Stewart Title Guar. Co. v. McCarthy (In re McCarthy)

• Decision Date: 14 June 2012
• Docket Number: Adversary No. 10–4143.,Bankruptcy No. 09–42842–MSH.
• Citation: 473 B.R. 485
• Parties: In re Paul D. McCARTHY, Tacheryn A. McCarthy, Debtors. Stewart Title Guaranty Company, Plaintiffs v. Paul D. McCarthy, Defendant.
• Court: U.S. Bankruptcy Court — District of Massachusetts

473 B.R. 485

In re Paul D. McCARTHY, Tacheryn A. McCarthy, Debtors.Stewart Title Guaranty Company, Plaintiffs

v.Paul D. McCarthy, Defendant.

Bankruptcy No. 09–42842–MSH.

Adversary No. 10–4143.

United States Bankruptcy Court,

D. Massachusetts,

Central Division.

June 14, 2012.

Paul D. McCarthy, Esq., North Andover, MA, pro se.

Michael P. Vernon, Esq., Bartlett, Hackett & Feinberg, P.C. Boston, MA, Counsel for Stewart Title Insurance Company.

MEMORANDUM OF DECISION ON PLAINTIFF'S MOTION AND DEFENDANT'S CROSS MOTION FOR SUMMARY JUDGMENT

MELVIN S. HOFFMAN, Bankruptcy Judge.

Plaintiff, Stewart Title Guaranty Company, has moved for summary judgment on counts I and II of its three-count complaint in which it seeks a judgment that the debt owed to it by the debtor, defendant Paul D. McCarthy, should be excepted from discharge in Mr. McCarthy's bankruptcy pursuant to Bankruptcy Code § 523(a)(2) and § 523(a)(4) (11 U.S.C. § 523(a)(2) and (4)). Mr. McCarthy opposes Stewart's motion and requests that summary judgment be entered against Stewart on count III of its complaint brought under Bankruptcy Code § 523(a)(6).

Facts

The facts are taken from those allegations in the complaint which Mr. McCarthy, who is an attorney representing himself in this proceeding, has not denied and the attachments referenced in the admitted allegations. Because the complaint is neither verified nor buttressed by any affidavits in support of Stewart's summary judgment motion, the unadmitted allegations in the complaint cannot be considered at this stage of the proceeding. Arguments presented in Stewart's brief or at oral argument may be given no evidentiary significance. Bonardi v. Bonardi (In re Bonardi), 2006 WL 1366942, at *1 (Bankr.D.Mass. May 16, 2006).

On or about January 26, 2001 Stewart and Mr. McCarthy's law firm, McCarthy & Malloy (the “Firm”), entered into an agreement entitled “Stewart Title Guaranty Company (Retainer Agreement)” (the “Agency Agreement”) in which the Firm was designated as a limited agent of Stewart for the purpose of issuing title insurance policies to purchasers and lenders in connection with real estate transactions.¹

The Agency Agreement provided that:

ATTORNEY agrees to keep in force, at ATTORNEY's expense, a Lawyer's Professional Liability Insurance Policy for not less than Five Hundred Thousand Dollars ($500,000) and to furnish STEWART with a copy of said policy. ATTORNEY agrees that he will exert his best efforts to obtain an endorsement to his Lawyer's Professional Liability Insurance Policy whereby STEWART will be named as a beneficiary.

Each year, when renewing his registration to practice law with the Massachusetts Board of Bar Overseers (the “BBO”), Mr. McCarthy signed a certification that he was covered by professional liability insurance. In his memorandum in opposition to Stewart's summary judgment motion, Mr. McCarthy represents that his registration with the BBO was renewed annually on March 1st.²

In April 2007, Mr. McCarthy and the Firm acting as counsel to Castle Point Mortgage, Inc. closed a $500,000 loan to Andrew G. Nikas. The loan was to have been secured by a mortgage on real estate located in Ipswich, Massachusetts. Prior to the loan closing, Mr. McCarthy and the firm reviewed a February 28, 2007 title report prepared by a non-attorney employee of the Firm. At the closing Mr. Nikas, in his individual capacity, executed a mortgage in favor of Mortgage Electronic Registration System (“MERS”), Castle Point's nominee. Mr. McCarthy and the Firm issued a lender's title insurance policy insuring MERS as nominee of Castle Point. The title insurance policy provided, among other things, that Stewart would indemnify MERS and its assigns against all loss or damage resulting from the “invalidity or unenforceability of the Insured Mortgage upon the Title.”

On July 15, 2009, Mr. McCarthy and his wife, Tacheryn A. McCarthy, commenced the main case by filing a voluntary petition under chapter 11 of the Bankruptcy Code. The case was converted to chapter 7 on July 15, 2010.

