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First Sealord Surety v. Durkin & Devries Insurance Agency

January 17, 2013

FIRST SEALORD SURETY
v.
DURKIN & DEVRIES INSURANCE AGENCY
v.
HELLER & SMITH CORPORATION



The opinion of the court was delivered by: O'neill, J.

MEMORANDUM

Presently before me are three fully briefed motions. For the purposes of clarity, I will list the motions and their accompanying memoranda and briefly summarize the arguments contained in each. First, there is defendant Durkin & Devries Insurance Agency's motion to dismiss plaintiff First Sealord Surety's negligent misrepresentation claim (ECF No. 40), First Sealord's response thereto (ECF No. 46), Durkin's reply to the response (ECF No. 48), First Sealord's supplemental declaration in opposition to Durkin's motion to dismiss (ECF No. 52) and Durkin's letter brief in further support of its motion to dismiss (ECF No. 54). Durkin argues that it made no misrepresentations to First Sealord, that even if it did make misrepresentations, that the misrepresentations were not the proximate cause of any of the losses in this case, and alternatively, that the negligent misrepresentation claim is barred by Pennsylvania's economic loss doctrine and the statute of limitations.

Second, there is Durkin's motion to quash a third-party subpoena (ECF No. 49) and First Sealord's reply thereto (ECF No. 50). Durkin argues that the subpoena is untimely and thus prejudicial to Durkin and moreover that the subpoena requires the disclosure of documents subject to a confidential settlement agreement in a prior litigation involving Durkin. First Sealord counters that the subpoena's timing is due to factual assertions made in filings Durkin submitted after the close of discovery and the confidentiality agreement does not bar compliance with the subpoena.

Finally, there is Durkin's motion for summary judgment as to First Sealord's breach of contract and breach of fiduciary duty claims (ECF No. 38), First Sealord's response thereto (ECF No. 44), Durkin's reply to the response (ECF No. 47), First Sealord's supplemental declaration in opposition to Durkin's motion for summary judgment (ECF No. 53), Durkin's letter brief in further support of its motion for summary judgment (ECF No. 54), First Sealord's memorandum regarding its breach of fiduciary duty claim (ECF No. 56), Durkin's letter memorandum in further support of its motion for summary judgment as to the breach of fiduciary duty claim (ECF No. 59), and First Sealord's letter memorandum in reply to Durkin's letter memorandum (ECF No. 60). In its motion for summary judgment, Durkin argues that First Sealord cannot demonstrate any material breaches of the contract between the parties and that the decisions which led to First Sealord's alleged damages were made entirely by First Sealord and were unrelated to any communications Durkin made to First Sealord. Moreover, Durkin asserts that it had no fiduciary duties beyond those imposed by the contract and that the fiduciary duty claim is thus duplicative of the breach of contract claim and must fail for that reason. First Sealord argues that Durkin was in breach of provisions of the contract which required that Durkin convey any adverse information about current or prospective clients to First Sealord, maintain accurate and complete records about clients and comply with the standard of care expected of Durkin as dictated by industry custom. First Sealord also argues that the claims are not duplicative because Durkin owed fiduciary duties to First Sealord beyond those imposed by the contract between the parties.

I held oral argument on the three pending motions on October 18, 2012.

I.Background Facts and Procedural History

A. The Agency Agreement

First Sealord is a Pennsylvania corporation that was engaged in the business of providing surety bonds. An Order liquidating First Sealord was entered on February 8, 2012 in the Commonwealth Court of Pennsylvania and First Sealord is no longer in operation. Durkin is a licensed insurance producer with a principal place of business in Massachusetts. On August 1, 2005, Durkin entered into an Agency Agreement with First Sealord. Under the Agreement, Durkin was to "solicit business for the surety bond products offered by [First Sealord] and to collect and give receipts for premiums or fees due." Agency Agreement ¶ 1. Durkin further was to "act as agent according to the terms and conditions of this agreement." Id. at ¶ 2. However, Durkin had no authority to bind or commit [First Sealord] to any undertaking to or for the benefit of any client of [Durkin]. Durkin only ha[d] authority to issue bonds after receipt of written approval from the company [. . . and all bonds] must be within the specific limits of authority granted under an approved power-of-attorney. . . [Durkin had] no authority to adjust claims or make any representations to third parties related to claims on bonds issued by [Durkin]. [Durkin] must report all claims and any adverse information [to First Sealord] as set forth below.

