General Sec. Ins. Co. v. Jordan, Coyne & Savits

• Decision Date: 23 February 2005
• Docket Number: No. 1:04CV1436.,1:04CV1436.
• Citation: 357 F.Supp.2d 951
• Parties: GENERAL SECURITY INSURANCE COMPANY (n/k/a Unitrin Auto and Home Insurance Company), et al. Plaintiffs, v. JORDAN, COYNE & SAVITS, LLP, et al. Defendants.
• Court: U.S. District Court — Eastern District of Virginia

357 F.Supp.2d 951

GENERAL SECURITY INSURANCE COMPANY (n/k/a Unitrin Auto and Home Insurance Company), et al. Plaintiffs, v. JORDAN, COYNE & SAVITS, LLP, et al. Defendants.

No. 1:04CV1436.

United States District Court, E.D. Virginia, Alexandria Division.

February 23, 2005.

Charles B. Wayne, Piper Rudnick LLP, Washington, DC, for Plaintiffs.

Jeffrey Jerome Hines, Goodell Devries Leech & Dann LLP, Baltimore, MD, John

H. Carstens, Jordan Coyne, Fairfax, VA, for Defendants.

MEMORANDUM OPINION

ELLIS, District Judge.

This diversity legal malpractice action is brought by an insurer against a law firm retained to defend an insured in a personal injury lawsuit arising out of an automobile accident. The insurer's claims are brought through the insurer's attorney-in-fact, a former corporate affiliate that assumed the insurer's liability for the underlying personal injury claim. The following potentially dispositive threshold issues are presented:

(i) Does Virginia law permit an insurer to sue a law firm for legal malpractice where, as here, the insurer selected, retained, and paid the law firm to represent its insured, and later alleges that the law firm was professionally negligent in the representation?

(ii) Assuming that an insurer has a legal malpractice claim in such circumstances, does Virginia law permit the claim to be brought, as here, through an attorney-in-fact that has assumed the insurer's liability for the underlying personal injury claim, or does Virginia law regard such an arrangement as a prohibited assignment of a legal malpractice claim?

I.¹

Of the five named plaintiffs in this action, only two are potential candidates to assert the claims in issue.² Plaintiff General Security Indemnity Company of Arizona ("GSINDA") is an Arizona corporation and a wholly-owned subsidiary of SCOR Reinsurance Company, a New York property and casualty insurance company. In November 2004, GSINDA filed this diversity action as the attorney-in-fact of plaintiff General Security Indemnity Company ("GSI"), a New York corporation and former co-subsidiary of SCOR,³ seeking damages from defendants Jordan, Coyne & Savits LLP ("Jordan Coyne"), a District of Columbia law firm, and Carol T. Stone, a member of Jordan Coyne. Plaintiffs' complaint arises from defendants' allegedly negligent representation of VIP & Celebrity Limousines, Inc. ("VIP"), the holder of a GSI liability insurance policy, in a personal injury lawsuit arising from a two-car automobile accident.

The underlying personal injury lawsuit was filed by Clarissa Scott in December 2000 in the Circuit Court for the City of Norfolk, Virginia. Scott was a passenger in a VIP limousine driven by Anthony Beason, a VIP employee, when the limousine collided with a second car driven by Romeo Dionisio, an unrelated party. Despite the fact that the police officer investigating the collision reported no injuries, Scott sought damages for bodily injuries sustained in the accident, originally naming VIP, Beason, and Dionisio as defendants in her state court suit. On March 26, 2001, Scott nonsuited her claims against Dionisio,⁴ and the following day received a default judgment against VIP as a result of VIP's failure to file a responsive pleading in her case. In April 2001, for reasons not disclosed in the record, the state court dismissed Beason as a defendant when the parties failed to appear at a scheduling conference.

In August 2001, several months after entry of the default judgment and the dismissal of Beason as a defendant, GSI retained Carol Stone and her firm, Jordan Coyne, to defend VIP and Beason in Scott's lawsuit. After reviewing court records, Stone advised GSI that the state court's order dismissing Beason as a defendant had the effect of voiding the default judgment against VIP, and consequently, that the case should be considered closed. Stone did not enter an appearance in the Circuit Court for the City of Norfolk, and took no further action in the matter.

In December 2001, the state court entered an order clarifying that its April 2001 order of dismissal was effective only with respect to Beason, and that Scott's default judgment against VIP therefore remained intact. In May 2002, the state court held a damages trial at which a jury heard evidence of the injuries Scott sustained in the collision. Because Stone had not entered an appearance on VIP's behalf, she was not notified of either the December 2001 order or the damages trial. Neither VIP nor Stone was present at the damages trial, and thus no defense was presented. Consequently, the jury hearing Scott's case awarded her $500,000 in damages despite the fact that her medical bills from the accident amounted to a mere $2,000. Stone learned of the damages award a few months later, and in September 2002 filed a motion to have both the default judgment and the damages award set aside. The state court denied the motion, stating, "VIP chose to sit on its rights, never again checking the file or making any appearance." Scott v. Beason, 62 Va. Cir. 70, 75 (2003). Subsequent efforts to appeal this ruling were unsuccessful.

