Opposition Brief — Oldfather v. CIGNA Insurance

;

No. 97-341 © oman

supseme Court, U.%.

FILED

In The

; SEP 25 1997

Supreme Court of the Unite tates

October Term, 1996 CLERK

¢

JOYCE I. OLDFATHER, Individually and

As Representative of a Bondholder Class; and

Edwin Bertrand, Individually and As a

Representative of a Bondholder Class,

Petitioners,

VS.

CIGNA INSURANCE COMPANY, f/k/a

INA Underwriters Insurance Company,

Respondent.

.

On Petition For Writ Of Certiorari

To The United States Court Of Appeals

For The Ninth Circuit

oe

RESPONDENT’S BRIEF IN OPPOSITION

e

Tep A. SCHMIDT Rosert J. ROMERO

KINERK, BEAL, SCHMIDT & Lone & Levit LLP

Dyer, P.C. 101 California Street

5255 East Williams Circle Suite 2300

Suite 6000 -— West Tower San Francisco, CA 94111

Tucson, AZ 85711 Telephone: (415) 397-2222

Telephone: (520) 790-5600 A

MY SAMBERG

Paut R. Koeprr O’CoNNoR, CAVANAGH,

Counsel of Record Mo ioy & JONEs

THomas J. Diresta 33 North Stone, Suite 2100

O’MeELveny & Myers LLP Tucson, AZ 85711

153 East 53rd Street Telephone: (520) 628-4600

New York, NY 10022

Telephone: (212) 326-2000 ig a for Respondent

igna Insurance Company

(f/k/a INA Underwriters

September 25, 1997 Insurance Company)

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831 ot |

5

QUESTIONS PRESENTED FOR REVIEW

Should the Court deny the instant Petition where the

Ninth Circuit’s opinion turned entirely on Arizona

state insurance law, there are no constitutional or

federal issues presented (let alone a split of authority

on such issues), Petitioners inappropriately seek this

Court’s review of the Ninth Circuit’s fact-bound and

evidentiary findings, and Petitioners misstate the

facts, the law and the fundamental basis of the Ninth

Circuit’s opinion?

Did the Ninth Circuit correctly apply well-established

Arizona law in ruling that there was no coverage

under Respondent’s professional liability policy, since

the insured, Guren, Merritt, Fiebel, Sogg & Cohen

(“Guren Merritt”) did not commit any liability-pro-

ducing conduct?

Did the Ninth Circuit correctly hold that liability in

the underlying class actions was limited to what

Robert Blattner did on the bond projects at a much

later time and while at a completely different law

firm, Benesch, Friedlander, Coplan & Aronoff

(“Benesch”), which Respondent did not insure?

il

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED FOR REVIEW ........... i

TRE Ge Ca hs on heb cccscanssinnnescssis ii

BABES OF ARTA ENED 6 sc csccnsocesvessesewitne Vv

STATEMENT OF THE CASE... .......cccccsscccsees 1

PEE on scecesccnseccctsseoessubhndaeeaeeee 3

The Underlying Chandler Manor And Sun Mesa

DO THRONE «6x50 0 scctortessnsnseseainss 3

B. Blattner’s Liability-Producing Conduct At

DORR TERS 00 bbc nwicnsdeeeaecsanes 4

The Underlying Securities Class Action Litigation... 5

A. The Class Action Complaints .............. 5

D Fee Fees CM... ccsevcvndschasabeasnes 7

C. The Underlying Settlement ................ 9

Se RASS Tike co nda secnisdwesmege nous 10

A, “Tie OE BU wa osc cen ivcccwcwadnas 10

B. The Guren Merritt Policy .................. 10

Few Cae Fae GR onc dns teneaseen 11

1. Under The PREC Policy .............. 11

2. Under The Respondent's Policy ...... 12

ili

TABLE OF CONTENTS - Continued

Page

The District Court’s Erroneous Coverage Order .. 12

The Ninth Circuit’s Opinion ......-----+--++++++:

REASONS WHY THE PETITION SHOULD BE

errr rrr rr eS Tete ee

I.

Il.

If.

THE STATE LAW ISSUES RAISED BY THE PETI-

TION ARE INSUFFICIENT TO INVOKE THIS

COURT’S CERTIORARI JURISDICTION .......-

CONTRARY TO WHAT PETITIONERS CON-

TEND, THERE ARE NO “COMPELLING REA-

SONS” WARRANTING THIS COURT’S

ne er. oe

A. There Are No Constitutional Or Federal

B. There Are No Other “Compelling Rea-

THE WRIT SHOULD BE DENIED BECAUSE

PETITIONERS INAPPROPRIATELY SEEK

THIS COURT’S REVIEW OF EVIDENTIARY

AND FACTUAL FINDINGS, AS WELL AS

MISSTATE THE BASIS OF THE NINTH CIR-

CUIT’S RULING, THE FACTS AND THE LAW

eee a ee ne oS ee S'S O66 SSS 9S Sh om”

A. The Petition Misstates The Basis Of The

Ninth Circuit’s Opinion ......----+++++:-

The Petition Misstates The Facts.........

C. The Petition Misstates The Law .......--

14

16

16

22

22

22

iv

TABLE OF CONTENTS - Continued

Page

IV. THE NINTH CIRCUIT’S RULING PROPERLY

VOIDED AN UNJUST WINDFALL FOR PETI-

SR 4 5 i 4n ian Cee aeeieeens oer eeasetnan 28

ee ee PUTT TT LETT ee eee ee eee ee 29

Vv

TABLE OF AUTHORITIES

Page

UniteD STATES SUPREME COURT CASES

Affiliated UTE Citizens v. United States, 406 U.S. 128

SITAR oo sc'se + nnen abn gh aeannngrePneee pane ares. 22

Basic, Inc. v. Levinson, 485 U.S. 224 (1988) .---------> 20

Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723

MED asctyceeassreteern teeter 19

Brockett v. Spokane Arcades, Inc., 472 U.S. 491 (1985) ..-- 17

Butner v. United States, 440 U.S. 48 (1979) ..-----++- 17

Central Bank of Denver, N.A. 2. First Interstate Bank

of Denver, N.A., 114 S.Ct. 1439 (1994) .-------+-+>: 21

Chiarella v. United States, 445 U.S. 222 (1979) .------> 20

Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938)...-----> 16

Estate of Spiegel v. Commissioner of Internal Revenue,

eee 11S.. FAl. (ADU) .«- oor esnccererreeccsee rer en® 16

Huddleston v. Dwyer, 322 U.S. 232 (1944) ------sr 16

NLRB v. Hendricks County Rural Elec. Corp., 454

SSS. S70 COORDS «ou. 3 wears cee een eteae essen rene™ 25

Rudolf v. United States, 370 U.S. 269 (1962) ...-----:> 25

United States v. Johnston, 268 U.S. 220 (1925)..------- 24

OTHER CASES

Ackerman v. Schwartz, 947 F.2d 841 (7th Cir. 1991).... 20

Camp v. Dema, 948 F.2d 455 (8th Cir. 1991)...------- 21

vi

TABLE OF AUTHORITIES - Continued

Page

Cronin v. Midwestern Oklahoma Develop. Authority,

ee Eee Ee Te rer eee 28

Employers Reins. Corp. v. Fireman's Fund Ins. Co., 95

ee Fe Fe ee | eer rere 18

Katara v. D.E. Jones Commodities, Inc., 835 F.2d 966

RA BOND ack idk dundecnws ne ndwoewesseeesseee se 22

Kiernan v. Homeland, Inc., 611 F.2d 785 (9th Cir.

