IN THE COURT OF COMMON PLEAS OF NORTHAMPTON COUNTY
COMMONWEALTH OF PENNSYLVANIA CIVIL DIVISION - LAW
NICHOLAS R. SABATINE, III, P.C. PROFIT SHARING PLAN,
Plaintiff,
v.
BLUE MOUNTAIN CONSUMER DISCOUNT COMPANY, First Defendant,
CAROL L. KING, Second Defendant,
JANE CINELLI, Third Defendant, WALTER P. LAMBERT, JR., Fourth
Defendant, FRANCIS J. CINELLI, Fifth Defendant, CINELLI FAMILY LIMITED
PARTNERSHIP, Sixth Defendant, and ELEANOR CINELLI, Seventh
Defendant,
Defendants.
No.: C-48-CV-2011-5066
OPINION OF THE COURT
This matter is before the Court on Defendant Blue Mountain Consumer
Discount Company’s (“Blue Mountain”) Preliminary Objections to the Third
Amended Complaint filed by Plaintiff Nicholas R. Sabatine, III, P.C. Profit
Sharing Plan (“Sabatine”). It was assigned to the Honorable Michael J.
Koury, Jr. from the May 1, 2012 Argument List. The parties submitted briefs
and the matter is now ready for disposition.
2
I. Factual and Procedural Background
Between 1998 and 2011, Sabatine made a series of loans to Blue
Mountain totaling $639,949.77 as of February 28, 2011. Third Amended
Complaint at ¶ 10, Nicholas R. Sabatine, III, P.C. Profit Sharing Plan v. Blue
Mountain Consumer Discount Co., et al., C-48-CV-2011-5066
(C.P.Northampton, Mar. 19, 2012) [hereinafter “Third Amended Complaint”].
Pursuant to the terms of the loans, Blue Mountain, through its Chief
Executive Officer, Defendant Walter P. Lambert (“Lambert”), agreed to pay
Sabatine 10% interest per annum, compounded monthly, payable on
demand. Id. at ¶ 12. Blue Mountain ceased payments under the terms of
the loan. Id. at ¶ 17. As a result, Sabatine contends that Blue Mountain
owes it $639,949.77 in principle plus accrued interest from February 28,
2011 at the rate of 10% compounded monthly. Id. at ¶ 13.
Through its Third Amended Complaint, Sabatine brought claims
against Blue Mountain for (1) breach of contract, (2) negligence, and
(3) concerted action under the Restatement (Second) of Torts § 876. See
generally id. Blue Mountain filed preliminary objections, in the nature of
demurrers and a motion to strike, claiming that: (1) the gist of the action
doctrine and the economic loss doctrine bar Sabatine’s claims for negligence
and concerted action; (2) Sabatine failed to state a cause of action for
negligence and concerted action; and (3) pursuant to Pa.R.C.P. 1028(a)(2),
all references to a Consent Agreement and Order should be stricken as
3
impertinent. See generally Defendant Blue Mountain Consumer Discount
Company’s Preliminary Objections to Nicholas R. Sabatine, III P.C. Profit
Sharing Plan’s Third Amended Complaint, Nicholas R. Sabatine, III, P.C.
Profit Sharing Plan v. Blue Mountain Consumer Discount Co., et al., C-48-
CV-2011-5066 (C.P.Northampton, Apr. 9, 2012) [hereinafter “Preliminary
Objections”].
II. Discussion
A. Demurrer Standard
A demurrer challenges the legal sufficiency of a complaint. See
Pa.R.C.P. 1028(a)(4). When evaluating preliminary objections based on a
claim of legal insufficiency, this Court must accept as true all of the well-
pleaded, material, and relevant facts alleged in the complaint and all
inferences fairly deducible therefrom. See Mazur v. Trinity Area Sch. Dist.,
961 A.2d 96, 101 (Pa. 2008). We need not, however, accept argument,
opinion, conclusions of law, or unwarranted inferences. See Penn Title Ins.
Co. v. Deshler, 661 A.2d 481, 483 (Pa. Commw. 1995).
The court may not sustain a preliminary objection seeking to dismiss
a cause of action unless “it is clear and free from doubt that the complainant
will be unable to prove facts legally sufficient to establish a right to relief.”
Mazur, 961 A.2d at 101. See also In re B.L.J., Jr., 938 A.2d 1068, 1071 (Pa.
