Opinion
Civil Action No. 01-4798
August 7, 2002
MEMORANDUM AND ORDER
Presently before the Court is a Motion to Dismiss Plaintiff John Edwards' ("Edwards") amended complaint by Defendants Duane, Morris Heckscher, LLP ("Duane Morris"). For the reasons that follow, Duane Morris' Motion is denied as to the fraud (Count I) and breach of contract (Count III) claims and granted as to the breach of fiduciary duty (Count II) and legal malpractice (Count IV) claims.
BACKGROUND
Plaintiff, John Edwards, was one-third owner and president of Pilot Air Freight ("Pilot"), a Pennsylvania corporation, from the 1970's until 1995. From the late 1980's through 1994, Edwards retained attorney Richard G. Phillips, Esq. ("Phillips") and his firm, Richard G. Phillips Associates, to serve as legal counsel for Pilot and himself personally. Phillips and his firm continuously provided legal services and advice to Pilot and Edwards individually through at least 1994. In 1993, in an effort to secure financing for Pilot, Phillips introduced Edwards to Mellon Bank ("Mellon") officials. The loan agreement between Pilot and Mellon included a provision that Edwards grant Mellon a second mortgage on his residence as security. In addition, Mellon insisted that Edwards transfer most of his control over Pilot, including check-writing authority, to Phillips. Thereafter, Pilot and Edwards entered into an employment agreement, stipulating that Edwards was to continue as Pilot's president for a specified term of years under a compensation arrangement including both annual salary and bonuses. From the closing of the Mellon refinancing at the end of January 1994 through the spring of that year, Edwards experienced continually escalating difficulties with Phillips' handling of Pilot and Edwards' personal affairs.
In May 1994, concerned with Phillips handling of Pilot, Edwards retained Duane Morris through its partner Donald R. Auten, Esquire ("Auten") to represent and protect his interests with respect to Pilot and Phillips. Edwards asserts that Mellon was a prominent client of Duane Morris when the firm undertook his representation, and that while Duane Morris was aware of Mellon's involvement in virtually every aspect of the business relationships at issue, Edwards was not informed at that time that there was a potential conflict of interest.
In the Fall of 1994, Edwards' relationship with Phillips began to further deteriorate. Edwards directed Auten and Duane Morris to negotiate a severance package from Pilot, but Phillips subsequently fired Edwards in April 1995. Thereafter, Pilot refused to pay all of Edwards' salary and bonuses causing Duane Morris to expand its efforts to either reach an acceptable severance resolution for Edwards or bring litigation against Phillips and other Pilot-related parties for their alleged misconduct toward Edwards. On May 23, 1995, Auten, acting on behalf of Duane Morris, November 13, 2001 and served on the defendants. Consequently, Defendants filed the instant motion contending all four claims are time-barred and should be dismissed with prejudice.
LEGAL STANDARD
A claim may be dismissed under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). A claim may be dismissed when the facts alleged and the reasonable inferences therefrom are legally insufficient to support the relief sought. Parker v. Stiles, Civ. A. No. 00-5334, 2001 WL 755094, at *1 (E.D. Pa. June 29, 2001). To prevail on a motion to dismiss, defendants must establish that the plaintiff can prove no set of facts which would entitle them to relief. See Kehr Packages, Inc. v. Fidelcor, Inc., 926 F.2d 1406, 1410 (3d Cir. 1991). A motion to dismiss properly raises a statute of limitations defense "when it clearly appears on the face of the complaint that the claim is time barred."Westwood-Booth v. Davy-Loewy Ltd., Civ. A. No. 97-7539, 1999 WL 219897, at *1 (E.D. Pa. April 13, 1999).
Whether the statute of limitations has run on a claim is usually a question of law, but where the issue involves a factual determination, the determination is for the jury. Smith v. Bell Telephone Co. of Pennsylvania, 153 A.2d 477, 481 (1959). Specifically, the question of "what is a reasonable time for the plaintiff to discover his injury and its cause," is one for the jury. Ingenito v. A.C. S., 430 Pa. Super. 129 (1993) (quoting Hayward v. Medical Center of Beaver County, 530 Pa. 320, 325 (1992)). Only where the facts are so clear that reasonable minds cannot differ may the commencement of the limitations period be determined as a matter of law. Sadtler v. Jackson-Cross Co., 402 Pa. Super. 492, 501 (1991).
DISCUSSION
Plaintiff asserts four claims against Defendants: (1) fraud; (2) breach of fiduciary duty; (3) breach of contract; and (4) legal malpractice. The statute of limitations requirements for the breach of fiduciary duty, and legal malpractice causes of action entitle Defendants to dismissal of those claims on procedural grounds. The fraud and breach of contract causes of action is not barred by the statute of limitations, and thus will not be dismissed on procedural grounds. As a result, it is not necessary to reach the merits of Plaintiffs substantive claims in the present discussion.
A. Fraud Claim
Under Pennsylvania law, the statute of limitations for fraud is two years. Callahan v. A.E.V., Inc., 182 F.3d 237, 246 n. 7 (3d Cir. 1999); see also 42 Pa. C.S.A. § 5524(7). The statute begins to run at the time "the right to institute and maintain the suit arises." Beauty Time, Inc. v. VU Skin Systems, Inc., 118 F.3d 140, 144 (3d Cir. 1997) (quotingPocono Int'l Raceway, Inc. v. Pocono Produce, Inc., 503 Pa. 80 (1993)).
Edwards claims that the Duane Morris made a material misrepresentation when they told him on October 25, 1995, that Mellon had asserted a conflict of interest with regard to their representation of Edwards, when in fact, Mellon had not asserted a conflict. Defendants argue that because Edwards received a letter from Mellon denying a conflict in May 1999 and was later advised by Duane Morris on September 17, 1999 that Duane Morris had no written record of a conflict of interest, Plaintiff was aware that he had suffered injury before September 21, 1999. If Plaintiff was aware of his injury prior to September 21, 1999, the two-year statute of limitations expired before Plaintiff filed his complaint on September 21, 2001. Plaintiff counters that he was unaware of the true cause of his injury until some time after the September 17, 1999 letter, and the statute could not have commenced until September 21, 1999, when Plaintiffs counsel received and assessed Duane Morris' letter. Additionally, Plaintiff alleges that Defendants engaged in affirmative acts of concealment when they actively misled him and his counsel into thinking that Mellon had asserted a conflict of interest. Plaintiff cites the language of the September 17, 1999 letter denying a written conflict as leaving open a possible assertion of an oral conflict in order to further mislead him and his counsel.
Plaintiffs argument that the statute of limitations should be tolled relies upon two exceptions, the discovery rule and fraudulent concealment. The discovery rule provides that the limitations period begins to run when "the plaintiff knows or reasonably should know: (1) that he has been injured, and (2) that his injury has been caused by another party's conduct." Redenz by Redenz v. Rosenberg, 360 Pa. Super. 430, 434, (1987). Where the existence of the injury is not known to the complaining party and such knowledge cannot reasonably be ascertained within the prescribed statutory period, the limitations period does not begin to run until the discovery of the injury is reasonably possible. Schaffer v. Larzelere, 410 Pa. 402, 406 (1963).
The party seeking to invoke the discovery rule bears the burden of establishing the inability to know of the injury despite the exercise of reasonable diligence. Pocono Int'l, 503 Pa. at 84-85. Reasonable diligence is an objective rather than a subjective standard, and the plaintiffs actions must be evaluated to determine whether he exhibited "those qualities of attention, knowledge, intelligence and judgment which society requires for its members for protection of their own interests and the interests of others." Burnside v. Abbot Laboratories, 351 Pa. Super. 264, 292 (1985) (quoting Petri v. Smith, 307 Pa. Super. 261, 271 (1982)).
The second exception, fraudulent concealment, applies to instances where, "through fraud or concealment, the defendant causes the plaintiff to relax his vigilance or deviate from his right of inquiry, the defendant is estopped from invoking the bar of the statute of limitations." Schaffer, 410 Pa. at 405. The asserting party has the burden of proving such fraud or concealment, by evidence which is clear, precise and convincing. Nesbitt v. Erie Coach Company, 416 Pa. 89, 96 (1964). Moreover, there must be an affirmative and independent act of concealment that would divert or mislead the plaintiff from discovering the injury. Gee v. CBS, Inc., 471 F. Supp. 600, 623 (E.D. Pa. 1979). Courts employ the same knew or should have known standard whether the statute is tolled because of the discovery rule or because of fraudulent concealment. Urland v. Merrell-Dow Pharmaceuticals, 822 F.2d 1268, 1273 (3d Cir. 1987).
The Court finds that the Defendants have not met their burden of proving Edwards' fraud claim should be dismissed pursuant to F.R.C.P. 12(b)(6). Assessing the facts in the light most favorable to the plaintiff, it is reasonable that Edwards did not know that Duane Morris committed fraud until after he received Duane Morris' September 17, 1999 letter. The discovery rule tolls the statute of limitations until the discovery of the injury is reasonably possible. In the present case, Edwards alleges he was unable to determine that Duane Morris had not asserted a conflict of interest until after they admitted in the September 17, 1999 letter that no record of the conflict existed. Defendants have not proved that Edwards should have been aware of a false assertion of conflict of interest when he received the letter from Mellon in May 1999. Even if Plaintiff was aware at that time that Mellon had not asserted the conflict of interest, it is still reasonable that he was unaware that Duane Morris fraudulently asserted the conflict. Under this set of facts, the determination cannot be made as a matter of law whether Edwards was aware of the alleged fraud on behalf of Duane Morris once Mellon asserted that they had no record of a conflict of interest. Thus, the Court will deny Defendants' motion to dismiss Plaintiffs fraud claim.
