen A. GREENBAUM, et al., Defendants-Appellees.

Jonah Jacob, Defendant-Appellant.

Nos. 97-1306, 97-1307.

United States Court of Appeals, First Circuit.

Heard July 30, 1997.

Decided Sept. 29, 1997.

Gary D. Buseck, with whom McDonough, Hacking & Neumeier was on brief, for appellant Stephen A. Greenbaum.

Robert J. Mailloux, Jr., with whom E. Peter Mullane and Mullane, Michel & McInnes were on brief, for appellant Jonah Jacob.

Jeffrey A. Goldwater, with whom Matthew J. Fink, Michelle M. Bracke, Bollinger, Ruberry & Garvey, Carol A. Griffin, Scott Douglas Burke and Morrison, Mahoney & Miller were on brief, for appellee Mt. Airy Insurance Company.

Before BOUDIN, Circuit Judge, HILL, ^* Senior Circuit Judge, and POLLAK, ^** Senior District Judge.

HILL, Senior Circuit Judge.

Mt. Airy Insurance Company sought a declaratory judgment that it does not have a duty to defend the named defendants in an underlying malpractice action against them. The district court granted summary judgment to Mt. Airy Insurance Company. This appeal ensued. ¹

I.

Jonah Jacob filed a malpractice action against eight attorneys, including Stephen A. Greenbaum, Richard Oshana, Ira A. Nagel, Howard S. Fisher, and Gerald A. Hamelburg (the Law Firm). ² The factual allegations of Jacob's complaint as summarized by the district court are as follows. In 1984, Jacob, Greenbaum, Oshana, and Richard Gold (not a party) formed a partnership styled as South Copley Limited Partnership (South Copley). South Copley was created to acquire, develop and manage residential real estate. Jacob was a passive investor who entrusted Greenbaum, Oshana and the Law Firm with management and oversight of these investment business affairs.

Over the next five years the partnership created four trusts and two partnerships to hold title to various projects: the Horace Street Trust, the Trenton Street Trust, the Westbridge Trust, the Queensbury Realty Trust, Northeast Glen Limited and Westwood Limited. Also, in 1986, Northeast Realty Investment Group was incorporated to manage the partnership's real estate holdings. Jacob's complaint describes these collectively as the "Business Entities."

All of the Business Entities were operated out of the offices of the Law Firm and were allegedly funded either with seed money from Jacob, or with real estate equity and loans which Jacob, Gold, Oshana and/or Greenbaum co-made and/or co-guaranteed. The Business Entities either owned real estate projects outright or they were used to channel borrowed monies for the acquisition and operation of the real estate projects.

At or about the time that South Copley was formed, Greenbaum, Oshana and Gold incorporated two close corporations, South Copley Development Corporation and South Copley Management Corporation, naming themselves as the sole officers, directors and shareholders. According to the complaint, Greenbaum, Oshana and Gold used these two corporations, together with Northeast Realty Investment Group, as "Related Cash Conduits" "to improperly funnel fiduciary monies (belonging to the Business Entities or to Jacob) to each named defendant, either directly for no reason or disguised in the form of income and/or reimbursement of expenses."

On August 13, 1986, Jacob, Gold and Oshana executed a "Mortgage Investors Line of Credit and Collateral Pool Agreement" (Collateral Pool Agreement) under which the Mortgage Investors Corporation (MIC) agreed to extend a five year, $5,000,000 line of credit secured by the assets of the Business Entities and a promissory note given by South Copley Limited Partnership. The term "Collateral Pool" was used because Jacob agreed to sign a number of anticipatory notes, mortgages, guaranties and other related security instruments or documents.

Over the next five years, MIC advanced various sums pursuant to the Collateral Pool Agreement. The complaint alleges that "[t]he management of virtually all of [Jacob's] business affairs with MIC was, at all times and in all matters material hereto, in the hands of (and entrusted to) Richard T. Oshana and Richard Gold, his co-borrowers, co-partner(s), co-beneficiary(s), co-shareholder(s) and/or trustee(s) in the real estate and business matters related to the MIC Loan Documents. At all times material hereto, Defendants Oshana and Greenbaum (as attorneys working frequently hand-in-glove) and the Law Firm each represented Plaintiff's interests in and related to the MIC Loans and the Collateral Pool Agreement, in and related to the various Business Entities...."

While managing the Business Entities, Jacob alleges that Greenbaum and Oshana misappropriated funds in the form of loans, unexplained disbursements and management fees. Jacob also alleges that Greenbaum and Oshana abused Jacob's trust by taking advantage of their position as principals of these Business Entities and as his attorney by concealing the aforementioned conduct and failing to advise Jacob of these breaches of trust. All of the alleged misappropriation occurred through Business Entities in which Greenbaum and Oshana were officers, directors, or partners.

