Medical Information Bureau Mib V Federal Insurance Corp Mibmemoredismissal

UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS MIB GROUP, INC., JAMES F. COOK, LEE B. OLIPHANT, and JAMES S. CORBETT, Plaintiffs, v. FEDERAL INSURANCE COMPANY, Defendant.

) ) ) ) ) CIVIL ACTION NO. ) 06-CV-10662 (NMG) ) ) ) ) ) )

PLAINTIFFS' MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANT’S MOTION TO DISMISS THE COMPLAINT The plaintiffs MIB Group, Inc., James F. Cook, Lee B. Oliphant, and James S. Corbett (the “MIB Insureds”) oppose the defendant Federal Insurance Company’s (“Federal”) motion to dismiss the complaint. The allegations of the complaint, with all inferences drawn in the MIB Insureds’ favor, clearly state a claim that Federal has wrongfully refused to defend the MIB Insureds in breach of Federal’s insurance policy. Federal’s motion to dismiss should be denied. FACTUAL BACKGROUND In considering the merits of this motion to dismiss, the Court must accept as true all factual allegations of the complaint, and draw all reasonable inferences in favor of the MIB Insureds. Langadinos v. American Airlines, Inc., 199 F.3d 68, 69 (1st Cir. 2000); Burns v. Potter, 334 F. Supp. 2d 13, 17 (D. Mass. 2004). Those factual allegations include documents attached to the complaint as exhibits. Id. The complaint and its attachments, with all reasonable inferences drawn in favor of the MIB Insureds, state the following facts: MIB Group, Inc. (“MIB Group”) is a not-for-profit membership corporation, headquartered in Westwood, Massachusetts. Complaint ¶ 1 (hereinafter “Compl.”). James F. Cook, Lee B. Oliphant and James S. Corbett are employees of MIB Group. Compl. ¶¶ 2-4.

MIB is the insured under Not for Profit Organization Liability Policy no. 8181-1573, issued by Federal for the policy period July 1, 2002 to July 1, 2003 (the “Policy”). The Policy is attached as Exhibit A to the complaint. Compl. ¶ 2 & Exh. A. MIB Group is defined in the Policy’s declarations as the “Organization,” and the Organization is in turn defined as an “Insured.” Policy at pages 1, 8. Cook, Oliphant and Corbett are also Insureds under the Policy. The definition of Insureds includes “Insured Persons,” who are in turn defined as natural persons who are officers, directors, trustees or employees of the Organization. Policy at 8. The Policy obligates Federal to pay on behalf of the MIB Insureds all loss which the MIB Insureds “become[] legally obligated to pay on account of any Claim . . . for . . . a Wrongful Act . . . committed . . . during the Policy Period.” Policy at 2. A “Claim” is defined to include a “civil proceeding . . . against an Insured for a Wrongful Act.” Id. at 8. A “Wrongful Act means any error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed . . . by an Organization or an Insured Person.” Policy at 9. The Policy provides that Federal “shall have the right and duty to defend any Claim covered by this policy.” Id. at 5. The main body of the Policy does not contain any exclusion for securities claims. That exclusion (the “securities exclusion”) appears in a Special Endorsement to the Policy for coverage of directors of for-profit subsidiaries of MIB Group. The Special Endorsement , appearing as Endorsement No. 7 to the Policy (the “Special Endorsement”), defines “For-Profit Entity” as any for-profit entity in which an Organization (i.e. MIB Group) owns more than 50% of the stock. Special Endorsement at 1. The lengthy definition of For-Profit Entity excludes the Organization, which is listed as MIB Group, along with any for-profit subsidiary of the Organization (more than 50% owned by the Organization) conducting a Securities Offering, any financial institution, or any high-tech or bio-tech company. Id. The Special Endorsement also defines “Insured Person” to mean any director or officer of the For-Profit Entity. Id. at 2. The

