Duane Morris has settled a legal malpractice suit against it for an undisclosed amount, letting stand a Pennsylvania Superior Court ruling that legal malpractice damages in civil cases are not limited to the fees paid to an attorney.

The state Supreme Court had granted allocatur in Coleman v. Duane Morris in June, in an order limiting review to the issue of whether its 1993 ruling in Bailey v. Tucker limiting malpractice damages to fees paid to an attorney applies only in the criminal context or can be extended to civil cases.

In November 2012, the Superior Court ruled the limitation on legal malpractice damages to the fees paid to an attorney only applies in criminal cases, not civil.

That ruling reinstated 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.

According to the docket, Duane Morris filed a praecipe to withdraw its appeal of that ruling September 17 and the case was listed as “disposed before decision.”

A spokesman for Duane Morris declined to comment except to say, “The parties have resolved their dispute.”

Counsel for Duane Morris, Abraham C. Reich of Fox Rothschild in Philadelphia, declined to comment.

Counsel for the plaintiffs, Kenneth J. Zoldan of Zoldan Associates in Philadelphia, also declined to comment on the settlement.

Thomas Waffenschmidt, a legal malpractice attorney with Rieders, Travis, Humphrey, Harris, Waters, Waffenschmidt & Dohrmann in Williamsport, Pa., who was not involved in Coleman, said overturning the Bailey precedent could lead to “tremendously unfair” results for plaintiffs in cases where the alleged malpractice led to losses well beyond what was paid in attorney fees.

Waffenschmidt said such a limitation on damages would amount to an “arbitrary cap.”

In Bailey, the court dealt with malpractice claims related to an attorney’s representation in an underlying criminal case. In Coleman, the underlying representation was a civil matter.

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,” Superior Court Senior Judge John L. Musmanno said for the panel in Coleman.

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.

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 Internal Revenue Service, 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 it was their understanding Shay would bill BCA for her services and that Mirabilis would pay the legal fees after acquiring BCA’s stock, the court said.

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 were 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.

Zack Needles can be contacted at 215-557-2493 or zneedles@alm.com. Follow him on Twitter @ZNeedlesTLI.