United States Court of Appeals
For the First Circuit
No. 03-2060
AMERICAN GUARANTEE & LIABILITY INSURANCE COMPANY,
Plaintiff, Appellant,
v.
TIMOTHY S. KEITER, P.A.; K.W. ENTERPRISES, INC., f/k/a
RENT-A-HUSBAND, INC.; KAILE R. WARREN, JR.; TIMOTHY S. KEITER,
Defendants, Appellees,
ERIKA L. KENNEDY, f/k/a ERIKA KENNEDY FRANK,
Defendant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MAINE
[Hon. Gene Carter, Senior U.S. District Judge]
Before
Boudin, Chief Judge,
Lourie, Circuit Judge,*
and Lynch, Circuit Judge.
Scott F. Bertschi, with whom Matthew T. Covell and Arnall
Golden Gregory LLP were on brief, for appellant.
Roy T. Pierce, with whom Jonathan S. Piper and Preti,
Flaherty, Beliveau, Pachios & Haley, LLC were on brief, for
appellees.
February 26, 2004
*
Of the Federal Circuit, sitting by designation.
LYNCH, Circuit Judge. A legal malpractice insurer sought
a declaratory judgment in federal district court that, pursuant to
a "business enterprise" exclusion in a lawyer's professional
liability insurance policy, it has neither a duty to defend nor a
duty to indemnify the insured lawyer, Timothy Keiter, in an
underlying state court suit alleging legal malpractice and breach
of fiduciary duty. The district court denied the insurer's summary
judgment motion. It found a duty to defend under Maine law and
held that consideration of the duty to indemnify was premature.
The insurer appealed on the duty to defend issue.
We affirm the finding of a duty to defend.
I.
American Guarantee & Liability Insurance Company
("American Guarantee") issued to Timothy S. Keiter, P.A. a
professional liability insurance policy (the "Policy") that was in
effect at all material times.
In June 1996, Keiter was retained as a lawyer by Kaile R.
Warren, Jr. to represent him in connection with the development of
his handyman business franchise concept. Keiter incorporated
MelBren Construction, Inc. ("MelBren") for Warren in 1996 and, in
exchange, was issued fifty shares (representing twenty-five
percent) of its common stock. Warren was the president of MelBren,
which did business under the assumed name of Rent-A-Husband. In
1997, Keiter incorporated Rent-A-Husband, Inc. ("RAH") for Warren
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for the purpose of promoting and selling Rent-A-Husband franchises.
Warren was also the president of RAH. Twenty-five percent of RAH's
shares were issued to Margaret Keiter, Timothy Keiter's wife at
that time. Keiter himself did not then receive any RAH stock. In
1998, Warren sought and was offered a contract to author a "how-to"
book, and Keiter represented Warren in negotiating the contract.
On Keiter's advice, the book contract was structured in such a way
that all book royalties would go to RAH and none would be paid
directly to Warren.
In June 1999, Keiter filed for bankruptcy; on June 16,
2001, he obtained a bankruptcy discharge. On July 21, 1999, a
divorce judgment ended the Keiters's marriage. The shares of
MelBren and RAH were deemed marital property and were divided, as
a consequence of the divorce decree, equally between Timothy and
Margaret such that each came to hold a 12.5% interest in MelBren
and a 12.5% interest in RAH as of July 21, 1999. In the fall of
2000, MelBren merged into RAH, and immediately thereafter, RAH was
renamed K.W. Enterprises, Inc. ("KWE").
On June 22, 2001, KWE and Warren, who are appellees in
this appeal, sued Keiter in Maine Superior Court. The suit (the
"underlying action") involves five counts of legal malpractice
against Keiter based on his alleged negligence in representing
MelBren and RAH. More specifically, the complaint alleges that
Keiter was professionally negligent in preparing certain franchise
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documents, prosecuting the RAH trademark application, negotiating
the sale of a franchise, drafting the closing documents for the
sale of a franchise, and drafting the documents for the purchase of
a trademark.
The suit also includes a sixth count -- a claim by Warren
against Keiter for breach of fiduciary duty in connection with
Keiter's 1998 representation of Warren in negotiating the book
contract. The relevant paragraphs of Count VI state:
81. At the time Mr. Keiter negotiated the book
contract on behalf of Mr. Warren, Mr. Keiter represented
both Mr. Warren and RAH and was directly and closely
related to a substantial stockholder in RAH, Mrs. Keiter.
