Cornerstone Title & Escrow, In v. Evanston Insurance Company
Filing
UNPUBLISHED AUTHORED OPINION filed. Originating case number: 1:12-cv-00746-WMN. Copies to all parties and the district court/agency. [999298856].. [13-1318]
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UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 13-1318
CORNERSTONE TITLE & ESCROW, INC.; SEAN ADETULA,
Plaintiffs – Appellants,
v.
EVANSTON INSURANCE COMPANY,
Defendant – Appellee.
Appeal from the United States District Court for the District of
Maryland, at Baltimore.
William M. Nickerson, Senior District
Judge. (1:12-cv-00746-WMN)
Argued:
January 29, 2014
Decided:
February 19, 2014
Before AGEE, FLOYD, and THACKER, Circuit Judges.
Reversed and remanded by unpublished opinion. Judge Agee wrote
the opinion, in which Judge Floyd and Judge Thacker joined.
Stephan Young Brennan, ILIFF, MEREDITH, WILDBERGER & BRENNAN,
P.C.,
Pasadena,
Maryland,
for
Appellants.
Paul
Newman
Farquharson, SEMMES, BOWEN & SEMMES, Baltimore, Maryland, for
Appellee.
Unpublished opinions are not binding precedent in this circuit.
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AGEE, Circuit Judge:
The
Maryland
Attorney
General
sued
Cornerstone
Title
&
Escrow, Inc., alleging that Cornerstone and others engaged in a
scheme to defraud homeowners on the brink of foreclosure.
response,
Cornerstone
liability
insurer,
sought
Evanston
coverage
Insurance
from
its
Company,
denied any duty to defend under the policy.
In
professional
but
Evanston
Cornerstone and its
owner then filed a breach-of-contract action against Evanston in
the District of Maryland.
That court entered summary judgment
in Evanston’s favor, finding that at least two policy exclusions
barred
coverage
for
the
underlying
action.
Cornerstone
appealed.
For the reasons explained below, we reverse and remand the
judgment of the district court.
Not all the claims found in the
underlying complaint fall within the two exclusions that the
district court identified, so those two exclusions do not defeat
Evanston’s duty to defend and, by extension, duty to indemnify.
I.
A.
Evanston
issued
a
“Service
and
Technical
Professional
Liability Insurance” policy to Cornerstone, which provides that
Evanston will pay “the amount of Damages and Claims Expenses . .
. because of any (a) act, error or omission in Professional
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Services rendered . . . or (b) Personal Injury committed . . .
by [Cornerstone].”
(J.A. 67–68.)
The policy also says that
Evanston will “investigate, defend and settle any Claim to which
coverage
together,
under
these
this
policy
provisions
applies.”
require
(J.A.
Evanston
68.)
to
defend
Taken
and
indemnify Cornerstone for covered claims.
This case implicates four of the policy’s exclusions:
•
Exclusion (a): applying to claims “based upon or arising
out of any dishonest, deliberately fraudulent, malicious,
willful or knowingly wrongful act or omissions committed by
or at the direction of [Cornerstone].” (J.A. 70.).
•
Exclusion (n): applying to claims “based upon or arising
out of [Cornerstone] gaining any profit or advantage to
which [Cornerstone] is not legally entitled.” (J.A. 70.)
•
Exclusion (x): applying to claims “based upon or arising
out
of
the
actual
or
alleged
theft,
conversion,
misappropriation, disappearance, or any actual or alleged
insufficiency in the amount of, any escrow funds, monies,
monetary
proceeds, or
any
other
assets,
securities,
negotiable instruments, . . . irrespective of which
individual,
party,
or
entity
actually
or
allegedly
committed or caused in whole or part the [excluded act].”
(J.A. 65.)
•
Exclusion (cc): applying to claims “based upon or arising
out of the Real Estate Settlement Procedures Act (RESPA) or
any similar state or local legislation.” (J.A. 66.)
If a “[c]laim” falls within one of these exclusions, then the
policy “[d]oes [n]ot [a]pply.”
