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NATIONAL UNION FIRE INS. CO. v. MASON

April 22, 1991

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, Plaintiff,
v.
MASON, PERRIN & KANOVSKY, et al., Defendants


Thomas Penfield Jackson, United States District Judge.


The opinion of the court was delivered by: JACKSON

THOMAS PENFIELD JACKSON, UNITED STATES DISTRICT JUDGE

 Plaintiff National Union Fire Insurance Company of Pittsburgh, Pennsylvania ("National Union"), a Pennsylvania insurance underwriter, sues to cancel a lawyers' professional liability insurance policy it issued to a Washington, D.C. law firm in 1986 as having been procured by fraud. *fn1" National Union has moved for early summary judgment on its complaint, for purposes of ruling upon which the Court will deem the following facts to be sufficiently established by the present record.

 I.

 The individual defendants, three securities lawyers, made one another's acquaintance in the 1970's, early in their careers, while working as associates at a prominent Washington, D.C., law firm. During the same period they also met a securities broker named John Galanis. Some time later the three attorneys, Arthur P. Mason, Richard P. Perrin, and Helen R. Kanovsky, left their original law firm to become the Washington branch office of a California law firm for which, in 1984, they acted as securities counsel in three of a series of real estate partnership securities offerings, known as the Madison offerings. John Galanis was a "promoter" of the Madison offerings within the meaning of the Securities Act of 1933, 15 U.S.C. §§ 77a-77bbb. The following year the defendants acted as securities counsel for nine additional real estate securities offerings, known as the Boardwalk Marketplace offerings, of which, once again, Galanis was a "promoter." Galanis had earlier disclosed to the defendant attorneys certain information about himself, including the fact that, in 1972, he had been the subject of an injunction obtained by the Securities and Exchange Commission in the U.S. District Court for the Southern District of New York. *fn2" As counsel of record for the Madison and Boardwalk Marketplace offerings defendants had both a legal and professional responsibility for assuring the accuracy of the required offering disclosures, and the qualifications of the offerors under state "blue sky" laws. Galanis' relationship to the ventures was not disclosed.

 In January, 1986, the defendant attorneys departed the California firm to start their own firm under the name Mason, Perrin & Kanovsky ("Mason, Perrin"). A principal, if not the only client of the new Mason, Perrin firm was John Galanis. In preparation for commencing business as a partnership, Mason, Perrin applied to National Union for lawyers' professional liability insurance coverage for the firm and its individual attorneys. Question 14 on the National Union application form inquired:

 
Is any applicant aware of any circumstances which may result in any claim being made against the applicant, their (his) predecessors in business or any of the present or past partners? If so, give full particulars.

 Helen Kanovsky, who filled out the application for the partnership, responded "No" to Question 14. On February 3, 1986, after the firm had paid the premium, National Union issued Mason, Perrin a one-year policy providing it with some $ 10 million in coverage.

 In July, 1986, approximately six months after the policy went into effect, various investors in the Madison and Boardwalk Marketplace partnerships filed a number of law suits, naming as defendants one or more members of the Mason, Perrin law firm, and alleging claims of securities fraud, civil RICO, malpractice and breach of fiduciary duty, all predicated on the investors' charge that the Madison and Boardwalk Marketplace securities offerings had failed to disclose John Galanis' role as a promoter for the offerings. Following service of the civil complaints filed against them by the several investors, Mason, Perrin and Kanovsky notified National Union and called upon it to provide them a defense. National Union accepted the notices of claims "under a full and complete reservation of rights" on the ground that the complaints appeared to fall within one or more of the policy's coverage exclusions. The investors' claims remain pending while this action proceeds to determine National Union's obligations under the policy.

 In February, 1988, a New York State grand jury returned a 39-count indictment against Galanis, Arthur Mason, and Richard Perrin charging various felony offenses in connection with the Madison and the Boardwalk Marketplace limited partnerships. The following October, John Galanis pled guilty in New York state court to four counts of second degree grand larceny. In the course of his allocutions Galanis admitted his promoter status for the offerings, and stated that Mason and Perrin had conspired with him to conceal his name, background, and involvement with the offerings from prospective investors. *fn3"

 On March 12, 1990, Perrin pled guilty to count three of the indictment charging him with making false statements to induce and promote the sale of securities. Three days later, on March 15, 1990, Mason pled guilty to count fourteen which charges him with tendering a false and misleading memorandum in connection with one of the Madison offerings. *fn4"

 II.

 Plaintiff National Union advances several grounds to justify its refusal to acknowledge coverage for the claims pending against defendants, including the "prior knowledge" and "criminal and fraudulent acts" exclusions of its policy. It is clear to the Court, however, that all but one indisputably present some genuine issue of material fact which precludes summary judgment in advance of trial. Fed.R.Civ.P. 56(c). With respect to plaintiff's primary argument, namely, a possible prior adjudication as to the presence of a materially false statement in the Mason, Perrin application for a policy, the question is a closer one.

 New York choice-of-law rules apply, because this case was transferred here pursuant to 28 U.S.C. § 1404(a) from the U.S. District Court for the Southern District of New York. See Van Dusen v. Barrack, 376 U.S. 612, 11 L. Ed. 2d 945, 84 S. Ct. 805 (1964). New York, it appears, would look to District of Columbia law as controlling on the question of whether there are sufficient grounds to rescind an insurance policy, the District of Columbia being the jurisdiction in which the policy was issued, the premiums paid, and the insured law firm organized and doing business. See Ethicon, Inc. v. Aetna Casualty ...


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