Attorneys Liability Protection vs. Whittington Law, et al., CV-11-563-JL 6/28/13 P

UNITED STATES DISTRICT COURT DISTRICT OF NEW HAMPSHIRE

Attorneys Liability Protection Society, Inc.

v. Civil N o . 11-cv-563-JL Opinion N o .

Whittington Law Associates, PLLC W.E. “Ned” Whittington, and Ledyard National Bank

MEMORANDUM ORDER

This dispute over the scope of a professional liability

insurance policy arises from a somewhat unusual set of facts, at

least as far as professional liability insurance policies are

concerned. Whittington Law Associates, PLLC and W.E. Whittington

(collectively, the “Whittington defendants”) were evidently the

victims of what has become known as a “Nigerian Check Scam.” In

the typical embodiment of that confidence game, “the victim is

asked to accept what appears to be a legitimate check on behalf

of a foreign corporation, deposit the funds, then wire some or

all of the proceeds to a foreign account before the victim’s bank

realizes the check i s , in fact, counterfeit.” Branch Banking &

Trust C o . v . Witmeyer, N o . 10-cv-55,

, at *1 (E.D.

V a . Jan. 6, 2011).

That is precisely what happened here. The Whittington

defendants were induced, by a “client” that did not actually exist, to deposit a sizeable check into their account at Ledyard

National Bank and promptly wire the bulk of the funds to a bank

account in Japan. By the time Ledyard discovered that the check

was invalid, the funds had already been withdrawn from the

Japanese account.

Finding itself more than $150,000 short, Ledyard commenced a

state-court action against the Whittington defendants to recover

that amount. The Whittington defendants, in turn, sought

coverage against that action from their professional liability

insurer, Attorneys Liability Protection Society, Inc. (“ALPS”),

which responded by filing this action seeking a declaratory

judgment that it need not provide coverage. The Whittington

defendants have counterclaimed, seeking a declaratory judgment to

the contrary, and alleging that ALPS breached the insurance

contract by declining to provide coverage. This court has

jurisdiction of this action under

(diversity).

ALPS has moved for summary judgment on both its claim and

the Whittington defendants’ counterclaims. Its arguments are

twofold. First, pointing out that the Whittington defendants’

insurance policy provides coverage only for damages arising from

“an act, error or omission in professional services that were or

should have been rendered,” it argues that the events underlying

Ledyard’s claim do not meet that definition. Second, it argues

2 that even if Ledyard’s claim falls within the general scope of

the policy, that claim is specifically excluded by the policy’s

exclusion for the “conversion, misappropriation or improper

commingling” of funds controlled by the Whittington defendants.

The Whittington defendants have cross-moved for summary judgment,

unsurprisingly taking a contrary position as to both the scope of

the policy and the applicability of the exclusion.

Having carefully considered the parties’ submissions and

heard oral argument, the court concludes that Ledyard’s claim

against the Whittington defendants arises from the conversion or

misappropriation of funds under the Whittington defendants’

control, and is therefore excluded under the unambiguous policy

language. The court accordingly grants ALPS’s motion for summary

judgment, and denies the Whittington defendants’ cross-motion.

I. Applicable legal standard

Summary judgment is appropriate where “the movant shows that

there is no genuine dispute as to any material fact and the

movant is entitled to judgment as a matter of law.” Fed. R. Civ.

P. 56(a). A dispute is “genuine” if it could reasonably be

resolved in either party’s favor at trial. See Estrada v . Rhode

Island,

6 , 62 (1st Cir. 2010) (citing Meuser v . Fed.

Express Corp.,

0 7 , 515 (1st Cir. 2009)). A fact is

3 “material” if it could sway the outcome under applicable law.

Id. (citing Vineberg v . Bissonnette,

0 , 56 (1st Cir.

2008)). In analyzing a summary judgment motion, the court “views

all facts and draws all reasonable inferences in the light most

favorable to the non-moving party.”

On cross-motions for

summary judgment, the court applies this standard to each party’s

motion separately. See, e.g., Am. Home Assurance C o . v . AGM

Marine Contractors, Inc.,

1 0 , 812 (1st Cir. 2006).

