Manganella v. Evanston Insurance Company

United States Court of Appeals
For the First Circuit

No. 12-1137

LUCIANO MANGANELLA,

Plaintiff, Appellant,

v.

EVANSTON INSURANCE COMPANY,

Defendant, Third-Party Plaintiff, Appellee,

v.

JASMINE COMPANY, INC.,

Third-Party Defendant.

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

[Hon. Richard G. Stearns, U.S. District Judge]

Before

Lynch, Chief Judge,
Selya and Stahl, Circuit Judges.

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.

November 27, 2012
 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

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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 Manganella would 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

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"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

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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.

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 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

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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)

1
In a separate summary judgment opinion, the district
court resolved third-party claims that Evanston brought against
Jasmine to establish that it did not owe Jasmine coverage for
Burgess's claims. Manganella v. Evanston Ins. Co., No. 09-cv-
11264-RGS, 2011 WL 5118898 (D. Mass. Oct. 28, 2011). The court
reiterated its holding that Evanston had breached its duty to
investigate the MCAD charge before denying coverage, and went on to
determine that Evanston had to indemnify Jasmine for Burgess's
claims because the conduct she alleged happened entirely after the
Policy's retroactive date. See id. at *5-7. That ruling is the
subject of a separate appeal. See Evanston Ins. Co. v. Jasmine
Co., No. 12-1139 (1st Cir. argued Nov. 6, 2012).

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(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. Miranda-Marín, 610

F.3d 756, 770 (1st Cir. 2010). The doctrine applies to issues of

fact as well as those of law, Allen v. McCurry, 449 U.S. 90, 94

(1980), and can apply where the subsequent proceeding involves a

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cause of action different from the first, see Comm'r v. Sunnen, 333

U.S. 591, 601 (1948). Under modern preclusion doctrine, "the

central question is 'whether a party has had a full and fair

opportunity for judicial resolution of the same issue.'"

Rodríguez-García, 610 F.3d at 771 (quoting Fiumara v. Fireman's

Fund Ins. Cos., 746 F.2d 87, 92 (1st Cir. 1984)).

Generally, final arbitral awards are afforded the same

preclusive effects as are prior court judgments. See FleetBoston

Fin. Corp. v. Alt, 638 F.3d 70, 79 (1st Cir. 2011) (citing Wolf v.

Gruntal & Co., 45 F.3d 524, 528 (1st Cir. 1995)). As we have

noted, however, "there may be particular difficulties" in applying

preclusion principles to an arbitral award, especially where the

reasoning behind the award is unexplained. Id. at 80. Thus, "it

has been suggested that courts have discretion as to whether issue

preclusion is appropriate" in the arbitration context. Id. (citing

18B Charles Alan Wright et al., Federal Practice & Procedure

§ 4475.1, at 518 (2d ed. 2002)). Here, though, "[w]e need not

consider that suggestion, as we find it clear that the outcome we

reach is consistent with the traditional requirements." Id.

Under those traditional requirements, issue preclusion

may be applied to bar relitigation of an issue decided in an

earlier action where: (1) the issues raised in the two actions are

the same; (2) the issue was actually litigated in the earlier

action; (3) the issue was determined by a valid and binding final

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judgment; and (4) the determination of the issue was necessary to

that judgment. Id.; accord Mercado-Salinas v. Bart Enters. Int'l,

Ltd., 671 F.3d 12, 21-22 (1st Cir. 2011). Here, Manganella argues

that two of these predicates are missing: identity of the issues

and necessity to the judgment. We begin with identity of the

issues.

For issue preclusion to apply here, the arbitrators must

have decided an issue "the same as the one presented" in this case.

Smith v. Bayer Corp., 131 S. Ct. 2368, 2376 (2011). The identity

of the issues need not be absolute; rather, it is enough that the

issues are in substance identical. See Montana v. United States,

440 U.S. 147, 155 (1979) (asking "whether the issues presented [in

the two actions] are in substance the same"). Further, the issue

need not have been the ultimate issue decided by the arbitration;

issue preclusion can extend to necessary intermediate findings,

Rodríguez-García, 610 F.3d at 771, even where those findings are

not explicit, Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26,

30-31 (1st Cir. 1994). Nevertheless, the arbitrators must have

effectively resolved the issue presented here: whether Manganella's

conduct, as described in the MCAD charge, was committed "with

wanton, willful, reckless or intentional disregard of" the

Massachusetts sexual harassment law underlying the charge.

