Criminal Conviction Of De Facto Officer Does Not Preclude D&O Coverage

After a two week trial in 2013, a jury convicted Mitchell J. Stein, a lawyer, of mail, wire, and securities fraud based on evidence that he fabricated press releases and purchase orders to inflate the stock price of his client Signalife, Inc., a publicly-traded manufacturer of medical devices.  Mr. Stein received a sentence of 204 months' imprisonment, over $5 million in forfeiture, and over $13 million in restitution.  He appealed to his conviction to the Eleventh Circuit Court of Appeals, which affirmed his conviction but vacated his sentence and remanded the case for resentencing.  U.S. v. Stein, 846 F.3d 1135 (11th Cir. 2017).  Mr. Stein then asked for a rehearing en banc.

While Mr. Stein's appeal was pending before the Eleventh Circuit, he sued the insurers of the corporation for which he served as a de facto officer for failure to cover defense expenses.  One of the insurers demurred to Mr. Stein's breach of contract claim on the basis of a policy provision requiring an insured to repay defense expenses if it has been "finally determined that the insured committed willful misconduct.  Superior Court Judge Michael M. Johnson sustained this demurrer.  Last week, the Court of Appeal concluded that Judge Johnson had erred, holding that "a think that is 'final until reversed' is not final".  This may be dicta, however, because the Court of Appeal also found that even if there is a final adjudication, the exclusion "by its terms does not apply to defense expenses".


A reader questioned my mention of "conventicles" in this post last week.  I picked up the word from one of my current reads, Professor David D. Hall's book, A Reforming People: Puritanism and the Transformation of Public Life In New England (2011).  The Maryland Court of Appeals provides the following historical background:

A "conventicle" was a meeting for religious worship in some form other than that prescribed by the Church of England. The Conventicle Act of 1664 prohibited "[u]nlawful conventicles and meetings under pretence of exercise of religion...." Act 16, Chas. II, c. 4. The Conventicle Act re-enacted the Elizabethan statute that made it a crime to "obstinately refuse to repair to some Church ... to hear Divine Service" and to be present at any "Assemblies, Conventicles or Meetings, under Colour or Pretence of any such Exercise of Religion, contrary to the Laws and Statutes of this Realm...." 35 Eliz. c. 1 (1593). Persons convicted under the 1593 Act were to be "committed to Prison, there to remain without Bail ... until they shall conform and yield themselves to come to some Church" to attend Church of England services.

Parker v. Maryland, 337 Md. 271, 277 n.4 (1995)

The year before the enactment of the Elizabethan statute described above, William Shakespeare, put "conventicle" into the mouth of the Duke of Gloucester (Humphrey of Lancaster):

Ay, all you have laid your heads together –
Myself had notice of your conventicles –
Henry VI, Act III, Scene 1.