Liberty Insurance Underwriters, Inc. v. Pacia et al

Filing 13

MEMORANDUM AND ORDER granting 4 Motion to Dismiss: For the reasons stated in the instant order, it is appropriate for this Court to abstain. Accordingly, the defendants' motion is granted and this action is hereby dismissed without prejudice to the right of any party to reopen the case at the conclusion of the state court proceeding. So Ordered by Chief Judge Mary M. Lisi on 9/29/2011. (Duhamel, John)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND

LIBERTY INSURANCE UNDERWRITERS
INC.,
Plaintiff,
v.

C.A. No. 011-196-ML

RICHARD A. PACIA; PACIA LAW
ASSOCIATES, LLC; JOSEPH MINDICK;
JASON LONG; DEBORAH MINDICK;
D/B/A D.J. MINDICK AND ASSOCIATES;
FORTUNE ASSOCIATES, RIGP; AND
WILLIAM J. DELANEY, IN HIS CAPACITY
AS PERMANENT RECEIVER OF PITMAN
ASSOCIATES, LLC.,
Defendants.
MEMORANDUM AND ORDER
Liberty Insurance Underwriters, Inc. (“Liberty”) brought this
declaratory judgment action to request a determination whether it
has any defense or indemnity obligations with respect to certain
claims (hereinafter referred to as the “Pitman Claims”) asserted
against its insured, Pacia Law Associates, LLC (“Pacia Law”), in
connection with the purchase and development of real property
located at 64-66 Pitman Street (the “Pitman Property”).

The

defendants in this declaratory action include (1) Richard A. Pacia
(“Pacia”), who owned and operated Pacia Law; (2) D.J. Mindick &
Associates1 (“D.J. Mindick”), Fortune Associates, RIGP (“Fortune”),
1

Named Defendants Joseph Mindick, Jason Long, and Deborah J.
Mindick are doing business as D.J. Mindick & Associates.
1

Advanced Ventures, LLC (“Advanced”), and Pitman Associates, LLC
(“Pitman”), which are, together, the parties who brought the Pitman
Claims against Pacia and/or Pacia Law; and (3) William J. Delaney,
who serves as receiver for Pitman.
this case

is

D.J.

The matter before the Court in

Mindick’s motion to

dismiss

the complaint

pursuant to Fed. R. Civ.P. 12(b)(6) or, in the alternative, to
request that the Court decline jurisdiction over the declaratory
action.
I. Facts2
A.

The Policy

On January 25, 2008, Pacia Law submitted an application for
renewal

of

its

malpractice

insurance

Complaint ¶ 13, Pltf.’s Ex. 1.

policy

with

Liberty.

In the cover letter, Pacia made

reference to a potential claim against Pacia Law, but stated that
he did not “think the claim has much merit” and/or that it was
likely the claim would be resolved.

Id. at 1.

In the Claims

Supplemental Application Form, Pacia noted that no suit had yet
been filed, and that the claimed injury was alleged to have been
$150,000.

Id. at 4.

Pacia’s description of the claim states:

“Attorney is alleged to have committed negligence in a secured loan

2

The factual summary is primarily based on information
contained in the fourteen exhibits attached to Liberty’s complaint,
which include correspondence between the parties and various
details regarding claims asserted against Pacia and/or Pacia Law in
Rhode Island state court.
2

closing transaction. Claimant3 foreclosed, sustained a deficiency,
and has made a ‘claim’ for loss.”

Id.

On February 7, 2008, Liberty issued to Pacia Law a Lawyers
Professional

Liability

Policy

(the

“Policy”)

February 2, 2008 to February 2, 2009.

effective

from

The Policy, which has a

limit of $1 million per occurrence and $2 million in the aggregate,
covers only claims first made and reported during the policy
period, and which are otherwise covered.
Page 1 of 13, Pltf.’s Ex. 2.

Complaint ¶ 15, Policy

Under the Policy, Pacia Law is

permitted to cancel the Policy at any time in writing.

Complaint

¶ 16, Rhode Island Amendatory Endorsement ¶ 2, Policy Page 12 of
13.