PU ikec sn vdeasaeskeeds bhabeeen este eae 22

Langley v. Mut. Fire, Marine & Inland Ins. Co., 512

ee ee eg eee ee eee Ce Sree 18

New England Ins. Co. v. Sylvia, 783 F. Supp. 6 (D.

SN BED Sine eukae Kaekcc Casale keener eR eaeuEr ies 18

Ohashi v. Bert Indus., 536 F.2d 849 (9th Cir.), cert.

Po ae ere re re eee 19

Roberts v. Peat, Marwick, Mitchell & Co., 857 F.2d

646 (9th Cir.), cert. denied, 493 U.S. 1002 (1989) .... 19

Schatz v. Rosenberg, 943 F.2d 485 (4th Cir.), cert.

Gheted, FRE UD. FOO CII aoc kk ec cackcesavenss 20, 21

Standard Fire Ins. Co. v. Peoples Church of Fresno,

S05 F.2d 406 Cth Cie. 1998)... 2. ccccscccccesere 26

Taub v. First State Ins. Co., 44 Cal. App. 4th 811, 52

Ch. Hee. 20 E 2. Ap. TS) oon cscccccewcsas. 18

Williams v. Sinclair, 529 F.2d 1383 (9th Cir.), cert.

dated, SOG WS. SoG CEGFBS oes ovine senivncscvnuns 21

bt RAD LARS Deni gh RA 6

Vii

TABLE OF AUTHORITIES - Continued

Page

STATUTES

USL. & TIGID) ...... 0220s cc eneesrcareseesescenss 13

Supreme Court Rule TOMO) onc cccccnsevesedevenseness 25

MIsCELLANEOUS

2 Long, The Law Of Liability Insurance, § 12B04[4];

§ 12C.04[2]; § 12B04[4]; § 12C.04[2] (1989).....---> 18

3 New York Insurance Law, § 40.03[2] (1991)......---- 18

Frankfurter, The Business of the Supreme Court at

October term 1933, 48 Harv. L. Rev. 238 (1934)..... 17

Hanen, Legal Malpractice Insurance: Exclusions,

Selected Coverage and Consumer Issues, 33

So.Tex.L.Rev. 75 (1992)....-sseeeeeeceeecscsseecees 18

1

STATEMENT OF THE CASE

This appeal concerns the Ninth Circuit’s correct

interpretation and application of well-established Ari-

zona law that Respondent’s professional liability insur-

ance policy, which insured a law firm (Guren Merritt),

did not provide coverage for two underlying securities’

class actions commenced by Petitioners, where: that law

firm was not named by Petitioners as a defendant in the

underlying actions; it had not committed any liability-

producing acts, errors, or omissions; it had ceased to have

any involvement with the underlying transactions and

issuance of bonds long before any liability-producing act,

error Or omission was committed by a different law firm

(Benesch); and the iiability-producing acts, errors and

omissions were committed solely by Benesch.

As such, the instant Petition is particularly inap-

propriate for review by this Court for at least the follow-

ing reasons:

First, this appeal turns entirely on the Ninth Circuit's

correct interpretation and application of Arizona state

insurance law. There is no need for this Court to deter-

mine and then review what is applicable Arizona state

insurance law, and whether the Ninth Circuit correctly

applied Arizona law, especially when that court has

expertise and experience with Arizona insurance law.

Moreover, to the extent Petitioners seek to have this

Court resolve purportedly “novel” questions of Arizona

insurance law, a proposition with which Respondent dis-

agrees, Petitioners should have commenced their cover-

age action in state court and not in federal court. Or else,

they should have sought to have certified questions of

law resolved by the Arizona State Supreme Court (not

this Court). Petitioners never made such a request before

2

the District Court. Petitioners’ certification request came

only after the Ninth Circuit rendered its opinion, and was

appropriately denied by the Ninth Circuit for obvious

reasons.

Second, Petitioners provide no “compelling reasons”

requiring this Court’s review. There are no constitutional

or federal questions at issue, and Petitioners did not

contend otherwise. There are no conflicts between any

federal courts of appeal (or with any state supreme

courts) with respect to Petitioners’ state insurance law

claims, and Petitioners do not contend otherwise. Indeed,

this case only involves whether there is insurance cover-

age under a specific professional liability insurance pol-

icy (issued 13 years ago), under a particular set of facts

and allegations which were extensively litigated before

the District Court and the Ninth Circuit.

Third, the standard reasons employed by this Court

in denying certiorari petitions apply with equal if not

greater force here. The alleged errors asserted by Peti-

tioners turn on factual and evidentiary findings that were

entirely correct and appropriate, and certainly do not

require this Court’s valuable time and resources to re-

review those factual and evidentiary submissions and

rulings by the District Court and the Ninth Circuit. In

addition, and perhaps in their zeal to seek review by this

Court, Petitioners have misstated the legal basis for the

Ninth Circuit’s ruling.

Fourth, Petitioners have already recovered all available

insurance coverage from the insurers of Benesch, and all

Petitioners are seeking now is insurance provided to a

different law firm (Guren Merritt) that was never named a

defendant in the underlying class actions, committed no

liability-producing conduct resulting in Petitioners’

3

alleged injury, ceased to be involved long before the key

events and transactions, and was never involved in the

underlying settlement in any respect. It is especially reveal-

ing that Petitioners state that this appeal is important to

not only them, but “society at large”, when in fact, the real

beneficiary is not the underlying plaintiff classes, but the

excess insurer of Benesch (Old Republic), which has

financed this coverage suit, used its own lawyers to liti-

gate this case and pursue appeals, and hopes to recover

50% of the potential $23 million sought from Respondent.

FACTS

The Underlying Chandler Manor And Sun Mesa Bond

Transactions

The underlying transactions forming the basis of this

insurance litigation involve tax exempt bonds issued for

the construction and operation of two residential retire-

ment communities in Mesa and Chandler, Arizona,

known as the “Sun Mesa” and “Chandler Manor” pro-

jects. Guren Merritt and one of its partners, Robert Blat-

tner, was initial co-bond counsel, but ceased to be co-

bond counsel in mid-March 1984. At that time, Blattner

left Guren Merritt to become a member of Benesch, at

which time Benesch became co-bond counsel.

Prior to when Blattner left Guren Merritt in mid-

March 1984, Blattner committed no liability-producing

act, error or omission, but only engaged in certain prelim-

inary activities. In stark contrast, however, much later in

1984, the Benesch firm and Blattner did commit liability-

producing acts, errors and omissions, which led to them

being sued in two class actions.

4

A. Blattner’s Preliminary Acts At Guren Merritt

While at Guren Mere’, Blattner performed certain

preliminary activities relating to the bond projects:

An initial application for each bond project was sub-

mitted to the Mesa and Chandler Industrial Develop-

ment Authority (“IDA”). (CR 181, p. 15; CR 211, p.

13)! Each IDA approved the preliminary application,

contingent on more information being submitted later.

Each IDA approved the applications shortly before the

bond projects closed, which was after Blattner had left

Guren Merritt and was at Benesch. (ER 8, p. 11; ER 14,

p. 5; ER 19, pp. 6-7) At no time was any IDA approval

withdrawn, and neither IDA asserted any claim

against Guren Merritt or Blattner.

An application seeking tax exemption was submitted

to the IRS. (CR 181, Exs. 45-46) After Blattner left

Guren Merritt and was at Benesch, the IRS approved

those applications. (CR 211, Ex. A; ER 19) However, at

no time did the IRS revoke its approval, or make any

claims against Guren Merritt or Blattner.