II. Background

Defendant W.E. Whittington is a New Hampshire attorney who

practices law under the name Whittington Law Associates, PLLC.

Late on the evening of July 2 4 , 2011, he received an e-mail from

a person claiming to be Richard Downey, an attorney with the Law

Offices of Richard L . Downey & Associates in Fairfax, Virginia.

“Downey” wrote that he would be “sending a client over for a

business litigation matter,” and asked Whittington to “[a]dvise

of [his] availability.” Once Whittington had done s o , the e-mail

continued, “Downey” would “have [his] client contact

[Whittington] directly with pertinent information.” Whittington

did not promptly respond to the e-mail, and late the following

night, “Downey” wrote a second, identical e-mail to Whittington,

sent from a different e-mail address.

4 The next morning, Whittington responded to the original e-

mail, advising “Downey” that he was “completely available”; the

morning after that, he responded to “Downey’s” second e-mail,

again advising of his availability. Several days later, “Downey”

wrote back, informing Whittington that he had “forwarded your

contact to my client to establish direct contact and provide

pertinent information for your review.” Shortly thereafter,

Whittington received an e-mail from a person claiming to be

Martin Joachim, a representative of Bendtsteel A/S in

Frederiksvaerk, Denmark. “Joachim” advised that he had been

referred by Richard Downey, and indicated that he would be

forwarding additional information about “our legal matter.”

In an e-mail to Whittington several days later, “Joachim”

outlined the contours of this “legal matter.” According to the

e-mail, Mill Steel Supply of Manchester, New Hampshire had made

only a part payment for “goods” supplied by Bendtsteel, with over

$500,000 still outstanding. Bendtsteel wished to maintain its

otherwise good relationship with Mill Steel Supply, but believed

that the retention of the Whittington defendants “and the

introduction of legal pressure may initiate immediate payment.”

“Joachim” continued: Our expectation of your services for now will be within the scenario of a phone call or demand letter to our

5 customer. This approach will trigger the much needed response from our customer towards payment.

When all available options have been exhausted, litigation may be introduced as a last resort. We will forward the pertinent document for your review.

You may send your retainer document for the board to review as we intend to commence immediately.

After checking for conflicts of interest and conducting some

internet research on Bendtsteel and Mill Steel Supply (both of

which seemed, to Whittington, to be legitimate companies),

Whittington advised “Joachim” via e-mail that he had no conflict

of interest, and forwarded an engagement letter. “Joachim”

returned a signed copy of the engagement letter (again via e-

mail), and informed Whittington that, after being notified of

Bendtsteel’s intention “to retain legal services as regards our

claim,” Mill Steel Supply had promised to make payment.

Following additional e-mail correspondence, “Joachim” informed

Whittington that Mill Steel Supply had “made a part payment to

you/your firm to avoid litigation,” and that the payment would be

sent directly to Whittington’s office.

On August 3 1 , 2011, Whittington received a UPS package

containing a check in the amount of $195,790, purportedly issued

by Citibank, N.A. on behalf of Mill Steel Supply and payable to

Whittington Law. He promptly notified “Joachim” of the receipt,

asking whether “Joachim” wanted the funds wired to him and

6 proposing that the Whittington defendants keep $2,000 as a

retainer. “Joachim” responded, agreeing to the $2,000 retainer

and requesting that Whittington ask his bank “to transfer by

swift to our creditor MS CAR FACTORY COMPANY LTD in CHIBA-KEN,

JAPAN the sum of $188,978.000 (USD).” Wire transfer instructions

were attached. The Whittington defendants immediately deposited

the check into their client trust account at Ledyard National

Bank, and requested that the bank wire the funds as directed by

“Joachim.”

Ledyard completed the transfer on September 6, 2011. Later

that same day, Ledyard received notification that Citibank would

not honor the check, and attempted–-unsuccessfully–-to recall the

wire transfer. A subsequent investigation determined that the

check was fraudulent, and that “Downey” and “Joachim” were fake

identities (although Richard Downey and his law firm actually

existed, his website had been hacked and the e-mail was not from

the real Richard Downey).

