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06/25/96 CONTINENTAL CASUALTY COMPANY v. MCDOWELL

June 25, 1996

CONTINENTAL CASUALTY COMPANY, AN ILLINOIS CORPORATION, PLAINTIFF-APPELLEE, CROSS-APPELLANT,
v.
MCDOWELL AND COLANTONI, LTD., AN ILLINOIS CORPORATION, BOYD MCDOWELL, III, ALLEN W. MCDOWELL, MARTIN N. PREISER, MICHAEL INMAN, INDIVIDUALLY, AND CHRISTINE J. WATKINS AND BARNETT BANKS TRUST CO., N.A., AS CO-GUARDIANS OF THE PROPERTY OF CASSIDY C. WATKINS, A MINOR, DEFENDANTS-APPELLANTS, CROSS-APPELLEES, V. ANTHONY M. COLANTONI, THOMAS J. FITZGIBBONS, KENNETH MOLL, BRUCE KISELSTEIN AND SHERRY K. DREW, DEFENDANTS.



Appeal from the Circuit Court of Cook County. Honorable Arthur L. Dunne, Judge Presiding.

Released for Publication August 13, 1996. As Corrected September 20, 1996.

Presiding Justice Hartman delivered the opinion of the court: Scariano and DiVITO, JJ., concur.

The opinion of the court was delivered by: Hartman

PRESIDING JUSTICE HARTMAN delivered the opinion of the court:

Christine Watkins (Watkins) retained the law firm of McDowell & Colantoni, Ltd. (Law Firm) to represent her minor daughter, Cassidy Watkins (Cassidy), in pursuance of an injury claim. Anthony Colantoni (Colantoni), a Law Firm partner, admitted having improperly transferred funds from the Law Firm's clients' trust account belonging to Cassidy to the Law Firm's general operating account for expenses unrelated to Cassidy's case. Watkins learned of these transfers and filed a complaint in Sarasota County, Florida, naming the Law Firm, an Illinois corporation, and Law Firm partners Colantoni, Allen McDowell, Boyd McDowell, III, Michael Inman and Martin Preiser, as individual defendants (sometimes collectively defendants).

Continental Casualty Co. (Continental) previously had issued a professional liability insurance policy (Policy) to the Law Firm with coverage relating to the instant action, but subsequently notified the Law Firm that it was denying coverage under the Policy. Continental commenced the instant declaratory action to have Watkins' action against the Law Firm excluded from coverage.

Following cross-motions for summary judgment, the circuit court ruled that the Policy's terms excluded Watkins' claims. On appeal, the issues presented include whether Watkins' suit to recover funds misappropriated by the Law Firm is excluded from coverage under the Policy's "dishonesty" provision; the Policy's "sole allegation" is ambiguous and, therefore, must be construed in favor of the insurdeds; Continental wrongfully withdrew its defense of the Law Firm in the underlying case; and Continental has a duty to defend the Law Firm and its partners in a pending related federal matter. The pleadings and summary judgment documents reveal the following circumstances.

In the underlying lawsuit, Watkins retained the Law Firm to represent Cassidy in a claim involving the Federal Vaccination Program. From the time the Law Firm was formed, until late 1991, Colantoni managed its financial affairs exclusively and was principal and managing partner of the Law Firm. Only Colantoni handled the Watkins' case. Before the Watkins' disposition, the Law Firm began to experience financial short-falls. Starting in February 1990, Colantoni, without knowledge of other Law Firm members, directed unauthorized transfers from the Law Firm's unsegregated clients' trust fund account into its general operating account. He intended to replenish the trust account as fees were received. Colantoni directed similar transfers nine times in other cases prior to receipt of Watkins' funds, and many more times thereafter, in excess of $1,000,000.

