Evanston Insurance Company v. Jasmine Company, Inc.

United States Court of Appeals
For the First Circuit

No. 12-1139

LUCIANO MANGANELLA,

Plaintiff,

v.

EVANSTON INSURANCE COMPANY,

Defendant, Third-Party Plaintiff, Appellant,

v.

JASMINE COMPANY, INC.,

Third-Party Defendant, Appellee.

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.

Harvey Nosowitz, with whom Anderson & Kreiger LLP was on
brief, for appellant.
Anthony R. Zelle, with whom Thomas W. Evans and Zelle
McDonough & Cohen, LLP were on brief, for appellee.

December 14, 2012
 STAHL, Circuit Judge. This is the second appeal we have

heard regarding an insurance coverage dispute arising from charges

of sexual harassment brought by a former employee against Luciano

Manganella, the one-time president of Jasmine Company, Inc. See

Manganella v. Evanston Ins. Co., ___ F.3d ___, 2012 WL 5907466 (1st

Cir. Nov. 27, 2012). After Manganella filed an action against

Jasmine's liability insurance provider, Evanston Insurance Co.,

seeking defense and indemnification for the harassment charges,

Evanston filed a third-party complaint against Jasmine itself,

requesting a declaratory judgment that it had no duty to defend or

indemnify Jasmine for the harassment claims. The district court

granted summary judgment on the third-party claims for Jasmine,

holding that Evanston had to both defend and indemnify Jasmine.

Evanston now appeals part of that ruling. As framed by the

parties, the dispute on appeal is whether a finder of fact must

conclude that the conduct underlying the sexual harassment charges

did or did not begin before Jasmine's insurance policy took

effect.1 Accordingly, our opinion is limited to that question and

does not discuss arguments not made by the parties. After careful

consideration, we vacate the judgment below and remand the case to

the district court.

1
The parties did not make certain arguments on appeal that
were available to them under Massachusetts law. We consider the
issues as the parties have presented them. See United States v.
Perazza-Mercado, 553 F.3d 65, 69 n.8 (1st Cir. 2009); Thomas v.
Eastman Kodak Co., 183 F.3d 38, 62 n.15 (1st Cir. 1999).

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 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 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

consisted of a series of annually renewed one-year installments

running from April 1999 through April 2006. The Policy covers

damages (including monetary settlements) "which [Jasmine] shall

become legally obligated to pay as a result of [timely made

claims], by reason of any Wrongful Employment Practice." A claim

is a "written charge or lawsuit . . . seeking Damages or other

relief for a Wrongful Employment Practice." 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."

Importantly, for a resulting claim to be covered, a Wrongful

Employment Practice must have "happened" in its "entirety" during

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the policy period or after the retroactive date (here, April 28,

1999).

In July 2005, Manganella sold Jasmine to Lerner New York,

Inc. for approximately $30 million. Manganella and Lerner executed

a stock purchase agreement to effectuate the sale and an employment

agreement under which Manganella would remain Jasmine's president

for three years. Under the stock purchase agreement, $7 million of

the purchase price was placed in escrow, "as security . . . in the

event of" certain types of misconduct by Manganella. 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 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 sexually harassing four female

employees and downloading sexually explicit images on company

computers, all in violation of Lerner's corporate Code of Conduct.

A subsequent arbitration between Lerner and Manganella confirmed

that he had violated the Code of Conduct by harassing several

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female employees. See Manganella, 2012 WL 5907466, at *2

(describing the arbitration).

On March 19, 2007, Burgess filed a charge of

discrimination against Manganella, Lerner, and Jasmine with the

Massachusetts Commission Against Discrimination ("MCAD").

Burgess's 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' body, inappropriate touching," and,

eventually, coerced sexual activity on five separate occasions.

Manganella also threatened Burgess (and others) with physical

violence.

Ten days after Burgess filed the MCAD charge, Manganella

notified Evanston of her claims and requested coverage. Less than

two weeks later, Evanston sent a letter to Jasmine, denying

coverage for Burgess's claims on the ground that it was "apparent"

that the harassment alleged by Burgess in the MCAD charge "did not

happen in its entirety subsequent to the Retroactive Date, which is

April 28, 1999," as required for coverage.

