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

United States District Court, S.D. New York

May 9, 2017

CONTINENTAL CASUALTY COMPANY, Plaintiff,
v.
MARSHALL GRANGER & COMPANY, LLP, and LAURENCE M. BROWN, Defendants, and JOSEPH J. BOUGHTON, JR. and NORTHSTAR INVESTMENT GROUP, LTD., Defendants-Intervenors.

          OPINION & ORDER

          CATHY SEIBEL, U.S.D.J.

         Before me is Plaintiff Continental Casualty Company's motion for sanctions against Defendants-Intervenors Joseph J. Boughton, Jr. and Northstar Investment Group, Ltd. (together, “the Boughton Entities”) and their lawyers and respective firms, Jonathan Schryber of Reed Smith LLP and Jeremy King of Olshan Frome Wolosky LLP (together, “the Lawyers”).[1] (Doc. 197.) For the following reasons, Plaintiff's Motion is DENIED.

         I. BACKGROUND [2]

         A. The Securities Fraud Scheme

         Defendant Marshall Granger & Company, LLC (“Marshall Granger”) was a certified public accounting firm owned and managed by Defendants Laurence M. Brown and Ronald J. Mangini. (Doc. 94 at 2.) In April 2010, Continental Casualty Company (“Continental”) issued an Accountants Professional Liability Insurance Policy to Marshall Granger based on an application that was filled out and signed by Brown on behalf of Marshall Granger. (Id. at 2-3.) As part of that application, Brown provided a number of answers that were false, including that no one from his firm had promoted or solicited on behalf of investment ventures. (Id. at 3-4.) At the time he submitted the application, however, Brown was in the midst of perpetrating a securities fraud scheme, convincing several of his accounting clients to participate in a nonexistent investment opportunity. (Id. at 4-5.) 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. (Id. at 5.) The cover letter attached to the prospectus and the stock certificates issued to investors were both signed by Brown as the president of “Infinity Reserves-Tennessee, Inc.” (“Infinity”), and the stock certificates were also signed by Mangini as Infinity's vice president. (Id.) 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. (Id.)

         Contrary to their assertions, neither Brown nor Mangini owned any portion of Infinity, nor was either of them an officer of that company, which was actually solely owned by Boughton, one of Marshall Granger's accounting clients. (Id.) 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.) Boughton then reported the allegations to the Securities and Exchange Commission (“SEC”), which initiated an emergency civil enforcement action against Brown and Mangini in this Court on July 22, 2010. (Id. at 6.) 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. (Id.) In addition to the SEC civil action, Brown was indicted in this District on federal charges of securities fraud, wire fraud, and money laundering. (Doc. 83 ¶¶ 12, 13.) Like the SEC's complaint, the superseding indictment in the criminal action alleged that Brown solicited investments in Infinity, which Brown knew to be inoperative, through material misrepresentations and that he converted the generated funds to his own personal use and the use of others. (Id. ¶ 13.)

         On August 31, 2010, the Boughton Entities sent a letter to Mangini asserting several claims of accounting malpractice and breach of fiduciary duty against Marshall Granger. (Doc. 94 at 6.) That same day, Mangini forwarded the letter to Continental, seeking coverage under the insurance policy for the Boughton Entities' claims. (Id.) On September 20, 2010, Mangini informed Continental of the SEC action and the criminal case against Brown, and later submitted additional claims to Continental relating to former Marshall Granger clients who had lost money in the Infinity scheme. (Id. at 6-7.) On November 1, 2010, Continental denied coverage and reserved its right to rescind the policy based on the misrepresentations Brown had made in the application. (Id. at 7.)

         On February 4, 2011, the SEC moved for summary judgment in the civil enforcement action against Brown and Mangini, submitting into the public record a significant amount of evidence relating to the Infinity scheme. (Id. at 9.) In March 2012, judgment was entered against Brown and Mangini in the SEC Action. Sec. & Exch. Comm'n v. Brown, No. 10-CV-5564 (S.D.N.Y. Mar. 22, 2012).

         On September 8, 2011, Brown pleaded guilty to the criminal charges of securities fraud, wire fraud, and money laundering. (Id. at 10.) In his plea allocution, Brown testified that he purported to sell interests in Infinity, which entity he knew to be inoperative and which interests he knew he did not have any authority to sell, to clients of Marshall Granger. (Doc. 74 Ex. N, at 8-10.) He also testified that he converted the majority of the funds thereby raised for personal use and the use of others, and that he knew what he was doing was a crime. (Id. Ex. N, at 11, 16.)

         B. The Current Action

         On June 13, 2011, Continental initiated the instant action against Marshall Granger, Brown, and Mangini seeking rescission of the policy. (Doc. 1.) On November 3, 2011, the Boughton Entities intervened after Mangini assigned all of his rights under the policy to them. (Doc. 13.) The suit was dismissed as against Mangini, (id.), and a default judgment was entered against Brown based on his failure to appear, (Doc. 21).