An issue of whether the projects required “life care”

permits under Arizona law had surfaced before Blat-

tner left Guren Merritt. (CR 296, Ex. 4) However, that

issue was not resolved, one way or the other, while

Blattner was at Guren Merritt. (CR 211, p. 13; CR 211,

Ex. Q, BB, and CC; ER 2)

B. Blattner’s Liability-Producing Conduct At

Benesch Friedlander

In mid-March 1984, Blattner left Guren Merritt and

became a partner at Benesch. At that time, Guren Merritt

ceased to be co-bond counsel, and Benesch became co-

1 Respondent’s citations to “CR” refer to docket number

entries in the Clerk’s Record; citations to “ER” are to the

Excerpts of Record submitted to the Ninth Circuit.

5

bond counsel. (CR 1, pp. 3-4; CR 211, p. 13; CR 211 Ex. A,

pp. 6-7; ER 19) At least the following liability-producing

activities occurred while Blattner was at Benesch:

e Preliminary official statements or red herrings were

distributed, in which Benesch (not Guren Merritt) was

identified as co-bond counsel. (CR 296, Ex. 4, ER 2)

e Blattner prepared, signed and delivered opinion let-

ters on Benesch letterhead (not Guren Merritt) attest-

ing to the validity and tax exempt status of the bonds.

(ER 4, 6) Copies of those bond opinions were provided

to potential bond purchasers, who allegedly relied on

them. (ER 14, p. 9; ER 8, p- 7)

e The prospectus-like documents for each bond project,

known as Official Statements (“OSs”), were reviewed

and approved by Blattner on behalf of Benesch (not

Guren Merritt), and were then distributed to potential

bond purchasers. (ER 3, 5, 19) Ultimately, the OSs

were allegedly relied upon by the bond purchasers.

Benesch (not Guren Merritt) appeared as co-bond

counsel in the OSs. (Id.) |

e On August 30, and November 30, 1984 respectively,

the bond projects for Chandler and Sun Mesa closed,

after which the bonds were sold. Blattner attended

each closing on behalf of Benesch. (ER 14, p. 5; ER 8,

ER 19, p. 3, 6-8)?

The Underlying Securities Class Action Litigation

A. The Class Action Complaints

The Sun Mesa and Chandler Manor projects eventu-

ally failed. In 1986 and 1987, the Sun Mesa bonds and the

Chandler Manor bonds were declared in default. (CR 1,

2 Respondent attaches as an Appendix a chart summarizing

the above undisputed facts, which compares Blattner’s work on

the projects while at Guren Merritt and Benesch.

6

pp. 5-7; ER 23) Thereafter, two separate class actions were

brought on behalf of purchasers of the Sun Mesa and

Chandler bonds, Joyce I. Oldfather v. Sun Mesa Corporation,

et al. and Bertrand v. Industrial Development Authority of

City of Chandler. (ER 8, 14) The plaintiff-classes consisted

solely of those persons who had purchased bonds, com-

plaining that they were materially misled by the OSs

provided to them prior to their bond purchases. In each

action, defendants were professionals and other entities

involved in the preparation and dissemination of the OSs,

erroneous legal opinions, and sale of the bonds to the

bond purchasers. (ER 7)

Both class action complaints named Benesch as a

defendant because of its role as co-bond counsel, pointing

to work of Blattner on the projects as a member of

Benesch. Both complaints named, as individual defen-

dants, those Benesch partners as of the date the bonds

were issued. (ER 14, p. 9-10; ER 8, p. 7-8)

In contrast, the Oldfather and Bertrand complaints did

not name Guren Merritt or any former Guren Merritt

partner as a defendant.4 Nor did the complaints

specifically allege that Blattner committed any wrongful

conduct at Guren Merritt. Rather, the gravamen of both

3 Both complaints made clear they were naming these

Benesch partners as defendants “solely to permit enforcement

of a judgment against their personal assets in the event that

[Benesch] assets [were] insufficient to satisfy the judgement to

be obtained by plaintiffs.” (ER 14, p. 10; ER 8, p. 8)

4 Not surprisingly, in response to complaints filed in

Bertrand and Oldfather, answers were only made on behalf of the

Benesch firm and the partners thereof who had been specifically

named as defendants (ER 16); no answer was ever served or

filed on behalf of Guren Merritt or any former partner of Guren

Merritt. Nor did Benesch or any of its partners assert any claim

against Guren Merritt or any former partners of Guren Merritt.

7

class action complaints was that the bond purchasers had

been misled by material Omissions in offering documents

disseminated when the bonds were sold. With respect to

Benesch, the complaints alleged:

In connection with disclosures to investors and the

sale of the bonds, all counsel involved in the

transaction issued misleading legal opinions

concerning their involvement in the preparation

and review of necessary documents, the

Chandler Commons Project, and applicable law.

The defendant law firms that rendered opinions

that there were no material representations or

non-disclosures as summarized above and

below, issued misleading legal opinions . . . Benesch

Friedlander, acting principally through its part-

ner, defendant Robert A. Blattner, delivered an

opinion at the closing that the bonds were valid

and legally binding special obligations of the

issuer and that the bonds were tax exempt.

Benesch Friedlander Participated in disclosures

to investors and Participated in the preparation

and use of the Prospectus. (ER 14, p. 9, 19; ER 7)

(Emphasis added)5

In Bertrand, the class of bondholders sought damages

predicated on their having purchased now worthless

bonds. The exact same is true for the damages sought in

Oldfather. No damages were sought in either action for

any wrongful conduct happening before they had pur-

chased the bonds.

B. The Pre-Trial Order

After all document and deposition discovery in the

underlying Oldfather action was complete, on February

> The allegations in the Oldfather complaint were identical

in all material aspects to the Bertrand allegations.

8

20, 1991, the parties submitted a joint pre-trial order

(“PTO”). (CR 211, Ex. 1, ER 19) In the PTO, Petitioners

identified as defendants “Benesch and all of its partners

as of November 30, 1984 including Robert A. Blattner.”

(Id. at 2) Petitioners asserted that Benesch’s conduct was

an “extreme departure” from Benesch’s duty of ordinary

care:

Benesch/Friedlander participated in making dis-

closures to plaintiffs. Through Blattner, they drafted,

reviewed and approved the Sun Mesa Official State-

ment, which was distributed to purchasers of the

Bonds, including plaintiffs . . . [Benesch] knew

and intended that the Bonds would be sold, that

the Sun Mesa Official Statement was to be used

in selling the bonds, that it would be distributed

to the investing public, including plaintiffs, and

that the investing public could and would rely

on the Official Statement . . . [Benesch] repre-

sented that the Sun Mesa Official Statement con-

tained a fair, complete, and accurate depiction of the

Sun Mesa project . . . In preparing the Sun Mesa

Official Statement, [Benesch] knew or recklessly

ignored the facts that a life care permit was

required .. . (Id. at 24-25)

Moreover, Petitioners asserted how they allegedly relied

upon and were harmed by Benesch’s conduct:

[Benesch] prepared a fraudulent Official State-

ment. Plaintiffs would not have purchased the

bonds but for the fraudulent admissions from

the Sun Mesa Official Statement. [Benesch’s]

conduct proximately caused plaintiff’s damages

in an amount equal to the purchase price of the

bonds, pre-judgment interest, attorney’s fees

and costs incurred . . . (Id. at 37)

Significantly, the only reference to Guren Merritt in the

PTO was that Blattner (and an associate) had left Guren

Merritt on March 19, 1984. (Id. at 6) The PTO contained

9

no other allegation concerning Guren Merritt, let alone

one of wrongdoing.