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Special Endorsement then goes on to provide that it does not provide coverage for any For-Profit Entity, leaving coverage under the Special Endorsement only for officers and directors of the For-Profit Entity. Id. at 2. Finally, the Special Endorsement contains the securities exclusion. The securities exclusion excludes coverage “for Loss on account of any Claim where all or part of such Claim, directly or indirectly, is based upon, arises from or is in consequence of any actual or alleged violation of:” (a) federal securities laws, (b) state “Blue Sky” securities laws, or (c) “any provision of the common law imposing liability in connection with the offer, sale or purchase of securities.” Id. at 3. On December 2, 2002, a civil action entitled e-Financial Ventures I, L.P. and e-Financial Ventures I, Unit Trust v. MIB Group, Inc., MIB, Inc., e-Services Corporation, James F. Cook, Lee B. Oliphant, and James S. Corbett (the “Underlying Action”) was filed against the MIB Insureds in Norfolk Superior Court. The original complaint in the Underlying Action (the “Original Underlying Complaint” or “Orig. Und. Compl.”), attached as Exhibit B to the complaint, was brought by e-Financial Ventures I, L.P. and e-Financial Ventures I, Unit Trust (collectively, “e-FV”). E-FV named as defendants the MIB Insureds along with two for-profit subsidiaries of MIB Group: MIB, Inc. and e-Services Corporation (collectively, “e-Services”). Orig. Und. Compl. ¶¶ 3-8. Cook, Oliphant and Corbett were officers and directors of e-Services. Id. at ¶¶ 6-8. The Original Underlying Complaint has 54 paragraphs of factual allegations and six separate legal claims. Briefly, the Original Underlying Complaint alleged that MIB Group, MIB, Inc. and e-Services formed a for-profit subsidiary called e-Nable Corporation (“e-Nable”). Orig. Und. Compl. ¶ 18. Cook, Oliphant and Corbett were officers of e-Nable. Id. at ¶¶ 6-8. E-Nable intended to create a web-based insurance-underwriting information system, called “Jet e-Nable.” Id. at ¶¶ 18-21. E-FV alleged that the defendants induced e-FV to invest in e-Nable and provide

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it bridge financing by a series of misrepresentations, both in its business plan and otherwise, and failed to carry out the promises on which e-FV relied when investing. Id. at ¶¶ 22-47, 49-53. The Original Underlying Complaint then alleged facts about the defendants’ actions after e-FV made its investment. In the Original Underlying Complaint, e-FV alleged that the defendants, including the MIB Insureds, breached their fiduciary duties both to e-FV and to eNable itself. Specifically, e-FV alleges that the MIB Insureds and the other defendants took actions to hurt e-Nable’s business and competed with e-Nable. Orig. Und. Compl. ¶¶ 48, 54-64. The Original Underlying Complaint has six claims. Counts One and Two, for breaches of fiduciary duty and minority shareholder oppression, relate to the alleged actions of the defendants in competing with and harming e-Nable after e-FV joined the company. Orig. Und. Compl. ¶¶ 67-78. Counts Three through Six relate to e-FV’s investment in e-Nable, and allege violations of Texas and Massachusetts securities statutes, common law fraud, and negligent misrepresentation. Id. at ¶¶ 79-102. The Original Underlying Complaint was served upon the MIB Insureds on or about December 4, 2002. The MIB Insureds promptly provided a notice of claim under the Policy to their insurance agent, who, by a letter dated December 6, 2002, provided a notice of claim to Federal, for Federal to assume the defense of the Underlying Action on behalf of the Federal Insureds. Compl. ¶¶ 11, 13 & Exh. C. By a letter dated January 17, 2003, Federal denied coverage and refused to provide a defense of the Underlying Action to the MIB Insureds. The MIB Insureds were forced to defend themselves in the Underlying Action at their own expense. Compl. ¶¶ 14-15 & Exh. D. On or about July 28, 2003, e-FV filed the Plaintiffs’ First Amended Complaint and Jury Demand in the Underlying Action (“Amended Underlying Complaint” or “Am. Und. Compl.”). The Amended Underlying Complaint added e-Nable as a defendant and repeated and expanded

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upon the factual allegations of the Original Underlying Complaint. As in the Original Underlying Complaint, the Amended Underlying Complaint alleged that the MIB Insureds and other defendants misled the plaintiffs into investing in e-Nable. Am. Und. Compl. ¶¶ 18-63, 72. The Amended Underlying Complaint then expanded upon its allegations of breach of fiduciary duty for alleged actions taken after e-FV invested in e-Nable. E-FV alleged that the MIB Insureds and other defendants attempted to freeze out e-FV from e-Nable, breached their own fiduciary duty to e-Nable, manipulated e-Nable’s pricing, competed with e-Nable, interfered with e-Nable’s business opportunities, and diverted e-Nable assets to themselves. Am. Und. Compl. ¶¶ 64, 66-71, 73-83. The Amended Underlying Complaint expanded to thirteen separate claims. Counts One through Four stated claims for violations of Texas and Massachusetts securities statutes, common-law fraud, and negligent misrepresentation, based on e-FV’s original investment in eNable. Am. Und. Compl. ¶¶ 87-115. Counts Five through Twelve stated claims for various breaches of fiduciary duty and breaches of contract, both directly and derivatively on behalf of eNable, against the MIB Insureds. These claims were based on factual allegations concerning the MIB Insureds’ treatment of e-Nable after e-FV joined the company, and, in fact, set forth those specific factual allegations within the body of the claims. Id. at ¶¶ 116-180. Finally, the Amended Underlying Complaint brought as Count Thirteen a claim for attorneys’ fees. Id. at ¶¶ 181-182. The MIB Insureds continued to defend themselves in the Underlying Action at their own expense. Compl. ¶ 19. On or about February 3, 2004, the court in the Underlying Action allowed the MIB Insureds motion for partial summary judgment and dismissed Counts Five through Ten and Count Twelve of the Amended Underlying Complaint. The remaining claims are Counts One through Four, for violations of securities laws, fraud, and negligent

