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Continental Cas. Co. v. Marshall Granger & Co., LLP

United States District Court, S.D. New York

January 31, 2013

MARSHALL GRANGER & COMPANY, LLP, and Laurence M. Brown, Defendants, and Joseph J. Boughton, Jr. and Northstar Investment Group, Ltd., Defendants-Intervenors.

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[Copyrighted Material Omitted]

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Kimberly A. Ashmore, Richard A. Simpson, Theodore A. Howard, Wiley Rein LLP, Washington, DC, Mary Anne Wirth, Bleakley, Platt & Smith, LLP, White Plains, NY, for Plaintiff.

Patrick J. Bliss, White Plains, NY, for Defendant Marshall Granger & Co., LLP.

Jeremy M. King, Dickstein Shapiro LLP, New York, NY, for Defendants-Intervenors Joseph J. Boughton and Northstar Investment Group, Ltd.

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SEIBEL, District Judge.

Before this Court are the Motion for Summary Judgment of Plaintiff Continental Casualty Company (" Continental" ) pursuant to Federal Rule of Civil Procedure 56, (Doc. 27); the Motion to Dismiss of Defendant Marshall Granger & Co., LLP (" Marshall Granger" ) pursuant to Federal Rule of Civil Procedure 12(b)(6), (Doc. 34); and the Motion to Dismiss of Defendants-Intervenors Joseph J. Boughton, Jr. and Northstar Investment Group, Ltd. (collectively, " Boughton Entities" ) pursuant to Federal Rule of Civil Procedure 12(b)(6), (Doc. 24). For the reasons stated below, Plaintiff's Motion is DENIED without prejudice to renewal following limited discovery; Defendant Marshall Granger's Motion is DENIED; and Defendants-Intervenors' Motion is DENIED.

I. Background

For the purposes of the Defendants' [1] Motions to Dismiss, the Court accepts as true the facts (but not the conclusions) stated in Continental's Complaint (" Compl." ), (Doc. 1).[2]

A. Factual Background

Continental issued Accountants Professional Liability Policy No. 140451264 (the " Policy" ) to Marshall Granger, a certified public accounting firm, for the period April 1, 2010 to April 1, 2011. (Compl. ¶¶ 1, 5.) Laurence M. Brown and Ronald J. Mangini were Marshall Granger's principals and general and managing partners. ( Id. ¶¶ 6-7.) The Policy's contract terms state:

This Policy consists of the Declarations, the Policy form, all endorsements attached to the Policy, the completed and signed application and all supplementary information and statements you have provided to us.
By acceptance of this Policy you agree that all of the information and statements provided to us by you are true, accurate and complete. This Policy has been issued in reliance upon the truth and accuracy of those representations.
No concealment, misrepresentation or fraud shall avoid or defeat recovery under this Policy unless such concealment, misrepresentation or fraud was material. Concealment, misrepresentation or fraud in the procurement of this Policy which if known by us would have led to refusal by us to make this contract or provide coverage for a claim hereunder will be deemed material.

( Id. ¶ 12; id. Ex. A, at VI.G (bold denotes defined terms in the Policy).)

On behalf of Marshall Granger, Brown prepared and signed the Policy's renewal application. ( Id. ¶ 13; id. Ex. B.) [3] Specifically, Brown answered " No" to the following application questions:

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Question 1: Does your firm or any owner, partner or officer render services or conduct any business activities under any other name?
Question 10.a: Within the past year has your firm, firm affiliates or their personnel ... [r]endered financial planning, asset management, or investment advisory services?
Question 12: Within the past year has your firm, firm affiliates or their personnel ... a. [o]rganized, promoted, solicited on behalf of or procured participants for investment ventures? b. [p]rovided management services for investment ventures? [or] c. [i]nvested in any non-public investment venture that a client has also invested in?
Question 13: Within the past year has your firm or firm affiliates rendered services, other than tax, for any client in which firm personnel, or the spouse of firm personnel, owned or received an equity interest or served as an officer, director, partner, manager or other member of a client's governing body?
Question 21.c: After inquiry of all owners, partners, officers and professionals of the firm and firm affiliates, within the past year have any past or present personnel ... become aware of any act, omission, circumstance or fee dispute which might be expected to be the basis of a claim or suit? [4],[5]

( Id. ¶¶ 14-18; id. Ex. B, at 1-3.) Above Brown's signature, the application contained several warnings, including that the " [a]pplicant represents, after inquiry, that the information contained herein and in any attachments, supplemental applications or forms required hereby are true, accurate and complete, and that no material facts have been suppressed or misstated." ( Id. ¶ 20; id. Ex. B, at 4.) Immediately above the signature line, the application also stated that it " [m]ust be signed by a person who has the authority to sign on behalf of and to bind the Applicant, all firms and individuals requesting insurance through this application." ( Id. Ex. B, at 4.) In reliance upon the information furnished in Marshall Granger's application and Marshall Granger's submission of the application subject to the application's admonitions, Continental issued the Policy. ( Id. ¶¶ 20-21.)

Unbeknownst to Continental, Brown and/or Marshall Granger had created a prospectus entitled " Infinity Reserves Tennessee— Gas Gathering and Trunk Pipeline System," which was distributed to certain Marshall Granger clients and other prospective investors beginning around October 2007. ( Id. ¶ 23; id. Ex. C.) The prospectus's cover letter— signed by Brown as President of Infinity Reserves-Tennessee, Inc. (" Infinity" )— stated that Infinity was " currently selling interests in its ... gas gathering and trunk system, along with its interconnect into the Duke Energy ... main east-west trunk line," and the opportunity was " an attractive package for several reasons." ( Id. ¶ 24; id. Ex. C.)