In April 2008, Jasmine settled the MCAD charge with

Burgess for $300,000. As part of the settlement, Burgess provided

Jasmine with an affidavit (the "2008 Affidavit") stating that the

"conduct and actions by Mr. Manganella that formed the basis of my

allegations of sexual harassment did not begin until in or about

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October 1999, and then continued throughout my employment."

Burgess's claims against Manganella were settled separately at a

later date.

Manganella filed this action against Evanston in July

2009, seeking (among other things) a ruling that Evanston was

required under the Policy to defend and indemnify Manganella

against Burgess's MCAD charge. Two months later, Evanston filed an

answer and a third-party complaint against Manganella and Jasmine,

asserting that it had no duty to defend or indemnify either

Manganella or Jasmine for Burgess's claims.2

After discovery, Manganella and Evanston cross-moved for

summary judgment on Manganella's coverage claims. 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 (including an affidavit that Burgess filed in Bawa's

harassment case) 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 arbitration between

Lerner and Manganella had conclusively established that Burgess's

MCAD charge fell within the Policy's exclusion of claims based on

conduct "committed with wanton, willful, reckless or intentional

2
Evanston initially named Burgess as a defendant in its
third-party complaint, but later voluntarily dismissed its claims
against her.

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disregard" for the laws underlying those claims. See id. at 348.

The district court thus found that the doctrine of issue preclusion

barred Manganella from relitigating that question, and granted

summary judgment for Evanston. Id. at 349. We recently affirmed

that ruling. See Manganella, 2012 WL 5907466, at *8.

In a subsequent summary judgment opinion, the district

court addressed Evanston's third-party claims against Jasmine.

Manganella v. Evanston Ins. Co., No. 09-cv-11264-RGS, 2011 WL

5118898 (D. Mass. Oct. 28, 2011). The court reiterated its earlier

holding that Evanston had a duty to at least investigate the MCAD

charge before denying coverage. Id. at *6-7. Because Evanston had

breached the duty to defend, it had "the burden of proving that

[Burgess's] claim was not within its policy's coverage." Id. at *7

(quoting Polaroid Corp. v. Travelers Indem. Co., 610 N.E.2d 912,

922 (Mass. 1993)) (internal quotation mark omitted). Evanston

failed to carry that burden. Addressing the issues as framed by

the parties, the district court found no genuine dispute of

material fact as to whether the conduct underlying Burgess's MCAD

charge had begun prior to the Policy's retroactive date of April

28, 1999. See id. at *5-6. In the district court's view, Evanston

had at most produced a "shard of allegedly contradictory evidence"

in the form of an interview memorandum and interrogatory answers

filed in connection with the MCAD proceeding, in which Burgess

characterized some of Manganella's pre-April 1999 remarks as

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offensive in hindsight. Id. at *5. The district court did not

consider these statements sufficient to create a factual dispute as

to the scope of Burgess's harassment claims. The court thus

"determined that Evanston is liable under the Policy for the costs

of defending and settling the Burgess claim," and granted summary

judgment for Jasmine. Id. at *8.3 Evanston now appeals the ruling

that summary judgment was properly entered against it, and that in

consequence it must reimburse Jasmine for the settlement with

Burgess (but not the holding that it must cover Jasmine's defense

costs).

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), and

will affirm if there is no genuine dispute as to any material fact

and the movant is entitled to judgment as a matter of law, see Fed.

R. Civ. P. 56(a). "Where, as here, we are presented with

cross-motions for summary judgment, we 'must view each motion,

3
In summarizing its findings, the district court suggested
that the evidence as to whether Burgess's claims were covered was
"in equipoise." 2011 WL 5118898, at *7. Seizing on this phrase,
and other ostensible errors in the district court opinion, Evanston
moved for reconsideration, asserting that the court's language
showed that it had improperly weighed the evidence and failed to
draw inferences in Evanston's favor. The district court denied
that motion, explaining that, although "the word 'equipoise' was
not well chosen," the evidence "provides no basis on which a
'fair-minded jury' could return a verdict for [Evanston] on the
coverage issue." Manganella v. Evanston Ins. Co., No.
09-cv-11264-RGS (D. Mass. Nov. 22, 2011) (electronic order).

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separately,' in the light most favorable to the non-moving party,

and draw all reasonable inferences in that party's favor."

