The second in a pair of opinions in as many days from the U.S. Court of Appeals for the Third Circuit held that insurers are not responsible for defending or indemnifying a juvenile-detention center operator who was involved in the “kids-for-cash” scandal in Luzerne County.
Neither Colony Insurance Co. nor General Star Indemnity Co. will have to cover Robert Powell or his company, Mid-Atlantic Youth Services Corp., against civil suits filed by youths who were held in detention centers that his company ran, the court ruled Thursday. It issued a similar opinion the day before, regarding Robert Mericle, whose construction company built the detention centers.
“The district court declared Colony Insurance and General Star Indemnity did not have a duty to defend or indemnify appellants in the underlying lawsuit brought by the juvenile victims of the kickback scheme,” Judge Anthony Scirica wrote on behalf of the three-judge panel that affirmed the U.S. District Court for the Middle District of Pennsylvania’s ruling in Colony Insurance v. Mid-Atlantic Youth Services .
Judges Marjorie Rendell and D. Brooks Smith joined Scirica on the panel.
The complaints against Powell and MAYS allege that he paid former Luzerne County Court of Common Pleas Judges Mark A. Ciavarella Jr. and Michael T. Conahan about $2.6 million in exchange for their placement of juveniles in detention centers that were owned and operated by MAYS, according to the opinion.
To Powell’s argument that some of the allegations he faces are based on negligence, which would trigger insurance coverage, Scirica responded, “Appellants’ attempt to recast the allegations in the underlying complaints as claims alleging negligence is unavailing.”
He quoted from several parts of the complaint alleging “knowing” and “willful” behavior, concluding, “We agree with the district court that the allegations include only claims of intentional conduct, not negligence.”
The policies that covered Powell and MAYS exclude coverage for any “knowing violation of rights of another,” according to the opinion.
Although Powell contended there are no factual allegations that he acted while knowing that his actions would violate the juveniles’ rights, Scirica said, “the complaints allege Powell participated in the conspiracy knowing that the juvenile victims’ detention had been procured by violating their constitutional rights in order to ensure the detention facilities operated at or near capacity to ensure maximum profit.”
MAYS, though, argued that the “knowing violation exclusion” would not apply to it because the complaints don’t allege that Powell was acting as an agent of MAYS.
However, the court held that the complaints do allege that Powell was an owner, officer, shareholder and operator of the company and, since he wasn’t specifically named on the insurance policies, he would only have coverage if he were an executive officer and director.
“Given that MAYS tendered the complaints to Colony Insurance and General Star for defense of both itself and Powell, it contradicts its own assertion that Powell was not a controlling agent,” Scirica said, adding that the complaint alleges the company also had a financial interest in the dealings. Therefore, the policy exclusion applies to MAYS as well as Powell, Scirica held.
Another exclusion in the policy was for personal injury, including imprisonment, that arose “out of the willful violation of a penal statute or ordinance committed by or with the consent of the insured,” according to the opinion. Powell argued that the injuries to the youths were “too remotely related from his actions to trigger the exclusion,” Scirica said.
Because the juveniles allege that there is a connection between Powell’s actions and their injuries, the district court was correct to apply the exemption and hold that the insurer is not responsible for Powell’s defense, Scirica said.
In February 2011, a federal jury in Scranton found Ciavarella guilty of 12 of the 39 counts of corruption filed against him, including racketeering, racketeering conspiracy, honest services mail fraud, money laundering conspiracy and a host of tax fraud charges. He is now serving 28 years in an Illinois federal prison.
Conahan pleaded guilty in 2010 to one count of racketeering and is currently serving a 17.5-year federal prison sentence in Florida.
In a June 2009 plea agreement, Powell pleaded guilty to failing to report a felony to federal authorities and with being an accessory after the fact to a tax conspiracy, but alleged his involvement in the scheme escalated as the judges forced his hand.
He is serving an 18-month sentence in a different federal prison in Florida.
Mericle has also entered a guilty plea but has yet to be sentenced.
Marianne Gilmartin of Stevens & Lee in Scranton, who represented General Star Indemnity Co. in the Middle District of Pennsylvania court, could not be reached for comment.
Bernard Schneider of Brucker, Schneider & Porter in Pittsburgh, who represented MAYS, could not be reached for comment.
(Copies of the 11-page opinion in Colony Insurance v. Mid-Atlantic Youth Services , PICS No. 12-1198, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •