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A legal malpractice insurer has no duty to defend or indemnify a lawyer who allegedly stole more than $780,000 from his clients and gambled much of it away before committing suicide when he learned that he was under investigation, a federal judge has ruled. As U.S. District Judge John Jones III described it in his 38-page opinion in Westport Insurance Corp. v. Hanft & Knight, the case involved “the tragic circumstances that resulted from a lawyer’s double life.” According to court papers, attorney Michael Hanft shot himself on Aug. 11, 2004, after learning that the FBI was investigating some of his real estate deals. Hanft’s estate and his firm were later sued by Raymond and Genevieve Diehl, who claimed that Hanft swindled them out of $784,000 by saying he was borrowing money for construction projects that did not exist. In a suicide note Hanft left to his wife, he wrote: “In the end, I failed miserably and compounded my failure with inappropriate and illegal acts at the office. I spent beyond my means and used my escrow account to try to dig out of it.” The note, which was filed in court papers, ended by saying: “I don’t see any way out and the last thing you or [our children] need is a husband or father in jail and I’m not going to do that to you.” In the federal suit, lawyers for Westport Insurance sought a declaratory judgment that Hanft’s professional-liability policy did not cover the Diehls’ lawsuit. Jones agreed, finding that the insurer had no duty to defend or indemnify the Diehls’ suit due to multiple exclusions that barred any coverage, including a personal-profit exclusion, a dishonesty exclusion, and a conversion exclusion. The ruling is a victory for attorney Charles Haddick Jr. of Dickie McCamey & Chilcote, based in Camp Hill, Pa. The Diehls’ lawyer, Charles Rubendall II of Keefer Wood Allen & Rahal in Harrisburg, Pa., argued in court papers that the personal-profit exclusion should not apply because the Diehls’ loans to Hanft were a debt to be repaid and not a profit. But Jones found that “the Diehls’ argument is belied by their own allegations in the underlying complaint that Hanft �never intended to repay’ the loans.” According to the Diehls’ suit, Jones said, Hanft “made only a single payment of $10,000 toward the almost $800,000 owed to the Diehls.” As a result, Jones concluded, the allegations in the suit “show that Hanft took money for personal use with no intention of repaying it,” and the personal-profit exclusion “therefore bars coverage.” BARRED BY PRIOR KNOWLEDGE According to court papers, the Diehls are in the farming business and, beginning in the early 1960s, got involved in the development arena, buying farms and turning them into housing developments. Hanft became their lawyer in 1997, according to the couple’s lawsuit, and soon after, Hanft began borrowing large sums of money from them, often on an unsecured basis and always on terms unfavorable to the Diehls. The suit alleges that Hanft claimed he was borrowing the money for a “construction project” that would generate sufficient returns to enable Hanft to timely repay the Diehls with interest. By January 2003, the suit alleged, Hanft owed the Diehls $784,742 in principal and interest. It was then, the suit claims, that Hanft, acting as both borrower and attorney for the Diehls, prepared a promissory note, also signed by Hanft’s wife, that said Hanft was required to “attempt” to make monthly payments to the Diehls. But Hanft made only one payment on the promissory, of about $2,400 in March 2004, the suit alleged. The Diehls claim in their suit that they later learned that Hanft’s representations regarding the “construction project” were false — that there was no project — and that Hanft had used the money “to gamble at casinos and satisfy gambling debts.” The litigation over whether Hanft’s malpractice insurance should cover the Diehls’ suit ultimately became a battle between the insurer and the Diehls. In opposing Westport’s bid for a declaratory judgment that it owed no coverage, the Diehls argued that the personal-profit exclusion should not apply because the language of the exclusion includes the words “in fact,” and that no fact-finder has yet determined “in fact” that Hanft personally profited. Jones disagreed, saying there was no reason to wait for a jury to render a verdict in the Diehls’ suit because, “given the undisputed allegations of the underlying complaint, there is no plausible way that Hanft could be legally entitled to the personal profit he gained, and therefore, application of the exclusion need not await final adjudication.” Adopting the Diehls’ interpretation of the exclusion, Jones said, “would render the exclusion meaningless.” Jones also found that coverage would be barred by the “prior knowledge” exclusion because Hanft “certainly knew” all of the critical facts that led to the Diehls’ claim prior to the policy’s effective date. “These facts — inducing loans through fraud, taking loans from clients without properly advising them and with no intention of repaying them, drafting illusory promissory notes, and failing to make payments of substantial debt — would undoubtedly provide any reasonable attorney, and in fact any reasonable person, with a basis to believe that he had breached his professional duty,” Jones wrote. THE DISHONESTY EXCLUSION The Diehls argued that a jury must decide several “fact issues,” such as whether Hanft intended and had the ability to repay the loans. Jones rejected that argument, saying it “ignores entirely the Diehls’ own allegation in the underlying complaint that Hanft never intended to repay the loans.” The policy’s “dishonesty” exclusion, also barred coverage, Jones found, because the allegations by the Diehls — that Hanft unfairly took advantage of them by deceiving them into lending money through false representations — “clearly arise from �dishonest’ acts.” The Diehls argued that because their suit also alleged a negligence claim, a jury could conclude that Hanft had merely acted negligently, a tort that would be covered under the policy. Jones disagreed, saying “no reasonable jury could conclude that Hanft was negligent, but not dishonest.” In the final section of his opinion, Jones rejected the Diehls’ argument that coverage should not be completely barred because Hanft’s firm, Hanft & Knight, is an “innocent insured.” Instead, Jones agreed with Westport’s argument that Hanft’s actions are imputed to the firm because he was one of two principals and owned 75 percent of the corporation. “In this case,” Jones wrote, “the personal profit and prior knowledge exclusions of the Westport policy bar coverage if �any insured’ commits acts which fall within their terms. .�.�. [T]hese exclusions preclude coverage for claims arising from Hanft’s conduct as alleged in the underlying complaint, and therefore, bar coverage on the underlying claims.” Neither Haddick nor Rubendall could be reached for comment on the decision.
Shannon Duffy is a reporter with The Legal Intelligencer , an ALM publication.

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