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misrepresentation, Count Eleven, for breach of fiduciary duty under the New York Business Corporation Law on behalf of e-Nable against Cook and Oliphant, and Count Thirteen for attorneys’ fees. Compl. ¶ 17. On December 5, 2005, counsel for MIB Group again wrote to Federal, repeating the MIB Insureds’ request for a defense under the Policy. Federal again refused. The Underlying Action is set down for trial on July 17, 2006, and the MIB Insureds continue to bear the expense of their defense. Compl. ¶¶ 18-19. ARGUMENT The standard for a motion to dismiss for failure to state a claim is as strict as it is familiar. Bearing in mind that the Federal Rules of Civil Procedure encourage notice pleading, claims shall not be dismissed unless, taking the well-pleaded facts of the complaint as true and drawing all reasonable inferences in the plaintiffs’ favor, it appears beyond doubt that the plaintiffs can prove no set of facts in support of their claims which would entitle them to relief. Centro Medico Del Turabo, Inc. v. Feliciano de Melecio, 406 F.3d 1, 5-6 (1st Cir 2005); Langadinos, 199 F.3d at 69; Burns, 334 F. Supp. 2d at 18. In the Complaint, the MIB Insureds state facts that establish on their face their claim that Federal was obligated under the Policy to provide them a defense of the Underlying Action, and breached the Policy when it refused to fulfill its obligation. Under longstanding Massachusetts law,1 the duty to defend under an insurance policy is extremely broad. Federal was obligated to assume the defense of the entire Action if the allegations of the Original Underlying Complaint and Amended Underlying Complaint were reasonably susceptible of an interpretation that they stated or adumbrated a claim covered by the Policy terms. Continental Cas. Co. v. Gilbane Bldg.

1 Federal agrees that this motion should be decided under Massachusetts law. See Commercial Union Ins. Co. v. Walbrook Ins. Co., 7 F.3d 1047, 1048 n.1 (1st Cir. 1993). 6

Co., 391 Mass. 143, 146, 461 N.E.2d 209, 212 (1984); Sterilite Corp. v. Continental Cas. Co., 17 Mass. App. Ct. 316, 318, 458 N.E.2d 338, 340 (1983). Federal owed this duty to defend under the allegations Original Underlying Complaint; it continued to owe a duty to defend under the allegations of Amended Underlying Complaint; and it still owes a duty to defend under the remaining claims of the Amended Underlying Complaint. Federal now seeks to avoid its obligation to defend, and to escape its clear breach of its obligations under the Policy. In its motion to dismiss, Federal does not argue that the MIB Insureds are not Insureds under the Policy. It does not dispute that the Policy contains a duty to defend that is to be interpreted according to Massachusetts law. It does not argue that it did not have notice of the Underlying Action and the contents of the Original Underlying Complaint and Amended Underlying Complaint. By not raising the argument, it concedes that, absent the securities exclusion, the Original Underlying Complaint and the Amended Underlying Complaint are reasonably susceptible of an interpretation that they state or adumbrate a covered claim invoking Federal’s duty to defend. Federal’s sole argument in support of its motion to dismiss is that the securities exclusion contained in the for-profit entity Special Endorsement to the Policy bars all coverage for any of the claims brought in the Underlying Action at any point against any of the MIB Insureds. Reading the Policy against the allegations of the Original Underlying Complaint and Amended Underlying Complaint in light of Massachusetts law and the strict standard applied to a motion to dismiss, Federal’s argument fails. Its motion to dismiss must be denied. I.

Absent the Securities Exclusion on Which Federal Relies, It Is Undisputed that Federal Would Be Obligated to Provide the MIB Insureds a Defense to the Underlying Action and Therefore Breached Its Duty to Defend. The Policy provides that Federal “shall have the right and duty to defend any Claim

covered by this policy. Coverage shall apply even if any of the allegations are groundless, false