Super. 2007); Kane v. State Farm Fire and Cas. Co., 841 A.2d 1038, 1041
(Pa. Super. 2004) (noting that demurrer should be sustained only where
4
“plaintiff has failed to assert a legally cognizable cause of action”). If any
doubts exist as to the legal sufficiency of the complaint, we must examine
those doubts in the context of the complaint as a whole and, thereafter,
should resolve any lingering doubt in favor of overruling the demurrer. See
Kane, 841 A.2d at 1041; Rachlin v. Edmison, 813 A.2d 862, 870 (Pa. Super.
2002).
B. Gist of the Action - Negligence
For a claim of negligence, “[i]t is axiomatic that a plaintiff must
establish he or she was owed a duty of care by the defendant, the defendant
breached this duty, and this breach resulted in injury and actual loss . . . .”
Reardon v. Allegheny College, 926 A.2d 477, 487 (Pa. Super. 2007) (citing
McCandless v. Edwards, 908 A.2d 900, 903 (Pa. Super. 2006)). Sabatine
alleges that Blue Mountain was negligent in allowing Lambert to divert Blue
Mountain’s funds for his own personal use while under the supervision of
Blue Mountain and the other defendants. Third Amended Complaint at ¶ 33.
In addition, Sabatine claims Blue Mountain was negligent in its handling of
Sabatine’s loans, and in failing to use adequate record keeping, accounting
methods and other safeguards. Id. at ¶ 35. Furthermore, Sabatine
contends that Blue Mountain was negligent in managing its assets
and allowing Lambert to freely run the day-to-day affairs of Blue Mountain.
Id. at ¶38. Sabatine maintains that Blue Mountain’s negligence caused the
5
loss of Sabatine’s principle and Blue Mountain’s inability to pay the
applicable interest. Id. at ¶ 37.
Blue Mountain contends that Sabatine’s claim for negligence is barred
by the “gist of the action” doctrine, which precludes plaintiffs from recasting
ordinary breach of contract claims into tort claims. Hart v. Arnold, 884 A.2d
316, 339 (Pa. Super. 2005); Pittsburgh Constr. Co. v. Griffith, 834 A.2d 572,
581 (Pa. Super. 2003), appeal denied, 852 A.2d 313 (Pa. 2004); Koken v.
Steinberg, 825 A.2d 723, 729 (Pa. Commw. 2003), appeal quashed, 834
A.2d 1103 (Pa. 2003). Blue Mountain maintains that Sabatine cannot
pursue this tort claim because Sabatine has alleged tortious conduct in
connection with Blue Mountain’s performance of its contractual obligations.
Defendant Blue Mountain Consumer Discount Company’s Brief in Support of
Preliminary Objections to Second Amended Complaint at 5-6, Nicholas R.
Sabatine, III, P.C. Profit Sharing Plan v. Blue Mountain Consumer Discount
Co., et al., C-48-CV-2011-5066 (C.P.Northampton, Apr. 9, 2012)
[hereinafter “Blue Mountain’s Brief”]. As such, Blue Mountain argues that
the gist of the action doctrine limits Sabatine’s recourse to a breach of
contract claim.
Negligence claims may be dismissed under the gist of the action
doctrine in the appropriate circumstances, but do not always result in per se
dismissal. See Bash v. Bell Telephone Co. of Pennsylvania, 601 A.2d 825
(Pa. Super. 1992). The key to deciding whether the gist of the action
6
doctrine bars a claim for negligence is to determine the source of the duty.
When the source of the duty arises from the contract, the gist of the action
doctrine prohibits a claim for negligence. See Pennsylvania Mfrs.’ Ass’n Ins.
Co. v. L.B. Smith, Inc., 831 A.2d 1178, 1182 (Pa. Super. 2003) (holding that
the claim for negligence is barred by the gist of the action doctrine because
the claim arose from the contractual obligations undertaken by the
defendant in relation to the sale and subsequent attempts to repair the
product); see Reardon, 926 A.2d at 487 (dismissing a negligence claim when
the only duties owed by the defendant were rooted in the contract
established by the college student handbook, which created a contract
between the parties, and no other source existed from which liability could
flow); see also Freestone v. New England Log Homes, Inc., 819 A.2d 550,
553-54 (Pa. Super. 2003) (finding that the breach of duty of care was a
failure to perform the contract and therefore the negligence claim was
barred by the gist of the action doctrine). When, however, the source of the
duty at issue “is imposed by law as a matter of social policy,” the gist of the
action will not bar a negligence claim. Hart, 884 A.2d at 339.
“When a plaintiff alleges that the defendant committed a tort in the
course of carrying out a contractual agreement, Pennsylvania courts
examine the claim and determine whether the ‘gist’ or gravamen of it
sounds in contract or tort.” Pennsylvania Mfrs.’ Ass’n Ins. Co., 831 A.2d at
1182 (quoting Yocca v. Pittsburg Steelers Sports, Inc., 806 A.2d 936 (Pa.
