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Mount Vernon Fire Insurance Co. v. Visionaid, Inc.

United States Court of Appeals, First Circuit

November 15, 2017

VISIONAID, INC. f/k/a H.L. Boulton Co. Inc., Defendant, Appellant.


          Kenneth R. Berman, with whom Heather B. Repicky and Nutter, McClennen & Fish LLP were on brief, for appellant.

          David Burgess, Wilchins Cosentino & Novins LLP, Edward J. Stein, Marshall Gilinsky, and Anderson Kill P.C. on brief for United Policy Holders, amicus curiae.

          James J. Duane III, with whom Scarlett M. Rajbanshi and Peabody & Arnold LLP were on brief, for appellee.

          Michael F. Aylward and Morrison Mahoney LLP on brief for American International Group, Inc. and Massachusetts Insurance Federation Inc., amici curiae.

          Before Thompson, Circuit Judge, Souter, Associate Justice, [*] and Barron, Circuit Judge.

          THOMPSON, Circuit Judge.


         This is a diversity-based declaratory-judgment action governed (all agree) by Massachusetts substantive law. See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938). The case pits an insured, VisionAid, against its employment-practices liability insurer (say that ten times fast!), Mount Vernon (each party's official name appears in the caption). VisionAid and Mount Vernon are back after the busy Massachusetts Supreme Judicial Court ("SJC, " for short) answered some state-law questions - arising from this litigation - that we had certified to it (we thank the SJC for its help). As things now stand, the only question left for us to decide is: Does a conflict of interest exist between the parties that permits VisionAid to choose the attorney to defend a suit brought against it by an ex-employee, with the tab for that defense picked up by Mount Vernon? Like the federal district judge below, we believe the answer is no.

         How We Got to This Point

         Our opinion certifying the questions is found at 825 F.3d 67 (1st Cir. 2016). And the SJC's opinion responding to the questions is found at 76 N.E.3d 204 (Mass. 2017). Rather than fill up the pages repeating everything said before, we assume the reader's familiarity with these decisions and mention here only those details necessary to put today's matter into perspective.

         VisionAid is a defendant in a suit filed by Gary Sullivan in Massachusetts state court. Sullivan essentially alleges there that VisionAid fired him as its vice president because he was too old. An attorney named Todd Bennett filed VisionAid's answer, insisting that VisionAid had canned Sullivan not because of his age, but because he had performed his job poorly, had acted insubordinately, and had embezzled money from VisionAid on a grand scale. Bennett got involved thanks to Mount Vernon, which - invoking the liability policy's terms - picked him to defend VisionAid. Mount Vernon originally acted under a "reservation of rights" (for anyone untutored in matters of insurance law, a proper reservation preserves an insurer's right to challenge any duty to defend at a later stage). But after VisionAid objected, Mount Vernon explicitly withdrew its reservation of rights and assumed the defense unconditionally.

         In the midst of all this, Sullivan offered to drop his age-discrimination claim if VisionAid agreed not to pursue its embezzlement claim. VisionAid said no. VisionAid also made it clear around this time that it wanted Bennett to do more than just raise Sullivan's embezzlement as a defense - it wanted Bennett to raise the embezzlement allegation as a counterclaim. Mount Vernon refused, explaining that because the policy between them was a defense-liability policy, it had no duty to fund affirmative actions and so would not fund VisionAid's counterclaim. Ultimately, VisionAid's personal counsel drafted the embezzlement counterclaim against Sullivan.

         Pulling no punches, Mount Vernon filed the underlying federal-diversity action seeking a declaratory judgment vindicating its understanding of the policy. Not willing to back down, VisionAid responded with a two-count counterclaim: the first count seeking a declaration that Mount Vernon's duty to defend includes a duty to prosecute the embezzlement counterclaim, and the second count seeking a declaration that a conflict of interest between Mount Vernon and VisionAid entitles VisionAid to select the attorney to defend it in Sullivan's suit - we will say more later about the conflict issue; for now it is enough to note that VisionAid thinks Mount Vernon has an interest in "diminishing" the value of VisionAid's counterclaim, because the counterclaim is "impeding" settlement.

