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COREGIS INS. CO. v. LAROCCA

United States District Court, Eastern District of Pennsylvania


December 7, 1999

COREGIS INSURANCE COMPANY, PLAINTIFF,
v.
F. CRAIG LAROCCA, ET AL., DEFENDANTS.

The opinion of the court was delivered by: Lowell A. Reed, Jr., Senior District Judge.

MEMORANDUM

Now before this Court are the cross-motions of plaintiff Coregis Insurance Company (Document No. 18) and defendant F. Craig LaRocca (Document No. 19) for summary judgment.*fn1 Upon consideration of the motions, memoranda and responses, and the record pursuant to Rule 56 of the Federal Rules of Civil Procedure, the motion of plaintiff will be granted and the motion of defendant will be denied.

I. BACKGROUND

Defendant F. Craig LaRocca ("LaRocca"), an attorney, has been sued in the Superior Court of New Jersey for his role in a botched real estate investment scheme. The complaints and counterclaims in those suits allege that LaRocca was negligent in his conduct as an attorney and as a partner and trustee in a realty business enterprise. LaRocca claims he is entitled to coverage for the legal malpractice claims in those suits under the professional liability insurance policy he holds with plaintiff Coregis Insurance Company ("Coregis"). Coregis brought this declaratory judgment action under 28 U.S.C. § 2201, seeking a determination of whether LaRocca is eligible for coverage. LaRocca counterclaimed, seeking declaration of coverage and alleging breach of contract and breach of the duties of good faith and fair dealing.

The facts of the case are largely undisputed. LaRocca was one of three trustees of the New Gretna Realty Trust, which was formed in March 1994 for the purpose of acquiring real estate to be developed and sold. The trust successfully acquired the property it sought and commenced construction of a real estate development called "Drewes Landing," which was to consist of residential lots upon which modular houses would be built and sold at a profit. In December 1994, for tax purposes, the trust was transformed into the New Gretna Realty, L.L.C.,*fn2 which continued the work of the trust. LaRocca was one of 16 partners in New Gretna Realty, and he held a 7.5 % interest in the company. (Motion of Defendant F. Craig LaRocca for Summary Judgment, Exhibit B, at 24) ("LaRocca Motion").

New Gretna contracted with a company called the Page Group, Inc., to construct homes on the lots. The Page Group was headed by Joseph Paggi. Paggi proceeded to encumber the Drewes Landing properties with millions of dollars in mortgages, apparently without authority.*fn3 Paggi committed suicide in August 1995.

The underlying suits in the Superior Court of New Jersey (the suits in which LaRocca is a defendant and for which LaRocca seeks coverage from Coregis) arose out of competing lien rights and other damages resulting from the financial irregularities that plagued the Drewes Landing project. Three suits have been filed in which LaRocca has been named as a defendant or third-party defendant: Carnegie Bank, N.A. v. Page Group, Inc., No. 5036-96 (Sup.Ct. N.J. Ocean Cty. 1996); Serot v. Page Group, No. 1153-96 (Sup.Ct. N.J. Ocean Cty. 1996); Pesce v. Page Group, Inc., No. 03252-96 (Sup.Ct. N.J. Burlington Cty. 1996). In each case, LaRocca is alleged to have violated his duty as a trustee of New Gretna, and to have committed legal malpractice. It is for the latter claims that LaRocca seeks coverage.

The parties do not dispute that LaRocca is the named insured under the professional liability policy. However, Coregis argues that the claims against LaRocca are excluded under the terms of the policy. Coregis cites two exclusions contained in the "Pennsylvania Lawyers Professional Liability" form (COR.OOP. 0430 (2/95)) appended to the policy issued to LaRocca:

The policy does not apply to: . . .

  E. any CLAIM arising out of an 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 the ownership, maintenance
    or care of any property in connection therewith)
    which is owned by an 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; . . .