C. The Underlying Settlement

On or about March 20, 1991, Petitioners entered a

settlement agreement with Benesch, and all Benesch part-

ners as of the dates when the bonds had been issued. (CR

181, Ex. 26, ER 20) Petitioners agreed to, among other

things, settle all of their claims against Benesch and its

partners, not execute on the stipulated judgments entered

against Benesch or its partners, and only seek to recover

the net amounts of the judgments from defendant.® (CR

296, Ex. 16, ER 21)

Benesch and its partners, including Blattner, assigned

their rights under the Guren Merritt policy to Petitioners.

(CR 296, Ex. 16, ER 21) Thereafter, all settlement-related

documents referred only to “Benesch and all of its part-

ners as of the date of issuance of the bonds, including

Blattner.” (CR 259, Ex. 28, ER 21-22) There were no settle-

ment-related documents relating to Guren Merritt or its

former partners.

6 As part of the March 20, 1991 settlement, the settling

parties and Old Republic gave Respondent 5 days to contribute

its $5 million limits, otherwise the settlement would be executed

without Respondent and Respondent would be sued for

coverage for $23 million and bad faith. (CR 181, Ex. 26, p. 6-7)

However, the settlement agreement already had provided that,

whether Respondent agreed to pay or not, Blattner was not

exposed to any liability. If Respondent did not pay, Petitioners

and Old Republic would try to hold Respondent liable. Knowing

that Blattner would not be exposed to any personal liability,

Respondent adhered to its no coverage position. (CR 181, Ex. 27)

Through this intended “set up,” Petitioners and Old Republic

sought a potential $23 million windfall from Respondent.

10

The Insurance Policies

A. The Benesch Policies

Benesch was insured under a $5 million professional

liability claims-made policy issued by Pacific Employers

Insurance Company (“PEIC”), an affiliate of Respondent,

effective January 19, 1987 to January 19, 1988. (CR 181,

Ex. 4) Only Benesch and its partners were insured under

the PEIC policy, and only for acts, errors or omissions

committed at Benesch.”

B. The Guren Merritt Policy

Respondent asured Guren Merritt under a policy

affording professional liability coverage from November

30, 1983 to November 30, 1984. For purposes of this case,

the applicable limits of liability are $5 million. The insur-

ing agreement provides in relevant part:

To pay on behalf of the Insured® all sums which

the Insured shall become legally obligated to

pay as damages as a result of claims first made

against the Insured or any person for whose acts

the insured is legally liable:

7 Old Republic issued an excess policy that followed form

to the PEIC policy, insuring Benesch and its partners for claims

made between January 19, 1987 and January 19, 1988. (CR 54,

Ex. B) Old Republic took the position that all underlying

coverage, including the Guren Merritt policy, had to be

exhausted before its excess policy provided any coverage to

Blattner. (CR 316, Ex. G)

8 The policy expressly required that the professional

services had to be rendered by “the Insured,” which was

defined as: “any former partner . . . acting in his professional

capacity on behalf of [Guren Merritt].” (Id.)

11

(a) By reason of any act, error or omission in

professional services rendered or which should

have been rendered by the insured. . . . (ER 1)

(Emphasis added)

As initially issued, the policy required that, in order

for there to be coverage, the claim had to be “first made”

during the policy period. (Id.) However, Endorsement 7

amended the policy to eliminate the requirement that the

claim had to be first made during the policy period.

Endorsement 7 provided in relevant part:

(1) Coverage will be provided according to the

applicable terms, conditions and exclusions of this

policy for all the claims first made after the

termination of the policy period, arising out of

any act, error, or omission in rendering profes-

sional services for others in the insured’s capac-

ity as a lawyer, which took place prior to the

end of the policy period and were caused by the

insured or any other person for whose acts,

errors, Or omissions the insured is legally

responsible, and are otherwise covered by the

policy. . . (Id.) (Emphasis added)

The sole purpose and effect of Endorsement 7 was to

eliminate the requirement that a claim first be made

during the policy, which was obtained by Guren Merritt

when it dissolved in June 1984.

C. The Claims For Coverage

1. Under The PEIC Policy

Immediately after institution of the underlying class

actions, Benesch and its partners, including Blattner,

demanded that PEIC defend and indemnify them under

the PEIC policy. (CR 181, Ex. 5) Without disputing cover-

age, PEIC acknowledged its obligation to defend and

appointed a leading Phoenix firm (Jennings, Strouss &

Selman) to defend. (CR 181, Ex. 6) Much later, when the

12

actions were being settled, PEIC paid its $5 million limits

of liability.

2. Under The Respondent’s Policy

For two years after the underlying class actions were

commenced, no one ever gave notice or made any

demand for coverage under Respondent’s Guren Merritt

policy. During that time, Benesch and its partners, includ-

ing Blattner, were defended by Jennings Strouss (under

the PEIC policy).

However, in May 1988 Benesch submitted a claim for

coverage to Respondent, contending that Respondent's

Guren Merritt policy provided coverage for the same

claims asserted against Benesch and its partners. (ER 9,

10) After considering the request, analyzing the terms of

its policy, and investigating relevant facts, Respondent

declined coverage under the Guren Merritt policy. (ER 11,

15, 18) Simply put, there was no coverage under the

Respondent's policy because Blattner had not committed

any liability-producing act, error or omission while at

Guren Merritt; rather, his liability in the two class actions

stemmed from what he did while at Benesch.

The District Court’s Erroneous Coverage Order

On May 17, 1993, Petitioners moved for partial sum-

mary judgment contending that the Guren Merritt policy

provided coverage for the $23 million settlement of the

claims against Blattner. (CR 177, 180-181, 221-223) Peti-

tioners claimed that Blattner had committed acts, errors

or omissions while at Guren Merritt, contending it was

irrelevant whether any such act, error or omission

resulted in liability against Blattner. (Id.) On or about

August 20, 1993, Respondent opposed Petitioners’ sum-

mary judgment motion and moved for summary judg-

ment on all counts in Petitioners’ complaint. (CR 211-215,

ss emeniemereeeetniemiienaiiiaaateeieianiamaiaiailliil

13

227-228, 233) Respondent asserted that the Guren Merritt

policy did not afford coverage because Blattner had not

committed any liability-producing act, error and omis-

sion at Guren Merritt. (Id.)

On June 24, 1994, without a hearing, the Honorable

Carl A. Muecke of the United States District Court of

Arizona issued an order granting Petitioners’ motion and

denying Respondent’s motion. (ER 27; Petitioner’s

Appendix (“Pet. App.”) 6-46)9 In its coverage analysis,

the District Court interpreted the phrase “act, error, omis-

sion” according to its “ordinary meaning and effect”,

finding that Blattner had merely committed “acts” while

at Guren Merritt. (Id. at 29-30)

However, after making these findings, the District

Court did not analyze whether Blattner’s alleged liability

in the underlying class actions was “by reason of” or

“arose out of” such conduct. Rather, the District Court

held that there was no requirement that the alleged acts

Or Omissions must result in liability. (Id. at 36-37)

By order dated November 28, 1995, the District Court

(Hon. Roslyn O. Silver, the current presiding judge)

reversed a prior order denying 28 U.S.C. § 1292(b) certi-

fication, and allowing Respondent an immediate inter-

locutory appeal of the District Court’s prior coverage

ruling. (ER 28)10

9 In rendering 21 pages of detailed findings, the District

Court reviewed, weighed and evaluated conflicting evidence

presented by each side. In several instances, the District Court

expressly noted that it had done so. (See June 24, 1994 order at

Pp. 5 n.2, 7, 8, 9, 10 n.6.; ER 27)

10 In the 1292(b) order, the District Court stated that

Respondent had a “substantial likelihood of success on the

merits,” expressing “serious doubts” about the “correctness” of

the coverage ruling, and noting that the coverage ruling was

14

The Ninth Circuit’s Opinion

In reversing summary judgment for Petitioners, the

Ninth Circuit, Justices Goodwin, Brunetti and Fernandez

presiding, expressly set forth in its unanimous opinion

numerous undisputed material facts that supported sum-

mary judgment for Respondent.

