Mt. Airy Insurance v. Greenbaum

                  UNITED STATES COURT OF APPEALS
                      FOR THE FIRST CIRCUIT
                                           

No. 97-1306

                   MT. AIRY INSURANCE COMPANY,

                      Plaintiff - Appellee,

                                v.

                  STEPHEN A. GREENBAUM, ET AL.,

                     Defendants - Appellants.

                                           

                  RICHARD T. OSHANA, JONAH JACOB

                     Defendants - Appellees.

                                           

No. 97-1307

                   MT. AIRY INSURANCE COMPANY,

                      Plaintiff - Appellee,

                                v.

                  STEPHEN A. GREENBAUM, ET AL.,

                     Defendants - Appellees.

                                           

                           JONAH JACOB

                      Defendant - Appellant.

                                           

          APPEALS FROM THE UNITED STATES DISTRICT COURT

                FOR THE DISTRICT OF MASSACHUSETTS

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

                                           


                              Before

                      Boudin, Circuit Judge,
                                                     

                   Hill,* Senior Circuit Judge,
                                                        

               and Pollak,** Senior District Judge.
                                                            

                                           

     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.

                                           

                        September 29, 1997
                                           

                    
                              

*  Of the Eleventh Circuit, sitting by designation.

**    Of  the  Eastern   District  of  Pennsylvania,  sitting  by
designation.

                               -2-


          HILL, Senior Circuit Judge.  Mt. Airy Insurance Company
                    HILL, Senior Circuit Judge.
                                              

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

                    
                              

1   We find no  merit in defendants'  suggestion, raised  for the
first time in their Reply Brief, that we have no jurisdiction  to
hear this  appeal because  the district  court  made no  findings
justifying its exercise of its discretionary declaratory judgment
authority.  An  insurance company's claim that it has  no duty to
defend  in another  action is  the  archetypal case  for which  a
declaratory judgment is appropriate.

2  Other  defendants are named in the malpractice action, but are
not parties to this appeal.

                               -3-


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

                               -4-


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.

                               -5-


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
                    
                              

3     Jacob's  ten-count   complaint  asserts  claims   of  legal
malpractice,  law  partnership  liability   by  estoppel,  fraud,
negligent   misrepresentation,   breach    of   fiduciary   duty,
conversion, monies had  and received, unfair and  deceptive trade
practices, and  equitable relief  in the  form of an  accounting,
imposition of a  receivership, a permanent injunction,  and reach
and apply.

                               -6-


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
                                                             

(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 (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
                            

                               -7-


(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.   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

                    
                              

4  Indemnification, of course, is another issue.   Exclusion A of
the  policy disclaims any  responsibility to pay  "any claim that
results  in final  adjudication  against  any  Insured  that  the
Insured has  committed  any criminal,  dishonest,  fraudulent  or
malicious act, errors, omissions or personal injuries."

                               -8-


          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.   The defendants also

contest that Exclusion G applies  to exclude all claims raised by

Jacob's complaint.  

          The district court  held, as a matter of  law, that all

of  Jacob's claims  come  within  Exclusion G.    We review  this

judgment de novo.   Alan Corp. v. Int. Surplus Lines Ins. Co., 22
                                                                       

F.3d 339, 341-42 (1st Cir. 1994).

                               IV.

          Exclusion  G applies  to any  of  Jacob's claims  which

arise  out of,  or are  in  connection with,  the conduct  of any

business  which is owned  in whole or  in part by  any Insured or

which  any Insured  controls, operates  or  manages.   Defendants

argue that  Exclusion G  is inapplicable  because Jacob's  claims

arise out of  an alleged breach of their fiduciary  duty to Jacob

                               -9-


as  his lawyers  rather  than  out of  their  roles as  partners,

officers,  directors, shareholders  or  trustees  of their  joint

business   ventures   as  his   partners,   officers,  directors,

shareholders or trustees of the joint business ventures.  

          Defendants'  argument  that  the  duty  to   defend  is

triggered  by allegations of  legal malpractice misses  the mark.

