United States District Court, Eastern District of Pennsylvania
February 17, 1999
COREGIS INSURANCE PLAINTIFF, COMPANY,
BARTOS, BROUGHAL & DEVITO, LLP; JOHN BARTOS; WESLEY M. WASYLIK; FRANK ZAJACEK, JR.; PHILLIP S. SCHWARTZ; AND DAVID SCHEUERMANN, DEFENDANTS.
The opinion of the court was delivered by: Joyner, District Judge.
MEMORANDUM AND ORDER
Presently before the Court is Plaintiff, Coregis Insurance Company's
("Coregis" or "Plaintiff"), Motion for Summary Judgment and Defendants,
Bartos, Broughal & DeVito, LLP ("BB & D"); John Bartos
("Bartos"); Wesley M. Wasylik ("Wasyuk"); Frank Zajacek, Jr.
("Zajacek"); Phillip S. Schwartz ("Schwartz"); and David Scheuermann's
("Scheuermann") (collectively "Defendants"), Cross Motion for Summary
Judgment. Plaintiff brought this declaratory judgment action to determine
whether the underlying legal malpractice claim is covered by professional
liability insurance policy issued to BB & D. For the following
reasons, Plaintiffs Motion for Summary Judgment is granted and
Defendants' Cross Motion for Summary Judgment is denied.
On November 22, 1996, Zajacek, Schwartz and Scheuermann (the "Zajacek
Plaintiffs") filed a complaint against Bartos, Wasylik, and BB & D in
the Court of Common Pleas in Northampton County, Pennsylvania.*fn1 The
facts in the underlying litigation revolve around John Bartos' improper
conduct in promoting, selling, and managing interests in four limited
partnerships, Desert Hospitality Limited Partnerships ("DHLP") #s 1-4,
that were formed to own Perkins restaurants in the state of Arizona.
Bartos acted as an attorney to the Zajacek Plaintiffs prior to formation
of the limited partnerships and promoted and sold interests in these
limited partnerships to the Zajacek Plaintiffs.
Bartos was a shareholder and officer in Desert Hospitality, Inc.
("DHI. Inc."), in which he owned a 12.5% equity interest and which was a
general partner in each of the limited partnerships, DHLPs #s 1-4.
Thus, Bartos was a general and limited partner in each of the four
limited partnerships and directly and/or indirectly controlled, operated
and managed the financial dealings of each of the limited partnerships.
In the underlying litigation, the Zajacek Plaintiffs allege that Bartos
engaged in a "Ponzi" Scheme whereby he paid out purported profits from
DHLP #1 by using funds received from new investments and subsequently
formed DHLPs #s 2-4. The Zajacek Plaintiffs allege that the limited
partnerships were improperly managed and that actual malfeasance was
committed by Bartos and a third party Bartos hired to manage the
restaurants. The Zajacek Plaintiffs further allege that not only were the
investments losing money but that taxes were not being paid and that
there were questionable expenses in the financial statements. Bartos
allegedly concealed these financial losses, irregularities and
malfeasances which placed the limited partnerships into bankruptcy.
The complaint in the underlying action alleges causes of action against
Bartos for securities violations (Count IV); common law fraud and
misrepresentation (Count V); Breach of Good Faith and Fair Dealing as a
partner and corporate insider (Count VI); Consumer Fraud (Count VII);
Breach of Partnership Agreements (Count VIII); and Breach of Fiduciary
Duty as a corporate insider (Count IX).*fn2
Counts I-III of the Zajacek Plaintiffs' underlying complaint allege
legal malpractice against Bartos and BB & D. Specifically these
counts allege malpractice based on the following conduct: commingling or
directing the commingling of funds between the limited partnerships;
or directing the concealment of material information concerning the true
financial condition of the investments; failing to advise of the true
state of financial affairs of the limited partnerships, and breaching the
duties of diligence, communication and loyalty; misrepresenting the
source of distributions to the limited partners of the limited
partnerships; diverting contributions to locations other than those
represented, diverting funds between the limited partnerships in
contravention of the partnership agreements; misrepresenting the
involvement that a third party (Sam Cippoloni) had in the day to day
management of the investments; and acting in an undisclosed conflict of
interest situation by simultaneously functioning as an attorney and the
promoter, investor, corporate insider and counsel to the investment
vehicle. (Zajacek Compl. at ¶¶ 246-247).
Coregis issued a claims-made Lawyers Professional Liability Policy
(No. PLL-320329-8) to BB & D effective for the policy period of May
14, 1996 to May 14, 1997 (the "Coregis Policy"). This policy contains two
exclusions and an endorsement which Coregis argues precludes coverage of
the Zajacek Plaintiffs' claims. Coregis brought this declaratory judgment
action to determine whether these exclusions apply and thus whether they
have a duty to defend in the underlying suit. The underlying facts, as
concerns the application of the exclusions in the Coregis Policy, are not
in dispute and both parties move for summary judgment in this declaratory
When interpreting an insurance policy, "the court must ascertain the
intent of the parties as manifested by the language of the policy."
Visiting Nurse Association of Greater Philadelphia v. St. Paul Fire and
Marine Insurance Co., 65 F.3d 1097, 1100 (3d Cir. 1995) (internal
citations omitted). In interpreting the policy, clear and unambiguous
language must be given its plain and ordinary meaning. Id. If a provision
of the policy is ambiguous, it must be construed against the insurer and
in favor of the insured. Id. "[A] court must read insurance policies to
avoid ambiguities and not torture the language to create them." Id.