(Memorandum of Law in Support of Coregis Insurance Company's motion for Summary Judgment Against F. Craig LaRocca and Pearlstine/Salkin Associates, Exhibit B to Exhibit 1, Coregis Lawyers Professional Liability Insurance Policy, No. PL-319334-4, Policy Period Jan. 23, 1996 through Jan. 23, 1997 ("Coregis Policy") [emphasis in original]).

LaRocca contends that the conduct at issue in the underlying claims arose solely out of the legal services that he provided to New Gretna, not out of his role as a trustee or partner of New Gretna, and therefore the exclusions do not apply.*fn4

II. ANALYSIS

Under Rule 56(c) of the Federal Rules of Civil Procedure, "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law," then a motion for summary judgment must be granted. The question before the Court at the summary judgment stage is "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." See Anderson v. Liberty Lobby, 477 U.S. 242, 251-52, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). The Court's role at summary judgment is not to weigh the evidence, but to determine whether there is a genuine issue for trial; that is, an issue upon which a reasonable jury could return a verdict in the nonmoving party's favor. See id. at 249, 106 S.Ct. at 2511.

The moving party "bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of `the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,' which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986). The nonmoving party must then "go beyond the pleadings and by her own affidavits, or by the `depositions, answers to interrogatories, and admissions on file,' designate `specific facts showing that there is a genuine issue for trial.'" Id. at 324, 106 S.Ct. at 2553.

In deciding whether there is a disputed issue of material fact, the "`inferences to be drawn from the underlying facts . . . must be viewed in the light most favorable to the party opposing the motion.'" Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986) (quoting United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962)).

The construction of the terms of the policy is governed by Pennsylvania law, as the policy was delivered in Pennsylvania. See Travelers Indem. Co. v. Fantozzi, 825 F. Supp. 80, 84 (E.D.Pa. 1993). Under Pennsylvania law, interpretation of the terms of an insurance contract is a question of law to be decided by the Court, and where there is no genuine issue of material fact, there is no need to submit the issue to a trier of fact. See Pacific Indem. Co. v. Linn, 766 F.2d 754, 760 (3d Cir. 1985).

In interpreting an insurance policy, unambiguous terms should be given their plain and ordinary meaning. See St. Paul Fire & Marine Ins. Co. v. Lewis, 935 F.2d 1428, 1431 (3d Cir. 1991). A provision of a policy is ambiguous if "reasonably intelligent men on considering it in the context of the entire policy would honestly differ as to its meaning," Hamilton Bank v. Insurance Co. of North America, 384 Pa. Super. 11, 16, 557 A.2d 747, 750 (1989) (quoting Celley v. Mutual Benefit Health & Accident Ass'n, 229 Pa. Super. 475, 481-83, 324 A.2d 430, 434 (1974)), and if more precise language could have eliminated the ambiguity. See Fantozzi, 825 F. Supp. at 84 (quotation omitted). Exclusions from coverage "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." Linn, 766 F.2d at 761 (internal citations omitted).

The policy at issue in this case covers claims "arising out of the conduct of the insured's profession as a lawyer . . .," (Coregis Policy, at 1), and thus I conclude that the underlying legal malpractice suits, on their face, fall within the coverage of the Coregis policy. The question before me on Coregis' motion is whether the policy's exclusions apply to the underlying claims against LaRocca, and thus whether LaRocca is ineligible for coverage.

I conclude as a threshold matter that reasonable persons could not differ on the meaning of the two relevant exclusions in the policy, E and G, and that the language of the exclusions is clear and unambiguous. See Coregis Ins. Co. v. Bartos, 37 F. Supp.2d 391, 394 (E.D.Pa. 1999) (concluding that identical policy exclusions were clear and unambiguous). Furthermore, I conclude that LaRocca was an "officer" and "partner" of a "company" or "business enterprise," New Gretna, within the meaning of Exclusions E and G.*fn5