OneBeacon Am. Ins. Co. v. Commercial Union Assur. Co. of Can., 684

F.3d 237, 241 (1st Cir. 2012) (quoting Estate of Hevia v. Portrio

Corp., 602 F.3d 34, 40 (1st Cir. 2010)). Because the parties

reasonably agree that Massachusetts law governs the Policy, we

apply that law. See Bird v. Centennial Ins. Co., 11 F.3d 228, 231

n.5 (1st Cir. 1993); cf. Saint Consulting Grp., Inc. v. Endurance

Am. Specialty Ins. Co., Inc., 699 F.3d 544, 550 (1st Cir. 2012)

(applying Massachusetts law to an insurance policy where all

parties assumed that it applied and the insured corporation was

based in Massachusetts).

The dispositive question here, as presented to us, is

whether there is any material issue of fact as to whether the

conduct giving rise to Burgess's MCAD charge began after the

Policy's retroactive date of April 28, 1999. Because the Policy

covers only damages (including settlement payments) paid on claims

"by reason of" any Wrongful Employment Practice that "happened" in

its "entirety" after the retroactive date, the parties agree that

Evanston must reimburse Jasmine for its settlement with Burgess

only if the course of harassing conduct from which her claims arose

began after that date. As the district court concluded (and as

Evanston does not dispute on appeal), Evanston's initial failure to

investigate and defend the MCAD charge means that it now bears the

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burden of proving that the charge lies beyond the Policy's

coverage. See Polaroid Corp., 610 N.E.2d at 922.

We begin with Burgess's MCAD charge, which describes in

general terms the progression of Manganella's harassing conduct

from offensive remarks and unwelcome touching to coerced sexual

activity. As to when the harassment began, the charge reports only

that Burgess began working at Jasmine in 1997 and that Manganella

harassed Burgess "[t]hroughout her employment" there. Thus, the

charge lends some support to Evanston's theory that the Wrongful

Employment Practice from which Burgess's claims arose included pre-

April 1999 conduct; taken literally, the word "throughout" would

mean that Burgess was harassed beginning on day one of her

employment, i.e., in 1997. That said, the word could also be read

to indicate simply that the harassment was pervasive. Indeed, we

note that the charge, even when describing particular instances of

harassment, is simply not specific as to dates. Thus, we turn to

the other evidence to shed more light on the conduct that gave rise

to Burgess's claims.

The parties vigorously dispute the significance of

various statements in which Burgess has described certain pre-April

1999 sexual comments by Manganella as offensive or unwelcome, or as

intended to soften her up for later, more egregious conduct. For

example, during her 2006 interview with Stier Anderson, she

reported that Manganella had made unwelcome sexual advances toward

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her "since early in her employment" and explained that she felt

that he had "tried to manipulate her from the beginning." In March

2009, in response to an interrogatory in the MCAD action that asked

her to identify each instance of harassment that she experienced,

Burgess related, among other things, that "[w]hen [she] first began

working for Jasmine[], Mr. Manganella would make off-color comments

on taking Viagra and about his sexual relations with his wife."

She explained that these comments made her "uncomfortable" but that

she "did not feel personally threatened by them." Similarly, at a

2011 deposition in this action, Burgess testified that Manganella

had made sexual comments in 1997; at the time, they made her

uncomfortable but she did not find them threatening. By 1999,

however, she viewed the comments as threatening in hindsight and

felt that they had been intended to set her up.

Considered in the light most favorable to Jasmine, none

of these statements necessarily shows that the conduct giving rise

to Burgess's MCAD charge began before April 28, 1999. That

Manganella's early comments made Burgess "uncomfortable" does not,

without more, establish that they contributed to the hostile

environment that resulted in the MCAD charge. This conclusion

would be consistent with Burgess's statement, in a November 1998

affidavit she submitted in Bawa's discrimination case, that "at no

time" had Burgess "ever witnessed or heard from anyone associated

with the company . . . that Mr. Manganella committed any acts of

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sexual harassment directed towards Ms. Bawa or others." Likewise,

that Burgess offered Manganella's comments as part of her answer to

an interrogatory asking her to list instances of sexual harassment

does not necessarily show that her claims arose in part from these

comments, given that she went on to clarify that she did not find

the comments threatening, which could suggest that they did not

contribute to the hostile environment that gave rise to her claims.