83. By advising Mr. Warren to negotiate a
contract in which the proceeds of the book were made
payable entirely to RAH, Mr. Keiter placed himself in a
position to unfairly and improperly gain in the
transaction through his wife, Mrs. Keiter's interest in
RAH. Through this transaction, Mr. Keiter took
affirmative steps to obtain financial gain at the expense
of his client.
In the amended complaint, the last line of what was ¶ 81 was
altered to read "related to the purported owner of a substantial
number of RAH's shares, Mrs. Keiter" and the end of the first
sentence of what was ¶ 83 was altered to read "through Mrs.
Keiter's purported interest in RAH." In short, Counts I-V
concerned MelBren, in which Keiter had an express ownership
interest, as well as RAH. But Count VI concerned only RAH, in
which Keiter's wife had an express ownership interest but Keiter
did not.
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When sued, Keiter tendered the complaint to American
Guarantee and filed a claim for coverage. American Guarantee
initially disclaimed any duty to defend or indemnify on the ground
that the allegations of the complaint were within the scope of the
Policy's business enterprise exclusion.
Keiter had gone into bankruptcy and had received a
bankruptcy discharge. It appears KWE and Warren believed that the
Policy was the only source of recovery because they amended the
complaint in an effort to avoid triggering the Policy's business
enterprise exclusion. The amended complaint included two new
paragraphs alleging that the MelBren and RAH stock issued to the
Keiters provided them with no pecuniary or beneficial interest in
either corporation because Maine law, Me. Rev. Stat. Ann. tit. 13-
A, § 507(3)(B), KWE and Warren say, prohibits the issuance of
shares in exchange for an agreement to perform future services and
deems any such shares void.
In response to the amended complaint, American Guarantee
agreed to provide Keiter with a defense subject to a reservation of
rights and initiated an action seeking declaratory judgment that it
has neither a duty to defend nor a duty to indemnify Keiter in the
underlying action. American Guarantee argued that the claims in
the Underlying Action fall within the scope of Section C(I)(h) of
the Policy, which provides that coverage does not apply to:
any claim based upon or arising out of the work performed
by the Insured, with or without compensation, with
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respect to any corporation, fund, trust, association,
partnership, limited partnership, business enterprise or
other venture, be it charitable or otherwise, of any kind
or nature in which any Insured has any pecuniary or
beneficial interest, irrespective of whether or not an
attorney-client relationship exists, unless such entity
is named in the Declarations. For purposes of this
policy, ownership or shares in a corporation shall not be
considered a "pecuniary or beneficial interest" unless
one Named Insured or members of the immediate family of
the Named Insured own(s) 10% of the issued and
outstanding shares of such corporation.
The argument was that Keiter's ownership interest in MelBren
brought Counts I-V within the exclusion; his interest in his wife's
ownership of RAH brought Count VI within the exclusion. To avoid
a duty to defend, all counts had to be within the exclusion.
The magistrate judge recommended that American
Guarantee's motion for summary judgment be denied. As to Count VI,
the magistrate judge held that the allegations could reasonably be
read as raising claims beyond those "based upon or arising out of"
work performed by Keiter "with respect to" RAH, because the
allegations suggested that Keiter may have undertaken the
negotiation of the book contract for Warren as an individual rather
than for the corporations. As to Counts I-V, the magistrate judge
held that the allegations of the complaint alone, considered
without extrinsic facts, made it possible that the Policy exclusion
did not apply to the claims and that the coverage issue thus could
not be decided at the summary judgment stage. The district court
affirmed without opinion.
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II.
We review the denial of summary judgment de novo. Mt.
Airy Ins. Co. v. Greenbaum, 127 F.3d 15, 19 (1st Cir. 1997).
It is helpful to understand the rationale behind the
business enterprise exclusion, a standard exclusion in lawyers'
professional liability insurance policies. Professional liability
insurers generally do not wish to provide coverage for the business
activities of insured lawyers. R. Mallen & J. Smith, Legal
Malpractice § 34.27 (5th ed. 2000). The actuarial rates on which
lawyers' professional liability insurance rates are based
contemplate that when insured lawyers exercise their professional
judgment (1) they will be acting in their capacity as lawyers and
(2) their judgment will not be clouded by personal interests.
