No Coverage for Lawyer’s Alleged Self-Dealing

The United States Court of Appeals for the Ninth Circuit has affirmed a decision in favor of an insurer, holding that the business enterprise and trust exclusions in a lawyers professional liability policy barred coverage for a suit alleging self-dealing by the insured attorney and his firm. Christensen v. Darwin Nat’l Assurance Co., No. 14-15914 (9th Cir. Mar. 23, 2016). Wiley Rein represented the insurer before the district court and on appeal to the Ninth Circuit.

A corporate client, which owned property on the Las Vegas Strip, retained the insured law firm and its named partner in connection with an eminent domain matter. During the course of that representation, the attorney purchased a 50% stake in the client through a trust, of which the attorney was the trustee and both he and his family members were beneficiaries. In time, parties associated with the client’s original owner sued the attorney and his firm, alleging that they had misrepresented the value of the business in order to acquire the 50% stake at a discount. In addition, the claimants alleged that the attorney used the trust’s stake in the business to engage in transactions that benefited his firm, his family, and himself at the expense of the business. Among other things, the claimants asserted that the law firm and the attorney’s family occupied client-owned real estate without paying full rent and that the attorney caused the client to purchase various assets owned by the attorney and his family under unfair terms.

In the coverage litigation that followed, the district court awarded summary judgment to the insurer. In affirming, the Ninth Circuit first determined that coverage was barred by the policy’s “Business Enterprise Exclusion,” which applied to “any claim . . . based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving . . . the Insured’s capacity or status as . . . an officer, director, partner, trustee, shareholder, manager or employee of a business enterprise.” In this regard, the court pointed out that the attorney’s conduct and alleged wrongdoing was “directly linked” to conduct on behalf of another entity, a trust in which he was a trustee. The court also observed that even if the insured’s misconduct took place before the self-dealing, the exclusion still applied because it barred coverage for claims based on acts “in any way involving” the “Insured’s capacity or status as: . . . an officer, director, partner, trustee, shareholder, manager or employee of a business enterprise, charitable organization or pension, welfare, profit sharing, mutual or investment fund or trust.” The court further determined that the “Trust Exclusion” applied as well. This provision barred coverage for “any claim . . . based on, arising out of, directly or indirectly resulting from, in consequence of, or in any other way involving . . . any act whatsoever of an Insured in connection with a trust or estate when an Insured is a beneficiary . . . of the trust.”