author: HERRON, J.,

text:
    First Republic Bank v. Brand

      Peter J. Boyer, for plaintiff.

      Jamie Perrapato, for defendants.
    April 30, 2001
   HERRON, J.,

Defendants Steven D. Brand, James M. Dougherty, Arthur L. Powell, Richard S. Powell, Jon R. Powell, Carol P. Heller, Nancy E. Powell, Harold G. Schaeffer, James R. Schaeffer, Anthony L. Schaeffer and Robert D. Schaeffer have filed a motion to disqualify Spector Gadon & Rosen PC., which is currently counsel for plaintiff First Republic Bank. For the reasons set forth in this opinion, the court is issuing a contemporaneous order denying the motion.

BACKGROUND

The underlying dispute in this matter arises from a transaction in which the defendants, who owned all of the shares of Fidelity Bond and Mortgage Co., sold an 80 percent interest in Fidelity to First Republic and Phoenix Mortgage Company. It is undisputed that the Spector firm served as counsel to First Republic in the transaction. First Republic has alleged that, in connection with the transaction, the defendants made numerous representations that they knew to be false.

On the basis of its allegations, First Republic has pled two counts for breach of contract, in addition to claims for fraudulent misrepresentation, negligent misrepresentation and punitive damages. This court struck the claims for negligent misrepresentation and punitive damages in response to the defendants’ preliminary objections in First Republic Bank v. Brand, August term 2000, no. 147 (C.P. Phila. Dec. 19, 2000) (Herron, J.), but allowed First Republic to proceed on its remaining claims.

The defendants now assert that, in addition to representing First Republic in the transaction, the Spector firm also represented Fidelity and the defendants, supplementing the advice the defendants were receiving from their own counsel. According to the motion, the Spector firm was the main proponent of the transaction and had “full and unfettered access” to Fidelity’s financial records. Motion at ¶6. In addition, it is asserted that the Spector firm performed legal services for the defendants and that First Republic’s claims are based on confidential information provided by the defendants to the Spector firm. Based on these allegations, the defendants assert that they had an attorney-client relationship with the Spector firm and that members of the Spector firm will be necessary witnesses in this matter. Both of these facts, they contend, require that the Spector firm be disqualified as First Republic’s counsel in this matter.

DISCUSSION

The defendants’ motion must be. denied for several reasons. First, the allegations in the motion, even if true, do not establish a legal relationship between the defendants and the Spector firm, which is necessary for disqualification of an attorney for a conflict of interest. In addition, because the Pennsylvania Rules of Professional Conduct bar representation by an attorney-witness at trial only, the motion is, at best, premature.

A Pennsylvania trial court has the authority to disqualify an attorney whose behavior threatens to violate the prohibition in the Rules of Professional Conduct against conflicting representations. Maritrans GP Inc. v. Pepper, Hamilton & Scheetz, 529 Pa. 241, 254-55, 602 A.2d 1277, 1283-84 (1992). See generally, McCarthy v. SEPTA, no. 733 EDA 2000, 2001 WL 347147 at *3 (Pa. Super. Apr. 10, 2001) (Pennsylvania trial courts may sanction counsel for violating the Rules of Professional Conduct). This authority, however, is limited to those circumstances “where disqualification is needed to [e]nsure the parties receive the fair trial which due process requires.” In re Estate of Pedrick, 505 Pa. 530, 542, 482 A.2d 215, 221 (1984). In addition, “[a] party seeking to disqualify opposing counsel has the burden of establishing that counsel’s continued participation in the case would violate the disciplinary rules.” Petition of Kenvue Development Inc., 145 Pa. Commw. 106, 117, 602 A.2d 470, 476 (1992) (citing Freeman v. Kulicke & Soffa Industries Inc., 449 F. Supp. 974 (E.D. Pa. 1978), aff’d, 591 F.2d 1334 (3d Cir. 1979)).

Here, the defendants assert that their prior relationship with the Spector firm creates a conflict with the Spector firm’s current representation of First Republic in violation of Pennsylvania Rule of Professional Conduct 1.9. In addition, the defendants claim that members of the Spector firm will be necessary witnesses at trial, precluding their participation as counsel under Pa.R.P.C. 3.7. These violations, they contend, disqualify the Spector firm from representing First Republic.

I. Because No Attorney-Client Relationship Ever Existed Between the Defendants and the Spector Firm, the Spector Firm May Not Be Disqualified Under Rule 1.9

The Pennsylvania Rules of Professional Conduct address an attorney’s conflict of interest with a former client:

“A lawyer who has formerly represented a client in a matter shall not thereafter:
“(a) represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client consents after a full disclosure of the circumstances and consultation; or
“(b) use information relating to the representation to the disadvantage of the former client except as Rule 1.6 would permit with respect to a client or when the information has become generally known.” Rule 1.9.

In Estate of Pew, 440 Pa. Super. 195, 655 A.2d 521 (1994), the Pennsylvania Superior Court elaborated on Rule 1.9 and set forth a three-prong test for when it might apply.

“An attorney is prohibited from undertaking a representation adverse to a former client in a matter ‘substantially related’ to that in which the attorney previously had served the client. . . . The fact that the two representations involved similar or related facts is not, in itself, sufficient to warrant the finding of a substantial relationship so as to disqualify the attorney from the representation, but, rather the test is whether information acquired by an attorney in his former representation is substantially related to the subject matter of subsequent representation____If the attorney might have acquired confidential information related to the subsequent representation, Pa.R.P.C. 1.9 would prevent the attorney from representing the second client. . . . Confidential information gained by one member of a law firm is imputable to other members of the same law firm____Therefore, a former client seeking to disqualify a law firm representing an adverse party on the basis of its past relationship with a member of the law firm has the burden of proving: (1) that a past attorney-client relationship existed which was adverse to a subsequent representation by the law firm of the other client; (2) that the subject matter of the relationship was substantially related; (3) that a member of the law firm, as attorney for the adverse party, acquired knowledge of confidential information from or concerning the former client, actually or by operation of law.” 440 Pa. Super. at 243-44, 655 A.2d at 545-46. (citations omitted) (emphasis added)

The defendants address the first prong of the Pew test concerning their alleged pre-existing attorney-client relationship with the Spector firm. According to the defendants, the Spector firm represented them in the transaction and was involved in drafting the transaction documents, securing financing from Summit Bank and counseling all of the parties with regards to the legal effects of the transaction. Defendants’ memorandum at 12; affidavit of Steven D. Brand atf][2-5. Seven Spector firm attorneys, including many of the senior members of the Spector firm, were allegedly involved in these activities. Defendants’ memorandum at 8, 21-22.

First Republic counters that the Spector firm never had an attorney-client relationship with the defendants, either by contract or by implication, although it acknowledges that the Spector firm represented Fidelity in a limited manner in the transaction. Without establishing a prior relationship with the Spector firm, First Republic asserts, the defendants cannot show a violation of Rule 1.9 and are not entitled to have the Spector firm disqualified.

The defendants anticipate and specifically confront First Republic’s argument by pointing to evidence of the Spector firm’s relationship with the defendants. First, the defendants contend that the transaction involved the sale of the Fidelity shares and therefore had a significant impact on the holders of the Fidelity shares, i.e., the defendants. In addition, the defendants assert that the alleged misrepresentations upon which First Republic’s claims are based “likely were confidentially communicated directly to the Spector firm by the [defendants] during the firm’s common representation of all interests in the merger transaction.” Defendants’ memorandum at 13. Moreover, the defendants allege that the Spector firm’s advice to Fidelity may have created an obligation on the defendants to act in a particular manner, although neither the advice given nor the obligation created is described. Id. As further evidence in support of their argument, the defendants have submitted a series of documents, including a letter from the Spector firm to Fidelity’s president that references an invoice for work done “on behalf of Fidelity Bond & Mortgage Co. and it’s [sic] investors” in connection with the transaction. Brand affidavit exhibit 7.

A threshold issue raised by these arguments is whether the defendants have shown that an attorney-client relationship arose with the Spector firm by implication. Pennsylvania courts have adopted the following test to determine if an attorney-client relationship has arisen by implication:

“Absent an express contract an implied attorney-client relationship will be found if (1) the purported client sought advice or assistance from the attorney; (2) the advice sought was within the attorney’s professional competence; (3) the attorney expressly or impliedly agreed to render such assistance; and (4) it is reasonable for the putative client to believe the attorney was representing him.” Atkinson v. Haug, 424 Pa. Super. 406, 411-12, 622 A.2d 983, 986 (1993) (citing Sheinkopf v. Stone, 927 F.2d 1259, 1264 (1st Cir. 1991)).

In addition, Pa.R.P.C. 1.13(a) states that “[a] lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.” This makes it clear that an attorney representing a corporation represents the corporation and not the corporation’s shareholders, officers or directors. No Pennsylvania state cases, however, specifically address an implied attorney-client relationship as between a corporation’s attorney and the corporation’s shareholders.

In informal opinion 95-390, issued in 1995, the American Bar Association Committee on Ethics and Professional Responsibility cautioned practitioners on the potential for confusing a corporate client with those involved in corporate operations:

“Because a lawyer who represents a corporation necessarily must deal with individuals — be they directors, officers and other employees, or shareholders — it is tempting to view some of them, or all of them collectively, as clients. Absent special circumstances, however, the rule of law applied by the courts, and the rule of professional responsibility that guides disciplinary authorities, is that the lawyer must view the corporation itself as the client, and in his or her representation must work for the best interest of the corporation.” Op. 95-390 at 10 n.6.

Although some courts have held that the attorney of a closely held corporation represents the corporation’s shareholders as well, most courts in other jurisdictions have analyzed the attorney-client relationship in closely held corporations based on the facts of the particular case. See e.g., Sackley v. Southeast Energy Group Ltd., no. 83 C 4615, 1987 WL 12950 at *3 (N.D. Ill. June 22, 1987) (“[wjhere a small, closely-held corporation is involved ... the line between individual representation and representation of the corporation may be blurred, and whether the attorney for the corporation is also acting as the attorney for individual officers, directors, or shareholders must be determined from the facts of the case”); Bobbitt v. Victorian House Inc., 545 F. Supp. 1124, 1126 (N.D. Ill. 1982) (client identity analysis in the context of a small close corporation with only a few shareholders and directors is “complex” and “must be determined on the individual facts of each case”). Cf. op. 95-390 at 11 (1995) (“whether a lawyer represents a corporate affiliate of his client, for purposes of Rule 1.7, depends not upon any clear-cut per se rule but rather upon the particular circumstances”).