Accordingly, several types of business activities raise concerns
for insurers and lead them to include policy provisions that
exclude those activities from coverage. First, there are the
business aspects of the practice of law -- such as renting office
space in which to practice or dissolving a partnership formed for
the purpose of practicing -- and the losses associated with those
aspects of practice. See id. Second, there are activities
undertaken by lawyers that blur the line between the practice of
law and the practice of business, such as serving as an officer or
director of a corporation. And third, there are business pursuits
by lawyers that create conflicts between lawyers' personal
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interests and the best interests of their clients, such as
acquiring part ownership of a client's business. See id.
Some courts have explained that standard business
enterprise exclusions have two purposes:
1) 'to prevent collusive suits whereby malpractice
coverage could be used to shift a lawyer's business loss
onto the malpractice carrier' and 2) to avoid the
circumstance where an insured so intermingles his
business relationships with his law practice that an
insurance carrier incurs additional risk of having to
cover the insured for legal malpractice claims relating
to the conduct of business, rather than solely out of the
professional practice.
Jeffer v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., 703 A.2d
316, 322 (N.J. Super. 1997) (quoting Niagara Fire Ins. Co. v.
Pepicelli, Pepicelli, Watts and Youngs, P.C., 821 F.2d 216, 221 (3d
Cir. 1987)).
Under Maine law, insurers bear the burden of proving the
applicability of policy exclusions, and any ambiguity as to the
meaning of the policy language is construed against the insurer.
See Home Ins. Co. v. St. Paul Fire & Marine Ins. Co., 229 F.3d 56,
65 (1st Cir. 2000) ("Maine law favors an expansive view of an
insurer's duty to defend; any ambiguity in policy language is to be
construed in favor of the insured."). Careful attention is paid to
the actual language of the exclusion, which we repeat:
any claim based upon or arising out of the work performed
by the Insured, with or without compensation, with
respect to any corporation, fund, trust, association,
partnership, limited partnership, business enterprise or
other venture, be it charitable or otherwise, of any kind
or nature in which any Insured has any pecuniary or
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beneficial interest, irrespective of whether or not an
attorney-client relationship exists, unless such entity
is named in the Declarations. For purposes of this
policy, ownership or shares in a corporation shall not be
considered a "pecuniary or beneficial interest" unless
one Named Insured or members of the immediate family of
the Named Insured own(s) 10% of the issued and
outstanding shares of such corporation.
Count VI of the complaint concerns RAH, shares of which were owned
by Keiter's wife but not by Keiter himself. We assume arguendo
that Count VI was "based upon or arising out of the work performed
by the Insured . . . with respect to" RAH.
The first sentence of the exclusion, literally read,
explains that the exclusion only applies if Keiter, the "Insured,"
has a "pecuniary or beneficial interest" in RAH. Under normal
usage of the term, Keiter has no pecuniary interest in RAH because
he is not a direct owner. Under normal usage, though, he might
have a beneficial interest in RAH by virtue of his wife's ownership
of RAH stock. For example, it appears that in some community
property states one spouse has a beneficial interest arising from
the other spouse's ownership of stock.1 Of course, the Policy
1
In Washington, a community property state, one spouse
is deemed to have a beneficial interest in stock owned by the other
spouse by virtue of the one-half community property interest. See
LaHue v. Keystone Investment Co., 496 P.2d 343, 350 (Wash. Ct. App.
1972) (widow has standing to bring a stockholder's derivative
action by virtue of her one-half community interest in her
husband's stock, which grants her a one-half vested beneficial
interest in shares held in his name, and her standing is not
contingent on her husband's death because she is not merely a
legatee, but rather, is an owner of the one-half community
interest).
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itself may define "pecuniary or beneficial interest." But the
Definitions section of the Policy does not provide a definition of
the terms.
One reading of the second sentence is that it implicitly
defines a Named Insured's "pecuniary or beneficial interest" as
encompassing a situation in which either the "Named Insured or
members of the immediate family of the Named Insured own[] 10% of
the issued and outstanding shares of such corporation." This
reading makes sense from the insurer's point of view as
establishing a flat and easily administered rule, benefitting it.
But there are problems with this reading. It is not a literal
reading. The second sentence is written in the negative, not as a
positive definition. If the sentence is meant to be definitional,
defining 10% ownership by a family member as a pecuniary or
beneficial interest of the Named Insured, then it is oddly written.
