Summary
The United States Court of Appeals for the Second Circuit considers whether Aspen American Insurance Company had a duty to defend and indemnify Marcus & Cinelli, LLP in an underlying action involving the sale of a client’s diamond ring and distribution of the proceeds. Applying New York law, the court concludes that the underlying allegations involved professional services and did not unambiguously allege misappropriation within the meaning of the policy exclusion. The court vacates the dismissal, reverses the denial of partial summary judgment, and remands for entry of partial summary judgment in favor of Marcus & Cinelli on the duty to defend; Judge Parker dissents.
Topics
Practice areas
Questions Presented
- Whether the allegations in Patterson's underlying complaint arguably arose from M&C's rendering of professional services under the policy.
- Whether the policy's undefined misappropriation exclusion barred Aspen's duty to defend based on allegations that M&C sold the ring and distributed the proceeds despite Patterson's restraining notice.
- Whether the court could reverse the denial of M&C's partial-summary-judgment motion and direct entry of judgment on Aspen's duty to defend.
Holdings
- The allegations in Patterson's complaint arose from M&C's provision of covered professional services because M&C acted using the special acumen and training of lawyers and also allegedly acted in a fiduciary capacity similar to a trustee.
- The misappropriation exclusion did not defeat Aspen's duty to defend because the underlying complaint did not allege that M&C used Stewart's property without her authorization, and any broader interpretation of misappropriation was at least ambiguous and therefore had to be construed in favor of the insured.
- The court did not decide whether Aspen ultimately must indemnify M&C for any liability arising from the underlying action.
Key quotations
“In New York, the duty to defend is “exceedingly broad” and “if any of the claims against the insured arguably arise from covered events, the insurer is required to defend the entire action.”” (13)
“The plain text of the definition requires more than just dishonest or wrongful conduct in the application of property; it requires using someone else’s property without their consent.” (19)
“Our holding is narrow, and our decision in this appeal does not signal that M&C will necessarily be indemnified for liability arising from the conduct alleged in the Patterson complaint.” (26)
Factual background
M&C represented Barbara Stewart, who owed Patterson more than $2 million and was subject to Patterson's restraining notice under N.Y. C.P.L.R. § 5222(b). M&C attorney David Marcus facilitated the private sale of Stewart's diamond ring, assured the auction house that Stewart had transferable title, and directed the $2.375 million proceeds into an M&C IOLA account. M&C transferred portions of the proceeds to itself and others for past and future legal fees and placed the remainder in escrow for Stewart. Patterson later sued M&C, alleging fraudulent conveyances, tortious interference with collection of its judgment, and contempt.
Procedural history
M&C sought coverage after Patterson Belknap Webb & Tyler LLP sued it in New York state court over the sale of M&C's client's diamond ring and distribution of the sale proceeds. Aspen denied coverage based on the professional-services coverage requirement and a misappropriation exclusion. The district court adopted the magistrate judge's recommendation, denied M&C's partial-summary-judgment motion, and dismissed the action under the misappropriation exclusion, while also identifying the fee-dispute theory as an alternative basis. The Second Circuit vacated the dismissal, reversed the denial of partial summary judgment, and remanded for entry of partial summary judgment requiring Aspen to defend.
Remand instructions
Vacate the district court's judgment of dismissal, reverse its denial of M&C's motion for partial summary judgment, and remand for the district court to enter partial summary judgment in favor of M&C on its claim that Aspen has a duty to defend.