UNITED STATES DISTRICT COURT

DISTRICT OF MASSACHUSETTS

)
MIB GROUP, INC., JAMES F. COOK, LEE B. )
OLIPHANT, and JAMES S. CORBETT, )
)
Plaintiffs, )
CIVIL ACTION NO.
)
v. 06-CV-10662 (NMG)
)
)
FEDERAL INSURANCE COMPANY, )
)
Defendant. )
)

PLAINTIFFS' MEMORANDUM OF LAW IN OPPOSITION TO

DEFENDANT’S MOTION TO DISMISS THE COMPLAINT

The plaintiffs MIB Group, Inc., James F. Cook, Lee B. Oliphant, and James S. Corbett

(the “MIB Insureds”) oppose the defendant Federal Insurance Company’s (“Federal”) motion to

dismiss the complaint. The allegations of the complaint, with all inferences drawn in the MIB

Insureds’ favor, clearly state a claim that Federal has wrongfully refused to defend the MIB

Insureds in breach of Federal’s insurance policy. Federal’s motion to dismiss should be denied.

FACTUAL BACKGROUND

In considering the merits of this motion to dismiss, the Court must accept as true all

factual allegations of the complaint, and draw all reasonable inferences in favor of the MIB

Insureds. Langadinos v. American Airlines, Inc., 199 F.3d 68, 69 (1st Cir. 2000); Burns v. Potter,

334 F. Supp. 2d 13, 17 (D. Mass. 2004). Those factual allegations include documents attached to

the complaint as exhibits. Id. The complaint and its attachments, with all reasonable inferences

drawn in favor of the MIB Insureds, state the following facts:

MIB Group, Inc. (“MIB Group”) is a not-for-profit membership corporation,

headquartered in Westwood, Massachusetts. Complaint ¶ 1 (hereinafter “Compl.”). James F.

Cook, Lee B. Oliphant and James S. Corbett are employees of MIB Group. Compl. ¶¶ 2-4.
 MIB is the insured under Not for Profit Organization Liability Policy no. 8181-1573,

issued by Federal for the policy period July 1, 2002 to July 1, 2003 (the “Policy”). The Policy is

attached as Exhibit A to the complaint. Compl. ¶ 2 & Exh. A. MIB Group is defined in the

Policy’s declarations as the “Organization,” and the Organization is in turn defined as an

“Insured.” Policy at pages 1, 8. Cook, Oliphant and Corbett are also Insureds under the Policy.

The definition of Insureds includes “Insured Persons,” who are in turn defined as natural persons

who are officers, directors, trustees or employees of the Organization. Policy at 8.

The Policy obligates Federal to pay on behalf of the MIB Insureds all loss which the MIB

Insureds “become[] legally obligated to pay on account of any Claim . . . for . . . a Wrongful

Act . . . committed . . . during the Policy Period.” Policy at 2. A “Claim” is defined to include a

“civil proceeding . . . against an Insured for a Wrongful Act.” Id. at 8. A “Wrongful Act

means any error, misstatement, misleading statement, act, omission, neglect, or breach of duty

committed . . . by an Organization or an Insured Person.” Policy at 9. The Policy provides

that Federal “shall have the right and duty to defend any Claim covered by this policy.” Id. at 5.

The main body of the Policy does not contain any exclusion for securities claims. That

exclusion (the “securities exclusion”) appears in a Special Endorsement to the Policy for

coverage of directors of for-profit subsidiaries of MIB Group. The Special Endorsement ,

appearing as Endorsement No. 7 to the Policy (the “Special Endorsement”), defines “For-Profit

Entity” as any for-profit entity in which an Organization (i.e. MIB Group) owns more than 50%

of the stock. Special Endorsement at 1. The lengthy definition of For-Profit Entity excludes the

Organization, which is listed as MIB Group, along with any for-profit subsidiary of the

Organization (more than 50% owned by the Organization) conducting a Securities Offering, any

financial institution, or any high-tech or bio-tech company. Id. The Special Endorsement also

defines “Insured Person” to mean any director or officer of the For-Profit Entity. Id. at 2. The

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Special Endorsement then goes on to provide that it does not provide coverage for any For-Profit

Entity, leaving coverage under the Special Endorsement only for officers and directors of the

For-Profit Entity. Id. at 2. Finally, the Special Endorsement contains the securities exclusion.

The securities exclusion excludes coverage “for Loss on account of any Claim where all or part

of such Claim, directly or indirectly, is based upon, arises from or is in consequence of any

actual or alleged violation of:” (a) federal securities laws, (b) state “Blue Sky” securities laws, or

(c) “any provision of the common law imposing liability in connection with the offer, sale or

purchase of securities.” Id. at 3.