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Joseph J. Boughton, Jr., a client of Marshall Granger, was the sole owner of Infinity, and Infinity's only asset— the pipeline— was inactive and non-revenue producing. ( Id. ¶ 26.) Brown and/or Marshall Granger continued to solicit Marshall Granger clients and other individuals to invest in Infinity securities and promissory notes until June 2010, obtaining more than $2 million in investor funds. ( Id. ¶ 25.) The Infinity stock certificates issued to investors, as well as several of the promissory notes, bore the signatures of Brown, as President of Infinity, and/or Mangini, as Vice-President of Infinity. ( Id. ¶ 28; id. Ex. D.)

In May 2010, Mangini informed Boughton that Brown was holding himself out as an officer of Infinity and soliciting investments based on false representations regarding its operations. ( Id. ¶ 29.) Boughton subsequently reported the allegations to the Securities & Exchange Commission (" SEC" ), which commenced an emergency enforcement action against Brown and Mangini on July 22, 2010 in this Court. ( Id. ¶¶ 29-30.) The SEC alleged that Brown and Mangini had been selling fictitious Infinity common stock and promissory notes, a scheme yielding over $2.1 million in fraudulently obtained profits from at least thirteen investors— some of whom were Marshall Granger clients— that were used to pay interest to other investors in furtherance of the scheme or misappropriated for personal use by Brown, Mangini, or their families. ( Id. ¶ 30.) Mangini and Brown both invoked their Fifth Amendment privileges against self-incrimination instead of providing any responses to the SEC's allegations. ( Id. ¶ 31.) Brown was also subsequently indicted in this Court. ( Id. ¶ 30.)

On September 20, 2010, Mangini informed Continental of the SEC action and Brown's indictment, ( id. ¶ 32; id. Ex. F), and Mangini later submitted claim reports to Continental relating to former Marshall Granger clients who lost money from their Infinity investments, ( id. ¶¶ 33-35; id. Exs. G-I). On November 1, 2010, Continental responded to the claims, stating that it had no coverage obligation to Marshall Granger and expressly reserving its right to seek rescission of the Policy. ( Id. ¶ 36.) Apart from the claims reported by Mangini, Continental received several other claims from former Marshall Granger clients, and Continental has denied coverage and/or reserved its rights to do so for all claims. ( Id. ¶ 37.)

B. Procedural History

Continental filed the Complaint on June 13, 2011, seeking a declaratory judgment against Marshall Granger, Brown, and Mangini that Continental is entitled to rescind the Policy on the basis of material misrepresentations in the application and that Continental has no obligation to provide coverage to Marshall Granger or to defend Marshall Granger, Brown, Mangini, or any other insured in connection with claims asserted by third parties relating to the Infinity investments. ( Id. ¶ 3.) On November 3, 2011, the Boughton Entities intervened after Mangini assigned all of his rights under the Policy to them. (Doc. 13.) Continental obtained a partial default judgment that it was entitled to rescind the policy with respect to Brown on January 20, 2012. (Doc. 21.) On March 9, 2012 before any discovery commenced, Defendants filed their Motions to Dismiss, (Docs. 24, 34), and Continental filed its Motion for Summary Judgment, (Doc. 27).

II. Motion to Dismiss

A. Documents the Court May Consider

When deciding a motion to dismiss, the Court's " review is limited to the facts as

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asserted within the four corners of the complaint, the documents attached to the complaint as exhibits, and any documents incorporated in the complaint by reference." McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir.2007); see Faulkner v. Beer, 463 F.3d 130, 134 (2d Cir.2006). " When matters outside the pleadings are presented in response to a 12(b)(6) motion, a district court must either exclude the additional material and decide the motion on the complaint alone or convert the motion to one for summary judgment ... and afford all parties the opportunity to present supporting material." Friedl v. City of N.Y., 210 F.3d 79, 83 (2d Cir.2000) (alteration and internal quotation marks omitted).

There are circumstances, however, under which it is appropriate for a court to consider documents outside of the complaint on a motion to dismiss. For example, when deciding a motion to dismiss, the Court is entitled to consider:

(1) facts alleged in the complaint and documents attached to it or incorporated in it by reference, (2) documents " integral" to the complaint and relied upon in it, even if not attached or incorporated by reference, (3) documents or information contained in [a] defendant's motion papers if plaintiff has knowledge or possession of the material and relied on it in framing the complaint, (4) public disclosure documents required by law to be, and that have been, filed with the Securities and Exchange Commission, and (5) facts of which judicial notice may properly be taken under Rule 201 of the Federal Rules of Evidence.

Weiss v. Inc. Vill. of Sag Harbor, 762 F.Supp.2d 560, 567 (E.D.N.Y.2011) (internal quotation marks omitted).