The Ninth Circuit determined that the complaint

failed to identify any conduct by Blattner “that created

liability” under the Guren Merritt policy; “nor have the

bondholders added additional allegations on summary

judgment to bolster their contention.” (Pet. App. at 3) The

Ninth Circuit also found that Petitioners initially filed

suit against Blattner, his then current firm Benesch and

others for losses arising out of defaults on the bonds; and

that a cause of the default, according to Petitioners, was

the failure to obtain life care permits. (Id. at 2)

The Ninth Circuit noted that, while Blattner was at

Benesch, the OSs prepared by Blattner “neglected to dis-

close the need for and absence of life care permits.” (Id. at

2, 4) Moreover, the court found that Petitioners relied

upon the OSs issued by Benesch in electing to invest in the

facilities. (Id.) The Ninth Circuit also noted that Blattner

prepared, signed and delivered opinion letters on

Benesch letterhead attesting to the validity of the bonds

and their tax exempt status; the bondholders received

copies of those opinion letters when they invested.

The Ninth Circuit then applied the undisputed facts

to Respondent’s policy, noting that before there could be

any coverage, Blattner had to be “legally obligated to pay

damages . . . by reason of any act, error or omission in

rendering professional services while he was at Guren

Merritt.” (Id. at 3) The Ninth Circuit stated the phrase “by

“contrary” to the common interpretation of the phrase “act,

error, and omission” in the insurance industry. (Id. at 2-3)

a ee ET

15

reason of” required some causal nexus between Blattner’s

activities at Guren Merritt and his liability to the bond

purchasers. In other words, the Ninth Circuit found that

the policy language required that Blattner had to have

committed a “liability-creating” act, error or omission

while at Guren Merritt in order to trigger coverage. (Id.)

Additionally, the Ninth Circuit acknowledged that

the Extended Reporting Period Endorsement (Endorse-

ment 7), by its own terms, did not expand coverage. The

court stated that use of the phrase “arising out of” in

Endorsement 7 “did not expand the scope of coverage”

and thus, “did not advance the bondholders’ argument

beyond their primary contention that Blattner acted ille-

gally while at Guren Merritt.” (Id. at 4-5)

Based on these undisputed facts, the Ninth Circuit

applied well-established Arizona insurance law in sup-

port of its no coverage opinion. The Ninth Circuit ini-

tially held that the District Court committed reversible

error in ruling that Blattner’s conduct at Guren Merritt

constituted an “act, error or omission” sufficient to trig-

ger coverage under the Guren Merritt policy. (Id. at 2)

Most significantly, the Ninth Circuit ruled that Petitioners

presented “no evidence” that Blattner engaged in any lia-

bility-producing act, error or omission while at Guren

Merritt, Stating:

[Petitioners’] deficiency [in failing to allege lia-

bility producing conduct of Blattner at Guren

Merritt] is fatal to the bondholders’ case

. . . Without evidence Blattner committed some

liability creating “act, error or omission” while

at Guren Merritt, the bondholder’s simply have

no claim. (Id.)

Moreover, the Ninth Circuit ruled that Petitioners

were wrong as a matter of law in attempting to assign

liability for Blattner’s legal services at one law firm,

16

which resulted in allegedly faulty documents issued by a

second law firm, stating “we cannot equate the liability-

creating act of issuing a disclosure statement with the

preliminary act of discussing the requirements for such a

document.” (Id. at 4)

Indeed, the Ninth Circuit recognized that this case is

predicated upon Blattner’s failure to disclose (while he

was at Benesch) that the project required life care permits.

(Id. at 4) The Court thus noted that Blattner’s “act, error

or omission” could not occur until he failed to make the

necessary disclosure in the OSs, “an event which

occurred after he left [Guren Merritt].” (Id.) Accordingly,

regardless of Blattner’s culpability, the Ninth Circuit held

that Guren Merritt cannot, as a matter of law, be held

liable “for actions undertaken after Blattner left their

employ”; necessarily, the Ninth Circuit held that the

bondholders’ claim must fail. (Id.)

REASONS WHY THE PETITION SHOULD BE DENIED

I. THE STATE LAW ISSUES RAISED BY THE PETI-

TION ARE INSUFFICIENT TO INVOKE THIS

COURT’S CERTIORARI JURISDICTION

This Court has long recognized that the ultimate

responsibility for determining state law resides not with

it, but with the highest courts of the states. Erie R.R. Co. v.

Tompkins, 304 U.S. 64, 78 (1938). Accordingly, where rea-

sonable arguments have been advanced to support a

determination of state law by a federal court of appeals,

this Court has found it “wholly unprofitable for [us] to

analyze [the state] cases on point.” Estate of Spiegel v.

Commissioner of Internal Revenue, 335 U.S. 701, 708 (1949).

It has thus become the policy of this Court to “accept and

therefore [not review] the considered determination of

questions of state law by the intermediate federal appel-

late courts.” Huddleston v. Dwyer, 322 U.S. 232, 237 (1944).

17

See, Frankfurter, The Business of the Supreme Court at Octo-

ber term 1933, 48 Harv. L. Rev. 238, 269-270 (1934) (“[t]he

Supreme Court cannot undertake to see that every case in

a federal court is decided as a state court would have

decided it”). Indeed, this Court has frequently deferred to

the views of a court of appeal as being those of an

“expert” tribunal concerning the laws of states within its

circuit. See, Brockett v. Spokane Arcades, Inc., 472 U.S. 491,

499-500 (1985); Butner v. United States, 440 U.S. 48, 57-58

(1979).

The Petition should therefore be denied because the

Ninth Circuit was entirely correct in ruling that, under

Arizona insurance law, there was and can be no coverage

under Respondent’s professional liability policy. The

Ninth Circuit properly recognized that Respondent's pol-

icy did not provide coverage unless the insured commit-

ted a liability-producing act, error or omission during the

policy period. (Pet. App. at 3) As noted above, the Ninth

Circuit found that, as a matter of law, Guren Merritt had

not committed any such act, error or omission — indeed,

Guren Merritt was not even sued in the underlying class

actions. Thus, since the Ninth Circuit found “no evidence”

of any liability-producing act, error or omission by Blatt-

ner while at Guren Merritt, there simply was no coverage,

and Petitioners thus had no claim.