On December 2, 2002, a civil action entitled e-Financial Ventures I, L.P. and e-Financial

Ventures I, Unit Trust v. MIB Group, Inc., MIB, Inc., e-Services Corporation, James F. Cook,

Lee B. Oliphant, and James S. Corbett (the “Underlying Action”) was filed against the MIB

Insureds in Norfolk Superior Court. The original complaint in the Underlying Action (the

“Original Underlying Complaint” or “Orig. Und. Compl.”), attached as Exhibit B to the

complaint, was brought by e-Financial Ventures I, L.P. and e-Financial Ventures I, Unit Trust

(collectively, “e-FV”). E-FV named as defendants the MIB Insureds along with two for-profit

subsidiaries of MIB Group: MIB, Inc. and e-Services Corporation (collectively, “e-Services”).

Orig. Und. Compl. ¶¶ 3-8. Cook, Oliphant and Corbett were officers and directors of e-Services.

Id. at ¶¶ 6-8.

The Original Underlying Complaint has 54 paragraphs of factual allegations and six

separate legal claims. Briefly, the Original Underlying Complaint alleged that MIB Group, MIB,

Inc. and e-Services formed a for-profit subsidiary called e-Nable Corporation (“e-Nable”). Orig.

Und. Compl. ¶ 18. Cook, Oliphant and Corbett were officers of e-Nable. Id. at ¶¶ 6-8. E-Nable

intended to create a web-based insurance-underwriting information system, called “Jet e-Nable.”

Id. at ¶¶ 18-21. E-FV alleged that the defendants induced e-FV to invest in e-Nable and provide

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it bridge financing by a series of misrepresentations, both in its business plan and otherwise, and

failed to carry out the promises on which e-FV relied when investing. Id. at ¶¶ 22-47, 49-53.

The Original Underlying Complaint then alleged facts about the defendants’ actions after

e-FV made its investment. In the Original Underlying Complaint, e-FV alleged that the

defendants, including the MIB Insureds, breached their fiduciary duties both to e-FV and to e-

Nable itself. Specifically, e-FV alleges that the MIB Insureds and the other defendants took

actions to hurt e-Nable’s business and competed with e-Nable. Orig. Und. Compl. ¶¶ 48, 54-64.

The Original Underlying Complaint has six claims. Counts One and Two, for breaches

of fiduciary duty and minority shareholder oppression, relate to the alleged actions of the

defendants in competing with and harming e-Nable after e-FV joined the company. Orig. Und.

Compl. ¶¶ 67-78. Counts Three through Six relate to e-FV’s investment in e-Nable, and allege

violations of Texas and Massachusetts securities statutes, common law fraud, and negligent

misrepresentation. Id. at ¶¶ 79-102.

The Original Underlying Complaint was served upon the MIB Insureds on or about

December 4, 2002. The MIB Insureds promptly provided a notice of claim under the Policy to

their insurance agent, who, by a letter dated December 6, 2002, provided a notice of claim to

Federal, for Federal to assume the defense of the Underlying Action on behalf of the Federal

Insureds. Compl. ¶¶ 11, 13 & Exh. C.

By a letter dated January 17, 2003, Federal denied coverage and refused to provide a

defense of the Underlying Action to the MIB Insureds. The MIB Insureds were forced to defend

themselves in the Underlying Action at their own expense. Compl. ¶¶ 14-15 & Exh. D.

On or about July 28, 2003, e-FV filed the Plaintiffs’ First Amended Complaint and Jury

Demand in the Underlying Action (“Amended Underlying Complaint” or “Am. Und. Compl.”).

The Amended Underlying Complaint added e-Nable as a defendant and repeated and expanded

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upon the factual allegations of the Original Underlying Complaint. As in the Original

Underlying Complaint, the Amended Underlying Complaint alleged that the MIB Insureds and

other defendants misled the plaintiffs into investing in e-Nable. Am. Und. Compl. ¶¶ 18-63, 72.

The Amended Underlying Complaint then expanded upon its allegations of breach of

fiduciary duty for alleged actions taken after e-FV invested in e-Nable. E-FV alleged that the

MIB Insureds and other defendants attempted to freeze out e-FV from e-Nable, breached their

own fiduciary duty to e-Nable, manipulated e-Nable’s pricing, competed with e-Nable, interfered

with e-Nable’s business opportunities, and diverted e-Nable assets to themselves. Am. Und.

Compl. ¶¶ 64, 66-71, 73-83.

The Amended Underlying Complaint expanded to thirteen separate claims. Counts One

through Four stated claims for violations of Texas and Massachusetts securities statutes,

common-law fraud, and negligent misrepresentation, based on e-FV’s original investment in e-

Nable. Am. Und. Compl. ¶¶ 87-115. Counts Five through Twelve stated claims for various

breaches of fiduciary duty and breaches of contract, both directly and derivatively on behalf of e-

Nable, against the MIB Insureds. These claims were based on factual allegations concerning the

MIB Insureds’ treatment of e-Nable after e-FV joined the company, and, in fact, set forth those

specific factual allegations within the body of the claims. Id. at ¶¶ 116-180. Finally, the

Amended Underlying Complaint brought as Count Thirteen a claim for attorneys’ fees. Id. at

¶¶ 181-182.