The Policy requires Liberty to obtain written consent from

Pacia Law before settling any claim covered by the terms of the
Policy, Complaint ¶ 17, Policy Page 7 of 13.

It also requires

Pacia Law’s assistance and cooperation in Liberty’s investigation,
defense, and settlement of any claims for which Pacia Law seeks
coverage.

Complaint ¶ 18, Policy Page 8 of 13.

The Policy is

subject to cancellation by Liberty in case of “[f]raud or material
misrepresentation made by you [the insured] or with your [the
insured’s] knowledge in obtaining the policy, continuing the policy
or

in

presenting

a

claim

under

the

policy.”

Rhode

Island

Amendatory Endorsement Page 2 of 3 (bolded in original).

3

The potential claimant is not identified.
3

The

exclusion provisions of the Policy exempt from coverage any claim
arising out of a wrongful act occurring prior to the policy period,
if the insured “had a reasonable basis to believe that you [the
insured] had breached a professional duty, committed a wrongful
act,

violated

a

disciplinary

rule,

engaged

in

professional

misconduct or to foresee that a claim would be made against you
[the insured].” Policy Page 5 of 13 (bolded in original.) Finally,
the Policy provides that the applicant agrees that “the statements
in the application are personal representations” which are deemed
material and that the Policy is issued in reliance upon such
representations.

Policy Page 11 of 13.

B. Claims against Pacia/Pacia Law
1. The Pitman Claims
On March 11, 2008, Pacia provided notice to Liberty of a
claim by D.J. Mindick and a potential claim by Fortune and Advanced
Ventures, both of which were related to allegations of professional
negligence.

Complaint ¶ 19, Pltf.’s Ex. 3.

In the notice, Pacia

explained that he had “conducted a real estate closing” at which
Pitman purchased the Pitman Property.4 D.J. Mindick provided three
loans for $625,000, $100,000, and $80,000 to acquire and develop
the property; Fortune extended two loans of $75,000 each; and
Advanced Ventures invested $200,000 and became a member of Pitman.
4

The notice does not disclose that Pacia also owned a quarter
share in Pitman.
4

Pacia

further

stated

that

all

the

loans

were

made

upon

representation that the Pitman Property was zoned for, and would be
converted into, seven (7) condominium units but that, subsequently,
it was established that the building was properly zoned only for
five (5) units.

Pltf.’s Ex. 3 Page 2.

A letter from D.J. Mindick

dated March 2, 2008 and attached to the notice states that “no
zoning approval was ever requested [sic] or granted by the zoning
board for seven residential units.”
noted that

Id. at 3.

D.J. Mindick also

Pitman was in default of the loan and had filed for

court receivership.

Id.

D.J. Mindick attributed a possible loss

to Pacia’s negligence and requested that Pacia contact his legal
malpractice carrier. Id.
On September 23, 2008, Fortune filed a complaint against Pacia
and Pacia Law alleging malpractice in connection with the two real
estate loans totaling $150,000 that were secured by mortgages on
the Pitman Property.

Pltf.’s Ex. 4, Fortune Complaint ¶ 4.

Fortune stated that, in extending the loans, it relied on incorrect
representations made in a May 12, 2006 letter from Pacia regarding
zoning approval.

Id. at ¶¶ 6, 7.

Fortune also alleged that, by

letter dated April 18, 2007, Pacia provided an opinion to Fortune
that the Pitman Property was valued at approximately $1,500,000.
Id. at ¶ 8.
On February 25, 2009, D.J. Mindick filed a complaint against
Pacia Law and Pacia, alleging that it engaged Pacia to represent

5

D.J. Mindick as lender in a transaction involving the purchase and
development of the Pitman Property. D.J. Mindick Complaint ¶ 7-9.
D.J.

Mindick

alleged

that

Pacia’s

legal

services

included

researching the Property’s zoning classification and that Pacia
knew that D.J. Mindick would not extend the loan unless the
Property could be converted to seven condominium units.
9.

