The opinion of the court was delivered by: Eduardo C. Robreno, J.
Minnesota Lawyers Mutual Insurance Co. ("Plaintiff") commenced this diversity action*fn1 against Christopher Mazullo, Anthony J. Mazullo, Jr., Kevin J. Murphy, and Mazullo & Murphy, P.C., (collectively "Defendants") for a declaratory judgment that it has no duty to defend or indemnify Defendants in two underlying actions in the Court of Common Pleas for Bucks County. Plaintiff and Defendants filed cross-motions for summary judgment. For the reasons that follow, the Court will grant Plaintiff's motion and deny Defendants' cross-motion.
Plaintiff issued a "claims made" professional liability insurance policy to Mazullo & Murphy, for the period of April 1, 2008, to April 1, 2009.*fn2 Lawyers Professional Liability Insurance Claims-Made Policy Declarations, Compl. Ex. A [hereinafter "Policy"]. The Policy provides the following coverage:
WE will pay all sums up to the limit of OUR liability, which the INSURED may be legally obligated to pay as DAMAGES due to any CLAIM:
(1) arising out of any act, error or omission of the INSURED or a person for whose acts the INSURED is legally responsible; and
(2) resulting from the rendering or failing to render PROFESSIONAL SERVICES while engaged in the private practice of law or from rendering or failing to render PROFESSIONAL SERVICES as a PART TIME EMPLOYED ATTORNEY OF A GOVERNMENTAL BODY, SUBDIVISION OR AGENCY.
Policy 1. A "claim" under the Policy includes a "lawsuit served upon the INSURED seeking DAMAGES." Id. at 2. Relevant to this action, the Policy does not provide coverage for "(1) any CLAIM for DAMAGES arising out of the dishonest, criminal, malicious or deliberately fraudulent act, error or omission of the INSURED, subject to the Innocent Insured Protection provisions." Id. at 3. The Court will refer to this provision as "Exclusion 1."
The victims of allegedly fraudulent investment schemes commenced two lawsuits during the Policy period. First, Ronald A. Levene commenced a civil action in the Court of Common Pleas of Bucks County, Pennsylvania, against Mazullo & Murphy, Anthony J. Mazullo, Jr., Christopher Mazullo, Kevin J. Murphy, and Christopher P. Kelly ("Levene Lawsuit").*fn3 Amended Complaint at 1, Levene v. Mazullo & Murphy, P.C., No. 10-1887 (Pa. Ct. Com. Pl. May 3, 2010) [hereinafter "Levene Amended Complaint"].*fn4 Levene alleges that on May 16, 2008, Roman R. Fitzmartin offered him an opportunity to invest in Doylestown Investment Group, L.L.C. ("DIG"). Id. ¶ 7. On June 5, 2008, Levene entered into an "Investment Agreement" whereby he agreed to invest $100,000 with DIG and Fitzmartin in exchange for six percent of DIG's Class B Limited Partner interest in Doylestown Retail Partners, L.P. ("DRP"), a guaranteed return on his investment plus fifteen percent of the principal invested by December 12, 2008, and Fitzmartin's personal guarantee for the $115,000 return. Id. ¶¶ 8-9. On December 3, 2009, Fitzmartin was indicted in federal court with two counts of mail fraud relating to a fraudulent real estate investment scheme, and on January 20, 2009, Fitzmartin filed for bankruptcy. Id. ¶¶ 11-12.
Levene alleges the Levene Lawsuit defendants acted as agents, legal counsel, business associates, and partners with Fitzmartin, DIG, and DRP. Id. ¶¶ 14-17. Levene alleges the Levene Lawsuit defendants had knowledge of an April 11, 2007, cease-and-desist order issued by the Pennsylvania Securities Commission against Fitzmartin and DIG to halt the offer and sale of similar unregistered securities and failed to disclose the existence of the case-and-desist order during negotiations. Id. ¶¶ 18-23. Levene alleges the Levene Lawsuit defendants failed to disclose that the securities at issue were unregistered as required by the Pennsylvania Securities Act of 1972. Id. ¶¶ 24-25. Levene alleges that, during discussions and drafting of the Investment Agreement, the Levene Lawsuit defendants failed to disclose that certain financial disclosures Fitzmartin provided were false. Id. ¶¶ 26-32. Based on these allegations, Levene claims the Levene Lawsuit defendants committed violations of the Pennsylvania Securities Act of 1972, professional negligence, and misrepresentation by omission. Id. ¶¶ 46-69. Levene seeks actual damages in excess of $100,000, punitive damages, interest, and costs. Id. at 14.
Second, John H. McFadden and James Vesci, Jr., commenced a civil action in the Court of Common Pleas of Bucks County, Pennsylvania, against Roman Fitzmartin, Christopher Mazullo, Mazullo & Murphy, P.C., DIG, DRP, and other entities ("McFadden Lawsuit"). Complaint at 1, McFadden v. Fitzmartin, No. 08-10383 (Pa. Ct. Com. Pl. Apr. 1, 2009) [hereinafter "McFadden Complaint"].*fn5 As is relevant here, McFadden and Vesci allege Christopher Mazullo and Mazullo & Murphy acted as general counsel, agents, representatives, and employees of DIG and the other defendant entities. Id. ¶ 14. Furthermore, McFadden and Vesci allege Christopher Mazullo invested in various partnerships for which he served as counsel and prepared investment and loan agreements. Id. ¶ 16.
McFadden alleges that in March 2004, October 2007, December 2007, and June 2008, he entered into various investment and loan agreements as an investor and lender that were secured, in some circumstances, by DIG's limited partner interests in other limited partnerships. Id. ¶¶ 24, 36, 39, 42. McFadden alleges Christopher Mazullo and others fraudulently induced him into entering into the secured transactions by misrepresenting the value of the security, the promise and likelihood of repayment, the nature and purpose of the loan, the financial condition of DIG, and the ownership and authority to transfer DIG's limited partner interests. Id. ¶¶ 37, 40, 43. McFadden further alleges that the limited partnerships were not registered pursuant to the Pennsylvania Securities Act of 1972. Id. ¶ 23.
Vesci alleges that in March 2006, October 2006, and October 2007 he entered into a similar series of investment agreements whereby he invested funds that were secured by certain of DIG's limited partnership interests. Id. ¶¶ 27-32. Furthermore, Vesci alleges Fitzmartin fraudulently induced him into execution of the investment agreements, and that the securities were not registered pursuant to Pennsylvania law. Id. ¶¶ 23, 29, 31, 34.
McFadden and Vesci allege that each of the limited partnerships identified in the McFadden Complaint is "defunct and the real estate holdings of the limited partnerships are subject to foreclosure proceedings." Id. ¶ 46. They allege that Christopher Mazullo and others solicited the investment and loan agreements, not to invest in real property and the operations of the limited partnerships, but to satisfy the obligations of other investors, in what is typically referred to as a "Ponzi" scheme.*fn6 Id. 48-49. As is relevant to this civil action, McFadden and Vesci claim Christopher Mazullo and Mazullo & Murphy committed negligent misrepresentation, intentional misrepresentation, breach of fiduciary duty, conversion, unjust enrichment, negligence, violations of the Pennsylvania Securities Act of 1972, and civil conspiracy. McFadden and Vesci seek actual damages in excess of $50,000, punitive damages, interest, and costs. Id. at 29.