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or fraudulent.” Policy at 5 (emphasis supplied). Under longstanding Massachusetts law, Federal’s duty under this provision to defend the MIB Insureds against a claim is far broader than, and independent of, its duty to indemnify them against loss from the same claim. Brazas Sporting Arms, Inc. v. American Empire Surplus Lines Ins. Co., 220 F.3d 1, 4 (1st Cir. 2000). The duty of an insurer to defend third-party actions against its insured is determined by matching the third-party complaint against the policy provisions: if the allegations of the complaint are reasonably susceptible of an interpretation that they state or adumbrate2 a claim covered by the policy terms, the insurer must undertake the defense. Id.; Herbert A. Sullivan, Inc. v. Utica Mut. Ins. Co., 439 Mass. 387, 394, 788 N.E.2d 522, 530 (2003); Continental Cas. Co., 391 Mass. at 146, 461 N.E.2d at 212; Sterilite Corp., 17 Mass. App. Ct. at 318, 458 N.E.2d at 340. “‘Otherwise stated, the process is one of envisaging what kinds of losses may be proved as lying within the range of the allegations of the complaint, and then seeing whether any such loss fits the expectations of protective insurance reasonably generated by the terms of the policy.’” Continental Cas. Co., 391 Mass. at 147, 461 N.E.2d at 212, quoting Sterilite, 17 Mass. App. Ct. at 318, 458 N.E.2d at 341. The duty to defend, therefore, is triggered whenever the underlying complaint merely shows, through general allegations, a possibility that the liability claim falls within the insurance coverage. There is no requirement that the facts alleged in the complaint specifically and unequivocally make out a claim within the coverage. Herbert A. Sullivan, Inc., 439 Mass. at 394, 788 N.E.2d at 531; Sterilite Corp., 17 Mass. App. Ct. at 318, 458 N.E.2d at 340. If the insurer has a duty to defend at least one count of the underlying complaint, it must defend the

2 Webster’s defines “adumbrate” as “to foreshadow vaguely,” to “suggest or disclose partially.” Webster’s Ninth New Collegiate Dictionary 58 (1988). 8

insured on all counts. Aetna Cas. & Sur. Co. v. Continental Cas. Co., 413 Mass. 730, 732 n.1, 604 N.E.2d 30, 32 n.1 (1992). In light of this standard, the MIB Insureds have clearly met their burden to state a claim that the allegations of the Original Underlying Complaint and Amended Underlying Complaint fall within the grant of coverage of the Policy, absent the securities exclusion. See GRE Ins. Group v. Metropolitan Boston Housing P’ship, Inc., 61 F.3d 79, 81 (1st Cir. 1995). The MIB Insureds have alleged that they are Insureds under the Policy. MIB Group is the “Organization” and Cook, Oliphant and Lee are alleged to be “Insured Persons” as defined in the Policy and in the Special Endorsement. “Insureds” are defined to include both the “Organization” and “Insured Persons.” The Underlying Action is a “Claim.” It is a “civil proceeding commenced by the service of a complaint” against an Insured. Policy at 8. The Original Underlying Complaint and Amended Complaint both allege that the MIB Insureds have committed “Wrongful Act[s],” defined in the Policy as “any error, misstatement, misleading statement, act, omission, neglect, or breach of duty . . . allegedly committed or attempted, by an Organization or an Insured Person . . . in their Insured Capacity.” Id. at 9. The Underlying Complaints are reasonably susceptible of an interpretation that they state or adumbrate a claim covered by the Policy. Federal does not argue otherwise. Instead, it places all its eggs in the basket of the securities exclusion. The sole reason for dismissing the MIB Insureds’ claims for breach of Federal’s duty to defend, it argues, is that the securities exclusion in the Special Endorsement unambiguously bars coverage under any interpretation of the Original and Amended Underlying Complaints. Federal bears the burden of establishing the applicability of this exclusion, GRE Ins. Group, 61 F.3d at 81, and in its motion to dismiss, it has failed to meet this burden.

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II.

The Claims for Breach of Fiduciary Duty Based on Actions Taken After e-FV’s Investment Are Susceptible of an Interpretation That They Are Covered By the Policy and Not Excluded By the Securities Exclusion. The securities exclusion in the Special Endorsement provides that Federal “shall not be

liable for Loss on account of any Claim where all or part of such Claim, directly or indirectly, is based upon, arises from or is in consequence of any actual or alleged violation of” federal or state securities laws or “any provision of the common law imposing liability in connection with the offer, sale or purchase of securities.” Special Endorsement at 3. Federal argues that based on two cases from this Circuit, Federal Ins. Co. v. Raytheon Co., 426 F.3d 491 (1st Cir. 2005), and High Voltage Eng’g Corp. v. Federal Ins. Co., 981 F.2d 596 (1st Cir. 1992), as well as some cases from other jurisdictions, this exclusion bars any chance of coverage for the claims remaining in the Amended Underlying Complaint after the dismissal of Counts Five through Ten and Twelve. Federal’s argument fails both factually and as a matter of law. First, Federal is wrong in applying the securities exclusion only to the currently remaining claims in the Underlying Action. The MIB Insureds have alleged that Federal had a duty to defend from the moment it had notice of the Underlying Action and breached that duty three separate times: First, when it refused to defend the Original Underlying Complaint; second, with respect to the allegations and claims of the Amended Underlying Complaint; and third, with respect to the claims of the Amended Underlying Complaint remaining after dismissal. Each of these three Underlying Complaints must be examined to see if they give rise to a duty to defend. Second, Federal misinterprets the law to be applied. The broad obligation of an insurer to tender a defense when any claim can reasonably be interpreted to give rise to coverage is discussed above. When seeking to apply an exclusion to avoid its duty to defend, an insurer is further constrained by Massachusetts law. Exclusions from coverage are strictly construed.