Id. at ¶

According to D.J. Mindick, Pacia informed him on May 17, 2006

that the zoning classification had been confirmed and that seven
condominium units could be constructed.
that

representation,

D.J.

Mindick

made

Id. at ¶ 10.
three

Based on

separate

totaling $843,000 to Pitman for development of the Property.
at ¶¶ 11-16.

loans
Id.

Pitman defaulted on the three loans and was placed

into receivership on July 10, 2007 by Dynamic Investments Inc.
(“Dynamic”), which held a half share in the Pitman Property.
at ¶ 19.

Id.

Subsequently, it was discovered that use of the Pitman

Property for seven condominium units was unlawful.5

Id. at ¶ 20.

On March 18, 2008, the Providence Zoning Board of Review adopted a
resolution permitting the Property to be used for five residential
units, subject to certain conditions.

Id. at ¶ 21.

On October 8,

2008, the receiver was ordered by a Rhode Island state court to
sell the Property for $500,000, free and clear of all liens.

Id.

5

According to D.J. Mindick, the Property was located in a R-3
Three Family Zone that permitted only three residential units on
the site but it was subject to a 1962 zoning variance which allowed
four office units and one residential unit. Id. at ¶ 20.
6

at

¶

22.

In

professional

its

complaint,

negligence,

D.J.

breach

Mindick
of

asserted

contract,

and

claims

of

negligent

misrepresentation against Pacia Law and Pacia.
2.

The Ciccone Claims

By letter dated January 22, 2009, Pacia informed Liberty
that he received notice of a claim from Orlando and Rosemarie
Ciccone, “regarding a real estate transaction in which I acted as
legal counsel for them some time ago.”

Pltf.’s Ex. 11. Pacia

stated that he had been under the impression that this was a claim
under a title policy but that “evidently,” this was a “malpractice
claim as well.”
3.

Id.

The Ramos Claim

On March 31, 2009, Pacia informed Liberty that he had
been served as a party defendant by Ronnie C. Ramos (“Ramos”).
Pltf.’s Ex. 1-13 at 1, 2.

According to the complaint attached to

Pacia’s notice, Ramos engaged Pacia to provide him with legal
representation necessary to complete Ramos’ purchase of two real
estate parcels.

Id. at 4-6.

Ramos alleged that Pacia, or someone

on his behalf, conducted a title examination only with respect to
one

parcel.

After

conducting

extensive

renovations

on

the

residence located on the other parcel, Ramos learned that this
parcel been previously sold in a tax sale and that ownership was
claimed by an entity other than the entity which sold both parcels
to Ramos.

Ramos sought primarily injunctive relief, but also

7

specifically charged Pacia with negligence in failing to order
title searches for both parcels, resulting in economic loss to
Ramos.

Id. at 9, 10.
4. Liberty’s Responses
By letter dated April 1, 2009, Liberty informed Pacia’s

counsel that it was prepared to provide a defense to Pacia Law and
Pacia regarding the D.J. Mindick and Fortune claims.

However,

Liberty reserved its right to disclaim coverage for those claims,
in whole or in part, based on referenced provisions in the Policy.
Liberty

noted

verification

that,

that

instead

the

of

Pitman

conducting

Property

was

an

independent

zoned

for

seven

residential units, Pacia relied on representations regarding zoning
by Dynamic, which was already part owner of the Property.
Ex. 9 Page 2.

Pltf.’s

Liberty pointed out that “[t]he Policy excludes from

coverage claims that result from an insured’s professional legal
services with respect to an organization in which that insured
person owns more than 10% of the outstanding shares” and that
Pacia, at all times pertinent to Fortune and D.J. Mindick’s claims,
“acted as a member of Pitman, the borrower whose default on loans
has caused the losses alleged by both claimants.”

Id. at Page 9.

Finally, Liberty reserved its right to void the Policy for material
misrepresentation on the application and asserted that Pacia Law
and/or Pacia were aware of all alleged wrongful acts that gave rise
to

the

claims

prior

to

filing

8

the

January

25,

2008

renewal

application.