Stewart commenced an action in state court against Mr. McCarthy and the Firm on November 3, 2009.³ In its amended complaint filed in the state court action, Stewart describes its action as “arising out of the negligence by [Mr. McCarthy] and the Firm in connection with the examination and certification of title in the context of a real estate transaction [the Castle Point loan closing], and for breach of the Agency Agreement between Stewart and [Mr. McCarthy] and the Firm.”

The basis for Stewart's claim is an alleged claim by a third party that Mr. Nikas had no interest in the Ipswich property when he gave MERS a mortgage on it at the Castle Point closing. The assertion of the claim attacking the validity of the Ipswich mortgage caused Stewart not only to file the state court suit against Mr. McCarthy but also to make a claim against one or more of Mr. McCarthy's malpractice insurance carriers as outlined more fully below. It was the insurer's denial of Stewart's malpractice claim, coupled with its discovery that Mr. McCarthy's malpractice insurance with American Guarantee & Liability Company (“American Guarantee”) had been canceled effective February 28, 2008, that gives rise to this adversary proceeding. Stewart asserts that Mr. McCarthy's annual certification to the BBO that he had malpractice insurance when in fact his policy with American Guarantee had been canceled is grounds for excepting from discharge any debt to Stewart that may ultimately arise by virtue of its malpractice claim as a result of the Ipswich title defect.

On November 5, 2009, Stewart reported a malpractice claim against Mr. McCarthy arising from the title defect which had been asserted in connection with the Ipswich mortgage to Zurich Financial Services, an entity that appears to be an affiliate or parent of American Guarantee. American Guarantee responded to Stewart's claim by denying coverage since the claim was reported to American Guarantee after the end of the policy period. The American Guarantee malpractice insurance policy, which was a claims made and reported policy, ⁴ was to have covered the period from September 2007 to September 2008. The policy was canceled, however, effective as of February 28, 2008.⁵ In any case the claim, having been reported to American Guarantee on November 5, 2009, was not covered.

Navigators Insurance Company (“Navigators”) wrote the Firm's professional liability insurance policy for the period November 17, 2009 to November 17, 2010. The Navigators' policy is also a claims made and reported policy. On April 30, 2010, Stewart reported a claim in connection with the title defect against Navigators and it too rejected the claim because although the claim was reported to Navigators during the policy period, the claim was first made no later than November 6, 2007 when Stewart served Mr. McCarthy and the Firm with the state court complaint Stewart had filed against them. Because the service on November 6, 2007 was before the Navigators policy period began, Navigators declined coverage.⁶

The Navigators policy also had a retroactive feature covering only claims arising on or after November 17, 2008. Navigators denied coverage under the retroactive feature as well because the date of Mr. McCarthy's alleged malpractice was in 2007.⁷

Mr. McCarthy filed an affidavit to which he attached copies of a series of declarations pages for insurance policies running from 2002 to 2010. According to one of the declarations, American Guarantee's coverage was supposed to run from September 2007 to September 2008. As the parties agree, however, the American Guarantee policy was canceled as of February 28, 2008. Greenwich Insurance Company (“Greenwich”) then wrote a claims made and reported policy covering the period from November 17, 2008 to November 17, 2009, the year before the Navigators policy. Item 8 of the Greenwich declaration lists several endorsements to the policy, including the retroactive effective date. None of those endorsements, however, is part of the record in this proceeding nor has it been established whether Stewart, Mr. McCarthy or the Firm reported the alleged malpractice arising from the Ipswich title defect to Greenwich.

Mr. McCarthy and Stewart agree that there was a gap in the Firm's malpractice insurance coverage but disagree on the length of the gap. Mr. McCarthy maintains the gap was from February 28, 2008 until November 17, 2008. Stewart alleges it was from February 28, 2008 to November 17, 2009.⁸ The length of the gap in coverageis immaterial to a determination of the motion and cross motion for summary judgment. What matters is that there was a gap.

Summary Judgment Standard

Summary judgment is appropriate if “the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue of a material fact and that the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c), made applicable by Fed. R. Bankr.P. 7056. A “genuine” issue is one supported by such evidence that “a reasonable jury, drawing favorable inferences,” could resolve it in favor of the nonmoving party. Triangle Trading Co. v. Robroy Indus., Inc., 200 F.3d 1, 2 (1st Cir.1999) (quoting Smith v. F.W. Morse & Co., 76 F.3d 413, 427 (1st Cir.1996)). “Material” means that a disputed fact has “the potential to change the outcome of the suit” under the governing law if the dispute is resolved in favor of the nonmovant. McCarthy v. N.W. Airlines, Inc., 56 F.3d 313, 314–15 (1st Cir.1995).

The moving party bears the initial responsibility of informing the court of the basis for its motion and “identifying those portions of the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, which it believes demonstrate the absence of a genuine issue of material fact.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d...