Mdl Capital Management, Inc.; Mark D. Lay; Steven L. Sanders; Edward Adatepe v. Planters Lifesavers Co., 206 F.3d 271, 278 3d Cir. 2000 . A judgment will be upheld…

1
NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 06-4815
MDL CAPITAL MANAGEMENT, INC.; MARK D. LAY;
STEVEN L. SANDERS; EDWARD ADATEPE,
Appellants
vs.
FEDERAL INSURANCE COMPANY,
Appellee
____________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
(D.C. Civ. No. 05-CV-01396 )
District Judge: Honorable Arthur J. Schwab
____________
Argued November 1, 2007
Before: RENDELL, WEIS, and NYGAARD Circuit Judges.
(Filed April 2, 2008)
____________
Joseph H. Luciana, III, Esquire (ARGUED)
Edward W. Diggs, Esquire
Clarence E. Dozier, Jr., Esquire
James S. Malloy, Esquire
KIRKPATRICK & LOCKHART
PRESTON GATES ELLIS, LLP
535 Smithfield Street
Pittsburgh, PA 15222

-- 1 of 13 --

2
Attorneys for Appellants
Daniel J. Standish, Esquire (ARGUED)
Mary E. Borja, Esquire
Kimberly M. Melvin, Esquire
WILEY REIN LLP
1776 K Street, N.W.
Washington, D.C. 20006
Dennis St. J. Mulvihill, Esquire
ROBB LEONARD MULVIHILL
2300 One Mellon Center
Pittsburgh, PA 15219
Attorneys for Appellee
_______________
OPINION
PER CURIAM.
Plaintiffs MDL Capital Management, Inc., Mark D. Lay, Steven L. Sanders,
and Edward Adatepe appeal the District Court’s judgment denying coverage for liability
claims under two separate policy binders. This is a non-precedential opinion and as such
is directed to the litigants. Because the parties’ briefs set out the facts and legal issues at
length, we do not review them in detail here.
Plaintiffs contend they are entitled to coverage under the Investment
Advisor Errors & Omission Liability (“E&O”) and Executive Liability & Indemnification
(“D&O”) binders issued by defendant Federal Insurance Company. The claims against
Federal Insurance arise from the Ohio Bureau of Workers’ Compensation’s suit against

-- 2 of 13 --

3
plaintiffs and a U.S. Securities and Exchange Commission investigation. The District
Court granted summary judgment in favor of Federal Insurance, correctly determining
that plaintiffs were not entitled to D&O coverage, but erroneously gave effect to an
exclusion contained in the E&O policy. We will affirm the judgment in part, reverse in
part, and remand for further proceedings.
We exercise plenary review over a grant of summary judgment and apply
the same standard that the district courts apply. Farrell v. Planters Lifesavers Co., 206
F.3d 271, 278 (3d Cir. 2000). A judgment will be upheld if there are no issues of material
fact and a party is entitled to judgment as a matter of law. Id. For purposes of this appeal
we assume, as did the District Court, that the Federal Insurance binders were valid.
Pennsylvania law, applicable to this case, instructs that an insurance binder
is a “written instrument, used when a policy cannot be immediately issued, to evidence
that the insurance coverage attaches at a specified time, and continues . . . until the policy
is issued or the risk is declined and notice thereof given.” Harris v. Sachse, 52 A.2d 375,
378 (Pa. Super. Ct. 1947) (quoting Webster’s Int. Dict. 2nd Ed.). Ordinarily a binder “is
to be regarded as made upon the terms and subject to the conditions contained in the
ordinary form of policies used by the [issuing] company.” Rossi v. Fireman’s Ins. Co.,
165 A. 16, 19 (Pa. 1932); see also 1A Lee R. Russ & Thomas F. Segalia, Couch on
Insurance 3d § 13:2 (1995) (“essential elements of the contract . . . may be supplied from
the standard form policy”). The provisions of Federal Insurance’s standard policy and
endorsements govern where applicable because in the binder Federal Insurance