As the state court's ruling was winding its way through the appellate process, SCOR underwent significant corporate changes, selling off several of its wholly-owned subsidiaries in 2002 and 2003, including GSI. See supra note 3. In connection with the sale of GSI, GSI and GSINDA — at SCOR's direction — entered into an agreement whereby GSINDA assumed GSI's liabilities under its existing insurance policies and undertook responsibility for the administration of those policies and any ensuing claims on them. The policy obligations assumed by GSINDA included GSI's liability for Scott's judgment against VIP. Accordingly, when the bill for the judgment came due in February 2004, GSINDA provided the funds for payment.⁵ By then, GSI was no longer a SCOR subsidiary and had begun operating under a different name. See id.

Approximately one week after Scott's judgment was paid, GSI — now known as Hudson Specialty Insurance Company — executed a power of attorney granting GSINDA the authority to act in its name for matters pertaining to the administration and servicing of the policy obligations that GSINDA had assumed. Several months later, GSINDA exercised the power of attorney and filed this diversity action on GSI's behalf, asserting claims for breach of contract, legal malpractice, and breach of fiduciary duty against Stone and Jordan Coyne, contending that its liability for the Scott judgment arose from Stone's failure to provide competent legal services to VIP.⁶ Defendants have moved to dismiss plaintiffs' complaint for failure to state a claim pursuant to Rule 12(b)(6), Fed.R.Civ.P. For the reasons that follow, this motion must be granted in part and deferred in part.

II.

A motion to dismiss pursuant to Rule 12(b)(6), Fed.R.Civ.P., tests the legal sufficiency of a plaintiff's complaint, and should not be granted unless it appears that the plaintiff can prove no set of facts that would entitle him to relief. See Randall v. United States, 30 F.3d 518, 522 (4th Cir.1994); Mylan Lab., Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir.1993). When reviewing a complaint under Rule 12(b)(6), a court must accept as true all well-pleaded allegations and must construe all factual allegations in the light most favorable to the plaintiff. See Schatz v. Rosenberg, 943 F.2d 485, 489 (4th Cir.1991). Because the purpose of Rule 12(b)(6) is to test a complaint's legal sufficiency, however, a court need not accept the legal conclusions a plaintiff draws from its factual allegations. Id.

III.

Analysis of the parties' positions and contentions properly focuses first on plaintiffs' claims of legal malpractice, for they are the heart and lynchpin of plaintiffs' complaint. In essence, plaintiffs argue that they may sue defendants for legal malpractice in their representation of VIP because GSI selected, retained, and paid defendants to undertake VIP's representation. By these acts, plaintiffs contend, GSI established itself as defendants' client, or, alternatively, as an intended non-client beneficiary of legal services provided to VIP. Defendants counter by arguing that an insurer cannot bring a legal malpractice claim against a law firm it retains to defend an insured because the insured, not the insurer, is the client of the firm, and conflict-of-interest principles bar any secondary duty to the insurer. Defendants also contend that GSI's grant of a power of attorney in GSINDA's favor for the purpose of bringing this lawsuit amounts to a prohibited assignment of GSI's legal malpractice claim.

The first question — whether an insurer can bring a legal malpractice claim against the law firm it retains to defend an insured — has never been squarely addressed by the Supreme Court of Virginia.⁷ While the courts of other jurisdictions generally recognize such a cause of action, they differ markedly on the theory of liability under which such a claim may be brought. In most jurisdictions, the retaining insurer may sue the law firm directly as its client. Although most of the reported cases involving such suits offer no analysis of the insurer's relationship with the law firm,⁸ the few that do reflect the view that a "tripartite relationship" exists among insurer, insured, and counsel, with both insurer and insured as co-clients of the firm in the absence of a conflict of interest.⁹ See RONALD E. MALLEN & JEFFREY M. SMITH, 4 LEGAL MALPRACTICE §§ 29.3, 29.16 (5th ed.2000). Some courts and the Restatement recognize an additional or substitute cause of action by the insurer as a non-client beneficiary of the firm's legal services.¹⁰ Both theories of liability, of course, depend on the existence of a duty of care running from the firm to the retaining insurer, and acknowledge that such a duty disappears when a conflict of interest threatens the firm's ability to represent the insured.¹¹ Some jurisdictions go one step further,...