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In this month's edition:
DIRECTORS AND OFFICERS
- Questions of Fact Preclude Dismissal of Suit Based Upon Business Judgment Rule
- Once Again, Shareholder's Failure to Make Pre-Suit Demand on the Board is Fatal to Action
- Claim Against Health Care Facility Under Section 1983
- Error in Judgment Rule
- Summary Judgment on EMTALA Claim
- Court Holds That Former Client Waives the Attorney-Client Privilege When It Sues Former Lawyers
- No Cause of Action Exists by Surety Company Against Attorney for Equitable Subrogation
- The Doctrine of Unclean Hands Precludes Recovery in a Legal Malpractice Action
- Statute of Limitations Defense Results in Dismissal of Legal Malpractice Claim
- Without Proof of Access to Copyrighted Material, Claim for Infringement to Architectural Designs Fails
ACCOUNTANT/ FINANCIAL PLANNING
- Enforcement of Arbitration Agreements in Malpractice Actions Against Financial Planners
- Direct Loss/Faithfully Performing Work
- The Extension to Federal Court of Pennsylvania's Certificate of Merit Requirement in Professional Liability Cases
DIRECTORS AND OFFICERS
Questions of Fact Preclude Dismissal of Suit Based Upon Business Judgment Rule
OFFICIAL COMM. OF UNSECURED CREDITORS EX REL. ESTATE OF LEMINGTON HOME FOR THE AGED V. BALDWIN
(3dCir., Sept. 21, 2011) [lexis.com/lexisONE]
A committee of unsecured creditors sued the directors and officers of the Lemington Home for the Aged for breach of fiduciary duty and deepening of insolvency. The Lemington Home was a nonprofit organization that started as a place of refuge for elderly members of the African American community in the late 1800s. Since the 1980s, when the home moved and expanded, the home was beset with financial troubles and, eventually, it filed for bankruptcy.
The committee brought this action in federal court under Pennsylvania law for breach of fiduciary duty alleging in part that the board relied on an unqualified administrator's judgment. This administrator was working part time for the home, which was in violation of state-law requirements, and had a string of deficiencies on her watch, which included the death of a resident of the home which resulted in the home being placed on a probationary list. The committee also asserted that the board breached its duty because it did not have a treasurer and thus did not discover another officer's failure to maintain records and failure to bill Medicare, which resulted in a loss of over $ 450,000 in one year.
The district court found that the business judgment rule shielded the directors and officers from liability and granted defendants summary judgment. On appeal, however, the Third Circuit found that there was a triable issue as to whether the board exercised reasonable diligence because the board had received numerous red flags about the officers in question, and because the board eschewed a viability study. Moreover, the board did not have any reason to believe the officers in question were reliable or competent because of their deficiencies and failures to maintain records. The committee also brought a claim for breach of the duty of loyalty as the board had a plan in place to close the home in order to divert clients and revenue to another organization, which had an interlocking board of directors.
The district court had found that the doctrine of in pari delicto shielded the directors and officers from liability because the defendants did not receive any benefit from the decision to close the home. Again, the Third Circuit reversed the district court and held that there were triable issues of fact because the defendants expressed a self-interest in closing the home and diverting it to an organization that had an interlocking board of directors. Finally, while the claim of deepening insolvency has never been dealt with in Pennsylvania courts, the court held that there were triable issues with regard to deepening insolvency. A claim for deepening insolvency is defined as an injury to a debtor's corporate property from fraudulent expansion of corporate debt caused by a director's actions. The committee alleged that the board kept information about a decision to close the home from its creditors and the bankruptcy court for a period of time, which increased the amount of debt accumulated by the home.
Impact: A board of directors must look into red flags and warning signs surrounding the administration of a business in order to raise the business judgment rule defense effectively.
Once Again, Shareholder's Failure to Make Pre-Suit Demand on the Board is Fatal to Action
STRUGALA V. RIGGIO
(S.D.N.Y., October 5, 2011)
Strugala, a Barnes and Noble shareholder, instituted a shareholder suit against the directors of Barnes and Noble. Barnes and Noble directors had recently agreed to purchase College Booksellers for a sum of $514 million. College Booksellers was owned entirely by Leonard Riggio, the chairman of Barnes and Noble's board of directors and the largest owner of Barnes and Noble's common stock.
Strugala instituted an action under 14(a) of the Securities Exchange Act claiming that the board issued proxy statements containing material misstatements or omissions. The proxy statement held out that the members of the board were independent and that the board was hard at work to maximize the value for all shareholders. Defendants moved to dismiss for failing to adequately plead under Federal Rule of Civil Procedure (FRCP) 23.1 grounds for suing without prior demand to the board.