(J.A. 69.)
B.
In 2008, the Maryland Attorney General sued Cornerstone and
ten
co-defendants,
alleging
that
3
the
defendants
collectively
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violated two Maryland statutes: the Protection of Homeowners in
Foreclosure Act and the Consumer Protection Act.
According to
the
statutes
complaint,
the
defendants
violated
these
by
scheming to “take title to homeowners’ residences and . . .
strip the equity that the homeowners ha[d] built up in their
homes.”
(J.A. 109.)
property
The complaint identified thirteen specific
transactions
in
which
the
defendants,
including
Cornerstone, acted wrongfully; it asked the court for a variety
of relief, including restitution.
The alleged scheme worked by preying on homeowners close to
losing
their
homes
in
foreclosure. 1
The
“Lewis
Defendants”
marketed foreclosure-consulting services for a fee and, with the
help of a colluding mortgage broker (Thomas), would convince
their
consulting
clients
to
enter
sale-leaseback
agreements.
Under such an agreement, a homeowner would sell her home to the
Lewis Defendants and rent it back.
The Lewis Defendants pitched
the arrangement as a way to resolve the homeowner’s delinquency
while allowing the homeowner to rebuild her credit and keep her
home.
The
reality
was
much
different.
Once
a
sale
was
consummated, the Lewis Defendants would tell a homeowner that
unspecified closing fees and charges had consumed any equity
1
As explained below, we assume that the allegations of the
underlying complaint are true for purposes of determining
whether Evanston owes Cornerstone a duty to defend.
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proceeds and convince the homeowner to sign her check for the
settlement proceeds back to the Lewis Defendants.
Lewis
Defendants
payments
that
would
were
charge
much
higher
the
homeowner
than
the
Then, the
monthly
original
rent
mortgage
payments -- driving the homeowner out of her home and ending any
chance for her to repurchase it in the future.
Cornerstone “provide[d] settlement services for the saleleaseback transactions,” and the Attorney General alleged that
Cornerstone
failed
to
“deliver
to
homeowners
the
checks
proceeds due to them at settlement or afterwards.”
Cornerstone
checks
to
instead
the
Lewis
“deliver[ed]
Defendants
the
or
homeowners’
to
Defendant
deliver[ed] the checks to the Lewis Defendants.”
for
(J.A. 116.)
[unendorsed]
Thomas,
who
(J.A. 116.)
The complaint alleged that Cornerstone never “disclose[d] [to
the homeowners] the fact that it provide[d] homeowners’ checks
to other parties” (J.A. 116), and alleged that this failure to
disclose
amounted
to
“a
failure
to
state
material
violation of the Maryland Consumer Protection Act.
facts”
in
(J.A. 129.)
In addition, by acting as the settlement agent, “Cornerstone
participated in and provided substantial assistance to the . . .
[equity-stripping] scheme.”
(J.A. 129.)
The Attorney General sought to hold Cornerstone responsible
not just for its own alleged failure to disclose, but also for
its co-defendants’ acts.
The Attorney General pled that it was
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the
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defendants’
possible”
(J.A.
Filed: 02/19/2014
“concerted
109),
so
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action
each
that
[made]
defendant
the
was
enterprise
“jointly
and
severally liable” for the acts of every other co-defendant (J.A.
124, 130).
