Liberty Ins. Underwriters, Inc. v. Davies Lemmis Raphaely Law Corp.

162 F.Supp.3d 1068

Liberty Insurance Underwriters, Inc., Plaintiff,

v.Davies Lemmis Raphaely Law Corporation, M. Randel Davies, Rosemary Lemmis, and Shabab Raphaely, Defendants.

Case No. CV 15–859 DMG (JCx)

United States District Court, C.D. California.

Signed February 23, 2016

Matthew M. Burke, Ropes and Gray LLP, Boston, MA, Bryan M. Weiss, Murchison and Cumming LLP, San Francisco, CA, for Plaintiff.

Mark Steven Reusch, John A. Marshall, Goshgarian & Marshall PLC, Calabasas, CA, for Defendants.

ORDER RE: PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT [43]

DOLLY M. GEE, UNITED STATES DISTRICT JUDGE

I.PROCEDURAL BACKGROUND

On February 6, 2015, Plaintiff Liberty Insurance Underwriters, Inc. (“Liberty”) filed a complaint against Defendants Davies Lemmis Raphaely Law Corporation (“DLR”), M. Randel Davies, Rosemary Lemmis, and Shahab Raphaely requesting a declaratory judgment that seven pending civil lawsuits (“the Underlying Actions”) alleging that Defendants participated in a fraudulent investment scheme should be considered a single claim for purposes of the per-claim limit contained in Liberty's insurance policy. [Doc. # 1.]

On December 29, 2015, Liberty filed a motion for summary judgment (“MSJ”) on the grounds that all of the Underlying Actions allege, are based upon, arise out of or are attributable to the same or related wrongful acts, and that Defendants have therefore exhausted the per-claim limit of liability under the 2010–2011 insurance policy issued by Liberty. [Doc. # 43.] On January 22, 2016, Defendants filed an opposition (“Opp.”). [Doc. # 44.] On February 5, 2016, Liberty filed a reply (“Reply”). [Doc. # 57.]

A hearing on the matter took place on February 19, 2016.

II.FACTUAL BACKGROUND¹

A. The Parties

Liberty is an insurance company which issues professional liability policies. (Defendants' Statement of Genuine Disputes of Material Facts and Additional Material Facts (“SGDMF”) ¶¶ 1–3 [Doc. # 45].)

DLR is a transactional real estate firm, and M. Randel Davies, Rosemary Lemmis, and Shahab Raphaely are transactional real estate attorneys who represent clients involved in purchasing, selling, transferring, and/or syndicating ownership, leasing, and financing of commercial properties. (Respond of Liberty Insurance Underwriters, Inc. to DLR's Statement of Disputed Facts (“Resp.SGDMF”) ¶ 1 [Doc. # 59].) DLR and its attorneys serve as counsel to Asset Management Consultants, Inc., a licensed California real estate broker which facilitates real estate investment partnerships, and its principal, James Hopper (collectively “AMC”). (Resp. SGDMF ¶¶ 6–7.)

B. The Policies

Liberty issued three successive professional liability policies to DLR for the periods of August 1, 2010 through August 1, 2011 (“2010–2011 Policy”), August 1, 2011 through August 1, 2012 (“2011–2012 Policy”), and August 1, 2012 through August 1, 2013 (“2012–2013 Policy”). (SGDMF ¶¶ 1–3.) All three policies (collectively, “the Policies”) are “claims-made-and-reported” policies. (Id. ¶ 4.) The Policies have a limit of liability of $1,000,000 per claim and $2,000,000 in the aggregate. (Id. ¶ 5.) Each Defendant is an insured under the Policies. (Id. ¶ 13.)

Each of the Policies states in pertinent part:

We agree to pay on your behalf all damages in excess of the deductible amount and up to the limits of liability stated in the Declarations that you become legally obligated to pay, provided such damages:

1. result from claims

a. first made against you during the policy period or any extended reporting period, if applicable, and reported to is in writing; and

2. are caused by a wrongful act which takes place before or during the policy period but not before the Retroactive Date set forth in the Declarations, if any.

(Id. ¶ 6.) Each of the Policies defines “wrongful act” as “any actual or alleged act, error, omission or personal injury which arises out of the rendering or failure to render professional legal services.” (Id. ¶ 11.)

Each of the Policies defines “claim” as “a demand received by you for money or services, including the service of suit or institution of arbitration proceedings against you, or a disciplinary proceeding.” (Id. ¶ 7.) Each of the Policies defines “claim expenses” to include “reasonable and necessary fees charged by any lawyer designated by us” and “all reasonable and necessary fees and expenses charged by any lawyer selected by you as independent counsel.” (Id. ¶ 8.) Each of the Policies provides: “[c]laim expenses reduce this policy's limits of liability and claim expenses apply to this policy's deductible. However, subject to specific conditions and limitations, a certain amount of claim expenses do not apply to the limits of liability or to the deductible as fully described in the Special Benefits section of the policy.” (Id. ¶ 9.) According to the “Special Benefits” section of the Policies, the first $250,000 of claim expenses incurred during the policy period does not apply to the limits of liability. (Id. ¶ 10.)