Ledyard responded to this revelation by seizing the funds

remaining in the Whittington defendants’ client trust account to

offset its loss. It also filed a state-court lawsuit against the

Whittington defendants, seeking to recover the balance of the

lost funds. The Whittington defendants duly reported the suit to

ALPS, their professional liability insurer, requesting that ALPS

7 provide them with a defense against Ledyard’s action. ALPS

denied coverage and filed this declaratory judgment action.

III. Analysis

As is often true of insurance coverage disputes, this case

does not involve any real disagreement as to the underlying

facts. The outcome turns instead on the interpretation of the

Whittington defendants’ insurance policy, over which there is

much disagreement. As noted at the outset, that disagreement

concerns two clauses in particular. The first of these is the

policy’s coverage clause, which, in pertinent part, provides

coverage for claims arising from or in connection with “an act,

error or omission in professional services that were or should

have been rendered by the Insured.” Ins. Pol’y (document n o . 18-

7 ) at 2 , § 1.1.1 (boldface omitted). 1 The second is one of the

policy’s multifarious exclusions, for claims arising from or in

connection with the “conversion, misappropriation or improper

commingling by any person” of client funds or funds “held or

1 The policy pervasively deploys boldface type, using it for terms that are defined in the body of the policy itself, and also to emphasize certain passages of text. Instead of either copying each occurrence of boldface when quoting the policy or commenting on its omission, this order omits the boldface from any quoted portion of the policy.

8 controlled by an Insured in any capacity or under any authority.”

Id. at 8 , § 3.1.13.

The parties’ memoranda devote considerable attention to the

first clause. ALPS, noting that the policy defines “professional

services” to be “services or activities performed for others as

an attorney in an attorney-client relationship,” see id. at 6,

§ 2.22.1, argues that the policy does not provide any coverage

because the Whittington defendants “did not have an attorney-

client relationship with any actual client.” Memo. in Supp. of

ALPS’s Mot. for Summ. J. (document n o . 18-1) at 1 5 . For their

part, the Whittington defendants argue that an “actual client” is

not necessary to an “attorney-client relationship,” and that the

only requirement is an attorney’s “good faith belief . . . that

he had entered into a legitimate attorney-client relationship.”

Memo. in Supp. of Defts.’ Mot. for Summ. J. (document n o . 21-1)

at 12-13. Each side cites several cases involving similar facts

in support of its favored interpretation.

While the interpretation of the first clause is interesting

–-particularly in light of the divergent results reached by the

cases the parties cite2--this court need not resolve that issue.

2 Compare Nardella Chong, P.A. v . Medmarc Cas. Ins. Co.,

(11th Cir. 2011) (losses due to Nigerian Check Scam arose from provision of professional services and were covered by attorney’s professional liability insurance policy); Stark &

9 Assuming without deciding that Ledyard’s claim against the

Whittington defendants arises from or in connection with “an act,

error or omission in professional services that were or should

have been rendered by the Insured,” such that the policy would

ordinarily provide coverage against it under the first clause,

that claim is excluded under the second clause.

The interpretation of insurance policy language is a

question of law for the court. Concord Gen. Mut. Ins. C o . v .

Doe,

3 , 75 (2010). “Insurers are free to contractually

limit the extent of their liability through use of a policy

exclusion.” Progressive N . Ins. C o . v . Concord Gen. Mut. Ins.

Co.,

(2005). “Such language must be so clear,

however, as to create no ambiguity that might affect the

Knoll Co., L.P.A. v . Proassurance Cas. Co., N o . 12-cv-2669,

(N.D. Ohio Apr. 8 , 2013) (same); O’Brien & Wolf, L.L.P. v . Liberty Ins. Underwriters Inc., N o . 11-cv-3748,

(D. Minn. Aug. 3 , 2012) (same); and Lombardi, Walsh, Wakeman, Harrison, Amodeo & Davenport, P.C. v . Amer. Guar. & Liab. Ins. Co.,

