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New Jersey Manufacturers Insurance Company v. Brady

United States District Court, M.D. Pennsylvania

January 20, 2017

NEW JERSEY MANUFACTURERS INSURANCE COMPANY, Plaintiff,
v.
J. SCOTT BRADY, Individually, and BRADY & GRABOWSKI, P.C. Defendants.

          MEMORANDUM

          A. RICHARD CAPUTO, UNITED STATES DISTRICT JUDGE

         Presently before the Court is a Motion for Partial Summary Judgment (Doc. 18) filed by Plaintiff New Jersey Manufacturers Insurance Company (“NJM”), and a Motion to Compel Production of Documents (Doc. 31) filed by Defendants J. Scott Brady, Esquire (“Brady”) and Brady & Grabowski, P.C. (collectively, “Defendants”). NJM's Complaint (Doc. 1) alleges that Brady committed legal malpractice when he represented NJM with respect to an Underinsured Motorist (UIM) claim brought by nonparty Gary Wells (“Wells”) against his insurer, NJM (the “Wells claim”). Defendants' Answer (Doc. 10) raises multiple affirmative defenses, including a contributory negligence defense based on NJM's alleged bad faith handling of the Wells claim. In response, NJM filed the instant Motion for Partial Summary Judgment, seeking to strike this affirmative defense and preclude further discovery related to its alleged bad faith handling of the Wells claim. Defendants subsequently filed the instant Motion to Compel, seeking production of documents and communications related to the Wells claim that NJM contends are privileged. NJM's Motion for Partial Summary Judgment will be granted in part and denied in part. Because the Court finds that NJM's exposure to bad faith liability is relevant to the issue of damages, NJM will not be precluded from pursuing discovery on NJM's bad faith handling of the Wells claim. However, as explained below, the Court will strike Defendants' contributory negligence defense only to the extent that the defense is based on conduct that is not causally related to the arbitration award. Additionally, after conducting an in camera review of the NJM file, the Court finds that, with the few exceptions noted below, the documents are properly withheld from discovery on the basis of the privilege claimed. Moreover, the Court finds that NJM has not waived its attorney-client privilege or work-product protection with respect to the withheld documents in the NJM file. However, NJM's privilege log entries for the Curtin & Heefner file are insufficiently detailed for the Court to determine whether the documents withheld on the basis of attorney-client privilege and/or work-product protection are actually privileged from discovery. NJM therefore must supplement its privilege log as detailed below. Defendants' Motion to Compel thus will be granted in part and denied in part.

         I. Relevant Factual Background

         The facts presented in the record, viewed in the light most favorable to Defendants, are as follows[1]:

         Plaintiff NJM is a New Jersey corporation authorized to issue automobile insurance policies in Pennsylvania. (Compl. ¶ 1, Doc. 1.) Defendant J. Scott Brady is a licensed Pennsylvania attorney who practiced at the law firm Defendant Brady & Grabowski, P.C. when he represented NJM. (Id. ¶¶ 2-3.) The instant dispute arises out of Brady's representation of NJM with respect to a UIM claim brought by one of its insureds, Gary Wells. Specifically, NJM contends that Brady negligently handled the arbitration between NJM and Wells (the "Wells arbitration") and continued to act negligently in the steps he took after the arbitration panel issued its award. (See Id. ¶¶ 61-63, 74-76.) NJM also claims that Brady breached his fiduciary duties in his handling of the Wells claim, including his handling of the Wells arbitration. (Id. Count II.)