With regard to multiple claims, the Policies state: “Claims alleging, based upon, arising out of or attributable to the same or related wrongful acts shall be treated as a single claim regardless of whether made against one or more than one of you. All such claims, whenever made, shall be considered first made during the policy period or any extended reporting period in which the earliest claim arising out of such wrongful acts was first made, and all such claims shall be subject to the same limits of liability.” (Id. ¶ 12.)² Under the Policies, Liberty has the right and duty to defend any claim. (Id. ¶ 14.)

C. The Underlying Actions

AMC handles investment partnership deals for both Tenant–in–Common (“TIC”) Investors and Limited Partnership (“LP”) Investors. (Resp. SGDMF ¶¶ 13, 18–19.) Prior to 2002, most AMC investors were LP Investors. (Id. ¶ 18.) In 2002, the Internal Revenue Service (“IRS”) issued a new Revenue Procedure providing guidance for the structuring of TIC ownership interests that would satisfy the requirements of Internal Revenue Code (“IRC”) section 1031 and not be characterized as disallowed partnership investments. (Id. ¶ 130.) Accordingly, in or about 2002, AMC began to offer investors a new type of TIC investment which would allow them to reinvest their sale proceeds with AMC in an IRC section 1031 “like-kind exchange” between sale of one asset and acquisition of another without incurring capital gains tax liability on the sale of the first asset. (Id. ¶¶ 17–19.) Many of the actions at issue in this case relate to these new types of TIC Investments and IRC section 1301 “like-kind exchanges” between LP Investments and TIC Investments intended to defer capital gains taxes. (Id. )

Between 2011 and 2013, seven cases were filed against Defendants and AMC related to 23 AMC transactions which occurred between December 2003 and November 2009. (Id. ¶¶ 20–21.) These actions are referred as the Amlap Action, the Ahern Action, the McCready Action, the Kornievsky Action, the Stella Action, the Kipnis Action, and the Barrons Action (collectively, the “Underlying Actions”).³ Fifteen of the 23 transactions included both TIC Investors and LP Investors, while the remaining eight transactions involved only LP Investors. (Id. ¶ 22.)

Each of the seven Underlying Actions involve a similar alleged scheme, which is that, in the course of negotiating a property acquisition transaction, the defendants made a false representation to plaintiff-investors that the sellers would pay all commissions relating to the transaction, when in reality the purchase price of the property was marked up to include a commission payment. (SGDMF ¶¶ 43–45.) The plaintiffs in the Underlying Actions allege that they relied upon these misrepresentations in choosing to invest. (Wrongful Acts Chart ¶ 2.⁴ ) All of the Underlying Actions allege that DLR and its attorneys participated in the drafting of the offering memoranda and other documents relating to the proposed investment and had knowledge of the alleged misrepresentations and materials omissions but failed to disclose them. (Id. ¶ 4.) With the exception of the Stella Action, each of the plaintiffs in the Underlying Actions allege that they had an attorney-client relationship with DLR, and that DLR failed to properly disclose actual or potential conflicts or properly represent the interests of the plaintiff-clients. (SGDMF ¶¶ 49–50). All of the Underlying Actions include causes of action for intentional and/or negligent misrepresentation, fraud by concealment and/or constructive fraud, and violations of California's unfair competition law (“UCL”). (Underlying Actions Chart.) Six of the seven Underlying Actions include legal malpractice and breach of fiduciary duty. (Id. )

The allegations in the Underlying Actions involve a variety of property sales and acquisitions, related to both TIC and LP Investments, some of which involve the same properties. The allegations in the Amlap Action involve a single TIC investment in the Amlap Property.⁵ (Id. ¶ 89.) The Ahern/Stella Action—originally a class action—involves an investment in the Robertson and Aerovault Transactions, and relates to both TIC and LP Investments.⁶ (Id. ¶ 58.) The second Stella Class Action involves LP investments in eight additional properties: Hamilton, Baker, Overland, Winaldi, Capom, Arbor, Packard, and Todd Lane. (Id. ¶ 119.) The McCready Action alleges that the plaintiff was wrongfully induced to sell the Robertson Property and reinvest in the Amlap and Aerovault Properties, and that McCready subsequently made a TIC Investment in the Amlap Property and several LP Investments in the Overland, Fiesta, and Packard Properties. (Id. ¶¶ 66–67, 108.) The Kornievsky Action alleges that the plaintiff was wrongly induced into investing in 15 different TIC Investments.⁷ (Id. ¶ 69.) The Kipnis Action alleges that the plaintiffs were induced to invest in two TIC Investments in the Aerovault and Eaton Properties, as well as several LP Investments in the...