" Rule 201 of the Federal Rules of Evidence permits judicial notice of a fact that is ‘ either (1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot be reasonably ... questioned.’ " United States v. Bryant, 402 Fed.Appx. 543, 545 (2d Cir.2010) (summary order) (quoting Fed.R.Evid. 201). Further, it is well established that courts may take judicial notice of publicly available documents on a motion to dismiss. See Blue Tree Hotels Inv. (Can.), Ltd. v. Starwood Hotels & Resorts Worldwide, Inc., 369 F.3d 212, 217 (2d Cir.2004) (courts can " look to public records ... in deciding a motion to dismiss" ). " In the motion to dismiss context, however, a court should generally take judicial notice ‘ to determine what statements [the documents] contain[ ] ... not for the truth of the matters asserted.’ " Schubert v. City of Rye, 775 F.Supp.2d 689, 698 (S.D.N.Y.2011) (alterations in original) (quoting Kramer v. Time Warner Inc., 937 F.2d 767, 774 (2d Cir.1991)).

1. Attachments to Parties' Submissions

Defendants submit the following documents with their Motions to Dismiss:

• Brief of Appellants, TIG Ins. Co. v. Robertson, Cecil, King & Pruitt, 116 Fed.Appx. 423, 2003 WL 25461238 (4th Cir.2004) (per curiam) (No. 03-1259), (King Decl. Ex. 4); [6]
• Continental's Answer and Counterclaim, Bryan Bros. Inc. v. Cont'l Cas. Co., 704 F.Supp.2d 537 (E.D.Va.2010) (No. 09-CV-675), (King Decl. Ex. 5);
• Continental's Answer,

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Prof'l Asset Strategies, LLC v. Cont'l Cas. Co., 2010 WL 4284991 (N.D.Ala. Aug. 27, 2010) (No. 09-CV-1238), (King Decl. Ex. 6);

Continental submits the following with its opposition to Defendants' Motions to Dismiss:

• Opinion and Order, Cont'l Cas. Co. v. Battery Wealth, Inc. (D.S.C. May 5, 2011) (No. 09-CV-605), (P's MTD Mem. Ex. A); [7]
• Brief of Defendant-Respondent, Fed. Ins. Co. v. Kozlowski, 792 N.Y.S.2d 397 (1st Dep't 2005) (No. 5109), (P's MTD Mem. Ex. B).

I will consider all of these documents for the purposes of the Defendants' Motions. I may take judicial notice of these materials— for the fact that they exist and what is in them, but not for their truth— because they are public documents. See Sutton ex rel. Rose v. Wachovia Sec., LLC, 208 Fed.Appx. 27, 29-30 (2d Cir.2006) (pleadings and court orders are " undisputably matters of public record" ); Global Network Commc'ns Inc. v. City of N.Y., 458 F.3d 150, 157 (2d Cir.2006) (" A court may take judicial notice of a document filed in another court not for the truth of the matters asserted in the other litigation, but rather to establish the fact of such litigation and related filings." ).

B. Legal Standard

" To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘ state a claim to relief that is plausible on its face.’ " Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). " A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. " While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555, 127 S.Ct. 1955 (alteration, citations, and internal quotation marks omitted). While Federal Rule of Civil Procedure 8 " marks a notable and generous departure from the hyper-technical, code-pleading regime of a prior era, ... it does not unlock the doors of discovery for a plaintiff armed with nothing more than conclusions." Iqbal, 556 U.S. at 678-79, 129 S.Ct. 1937.

In considering whether a complaint states a claim upon which relief can be granted, the court " begin[s] by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth," and then determines whether the remaining well-pleaded factual allegations, accepted as true, " plausibly give rise to an entitlement to relief." Id. at 679, 129 S.Ct. 1937. Deciding whether a complaint states a plausible claim for relief is " a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. " [W]here the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged— but it has not ‘ shown’ — ‘ that the pleader is entitled to relief.’ " Id. (alteration omitted) (quoting Fed.R.Civ.P. 8(a)(2)).

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C. Discussion

In support of their motion to dismiss the Complaint against Mangini, Defendants assert that the Complaint alleges concealment of material information during the policy procurement process only by Brown— not by Mangini— and that the Policy's Innocent Insureds provision [8] provides that the Policy may not be rescinded as to an insured who did not conceal material information from an insurer during the procurement process. (Ds' MTD Mem. 1-2; Ds' Reply MTD Mem. 1-3.) [9] In response, Continental argues that New York law allows an insurer to rescind a policy as to all insureds where the application contains a material representation, and the Innocent Insureds provision is not a severability clause and thus not implicated. (P's MTD Mem. 2.) Further, Continental asserts that there is no need to interpret the scope of the Innocent Insureds provision because Brown's misrepresentations in the application are imputed to Marshall Granger and binding on all insureds, including Mangini, ( id. at 3), and the Complaint sufficiently alleges that Mangini had knowledge of and participated in the Infinity scheme, ( id. at 4).

1. Innocent Insureds Provision

Both parties agree that New York law entitles an insurer to rescind an insurance policy— and the policy is deemed void ab initio — " if it was issued in reliance on material misrepresentations." Fid. & Guar. Ins. Underwriters, Inc. v. Jasam Realty Corp., 540 F.3d 133, 139 (2d Cir.2008); see Interboro Ins. Co. v. Fatmir, 89 A.D.3d 993, 933 N.Y.S.2d 343, 345 (2d Dep't 2011). A misrepresentation in an application for insurance is a false " ‘ statement as to past or present fact, made to the insurer by ... the applicant for insurance ... as an inducement to the making thereof.’ " Fid. & Guar. Ins. Underwriters, 540 F.3d at 139 (quoting N.Y. Ins. Law § 3105(a)). " If an insurer can show that it was induced to accept an application that it might otherwise have refused it is entitled to rescind the policy." In re WorldCom, Inc. Sec. Litig., 354 F.Supp.2d 455, 465 (S.D.N.Y.2005); see Interboro, 933 N.Y.S.2d at 345 (" A misrepresentation is material if the insurer would not have issued the policy had it known the facts misrepresented." ). Further, " [e]ven an innocent misrepresentation, if material, will support rescission." WorldCom, 354 F.Supp.2d at 465; see Vella v. Equitable Life Assurance Soc'y, 887 F.2d 388, 391 (2d Cir.1989) ( " So long as a misrepresentation is material, it is no defense to an action for rescission that the misrepresentation was innocently made." ).