The sentence starts with "For purposes of this policy, ownership or
shares in a corporation shall not be considered a . . . beneficial
interest' unless . . ." (emphasis added). The sentence could
easily have been written to say "For purposes of this policy,
ownership of 10% or more of the issued and outstanding shares in
such a corporation by the Named Insured or by members of the
immediate family of the Named Insured shall constitute a pecuniary
or beneficial interest in such corporation on the part of the Named
Insured." It also departs from the normal usage of the terms
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"pecuniary" and "beneficial" in describing property rights. And it
is at some tension with a literal reading of the first sentence.
There is an alternate reading of the second sentence --
as a carve out, not as a definition. Under this reading, the
insurer must first establish that a Named Insured who does not have
a pecuniary interest does have a "beneficial interest" in a
corporation (under the first sentence). Then, if that beneficial
interest on the part of the Named Insured arises from ownership of
that corporation's stock by members of the Named Insured's
immediate family (under the second sentence), that beneficial
interest does not bring the Named Insured within the business
exclusion unless the ownership by the family member amounts to 10%
of the corporation's stock. Under this reading, the language of
the exclusion does not purport to define the circumstances in which
a Named Insured is deemed to have a "pecuniary or beneficial
interest" in a corporation by virtue of stock ownership by a member
of the Named Insured's immediate family; instead, the exclusion
merely carves out of the business exclusion ownership of stock of
less than 10%. This reading makes sense only if there are
situations in which a person may be deemed to have a "pecuniary or
beneficial interest," as that term is defined elsewhere, in a
family member's ownership of stock. Such situations clearly do
exist: under the law of some states, spouses do sometimes have
beneficial interests arising from the other spouse's stock
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ownership. This is the most literal reading of the two sentences.
It also has the benefit of looking to state law definitions of
property rights in the absence of an express definition of the term
"pecuniary or beneficial interest" in the Policy.
None of this would matter if the relevant state law gave
Keiter a "pecuniary or beneficial interest" in RAH by virtue of his
wife's shares. The Policy does not specify the law of any
particular state as governing. Here, the parties agree that Maine
law applies to the Policy. Under Maine law, there are some
instances in which one spouse has a beneficial interest arising
from the other spouse's ownership of shares. If one of those
instances were alleged here, then Keiter's wife's ownership of RAH
stock would not bring Keiter within the latter reading of the
exclusion unless she owned, as she did, at least 10% of the shares
(by operation of the second sentence of the policy as a limitation
on the first sentence). But under Maine law, Keiter had no
beneficial interest arising from his wife's ownership of shares at
the relevant time, or at least none that could be determined from
the face of the complaint in the underlying action. Under the
second reading, Keiter was not within the business exclusion as to
RAH by operation of the first sentence; the second sentence is
never even reached. This reading may not be so beneficial to the
insurer, but then it is the insurer that wrote the language.
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We explain briefly why Maine law does not grant Keiter a
beneficial interest. The concept of a "beneficial interest"
appears most often in the context of trusts and estates law. See,
e.g., Estate of Fisher, 545 A.2d 1266, 1272 (Me. 1988) (discussing
a surviving spouse's beneficial interest in a testamentary trust);
Green v. Allen, 170 A. 504, 506 (Me. 1934) (discussing the
beneficial interest passing by way of a resulting trust); see also
Black's Law Dictionary 149 (7th ed. 1999) (defining "beneficial
interest" as "[a] right or expectancy in something (such as a trust
or an estate), as opposed to legal title to that thing"). Nothing
on the face of the complaint alleges that Keiter was a beneficiary
under his wife's will or under a trust she executed for his
benefit. And under Maine law, it is the face of the complaint that
is examined in determining whether an insurer has a duty to defend.
See Auto Europe, LLC v. Conn. Indem. Co., 321 F.3d 60, 66 (1st Cir.
2003) (applying Maine law); York Ins. Group of Me. v. Lambert, 740
A.2d 984, 985 (Me. 1999); American Employers' Ins. Co. v. DeLorme
Pub. Co., Inc., 39 F.Supp. 2d 64, 73 (D. Me. 1999).
The insurer argues that a beneficial interest on the part
of Keiter arises by virtue of the marriage itself. In Maine,
marital property is subject to equitable distribution upon divorce.