Id. at ¶ 3. Moreover, in the Agreement Durkin agreed not to "[r]elease a Bond to a client when anyone within the Agent's organization is aware of a pending or prior claim or loss to any surety, including [First Sealord], who may have previously issued a bond to such client, unless such information is provided in writing to and acknowledged by [First Sealord] in advance of delivery of the bond." Id. at ¶ 11. In the Agency Agreement Durkin also acknowledge[d] and agree[d] that [Durkin's] loss management and control obligations to [First Sealord] are a material obligation under this Agreement. [Durkin] agrees to promptly report any Adverse Information (as the term is hereafter defined) which comes to the attention of any person in [Durkin's] organization about any client of [Durkin] who is either applying for or who has received a bond from the [First Sealord]. Adverse Information includes any information concerning a client's character, financial condition, mental or technical competence in meeting its contractual obligations, including but not limited to: any information about a pending or past claim on or against a bond issued by any surety, including [First Sealord]; or any information which may give rise to a potential claim against a bond issued by any surety, including [First Sealord]; or a threat by an obligee on a surety bond issued on behalf of a client to place any surety, including [First Sealord], on notice of a claim; or a threat by anyone to assert a claim against a payment bond issued by any surety, including [First Sealord], on behalf of a client; or the filing of or threat of filing of a mechanic's lien against the property of an obligee on a surety bond issued by any surety, including [First Sealord], on behalf of a client. [Durkin] is only authorized to report claims and Adverse Information to [First Sealord]. [Durkin] is not authorized to adjust, settle, negotiate, or deal in any fashion with claims on bonds issued by the Agent.

Id. at ¶ 13. Further, the Agreement set forth Durkin's obligation to maintain complete and accurate records:

In addition to [Durkin's] compliance with the record keeping requirements imposed by the applicable federal and state laws and regulations, [Durkin] shall keep accurate and complete records of all client accounts who apply for or obtain a bond from the [First Sealord], and shall produce copies thereof and any other information with respect to the account, at [Durkin's] own cost, as requested by [First Sealord] from time to time.

Id. at ¶ 12. The Agency Agreement also contained a clause by which Durkin agreed to indemnify First Sealord for any losses relating to Durkin's performance under the Agreement, including but not limited to (1) the Agent having executed or having procured the execution of any bond or bonds contrary to [Durkin's] obligations under this agreement or contrary to the standard of care expected of [Durkin] as dictated by industry custom; (2) [Durkin] failing to perform or comply with any of the covenants or conditions of this Agreement; (3) any payment, compromise, judgment, fine, penalty, or similar charge paid by [First Sealord]; or (4) [First Sealord] enforcing any of the covenants and conditions of this Agreement..

Id. at ¶ 20. It is the provision requiring behavior consistent with the standard of care as dictated by industry custom that First Sealord in part points to as the source of the independent fiduciary duty that Durkin owed First Sealord. Pl.'s Opp. Br. p. 3, 5.

First Sealord filed its original complaint on March 1, 2010. In its complaint First Sealord asserted a breach of contract claim against Durkin for failing to comply with the Agency Agreement. Specifically, First Sealord alleged that Durkin failed to convey adverse information regarding one of Durkin's clients, Heller & Smith ("H & S"), as required by the Agency Agreement. First Sealord argues that Durkin's failure to convey adverse information, including cash flow problems, was a material breach of the Agreement and caused First Sealord to issue bonds to H & S that First Sealord otherwise would not have approved. First Sealord also asserted a claim for breach of fiduciary duty against Durkin contending that Durkin did not conduct itself consistent with the standard of care owed a principal by its agent.