The MIB Insureds continued to defend themselves in the Underlying Action at their own

expense. Compl. ¶ 19. On or about February 3, 2004, the court in the Underlying Action

allowed the MIB Insureds motion for partial summary judgment and dismissed Counts Five

through Ten and Count Twelve of the Amended Underlying Complaint. The remaining claims

are Counts One through Four, for violations of securities laws, fraud, and negligent

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misrepresentation, Count Eleven, for breach of fiduciary duty under the New York Business

Corporation Law on behalf of e-Nable against Cook and Oliphant, and Count Thirteen for

attorneys’ fees. Compl. ¶ 17.

On December 5, 2005, counsel for MIB Group again wrote to Federal, repeating the MIB

Insureds’ request for a defense under the Policy. Federal again refused. The Underlying Action

is set down for trial on July 17, 2006, and the MIB Insureds continue to bear the expense of their

defense. Compl. ¶¶ 18-19.

ARGUMENT

The standard for a motion to dismiss for failure to state a claim is as strict as it is familiar.

Bearing in mind that the Federal Rules of Civil Procedure encourage notice pleading, claims

shall not be dismissed unless, taking the well-pleaded facts of the complaint as true and drawing

all reasonable inferences in the plaintiffs’ favor, it appears beyond doubt that the plaintiffs can

prove no set of facts in support of their claims which would entitle them to relief. Centro

Medico Del Turabo, Inc. v. Feliciano de Melecio, 406 F.3d 1, 5-6 (1st Cir 2005); Langadinos,

199 F.3d at 69; Burns, 334 F. Supp. 2d at 18.

In the Complaint, the MIB Insureds state facts that establish on their face their claim that

Federal was obligated under the Policy to provide them a defense of the Underlying Action, and

breached the Policy when it refused to fulfill its obligation. Under longstanding Massachusetts

law,1 the duty to defend under an insurance policy is extremely broad. Federal was obligated to

assume the defense of the entire Action if the allegations of the Original Underlying Complaint

and Amended Underlying Complaint were reasonably susceptible of an interpretation that they

stated or adumbrated a claim covered by the Policy terms. Continental Cas. Co. v. Gilbane Bldg.

1 Federal agrees that this motion should be decided under Massachusetts law. See Commercial
Union Ins. Co. v. Walbrook Ins. Co., 7 F.3d 1047, 1048 n.1 (1st Cir. 1993).

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Co., 391 Mass. 143, 146, 461 N.E.2d 209, 212 (1984); Sterilite Corp. v. Continental Cas. Co., 17

Mass. App. Ct. 316, 318, 458 N.E.2d 338, 340 (1983). Federal owed this duty to defend under

the allegations Original Underlying Complaint; it continued to owe a duty to defend under the

allegations of Amended Underlying Complaint; and it still owes a duty to defend under the

remaining claims of the Amended Underlying Complaint.

Federal now seeks to avoid its obligation to defend, and to escape its clear breach of its

obligations under the Policy. In its motion to dismiss, Federal does not argue that the MIB

Insureds are not Insureds under the Policy. It does not dispute that the Policy contains a duty to

defend that is to be interpreted according to Massachusetts law. It does not argue that it did not

have notice of the Underlying Action and the contents of the Original Underlying Complaint and

Amended Underlying Complaint. By not raising the argument, it concedes that, absent the

securities exclusion, the Original Underlying Complaint and the Amended Underlying

Complaint are reasonably susceptible of an interpretation that they state or adumbrate a covered

claim invoking Federal’s duty to defend. Federal’s sole argument in support of its motion to

dismiss is that the securities exclusion contained in the for-profit entity Special Endorsement to

the Policy bars all coverage for any of the claims brought in the Underlying Action at any point

against any of the MIB Insureds. Reading the Policy against the allegations of the Original

Underlying Complaint and Amended Underlying Complaint in light of Massachusetts law and

the strict standard applied to a motion to dismiss, Federal’s argument fails. Its motion to dismiss

must be denied.

I. Absent the Securities Exclusion on Which Federal Relies, It Is Undisputed that Federal
Would Be Obligated to Provide the MIB Insureds a Defense to the Underlying Action
and Therefore Breached Its Duty to Defend.

The Policy provides that Federal “shall have the right and duty to defend any Claim

covered by this policy. Coverage shall apply even if any of the allegations are groundless, false

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or fraudulent.” Policy at 5 (emphasis supplied). Under longstanding Massachusetts law,

Federal’s duty under this provision to defend the MIB Insureds against a claim is far broader

than, and independent of, its duty to indemnify them against loss from the same claim. Brazas

Sporting Arms, Inc. v. American Empire Surplus Lines Ins. Co., 220 F.3d 1, 4 (1st Cir. 2000).