that
Applying this theory, the Attorney General asserted
Cornerstone
was
liable
for
a
laundry
list
of
statutory
violations committed by its co-defendants, including:
•
Failing
to
provide
a
written
foreclosure
contract or written sale-leaseback agreement;
•
Requiring homeowners to pay a membership
receiving foreclosure consulting services;
•
Obtaining an interest in a person’s home while offering
that same person foreclosure consulting services;
•
Representing that the services
homeowner from foreclosure;
•
Failing to disclose the nature of the foreclosure services
provided,
the
material
terms
of
the
sale-leaseback
agreement, the terms of the rental agreement that followed,
and the terms of any subsequent repurchase;
•
Failing to disclosure specific terms of the sale-leaseback
agreements that statutes require to be disclosed;
•
Failing to provide several statutorily required forms and
notices in connection with the foreclosure counseling and
the sale-leaseback agreements;
•
Failing
to
determine
whether
the
borrower
has
the
reasonable ability to make lease payments and repurchase
her home;
•
Misleading consumers about whether they are entitled to
proceeds of settlement and whether those proceeds would be
placed in escrow accounts;
•
Taking consumers’ settlement checks; and
6
were
offered
consulting
fee
to
before
save
a
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Recording land deeds and encumbering properties before the
homeowners’ rescission period expired.
Cornerstone sought coverage under the policy from Evanston,
requesting
that
Evanston
defend
Cornerstone
complaint and indemnify it for any liability.
coverage.
Although
Cornerstone
denied
the
against
the
Evanston denied
Attorney
General’s
allegations, it eventually agreed to a settlement in which it
agreed to pay $100,100 in restitution.
C.
In March 2012, Cornerstone sued Evanston, alleging that the
insurer
breached
indemnify
under
both
the
its
duty
policy.
to
defend
Cornerstone
and
moved
its
duty
for
to
summary
judgment on the duty-to-defend issue and Evanston responded by
filing its own cross-motion for partial summary judgment.
Among
other things, Evanston argued that the Attorney General’s suit
fell within policy exclusions (a), (n), (x), and (cc) and thus
no duty to defend, or indemnify, arose.
The district court granted Evanston’s motion for partial
summary
judgment,
sponte
entered
claim.
Of relevance here, the court concluded -- based on the
“gravamen”
of
denied
judgment
the
Cornerstone’s
on
complaint
cross-motion,
Cornerstone’s
--
that
the
and
sua
duty-to-indemnify
Attorney
General’s
complaint “only alleged conduct that meets exclusions of the
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policy—(n) and (x), at minimum[.]”
Cornerstone Title & Escrow,
Inc. v. Evanston Ins. Co., No. WMN-12-746, 2013 WL 393286, at
*3,
*7
(D.
Md.
misappropriation
Jan.
and
30,
2013).
illegal
gains
The
were
court
stated
“precisely”
what
that
the
Attorney General alleged in his complaint against Cornerstone.
Id.
at
*7.
Therefore,
the
district
court
concluded
that
Evanston had no duty to defend and, consequently, no duty to
indemnify, but did not address exclusions (a) or (cc).
Cornerstone filed this timely appeal, over which we have
jurisdiction under 28 U.S.C. § 1291.
II.
The district court decided this case on summary judgment,
and we review that decision de novo.
See Turner v. United
States, 736 F.3d 274, 280 (4th Cir. 2013).
In doing so, we
apply “the same legal standards as the district court and view[]
all the facts and reasonable inferences therefrom in the light
most
favorable
to
the
non
moving
party,”
Cornerstone.
Id.
“Summary judgment is appropriate if the movant shows that there
is no genuine dispute as to any material fact and the movant is
entitled
to
judgment
as
a
matter
quotation marks and citation omitted).
8
of
law.”
Id.
(internal
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III.
As
the
diversity
parties
case.
agree,
The
Maryland
district
law
court
applies
focused
to
on
this
the
law
concerning the duty to defend, correctly reasoning that Evanston
would have no duty to indemnify if it had no duty to defend,
because the duty to defend is broader.
See Cowan Sys., Inc. v.
Harleysville Mut. Ins. Co., 457 F.3d 368, 372 (4th Cir. 2006).
In
Maryland,
the
duty
to
defend
“should
be
construed
liberally in favor of the policyholder,” Pac. Emp’rs Ins. Co. v.
Eig,
864
A.2d
240,
248
(Md.
Ct.
Spec.
App.
2004),
and
it
attaches “when there exists a potentiality that the claim could
be covered by the policy,” id. (emphasis in original; internal
quotation
marks
omitted).
constitute a “potentiality.”