If a policy was procured through a material misrepresentation, the insurer

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may rescind an insurance policy as to all insureds— even those insureds with no knowledge of any misrepresentation. See Nat'l Union Fire Ins. Co. of Pittsburgh v. Hicks, Muse, Tate & Furst, Inc., No. 02-CV-1334, 2002 WL 1482625, at *5 (S.D.N.Y. July 10, 2002) (" New York permits a court to void an insurance policy as to all insureds if the policy was procured through material misrepresentation." ); Wedtech Corp. v. Fed. Ins. Co., 740 F.Supp. 214, 218 (S.D.N.Y.1990) (" [A] D & O policy can be found void ab initio and rescission deemed appropriate if the policy was obtained through a material misrepresentation, even when there are officers and directors who had no knowledge of the fraud." ); see also Am. Int'l Specialty Lines Ins. Co. v. Towers Fin. Corp., No. 94-CV-2727, 1997 WL 906427, at *9-10 (S.D.N.Y. Sept. 12, 1997) (Report and Recommendation) (allowing rescission based on material misrepresentations as to all insureds, including a director who was unaware that the application contained false information).

The Complaint's allegations, taken as true, sufficiently allege that Marshall Granger's responses to Questions 1, 10.a, 12, 13, and 21.c amounted to material misrepresentations in that Continental would not have issued the Policy had it been aware of the true facts. (Compl. ¶¶ 14-19, 21-22.) The crux of the Defendants' argument, however, is that the Policy's Innocent Insureds provision functions as a severability clause, preventing rescission of the Policy as to Mangini because the Complaint fails to allege that Mangini participated in any concealment or misrepresentation during the procurement process. (Ds' MTD Mem. 1-2; Ds' Reply MTD Mem. 1-5.) I find this argument unavailing.

" An insurance policy must be construed to ‘ effectuate the intent of the parties as derived from the plain meaning of the policy's terms.’ " Gfroerer v. Ace Am. Ins. Co., No. 03-CV-866, 2004 WL 2966173, at *4 (W.D.N.Y. Dec. 22, 2004) (quoting Andy Warhol Found. for Visual Arts, Inc. v. Fed. Ins. Co., 189 F.3d 208, 215 (2d Cir.1999)). In New York, " [i]nsurance policies are read in light of common speech and the reasonable expectations of a businessperson." United Nat. Ins. Co. v. Granoff, Walker & Forlenza, P.C., 598 F.Supp.2d 540, 546 (S.D.N.Y.2009) (internal quotation marks omitted). Unambiguous provisions are interpreted according to their " plain and ordinary meaning." Lavanant v. Gen. Accident Ins. Co. of Am., 79 N.Y.2d 623, 629, 584 N.Y.S.2d 744, 595 N.E.2d 819 (1992) (" Unambiguous provisions of a policy are given their plain and ordinary meaning." ). If a provision is ambiguous, however, it is construed against the insurer. See K. Bell & Assocs. v. Lloyd's Underwriters, 97 F.3d 632, 637 (2d Cir.1996). " An ambiguity exists where the terms of an insurance contract could suggest more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business." Fabozzi v. Lexington Ins. Co., 601 F.3d 88, 90 (2d Cir.2010) (internal quotation marks omitted).

Defendants cite Wedtech, 740 F.Supp. at 219, for the proposition that the " Innocent Insureds" provision functions as a severability provision, but the policy at issue in Wedtech — unlike Marshall Granger's Policy— contained specific severability language. When Wedtech's insurer cancelled coverage following a government investigation and the convictions of several of its former officers and directors, Wedtech sought a declaratory judgment that the

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policy was not void ab initio and remained effective with respect to its directors and officers who had acted in good faith. Id. at 216-17. This Court noted that while New York law could deem the entire policy void ab initio — even as to the directors and officers with no knowledge of the fraud— the policy's severability provision,[10] which expressly held that statements in the application would not be imputed to insureds other than those who had made them, indicated that the parties had intended to bar coverage only for the insureds who actually participated in the fraud, id. at 218-19, and thus, the policy could not be void ab initio with respect to all insureds, id. at 222.

Defendants allege that the Innocent Insureds provision here is " in the nature of [a] ‘ severability’ clause[ ]" and serves as " an important bargained-for promise that shields insureds not involved in policy procurement from misstatements and errors allegedly made in applying for the Policy," " creat[ing] a separate Policy and Application for each individual insured." (Ds' MTD Mem. 4-5.) But the Policy— unlike the policies in Wedtech and the other cases on which Defendants rely, ( id. at 4-6) [11]— contains no explicit severability language. As a sophisticated party, Marshall Granger could have— but chose not to— bargain with Continental for the inclusion of such a severability clause.

