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COREGIS INS. CO. v. BARTOS

February 17, 1999

COREGIS INSURANCE PLAINTIFF, COMPANY,
v.
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.

BACKGROUND

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 judgment action.

DISCUSSION

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 citations omitted).

The Coregis Policy provides, inter alia, the ...


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