Even
a
slim
possibility
can
Compare Walk v. Hartford Cas. Ins.
Co., 852 A.2d 98, 106 (Md. 2004) (defining a potentiality as “a
reasonable potential that the issue triggering coverage will be
generated at trial” (quotation marks omitted)), with Litz v.
State Farm Fire & Cas. Co., 695 A.2d 566, 572 (Md. 1997) (“If
there is a possibility, even a remote one, that the plaintiffs’
claims
could
defend.”).
be
covered
by
the
policy,
there
is
a
duty
to
And “any doubts about the potentiality of coverage
must be resolved in favor of the insured.”
at 372.
9
Cowan Sys., 457 F.3d
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To
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determine
whether
the
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insurer
must
defend,
Maryland
courts ask two questions: “(1) what is the coverage and what are
the defenses under the terms and requirements of the insurance
policy? [and] (2) do the allegations in the [underlying] tort
action
potentially
coverage?”
bring
the
tort
claim
Id. (alterations in original).
within
the
policy’s
“The first question
focuses upon the language and requirements of the policy, and
the second question focuses upon the allegations of the tort
suit.”
St. Paul Fire & Marine Ins. Co. v. Pryseski, 438 A.2d
282, 285 (Md. 1981).
A.
In answering the first question noted above, “[i]nsurance
contracts
are
treated
as
any
other
contract,
courts] measure such an agreement by its terms.”
and
[Maryland
United Servs.
Auto. Ass’n v. Riley, 899 A.2d 819, 833 (Md. 2006).
We must
construe the policy as a whole, and a word should be accorded
“its
usual,
ordinary
and
accepted
meaning
unless
there
is
evidence that the parties intended to employ it in a special or
technical sense.”
Clendenin Bros., Inc. v. U.S. Fire Ins. Co.,
889 A.2d 387, 393 (Md. 2006) (quotation marks omitted).
“In
addition,
the
[Maryland
courts]
examine
the
character
of
contract, its purpose, and the facts and circumstances of the
parties at the time of execution.”
10
Cole v. State Farm Mut. Ins.
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Co., 753 A.2d 533, 537 (Md. 2000) (quotation marks omitted).
“[I]f
no
ambiguity
in
the
terms
of
the
insurance
exists, a court will enforce those terms.”
contract
Nat’l Union Fire
Ins. Co. of Pittsburgh v. David A. Bramble, Inc., 879 A.2d 101,
109 (Md. 2005).
But “if an insurance policy is ambiguous, it
will be construed liberally in favor of the insured and against
the insurer as drafter of the instrument,” Dutta v. State Farm
Ins. Co., 769 A.2d 948, 957 (Md. 2001) (quotation marks omitted;
emphasis in original), at least if extrinsic evidence cannot
resolve the ambiguity, Clendenin Bros., 889 A.2d at 394.
We
must find policy language ambiguous if it “suggests more than
one meaning to a reasonably prudent layperson.”
State Farm Mut.
Auto. Ins. Co. v. DeHaan, 900 A.2d 208, 226 (Md. 2006).
In
special
interpreting
care
to
the
interpret
insurance
contract,
exclusion
we
provisions
should
take
narrowly.
See
Megonnell v. United Servs. Auto. Ass’n, 796 A.2d 758, 772 (Md.
2002).
“[S]ince
exclusions
are
designed
to
limit
or
avoid
liability, they will be construed more strictly than coverage
clauses
and
coverage.”
the
be
construed
in
favor
Id. (quotation marks omitted).
insurer
applies.
must
bears
the
burden
of
showing
of
a
finding
of
And, in all cases,
that
an
exclusion
See Prop. & Cas. Ins. Guar. Corp. v. Beebe-Lee, 66
A.3d 615, 624 (Md. 2013); see also Trice, Geary & Myers, LLC v.
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Camico Mut. Ins. Co., 459 F. App’x 266, 274 (4th Cir. 2011)
(unpublished) (applying Maryland law).
