Litigation Alert – 05/21/2014

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The Uncertain Nature of Contract Damage Cases in PA Legal Malpractice Cases

On July 17, 2012, the Superior Court of Pennsylvania held in Coleman v. Duane Morris, LLP that a plaintiff’s damages for a legal malpractice claim, based upon breach of contract, are not necessarily limited to the attorneys’ fees paid to the defendant during the underlying representation.  In doing so, the Court held that the attorneys’ fees limitation previously announced by the Supreme Court of Pennsylvania in Bailey v. Tucker is inapplicable when the underlying case is a civil action. Accordingly, plaintiffs’ attorneys and aggrieved clients should proceed with caution, as the state of the law with respect to this issue remains unsettled.

The Legal Landscape

In Pennsylvania, the statute of limitations for legal malpractice stemming from negligence is a relatively short two years, pursuant to 42 Pa.C.S. § 5524.  Under § 5525, a malpractice action based on a breach of contract must be commenced within four years.  However, in Pennsylvania “when an attorney enters into a contract to provide legal services, there automatically arises a contractual duty on the part of the attorney to render those legal services in a manner that comports with the profession at large.”  Gorski v. Smith, 812 A.2d 683, 694 (Pa. Super. Ct. 2002).  Accordingly, a plaintiff can always pursue their case under a contract theory and enjoy the longer four year statute of limitations, at first glance effectively rendering the two year negligence statute obsolete.

However, in Bailey the Supreme Court ruled that a legal malpractice plaintiff suing under a contract theory can only recover the amount of legal fees, actually paid, in the underlying matter.  Bailey v. Tucker, 621 A.2d 108, 115 (Pa. 1993).  Until Bailey, a legal malpractice plaintiff could be made “whole” only by succeeding on a claim sounding in negligence—thus negating the benefit of the longer contractual period of limitations. Coleman, however, adds important qualifications to Bailey.

The Facts

The plaintiffs in Coleman were the owners of BCA Management, Inc. and BCA Professional Services, Inc. (together “BCA”).  The Plaintiffs decided to sell BCA after it was determined that the companies owed approximately $2.16 million in unpaid taxes, for which the Plaintiffs were personally liable.  The Plaintiffs engaged the services of Duane Morris, LLP (“Defendants”), via oral agreement, to assist in the sale to purchaser Mirabilis Ventures, Inc. (“Mirabilis”).  Pursuant to BCA’s agreement with Mirabilis, Duane Morris would bill BCA for its services, but Mirabilis would ultimately pay the fees after the sale was completed.  Despite Plaintiffs’ expressed expectation that the sale would eliminate their liability for the back-taxes, an error on the part of a Duane Morris attorney left them personally liable.

Subsequently, the Plaintiffs brought an action against Defendants for legal malpractice based upon breach of contract, as they were outside the two-year window for a negligence claim.  Defendants filed a new matter asserting, inter alia, that their invoices for legal services remained unpaid.  Thereafter, Defendants moved for judgment on the pleadings arguing that because Plaintiffs had not in fact paid their legal fees, they had incurred no recoverable damages. Based upon the holding of Bailey, the trial court agreed with Defendants and dismissed the suit.  The Plaintiffs filed a timely appeal to the Superior Court.

The Decision

The Superior Court found the Supreme Court’s reasoning in Bailey unpersuasive when applied to the facts of Coleman and reversed and remanded the trial court’s dismissal of the case.  The Superior Court reviewed the Bailey decision and noted that the Supreme Court had specifically addressed the issues within the context of policy considerations unique to cases where the underlying subject matter is criminal. The Superior Court concluded that the Supreme Court intended its holding in Bailey, regarding recoverable damages in a legal malpractice contract claim, to be limited to cases where the underlying action was criminal.  The Superior Court in Coleman stated:

[W]e conclude that that 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.

Coleman v. Duane Morris, LLP, 58 A.3d 833, 838 (Pa. Super. Ct. 2012).

Practical Application

The decision in Coleman certainly appears to have positive implications for aggrieved clients and their counsel.  After all, the law in the Commonwealth at the moment indicates that a plaintiff can recover more than attorneys’ fees in a legal malpractice action based on breach of contract, provided of course the underlying matter was a civil action.  However, there is reason for pause.

The Coleman Defendants appealed the Superior Court’s decision to the Supreme Court of Pennsylvania.  On June 13, 2013 the Supreme Court certified the following question for appeal:

Does the limitation on damages in a legal malpractice action sounding only in contract set forth in Bailey v. Tucker, 533 Pa. 237, 252, 621 A.2d 108, 115 (1993) — which limited such damages to “the amount actually paid for the services plus statutory interest” in a case involving an underlying criminal representation—apply where the underlying representation is a civil one?

Coleman v. Duane Morris, LLP, 68 A.3d 328 (Pa. 2013).

Clearly, the highest court in the Commonwealth was intent on settling this question.  However, the Supreme Court did not get the chance to do so, as the parties in Coleman settled before Court could render its decision and the appeal was withdrawn on September 17, 2013.

Following Coleman, a plaintiff can file a legal malpractice action based on breach of contract and claim damages in excess of their underlying attorneys’ fees.  The Superior Court will likely uphold the trial court’s award of consequential damages.  However, that hypothetical decision may be appealed to the Supreme Court, which appears poised to decide the question.  Until such time as the Supreme Court conclusively determines this issue, attorneys should counsel potential plaintiffs that if they wish to pursue a legal malpractice claim based upon breach of contract, they should be prepared to see the case through multiple levels of appeal.  Moreover, the risk remains that the Supreme Court could overturn the Coleman decision and reestablish the preeminence of Bailey.

Best Regards,

The Litigation Department, Gibson&Perkins, PC

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