The particular difficulties in client identity in the context of a closely held corporation were explored by the Fifth Circuit in United States v. Edwards, 39 F. Supp.2d 716 (M.D. La. 1999), where it observed as follows:

“As a general rule, an attorney for a corporation represents the corporation, and not its shareholders. The issue of attorney-client relationship becomes more complicated in the case of a small closely-held corporation with only a few shareholders or directors. In such cases, the line between individual and corporate representation can become blurred. The determination whether the attorney represented the individual of the small closely-held corporation is fact-intensive and must be considered on a case-by-case basis. The court in Rosman v. Shapiro[, 653 F. Supp. 1441 (S.D.N.Y 1987),] noted that although corporate counsel does not ordinarily become counsel for the shareholders and directors, in a closely-held corporation consisting of only two shareholders, ‘it is indeed reasonable for each shareholder to believe that the corporate counsel is in effect his own individual attorney.’ The court in Sackley v. Southeast Energy Group Ltd. set forth a number of factors which could be considered: (1) ‘whether the attorney ever represented the shareholder in individual matters;’ (2) ‘whether the attorneys’ services were billed to and paid by the corporation;’ (3) ‘whether the shareholders treat the corporation as a corporation or as a partnership;’ and (4) ‘whether the shareholder could reasonably have believed that the attorney was acting as his individual attorney rather than as the corporation’s attorney.’ ” 39 F. Supp.2d at 731-32. (footnotes omitted)

The American Bar Association Committee on Ethics and Professional Responsibility has established a similar, yet distinguishable, list of criteria to be considered when determining whether an attorney-client relationship has been formed between a partnership’s attorney and an individual partner:

“Whether such a relationship has been created almost always will depend on an analysis of the specific facts involved. The analysis may include such factors as whether the lawyer affirmatively assumed a duty of representation to the individual partner, whether the partner was separately represented by other counsel when the partnership was created or in connection with its affairs, whether the lawyer had represented an individual partner before undertaking to represent the partnership, and whether there was evidence of reliance by the individual partner on the lawyer as his or her separate counsel, or of the partner’s expectation of personal representation.” Amer. Bar Ass’n Comm, on Eth. & Prof. Resp. inf. op. 91-361 at 6 (1991).

Although the opinion 91-361 test is aimed at representation in the context of a partnership, the opinion states that “[t]here is no logical reason to distinguish partnerships from corporations or other legal entities in determining the client a lawyer represents.” Id. at 3. See also, Hopper v. Frank, 16 F.3d 92, 96 (5th Cir. 1994) (applying opinion 91-361 factors to corporate attorney and shareholder); Meyer v. Mulligan, 889 P.2d 509, 514 (Wyo. 1995) (the factors in opinion 91-361 “are relevant to and offer guidance in the determination of when a closely-held corporation’s attorney has established an attorney-client relationship with one of the corporation’s incorporators, shareholders, or managers because partnerships and closely-held corporations combine many similar characteristics”). Numerous courts have relied on the factors specified in opinion 91-361 and Edwards, even when not citing them by name. See e.g., Mayer-Wittmann Joint Ventures Inc. v. Gunther Int'l Ltd., no. CV 93 0134790 S, 1994 WL 271795 at *3-*4 (Conn. Super. Ct. June 6, 1994) (focusing generally on shareholder’s reasonable belief). Cf. Herrick Co. v. Vetta Sports Inc., no. 94 Civ. 0905 (RPP), 1996 WL 691993 at *18 (S.D.N.Y. 1996) (finding an attorney-client relationship between the constituents of a joint venture and the joint venture’s attorney “depends on the nature of advice and assistance given to the alleged client by the attorney, the context in which that advice was solicited, the attorney’s statements regarding this advice, and the reasonableness of the client’s expectation of an attorney-client relationship”); Sheinkopf 927 F.2d at 1266 (corporate attorney did not represent shareholder where there was “no history of a pre-existing attorney-client relationship; no fee arrangement in place (or even discussed); no retainer paid; no particularized discussions of the legal ramifications of the deal” and shareholder was regularly represented by other counsel).

The relevant case law and literature, therefore, suggest that the following criteria are helpful in determining whether a corporation’s attorney has entered into an attorney-client relationship with the corporation’s shareholder:

(1) Whether the shareholder was separately represented by other counsel when the corporation was created or in connection with its affairs;
(2) Whether the shareholder sought advice on and whether the attorney represented the shareholder in particularized or individual matters, including matters arising prior to the attorney’s representation of the corporation;
(3) Whether the attorney had access to shareholder’s confidential or secret information that was unavailable to other parties;
(4) Whether the attorneys’ services were billed to and paid by the corporation or the shareholder;
(5) Whether the corporation is closely held;
(6) Whether the shareholder could reasonably have believed that the attorney was acting as his individual attorney rather than as the corporation’s attorney;
(7) Whether the attorney affirmatively assumed a duty of representation to the shareholder by either express agreement or implication;
(8) Whether the matters on which the attorney gave advice are within his or her professional competence;
(9) Whether the attorney entered into a fee arrangement; and
(10) Whether there was evidence of reliance by the shareholder on the attorney as his or her separate counsel or of the shareholder’s expectation of personal representation.

An examination of the facts of this case reveals few factors that support finding an attorney-client relationship between the defendants and the Spector firm. The defendants concede that they were represented by other counsel in the transaction. Motion at ¶5. In addition, the defendants neither assert nor present any record of a prior relationship between themselves and the Spector firm. They also fail to allege a request by the defendants to the Spector firm for representation. Moreover, it appears that the Spector firm never entered into any express agreement or fee arrangement with the defendants, never submitted a bill to, or received a retainer from, the defendants and never gave the defendants particularized legal advice. Fitzgerald affidavit at ¶3.

The defendants contend that the Spector firm had “full and unfettered access to [Fidelity’s] financial records,” as well as “information concerning all aspects of its operations, management and corporate structure, as well as information concerning the Fidelity shareholders.” Motion at ¶6. As a practical matter, it is common in corporate practice for a corporation’s attorney to have frequent access to confidential corporate records, including information about the corporation’s shareholders, through such activities as due diligence. If such everyday activity created an implied relationship between the attorney and the shareholders, then it would erase the distinction between a corporate client and the corporation’s shareholders and would render Rule 1.13(a) meaningless.

Given the regular practice described supra, the Spector firm’s access to Fidelity information is to be expected, as the Spector firm was engaged in a due diligence review of Fidelity for First Republic and also was representing Fidelity at the time. Fitzgerald affidavit at ¶¶16-17. As a result, the Spector firm’s access to Fidelity’s records, regardless of what such records revealed about the defendants, does not support an extension of the legal relationship to the defendants.

The assertion that the Spector firm did work for the defendants is equally unpersuasive. While the shareholders may have benefitted from the Spector firm’s work, it is not uncommon for counsel of different parties in a transaction to divide responsibilities in such a way that one party’s attorney is wholly responsible for a particular facet of the transaction. Merely working toward the common goal of consummating the transaction, however, does not give rise to an attorney-client relationship with the other parties to that transaction. If a legal relationship could be created in this manner, an attorney representing one party in a commercial transaction would almost invariably end up representing all of the parties in the transaction. Because this conclusion is untenable, the development of an attorney-client relationship must require that an attorney counsel the shareholder specifically and particularly.

Here, the defendants maintain that the Spector firm drafted some of the transaction documents and the closing checklist for the transaction. Brand affidavit at ¶¶5, 8. While these actions no doubt benefitted the defendants, they also advanced the interests of all the other parties to the transaction and do not amount to advice provided specifically to the defendants. Thus, they do not support the defendants’ contention that they had a legal relationship with the Spector firm.

The defendants’ remaining allegations consist of little more than general assertions that the Spector firm provided them with “legal advice” and had access to “confidential information.” These ambiguous and general statements contrast sharply with the details provided throughout the defendants’ submissions to show First Republic’s and Fidelity’s relationships with the Spector firm. Even when viewed as a whole, the motion’s vague and conclusory allegations do not support finding that an attorney-client relationship existed between the defendants and the Spector firm. See Commonwealth v. Sal-Mar Amusements Inc., 428 Pa. Super. 321, 328, 630 A.2d 1269, 1273 (1993) (trial court properly denied motion for recusal where allegations forming the basis of the motion were “vague and unfounded”); Central Penn National Bank v. Williams, 362 Pa. Super. 229, 235, 523 A.2d 1166, 1169 (1987) (movant’s conclusive statement that he had a meritorious defense was “self-serving” and did not warrant opening the judgment confessed against him). See also, Sheinkopf, 927 F.2d at 1266 (“ambiguous” and “amorphous” allegations by purported client did not support finding the existence of a legal relationship); Rice v. Strunk, 670 N.E.2d 1280, 1288 (Ind. 1996) (where assertions of legal representation were conclusory, they did not raise issues of fact).

The only real support for the defendants’ argument is the language in the cover letter of an invoice from the Spector firm to Fidelity, which states that the enclosed invoice is for work done on behalf of Fidelity and its investors. It must be noted, however, that this letter is addressed to Donald L. Salmon as president of Fidelity. In addition, the invoices attached to the defendants’ own motion indicate that the charges were billed to Fidelity, not the shareholders. Brand affidavit exhibit 2. While the court does not share Fitzgerald’s “annoyance” at the defendants’ use of this letter, it must agree with his statement that the Spector firm “never represented [the defendants] for any task for any purpose at any time.” Fitzgerald affidavit at ¶19. Thus, there is no basis for finding a violation of Rule 1.9.

