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04/25/94 CONTINENTAL CASUALTY COMPANY v. HOWARD C.

April 25, 1994

CONTINENTAL CASUALTY COMPANY, PLAINTIFF-APPELLEE,
v.
HOWARD C. FLOMENHOFT, INDIVIDUALLY, AND HOWARD C. FLOMENHOFT, LTD., DEFENDANTS, AND JOHN A. MCGUINN, NEWELL R. PARTUCH, RICHARD BRADLEY, DAVID THOMPSON, STEVEN H. MILLER, JOHN TRAYNOR, JEANNETTE SPACKMAN, SIDNEY STERN, JOHN T. DAWSON, JOHANAN VIGODA, FREDERICK HENDENTAHL, DAVID SOTO, HOWARD QUIGLEY, ROBERT BRASSFIELD, HARRY BRASSFIELD, BOYD DEEL, THEODORE URBAN AND OLIVER R. COLVIN, EACH INDIVIDUALLY, AND AS MEMBERS OF MONTCLAIR INVESTMENTS, A CALIFORNIA GENERAL PARTNERSHIP, DEFENDANTS-APPELLANTS.



Appeal from the Circuit Court of Cook County. Honorable EDWARD C. HOFERT, Judge Presiding.

Buckley, Campbell, O'connor, Jr.

The opinion of the court was delivered by: Buckley

JUSTICE BUCKLEY delivered the opinion of the court:

Continental Casualty Company ("Continental") brought an action seeking a declaratory judgment that it was not required to defend or indemnify Howard Flomenhoft ("Flomenhoft"), an attorney, for his legal malpractice in connection with his formation and representation of Morgan Associates ("Morgan"), a limited partnership, in which Montclair Investments ("Montclair") was a limited partner. Besides Flomenhoft, the named, defendants are the partners in Montclair. Continental moved for summary judgment on the grounds that (a) the policy it issued Flomenhoft did not provide coverage because his negligence predated the policy period, and (b) coverage was precluded under the "business exclusion" provision in the policy. The trial Judge granted Continental's summary judgment motion "on all bases argued." On appeal, defendants contend: (1) that Flomenhoft's negligent conduct continued during the policy period and did not constitute a single negligent "occurrence" which predated the coverage period; and (2) that the "business enterprise" exclusion does not apply to preclude coverage. We affirm.

Flomenhoft, through his professional corporation Howard C. Flomenhoft Ltd., was the named insured under a professional liability policy issued by Continental. The coverage period under the policy was from September 7, 1977 through September 7, 1982. The policy provided that Continental would pay all damages which Flomenhoft became legally obligated to pay which arose out of his performance of professional services as an attorney "because of an error, negligent omission or negligent act." The policy further provided that it would apply only "to errors, negligent omissions and negligent acts taking place during the policy period." The policy also explicitly excluded coverage for errors, negligent acts or negligent omissions "occurring while performing professional services for a business enterprise owned by an insured, a business enterprise in which the insured is a partner or a business enterprise which is controlled, managed or operated by an insured."

In the fall of 1976, Flomenhoft began exploring the possibility of setting up a "tax shelter" by forming a limited partnership which would invest in coal mines. At that time, the IRS gave favorable treatment to coal mining investments and, therefore, the investors in the limited partnership would gain substantial tax advantages. In early October 1976, Flomenhoft began negotiating with Aminex Corp. ("Aminex"), an owner of certain mineral rights in coal mines, about the possibility of having a limited partnership formed by Flomenhoft sublease Aminex's mineral rights.

Subsequently, the IRS announced that it was eliminating favorable tax treatment for coal mining investments effective October 28, 1976. The IRS stated, however, that this tax change would not affect deals which were already "in place" on October 28, 1976. According to Flomenhoft, he and Aminex reached an oral agreement on October 28. It is uncontested, however, that no agreement was reached between Flomenhoft and Aminex prior to October 28. Additionally, Flomenhoft admitted that the documents creating Morgan Associates, the limited partnership which would sublease Aminex's mineral rights, were not prepared nor was the partnership agreement signed until after October 28, 1976. Nonetheless, Flomenhoft advised others to use the date of October 28 as the date that Morgan was formed.

Flomenhoft, through his professional corporation, was a three percent limited partner in Morgan. According to defendants, however, neither he nor his corporation "controlled, managed, or operated" Morgan. Additionally, neither he nor his corporation had any management or ownership interest in Montclair.

Flomenhoft, however, was the general counsel for Morgan. In such capacity, he prepared Morgan's partnership agreement and investment memorandum which gave the date of Morgan's formation as October 28, 1976. According to defendants, in reliance upon Flomenhoft's advice that investors would gain substantial tax advantages, Montclair became a limited partner in Morgan on December 29, 1976. Additionally, as counsel to Morgan, Flomenhoft gave continuing legal advice to Morgan's limited partners which included defendants, the partners in Montclair, on numerous subjects including the purported tax savings investors would gain as limited partners in Morgan.

Flomenhoft also prepared the partnership K-1 tax returns for the years 1977 through 1981 which he distributed to Morgan's investors. Moreover, he represented Morgan during its IRS tax audit for the years 1976 and 1977. The IRS subsequently disallowed the tax deductions taken by Morgan on the ground that the limited partners, including Montclair, had not joined the partnership before October 28, 1976.

At the hearing on Continental's motion for summary judgment, Continental argued both that Flomenhoft's negligent acts which caused defendants' injuries constituted a single "occurrence" which predated the policy period and that, even if the policy was implicated, its "business exclusion" provision applied to preclude coverage. Defendants asserted that Flomenhoft's negligence continued through the policy period and that the policy was not triggered until defendants suffered injury. The trial Judge accepted both arguments asserted by Continental and granted Continental's motion. Defendants filed this timely appeal.

Defendants' first assertion on appeal is that Continental is responsible for coverage because defendants suffered injury during the policy period. Continental, on the' other hand, responds that the policy it issued Flomenhoft did not provide coverage because Flomenhoft's negligence predated the policy period. Although a legitimate question of coverage exists, for purposes of this appeal, we willassume that the policy provided coverage and choose to decide this cause under defendant's second contention.

Summary judgment is only proper if, after reviewing all the pleadings, affidavits, and other evidence on file in the light most favorable to the nonmovant, it is clear that no material question of fact is at issue and that the movant is entitled to judgment as a matter of law. (Ill. Rev. Stat. 1991, ch. 110, par. 2-1005 (now 735 ILCS 5/2-1005 (West 1992)); Srivastava v. Russell's Barbecue, Inc. (1988), 168 Ill. App. 3d 726, 730, 523 N.E.2d 30, 33, 119 Ill. Dec. 562.) The construction of insurance contracts are questions of law and thus proper subjects of motions for summary judgment. Scottish & York International Insurance Group/Guarantee Insurance Co. v. Comet Casualty Co. (1990), 207 Ill. App. 3d 881, 884, 566 N.E.2d 477, 479, 152 Ill. Dec. 790.

We also note that the general rules of contract construction apply equally to insurance contracts. ( Management Support Associates v. Union Indemnity Insurance Co. (1984), 129 Ill. App. 3d 1089, 1092, 473 N.E.2d 405, 408, 85 Ill. Dec. 37.) Therefore, where policy language is clear and unambiguous, it will be given "its plain, ordinary and popular meaning" ( Management Support, 129 Ill. App. 3d at 1092, 473 N.E.2d at 408) and there is no need for a court to construe that language. ( Mason v. Home Insurance Co. (1988), 177 Ill. App. 3d 454, 458, 532 N.E.2d 526, 528, 126 Ill. Dec. 841.) ...


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