In order to make a claim under 14(a), a plaintiff must make a demand on the board if the plaintiff has not alleged facts creating a reasonable doubt that the directors are disinterested and independent. Here, Strugala alleged that the defendants were not disinterested because (1) they faced substantial likelihood of liability for the false statements in the proxy if found guilty, (2) certain directors were controlled by Leonard Riggio because they were friends who had previously voted with him, (3) the directors received directors' fees from Riggio and (4) a director was a person of interest because she had worked for the bank loaning the capital beforehand. The court ruled that each of these was insufficient to rebut the presumption of independence. The potential for liability, the fact that directors were friends and the fact that directors received fees were found to be insufficient as a matter of law. That a director previously worked for a bank did not make her an interested person.
Strugala also alleged that the defendants knew that the directors were not independent because the directors omitted controversial facts from their proxy statements. One controversial fact was that in a prior similar action involving the same directors a Vice Chancellor had stated that the board "continues to have a good deal of the feel of a board of a controlled company." The court here concluded that the business judgment rule protects the directors from having to second guess why certain facts were not disclosed. As the plaintiff failed to meet his burden of demonstrating that defendant's lack of independence would have rendered a pre-suit demand futile, defendants' motion to dismiss the complaint was granted, although plaintiff was given 30 days within which to file an amended complaint.
Impact: In order to institute an action in federal court against a corporation without first making a demand on the corporation, one must show that the directors and officers are interested parties unable to be independent.
Claim Against Health Care Facility Under Section 1983
THROWER V. COMMONWEALTH
(W.D Pa., 2011) [lexis.com]
Plaintiff sought to recover wrongful death and survival damages under 42 U.S.C. § 1983 after the deceased died due to defendants' administration of the drug Haidol. The defendants were a state-run health care center and its employees. Plaintiff also sought damages for medical negligence under the professional liability exception to the Medicaid Act, 42 Pa.C.S. § 8522(b)(2). Defendants filed a motion to dismiss pursuant to FRCP 12(b)(6) for failure to state a claim upon which relief may be granted.
Defendants raised several arguments in support of their motion. First, defendants argued that the claim cannot be brought under section 1983. Second, defendants argued it was improper to bring forth a claim under the Medicaid Act under section 1983. Finally, defendants claim they are immune from liability for medical negligence because they are a state government healthcare facility.
The court held that in order to maintain a 1983 claim against a government employee in his individual capacity, that individual must have personal involvement in the alleged wrongdoing. Moreover, liability cannot be based solely upon the doctrine of respondeat superior. The amended complaint failed to adequately plead any allegations concerning the personal involvement of the employees.
Impact: To maintain an action under section 1983 against an employee of a state-run healthcare facility, the complaint must raise allegations concerning the employee's personal involvement in the alleged wrongdoing to avoid dismissal under FRCP 12(b)(6).
Error in Judgment Rule
PASSARELLO V. GRUMBINE
(Pa. Super. Court, September 9, 2011) [lexis.com/lexisONE]
In this medical malpractice action, the parents of the deceased alleged the death of their child was caused by the defendant-physician's failure to treat her acute viral myocarditis. At trial, the jury returned a verdict in favor of the defendant. On appeal, the plaintiffs argued the trial judge improperly provided the jury with the "error in judgment" instruction, which states: "Under the law physicians are permitted a broad range of judgment in their professional duties and physicians are not liable for errors of judgment unless it's proven that an error of judgment was the result of negligence."
On appeal, the court found the above-referenced jury charge warranted a new trial because it suggests the physician's commission of an error may indicate he can avoid judgment if he did the "best he could" or "what he thinks best." Thus, this charge attenuated the objective standard of care imposed by Pennsylvania law and obfuscated the manner in which a jury may weight the evidence. It allowed the jury to weigh the physician's subjective state of mind, which led to potential confusion and placed the plaintiffs at a disadvantage.
Impact: It is generally improper for a trial judge to provide a jury with the "error in judgment" charge in medical malpractice cases.
Summary Judgment on EMTALA Claim
HALE v. N.E. VERMONT REGIONAL HOSPITAL, INC.