The duty of an insurer to defend third-party actions against its insured is determined by matching

the third-party complaint against the policy provisions: if the allegations of the complaint are

reasonably susceptible of an interpretation that they state or adumbrate2 a claim covered by the

policy terms, the insurer must undertake the defense. Id.; Herbert A. Sullivan, Inc. v. Utica Mut.

Ins. Co., 439 Mass. 387, 394, 788 N.E.2d 522, 530 (2003); Continental Cas. Co., 391 Mass. at

146, 461 N.E.2d at 212; Sterilite Corp., 17 Mass. App. Ct. at 318, 458 N.E.2d at 340.

“‘Otherwise stated, the process is one of envisaging what kinds of losses may be proved as lying

within the range of the allegations of the complaint, and then seeing whether any such loss fits

the expectations of protective insurance reasonably generated by the terms of the policy.’”

Continental Cas. Co., 391 Mass. at 147, 461 N.E.2d at 212, quoting Sterilite, 17 Mass. App. Ct.

at 318, 458 N.E.2d at 341.

The duty to defend, therefore, is triggered whenever the underlying complaint merely

shows, through general allegations, a possibility that the liability claim falls within the insurance

coverage. There is no requirement that the facts alleged in the complaint specifically and

unequivocally make out a claim within the coverage. Herbert A. Sullivan, Inc., 439 Mass. at

394, 788 N.E.2d at 531; Sterilite Corp., 17 Mass. App. Ct. at 318, 458 N.E.2d at 340. If the

insurer has a duty to defend at least one count of the underlying complaint, it must defend the

2 Webster’s defines “adumbrate” as “to foreshadow vaguely,” to “suggest or disclose partially.”

Webster’s Ninth New Collegiate Dictionary 58 (1988).

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insured on all counts. Aetna Cas. & Sur. Co. v. Continental Cas. Co., 413 Mass. 730, 732 n.1,

604 N.E.2d 30, 32 n.1 (1992).

In light of this standard, the MIB Insureds have clearly met their burden to state a claim

that the allegations of the Original Underlying Complaint and Amended Underlying Complaint

fall within the grant of coverage of the Policy, absent the securities exclusion. See GRE Ins.

Group v. Metropolitan Boston Housing P’ship, Inc., 61 F.3d 79, 81 (1st Cir. 1995). The MIB

Insureds have alleged that they are Insureds under the Policy. MIB Group is the “Organization”

and Cook, Oliphant and Lee are alleged to be “Insured Persons” as defined in the Policy and in

the Special Endorsement. “Insureds” are defined to include both the “Organization” and

“Insured Persons.” The Underlying Action is a “Claim.” It is a “civil proceeding commenced by

the service of a complaint” against an Insured. Policy at 8. The Original Underlying Complaint

and Amended Complaint both allege that the MIB Insureds have committed “Wrongful Act[s],”

defined in the Policy as “any error, misstatement, misleading statement, act, omission, neglect, or

breach of duty . . . allegedly committed or attempted, by an Organization or an Insured Person

. . . in their Insured Capacity.” Id. at 9. The Underlying Complaints are reasonably susceptible

of an interpretation that they state or adumbrate a claim covered by the Policy.

Federal does not argue otherwise. Instead, it places all its eggs in the basket of the

securities exclusion. The sole reason for dismissing the MIB Insureds’ claims for breach of

Federal’s duty to defend, it argues, is that the securities exclusion in the Special Endorsement

unambiguously bars coverage under any interpretation of the Original and Amended Underlying

Complaints. Federal bears the burden of establishing the applicability of this exclusion, GRE

Ins. Group, 61 F.3d at 81, and in its motion to dismiss, it has failed to meet this burden.

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II. The Claims for Breach of Fiduciary Duty Based on Actions Taken After e-FV’s
Investment Are Susceptible of an Interpretation That They Are Covered By the Policy
and Not Excluded By the Securities Exclusion.

The securities exclusion in the Special Endorsement provides that Federal “shall not be

liable for Loss on account of any Claim where all or part of such Claim, directly or indirectly, is

based upon, arises from or is in consequence of any actual or alleged violation of” federal or

state securities laws or “any provision of the common law imposing liability in connection with

the offer, sale or purchase of securities.” Special Endorsement at 3. Federal argues that based on

two cases from this Circuit, Federal Ins. Co. v. Raytheon Co., 426 F.3d 491 (1st Cir. 2005), and

High Voltage Eng’g Corp. v. Federal Ins. Co., 981 F.2d 596 (1st Cir. 1992), as well as some

cases from other jurisdictions, this exclusion bars any chance of coverage for the claims

remaining in the Amended Underlying Complaint after the dismissal of Counts Five through Ten

and Twelve.