II. Rule 3.7 Requires Disqualification of an Advocate-Witness at Trial Only, and the Motion Is Premature

Another basis for the defendants’ motion to disqualify the Spector firm is rooted in an alleged violation of the advocate-witness rule. Pennsylvania has adopted the common-law prohibition on an attorney functioning as both an advocate and a witness:

“(a) A lawyer shall not act as advocate at a trial in which the lawyer is likely to be a necessary witness except where:
“(1) the testimony relates to an uncontested issue;
“(2) the testimony relates to the nature and value of legal services rendered in the case; or
“(3) disqualification of the lawyer would work substantial hardship on the client.” Rule 3.7. See also, Com monwealth v. Gibson, 448 Pa. Super. 63, 70, 670 A.2d 680, 683 (1996) (“appearance of an attorney as both advocate and witness at trial is considered highly indecent and unprofessional conduct to be avoided by counsel and to be strongly discountenanced by colleagues and the courts”).

While there is no binding and clear decision as to when Rule 3.7 may be applied, the consensus in Pennsylvania is that an attorney-witness is permitted to participate in pretrial activity and may not be disqualified under Rule 3.7 until trial. This position is in line with the interpretation given to the equivalent of Rule 3.7 in other jurisdictions. As such, any motion seeking disqualification of an attorney under Rule 3.7 alone generally is premature if submitted prior to trial.

The projected trial date in this matter is February 4, 2002. Thus, the motion cannot be granted at present on the basis of Rule 3.7, as it comes at least nine months before trial.

CONCLUSION

The defendants have not shown that they ever had an attorney-client relationship with the Spector firm, precluding the court from granting the motion under Rule 1.9. In addition, Rule 3.7 prohibits an attorney-witness from acting as an advocate at trial only, allowing the Spector firm to continue its representation of First Republic at least until that point. As a result, the motion is denied.

ORDER

And now, April 30, 2001, upon consideration of the motion to disqualify Spector Gadon & Rosen RC. as counsel for plaintiff First Republic Bank, filed by defendants Steven D. Brand, James M. Dougherty, Arthur L. Powell, Richard S. Powell, Jon R. Powell, Carol P. Heller, Nancy E. Powell, Harold G. Schaeffer, James R. Schaeffer, Anthony L. Schaeffer and Robert D. Schaeffer, and the response of the plaintiff thereto, and in accordance with the memorandum opinion being filed contemporaneously with this order, it is hereby ordered and decreed that the motion is denied.

      . The transaction was structured such that First Republic and Phoenix formed FBMC Acquisition Corp., with First Republic contributing cash in exchange for 51 percent of the common stock of FBMC and Phoenix purchasing the remaining 49 percent. FBMC, in turn, purchased all of the Fidelity common stock from the defendants and issued the defendants 20 percent of the FBMC stock. The end result was that FBMC owned all of the Fidelity shares, and that First Republic, Phoenix and the defendants owned 41 percent, 39 percent and 20 percent, respectively, of the outstanding FBMC stock. These events are referred to collectively as the “transaction.”

      . Available at http://courts.phila.gov/cpcvtcomp.htm. This opinion describes the transaction and First Republic’s allegations in greater detail.

      . This appears to have come in the course of the Spector firm’s due diligence review of Fidelity’s records, which it did on First Republic’s behalf. Affidavit of Edward G. Fitzgerald at ¶16.

      . The Pew court observed that “[t]he test of whether an attorney has conflicting interests so as to preclude his representation of a party is not actuality of conflict, but possibility that a conflict may arise.” 440 Pa. Super. at 243, 655 A.2d at 545 (citing Middleberg v. Middleberg, 427 Pa. 114, 233 A.2d 889 (1967)).

      . The defendants allege that the Spector firm also represented First Republic, Fidelity and FBMC. They also assert that the Spector firm engaged in the “common representation of all interests” in the transaction, but it is unclear if the defendants intend to assert that the Spector firm represented Phoenix as well. Defendants’ memorandum at 13.

      . The Spector firm states that it represented Fidelity only in securing loans from Summit Bank, PNC Bank and CoreStates Bank and that its representation of Fidelity in the transaction was “strictly limited to the completion of specific corporate matters that were necessary for the transaction to be consummated.” Fitzgerald affidavit at ¶17. This representation was undertaken with the consent of all parties to the transaction. Id. The Spector firm also acknowledges that it did work for Fidelity after the transaction’s consummation. Id. at ¶¶20-22.

      . The defendants have not attached a contract evidencing any relationship between the Spector firm and the defendants, forcing the court to focus solely on whether an implied relationship existed.

      . This distinction is important because, in a corporate setting, the question is not whether an attorney-client relationship has been formed but rather with whom the relationship has been formed. In addition, as noted infra, determining who is a client is especially difficult when distinguishing between a corporation and its shareholder.

      . The most extreme example of this approach is set forth in In re Brownstein, 602 P.2d 655 (Or. 1979):
      “Where a small, closely held corporation is involved, and in the absence of a clear understanding with the corporate owners that the attorney represents solely the corporation and not their individual interests, it is improper for the attorney thereafter to represent a third party whose interests are adverse to those of the stockholders and which arise out of a transaction which the attorney handled for the corporation. In actuality, the attorney in such a situation represents the corporate owners in their individual capacities as well as the corporation unless other arrangements are clearly made.” 602 P.2d at 657.
      This broad statement, however, has been limited in focus in subsequent opinions. See In re Conduct of Kinsey, 660 P.2d 660, 670 (Or. 1983) (distinguishing and narrowing Brownstein). Cf. Agster v. Barmada, 43 D.&C.4th 353, 375 (C.P. Allegheny 1999) (Wettick, J.) (stating that there is “no legal justification” for an “absolute rule that in closely held corporations corporate counsel represents all shareholders”).

      . As might be expected, there is a great deal of variation in the conclusions courts have reached. Compare Wayland v. Shore Lobster & Shrimp Corp., 537 F. Supp. 1220, 1223 (S.D.N.Y. 1982) (where corporation did not counsel any shareholder individually, and firm billed corporation, shareholder’s belief that firm was his counsel was not reasonable); In re United Utensils Corp., 141 B.R. 306, 308 (Bankr. W.D. Pa. 1992) (“[a]n attorney for a corporation does not by virtue of that fact necessarily create an attorney-client relationship with its officers, directors, shareholders, or other third parties affiliated with the corporation”); Skarbrevik v. Cohen, England & Whitfield, 282 Cal. Rptr. 627, 634 (Cal. Ct. App. 1991) (corporate counsel is not the attorney of the corporation’s stockholders merely because his or her actions benefit the stockholders); Brennan v. Ruffner, 640 So.2d 143, 146 (Fla. Dist. Ct. App. 1994) (“an attorney representing a corporation does not become the attorney for the individual stockholders merely because the attorney’s actions on behalf of the corporation may also benefit the stockholders”); McCabe v. Arcidy, 635 A.2d 446, 450 (N.H. 1994) (“[a]bsent evidence that a corporation’s attorney furnished legal advice to a shareholder,... the attorney is not the representative of the corporation’s shareholders simply because the attorney’s actions on its behalf also benefit the shareholders”); and Lee v. Mitchell, 953 P.2d 414, 425-26 (Or. Ct. App. 1998) (“a corporation is a legal entity separate from its shareholders, directors and officers .... Thus, the mere existence of an attorney-client relationship between a corporation and an attorney does not in itself create an attorney-client relationship — or any other basis for fiduciary duties — between the attorney and a corporate stockholder”); with Rosman v. Shapiro, 653 F. Supp. 1441, 1445 (S.D.N.Y. 1987) (counsel for a closely held corporation consisting of two fifty-percent shareholders represented both the corporate entity and the individual shareholders as well); In re Berger McGill Inc., 242 B.R. 413, 421 (Bankr. S.D. Ohio 1999) (belief of debtor’s controlling shareholder that debtor’s attorney was also his attorney was reasonable where there was no record that anyone from firm ever advised creditor that he should retain separate counsel before executing documents, and there was nothing in the record that would have led creditor to believe that his interests differed from those of debtor at that time); In re Legal Econometrics Inc., 191 B.R. 331, 346-47 (Bankr. N.D. Tex. 1995), aff’d in relevant part sub nom, Vaughn v. Akin, Gump, Hauer & Feld LLP., no. 3-95-CV-0457-R, 1997 WL560617(N.D. Tex. Aug. 29, 1997) (where corporation’s lawyers had performed various services on shareholder’s behalf and had communicated with him directly without contacting his other attorneys for period of almost two years, attorney-client relationship between corporation’s lawyers and shareholder was formed); Matter of Nulle, 620 P.2d 214, 217 (Ariz. 1980) (quoting Brownstein and stating that the conclusion that the corporation’s attorney did not represent shareholders “would require blinding ourselves to ... realities”); Boisdore v. Bridgeman, 502 So.2d 1149, 1152 (La. Ct. App. 1987) (relationship formed where shareholder went to attorney for legal advice in financing of property, attorney prepared paperwork for corporation in his law office and attorney’s secretary acted as incorporator); Tekni-Plex Inc. v. Meyner & Landis, 674 N.E.2d 663, 671 (N.Y. 1996) (concluding that there was an insufficient record to determine if corporate attorney formed a relationship with shareholder); and Meyer v. Mulligan, 889 P.2d 509, 514-16 (Wyo. 1995) (findingissues of fact as to whether shareholder and corporation’s attorney had entered into an attorney-client relationship). Cf. Philadelphia Hous. Auth. v. American Radiator & Standard Sanitary Corp., 294 F. Supp. 1148, 1150 (E.D. Pa. 1969) (an attorney-client relationship existed between an unincorporated trade association’s attorney and its members).

      . This principle supports the elimination of the third factor set forth in Edwards.