(D. V.T. September 30, 2011) [[lexis.com]
The Emergency Medical Treatment and Active Labor Act (EMTALA), also known as the "anti-dumping" statute, is the federal law which requires all Medicare-provider hospitals to provide medical screening and stabilization to any patient entering its emergency room, regardless of the patient's ability to pay. The purpose of the statute was to prevent hospitals from turning away indigent patients in need of emergency treatment. The medical screening aspect of the statute is the element which requires hospitals to determine whether the patient is in need of emergency treatment to stabilize their condition, and the stabilization element of statute requires the hospital to take steps to treat emergency medical conditions, at least to the point of stabilizing the patient. Although this statute was not intended to replace or supplement individual states' medical malpractice laws, many medical malpractice plaintiff's attorneys allege violations of EMTALA along with medical malpractice claims.
In this case, the federal District Court in Vermont addressed the defendant hospital's motion for summary judgment on negligence and EMTALA claims against it. The plaintiff had presented to the hospital emergency room complaining of neck pain radiating into her temples and back. Torticollis (muscle spasms resulting in stiff neck) was diagnosed. She was discharged with a prescription for a muscle relaxant and instructions to return to the emergency room if she did not improve. Three days later the plaintiff returned with a worse headache and continued neck and upper back pain. The emergency room physician ordered a lumbar puncture and a CT scan which resulted in a diagnosis of brain aneurysm. During surgery to treat the aneurysm it ruptured and the plaintiff was left with severe neurologic deficits. The court granted summary judgment on the EMTALA "stabilization claim" but denied summary judgment on the EMTALA "screening claim".
Impact: The interesting aspect of the case is that the stabilization claim was dismissed because, at the first emergency room visit, it was determined that torticollis is not an emergency medical condition within the meaning of the statute (e.g., a condition placing the patient's health in serious jeopardy). As such, the plaintiff failed to meet the predicate element of an EMTALA stabilization claim that an emergency medical condition was not stabilized by the hospital. Curiously, however, the diagnosis of torticollis was clearly an error and, in fact, the court did not account for this misdiagnosis while granting summary judgment on the stabilization claim. The screening claim, however, resulted in denial of summary judgment. The court noted that the plaintiff had come to the same emergency room on two prior occasions, two and three years earlier, with complaints of headache, back and neck pain. On each occasion a lumbar puncture was performed as part of the medical workup in the emergency room. Since no workup was performed during the emergency room visit at which torticollis was diagnosed, and because the hospital did not put in evidence of its lumbar puncture policy, the court found that a question of fact existed as to whether the hospital discharged its EMTALA obligation to perform appropriate screening. On this basis alone summary judgment was denied on the EMTALA screening claim. In sum, the misdiagnosed condition was sufficient to grant summary judgment on the stabilization claim, since that condition (even as misdiagnosed) was not an emergency medical condition, but the misdiagnosis was indirectly accounted for in that a proper screening was not done, which may have revealed the misdiagnosis.
Court Holds That Former Client Waives the Attorney-Client Privilege When It Sues Former Lawyers
LYON FINANCIAL SERVICES, INC. v. THE VOGLER LAW FIRM P.C., et. al.
(S.D. Ill., September 2, 2011) [lexis.com]
This lawsuit involved a legal malpractice dispute between the plaintiff, Lyon Financial Services, Inc., and the defendant Vogler Law Firm as well as two other law firms that replaced the Vogler Law Firm as successor counsel for Lyon. Vogler originally represented Lyon. Due to alleged professional misconduct during the discovery phase, Lyon dismissed Vogler as counsel and retained other counsel for trial. A jury returned a verdict against plaintiff for $67,926,728.31. The case settled while on appeal.
Lyon filed a legal malpractice action against Vogler alleging malpractice and professional negligence, breach of fiduciary duty, and breach of contract. Vogler filed a third-party complaint against the firm that replaced it. Vogler then subsequently sought the production of attorney-client communications and work product between Lyon and the third-party defendant law firm (as well as another firm that replaced the third-party defendant law firm for appeal), which had represented Lyon after Vogler's representation was terminated.
Lyon and the successor counsel objected on the ground that the communications were privileged and Vogler eventually filed a motion to compel the production of these communications and work product. Vogler alleged that the legal malpractice claim against it was sufficient to waive the attorney-client privilege. It argued that it needed the communications to show that successor counsel was negligent and caused the loss.
The court agreed and held for Vogler. It explained that if Lyon was seeking to prove the cause of damages that occurred prior to trial, and only during Vogler's representation, then attorney-client communications could arguably be irrelevant. Because, however, the specific party, if any, that caused Lyon's trial loss remained unresolved, Lyon had implicitly placed its attorney-client communications with subsequent counsel "at issue." According to the court, implicit within Lyon's position was the fact that the alleged legal malpractice of which it accused Vogler must have continued beyond the duration of Vogler's representation. For the court, this contradicted Lyon's contention that Vogler's alleged legal malpractice was "prior to and independent from" subsequent counsel's involvement. It also noted that as a matter of policy, Lyon could not use the doctrine of attorney-client privilege as a means to strengthen its claims and defenses in a legal malpractice action. Thus, the court granted Vogler's motion to compel the production of the disputed attorney-client communications and certain work product.