In addition, the Ninth Circuit correctly determined

that, as a matter of Arizona law, the so-called “tail”

endorsement (Endorsement 7) did not “expand” cover-

age, except to allow coverage for a claim that was first

made after the policy expired. More importantly, the

court recognized that Endorsement 7 did not, as Peti-

tioners contended, “expand” coverage for acts, errors or

omissions that were not liability producing. Rather, as

Endorsement 7 expressly provided, the court held that in

18

order for there to be coverage, the same fundamental

requirements of the policy must be met.!! Petitioners

11 Respondent presented the Ninth Circuit with numerous

authorities, including leading insurance treatises, stating that

the sole purpose and effect of an extended discovery period

endorsement, such as Endorsement 7, was only to eliminate the

requirement that the claim had to be made during the policy

period. See, New England Ins. Co. v. Sylvia, 783 F. Supp. 6, 7 (D.

N.H. 1991) (“[i]t is noted that the extension relates only to the

reporting period and not the coverage period”); Taub v. First

State Ins. Co., 44 Cal. App. 4th 811, 818, 52 Cal. Rptr. 2d 1, 5 (Ct.

App. 1995) (“[Extended Claims Reporting Period] provision

allows [insured] to seek coverage for his claim assuming that the

policy otherwise covers this claim”) (emphasis added); Langley v.

Mut. Fire, Marine & Inland Ins. Co., 512 So.2d 752, 753 (Ala. 1987)

(“optional extension of coverage . . . would have continued

[insured’s] coverage . . . for claims based on acts or omissions

that occurred during the primary term”) (emphasis added);

Employers Reins. Corp. v. Fireman's Fund Ins. Co., 95 N.J. 1, 468

A.2d 421, 423 (N.J. 1983) (“[under extended reporting

endorsement] coverage is not extended to claims made after [the

policy period] if the act giving rise to that claim also occurs after

that date”); See also, 2 Long, The Law Of Liability Insurance,

§ 12B04[4] at p. 12B-85; § 12C.04[2] at p. 12C-60; § 12B04[4] at p.

12B-85 § 12C.04[2] at p. 12C-60 (1989) (“extended reporting

provisions merely allow the insured to report claims for a stated

period after the expiration date of the policy. They do not cover

claims arising out of acts occurring after the expiration date of

the policy . . . It should be noted that the purchase of the

extended reporting period coverage does not increase the scope of

coverage under the policy) (emphasis added); See also 3 New York

Insurance Law, § 40.03 [2] at p. 40-7 n.14 (1991) (“extended

reporting period coverage does not extend the time during

which the act, event or occurrence out of which the claim arises

must have happened”) (emphasis in original); Hanen, Legal

Malpractice Insurance: Exclusions, Selected Coverage and Consumer

Issues, 33 So.Tex.L.Rev. 75, 85 (1992) (“[S]ome legal malpractice

insurance policies provide that an insured may purchase an

additional period of time in which to report claims under their

19

failed to refute any of Respondent's legal authorities con-

cerning the purpose and effect of Endorsement 7, and

they are unable to demonstrate that the Ninth Circuit’s

interpretation of Endorsement 7 was incorrect.

Likewise, there is no reason for this Court to review

the Ninth Circuit’s correct application of indisputable

facts and well-established securities law. As a matter of

law and undisputed fact, the Guren Merritt firm was not

and could not be liable where it was not a named defen-

dant in the underlying class actions, had not committed

any liability-producing act, and had ceased to have any

involvement with the underlying transactions when the

liability-producing acts were committed.

In addition, the sale of bonds to the classes, which is

a sine qua non to a securities claim, took place more than a

half year after Guren Merritt had ceased to have any

involvement with the projects.!2 It was undeniable that

Guren Merritt had no involvement at the time the bonds

were sold. Furthermore, the Ninth Circuit properly ruled

that because Blattner did not prepare or disseminate any

opinion letters to potential bond purchasers while at

Guren Merritt, he could not have had any liability as a

partner of that firm as a matter of law. As Respondent

policy . . . These extensions are called extended reporting

endorsements or ‘tail’ coverage”).

12 See, e.g., Blue Chip Stamps v. Manor Drug Stores, 421 U.S.

723, 749 (1975) (“one asserting a claim for damages based on the

violation of Rule 10(b)5 must either be a purchaser or seller of

securities”); Roberts v. Peat, Marwick, Mitchell & Co., 857 F.2d 646,

649-650 (9th Cir.), cert. denied, 493 U.S. 1002 (1989) (“to prevail

on a cause of action for violation of [Rule 10(b)5], the investors

must establish fraud in connection with the purchaser’s sale of

any security”); Ohashi v. Bert Indus., 536 F.2d 849, 853 (9th Cir),

cert. denied, 429 U.S. 1004 (1976) (“no 10(b)-5 liability where

alleged fraud was not in connection with the inducement nor

concurrently with the exchange [of the security]”).

20

demonstrated below, absent any opinion or representa-

tion to the bond purchasers, Blattner had no fiduciary

obligation or duty to disclose material information while

at Guren Merritt.!> Thus, the Ninth Circuit correctly held

that the opinions of bond counsel upon which the classes

relied were issued by Benesch, on Benesch letterhead;

Guren Merritt had nothing to do with the bond opinions,

issued almost half a year after Guren Merritt no longer

was involved in the projects.

The Ninth Circuit also properly determined that, as a

matter of law, whatever preliminary activities were done

by Guren Merritt (while it was bond counsel) were not

liability-producing and certainly were not the basis of the

bondholders’ claims. (Pet. App. at 4) The best example is

that the bondholders complained about a failure to dis-

close in the prospectus-like Official Statements that cer-

tain life care permits had not been obtained and were

necessary to make the projects viable. However, as the

Ninth Circuit observed, Guren Merritt had nothing to do

with the preparation and dissemination of the Official

Statements; rather, it was Benesch (and Blattner at

13 See, e.g., Basic, Inc. v. Levinson, 485 U.S. 224, 239, n.17

(1988) (“[s]ilence, absent a duty to disclose, is not misleading

under 10(b)5”); Chiarella v. United States, 445 U.S. 222, 229, 231

(1979) (“ ‘[t]he party charged with failing to disclose market

information must be under a duty to disclose it’ . .. There can be

no fraud absent a duty to speak”); Ackerman v. Schwartz, 947 F.2d

841 (7th Cir. 1991) (attorney could not evade responsibility to

disclose “to the extent he permitted promoters to release his

opinion letter to investors’ agents”); Schatz, supra, 943 F.2d at

494 (“an attorney is rarely liable to any third parties for his or

her legal work unless the attorney has prepared a signed

‘opinion’ letter designed for use by a third party”).

21

Benesch) which approved those Official Statements.14

Additionally, the Ninth Circuit properly rejected Peti-

tioners’ argument that Blattner could have been liable for

“aiding and abetting” an alleged securities law violation,

merely because he performed preliminary work at Guren

Merritt.!5

Moreover, the Ninth Circuit held that Blattner could

not have been liable as a Guren Merritt partner because,

while at Guren Merritt, he made no representations to the

* Respondent presented the Ninth Circuit with ample

authorities establishing that, since no Official Statement was

issued or delivered to any bond purchasers while Blattner was

at Guren Merritt, he could not have been liable to the bond

purchasers for what he did at Guren Merritt. See, e.g., Williams v.

Sinclair, 529 F.2d 1383, 1389 (9th Cir.), cert. denied, 426 U.S. 936

(1976) (“because investor purchased shares follow[ing] his

receipt of the prospectus, the transactional nexus between the

alleged fraud and the loss” was met). See also, Schatz v.

Rosenberg, 943 F.2d 485, 492 (4th Cir.), cert. denied, 503 U.S. 936

(1992) (“no rule 10(b)5 liability law firm where “{it] did not

solicit any purchase of securities or prepare any solicitation

documents”) (emphasis added).