B. Breach of Fiduciary Duty Claim
The statute of limitations for a breach of fiduciary duty is two years. FG Assoc. v. Pomerantz, 47 Pa. D. C.4th 173, 175 (Pa. Ct. C.P. Phila. Co. 2000); see also 42 Pa. C.S.A. § 5524(7). The limitations period begins to run "when the alleged breach of duty occurs." Pomerantz, 47 Pa. D. C.4th 175 (quoting Garcia v. Community Legal Servs. Corp., 524 A.2d 980, 986 ( Pa. Super. 1987)). When tolling the statute under the discovery rule for a breach of fiduciary duty action, the limitations period may be tolled only until the injured party, in the exercise of due diligence, knew, or should have known of the injury.
Plaintiff claims Duane Morris breached its fiduciary duty by failing to inform him of the potential conflict of interest with Mellon. Defendants argue that Edwards knew that a possible breach of fiduciary duty occurred in October 1995 when Duane Morris first asserted the conflict of interest with Mellon without notifying him of the situation when he first retained the firm. Plaintiff counters that he was unaware as to a possible breach of fiduciary duty until Duane Morris admitted that there was no written assertion of conflict by Mellon. Plaintiff argues that since this information was not available until after September 21, 1999, the statute of limitations should be tolled until he was aware of the salient facts concerning his injury.
The plaintiffs breach of fiduciary duty claim is barred by the statute of limitations. Plaintiff asserts that Duane Morris took the status of fiduciary and under this duty was required to act fairly, honestly, zealously, and with complete candor and good faith toward him, and that this duty further required Duane Morris to offer undivided loyalty and prohibited it from engaging in activities that created conflicts of interest. The fiduciary duty and its breach would have arisen when Edwards retained Duane Morris in May 1994 and the firm purportedly failed to inform him of a potential conflict of interest with Mellon. At this point, it was unlikely that Edwards would have been aware of his injury and thus the statute would be tolled until he reasonably knew of Defendants breach. When Duane Morris asserted a conflict of interest on October 25, 1995, and failed to continue to represent Edwards, the statute of limitations for the breach of fiduciary duty commenced. By October 1995, Edwards admits that Duane Morris informed him that they could no longer pursue his litigation because of a conflict of interest. At this time, Edwards knew that Duane Morris breached their fiduciary duty to him because they had not alerted him to a possible conflict when he first retained the firm.
Moreover, Plaintiffs assertion that he was unaware of the true cause of his injury would not apply to the breach of fiduciary duty claim. The fact that Duane Morris asserted a conflict of interest regardless whether the conflict was valid or not, breached their fiduciary duty to Plaintiff, and he should have reasonably known once the breach was asserted that he was injured. For the reasons set forth above, the Court finds that Edwards breach of fiduciary duty claim is barred by the statute of limitations.
C. Breach of Contract Claim
The statute of limitations on a breach of contract action is four years, and the statute begins to accrue when the contract is breached.McCarthy v. Scottsdale Ins. Co., Civ. A. No. 99-978, 1999 WL 672642, *2 (E.D. Pa. Aug. 16, 1999); see also 42 Pa. C.S.A. § 5525. To sustain a claim of legal malpractice that arises from a breach of contract, a plaintiff must show that there was a contract, and "that the defendant breached a specific provision thereof." Lactaid v. Youtie, Civ. No. 85-6751, 1986 WL 35871, (E.D. Pa. March 18, 1986). Thus, a plaintiff must "raise an issue as to whether it specifically instructed the defendant to perform a task that the defendant failed to perform, or as to whether the defendant made a specific promise upon which plaintiff reasonably relied to its detriment." Sherman Industries, Inc. v. Goldhammer, 683 F. Supp. 502, 506 (E.D. Pa. 1988). The discovery rule may be applied to breach of contract actions where the injured party is unable, despite the exercise of due diligence, to know of an injury or its cause. see Pagano v. Flakey Jake's, 1995 U.S. Dist. LEXIS 16284, at *5-9 (E.D. Pa. Nov. 2, 1995). In addition, a plaintiff need not know the motive behind the breach of contract, only that such breach occurred. see Westwood-Booth v. Davey Loewy LTD., 1999 WL 219897 (E.D. Pa. April 13, 1999).
