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Westport Insurance Corp. v. Hanft & Knight

December 10, 2007

WESTPORT INSURANCE CORPORATION, PLAINTIFF,
v.
HANFT & KNIGHT, P.C., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Judge John E. Jones III

MEMORANDUM

Before the Court are cross-motions for summary judgment filed by Plaintiff Westport Insurance Corporation ("Plaintiff" or "Westport") and Defendants Raymond A. Diehl and Genevieve A. Diehl ("Defendants" or "the Diehls"). These motions have been fully briefed, and the Court has heard oral argument on the issues raised therein. For the reasons set forth below, the Court will grant Westport's motion (Doc. 50) and deny the Diehls' motion (Doc. 55).

I. BACKGROUND

This is a declaratory judgment action regarding professional liability insurance. The underlying facts reveal the tragic circumstances that resulted from a lawyer's double life. Westport seeks a declaration that it owes no duty to defend or indemnify the Estate of Michael J. Hanft and Hanft & Knight, P.C., who are defendants in an action filed by the Diehls in the Cumberland County Court of Common Pleas. The Diehls oppose Westport's declaration and also seek an affirmative declaration of coverage for the underlying suit. Westport is currently defending the underlying action under a reservation of rights. The following facts are derived from the operable underlying complaint and the insurance policy at issue, and are undisputed.*fn1

A. The Underlying Action

The Diehls filed the underlying complaint on September 8, 2004 against Hanft & Knight and Susan Hanft, as representative of Michael Hanft's estate.*fn2

The operable complaint in the underlying action is the Third Amended Complaint. (See Westport Ex. E, Doc. 50-6.) In the underlying complaint, the Diehls make the following allegations.

The Diehls engaged Michael Hanft as their attorney sometime prior to 1997 or 1998. (Third Amend. Compl. ["TAC"] ¶ 7.) Beginning in 1997, Hanft frequently "took unfair advantage of Mr. and Mrs. Diehl by borrowing large sums of money from them, often on an unsecured basis and always on terms unfavorable to the Diehls." (TAC ¶ 10.) In making these loans, the Diehls relied on Hanft's status as a professional and their trust in him as their attorney. (TAC ¶ 11.)

Beginning in 1997, Hanft borrowed money from the Diehls, purportedly for a "construction project" which would generate sufficient returns to enable Hanft to timely repay the Diehls with interest. (TAC ¶¶ 10, 13.) The Diehls relied on Hanft's representation regarding the "construction project" in lending this money. (TAC ¶ 14.)

On November 13, 1997, Hanft also borrowed $86,000 from the Diehls, purportedly to purchase property located at 310 Fairview Street, South Middleton Township, Cumberland County. (TAC ¶¶ 27, 64.) To secure this loan, Hanft gave the Diehls a mortgage on the 310 Fairview Street property, although he never provided the Diehls a copy of the mortgage note. (TAC ¶¶ 66-67, Ex. C.) Hanft made payments on this loan, but failed to pay the Diehls $34,745.48 in interest. (TAC ¶¶ 27, 70-72.)

On May 3, 1999, Hanft borrowed $65,000 from the Diehls, purportedly to purchase property located at 308 Fairview Street, South Middleton Township, Cumberland County. (TAC ¶ 52.) This loan was an oral agreement; although the Diehls requested a note and mortgage from Hanft, he failed to provide them. (TAC ¶ 54.) Hanft repaid the principal on this loan in two installments on October 11, 2002 and February 18, 2004, and made one payment of interest on July 2, 1999. (TAC ¶¶ 56-57.) However, Hanft never paid $22,012.33 in remaining interest due on the loan. (TAC ¶¶ 53, 59-62.)

By August 2000, Hanft had borrowed more than $500,000 from the Diehls for the "construction project," and continued to borrow more, while making only a single payment of $10,000 in August 2001. (TAC ¶ 17.) By January 2003, Hanft owed the Diehls $784,742.07 in principal and interest. (TAC ¶ 18.) In January 2003, acting as borrower and attorney for the lenders, Hanft prepared a promissory note to evidence this debt. (TAC ¶¶ 19, 21, Ex. A.) The note, signed by Hanft and his wife, required the borrowers to "attempt" to make monthly payments. (TAC ¶¶ 20, 21.) The borrowers made only one payment of $2,396.18 in March 2004. (TAC ¶ 24.) The Diehls later learned that Hanft's representations regarding the "construction project" were false; there was no project, and Hanft had used the money to gamble at casinos and satisfy gambling debts. (TAC ¶¶ 15-16.)

On January 1, 2002, Hanft and Gregory H. Knight, Esq. formed the law firm Hanft & Knight, P.C., the party to this action. (TAC ¶¶ 4, 6, 34.) Hanft was the 75% majority shareholder of the firm. (TAC ¶ 31.) Hanft committed suicide on August 11, 2004. (TAC ¶ 3.)