B.
In
“causes
answering
the
of
actually
action
second
underlying] lawsuit.”
question,
alleged
by
courts
the
evaluate
plaintiff
in
the
[the
Reames v. State Farm Fire & Cas. Ins.,
683 A.2d 179, 186 (Md. Ct. Spec. App. 1996); see also Sheets v.
Brethren Mut. Ins. Co., 679 A.2d 540, 542 (Md. 1996) (“[W]e must
assume that the facts in the [underlying] complaint are true.”).
We do not consider the merits of the underlying suit at the
duty-to-defend stage; “the underlying tort suit need only allege
action that is potentially covered by the policy, no matter how
attenuated,
Sheets,
frivolous,
679
policyholder
A.2d
--
but
or
at
illogical
544
not
that
(emphasis
the
insurer
allegation
in
--
may
original).
may
also
be.”
The
introduce
extrinsic evidence at this step to establish a potentiality of
coverage.
Aetna Cas. & Sur. Co. v. Cochran, 651 A.2d 859, 866
(Md. 1995).
Finally, and critically, if the complaint at issue contains
some
covered
claims
and
some
non-covered
insurer must defend the entire action.
claims,
then
the
See Perdue Farms, Inc.
v. Travelers Cas. & Sur. Co. of Am., 448 F.3d 252, 258 (4th Cir.
2006) (“Under Maryland’s comprehensive duty to defend, if an
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insurance policy potentially covers any claim in an underlying
complaint, the insurer . . . must typically defend the entire
suit, including non-covered claims.”).
With these basic principles in mind, we consider each of
the parties’ exclusion-related arguments.
IV.
A.
Evanston first argues that exclusion (n), sometimes called
the personal-profits exclusion, defeats coverage.
exclusion
(n)
that
policyholder
the
position.
applies
Evanston
whenever
gained
an
an
contends
underlying
illegal
that
In its view,
action
benefit
the
or
Attorney
suggests
superior
General’s
complaint alleged such an advantage because Cornerstone did not
deliver the settlement checks to the selling homeowners, thereby
taking part in an equity-stripping scheme.
Even if we were to adopt Evanston’s reading of the relevant
exclusion, we do not agree with its view of the complaint.
Our
disagreement leads us to conclude that exclusion (n) does not
bar coverage to Cornerstone.
The Attorney General’s complaint did not allege that any
particular
benefit,
as
“profit”
or
exclusion
“advantage”
(n)
requires.
inured
To
to
the
Cornerstone’s
contrary,
the
complaint alleged that all the relevant benefits and funds went
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to the Lewis Defendants and, perhaps, Thomas.
Defendants,
after
all,
who
“stripped”
It was the Lewis
the
equity
from
homeowners’ homes by contriving false fees and other reasons to
obtain the homeowners’ settlement proceeds.
much.
(See
Evanston’s
Br.
17
(“The
Evanston admits as
result
of
this
scheme
allowed the Lewis Defendants to wrongfully take the homeowners’
equity.” (emphasis added)).)
Although Cornerstone collected the
settlement proceeds, the complaint does not suggest that it ever
retained them.
See Perdue Farms, 448 F.3d at 256 n.3 (finding
personal-profits
plaintiffs
exclusion
“never
inapplicable
alleged
that
[the
advantage from its unlawful conduct”).
that
Cornerstone
proceeds
because,
required to do so.
should
as
a
not
have
where
defendant]
underlying
gained
any
There is no allegation
collected
settlement
the
agent,
the
the
settlement
company
was
Cf. Obligation of Title Insurance Companies
to Conduct Annual Review of Settlement Agents, 85 Md. Op. Att’y
Gen. 306, 315 (2000) (“Funds are normally escrowed as a part of
a real estate settlement.”).
money
might
be
an
illegal
While the homeowners’ equity and
profit
or
advantage
that
went
to
someone after settlement, those assets went to parties other
than “the Insured” under the terms of Cornerstone’s policy with
Evanston.