(N.Y. App. Div. 2011) (same) with Bradford & Bradford, P.A. v . Attorneys Liab. Prot. Soc’y, Inc., N o . 09-cv-2981,

(D.S.C. Oct. 2 0 , 2010) (losses due to Nigerian Check Scam did not arise from provision of professional services and were not covered by attorney’s professional liability insurance policy); Fidelity Bank v . Stapleton, N o . 07A-11482-2 (Ga. State C t . Jan. 1 4 , 2009) (same); and Fleet Nat’l Bank v . Wolsky, N o . 04-CV-5075 (Mass. Super. C t . Dec. 6, 2006) (same). (In light of these cases, the court might need to reconsider its statement that this case “arises from a somewhat unusual set of facts, at least as far as professional liability insurance policies are concerned.” Supra at 1.)

10 insured’s reasonable expectations.” Id. An ambiguity exists

when, considering the exclusion “in its appropriate context, and

constru[ing] the words used according to their plain, ordinary,

and popular definitions . . . the parties may reasonably differ

about the interpretation of the language.” Id. The court

ultimately “interpret[s] exclusion language to mean what a

reasonable person would construe it to mean.” Id.

In full, the relevant policy exclusion provides that

THIS POLICY DOES NOT APPLY TO ANY CLAIM ARISING FROM OR IN CONNECTION WITH . . . [a]ny conversion, misappropriation or improper commingling by any person of client or trust account funds or property, or funds or property of any other person held or controlled by an Insured in any capacity or under any authority, including any loss or reduction in value of such funds or property.

Ins. Pol’y (document n o . 18-7) at 8 , § 3.1.13. As the

Whittington defendants note, “this exclusion has apparently not

been reviewed by any court in a reported decision.” Memo. of Law

in Supp. of Defts.’ Mot. for Summ. J. (document n o . 21-1) at 2 2 .

That is not, however, an obstacle to its application here, as its

terms are clear and unambiguous as applied to the facts of this

case. Ledyard’s claim against the Whittington defendants arises

from the scammer’s misappropriation of the bank’s funds, which

the Whittingon defendants controlled, and thus falls squarely

within this exclusion.

11 The Whittington defendants’ arguments to the contrary are

not persuasive. In their memorandum in support of their motion

for summary judgment, they focus solely on whether the

misappropriated funds were “client or trust account funds or

property,” asserting that because Ledyard “is not seeking to

recover” such funds and “[t]he $195,790 represented by the

fraudulent check was simply never in the firm’s [client trust]

account . . . the exclusion by its own terms is inapplicable.”

Id. By its own terms, though, the exclusion does not apply

solely to the misappropriation of “client or trust account funds

or property.” It also applies to the misappropriation o f ,

simply, “funds” that are “held or controlled by an Insured in any

capacity or under any authority.”

Perhaps recognizing their oversight, in their opposition to

ALPS’s motion for summary judgment, the Whittington defendants

assert that they “never actually held or controlled the money

sent to [them] by Citibank” because “[t]he money represented by

the $195,790 check that was purported to come from Citibank . . .

never existed.” Defts.’ Memo. in Supp. of O b j . to Pl.’s Mot. for

Summ. J. (document n o . 23-1) at 1 0 . Ledyard’s action does not,

however, arise from the scammer’s misappropriation of the

nonexistent funds “represented by the $195,790 check,” so whether

the Whittington defendants actually controlled those funds is

12 irrelevant. What is relevant is whether the Whittington

defendants controlled the funds that were misappropriated, and

which are the subject of Ledyard’s claim against the Whittington

defendants–-the funds the Whittington defendants instructed

Ledyard to wire to the Japanese bank account.