Id. at Page 10.

By letter dated May 12, 2009, Liberty informed Pacia that it
was prepared to provide a defense to its insured against the
Ciccones’ claims, subject to a complete reservation of its rights
to deny coverage and to rescind the Policy.

Pltf.’s Ex. 1-12.

On

the same day, by separate letter, Liberty also informed Pacia that
it would provide a defense to Pacia with respect to Ramos’ claims,
subject to the same reservation.
C.

Pltf.’s Ex. 1-14.

The Settlement Agreement

According to Liberty, on April 9, 2010, Pacia informed Liberty
that he intended to withdraw his request for coverage of the Pitman
Claims.

Complaint ¶ 26.

Pacia also informed Liberty that he

refused all assistance and cooperation in defense of the Pitman
Claims and that he would not authorize, or consent to, any offer of
settlement with regards thereto.

In exchange for withdrawing his

demand for coverage, Pacia sought Liberty’s agreement to cover the
claims by Ramos and the Ciccones and to refrain from seeking (a)
rescission of the Policy based on misrepresentation in the Policy
application; (b) reimbursement of costs and fees for defense of all
claims upon rescission of the Policy; and (c) indemnification and
contribution from Pacia personally for any amounts paid to the
Pitman Plaintiffs.
On June 18, 2010, while the underlying malpractice claims
against Pacia were pending in state court, Liberty, Pacia Law and

9

Pacia executed a settlement agreement (the “Settlement Agreement”),
pursuant to which Liberty agreed to provide coverage under the
Policy for the Ramos and the 2009 Ciccone claim and to conduct a
prompt investigation of a 2010 Ciccone claim to determine whether
coverage applied as well.

Pltf.’s Ex. 1-6 at 3.

On his part,

Pacia agreed that the Pitman claims were not covered under the
Policy and that, even if they were, Pacia waived coverage therefor.
Id. at 3.

Liberty also agreed not to seek rescission of the Policy

with respect to claims known at that time.

With respect to

additional claims not identified in the Settlement Agreement,
Liberty reserved its right to deny coverge and to seek rescission
of the Policy for any reason, including material misrepresentation
as to any Pitman Claims on the Policy application. Id.
On July 29, 2010, D.J. Mindick filed a motion for summary
judgment in state court to establish negligence and damages in the
malpractice claim against Pacia.

That motion remains pending.

On

December 17, 2010, D.J. Mindick filed a motion in the state court
action pursuant to R.I. Gen. Laws § 27-7-2.4,6 to substitute
6

R.I. Gen. Laws § 27-7-2.4 Direct action against insurer upon
filing for bankruptcy provides:
Any person, having a claim because of damages of any kind
caused by the tort of any other person, may file a complaint
directly against the liability insurer of the alleged tortfeasor
seeking compensation by way of a judgment for money damages
whenever the alleged tortfeasor files for bankruptcy, involving a
chapter 7 liquidation, a chapter 11 reorganization for the benefit
of creditors or a chapter 13 wage earner plan, provided that the
complaining party shall not recover an amount in excess of the
10

Liberty as a direct defendant for Pacia who had since been forced
into Chapter 7 personal bankruptcy.

Liberty objected, in part

because D.J. Mindick had failed to obtain relief from the automatic
stay, and because Pacia had not filed for bankruptcy protection
voluntarily. The state court denied D.J. Mindick’s motion on March
2, 2011. D.J. Mindick then obtained relief from the automatic stay
and re-filed the motion on May 12, 2011.
pending.

This motion also remains

The following day, on May 13, 2011, Liberty filed its

declaratory judgment action in this Court.
D.

The Declaratory Action

In its declaratory action, Liberty asserts that “Pacia Law’s
voluntary withdrawal of coverage for the Pitman claims through the
Settlement Agreement removes any obligation by Liberty to provide
defense for the Pitman claims.”

Complaint ¶ 36.