B. The Agency Questionnaire and the Amended Complaint

Prior to the execution of the Agency Agreement in August 2005, Durkin completed and submitted an Agency Questionnaire which provided general information about the Durkin agency, its owners and employees as well as the scope of Durkin's operations. First Sealord amended its complaint on June 14, 2012 to assert a negligent misrepresentation claim contending that Durkin made misrepresentations in this Agency Questionnaire. Specifically, First Sealord alleges that Durkin provided inaccurate information in response to four items on the questionnaire. First, Question 16 required Durkin to provide the identity of the surety companies Durkin represented in 2002, 2003 and 2004 along with the amount of premiums collected on behalf of those sureties and the amount of any losses sustained by those sureties during those same years. See Am. Compl. ¶ 8. In response to Question 16, Durkin identified CNA as a surety company the agency represented in 2003 and 2004 and Monitor and Hanover as surety companies the agency represented in 2002, 2003 and 2004. Am. Compl. ¶ 9; see also Agency Questionnaire p. 2. Question 17 required Durkin to state whether anyone associated with the Durkin agency ever had powers of attorney revoked. Id. at ¶ 10. In response to Question 17, Durkin represented that no one associated with the agency had ever had powers of attorney revoked. Id. at ¶ 11; see also Agency Questionnaire p. 2. Question 18 required Durkin to state whether anyone associated with Durkin had ever been involved in litigation or claims concerning unauthorized bonds or misuse of powers of attorney. Am. Compl. ¶ 12. In response to Question 18, Durkin represented that no one associated with it had ever been involved in litigation or claims concerning unauthorized bonds or misuse of powers of attorney. Id. at ¶ 13; see also Agency Questionnaire p. 2. Question 19 required Durkin to state whether Durkin had ever been canceled by a company. Am. Compl. ¶ 14. In response to Question 19, Durkin represented that it had never been canceled by a company. Id. at ¶ 15; see also Agency Questionnaire p. 2. First Sealord alleges that it "relied upon the Agency Questionnaire and the representations and warranties made by [Durkin] therein in its determination to execute the Agency Agreement and to appoint [Durkin] as its agent to solicit business for the surety bond products offered by First Sealord." Am. Compl.¶ 18.

First Sealord alleges that Durkin's responses to the above questions were inaccurate. Specifically, First Sealord contends that Durkin: (i) failed to identify other surety companies it had represented, including St. Paul Fire and Marine Insurance Company; (ii) failed to disclose that St. Paul allegedly revoked Durkin's powers of attorney in 2004; (iii) failed to disclose a claim asserted by St. Paul against Durkin relating to an alleged unauthorized bond; and (iv) failed to disclose that St. Paul had canceled Durkin as its agent. Id. at ¶ 48; see also id. at ¶¶ 29-30. First Sealord alleges that Durkin acted negligently in responding to the Agency Questionnaire because Durkin knew or should have known that each of its responses to questions 16-19 were false when made. Id. at ¶ 49. First Sealord asserts that these misrepresentations were meant to induce First Sealord into entering into an agency relationship with Durkin and that First Sealord's reliance upon Durkin's responses to the Agency Questionnaire was justifiable.

Id. at ¶ 50-51. First Sealord also argues that, had it known at the time it entered the Agency Agreement that St. Paul had previously claimed that Durkin had issued unauthorized bonds and that St. Paul had revoked Durkin's power of attorney and canceled Durkin as its agent, First Sealord would not have entered into the Agency Agreement or appointed Durkin its agent to solicit business. Id. at ¶ 52.

In support of these contentions, First Sealord avers the following facts. In 1998, Durkin entered into an agency agreement with St. Paul, another surety company. Id. at ¶ 24. Under that agreement, which became effective January 1, 1999, Durkin was authorized to issue surety bonds for St. Paul. Id. Pursuant to the St. Paul Agreement, on May 7, 2003, St. Paul issued a power of attorney to Durkin. Id. at ¶ 25. During 2002, 2003 and the first part of 2004, Durkin represented St. Paul as an agent for purposes of soliciting business for the surety bond products offered by St. Paul. Id. at ¶ 26. In April or May 2004, a dispute arose between Durkin and St. Paul regarding a Performance Bond issued by Durkin securing the performance by Eastern Contractors, Inc. of a construction contract with the City of Lawrence, Massachusetts. Id. at ¶ 27. The Lawrence Bond, which was issued by Durkin sometime in November or December 2003, was in the amount of $77,252,000.00. Id. By letter dated May 3, 2004 addressed to Thomas P. Durkin, Durkin's managing partner, a St. Paul Senior Vice President advised Durkin of St. Paul's position that the Lawrence Bond had been issued without St. Paul's authority. Id. at ¶ 28. Specifically, the letter advised that there had been explicit approval conditions associated with approval of the Lawrence Bond that had not been satisfied prior to the bond issuance. Id.*fn1 By

letter dated May 6, 2004, Thomas Durkin responded to St. Paul addressing, among other issues, the explicit approval conditions set by St. Paul regarding the City of Lawrence Performance Bond. Id. at ¶ 29.*fn2 First Sealord contends that as of the date of this letter, at the latest, Durkin understood that St. Paul was claiming that the Lawrence Bond was unauthorized. Id.