         Nonparty Gary Wells was injured in a car accident on February 20, 2012. (Pl.'s Statement of Undisputed Facts ("PSUF") ¶ 1, Doc. 19.) NJM provided automobile insurance to Mr. Wells, including Underinsured Motorist (UIM) coverage. (Id. ¶ 2.) Under the policy, UIM coverage was limited to $2 million. (Id. ¶ 3.) Mr. Wells was represented by the law offices of Lenahan & Dempsey, who submitted a claim on behalf of Mr. Wells to NJM under the UIM provisions of his policy. (Id. ¶ 5.) On March 11, 2014, Defendant J. Scott Brady and his firm, Defendant Brady & Grabowski, P.C., were retained to represent NJM with respect to the Wells claim. (Id. ¶ 7.) The parties agreed to a common law arbitration before a three-person arbitration panel. (Id. ¶ 8; see Ex. F, at 4:2-6, Doc. 19.) The arbitration was scheduled to take place on August 19, 2014 in Lackawanna County, Pennsylvania. (PSUF ¶ 8.) On August 14, 2014, John Lenahan, Mr. Wells's attorney, sent Brady a letter that stated: "Enclosed you will find a submission I propose we give the arbitrators in a sealed envelope, to be opened after their deliberations have been completed." (Ex. G, Doc. 19.) The letter further stated that Lenahan was "including the UIM policy limit disclosure” in the proposed sealed envelope “without waiving [plaintiffs'] argument that the arbitrators should be advised of the UIM limits in advance of the arbitration proceedings. . . ." (Id.) However the arbitrators were not made aware of the UIM policy limits prior to issuing their decision. (PSUF ¶ 13.)

         For purposes of the arbitration, NJM stipulated that the driver who caused Wells's injuries was negligent. (PSUF ¶ 10.) The only issues before the arbitration panel were the scope and extent of Wells's injuries. (Id. ¶ 11.) The issue of NJM's alleged bad faith handling of Wells's UIM claim was not at issue in the arbitration. (Id. ¶ 12.) Brady never requested the arbitration panel to mold an award in excess of the $2 million policy limit to match that limit. (Id. ¶ 14.) On August 20, 2014, the arbitration panel issued an award in favor of Mr. Wells for $5, 921, 117. (Id. ¶ 15; Ex. J, Doc. 19.) This award was for compensatory damages only, and exceeded the $2 million policy limit by $3, 921, 117.[2] (PSUF ¶ 16.) The award did not encompass extra-contractual damages, including damages related to any bad faith on the part of NJM. (Id.)

         On September 2, 2014, Brady filed a Petition with the arbitration panel seeking reconsideration, correction, modification, and/or clarification of the award pursuant to 42 Pa. Cons. Stat. Ann. § 7311. (Id. ¶ 17; see Ex. K, Doc. 19.) The Petition sought to modify the award, arguing that the amount was arbitrary. (PSUF ¶ 17.) The Petition did not provide the UIM policy limits or expressly request the arbitration panel to mold the award to the policy limits. (See Ex. K, Doc. 19.) On September 15, 2014, Brady sent a letter to NJM in which he opined that, because he had “no doubt” that a court would interpret Wells's policy language as calling for a common law arbitration rather than a statutory arbitration, NJM had very narrow grounds on which to appeal the arbitration award, none of which he believed applied to the Wells arbitration. (Ex. V, Doc. 25-1.) Brady thereafter withdrew the Petition on September 16, 2014 (Ex. L, Doc. 19) and filed an appeal of the award in the Court of Common Pleas of Monroe County, Pennsylvania on September 19, 2014. (PSUF ¶¶ 19-20.) The appeal did not explicitly use the term “molding” in its request for modification of the Wells arbitration award. (See Ex. M, Doc. 19.) On September 23, 2014, Lenahan filed a Petition to Confirm Common Law Arbitration Award and Enter Judgment in the Court of Common Pleas of Lackawanna County-the same county where the arbitration took place. (PSUF ¶ 22.) Around this time, NJM discharged Brady and retained new counsel, Curtin & Heefner, to handle the challenge to the Wells arbitration award. (See Stein Aff. ¶ 3, Doc. 36-1.) On October 14, 2014, Curtin & Heefner on behalf of NJM filed an Amended Petition in Monroe County requesting the award be molded to the $2 million policy limits, as well as a Motion to Transfer Venue from Monroe County to Lackawanna County. (Ex. 7, p. 3598, Doc. 23.)

