Summary
considering similar policy language and noting that the complaint was "not limited to a request that the allegedly fraudulently obtained fees be returned"
Summary of this case from First Cmty. Bancshares v. St. Paul Mercury Ins. Co.Opinion
Civil No. CCB-06-CV-3371.
June 15, 2007
MEMORANDUM
Plaintiff Ace American Insurance Company ("Ace") brings this action for a declaratory judgment against defendants Ascend One Corp., et al. ("Ascend One"). On March 29, 2004, a class action was filed against Ascend One in the District of Maryland; Judge Motz subsequently ordered the case to arbitration proceedings. Ascend One asked Ace, from whom it had purchased a Miscellaneous Errors and Omissions Policy ("E O policy") and a Directors and Officers Liability Policy ("D O policy"), to defend them against the class action. Ace refused and filed this action requesting a declaratory judgment that Ace does not owe Ascend One a duty to defend or indemnify under either policy because the class action is excluded from coverage. Ascend One filed a motion for partial summary judgment on the duty to defend and Ace filed a cross-motion for summary judgment. Oral argument was heard on June 1, 2007. I find that Ace has a duty to defend Ascend One under the E O policy; therefore, Ascend One's motion for partial summary judgment on this issue will be granted. Because the E O policy provides a duty to defend all defendants against the underlying class action, I need not address the D O policy, and Ascend One's motion for partial summary judgment as to the D O policy therefore will be denied without prejudice. Plaintiff Ace's cross-motion for summary judgment will also be denied.
The underlying case is Laverne Jones v. Genus Credit Management Corp., et al. (JFM-04-136).
I.
The arbitration complaint at issue in this case alleges that Ascend One and the other defendants engaged in "unfair, deceptive and misleading debt management, credit counseling, budget planning and debt collection activities." The defendants sold Debt Management Plans ("DMPs") to consumers. Consumers who enrolled in DMPs made payments directly to Ascend One instead of creditors; Ascend One then paid the creditors. Ascend One promised that enrollment in a DMP would lower monthly debt payments and interest rates, eliminate late fees, quickly eliminate debts, and improve the credit of their clients. Ascend One and the other defendants styled themselves as non-profit organizations providing free services to consumers. The complaint alleges that in reality they ran for-profit companies, did not substantially reduce their clients' debts and interest rates, and charged consumers monthly fees. Additionally, Ascend One failed to disclose that some credit card companies refuse to lower interest rates and will not waive fees for past due payments and that many creditors have recently increased the interest rates they impose on consumers participating in DMPs. Ascend One also failed to disclose that they received a percentage of all payments submitted to creditors, which gave them an incentive to counsel consumers not to file for bankruptcy. Furthermore, they did not disclose that many consumers participating in DMPs do not complete them and so do not eliminate their debt. The complaint also alleges that defendants failed to timely remit payments from consumers to the consumers' creditors, causing the consumers to be charged late fees by their creditors.
Based on these alleged facts, the arbitration complaint contains nine counts. Mot. for Partial Summ. J, Ex. A-3. Counts I and II allege violations of the Fair Debt Collections Practices Act and charge defendants with using false representations and unfair or unconscionable means to induce consumers to participate in DMPs. Count III alleges that defendants made untrue and misleading statements in violation of the Credit Repair Organizations Act. Count IV accuses defendants of violating the Racketeer Influenced and Corrupt Organizations Act, in that defendants used the mails or wires in interstate commerce in committing fraud. Count V asserts that defendants violated the Telemarketing and Consumer Fraud and Abuse Prevention Act by engaging in deceptive and abusive telemarketing acts. Count VI maintains that defendants violated the Maryland Consumer Protection Act and the similar statutes of other states by engaging in misrepresentations, omissions, and deceptive and misleading advertising. Count VII alleges that defendants violated the Maryland Debt Management Services Act and the similar statutes of other states by offering debt management services without a license and by charging fees in excess of those permitted. Count IX alleges that defendants violated their fiduciary duties of care, candor, and loyalty by engaging in self-dealing for their own benefit and by failing to disclose conflicts of interest. Count X alleges that defendants committed common law fraud when they knowingly and/or recklessly made false statements for the purpose of inducing plaintiffs to enroll in DMPs.
The complaint skips from Count VII to Count IX.
The arbitration complaint requested disgorgement of all proceeds unlawfully received by defendants and an injunction preventing defendants from continuing to engage in the unlawful and inequitable conduct alleged by plaintiffs. Plaintiffs also requested compensatory, statutory, exemplary, and punitive damages and attorney's fees.
II.