Impact: This case highlights that a legal malpractice claim may place the communications and work product of successor counsel in the spotlight.
No Cause of Action Exists by Surety Company Against Attorney for Equitable Subrogation
WESTERN SURETY COMPANY v. JEAN PEITRZKIEWICZ
(Conn.Super., September 6, 2011) [lexis.com/lexisONE]
The plaintiff surety company brought suit against 10 defendants, including the attorney of one of the defendants, alleging legal malpractice. Plaintiff insurer issued a probate surety bond in connection with defendant Walter Krasniewicz's appointment as administrator of the Estate of Zlotnicki. In his application, Walter named himself and other defendants as the heirs of Zlotnicki's estate and made distributions to the named heirs, including himself. Subsequent to the distribution, which was never approved by the probate court, the probate court issued a decree finding different individuals to be Zlotnicki's heirs.
The plaintiff alleges that attorney Elinor Roberts was retained to represent Walter in his capacity as administrator, and that in her role she failed to attempt to obtain the return of the money distributed to the incorrect heirs once she learned of Zlotnicki's true heirs.
Attorney Roberts filed a motion to strike the complaint because there was no attorney-client relationship between herself and the plaintiff and because she is not liable to persons other than her client for negligent rendering of services. The trial court looked to the very limited Connecticut exceptions to the rule requiring privity between an attorney and the plaintiff in legal malpractice cases. The court examined the case law and stated that the exception to the rule of privity is narrow and essentially limited to wills and determined that plaintiff had not made any allegations that fell within the exception.
However, plaintiff argued that it was suing under the doctrine of equitable subrogation as representative of the Zlotnicki estate, which did have an attorney-client relationship with attorney Roberts. The trial court rejected this argument as well, citing to Connecticut substantive law which does not, for public policy reasons, allow a subrogee to stand in the shoes of a subrogor against a party liable to the subrogor for the bonded loss in a legal malpractice action brought against the subrogor's attorney. Illustrative of the court's rationale is the following:
"To hold otherwise would ... be tantamount to saying that insurance defense attorneys do not owe their duty of loyalty and zealous representation to the insured client alone. Such a holding would contradict the personal nature of the attorney-client relationship, which permits a legal malpractice action to accrue only to the attorney's client."
Attorney Roberts also argued that the plaintiff had not alleged that it was damaged as it had not alleged that it paid out any money under the surety bond.
Impact: This case illustrates that insurance company claims for equitable subrogation against attorneys are highly scrutinized and not sanctioned in Connecticut.
The Doctrine of Unclean Hands Precludes Recovery in a Legal Malpractice Action
KIRBY E. COLE v. C. GARY MITCHELL
(La .App., September 21, 2011) [lexis.com/lexisONE]
The plaintiff, an incarcerated convict, pleaded guilty to mail fraud in a federal court. As trustee to the Phillips Foundation, he breached his fiduciary duties to the foundation by fraudulently transferring foundation property and mineral rights to himself. Plaintiff alleged losses that included, inter alia, loss of his liberty and enjoyment of life due to his incarceration and loss of income.
The plaintiff alleged that if attorney Mitchell had advised him against self-dealing as a foundation trustee then he never would have transferred any of the foundation's property to himself. The defendant attorney filed a motion for summary judgment arguing that plaintiff could not prevail as he has unclean hands. In support of the motion, defendant submitted the plaintiff's guilty plea colloquy wherein he admitted that he intended to commit fraud by his actions and schemes.
The defendant's motion for summary judgment was denied by the trial court, and the defendant appealed. The appellate court overturned the trial court's decision and granted defendant's motion for summary judgment on the grounds that the doctrine of in pari delicto precludes plaintiff from recovering as a result of plaintiff's own participation in the tortious conduct.
Impact: Although rare that a defendant pleads in pari delicto as a defense to a legal malpractice action, this doctrine must be considered when it is against public policy to accord the plaintiff a recovery for his own wrongdoings.
Statute of Limitations Defense results in dismissal of legal malpractice claim
MORSON v. KREINDLER & KREINDLER, LLP
(E.D. N.Y. September 28, 2011) [lexis.com]
While there is usually no doubt about the length of a statute of limitations for a legal malpractice claim, there can be several opportunities for defense with respect to when the time period of the statute begins to run. This case is a very instructive example.