         Lenahan had also drafted a complaint that alleged NJM acted in bad faith in handling the Wells claim. (PSUF ¶ 23; Ex. O, Doc. 19.) Lenahan sent the draft bad faith complaint to Bonnie Stein of Curtin & Heefner on October 23, 2014. (Ex. 13, Doc. 23.) In this email Lenahan informed Stein that he was “likely” to file the complaint before the end of the following day (October 24, 2014). (Id.) On October 26, 2014, Stein emailed Nathan Buurma and Jeffrey Bartolino, members of NJM's in house legal team, a copy of the bad faith complaint. (Ex. 3, Doc. 23.) In that email, Stein stated that she wanted to meet “ASAP" to "speak about some significant developments" and "go over major concerns and the possible benefits of this going [to] the October 30, 2014 Mediation." (Id.) Additionally, an email from Buurma concerning the Wells claim sent on October 27, 2014 demonstrates that NJM's legal team was actively strategizing over its ability to mold the arbitration panel's award to the policy limits, as well as its potential exposure to bad faith liability. (Ex. 4, Doc. 23.) On October 28, 2014, Buurma sent a notice to Brady informing him that NJM planned to file a malpractice suit against him in connection with his handling of the Wells arbitration. (Ex. 5, Doc. 23.) A mediation between NJM and Wells was scheduled for October 30, 2014. (Id. Exs. 6-7.) Both parties' mediation memoranda dealt extensively with the issue of NJM's bad faith handling of the Wells claim before and after the arbitration. (See id.)

         On November 10, 2014, NJM and Wells executed a release and settlement agreement. (Ex. P, Doc. 19.) NJM contends that it reasonably believed Brady's failure to submit the policy limits to the arbitration panel or otherwise request a molding of the award would have resulted in the full amount of the arbitration award being confirmed in court, and that its pending motions seeking to reduce the award would have been futile. (See PSUF ¶ 24.) NJM therefore agreed to pay Wells the full arbitration award plus interest in exchange for the release of all claims against NJM relating to this matter, including any claims for bad faith. (Ex. P ¶ 1, Doc. 19.) The agreement also states: "[T]he Payment referenced in this Agreement is made by NJM solely for the purposes of avoiding the uncertainty, nuisance and expense of litigation, and [] no part of the Payment is for bad faith or extra-contractual liability." (Id. ¶ 5.)

         NJM subsequently filed its malpractice suit on November 20, 2015. The Complaint alleges that Brady handled the Wells arbitration negligently, and committed legal malpractice by failing to present the arbitration panel with the UIM policy limits and failing to raise the issue of molding the award to the policy limits before the arbitration panel or any subsequent court. NJM seeks damages totaling the difference between its policy limits ($2 million) and the Wells arbitration award ($5, 921, 117). Defendants filed their Answer on February 1, 2016, in which they raised multiple affirmative defenses, including:

NJM acted in Bad Faith in violation of 42 Pa.C.S. section 8371 and knew that it had significant bad faith exposure for it's [sic] conduct, some of which is outlined in Lineman's [sic] 125 page draft Bad Faith Complaint submitted to NJM on October 26ththrough NJM's counsel before the mediation that settled the UIM and Bad Faith cases on or about October 30, 2014. As specifically outlined in the draft Bad Faith Complaint, NJM repeatedly ignored demands for the policy limits before Brady was retained, after Brady was retained (but prior to Arbitration) and after Arbitration in spite of repeated demands that the policy limit and only the policy limit be paid.

(Answer ¶ 3; see also Id. ¶ 1 (“The Plaintiff's claims are barred by NJM's fault or their contributory negligence . . . .”).) NJM argues that a “bad faith contributory negligence defense” should be stricken because NJM's alleged bad faith “bears no causal nexus to the claims and damages asserted by NJM against Brady. . . .” (See Pl.'s Br. in Supp. 7, Doc. 20.) A hearing was held on December 22, 2016, and the motions are now ripe for disposition.

         II. Legal Standards

         A. Motion for Partial Summary Judgment on an Affirmative Defense

         Summary judgment shall be granted “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). As such, summary judgment is appropriate when “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Wright v. Corning, 679 F.3d 101, 105 (3d Cir 2012) (quoting Orsatti v. N.J. State Police, 71 F.3d 480, 482 (3d Cir. 1995)). A fact is material if proof of its existence or nonexistence might affect the outcome of the suit under the applicable substantive law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

