Continental Casualty Company v. Law Offices of Melbourne Mills, Jr., PLLC

Melbourne Mills (defendant) and three other attorneys represented a class of plaintiffs in a case involving the drug fen-phen. The defendant in that case agreed to pay the class $200 million. By contract, Mills and the others could not collect more than 30 percent of that amount, or $60 million, as attorney’s fees. However, the attorneys collected $99 million directly, placed $20 million in a charitable trust, paid other consultants and expenses, and divided $74 million among the class members. The attorneys also controlled the trust. Mills received $5,350 per month for managing it, but the trust never distributed money to charity. In February 2002, the Kentucky bar association notified Mills it was investigating complaints against him regarding the settlement. For years, Mills had purchased malpractice insurance from Continental Casualty Company (Continental) (plaintiff). The policy had a dishonesty exclusion that barred coverage if a court or regulatory body determined the attorney had engaged in dishonest, fraudulent, or criminal acts. In August 2003, Continental asked Mills to complete a renewal application. The application asked whether there were any existing or expected malpractice claims against Mills. Mills checked no. Another question asked whether Mills had been subject to any disciplinary inquiry or complaint during the prior policy period. Mills again checked no and affirmatively wrote that no attorney at his firm was subject to any disciplinary inquiry or complaint. The fen-phen class sued Mills and the other class attorneys for malpractice, winning $42 million. Continental defended Mills against this lawsuit but reserved its right to contest coverage. Continental then filed its own action contesting coverage, arguing that it could (1) rescind the 2003 policy based on Mills’s misrepresentations in the renewal application or (2) deny coverage for the malpractice claim under the misrepresentation or dishonesty exclusion. Several class members intervened, claiming Continental could not deny coverage and must pay the $42 million judgment. The district court granted summary judgment for Continental, ruling it could deny coverage. By then, Mills had been disbarred. Mills appealed the judgment denying coverage.