Malicious Prosecution is an Intentional Tort and Defense is Unavailable

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Filing a Suit for the Sole Purpose of Defeating a Sale of Real Property is Malicious

Regent Insurance Company (“Regent”) appealed from the order of the United States District Court in Regent Insurance Company v. Strausser Enterprises, Inc; Gary Strausser, No. 12-4135, United States Court Of Appeals For The Third Circuit (August 7, 2020) Regent claimed no duty to defend an insured who filed a frivolous malicious prosecution action to prevent the sale of real property.

FACTS

On November 5, 2007, Kenneth Segal, the Karen and Kenneth Segal Descendants Trust (“Trust”), and Segal and Morel, Inc. (“S & M”) (collectively “Segal Plaintiffs”) sued SEI, Strausser, and Leonard Mellon, Esq. (SEI’s attorney). The Segal Action arose from purchase agreements in which SEI sold several parcels of land to S & M (which then assigned its rights and obligations to several limited liability companies (“the S & M LLCs”), of which Segal and the Trust are the sole members). Segal and the Trust subsequently contracted to sell their interests in the S & M LLCs to K. Hovnanian Pennsylvania Acquisitions, LLC (“Hovnanian”).

According to the underlying complaint, SEI, Strausser, and Mellon sabotaged the Hovnanian deal by manufacturing a frivolous state court lawsuit as well as a frivolous arbitration.

The Segal Action complaint included four counts: (1) tortious inference with contract; (2) tortious interference with prospective contractual relations; (3) Malicious Prosecution; 42 Pa. C.S.A. § 8351 et seq; and (4) abuse of process.

Appellees advised Regent of the Segal Action and sought coverage. The insurance policy at issue expressly provides coverage for personal and advertising injury liability. Regent provided a defense to the Segal Action subject to a reservation of rights and sued seeking a declaration that it has no duty to defend or indemnify Appellees. The District Court, in what it hoped was a Solomon-like decision, granted in part, denied in part, and dismissed in part both motions for summary judgment. It granted Appellees’ summary judgment motion “to the extent it seeks a declaration that [Regent] has a duty to defend [Appellees] in the [Segal Action]” and “to the extent it seeks a declaration that [Regent] has a duty to indemnify [Appellees] for the malicious prosecution claim in the underlying action, with the exception of punitive damages.” Entering partial judgment in favor of and against both Appellees and Regent, the District Court declared that Regent has a duty to indemnify Appellees for the malicious prosecution claim (with the exception of any punitive damages awarded on this claim) as well as to defend Appellees in the underlying action. ”

The District Court explained that the policy language is ambiguous because malicious prosecution under Pennsylvania law, codified as “Wrongful use of civil proceedings” by the Dragonetti Act, 42 Pa. C.S.A. § 8351, et.seq. requires more than proof of gross negligence. Instead, proof of actual malice or improper motive is required, and malicious prosecution thereby represents an intentional tort under state law. Concluding that where there is the potential for a claim against a defendant to be covered under the defendant’s insurance policy, the insurer has a duty to defend.

ANALYSIS

In its brief in support of its motion for summary judgment, Regent appears to argue that the “Knowing Violation” exclusion applies to all malicious prosecution claims because malice is a necessary element.

It is well established that the obligation to defend arises whenever the complaint filed by the injured party may potentially come within the coverage of the policy. The factual allegations of the underlying complaint are to be taken as true and to be liberally construed in favor of the insured. In turn, the duty to defend is “fixed solely” by such allegations.”

The four corners of the complaint rule is the correct statement of Pennsylvania law and that, under this approach, there is coverage for claims that potentially fall within the scope of coverage, but only insofar as those potential claims are grounded in the complaint itself. Applying this standard, the Third Circuit, to allow defense and indemnity, must determine that the malicious prosecution claim set forth in the underlying complaint in the Segal Action “potentially falls” within the scope of coverage.

The underlying complaint clearly alleged intentional and knowing conduct — as opposed to negligence (or gross negligence) — on the part of Appellees. SEI was aware of an impending transaction and desperately wanted to stop it, hoping that doing so would garner it leverage from which to secure monetary concessions from the Segal Sellers. SEI and Strausser, along with Mellon, their long-time counsel, hatched a baseless, spiteful and malicious plan to derail the transaction by filing a frivolous lawsuit mentioned below. Strausser allegedly admitted that he knew SEI lacked the requisite right of first refusal.

In fact, Appellees’ counsel “admitted to the Segal Sellers’ counsel [prior to the hearing before the state trial court] that Strausser had instructed him to file anything that he could to stop the transaction. Mellon also admitted that Strausser, who had verified the state court Complaint, had never actually read the pleading. In the end, the filing of the state court action and the Lis Pendens had the desired effect: Hovnanian refused to proceed with a closing.

SEI used the lis pendens mechanism as a procedural weapon, and so doing was inappropriate. The purpose behind the frivolous filings was not lost on the trial Court: “Plaintiff filed its Complaint in order to secure a lis pendens attached to the properties at issue in its dispute . . . the practical effect of a recorded lis pendens is to render a defendants property unmarketable.”

The Third Circuit, accordingly, found it had no choice but to remand the case to the trial court with instructions to grant Regent’s motion for summary judgment and deny Appellees’ summary judgment motion and to enter judgment in favor of Regent and against Appellees declaring that Regent has no duty to defend or indemnify Appellees in the Segal Action.

ZALMA OPINION

It is always inappropriate to force an insurer to defend an insured who acted intentionally and maliciously to cause damage to third parties. When the Appellees instructed their counsel to file any lawsuit that could derail the sale of the property to Hovnanian and cause damage to the property owners they knowingly, intentionally and maliciously acted to cause damage to the property owners. There was, therefore, no fortuitous conduct, no accident, no occurrence that would require a defense.


© 2020 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

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