Under Maryland law, whether an insurance company has a duty to defend an insured against a lawsuit is determined by a two-part inquiry:
(1): what is the coverage and what are the defenses under the terms and requirements of the insurance policy? (2) do the allegations in the tort action potentially bring the tort claim within the policy's coverage?St. Paul Fire Marine Ins. Co. v. Pryseski, 438 A.2d 282, 285 (Md. 1981); see also Cowan Sys., Inc. v. Harleysville Mut. Ins. Co., 457 F.3d 368, 372 (4th Cir. 2006). In this case, Ascend One claims that the allegations of the arbitration complaint fall within the provisions of the insurance policy provided by Ace, and thus Ace has a duty to defend Ascend One. Ace does not dispute that the general terms of the E O policy cover the class action allegations but rather claims that coverage is excluded by Exclusion J, which states that: "this policy does not apply to any Claim against the Insured based on or arising out of . . . any dispute involving fees, expenses or costs paid to or charged by the Insured."
The Maryland Court of Appeals has stressed that a duty to defend exists if there is any chance that the allegations of the underlying action fall within the policy's terms: "Even if a tort plaintiff does not allege facts which clearly bring the claim within or without the policy coverage, the insurer still must defend if there is a potentiality that the claim could be covered by the policy." Brohawn v. Transamerica Ins. Co., 347 A.2d 842, 850 (Md. 1975) (emphasis in original); Cowan, 457 F.3d at 372; Warfield-Dorsey Co., Inc. v. The Travelers Cas. Sur. Co. of Illinois, 66 F. Supp. 2d 681, 685 (D.Md. 1999). If any of the claims in the underlying suit fall within the terms of the policy, the insurer must defend all of the claims until such time as the only claims remaining are those outside of the policy coverage. Utica Mut. Ins. Co. v. Miller, 746 A.2d 935, 940 (Md. Ct. Spec. App. 2000). "Doubts as to whether an allegation indicates the possibility of coverage should be resolved in the insured's favor." Id. at 940-41.
Both the Maryland Court of Special Appeals and Judge Motz in the District of Maryland have analyzed exclusionary language similar to the fee exclusion at issue in this case. In Utica Mutual Insurance Co. v. Miller, the Maryland Court of Special Appeals determined the scope of an exclusion from the duty to defend for "[a]ny liability for money received by an insured or credited to an insured for fees, premiums, taxes, commissions, loss payments, or escrow or brokerage monies." 746 A.2d at 935. The underlying case involved claims by the Insurance Company of North America ("CIGNA") that: 1) Miller owed CIGNA an accounting for premiums he should have collected for CIGNA; 2) conversion; 3) breach of fiduciary duty; 4) unjust enrichment; and 5) negligence. Id. at 938. Although the "primary thrust" of CIGNA's complaint was that Miller stole over three hundred thousand dollars he received as premiums on CIGNA's behalf, the complaint also alleged that he had violated both his duty to exercise ordinary care in remitting funds to CIGNA and his duty to oversee the business so as to discover and prevent the misuse of funds. Id. The court held that if "CIGNA's sole cause of action asserted in the complaint was based on appellee's failure to remit premiums collected, we would hold that appellant had no duty to defend under the monies received exclusion." Id. at 942. The negligence claims, however, did not fall within the terms of the exclusion. Id. Because these claims were covered by the policy, the insurance company had a duty to defend Miller so long as those claims remained. Id.
The court noted that the claims for suit on account, conversion, breach of fiduciary duty, and money received were based on the premiums received and thus excluded from coverage, but did not elaborate on this finding. Id. at 942 n. 1.
Judge Motz analyzed a similar exclusion in Hartford Casualty Insurance Co. v. Chase Title, Inc., 247 F. Supp. 2d 779 (D.Md. 2003). The underlying suit was a class action brought against Chase and other defendants for alleged deceptive settlement practices on home mortgage loans. Id. at 790. The five counts of the class action alleged violations of the District of Columbia Consumer Protection Procedures Act ("CPPA") and the Real Estate Settlement Procedures Act, in addition to common law claims for conversion, breach of fiduciary duty, and negligence. Id. The insurance policy defined damages so as to exclude damages from "disputes over fees, commissions, deposits, premiums or charges made for services rendered or which should have been rendered." Id. at 781.
Judge Motz held that the class action potentially involved more than just a dispute over fees, and thus the insurance company had a duty to defend Chase. Id. Analogizing to the Miller case, he found that the "`primary thrust' of the class action complaint was a dispute over fees. Id. at 782. The class action complaint, however, also alleged that defendants had violated the CPPA by: 1) falsely representing that the HUD-1 settlement statements were accurate; 2) falsely representing that loan disbursements were in conformance with the settlement statements; 3) offering services they did not intend to provide; and 4) violating other statutory requirements intended to protect real estate borrowers. Id. Judge Motz found that these allegations potentially implicated more than just a fee dispute, and held that Hartford had a duty to defend Chase against the entire action. Id.