Jacob also alleges that Oshana and Gold were forging his signature to obtain monies from another joint business venture, and that Greenbaum knew it. He asserts that Greenbaum, Oshana and Gold treated the assets of these various business ventures as their own in complete disregard of the rights, duties and obligations each owed Jacob.

Jacob also alleges that Greenbaum and Oshana's conduct constitutes legal malpractice in that they stole fiduciary funds from him and concealed the misappropriation; failed to account for fiduciary funds, or to segregate Jacob's portion of the funds from the Business Entities' funds; failed to protect or promote Jacob's interest in the Business Entities, acting instead in their own self-interest by misappropriating funds and concealing the wrongdoing. ³

Mt. Airy Insurance Company (Mt. Airy) insures the Law Firm against malpractice claims and initially agreed to defend, under a reservation of rights. Upon learning facts demonstrating that Jacob's claim is not covered by its policy, Mt. Airy filed this declaratory judgment action. Mt. Airy continued to provide a defense to the Law Firm until the district court ruled that Exclusion G of its policy with the Law Firm precludes coverage for Jacob's claims against it and that Mt. Airy has no duty to defend.

II.

A liability insurer in Massachusetts has a duty to defend its insured "if the allegations in the third-party complaint are reasonably susceptible of an interpretation that they state or adumbrate a claim covered by the policy terms...." Sterilite Corp. v. Continental Cas. Co., 17 Mass.App.Ct. 316, 318, 458 N.E.2d 338 (Mass.App.Ct.1983). This is true even if the claim is baseless, as "it is the claim which determines the insurer's duty to defend." Id. at 324 n. 17, 458 N.E.2d 338 (quoting Lee v. Aetna Cas. & Surety Co., 178 F.2d 750, 751 (2d Cir.1949)). Furthermore, under Massachusetts law, if an insurer has a duty to defend one count of a complaint, it must defend them all. Aetna Cas. & Surety Co. v. Continental Cas. Co., 413 Mass. 730, 732 n. 1, 604 N.E.2d 30 (1992).

There is, on the other hand, no duty to defend a claim that is specifically excluded from coverage. While the insured bears the initial burden of proving that a claim falls within the grant of coverage, Camp Dresser & McKee, Inc. v. Home Ins. Co., 30 Mass.App.Ct. 318, 321, 568 N.E.2d 631 (Mass.App.Ct.1991), the insurer "bears the burden of demonstrating that the exclusion applies." Great Southwest Fire Ins. Co. v. Hercules Building & Wrecking Co. Inc., 35 Mass.App.Ct. 298, 302, 619 N.E.2d 353 (Mass.App.Ct.1993). "Exclusions from coverage are to be strictly construed.... Any ambiguity in the somewhat complicated exclusions must be construed against the insurer." Sterilite, 17 Mass.App.Ct. at 321 n. 10, 458 N.E.2d 338. An ambiguity is said to "exist[ ] in an insurance contract when the language contained therein is susceptible of more than one meaning." Jefferson Ins. Co. v. Holyoke, 23 Mass.App.Ct. 472, 474, 503 N.E.2d 474 (Mass.App.Ct.1987) (citations omitted). "[W]here the language permits more than one rational interpretation, that most favorable to the insured is to be taken." Boston Symphony Orchestra, Inc. v. Commercial Union Ins. Co., 406 Mass. 7, 12, 545 N.E.2d 1156 (Mass.1989) (quoting Palmer v. Pawtucket Mut. Ins. Co., 352 Mass. 304, 306, 225 N.E.2d 331 (Mass.1967)).

III.

Under the Mt. Airy policy with the Law Firm, coverage is provided for claims arising out of professional services rendered by an "Insured." The policy defines "Insured" to include "any lawyer ... who was or is a partner, officer, director, or employee of the [Law Firm], but only as respects professional services rendered on behalf of the Named Insured...." There is no dispute that a defense is owed under the policy unless some exclusion applies. ⁴

The policy contains an Exclusion G which precludes coverage for:

any claim arising out of or in connection with the conduct of a business enterprise other than the Named Insured (including the ownership, maintenance or care of any property in connection therewith) which is owned by any Insured or in which any Insured is a partner, or which is directly or indirectly controlled, operated or managed by any Insured either individually or in a fiduciary capacity;

Mt. Airy argues that, because Jacob's claims involve losses connected with independent businesses owned, controlled, or managed by the Insureds, the claims are excluded. The defendants, joined by Jacob, argue that, because at least some claims in the Jacob complaint allege breach of fiduciary duty, Mt. Airy has an unqualified duty to defend....