Moreover, First Sealord asserts that on or around June 30, 2004, as a result of Durkin's unauthorized issuance of the Lawrence Bond, and on other grounds, St. Paul revoked and terminated Durkin's power of attorney. Id. at ¶ 30. First Sealord contends that neither the fact of Durkin's representation of St. Paul during the 2002 to 2004 timeframe nor the facts surrounding St. Paul's claim that Durkin issued an unauthorized bond nor the alleged subsequent termination of Durkin's power of attorney by St. Paul were "disclosed to First Sealord prior to First Sealord's execution of the Agency Agreement with Durkin or reflected in Durkin's responses to the Agency Questionnaire." Id. at ¶ 31. Finally, First Sealord states that St. Paul ultimately filed suit against Durkin in the United States District Court for the District o f Massachusetts asserting causes of action for breach of contract, negligence, breach of fiduciary duty, contractual indemnity and common law indemnity. Id. at ¶ 32.*fn3

C. The H & S Bonds

In October 2005, after appointing Durkin as its agent, First Sealord alleges that Durkin contacted First Sealord about H & S, a utility construction firm located in Massachusetts, as a potential client. Id. at ¶ 34; see also Def.'s Statement of Undisputed Material Facts, p. 4. Allegedly touting H & S's financial strength, Durkin "aggressively sought performance and payment bonds for H & S' projects from First Sealord." Am. Compl. ¶ 35. "As part of its duties as First Sealord's agent, [Durkin] provided information concerning [H & S] to First Sealord to be used by First Sealord in conjunction with making determinations whether to issue bonds for [H & S.]" Pl.'s Opp. Br. (ECF No. 44) p. 6. First Sealord issued bid bonds and payment bonds for H & S beginning in November 2005 with the last one being issued in September 2008. Id. Beginning in July 2006, First Sealord began to receive claims against bonds that it had issued for H & S. Id.; see also Barbour Decl. Ex. D.

First Sealord alleges that Durkin at all times provided an optimistic picture of H & S' financial well-being to First Sealord, including its cash flow and work in progress. At no time during these three years did [Durkin] present any negative information to First Sealord with regard to H & S' finances or ability to perform under its bonded contracts.

Am. Compl. ¶ 36. First Sealord further alleges that despite Durkin's "repeated assurances as to the financial health and strength of H & S, H & S frequently defaulted on projects bonded between 2006 and 2007 by First Sealord." Id. at ¶ 38. Additionally, "[d]espite mounting claims against H & S and a declining financial situation, [Durkin] continued to request that First Sealord issue additional bonds on behalf of H & S." Id. at ¶ 41. First Sealord alleges that as a result of Durkin's misrepresentations it suffered losses in connection with the H & S bonds. Id. at ¶ 54. It is these losses that are First Sealord's claimed damages in the instant litigation.

Durkin contends that in August 2007 "First Sealord began to receive an increasing number of payment claims against bonds issued to H & S" and that on "August 21, 2007 Durkin advised First Sealord that H & S was two months behind its prior cash flow projections." Def.'s Statement of Undisputed Material Facts (ECF No. 38), p. 7.*fn4 "On September 4, 2007, First Sealord placed the H & S bonds on hold pending some resolution of the claims activity as well as the completion of an interim financial statement." Id. Despite this action, sometime in September 2007, First Sealord approved a bid bond for H & S on a construction project and subsequently approved a final performance bond for the project on December 17, 2007. Id. at 8. On November 16, 2007 Durkin forwarded to First Sealord an interim financial statement prepared by McGladrey, an independent accounting firm, on behalf of H & S. Id. at 7. In March 2008, First Sealord placed H & S in "jobs control," meaning that contractors in H & S projects were "directed to send payment on H & S contracts directly to First Sealord to be held in escrow, and First Sealord would in turn pay claims and other job-related expenses on behalf of H & S out of the escrowed funds." Id. at 8.