At oral argument, Ace did not deny that several of the allegations in this case are very similar to the allegations in Chase, but rather argued that the exclusionary language in Chase is much narrower than the language contained in Exclusion J. The Chase language stated only that damages did not include disputes over fees, and the language in this case excludes from coverage all claims arising out of disputes involving fees, expenses or costs. Ace contends that the essence of the class action at issue is an allegation that Ascend One defrauded consumers by requiring them to pay illegal fees and expenses and thus all of the claims arise from a dispute involving fees, expenses, or costs.
As an initial matter, it is not nearly as clear as Ace supposes that fraud allegations such as the one at hand are fairly characterized as arising from "fee disputes." The simplest understanding of a "fee dispute" is a disagreement regarding the amount the consumer paid for services, not a disagreement regarding whether the provider ever intended to render the contracted services at all. Even if a fee dispute is defined more broadly, however, to include claims that consumers were defrauded of the fees they paid to Ascend One, neither Miller nor Chase supports Ace's argument that the plaintiff's overall theory of the case determines coverage. Rather both cases indicate that each individual count of the complaint must be analyzed to determine whether it falls within the policy's coverage. In this case, the arbitration complaint is not limited to a request that the allegedly fraudulently obtained fees be returned, nor does it claim that the fees are the only damages. Plaintiffs also allege that Ascend One caused consumers to incur late fees, increase their debt, and hurt their credit ratings. Additionally, plaintiffs allege that Ascend One's practice of advising consumers not to file for bankruptcy adversely affected consumers' financial situations. None of the damages from these allegations can fairly be said to arise from a dispute involving "fees, expenses or costs paid to or charged by" Ascend One.
Ace cites to Eastern Shore Financial Resources, Ltd. v. Donegal Mutual Insurance Co. for the proposition that there is no potential for policy coverage when every count of the complaint is premised upon the same excluded conduct. 581 A.2d 452 (Md. Ct. Spec. App. 1990). The Donegal court found that a case including a negligence count, but entirely based on factual allegations of intentional striking, pushing, and shoving, was precluded by the intentional acts exclusion in the insurance policy. Id. at 618-21. Since none of the facts suggested that the striking, pushing, or shoving was done negligently or that the harm resulting from it was unexpected or unintended, the negligence count did not create a potentiality of coverage. Id. at 620-21. Ace argues that in this case all of the counts of the complaint incorporate facts alleging that Ascend One engaged in fraudulent conduct for the purpose of extorting illegal fees from consumers. Ace ignores the fact that the factual allegations of misleading advertising, failure to obtain a license, deliberately delaying payments to creditors, etc., are actionable by themselves under various consumer protection statutes separate and apart from any role they might have played in Ascend One's allegedly fraudulent scheme to obtain fees.
Ace argues that the "arising out of" language is very broad and should be construed accordingly. Even accepting Ace's contention, the only way all of the claims alleged can be said to arise from a fee dispute is by reasoning that the claims only arose because all of the consumers at some point contracted with and paid money to Ascend One. If this were the only limiting factor, every claim a customer had against Ascend One would be excluded from coverage.
In fact, Ace admits in its reply memorandum that "if in providing debt management services, the Ascend One parties collected but failed to timely pay its customer's creditor as promised . . . any resulting liability from such failure . . . would fall within the scope of the Insuring Agreement." Reply to Def.'s Opp. to Pl.'s Cross Mot. for Summ. J. at 6. As noted above, the arbitration complaint does specifically allege that the Ascend One parties delayed paying customers' creditors for the purpose of collecting interest on the money, which resulted in late fees incurred by the customers. Therefore, by Ace's own admission, at least one allegation of the complaint is not excluded by the fee dispute exclusion.
In summary, Ace argues that because all of the allegations in the complaint are related to Ascend One's scheme to cheat consumers out of the fees they paid to Ascend One for services they did not receive, all of the allegations must arise out of a fee dispute. Under Maryland law, however, it is clear that in assessing a duty to defend the court must consider each claim individually to determine whether it is excluded. Because at least one claim, the allegation that Ace caused consumers to incur late fees, is not excluded by the fee dispute exclusion, Ace has a duty to defend Ascend One against the entire action. Accordingly, Ascend One's motion for partial summary judgment as to the duty to defend under the E O policy will be granted, and Ace's motion for summary judgment will be denied.
A separate order follows.
ORDER
For the reasons stated in the accompanying Memorandum, it is hereby ORDERED that:1. the cross-motion for summary judgment filed by Ace American Insurance Co. (docket entry no. 16) is Denied; and
2. the motion for partial summary judgment on the duty to defend filed by Ascend One Corporation et al. (docket entry no. 7) is Granted as to the E O policy and Denied without prejudice as to the D O policy.