DiSabatino v. US Fidelity & Guar. Co.

• Court: U.S. District Court — District of Delaware
• Writing for the Court: C. Waggaman Berl, Jr., Wilmington, Del., pro se
• Citation: DiSabatino v. US Fidelity & Guar. Co., 635 F. Supp. 350 (D. Del. 1986)
• Decision Date: 15 May 1986
• Docket Number: Civ. A. No. 84-260-JJF.
• Parties: Francis John DiSABATINO, Jr., and Patricia DiSabatino, his wife, as guardians of the property of Francis Gabriel DiSabatino, and individually, Plaintiffs, v. UNITED STATES FIDELITY & GUARANTY CO., a corporation of the State of Maryland, Defendant and Third-Party Plaintiff, v. C. Waggaman BERL, Jr., Third-Party Defendant.

635 F. Supp. 350

Francis John DiSABATINO, Jr., and Patricia DiSabatino, his wife, as guardians of the property of Francis Gabriel DiSabatino, and individually, Plaintiffs, v. UNITED STATES FIDELITY & GUARANTY CO., a corporation of the State of Maryland, Defendant and Third-Party Plaintiff, v. C. Waggaman BERL, Jr., Third-Party Defendant.

Civ. A. No. 84-260-JJF.

United States District Court, D. Delaware.

May 15, 1986.

Sidney Balick, Wilmington, Del., for Francis and Patricia DiSabatino.

Wayne N. Elliott, and Michael P. Kelly, of Prickett, Jones, Elliott, Kristol & Schnee, Wilmington, Del., for U.S. Fidelity & Guar. Co.

C. Waggaman Berl, Jr., Wilmington, Del., pro se.

OPINION

FARNAN, District Judge.

The defendant in this action, United States Fidelity & Guaranty Co. ("Fidelity"), a Maryland corporation, has filed a motion pursuant to Fed.R.Civ.P. 12(b)(6) (Docket Item "D.I." 35) to dismiss the complaint of the plaintiffs, Francis and Patricia DiSabatino, Jr., who are citizens of Delaware, on the grounds that their complaint fails to state a claim upon which relief can be granted.¹ The present litigation arose from a case settled in state court involving the alleged medical malpractice of the defendants' insured. The plaintiffs claim that Fidelity, through its agent, fraudulently misrepresented the amount of insurance coverage and that absent this misrepresentation a trial or settlement would have resulted in a substantially greater recovery. (D.I. 1, ¶ 10.) The plaintiffs proceed on a theory based on fraud and pray for compensatory and punitive damages. (D.I. 1 at 3.) The defendant, in answer, claims that the plaintiffs' case remains essentially a cause of action based on tort, that punitive damages are inappropriate, and that the plaintiffs' only remedy is to rescind the settlement and proceed upon the underlying negligence cause of action. (D.I. 7, ¶ 12; D.I. 36 at 5-11.)

BACKGROUND

The plaintiffs instituted their original suit against Drs. Charles L. Miller, David A. Levitsky, Joseph A. Vitale, and the Wilmington Medical Center, Inc., in Delaware Superior Court on July 6, 1977.² (D.I. 1, ¶ 4.) In the spring of 1983, C. Waggaman Berl, Jr., counsel for plaintiffs, entered into settlement negotiations with Harry B. Hoffman, agent for Fidelity, which was the malpractice liability insurer for Drs. Miller and Levitsky. (Id. at ¶ 5.)

The plaintiffs claim that in the course of these settlement negotiations Hoffman represented to Berl that Miller and Levitsky each had liability coverage of $200,000, for a total policy limit of $400,000 when Hoffman knew in fact that a $1,000,000 excess malpractice liability policy covered the insureds against the plaintiffs' claim and that his representation was false. (D.I. 1, ¶¶ 6-7.) The plaintiffs further allege that in reliance on this representation they entered into a settlement agreement whose value Hoffman represented to Berl as having a current value of $294,000. The Court of Chancery approved the settlement on July 8, 1983. (Id. at ¶ 8.)

The defendant denies that Hoffman made any misrepresentation but admits that he knew that there was excess liability coverage. (D.I. 7, ¶¶ 6-7.)

ANALYSIS

The defendant has made a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6). A court should not dismiss a complaint for failure to state a claim "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957); Bernstein v. IDT Corp., 582 F.Supp. 1079, 1082 (D.Del.1984). Specifically, the defendant is asking this Court not to recognize a cause of action which is a matter of first impression in the State of Delaware: whether a plaintiff who has settled a negligence suit for personal injuries may affirm that release and institute a cause of action based on fraud.