Plaintiff Morson was represented by the defendant attorney in a 1996 case against the Libyan government regarding its involvement in the 1988 terror bombing of Pan Am flight 103 over Lockerbie, Scotland. A settlement agreement was reached in that case which was conditioned upon the occurrence of three "triggering events". At the same time, plaintiff Morson, who had been a defendant in an unrelated action, had a $1,700,000 judgment against him by Sergio Palazzetti. In the course of settlement discussions, Palazzetti agreed to settle for $500,000, in part upon the belief that he would not be able to recover any more than this were he to pursue the judgment by execution on Morson. Through news report, however, Palazzetti learned that Morson was a plaintiff in the Lockerbie action and that he may be receiving a large settlement in that case. Palazzetti's lawyer sent Morson's lawyer (the defendant in the subject legal malpractice action) a judgment questionnaire in which defendant Kreindler identified Morson's claim against Libya and indicated that "settlement is not less than $5,000,000 no more than $10,000,000." Morson eventually recovered $10,000,000 in the Lockerbie action. He then sued Kreindler on the basis that the response to the judgment questionnaire had "derailed" his settlement negotiations with Palazzetti.
The interesting aspect of the claim with respect to the statute of limitations defense, which helped defendant Kreindler obtain dismissal of the case, was the court's view of what Morson knew and when he knew it. If the statute was deemed to have started running when Morson learned about Kreindler's response to the questionnaire, his claim against Kreindler was time barred because he did not bring it for more than 3 years after that time. If the statute began to run when Morson learned that he had an actionable claim against Kreindler, his claim was not time barred and could continue. Thus, the date on which the statute of limitations accrued (or began to run) was the central issue. Morson argued that when he learned about Kreindler's response to the questionnaire he did not understand that he had a claim against Kriendler for legal malpractice (with respect to "derailing" the Palazzetti negotiations) until he spoke with his lawyer and learned that this was an actionable claim. The court rejected that argument and held that the earlier date, on which Morson first learned that he had potentially been injured by Kreindler's action, was the date on which the statute of limitations accrued.
Impact: The case involves discussion of New York's "borrowing statute" with respect to statutes of limitations of other states which were potentially involved in this case and provides a very good road map to potential legal malpractice defenses with respect to statute of limitations.
Without Proof of Access to Copyrighted Material, Claim for Infringement to Architectural Designs Fails
BUILDING GRAPHICS, INC. v. LENNAR CORP.
(W.D.N.C., September 30, 2011) [lexis.com]
In Building Graphics, Inc. v. Lennar Corp., the court denied plaintiff's motion for summary judgment and granted defendants based on plaintiff's inability to show direct access to the allegedly infringed architectural designs. Plaintiff alleged that Defendants had infringed on their copyrighted material with their similar home architecture designs. An architectural work is defined as the "design of a building as embodied in any tangible medium of expression, including a building, architectural plans, or drawings." Id. at 12. The court noted that as an essential element to a copyright claim, a plaintiff must prove that they own the valid copyright and that the defendant copied the original work or protectable assets of the work. Indeed, plaintiff had proved that it copyrighted the original plans, thereby satisfying the first element of a copyright claim. It failed on the second element, proving that its work was copied.
The court discussed how hard it is to prove actually copying. As a result, most plaintiffs prove this element by proving an "inference of copying." The court noted that there are generally two prongs to prove this inference: 1) that the defendants had access to the infringed work; and 2) that the works are substantially similar. Here, Building Graphics asserted four different allegations of access, all of which failed. Specifically, it asserted that defendants had access to its designs by performing due diligence in the same market, which would have revealed the copyrighted material; evidence that plaintiff's plans had been published on the internet; a former employee of plaintiff worked for defendant; and the plans were given to a common client of both parties. The court rejected each of these reasons. The court held that the mere possibility defendants had the opportunity to view or copy the work is not sufficient. It must be shown that "the paths of the infringer and the infringed work crossed." Id. at 18-19.
Since plaintiffs failed on the first level to establish access, the court did not have to discuss similarity. However, the court did address this prong, finding that the works were not so similar to evidence copyright infringement. Indeed, the court noted that in the architecture field in particular, compilation is common and many times designs are not copyrightable. Thus, the compilation analysis should be employed when evaluating these claims. The court still went through both sets of designs and found several differences. As a result, the court concluded that no reasonable jury could find the works substantially similar, and the plaintiff failed to prove access. Thus, the Court granted summary judgment in favor of the defendants, dismissing the action.