Federal’s argument fails both factually and as a matter of law. First, Federal is wrong in

applying the securities exclusion only to the currently remaining claims in the Underlying

Action. The MIB Insureds have alleged that Federal had a duty to defend from the moment it

had notice of the Underlying Action and breached that duty three separate times: First, when it

refused to defend the Original Underlying Complaint; second, with respect to the allegations and

claims of the Amended Underlying Complaint; and third, with respect to the claims of the

Amended Underlying Complaint remaining after dismissal. Each of these three Underlying

Complaints must be examined to see if they give rise to a duty to defend.

Second, Federal misinterprets the law to be applied. The broad obligation of an insurer to

tender a defense when any claim can reasonably be interpreted to give rise to coverage is

discussed above. When seeking to apply an exclusion to avoid its duty to defend, an insurer is

further constrained by Massachusetts law. Exclusions from coverage are strictly construed.

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Hakim v. Massachusetts Ins’rs Insolvency Fund, 424 Mass. 275, 282, 675 N.E.2d 1161, 1165

(1997). Moreover, while an unambiguous exclusion is to be given its usual and ordinary

meaning, any ambiguity in an exclusion is construed against the insurer and in favor of coverage.

Id. at 281, 675 N.E.2d at 1165; Brazas, 220 F.3d at 4. In reading the exclusion and the rest of the

Policy, the Court should consider what an objectively reasonable insured, reading the relevant

policy language, would expect to be covered. Hakim, 424 Mass. at 282, 675 N.E.2d at 1165.

Applying these principles, and, of course, drawing all reasonable inferences in the MIB

Insureds’ favor, the securities exclusion does not, on its face, act to bar any and all coverage

under the Policy of all of the claims of the Underlying Action. The MIB Insureds agree that the

language of the securities exclusion is expansive, excluding not only claims for breaches of

securities law but for claims that are “directly or indirectly . . . based upon, aris[e] from or [are]

in consequence of” any such violations. Special Endorsement at 3. The MIB Insureds also agree

that the definition of “Claim” in the Policy is “a civil proceeding,” or, in other words, the

Underlying Action. It does not follow, however, that this means that because there are securities

claims in the Original Underlying Complaint and the Amended Underlying Complaint, that the

securities exclusion bars any prospect of coverage of any of the other claims and therefore

relieves Federal of its duty to defend. Both Original and Amended Underlying Complaints, even

after partial dismissal, contain claims that are not based on or arise from acts in violation of

securities laws, and are therefore not excluded from coverage by the securities exclusion.

A. The Original Underlying Complaint.

The Original Underlying Complaint alleged claims of breach of fiduciary duty (Count

One), minority shareholder oppression (Count Two), violations of Texas and Massachusetts

securities laws (Counts Three and Four), fraud (Count Five), and negligent misrepresentation

(Count Six). While Federal did not address in its motion whether the securities exclusion applies

11
to all these counts and allegations, it did rely on the Raytheon case for the proposition that

because a claim refers to the Underlying Action, the broad language of the securities exclusion

that excludes claims “based upon” securities law violations means that the entire Underlying

Action is barred from coverage if it contains any securities claims.

This is a misreading of Raytheon. In that decision, the First Circuit used the dictionary

definition of “based” to hold that a “prior litigation” exclusion applied if the current complaint

drew substantial support from the allegations of the earlier complaint. Raytheon, 426 F.3d at

499. The application of this principle to the Original Underlying Complaint is obvious. The

securities exclusion bars both explicit securities claims and those claims that draw substantial

support from allegations relating to the securities claims—that is, the allegations relating to the

MIB Insureds’ alleged misrepresentations that induced e-FV to invest in e-Nable. Those claims

are Counts Three through Six of the Original Underlying Complaint.

However, Counts One and Two are not based upon or draw substantial support from

factual allegations surrounding e-FV’s investment in e-Nable or the MIB Insureds’ alleged

misrepresentations that induced that investment. These claims, for breach of fiduciary duty and

minority shareholder oppression, arise from alleged actions taken after e-FV made its investment

that are unrelated to any of the reasons or actions leading up to that investment. As these claims

state, the MIB Insureds allegedly breached their fiduciary duty and engaged in minority

shareholder oppression by “us[ing] e-Nable’s confidential and proprietary information . . . for

their own benefit,” by “divert[ing] corporate opportunities and revenues from e-Nable to

themselves,” by “interfer[ing] with e-Nable’s efforts to market” its platform and to obtain

financing,” by using “e-FV’s assets for their own” benefit and purposes, by “engag[ing] in self-

dealing at the expense of e-Nable,” by “operat[ing] e-Nable solely for their own benefit,” “by

wrongfully competing with e-Nable,” and by “fail[ing] to cross-market e-Nable’s products and

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services” and “to avoid potential conflicts or redundancy of product development and duplicative

costs.” Orig. Und. Compl. ¶¶ 71, 76. The allegations upon which these claims are based are not

the same on which the securities-related claims are based, nor do they draw support from those

securities-related allegations. The fiduciary duty and minority shareholder oppression claims are

not subject to the securities exclusion. 3

Similarly, these fiduciary duty and minority shareholder oppression claims do not arise

from, nor are they in consequence of, any violations of securities law. While the phrase “arising

out of” indicates a wider range of causation than that of proximate cause, it falls short of “but

for” causation. Brazas, 220 F.3d at 7; Kinsella v. Wyman Charter Corp., 417 F. Supp. 2d 159,

2006 U.S. Dist. LEXIS 8118, * 12 (D. Mass. Feb. 2, 2006). In interpreting the phrase “arising

out of” in this case, the Court looks at the source from which the claims in the Original

Underlying Complaint originate. Where the claims arise from a different set of facts than do the

claims that are subject to the exclusion, the exclusion does not apply. See Brazas, 220 F.3d at 7-

8, and cases cited. Based upon that standard, the fraud and negligent misrepresentation claims of

Counts Five and Six would certainly come under the orbit of the securities exclusion. They are

based on the same factual allegations as Counts Three and Four, the securities claims. Counts

One and Two, the fiduciary duty and minority shareholder oppression claims, however, are not

subject to the securities exclusion. As discussed above, they are allegedly caused by and arise

from entirely separate facts than those underlying the securities-related claims.

3 Contrary to Federal’s argument, the boilerplate reference in the Original Underlying Complaint
to “FACTS APPLICABLE TO ALL COUNTS” carries no weight. A duty to defend is
determined by weighing the actual allegations of the complaint to see if any of them are
reasonably susceptible of an interpretation that they state or adumbrate a claim covered by the
policy. Herbert A. Sullivan, Inc., 439 Mass. at 394, 788 N.E.2d at 530; Sterilite Corp., 17 Mass.
App. Ct. at 318, 458 N.E.2d at 340.

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 None of the authority cited by Federal states otherwise. Federal relies upon High Voltage

Eng’g and a case from the Sixth Circuit, Isroff v. Federal Ins. Co., No. 93-3130, 1994 U.S. App.

LEXIS 14416 (6th Cir. June 8, 1994), for the proposition that the “arising from” language of the

securities exclusion should operate to bar coverage of these unrelated claims. Neither case

justifies Federal’s reading. High Voltage concerned the applicability of a pollution exclusion

that excluded claims arising out of the discharge of pollutants to counts against directors for

unfair and deceptive acts in trade or commerce under Massachusetts G.L. c. 93A. High Voltage

Eng’g, 981 F.2d at 598-600. The court held that the allegations underlying the c. 93A claims

either were the same allegations that underlay the pollution claims or specified actions that the

defendants took to prevent removal of the contamination. Id. at 601-602. Similarly, in Isroff,

which concerned the same securities exclusion at issue here, the court found that the fiduciary

duty claim arose out of the securities claim because it was based on the same misrepresentations

and simply “posed an alternative theory for recovery” based on those facts. Isroff, 1994 U.S.

App. LEXIS 14416, at *5-*6.4

Unlike the claims in High Voltage Eng’g and Isroff, the fiduciary duty and shareholder

oppression claims in the Original Underlying Complaint arise out of and are in consequence of

entirely different facts from the securities claims. They are unrelated and do not have any

connection to the facts giving rise to the alleged securities violations. These claims are not

subject to the securities exclusion, and are “reasonably susceptible of an interpretation that they

state or adumbrate a claim covered by” the Policy. Sterilite Corp., 17 Mass. App. Ct. at 318, 458

N.E.2d at 340. The MIB Insureds have stated a claim that Federal (a) was obligated to defend

the MIB Insureds in the Underlying Action as stated by the Original Underlying Complaint, and

(b) breached the Policy when it refused to do so. Federal’s motion to dismiss should be denied.

4 It is not clear that Isroff can be cited as authority, as it is unpublished. See 6 Cir. R. 28(g).

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 B. The Amended Underlying Complaint.

The same principles hold true for the allegations of the Amended Underlying Complaint.

While the Amended Underlying Complaint added several plaintiffs, an additional defendant, and

several more counts, it essentially stated the same underlying facts as the Original Underlying

Complaint. Of the Amended Underlying Complaint’s thirteen separate claims, Counts One

through Four stated claims for violations of Texas and Massachusetts securities statutes,

common-law fraud, and negligent misrepresentation, based on the e-FV’s original investment in

e-Nable. Am. Und. Compl. ¶¶ 87-115. As discussed above, these claims are subject to the

securities exclusion.