Liberty also

notes that the Policy requires Pacia Law’s consent to settle any
case and its assistance and cooperation in defense of any claim for
which Pacia Law seeks coverage.
concludes

that

“in

the

absence

Id. at ¶¶ 37, 38. Liberty
of

consent,

assistance

and

cooperation,” Liberty has no obligation to defend or indemnify
Pacia for the Pitman Claims.
judgment

(a)

declaring

that

Id. at ¶ 39.
it

has

no

Liberty seeks a

defense

or

indemnity

obligations with respect to the Pitman Claims, (b) enforcing the

insurance coverage available for the tort complained of.

11

Settlement Agreement, and (c) awarding Liberty legal fees and costs
in pursuing this declaratory action.
II.

Id. at 7.

Standard of Review

Pursuant to Rule 12 of the Federal Rules of Civil Procedure,
a party may move for dismissal of a complaint for “failure to state
a claim upon which relief can be granted.”
12(b)(6).

Fed. R. Civ. P.

The Court, when deciding a motion to dismiss, must

accept as true “all well-pleaded factual averments and indulg[e]
all reasonable inferences in the plaintiff’s favor.”
Blanchard, 83 F.3d 1, 3 (1st Cir. 1996).

Aulson v.

In order to survive a

motion to dismiss, the pleadings, when so viewed, must allege “‘a
plausible

entitlement

to

relief.’”

Rodriguez-Ortiz

v.

Margo

Caribe, Inc., 490 F.3d 92, 95 (1st Cir. 2007)(quoting Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 559, 127 S.Ct. 1955, 1967, 167
L.Ed.2d 929 (2007)).

However, the Court is not required to

consider “bald assertions, unsupportable conclusions, periphrastic
circumlocutions, and the like.” Aulson v. Blanchard, 83 F.3d at 3.
See Ashcroft v. Iqbal, –U.S.–, 129 S.Ct. 1937, 173 L.Ed.2d 868
(2009)(“Threadbare recitals of the elements of a cause of action,
supported by mere conclusory statements, do not suffice.”).
III.

Discussion
A.

The Motion to Dismiss the Declaratory Action
D.J.

Mindick alleges

that Liberty’s

diversity

action is “an impermissible attempt to bifurcate legal malpractice

12

claims covered under the same policy, by filing for Declaratory
Judgement as to certain claims while selectively leaving other
claims for hearing in the state court system, which are all subject
to the same insurance coverage limits.”
2 of 8.

D.J. Mindick’s Mem. Page

D.J. Mindick notes that its motion to substitute Liberty

as a party defendant is currently pending in the underlying state
court action which D.J. Mindick has brought against Pacia and Pacia
Law regarding the Pitman Property.

Id. at Page 4 of 8. D.J.

Mindick points out that Liberty has had ample opportunity to file
a

declaratory

judgment

action

in

state

court

and

that

any

determinations regarding coverage are equally available to Liberty
in

the

underlying

legal

malpractice

action

in

state

court.

Moreover, extensive discovery has already been conducted by defense
counsel selected by Liberty in the state action.7

D.J. Mindick

also asserts that the state court would be the more appropriate
forum to address whether Liberty and Pacia/Pacia law could agree to
selectively withdraw coverage as to certain malpractice claims and
for the insured to withhold his assistance and cooperation with the
insurer with respect to those claims.
B.

Liberty’s Position

Liberty asserts that its claims for declaratory relief “will

7

According to D.J. Mindick, insurance defense counsel was
permitted to withdraw on April 14, 2010 and all ongoing discovery
in the state court proceedings was stayed until June 13, 2010.
Obj. Page 3 of 8.
13

not, and cannot, be adjudicated in the underlying state court
proceeding.” Obj. 1.

Liberty states that it is not a party to the

state court action and it suggests that “this Court’s immediate
guidance on Liberty’s coverage obligations will resolve the Mindick
Parties’ pursuit of coverage for their malpractice claim.”

Id.

Liberty also points out that “it does not have any interest in the
Underlying Action because Pacia has withdrawn the request for
coverage and

has

specifically agreed

Underlying Action are not covered.”

that

the

claims

Id. at 8.

in

the

As Liberty

acknowledges, its objection to D.J. Mindick’s motion to substitute
is specifically based on the asserted lack of coverage as a result
of Pacia’s waiver.

