United States District Court, S.D. New York
[Copyrighted Material Omitted]
For Plaintiff: Richard A. Simpson, Theodore A. Howard, Kimberly A. Ashmore, Wiley Rein LLP, Washington, District of Columbia; Mary Anne Wirth, Bleakley Platt & Schmidt, LLP, White Plains, New York.
For Defendants-Intervenors: Jeremy M. King, Olshan Frome Wolosky LLP, New York, New York; John Schryber, Dickstein Shapiro LLP, Washington, District of Columbia.
OPINION AND ORDER
Before the Court are Plaintiff's Motion for Summary Judgment, (Doc. 71), and Defendants-Intervenors' Cross-Motion for Summary Judgment, (Doc. 78). For the reasons set forth below, Plaintiff's Motion is GRANTED IN PART and DENIED IN PART and Defendants-Intervenors' Motion is DENIED. Both denials are without prejudice to renewal following limited additional discovery.
A. Factual Background
The following facts are set forth on the basis of the parties' Local Rule 56.1 Statements, declarations and exhibits, and are undisputed except where noted.
Defendant Marshall Granger & Company, LLC (" Marshall Granger" ) was a certified public accounting firm owned and managed by Laurence M. Brown and Ronald J. Mangini. (P's 56.1 ¶ ¶ 1, 5, 28.) In
April 2010, Plaintiff Continental Casualty Company (" Continental" ) issued Accountants Professional Liability Insurance Policy No. 14045126 (the " Policy" ) to Marshall Granger for the period April 1, 2010 to April 1, 2011. (P's 56.1 ¶ ¶ 26-27.) The Policy states, in part:
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.
(Burrows Decl. Ex. B (" Policy" ), at C00071.) The Policy was issued pursuant to a Premier Plan Renewal Update application (the " Application" ), which was filled out and signed by Brown on behalf of Marshall Granger. (P's 56.1 ¶ 19; see Burrows Decl. Ex. A (" App." ).) The Application included the following 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?
(P's 56.1 ¶ ¶ 20-23; see App. 1-3.) Brown answered " No" to each of these questions. (P's 56.1 ¶ ¶ 20-23; see App. 1-3.) The Application included several warnings that submission of the Application constituted a representation that the responses were true and complete and that no material
facts had been omitted. (P's 56.1 ¶ 24; see App. 4.) In reliance on the responses provided in the Application, Continental issued the Policy. (P's 56.1 ¶ 26.) The premium under the Policy was $30,769.00, (P's 56.1 ¶ 29; Policy at C00029), which Marshall Granger financed through First Insurance Funding Corp., an independent entity, (P's 56.1 ¶ 30; Gross Decl. ¶ ¶ 4-5). Thus, although Marshall Granger was making periodic payments to First Insurance Funding, Continental received the entire premium from First Insurance up front (less payments to various intermediaries). (P's 56.1 ¶ ¶ 30-32; Gross Decl. ¶ ¶ 4-6; Haines Decl. ¶ ¶ 5-6.) Continental did not receive any additional premium payments in connection with the Policy after the initial payment. (P's 56.1 ¶ 32.)
The above answers Brown provided on the Application were false. At the time he submitted the Application, Brown was in the midst of perpetrating a securities fraud scheme, duping several of his accounting clients into participating in a nonexistent investment opportunity. (P's 56.1 ¶ ¶ 1-7; see, e.g., Ashmore Decl. Ex. N (minutes of Brown's plea of guilty to related criminal charges).) As part of this scheme, Brown and possibly others 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 in approximately 2007. (P's 56.1 ¶ 1.) The prospectus's cover letter -- which was signed by Brown and in which Brown identified himself as the 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 that the investment opportunity was " an attractive package for several reasons." ( Id. ¶ ¶ 2-3; see Ashmore Decl. Ex. A (prospectus).) Brown 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. (P's 56.1 ¶ 5.) 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. ¶ 6; see Ashmore Decl. Ex. G (sample stock certificates and promissory notes).)
Contrary to these assertions, however, neither Brown nor Mangini owned any portion of Infinity, nor was either of them an officer of that company. Infinity was actually solely owned by Joseph J. Boughton, Jr., one of Marshall Granger's accounting clients, and Infinity's only asset -- the pipeline -- had been inactive and non-revenue producing for years. (P's 56.1 ¶ ¶ 4, 8.) 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 Infinity's operations. ( Id. ¶ 8.) Boughton subsequently reported the allegations to the Securities and Exchange Commission (" SEC" ), which initiated an emergency enforcement action against Brown and Mangini in this Court on July 22, 2010. ( Id. ¶ 10.) The SEC alleged that Brown and Mangini had been selling
fictitious Infinity common stock and promissory notes as part of a scheme yielding over $2.1 million in fraudulently obtained profits from at least thirteen investors -- some of whom were Marshall Granger clients -- which funds were used to pay interest to other investors in furtherance of the scheme or misappropriated for personal use. ( Id.) Brown was subsequently indicted by a grand jury in this District. ( Id. ¶ ¶ 12-13.)
