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Pepper Hamilton was hit with a $30 million legal malpractice suit brought by former clients who claim that a series of mistakes by two Philadelphia lawyers resulted in a New York jury’s decision to hand up a verdict of more than $28.8 million. According to the suit, the Pepper Hamilton lawyers failed to object when the trial judge decided that eight jurors would deliberate and then took a verdict in which only six of the eight agreed. The suit says New York law requires civil verdicts to be rendered by at least five of six jurors — equal to about 83 percent of the panel. But the Pepper Hamilton lawyers failed to object at the time of the verdict that a decision by six of the eight jurors violated the so-called “five-sixths rule” because it reflected a decision by just 75 percent of the panel, the suit alleges. According to the suit, the Pepper Hamilton lawyers raised the issue for the first time when the case was on appeal and were told by the Appellate Division of the Supreme Court of New York that they had waived any right to object because they failed to complain about it at the time the verdict was rendered. The legal malpractice suit was filed in the Philadelphia Court of Common Pleas by attorneys Clifford E. Haines and Daniel J.T. McKenna of Haines & Associates on behalf of Richard and Jeanne DiLoreto. Pepper Hamilton’s executive partner, Robert E. Heidick, said the firm will be “vigorously defending” the case and that “we don’t think this claim has any merit.” According to the suit, the $28.8 million verdict against the DiLoretos in June 2001 was the culmination of a complicated series of court proceedings dating back to 1985 involving a defunct insurance company and its primary reinsurer. New York insurance officials had placed Nassau Insurance Co. in receivership and later filed a $10 million suit against ARDRA Insurance Co., a Bermuda company, alleging breach of its reinsurance treaties with Nassau. The suit also named the DiLoretos as defendants, alleging that they were the “alter egos” of ARDRA. (Richard DiLoreto was president of ARDRA, and Jeanne DiLoreto was a shareholder of Tiber Holding Corp., which was the parent of ARDRA and held all of its stock.) In defending the suit, ARDRA argued that any obligations it owed to Nassau were nullified by the failure of the New York state liquidators to honor the terms of its reinsurance treaties. But as a foreign reinsurance company, ARDRA was required under New York law to post a $10 million security bond before it had even filed a formal answer to the suit. When ARDRA was unable to post the “pre-answer” bond, New York Superintendent of Insurance Gregory V. Serio obtained a default judgment of $10 million. According to court papers, Richard DiLoreto hired Pepper Hamilton in 1989. More than a decade later, a trial was scheduled in which the state liquidators were seeking to “pierce the corporate veil” in order to obtain the DiLoretos assets to satisfy the $10 million judgment against ARDRA — a judgment that, with interest added, had nearly tripled over the years. Now, in their legal malpractice suit, the DiLoretos are lodging a series of complaints about how the case was handled by Pepper Hamilton attorneys Thomas E. Zemaitis and Alfred H. Manwaring IV. The suit alleges that the Pepper Hamilton lawyers advised Jeanne DiLoreto to dismiss her personal lawyer so that she and her husband could be jointly represented. In doing so, the suit says, Pepper Hamilton never warned the DiLoretos of the potential conflicts they would face in being represented by the same lawyers. The suit also alleges that Pepper Hamilton never sought any assistance in the case from lawyers who regularly practice in New York. When the trial began in May 2001, the suit says, Judge Alice Schlesinger of the Supreme Court of New York announced that nine jurors would be selected, and that six jurors would deliberate, but that the identity of the three alternates would be decided after closing arguments were delivered. Both of the DiLoretos were called as witnesses at trial, the suit says, and Jeanne DiLoreto claims that she was “inadequately prepared to give evidence by her counsel.” The suit also alleges that, throughout the trial, the lawyer representing the New York state insurance superintendent “made inappropriate remarks and ethnic slurs” to the jury, including a comment in which he analogized the concept of reinsurance to “a bookie laying off his bets.” Pepper Hamilton’s lawyers never objected to those remarks, the suit alleges. When the trial ended, the suit says, the judge altered her original plan and, after excusing one of the nine jurors, announced that all eight of the remaining jurors would deliberate, and that when six of the eight had agreed, their decision would constitute the jury’s verdict. That decision, the suit alleges, violated both New York law and the state’s constitution, which both require that five-sixths of the jurors must agree in a civil case. But the suit alleges that neither Zemaitis nor Manwaring lodged any objection to the court’s decision to take a verdict from six of eight jurors. On June 13, 2001, the jury — with just six of its members agreeing — found against the DiLoretos and awarded more than $28.8 million to the insurance superintendent. According to the suit, the Pepper Hamilton lawyers raised the issue of the five-sixths rule violation only after the provision of New York law was brought to their attention by Richard DiLoreto. In April 2003, the suit says, the Appellate Division of the New York Supreme Court refused to order a new trial, finding that the DiLoretos had “consented to a verdict rendered by six of eight jurors” and had therefore “waived their claim that the verdict was rendered by less than five-sixths of the jury.” The appellate panel also upheld the jury’s verdict on the merits, finding that the insurance superintendent had presented sufficient evidence to justify piercing the corporate veil. “The DiLoretos, through their control of ARDRA, deprived it of the funds needed to meet its reinsurance obligations, and that … circumstance rendered the agreements at issue inequitable,” the panel said. “Given the sequence of the transactions, in which premiums paid by Nassau were immediately transferred to other DiLoreto-owned entities, the jury was entitled to consider the sequential transfers as part of an integrated transaction designed to benefit DiLoreto entities by effectively denying ARDRA’s insured the coverage for which it had contracted and paid.” The state’s highest court, the New York Court of Appeals, refused to hear the case in July 2003. According to the suit, the DiLoretos are now saddled with a judgment against them that has swelled to more than $30 million. In their suit, the DiLoretos are pursuing four claims against Pepper Hamilton — professional negligence; breach of contract; breach of fiduciary duties; and punitive damages. In the claim for punitive damages, the suit alleges that Pepper Hamilton’s lawyers at one point in the litigation “threatened” to provide the “bare minimum” in legal services to the DiLoretos due to a fee dispute the firm had with Richard DiLoreto.

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