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Marcus v. Allied World Insurance Co.

United States District Court, D. Maine

April 23, 2019

GEORGE J. MARCUS and MARCUS, CLEGG, BALS & ROSENTHAL, P.A., Plaintiffs/Counterclaim Defendants
ALLIED WORLD INSURANCE COMPANY, Defendant/Counterclaim Plaintiff



         This litigation concerns the scope of an insurer's duty to defend a lawyer and his law firm in two lawsuits. The underlying lawsuits are an SEC enforcement action against the lawyer and several other defendants for violating federal securities laws, and a private class action against the lawyer and his law firm in which investors seek damages. The primary issues involve interpretation of a lawyers' professional liability (LPL) policy-specifically, whether the SEC's requested disgorgement from the lawyer is a covered claim under the policy; whether the policy's investment advice exclusion bars coverage for both lawsuits; and the effect of a related claims provision.

         I conclude that the insurer has no duty to defend the SEC lawsuit because disgorgement is a penalty not covered under the policy, but that the insurer does have a duty to defend the private class action notwithstanding the policy's investment advice exclusion.

         Procedural History

         First Claim

         On March 30, 2018, the SEC filed a complaint against the defendant, Attorney George Marcus, and others in this court, Securities and Exchange Commission v. Michael A. Liberty, et al., No. 18-139 (D. Me.). That lawsuit asserts that along with others, Attorney Marcus-who for years represented Michael Liberty and some of his businesses (including corporate defendants in the SEC lawsuit)-violated the federal Securities Acts through a deceitful investment scheme involving fraudulent securities offerings. The SEC seeks an injunction, disgorgement of “ill-gotten gains, ” and a civil monetary penalty under the Securities Act. Marcus's insurer, Allied World Insurance Company (Allied World), has denied any coverage or duty to defend Marcus in the SEC lawsuit.[1]

         When Allied World refused to defend Marcus, Marcus filed this federal declaratory judgment complaint in June 2018 seeking a defense. Compl. ¶¶ 29-38 (ECF No. 1). He also requested damages from Allied World for breach of the implied covenant of fair dealing and for unfair claims practices under Maine statutes. See id. at ¶¶ 39-42.

         Second Claim

         On August 22, 2018, two private plaintiffs sued Marcus and his law firm, Marcus, Clegg, Bals & Rosenthal, P.A., seeking to proceed as a class action.[2]Tina A. Endicott, et al. v. George Marcus, et al., No. 18-331 (D. Me.) (the Endicott lawsuit). The complaint alleges that Marcus's and his firm's misconduct occurred both “within their legal practice” and “outside of their legal services, ” and that Marcus knowingly profited, through legal fees, from the fraudulent scheme that he helped Michael Liberty perpetrate. Endicott Compl. ¶¶ 4-5 (ECF No. 22-3). Specifically, the Endicott plaintiffs accuse Marcus and his law firm of “drafting . . . faulty and misleading legal documents”; of “negligent and improper handling of investor funds deposited in their law firm IOLTA account, in breach of their duties and in other instances outside of their legal services wherein Defendant Marcus became directly involved in the improper sale of securities”; of “misrepresentations and omissions of material facts to investors”; and of “misappropriation and misuse of the investors' funds.” Id. ¶ 4. Allied World initially agreed to defend the Endicott lawsuit, but reserved its right to argue that it had no duty to defend or indemnify.

         At a conference of counsel, I allowed the parties to amend their pleadings to encompass this second lawsuit. See Report of Pre-filing Conference under D. Me. L.R. 56 at 1 (ECF No. 20). They have done so. Allied World now denies any duty to defend either lawsuit, whereas Marcus and his law firm say Allied World is obligated to defend both. All parties have moved for summary judgment. I heard oral argument on April 18, 2019.


         Under Maine law, a duty to defend is determined by comparing the allegations of the complaints in the underlying lawsuits to the language of the policy. Merrimack Mut. Fire Ins. Co. v. Brennan, 534 A.2d 353, 354 (Me. 1987). Thus, on the interpretation issues concerning the duty to defend, there can be no facts in dispute. For some collateral issues concerning Count 2 and unfair claims practices, I examine the parties' statements and opposing statements of material facts and find no genuine issue of material fact to affect the outcome.

         Insurance Policy Interpretation

         Maine law is clear that I first determine whether a claim is potentially covered under the insurance policy. For that decision, the burden is on the insured. See York Golf & Tennis Club v. Tudor Ins. Co., 845 A.2d 1173, 1175 (Me. 2004). If I find potential coverage, then I consider any policy exclusion. For that decision, the burden is on the insurer. Vermont Mutual Ins. Co. v. Ben-Ami, 193 A.3d 178, 181 (Me. 2018).

         1. SEC Lawsuit

         The Allied World LPL policy states that Allied World must “defend any Claim seeking Damages covered under this Policy.” Policy § V.C.1. In its lawsuit, the SEC has asked that all defendants, including Marcus, “disgorge their ill-gotten gains, plus pre-judgment interest.” SEC Compl. at 65 ¶ B. Marcus and Allied World dispute whether the requested disgorgement is included within the policy's coverage of damages.[3]

         According to the Allied World LPL policy:

DAMAGES means the monetary portion of any judgment, award or settlement, including pre- and post-judgment interest.
Damages shall not include:
1. criminal or civil fines, taxes, penalties (statutory or otherwise), fees or sanctions;
2. punitive, exemplary or the multiplied portion of multiple damages;
3. amounts deemed uninsurable by law;
4. the return or restitution of legal fees, costs and expenses, no matter how claimed;
5. amounts paid or incurred by an Insured to comply with a judgment or settlement for any form of equitable or non-monetary relief; or
6. amounts incurred by an individual or entity providing support services to the Insured resulting from an interruption of such individual or entity's business operations.