Id.

Further, Liberty maintains that the

underlying action provides no parallel proceeding for Liberty to
litigate the coverage issues it seeks to have resolved in this
case.

Finally, Liberty submits that “the determination whether

Liberty’s Settlement Agreement with Pacia is enforceable presents
a simple question of contract law” and is not “novel, unsettled,
difficult or otherwise problematic.”
C.

Id. at 10.

Abstention Analysis

The Declaratory Judgment Act provides that a court “may
declare the rights and other legal relations of any interested
party seeking such declaration.”

28 U.S.C. § 2201 (a).

It is well

established that a district court’s decision of whether or not to
exercise jurisdiction is subject to the court’s broad discretion.

14

Wilton v. Seven Falls Co., 515 U.S. 277, 115 S.Ct 2137, 132 L.Ed.2d
214

(1995)(holding

propriety

of

that

district

hearing

courts’

declaratory

decisions

judgment

about

the

actions

is

discretionary); Lichoulas v. City of Lowell, 555 F.3d 10, 13 n.3
(1st

Cir.

injunctive

2009)

(listing

relief

are

cases)(“In

both

matters

general,
of

declaratory

judicial

and

discretion);

Hartford Fire Ins. Co. v. Gilbane Bldg. Co., 2011 WL 2457638
(D.R.I. Jul. 16, 2011)(noting that a court has “no compulsion” to
exercise jurisdiction in a declaratory judgment action)(citation
omitted).
As this Court recently noted, there is “no exclusive set of
factors [which] guides a court’s exercise of discretion.” Hartford
Fire Ins. Co. v. Gilbane Bldg. Co., 2011 WL 2457638 at *2.
However, the court “should consider ‘the scope of the pending state
court proceeding and the nature of defenses open there.”
(quoting Wilton, 515 U.S. at 283).

Id.

The question of whether

declaratory relief is appropriate in a particular case “will depend
upon a circumspect sense of its fitness informed by the teachings
and experience concerning the functions and extent of federal
judicial power.”

Id. (quoting Wilton, 515 U.S. at 287 (quoting

Pub. Serv. Comm’n of Utah v. Wycoff Co. Inc., 344 U.S. 237, 243
(1952))).
To determine whether abstention under Wilton is appropriate,
this Court has, in the past, employed the following five factors:

15

(1) whether the same parties are involved in both cases;
(2) whether the claims made in the declaratory judgment
action can be adjudicated in the state court action; (3)
whether resolution of the declaratory judgment action
turns on factual questions that will be litigated in the
state court action; (4) whether the issues presented are
governed by state or federal law; and (5) what effect the
declaratory judgment action is likely to have on
potential conflicts of interest between the insurer and
the insured.
Hartford Fire Ins. Co. v. Gilbane Bldg. Co., 2011 WL 2457638 at *2
n. 2 (listing cases).
D.

This Case

In

its

objection

to

D.J.

Mindick’s

request for

abstention, Liberty relies, in great part, on the recent case of
Hartford Fire Ins. Co. v. Gilbane Bldg. Co., 2011 WL 2457638
(D.R.I. Jul. 16, 2011), in which this Court denied the defendant’s
request for abstention on a declaratory judgment action by its
insurer.
Hartford”)

In that case, The Hartford Fire Insurance Company (“The
filed

a

declaratory

judgment

action

requesting

a

determination whether it had a duty to defend and indemnify Gilbane
Building Company (“Gilbane”) in an underlying state court action.
Gilbane, which had served as general contractor on a building
project, had subcontracted some of the work to Arden Engineering
Constructors, LLC (“Arden”) which, in turn, had subcontracted some
of the work to Unique Sheet Metal, Inc. (“Unique”).

Arden was

covered by a general liability insurance policy issued by The
Hartford.