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Hakim v. Massachusetts Ins’rs Insolvency Fund, 424 Mass. 275, 282, 675 N.E.2d 1161, 1165 (1997). Moreover, while an unambiguous exclusion is to be given its usual and ordinary meaning, any ambiguity in an exclusion is construed against the insurer and in favor of coverage. Id. at 281, 675 N.E.2d at 1165; Brazas, 220 F.3d at 4. In reading the exclusion and the rest of the Policy, the Court should consider what an objectively reasonable insured, reading the relevant policy language, would expect to be covered. Hakim, 424 Mass. at 282, 675 N.E.2d at 1165. Applying these principles, and, of course, drawing all reasonable inferences in the MIB Insureds’ favor, the securities exclusion does not, on its face, act to bar any and all coverage under the Policy of all of the claims of the Underlying Action. The MIB Insureds agree that the language of the securities exclusion is expansive, excluding not only claims for breaches of securities law but for claims that are “directly or indirectly . . . based upon, aris[e] from or [are] in consequence of” any such violations. Special Endorsement at 3. The MIB Insureds also agree that the definition of “Claim” in the Policy is “a civil proceeding,” or, in other words, the Underlying Action. It does not follow, however, that this means that because there are securities claims in the Original Underlying Complaint and the Amended Underlying Complaint, that the securities exclusion bars any prospect of coverage of any of the other claims and therefore relieves Federal of its duty to defend. Both Original and Amended Underlying Complaints, even after partial dismissal, contain claims that are not based on or arise from acts in violation of securities laws, and are therefore not excluded from coverage by the securities exclusion. A.

The Original Underlying Complaint.

The Original Underlying Complaint alleged claims of breach of fiduciary duty (Count One), minority shareholder oppression (Count Two), violations of Texas and Massachusetts securities laws (Counts Three and Four), fraud (Count Five), and negligent misrepresentation (Count Six). While Federal did not address in its motion whether the securities exclusion applies

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to all these counts and allegations, it did rely on the Raytheon case for the proposition that because a claim refers to the Underlying Action, the broad language of the securities exclusion that excludes claims “based upon” securities law violations means that the entire Underlying Action is barred from coverage if it contains any securities claims. This is a misreading of Raytheon. In that decision, the First Circuit used the dictionary definition of “based” to hold that a “prior litigation” exclusion applied if the current complaint drew substantial support from the allegations of the earlier complaint. Raytheon, 426 F.3d at 499. The application of this principle to the Original Underlying Complaint is obvious. The securities exclusion bars both explicit securities claims and those claims that draw substantial support from allegations relating to the securities claims—that is, the allegations relating to the MIB Insureds’ alleged misrepresentations that induced e-FV to invest in e-Nable. Those claims are Counts Three through Six of the Original Underlying Complaint. However, Counts One and Two are not based upon or draw substantial support from factual allegations surrounding e-FV’s investment in e-Nable or the MIB Insureds’ alleged misrepresentations that induced that investment. These claims, for breach of fiduciary duty and minority shareholder oppression, arise from alleged actions taken after e-FV made its investment that are unrelated to any of the reasons or actions leading up to that investment. As these claims state, the MIB Insureds allegedly breached their fiduciary duty and engaged in minority shareholder oppression by “us[ing] e-Nable’s confidential and proprietary information . . . for their own benefit,” by “divert[ing] corporate opportunities and revenues from e-Nable to themselves,” by “interfer[ing] with e-Nable’s efforts to market” its platform and to obtain financing,” by using “e-FV’s assets for their own” benefit and purposes, by “engag[ing] in selfdealing at the expense of e-Nable,” by “operat[ing] e-Nable solely for their own benefit,” “by wrongfully competing with e-Nable,” and by “fail[ing] to cross-market e-Nable’s products and

