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
_________________________
Mullane, Michel & McInnes
___________________________

were

whom

on brief

E. Peter Mullane and

_________________
for

appellant Jonah

Jacob.

Jeffrey A. Goldwater, with whom Matthew J. Fink, Michelle M.

____________________
_______________ ___________
Bracke,
______

Bollinger, Ruberry & Garvey,

____________________________

Douglas Burke
_____________

Carol A. Griffin,
_________________

and Morrison, Mahoney & Miller were on

___________________________

appellee Mt. Airy Insurance Company.

____________________

September 29, 1997

____________________

Scott
_____

brief for

____________________

**

Of the Eleventh Circuit, sitting by designation.

Of

the

Eastern

District

designation.

-2-

of

Pennsylvania,

sitting

by

HILL, Senior Circuit Judge.

HILL, Senior Circuit Judge.
____________________

sought a

declaratory judgment that

defend the named

against them.

Mt. Airy Insurance Company

it does

defendants in an underlying

not have a

duty to

malpractice action

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

Oshana,

and

are

as

follows.

Richard Gold

(not

In

1984,

a party)

Jacob,

formed

Greenbaum,

a partnership

styled as South Copley Limited Partnership (South Copley).

Copley was

real

created to

estate.

Greenbaum,

Jacob

acquire, develop

was

passive

and manage

investor

South

residential

who

entrusted

Oshana and the Law Firm with management and oversight

of these investment business affairs.

Over the next

trusts and

five years the partnership

two partnerships to

hold title to

created four

various projects:

the Horace Street Trust, the Trenton Street Trust, the Westbridge

____________________

We find no

merit in defendants'

suggestion, raised

for the

first time in their Reply Brief, that we have no jurisdiction

hear this

appeal because

the district

court

made no

to

findings

justifying its exercise of its discretionary declaratory judgment

authority.
defend

An

insurance company's claim that it has

in another

action is

the

archetypal case

no duty to
for which

declaratory judgment is appropriate.

Other

defendants are named in the malpractice action, but are

not parties to this appeal.

-3-

Trust,

the Queensbury Realty

Westwood Limited.

Group

Also,

was incorporated to

holdings.

Trust, Northeast Glen

in 1986,

Northeast Realty

manage the partnership's

Limited and

Investment

real estate

Jacob's complaint describes these collectively as the

"Business Entities."

All of the Business

offices of

the Law

Entities were operated out

Firm and were

allegedly funded

of the

either with

seed money from Jacob, or with real estate equity and loans which

Jacob,

Gold,

guaranteed.

Oshana

The

projects outright

and/or

Greenbaum

Business Entities

or they were

co-made

either

owned

used to channel

and/or

co-

real estate

borrowed monies

for the acquisition and operation of the real estate projects.

At or

about

Greenbaum, Oshana and

the time

that South

Gold incorporated two

Copley was

formed,

close corporations,

South Copley

Development Corporation and South Copley Management

Corporation, naming

and

shareholders.

and Gold

Realty

used these

Investment

improperly

no

reason

two corporations,

Group,

as

Jacob) to each

or

the sole

officers, directors

According to the complaint, Greenbaum, Oshana

funnel fiduciary

Entities or to

for

themselves as

disguised

together with

"Related

monies

Cash

Northeast

Conduits"

(belonging to

the Business

named defendant, either

in

the

form

of

"to

directly

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

-4-

which the

Mortgage Investors

Corporation (MIC) agreed

to extend a five

year, $5,000,000 line

of credit

secured by the assets

of the Business Entities

promissory

note given by South

Copley Limited Partnership.

term "Collateral

number of

Pool" was used

anticipatory

because Jacob agreed to

notes, mortgages,

and a

The

sign a

guaranties and

other

advanced various

sums

related security instruments or documents.