The misappropriated funds were generated by settlement of Watkins' personal injury claims in Federal Claims court. Following two evidentiary hearings in that case, a special master awarded Watkins $2,403,864.46, payable in four United States treasury checks of equal annual installments. Colantoni, as Watkins' attorney, received the first installment check of $600,966.12 in August of 1990 and had it placed in the Law Firm's clients' trust account. Subsequently, as in the nine previous instances mentioned, he directed the transfer of the Watkins' funds to the Law Firm's overhead and bank loan accounts, as well as for some of his personal expenses. *fn1 The Law Firm's attorneys first learned of the improper transfers in October of 1991 and, on December 12, 1991, notified Continental that Watkins intended to file a lawsuit against the Law Firm, requesting Continental to provide a defense. Partial restoration of over $336,000 was made by the Law Firm to Watkins.

On January 22, 1992, Watkins filed a complaint on Cassidy's behalf in Sarasota County, Florida, naming the Law Firm and Colantoni, individually, as defendants. Her second amended complaint added the Law Firm's partners as individual defendants, and contained seven counts. Count I alleged that the Law Firm was liable for breach of contract; count II asserted that the Law Firm and Colantoni breached their fiduciary duties to plaintiffs; count III was an action against the Law Firm for negligence in supervising the trust account; count IV was an action for accounting; count V sought injunctive relief; count VI claimed that Allen McDowell was negligent in maintaining the Law Firm's accounts and books; and count VII alleged vicarious liability against Allen McDowell, Boyd McDowell, III, Michael Inman, *fn2 Martin Preiser and the Law Firm, based upon Illinois Supreme Court Rule 721(d). 134 Ill. 2d R. 721(d).

The Florida trial court on March 25, 1993, entered a "summary final judgment" against the Law Firm, based upon Watkins' second amended complaint, concluding that the Law Firm breached its duty of care to Watkins by supervising its accounts negligently and awarded Watkins $446,997 plus pre-judgment interest. In March of 1994, Watkins filed a petition for registration of the Florida judgment in the circuit court of Cook County.

The Law Firm initially was represented by counsel in Florida, selected by Continental, which thereafter informed defendants that it would cancel their 1991-92 policy, effective August 29, 1992. In November of 1992, Continental notified the Law Firm that it would no longer provide counsel for the defense in the Watkins' case, but agreed, under a reservation of rights, to reimburse the Law Firm for the fees of defense counsel.

Meanwhile, on May 21, 1992, Continental filed its initial complaint in the circuit court of Cook County, seeking declaratory relief for recission of its Policy. Subsequent amended complaints abandoned recission and essentially claimed non-coverage for the Watkins' matter, and exclusion for "dishonesty" as provided in the Policy. These two theories remained in Continental's last pleading, its fourth amended complaint, filed November 19, 1993, seeking a judicial declaration that the Policy excluded the claims related to the Watkins' litigation. Various defendants eventually answered these complaints. *fn3

As previously noted, both parties filed cross-motions for summary judgment. The Law Firm's motion, filed August 3, 1994, was supported by 10 exhibits and 2 partner's affidavits. The motion asserted that the partners were unaware of Colantoni's improper transfers of clients' trust funds and that Colantoni was the only attorney working on the Watkins' file. The motion contended that the dishonesty exclusion of the Policy invoked by Continental clashed directly with other Policy provisions, setting them forth. Continental's motion, filed August 12, 1994, asserted that all claims articulated in the Watkins' lawsuit against the Law Firm arose from the dishonest act of Colantoni and, therefore, were excluded from coverage under the Policy's dishonesty exclusion.

At the hearing on these cross-motions for summary judgment, the circuit court found that Colantoni's dishonest acts were the predominant cause of the action which gave rise to Watkins' Florida lawsuit, held that the dishonesty exclusion of the Policy operated to bar coverage, and ruled that Continental did not have a duty to defend or indemnify the Law Firm or its individual partners. The court declined to extend its ruling to Watkins' pending federal action. Both parties appeal.

I

Defendants contend that they were entitled to summary judgment as a matter of law because the Policy provides coverage arising from claims for failure to render professional service, which included their negligence in failing to supervise their clients' trust account, with which they were charged and found guilty in Watkins' Florida lawsuit. Continental asserts that Watkins' lawsuit is excluded from ...


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