-- 3 of 13 --

4
specifically directed plaintiffs to refer to the form policy and endorsements “for a
description of coverage.”
I. The E&O Binder
The District Court’s analysis of the E&O binder focused on an endorsement
titled “Broad Private Fund Exclusion- MDL Broad Market Fixed Income Fund, MDL
Core Fund or MDL Active Duration Fund, Ltd. (endorsement wording to be developed).”
The Court held, as a matter of law, that this endorsement denied coverage for the
plaintiffs’ claims under the E&O binder. We do not agree.
The heading for the section of the E&O binder containing endorsements
includes a parenthetical providing, “The titles and headings are for convenience only.
Please refer to the policy and endorsements for a description of coverage.” The Broad
Private Fund Exclusion did not refer to a form containing prototypical language. Instead,
immediately following the Exclusion’s title appears the language, “endorsement wording
to be developed.”
The District Court reasoned that when considered within the grant of
coverage afforded in the prototype E&O policy’s insuring clause, the exclusion “could
only have one meaning: that the Investment Adviser [E&O] Policy would not extend to
claims based upon MDL’s provision of professional services related to the three listed
funds. . . . [T]he title of the endorsement itself explains that the MDL Broad Market Fixed
Income Fund, the MDL Core Fund and the MDL Active Duration Fund, Ltd. would be
excluded from coverage under the Investment Adviser Policy.”

-- 4 of 13 --

5
Pennsylvania law requires courts to read an insurance policy in its entirety
and ascertain the scope of its coverage by considering the entire instrument. See Riccio
v. Am. Republic Ins. Co., 705 A.2d 422, 426 (Pa. 1997).
In performing its analysis in this case, the District Court overlooked the
caution in the binder providing that the titles of the endorsements “are for convenience
only.” The binder made it clear that the titles were not intended to be used in interpreting
the effect of the endorsements. The language “Broad Private Fund Exclusion” does not
define the exclusion. Although the parties agreed that an endorsement titled “Broad
Private Fund Exclusion . . .” would be included in the contemplated E&O policy, they
never agreed on what it would provide. Thus, we are left with an exclusion that is devoid
of substance.
The reference to the Broad Private Fund Exclusion endorsement in the
E&O binder was essentially an “agreement to agree,” and, under Pennsylvania law is a
nullity. See Onyx Oils & Resins, Inc. v. Moss, 80 A.2d 815, 816 (Pa. 1951) (holding
“[a]n agreement to agree is incapable of enforcement”). This Court cannot rewrite the
parties’ agreement in order to give effect to the parties’ conflicting views of what the
Exclusion was intended to accomplish. See Moore v. Stevens Coal Co., 173 A. 661, 662
(Pa. 1934) (“It is not the province of the court to . . . make a new contract for the parties;
its duty is confined to the interpretation of the one they have made for themselves.”).
The District Court erred in granting summary judgment in Federal
Insurance’s favor based on an unarticulated text of the purported Private Fund Exclusion.

-- 5 of 13 --

6
To that extent and without prejudice to other contentions of the parties with respect to the
E&O binder, including allegations of misstatements in the application for insurance, the
judgment in favor of Federal Insurance will be reversed and the case remanded for further
proceedings.
II. The D&O Binder
We will affirm the District Court’s conclusion that plaintiffs Lay, Sanders,
and Adatepe are not entitled to coverage for the Ohio Bureau lawsuit or the SEC
investigation under the Executive Liability and Indemnification (“D&O”) binder.
The D&O binder referred to Federal Insurance form #17-02-1149 for a
description of its coverage. The insuring clause of that form provides,
“[Federal Insurance] shall pay on behalf of each of the
Insured Persons all Loss for which the Insured Person . . .
becomes legally obligated to pay on account of any Claim
first made against such Insured Person, individually or
otherwise, during the Policy Period . . . for a Wrongful Act
committed, attempted, or allegedly committed or attempted by
such Insured Person before or during the Policy Period.”
(emphasis in original).
An “Insured Person” is “any past, present or future duly elected director or
duly elected or appointed officer of the Organization,” in this case MDL Capital.
(emphasis in original). Lay, Sanders, and Adatepe all qualify as “Insured Persons”
because they all were past directors and/or officers of MDL Capital.
A “Wrongful Act” is “any error, misstatement, misleading statement, act,
omission, neglect, or breach of duty committed, attempted, or allegedly committed or

