Global Naps, Inc. v. Federal Insurance

United States Court of Appeals
For the First Circuit

No. 02-2005

GLOBAL NAPs, INC., FRANK T. GANGI,
WILLIAM J. ROONEY, JR. and JANET LIMA,

Plaintiffs, Appellants,

v.

FEDERAL INSURANCE COMPANY,

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Patti B. Saris, U.S. District Judge]

Before

Boudin, Chief Judge,
Torruella and Lipez, Circuit Judges.

Martin C. Pentz, with whom Nutter McClennen & Fish LLP was on
brief, for appellants.
Megan E. Kures with whom Robert P. Powers, and Melick, Porter
& Shea, LLP, were on brief, for appellee.

July 17, 2003
 LIPEZ, Circuit Judge. Plaintiffs Global NAPs, Inc.,

Frank T. Gangi, William J. Rooney, Jr. and Janet Lima

(collectively, "Global NAPs" or "GNAPS") brought this diversity

action against defendant Federal Insurance Company ("Federal

Insurance"), seeking reimbursement of litigation expenses incurred

in the course of defending a lawsuit brought by Verizon.1 At the

time Verizon filed its complaint, Global NAPs was covered by a

combination insurance policy issued by Federal Insurance that

obliged the insurance company "to defend any insured against a suit

seeking damages for . . . personal injury." The policy pertinently

defined personal injury as "injury . . . arising out of one or more

of the following offenses, committed in the course of your business

. . . (B) malicious prosecution." Global NAPs argues that the

Verizon complaint adumbrated2 a claim for malicious prosecution,

see Continental Cas. Co. v. Gilbane Bldg. Co., 461 N.E.2d 209, 212

(Mass. 1984), triggering Federal Insurance's duty to defend the

lawsuit.

1
Over the relevant time period, the plaintiffs in the
underlying action were alternatively known as Bell Atlantic, New
York/New England Telephone and Telegraph Company, and Verizon. For
simplicity, we refer to the plaintiffs as "Verizon" throughout the
discussion.
2
We have previously defined "adumbrate" in the liability
insurance context to mean "to give a sketchy representation of;
outline broadly, omitting details . . . or 'to suggest, indicate,
or disclose partially and with a purposeful avoidance of precision'
. . . " Open Software Found. v. United States Fid. & Guar. Co.,
307 F.3d 11, 15n.4 (1st Cir. 2002).

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 The district court granted the defendant's motion for

summary judgment, concluding in a thorough and well-reasoned

decision that the Verizon action could not be construed to

adumbrate a claim for malicious prosecution. For the reasons that

follow, we agree that Federal Insurance was not obligated to defend

the Verizon action under the terms of the policy. Accordingly, we

affirm the decision of the district court.

I.

Global NAPs and Verizon are telecommunications carriers

offering local telephone service to customers in New York and New

England. Under the Telecommunications Act of 1996 (the "Telecom

Act"), 47 U.S.C. §§ 201-231 (2002), local exchange carriers must

permit competing carriers to interconnect with their telephone

networks, thereby allowing customers of different local carriers to

connect to each other. Generally, only the carrier of the customer

who originates a phone call bills the customer, even though the

carrier of the party on the receiving end also incurs costs to

connect the call. Thus, if a Verizon customer calls a Global NAPs

customer, Verizon would initially bill its customer for the phone

call, and then compensate Global NAPs for handing off the call to

its own customer. The Telecom Act obliges local exchange carriers

to establish "reciprocal compensation arrangements" that govern the

originating carrier's obligation to reimburse the terminating

carrier. The rates that a terminating carrier may charge are set

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by the public utility commission ("PUC") or public service

commission ("PSC") for each state, and are generally based on

minutes of use ("MOUs") generated by traffic sent to that carrier's

network.

On September 7, 1999, Global NAPs filed an administrative

complaint before the New York PSC encompassing two distinct claims.

First, Global NAPs alleged that Verizon unlawfully withheld

reciprocal compensation for MOUs invoiced in August 1999. The

second claim sought a declaration from the PSC that Global NAPs was

entitled to the same rate of reciprocal compensation from Verizon

for calls terminating with its Internet Service Provider ("ISP")

customers as for all other telephone traffic. In February 2000,

Global NAPs withdrew its claim for payment of the August 1999

invoice from the PSC complaint. One month later, the PSC issued a

declaratory ruling upholding Global NAPs' position on the second

claim.