When a Unique employee was injured while working on the

16

project, he filed a negligence claim against Gilbane in state
court. In response, Gilbane filed a third party complaint against,
inter alia, Arden and Unique, claiming that the employee’s injuries
were the result of negligence of the subcontractors and/or that the
subcontractors were contractually obligated to indemnify Gilbane
against the injured employee’s claims.

The Hartford filed a

declaratory action in this Court and Gilbane sought to dismiss that
action or to have the case stayed until the underlying state court
tort action had been resolved.

The question before this Court was

whether, under the terms of Arden’s insurance policy, The Hartford
had a duty to defend and indemnify Gilbane in a tort proceeding in
which the plaintiff alleged that Gilbane was solely negligent.
As Liberty correctly points out, this Court concluded that the
state court proceeding involved issues that were separate and
distinct from the questions presented in the declaratory judgment
action. The insurer was not a party in the pending state court
proceeding, although it remained an interested party as a result of
having issued the insurance policy to Arden.

As this Court

specifically noted, Rhode Island law prohibits an injured party
from joining an insurer as a defendant.

Hartford Fire Ins. Co. v.

Gilbane Bldg. Co., 2011 WL 2457638 at *2 n.3 (citing R. I. Gen.
Laws § 27-7-2.8)
8

R.I. Gen. Laws § 27-7-2, titled Remedies of injured party
against insurer, provides, in pertinent part, that “[a]n injured
party . . . shall not join the insurer as a defendant.”
17

The Court concluded that the underlying state court action
involved determinations of negligence and contractual obligations
under trade agreements, whereas the issue before this Court was a
contract question involving insurance coverage. This Court further
concluded that, although state law was implicated in the insurance
coverage question, it was “not the kind of ‘novel, unsettled,
difficult, complex, or otherwise problematic’ issue that would
weigh in favor of abstention.”

Hartford Fire Ins. Co. v. Gilbane

Bldg. Co., 2011 WL 2457638 at *3 (quoting Standard Fire Ins. Co. v.
Gordon, 376 F. Supp.2d 218, 231 (D.R.I. 2005)).

Noting that “[a]

decision by this Court on the coverage question could benefit the
parties

by

establishing

contours

of

their

various

ongoing

obligation to one another in the underlying tort action,” the Court
denied Gilbane’s request for abstention. Hartford Fire Ins. Co. v.
Gilbane Bldg. Co., 2011 WL 2457638 at *3.
After a thorough review of the pleadings, which Liberty has
supported with extensive documentation, and in consideration of all
the arguments raised by the parties, this Court is of the opinion
that the instant case, both with regard to its procedural posture
and

the

underlying

substantive

issues,

is

sufficiently

distinguishable from Hartford Fire Ins. Co. v. Gilbane Bldg. Co. to
warrant an exercise of this Court’s discretion to abstain from
deciding the declaratory judgment action.
It is true that Liberty, like The Hartford, is not now a party

18

to the underlying state court action.

However, The Hartford, as

this Court specifically pointed out, was precluded by Rhode Island
law from becoming a party to the state court proceeding.
Gen. Laws § 27-7-2.

See R.I.

In the state court proceeding underlying the

instant case, the plaintiffs have sought to substitute Liberty as
a defendant pursuant to R.I. Gen. Laws § 27-7.2.4. Whether Liberty
can

be

substituted

under

that

section

in

light

of

Pacia’s

involuntary bankruptcy is a question that was already pending in
the state court before Liberty filed this declaratory judgment
action.

Therefore, it has not been established that Liberty will

not be able to address its concerns in state court.
Liberty’s

assertion

that

it

has

no

further

Likewise,

interest

in

the

underlying litigation based on Pacia’s waiver of coverage, first
requires a determination that its contractual agreement with Pacia
to

provide

coverage

with

respect

to

certain,

but

not

other

potential claimants, will be upheld.
It is also true that the underlying state court action seeks
a

determination

regarding

Pacia’s

alleged

legal

malpractice,

whereas here, Liberty seeks a determination regarding coverage.
However, in addition to requesting a declaration that Liberty has
no duty to defend or indemnify Pacia regarding the Pitman Claims,
Liberty also seeks enforcement of the Settlement Agreement, which
would preclude D.J. Mindick from obtaining coverage for its alleged
losses and may, according to Liberty, preclude D.J. Mindick from