Exclusion G does  not even come into play  unless the allegations

charge  legal malpractice, because  coverage under the  policy is

limited to malpractice.  "There will always be an attorney-client

relationship  when these  exclusions  are at  issue.   Absent  an

attorney-client  relationship, the  insuring  agreement does  not

apply and the  language of the specific exclusions  does not come

into  play.  [Defendants']  contention would create  an illogical

result;  the  policy   exclusions  would  be   rendered  entirely

meaningless and of no effect."   Senger v. Minnesota Lawyers Mut.
                                                                           

Ins.  Co.,  415 N.W.2d  364,  368 (Minn.  App. 1987).    See also
                                                                           

Potomac  Ins. Co.  v. McIntosh,  804  P.2d 759,  762 (Ariz.  App.
                                        

1990).

          Defendants also argue  that the Exclusion's requirement

that the claim "arise  out of or in connection  with" the conduct

of a controlled business enterprise should be interpreted to mean

that the  only acts  excluded are those  which are  the proximate

cause of the  alleged loss.  If attorney  negligence, rather than

the conduct of the business, is  the proximate cause of the loss,

they argue, the exclusion is inapplicable.  

                               -10-


          The  argument ignores the plain language of Exclusion G

which  excludes coverage  for  any  claim arising  out  of or  in
                                            

connection  with the  conduct of  a business  entity in  which an

Insured has an interest.  The  cases cited by defendants are  not

to the contrary.  See  Clauder v. Home Ins. Co., 790 F. Supp. 162
                                                         

(S.D. Ohio 1992); Morris v. Valley Forge Ins. Co., 805 S.W.2d 948
                                                           

(Ark. 1991); and Niagara Fire Ins. Co. v. Pepicelli, 821 F.2d 216
                                                             

(3d Cir. 1987).   In Clauder, the policy  exclusion required that
                                      

the  claim arise out of  work performed for  a business entity in

which  the lawyer  had a  pecuniary or  beneficiary interest,  an

exclusion  that is  narrower that  Exclusion G.   The  lawyer was

accused of selling an  estate asset to a company in  which he had

an interest without  disclosing that fact to his client.   790 F.

Supp. at 164-65.   The Morris  court held that  application of  a
                                       

similar exclusion  depended on  whether the attorney  represented

his own company, the client, or both.  805 S.W.2d at  952.  Here,

Jacob's  complaint alleges  that Greenbaum  and  Oshana were,  at

best, representing both their companies and Jacob, and, at worst,

representing their companies to Jacob's detriment.  In Pepicelli,
                                                                          

the attorney's interest in another business was not at issue; the

plaintiff rather alleged  negligence on the part of  his law firm

in its handling of the plaintiff's insurance claim.   821 F.2d at

220-21.

          Furthermore, the  law of  Massachusetts is  contrary to

defendants'  position.   See New  England Mut.  Life Ins.  Co. v.
                                                                        

Liberty Mut. Ins. Co., 40 Mass. App. Ct. 722, 726, 667 N.E.2d 295
                               

                               -11-


(Mass. App. Ct. 1966) (the term  "arising out of" is much broader

than  the term  "caused by,"  particularly in  the context  of an

exclusionary clause in an insurance policy).  See also Murdock v.
                                                                        

Dinsmoor,  892  F.2d 7,  8  (1st  Cir.  1989) ("arising  out  of"
                  

ordinarily held  to mean  "originating from,"  "growing out  of,"

"flowing  from," "incident  to,"  or "having  connection  with").

Exclusion G extends to include  all claims in connection with the

conduct of an Insured's business entities.

          In  summary, Exclusion  G  precludes  coverage for  any
                                                                           

claim  which arises  out  of  or in  connection  with a  business

venture  controlled, operated  or  managed by  any Insured  or in
                                                            

which the Insured has an interest as an owner or a partner.  This

includes  all claims sounding  in malpractice if  the allegations

charge wrongdoing  in connection  with a  business  in which  the

Insured has such an interest.

          We must  determine, then,  whether an  insured attorney

played a  role as an  officer, shareholder, director,  trustee or

partner in  every Business  Entity about  which Jacob  complains.

The district court  found the undisputed facts to  be that either

Greenbaum or Oshana did play such a role.

