The opinion of the court was delivered by: Joyner, District Judge.
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
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 ...