On August 31, 2010, Boughton and his investment entity, Northstar Investment Group, Ltd. (collectively, the " Boughton Entities" ), sent a letter to Mangini asserting several claims of accounting malpractice and breach of fiduciary duty against Marshall Granger. (King Decl. II Ex. A.) That letter listed three specific sets of transactions unrelated to the Infinity scheme in connection with which the Boughton Entities were asserting claims, and also sought " indemnification for all liabilities potentially resulting from the negligent services and advice and breach of fiduciary duties, including but not limited to any tax liabilities, damages, legal costs and fees, and liabilities to other third parties." ( Id.) That same day, Mangini forwarded the Boughton Entities' letter to Continental, seeking coverage under the Policy for the Boughton Entities' claims. (King Decl. I Ex. A.) On September 20, 2010, Mangini informed Continental of the SEC action and the criminal case against Brown, ( see id. Ex. B), and he later submitted claims to Continental relating to former Marshall Granger clients who lost money in the Infinity scheme, (Ds' 56.1 ¶ ¶ 13-14, 25).
On November 1, 2010, Continental sent a letter to Mangini (the " November 1 Letter" ) in which it denied coverage for claims relating to the Infinity scheme and expressly reserved its right to rescind the Policy on the basis that Brown had made material misrepresentations on the Application. (Burrows Decl. Ex. C; see id. at 5 (" Continental reserves its right to rescind the Policy, or to deny coverage for the Infinity Reserves claims, to the extent that the application for the Policy contained one or more material misrepresentations." ).) As the basis for this denial, Continental stated, " In this case, Mr. Brown misappropriated client investment funds prior to the Policy's effective date of April 1, 2010. . . . Accordingly, by April 1, 2010, Mr. Brown indisputably was aware of acts or omissions . . . which a reasonable person would expect to be the basis of a claim against him and/or Marshall Granger." ( Id. at 5.) The November 1 Letter gave Marshall Granger thirty days in which to bring to Continental's attention any information that might be relevant to Continental's assessment of rescission and coverage. ( Id. at 1.) The letter also informed Mangini that Continental would be advancing defense costs in connection with the regulatory investigation as required under the Policy. ( Id. at 8-9.)
Later in November 2010, Mangini submitted two requests to make ministerial changes to the Policy: one to change the address of record for Marshall Granger, and the other to change the name of the insured entity from " Marshall Granger & Company, LLP" to " Mangini & Company PLLC" to reflect that the company had changed its name. (Ds' 56.1 ¶ ¶ 43-57.) These requests were handled by Aon Insurance Services (" Aon" ), Continental's national administrator. (Burrows Decl. ¶ 5.)
Aon is Continental's agent for certain administrative tasks and has authority to make minor underwriting decisions without Continental's involvement in certain circumstances. (P's 56.1 ¶ ¶ 15-17.) On November 11, 2010, Aon issued an administrative endorsement to the Policy changing Marshall Granger's address of record. (Burrows Decl. ¶ 17; see id. Ex. E.) On November 24, 2010, Aon issued a second administrative endorsement to the Policy to reflect that the insured entity's name had been changed. ( Id. ¶ 18; see id. Ex F.) No modifications were made to the substantive terms of the Policy, nor was any additional premium paid in connection with either endorsement. ( Id. ¶ 16.) Continental was not consulted on either endorsement. ( Id.)
On January 24, 2011, Continental sent another letter to Mangini (the " January 24 Letter" ). (King Decl. I Ex. D.) In this letter, Continental acknowledged receiving additional information relevant to its investigation, including at least one fax transmission from Mangini and information from several Marshall Granger clients directly. ( Id. at 1.) Continental also indicated that it had received evidence that apart from the Infinity scheme, Brown and his daughter had allegedly misappropriated $1.6 million from a separate investment made by the Boughton Entities. ( Id. at 3.) The letter states that Continental was treating that misappropriation as related to the Infinity scheme for coverage purposes and that the misappropriation " provides additional support for Continental's conclusion that the Policy is subject to rescission." ( Id.) The letter concludes by again giving Mangini another thirty days in which to submit additional information, while " continu[ing] to reserve all of [Continental's] rights under the Policy and applicable law, including [the] right to rescind the Policy." ( Id. at 6.)
On February 4, 2011, Continental sent another letter to Mangini (the " February 4 Letter" ), stating that " This notice is being sent to advise you that upon expiration of your Accountants Professional Liability Policy, . . . the Policy will not be renewed. The Policy will expire on April 1, 2011, and there will be no coverage available after that date." (Burrows Decl. Ex. G, at 1.) The February 4 Letter also offered the sale of Extended Claim Reporting Period Coverage (which Continental contends it was required to offer under New York insurance law). ( Id. at 1-2.) The letter reiterated that in the November 1 Letter, " Continental noted the failure to disclose a claim and/or potential claim regarding the Infinity Reserves Scheme in response to Question 21 of the Application . . . . In addition, Continental is ...