Counts Five through Twelve, on the other hand, stated claims for various breaches of

fiduciary duty and breaches of contract, both directly and derivatively on behalf of e-Nable,

against the MIB Insureds. These claims were based on factual allegations concerning the MIB

Insureds’ treatment of e-Nable after e-FV joined the company, and, in fact, set forth those

specific factual allegations within the body of the claims. Am. Und. Compl. ¶¶ 116-180. These

claims, like Counts One and Two of the Original Underlying Complaint, are not subject to the

securities exclusion.5 The MIB Insureds have stated a claim that Federal was obligated to

defend the MIB Insureds in the Underlying Action as stated by the Amended Underlying

Complaint and breached the Policy when it refused to do so. Federal’s motion to dismiss should

be denied.

C. The Remaining Claims of the Amended Underlying Complaint.

In its motion, Federal focused only on the claims of the Amended Underlying Complaint

remaining after the court allowed the MIB Insureds’ motion for partial summary judgment.

5 Count Thirteen of the Amended Underlying Complaint seeks attorneys’ fees and is based on
the allegations underlying the other Counts. Am. Und. Compl. ¶¶ 181-182.

15
These claims are Counts One through Four, for violations of securities laws, fraud, and negligent

misrepresentation, Count Eleven, for breach of fiduciary duty under the New York Business

Corporation Law on behalf of e-Nable against Cook and Oliphant, and Count Thirteen for

attorneys’ fees. Compl. ¶ 17. As discussed, Counts One through Four are barred by the

Securities Exclusion.

Count Eleven, however, is not subject to the securities exclusion. Count Eleven alleges

breaches of fiduciary duty under the New York Business Corporation Law on behalf of e-Nable

against Cook and Oliphant. That statute holds an officer or director liable for the “neglect of, or

failure to perform, or other violation of his duties in the management and disposition of corporate

assets committed to his charge” or for the “acquisition by himself, transfer to others, loss or

waste of corporate assets due to any neglect of, or failure to perform, or other violation of his

duties.” N.Y. Bus. Corp. Law § 720(1). The body of the Count sets forth the factual allegations

on which it is based. Am. Und. Compl. ¶¶ 167-174. Those allegations are substantially the same

as those underlying Counts One and Two of the Original Underlying Complaint. See Orig. Und.

Compl. ¶¶ 71, 76. Like those claims, Count Eleven is not subject to the securities exclusion.

The MIB Insureds have stated a claim that Federal continues to have a duty to defend them in the

Underlying Action and has continued to breach that duty, and the motion to dismiss must fail.

III. Because MIB Group and Its Officers and Directors Cook, Oliphant and Corbett Are Not
Insureds under the Special Endorsement, They Are Not Subject to the Securities
Exclusion That Applies Only to the Coverage Provided in That Endorsement.

As discussed above, the Original Underlying Complaint and the Amended Underlying

Complaint brought Claims, as that term is defined in the Policy, against MIB Group that are

potentially covered by the Policy, thereby triggering Federal’s duty to defend. They also brought

claims against Cook, Oliphant and Corbett in their capacities as officers and directors of MIB

Group, again triggering Federal’s duty to defend notwithstanding any added coverage provided

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in the Special Endorsement. Orig. Und. Compl. ¶¶ 6-8; Am. Und. Compl. ¶¶ 7-9. Even if the

securities exclusion applies to the Original Underlying Complaint or the Amended Complaint, it

does not exclude the coverage provided to the MIB Insureds under the Policy.

MIB Group is a not-for-profit membership corporation. Compl. ¶ 1. The Policy is a Not-

for-Profit Organization Liability Policy, and insures MIB Group as the insured Organization.

Compl. ¶ 7 & Policy at 1. In the Policy, MIB Group and its officers and directors Cook,

Oliphant and Corbett are insured against losses from claims against them and have the right to a

defense against such claims. Policy at 2, 5.

The Policy itself does not insure any for-profit subsidiary of MIB Group or any officers

or directors of any for-profit subsidiary—such an entity and its officers and directors are not part

of the Policy’s definition of “Insured.” Policy at 8. In order to provide coverage for officers and

directors of its for-profit subsidiary, MIB Group has obtained the Special Endorsement.

The language of the Special Endorsement is particularly opaque. A close reading

indicates that, while the Special Endorsement defines a “For-Profit Entity” as a for-profit

subsidiary of MIB Group, Special Endorsement at 1, it purports to provide coverage only to the

officers and directors of that subsidiary, not to the subsidiary itself (and even that coverage is

limited by the Special Endorsement’s limitations to the definition of the For-Profit Entity). It

effects this limited coverage by redefining Insured Person to include officers and directors of the

subsidiary, but not the for-profit subsidiary itself. Special Endorsement at 2.

The Special Endorsement explicitly excludes MIB Group from the definition of For-

Profit Entity and from the coverage provided by the Special Endorsement. It states that the

“For-Profit Entity shall not include . . . the Organization,” which is defined as MIB Group.