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services” and “to avoid potential conflicts or redundancy of product development and duplicative costs.” Orig. Und. Compl. ¶¶ 71, 76. The allegations upon which these claims are based are not the same on which the securities-related claims are based, nor do they draw support from those securities-related allegations. The fiduciary duty and minority shareholder oppression claims are not subject to the securities exclusion. 3 Similarly, these fiduciary duty and minority shareholder oppression claims do not arise from, nor are they in consequence of, any violations of securities law. While the phrase “arising out of” indicates a wider range of causation than that of proximate cause, it falls short of “but for” causation. Brazas, 220 F.3d at 7; Kinsella v. Wyman Charter Corp., 417 F. Supp. 2d 159, 2006 U.S. Dist. LEXIS 8118, * 12 (D. Mass. Feb. 2, 2006). In interpreting the phrase “arising out of” in this case, the Court looks at the source from which the claims in the Original Underlying Complaint originate. Where the claims arise from a different set of facts than do the claims that are subject to the exclusion, the exclusion does not apply. See Brazas, 220 F.3d at 78, and cases cited. Based upon that standard, the fraud and negligent misrepresentation claims of Counts Five and Six would certainly come under the orbit of the securities exclusion. They are based on the same factual allegations as Counts Three and Four, the securities claims. Counts One and Two, the fiduciary duty and minority shareholder oppression claims, however, are not subject to the securities exclusion. As discussed above, they are allegedly caused by and arise from entirely separate facts than those underlying the securities-related claims.

3 Contrary to Federal’s argument, the boilerplate reference in the Original Underlying Complaint to “FACTS APPLICABLE TO ALL COUNTS” carries no weight. A duty to defend is determined by weighing the actual allegations of the complaint to see if any of them are reasonably susceptible of an interpretation that they state or adumbrate a claim covered by the policy. Herbert A. Sullivan, Inc., 439 Mass. at 394, 788 N.E.2d at 530; Sterilite Corp., 17 Mass. App. Ct. at 318, 458 N.E.2d at 340. 13

None of the authority cited by Federal states otherwise. Federal relies upon High Voltage Eng’g and a case from the Sixth Circuit, Isroff v. Federal Ins. Co., No. 93-3130, 1994 U.S. App. LEXIS 14416 (6th Cir. June 8, 1994), for the proposition that the “arising from” language of the securities exclusion should operate to bar coverage of these unrelated claims. Neither case justifies Federal’s reading. High Voltage concerned the applicability of a pollution exclusion that excluded claims arising out of the discharge of pollutants to counts against directors for unfair and deceptive acts in trade or commerce under Massachusetts G.L. c. 93A. High Voltage Eng’g, 981 F.2d at 598-600. The court held that the allegations underlying the c. 93A claims either were the same allegations that underlay the pollution claims or specified actions that the defendants took to prevent removal of the contamination. Id. at 601-602. Similarly, in Isroff, which concerned the same securities exclusion at issue here, the court found that the fiduciary duty claim arose out of the securities claim because it was based on the same misrepresentations and simply “posed an alternative theory for recovery” based on those facts. Isroff, 1994 U.S. App. LEXIS 14416, at *5-*6.4 Unlike the claims in High Voltage Eng’g and Isroff, the fiduciary duty and shareholder oppression claims in the Original Underlying Complaint arise out of and are in consequence of entirely different facts from the securities claims. They are unrelated and do not have any connection to the facts giving rise to the alleged securities violations. These claims are not subject to the securities exclusion, and are “reasonably susceptible of an interpretation that they state or adumbrate a claim covered by” the Policy. Sterilite Corp., 17 Mass. App. Ct. at 318, 458 N.E.2d at 340. The MIB Insureds have stated a claim that Federal (a) was obligated to defend the MIB Insureds in the Underlying Action as stated by the Original Underlying Complaint, and (b) breached the Policy when it refused to do so. Federal’s motion to dismiss should be denied.

4 It is not clear that Isroff can be cited as authority, as it is unpublished. See 6 Cir. R. 28(g). 14

B.

The Amended Underlying Complaint.

The same principles hold true for the allegations of the Amended Underlying Complaint. While the Amended Underlying Complaint added several plaintiffs, an additional defendant, and several more counts, it essentially stated the same underlying facts as the Original Underlying Complaint. Of the Amended Underlying Complaint’s thirteen separate claims, Counts One through Four stated claims for violations of Texas and Massachusetts securities statutes, common-law fraud, and negligent misrepresentation, based on the e-FV’s original investment in e-Nable. Am. Und. Compl. ¶¶ 87-115. As discussed above, these claims are subject to the securities exclusion. Counts Five through Twelve, on the other hand, stated claims for various breaches of fiduciary duty and breaches of contract, both directly and derivatively on behalf of e-Nable, against the MIB Insureds. These claims were based on factual allegations concerning the MIB Insureds’ treatment of e-Nable after e-FV joined the company, and, in fact, set forth those specific factual allegations within the body of the claims. Am. Und. Compl. ¶¶ 116-180. These claims, like Counts One and Two of the Original Underlying Complaint, are not subject to the securities exclusion.5 The MIB Insureds have stated a claim that Federal was obligated to defend the MIB Insureds in the Underlying Action as stated by the Amended Underlying Complaint and breached the Policy when it refused to do so. Federal’s motion to dismiss should be denied. C.