7
Commw. 2002)). Accordingly, “[t]ort actions lie for breaches of duties
imposed by law as a matter of social policy, while contract actions lie only
for breaches of duties imposed by mutual consensus agreements between
particular individuals.” Hart, 884 A.2d at 339; Sullivan v. Chartwell Inv.
Partners, LP, 873 A.2d 710, 719 (Pa. Super. 2005) (quoting eToll, Inc. v.
Elias/Savion Advertising, Inc., 811 A.2d 10, 14 (Pa. Super. 2002));
Pittsburgh Constr. Co., 834 A.2d at 582. In the seminal case of eToll, Inc.,
the Superior Court remarked:
Thus, although mere non-performance of a contract does not constitute a fraud, it is possible that a breach of contract also
gives rise to an actionable tort. To be construed as in tort, however, the wrong ascribed to defendant must be the gist of
the action, the contract being collateral. The important difference between contract and tort actions is that the latter lie from the
breach of duties imposed as a matter of social policy while the former lie for the breach of duties imposed by mutual consensus.
In other words, a claim should be limited to a contract claim when the parties’ obligations are defined by the terms of the
contracts, and not by the larger social policies embodied by the law of torts.
eToll, 811 A.2d at 14 (citations omitted). Accord Hart, 884 A.2d at 339-40;
The Brickman Group, Ltd. v. CGU Ins. Co., 865 A.2d 918, 927 (Pa. Super.
2004). As such,
[t]he gist of the action doctrine acts to foreclose tort claims: 1) arising solely from the contractual relationship between the
parties; 2) when the alleged duties breached were grounded in the contract itself; 3) where any liability stems from the
contract; and 4) when the tort claim essentially duplicates the breach of contract claim or where the success of the tort claim is
dependent on the success of the breach of contract claim. The critical conceptual distinction between a breach of contract claim
and a tort claim is that the former arises out of ‘breaches of
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duties imposed by mutual consensus agreements between
particular individuals,’ while the latter arises out of ‘breaches of duties imposed by law as a matter of social policy.’
Reardon, 926 A.2d at 486-87 (citations and quotations omitted).
Applying these principles to the facts before us, we must determine
whether the duty allegedly breached by Blue Mountain is a duty imposed by
mutual consensus agreements, i.e., the loan, as evidenced by the Note,
between Blue Mountain and Sabatine, or is a duty imposed by law as a
matter of social policy. See id.
1. Blue Mountain’s Duty Arises from a Contract
Sabatine contends that Blue Mountain breached a duty and was
thereby negligent in 1) allowing Lambert to divert Blue Mountain’s funds for
his own personal use while under the supervision of Blue Mountain, 2) its
handling of Sabatine’s loans, and 3) failing to use adequate record keeping,
accounting methods and other safeguards. Id. at ¶¶ 33-37. Furthermore,
Sabatine contends that Blue Mountain was negligent in managing its assets
and allowing Lambert to freely run the day-to-day affairs of Blue Mountain.
Id. at ¶38.
Sabatine argues that its claims are not barred by the gist of the action
doctrine because the negligence claim is based on Blue Mountain’s duty as
referenced above. This duty, Sabatine insists, is a duty founded not in the
contract between the parties, but in social and legal policies.
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After thoroughly analyzing this issue, and for the reasons set forth at
length below, we conclude that there is no Pennsylvania case or statutory
law which imposes a duty as a matter of social policy on the part of Blue
Mountain to Sabatine independent of the contract. Because the source of
duty is not imposed by Pennsylvania law as a matter of social policy, if the
duty is in fact legally recognized, the source of the duty must necessarily
arise from the contract. Consequently, the “gist” of Sabatine’s claim against
Blue Mountain sounds in contract, not tort. Because the source of the duty
is necessarily grounded in the contract, Sabatine’s claim that Blue Mountain
was negligent is barred by the gist of the action doctrine. See Alpart, 574 F.
Supp. 2d at 499. See also Bohler-Uddeholm Am. v. Ellwood Grp. Inc., 247
F.3d 79, 105 (3d Cir. 2001); eToll, Inc., 811 A.2d at 19.