Conversely, when viewed in the light most favorable to

Evanston, these statements could support the inference that the

harassing conduct giving rise to Burgess's claims did include

Manganella's pre-April 1999 remarks. That Burgess did not feel

"threatened" by Manganella's comments at the time they were made --

or did not believe that she was aware of sexual harassment on his

part at the time, as stated in the 1998 affidavit -- does not

necessarily mean that those remarks did not ultimately contribute

to a hostile, sexually harassing work environment. "Incidents of

sexual harassment serious enough to create a work environment

permeated by abuse typically accumulate over time, and many

incidents in isolation may not be serious enough for complaint."

Cuddyer v. Stop & Shop Supermarket Co., 750 N.E.2d 928, 937 (Mass.

2001). Thus, a reasonable factfinder could conclude that

Manganella's offensive sexual comments, while perhaps "not . . .

serious enough for complaint" when made, were ultimately part of

the broader pattern of harassing, unlawful conduct that gave rise

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to Burgess's claims. See id. at 941 ("A hostile work environment

constitutes a pattern of sexual harassment . . . that, by its very

nature, often is apparent only in hindsight."). That conclusion

would find support in the fact that Burgess answered an

interrogatory asking about instances of sexual harassment by

identifying these comments (albeit with the clarification discussed

above), and in her statements that Manganella had set her up and

"tried to manipulate her from the beginning."4

So far, then, we have a stalemate. Considering the two

motions separately and drawing all reasonable inferences in favor

of the non-movant, see OneBeacon, 684 F.3d at 241, we do not

believe that the undisputed facts entitle either party to judgment

as a matter of law. Rather, the MCAD charge and Burgess's various

descriptions of Manganella's sexual comments support the sort of

"conflicting yet plausible inferences" that make summary judgment

improper. See Desmond v. Varrasso (In re Varrasso), 37 F.3d 760,

764 (1st Cir. 1994); see also Coyne v. Taber Partners I, 53 F.3d

454, 457 (1st Cir. 1995) (explaining that "when the facts support

plausible but conflicting inferences on a pivotal issue in the

case, the judge may not choose between those inferences at the

summary judgment stage").

4
We note these descriptions by Burgess not because her
subjective understanding of the scope of her claims controls the
question before us, but rather because the effect of Manganella's
remarks on Burgess may be relevant to whether those remarks
contributed to the hostile environment from which her claims arose.

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 Nor do we believe that this stalemate is broken by

Burgess's 2008 Affidavit, which states that the "conduct and

actions by Mr. Manganella that formed the basis of [Burgess's]

allegations of sexual harassment did not begin until in or about

October 1999, and then continued throughout [her] employment."

Although we do not agree with Evanston that Preferred Mutual

Insurance Co. v. Gamache, 675 N.E.2d 438 (Mass. App. Ct.), aff'd,

686 N.E.2d 989 (Mass. 1997), requires us to entirely disregard the

affidavit,5 we do understand Evanston's concern over the prospect

of claimants and insureds colluding against insurers by swapping

such statements for settlement money. More importantly, the

affidavit is not admissible because it is not relevant to any issue

before us on this appeal. The affidavit goes to Burgess's

subjective intent, but her subjective intent is not relevant.

Further, even if the 2008 Affidavit were relevant here,

it could not provide a basis for summary judgment in Jasmine's

5
Evanston argues that Gamache stands for the proposition
that "characterizations of the underlying claim agreed to by the
insured and the claimant in settling the underlying claim have no
weight in subsequent coverage litigation." That case, however,
simply declined to give preclusive effect to a stipulation between
a claimant and an insured in a subsequent action between the
insured and the insurer. See 675 N.E.2d at 444 n.10. Because the
stipulation was not material to the underlying judgment, it lay
outside the long-standing Massachusetts rule that "[w]here an
action against the insured is ostensibly within the terms of the
policy, the insurer . . . is bound by the result of that action as
to all matters therein decided which are material to recovery by
the insured in an action on the policy." Miller v. U.S. Fid. &
Cas. Co., 197 N.E. 75, 77 (Mass. 1935); accord Lodge v. Bern, 101
N.E.2d 748, 749 (Mass. 1951); see Gamache, 675 N.E.2d at 444 n.10.

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favor because a reasonable factfinder could disbelieve it. Our

decision in another insurance coverage dispute, Blanchard v.