-- 6 of 13 --

7
attempted, by an Insured Person, individually or otherwise, in his Insured Capacity, or
any matter claimed against him solely by reason of his serving in such Insured
Capacity.” (emphasis in original). “Insured Capacity” means “the Insured Person’s
position or capacity but shall not include any position or capacity in any entity other than
[MDL Capital], even if [MDL Capital] directed or requested the Insured Person to serve
in such other position or capacity.” (emphasis in original). For purposes of this appeal,
we will assume that the allegations against Lay, Sanders, and Adatepe in the Ohio Bureau
complaint and SEC Order are concerned with their “Insured Capacity” and therefore
assert “Wrongful Acts.”
The binder states that the “Professional Services Exclusion- Complete,”
Federal Insurance form #17-02-1224, applies to the D&O coverage. This prototypical
endorsement provides,
“It is agreed that [Federal Insurance] shall not be liable for
Loss on account of any Claim based upon, arising from or in
consequence of the rendering of or failure to render
professional services, including but not limited to the
following services:
i. broker;
ii. dealer;
iii. financial adviser;
iv. investment adviser;
v. investment banker;
vi. investment manager;

-- 7 of 13 --

In the District Court, the parties disputed whether the D&O and E&O1
binders would cover the SEC investigation. Federal Insurance asserted that both binders
expired on their own terms before the SEC investigation began on July 15, 2005. The
District Court did not address this issue. Our analysis of the D&O binder’s
inapplicability to the SEC investigation does not prevent Federal from renewing its
argument as to the E&O binder on remand.
8
. . . .”
(emphasis in original).
Since Lay, Sanders, and Adatepe are “Insured Persons” that had two
“Claims” filed against them during the “Policy Period” for, we assume, a “Wrongful
Act,” the D&O binder will cover the claims arising from the Ohio Bureau litigation and
SEC investigation unless barred by the professional services exclusion.1
The endorsement bars coverage under the D&O binder if the litigation
“arises from . . . the rendering of or failure to render professional services.” Pennsylvania
law defines a similar phrase “arising out of” as “‘[b]ut for’ causation . . . a cause and
result relationship.” Forum Ins. Co. v. Allied Sec., Inc., 866 F.2d 80, 82 (3d Cir. 1989)
(quoting McCabe v. Old Republic Ins. Co., 228 A.2d 901, 903 (Pa. 1967)). Applying this
definition, the “Professional Services Exclusion- Complete” excludes D&O coverage for
Lay, Sanders, and Adatepe for claims that would not have occurred but for the providing
of, or failing to provide, investment adviser and investment manager services.
A. The Ohio Bureau Lawsuit
We have carefully reviewed the Ohio Bureau’s complaint. The 37-page

-- 8 of 13 --

The counts include allegations of common law fraud, fraudulent2
inducement, Ohio Securities Act violations, negligent misrepresentation, negligent
nondisclosure, breach of fiduciary duty, constructive fraud, breach of contract, common
law conspiracy, common law unjust enrichment, and aiding and abetting.
9
document, containing 17 counts over 222 paragraphs, focuses on MDL Capital’s alleged2
derelictions as investment adviser and investment manager to the Bureau. The allegations
assert two roles of MDL Capital: (i) as fixed-income investment manager to the Ohio
Bureau in connection with the creation of the “long-bond account” and the Active
Duration Fund; and, (ii) as investment adviser and manager of the Active Duration Fund.
Both roles involve the provision of “professional services” as that term is
defined in the “Professional Services Exclusion- Complete.” The Ohio Bureau litigation,
therefore, arises from the alleged provision of, or failure to provide, “professional
services,” and the endorsement operates to withhold D&O coverage.
Plaintiffs attempt to avoid this conclusion by quoting a portion of the
complaint that alleges, “inaction, lack of diligence and oversight, and failure to intervene
by the Individual Director Defendants . . . caused the overleveraging of the [Active
Duration] Fund’s assets.” They assert that this language implicates them as directors of
MDL Capital in a role that does not involve “professional services” and hence would be
covered under the D&O binder.
The complaint does assert that Lay, Sanders, and Adatepe were directors of
both MDL Capital and the Active Duration Fund. Assuming the complaint states that
they failed in their capacity as directors of MDL Capital to oversee its activities with