      . In addition, much ink has been spilled debating the merits of extending the attorney-client relationship to a corporate client’s shareholders and how to determine whether such a relationship has been formed. See e.g., Miriam P. Hechler, The Role of the Corporate Attorney Within the Takeover Context: Loyalties to Whom?, 21 Del. J. Corp. L. 943 (1996) (examining lawyers’ roles in a takeover context and the ethical conflicts that arise in the performance of such roles); Ellen A. Pansky, Between an Ethical Rock and a Hard Place: Balancing Duties to the Organizational Client and its Constituents, 37 S. Tex. L. Rev. 1167 (1996) (discussing conflicts of interest in representing both a corporation and its management and shareholders); Nancy J. Moore, Expanding Duties of Attorneys to “Non-Clients”: Reconceptualizing the Attorney-Client Relationship in Entity Representation and Other Inherently Ambiguous Situations, 45 S.C. L. Rev. 659 (1994) (discussing policy effects of broad and ambiguous attorney responsibilities); Lawrence E. Mitchell, Professional Responsibility and the Close Corporation: Toward a Realistic Ethic, 74 Cornell L. Rev. 466 (1989) (examining a lawyer’s conflicting roles in advising close corporation and proposing ethics rules). This discussion includes at least two approaches proposed as alternatives to the Edwards and opinion 91-361 tests. See Brian J. Pechersky, Representing General Partnerships and Close Corporations: A Situational Analysis of Professional Responsibility, 73 Tex. L. Rev. 919 (1995) (advocating use of situational analysis to determine client identity); An Expectations Approach to Client Identity, 106 Harv. L. Rev. 687 (1993) (proposing a reasonable constituent’s expectation approach to client identity). Neither of these tests has been adopted by any court in any published opinion.

      . This list incorporates the elements set forth by the Pennsylvania Superior Court in Atkinson, as well as the significant factors mentioned in Edwards and opinion 91-361. Notably absent from the set of factors considered by any other court, and thus from this list, is whether the shareholders generally benefitted from work done by the corporation’s attorneys.

      . According to First Republic, the defendants were represented by Kirkpatrick & Lockhart LLP and Wolf, Block, Schorr & Solis-Cohen LLP in the transaction. Fitzgerald affidavit a^3.

      . In his affidavit, Edward G. Fitzgerald, a principal of the Spector firm, contends that “neither he nor the Spector firm nor any Spector firm attorney has ever represented any of the defendants.” Fitzgerald affidavit at ¶8. In contrast, Fitzgerald avers that the Spector firm has represented First Republic for more than eight years. Id. at ¶7.

      . Fitzgerald specifically denied that the defendants ever asked the Spector firm to represent them. Fitzgerald affidavit at ¶2.

      . Under Philadelphia Civil Rule 206.1 and Pennsylvania Rule of Civil Procedure 206.7, where the answer to a motion raises conflicting issues of material fact, a court generally must order discovery in some form. In the context of this motion, however, the defendants have not contradicted any of First Republic’s assertions, removing the need for additional fact finding.

      . This appears to be exactly what happened in the transaction. See Fitzgerald affidavit atf6 (defendants’ counsel handled licencing issues and Phoenix’s counsel prepared employment agreements); Id. at ¶15 (defendants’ counsel prepared transaction purchase agreement).

      . The defendants appear to embrace this conclusion, as they argue that the Spector firm represented “all parties in connection with the transaction.” Brand affidavit at ¶8.

      . For examples of these details, see defendants’ memorandum at 17 (detailing confidential Fidelity documents reviewed by the Spector firm); Brand affidavit at|7 (describing the Spector firm’s representation of Fidelity in connection with a loan from Summit B ank); Id. at ¶9 (detailing services provided by the Spector firm to Fidelity after the transaction’s completion); Id. at'flll (describing the Spector firm’s representation of Fidelity in negotiations for the sale of its assets to Keystone Bank); Id. at exhibit 3 (detailing operations and management of Fidelity as revealed by the Spector firm’s due diligence review of Fidelity’s records on behalf of First Republic); Id. at exhibit 4 (requesting waiver from Summit Bank to allow the Spector firm’s representation of Fidelity); and id. at exhibit 11 (setting forth the Spector firm’s claims against Fidelity’s bankruptcy estate). Because the Spector firm’s relationship with Fidelity is acknowledged and largely irrelevant to the motion, the inclusion of such details is puzzling.

      . See Davisair Inc. v. Butler Air Inc., 40 D.&C.4th 403, 406 (C.P. Allegheny 1998) (Wettick, J.) (“[t]here is no prohibition against [an attorney-witness] providing representation prior to the trial”); Golomb & Honik v. Ajaj, November term 2000, no. 425 (C.P. Phila. Apr. 5,2001) (Herron, J.) (motion for disqualification under Rule 3.7 eight months prior to trial was premature) (available at http://courts.phila.gov/ cptcvcomp.htm); Pa. Bar Ass’n Comm, on Leg. Eth. & Prof. Resp. inf. op. no. 96-15 (1996) at 1 (“there is no . . . bar to an attorney witness acting as an advocate in pretrial proceedings”); Pa. Bar Ass’n Comm, on Leg. Eth. & Prof. Resp. inf. op. no. 94-153 at 2 (1994) (“[t]he key words in [Rule 3.7] are ‘act as advocate at a trial.’ Accordingly, the proscription is only with reference to ‘a trial’”); Pa. Bar Ass’n Comm, on Leg. Eth. & Prof. Resp. inf. op. no. 92-150 at 2 (1992) (“insofar as the nature of your legal representation involves negotiation and trial preparation work, as opposed to the actual representation of the corporation in a trial, the rule would not prohibit you . . . from representing the corporation”); Phila. Bar Ass’n Prof. Guid. Comm. guid. req. no. 88-35 at 1 (1988) (“it is premature to require your withdrawal during pretrial proceedings because Rule 3.7 only precludes a lawyer-witness from acting as counsel at trial”).

      . See Amer. Bar Ass’n Ann. Model R.P.C. 3.7, cmt. (“in most jurisdictions, a lawyer who is likely to be a necessary witness may still represent a client in the pretrial stage”). See also, e.g., Culebras Enters.

        Corp. v. Rivera-Rios, 846 F.2d 94, 97 (1st Cir. 1988) (agreeing that advocate-witness rule did not prevent attorneys from acting as party’s “solicitors” prior to trial); Jones v. City of Chicago, 610 F. Supp. 350, 363 (N.D. Ill. 1984) (allowing attorney-witness and his firm to handle pretrial matters); Columbo v. Puig, 745 So.2d 1106, 1107 (Fla. Ct. App. 1999) (“a lawyer may act as an advocate at pretrial (before the start of the trial) and post-trial (after the judgment is rendered) proceedings”); Anderson Producing Inc. v. Koch Oil Co., 929 S.W.2d 416, 422 (Tex. 1996) (advocate-witness rule “only prohibits a testifying attorney from acting as an advocate before a tribunal, not from engaging in pretrial, out-of-court matters such as preparing and signing pleadings, planning trial strategy, and pursuing settlement negotiations”); ABA Comm. on Eth. & Prof. Resp. inf. op. 89-1529 (1989) (although there are “some limitations” on pretrial representation, “a lawyer may serve as an advocate in taking depositions of witnesses and engaging in other pretrial discovery as well as in arguing pretrial motions and appeals from decisions on those motions as long as the other requirements of Rule 3.7 are met”). But, see e.g., Massachusetts Sch. of Law at Andover Inc. v. American Bar Ass’n, 872 F. Supp. 1346, 1380-81 (E.D. Pa. 1994), aff’d, 107 F.3d 1026 (3d Cir. 1997) (disqualifying attorney-witnesses from “not only acting as trial counsel, but also from taking depositions and arguing pretrial matters in court”).


source: Caselaw Access Project

author: ABRAMSON, J.,

license: Public Domain

text:
    Werner v. Platzer-Zyberk

      Alan R. Zibelman, for plaintiff.

      Jeffrey B. Albert, for defendants.
    February 20, 2001
   ABRAMSON, J.,

I. FACTS AND PROCEDURAL HISTORY

This case arises from a prior action in Federal District Court for the Eastern District of Pennsylvania. The plaintiff-appellant, Arthur Werner, Esquire was the defendant in the prior federal case. The defendantappellees, J. Platzer-Zyberk Jr. Ph.D., Stephen A. Winston, Esquire, Berger & Montague P.C., Joseph Posillicio, Esquire, Synnestvedt & Lechner LLP, were the plaintiffs in the prior federal action.

On April 11, 2000, plaintiff commenced this action for wrongful use of civil proceedings under the Pennsylvania Wrongful Use of Civil Proceedings statute, also known as the Dragonetti Act, arising from the underlying federal action accusing plaintiff of violating the Racketeer Influenced and Corrupt Organization Act. The underlying action was dismissed by the federal court. On September 11, 2000, all defendants filed preliminary objections to plaintiff’s complaint, requesting that plaintiff’s complaint be dismissed for failure to state a claim upon which relief can be granted. Plaintiff’s complaint states four causes of action: (1) wrongful use of civil proceedings under 42 Pa.C.S. §8351, (2) common-law abuse of process, (3) counsel fees under 42 Pa.C.S. §2503(7,9), and (4) defamation, libel and slander. On December 1, 2000, this court sustained defendants’ preliminary objections and dismissed plaintiff’s complaint for failure to state a claim upon which relief may be granted. This appeal ensued.

Plaintiff’s appeal is based on the following: (1) the court erred in dismissing the complaint based upon the conclusion that the Dragonetti Act cannot be extended to litigation which had previously occurred in federal court, (2) the court erred in dismissing the complaint based upon the defendants’ contention that plaintiff’s complaint is based merely upon the fact that a RICO claim was dismissed, (3) the court erred in dismissing the complaint based upon the contention that the mere prosecution of a lawsuit does not constitute an abuse of process, and (4) the court abused its discretion in creating a new legal standard for which to apply the Dragonetti Act and has misinterpreted the intent of the Pennsylvania Legislature which created the wrongful use statute to afford a remedy to Pennsylvania residents and litigants.

II. DISCUSSION

A. Standard of Review

On review of a trial court’s order granting preliminary objections for failure to state a claim upon which relief may be granted, an appellate court applies the same standard applied by the trial court that all material facts set forth in the complaint and all reasonable inferences are admitted as true for the purposes of review. Juban v. Schermer, 751 A.2d 1190, 1192 (Pa. Super. 2000). On review of a demurrer, the Superior Court must reverse if any doubt exists as to whether a demurrer should be sustained. Wiernik v. PHH U.S. Mortgage Corp., 736 A.2d 616, 619 (Pa. Super. 1999).

B. Wrongful Use of Civil Proceedings under 42 Pa.C.S. §8351

Count I of plaintiff’s complaint states a cause of action for wrongful use of civil proceedings under 42 Pa.C.S. §8351, the Dragonetti Act. The Dragonetti Act is a Pennsylvania statute providing liability for wrongful use of civil proceedings. The purpose of the Dragonetti Act is to discourage baseless civil suits. Catania v. Hanover Insurance Co., 389 Pa. Super. 144, 149, 566 A.2d 885, 888 (1989). The question presented is whether federal litigants, who are also Pennsylvania residents, may pursue a state law remedy in state court for wrongful use of civil proceedings under the Dragonetti Act where the sanctionable conduct arises out of a federal cause of action asserted in federal court.

This court committed no error in sustaining defendants’ preliminary objections for failure to state a claim upon which relief may be granted where plaintiff’s claims are based on litigation abuse that occurred in federal court. We conclude herein that federal litigants are precluded from availing themselves of state remedies in state court for litigation misconduct where the subject litigation abuse occurred in federal court and the federal court’s jurisdiction was based on federal question.

While we believe that this is a case of first impression in Pennsylvania state court, it is an issue that has been decided by federal courts, including the Eastern District of Pennsylvania. These federal courts have held, and we hold now, that federal courts have exclusive power to sanction litigants for litigation abuses committed in a federal suit where the federal court’s jurisdiction is based on federal question. See Mruz v. Caring, 39 F. Supp.2d 495, 503 (D.N.J. 1999) (holding that where the jurisdictional basis for the alleged frivolous claim is federal question, the aggrieved parties must avail themselves of the arsenal of federal remedies available to punish litigation abuse and dismissing a counterclaim for attorneys’ fees under the New Jersey Frivolous Claim Act); Thompson v. Lehrer P.C., 183 F.R.D. 161 (D.N.J. 1998) (holding that an attorney who seeks to assert an abuse of process claim against an attorney-adversary based upon conduct which occurred in a case pending before a federal district court must seek redress in district court, and not state court); Reitz v. Dieter, 840 F. Supp. 353 (E.D.Pa. 1993) (holding that Pennsylvania statute 42 Pa.C.S. §2503(9) was not applicable in federal court where the court’s original subject matter jurisdiction was grounded upon federal question, thus, defendant’s counterclaim was dismissed). This exclusive power of the federal district court is derived from the principles of federalism and comity. As the Supreme Court of the United States wrote:

“Courts of justice are universally acknowledged to be vested, by their very creation, with power to impose silence, respect, and decorum, in their presence, and submission to their lawful mandates. . . . These powers are governed not by rule or statute but by the control necessarily vested in courts to manage their own affairs so as to achieve the orderly and expeditious disposition of cases .... A primary aspect of that discretion is the ability to fashion an appropriate sanction for conduct which abuses the judicial process.” Chambers v. NASCO Inc., 501 U.S. 32, 43-45, 111 S.Ct. 2123, 2132-2133 (1991) (holding that federal courts sitting in diversity can use their inherent power to assess attorneys’ fees as a sanction even if state law does not recognize such).

To allow plaintiff’s claim of federal litigation abuse to proceed in Pennsylvania would fashion a law allowing all Pennsylvania residents who are also federal litigants to appear in state court after a final disposition in federal court, solely for the purpose of sanctioning federal litigants for conduct arising out of a federal action. Such a result would unreasonably divest the federal court of its power to sanction parties appearing before it and disrupt the federal-state balance. Mruz v. Caring, 39 F. Supp.2d 495, 503 (D.N.J. 1999).

Further, such a rule would result in forum shopping, judge shopping and needless satellite litigation. This court adopts the reasoning of Thompson, that allowing state courts to entertain such cases would allow litigants the choice to pursue sanctions in federal court or state court causing great expense to the opposing litigant, and diverting state court judges from other matters. Thompson v. Lehrer P.C., 183 F.R.D. 161, 172 (D.N.J. 1998). Adopting a rule which prohibits cases such as this from being filed in state court, conserves state judicial resources, and “avoids the evils of judge shopping and forum shopping.” Id. at 172. These goals of discouraging forum shopping, judge shopping and unnecessary litigation are consistent with the principles of federalism and comity. The state may not chill the rights of those who choose to litigate in federal court by affording remedies to the winning party.

Plaintiff submits that since there is no federal wrongful use of civil proceedings statute, there can be no similar action maintained in this court. This argument is without merit. First, Federal Rule of Civil Procedure 11 provides a substantially similar remedy for litigation abuse. Federal Rule 11 specifically provides for the recovery of “all of the reasonable attorneys’ fees and other expenses incurred as a direct result of a party’s improper attempts to ‘harass or cause unnecessary delay or needless increase in the cost of litigation . . Fed.R.C.P. ll(b)(l)-(c)(2). Second, Congress has inherent and exclusive power to provide for sanctions that it sees fit for all of the above stated reasons of federalism and comity. Therefore, a party’s remedy pursuant to proceedings in federal court are limited to those provided by Congress and federal courts and a state court determination of such would be an unpermitted divesting of the power of federal courts.

In conclusion, this court properly dismissed Count I of plaintiff’s complaint, the Dragonetti Act, for failure to state a claim upon which relief may be granted where the sanctionable conduct arose under a federal cause of action in a federal court.

C. Common-Law Abuse of Process

Count II of plaintiff’s complaint states a cause of action for common-law abuse of process. This court did not err in granting defendants’ preliminary objections and dismissing this count in plaintiff’s complaint. As stated above, process and proceedings arising out of a federal cause of action may not be subject to sanctions under Pennsylvania law.

D. Counsel Fees under 42 Pa.C.S. §2503(7,9)

Count III of plaintiff’s complaint states a cause of action for counsel fees under 42 Pa.C.S. §2503(7,9). Under this statute, participants may receive counsel fees as part of the taxable costs of the matter only where the participant was previously awarded counsel fees as a sanction for conduct that is dilatory, obdurate or vexatious, or commencing a matter which is arbitrary, vexatious or in bad faith. 42 Pa.C.S. §2503(7,9). Thus, the awarding of counsel fees under this section is conditioned upon a previous award of counsel fees based on sanctions. Since plaintiff’s cause of action based on the Dragonetti Act was properly dismissed, as discussed above, this cause of action for counsel fees based on the sanctions of the Dragonetti Act must also be dismissed. As noted in Reitz, 42 Pa.C.S. §2503(9) is not applicable in federal court where the court’s original subject-matter jurisdiction is grounded upon federal question. Reitz v. Dieter, 840 F. Supp. 353, 354 (E.D. Pa. 1993). Pennsylvania courts limit the availability of attorneys’ fees under section 2503(7,9) to matters litigated before components of the “unified judicial system.” PennDOT v. Smith, 145 Pa. Commw. 164, 172, 602 A.2d 499, 502 (1992). Federal courts are not within the “unified judicial system.” See 42 Pa.C.S. §§102, 301. Thus, attorneys’ fees under 42 Pa.C.S. §2503 cannot be based upon litigation conduct occurring outside of the unified judicial system.

Therefore, this court properly dismissed Count III of plaintiff’s complaint for failure to state a claim upon which relief can be granted.

E. Defamation, Libel and Slander

Count IV of plaintiff’s complaint states a cause of action for defamation, libel and slander. Plaintiff’s allegations of defamation, libel and slander are based on allegations of fraud, misrepresentation and conspiracy, in particular, the violations of the RICO Act. It is a well established principle of Pennsylvania law that the filing of a complaint and other pleadings is protected by an absolute privilege and no action can be maintained for any defamatory matter arising therefrom. Smith v. Griffiths, 327 Pa. Super. 418, 425, 476 A.2d 22, 24 (1984). Therefore, this court properly dismissed Count IV of plaintiff’s complaint for failure to state a claim upon which relief can be granted.

III. CONCLUSION

For the foregoing reasons, plaintiff’s appeal is without merit, and the trial court should be affirmed.


text:
    Waterware Corp. v. Ametek/US Gauge Division, PMT Products

      Martin J. Pezzner, for plaintiff.

      Howard D. Scher, for defendants.
    April 17, 2001
   HERRON, J.,

Presently before this court are the preliminary objections of defendants, Ametek/US Gauge Division, PMT Products, U.S. Gauge Division, Ametek Inc., and Ametek (collectively Ametek) to the amended complaint of plaintiff, Waterware Corporation.

For the reasons set forth in this opinion, the court is entering a contemporaneous order sustaining the objections in part and overruling the objections in part.

BACKGROUND

Waterware is a company which specializes in the construction and maintenance of sewer controls and monitoring systems. Am. compl. at ¶1. Ametek engages in the business of selling specialty equipment for the monitoring of underground sewer systems. Id. at ¶4. In or about 1994, Waterware had contracted with the City of Philadelphia to provide and install monitoring equipment for sewer maintenance and to provide a stockpile of replacement parts for future repairs. Id. at ¶5. In order to fulfill its contract with the city, Waterware requested bids from specialized equipment suppliers for level sensors to be installed in the city’s sewer system. Id. at ¶6. Waterware specified that the sensors be suitable for a sewer environment and would be covered under a five-year warranty. Id. at ¶7.

Prior to June 1995, Waterware met with representatives of Ametek to discuss the purchase of level sensors. Id. at ¶8. In order to induce Waterware to enter into a contract for the sale of its level sensors, Ametek submitted bids and advised Waterware that “[its] sensors were very suitable for the sewer environment,” and advised that the failure rate of its sensors would not exceed 6 percent and any sensors that failed would be warranted for five years. Id. Relying on these representations, Waterware offered to purchase the sensors from Ametek by issuing a purchase order dated June 7,1995, which required that the sensors be warranted for five years. Id. at ¶9. See am. compl., exhibit A. On June 20, 1995, by facsimile, Ametek accepted Waterware’s offer. Id. at ¶10. See am. compl., exhibit B. Thereafter, Waterware purchased approximately 500 sensors from Ametek. Id. atftll.

During the course of installation and operation of the sewer system, numerous sensors failed and continued to fail at a rate of 27 percent, rather than the 6 percent failure rate represented by Ametek. Id. at^2. Waterware returned 137 sensors for warranty repairs, but Ametek has refused to repair/replace 42 of these sensors. Id. at ¶¶12-13. As a direct and proximate result of the sensor failure, other component parts of the system which were not manufactured by, or purchased from, Ametek have also been damaged and Waterware has been forced to replace these parts at a substantial cost. Id. at ¶14. In addition, as a result of the failed sensors and Ametek’s alleged refusal to honor its contractual and/or warranty obligations, Waterware has suffered in the performance of its contract with the city and its reputation has allegedly been damaged. Id. at ¶¶15-16.

There is a separate prior action pending that has been filed by Waterware against the city, in which Waterware asserts breach of contract and/or unjust enrichment claims against the city. See objections, exhibit D. Specifically, Waterware alleges that the city failed to fulfill its contractual obligations in assisting Waterware in obtaining permits, failed to provide necessary right of ways and failed to provide necessary information for the design and installation of the main computer system. Id. at ¶6. Waterware also asserts other allegations against the city in reference to the city’s delaying the contract’s performance, the city’s wrongful declaration of Waterware’s default and the city’s failure to pay Waterware for work that had been completed. Id. at ¶¶6-14.

Notwithstanding its action against the city, Waterware has instituted the present suit against Ametek, asserting counts for breach of contract, breach of warranty, violations of the Uniform Commercial Code, codified at 13 Pa.C.S. §2300 et seq., negligent misrepresentation, and fraudulent misrepresentation. See am. compl., Counts I-VII. In response, Ametek has filed the objections asserting pendency of a prior action and moving to stay the present action, attacking the legal sufficiency of the negligent misrepresentation count based on the economic loss doctrine, and moving to strike the demand for punitive damages and attorney fees. See objections at ¶¶1-36.

DISCUSSION

The objections, asserting that the economic loss doctrine bars the claim for negligent misrepresentation are sustained in part and overruled in part, and the motion to strike the demand for attorney fees is granted without prejudice. The remaining objections are without merit and are overruled.

I. Pendency of Prior Action and Grounds for a Stay of the Present Action

A party may raise preliminary objections based on the pendency of a prior action. Pa.R.C.P. 1028(a)(6). This protects “a defendant from harassment by having to defend several suits on the same cause of action at the same time.” Penox Technologies Inc. v. Foster Medical Corp., 316 Pa. Super. 450, 453, 546 A.2d 114, 115 (1988). Under Pennsylvania law, the question of a pending prior action “is purely a question of law determinable from an inspection of the pleadings.” Davis Cookie Co. v. Wasley, 389 Pa. Super. 112, 121, 566 A.2d 870, 874 (1989) (quoting Hessenbruch v. Markle, 194 Pa. 581, 592, 45 A. 669, 671 (1900)).

To sustain a preliminary objection based on pending prior action, “the objecting party must demonstrate to the court that in each case the parties are the same, and the rights asserted and the relief prayed for are the same.” Virginia Mansions Condominium Association v. Lampl, 380 Pa. Super. 452, 456, 552 A.2d 275, 277 (1988). See also, Norristown Automobile Co. v. Hand, 386 Pa. Super. 269, 274, 562 A.2d 902, 904 (1989); Davis Cookie Co., 389 Pa. Super. at 120, 566 A.2d at 874 (requiring that the parties be “acting in the same legal capacity” in both actions). But, see Hessenbruch, 194 Pa. at 594, 45 A. at 671 (while a plaintiff in the first suit may be a defendant in second suit, the fact that the same persons are present in both suits allows a court “with perhaps some liberality of construction, [to] assume that the parties are the same.”). The three-pronged identity test must be applied strictly when a party is seeking dismissal under the doctrine of prior pending action. Hand, 386 Pa. Super. at 274, 562 A.2d at 904.

Alternatively, if the identity test is not strictly met but the action involves a set of circumstances where the litigation of two suits would create a duplication of effort on the part of the parties, waste judicial resources and “create the unseemly spectacle of a race to judgment,” the trial court may stay the later-filed action. Id. at 276-77, 562 A.2d at 905. See also, Singer v. Dong Sup Cha M.D., 379 Pa. Super. 556, 560, 550 A.2d 791, 793 (1988) (“while the pendency of a foreign action does not serve as a bar to an action brought in a Pennsylvania court, the court has the inherent, equitable power to stay the proceedings in the second suit during the pendency of the prior suit”); Klein v. City of Philadelphia, 77 Pa. Commw. 251, 253-54, 465 A.2d 730, 731 (1983) (directing the trial court to stay the second action even though the plaintiffs in the two suits are not the same party, but both plaintiffs filed taxpayer suits in representative capacities to challenge the award of two municipal contracts); L.B. Corp. v. Jessop Steel Co., 1985 WL 5937 at **4-5 (C.P. Chester Cty. May 17, 1985) (deeming that the two suits involving the same parties and same leases but asking for different relief “are so intertwined that one naturally depends on the other”).

Here, Ametek asserts that a stay of the present suit is justified because the present case and Waterware’s case against the city are sufficiently intertwined factually. Defs.’ mem. of law at 11. Ametek also contends that Waterware’s ability to perform its contract with the city is directly at issue in the present suit, and that many of the damages claimed by Waterware in this action are the same damages claimed in the action against the city. Id. Contrary to Ametek’s arguments, this court finds as a matter of law that the doctrine of prior pending action does not apply in the present circumstances. It is clear that Waterware’s suit against the city and its present suit against Ametek do not involve the same parties and the claims do not arise out of the same contract. Even if Waterware’s suit against the city were to result in an adverse verdict for Waterware, such a result would not necessarily dispose of, or be binding on, Waterware’s claims against Ametek. Similarly, the circumstances do not justify staying the present action to await the disposition of Waterware’s case against the city. But, see Hand, 386 Pa. Super. at 275, 562 A.2d at 905 (concerning two suits between employer and employee— the first by employee against employer for breach of contract; the second by employer against employee for tort); Klein, 77 Pa. Commw. at 253-54, 465 A.2d at 731 (reasoning that judgment in one suit would be binding on the second because both suits are taxpayer actions involving similar claims); Jessop Steel Co., 1985 WL 5937 at **3-4 (identical parties involved in both suits, but first suit seeks rescission or reformation of the leases, while second suit is a breach of contract action seeking the rent due on the leases).

For these reasons, Ametek’s objections based on pendency of a prior action are overruled and Ametek’s request for a stay of the present action is denied.

II. Legal Sufficiency of Negligent Misrepresentation Count

A party may raise preliminary objections which challenge the legal insufficiency of a pleading or a demurrer. Pa.R.C.P. 1028(a)(4). Preliminary objections, whose end result would be the dismissal of a cause of action, should be sustained only where “it is clear and free from doubt from all the facts pleaded that the pleader will be unable to prove facts legally sufficient to establish [its] right to relief.” Bourke v. Kazara, 746 A.2d 642, 643 (Pa. Super. 2000). Moreover, whether, on the facts averred, the law says with certainty that no recovery is possible.” Bailey v. Storlazzi, 729 A.2d 1206, 1211 (Pa. Super. 1999). (citations omitted)

“[I]t is essential that the face of the complaint indicate that its claims may not be sustained and that the law will not permit recovery. If there is any doubt, it should be resolved by the overruling of the demurrer.... Put simply, the question presented by demurrer is

To support a claim for negligent misrepresentation, a plaintiff must allege (1) a misrepresentation of material fact, (2) made under circumstances where the misrepresenter ought to have known of its falsity, (3) with an intent to induce another to act on it, and (4) which results in injury to a party acting in justifiable reliance on the misrepresentation. Bortz v. Noon, 556 Pa. 489, 500, 729 A.2d 555, 561 (1999). Though similar to a cause of action for intentional misrepresentation, negligent misrepresentation differs in the sense that the speaker need not know his or her words are untrue, but must have failed to make a reasonable investigation of the truth. Id. at 501, 729 A.2d at 561. In addition, like any action in negligence, there must be an existence of a duty owed by one party to another. Id.

The gravamen of Count VI of the amended complaint is that defendants made misrepresentations of material fact regarding the reliability of their sensors and their suitability to a sewer environment in order to induce Waterware to purchase and install the sensors, and that Waterware suffered damages as a result of the sensors’ failure to operate and caused Waterware to replace the sensors and other parts, that were not manufactured by Ametek, at substantial costs. See am. compl. at ¶¶53-62. Taken as true, as this court must for purposes of ruling on a demurrer, these allegations do state a cause of action for negligent misrepresentation. However, this initial conclusion does not end this court’s inquiry.

Rather, this court must determine whether the claim is barred by the economic loss doctrine on account of the nature of the alleged damages. As a result of Ametek’s alleged negligent misrepresentations, Water-ware allegedly suffered the following damages, including: the cost of removal of allegedly defective sensors, the cost of reinstallation of replacement sensors, the cost of obtaining a sufficient stockpile of sensors to fulfill its contractual obligations with the city, loss of good will and/or harm to reputation, damage to its existing business operations and prospective business opportunities, the cost of replacing other component parts of the sewer system not manufactured by Ametek, and the cost of having to reassign employees from other jobs to address the problems with the failed sensors. See am. compl. at ¶¶17, 22-23, 30-31, 36-37, 41-42, 51-52, 54-55, 61-62, 70-71.

Ametek asserts that Count VI of Waterware’s amended complaint for negligent misrepresentation must be dismissed with prejudice since all of the “alleged damages constitute economic losses that are not recoverable under a negligence theory under Pennsylvania law” pursuant to the economic loss doctrine. Defs.’ mem. of law at 14-15. Ametek also argues that the exception to the economic loss doctrine for “other property” does not apply to the type of property that one would reasonably expect to be injured as a direct consequence of the failure of the product at issue; i.e., the sensors. Id. at 16. In response, Waterware argues that the economic loss doctrine, as analyzed by the Third Circuit, does not preclude recovery for damage to property or components which were not manufactured or supplied by the defendants. Pl.’s mem. of law at 15-17.

A. Economic Loss Doctrine

The purpose of the economic loss doctrine, as adopted in Pennsylvania, is “maintaining the separate spheres of the law of contract and tort.” New York State Electric & Gas Corp. v. Westinghouse Electric Corp., 387 Pa. Super. 537, 550, 564 A.2d 919, 925 (1989). As noted in NYSEG:

“The Supreme Court [in East River] . . . emphasized that where an allegedly defective product causes damage only to itself, and other consequential damages resulting from the use of the product, the law of contract is the proper arena for redressing the harm because in such a case, the damages alleged relate specifically to product quality and value as to which the parties have had the opportunity to negotiate and contract in advance. They have allocated the risks of possible types of losses and agreed on the level of quality that will be given for the price demanded. When the product fails to conform and only economic losses result, the parties’ recovery one against the other for economic losses should be limited to an action on that contract and no additional recovery in negligence or strict liability is permitted. ...” 387 Pa. Super. at 550-51, 564 A.2d at 925-26. See also, REM Coal Company Inc. v. Clark Equipment Co., 386 Pa. Super. 401, 411-13, 563 A.2d 128, 132-34 (1989) (en banc) (adopting the rationale of East River SS. Corp. v. Transamerica Delaval Inc., 476 U.S. 858, 871-73 (1986)).

Thus, the Commonwealth’s version of the doctrine precludes recovery for economic losses in a negligence action if the only damage sustained by the plaintiff/purchaser is damage to the product itself but no other property damage or personal injury resulted. Id. at 412, 563 A.2d at 133. This doctrine generally includes actions for negligent misrepresentation. Duquesne Light Co. v. Westinghouse Electric Corp., 66 F.3d 604, 620 (3d Cir. 1995); North Am. Roofing & Sheet Metal Co. v. Building & Constr. Trades Council, no. civ. a. 99-2050, 2000 WL 230214 at **7-8 (E.D. Pa. Feb. 29, 2000) (relying on economic loss doctrine to dismiss a claim for negligent misrepresentation). Moreover, economic losses include damage to the product and consequential damages in the nature of costs of repair, replacement and/or lost profits. REM, 386 Pa. Super. at 403, 563 A.2d at 129. Damages to good will and business reputation are also considered economic losses. Valley Forge Convention & Visitors Bureau v. Visitor’s Servs. Inc., 28 F. Supp.2d 947, 951 (E.D. Pa. 1998) (“Contrary to plaintiff’s suggestion, [economic losses] also include loss of business reputation and good will.”); Lucker Mfg. v. Milwaukee Steel Foundry, Div. Grede Foundaries, 111 F. Supp. 413, 417 (E.D. Pa. 1991) (“[T]he economic loss rule bars tort recovery for good will damages.”).

Here, pursuant to the economic loss doctrine, Waterware is precluded from recovering on its negligent misrepresentation claim for all of its alleged damages incurred from the defective sensors and the consequential costs associated with replacing the sensors, the loss of good will, harm to reputation and reassigning its employees to address the sensor problems. However, the real issue is whether the economic loss doctrine bars Waterware’s recovery of the cost of replacing other component parts of the sewer system that were not manufactured by Ametek. For the following reasons, this court holds that the economic loss doctrine does not preclude recovery for damages to these other parts on a negligent misrepresentation theory.

First, in East River, the shipbuilder had contracted with a manufacturer to design, manufacture and supervise the installation of turbines which would be the main propulsion units for four ships. 476 U.S. at 859-60. The turbines were defective, causing damage to the ships and requiring the ships’ repair. Id. at 860-61. Certain counts of the complaint alleged that the defectively designed turbine components damaged only the turbine itself. Id. at 867. The Supreme Court rejected these assertions, finding that there was no damage to other property since the manufacturer had supplied each turbine as an integrated package. Id. It stated: “[sjince all but the very simplest of machines have component parts, [a contrary] holding would require a finding of ‘property damage’ in virtually every case where a product damages itself. Such a holding would eliminate the distinction between warranty and strict products liability.” Id. (quoting Northern Power & Engineering Corp. v. Caterpillar Tractor Co., 623 P.2d 324, 330 (Alaska 1981)).

The court, nonetheless, reaffirmed that a tort remedy remained available for damage to “other property” or personal injuries. Id. at 870.

In the more recent decision of Saratoga Fishing Co. v. J.M. Martinac & Co., the Supreme Court clarified the distinction between what was the “product” and what constituted “other property.” 520 U.S. 875 (1997). In that case, the plaintiff was the second owner of a fishing vessel which caught fire, flooded and sank as a re-suit of a defective hydraulic system. Id. at 877-79. The plaintiff sued the boat manufacturer/supplier to recover for damage to fishing equipment which was added by the initial user. Id. The Supreme Court concluded that: “[wjhen a manufacturer places an item in the stream of commerce by selling it to an initial user, that item is the ‘product itself’ under East River. Items added to the product by the initial user are therefore ‘other property,’ and the initial user’s sale of the product to a subsequent user does not change these characterizations.” Id. at 879.

The product in Saratoga was deemed to be the original ship with the defective hydraulic system that itself caused the harm. Id. at 885. The equipment added to the ship was deemed to be “other property” for which the plaintiff could recover damages on a negligence theory. Id.

This rationale was followed in 2-J Corporation v. Tice, 126 F.3d 539 (3d Cir. 1997), where the plaintiff sought damages to its inventory and other items when the roof of its warehouse collapsed and defendant had constructed the steel structure supporting the roof. 126 F.2d at 540-41.

The defendant/manufacturer moved for summary judgment, arguing that tort recovery was barred by the economic loss doctrine and the district court granted the defendant’s motion. Id. In ruling as such, the district court expanded the economic loss doctrine to bar recovery for damage to property that foreseeably may be injured if the defective product fails. Id. at 542. The district court was convinced that where property is effectively “integrated” with the defective product that damage to it is tantamount to damage to the product itself. Id. However, the Third Circuit reversed, concluding that the Pennsylvania Supreme Court would not adopt this expansion of the doctrine. Id. The Tice court noted that “for purposes of applying the economic loss doctrine, ‘the product’ is no more and no less than whatever the manufacturer placed in the stream of commerce by selling it to the initial user.” Id. at 543 (quoting Saratoga, 520 U.S. at 879). The court therefore held that the plaintiff could recover for the loss of its inventory and other property stored in the warehouse. Id. at 544. But, see Industrial Uniform Rental Co. v. International Harvester Co., 317 Pa. Super. 65, 77-78, 463 A.2d 1085, 1092 (1983) (where various components of a product are provided by the same supplier as part of a complete and integrated package, even if a defect in one component damages another, there is no damage to “other property” of the plaintiff).

Here, under the rationale of Saratoga, East River, and Tice, Waterware should be able to recover for the costs of replacing other component parts of the sewer system which were not manufactured by Ametek but were allegedly damaged on account of the defective sensors. These other component parts should be considered “other property” since the sensors provided by Ametek were the “product” provided by Ametek and only one part of the package to be incorporated in the sewer system. Naturally, Waterware will have to establish proof that other components, that were not manufactured by Ametek, were in fact damaged in order to recover on a negligent misrepresentation theory. Moreover, Water-ware may not recover economic damages to the sensors themselves on this theory but is limited to contract and warranty causes of action.

For these reasons, Ametek’s objections to Count VI of the amended complaint (negligent misrepresentation), based on the economic loss doctrine, are sustained in part and overruled in part.

III. Motion To Strike Demand for Punitive Damages and Attorney Fees

Finally, Ametek moves to strike both the demand for punitive damages and the one for attorney fees from the ad damnum clauses of the amended complaint. Ametek argues that Waterware has not alleged any facts in support of the imposition of punitive damages in its claims for negligent misrepresentation and/or fraudulent misrepresentation. Defs.’ mem. of law at 19-20. Further, Ametek contends that attorney fees are not recoverable absent statutory authority, agreement between the parties or some other exception. This court agrees with Ametek only with respect to the demand for attorney fees, but it finds that the complaint sufficiently sets forth the general intent necessary to support a demand for punitive damages.

Preliminary objections are permitted to strike scandalous or impertinent matter from a pleading. Pa.R.C.P. 1028(a)(2). See Hudock v. Donegal Mutual Insurance Co., 438 Pa. 272, 277-78 n.2, 264 A.2d 668, 671 n.2 (1970) (“a preliminary objection in the nature of a motion to strike off impertinent matter... would appear to be the appropriate means through which to challenge an erroneous prayer for damages”). Under the general rule, attorney fees cannot be recovered from an adverse party, “absent an express statutory authorization, a clear agreement by the parties or some other established exception.” Merlino v. Delaware County, 556 Pa. 422, 425, 728 A.2d 949, 951 (1999). Counsel fees may be awarded “as a sanction against another participant for dilatory, obdurate or vexatious conduct during the pendency of a matter.” 42 Pa.C.S. §2503(7). In addition, a cause of action for misrepresentation can support a claim for punitive damages. McClellan v. Health Maintenance Organization of Pennsylvania, 413 Pa. Super. 128, 144, 604 A.2d 1053, 1061 (1992). However, “a court may not award punitive damages merely because a tort has been committed. Additional evidence must demonstrate willful, malicious, wanton, reckless or oppressive conduct.” Id. Further, “it is difficult to picture a fact pattern which would support a finding of intentional fraud without providing proof of ‘outrageous conduct’ to support an award of punitive damages.” Id. (citing Delahanty v. First Pennsylvania Bank N.A., 319 Pa. Super. 90, 129-30, 464 A.2d 1243, 1263 (1983)). See also, Bannar v. Miller, 701 A.2d 232, 242 (Pa. Super. 1997) (“Punitive damages are appropriate when an individual’s actions are of such an outrageous nature as to demonstrate intentional, willful, wanton, or reckless conduct.”). Moreover, “[m]alice, intent, knowledge, and other conditions of mind may be averred generally.” Pa.R.C.P. 1019(b).

Here, plaintiff fails to allege any agreement, circumstances or statute which would entitle it to attorney fees. Therefore, the motion to strike the demand for attorney fees is granted without prejudice. However, plaintiff sets forth a count for intentional misrepresentation (Count VII) in its amended complaint and defendants do not set forth a demurrer to this count in its objections. Therefore, this count remains and it may support an award of punitive damages. Specifically, plaintiff alleges that “[djefendants made representations [concerning the level sensors] with a reckless disregard for their falsity” and “with the intent and for the purpose of deceiving the plaintiff and to induce plaintiff into relying on the representations.” Am. compl. at ¶¶65-66. For purposes of ruling on preliminary objections and a motion to strike, these allegations are sufficient to allow the demand for punitive damages to remain even though Waterware will have to present suitable proof of Ametek’s allegedly reckless conduct.

For these reasons, the motion to strike the demand for attorney fees is granted, but the motion to strike the demand for punitive damages is denied as premature.

CONCLUSION

For the reasons set forth above, the objections asserting prior pending action are overruled and the request to stay the present action is denied. The objections to Waterware’s claim for negligent misrepresentation, based on the economic loss doctrine, are sustained in part and overruled in part. And the motion to strike the demand for attorney fees is granted, while the motion to strike the demand for punitive damages is denied.

ORDER

And now, April 17, 2001, upon consideration of defendants’ preliminary objections to the amended complaint, plaintiff’s response thereto, all respective memoranda, and in conjunction with the memorandum opinion being filed contemporaneously with this order, it is hereby ordered as follows:

(1) The preliminary objections, asserting prior pending action pursuant to Pa.R.C.R 1028(a)(6) are overruled and the request to stay the present action is denied;
(2) The preliminary objections to Count VI for negligent misrepresentation, asserting legal insufficiency based on the economic loss doctrine are sustained in part and overruled in part;
(3) The preliminary objections, moving to strike the demand for attorney fees, are sustained without prejudice, and the demand for attorney fees are stricken;
(4) The preliminary objections, moving to strike the demand for punitive damages, are overruled; and
(5) The defendants are directed to file an answer to the amended complaint within 20 days of this order.

      . The facts presented in this section of the opinion were gleaned from the complaint, and are accepted as true for purposes of ruling on preliminary objections. See Tucker v. Philadelphia Daily News, 757 A.2d 938, 941-42 (Pa. Super. 2000).

      . References in this opinion to “exhibits” shall be understood as those exhibits attached either to the amended complaint or to the objections. The amended complaint was attached at exhibit B to the objections.

      . This action is captioned as Waterware Corporation v. City of Philadelphia, November term 1999, no. 1382.

      . Waterware asserts these same damages to every count of its amended complaint. However, for purposes of analyzing the objections to Count VI, this court will address the damages as they apply to that count only.

      . Ametek relies on several district court cases for the proposition that the economic loss doctrine bars recovery for the type of property that one would reasonably expect to be injured as a direct consequence for the failure of the product at issue. See Factory Market Inc. v. Schuller International Inc., 987 F. Supp. 387 (E.D. Pa. 1998) (holding that building lessee may not maintain negligence action against roofing manufacturer since economic loss doctrine precluded claims for water damage to tenants’ property since building lessee must have reasonably expected that if the roof was not watertight, property could be injured by leaks); Neuchatel Ins. v. ADT Security Systems Inc., 1997 WL 5398687 at **7-8 (E.D. Pa. Aug. 11,1997) (holding that property stolen from a vault and business interruption damages resulting from the loss of that property were not “other property” where the parties would reasonably expect such losses as a direct consequence of the sale of a vault which failed to meet buyer’s contractual specifications); Hartford Fire Ins. Co. v. Hulls America Inc., 893 F. Supp. 465, 469 (E.D. Pa. 1995) (holding that water damage when roof collapsed cannot constitute injury to “other property” to fit within exception to the economic loss doctrine).

        Ametek’s reliance on these district court cases is unpersuasive since these decisions, which preceded Saratoga and Tice other than Factory Market, did not take into account the Tice court’s express rejection of the expansion of the economic loss doctrine to preclude recovery for damage to property which may foreseeably result from damage to the product itself.


author: SPICER, P.J.,

text:
    Erie Insurance Group v. Ford Motor Co.
    C.P. of Adams County,
    no. 00-S-968.

      John Popilock, for plaintiff.

      Nancy Winschel and Richard J. Kabbert, for defendant.
    March 21, 2001
   SPICER, P.J.,

Plaintiff, acting as subrogee on behalf of its insured, filed a complaint September 29, 2000 against defendant manufacturer to recover from a fire that destroyed insured’s 1997 Mercury Mystique and personal property that was in the vehicle. Plaintiff raises claims of breach of warranty, negligence and strict liability alleging the fire was the result of faulty wiring within the vehicle.

Defendant has filed preliminary objections in the nature of demurrers as to counts sounding in negligence and strict liability. Defendant asks the court to dismiss tort claims with prejudice because of the economic loss doctrine. It argues that plaintiff is not entitled to recover purely economic damages arising out of the fire and implies that plaintiff has alleged damages to personal property located within the car only to avoid the doctrine.

A court should not sustain a preliminary objection in the nature of a demurrer unless it is clear that the law will not permit recovery. Small v. Horn, 554 Pa. 600, 722 A.2d 664 (1998).

Although the Superior Court has' upheld dismissal of a complaint in a factually similar case, Jones v. General Motors Corp., 428 Pa. Super. 544, 631 A.2d 665 (1993), the case did not involve property other than the motor vehicle. Our Supreme Court has yet to rule on the doctrine. The Superior Court’s first pronouncement is found in REM Coal Co. Inc. v. Clark Equipment Co., 386 Pa. Super. 401, 409, 563 A.2d 128, 132 (1989), where the court reviewed the history of the doctrine and adopted the standard expressed by the U.S. Supreme Court in East River S.S. Corp. v. Transamerica Delaval Inc., 476 U.S. 858, 106 S.Ct. 2295, 90 L.Ed.2d 865 (1986): “recovery in tort is barred in product liability actions between commercial enterprises where the only damage alleged is to the product itself, whether or not the defect posed a risk of other damage or injury or manifested itself in a sudden and calamitous occurrence.”

Justice Blackman writing for the Supreme Court explained:

“The distinction that the law has drawn between tort recovery for physical injuries and warranty recovery for economic loss is not arbitrary and does not rest on the ‘luck’ of one plaintiff in having an accident causing physical injury. The distinction rests, rather, on an understanding of the nature of the responsibility a manufacturer must undertake in distributing his products.” Citing Seely v. White Motor Company, 63 Cal.2d at 18, 403 P.2d at 151.
“Where injury is only to the product itself the reasons for imposing a duty in tort are weak and those for leaving a party to its contractual remedy are strong.” East River, 476 U.S. at 871, L.Ed.2d at 877. Offering further explanation, the Superior Court has said:
“[In the East River case, the Supreme Court] emphasized that where an allegedly defective product causes damage only to itself, and other consequential damages resulting from the loss of the use of the product, the law of contract is the proper arena for redressing the harm because in such a case, the damages alleged relate specifically to product quality and value as to which the parties have had the opportunity to negotiate and contract in advance. They have allocated the risks of possible types of losses, and agreed on the level of quality that will be given for the price demanded. When the product fails to conform and only economic losses result, the parties’ recovery one against the other for economic losses should be limited to an action on that contract and no additional recovery in negligence or strict liability is permitted.” New York State Electric & Gas Corp. v. Westinghouse Electric Corp., 387 Pa. Super. 537, 550-51, 564 A.2d 919, 925-26 (1989).

However, where other property is injured, such damage may be considered so akin to personal injury that the two are treated alike. East River, citing Seely at 152.

There is no Pennsylvania appellate authority on point. While the REM and Jones cases, supra, adopted the U.S. Supreme Court’s analysis as to damages to the chattel alone, neither case involved additional property.

Section 402A ostensibly authorizes recovery for damages other than to the product in question. It is clear that damage to property in the plaintiff’s subrogor’s automobile does not involve the type of harm that contract law was designed to redress. It is equally clear that section 402A is designed to reduce to irrelevancy considerations of warranty and contract law. See comment to the section on pages 355 and 356. Thus, commercial law and tort law are designed to provide distinct remedies. There is no reason to disallow recovery when unequivocally stated policy reasons expressed in REM and Jones, supra, are inapplicable. There is equally no reason for abrogating those policies merely because some other property was damaged.

Accordingly, the attached order is entered.

ORDER

And now, March 21, 2001, defendant’s preliminary objections are sustained as to the 1997 Mercury Mystique, but denied as to the other property. Defendant shall have 20 days in which to file an answer.

      . Pennsylvania Supreme Court adopted section 402A of the Restatement in Webb v. Zern, 422 Pa. 424, 220 A.2d 853 (1966).
      Section 402A of the Restatement (Second) of Torts, provides in relevant part:
      “(1) One who sells any product in a defective condition unreasonably dangerous to the user or consumer or to his property is subject to liability for physical harm thereby caused to the ultimate user or consumer, or his property, if____” Section 402A of the Restatement (Second) of Torts (1965). (emphasis added)

      . The doctrine applies to causes sounding in both negligence and strict liability. See also, 4 Standard Pennsylvania Practice 2d §23.6 (p. 323).

      . This case involved an action between a strip mining business and the manufacturer and seller of the front end loader that caught on fire, resulting in damage to the loader itself.

      . An admiralty case also involving two commercial enterprises. Plaintiff and defendant contracted for construction of four supertankers. Plaintiff brought products liability action after discovering turbines were defective, seeking the cost of repair, and income lost while tankers were out of service.

      . The REM court noted that the dispute was between two commercial enterprises, as was the case in East River, and declined to answer any questions regarding disputes between noncommercial parties. However, our Superior Court later found that the rationale behind REM was equally applicable to disputes involving claims brought by individuals. Jones v. General Motors Corp., supra.

      . More recently, the U.S. Supreme Court has clarified what constitutes “the product itself ” in Saratoga Fishing Co. v. J.M. Martinac & Co., 520 U.S. 875, 117 S.Ct. 1783, 138 L.Ed.2d76 (1997). In this case, an individual purchased a boat then added additional equipment to it. The boat was then sold and subsequently sank as the result of a fire in the engine room caused by a defectively designed hydraulic system. The Supreme Court held that plaintiff could recover for the physical damage caused to the equipment as it constituted “other property.” Added equipment that played no causal role in the accident that damaged the product is recoverable in tort.