Edwards claims that Duane Morris breached various provisions of their contract by failing to zealously pursue litigation on his behalf and failing to act in conformance with the covenant of good faith and fair dealing. Defendants argue that the actions that gave rise to the alleged breach would have had to occur prior to the discontinuation of representation. Plaintiff counters that with the presence of due diligence on his part, he was not aware of the breach until on or about September 21, 1999.
Edwards' breach of contract claim is not barred by the statute of limitations. Edwards has shown that a contract existed, and that the defendants breached elements of the contract by asserting a conflict of interest and dropping him, while refusing to proceed in litigation, as agreed upon under the contract. While Plaintiff may have had reason to know that his claims were not actively pursued, he did not appear to have reason to know that the defendants breached the covenant of good faith and fair dealing until after this was confirmed in September 1999. Motive is not a consideration in breach of contract actions, but the discovery rule applies to toll the statute of limitations for the breach of contract claim because the defendant required time to know of the injury and its cause. Plaintiff was unaware of Defendants failure to zealously represent him until sometime around May 1999. Thus, the four-year statutory period had not run on Plaintiffs breach of contract claim, at the filing of Plaintiffs complaint on November 13, 2001. The Defendants' motion to dismiss at to Plaintiffs breach of contract claim is denied.
D. Legal Malpractice Claim
The statute of limitations period for legal malpractice is two years.Garcia v. Community Legal Services Corp., 524 A.2d 980, 982 (Pa.Super. 1987); see also 42 Pa. C.S.A. § 5524(7). The statutory period "commences upon the happening of the alleged breach of duty." Robbins Seventko Orthopedic Surgeons, Inc. v. Geisenberger, 674 A.2d 244 (Pa.Super. 1996) (quoting Baily v. Tucker, 533 Pa. 237, 251 (1993)). The discovery rule also applies to toll the running of the statute for legal malpractice actions.
Edwards claims that Duane Morris and Auten committed malpractice by failing to represent him zealously, inform him of the potential conflict of interest, and in the firm's recommendation that he file for bankruptcy. Plaintiff alleges that Duane Morris and Auten owed him a duty to correctly interpret and apply potential conflict of interest principles to him in a timely and truthful manner. Defendants argue that the alleged legal malpractice occurred prior to October 25, 1995, when they ceased to represent Plaintiff and recommended that he file for bankruptcy. Plaintiff counters that the statutory period should have been tolled until the salient facts were available following the September 17, 1999 letter denying written assertion of any conflict of interest.
The Court finds that the statutory period for the legal malpractice claim has expired. The claim began to accrue at the happening of the breach of duty, sometime during Duane Morris' representation of Plaintiff, which ceased in 1996 during the bankruptcy proceedings. The discovery rule does not toll the statute of limitations for the simple fact that Plaintiff was aware of his injury prior to knowing that Duane Morris asserted the false conflict of interest. Although Plaintiff was unaware that Duane Morris may have acted fraudulently until September 1999, he was aware that the defendants failed to pursue his claim zealously, and the conflict of interest principles were improperly applied once Duane Morris ceased to actively represent him. Although Edwards would later question the validity of Duane Morris' assertion of the conflict of interest, the fact that Duane Morris had not informed him sooner of the potential conflict constitutes the alleged legal malpractice.
Moreover, Plaintiff was advised to file for bankruptcy in October 1995. Plaintiff asserts that Duane Morris continued to advise him in the matter until 1996, although they did not represent him in bankruptcy court. This allegedly negligent legal advice, given at the latest in 1996 would commence the running of the statute of limitations at the happening of the alleged breach of duty. Robbins, 674 A.2d at 244. For the reasons set forth above, the statutory period for both alleged forms of legal malpractice expired before Plaintiff filed his claim in September 2001. Therefore, the claim is dismissed as barred by the two-year statute of limitations.
CONCLUSION
In conclusion, this Court denies Defendants' Motion to dismiss Plaintiffs fraud (Count I) and breach of contract (Count III) claims. Defendants' Motion to dismiss Plaintiffs breach of fiduciary duty (Count II) and legal malpractice (Count IV) claims is granted. An appropriate Order follows.
ORDER
AND NOW, this 7th day of August, 2002, upon consideration of Defendants' Motion to Dismiss (Doc. No. 6), Plaintiffs Opposition thereto (Doc. No. 7), Defendants' Reply (Doc. No. 11), and Plaintiffs Sur-Reply (Doc. No. 14),
IT IS HEREBY ORDERED and DECREED that the Motion is DENIED as to Counts I and III of Plaintiffs Amended Complaint and GRANTED as to Counts II and IV of Plaintiffs Amended Complaint. Counts II and IV of the Amended Complaint are DISMISSED WITH PREJUDICE.