III. The Pepicelli Analysis

As both parties acknowledge, controlling case in this jurisdiction is Niagara Fire Ins. Co. v. Pepicelli, 821 F.2d 216 (3d Cir. 1987). In that case, the Court of Appeals for the Third Circuit considered legal malpractice liability exclusions that were substantially similar to those at issue in this case.*fn6 Pepicelli, a lawyer, represented tire manufacturer Perma Tread. Pepicelli also owned a business that had entered into an agreement to purchase a manufacturing plant from Perma Tread. The plant burned down after the purchase agreement with Pepicelli's business was signed, but before closing. Pepicelli and his law firm represented Perma Tread in its efforts to secure coverage from its fire insurer for damages to the plant sustained during the fire. When these efforts failed, Perma Tread sued Pepicelli and his law firm for legal malpractice. Pepicelli then sought coverage in that suit under a professional liability policy Pepicelli held with Niagara Fire Insurance Company. Niagara filed a declaratory judgment suit on Pepicelli's claim for coverage under his policy. The court concluded that two exclusions cited by Niagara did not apply to Pepicelli and that Pepicelli was therefore entitled to coverage under the policy.

The Court of Appeals for the Third Circuit considered three major factors in addressing the two exclusions in Pepicelli. First, the court sought to determine whether the actions or interests of the insured attorney in his business enterprise were at issue in the underlying litigation and whether the resolution of the underlying claims would affect those interests. See Pepicelli, 821 F.2d at 220. While the court in Pepicelli concluded that the attorney's business interests were not at issue in the underlying suits, I cannot so conclude today. The present case involves three different underlying suits in which LaRocca's business interests in New Gretna are at issue; the suits include claims of negligence against LaRocca in his role as both a trustee and partner of New Gretna. In addition, the suits against LaRocca would undoubtedly affect his interest in his business, New Gretna, as both LaRocca and his business are defendants and adversaries in those suits and both face liability for the losses of the plaintiffs and third-party plaintiffs in those cases. Thus, I conclude that the insured attorney's (LaRocca's) interests in his business (New Gretna) are indeed at issue in the underlying litigation.

A. Officer, Director or Partner Exclusion

Turning to the individual exclusions, the court in Pepicelli considered an exclusion that, like Exclusion E in the present case, exempted from coverage claims that arise out of the insured lawyer's activities as an officer or director of a corporation or business. The court held that the exclusion applied to situations in which an individual acted solely as a business person or simultaneously as business person and lawyer, and concluded that the exclusion did not apply to the attorney's claim. See Pepicelli, 821 F.2d at 220-21.

A reasonable trier of fact applying this analysis could not reach the same conclusion in the instant case. The underlying malpractice claims against LaRocca, while of course critical of his legal representation of New Gretna, are not "based solely on [LaRocca's] . . . legal representation" of New Gretna; rather, they also are closely intertwined with his role in New Gretna as both a partner and trustee. See id. at 221. The allegations refer to a period of time during which LaRocca was both an attorney and partner of New Gretna.*fn7 The plaintiffs and third-party plaintiffs in the underlying claims allege that during that time, LaRocca knew or should have known about Paggi's conduct, and failed to adequately supervise transactions related to Drewes Landing. (See, e.g., Coregis Motion, Exhibit G to Exhibit 1, Answer and Counterclaim of Fidelity National Title Ins. Co., at 31). The allegations involve overlap between LaRocca's role as legal counsel and partner/trustee to New Gretna, because his knowledge of Paggi's conduct and supervision of transactions could have arisen from or related to both roles. Thus, the underlying legal malpractice claims "simultaneously involve[d] business decisions by [LaRocca]," which is the precise scenario under which the Court of Appeals for the Third Circuit suggested that such an exclusion would apply. See Pepicelli, 821 F.2d at 221. I therefore conclude that Exclusion E applies to LaRocca, and that he is not eligible for benefits under the Coregis professional liability policy. See Coregis Ins. Co. v. Bartos, 37 F. Supp.2d 391, 394-95 (E.D.Pa. 1999).