         When there is no material fact in dispute, the moving party need only establish that it is entitled to judgment as a matter of law. See Edelman v. Comm'r of Soc. Sec., 83 F.3d 68, 70 (3d Cir. 1996). Where, however, there is a disputed issue of material fact, summary judgment is appropriate only if the factual dispute is not a genuine one. Anderson, 477 U.S. at 247-48. An issue of material fact is genuine if “a reasonable jury could return a verdict for the nonmoving party.” Id. at 248. Where there is a material fact in dispute, the moving party has the initial burden of proving that: (1) there is no genuine issue of material fact; and (2) the moving party is entitled to judgment as a matter of law. See Howard Hess Dental Labs., Inc. v. Dentsply Int'l, Inc., 602 F.3d 237, 251 (3d Cir. 2010). The moving party may present its own evidence or, where the nonmoving party has the burden of proof, simply point out to the court that “the nonmoving party has failed to make a sufficient showing on an essentia element of her case.” Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). In deciding a motion for summary judgment, the Court must view the evidence in the light most favorable to the nonmoving party. See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

         Courts differ as to whether a motion for summary judgment under Rule 56 or a motion to strike under Rule 12(f) “is the appropriate procedure by which to challenge an affirmative defense.” Prof'l Buyer's Guild, LLC v. Ace Fire Underwriter Ins. Co., No. 06-2127 (GEB) 2007 WL 3227183, at *1 n.1 (D.N.J. Oct. 30, 2007). Here, because both parties refer to matters outside of the pleadings, it is appropriate for the Court to treat NJM's Motion as one for partial summary judgment rather than a motion to strike. See United States v. Manzo, 182 F.Supp.2d 385, 395 n.6 (D.N.J. 2000). “The effect of a grant of partial summary judgment in this situation is that the affirmative defense[] [is] stricken.” Kantner v. Sears & Roebuck, Inc., 5:15-CV-01039, 2016 WL 739187, at *2 (E.D. Pa. Feb. 25, 2016) (citation omitted).

         B. Legal Malpractice Claim

         “A legal malpractice lawsuit arising out of the conduct of underlying litigation involves a ‘case within a case.'” Scaramuzza v. Sciolla, No. Civ.A.04-1270, 2006 WL 557716, at *7 (E.D. Pa. Mar. 3, 2006). Under Pennsylvania law, [3] “an allegedly aggrieved client must establish three elements in order to recover for legal malpractice”: (1) the employment of the attorney or other basis for duty; (2) the failure of the attorney to exercise ordinary skill and knowledge; and (3) the attorney's negligence was the proximate cause of damage to the plaintiff. Rizzo v. Haines, 555 A.2d 58, 65 (Pa. 1989). This requires "proof of actual loss rather than a breach of a professional duty causing only nominal damages, speculative harm or the threat of future harm." Kituskie v. Corbman, 714 A.2d 1027, 1030 (Pa. 1998). Stated differently, a plaintiff may recover as damages only the actual losses he suffered as a result of the attorney's misconduct. Duke & Co. v. Anderson, 418 A.2d 613, 617 (Pa. Super. Ct. 1980); see Ammon v. McCloskey, 655 A.2d 549, 552 (Pa. Super. Ct. 1995) (“Hence, until the client suffers appreciable harm as a consequence of his attorney's negligence, the client cannot establish a cause of action for malpractice.”) (citation omitted). “Damages are speculative only if the uncertainty concerns the fact of damages rather than the amount.” Liberty Bank v. Ruder, 587 A.2d 761, 765 (Pa. Super. Ct. 1991) (citation omitted) (emphasis in original); see Ammon, 655 A.2d at 553 (holding that the entry of a negligently-obtained judgment constitutes an actual loss giving rise to a cognizable malpractice claim, even if execution of the judgment does not occur, so long as the aggrieved client is able to demonstrate it incurred other actual damages).

         In a legal malpractice case in which the underlying action involved litigation, actual losses are usually “measured by the judgment the plaintiff lost in the underlying action[, ] and the attorney who negligently handled the underlying action is the party held responsible for the lost judgment.” Kituskie, 714 A.2d at 1030. However, it is inequitable for an aggrieved client to obtain a judgment against his attorney for an amount that is greater than what the client could have obtained from the third party in the underlying action. Id. Such a scenario would allow the client to “receiv[e] a windfall at the attorney's expense.” Id. (citation omitted).