In the underlying complaint, the Diehls assert four causes of action against Hanft's estate. First, the Diehls seek rescission of the 2003 promissory note. (TAC, Count I.) The Diehls allege that they were "induced to loan the money and accept the 2003 Note by [Hanft's] fraudulent representations" and Hanft's abuse of his position as their attorney. (TAC ¶ 39.) The Diehls further allege that they received nothing of value for the promissory note, "which [Hanft] never intended to repay or, in the alternative, believed he could repay only because of a [sic] unreasonable disregard for the truth that was so reckless as to amount to conscious deception." (TAC ¶ 40.) The Diehls demand "the return of all unpaid funds borrowed by [Hanft] under false pretenses," which totals $614,735.20 in principal plus interest of $275,184.79. In the alternative, the Diehls assert a cause of action for breach of the 2003 promissory note, demanding damages of principal and interest totaling $909,962.04. (TAC, Count II.) The Diehls also assert causes of action for breach of contract in regard to the 308 and 310 Fairview Street loans, seeking the unpaid interest on those loans. (TAC, Counts III and IV.)

The Diehls also assert three causes of action against Hanft & Knight. The Diehls first allege that Hanft & Knight breached its professional duty of care both through the actions of its managing partner Hanft, and by failing to adequately supervise Hanft. (TAC, Count V.) The Diehls also allege that Hanft & Knight's "acts and omissions" breached its fiduciary duty to the Diehls. (TAC, Count VI.) Finally, the Diehls allege that Hanft & Knight, acting through Hanft, violated Pennsylvania's Unfair Trade Practices and Consumer Protection Law. (TAC, Count VII.)

B. The Westport Policy

Westport issued policy number PLL-351215-1 for the policy period of December 31, 2003 to December 31, 2004. (Westport Ex. L, Doc. 50-13 at 14.)*fn3

The named insured is Hanft & Knight, P.C. The policy defines an "insured" to include "any lawyer who is a past or present partner, officer, director, stockholder, shareholder, employee or 'of counsel' of the Named Insured, but only as respects legal services rendered on behalf of the named insured." (Id. at 30.) The policy also defines an "insured" to include "the heirs, executors, administrators, and legal representatives of any Insured, but only in their capacity as such in the event of any Insured's death ... and only for Claims based on legal services rendered prior to such Insured's death." (Id.)

The policy is a claims made professional liability policy which provides $1,000,000 of per claim and $2,000,000 aggregate coverage for "lawyers professional liability." (Id. at 14.) Insuring Agreement I.A of the Lawyers Professional Liability coverage part obligates Westport to: pay on behalf of any Insured all Loss in excess of the deductible which any Insured becomes legally obligated to pay as a result of Claims first made against any Insured during the Policy Period ... by reason of any Wrongful Act occurring on or after the Retroactive Date, if any. (Id. at 26.) "Loss" is defined as "the monetary and compensatory portion of any judgment, award or settlement" but does not include "civil or criminal fines, penalties, fees or sanctions" or "punitive or exemplary damages, including the multiplied portion any multiple damages." (Id. at 31.) "Claim" means "a demand made upon any Insured for Loss ... including, but not limited to, service of suit...." (Id. at 23.) "Wrongful Act" means "any act, error, omission, circumstances, Personal Injury, or breach of duty in the rendition of legal services for others, either for a fee or pro bono in the Insured's capacity as a lawyer...." (Id. at 32.)

The professional liability coverage part also includes a supplemental defense provision, which states that Westport has "the right and duty to select counsel ... to defend any Claim for Loss against any Insured covered by Insuring Agreement I.A., even if such Claim is groundless, false or fraudulent." (Id. at 27.)

The policy also contains numerous exclusions, which Westport argues apply to preclude coverage in this case. These exclusions will be discussed in turn below.

II. STANDARD OF REVIEW

Summary judgment is appropriate if the record establishes "that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). Initially, the moving party bears the burden of demonstrating the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The movant meets this burden by pointing to an absence of evidence supporting an essential element as to which the non-moving party will bear the burden of proof at trial. Id. at 325. Once the moving party meets its burden, the burden then shifts to the non-moving party to show that there is a genuine issue for trial. Fed. R. Civ. P. 56(e). An issue is "genuine" only if there is a sufficient evidentiary basis for a reasonable jury to find for the non-moving party, and a factual dispute is "material" only if it might affect the outcome of the action under the governing law. Anderson, 477 U.S. at 248-49.

In opposing summary judgment, the non-moving party "may not rest upon the mere allegations or denials of the adverse party's pleadings, but ... must set forth specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e). The non-moving party "cannot rely on unsupported allegations, but must go beyond pleadings and provide some evidence that would show that there exists a genuine issue for trial." Jones v. UPS, 214 F.3d 402, 407 (3d Cir. 2000). Arguments made in briefs "are not evidence and cannot by themselves create a factual dispute sufficient to defeat a summary judgment motion." Jersey Cent. Power & Light Co. v. Township of Lacey, 772 F.2d 1103, 1109-10 (3d Cir. 1985). However, the underlying facts and all reasonable inferences therefrom must be viewed in the light most favorable to the non-moving party. P.N. v. Clementon Bd. of Educ., 442 F.3d 848, 852 (3d Cir. 2006).

Summary judgment should not be granted when there is a disagreement about the facts or the proper inferences that a fact-finder could draw from them. Peterson v. Lehigh Valley Dist. Council, 676 F.2d 81, 84 (3d Cir. 1982). Still, "the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; there must be a ...


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