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See Towers Fin. Corp., 1997 WL 906427, at *10 (" [T]his transaction involved sophisticated businessmen.... The case law makes clear that [the allegedly innocent insured] could have protected himself by requiring the policy to include a severability clause, so that a misrepresentation by [one insured] would result only in rescission of the [ ] insurance policy as to [that insured]." ); see also TIG, 116 Fed.Appx. at 427 (" The [insured] could have, but did not, contract for additional protection in the case of a partner making misrepresentations on behalf of the partnership on the application form.... Thus, although [the other partners] may, in fact, be ‘ innocent,’ they did not contract to be protected in this circumstance, and as a result, rescission of the policy does not violate the ‘ clear intent of the policy.’ " ).

Despite Defendants' urging, the Innocent Insureds provision cannot reasonably be construed as a severability provision relating to misrepresentations in the application. ( See Ds' MTD Mem. 6; Ds' Reply MTD Mem. 2-3.) Defendants assert that the provision's plain language— that one insured's " concealment ... from us" does not render the Policy inapplicable to a different insured " who did not personally ... participate in" the concealment— shows that the Policy is severable as to each insured's role in the procurement process and cannot be rescinded as to those insureds who did not conceal material information from the insurer. (Ds' MTD Mem. 6.) Specifically, Defendants argue that the words " from us" necessarily refer to the Policy procurement process because a duty to disclose to the insurer arises only at this time, and it is thus impossible to conceal anything from an insurer outside of the procurement period. (Ds' Reply MTD Mem. 2, 5-7.) Therefore, Defendants' argument goes, the inclusion of these two words extends the applicability of the Innocent Insureds provision to any misrepresentations or omissions during procurement and preserves coverage for any insured who did not conceal material information from the insurer. ( Id. )

I disagree with Defendants' assertion that this interpretation is the only one that accords with " common speech" and the " reasonable expectations of a businessperson." (Ds' MTD Mem. 6 (quoting United Nat. Ins. Co., 598 F.Supp.2d at 546 (internal quotation marks omitted)).). To the contrary, the Innocent Insureds provision by its terms makes clear that it applies only " [i]f coverage under this Policy would be excluded as a result of any criminal, dishonest, illegal, fraudulent or malicious acts of any of you." (Compl. Ex. A., at VI.L.) This language, which mirrors that of the Policy's " bad acts" exclusion— " This Policy does not apply to ... any claim based on or arising out of a dishonest, illegal, fraudulent, criminal or malicious act by any of you," ( Id. at V.D)— makes plain that the Innocent Insureds provision kicks in only where coverage would otherwise be disclaimed under the bad acts exclusion. Continental does not invoke that exclusion from coverage here in search of a declaration that it need not cover a claim, and thus the Innocent Insureds provision's exception to that exclusion does not apply either. Rather, Continental seeks a declaration that it is entitled to rescission of the entire Policy on the ground that it was void from the start because of misrepresentations. This case thus presents no occasion to apply a clause, such as the Innocent Insureds provision, that presumes that there is a valid policy in place under which coverage " that would otherwise be afforded" " [c]ould be excluded." ( Id. at VI.L.)

Similarly, the Innocent Insureds provision's reference to concealment of bad acts " from us" merely means that if there is a valid policy, and if under that policy coverage

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would ordinarily be excluded because the claim is based on a bad act, an insured can avoid application of the exclusion if he is " innocent," which is defined to mean he did not commit the bad act, know of it, or participate either in the bad act or in its concealment. In other words, an insured is " innocent" not— as Defendants argue, (Ds' MTD Mem. 4)— when he had no involvement in the misrepresentation that induced issuance of the policy, but where he had no part in committing or concealing the conduct that justifies the invocation of the bad acts exclusion.[12]

Thus, the plain language neither supports Defendants' interpretation nor is ambiguous. Rather, the Innocent Insureds provision cannot be construed by a knowledgeable objective observer as anything but an exception applicable where the insurer would otherwise disclaim coverage under the bad acts exception. By its terms it cannot be read as affecting whether the Policy was void as a whole from inception.

Moreover, while courts in the Second Circuit have not weighed in on this issue, I find the Fourth Circuit's and the Eleventh Circuit's interpretations of identical " Innocent Insureds" provisions persuasive— that the provision saves coverage for innocent insureds only when coverage is otherwise denied based on a policy's " bad acts" exclusion. In Bryan Bros. Inc. v. Continental Casualty Co. (applying Virginia law and affirming summary judgment disclaiming coverage for claims arising out of employee's theft), the Court interpreted the Innocent Insureds provision as " an exception to the bad acts exclusion," noting that because " exclusions and exceptions in an insurance policy cannot expand the scope of the agreed coverage," " the innocent insureds provision cannot provide coverage that is precluded by the plain language of the prior knowledge provision," relying in part on its earlier decision in TIG, 116 Fed.Appx. at 426-27 (affirming summary judgment allowing rescission against all partners based on material misrepresentation by one partner in policy application). See Bryan Bros., 660 F.3d 827, 831-32 (4th Cir.2011). Likewise, in Professional Asset Strategies, LLC v. Continental Casualty Co. (applying Alabama law and affirming summary judgment for insurer disclaiming coverage for a claim arising out of an employee's theft), the Eleventh Circuit cited Bryan Bros. with approval, agreeing that the policy's Innocent Insureds provision— identical to the provision at issue here— was applicable only if the bad acts exclusion barred coverage. See 447 Fed.Appx. 97, 100 (11th Cir.2011). Finally, relying on Bryan Bros., the District of South Carolina held that coverage was precluded under the prior knowledge provision of an accountants liability policy with an identical Innocent Insureds provision even where the innocent partner who completed the renewal application had no knowledge of her other partner's misappropriation of client funds. Cont'l Cas. Co. v. Jones, No. 09-CV-1004, 2011 WL 3880963, at *3, *6 (D.S.C. Sept. 2, 2011), order amended on other grounds on reconsideration, 2012 WL 530002 (D.S.C. Feb. 17, 2012).