B. Business Enterprise Exclusion

Finally, the court in Pepicelli also considered the applicability of a "business enterprise" exception similar to Exclusion G in LaRocca's policy. The court held that because "the malpractice claims [were] not `made by or against'" the insured attorney's business enterprise and were not made "in connection with" the business enterprise, the exclusion did not apply. See Pepicelli, 821 F.2d at 221.

Here, faced with a similar exclusion but very different facts, I conclude that the language of Exclusion G applies to the suits against LaRocca. It is axiomatic that a suit against a lawyer for services he provided to a business enterprise in which he was a partner is a suit that "arises out of" and is "in connection with" that business enterprise, which is the precise scenario that presents itself in this case. Furthermore, the malpractice claims in the underlying litigation here were both "made by" and "against" the insured attorney's business, New Gretna. See id.*fn8 I conclude that the suits arise out of and are connected with LaRocca's interest in his business.*fn9

Therefore, I find that the broad wording of Exclusion G encompasses the underlying malpractice suits against LaRocca and thus renders him ineligible for coverage under the Coregis policy.*fn10

C. LaRocca's Arguments

LaRocca makes a three-pronged argument in support of coverage.

First, he asserts that his liability in all three underlying suits rests solely on a letter he wrote on February 8, 1995, authorizing the encumbering of 20 lots in the Drewes Landing development. The assertion is without merit; neither the complaints in the underlying actions nor the record before me suggest that liability rests on such a limited sphere of conduct. The complaints allege in general fashion that LaRocca "knew or should have known" of the financial misconduct by Paggi that gave rise to the underlying suits and that he "failed to exercise adequate supervision" over legal instruments used in the sale and encumbrance of properties in the Drewes Landing development. (See, e.g., Coregis Motion, Exhibit G to Exhibit 1, Answer and Counterclaim of Fidelity National Title Ins. Co., at 31). LaRocca provides neither evidence nor persuasive argument as to why the Court should assume that these broadly worded allegations rest on the paper-thin foundation of a single letter.

By narrowing the factual basis of his liability, LaRocca seeks to bolster the second prong of his argument, which can be summarized in this way: because, in the precise moment he wrote the letter, LaRocca was acting solely as legal counsel, the claims against him do not fall within the ambit of Exclusions E and G.*fn11 His argument attempts to narrow the scope of the relevant conduct under Exclusions E and G down to a single factual episode, and to persuade the Court that because LaRocca may have been wearing his lawyer "hat" at the precise moment he was writing the letter at issue, Exclusions E and G do not apply.*fn12

I read the plain language of the exclusions to apply much more broadly than LaRocca suggests to encompass "any CLAIM arising out of" or "in connection with" an insured attorney's business roles and activities, including claims that reside in the twilight between business and legal affairs. (Coregis Policy, at 3).*fn13 The underlying legal malpractice claims, as discussed above, focus on events that took place during a time when LaRocca wore two hats; one as legal counsel to New Gretna, and another as trustee and part owner of New Gretna. Distinguishing with certainty between the roles LaRocca was playing at different moments in his dealings with New Gretna and Drewes Landing could prove impossible. The broad, inclusive language of the exclusions, however, makes the drawing of such distinctions unnecessary. The exclusions apply to any claims that "arise out of" situations in which the insured was both a lawyer to a business and an officer in that same business, and because LaRocca played both roles in New Gretna and the malpractice claims arise out of those roles, the exclusions apply to the suits against him. See Bartos, 37 F. Supp.2d at 394-95.

