United States District Court, N.D. New York
RALPH C. LEWIS, JR., ESQ., Lewis & Stanzione, Lewis, Stanzione Law Firm, Catskill, NY, RAYMOND A. KELLY, ESQ., Lewis & Stanzione; Joseph Stanzione, Office of Raymond A. Kelly, Albany, NY, Attorney for Plaintiff.
AMBER O. LAFEVERS, ESQ., CHRISTOPHER J. BANNON, ESQ., Aronberg, Goldgehn Law Firm, Chicago, IL, MATTHEW S. LERNER, ESQ., Goldberg, Segalla Law Firm, Albany, NY, Attorney for Defendant.
MEMORANDUM-DECISION AND ORDER
GARY L. SHARPE, Chief District Judge.
Plaintiffs Lewis & Stanzione (hereinafter, "the Firm") and Joseph Stanzione, the insured, commenced this diversity action against defendant St. Paul Fire & Marine Insurance Company, the insurer, seeking a declaratory judgment that St. Paul must defend Stanzione in an underlying lawsuit pursuant to a professional liability insurance policy. (Am. Compl., Dkt. No. 35.) Pending are plaintiffs' motion for summary judgment, (Dkt. No. 56), St. Paul's motion for summary judgment, (Dkt. No. 57), and St. Paul's motion to strike, (Dkt. No. 59). For the reasons that follow, St. Paul's motion for summary judgment is granted, its motion to strike is denied as moot, and plaintiffs' motion for summary judgment is denied.
St. Paul issued a Lawyer's Professional Liability Policy, under policy number 561JB9299 (the "Policy"), to the Firm, which was effective from June 3, 2010 to June 3, 2011, and generally provides defense and indemnity coverage. (Dkt. No. 57, Attach. 2 at 9-27; Def.'s Statement of Material Facts (SMF) ¶ 1, Dkt. No. 57, Attach. 5.) More specifically, the Policy provides that St. Paul will indemnify an insured for "damages' and claims expenses, '" as long as the "damages'... arise out of an error, omission, negligent act or personal injury', in the rendering of or failure to render legal services' for others." (Def.'s SMF ¶ 2; Dkt. No. 57, Attach. 2 at 13.) With respect to St. Paul's defense obligations, the Policy provides that St. Paul "will have the right and duty to defend any claim' or suit' against an insured seeking damages' to which this insurance applies, even if any of the allegations of the claim' or suit' are groundless, false or fraudulent." (Def.'s SMF ¶ 2; Dkt. No. 57, Attach. 2 at 13.) Additionally, the Policy includes certain exclusions, which outline what is not covered under the agreement. (Dkt. No. 57, Attach. 2 at 15-16.) As relevant here, the Policy states that "[t]his insurance does not apply to claims'... [a]rising out of any dishonest, fraudulent, criminal or malicious act, error, omission or personal injury' committed by, at the direction of, or with the knowledge of an insured, " (hereinafter, "the Fraud Exclusion"). ( Id. at 15.)
Stanzione is a partner with the Firm, and, therefore, an insured under the Policy. (Def.'s SMF ¶ 6; Dkt. No. 57, Attach. 2 at 10, 14.) On or about March 17, 2011, Stanzione was sued in New York State court (hereinafter, "the Underlying Action" or "the Underlying Complaint"). (Def.'s SMF ¶¶ 7-10; Dkt. No. 57, Attach. 3.) The Underlying Action was brought by Melvin D. Hiller & Jeffrey Hiller LLC and Freehold House, Inc. (hereinafter, "the Underlying Plaintiffs"), and alleges only one claim against Stanzione: fraud. (Dkt. No. 57, Attach. 3 at 2-3, 10-11.) While the facts of the Underlying Action are complex, the court's discussion of them is not. Generally, the Underlying Plaintiffs allege that Stanzione, who represented the sellers of the Freehold Country Inn (hereinafter, "the Inn"), along with the other defendants, orchestrated and participated in a scheme that fraudulently induced Melvin D. Hiller & Jeffrey Hiller LLC to extend a loan in the amount of $1.25 million to Zofia Goshal, the purchaser of the Inn. (Pls.' SMF ¶ 17, Dkt. No. 56, Attach. 2; Dkt. No. 57, Attach. 3 at 3-5.) The loan was secured by a mortgage on the Inn and Goshal's personal guarantee of repayment. (Dkt. No. 57, Attach. 3 at 4-5.) Soon after the closing, however, Goshal defaulted on her mortgage payments, which forced Melvin D. Hiller & Jeffrey Hiller LLC to foreclose on the loan, costing it "damages in excess of $750, 000.00." ( Id. at 4-6.) The Underlying Plaintiffs, thus, seek compensatory and punitive damages in the amount of several million dollars. ( Id. at 15-16.)
Soon after Stanzione was served with the amended complaint, he notified St. Paul and requested that it defend him in the Underlying Action. (Pls.' SMF ¶¶ 7, 14; Def.'s SMF ¶ 13.) Thereafter, St. Paul sent a letter to Stanzione denying defense and indemnity coverage for the Underlying Action. (Def.'s SMF ¶ 14; Dkt. No. 56, Attach. 5 at 28-32.) In its letter, St. Paul informed Stanzione that coverage was denied because "all of the wrongful acts allegedly committed by you are claimed to have occurred as part of a fraudulent scheme intended to secure the loan at issue, " and "the Policy does not apply to claims arising out of a dishonest, fraudulent, criminal or malicious act, error or omission.'" (Dkt. No. 56, Attach. 5 at 30.)
B. Procedural History
The Firm commenced this action in New York State court, seeking, among other things, a declaratory judgment ordering St. Paul to defend Stanzione in the Underlying Action, but failed to name Stanzione as a plaintiff. (Dkt. No. 1, Attach. 1 at 2-4.) Thereafter, St. Paul removed the action to federal court, (Dkt. No. 1), filed an answer with counterclaims, (Dkt. No. 6), and interposed a third-party complaint against Stanzione, (Dkt. No. 17). After a few rounds of tortured motion practice, (Dkt. Nos. 24, 27), the procedural posture of this case aligned-and all third-party practice was eradicated-upon the Firm and Stanzione's filing of an amended complaint, (Dkt. No. 35). St. Paul then filed an answer to the amended complaint and interposed a counterclaim against Stanzione, seeking only a declaration that St. Paul is not obligated to defend or indemnify him in the Underlying Action. (Dkt. No. 45.) The parties then filed their respective summary judgment motions, (Dkt. Nos. 56, 57), and St. Paul filed a cross motion to strike, (Dkt. No. 59), all of which are now ripe for review.
III. Standard of Review
The standard of review pursuant to Fed.R.Civ.P. 56 is well established and will not be repeated here. For a full discussion of the standard, the court refers the parties to its decision in Wagner v. Swarts, 827 F.Supp.2d 85, 92 (N.D.N.Y. 2011), ...