PHILADELPHIA – A federal appeals court has struck down a breach of contract action brought by a pair of major insurance providers against a prominent Philadelphia law firm and one of its attorneys.
U.S. Court of Appeals for the Third Circuit Judges Kent A. Jordan, Thomas M. Hardiman and Joseph A. Greenaway Jr. upheld an earlier federal court decision in dismissing with prejudice a breach of contract suit initiated by New York Central Mutual Insurance Company (NYCM) of Edmeston, N.Y., and St. Paul Mercury Insurance Company of St. Paul, Minn., against Margolis Edelstein and Michael T. Savitsky of Scranton.
In 2003, Cheryl Shannon was injured in an accident involving an automobile driven by motorist Marcial Gonzalez and insured by NYCM. After negotiations in which NYCM refused to pay the full insurance policy limit of $25,000 for Shannon’s injuries, Shannon sued Gonzalez in 2004. By 2009, Shannon’s settlement demand had risen to $200,000.
NYCM retained Margolis Edelstein to determine possible exposure to a bad faith insurance claim under Pennsylvania law, based on its handling of Shannon’s case. Through three letters issued from November 2009 to April 2010, Savitsky averred his opinion NYCM was not liable for a bad faith claim and should not settle Shannon’s claim for more than $25,000.
After a jury trial, Shannon secured a judgment against Gonzalez for $906,000 and, having acquired Gonzalez’s rights against NYCM, likewise sued NYCM for breach of contract and insurance bad faith. In turn, NYCM filed a claim with St. Paul, its own insurer. In March 2014, Shannon negotiated a total settlement with the appellants for $2 million.
On April 29, 2014, appellants commenced the present action alleging one count of breach of contract by appellees. After two amended filings for diversity jurisdiction, the appellees motioned to dismiss the appellants’ complaint due to the two-year statute of limitations expiring on tort claims – believing the appellants’ claims originated in negligence, instead of breach of contract (which carries a four-year statute of limitations).
Applying the gist of the action doctrine, the District Court concluded the appellants’ claim was “a legal malpractice tort” and dismissed it as time-barred by the applicable two-year statute of limitations. The District Court also concluded amendment to the second amended complaint would be futile. The appellants timely appealed.
“Based on the allegations in their second amended complaint, the appellants’ malpractice claim arises from Savitsky’s negligent performance of his contractual obligations and, therefore, sounds in tort,” Greenaway said. “Thus, we conclude that this is a case in which the contract between appellants and appellees is best “regarded merely as the vehicle, or mechanism, which established the relationship between the parties, during which the tort of negligence was committed.”
Though the appellant relied on Supreme Court of Pennsylvania precedent in Bailey v. Tucker regarding attorneys involved in breach of contract claims (feeling they need to provide professional services at a level consistent with those expected of “the profession at large”), the Third Circuit instead preferred the Supreme Court’s rationale presented in Bruno v. Erie Insurance Company, which said that a contractual agreement requires “specific executory promises.”
The absence of those same promises did not make the agreement between the appellants and appellees as “a distinct contractual promise upon which a breach of contract claim may be premised.”
“Having concluded that appellants’ malpractice claim sounds in tort rather than contract, we therefore agree with the District Court that appellants’ tort claim is untimely because the action was filed outside of the two-year time period,” Greenaway said.
“We further conclude that the District Court properly found that further amendment to the second amended complaint would be futile and dismissed it without providing leave to amend,” Greenaway added.
The appellants were represented by Loren L. Pierce and Richard S. Mills of McElroy Deutsch Mulvaney & Carpenter, both in Philadelphia and New York, N.Y.
The appellees were represented by David B. Picker and George M. Vinci Jr. of Spector Gadon & Rosen, in Philadelphia.
U.S. Court of Appeals for the Third Circuit case 15-1541
U.S. District Court for the Middle District of Pennsylvania case 3:14-cv-00829
From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at nickpennrecord@gmail.com