The Remaining Claims of the Amended Underlying Complaint.

In its motion, Federal focused only on the claims of the Amended Underlying Complaint remaining after the court allowed the MIB Insureds’ motion for partial summary judgment.

5 Count Thirteen of the Amended Underlying Complaint seeks attorneys’ fees and is based on the allegations underlying the other Counts. Am. Und. Compl. ¶¶ 181-182. 15

These claims are Counts One through Four, for violations of securities laws, fraud, and negligent misrepresentation, Count Eleven, for breach of fiduciary duty under the New York Business Corporation Law on behalf of e-Nable against Cook and Oliphant, and Count Thirteen for attorneys’ fees. Compl. ¶ 17. As discussed, Counts One through Four are barred by the Securities Exclusion. Count Eleven, however, is not subject to the securities exclusion. Count Eleven alleges breaches of fiduciary duty under the New York Business Corporation Law on behalf of e-Nable against Cook and Oliphant. That statute holds an officer or director liable for the “neglect of, or failure to perform, or other violation of his duties in the management and disposition of corporate assets committed to his charge” or for the “acquisition by himself, transfer to others, loss or waste of corporate assets due to any neglect of, or failure to perform, or other violation of his duties.” N.Y. Bus. Corp. Law § 720(1). The body of the Count sets forth the factual allegations on which it is based. Am. Und. Compl. ¶¶ 167-174. Those allegations are substantially the same as those underlying Counts One and Two of the Original Underlying Complaint. See Orig. Und. Compl. ¶¶ 71, 76. Like those claims, Count Eleven is not subject to the securities exclusion. The MIB Insureds have stated a claim that Federal continues to have a duty to defend them in the Underlying Action and has continued to breach that duty, and the motion to dismiss must fail. III.

Because MIB Group and Its Officers and Directors Cook, Oliphant and Corbett Are Not Insureds under the Special Endorsement, They Are Not Subject to the Securities Exclusion That Applies Only to the Coverage Provided in That Endorsement. As discussed above, the Original Underlying Complaint and the Amended Underlying

Complaint brought Claims, as that term is defined in the Policy, against MIB Group that are potentially covered by the Policy, thereby triggering Federal’s duty to defend. They also brought claims against Cook, Oliphant and Corbett in their capacities as officers and directors of MIB Group, again triggering Federal’s duty to defend notwithstanding any added coverage provided

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in the Special Endorsement. Orig. Und. Compl. ¶¶ 6-8; Am. Und. Compl. ¶¶ 7-9. Even if the securities exclusion applies to the Original Underlying Complaint or the Amended Complaint, it does not exclude the coverage provided to the MIB Insureds under the Policy. MIB Group is a not-for-profit membership corporation. Compl. ¶ 1. The Policy is a Notfor-Profit Organization Liability Policy, and insures MIB Group as the insured Organization. Compl. ¶ 7 & Policy at 1. In the Policy, MIB Group and its officers and directors Cook, Oliphant and Corbett are insured against losses from claims against them and have the right to a defense against such claims. Policy at 2, 5. The Policy itself does not insure any for-profit subsidiary of MIB Group or any officers or directors of any for-profit subsidiary—such an entity and its officers and directors are not part of the Policy’s definition of “Insured.” Policy at 8. In order to provide coverage for officers and directors of its for-profit subsidiary, MIB Group has obtained the Special Endorsement. The language of the Special Endorsement is particularly opaque. A close reading indicates that, while the Special Endorsement defines a “For-Profit Entity” as a for-profit subsidiary of MIB Group, Special Endorsement at 1, it purports to provide coverage only to the officers and directors of that subsidiary, not to the subsidiary itself (and even that coverage is limited by the Special Endorsement’s limitations to the definition of the For-Profit Entity). It effects this limited coverage by redefining Insured Person to include officers and directors of the subsidiary, but not the for-profit subsidiary itself. Special Endorsement at 2. The Special Endorsement explicitly excludes MIB Group from the definition of ForProfit Entity and from the coverage provided by the Special Endorsement. It states that the “For-Profit Entity shall not include . . . the Organization,” which is defined as MIB Group. Special Endorsement at 1. Its redefinition of “Insured Person” for the coverage provided by the Special Endorsement is limited to a “natural person who . . . is . . . a . . . director or . . . officer of