We also observe that exclusion (n) would not apply because
the underlying complaint did not allege illegal profiteering by
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Cornerstone.
Instead,
the
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complaint
that produced incidental gains.
alleged
illegal
conduct
Put another way: the Attorney
General could have succeeded on its claims against Cornerstone
without showing that Cornerstone received a single dollar or any
other advantage, legal or illegal.
In fact, many of the claims
for which Cornerstone was allegedly jointly and severally liable
did
not
involve
disclosures
and
money
at
all,
but
instead
misrepresentations.
(See
alleged
J.A.
109
wrongful
(defining
Cornerstone as a “Foreclosure Rescue Defendant”); J.A. 126-30
(listing
were
actions
for
which
all
Cf.
Fed.
responsible).)
N.Y.S.2d
397,
403
(N.Y.
App.
Foreclosure
Ins.
Co.
Div.
Rescue
v.
2005)
Defendants
Kozlowski,
(explaining
792
that
personal-profits exclusion did not relieve insurer of duty to
pay
defense
allegations
costs
where
relating
to
underlying
“alleged
actions
misstatements
also
and
contained
omissions”
that were “archetypical of claims that encompass both excluded
and covered behavior”).
at
a
minimum,
do
not
The underlying nondisclosure claims,
“arise
out
of”
the
illegal
profit
or
advantage itself, so those allegations of the complaint do not
fall within the exclusion.
Perdue Farms, 448 F.3d at 256 n.3
(“[T]he alleged ERISA violations do not ‘aris[e] out of’ illegal
profiteering,
because
conduct,
not
profit.”);
Westport
Ins.
Corp.,
29
U.S.C.
see
307
§
also
F.3d
15
1140
proscribes
Brown
660,
&
664
specified
LaCounte,
(7th
Cir.
LLP
v.
2002)
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(distinguishing between cases involving “allegations of breaches
of fiduciary duty where the dispute concerned the illegality of
the actions taken or profits received” and case involving an
“unequivocal[]
alleg[ation]
that
[the
defendant]
reaped
an
illegal profit”).
Though Evanston argues otherwise, it makes no difference
that Cornerstone received fees for the settlement services that
it provided at closing when the houses were conveyed to the
Lewis
Defendants.
The
complaint
does
not
allege
that
Cornerstone overcharged or that it failed to provide bona fide
settlement services.
Under the plain terms of exclusion (n),
Cornerstone’s receipt of legally justified funds does not defeat
policy
coverage.
See,
e.g.,
St.
Paul
Mercury
Ins.
Co.
v.
Foster, 268 F. Supp. 2d 1035, 1045 (C.D. Ill. 2003) (finding
personal-profits exclusion inapplicable where policyholder might
have been “legally entitled to retain” the funds in question).
More importantly, as the district court held in an unchallenged
ruling and as Evanston acknowledged at argument, the Attorney
General’s complaint did not seek damages for the “consideration
or
expenses
paid
to
[Cornerstone]
for
services
or
goods.”
Cornerstone, 2013 WL 393286, at *5 (alteration in original).
Because
the
Attorney
General’s
claims
did
not
touch
upon
Cornerstone’s settlement fees, those fees could hardly have been
a “profit” or “advantage” that spurred the underlying claim.
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See, e.g., Axis Reinsurance Co. v. Telekenex, Inc., 913 F. Supp.
2d 793, 803 (N.D. Cal. 2012) (finding personal-profits exclusion
did
not
bar
spoilative
act
coverage
might
for
spoliations
have
also
sanction
provided
even
business
though
advantage,
where court did not premise the sanction on the act creating the
advantage); In re Donald Sheldon & Co., Inc., 186 B.R. 364, 369
(S.D.N.Y. 1995) (holding that exclusion did not apply where the
“alleged
personal
profits
.
.
.
were
not
the
basis
of
the
liability for which recovery was sought”).
