Last month, the Superior Court of Pennsylvania handed down an extremely well-reasoned opinion in J.J. DeLuca Company v. Toll Brothers. The matter explored the contours of the gist of the action doctrine and punitive damages law within the framework of an extremely ambitious development project. Toll Brothers (TB), a local behemoth clearly in need of no introduction, has been aggressively developing communities, even during these economically precarious times, stimulating the local economy and responding to the needs of sophisticated homebuyers throughout the region. One of these efforts has unquestionably altered the complexion of the area just south of Fitler Square in Philadelphia.
Naval Square, a grand-scale Philadelphia community, represents a highly complex undertaking. And for those history buffs amongst us, perhaps some very brief background is in order. According to TB’s website, the Philadelphia Naval Asylum first opened in 1834 and served as the first home of the U.S. Naval Academy and as the nation’s first retirement home for sailors and marines. One of the uses of the Naval Asylum was for the Philadelphia Naval School, an academy for midshipmen that was a precursor of the U.S. Naval Academy. The developer first acquired the subject property in 1988, many years before commencing formal development. Eventually, TB spearheaded major construction efforts at the approximately 20-acre site, expending tens of millions of dollars to create a picturesque gated community, with both single-family as well as condominium offerings. The stunning focal point, Biddle Hall, was formerly the surgeon general’s residence and designed by architect William Strickland. Well preserved, the structure represents a quintessential example of Greek Revival architecture in the United States.
Needless to say, in addition to the intensive planning and designing surely involved with such a massive project, numerous contractual relationships were either established or forged. One such alliance was created with the underlying plaintiff in the fairly protracted piece of litigation, J.J. DeLuca Co. DeLuca was engaged to serve as the general contractor for the approximately $79 million project. According to the decision, in addition to other compensation, TB had agreed to remit 3.5 percent of the total billings, representing a management/administrative fee for their anticipated efforts. Unfortunately, however, disagreement ensued concerning the timeliness of permit acquisition, drawings and performance. In addition to scheduling gripes, TB also raised concerns with the quality of the workmanship. DeLuca took the position that some of these claimed delays had actually been caused by TB.
At any rate, bad blood developed between the parties, and TB elected to take back control of the entire project. After extensive negotiation, a termination for convenience agreement (TCA) was executed, memorializing the parameters of the fissure, including limiting the types of claims that could be brought in the event of future litigation. In March 2007, after mediation efforts broke down, DeLuca sued TB for amounts held back by TB under a 10 percent retainage arrangement. The complaint alleged breach of contract, unjust enrichment, quantum meruit and violation of the Contractor and Subcontractor Payment Act (CASPA), 73 P.S. §§ 501-516, theories. Originally, DeLuca pursued damages to the tune of about $4 million, not an insignificant sum. TB counterclaimed for cost overruns, costs of completion, unanticipated personnel costs and liquidated damages. Evidence developed by TB during discovery confirmed that subcontractors, including Brookside Construction, had been directed by DeLuca personnel to submit invoices to TB for work not actually performed at the site.
Over DeLuca’s objection, the trial court permitted TB to amend and include a fraud count. The plaintiff’s fraudulent billing claims were eventually withdrawn. After a bench trial, the trial court awarded about $1.2 million to DeLuca. Post-trial motions were submitted and that court revised its original verdict, increasing the award amount to about $2.1 million. Motions for attorney fees were denied, “because neither party is the ‘substantially prevailing party’ under [CASPA],” as were claims for interest, not preserved under the TCA and therefore waived. Albeit that the court acknowledged TB’s discovery of “pervasive significant fraud” committed by DeLuca, it declared that “all such sums have been voluntarily withdrawn or ruled not owed.” TB’s punitive damages claim had been deemed waived as well and subsequently both parties appealed.
On appeal, a Superior Court panel vacated the original judgment and remanded the case, deciding that the trial court erroneously concluded that TB’s claim for punitive damages had been waived. On remand, and after briefs and further argument, the lower court entered a $4.5 million verdict in favor of TB on the punitive damages claim, resulting in a net award to TB of about $2.4 million.
Post-trial motions followed yet again, with the trial court essentially reaffirming itself, except with respect to the punitive damages. Timely cross appeals were eventually filed as well. Although DeLuca raised numerous issues on appeal, the thrust of its efforts concerned the evisceration of TB’s fraud and punitive damages claims. For instance, DeLuca contended that the lower court failed to find that fraud had even occurred. Additionally, at least in DeLuca’s estimation, TB waived any fraud claim by failing to preserve such a theory in the TCA.
The Superior Court easily rejected these attacks, however, citing to “express and unequivocal” findings of fraud below and reminding the litigants of the duty of good faith and fair dealing implied in every contract. A statute of limitations defense had also been asserted yet was highly attenuated, at best, in the face of active concealment, a theory the lower court found to be an insurmountable impediment. Most notably, DeLuca contended that TB’s fraud claim should have properly been barred by the gist of the action doctrine. The Superior Court easily concluded however that TB’s fraud did not arise out of the performance of the contract. Rather, it was DeLuca’s fraudulent billing scheme that gave rise to such a claim. Furthermore, “DeLuca had an independent, societal duty not to defraud [TB], or any other comparably situated party.” Lastly, “proof of the fraud is an independent and self-sufficient basis for recovery.”
As for the punitive damages challenge, a multi-pronged attack, the Superior Court could not concur that such an award had not been constitutionally warranted, especially in light of such egregious conduct committed by a business. The separate basis for fraud and the associated evidence proved too severe for DeLuca’s “mathematical gyrations.” Practitioners advising defense clients would be particularly wise to understand the bounds of their client’s conduct before rejecting tort claims willy-nilly. •
Harper J. Dimmerman is an adjunct professor at Temple University’s Fox School of Business and published novelist. His firm represents clients in various litigation and real estate law matters. He can be reached at email@example.com or 215-545-0600.
James M. Lammendola is an instructor at Temple University’s Fox School of Business who was in private practice for 20 years. He can be reached via email at firstname.lastname@example.org or telephone 267-254-3324.
Bradley J. Osborne is an attorney at the Law Office of Harper J. Dimmerman.