On May 8, 2000, Verizon brought the lawsuit underlying

this matter in the United States District Court for the Eastern

District of New York. The complaint alleged that Global NAPs had

fraudulently billed Verizon for "tens of millions of dollars in

reciprocal compensation charges for telephone calls that were never

made, or that if made, were of substantially shorter duration than

claimed on GNAPs' bills." In total, Verizon articulated nine

causes of action in its complaint, including violations of RICO,

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the Telecom Act, and the Massachusetts Deceptive Trade Practices

Act, as well as breach of contract and unjust enrichment. Of

particular significance to this case, Verizon alleged that Global

NAPs' prosecution of its administrative complaint before the New

York PSC was a "predicate act" supporting RICO liability:

Defendants' prosecution and maintenance of the
New York PSC proceeding relating to the number
of MOUs involved was itself a fraud, designed
to confuse Bell Atlantic and conceal the
nature of Defendants' racketeering activity.
Gangi and Rooney in particular submitted
papers, and directed GNAPs' counsel to submit
papers and take positions, that Defendants
knew were false and misleading.

Conspicuously absent from Verizon's lengthy complaint was

any cause of action for malicious prosecution arising from Global

NAPs' prosecution of the PSC action. Indeed, as the district court

observed in its decision, the term "malicious prosecution" does not

appear anywhere in Verizon's complaint. Nonetheless, Global NAPs

asserts that various references to the PSC proceedings in Verizon's

complaint adumbrated a claim for malicious prosecution, triggering

Federal Insurance's duty to defend the Verizon action. For the

reasons that follow, we disagree.

II.

A. Duty to Defend

Both parties agree that Massachusetts law governs this

dispute. The Supreme Judicial Court of Massachusetts (SJC) has

stated that

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 the question of the initial duty of a
liability insurer to defend third-party
actions against the insured is decided by
matching the third-party complaint with the
policy provisions: if the allegations of the
complaint are "reasonably susceptible" of an
interpretation that they state or adumbrate a
claim covered by the policy terms, the insurer
must undertake the defense . . . . Otherwise
stated, the process is one of envisaging what
kinds of losses may be proved as lying within
the range of allegations of the complaint, and
then seeing whether any such loss fits the
expectation of protective insurance reasonably
generated by the terms of the policy.

Continental Cas., 461 N.E.2d at 212 (quoting Sterilite Corp. v.

Continental Cas. Co., 458 N.E.2d 338, 340-41 (Mass. App. Ct. 1983)

(internal citations and footnote omitted)).

The SJC has stressed the broad scope of this duty. See

Rubenstein v. Royal Ins. Co. of America, 708 N.E.2d 639, 643 n.4

(Mass. 1999) ("An insurer must tread cautiously regarding its duty

to defend an insured against third-party actions in view of the

expansive interpretation given to that duty."); Boston Symphony

Orchestra, Inc. v. Commercial Union Ins. Co., 545 N.E.2d 1156, 1158

(Mass. 1989) ("It is axiomatic that an insurance company's duty to

defend is broader than its duty to indemnify."). Accordingly, the

absence of any explicit claim for malicious prosecution in the

Verizon complaint is not dispositive. We must look beyond the

specified causes of action to determine whether the underlying

allegations are "'reasonably susceptible' of an interpretation that

they state or adumbrate a claim" for malicious prosecution.

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Liberty Mut. Ins. Co. v. SCA Services, Inc., 588 N.E.2d 1346, 1347

(Mass. 1992).

B. Malicious Prosecution

1. The elements of malicious prosecution

To determine whether the allegations contained in the

Verizon complaint state or adumbrate a claim for malicious

prosecution, we must first identify the elements of the offense.

The district court concluded correctly that the elements of a claim

for malicious prosecution are governed by New York law because both

the PSC proceeding and the Verizon complaint were filed in New

York. See Ethicon, Inc. v. Aetna Cas. & Sur. Co., 737 F. Supp.