Manganella argues that the arbitrators were simply never

called upon to decide whether he acted in disregard of state law.

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He claims that Lerner's Code of Conduct is broader and stricter

than state sexual harassment law; the Code, he says, reaches not

only sexual harassment serious enough to violate the law, but also

less serious harassment, as well as behavior that would embarrass

the company or constitute a failure of leadership. Thus,

Manganella argues, the arbitrators did not, in the process of

deciding whether he violated the Code, decide anything about the

relationship between his conduct and state law.

We think that Manganella overstates the differences

between the Code of Conduct and the state law referenced in the

Disregard Exclusion. The relevant portion of the Code provides:

We are committed to maintaining a workplace
entirely free from illegal discrimination or
harassment. . . .

The term "harassment" may include unwelcome
slurs and other offensive remarks, jokes and
other verbal, graphic or unwelcome physical
contact. Harassment may also include
unwelcome sexual advances, requests for sexual
favors or unwelcome or offensive touching and
other verbal, graphic or physical conduct of a
sexual nature . . . .

The applicable state law similarly provides that sexual harassment

means:

sexual advances, requests for sexual favors,
and other verbal or physical conduct of a
sexual nature when (a) submission to or
rejection of such advances, requests or
conduct is made either explicitly or
implicitly a term or condition of employment
or as a basis for employment decisions; [or]
(b) such advances, requests or conduct have
the purpose or effect of unreasonably

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 interfering with an individual's work
performance by creating an intimidating,
hostile, humiliating or sexually offensive
work environment.

Mass. Gen. Laws ch. 151B, § 1(18). Thus, both the state law and

the Code reach "sexual advances," "requests for sexual favors," and

other "verbal" or "physical" "conduct of a sexual nature."

To be sure, the law does impose a severity requirement

absent from the Code; the behavior described above is unlawful only

if it involves a quid pro quo or "creat[es] an intimidating,

hostile, humiliating or sexually offensive work environment." But

this requirement does not, as Manganella suggests, mean that a

single incident cannot constitute unlawful sexual harassment. In

fact, the Supreme Judicial Court has declined to require sexual

harassment claims to be based on any particular number of

incidents. See Gnerre v. Mass. Comm'n Against Discrim., 524 N.E.2d

84, 88-89 (Mass. 1988) (citing Coll.-Town, Div. of Interco, Inc. v.

Mass. Comm'n Against Discrim., 508 N.E.2d 587, 591 (Mass. 1987));

see also Maltese v. Thacker, No. CA963864, 2000 WL 1180285, at *2

(Mass. Super. Ct. May 3, 2000) ("A single incident can, depending

on the nature and severity of the conduct, constitute sexual

harassment."). Thus, the fact that the arbitrators did not

expressly find that Manganella had propositioned any particular

employee more than once does not mean that his conduct could not

have run afoul of the law.

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 None of this is to say that we see no distinction between

the standard imposed by the Code and that created by the law.

Rather, the point is that the two standards are similar enough that

we are unable to discern a meaningful difference, on the facts of

this case, between acting in willful violation of the former (which

the arbitrators found Manganella to have done) and acting with

wanton disregard of the latter (which triggers the Disregard

Exclusion). Because of this similarity, sexually harassing conduct

committed in willful violation of the Code, by a person familiar

with the law, would, on these facts, show a wanton or reckless

disregard for whether that conduct was lawful.

Manganella's fall-back position is that the two issues

are nevertheless not the same because the arbitrators did not make

any findings specific to Burgess herself. Thus, he contends, the

arbitration could not have decided whether the conduct alleged in

Burgess's MCAD charge was committed in disregard of the law. This

argument, however, is impossible to square with Manganella's

admission below that "Burgess is one of the Jasmine employees who

the Arbitration panel found Mr. Manganella had sexually harassed."