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I agree with the reasoning of these courts, and Defendants cite no authority interpreting the Innocent Insureds language here as a severability clause with respect to material misrepresentations in the policy procurement process.[13] Accordingly, dismissal based on the Innocent Insureds provision is not warranted.

2. Continental's Allegations Regarding Mangini

Defendants also argue that the Complaint does not state a plausible cause of action for rescission against Mangini because it does not allege that Mangini signed the policy application; had knowledge of any questions asked or answers provided in the application prior to the Policy's issuance; made any statement to Continental suggesting that Brown had authority to sign the application on his behalf; made any statement to Continental on which Continental relied in issuing the Policy or supplied any information to Brown for submission to Continental; or even was aware that Brown was procuring insurance. (Ds' MTD Mem. 3-4.) Defendants further assert that nothing in the SEC enforcement action is relevant to the issue of whether Continental relied upon misrepresentations by Mangini in issuing the Policy. ( Id. at 9-10.) I find Defendants' arguments unavailing.

First, as noted above, because the Innocent Insureds provision does not apply, Mangini need not have personally been involved in the procurement process for Continental to have the right to rescind the Policy as to him. Under New York law, Brown's responses bind Marshall Granger and its partners, including Mangini. See Madison Recycling Assocs. v. Comm'r of Internal Revenue, 295 F.3d 280, 286-87 & n. 14 (2d Cir.2002); Kaur v. Royal Arcadia Palace, Inc., 643 F.Supp.2d 276, 295 (E.D.N.Y.2007); see also N.Y. P'ship Law §§ 20, 22-24, 26. By signing the application, Brown represented to Continental that he inquired into the truth, completeness, and accuracy of the application's responses; that the responses were true, accurate, and complete; that no material facts had been suppressed or misstated; and that he had the authority to sign on behalf of and to bind Marshall Granger and its employees to the information contained in the application.[14]

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(Compl. ¶ 20; id. Ex. B, at 4.) Brown's representation to Continental as a Marshall Granger partner that he had the authority to bind the company and its employees is sufficient, and it is thus irrelevant that Mangini did not sign the application himself; inform Continental that Brown had authority to sign the application; or know of any questions asked on the application, answers provided to Continental, or that Brown was procuring insurance on behalf of Marshall Granger.

Moreover, the Complaint adequately alleges that Mangini had knowledge of and involvement in the Infinity scheme. Specifically, the Complaint alleges that Mangini was listed as an officer of Infinity in its fraudulent marketing materials and that Mangini's signature appeared on counterfeit promissory notes and stock certificates issued to investors. ( Id. ¶ 28; id. Ex. D.) Further, contrary to Defendants' assertion that the SEC enforcement action is irrelevant, ( see Ds' MTD. Mem. 9-10), the Complaint incorporates the SEC's allegations that both Brown and Mangini violated the Securities Act of 1933 and the Securities Exchange Act of 1934 by offering and selling fictitious Infinity securities and misappropriating the proceeds for personal use. (Compl. ¶ 30.) Thus, the Complaint sufficiently alleges that Mangini knew of and participated in the Infinity scheme such that it is plausible that Continental could seek rescission of the Policy as to Mangini— a managing and general partner of Marshall Granger— for material misrepresentations made by another partner during the Policy procurement process.

III. Motion for Summary Judgment

A. Legal Standard

Summary judgment is appropriate when " the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). " [T]he dispute about a material fact is ‘ genuine’ ... if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A fact is " material" if it " might affect the outcome of the suit under the governing law.... Factual disputes that are irrelevant or unnecessary will not be counted." Id. On a motion for summary judgment, " [t]he evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor." Id. at 255, 106 S.Ct. 2505. The movant bears the initial burden of demonstrating " the absence of a genuine issue of material fact," and, if satisfied, the burden then shifts to the non-movant to present " evidence sufficient to satisfy every element of the claim." Holcomb v. Iona Coll., 521 F.3d 130, 137 (2d Cir.2008) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 323-24, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)). " The mere existence of a scintilla of evidence in support of the [non-movant's] position will be insufficient; there must be evidence on which the jury could reasonably find for the [non-movant]." Anderson, 477 U.S. at 252, 106 S.Ct. 2505. Moreover, the non-movant " must do more than simply show that there is some metaphysical doubt as to the material facts," Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986), and he " may not rely on conclusory allegations or unsubstantiated speculation," Fujitsu Ltd. v. Fed. Express Corp., 247 F.3d 423, 428 (2d Cir.2001) (internal quotation marks omitted).