Special Endorsement at 1. Its redefinition of “Insured Person” for the coverage provided by the

Special Endorsement is limited to a “natural person who . . . is . . . a . . . director or . . . officer of

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a For-Profit Entity.” Id. at 2. Thus, the “Insured Person” covered by the Special Endorsement

is any officer or director of the For-Profit Entity, not Cook, Oliphant or Corbett in their capacity

as officers or directors of MIB Group. In short, MIB Group and its officers and directors have

no added coverage by virtue of the Special Endorsement. That added coverage is limited to

Cook, Oliphant and Corbett solely in their capacities as officers or directors of e-Nable, e-

Services, or MIB, Inc.

The securities exclusion on which Federal relies appears only in the Special

Endorsement. Given that exclusions are to be read narrowly, Hakim, 424 Mass. at 282, 675

N.E.2d at 1165, the only fair reading of the securities exclusion is that it applies only to the

additional coverage provided in the Special Endorsement. The Special Endorsement provides

added coverage to officers and directors of a for-profit entity that may offer its stock for sale, and

only to those officers and directors. The purpose of the securities exclusion is to exclude from

that added coverage claims against those officers and directors arising out of the sale of stock.

MIB Group and its officers and directors, of course, do not benefit from the Special

Endorsement.6 They have no additional coverage. Because they do not benefit from the added

coverage of the Special Endorsement, they should not have their coverage (i.e., the coverage they

actually do have) under the Policy limited by the securities exclusion within that Special

Endorsement. An objectively reasonable insured would not expect that an endorsement adding

coverage that does not apply to it would at the same time limit the coverage provided by the

main body of the policy. See id., 675 N.E.2d at 1165.

6 Likewise, MIB, Inc., e-Services and e-Nable derived no protection from the Special
Endorsement, even though it was apparently added to close the gap in coverage created by MIB
Group’s creation of e-Nable.

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 Federal did not make the scope of the securities exclusion clear in the Special

Endorsement. While some provisions of the Special Endorsement provide that they are made

“[s]olely for the purposes of the coverage afforded pursuant to this endorsement,” the securities

exclusion does not. On the other hand, the securities exclusion only applies to securities claims,

and the only entity that may issue securities is the For-Profit Entity that is defined in the Special

Endorsement. That definition excludes MIB Group and its officers and directors.

In addition, if the securities exclusion was intended to apply to the Policy as a whole, the

Special Endorsement should have purported to add the securities exclusion to the Policy

exclusions enumerated in sections 4.1 and 4.2 of the Policy. Policy at 2-4. The Breach of

Written Employment Contract Exclusion, attached to the Policy as Endorsement No. 6, does

exactly that. In contrast, the securities exclusion in the Special Endorsement makes no reference

to the exclusions in sections 4.1 and 4.2 of the Policy. Moreover, in contrast to the exclusion in

Endorsement No. 2, the securities exclusion does not specify that it applies “to all Insuring

Clauses,” thereby creating a reasonable expectation that it applies only to the additional coverage

provided by the Special Endorsement.

In short, “there is more than one rational interpretation of the policy language” of the

securities exclusion and the Special Endorsement. Hakim, 424 Mass. at 281, 675 N.E.2d at

1165; see Brazas, 220 F.3d at 4-5. In that situation, the insured “is entitled to the benefit of the

one that is more favorable to it.” Trustees of Tufts Univ. v. Commercial Union Ins. Co., 415

Mass. 844, 849, 616 N.E.2d 68, 72 (1993) (quoting Hazen Paper Co. v. United States Fidelity &

Guar. Co.¸ 407 Mass. 689, 700, 555 N.E.2d 576, 583 (1990)). MIB Group and its officers and

directors are entitled to the interpretation that the securities exclusion does not apply to the

claims against them.

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 This is a motion to dismiss. Inferences must be drawn in favor of the plaintiffs.

Moreover, ambiguities in policy terms such as this must be resolved in favor of the insureds, and

endorsements must be strictly construed. A duty to defend arises if any of the allegations of the

complaint are reasonably susceptible of an interpretation that they state or adumbrate a covered

claim. In light of all these inferences, the facts alleged in the complaint, and the terms of the

Policy, the Original Underlying Complaint, and the Amended Underlying Complaint, there is no

doubt that the MIB Insureds have stated a claim upon which relief can be granted. The motion to

dismiss should be denied.

CONCLUSION

For the foregoing reasons, the plaintiffs respectfully submit that the defendant’s motion

to dismiss the complaint should be denied.

REQUEST FOR ORAL ARGUMENT

Pursuant to Local Rule 7.1(D), the plaintiffs hereby request oral argument on this motion.

Respectfully submitted,

MIB GROUP, INC., JAMES F. COOK,

LEE B. OLIPHANT, and JAMES S.
CORBETT

By their attorneys

/s/ Robert B. Foster

Robert B. Foster, BBO 563347
Donald R. Pinto, Jr., BBO 548421
Rackemann, Sawyer & Brewster
One Financial Center
Boston, Massachusetts 02111-2659
(617) 542-2300

Dated: May 4, 2006

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