         Policy § III.G (emphasis added). The term in dispute is “penalties, ” and it is undefined.

         The basis for the “ill-gotten gains” the SEC Complaint has attributed to Marcus is that “Marcus obtained money (in the form of legal fees) from the Defendants' fraudulent misrepresentations and omissions in the course of the securities offerings . . . .” SEC Compl. ¶ 18. But covered damages under the policy expressly do not include “the return or restitution of legal fees, costs and expenses, no matter how claimed, ” Policy § III.G.4, so the requested disgorgement of Marcus's legal fees alone would not generate a duty to defend.[4] Marcus argues that Allied World nevertheless must defend him here because, under SEC disgorgement principles, there is “a possibility that Mr. Marcus, if found liable, could be held jointly and severally liable for amounts far exceeding his attorney's fees.” Pls.' Mot. for Summ. J. at 16 (ECF No. 27) (in other words, for amounts that other defendants may have fraudulently gained). The United States Supreme Court recognized that possibility in 2017, saying that disgorgement “sometimes exceeds the profits gained as a result of the violation, ” Kokesh v. Securities & Exchange Comm'n, 137 S.Ct. 1635, 1644 (2017). In this opinion, I will call that kind of disgorgement “excess disgorgement.”[5] Allied World has not disputed that excess disgorgement could occur, but says that form of disgorgement fits within “penalties” that are not included in LPL damages coverage and that it therefore has no duty to defend the SEC lawsuit.

         I have looked for cases interpreting use of the term “penalties” before Marcus and Allied World executed the policy (and before Kokesh was decided).[6] The cases I have found do not agree on whether the term is ambiguous.[7] In determining whether court-imposed sanctions or a statutory surcharge fit within the “penalties” exception to coverage, [8] the courts generally focus on whether the remedy is punitive or compensatory.[9]

         I have found no cases dealing with whether SEC excess disgorgement is excluded from LPL policy coverage as a penalty. The Restatement (Third) of Restitution & Unjust Enrichment (2011) speaks of disgorgement. It says: “The object of restitution in such cases is to eliminate profit from wrongdoing while avoiding, so far as possible, the imposition of a penalty.” § 51(4). “The profit for which the wrongdoer is liable by the rule of § 51(4) is the net increase in the assets of the wrongdoer, to the extent that this increase is attributable to the underlying wrong.” Id. § 51 cmt. e. The Restatement does not consider “disgorgement of wrongful gain” to be “a punitive remedy” because “the wrongdoer who is deprived of an illicit gain is ideally left in the position he would have occupied had there been no misconduct.” Id. § 51 cmt. k. Those statements do not seem apt for recovery of amounts beyond the wrongdoer's gain like the excess disgorgement the SEC may obtain against Marcus. The Restatement recognizes that sometimes the goal of deterrence requires going beyond simple disgorgement and points, for example, to exemplary damages. Id. (discussing “punitive or exemplary” damages). The potential remedy in the SEC lawsuit here-excess disgorgement beyond Marcus's legal fees-is a demand by a government agency that would not merely eliminate Marcus's allegedly ill-gotten gains, but would also force Marcus to pay the SEC for gains that other defendants may have garnered.[10] In that respect, the requested relief operates as a punitive deterrent, [11] not compensation for an injured investor. Maine does not favor insuring against deterrent remedies. Braley v. Berkshire Mut. Ins. Co., 440 A.2d 359, 361-62 (Me. 1982) (with respect to punitive damages, “[a]llowing punitive damages to be awarded against an insurance company can serve no deterrent function because the wrongdoer is not the person paying the damages”). I conclude that the term “penalties” is not ambiguous, but even if it were ambiguous and I construed it against Allied World, excess disgorgement nevertheless fits squarely within its scope.[12]

         Kokesh, decided just after this policy went into effect, confirms my conclusion that SEC excess disgorgement relief is a penalty under the LPL policy. Marcus correctly points out that Kokesh was interpreting, not an insurance policy, but a federal statute of limitations that established a 5-year limitations period for the SEC to seek a penalty. Id. at 1642 & n.3. Certainly the 2017 Kokesh decision is not determinative of what the Allied World LPL policy meant when the parties agreed to its language earlier, but it is instructive because Kokesh's reasoning is broad and persuasive. Kokesh concluded that SEC disgorgement is a penalty under the statute of limitations because: (1) it is imposed for a violation “against the United States rather than an aggrieved individual, ” id. at 1643; (2) it “is imposed for punitive purposes, ” id.; and (3) in many cases it is not compensatory, id. at 1644. (In Kokesh, the fact that disgorgement “sometimes exceeds the profits gained as a result of the violation, ” id., as Marcus has argued that it may here, demonstrated that disgorgement “is a punitive, rather than a remedial, sanction, ” id. at 1645.) Those principles for determining what is a penalty were not invented out of whole cloth in Kokesh, and they are pertinent here. The SEC seeks disgorgement from Marcus for violating United States securities laws (factor 1); disgorgement against Marcus beyond his legal fees would be imposed for punitive purposes (factor 2); it is not compensatory (factor 3); and disgorgement may exceed any profits Marcus gained. Thus, Kokesh confirms my conclusion that excess disgorgement is a penalty.[13] Marcus has not shown that Allied World has a duty to defend him in the SEC lawsuit.[14]

         2. ...

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