Over the

next five

years, MIC

pursuant to the Collateral Pool Agreement.

that "[t]he

affairs with

management of

virtually all

MIC was, at all

The complaint alleges

of [Jacob's]

times and in all

business

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

business matters related to the MIC Loan Documents.

material hereto,

working

Defendants Oshana

frequently

hand-in-glove)

estate

At all times

and Greenbaum (as

and

the

Law

and

attorneys

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

that Greenbaum and

Business

Entities, Jacob

Oshana misappropriated funds

alleges

in the form

of

loans, unexplained disbursements and management fees.

alleges that

advantage

of

Entities and

Jacob also

Greenbaum and Oshana abused Jacob's trust by taking

their

position as

principals

of

these Business

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

his

signature to

also alleges that

obtain

monies

venture, and that Greenbaum knew

Oshana

and Gold

treated the

Oshana and Gold

from

it.

assets

another

were forging

joint

business

He asserts that Greenbaum,

of these

various business

ventures as their own in complete disregard of the rights, duties

and obligations each owed Jacob.

Jacob also alleges that

constitutes

from

Greenbaum and Oshana's conduct

legal malpractice in that they stole fiduciary funds

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

their own self-interest by

Entities,

acting instead

in

misappropriating funds and concealing

the wrongdoing.3

Mt. Airy Insurance

Firm against malpractice

Company (Mt. Airy) insures

claims and initially agreed

under a reservation of rights.

that Jacob's claim

the Law

to defend,

Upon learning facts demonstrating

is not covered by its policy,

this declaratory judgment action.

Mt. Airy

Mt. Airy filed

continued to provide

____________________

Jacob's

malpractice,
negligent

ten-count
law

complaint

partnership

liability

misrepresentation,

conversion, monies had

practices, and
imposition of a

asserts

breach

claims

by
of

and received, unfair and

equitable relief

in the

-6-

legal

estoppel,

fraud,

fiduciary

duty,

deceptive trade

form of an

receivership, a permanent injunction,

and apply.

of

accounting,

and reach

defense to

Exclusion G

the Law Firm

of its policy

for Jacob's claims

until the district

with the Law Firm

against it and that

court ruled that

precludes coverage

Mt. Airy has no

duty to

defend.

II.

defend

its

complaint are

liability insurer

in Massachusetts

insured

allegations

"if

the

reasonably susceptible

in

has

the

a duty

to

third-party

of an interpretation

that

they state or adumbrate a claim covered

."

Sterilite Corp. v. Continental Cas. Co., 17 Mass.

_______________
_____________________

316, 318,

even

if

458 N.E.2d 338

the

determines

claim

Cir. 1949)).

a duty to

them all.

(Mass. App. Ct.

is baseless,

the insurer's

(quoting Lee v.
___

has

by the policy terms. . .

duty

as

to

1983).

"it

is

defend."

App. Ct.

This

is true

the claim

Id.
___

which

at 324

Aetna Cas. & Surety Co., 178 F.2d 750,

________________________

n.17

751 (2d

Furthermore, under Massachusetts law, if an insurer

defend one count

of a complaint,

it must defend

Aetna Cas. & Surety Co. v. Continental Cas. Co.,

________________________
____________________

413

Mass. 730, 732 n.1 (1992).

There is, on the other hand, no duty

that

is specifically excluded from coverage.

to defend a claim

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.

______________________________

Wrecking Co. Inc., 35

__________________

Mass. App. Ct.

-7-

Hercules Building &

___________________

298, 302, 619

N.E.2d 353

(Mass.

App. Ct.

strictly

1993).

construed.

complicated exclusions

Sterilite, 17
_________

"Exclusions

Any

must be

from coverage

ambiguity

in

the

construed against

Mass. App. Ct. at 321 n.10.

are to

be

somewhat

the insurer."

An ambiguity is said

to "exist[ ] in an insurance contract when the language contained

therein is susceptible of more than one meaning."

Co. v.
___

Holyoke, 23
_______

Mass.

App. Ct.