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" A party asserting that a fact cannot be or is genuinely disputed must support the assertion by ... citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for purposes of the motion only), admissions, interrogatory answers, or other materials...." Fed.R.Civ.P. 56(c)(1). Where an affidavit is used to support or oppose the motion, it " must be made on personal knowledge, set out facts that would be admissible in evidence, and show that the affiant ... is competent to testify on the matters stated." Fed.R.Civ.P. 56(c)(4); see Major League Baseball Props., Inc. v. Salvino, Inc., 542 F.3d 290, 310 (2d Cir.2008). In the event that " a party fails ... to properly address another party's assertion of fact as required by Rule 56(c), the court may," among other things, " consider the fact undisputed for purposes of the motion" or " grant summary judgment if the motion and supporting materials— including the facts considered undisputed— show that the movant is entitled to it." Fed.R.Civ.P. 56(e)(2), (3).

B. Discussion

1. Factual Background

Continental's 56.1 Statement of Material Facts incorporates in greater detail all of the Complaint's allegations outlined above. (Doc. 29.) Given the disposition of the Motion, and the Defendants' evasive 56.1 response, (Doc. 40), I need not determine at this stage which material facts are actually undisputed. I note, however, that Defendants dispute all of the facts enumerated in Continental's 56.1 Statement, save the following: that Continental issued the Policy insuring Marshall Granger, Brown, and Mangini, (P's 56.1 ¶¶ 24-25; Ds' 56.1 ¶¶ 24-25); [15] that Boughton has an ownership interest in Infinity Reserves-Tennessee, Inc., (P's 56.1 ¶¶ 4, 8; Ds' 56.1 ¶¶ 4, 8); that Mangini contacted Boughton on or about May 12, 2010 to inform Boughton of Brown's sales of Infinity stock, promissory notes, and convertible debt, (P's 56.1 ¶ 8; Ds' 56.1 ¶ 8); that Mangini notified Continental of claims made under the Policy relating to the Infinity scheme, (P's 56.1 ¶¶ 30, 44-45; Ds' 56.1 ¶¶ 30, 44-45); that the SEC initiated an enforcement action in which Brown and Mangini invoked their Fifth Amendment rights, (P's 56.1 ¶¶ 10-11; Ds' 56.1 ¶¶ 10-11); that Brown was indicted and pleaded guilty on September 8, 2011 (P's 56.1 ¶¶ 12-14; Ds' 56.1 ¶¶ 12-14); and that Brown did not answer the Complaint and a default judgment has been entered against him in this action, (P's 56.1 ¶ 46; Ds' 56.1 ¶ 46).

1. Federal Rule of Civil Procedure 56(d)

Rule 56(d) gives the court discretion to deny or defer an otherwise supported motion for summary judgment to allow for further discovery if the nonmoving

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party " shows by affidavit that, for specified reasons, it cannot present facts essential to justify its opposition" to the motion. Fed.R.Civ.P. 56(d). The affidavit must explain: " ‘ [ (1) ] the nature of the uncompleted discovery; [ (2) ] how the facts sought are reasonably expected to create a genuine issue of material fact; [ (3) ] what efforts the affiant has made to obtain those facts; and [ (4) ] why those efforts were unsuccessful.’ " Hoffmann v. Airquip Heating & Air Conditioning, 480 Fed.Appx. 110, 112 (2d Cir.2012) (quoting Paddington Partners v. Bouchard, 34 F.3d 1132, 1138 (2d Cir.1994)). Even where a Rule 56(d) affidavit is adequate, " a district court may refuse to allow additional discovery ‘ if it deems the request to be based on speculation as to what potentially could be discovered’ — that is, a mere fishing expedition." Seneca Beverage Corp. v. Healthnow N.Y., Inc., 200 Fed.Appx. 25, 27 (2d Cir.2006) (quoting Nat'l Union Fire Ins. Co. of Pittsburgh v. Stroh Cos., 265 F.3d 97, 117 (2d Cir.2001)).

Defendants' primary argument is that summary judgment is inappropriate here where they have been afforded no opportunity for discovery, and discovery is reasonably anticipated to raise genuine issues of material fact. (Ds' SJ Mem. 1-2, 8-11.) [16] Specifically, Defendants allege that they need discovery on the following issues for the following reasons:

• Communications between Aon— CNA's National Administrator for certain Accountants Professional Liability policies, including the Marshall Granger Policy, ( see Burrows Reply Decl. ¶ 3) [17]— and Continental regarding Marshall Granger's application, which relates to Continental's evaluation of the risk and decision-making prior to issuing the Policy, (Schryber Decl. ¶ 13a); [18]
• Continental's underwriting file and decision-making process, including Continental's past underwriting of similar risks, which relates to whether Continental relied on any purported material misrepresentations, ( id. ¶ 13b);
• Mangini's knowledge of the procurement process and the application's answers, which relates to the Innocent Insureds provision and the representations made to Continental, ( id. ¶ 13c);
• Brown's activities related to Infinity and Brown's understanding of the application questions, which relates to determining if the application responses were actually false, ( id. ¶¶ 13d-13e); and
• Information from the drafters of the application and Policy regarding the meaning of certain provisions, ( id. ¶¶ 13e-13f).

Defendants also allege that, although they have tried to obtain Continental's underwriting guidelines, as well as any recommendations or written comments from Aon to Continental concerning the Policy's renewal, the only documents they have received have been those submitted in connection with this Motion, and that Defendants require a judicially-enforceable manner in which to obtain these necessary documents. ( Id. ¶¶ 11-12; Ds' SJ Mem. 11 & n. 2.) I agree that summary judgment is premature, and Defendants are entitled to conduct limited discovery as set forth below.