Impact: In general, it cannot be established as a matter of law as to whether a copyrighted work has been infringed upon. Indeed, it is well established that the court is reluctant to make these subjective determinations as to the degree of similarity between two works. However, it can be established as a matter of law that the work was not infringed upon. The court noted two specific scenarios upon which this showing can be made. First, it can be established that the similarity of the two works is only with regard to the non-copyrighted elements; second, it can be shown that no reasonable jury, with proper instruction, could find that the two works are substantially similar.
ACCOUNTANT/ FINANCIAL PLANNING
Enforcement of Arbitration Agreements in Malpractice Actions Against Financial Planners
DERBIN v. ACCESS WEALTH MGMT.
(D. N.J., October 7,2011) [lexis.com]
In Derbin, plaintiffs filed suit against their former financial planners based upon the latter's purported mismanagement of plaintiffs' assets. Plaintiffs entered into a financial planning agreement with an entity named EKS Associates, LLC that contained a mandatory arbitration clause. EKS, after entering into the financial planning agreement with plaintiffs, merged with an entity named Access Wealth Management, LLC. Plaintiffs, while never entering into a financial planning agreement with Access Wealth Management, "continued their financial relationship with the ... merged entity."
A dispute arose between plaintiffs, Access Wealth Management and the individuals in charge of managing plaintiffs' assets. The individual defendants were neither parties nor signatories to the above referenced financial planning agreement containing the mandatory arbitration clause. Originally, plaintiffs sought to compel arbitration against EKS, Access Wealth Management and the individual defendants, but later withdrew their arbitration claims against everyone except EKS. After withdrawing their arbitration claims, plaintiffs commenced a lawsuit against Access Wealth Management along with the individual defendants asserting claims sounding in breach of contract, professional negligence and fraud. Defendants "move[d] to compel [p]laintiffs to arbitrate their claims pursuant to the arbitration clause contained in the ..." financial planning agreement.
The central issue before the court was whether Access Wealth Management had "standing to compel arbitration as a non-signatory party to the [financial planning agreement]." The court recognized that pursuant to New Jersey and Third Circuit case law "a non-signatory has standing to enforce an arbitration agreement against a signatory party when the plaintiff has pleaded that the non-signatory and signatory have conspired together or otherwise treated the non-signatory affiliate of the signatory as if it were a signatory." As a result, Access Wealth Management's status as a non-signatory to the financial planning agreement did not, as a matter of law, preclude it from seeking to enforce the mandatory arbitration clause.
The court held the above standard had in fact been satisfied given that plaintiffs, subsequent to the merger, treated Access Wealth Management and EKS as a single entity. The linchpin for the court's holding was twofold. First, plaintiffs "continued their financial relationship with the merged entity without voicing any objections." Second, plaintiffs initially commenced the arbitration proceedings against both EKS and Access Wealth Management. Ultimately, defendants' motion to compel arbitration was granted.
Impact: The Derbin case is noteworthy for two separate, but equally important, reasons. First, the case underscores the importance of incorporating broad mandatory arbitration clauses into a financial planner's engagement letter or contractual agreement with their clients. Of course, if a financial planner would prefer to have disagreements with former clients resolved in the courts, rather than through private arbitration, such a provision should not be included in the engagement letter or the parties' contractual arrangement. Second, the case reaffirms that in the Third Circuit a non-party to a contract containing a mandatory arbitration clause may still have standing to compel arbitration. The Derbin opinion provides a detailed analysis of the circumstances that justify allowing a non-party, such as a financial planner, to enforce a mandatory arbitration clause.
Direct Loss/Faithfully Performing Work
MICHIGAN FIRST CREDIT UNION v. CUMIS INSURANCE SOCIETY
(6th Cir., May 24, 2011) [lexis.com/lexisONE]
This matter involved an insurance coverage dispute between the defendant insurer and the plaintiff, Michigan First Credit Union. Plaintiff is a credit union that, among other things, provides loans. In July 2003, plaintiff expanded its business to provide indirect lending, which allowed applicants to apply for loans at automobile dealerships. Once indirect loan applications were completed, a third-party administrator compiled the applications and automatically approved low-risk loans. Two of plaintiff's employees were responsible for reviewing the indirect loan applications. They were instructed to follow the plaintiff's lending policy, which directed them to make decisions based upon eight factors, including capacity to pay and assets. A more senior officer was responsible to monitor this activity but failed to do so.