Peerless Insurance Co., 958 F.2d 483 (1st Cir. 1992), illustrates

why. There, the crucial question was whether Paul, who shot the

claimant, Blanchard, with a pellet gun, intended to reside in his

parents' home in the future (which would make him a "resident" for

the purposes of their homeowners' insurance policy). See id. at

484, 486. This court reversed a grant of summary judgment for the

insurer that was based in part on Paul's deposition testimony that

he had no intention of returning to his parents' home, explaining:

"State of mind" testimony from the putative
"covered person" may raise inherent
credibility concerns insofar as it supports
limitations on third-party beneficiary
coverage in the somewhat unusual circumstances
where the financial interests of an insurer
and its insured are aligned. Blanchard
specifically points to undisputed evidence
from which a jury might reasonably infer that
Paul's statements as to his subjective intent
were motivated by self-interest. Were a jury
to credit Blanchard's evidence, it would be
entitled to infer that Paul did not harbor the
intent to which he testified on deposition.

Id. at 490-91.6 Here, of course, it is not the insured and insurer

whose financial interests are aligned, but rather the claimant and

the insured. Nevertheless, the same credibility concerns are

6
The relevant evidence in Blanchard suggested that Paul
had a motive to dissemble about his intention to return to his
parents' home because their insurance premiums would increase if
the claimant prevailed against the insurer in the action on the
parents' policy. See 958 F.2d at 490 n.10.

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present here; Burgess provided Jasmine with the 2008 Affidavit as

a condition of the settlement in which she received $300,000.

Moreover, as explained above (and as was true in Blanchard, see id.

at 490 n.10), there is other evidence in the record that, when

construed in Evanston's favor, would suggest that Burgess's

subjective intent was not as she subsequently described it in the

2008 Affidavit. Thus, even if the affidavit were relevant here, we

would set it aside for the purposes of resolving Jasmine's motion

because a reasonable factfinder could refuse to credit it. See id.

at 491 (giving the disputed statements "no weight" in resolving the

summary judgment motion of the party relying on them).7

In sum, we hold that neither party is entitled to summary

judgment. As described above, the remaining evidence before us can

support the sort of divergent but plausible inferences as to a key

issue that make summary judgment unavailable. See Desmond, 37 F.3d

at 764. Indeed, we believe that, on this record and as the issues

have been framed, the question of when the harassing conduct that

gave rise to Burgess's claims began is a quintessential question

for a factfinder.

One final point warrants brief mention: our conclusion

that neither party is entitled to summary judgment is not affected

7
The same would not be true, of course, for the purposes
of resolving Evanston's motion, because the "evidence of the
non-movant is to be believed." See Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 255 (1986). Here, though, the 2008 Affidavit
is not relevant and thus does not impact our decision anyway.

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by the fact -- emphasized by Evanston -- that the Policy defines

"Wrongful Employment Practice" to mean conduct that "allegedly

culminated in" a violation of law. Certainly, drawing all

inferences in Evanston's favor, one could see the evidence

discussed above as establishing that Manganella's pre-April 1999

remarks were part of a single course of sexually harassing conduct

that "culminated in" the events at the heart of Burgess's

harassment claims. But, as we have already explained, when all

inferences are drawn in Jasmine's favor, it is possible to see

these comments as simply separate from the Wrongful Employment

Practice that gave rise to Burgess's MCAD charge. And Evanston has

not attempted to show that "an objectively reasonable insured,

reading the relevant policy language," Finn v. Nat'l Union Fire

Ins. Co. of Pittsburgh, Pa., 896 N.E.2d 1272, 1277 (Mass. 2008)

(citation omitted), would expect the phrase "allegedly culminated

in" to bar coverage of Burgess's claims even if those claims arose

from a Wrongful Employment Practice that did not encompass

Manganella's early comments. Further, to the extent that this

phrase is ambiguous, we construe that ambiguity "against the

insurer . . . and in favor of the insured." GRE Ins. Grp. v.

Metro. Bos. Hous. P'ship, Inc., 61 F.3d 79, 81 (1st Cir. 1995)

(citing Hazen Paper Co. v. U.S. Fid. & Guar. Co., 555 N.E.2d 576,

583 (Mass. 1990)). Thus, the Policy's use of "culminated in" does

not entitle Evanston to summary judgment.

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 III. Conclusion

For the foregoing reasons, we vacate the judgment below

and remand for further proceedings consistent with this opinion.

No costs are awarded.

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