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a For-Profit Entity.” Id. at 2. Thus, the “Insured Person” covered by the Special Endorsement is any officer or director of the For-Profit Entity, not Cook, Oliphant or Corbett in their capacity as officers or directors of MIB Group. In short, MIB Group and its officers and directors have no added coverage by virtue of the Special Endorsement. That added coverage is limited to Cook, Oliphant and Corbett solely in their capacities as officers or directors of e-Nable, eServices, or MIB, Inc. The securities exclusion on which Federal relies appears only in the Special Endorsement. Given that exclusions are to be read narrowly, Hakim, 424 Mass. at 282, 675 N.E.2d at 1165, the only fair reading of the securities exclusion is that it applies only to the additional coverage provided in the Special Endorsement. The Special Endorsement provides added coverage to officers and directors of a for-profit entity that may offer its stock for sale, and only to those officers and directors. The purpose of the securities exclusion is to exclude from that added coverage claims against those officers and directors arising out of the sale of stock. MIB Group and its officers and directors, of course, do not benefit from the Special Endorsement.6 They have no additional coverage. Because they do not benefit from the added coverage of the Special Endorsement, they should not have their coverage (i.e., the coverage they actually do have) under the Policy limited by the securities exclusion within that Special Endorsement. An objectively reasonable insured would not expect that an endorsement adding coverage that does not apply to it would at the same time limit the coverage provided by the main body of the policy. See id., 675 N.E.2d at 1165.

6 Likewise, MIB, Inc., e-Services and e-Nable derived no protection from the Special Endorsement, even though it was apparently added to close the gap in coverage created by MIB Group’s creation of e-Nable. 18

Federal did not make the scope of the securities exclusion clear in the Special Endorsement. While some provisions of the Special Endorsement provide that they are made “[s]olely for the purposes of the coverage afforded pursuant to this endorsement,” the securities exclusion does not. On the other hand, the securities exclusion only applies to securities claims, and the only entity that may issue securities is the For-Profit Entity that is defined in the Special Endorsement. That definition excludes MIB Group and its officers and directors. In addition, if the securities exclusion was intended to apply to the Policy as a whole, the Special Endorsement should have purported to add the securities exclusion to the Policy exclusions enumerated in sections 4.1 and 4.2 of the Policy. Policy at 2-4. The Breach of Written Employment Contract Exclusion, attached to the Policy as Endorsement No. 6, does exactly that. In contrast, the securities exclusion in the Special Endorsement makes no reference to the exclusions in sections 4.1 and 4.2 of the Policy. Moreover, in contrast to the exclusion in Endorsement No. 2, the securities exclusion does not specify that it applies “to all Insuring Clauses,” thereby creating a reasonable expectation that it applies only to the additional coverage provided by the Special Endorsement. In short, “there is more than one rational interpretation of the policy language” of the securities exclusion and the Special Endorsement. Hakim, 424 Mass. at 281, 675 N.E.2d at 1165; see Brazas, 220 F.3d at 4-5. In that situation, the insured “is entitled to the benefit of the one that is more favorable to it.” Trustees of Tufts Univ. v. Commercial Union Ins. Co., 415 Mass. 844, 849, 616 N.E.2d 68, 72 (1993) (quoting Hazen Paper Co. v. United States Fidelity & Guar. Co.¸ 407 Mass. 689, 700, 555 N.E.2d 576, 583 (1990)). MIB Group and its officers and directors are entitled to the interpretation that the securities exclusion does not apply to the claims against them.

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This is a motion to dismiss. Inferences must be drawn in favor of the plaintiffs. Moreover, ambiguities in policy terms such as this must be resolved in favor of the insureds, and endorsements must be strictly construed. A duty to defend arises if any of the allegations of the complaint are reasonably susceptible of an interpretation that they state or adumbrate a covered claim. In light of all these inferences, the facts alleged in the complaint, and the terms of the Policy, the Original Underlying Complaint, and the Amended Underlying Complaint, there is no doubt that the MIB Insureds have stated a claim upon which relief can be granted. The motion to dismiss should be denied. CONCLUSION For the foregoing reasons, the plaintiffs respectfully submit that the defendant’s motion to dismiss the complaint should be denied. REQUEST FOR ORAL ARGUMENT Pursuant to Local Rule 7.1(D), the plaintiffs hereby request oral argument on this motion. Respectfully submitted, MIB GROUP, INC., JAMES F. COOK, LEE B. OLIPHANT, and JAMES S. CORBETT By their attorneys /s/ Robert B. Foster Robert B. Foster, BBO 563347 Donald R. Pinto, Jr., BBO 548421 Rackemann, Sawyer & Brewster One Financial Center Boston, Massachusetts 02111-2659 (617) 542-2300 Dated: May 4, 2006

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