1320, 1332-33 (S.D.N.Y. 1990) (holding that the state where the

underlying action is filed should furnish the malicious prosecution

standard). Under New York law

the elements essential to the maintenance of
an action to recover damages for malicious
prosecution are: (1) the commencement of a
judicial proceeding against the plaintiff, (2)
at the insistence of the defendant, (3)
without probable cause, (4) with malice, (5)
which action was terminated in favor of the
plaintiff, and (6) to the plaintiff's injury.3

Felske v. Bernstein, 570 N.Y.S.2d 331, 332-33 (App. Div. 1991)

(citing Berman v. Silver, Forrester & Schisano,549 N.Y.S.2d 125,

3
As we discuss subsequently, the sixth element of a malicious
prosecution claim -- that the plaintiff has suffered an injury --
has been construed by the New York Court of Appeals to require a
showing of "special damages." See Engel v. CBS, Inc., 711 N.E.2d
626, 629-31 (N.Y. 1999).

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126 (App. Div. 1989)). Global NAPs resists this doctrinaire

conception of malicious prosecution, insisting that this phrase

should be understood according to its ordinary meaning and not

treated as a legal term of art: "In construing liability insurance

policies, the Supreme Judicial Court . . . ordinarily looks to

common usage, eschewing reliance upon nice legal distinctions that

would not be apparent to the lay policyholder." Global NAPs

further argues that employing a lay understanding of malicious

prosecution "should lead the Court to find a defense obligation

because a reasonable lay insured would expect 'malicious

prosecution' coverage to apply to allegations that it had

prosecuted a baseless claim to advance a fraudulent scheme."

An "ordinary meaning" approach to construing malicious

prosecution claims has been rejected in a majority of

jurisdictions:

Though the meaning of 'malicious prosecution,'
as used in a commercial general liability
insurance policy, appears to be an issue of
first impression under Texas law, many other
courts throughout the country have addressed
this issue. Most have held that "malicious
prosecution" in an insurance policy means the
technical legal definition of "malicious
prosecution" under the applicable
jurisdiction's tort law.

Pennsylvania Pulp & Paper Co. v. Nationwide Mut. Ins. Co., 100

S.W.3d 566, 574 (Tex. App. 2003) (citing cases). In William J.

Templeman Co. v. Liberty Mut. Ins. Co., 735 N.E.2d 669 (Ill. App.

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Ct. 2000), the court confronted the same argument raised here by

Global NAPs:

The plaintiffs . . . argue that the term
"malicious prosecution" in the insurance
policies is ambiguous, and that such ambiguity
should be construed in their favor. In
support the defendant argues that the
ambiguity is demonstrated by the differing
interpretations of the parties in this case
[and] the lack of a definition of "malicious
prosecution" in the policy . . . . We find the
meaning of the term "malicious prosecution" in
this case is clear and unambiguous. The term
has long denoted a separate and independent
tort catalogued and discussed by Blackstone in
the eighteenth century. See 3 William
Blackstone, Commentaries (Thomas M. Cooley
ed., Callagahan & Co. 1899) (1765). The clear
import of that term denotes coverage for an
insured who is sued for the established tort
of malicious prosecution.

Id. at 678-79.

The long common law history of "malicious prosecution"

undermines the ordinary meaning construction advocated by

appellants. "It is hardly unreasonable for a drafter of an

insurance instrument policy, or any other instrument, to expect

that a legal term used in the policy will be accorded the meaning

that the courts have given it." Open Software Found. v. United

States Fid. & Guar. Co., No. Civ. A. 98-11177-GA, 2001 WL 1298878

at *7 (D. Mass. Aug. 16, 2001); see Western Alliance Ins. Co. v.

Gill, 686 N.E.2d 997, 999 (Mass. 1997) (attributing legal rather

than ordinary meaning to exclusion provision in liability policy);

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Atlantic Mut. Ins. Co. v. McFadden, 595 N.E.2d 762, 764 (Mass.

1992) (same).

We therefore conclude that New York's six-element

standard for malicious prosecution claims governs this insurance

dispute. We must now determine whether the allegations in the

Verizon complaint state or adumbrate a claim for malicious

prosecution.