472, 474,

(Mass. App. Ct. 1987) (citations omitted).

permits

favorable

more

than

to the

one

insured

rational

is

Jefferson Ins.
______________

503 N.E.2d

"[W]here the language

interpretation,

to be

474

taken."

that

most

Boston Symphony
________________

Orchestra, Inc.
_______________

v. Commercial Union Ins. Co., 406 Mass.

__________________________

545 N.E.2d 1156

(Mass. 1989) (quoting

Palmer v. Pawtucket

7, 12,

Mut.

______

_______________

Ins. Co., 352 Mass. 304, 306, 225 N.E.2d 331 (Mass. 1967)).
________

III.

Under the Mt. Airy

is

provided

for

claims arising

rendered

by

include

"any lawyer .

director, or

policy with the Law

an "Insured."

employee of

The

. . who

out

of

Firm, coverage

professional services

policy defines

was or

the [Law Firm],

"Insured"

is a partner,

but only

to

officer,

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

____________________

Indemnification, of course, is another issue.

Exclusion A of

the

policy disclaims any

results

in final

Insured has

responsibility to pay

adjudication

committed

against

any criminal,

any

"any claim that

Insured

dishonest,

that

fraudulent

the

or

malicious act, errors, omissions or personal injuries."

-8-

The

policy

contains

an Exclusion

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)

is owned by

any Insured or in

Insured

directly

is

partner,

or

which any

or

indirectly

which

which

is

controlled,

operated or managed by any Insured either

individually or in a fiduciary capacity;

Mt.

Airy argues that,

losses connected

or

managed

defendants,

claims in

because Jacob's

with independent businesses

by the

Insureds,

the

claims

owned, controlled,

are excluded.

joined by Jacob,

argue that, because

the Jacob complaint

allege breach of

Mt. Airy has an unqualified duty to defend.

contest that Exclusion G applies

claims involve

The

at least some

fiduciary duty,

The defendants also

to exclude all claims raised by

Jacob's complaint.

The district court

of

Jacob's claims

come

held, as a matter of

within

Exclusion G.

law, that all

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

arise

out of,

business

which

G applies

or are

which is owned

any Insured

argue that

arise out of

in

to any

of

connection with,

in whole or

which

the conduct

of any

in part by

controls, operates

Exclusion G

Jacob's claims

is inapplicable

or

manages.

Defendants

because Jacob's

an alleged breach of their fiduciary

-9-

any Insured or

claims

duty to Jacob

as

his lawyers

rather

than

out of

officers,

directors, shareholders

business

ventures

as

his

or

their

roles as

trustees

partners,

partners,

of their

officers,

joint

directors,

shareholders or trustees of the joint business ventures.

Defendants'

triggered

by allegations of

Exclusion G does

charge

argument

that

not even come into play

limited to malpractice.

when these

attorney-client

duty

to

legal malpractice misses

legal malpractice, because

relationship

the

defend

is

the mark.

unless the allegations

coverage under the

policy is

"There will always be an attorney-client

exclusions

relationship, the

are at

insuring

issue.

Absent

agreement does

an

not

apply and the

into

play.

result;

the

language of the specific exclusions

[Defendants']

policy

contention would create

exclusions

meaningless and of no effect."

Ins. Co.,
_________

415 N.W.2d

Potomac Ins. Co.

_________________

364,

does not come

would

be

an illogical

rendered

entirely

Senger v. Minnesota Lawyers Mut.

______
______________________

368 (Minn.

v. McIntosh,
________

804

App. 1987).

P.2d 759,

See also
________

762 (Ariz.

App.

1990).

Defendants also argue

that the claim "arise

that the Exclusion's requirement

out of or in connection

with" the conduct

of a controlled business enterprise should be interpreted to mean

that the

only acts

cause of the

excluded are those

alleged loss.

If attorney

the conduct of the business, is

which are

the proximate

negligence, rather than

the proximate cause of the loss,

they argue, the exclusion is inapplicable.

-10-

The

which

argument ignores the plain language of Exclusion G

excludes coverage

connection

with the

for

any
___

conduct of

Insured has an interest.

