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MORGAN STANLEY GROUP, INC. v. NEW ENGLAND INS. CO.

February 16, 1999

MORGAN STANLEY GROUP, INC. AND MORGAN STANLEY & CO. INCORPORATED, PLAINTIFFS,
v.
NEW ENGLAND INSURANCE CO. AND ITT NEW ENGLAND MANAGEMENT CO., INC., DEFENDANTS.



The opinion of the court was delivered by: Stein, District Judge.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

This action was tried to this Court on October 13 and October 14, 1998. After due consideration of the testimony and evidence adduced during that trial, the following are the findings of fact and conclusions of law of this Court:

I. Jurisdiction, Venue, and Choice of Law

The plaintiffs and defendants are citizens of different states, and the amount in controversy exceeds $75,000, exclusive of interest and costs. Accordingly, this Court has subject matter jurisdiction over this action pursuant to 28 U.S.C. § 1332. Venue is proper in the Southern District of New York pursuant to 28 U.S.C. § 1391 because "a substantial part of the events or omissions giving rise to the claim occurred" in this judicial district. Plaintiffs reside in New York and the insurance contract in question was negotiated and delivered in New York. Thus, New York is the state with the greatest interest in this action. Therefore, under New York's choice of law rules, New York law governs this breach of contract action. See Employers Ins. of Wausau v. Duplan Corp., 899 F. Supp. 1112, 1116 (S.D.N Y 1995).

II. Background

In the underlying transactions, Siscorp made numerous misrepresentations to Morgan Stanley, to TBC and to Whitestone. The most significant was Siscorp's representation that 30 savings and loan institutions had agreed to repurchase the interest of any investor in the loan at the investor's option after 24 months. In reality, the 30 S & L's had never consented to such an arrangement. Siscorp's misrepresentations were revealed before the loan was fully funded, and, as a result, the Fourth and Broadway project failed. Because of the failure of the investment, Whitestone and TBC filed lawsuits against Morgan Stanley and others involved in the transactions.

In these underlying litigations, Whitestone and TBC claimed, among other things, that Morgan Stanley had committed fraud, had been negligent, and had breached a fiduciary duty by relaying to Whitestone and TBC false and incomplete information concerning the Siscorp investment. Morgan Stanley defended itself in the underlying litigations and ultimately settled both; specifically, in October 1994 it settled with Whitestone for $3.7 million and in January 1997 it settled with TBC for $2.1 million. In addition, Morgan Stanley claims to have incurred more than $4.3 million in legal fees defending those actions. See Joint Pretrial Order at p. 3.

At the time the Whitestone and TBC lawsuits were filed, Morgan Stanley was covered by an "Investment Counselors Errors and Omissions and Fiduciary Liability Insurance" policy provided by defendants in the instant action, New England Insurance Company and ITT New England Management Company, Inc. (collectively, "New England"). The policy provided that New England would indemnify Morgan Stanley for:

    Loss which the Insured shall become legally
  obligated to pay, from any claim made against the
  Insured during the Policy Period, by reason of any
  actual or alleged negligent act, error or omission
  committed in the scope of the Insured's duties as
  investment counselors.

Plaintiff's Exhibit 1 at p. 1.

The policy also obligated New England to pay all "[c]osts and expenses incurred in the defense of any claim for which coverage is provided hereinunder." Id. Morgan Stanley kept New England abreast of the events in the Whitestone and TBC litigations and gave New England adequate notice of its intent to settle those litigations. After settlement, Morgan Stanley sought payment from New England of its legal expenses and settlement costs. New England refused to pay, claiming that the underlying litigations are not covered by the policy because Morgan Stanley was not acting as an "investment counselor" in the transactions involving Whitestone and TBC. The present litigation, in which Morgan Stanley claims that New England has breached its obligations under the insurance contract by refusing to indemnify Morgan Stanley for the costs associated with the settlement of the Whitestone and TBC claims, ensued.

III. Conclusions of Law

A. Standard of Proof for a Settling Insured


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