In this case, the Court is exercising its diversity jurisdiction. Although providing a federal forum, the Court must apply the substantive law of the appropriate state jurisdiction as expressed in that state's statutes and decisions of its highest courts. Erie Railroad v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 822, 82 L.Ed. 1188 (1938). In certain instances, the law of a state on a particular issue is not readily accessible because the state's highest court has not yet dealt with that question of law. Jones & Laughlin Steel Corp. v. Johns-Manville Sales Corp., 626 F.2d 280, 285 (3d Cir. 1980). "In the absence of an authoritative pronouncement from the state's highest court, the task of a federal tribunal is to predict how that court would rule." Pennsylvania Glass Sand Corp. v. Caterpillar Tractor Co., 652 F.2d 1165, 1167 (3d Cir. 1981); Jones & Laughlin Steel Corp., 626 F.2d at 285.

The Court must examine the best available evidence in forecasting such decisions. Evidence of state law can come in the form of lower state court precedents, related decisions in considered dicta of a state's highest court, the policies that inform that court's application of certain legal doctrines, court decisions in other jurisdictions, and relevant legal treatises and articles. See McKenna v. Ortho Pharmaceutical Corp., 622 F.2d 657, 662-63 (3d Cir.), cert. denied, 449 U.S. 976, 101 S.Ct. 387, 66 L.Ed.2d 237 (1980); Brown v. Caterpillar Tractor Co., 696 F.2d 246, 250 (3d Cir. 1982).

As the defendant notes, the Delaware courts are in accord with the basic contract principle that a party defrauded on a contract may elect either to rescind the contract or to affirm it and sue for damages. Sannini v. Cascells, 401 A.2d 927, 930 (Del.Supr.1979); Hegarty v. American Commonwealth Power Co., 19 Del.Ch. 86, 163 A. 616, 619 (1932). However, the courts in Delaware have yet to apply this principle in the context of releases of tort claims, which are a species of contract. There is a split of opinion whether a plaintiff has an election of remedies in such a case. Several courts have held that the releasor of a tort claim may stand upon a fraudulently induced release and maintain a separate fraud action. Slotkin v. Citizens Casualty Co. of New York, 614 F.2d 301, 312 (2d Cir.1979), cert. denied, 449 U.S. 981, 101 S.Ct. 395, 66 L.Ed.2d 243 (1980); Bilotti v. Accurate Forming Corp., 39 N.J. 184, 188 A.2d 24, 34-35 (1963). In other jurisdictions, however, courts have made a distinction between contract and tort claims and have refused to allow a plaintiff to elect rescission or affirmance when the underlying cause of action is an action sounding in tort. Mackley v. Allstate Ins. Co., 564 S.W.2d 634, 635-36 (Mo.App.1978); Shallenberger v. Motorists Mutual Ins. Co., 167 Ohio St. 494, 150 N.E.2d 295, 299 (1958).

This Court predicts that in a case such as this a Delaware court would rule that a tort claimant has an election to stand on a fraudulently induced release and proceed on a cause of action based on fraud. The reasoning of the Delaware Court of Chancery in Hegarty provides some support for such a prognostication. Hegarty involved an allegedly fraudulent acquisition of stock by the defendant from the plaintiff. The plaintiff was allowed to recover on the basis of the equitable right to a rescission although he did not restore or offer to restore anything obtained under the contract.

The court in Hegarty employed expansive language in detailing the remedies available to a party induced to enter an agreement by fraudulent misrepresentation. In such a case, the contract is voidable, and the plaintiff may "let the contract stand, retaining all that he obtained thereunder, and maintain an action at law to recover damages for the fraud." Hegarty, 163 A. at 619. The plaintiff alternatively may "choose to regard the contract as never having been entered into and seek relief based on rescission, in which event the relief afforded is by way of restoration of the parties to the status quo ante." Id. In discussing this election, the court stated that the "best interests" of the aggrieved party would suggest which election he would make and did not attempt to "elaborate upon the details or shades" of application of these "general principles." Id. The court gave no indication that such principles should be restricted exclusively to contracts involving commercial fraud.

More on point is Eastern States Petroleum Co. v. Universal Oil Products Co., 29 Del.Ch. 305, 49 A.2d 612 (1946). In the course of a patent infringement litigation, the parties entered into a compromise agreement the consideration for which included the release of the complainant's rights in an antitrust case against a third party to which the opposing party was liable. The Court of Chancery in Eastern States Petroleum considered this release to form part of the consideration for certain licenses and rights received by the complainant in the agreement of settlement. Id. 49 A.2d at 615. The court held that in this case the complainant must make an election of remedies because of the fraud alleged by the complainant in the making of settlement. Id. 49 A.2d at 616.³

Eastern States Petroleum demonstrates that in Delaware a settlement agreement involving the release of a cause of action should be treated no differently from a fraudulently induced commercial contract in which courts routinely allow an election of remedies. Such a rule of law is significant, because it is in fundamental contradiction to the reasoning of courts which differentiate between a simple contract and a settlement of a tort claim.

The holdings of Hegarty and Eastern States Petroleum can easily be extended to cover a contract of settlement compromising a tort claim. A contrary holding fails both on grounds of analytical consistency and for reasons of policy.

The distinction made by some courts between simple contracts and releases of tort actions rests in part on the theory that the tort claimant has parted with nothing because he can avoid the contract of settlement...