-- 9 of 13 --

10
respect to the Active Duration Fund, the allegation stems from MDL Capital’s purported
failure as investment adviser and investment manager. Consequently, the claim arises
from the providing of, or failure to provide, professional services and D&O coverage is
not available pursuant to the “Professional Services Exclusion- Complete.”
B. The SEC Investigation
Federal Insurance’s D&O binder does not cover the SEC investigation
because the investigation also arises from the providing of or failure to provide
“professional services.” The SEC Order Directing Private Investigation and Designating
Officers to Take Testimony alleges that individuals and entities associated with MDL
Capital may have violated federal securities law. The order asserts: (i) MDL Capital and
individuals and entities associated with MDL Capital may have defrauded or deceived
individuals in connection with the offer, purchase and sale of securities; (ii) MDL Capital
and individuals and entities associated with MDL Capital may have engaged in fraudulent
transactions, practices or courses of business; (iii) MDL Capital may have made
unauthorized transactions in the course of its business and attempted to conceal losses
from these transactions; and, (iv) MDL Capital, as an investment adviser, may have failed
to keep accurate records and books relating to its business.
These allegations are based upon MDL Capital’s providing of, or failure to
provide, investment adviser or investment manager services. Therefore, the “Professional

-- 10 of 13 --

Federal contends that plaintiffs have waived the SEC issue by failing to3
brief it on appeal. In view of our holding on the merits, we need not address that
contention.
11
Services Exclusion- Complete” excludes D&O coverage for the SEC investigation.3
C. The Outside Directorship Endorsement
Lay, Sanders, and Adatepe also advance an alternative contention that they
are entitled to D&O coverage as directors of the Active Duration Fund because of the
binder’s “Outside Directorship Endorsement - As required by the Insured Organization.”
This endorsement refers to form #17-02-6537, a prototype endorsement that provides,
“It is agreed that:
1. The term Insured Capacity . . . is amended to read in
its entirety as follows:
Insured Capacity means the Insured Person’s
position or capacity in the Organization or in
any Outside Directorship
2. [The] Definitions of this Policy is amended to include
the following terms:
(a) Outside Directorship means the position of
director, officer, trustee, governor, or equivalent
executive position with an Outside Entity if
service by an Insured Person in such position
was at the specific request of the Organization
or was part of the duties regularly assigned to
the Insured Person by the Organization.
(b) Outside Entity means any of the following
organizations:
[The term insured person will also include]
[Outside Entity]

-- 11 of 13 --

12
3. Coverage provided to any insured person in an
Outside Directorship shall:
. . .
b. only extend to those Outside Entities and
corresponding Insured Persons listed in
paragraph 2 above;
. . . .”
(emphasis in original).
Section b of paragraph 3 of the endorsement clearly provides that outside
directorship coverage would only extend to the entities listed in paragraph 2. Section (b)
of paragraph 2 contemplates negotiation over the organizations that would qualify as
“Outside Entities.” Federal Insurance and MDL Capital never reached an agreement on
this provision.
We conclude that, like the Broad Private Fund Exclusion in the E&O
binder, the “Outside Directorship Liability Endorsement” was merely an agreement to
agree and is not entitled to any legal significance. Accordingly, Lay, Sanders, and
Adatepe are not entitled to D&O coverage for their roles as directors of the Active
Duration Fund.
III. The Application Warranty Exclusion
Finally, Federal Insurance argues that MDL Capital made material
misrepresentations in its application for insurance, which precludes coverage under both
binders. The District Court did not address this contention. We specifically decline to

-- 12 of 13 --

13
consider the material misrepresentations issue on this appeal and leave it for further
consideration by the District Court on remand. See Woodson v. Scott Paper Co., 109
F.3d 913, 933 n.21 (3d Cir. 1997) (quoting Selected Risks Ins. Co. v. Bruno, 718 F.2d 67,
69 (3d Cir. 1983), for the proposition, “[i]t is the general rule that a federal appellate court
does not consider an issue not passed upon below.”).
This appeal is from rulings applicable to two separate binders. We
conclude on the present record that the District Court erred in interpreting the Broad
Private Fund Exclusion endorsement. We will reverse the entry of summary judgment on
the E&O claim and remand for further proceedings.
We will affirm the District Court judgment in favor of defendant in the
D&O coverage claim.
Accordingly, the judgment of the District Court is affirmed in part and
reversed in part.

-- 13 of 13 --