2. The Allegations in the Verizon Complaint

Federal Insurance argues that two required elements of a

malicious prosecution claim are not alleged in the Verizon

Complaint: 1) a special injury, and 2) a termination of the PSC

proceeding in Verizon's favor. We turn first to the special injury

requirement, mindful of the narrow scope of our review. As Global

NAPs correctly points out, our charge is not to determine whether

an allegation of special damages is apparent on the face of the

Verizon complaint, or to analyze the merits of any such claim.

Continental Cas., 461 N.E.2d at 212; Liberty Mut. Ins. Co., 588

N.E.2d at 1347. To survive summary judgment, Global NAPs need not

demonstrate or even allege that Verizon could have proven the

existence of special damages resulting from the PSC proceeding.

Under well-settled Massachusetts law, our objective is simply to

ascertain whether the allegations in the Verizon complaint are

reasonably susceptible to an interpretation that they adumbrate, or

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sketch, an allegation of special damages. Continental Cas., 461

N.E.2d at 212.

In Engel, 711 N.E.2d at 626, the New York Court of

Appeals addressed the required element of special damages for

malicious prosecution claims:

[I]t seems clear that New York law has deemed
special injury to be a necessary consequence
of a malicious prosecution . . . . [W]hat is
'special' about special injury is that the
defendant must abide some concrete harm that
is considerably more cumbersome than the
physical, psychological or financial demands
of defending a lawsuit.

Id. at 629-31. The Engel court further elaborated that "[a]ctual

imposition of a provisional remedy need not occur, and a highly

substantial and identifiable interference with person, property or

business will suffice." Id. at 631. Global NAPs' position that

Verizon adequately alleged special injury is rooted primarily in

Paragraph 131 of the Verizon complaint, which reads as follows:

On or about September 3, 1999, Rooney prepared
a complaint for filing with the New York PSC
in which GNAPs demanded payment for reciprocal
compensation pursuant to the invoices it had
sent to Bell Atlantic . . . . In that
complaint, Rooney claims that GNAPs is
entitled to the full amount of the unpaid
invoices, even though he knew that
approximately one half of the amount sought
arose from the Defendants' criminal fraud
involving phantom MOUs, and not from any
actual use by or non-fraudulent charge to Bell
Atlantic. Rooney wrote and sent the complaint
- and thereby commenced the proceeding - with
the intention of concealing the fraud from
Bell Atlantic, so that GNAPs could continue to
collect reciprocal compensation while the MOU

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 dispute dragged on, and with the intention of
persuading the PSC to become an unwitting
accomplice to Defendants' Phantom MOUs Scheme.

(emphasis added). The appellants' theory is that Verizon alleged

in the underlying complaint that Global NAPs' prosecution of its

baseless invoice claim before the New York PSC precluded Verizon

from uncovering the fraud. As a result, Verizon suffered damages

in the amount of their payments for "phantom MOUs" from September

1999 (when the PSC complaint was filed) to February 2000 (when

Global NAPs withdrew the invoice claim from the PSC complaint).

Global NAPs can defeat Federal Insurance's motion for

summary judgment on this theory only if the Verizon complaint can

be read to make the following two assertions: 1) Verizon was in a

position to uncover the "phantom MOUs scheme" by September 1999,

but 2) Verizon was prevented from doing so by Global NAPs' decision

to file the PSC Complaint. Yet the Verizon complaint contains no

such assertions (either explicit or implicit). Indeed, critical

portions of the complaint actually refute any contention that the

PSC proceedings delayed Verizon's discovery of Global NAPs' billing

irregularities. The complaint specifies that by late 1998 (nearly

a full year before Global NAPs commenced the PSC complaint) Verizon

was using a software package called "AcceSS7" that enabled local

exchange carriers to monitor the number of MOUs generated by

traffic sent to the networks of competing local carriers like

Global NAPs. According to the complaint:

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 The AcceSS7 software provided an accurate
measurement of the MOUs for which GNAPs was
legitimately entitled to receive reciprocal
compensation for the periods during which it
was used to measure GNAPs' MOUs. The results
obtained by use of the AcceSS7 software also
provided an accurate basis upon which to
estimate the true number of MOUs for which
GNAPs was entitled to reciprocal compensation
for all other periods.