15 See, Schatz, supra, 943 F.2d at 497 (“when a lawyer offers

no legal opinions or affirmative misrepresentations . . . and

merely acts as a scrivener . . . a lawyer cannot be liable [as an]

aider and abettor”); Camp v. Dema, 948 F.2d 455, 463 (8th Cir.

1991) (aiding and abetting liability under 10(b)5 rejected for

attorneys’ “routine actions . . . necessary to consummate the sale

of stock”) (emphasis added). Moreover, the United States

Supreme Court has since held that there is no private cause of

action for “aiding and abetting” a violation of Rule 10(b)-5.

Central Bank of Denver, N.A. v. First Interstate Bank of Denver,

N.A., 114 S.Ct. 1439, 1448 (1994) (“[W]e cannot amend the

statute to create liability for acts that are not themselves

manipulative or deceptive”).

22

bond purchasers upon which they could have or did in

fact rely.1° (Pet. App. at 4)

Il. CONTRARY TO WHAT PETITIONERS CON-

TEND, THERE ARE NO “COMPELLING REA-

SONS” WARRANTING THIS COURT’S REVIEW

A. There Are No Constitutional Or Federal Issues

The Petitioners did not raise, nor have they

attempted to raise, any constitutional or federal issues

warranting this Court’s review. Rather, the Petition

improperly seeks this Court’s review of the Ninth Cir-

cuit’s reasoned application of Arizona state law. Since the

Petition raises no constitutional or federal law issues, the

Court should deny the Petition.

B. There Are No Other “Compelling Reasons”

The Petition should also be denied because there are

no other “compelling reasons” warranting this Court’s

review. The standard factors this Court considers in

determining whether “compelling reasons” exist include

whether the court of appeal’s decision conflicts with

another court of appeals on the same matter, or has

16 Again, Respondent presented the Ninth Circuit with

numerous authorities in support of this fundamental

requirement. See, e.g., Affiliated UTE Citizens v. United States, 406

U.S. 128, 153-54 (1971); Kiernan v. Homeland, Inc., 611 F.2d 785,

788 (9th Cir. 1980) (“substantial reliance is necessary for

recovery in a 10(b)-5 case”); Katara v. D.E. Jones Commodities,

Inc., 835 F.2d 966, 970-71 (2nd Cir. 1987) (securities fraud claim

required “reasonable reliance on the representation, causing

damage to the plaintiff”).

23

decided an “important federal question” in conflict with

a state court of last resort.17

Here, there is no conflict between two different

courts of appeal (or with a state supreme court) with

respect to any of the state law insurance issues resolved

by the Ninth Circuit, and Petitioners certainly did not

contend there was any. Nor did Petitioners demonstrate

any conflict with or deviation from Arizona insurance

law. In fact, as explained herein, the Ninth Circuit opin-

ion was demonstrably correct in its interpretation and

application of Arizona law.

There is no support in the record or elsewhere for

Petitioners’ contention that this is a case of “major

national importance” to financial offerings. (Pet. at 15)

Prior to seeking review by this Court, Petitioners had

never stated or intimated that this particular case was of

“major national importance.” Indeed, it is fair to say that

Petitioners always viewed and treated this case as a “gar-

den variety” insurance coverage and bad faith action to

be resolved under Arizona law. One will search the

record in vain to find anything where Petitioners stated

that this case would have significance outside the con-

fines of Arizona. Their belated and self-serving plea of

“major national importance” is a transparent effort to

convert this case into something which it plainly is not.

17 Indeed, this Court’s 1980 amendments to its own rules

reflect the Court’s lack of interest in reviewing diversity cases

where, as here, the only issue is an alleged inconsistency (which

Respondent disputes) between the court of appeals’ decision

and the applicable substantive state law. (Omitting the factor

that the court of appeals resolved “an important [state] question

in a way in conflict with applicable [state] law”).

24

Similarly, Petitioners raise the false cry that this case

will “greatly impact” how other professional liability

insurers will act. (Pet. at 15) Never before have Peti-

tioners made that assertion. They provide this Court with

no specifics or details for such a proposition, since obvi-

ously there is none. This case involves a professional

liability insurance policy issued more than thirteen years

ago with unique policy language. The Ninth Circuit

determined there was no coverage based on that lan-

guage and the particular facts at issue. It is hard to see

how this action catapults itself to “national prominence”

in today’s insurance field. Certainly, Petitioners provide

no explanation.18

Ill. THE WRIT SHOULD BE DENIED BECAUSE

PETITIONERS INAPPROPRIATELY SEEK THIS

COURT’S REVIEW OF EVIDENTIARY AND FAC-

TUAL FINDINGS, AS WELL AS MISSTATE THE

BASIS OF THE NINTH CIRCUIT’S RULING, THE

FACTS AND THE LAW

The Petition should also be denied because Peti-

tioners improperly seek this Court’s review of factual and

evidentiary findings. As this Court held in United States v.

Johnston, 268 U.S. 220, 227 (1925), certiorari proceedings

are not the appropriate vehicle “to review evidence and

18 Perhaps the most compelling basis why this Court

should reject the purported reasons advanced by Petitioners is

that, undeniably, the instant coverage action is really an action

by a different professional liability insurer (Old Republic)

seeking to make a profit on its having insured Benesch, since it

stands to recover 50% of the over $23 million being sought from

Respondent. Old Republic has financed this case, pursued it

with its own lawyers, has filed the instant Petition through its

attorneys and constantly invokes the guise of appearing as the

underlying classes.

ee

25

discuss specific facts.” See also-NLRB v. Hendricks County

Rural Elec. Corp., 454 U.S. 170, 176 (1981) (cross-petition

presenting “primarily question of fact . . . does not merit

Court review”); Rudolf v. United States, 370 U.S. 269

(1962). Indeed, under this Court’s standard procedure, “a

petition for writ of certiorari is rarely granted when the

asserted error consists of erroneous factual findings.” (SC

Rule 10(a)).

Moreover, the Petition misstates the fundamental

basis of the Ninth Circuit's opinion, the relevant facts and

the law, and therefore should be denied.

A. The Petition Misstates The Basis Of The Ninth

Circuit’s Opinion

Petitioners wrongly claim that the Ninth Circuit's

interpretation of the policy was contrary to the “very

purpose of the tail endorsement.” (Pet. at 2) According to

Petitioners, Endorsement 7 had the effect of expanding

coverage beyond that afforded by the policies’ basic

insuring agreement, given that Endorsement 7 uses the

phrase “arising out of’, while the insuring agreement

uses “by reason of.” (Pet. at 17-18)

In rejecting Petitioners’ premise of coverage, the

Ninth Circuit correctly held that, under Arizona law, the

well-established meaning, purpose and effect of Endorse-

ment 7 required that Blattner’s liability to the bond-

holders had to be “by reason of” (not merely “arise out

of”) a liability-producing act, error or omission while at

Guren Merritt. (Pet. App. at 3, 5) Petitioners also mis-

characterize how the Ninth Circuit arrived at its opinion

by claiming that the panel “did not even attempt” to

determine whether the language in the tail endorsement

was “ambiguous” under Arizona law. (Pet. at 25-30) In

fact, the Ninth Circuit expressly rejected this argument,

26

noting that “Endorsement 7’s plain language clearly does

not expand the scope of coverage beyond the original policy.” 19

B. The Petition Misstates The Facts

Petitioners also misstate the facts by contending that

“the scheme to defraud investors was hatched while

Blattner was at Guren Merritt.” (Pet. at 8) As properly

recognized by the Ninth Circuit, however, Petitioners

presented “no evidence” of any liability-creating conduct

of Blattner while at Guren Merritt.2° (Pet. App. at 4)