         The plaintiff bears the burden of proving damages and establishing that it would have succeeded on its defense in the underlying action but for its attorney's negligence. Duke, 418 A.2d at 618.

         C. Contributory Negligence in Legal Malpractice Cases

         “[T]he negligence of a client may be raised as an affirmative defense by an attorney in a legal malpractice action that is based on a theory of negligence.” Gorski v. Smith, 812 A.2d 683, 700 (Pa. Super. Ct. 2002). Because legal malpractice actions “do not involve bodily injury or damage to property, ” they fall outside the scope of Pennsylvania's Comparative Negligence Act, and the doctrine of contributory negligence therefore applies. Id. at 702. “Contributory negligence is conduct on the part of a plaintiff which falls below the standard [of care] to which he should conform for his own protection and which is a legally contributing cause, cooperating with the negligence of the defendant, in bringing about the plaintiff's harm.” Id. at 703 (citation omitted). Under the doctrine of contributory negligence, “[i]t does not matter how slight the evidence of plaintiffs' contributory negligence is. . . . Any contributory negligence by the plaintiffs would be a complete bar to recovery.” Rizzo v. Michener, 584 A.2d 973, 978 (Pa. Super. Ct. 1990). However, a plaintiff “may not be found contributorily negligent unless it appears that he engaged in conduct that was both negligent and a legal cause of his injury.” Fahringer v. Rinehimer, 423 A.2d 731, 733 (Pa. Super. Ct. 1980); see Angelo v. Diamontoni, 871 A.2d 1276, 1280 (Pa. Super. Ct. 2005) (“[T]he burden to establish the plaintiff's conduct as a contributing factor in his injury rests with the defendant, who must show both the negligence of the conduct alleged and the causal relationship of that conduct to the injuries for which damages are sought.”).

         III. Discussion

         A. NJM's Motion for Partial Summary Judgment

         NJM's Motion for Partial Summary Judgment is premised on the notion that there is no causal relationship between NJM's purported contributorily negligent conduct-NJM's bad faith handling of the Wells claim-and the damages that NJM seeks from the Defendants-the delta between the arbitration award and the policy limits. (See Pl.'s Br. in Supp. 9-10, Doc 20.) The reasoning underlying NJM's position proceeds as follows: First, NJM correctly argues that the arbitration award issued in favor of Wells was for compensatory damages only and in no way predicated on NJM's bad faith conduct. As such, NJM's bad faith conduct was not factored into the amount of the arbitration award. Second, NJM correctly advances that the arbitration award exceeded the $2 million limit in Wells's UIM policy by approximately $3.9 million. Third, NJM argues that, at the time Lenahan filed the Petition to Confirm the arbitration award in the court of common pleas, NJM had no legal recourse to avoid paying the arbitration award in full. Thus, the entire arbitration award was going to be confirmed by the court and on appeal as a matter of law. NJM therefore elected to settle with Wells instead of engaging in a futile legal challenge. Furthermore, NJM specifically enumerates a clause in the settlement agreement that states “no part of the Payment is for bad faith or extra-contractual liability” as evidence that the settlement payment was contemplated to extinguish NJM's liability with respect to Wells's UIM claim only. (See Pl.'s Br. in Supp. 10-11, Doc. 20.) Fourth, NJM contends that it now simply seeks liquidated damages-the difference between the arbitration award that it was bound to pay in full and the policy limits. Based on this foundation, NJM posits that the Court will ultimately have to decide whether NJM would have lost its challenge to the Petition to Confirm the arbitration award and on any subsequent appeal, and therefore have been bound to pay the full amount of the award as a matter of law due to Brady's negligence. (Pl.'s Reply Br. 3, Doc. 25.) Because NJM's bad faith handling of the Wells claim does not affect this inquiry, NJM argues that partial summary judgment on this affirmative defense is warranted.

         The Court concludes that NJM's exposure to bad faith liability is relevant to the issue of the damages it seeks in this case. As such, for the reasons that follow, the Court will not preclude discovery on NJM's bad faith conduct. However, NJM's Motion for Partial Summary Judgment will be granted in part, and the Court will strike Defendants' bad faith contributory negligence defense only to ...


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