The Complaint further suggests that Verizon had implemented the

software and begun exposing the alleged fraud as early as April

1999, nearly six months before Global NAPs initiated the PSC

action:

Bell Atlantic first measured GNAPs MOUs in
April 1999, in the heavily trafficked [area
of] Boston, Massachusetts. That check
revealed a staggering disparity between the
number of MOUs GNAPs invoiced to Bell Atlantic
. . . during that month, and the actual number
of MOUs for calls handed off to the GNAP's
network. In response, Bell Atlantic focused
more of its monitoring efforts onto GNAPs,
extending its scrutiny to other . . . states.
Over the following months, these examinations
demonstrated a consistent pattern of massive
overstatement of MOUs by GNAPs.

In short, the complaint cannot be read to allege that the

PSC action stymied Verizon in its efforts to uncover the fraudulent

MOUs scheme, which was actually revealed months earlier with the

aid of AcceSS7. Indeed, it was Verizon's use of AcceSS7 to monitor

MOUs in the New York area that initially led the company to

withhold reciprocal compensation invoiced in August 1999, which in

turn prompted Global NAPs to file the invoice claim with the PSC.

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According to Verizon's complaint, the revelation that Global NAPs'

MOUs could be independently verified using AcceSS7 led Global NAPs

to scale back its fraudulent billing:

[i]n the months immediately following Bell
Atlantic's disclosure, the MOUs for which
GNAPs was billing Bell Atlantic began
increasing at a markedly slower rate of
growth. This flattening of its growth rate
occurred at a time when the industry in
general continued its rapid expansion.
Concerned about Bell Atlantic's scrutiny,
Defendants began generating a smaller
percentage of phantom MOUs in each invoice.

While it appears that Verizon periodically attempted to obtain

documentation from Global NAPs for its invoices, there is no

suggestion in the complaint or elsewhere in the record that the

information Verizon obtained through AcceSS7 painted an incomplete

picture of the fraud in the coverage areas where the software was

implemented. The allegations in the complaint do reflect that

Verizon had uncovered Global NAPs' fraudulent billing practices,

and that Global NAPs was reacting to their discovery in the months

preceding the filing of the PSC action. Consequently, Global NAPs'

portrayal of the PSC action as a successful obfuscatory tactic is

without basis in the complaint.

For reasons that are unclear, it appears that Verizon

continued to rely on certain Global NAPs invoices after April 1999,

presumably in coverage areas where it had not yet implemented the

AcceSS7 monitoring software. What is beyond dispute, however, is

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that the timing of Verizon's acceptance and rejection of various

Global NAPs invoices does not correspond to the filing and

withdrawal of the PSC claim. Not only had Verizon begun to uncover

the fraud before the filing of the PSC complaint, but the complaint

alleges that the fraud did not end with the February withdrawal of

the PSC claim. As of May 8, 2000 (three months after the invoice

claim was withdrawn), Global NAPs was allegedly "continu[ing] to

transmit fraudulently overstated invoices for phantom MOUs for

Rhode Island to Bell Atlantic each month." These allegations

further undermine Global NAPs' theory that Verizon's awareness of

the fraudulent MOU scheme was somehow tied to the PSC proceedings.

In the end, nothing in the complaint explains or even hints at a

causal connection between the PSC action and any delayed discovery

by Verizon of the phantom MOU scheme. The complaint unambiguously

indicates that Verizon had begun uncovering the fraud many months

before the PSC action, and that as of April 1999 they were using

software that provided reliable measures of the MOUs transferred

from their network to Global NAPs.

Massachusetts law directs us to broadly construe and

extrapolate from the language of the complaint to determine whether

the plaintiff in the underlying action has adumbrated a claim

covered by the insurance policy. But we cannot credit a theory

of coverage that flatly contradicts facts and assertions made

explicit in the complaint. One would have to selectively ignore

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the portions of the complaint excerpted above to construe the

complaint as alleging that Global NAPs' prosecution of the PSC

action imposed "a highly substantial and identifiable interference

with business," Engel, 711 N.E.2d at 631, by obscuring Global NAPs'

fraudulent practices. This we cannot do.

III.

Because we conclude that the Verizon complaint does not

allege the required element of special injury, we need not address

the question of whether the PSC proceeding was terminated in

Verizon's favor. The Verizon complaint did not state or adumbrate

a claim for malicious prosecution as that offense is defined by New

York law. The decision below is affirmed.

So ordered.

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