Steadfast Insurance v. Stroock & Stroock & Lavan, LLP
Docket: Docket No. 03-7670
Court: Court of Appeals for the Second Circuit; August 5, 2004; Federal Appellate Court
An insurance coverage dispute exists between Steadfast Insurance Company and Stroock, Lavan, LLP regarding a 'Lawyers Professional Liability Insurance' policy covering September 1, 1997, to September 1, 2000. Under the policy, Steadfast is obligated to pay 'Defense Expenses' and 'Loss' for 'Insured' individuals (Stroock and its partners, associates, and employees) in connection with 'Claims' arising from 'Wrongful Acts' related to professional services. 'Wrongful Acts' encompass acts, errors, omissions, or breaches of duty by Insureds or those for whom Stroock is responsible, but do not cover all liabilities. Exclusions include claims based on knowingly wrongful acts and unlawful profit or advantage. The policy features a severability clause stating that knowledge of one Insured is not imputed to another for coverage determinations.
The dispute stems from a December 1998 adversary proceeding in bankruptcy court involving Helionetics, Inc., initiated by its Unsecured Creditors' Committee against various parties, including Stroock, related to a transaction where Helionetics allegedly misappropriated assets from its subsidiary, KSWI. Stroock, which represented KSWI, is accused of participating in a scheme to benefit Helionetics' shareholders at KSWI's expense. Stroock settled the claims against it, and Steadfast is seeking a declaratory judgment to avoid indemnifying Stroock for this settlement. The district court ruled in favor of Steadfast, concluding that the claims against Stroock fell within the policy's exclusions for knowingly wrongful acts and unlawful profit. The judgment is subject to de novo review.
Stroock presents three arguments challenging the district court's decision, all of which are rejected.
1. **Separate Insureds**: Stroock asserts that it, as a firm, did not directly draft documents related to the KSWI transaction, and thus should not be held liable for wrongful acts attributed to its individual attorneys. It highlights the Policy’s severability clause, which prevents the imputation of knowledge of wrongful acts from one insured to another. However, the district court clarifies that this clause pertains only to coverage determination and does not shield Stroock from liability for its attorneys' actions, as liability is imputed to the firm under the doctrine of respondeat superior. Therefore, Stroock’s knowledge of its attorneys’ alleged wrongful acts is applicable for liability under the Policy.
2. **'In Fact' Requirement**: Stroock argues that the Policy’s provision stating that losses will not be covered if based on 'in fact' claims necessitates proof that Stroock actually received unlawful benefits or acted wrongfully. The district court counters that requiring such proof would be impractical, as it would necessitate a trial for each underlying claim. Instead, the exclusion only applies when fraud, which is excluded from coverage, is the basis for liability. Since all claims against Stroock involved allegations of fraud, Steadfast properly denied coverage.
3. **Aiding and Abetting Under California Law**: Stroock contends that not all claims against it are based on fraud, specifically mentioning aiding and abetting claims under California law, which it argues could be based on negligence. However, this argument was not presented in the district court, and as a general rule, appellate courts do not consider issues not raised at the lower level.
Consequently, the district court’s judgment is affirmed.