In light of that concession, the only open question is whether

Burgess was one of the "several" employees Manganella was found to

have "sexually propositioned" or was instead the one employee he

"inappropriately touched" and "propositioned." But for present

purposes, this distinction is immaterial; for the reasons given

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above, we do not see how Manganella could have undertaken any of

this conduct without a wanton or reckless disregard for its

legality. Thus, the lack of factual findings expressly tied to

Burgess herself does not place the present issue beyond the scope

of the arbitrators' decision.

One final point bolsters our conclusion that the

arbitrators effectively decided the issue presented here: proof of

a willful violation of the Code and proof of conduct committed in

disregard of the law would be extremely similar. See 18 Wright et

al., supra, § 4417, at 413 n.2 (noting that, in defining the issues

precluded by a prior action, courts consider, among other factors,

whether there is a substantial overlap between the evidence or

argument advanced in the two proceedings); accord Restatement

(Second) of Judgments § 27 cmt. c (1982). Apart from the question

of findings specific to Burgess, discussed above, the only obvious

difference in proof is that the evidence in the arbitration was

geared toward showing Manganella's familiarity with the Code,

whereas the evidence in a proceeding based on the Disregard

Exclusion would be aimed at showing his familiarity with state law.

But we believe that the arbitration sufficiently established this

point; as the arbitrators found, Manganella was "quite familiar

with the subject of sexual harassment," having in 1998 updated

Jasmine's company policy to reflect the same Massachusetts sexual

harassment law that undergirded Burgess's claims against him.

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Thus, we believe that a subsequent proceeding to litigate the

applicability of the Disregard Exclusion would involve

substantially the same discovery, testimony, and argument as did

the arbitration.

Consequently, we turn to the other element of issue

preclusion that Manganella contends is missing here: necessity to

the judgment. Manganella asserts that the arbitrators' finding

that he engaged in sexual harassment in willful violation of

Lerner's Code of Conduct was not essential to their ruling.

Because the arbitrators' decision ultimately turned on whether

Lerner had given Manganella the contractually required notice of

and opportunity to remedy his misdeeds, Manganella argues that the

arbitrators could have reached the same result by simply assuming

the validity of the harassment allegations and not making explicit

findings thereon. Based on what was actually decided by the

arbitrators, we disagree.

To begin with, although Manganella argues here that the

arbitrators could have just assumed the truth of the harassment

allegations, he did not ask them to do so. Rather, he vigorously

litigated both the truth of those allegations and the question of

whether he knew that his behavior was prohibited. Thus, there is

no concern here that the panel's resolution of this issue was based

on something less than a full adversarial presentation, which could

call into question whether the issue was "actually litigated" for

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preclusion purposes. See FleetBoston Fin. Corp., 638 F.3d at 81

(finding preclusion appropriate where parties not only had a "full

opportunity" to litigate before arbitrators, but also "fully took

advantage of that opportunity"); cf. Kane v. Town of Harpswell (In

re Kane), 254 F.3d 325, 329 (1st Cir. 2001) (giving "situations

where a matter is stipulated [or] admitted without controversy" as

examples in which actual litigation is absent (citing Restatement

(Second) of Judgments § 27 cmt. e (1982))).

In any event, Manganella's argument that the arbitrators'

findings as to his sexually harassing conduct were not necessary to

the arbitral judgment is based on a misapprehension of the

necessity-to-the-judgment requirement. We do not ask whether the

resolution of an issue was necessary to reach the same outcome;

rather, the inquiry is whether the issue was necessary to the

decision actually rendered. See 18 Wright et al., supra, § 4421,

at 548-49 (suggesting that courts should resist the urge "to

speculate that a prior decision could have been rested on narrower

grounds than those actually chosen, so that resolution of the

broader issues was not necessary to the decision"); cf. Rodríguez-

García, 610 F.3d at 771. Here, the arbitrators' determination that

Manganella sexually harassed his employees in willful violation of

the Code was necessary to the actual decision reached because the

panel had to decide whether Lerner's undisputed failure to comply

with the SPA's notice-and-remedy requirement was excusable. New

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York law, which governed the arbitration, sometimes allows non-

breaching parties to eschew such contractually mandated measures,

including where they would prove futile. See Wolff & Munier, Inc.

v. Whiting-Turner Contracting Co., 946 F.2d 1003, 1009 (2d Cir.

