Pine Management, Inc. v. Colony Insurance Company

Background

Pine Management, Inc. manages, develops, and acquires rental apartment buildings. Pine sought coverage under a professional liability insurance policy issued by Colony Insurance Company for an underlying New York state-court lawsuit brought by Jerome Schneider on behalf of members of ten limited liability companies managed by Pine. The underlying lawsuit asserted ten causes of action, including breach of contract, breach of fiduciary duty, inspection of books and records, and an accounting. It sought damages as well as injunctive and declaratory relief.

The Colony policy covered claims connected with Pine’s real-estate development services. It generally required that a claim be first made and reported in writing during the policy period, from August 1, 2018, through December 1, 2019, and that the alleged wrongful act occur on or after the March 1, 2016, retroactive date. The policy defined a claim as a written demand for monetary, nonmonetary, or injunctive relief. It also treated claims arising from a single wrongful act or related wrongful acts as one claim.

Before the underlying lawsuit was filed, Pine received a letter from Michael Geller of Holland & Knight. The letter described claims against Pine, alleged various forms of misconduct, demanded documents, requested an accounting, and suggested a meeting to resolve the concerns without litigation. Colony denied any obligation to defend or indemnify Pine. Pine then sued Colony for breach of contract and sought damages and declarations that Colony had duties to defend and indemnify it.

Colony’s Motion and the Court’s Analysis

Colony moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c). The court applied the same standard used for a motion to dismiss for failure to state a claim, while considering the pleadings and the documents incorporated into them. The parties had stipulated that the underlying complaint and its exhibits, including the Holland & Knight letter, could be considered.

The court identified three independently sufficient reasons why the policy provided no coverage:

1. The claim was made before the policy period

The court held that the Holland & Knight letter was a “claim” under the policy. It alleged misconduct, identified legal theories, demanded documents, requested an accounting, referred to possible litigation, and sought a meeting to resolve the claims. The court rejected Pine’s arguments that the letter merely stated legal points, used nonbinding language, or failed to explain what the meeting would involve.

The court also held that the letter and the later underlying complaint arose from largely the same facts, circumstances, and alleged violations. Under the policy’s related-claims provision, they therefore constituted one claim. Because that claim was made before the policy period began, the underlying lawsuit was not covered.

2. Pine had prior knowledge of an alleged wrongful act

The policy excluded claims arising from a wrongful act occurring before the policy period if Pine had a reasonable basis, before the policy’s effective date, to believe that it had committed a wrongful act. Under the New York law discussed by the court, this required both subjective knowledge of the relevant facts and an objective basis for a reasonable insured to expect those facts to lead to a claim.

The court concluded that Pine had both types of knowledge after receiving the letter. The letter accused Pine of alleged acts, errors, omissions, and breaches of duty, and the policy defined “wrongful act” to include alleged conduct. The court stated that it did not matter whether the allegations were true or whether the claims were likely to be filed or succeed. The letter gave Pine a basis to anticipate a claim.

3. The alleged wrongful acts predated the retroactive date

The policy covered wrongful acts occurring on or after March 1, 2016, and treated related wrongful acts as occurring on the date of the first act in the series. The underlying complaint alleged a history of related mismanagement by Pine in operating the same business and involving the same parties. Examples included alleged improper loans from September 2015 to June 2019, alleged unauthorized fees from 2012 through the first half of 2019, and alleged changes to cash reserves and distributions beginning in 2012.

The court held that all of the alleged wrongful acts were related. Because some began before the retroactive date, the policy provided no coverage for the related allegations, including allegations concerning later conduct. The court rejected Pine’s argument that a factfinder in the underlying lawsuit might determine that any wrongful act occurred only after the retroactive date.

Ruling

The court found no possibility of coverage under the Colony policy. It held that Colony had no duty to defend or indemnify Pine in the underlying lawsuit. The court granted Colony’s motion for judgment on the pleadings, directed the Clerk to enter judgment for Colony and dismiss the case, terminated the motion docket entry, and closed the case.