Later that year, the plaintiff's outside consulting and audit firm reviewed the loans for compliance purposes and noted an exception with respect to an indirect loan, which they felt violated the plaintiff's lending policy. This exception, however, was removed from the report at the insistence of the senior officer who was allegedly responsible for the lending activity. The plaintiff's vice-president of finance became concerned over the high percentage of high-risk loans being approved and discussed this concern with the CEO. The CEO was assured by the senior officer that everything was fine. Another audit was conducted by the outside consulting and audit firm. Following that audit, the senior officer admitted that he had not been monitoring the indirect lending activity. Yet another audit was conducted following that admission and it was discovered that hundreds of loan applications were in violation of the lending policy, which resulted in numerous defaults.
The plaintiff contends that it suffered a financial loss and filed a claim with the defendant insurer and attempted to invoke coverage for its employee's "failure to faithfully perform his/her trust." Defendant insurer denied the claim.
A trial ensued and the jury determined that the plaintiff suffered over $5 million in losses that were covered by the fidelity bond. The defendant moved for a new trial, which was denied, and then moved to amend the judgment to impose a specific interest amount. The lower court imposed an interest award of over $2 million and held that the plaintiff was entitled to a penalty interest but it must be off-set by prejudgment interest. Both plaintiff and defendant appealed.
Defendant insurer asserted that the evidence at trial was insufficient to trigger the faithful-performance clause of the policy. The fidelity bond provided coverage for loss resulting directly from a named employee's failure to faithfully perform his trust (this does not mean negligence or oversight; acts or omissions from inadequate training; unintentional violation of laws or insured's polices; acts ratified by the board of directors; or a claim that could have been made under dishonesty coverage). The court disagreed with the defendant insurer's contentions and found that the evidence at trial demonstrated that the lending policy was established and enforced. The court also found that the employees consciously disregarded the lending policy. Finally, the court found that the board of directors did not know of the violations and could not have possibly acquiesced to them. Defendant insurer's remaining arguments focused on procedural issues concerning the trial, and the court denied each of those contentions.
Finally, the court addressed plaintiff's arguments that the lower court erred in holding that penalty interest was to be "offset" by the prejudgment interest provided under Michigan law. The court disagreed with the plaintiff's contentions and held that the lower court properly applied the state statute with respect to interest.
Impact: This decision provides an excellent discussion about how an investigation that provides honest and straightforward facts can trigger coverage under a very specific insurance agreement.
The Extension to Federal Court of Pennsylvania's Certificate of Merit Requirement in Professional Liability Cases
LIGGON-REDDING v. ESTATE OF ROBERT SUGARMAN
(Third Circuit Court of Appeals, October 4, 2011)[ lexis.com/lexisONE]
In Pennsylvania state court, any claim that a licensed professional deviated from the applicable standard of care must be accompanied by a "Certificate of Merit." This has been the case since January 2003, when the Pennsylvania Rules of Civil Procedure governing Professional Liability actions were adopted. Pursuant to the "Certificate of Merit Rules," Pa.R.C.P. 1042.3 et seq., all claims of professional negligence must include a certificate affirming that a professional has reviewed the plaintiff's claims and, if true, the alleged conduct amounted to professional negligence. These rules govern the steps necessary to maintain a professional malpractice claim. In the event that a plaintiff fails to timely file a Certificate, the defending professional may move to dismiss the claim. Although it was well established that these rules apply in Pennsylvania state court, it was not until the Third Circuit's recent decision in Liggon- Redding v. Estate of Robert Sugarman that those rules were extended to federal court as well.
The Certificate of Merit Rules: What and Why?
Pennsylvania Rule of Civil Procedure 1042.3 provides:
In any action based upon an allegation that a licensed professional deviated from an acceptable professional standard, the attorney for the plaintiff ... shall file with the complaint or within sixty days after the filing of the complaint, a certificate of merit signed by the attorney or party that either
(1) an appropriate licensed professional has supplied a written statement that there exists a reasonable probability that the care, skill or knowledge exercised or exhibited in the treatment, practice or work that is the subject of the complaint, fell outside acceptable professional standards and that such conduct was a cause in bringing about the harm, or
(2) the claim that the defendant deviated from an acceptable professional standard is based solely on allegations that other licensed professionals for whom this defendant is responsible deviated from an acceptable professional standard, or
(3) expert testimony of an appropriate licensed professional is unnecessary for prosecution of the claim.
