According to the complaint in the underlying action, the saga
leading up to this case began in May 1994, when defendant Armando
Ferroni ("Ferroni"), an Italian businessman, and defendant Gary
W. Black, Sr. ("Black Sr."), on behalf of his company, defendant
Nouveau International, Inc. ("Nouveau"), explored the possibility
of a pizza-related business arrangement. Black Sr. had invented a
method of preserving microwaved dough products and incorporated
it into a robotic pizza vending machine. He sought Ferroni's
assistance in delivering these machines to Europe. During those
initial discussions, Black Sr. allegedly represented to Ferroni
that his company, Nouveau, was financially sound.*fn2
Ferroni believed Nouveau's pizza vending machine had all the
ingredients of success and agreed to market Nouveau's machines in
Italy and Europe. In February 1995, Ferroni, joined by fellow
Italian businessman Marco Fojanini (together, the "Italian
defendants"), entered into an agreement with Nouveau under which
the Italian defendants would serve as Nouveau's exclusive
marketer and distributor in Europe. Allegedly in reliance on the
Blacks' representations concerning the financial soundness of
their company, the Italian defendants invested a significant
amount of their own funds in promoting the Nouveau machines in
Italy and Europe, purchasing numerous pizza machines, and
entering into distribution contracts.
A dispute between the parties began to mushroom when Nouveau
and the Blacks failed to deliver on numerous assurances. The
machines sent by Nouveau to Ferroni and Fojanini were defective
in several respects due to technical and aesthetic
incompatibilities with Europe,*fn3 and Nouveau did not promptly
address the defects, despite promises that it would do so.
Without working machines to test or show to customers, Ferroni
and Fojanini's business prospects fell like dominos.
Topping it all off was the fact that Black Sr.'s lofty account
of Nouveau's financial status was mere pie in the sky; in
December 1995 Black Sr. admitted to the Italian defendants
Nouveau was in bankruptcy, and had been throughout their
relationship. Black also revealed that Nouveau had sued an
individual for overselling its distributorships and another
corporation for supplying Nouveau with defective pizza vending
machines. In February 1996, Black Sr. promised to compensate the
Italian defendants for their losses, but they never received the
full amount promised.
Fojanini and Ferroni sought a slice of the profits from the
sales of the pizza machines, and in April 1996, the parties
renegotiated their exclusive distributorship deal to require
Nouveau to make monthly payments to the Italian defendants of
$20,000 plus a percentage from the sale of every machine.
However, the Italian defendants later discovered that Black Sr.
made deals with other distributors in Europe in apparent
violation of the agreement. Nouveau continued to deliver
deficient machines to the Italian defendants.
Finally, in August of 1996, Black Sr. told Fojanini and Ferroni
that he was no longer the president of Nouveau, and referred them
to the new president, Chris Plunkett,
who, the Italian defendants claim, reneged on Black Sr.'s April
1996 promise to provide monthly financial support and failed to
resolve outstanding issues related to the pizza machines and food
product. Black Sr. also informed Fojanini and Ferroni that
Nouveau had no intention of changing the pizza ingredients and
nevertheless insisted that they purchase additional Nouveau
vending machines. Fojanini and Ferroni brought a suit against
Nouveau, Black Sr., and Black Jr. in May 1997, stating tort
claims of fraud, and intentional and negligent
Defendants Black Sr., and Black Jr., sought coverage in that
suit under a directors and officers liability insurance policy
that Nouveau purchased from plaintiff American Guarantee
Liability and Insurance Company ("American Guarantee").*fn5
American Guarantee then filed this suit, seeking a declaration
that it has no duty to cover or defend in the underlying action.
Plaintiff and defendants Fojanini, Ferroni, and Europe Invest
have filed cross-motions (Document Nos. 22 and 23) for summary
judgment in this declaratory judgment action.*fn6
For the following reasons, upon consideration of the parties'
motions and the evidence pursuant to Rule 56 of the Federal Rules
of Civil Procedure, the motion of plaintiff will be denied, and
the motion of defendants will be granted in part and denied in
According to 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 non-moving 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)). On cross-motions for
summary judgment, the court must determine separately on each
party's motion whether judgment may be entered in accordance with
the summary judgment standard. See Sobczak v. JC Penny Life Ins.
Co., 1997 WL 83749 (E.D.Pa. Feb. 18, 1997), aff'd,
129 F.3d 1256 (3rd Cir. 1997) (citing 10A Charles Alan Wright, Arthur R.
Miller, Mary Kay Kane, Federal Practice and Procedure § 2720,
at 23-25 (2d ed. 1983)).
Both parties agree that the construction of the terms of the
policy are governed by Pennsylvania law. See Travelers Indem.
Co. v. Fantozzi, 825 F. Supp. 80, 84 (E.D.Pa. 1993). Under
Pennsylvania law, the 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 jury. See Rich Maid Kitchens, Inc.
v. Pennsylvania Lumbermens Mut. Ins. Co., 641 F. Supp. 297, 306
(E.D.Pa. 1986), aff'd, 833 F.2d 307 (3d Cir. 1987) (citing
Pacific Indem. Co. v. Linn, 766 F.2d 754, 760 (3d Cir. 1985)).
A. Prior Knowledge Exclusion
American Guarantee first argues that it owes no coverage
because of an exclusion in the policy that reads, "The
Underwriter shall not be liable for loss on account of any Claim
made against an Insured Person based upon, arising from, or in
consequenxo [sic] of any facts, circumstances, acts, errors, or
omissions disclosed or required to be disclosed in response to
questions 8 or 9(c) of the application to this policy. . . ."
(Motion of Plaintiff for Summary Judgment, Exhibit 1, Directors
and Officers Liability and Reimbursement Policy, Endorsement No.
1, at 1). Question 8 of the application reads:
Does any director or officer of the Applicant
Corporation or its subsidiaries have any knowledge or
information of any act, error, omission or other
circumstance which he/she believes either will give
rise or could give rise to a lawsuit being filed or a
claim being made against the directors and officers
under the proposed insurance?
(Motion of Plaintiff for Summary Judgment, Exh. 2, Directors and
Officers Liability and Company Reimbursement Application, at 3).
On Nouveau's application, which was completed on September 30,
1996, Question 8 was marked "No". American Guarantee argues that
an officer or director of Nouveau must have known of the
misrepresentations made to Fojanini and Ferroni because Black
Sr., an officer of Nouveau, allegedly made the very
misrepresentations on which the underlying claims were based. In
light of Black Sr.'s knowledge of the misrepresentations,
American Guarantee argues, the burgeoning dispute between Nouveau
and Fojanini and Ferroni was "required to be disclosed" on the
application. Plaintiff thus urges the Court to conclude that the
exclusion operates to deny coverage to the Blacks in the lawsuit
arising out of the relationship between Nouveau and Fojanini and