Finally, Evanston has not persuaded us that some undefined
personal
benefit
flowed
to
Attorney
General
sought
restitution
complaint.
Cornerstone
merely
as
a
because
remedy
under
the
the
To be sure, a restitution award sometimes suggests
that the defendant enjoyed some gain, as “restitution [in the
Consumer Protection Act context] aims at disgorgement of unjust
enrichment, not compensation for damages.”
Consumer Prot. Div.
v. Morgan, 874 A.2d 919, 953 (Md. 2005).
But in a case that
involves
“concerted
underlying
action
action”
here
--
-the
that
is,
a
restitution
case
award
like
the
doesn’t
necessarily aim to disgorge benefits from particular defendants.
Instead, the award serves to disgorge the benefits going to the
scheme
as
a
whole.
A
conspiring
Consumer
Protection
Act
defendant will therefore face potential restitution anytime any
of
his
co-conspirators
enjoyed
17
some
benefit.
Id.
(“As
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tortfeasors acting in concert are responsible for the damages
each caused, so too are Consumer Protection Act violators who
act in concert responsible for the unjust enrichment each gained
at
the
consumers’
expense.”).
A
defendant
who
enjoyed
no
personal gain could still be ordered to pay restitution if he
were part of a broader concerted action that produced benefits
to
a
fellow
co-defendant.
See,
e.g.,
State
v.
Cottman
Transmissions Sys., Inc., 587 A.2d 1190, 1201 (Md. Ct. Spec.
App. 1991) (ordering defendant to pay restitution where another
party received improper fees but defendant “indirectly” assisted
other party in deception); see also J.P. Morgan Secs. Inc. v.
Vigilant Ins. Co., 992 N.E.2d 1076, 1082-83 (N.Y. 2013) (finding
that
personal-profit
disgorgement
payment
exclusion
made
by
would
defendant
not
apply
“did
not
where
actually
represent the disgorgement of [the defendant’s] own profits,”
but rather “represented the improper profits acquired by thirdpart[ies]”).
The restitution request therefore does not serve
as any guarantee of personal gain on Cornerstone’s part.
In sum, the personal-profits exclusion –- exclusion (n) -does not defeat Evanston’s duty to defend and the district court
erred in granting partial summary judgment to Evanston in that
regard.
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B.
Alternatively, Evanston references the Attorney General’s
allegations that Cornerstone misdirected settlement checks and
maintains that exclusion (x) also bars coverage.
delivery, it says, amounts to conversion. 2
This improper
Evanston’s argument
suffers from a fatal flaw: the improper delivery seen here did
not amount to conversion.
In Maryland, the payee of a check (here, the homeowner)
must receive the check before he or she can bring a conversion
action based on a misuse or improper delivery of it.
See Md.
Code Ann., Comm. L. § 3-420(a) (“An action for conversion of an
instrument may not be brought by . . . a payee or indorsee who
did not receive delivery of the instrument either directly or
through delivery to an agent or a co-payee.”).
Where the payee
has not received the check, the payee retains a cause of action
against the drawer (in this case, Cornerstone) for the liability
reflected in the check, but, at least at that point in time,
cannot
bring
a
conversion
action.
See
Jackson
v.
2109
Brandywine, LLC, 952 A.2d 304, 321 (Md. Ct. Spec. App. 2008).
In this case, Cornerstone allegedly misdirected the settlement
checks before they ever reached the hands of the homeowners.
2
On appeal, Evanston invokes only the conversion portion of
the exclusion.
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Thus,
the
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necessary
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element
of
delivery
for
a
Maryland
conversion action to the payee was absent at the time of the
allegedly wrongful transfer by Cornerstone.
Even if we could overlook this basic issue and assume that
the
Cornerstone’s
act
of
“improper
delivery”
fell
within
exclusion (x), we would still find that other allegations in the
Attorney General’s complaint are not within the ambit of that
exclusion and therefore the duty to defend is triggered.
For
instance,
for
failing
the
to
previously
underlying
disclose
complaint
certain
described,
the
faults
facts.