Me. Rev. Stat. Ann. tit. 19-A, § 953 (1998); see Warner v. Warner,
807 A.2d 607, 616, 621 n.16 (Me. 2002). Once a divorce petition is
filed, each spouse is deemed to have a beneficial interest in
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marital property to which the other spouse holds legal title.
Davis v. Cox, 2004 WL 110848, at *13 (1st Cir. Jan. 15, 2004)
(interpreting Maine law). But as this court recently held under
Maine law, "a non-owner spouse does not, absent a divorce
situation, acquire by virtue of the marital relationship alone an
interest, beneficial or otherwise, in the owner-spouse's property."
Id. at *8 (emphasis added); see Long v. Long, 697 A.2d 1317, 1321
(Me. 1997) ("[t]he 'marital property' designation grants no present
rights [to the non-owner spouse] in the property during the
marriage"); Szelenyi v. Miller, 564 A.2d 768, 770 (Me. 1989). That
rule resolves this case. On the face of the complaint in the
underlying action, there is no indication that Timothy and Margaret
Keiter were in a divorce situation at the time of the alleged
fiduciary breach. As a result, Timothy Keiter has no beneficial
interest in RAH and is not within the exclusion under the second
reading.
The question of whether there is ambiguity is close, but
the insurer bears the burden of proving the exclusion and the
tradition of construing language against insurers, especially
language of exclusions from coverage, is very strong. This is
particularly so under Maine law. Golden Rule Ins. Co. v. Atallah,
45 F.3d 512, 516 (1st Cir. 1995) ("Because exclusions from coverage
in insurance contracts are not favored [under Maine law] and must
be stated clearly and unambiguously, ambiguities in such contracts
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must be resolved against the insurer."); Gross v. Green Mtn. Ins.
Co., 506 A.2d 1139, 1141 (Me. 1986) ("Standard insurance policies,
having been drafted by the insurers, will be construed most
strongly against them."); Mallen & Smith at § 34.23. Construing
the two sentences of the business exclusion against the insurer, we
conclude that there was a duty to defend.
We need not reach the arguments made as to the remaining
counts of the complaint because "under Maine law, if an insurer has
a duty to defend against one count of a complaint, it has a
derivative duty to defend against other counts if they are
sufficiently related that apportioning defense costs as between
[them] is not practicable." Home Ins. Co., 229 F.3d at 65; see
Gibson v. Farm Family Mut. Ins. Co., 673 A.2d 1350, 1353-54 (Me.
1996).
III.
The district court's order denying summary judgment is
affirmed. Costs are awarded to defendants. So ordered.
Dissenting opinion follows.
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LOURIE, Circuit Judge (dissenting). I respectfully
dissent from the majority's conclusion that the business enterprise
exclusion does not apply to Count VI. That provision defines a
pecuniary or beneficial interest as existing if an insured or
anyone in his immediate family owns at least 10% of the outstanding
stock of that business. The second sentence of that provision
states that "ownership or shares in a corporation shall not be
considered a 'pecuniary or beneficial interest' unless one Named
Insured or members of the immediate family . . . own(s) 10% of the
. . . shares of [the] corporation." (Emphasis added.) Contrary to
the views of the majority, I believe that the "unless" language
makes all the difference in the meaning of that provision. It
means that if there is a pecuniary interest on the part of his
then-wife greater than 10%, then the insured (Keiter) is considered
to have a pecuniary interest. There is no ambiguity in that
language.
In my view, the reference to a member of the immediate
family clearly applies to Keiter's then-wife. The fact that it is
framed in the negative does not make it ambiguous or mask its clear
meaning, viz., that ownership of 10% of stock in the corporation by
Keiter's wife is a "pecuniary or beneficial interest" in Keiter.
Accordingly, I consider the beneficial interest analysis under
Maine law to be irrelevant. It is a pecuniary interest that the
then-wife possessed, not a mere beneficial interest. And it is not
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a beneficial interest in Keiter that matters, but the pecuniary
interest possessed by the "member[s] of the immediate family."
I recognize that the policy of Maine favors an insurer's
duty to defend. However, I cannot see that that policy overcomes
language that the parties to an insurance contract agreed to that
negates such coverage.
Whether the exclusion also applies to Counts I-V involves
analyses that the majority did not need to get to, but, under my
analysis of Count VI, needs to be decided. I make no comment on
the merits of those issues, except to state that, in my view, they
need to be addressed in order to determine whether American
Guarantee had a duty to defend.
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