Petitioners also grossly mischaracterize the life care

permit issue, stating that Blattner “had knowledge” of the

life care permit “requirement” while he was at Guren

Merritt. (Pet. at 9) Substantial evidence in the record and

Respondent’s main brief below demonstrated that the

issue of life care permits had just surfaced, and was

undetermined at the time Blattner left Guren Merritt for

Benesch. More importantly, however, the Ninth Circuit

recognized that the “life care” permit issue was only

relevant because the OSs — disseminated to the bond pur-

chasers while Blattner was at Benesch — failed to disclose the

alleged requirement for life care permits, and the inves-

tors relied on those omissions. (Pet. App. at 4) (See

19 Petitioners further misstate that the Ninth Circuit

“ignored” certain extrinsic evidence purporting to show that

CIGNA “recognized” there was coverage. (Pet. at 27-30) The

Ninth Circuit did not “ignore” such extrinsic evidence; the court

was presented with ample, unrefuted authorities by

Respondent confirming that such “evidence” was both

inadmissible and irrelevant.

20 To the extent Petitioners claim there was a “scheme to

defraud” while Blattner was at Guren Merritt, that claim is

frivolous, since as a matter of law and public policy, there can be

no insurance for such conduct. See, e.g., Standard Fire Ins. Co. v.

Peoples Church of Fresno, 985 F.2d 446, 448-51 (9th Cir. 1993).

ooo

27

attached Appendix) Thus, in determining that the life

care issue was wholly irrelevant for purposes of whether

Blattner’s Guren Merritt conduct was liability-producing,

the Ninth Circuit stated:

[Petitioners] do not contend that Blattner issued

the Official Statements which failed to include

the life care requirements until after he left

Guren Merritt . . . Blattner’s act, error, or omis-

sion could not occur until he failed to make the

necessary disclosure in the Official Statements,

an event which occurred after he left Guren

Merritt. (Pet. App. at 3-4)

Petitioners also wrongly contend that the Ninth Cir-

cuit “was required, yet failed, to engage in an analysis of

case law on insurance contract construction.” (Pet. at

25-26) Petitioners have no evidence to support this claim.

Indeed, as explained above, the Ninth Circuit expressly

analyzed the plain meaning of the policy language, giv-

ing Endorsement 7 its well-established meaning and

effect. Respondent also presented the Ninth Circuit with

numerous authorities that there was no “conflict” or

“inconsistency” between Endorsement 7 and the policy,

all of which support the Ninth Circuit's construction of

the policy.

C. The Petition Misstates The Law

With no authorities to support their position, as the

Ninth Circuit noted, Petitioners nonetheless insist that

the Ninth Circuit “nullified” the very purpose of

Endorsement 7, because the language of the tail (i.e.,

“arising out of”) controls over the language of the insur-

ing agreement (“by reason of”). As noted above (see fn.

11, supra), ample case law and other authorities, as well

as Petitioners’ own concessions at oral argument, refute

28

Petitioners’ interpretation of Endorsement 7 before this

Court.2!

In addition, Petitioners misstate the law by suggest-

ing that Blattner could have been liable to the bond-

holders for what he did at Guren Merritt. (Pet. at 19-24)

Petitioners principally rely on a single case, Cronin v.

Midwestern Oklahoma Develop. Authority, 619 F.2d 856

(10th Cir. 1980), in asserting that Blattner engaged in

“liability creating” acts at Guren Merritt. As Respondent

asserted below, however, Cronin is distinguishable

because, in that securities fraud case, the court merely

held that summary judgment in favor of an attorney was

prematurely granted; there was no determination of lia-

bility against the attorney. As Respondent demonstrated

below, numerous decisions from this Court, the Ninth

Circuit and elsewhere confirm that, as a matter of law,

Blattner could not have been liable to the bond pur-

chasers because of anything he did at Guren Merritt. (See

attached Appendix; discussion Point I, supra, at pp. 16-22)

IV. THE NINTH CIRCUIT’S RULING PROPERLY

VOIDED AN UNJUST WINDFALL FOR PETI-

TIONERS

The Ninth Circuit properly reversed the District

Court’s coverage ruling, which would have resulted in a

windfall for Petitioners and Old Republic. As part of the

March 20, 1991 settlement, the settling parties and Old

Republic gave Respondent 5 days to contribute its $5

21 Indeed, Petitioners’ counsel conceded at oral argument

before the Ninth Circuit panel that Petitioners’ position on why

coverage exists was not dependant upon Endorsement 7

purportedly expanding the scope of coverage. (See March 13,

1997 Transcript of Oral Argument to Ninth Circuit, JJ. Goodwin,

Brunetti and Fernandez presiding, at pp. 29-30, 36).

29

million limits, otherwise the settlement would be exe-

cuted without Respondent and Respondent would be

sued for coverage for the stipulated $23 million judg-

ments, bad faith, and punitive damages. However, at that

time, the settlement agreement already had provided,

whether Respondent agreed to pay or not, that Blattner

was not exposed to any liability.

If Respondent did not pay, Petitioners and Old

Republic would try to hold Respondent liable. Knowing

that Blattner would not be exposed to any personal lia-

bility, Respondent adhered to its no coverage position.

Through this intended “set up,” Petitioners and Old

Republic sought an undeserved, potential $23 million

windfall from Respondent, which the Ninth Circuit prop-

erly reversed.

CONCLUSION

For all of the foregoing reasons, Respondent respect-

fully requests the Court to deny the instant Petition for

grant of a writ of certiorari.

Dated: September 25, 1997

Respectfully submitted,

Paut R. Koeprr

THomas J. Drresta

O’MELveny & Myers LLP

153 East 53rd Street

New York, New York 10022

Telephone: (212) 326-2000

30

Tep A. SCHMIDT

KINERK, BEAL, SCHMIDT & Dyer, P.C.

5255 East Williams Circle

Suite 6000 — West Tower

Tucson, AZ 85711

Telephone: (520) 790-5600

Rosert J. ROMERO

Lonc & Levit

101 California Street

Suite 2300

San Francisco, CA 94111

Telephone: (415) 397-2222

Amy SAMBERG

O’CONNOR CAVANAGH MOLLOY

& JONES

33 North Stone Street,

Suite 2100

Tucson, AZ 85701

Telephone: (520) 628-4637

Attorneys for Respondent

CIGNA Insurance Company

APPENDIX

na Merritt <i Benesch Friedlander

| Apr. if May June | Aug. | Sept. Nov. Dec.

| IDA pion | | ik . : |

| | amended Application

| | a _ |

| ~~ Final IDA |

| | for Chandler |

Sun Mesa

filed | |

Amended IDA i |

resolution re

Tax Exempt ; T ;

Status {cs meee | |

Life Care _ hn 4 T |

Applications oo Clark and oply application fled letter trom "

| | Liberatore to tate oie | | (by Drummond po} 1985

| | “mer | | | Bonds

| | ! go into

oe default

Sescumts | |

|

— me :

cla |

— | | Discmasion | rs fn es | |

(POS) | | ae, a POS | | |

| draft of POS

| |

Official | | is

atements | | | |

a Disseminated | | al Staten

a issuance of <

Bond Opinions Bond Opinion

Sale of Bonds | ha

to Investors on lil