Under Pennsylvania law, an insurance company has a duty to defend an
insured whenever the complaint filed by the injured party may potentially
come within the policy's coverage. Id. "If the factual allegations in the
complaint state a claim to which the policy potentially applies, the
insurer must defend . . . until it can confine the claim to a recovery
that the policy does not cover." Id. Further, "[e]xclusions from coverage
contained in an insurance policy will be effective against an insured if
they are clearly worded and conspicuously displayed, irrespective of
whether the insured read the limitations or understood their import."
Pacific Indemnity Co. v. Linn, 766 F.2d 754, 761 (3d Cir. 1985) (internal
The Coregis Policy provides, inter alia, the following exclusions:
This policy does not apply to
E. any CLAIM arising out of any INSURED'S activities
as an officer, director, partner, manager or employee
of any company, corporation, operation, organization
or association other than the NAMED INSURED;
G. any CLAIM arising out of or in connection with the
conduct of any business enterprise other than the
NAMED INSURED (including ownership, maintenance or
care of any property in connection therewith) which is
owned by any INSURED or in which any INSURED is a
partner, or which is directly or indirectly
controlled, operated or managed by any INSURED either
individually or in a fiduciary capacity.
The policy also contains an additional exclusion, Endorsement K1, which
This policy does not apply:
To any CLAIM arising out of professional services
rendered or that should have been rendered to or on
behalf of any entity which, at that time, was 5% or
more owned, controlled, managed, or operated by any
INSURED or combination of INSUREDS.
The parties do not dispute that BB & D is the named insured or that
Bartos is an insured under the Coregis Policy.
Coregis argues that Bartos' alleged conduct, which forms the basis of
the legal malpractice claim, falls within the "business enterprise"
exclusions obviating the need for it to defend in the underlying suit.
The Defendants argue that these exclusions do not apply because the
conduct that forms the basis of their complaint all occurred prior to
formation of DHLPs #s 2-4.
Defendants first contend that the language of Exclusion G, which
requires that the insured's activities "arise out of" or be "in
connection with" the conduct of any business enterprise other than the
named insured, only applies to business enterprises that are in existence
at the time of the alleged malpractice.*fn3 Therefore, Defendants
argue, since DHLPs #s 2-4 were not in existence when the conduct
allegedly occurred, the conduct could not "arise out of" or be "in
connection with" these entities.
However, we agree with Coregis that the clear and unambiguous language
of Exclusion G does not require that the partnerships be in legal
existence at the time the alleged malpractice occurred in order for the
exclusion to apply. See generally Dukart v. National Union Fire Ins. Co.
of Pittsburgh, PA, 1993 WL 331175 (Del.Super. July 13, 1993) (finding
that language in a similar exclusion "does not require that the act of
alleged malpractice or, for that matter, any other event, such as the
accrual of the cause of action or the making of a claim, occur during the
existence of the legal entity used to carry on the business
enterprise"). Further, Exclusion G applies to the Zajacek Plaintiffs'
claims because they arise out of or are in connection with a "business
enterprise other than the named insured" (DHLPs #s 2-4) in which one of
the insureds (Bartos) is a partner and which is "directly or indirectly
controlled, operated or managed by" one of the insureds (Bartos) "either
individually or in a fiduciary capacity." (Coregis Policy Exclusion G).
Moreover, even if the language of Exclusion G did require the legal
existence of the other business enterprise contemporaneous with the
alleged conduct, Exclusion G would still apply to Bartos' conduct and
thus exclude the Zajacek Plaintiffs' claims. Bartos was an officer,
director and shareholder of DHI, Inc. during the entire time frame
encompassed in the Zajacek Plaintiffs' complaint. It is undisputed that
Bartos, on behalf of DHI, Inc., solicited investors for the series of
limited partnerships, DHLPs #s 1-4. Further, DHI, Inc. was the general
partner in each of the limited partnerships. Thus, the Zajacek Plaintiffs'
claims arise out of or are in connection with DHI. Inc., a business
enterprise other than the named insured which is owned by a named insured
or in which a named insured is a partner.*fn4 See (Coregis Policy
Further, Exclusion E and Endorsement K1 would also apply to exclude the
Plaintiffs' claims. As stated above, the Zajacek Plaintiffs' claims arise
out of Bartos' conduct as an officer and director of DHI, Inc.
Therefore, the Zajacek Plaintiffs' claims arise out of or are in
connection with an insured's activities as an officer or director of a
corporation other than the named insured (DHI, Inc.), and Exclusion E
applies. Further, the offering memoranda prepared by Bartos to solicit
investors in the limited partnerships were "professional services
rendered . . . to or on behalf of any entity which, at the time, was 5%
or more owned . . . by any insured." (Coregis Policy Endorsement K1).
Bartos maintained a 12.5% equity interest in DHI, Inc., and the offering
memoranda to entice investors was arguably prepared for DHI, Inc., one of
the general partners in each limited partnership. Thus, the language of
Endorsement K1 would also apply.
We find that the clear and unambiguous language of Exclusions E, G and
Endorsement K1 apply to the Zajacek Plaintiffs' claims; therefore,
Coregis does not have a duty to defend the malpractice claims in the
An appropriate Order follows.
AND NOW, this 17th day of February, 1999, upon consideration of
Plaintiffs Motion for Summary Judgment and Defendants' response thereto
as well as Defendants' Cross Motion for Summary Judgment and Plaintiffs
response thereto, it is hereby ORDERED, in accordance, with the foregoing
Memorandum, as follows:
1) Plaintiffs Motion for Summary Judgment is GRANTED; and
2) Defendants' Cross Motion for Summary Judgment is DENIED.