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BERGER & MONTAGUE, P.C. v. SCOTT & SCOTT

July 26, 2001

BERGER & MONTAGUE, P.C., PLAINTIFF,
v.
SCOTT & SCOTT, LLC, DEFENDANT.



The opinion of the court was delivered by: Joyner, J.

MEMORANDUM AND ORDER

In this Civil Suit between two law firms, Defendant, Scott & Scott LLC ("Scott"), moves for a partial dismissal of Counts II and III of Plaintiff's Complaint for failure to state a claim upon which relief may be granted. For the reasons that follow, we will deny the Defendant's motion.

Background

Berger eventually withdrew as lead counsel, and began negotiations with Scott and the clients to transition lead counsel to another firm. Thereafter, Berger entered into a Memorandum of Understanding ("Memo") with Scott and the clients to reduce Berger's fee to 50% of the total contingent fees. Under this Memo, Berger and Scott entered a separate agreement to divide the 50% of the total fees awarded. Thus, if the case was won, 50% of the total fee would be divided between Berger and Scott according to each firm's respective lodestar. Furthermore, both Berger and Scott would be reimbursed for their costs.

On December 4, 2000, the clients' case settled, and the new lead counsel was paid $1,968,170.90 in fees. From this amount, Berger and Scott were due $984,085.45, which, under the agreement, the firms were to split according to their lodestars. The $984,085.45 was forwarded to Scott for distribution pursuant to the terms and conditions of the Agreement. However, Scott has failed to pay Berger its full share of $984,085.45. To date, Scott has only paid Berger the sum of $315,000, which does not reflect Berger's share of the fees due under the Agreement.

Motion to Dismiss Standards

The standards for granting a motion to dismiss are outlined in Fed.R.Civ.P. 12(b)(6). Under Rule 12(b)(6), a motion to dismiss may be granted only when "it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon v. King & Spaulding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984); Quarles v. Germantown Hosp. & Cmty. Health Servs., 126 F. Supp.2d 878, 880 (E.D.Pa. 2000) (quoting Hishon). The Court must accept all well-pleaded allegations as true and construe the complaint in a light most favorable to the plaintiff when determining whether, under any reasonable reading of the pleadings, the plaintiff may be entitled to relief. See, e.g., Lake v. Arnold, 232 F.3d 360, 365 (3d Cir. 2000); Allah v. Seiverling, 229 F.3d 220, 223 (3d Cir. 2000). Although generally, courts may not look beyond the complaint in deciding a motion to dismiss under Rule 12(b)(6), "they may consider an undisputedly authentic document that a defendant attaches to a motion to dismiss, if the plaintiff's claims are based on that document." Pension Benefit Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir. 1993); ALA, Inc. v. CCAIR, Inc., 29 F.3d 855, 859 (3d Cir. 1994).

Discussion

In Counts I, II, and III of its Complaint, Berger contends that Scott has breached the contract between the parties, committed the tort of conversion, and that it is entitled to an accounting for Scott's failure to pay its portion of the referral fee. By way of the motion that is now before the Court, Scott seeks the dismissal of Counts II and III of the Complaint on the grounds that the "gist of action" test and the "economic loss doctrine" preclude Berger from recovering for the same wrong under theories of breach of contract and tort, and for an equitable accounting of Scott's legal fees, costs and funds associated with the clients' case.

Under Pennsylvania law, tort claims allegedly committed in the course of carrying out a contract are dismissible if the "gist" of them sound in contract instead of tort. Quorum Health Res. Inc. v. Carbon-Schuylkill Cmty. Hosp. Inc., 49 F. Supp.2d 430, 432 (E.D. Pa 1999). The Pennsylvania state courts have thus developed a "gist of the action" test to establish if a claim asserts either a breach of contract or tort claim. Lex & Smith Professional Assoc., LTD. v. Wilmington Professional Assoc., Inc., No. CIV.A. 98-6422, 1999 WL 33100113 at *1 (E.D.Pa. May 18, 1999). Under this test, an action is considered a tort action if the wrong ascribed to the defendant is the gist of the action, with the contract being collateral. Lex & Smith, 1999 WL 33100113, at *1; Phico Ins. Co. v. Presbyterian Med. Servs. Corp., 663 A.2d 753, 757 (Pa.Super.Ct. 1995).

Moreover, under Pennsylvania's "economic loss doctrine," a plaintiff is prohibited "from recovering in tort economic losses to which their entitlement flows only from a contract," thereby circumventing the bar on collecting punitive damages for breach of contract. Duquesne Light Co. v. Westinghouse Elec. Corp., 66 F.3d 604, 618 (3d Cir. 1995); Craig v. Salamone, No. CIV.A. 98-3685, 1999 WL 213368 at *8 (E.D.Pa. April 8, 1999). Conversion, of course is defined as the "deprivation of another's right of property in, or use of possession of a chattel, without the owner's consent and without lawful justification." Bernhardt v. Needleman, 705 A.2d 875 (Pa.Super.Ct. 1998).

In Bernhardt v. Needleman, 705 A.2d 875 (Pa.Super.Ct. 1998), the Superior Court considered the question of whether an action for recovery of an attorney's unpaid referral fees would lie under the theories of conversion and breach of contract. In resolving this issue of first impression under Pennsylvania law, the Court examined Rule 1.5 of the Pennsylvania Professional Rules of Conduct. As the comment thereto recognized, a client and a contingent fee attorney contract for specified percentage interests in property — the proceeds of the lawsuit. Thus, the Bernhardt Court reasoned, "the contract for a referral fee is a contract for a division of work in exchange for a division of property — the attorney's interest in those proceeds. Accordingly, once a fee has been received, the referral fee can be the subject of conversion." Bernhardt, 705 A.2d at 879.

In the instant case, Berger and Scott entered an Agreement, that upon settlement of the case, the firms would divide the 50% of total fees awarded from the clients, according to each firm's respective lodestar. Furthermore, both Berger and Scott would be reimbursed for their costs. Moreover, Scott was responsible for the collection and disbursement of the fees received from the clients. The total fees awarded were $1,968,170.90, and from this amount Berger and Scott were due $984,085.45. The $984,085.45 was forwarded to Scott for distribution, however, Scott has not paid ...


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