I. FIRM NEWS

Thomas Paschos and Associates would like to wish everyone a safe and happy Thanksgiving.

II. PROFESSIONAL LIABILITY

The Litigation Privilege that Protects Lawyers From Liability for Statements in Court Applies As Well to a Lawyers Actions During Litigation

In Wallach v. Gowing, 2009 WL 3762901 (N.J. Super. November 9, 2009), an unpublished opinion, the Superior Court held that the litigation privilege applies not only to “statements” but also to “actions” relating to litigation.

Appellant Kenneth Goodkind, an attorney in the law firm of Flaster Greenberg, represented Quaker Group entities in an underlying lawsuit brought by respondent Brad R. Krupnick, Esquire, on behalf of homeowners seeking to recover for damage caused by water infiltration and mold growth. Attorney Goodkind filed a motion to disqualify attorney Krupnick as counsel for the plaintiff homeowners based on the Quaker defendants' concern that Krupnick was using confidential information to settle similar claims that he had brought personally as a homeowner against the Quaker defendants. This motion was denied. Krupnick then filed a motion for sanctions against the Quaker defendants for frivolous litigation, which was also denied.

Goodkind subsequently filed a third-party complaint on behalf of the Quaker defendants against Krupnick alleging violation of the confidentiality provision of the releases they signed in settling their claims concerning water infiltration against the Quaker defendants. In response, Krupnick filed a fourth-party complaint against Goodkind, and Flaster Greenberg alleging that both had engaged in tortious interference with contract and prospective economic advantage by interfering with his representation of other Quaker homeowners. The complaint identified two acts of interference by Goodkind: the filing of the motion to disqualify Krupnick from representing the plaintiff homeowners and the filing on behalf of the Quaker defendants of the third-party complaint against Krupnick based on his alleged violation of the release he signed in settling his own claims against these defendants.

Goodkind and Flaster Greenberg filed a motion to dismiss Krupnick's fourth-party complaint on the grounds that his claims against them were barred by the litigation privilege and collateral estoppel. The trial court denied this motion and a motion for reconsideration was also denied.

On appeal, the Superior Court reversed the trial court’s order denying the motion to dismiss and found that Goodkind and Flaster Greenberg were protected by the litigation privilege. The court applied the reasoning of the Supreme Court in Loigman v. Twp. Comm. of Middletown, 185 N.J. 566 (2006). Loigman involved a claim under the Federal Civil Rights Act for an alleged violation of the plaintiff's First Amendment right to attend an administrative law hearing, which was based on the alleged improper use of a sequestration motion to exclude plaintiff from the hearing. The Court held that the litigation privilege protected the defendants from being subjected to a damages action as the sequestration motion was a “communication” covered by the privilege.

The court held that Goodkind and Flaster Greenberg's filing of the motion to disqualify and the third-party complaint against Krupnick is substantially the same kind of action by an attorney on behalf of a client as the motion for sequestration of an alleged potential witness that the Court held was protected by the litigation privilege in Loigman. The court found no support in Loigman for the trial court's view that the litigation privilege applies only to “statements” and not to “actions” relating to the litigation. As such, the court dismissed the fourth-party complaint, holding Goodkind and Flaster Greenberg were protected by the litigation privilege.

III. INSURANCE COVERAGE LITIGATION

Because Second Defendant in Declaratory Judgment Action Could Be Aligned as a Plaintiff, the Requisite Diversity of Citizenship Existed to Support Jurisdiction in Federal Court

In Chancellor Properties, Inc. v. Houston Casualty Co., 2009 WL 3790309 (E.D. Pa. November 12, 2009), plaintiff Chancellor Properties Inc. (“Chancellor”) filed a motion to remand this declaratory judgment action to state court. The underlying suit was filed by Lenox against Chancellor in the state court for negligently misrepresenting the condition of condominiums for which Chancellor had acted as the exclusive sales agent. Chancellor contacted Houston, its insurer, in order to obtain representation. Houston refused to defend and indemnify Chancellor on the ground that Lenox's suit fell outside the scope of the policy coverage. As a result, Chancellor brought this declaratory judgment action against Houston and Lenox in the state court. Houston subsequently removed the action.

Plaintiff Chancellor is a Pennsylvania citizen, while defendant Houston is a citizen of Texas and defendant Lenox, like Chancellor, is a citizen of Pennsylvania. Diversity was lacking because plaintiff Chancellor and defendant Lenox are both citizens of Pennsylvania. Houston argued, however, that defendant Lenox was fraudulently joined and must be ignored for purposes of removal. The court rejected this argument noting that in declaratory actions regarding the scope of insurance coverage, the injured party is an indispensable party. Here, Lenox is the party whose injury is the subject of the insurance coverage dispute. Therefore, the court held that Lenox is an indispensable party and thus not fraudulently joined.

The court recognized that if Lenox was a properly named defendant, removal to this court is prohibited because a diversity case cannot be removed where a defendant is a citizen of the state in which the action was originally filed. However, Houston argued that Chancellor's joinder of Lenox still did not defeat removal because Lenox must be realigned as a plaintiff.

The court applied the “principal purpose” or “primary issue” test recognized by the Court of Appeals for determining whether the alignment of the parties is appropriate. Under this test, the court must first identify the primary issue in controversy in the action and then determine whether there is a real dispute between the parties regarding that issue.

The court determined that the primary purpose of Chancellor’s declaratory judgment action was to determine the scope of the insurance policy issued to Chancellor by Houston. The court found that while Chancellor and Houston were at odds regarding the scope of the coverage, Chancellor and Lenox were not. Chancellor and Lenox shared a common interest in obtaining coverage for the subject of Lenox's underlying suit against Chancellor in the state court. Chancellor conceded this issue and agreed that Lenox should be properly realigned as a plaintiff. Because realignment of the parties is proper, the court held that Lenox is truly a plaintiff in the suit and, therefore, the court had subject matter jurisdiction based on diversity of citizenship and the requisite amount in controversy.