These rules apply to claims of malpractice asserted against the following professionals: health care providers, accountants, architects, chiropractors, dentists, engineers, land surveyors, nurses, optometrists, pharmacists, physical therapists, psychologists, veterinarians, and attorneys. See, Pa.R.C.P. 1042.1. Under the Certificate of Merit Rules, a professional defending such a claim has no obligation to respond to a complaint until 20 days after the plaintiff files the required Certificate of Merit pursuant to Pa.R.C.P. 1042.5. Moreover, the defending professional may move for entry of a judgment of non pros dismissing the malpractice claim in the event that a plaintiff does not timely file a Certificate.
The Certificate of Merit Rules were adopted in Pennsylvania as a result of the growing frequency with which professional malpractice actions "of questionable merit were being commenced." Ditch v. Waynesboro Hosp., 17 A.3d 310, 314-315 (Pa. 2011). The Pennsylvania Supreme Court utilized its constitutional rule-making authority to implement "an orderly procedure that would serve to identify and weed non-meritorious malpractice claims from the judicial system efficiently and promptly." Womer v. Hilliker, 589 Pa. 256, 266-267 (Pa. 2006). A goal was to avoid the potential burdens that frivolous professional negligence claims impose upon the parties and the courts. Id. Moreover, the Certificate of Merit Rules help to minimize defense costs and the time necessary to defend such claims "until the plaintiff has been able to secure a certificate of merit," and hence affirm that the claim as alleged is meritorious if supported by the evidence. Almes v. Burket, 2005 PA Super 289, P14 (Pa. Super. Ct. 2005).
As a result of these rules, the litigation cannot proceed without a Certificate of Merit. On the one hand, the presence of a filed Certificate signals to the parties and the trial court "that the plaintiff is willing to attest to the basis of his malpractice claim; that he is in a position to support the allegations he has made in his professional liability action; and that resources will not be wasted if additional pleading and discovery take place." Womer v. Hilliker, 589 Pa. 256, 266-267 (Pa. 2006). On the other hand, however, the lack of a Certificate signals "that nothing further should transpire in the action, except for the lawsuit's termination." Id. Hence, these rules force a complaining plaintiff to obtain independent, presumably objective, confirmation prior to initiating suit. Accordingly, the Certificate of Merit Rules go a long way toward eliminating frivolous suits and providing some unique defense opportunities for the defending professional.
The Application of the Certificate of Merit Rules in Federal Court
Since their inception, the Certificate of Merit Rules have been uniformly followed throughout Pennsylvania in state courts. It was not until the Third Circuit's recent decision in Liggon-Redding, however, that Pennsylvania joined some of its neighbors in extending the reach of the Certificate of Merit requirement to professional negligence claims in federal court as well.
By way of comparison, an affidavit of merit is required in New Jersey state and federal courts for certain claims of professional negligence resulting in property damage or personal injury, notably medical malpractice claims. See, N.J.S.A. §§ 2A:53A-26 to 2A:53A-29. Likewise, in state and federal court in Connecticut, an affidavit is required to maintain a cause of action for professional negligence against a health care provider. See, Conn. Gen. Stat. § 52-190a.
In Liggon-Redding, a pro se plaintiff alleged that her former attorney, Robert Sugarman, committed legal malpractice in an underlying medical malpractice suit. Liggon-Redding alleged that her case was dismissed because Sugarman negligently failed to retain an expert witness. In the case in chief, Sugarman's counsel filed a motion to dismiss the complaint for failure to file a certificate of merit. The district court granted the defendant's motion and dismissed the complaint.
On appeal, the Third Circuit Court of Appeals initially evaluated whether Pennsylvania's Certificate of Merit Rules apply in federal court. According to the circuit court, a federal court sitting in diversity must apply state substantive law and federal procedural law under Erie R.R. v. Tompkins, 304 U.S. 64 (1938). According to that standard, the court determined that Pennsylvania's Certificate of Merit Rules were substantive law and must be applied by the federal courts.
As a result, all claims of professional negligence in Pennsylvania state and federal court, including claims against attorneys, accountants, architects, health care providers and others, must contain a Certificate of Merit. This decision will certainly open the door to additional defenses for professionals defending claims of professional malpractice in Pennsylvania's federal courts.
Goldberg Segalla LLP is a Best Practices law firm with offices in Philadelphia, New York, Princeton, Hartford, Buffalo, Rochester, Syracuse, Albany, White Plains and on Long Island. The Professional Liability Practice Group is comprised largely of seasoned trial attorneys who routinely handle all matters of professional liability claims and cases, with an emphasis in the areas of fidelity, directors and officers, insurance agents and brokers, nursing home defense, health care, and lawyers' professional liability.
The editors, Sharon Angelino, Brian R. Biggie, and Richard J. Cohen, appreciate your interest and welcome your feedback.
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