United States District Court, S.D. New York
[Copyrighted Material Omitted]
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.
OPINION AND ORDER
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.
For the purposes of the Defendants'  Motions to Dismiss, the Court accepts as true the facts (but not the conclusions) stated in Continental's Complaint (" Compl." ), (Doc. 1).
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.)  Specifically, Brown answered " No" to the following application questions:
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? ,
( 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.
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