The Pennsylvania Superior Court has ruled the limitation on legal malpractice damages to the fees paid to an attorney only applies in criminal cases, not civil.
The court’s ruling reinstates a legal malpractice suit filed against Duane Morris that had been thrown out by the trial court because the plaintiffs never paid Duane Morris’ bills and, therefore, had no damages to collect, according to the lower court.
The three-judge Superior Court panel also ruled the trial court erred in granting Duane Morris’ motion for judgment on the pleadings as to damages because the plaintiffs’ damages claims of $2.5 million in lost stock value and interest and penalties owed on taxes were, if proven, actual losses under a breach of contract theory rather than consequential damages.
The Superior Court’s ruling in Coleman v. Duane Morris, which came in the form of an unpublished memorandum opinion November 13, dealt with the interpretation of the Pennsylvania Supreme Court’s 1993 decision in Bailey v. Tucker. The Bailey court dealt with a criminal case and malpractice claims in both tort and in assumpsit, or breach of contract.
The Bailey court dealt with whether there should be immunity for attorney malpractice in the criminal setting. The court noted there are “‘substantial differences’” between malpractice claims based in tort in the criminal context versus the civil context and that they should be treated differently, Superior Court Judge John L. Musmanno said for the panel in Coleman.
The Bailey court addressed, in part, what happens when a malpractice claim is brought under a breach of contract theory, as was done in Coleman. The court said traditional contract principles apply, but out of public policy concerns regarding criminal representation, only actual damages, not consequential damages, can apply.
The Bailey decision has often been cited by lawyers defending malpractice claims. They argue that if their bills weren’t paid, there would be no damages available for a malpractice plaintiff to collect as consequential damages are not available.
The Superior Court panel in Coleman disagreed with that argument.
“We conclude that the limitation on damages imposed by the Bailey court applies to an action in assumpsit based on a claim of attorney malpractice in a criminal case, but that limitation does not extend to an action for legal malpractice in assumpsit where the underlying action was, as here, a civil action,” Musmanno said.
In Coleman, the plaintiffs filed a breach of contract action toward the end of the four-year statute of limitations for that claim. The defendants have argued that, while the plaintiffs were barred from collecting damages for breach of contract under the Bailey precedent, they would have been able to collect consequential damages through a malpractice claim filed under a negligence theory had it been filed by the two-year statute of limitations.
Philadelphia Court of Common Pleas Judge Allan L. Tereshko had said that because husband and wife Eric and Linda Coleman and business partner Timothy Carroll sued for legal malpractice under a breach of contract theory, Bailey applied, limiting any potential recovery to fees they paid the law firm.
But because the business sale Duane Morris assisted the Colemans and Carroll in crafting included the acquiring company assuming the legal bills, the plaintiffs never paid any fees to the firm and couldn’t recover, Tereshko had said.
The plaintiffs were represented by Kenneth J. Zoldan of Zoldan Associates in Bala Cynwyd, Pa., and solo practitioner Michael B. Pisani of Gladwyne, Pa.
Zoldan said he may petition the court to make this a published decision. He said the court’s language in this opinion is “broad” in terms of the state of the law in malpractice cases. He said the court was clear that contract law applies in civil malpractice cases filed under a breach of contract theory, and that includes the allowance of consequential damages.
Abraham C. Reich and Peter C. Buckley of Fox Rothschild represented Duane Morris.
“We are reviewing the Superior Court’s opinion and considering an appeal to the Pennsylvania Supreme Court regarding this legal issue, which does not involve the substantive factual issues in the case,” Reich said. “Moreover, Duane Morris conducted its work diligently and properly and plaintiffs’ allegations are completely meritless.”
Eric Coleman and Carroll owned BCA Management Inc. and their respective spouses, Linda Coleman and Louise Carroll, owned BCA Professional Services Inc. The companies incurred a combined $2.16 million in unpaid employee withholding, wage and sales taxes to state and local authorities and the IRS, for which they were personally liable, according to court documents.
They began to consider a sale of the companies to alleviate the tax burdens. To that end, Eric Coleman and Timothy Carroll entered preliminary negotiations with Mirabilis Ventures Inc. On May 19, 2006, Coleman asked Duane Morris partner Kathleen Shay for legal advice related to a nonbinding letter of intent. The letter provided Mirabilis would purchase 100 percent of the companies’ stock for a minimum of $2.5 million, according to the opinion.
The plaintiffs alleged in the malpractice suit that Shay orally agreed to represent them and BCA in the sale of the stock to Mirabilis. They also said it was their understanding that Shay would bill BCA for her services and that Mirabilis would pay the legal fees after acquiring BCA’s stock, the court said.
Coleman and Carroll submitted a draft agreement of sale to Shay for her review. The agreement provided BCA would sell 100 percent of its stock to Mirabilis and resign their positions in exchange for a $300,000 payment and new positions with Mirabilis. The draft also included a guaranty from Mirabilis that it would pay up to $2.2 million in unpaid taxes, according to the opinion.
The plaintiffs said they asked Shay for confirmation that the sale would terminate their personal tax liabilities and she allegedly said it would, the court said.
At the July 14, 2006, closing, Shay and the plaintiffs were told Avant Services would be substituted for Mirabilis in the purchase agreement. Avant was created two days prior and was owned by Mirabilis. The plaintiffs alleged they asked Shay whether that was significant and if they were still covered regarding the tax liabilities. She allegedly assured them everything was fine, according to the opinion.
BCA retained its identity after the stock transfer and Coleman continued to operate the company. The plaintiffs learned several months after the closing that they were still personally on the hook for the taxes. Coleman was then fired from BCA in early 2007. Soon after, he petitioned the Chester County Court of Common Pleas to regain control of BCA after receiving complaints from former clients that the company had canceled their contracts and acted unprofessionally, according to the opinion.
The Chester County court granted Coleman power of attorney status over BCA and ordered he perform an accounting. Coleman said he learned BCA’s assets had been “plundered, and the taxes had not yet been paid,” according to the opinion.
The IRS seized a bank account in BCA’s name to pay the back taxes. In November 2010, the plaintiffs filed this malpractice suit in assumpsit, alleging breach of contract against Duane Morris and Shay. The defendants argued in response that the plaintiffs never discussed their tax liability with Shay, concealed the nature of BCA’s tax liability and that Duane Morris’ invoices had not been paid, the court said.
According to Musmanno, the plaintiffs are seeking the lost value of BCA’s stock, which is estimated to be $2.5 million, and the interest and penalties that accrued on the taxes since July 14, 2006. Duane Morris argued those damages were inconsistent with proof of actual loss required in legal malpractice actions.
Accepting the plaintiffs’ allegations as true, Musmanno said the plaintiffs’ claims for damages constituted actual loss because they sold their stock without receiving the bargained-for result of their release from liability for the taxes owed.
“Thus, the plaintiffs’ claim for the value of their stock, which they bargained away based on their reliance on defendants’ legal advice, and the interest and penalties that had accrued on the unpaid taxes, if proved, would constitute the actual losses sustained by plaintiffs,” Musmanno said.
Judge Sallie Updyke Mundy and Senior Judge James J. Fitzgerald III joined Musmanno in his opinion.
(Copies of the 14-page opinion in Coleman v. Duane Morris, PICS No. 12-2196, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •