Selko v. Home Ins. Co.
| Decision Date | 12 March 1998 |
| Docket Number | No. 96-1702,96-1702 |
| Parties | William SELKO, Appellant, v. HOME INSURANCE COMPANY, Appellee. |
| Court | U.S. Court of Appeals — Third Circuit |
Jeremy T. Ross (Argued), Schiffman & Ross, Philadelphia, PA, for Appellant.
James W. Christie (Argued), Christie, Pabarue, Mortensen & Young, Philadelphia, PA, for Appellee.
Before: STAPLETON, LEWIS and CAMPBELL, * Circuit Judges.
William Selko ("Selko"), who is the assignee of his former attorney's professional liability policy, appeals from the district court's grant of summary judgment denying recovery on this policy against Home Insurance Company ("Home").
In 1982, at age 18, Selko was the passenger in a car that struck a telephone pole. The accident rendered him a quadriplegic. He and his father engaged Stephen R. Signore, Jr., a Pennsylvania attorney, who has since been disbarred, to represent him in obtaining compensation for his injuries. Signore prepared and Selko executed a power of attorney authorizing Signore to collect all sums due to Selko arising from the accident and to deposit them in banks and other depositories. Also included was an investment clause, giving Signore the authority
[t]o invest in my name, in any stock, shares, bonds, securities or other property, real or personal, and to vary such investments as he may, in his absolute discretion deem best, and to vote at meetings of any corporation or company and to execute any proxies or other instruments in connection therewith.
Signore stated in a deposition that he prepared the power of attorney in light of his discussion with Selko's father, during which Signore stated
Between 1982 and 1991, Signore collected various sums on Selko's behalf from settlements and insurance claims. From these recoveries, Signore invested $300,000 without Selko's prior knowledge or further approval in real estate ventures of his own. Signore placed the collected sums in the bank account of a shell company wholly owned by him called Innovative Concepts, Inc. ("ICI"). He then caused ICI to issue "participation bonds" in Selko's name for the stated amounts as evidence of "loans" by Selko to ICI. The bonds, at least those of record, called for repayment of the original sum together with accrued interest at ten percent per annum, after five years. (These bonds were due, respectively, in 1994, 1995, and 1996.) The monies for which the bonds were issued, consisting of Selko's $300,000 as well as sums from other purported lenders, were then used to purchase interests in Signore's sole name in real estate ventures. Selko's ICI participation bonds were "secured" by Signore's personal pledges of his real estate interests and by Signore's personal guarantees. ICI and Signore later defaulted on the bonds when they became due, beginning in 1994, and in 1995 Signore filed for bankruptcy.
According to Selko, he did not learn that his personal injury proceeds were being utilized in this manner until he made inquiry of Signore in 1991. After Signore responded with some information, Selko wrote Signore on May 9, 1991, expressing concern about the investments' "illiquidity." Selko's letter also stated that he believed he should "diversify and reduce my 100 percent exposure to the vagaries of the local real estate market." Without replying right away, Signore continued to invest in the fashion described above. After further inquiries, Signore again responded to Selko on October 30, 1991. Reassuring him about the investments, Signore said that, for the "long term," they were sustaining a very fair return. Further correspondence between Selko and Signore led to Signore's assurances to work with Selko and "get for you some liquidity as soon as possible." (A building sale or replacement of Selko by another investor were mentioned as possible ways to do this if the market improved.)
Selko later sought and received guidance from a retired attorney, Guy Gabrielson, who met with Signore in July of 1992. Gabrielson reported to Signore his understanding of that meeting in a letter dated July 17, 1992. In the letter, Gabrielson indicated the time was ripe to relieve Signore's office of further responsibilities. Gabrielson also said he believed Selko would like to divest himself as rapidly as possible of the real estate investments so that he could begin to diversify his investments under the guidance of an investment advisor, and that Gabrielson would advise Selko to do so. Signore testified in his deposition that he understood at about this time that he was being relieved of his representation of Selko.
Gabrielson's letter was quickly followed by a letter from Selko to Signore dated July 20, 1992, requesting that Selko receive "any part, or preferably all, of my interest payments currently" from the ICI participation bonds, and stating that he wished to divest himself of all bonds as rapidly as possible beginning with the last to mature. Signore was asked to make checks either for interest or principal payable to Selko's order and send them to him, so that he could begin the process of diversifying his portfolio into investments other than real estate.
On July 20, 1992, Selko also revoked Signore's 1982 power of attorney, substituting in its place a far more limited power of attorney. The new power contained no investment authority but merely authorized Signore to claim, demand and receive "any interest or principal payments which may be due or payable to me in investments heretofore made" under the old power of attorney and, after deduction of sums needed to prosecute the automobile accident claim, to remit the same to Selko. Any further funds received on Selko's behalf were to be deposited in a bank or other depository institution.
Signore neither acknowledged nor took any action to comply with the Selko's requests of July 20, 1992. He did not remit any interest nor did he take steps to liquidate Selko's investments as requested. No further communication occurred between Signore and Selko until more than two years later, in September of 1994. In that month, the earlier of Selko's ICI participation bonds became due. A new attorney representing Selko made demands upon Signore for payment. When no payment was forthcoming, Selko commenced a legal action in the state court against Signore, seeking damages for legal malpractice and breach of fiduciary duty. This action was settled on July 31, 1995. The settlement agreement provided for entry of judgment against Signore for $443,585.50. As part of the agreement, Signore assigned to Selko all his rights against Home under a policy of professional liability insurance he had purchased for his law firm in April of 1994.
Home continued to deny coverage under the policy when Selko, pursuant to the settlement with Signore and the assignment of the policy, later sought indemnification for the losses he had sustained because of Signore's wrongdoing. 2 Selko then brought the present diversity action in the district court against Home. After discovery, both Selko and Home moved for summary judgment, and the court allowed Home's motion but denied Selko's. This appeal followed.
In granting summary judgment to Home, the district court construed Signore's deposition testimony as admitting that, when applying for the policy, Signore already knew he had breached his professional duty to Selko. For this reason, the policy's basis to believe exclusion was held to bar recovery. The district court noted that Rule 1.8(a) of the Pennsylvania Rules of Professional Conduct provided, in essence, that a lawyer shall not enter into a business transaction with a client or acquire an ownership interest adverse to a client without full written disclosure of the transaction and terms. Additionally, the client is to be advised and given a reasonable opportunity to seek the advice of independent counsel.
The court determined that Signore's investment of Selko's funds in his personal real estate ventures clearly violated Rule 1.8(a). Signore did not advise Selko for two years where his money was invested and of Signore's personal financial involvement. Signore, moreover, did not honor his client's wishes, expressed in May 1991, to diversify, but instead increased the investment. The court found the investment authorization in the 1982 power of attorney fell short of being adequate written disclosure under Rule 1.8(a). The court concluded that when Signore applied for malpractice insurance in April of 1994, "he clearly had a basis to believe that a claim of malpractice could be brought against him."
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