The Whittington defendants plainly controlled those funds,

as their attorney conceded at oral argument. To “control”

something, in the sense that term is used in the policy, means

“to exercise restraining or directing influence over” or “to have

power over.” Webster’s Third New International Dictionary 496

(2002). The Whittington defendants’ “directing influence” or

“power over” the funds in question is evident from the fact that

the bank wired those funds at their direction.3 Further, the

clause refers to funds controlled by the Whittington defendants

3 As ALPS notes, several courts have concluded that one exercises control over funds by directing that they be wired. See, e.g., Gould v . Georgia,

5 2 , 255 (Ga. C t . App. 2005) (“[A]n individual can exercise control over funds by directing a wire transfer.”); Bailey v . Texas,

(Tex. C t . App. 1994) (defendant “exercised control over” bank funds by “orchestrat[ing] a wire transfer” from one account to another). The Whittington defendants assert that these cases are inapposite because they “have absolutely nothing at all to do with insurance” and “involve the theft of ‘real’ money,” not “a counterfeit check or the wiring of funds that did not exist.” Defts.’ Reply (document n o . 25) at 6. This argument–-which rather flippantly ignores the fact that this case also involves “the theft of ‘real’ money” from the bank and its depositors–- does not diminish these cases’ instructive value as to the plain and ordinary meaning of the term “control.”

13 “in any capacity or under any authority,” a clause broad enough

to encompass the Whittington defendants’ status as account

holders at Ledyard. Indeed, the Whittington defendants’

authority, as account holders, to direct the bank how to disperse

the funds at issue was the linchpin on which the scam itself

turned; if the Whittington defendants had no such authority, the

scam could not have been accomplished.

The Whittington defendants also argue that the exclusion is

ambiguous because ALPS could have included additional language in

the policy to exclude claims “arising out o f , in connection with,

or in consequence of . . . the dishonoring of any financial

instrument.” Defts.’ Memo. in Supp. of O b j . to Pl.’s Mot. for

Summ. J. (document n o . 23-1) at 11 (quoting Chicago Title Ins.

C o . v . Northland Ins. Co., 31 S o . 3d 2 1 4 , 215 n.1 (Fla. Dist. C t .

App. 2010)) (emphasis omitted); see also Defts.’ Reply (document

n o . 25) at 7 . Determining whether a policy exclusion is

ambiguous, though, does not turn on whether the insurer might

have included another, more precise exclusion. As already

discussed, ambiguity turns instead on whether “the parties may

reasonably differ about the interpretation of the language” of

the exclusion that was actually included in the policy. Concord

Gen. Mut. Ins.,

. And, for the reasons already

14 discussed, the parties can not “reasonably differ” as to whether

Ledyard’s claim falls within the scope of § 3.1.13’s exclusion.4

As a last resort, in their reply brief, the Whittington

defendants argue that the language of § 3.1.13 quoted above does

not apply at all, and that a version of the exclusion that ALPS

promulgated in August 2011 applies instead. This position

directly contradicts the position the Whittington defendants take

in their memorandum in support of their motion for summary

judgment, in which they rely upon the same version of § 3.1.13

quoted above. See Memo. in Supp. of Defts.’ Mot. for Summ. J.

(document n o . 21-1) at 21-22. This court ordinarily does not

consider arguments made for the first time in reply, see Doe v .

Friendfinder Network, Inc.,

8 8 , 303 n.16 (D.N.H.

2008), a practice that is even more sensible when a party’s

tardily-contrived arguments are in conflict with its own earlier

arguments, see Beane v . Beane,

8 0 , 298 (D.N.H.

2012). The court also does not, for that matter, consider

inadmissible evidence on summary judgment, see, e.g., Elmo v .

4 At oral argument, the Whittington defendants argued that the exclusion was ambiguous as actually written, contending that the parties could reasonably differ as to whether the term “any person” referred only to persons employed by or acting on behalf of an Insured. This argument was not presented in any of the Whittington defendants’ memoranda and is untimely. See Johnson v . Gen. Dynamics Info. Tech, Inc.,

, 241 n.3 (D.N.H. 2009). It is also unpersuasive.

15 Callahan,

at 1 8 , and the “new” version of § 3.1.13

upon which the Whittington defendants rely is unauthenticated and

hence inadmissible, see Fed. R. Evid. 901(a).