1991); Sea Tow Servs. Int'l, Inc. v. Pontin, 607 F. Supp. 2d 378,

389 (E.D.N.Y. 2009). To assess whether this doctrine excused

Lerner's omission, the arbitrators weighed a raft of factors,

including the specifics and severity of Manganella's conduct.

Ultimately, they determined that, although Manganella's behavior

was egregious and willfully violated the Code, notice was still

feasible under the circumstances; in particular, they concluded

that Manganella could have been given the requisite notice after

being placed on administrative leave. The panel's factual findings

as to Manganella's conduct were part and parcel of its resolution

of this issue, and were thus "necessary intermediate findings," to

which we give preclusive effect. See Rodríguez-García, 610 F.3d at

771 (citation and emphasis omitted).2

In sum, the arbitration presented Manganella with the

"full and fair opportunity" for adjudication of the issue at hand

that is the centerpiece of modern issue preclusion doctrine. See

2
We do not see the panel's finding that Lerner was not
excused from complying with the SPA's notice-and-remedy requirement
as reflecting a conclusion that Manganella's malfeasance was
somehow less than serious; rather, the panel explained that its
decision that notice was still appropriate reflected the philosophy
that parties should attempt "to find resolutions to even the most
egregious of misconduct."

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id. (quoting Fiumara, 746 F.2d at 92). The extent of his harassing

conduct and his knowledge that it was prohibited were vigorously

litigated and were essential to the panel's judgment. Allowing

Manganella to contest these questions now would contravene the twin

goals of issue preclusion: protecting litigants from the burden of

relitigating settled issues and promoting judicial economy by

preventing needless litigation. See Parklane Hosiery Co. v. Shore,

439 U.S. 322, 326 (1979). Accordingly, the district court was

correct to bar Manganella from disputing the applicability of the

Disregard Exclusion.

That conclusion, in turn, forecloses the other

contentions that Manganella presses on appeal. Manganella avers

that Evanston must reimburse him for the cost of the arbitration

with Lerner because it was "reasonably related to the defense of"

Burgess's harassment claims. But, because the Disregard Exclusion

applies to Burgess's claims against Manganella, her claims were not

covered and Evanston had no duty to defend Manganella against them,

let alone to defend him in a proceeding "reasonably related"

thereto.

Likewise, the applicability of the Disregard Exclusion is

fatal to Manganella's state law claims, which allege breaches of

contract and violations of Mass. Gen. Laws chs. 93A and 176D and

the duty of good faith and fair dealing. Because Evanston's denial

of coverage was justified by the Disregard Exclusion, these claims

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cannot proceed under the theory that the denial of coverage was

wrongful. See Timpson v. Transamerica Ins. Co., 669 N.E.2d 1092,

1098 (Mass. App. Ct. 1996). The only other basis that Manganella

offers for these claims is Evanston's initial failure to

investigate Burgess's MCAD charge before denying coverage. But, as

Evanston points out (and as Manganella does not address), even if

that omission was improper, it cannot have harmed Manganella

because any investigation would have promptly revealed the

arbitration award, which, as we have explained, establishes the

applicability of the Disregard Exclusion. See Van Dyke v. St. Paul

Fire & Marine Ins. Co., 448 N.E.2d 357, 362 (Mass. 1983) (rejecting

chapter 93A claims because, even if insurer "had conducted a proper

investigation," it would have been justified in refusing

settlement, so "any omission" by the insurer "did not cause any

injury to or adversely affect the plaintiffs"). Because Manganella

offers no other way for these claims to survive in the absence of

his coverage claim, we need not address them further.

III. Conclusion

For the foregoing reasons, we affirm.

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