The

claim arising

a business

out

entity in

of or

in

which an

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).

the

which

In Clauder, the policy

_______

claim arise out of

the lawyer

exclusion

that is

an interest without

work performed for

had a

pecuniary or

narrower that

accused of selling an

exclusion required that

a business entity in

beneficiary interest,

Exclusion G.

The

estate asset to a company in

lawyer was

which he had

disclosing that fact to his client.

Supp. at 164-65.

The Morris
______

similar exclusion

depended on

court held that

his own company, the client, or both.

790 F.

application of

whether the attorney

805 S.W.2d at

an

represented

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

defendants'

position.

law of

Massachusetts is

contrary to

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

than

the term

"caused by,"

"arising out of" is much broader

particularly in

exclusionary clause in an insurance policy).

Dinsmoor,
________

892

ordinarily held

"flowing

F.2d 7,

to mean

from," "incident

(1st

Cir.

Exclusion G extends to include

or "having

of an

See also Murdock v.

________ _______

1989) ("arising

"originating from,"

to,"

the context

out

"growing out

connection

of"

of,"

with").

all claims in connection with the

conduct of an Insured's business entities.

In

claim

summary, Exclusion

which arises

venture

out

of

precludes

or in

controlled, operated

or

coverage for

connection

managed by

with a

business

any Insured
___

or in

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

includes

all claims sounding

charge wrongdoing

in malpractice if

in connection

with a

any
___

This

the allegations

business

in which

the

Insured has such an interest.

We must

played a

partner in

determine, then,

role as an

insured attorney

officer, shareholder, director,

every Business

The district court

whether an

Entity about

which Jacob

found the undisputed facts to

trustee or

complains.

be that either

Greenbaum or Oshana did play such a role.

Greenbaum and

Oshana were

partners

in South

Copley,

shareholders

Corporation,

and

and

officers

shareholders

Management Corporation.

Northeast

director.

Realty

South

and

Copley

officers

Oshana was a

Investment

Oshana was

of

of

Development

South

Copley

shareholder and officer of

Group,

a beneficiary of

while

Greenbaum

Horace Street

was

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

dispute,

the policy at all relevant times.

however, as

to

Oshana's

status

after May

There is a

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

motion

however,

for

on a fact

summary judgment

that the district

the undisputed facts

necessary to the resolution

precludes

its

entry.

court correctly reasoned

of this case, Oshana's status

We

of a

hold,

that under

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.

each case these interests began prior

_____

In

to May 1988 and continued uninterrupted until Jacob uncovered the

-13-

scheme.

Jacob's claims

business schemes,

all

arise

all of which

in connection

began prior to

with

these

Oshana's leaving

the firm, whenever that was.

The issue, in fact, is not whether

had an

interest in

alleged in

the complaint.

claim arises out

Greenbaum or

each Business Entity

of the

Greenbaum or Oshana

for the

The relevant inquiry is

conduct of a

Oshana had the

entire period

whether the

Business Entity to

requisite relationship at

which

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

uninterrupted

early as May

until Jacob discovered

it in 1990. Greenbaum was

Oshana a beneficiary of the

the defendants attempt to

obtain

Collateral Pool

1985, and continued

trust at its inception.5

separate the forged notes

funds, arguing

that

these notes are

covered because Oshana was no

at

It

the

time.

was

a director and

in

1986,

however,

misappropriation and forgery first began.

Similarly,

executed to

claims related

to

longer an Insured

that

the

alleged

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.

____________________

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

still an Insured.

some

might

not

independently,

that began

while Oshana

was

If, out of hundred of individual transactions,

fall

under

that fact

Exclusion

is irrelevant.

if

they

occurred

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

connection

Exclusion G

claims.

Mt.

with

only allege

businesses

of the

in

wrongdoing by

which

Mt. Airy policy

they

had

Insureds in

an

excludes coverage

Airy, therefore, has no duty

interest.

for such

to defend appellants.

The judgment of the district court is affirmed.

________

-15-