          Greenbaum and  Oshana were  partners  in South  Copley,

shareholders   and   officers   of   South   Copley   Development

Corporation,  and  shareholders  and  officers  of  South  Copley

Management Corporation.  Oshana was a  shareholder and officer of

Northeast  Realty  Investment   Group,  while  Greenbaum  was   a

director.   Oshana was  a beneficiary of  Horace Street  Trust; a

                               -12-


trustee and  beneficiary of Trenton  Street Trust; a  trustee and

beneficiary of the Westbridge Trust; a trustee and beneficiary of

Queensbury Realty Trust; a partner in Northeast Glen Limited; and

a partner in Westwood Limited.  Greenbaum served as a trustee and

beneficiary of Horace Street Trust; and as a partner in Northeast

Glen Limited.  

          The  parties do not dispute that Greenbaum qualifies as

an "Insured" under  the policy at all relevant times.  There is a

dispute,  however, as  to  Oshana's  status  after May  8,  1988.

Greenbaum attests that Oshana was terminated from the Law Firm on

that date.  Oshana disputes this fact.  

          If Oshana was not an Insured after May of 1988, he has,

of course, no coverage at all under the policy for his acts after

that date.  The Law Firm argues, however, that its coverage would

be revived for  malpractice claims arising after May  1988 and in

connection with business  entities to which Oshana is  their only

link.

          A dispute  on a fact  necessary to the resolution  of a

motion  for  summary judgment  precludes  its  entry.   We  hold,

however,  that the district  court correctly reasoned  that under

the undisputed facts  of this case, Oshana's status  after May of

1988 is irrelevant to the issue of coverage.  

          The facts  are that either Greenbaum or Oshana played a

role or had an interest in  each and every business venture about

which Jacob complains.  In  each case these interests began prior
                                                                           

to May 1988 and continued uninterrupted until Jacob uncovered the

                               -13-


scheme.    Jacob's claims  all  arise  in connection  with  these

business schemes,  all of which  began prior to  Oshana's leaving

the firm, whenever that was.  

          The issue, in fact, is not whether  Greenbaum or Oshana

had an  interest in  each Business Entity  for the  entire period

alleged in  the complaint.   The relevant inquiry is  whether the

claim arises out  of the  conduct of a  Business Entity to  which

Greenbaum or  Oshana had the  requisite relationship at  the time

the conduct began.  

          For example, although  an alleged misappropriation from

the 11 Horace Street Trust may have occurred after  May 1988, the

scheme began as  early as May  1985, and continued  uninterrupted

until Jacob discovered  it in 1990. Greenbaum was  a director and

Oshana a beneficiary of the  trust at its inception.5  Similarly,

the defendants attempt to  separate the forged notes  executed to

obtain  Collateral Pool  funds, arguing  that  claims related  to

these notes are  covered because Oshana was no  longer an Insured

at  the  time.   It  was  in  1986,  however,  that  the  alleged

misappropriation and forgery first began.  The fact that Oshana's

alleged misconduct continued uninterrupted until Jacob discovered

it does not negate the  applicability of the Exclusion. The claim

still arises out of the conduct of a business enterprise in which

an Insured was a partner at the time the conduct began.  

                    
                              

5   In fact, it  is undisputed that  Greenbaum was a  Trustee and
Beneficiary of the Trust from its formation in 1985 through 1990.

                               -14-


          Jacob's complaint alleges  an integrated ongoing scheme

of deception  and misappropriation  that began  while Oshana  was

still an Insured.  If, out of hundred of individual transactions,

some  might  not  fall  under   Exclusion  G  if  they   occurred

independently,  that fact  is irrelevant.   An additional  act of

wrongdoing at the tail end of the scheme does not create coverage

for  conduct which  began at  a time  when the  Insureds  had the

requisite relationship with the Business Entities.

                               V.  

          Jacob's claims  only allege  wrongdoing by  Insureds in

connection  with  businesses  in  which  they  had  an  interest.

Exclusion G  of the  Mt. Airy policy  excludes coverage  for such

claims.  Mt.  Airy, therefore, has no duty  to defend appellants.

The judgment of the district court is affirmed.  
                                                        

                               -15-