
USCA1 Opinion

	




                            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-