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substituting Liberty as a party defendant in the pending state
court proceeding. Similarly, as grounds for its conclusion that no
coverage is afforded under the Policy regarding the Pitman claims,
Liberty relies on Pacia’s voluntary waiver of such coverage and his
stated refusal to assist or cooperate in his defense.
From a review of the supported documentation, it is apparent
that Liberty, after initially providing a defense to Pacia, subject
to

a

reservation

claimants,

struck

of
a

rights,
deal

with

with

its

respect

to

insured

all

to

the

his

known

potential

detriment of those claimants who are now purportedly excluded from
any coverage by the Settlement Agreement.

Whether an insured can

choose to elect, after the fact, to waive coverage with respect to
certain

claimants,

either

contractually

or

by

deliberately

breaching conditions of coverage in the Policy, such as refusing to
cooperate, clearly implicates state law.
This Court has found no Rhode Island case which has confronted
the question of whether an insured can waive, by post-occurrence
settlement with the insurer, coverage for injured third parties.
Other courts have determined that “a settlement and release between
an insured and his liability insurer is ineffective as against a
third party who establishes that he is an intended third-party
beneficiary of the insurance contract prior to his obtaining a
judgment against the insured.”

Cowley v. Texas Snubbing Control,

Inc., 812 F.Supp. 1437, 1453 (S.D. Miss. 1992); Key Life Ins. Co.

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of South Carolina v. Taylor, 456 S.W.2d 707 (Tex. Civ. App.
1970)(holding that release by insured did not bar claim by thirdparty beneficiary under blanket accident policy).
Although

this

Court

makes

no

determination

whether

D.J.

Mindick qualifies as a third-party beneficiary under the Policy,
the Court notes that, under Rhode Island law, “when an insurer is
faced with multiple claimants with claims that in the aggregate
exceed the policy limits, the insurer has a fiduciary duty to
engage in timely and meaningful settlement negotiations in a
purposeful attempt to bring about settlement of as many claims as
is possible, such that the insurer will thereby release its insured
of as much of the insured’s potential liability as is reasonably
possible

given

circumstances.”

the

policy

limits

and

the

surrounding

DeMarco v. Travelers Ins. Co., –A.3d –, 2011 WL

2697038 (R.I. Jul. 12, 2011).

This holding seems to cast doubt on

the enforceability of a settlement between insurer and insured
that, at the election of the insured, precludes certain potential
claimants
question

from participating
would

appear

to

be

in

that

the

process.

kind

of

In

“novel,

sum,

this

unsettled,

difficult, complex, or otherwise problematic” issue that would
weigh in favor of abstention.
With regards to the consideration what effect the declaratory
judgment action

is

likely

to

have

on potential

conflicts

of

interest between the insurer and the insured, it appears that Pacia
Law/Pacia and Liberty seek endorsement by this Court of their
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arrangement, which would, in effect, preclude coverage for certain
claimants without determining the validity of their claims.
Whether an insurer and its insured can thus contract to preclude
claimants from litigating their coverage claims is, again, a matter
best left to be addressed by the state court in which such claims
are already pending.
In light of the unique circumstances of this case created by
the agreement between Liberty and its insured to cover some of the
asserted malpractice claims in exchange for Pacia’s purported
waiver of coverage for other claims, and in view of the pending
state court proceeding - in which a motion to substitute Liberty as
a party defendant was already pending at the time this declaratory
action was filed - the Court is persuaded that abstention is
appropriate in this case.
Conclusion
For the reasons stated herein, it is appropriate for this
Court to abstain.

Accordingly, the defendants’ motion is granted

and this action is hereby dismissed without prejudice to the right
of any party to reopen the case at the conclusion of the state
court proceeding.
SO ORDERED.
/s/ Mary M. Lisi
Mary M. Lisi
Chief United States District Judge
September 29, 2011

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