         1. Continental's First Motion for Summary Judgment

         On February 3, 2012, more than four months after Brown's guilty plea, Continental served its first motion for summary judgment on Marshall Granger and the Boughton Entities, (Doc. 27), arguing that given the pending SEC action against Brown and Mangini, for which a temporary restraining order (“TRO”) had been issued, and the substance of Brown's guilty plea, there were no issues of material fact as to either the falsity or materiality of several of Marshall Granger's representations in its insurance application, (Doc. 28). As required by Local Rule 56.1, Continental submitted a statement of material facts that it asserted were undisputed. (Doc. 29.) Many of the paragraphs in Continental's 56.1 statement contained more than one fact. (See id.)

         The Boughton Entities opposed the motion in a brief signed by Mr. Schryber that argued, among other things, that Continental's motion was premature given the lack of discovery to establish the falsity and materiality of statements made in Marshall Granger's application. (See Doc. 39 at 8-11.) In support of their opposition, the Boughton Entities submitted a declaration of Mr. Schryber, in which he asserted that summary judgment was premature because the Boughton Entities required discovery on, among other things, “the facts necessary for the Boughton Entities to determine whether the responses contained on the Application were actually false, including discovery from Brown regarding his purported activities” and Brown's understanding of the meaning of the application's questions. (Doc. 38 ¶ 13(d)-(e).)

         As required by Local Rule 56.1, the Boughton Entities submitted a response to Continental's statement of undisputed material facts that was drafted by Mr. King, (Doc. 202 ¶ 3), and signed by Mr. Schryber, (Doc. 40). Their responses included several bases for objection, including that they were either entirely or partially “unable to respond” to thirty-eight out of forty-six statements because there had been no discovery. (Id.) At the time, I found these responses “evasive.” (Doc. 58 at 22.) For example, the Boughton Entities asserted that “because there ha[d] been no discovery as to any of Brown's purported activities, ” they were unable to respond to paragraphs of Continental's 56.1 statement that included the following facts:

● Brown created a prospectus for the Infinity scheme and distributed it to Marshall Granger clients and other prospective investors, (Doc. 29 ¶ 1; Doc. 40 ¶ 1);
● Brown signed the prospectus's cover letter representing that he was the president of Infinity and mailed it from the Marshall Granger office, (Doc. 29 ¶ 2; Doc. 40 ¶ 2);
● From early 2008 through June 2010, Brown used these marketing materials to solicit Marshall Granger clients and other prospective investors to invest in Infinity securities and promissory notes, yielding more than $2 million in investor funds, (Doc. 29 ¶ 5; Doc. 40 ¶ 5);
● Brown issued and signed fictitious notes and stock certificates purportedly reflecting the investors' interests in the Infinity scheme, (Doc. 29 ¶ 6; Doc. 40 ¶ 6);
● Brown misappropriated “virtually all” of the $2 million in investor funds and diverted them to bank accounts for him, Mangini, and various family members, (Doc. 29 ¶ 7; Doc. 40 ¶ 7);
● Brown's plea allocution in his criminal case confirmed that at all relevant times he fully understood that the Infinity scheme was fraudulent and illegal, (Doc. 29 ¶ 14; Doc. 40 ¶ 14);
● Brown signed and submitted the policy application on behalf of Marshall Granger, and answered “no” to each of the following questions: (i) whether “your firm or any owner, partner or officer renders services or conducts any business activities under any other name?”; (ii) whether “[w]ithin the past year . . . your firm, firm affiliates or their personnel . . . rendered financial planning, asset management or investment advisory services?”; and (iii) whether “[w]ithin the past year . . . your firm, firm affiliates or their personnel have: 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 public investment venture that a client also invested in?”, (Doc. 29 ¶¶ 17-19; Doc. 40 ¶¶ 17-19).

         Ultimately, I denied Continental's motion and ordered limited discovery on Continental's internal communications and decision-making process, but denied the Boughton Entities' request for discovery regarding “Brown's Infinity activities and his understanding of the application questions, ” because I found that the facts surrounding Brown's activities could not reasonably be disputed. (Doc. 58 at 28 n.22.) The Boughton Entities filed an Answer, (Doc. 60), and the case proceeded through limited discovery.

         2. Continental's Second Motion for Summary Judgment

         Following limited discovery, and after judgment against Brown and Mangini in the SEC action, Continental filed a second motion for summary judgment on June 10, 2013, (Doc. 71), arguing that it was undisputed that Marshall Granger had made material misrepresentations on its insurance application, thus entitling Continental to rescind the policy, (see Doc. 72 at 1-2). The Boughton Entities cross-moved for summary judgment, (Doc. 78), arguing that Continental's delay in seeking rescission constituted waiver of its entitlement to rescind, (Doc. 82 at 1-2).

         Although I had already ruled that facts concerning Brown's involvement in the Infinity scheme were beyond reasonable dispute, the Boughton Entities in their Local Rule 56.1 counterstatement - which was again drafted by Mr. King, (Doc. 202 ¶ 4), and signed by Mr. Schryber - again objected, among other things, that they were “unable to respond” to many paragraphs that included allegations regarding Brown's fraud “because there ha[d] been no discovery as to any of Brown's purported activities, ” (e.g., Doc. 83 ¶¶ 1, 2, 5, 6, 7). Several of the Boughton Entities' responses were even internally inconsistent. For example, they stated (among other things) that they were unable to respond to the fact that Brown misappropriated over $2 million in investor funds, (id. ΒΆ 7), despite admitting that Brown ...


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