Finally, LaRocca argues that he had "no ownership interest or control" over two of the plaintiffs in the underlying suits (Carnegie Bank and Fidelity National Title Ins. Co.), and therefore the policy exclusions do not apply to their claims. His argument implies that exclusions such as E and G operate only where the insured attorney is sued by his own business or an organization in which he or she had an ownership interest in or control over. This misconstrues the language of the policy exclusions and the holding of the court of appeals in Pepicelli. There is no suggestion in Pepicelli that the exclusions applied only when an insured attorney's business sued the attorney in the underlying suit. The basis for LaRocca's argument appears to be the court's suggestion in Pepicelli that the exclusions did not apply because "the malpractice claims [were] not `made by or against'" the insured attorney's business enterprise. See Pepicelli, 821 F.2d at 221. However, the very opposite is true in this case; in each underlying suit, the malpractice claims have been made "against" New Gretna, and in one case, the malpractice claims have been made "by" New Gretna. Thus, this argument fails as well.*fn14

I conclude that Exclusions E and G apply to the underlying claims against LaRocca in the three above-mentioned suits in the Superior Court of New Jersey and find that Coregis is under no obligation to provide coverage to LaRocca in those suits. I will therefore grant the motion of Coregis for summary judgment on Counts I and II of its First Amended Complaint for Declaratory Judgment.

LaRocca has moved for summary judgment on his counterclaim for coverage under his insurance policy and for counsel fees. Having concluded as a matter of law that LaRocca's claim falls within the plain language of Exclusions E and G, and that he is therefore not eligible for coverage, I will deny LaRocca's motion for summary judgment on his counterclaim for coverage and attorneys' fees.

LaRocca also moves for summary judgment on his counterclaim of breach of contract. Because I have determined that LaRocca's claim falls within the insurance contract's exclusionary language, I conclude that a denial of benefits under the policy does not breach the insurance contract between LaRocca and Coregis. LaRocca's motion for summary judgment will therefore be denied as to his breach of contract claim.

LaRocca seeks summary judgment on his counterclaim for bad faith, as well. To prove a claim of bad faith on the part of an insurance company, the insured must demonstrate with the support of clear and convincing evidence (1) that the insurer lacked a reasonable basis for denying benefits and (2) that the insurer knew of or recklessly disregarded its lack of reasonable basis. See Klinger v. State Farm Mutual Automobile Ins. Co., 115 F.3d 230, 233 (3d Cir. 1997). LaRocca's claim fails both prongs. Because I have concluded that Coregis' interpretation of the relevant exclusions and its consequent denial of benefits was correct under the policy, it follows that Coregis had a reasonable basis for denying coverage. LaRocca's motion for summary judgment on his counterclaim of bad faith against Coregis therefore cannot prevail as a matter of law.*fn15

III. CONCLUSION

Having determined that the exclusions in LaRocca's professional responsibility insurance policy apply to the legal malpractice claims made against him in the underlying suits in the Superior Court of New Jersey, I will grant the motion of Coregis for summary judgment and deny the motion of LaRocca for summary judgment.

An appropriate Order follows.

ORDER

AND NOW, this 7th day of December, 1999, upon consideration of the cross-motions of plaintiff Coregis Insurance Company (Document No. 18) and defendant F. Craig LaRocca (Document No. 19) for summary judgment and the memoranda in support thereof and responses thereto, having thoroughly reviewed the pleadings and evidence pursuant to Rule 56 of the Federal Rules of Civil Procedure, and for the reasons set forth in the foregoing memorandum, it is hereby ORDERED that the motion of Coregis Insurance Company is GRANTED as to Counts I and II of the complaint, and the motion of LaRocca is DENIED as to all counts of the counterclaim.

IT IS HEREBY DECLARED, pursuant to 28 U.S.C. § 2201, that Coregis does not provide coverage under Policy Number PL-319334-4 and has no duty to defend LaRocca, due to the operation of Exclusions E and G, in the following actions filed against LaRocca in the Superior Court of New Jersey: Carnegie Bank, N.A. v. Page Group, Inc., No. 5036-96 (Sup.Ct. N.J. Ocean Cty. 1996); Serot v. Page Group, No. 1153-96 (Sup.Ct. N.J. Ocean Cty. 1996); Pesce v. Page Group, Inc., No. 03252-96 (Sup.Ct. N.J. Burlington Cty. 1996).

This is a Final Order.


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