Despite being First Sealord's agent, on April 30, 2008, Durkin sent a letter to an attorney describing the interactions between First Sealord and H & S, asserting that H & S was proceeding under "the duress of a funds control arrangement" imposed by First Sealord which "effectively precludes [H & S's] ability to successfully satisfy [its] suppliers and places [it] in jeopardy of defaulting on [its] bank loan." See Pl.'s Opp. to Def.'s Mot. Summ. J. (ECF No. 44), Barbour Dec., Ex. E, p. 1. In the letter Durkin further stated that the issue involves [First Sealord's] apparent takeover of a company which was not in default of any of its contracts. . . . At this point [H & S] has been hobbled by [First Sealord] even though [H & S] was not in violation of any of the contracts which remain outstanding. . . . I think a great deal has gone wrong here with the way [First Sealord] approached the entire situation. . . . [There] appears to be merit for [legal action] against [First Sealord's] claims department. They refuse to cooperate with me as [H & S's] agent in order to achieve a successful resolution of this matter.

Id. at p. 2.

I will begin by addressing Durkin's motion to dismiss the negligent misrepresentation claim, next review Durkin's motion to quash the St. Paul subpoena, and conclude by deciding the merits of Durkin's motion for summary judgment as to First Sealord's breach of contract and breach of fiduciary duty claims.

II.Durkin's Motion to Dismiss the Negligent Misrepresentation Claim in the Amended Complaint

Durkin has moved to dismiss the negligent misrepresentation claim amended to the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) and argues that: 1) there were no misrepresentations in its responses to the Agency Questionnaire, 2) that, even if there were misrepresentations, First Sealord cannot demonstrate that these misrepresentations were the proximate cause of the H & S bond issuance, which Durkin characterizes as the "relevant loss" in the case, 3) that the claim is barred by Pennsylvania's economic loss doctrine, and 4) that the claim is barred by the statute of limitations. See Def.'s Mot. Dismiss p. 9-22.

A. Standard of Review

Federal Rule of Civil Procedure 12(b)(6) permits a court to dismiss all or part of an action for "failure to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). Typically, "a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations," though plaintiff's obligation to state the grounds of entitlement to relief "requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). "Factual allegations must be enough to raise a right to relief above the speculative level on the assumption that all of the allegations in the complaint are true (even if doubtful in fact)." Id. (citations omitted). The complaint must state "'enough facts to raise a reasonable expectation that discovery will reveal evidence of' the necessary element." Wilkerson v. New Media Tech. Charter Sch. Inc., 522 F.3d 315, 321 (3d Cir. 2008), quoting Twombly, 550 U.S. at 556. The Court of Appeals has made clear that after Ashcroft v. Iqbal, 556 U.S. 662 (2009), "conclusory or 'bare-bones' allegations will no longer survive a motion to dismiss: 'threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.' To prevent dismissal, all civil complaints must now set out 'sufficient factual matter' to show that the claim is facially plausible." Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir. 2009), quoting Iqbal, 556 U.S. at 678. The Court also set forth a two part-analysis for reviewing motions to dismiss in light of Twombly and Iqbal:

First, the factual and legal elements of a claim should be separated. The District Court must accept all of the complaint's well-pleaded facts as true, but may disregard any legal conclusions. Second, a District Court must then determine whether the facts alleged in the complaint are sufficient to show that the plaintiff has a "plausible claim for relief."

Id. at 210-11, quoting Iqbal, 556 U.S. at 679. The Court explained "a complaint must do more than allege the plaintiff's entitlement to relief. A complaint has to 'show' such an entitlement with its facts." Id., citing Phillips v. Cnty. of Allegheny, 515 F.3d 224, 234-35 (3d Cir. 2008). At the 12(b)(6) phase, I must also accept as true all well-pled factual allegations as well as all reasonable inferences that can be drawn from them, and construe those allegations in the light most favorable to the plaintiff. Mayer v. Belichick, 605 F.3d 223, 229-30 (3d Cir. 2010). However, "[w]here the well-pleaded facts do not permit the court to infer ...


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