The new version of the exclusion does not help the

Whittington defendants in any event. That version excludes

claims arising out of or in connection with “[a]ny conversion,

misappropriation, improper commingling or negligent supervision

of client or trust account funds or property, or funds or

property of any other person held or controlled by an Insured in

any capacity or under any authority, . . . .” Revised Ins. Pol’y

(document n o . 25-1) at 8 , § 3.1.13. The removal of the phrase

“by any person,” the Whittington defendants argue, makes it

“clear that the bad or negligent act must be done by the

insured.” Defts.’ Reply (document n o . 25) at 7 (emphasis in

original). Reading the exclusion “in its appropriate context,”

Concord Gen. Mut. Ins.,

, though, it is apparent

that the revision worked no such change.

When the policy excludes coverage for claims arising from

the insured’s acts, it includes a specific limitation to that

effect. By way of example, the policy contains exclusions for

claims arising from or in connection with:

An Insured’s activities as an elected public official or as an employee of a governmental body, subdivision, or agency thereof; . . .

16 An Insured’s activities or capacity as a fiduciary under the Employee Retirement Income Security Act of 1974, as amended, or any regulation or order issued pursuant thereto; . . .

Alleged discrimination by an Insured, including discrimination based on race, color, creed, age, sex, nationality, marital status or sexual orientation;

Alleged sexual harassment or misconduct by an Insured;

An Insured’s rendering of investment advice to any person, including but not limited to advice concerning securities, real property, commodities or franchises; [and]

An Insured’s services or capacity as a broker, dealer, investment advisor, business manager, accountant, real estate broker or real estate agent[.]

Revised Ins. Pol’y (document n o . 25-1) at 7-8 (section numbers

omitted; emphasis added); see also Ins. Pol’y (document n o . 18-7)

at 6-8 (using the same or similar language). So the very fact

that the exclusion set forth in § 3.1.13 is not limited to “an

Insured’s conversion, misappropriation, improper commingling or

negligent supervision” or “conversion, misappropriation, improper

commingling or negligent supervision by an Insured” is enough to

set it apart from its confederates, and to make clear to any

reasonable person that the “bad or negligent act” need not be

done by the insured. The phrase “by any person” was surplusage,

17 and its deletion made no change to the substance of the exclusion.5

The Whittington defendants finally protest that “no law firm

purchasing professional liability insurance would expect that

permitting its client trust account to be pilfered would not be

covered.”6 Defts.’ Reply (document n o . 25) at 9 (quoting O’Brien

& Wolf,

at * 8 ) . It suffices to say in response

that if the plain and unambiguous language of the insurance

policy excludes coverage for those acts, the insured law firm

should expect just that. That is the case here, and ALPS is

entitled to summary judgment in its favor.

5 The Whittington defendants also argue that the addition of “negligent supervision” to § 3.1.13 (which, they say, does not bind them) “highlights the ambiguity in the original exclusion” by demonstrating that the earlier version did not exclude claims arising from negligence of the type alleged in Ledyard’s suit against them. Defts.’ Reply (document n o . 25) at 8 . But, as already discussed, in reviewing policy language for ambiguity, this court reviews the language of the policy as it was actually written and does not speculate about how it might have been written. 6 This protestation, it bears noting, is in tension with the Whittington defendants’ argument–-discussed above--that the “pilfered” funds were not in their client trust account.

18 IV. Conclusion

For the foregoing reasons, ALPS’s motion for summary

judgment7 is GRANTED, and the Whittington defendants’ motion for

summary judgment8 is DENIED. The clerk shall enter judgment

accordingly and close the case.9

SO ORDERED.

United States District Judge

Dated: June 2 8 , 2013

cc: William L . Boesch, Esq. Gordon A . Rehnborg, Jr., Esq. R. Matthew Cairns, Esq.

7 Document n o . 1 8 . 8 Document n o . 2 1 . 9 As a member of the bar of this court, ALPS’s counsel is expected to be familiar with and observe the local rules of this court. Counsel is reminded that pursuant to Local Rule 5.1(a), “[f]ootnotes shall be used sparingly.” In spite of this rule, every citation to the record or to authority in ALPS’s legal memoranda is contained in a footnote, begetting around 150 footnotes total. Counsel would do well to temper his use of footnotes in the future.

19