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2. Rescission

An insurer seeking rescission has the burden of proving the existence of a material misrepresentation in the procurement process and that the insurer's knowledge of the truth would have resulted in refusal to issue the policy in the first instance. Vella, 887 F.2d at 391; Landmark Am. Ins. Co. v. S & S Pub, No. 10-CV-2982, 2011 WL 5825143, at *3 (E.D.N.Y. Nov. 14, 2011). Although materiality is usually a question of fact for the jury, see Towers Fin. Corp., 1997 WL 906427, at *7, an insurer may establish materiality as a matter of law by submitting " evidence of its underwriting practices with respect to similar applicants" but " may not rely merely on statements by representatives of the insurer that it would not have issued the policy but for the representation." WorldCom, 354 F.Supp.2d at 465 (internal quotation marks omitted); see Curanovic v. N.Y. Cent. Mut. Fire Ins. Co., 307 A.D.2d 435, 762 N.Y.S.2d 148, 151 (3d Dep't 2003) (" To establish materiality of misrepresentations as a matter of law, the insurer must present documentation concerning its underwriting practices, such as underwriting manuals, bulletins or rules pertaining to similar risks, to establish that it would not have issued the same policy if the correct information had been disclosed in the application. Conclusory statements by insurance company employees, unsupported by documentary evidence, are insufficient...." ).

Defendants assert that Continental thus cannot establish a material misrepresentation as a matter of law because the evidence that Continental has submitted— declarations from the Policy's principal underwriter, ( see Burrows Decl.; Burrows Reply Decl.), and the relevant portions [19] of its underwriting guidelines, (Burrows Decl. ¶ 15; id. Ex. D)— is insufficient. First, Defendants question the applicability of the underwriting guidelines submitted with the Motion, pointing out that the document is actually titled " Aon Underwriting Authority, Renewals; " that Continental has not set forth any evidence showing how it followed these guidelines; that the document does not appear to govern Continental's underwriting process, only the process by which Aon submits its recommendations and referrals to Continental; and that the declaration of the underwriter regarding the use of the document contradicts the document's text. (Ds' SJ Mem. 7, 15-16, 18.) Also, while Continental refers to Aon's comments on Marshall Granger's application, (Burrows Decl. ¶ 5), Continental has not provided these comments— which relate to its decision to renew the Policy— to Defendants or submitted them with its Motion, (Ds' SJ Mem. 16, 18-19). Defendants further allege that Continental promulgates and maintains underwriting guidelines bearing CNA's logo, not Aon's, and these guidelines have also not been provided to Defendants or submitted with its Motion. (Schryber Decl. ¶ 10.) [20]

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Defendants also dispute that Continental has shown that the Policy would not have been issued had truthful information been disclosed in the application. (Ds' SJ Mem. 16-17.) Continental's underwriter " state[s] without qualification" — after comparing the application's responses to its guidelines— " that if the Application questions to which Marshall Granger provided false and/or misleading responses had been answered truthfully, the underwriting process would have been affected in a material way" — specifically that Continental " would have declined to issue renewal coverage at all or, at a minimum, would have issued a Policy based on significantly different terms under which any risk exposure or potential liability associated with Infinity Reserves-Tennessee would have been expressly excluded." (Burrows Decl. ¶¶ 13-23.)

While it seems highly unlikely to the Court that that Defendants' assertions are correct, it is peculiar that Continental did not simply provide its files regarding its underwriting decision with respect to the Policy. Because an insurer must present documentation— the applicability of which is in dispute here— concerning its underwriting practices to show that it would not have issued the Policy but for the misrepresentation, see WorldCom, 354 F.Supp.2d at 465; Curanovic, 762 N.Y.S.2d at 151, I agree that summary judgment is premature and limited discovery on Continental's underwriting guidelines and process for the Policy is necessary.[21] Without discovery, I cannot determine whether the questions Defendants have raised about the applicability of the partial underwriting guidelines submitted by Continental have merit. See generally Miller v. Wolpoff & Abramson, LLP, 321 F.3d 292, 303 (2d Cir.2003) (" [Rule 56(d) ] provides ... that when a party facing an adversary's motion for summary judgment reasonably advises the court that it needs discovery ... the court should defer decision of the motion until the party has had the opportunity to take discovery

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and rebut the motion. Accordingly, we have held that summary judgment should only be granted if after discovery, the nonmoving party has failed to make a sufficient showing on an essential element of its case with respect to which it has the burden of proof." ) (internal quotation marks, citations, and alterations omitted); see also Themis Capital, LLC v. Democratic Republic of Congo, 881 F.Supp.2d 508, 528-31 (S.D.N.Y.2012) (pre-discovery summary judgment premature where discovery necessary to resolve questions regarding key document and communications culminating in transaction). Therefore, Defendants may conduct limited discovery with respect to (1) communications between Aon and Continental regarding Marshall Granger's renewal application and (2) Continental's underwriting file and decision-making process with respect to Marshall Granger's renewal application. ( See Schryber Decl. ¶¶ 13a-13b.) [22]

IV. Conclusion

For the foregoing reasons, Continental's Motion for Summary Judgment is DENIED without prejudice to renewal following limited discovery; Defendant Marshall Granger's Motion to Dismiss is DENIED; and Defendants-Intervenors Boughton Entities' Motion to Dismiss is DENIED. The Clerk of Court is respectfully directed to terminate the pending motions. (Docs. 24, 27, 34.) The parties are to appear for a status conference on February 28, 2013 at 3:30 p.m.


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