And,
underlying
Cornerstone
as
complaint
we
have
now
attempts
to
impose liability on Cornerstone for acts of its co-defendants
that have no connection at all to misdirected checks.
Among
other things, the Attorney General sought to hold Cornerstone
responsible for acts such as failing to make required statutory
disclosures, recording deeds prematurely, and making misleading
statements
Those
about
claims
do
misappropriation,
exclusion
(x),
the
or
and
services
not
any
that
arise
of
the
consequently
the
from
defendants
theft,
other
require
acts
provided.
conversion,
described
coverage
under
in
the
policy.
At argument, Evanston pressed two other points that we need
only
briefly
address.
First,
Evanston
evoked
a
notion
reminiscent of the one that the district court adopted –- that
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the “gravamen” of the underlying complaint should decide whether
it warrants coverage.
But as we have already discussed, the
well-established rule in Maryland says otherwise.
Where covered
and uncovered claims arise in the same action, the insurer must
defend, regardless of what the gravamen of the action might be.
See, e.g., Cont’l Cas. Co. v. Bd. of Educ. of Charles Cnty., 489
A.2d 536, 542 (Md. 1985); Back Creek Partners, LLC v. First Am.
Title Ins. Co., 75 A.3d 394, 400 (Md. Ct. Spec. App. 2013);
Zurich Ins. Co. v. Principal Mut. Ins. Co., 761 A.2d 344, 348
(Md. Ct. Spec. App. 2000); Balt. Gas & Elec. Co. v. Commercial
Union Ins. Co., 688 A.2d 496, 512 (Md. Ct. Spec. App. 1997).
Indeed, in Utica Mutual Insurance Co. v. Miller, 746 A.2d 935,
941–42 (Md. Spec. Ct. App. 2000), the Court of Special Appeals
of Maryland found that an underlying complaint triggered the
duty to defend even though the “gravamen” of that complaint was
plainly
excluded,
where
other
claims
were
not.
Second,
Evanston questioned whether Cornerstone faced a genuine prospect
of liability from the acts of its co-defendants.
As should be
clear by now, we need not answer that question to determine
whether the insurer must defend.
defend
a
covered
“frivolous.”
claim
even
when
The insurer has a duty to
the
claim
can
be
called
Back Creek Partners, 75 A.3d at 400.
In short, exclusion (x) also does not defeat Evanston’s
duty to
defend
the
Attorney
General’s
21
suit
and
the
district
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court erred in awarding Cornerstone partial summary judgment in
that regard.
C.
Evanston suggests that we affirm on alternative grounds,
particularly that exclusions (a) and (cc) exclude coverage.
As
noted earlier, the district court did not address these policy
exclusions.
“Although
[alternative
grounds
we
for
are
not
precluded
affirmance],
we
from
deem
addressing
it
more
appropriate to allow the district court to consider them, if
necessary, in the first instance on remand.”
Q Int’l Courier
Inc. v. Smoak, 441 F.3d 214, 220 n.3 (4th Cir. 2006); see also
United States ex rel. Carter v. Halliburton Co., 710 F.3d 171,
184 (4th Cir. 2013) (“The district court did not reach this
argument,
having
found
grounds
for
dismissal
elsewhere.
We
decline to address this issue for the first time on appeal.”).
Accordingly, we will remand the case for further proceedings so
that the district court can address the parties’ arguments as to
exclusions (a) and (cc) in the first instance.
V.
For these reasons, we reverse the district court’s grant of
summary
judgment
to
Evanston
on
the
duty-to-defend
issue.
Because the district court’s decision on the duty-to-indemnify
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matter rested solely on its erroneous duty-to-defend decision,
we must reverse that decision as well.
We direct the district
court to enter partial summary judgment in Cornerstone’s favor
on the duty-to-defend issue as to exclusions (n) and (x).
We
remand for further proceedings consistent with this opinion.
REVERSED AND REMANDED
23
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