         Eventually the parties cross-moved for summary judgment. Acting on the motions, the federal district judge ruled that given the policy's plain language, Mount Vernon's duty to defend does not oblige it to foot the bill for VisionAid's affirmative counterclaim - a result, he added, that did not violate any state law. And then the judge rejected what he called VisionAid's "counter-intuitive assertion" that Mount Vernon and Bennett "have an interest in devaluing the counterclaim." "The strength of VisionAid's counterclaim, " the judge wrote,

both weakens the wrongful termination case against VisionAid and increases appointed counsel's bargaining power in settlement negotiations. Devaluing the counterclaim would undermine Mount Vernon's own interest in limiting Sullivan's recovery for wrongful termination.

         Finally, the judge refused "to acknowledge VisionAid's parade of horribles" it believes will occur if appointed counsel defends against Sullivan's claims and VisionAid's personal counsel prosecutes the counterclaim. "[T]here is, " the judge noted, "nothing inherently impractical or unwieldy about VisionAid relying on its own separate counsel to assert the counterclaim." For support, the judge noted that in responding to Sullivan's complaint, appointed counsel wrote the answer and VisionAid's own counsel wrote the counterclaim. Which, the judge stressed, goes to show that these "separate attorneys" can "collaborate and yet accomplish their distinct objectives."

         A disappointed VisionAid appealed to us. And for the reasons recorded in our prior opinion, we certified three questions to the SJC - two on the duty-to-defend issue and one on the conflict-of-interest issue:

(1) Whether, and under what circumstances, an insurer (through its appointed . . . counsel) may owe a duty to its insured . . . to prosecute the insured's counterclaim(s) for damages, where the insurance contract provides that the insurer has a "duty to defend any Claim, " i.e., "any proceeding initiated against [the insured]"?
(2) Whether, and under what circumstances, an insurer (through its appointed . . . counsel) may owe a duty to its insured to fund the prosecution of the insured's counterclaim(s) for damages, where the insurance contract requires the insurer to cover "Defense Costs, " or the "reasonable and necessary legal fees and expenses incurred by [the insurer], or by any attorney designated by [the insurer] to defend [the insured], resulting from the investigation, adjustment, defense, and appeal of a Claim"?
(3) Assuming the existence of a duty to prosecute the insured's counterclaim(s), in the event it is determined that an insurer has an interest in devaluing or otherwise impairing such counterclaim(s), does a conflict of interest arise that entitles the insured to control and/or appoint independent counsel to control the entire proceeding, including both the defense of any covered claims and the prosecution of the subject counterclaim(s)?

825 F.3d at 72 (brackets in original; ellipses added). That court recently returned its answers, albeit by a divided vote. On question (1), the SJC ruled that "an insurer with a contractual duty to defend an insured is not required to prosecute an affirmative counterclaim on the insured's behalf, " either under the "contractual language in the policy at issue or the common-law" of Massachusetts. 76 N.E.2d at 208. On question (2), the SJC held that "the duty to pay defense costs has the same scope as the duty to defend, and thus does not require an insurer to pay the costs of prosecuting a counterclaim on behalf of the insured[.]" Id. And on question (3), the SJC concluded that given its other two answers, it need not reach the conflict-of-interest issue as framed by us. Id.

         After the SJC's opinion came down, VisionAid asked us to let each side file supplemental briefs "to address how the [S]C's] decision affects the resolution of the remaining" conflict-of-interest question. In its telling, regardless of who pays the fees to prosecute the embezzlement counterclaim (VisionAid or Mount Vernon), an obvious conflict of interest exists "that affects the right to select counsel" to "defend VisionAid against Gary Sullivan's complaint." Mount Vernon opposed the request for more briefing. Accepting VisionAid's view that the SJC's decision does not necessarily dispose of the conflict issue, we allowed additional briefing from both sides and invited any interested amicus to chime in too. With these materials in hand, we tackle the conflict question (which again is the only question before us), without requiring another round of oral argument.[1]

         The Parties' Take

         The parties argue over the conflict-of-interest matter keenly and vigorously - which is not a surprise, given how hard they have fought in multiple courts. Bear with us now as we plow through their contentions.

         VisionAid's Arguments

         VisionAid throws a lot of arguments at us, all based on its understanding of Massachusetts law. For starters, VisionAid argues that Bennett - the insurer-appointed counsel - represents both VisionAid and Mount Vernon. This being so, the argument continues, Bennett must act in good faith, diligently carrying out his duties without sacrificing VisionAid's interests to Mount Vernon's interests. ...

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