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Scottsdale Insurance Co. v. Byrne

United States District Court, D. Massachusetts

March 1, 2018

SCOTTSDALE INSURANCE COMPANY, Plaintiff and Counter-Defendant,
v.
TIMOTHY BYRNE and ROBERT BOLTON, Defendants and Counter-Claimants.

          MEMORANDUM AND ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

          F. Dennis Saylor IV United States District Judge

         This is an insurance coverage dispute, essentially involving whether an insurer was obligated to defend an investment fund accused of mismanagement and self-dealing.

         Wellesley Advisors Funds was, apparently, an investment advisor. It purchased a Business and Management Indemnity Policy from plaintiff Scottsdale Insurance Company. Defendants Timothy Byrne and Robert Bolton are co-chairs of the Board of Trustees for the Plumbers and Pipefitters Local 51 Pension and Annuity Funds (the “Pension Funds”).

         The Pension Funds invested in WARF Realty Fund I, LLC (“WARF”), an investment fund of Wellesley Advisors. WARF mismanaged the investments and engaged in self-dealing, precipitating a law suit alleging negligence and an ERISA violation. Scottsdale declined to defend WARF, citing various coverage exclusions. WARF subsequently went into receivership and did not defend the suit; the court eventually entered a default judgment against it for approximately $5 million.

         The Pension Funds then requested that Scottsdale pay the judgment (at least up to the coverage limit) pursuant to the insurance policy it had issued to Wellesley Advisors, which Scottsdale declined to do. Scottsdale now seeks a declaratory judgment stating that it had no duty to defend or indemnify WARF, and the Pension Funds have counterclaimed for the amount of the default judgment. The parties have cross-moved for summary judgment.

         The dispute principally concerns three exclusions under the policy, which govern the scope of Scottsdale's duties. For the following reasons, the Court finds that coverage was not clearly excluded, and Scottsdale had a duty to defend. Accordingly, plaintiff's motion for summary judgment will be denied, and defendants' motion for partial summary judgment will be granted.

         I. Background

         The following facts are as set forth in the record and appear to be undisputed.

         A. Factual Background

         Wellesley Advisors Funds was, apparently, an investment adviser located in Massachusetts. Wellesley Advisors created a real-estate investment fund called Wellesley Advisors Realty Fund I, LLC (“WARF”), which was organized as a limited liability company. (Kessler Aff. Ex. A ¶ 11).

         On June 7, 2005, the Board of Trustees of the Pension Funds approved a $5 million investment in WARF. (Id. ¶ 13). WARF used the funds to invest in real property in Massachusetts and Rhode Island. (Id. ¶ 14). One such investment was “Stone House, ” a hotel resort property in Little Compton, Rhode Island. (Id. ¶ 15).[1] WARF improperly collected the hotel's revenues as management fees and failed to make necessary mortgage payments on the property. (Id. ¶ 20). In February 2014, the successor-in-interest to the bank holding the mortgage filed suit in the Rhode Island Superior Court to recover $5.6 million in damages. (Id.). It appears that WARF had also failed to make tax payments on various property investments. (Id. ¶ 22). Because of WARF's mismanagement, Realty Fund I failed, and the Pension Funds lost the entirety of their $5 million investment. (Id.).

         In 2013, Scottsdale Insurance Company had issued a Business and Management Indemnity Policy to Wellesley Advisors Funds. (Zartman Aff. Ex. A at 1). The policy was effective from November 15, 2013, to November 15, 2014, and had a coverage limit of $3 million. (Id.).[2] On November 6, 2014, the parties entered into Endorsement No. 26, which extended the policy's effective period one month to December 15, 2014. (Id. at 50).

         The policy provided coverage for certain losses that Wellesley Advisors or other “Insureds” were obligated to pay.[3] Under the section titled “Management Insureds and Company Coverage, ” subsection (F), titled “Settlement and Defense, ” states as follows:

It shall be the duty of the Insurer and not the duty of the Insureds to defend any Claim. Such duty shall exist even if any of the allegations are groundless, false or fraudulent. The insurer's duty to defend any Claim shall cease when the Limits of Liability have been exhausted by the payment of Loss including Costs, Charges, and Expenses.

(Id. at 18). The term “Claim” is defined in subsection B(1)(b) as encompassing “[a] civil proceeding against any Insured seeking monetary damages or nonmonetary or injunctive relief, commenced by the service of a complaint or similar pleading. (Id. at 10). The term “Loss” is defined in subsection (B)(8) as including “damages, judgments, settlements, pre-judgment or post-judgment interest awarded by a court, and Costs, Charges and Expenses incurred by [WARF or other Insureds] . . . .” (Id. at 11).

         Subsection (C)(1), titled “Exclusions Applicable to All Insuring Clauses, ” states that Scottsdale shall not be liable for losses attributable to various causes. (Id. at 13). As relevant here, there are three potentially applicable exclusions.

         The first is the “ERISA Exclusion.” Subsection (C)(1)(d) provides that Scottsdale shall not be responsible for covering losses attributable to:

[A]ny actual or alleged violation of the responsibilities, obligations or duties imposed by [the] Employee Retirement Income Security Act of 1974, as amended, or any rules or regulations promulgated thereunder, or similar provisions of any federal, state or local statutory or common law.

(Id. at 14).

         The second is the “Intentional Conduct Exclusion.” Subsection (C)(1)(f) provides that Scottsdale shall not be responsible for covering losses attributable to:

[A]ny dishonest, deliberately fraudulent or criminal act of an Insured; provided, however this exclusion [ ] shall not apply unless and until there is a final judgment against such Insured as to such conduct; or
[T]he gaining of any profit, remuneration or financial advantage to which any Management Insureds were not legally entitled; provided, however this exclusion [ ] shall not apply unless and until there is a final judgment ...

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