Sabatine’s claim arises solely from the contract, i.e., the loan as
evidenced by the Note from Sabatine to Blue Mountain. The Note required
Blue Mountain to pay Sabatine 10% interest per annum, compounded
monthly, payable on demand. Third Amended Complaint at ¶ 12. Moreover,
the Note between the parties provided, in pertinent part:1
1 While Sabatine alleges that it never received copies of the Note from Lambert, all of the Notes in the consolidated matters against Blue Mountain are identical. Third
Amended Complaint at ¶ 11. Therefore, although Sabatine has not attached a Note to its Third Amended Complaint, the Note referenced is identical to the other notes
given by Blue Mountain to all of the other lenders. In addition, a Note was attached to the Third Amended Complaint in Sabatine v. Blue Mountain Consumer Discount Co., C-48-CV-2011-5068, which is identical to all of the Notes in the Blue Mountain
consolidated matters. See Third Amended Complaint at Ex. A, Sabatine v. Blue Mountain Consumer Discount Co., et al., C-48-CV-2011-5068 (C.P.Northampton,
Mar. 19, 2012).
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We may demand payment at any time. If you fail to make any
payment when due, or to pay us in full upon demand, you will be in default of this Note. If you default on this Note you will be in
default of every other obligation with us. We may exercise our right of set-off in any of your property then in our possession, as
well as, all of the rights of a secured party under the Pennsylvania Uniform Commercial Code, and all of the rights
granted to us in any other security agreement or mortgage. The proceeds of any property securing this Note will be applied first
to our costs of collection and selling the property, including our court costs and reasonable attorney’s fees of 20% of the amount
due and will then be applied to reduce the amounts you owe us on this Note. Interest at the rate provided in this Note will
continue to accrue on all sums due until we receive payment in full, even if we have obtained a judgment against you.
See Third Amended Complaint at Ex. A, Sabatine v. Blue Mountain
Consumer Discount Co., et al., C-48-CV-2011-5068 (C.P.Northampton, Mar.
19, 2012).
The duties allegedly breached by Blue Mountain were the duties it was
contractually obligated to perform pursuant to the Note. The Note required
Blue Mountain to pay Sabatine 10% interest per annum, compounded
monthly, payable on demand. Third Amended Complaint at ¶ 12.
Therefore, the only possible source for these duties is the alleged loan and
corresponding Note, which is a contract. Blue Mountain’s liability arises
solely from the contract. Without such a contract, Blue Mountain would not
have had any duty to Sabatine. Failing to meet these obligations breached
the duties imposed by the contract. Merely asserting that Blue Mountain
was negligent in performing its contractual duties does not convert
Sabatine’s contract claim to one in tort. The negligence claim is duplicative
11
of Sabatine’s breach of contract claim. Therefore, the “gist” of Sabatine’s
claim against Blue Mountain is clearly breach of contract. See Reardon, 926
A.2d at 486-87.
2. Source of Duty Not Imposed as a Matter of
Social Policy
As noted above, Sabatine insists that there exists a duty between Blue
Mountain and Sabatine that Pennsylvania law recognizes as a matter of
social policy. Although Sabatine maintains that Pennsylvania law imposes a
duty as a matter of social policy on Blue Mountain independent of its
contractual duties, Sabatine does not cite to any reported decisions from
Pennsylvania or federal courts which recognize such a duty imposed by law.
a. No duty based upon relationship between
Blue Mountain and Sabatine
The relationship between Sabatine and Blue Mountain can be
characterized as either that of lender and borrower or as that of
bank/financial institution and customer. Using either characterization, such
a relationship would not create a duty imposed as a matter of social policy
on the part of Blue Mountain to Sabatine independent of the contract.
The relationship between Sabatine and Blue Mountain can be
characterized as that of a lender and borrower. See Third Amended
Complaint at ¶¶ 10-13. Sabatine is the lender and Blue Mountain is the
borrower. Sabatine avers that Blue Mountain breached a duty to Sabatine
by negligently managing its assets, intentionally failing to implement
12
procedures to prevent fraud, misconduct, and corporate waste, and failing to
maintain corporate records. See id. at ¶¶ 32-38. In addition, Sabatine
contends that Blue Mountain breached a duty by failing to properly manage
its assets and allowing Lambert to freely run the day-to-day affairs of Blue
Mountain, as well as neglecting to safeguard Sabatine’s loans to Blue
Mountain. Id.
Ordinarily, the relationship between lender and borrower does not
create a duty imposed by law as a matter of social policy. See Fed. Land
Bank of Baltimore v. Fetner, 410 A.2d 344, 348 (Pa. Super. 1979), cert.
den., 446 U.S. 918 (1980). However, “if a creditor ‘gains substantial control
over the debtor’s business affairs’ a fiduciary relationship may result.” I & S
Assocs. Trust v. LaSalle Nat’l Bank, 2001 WL 1143319, *7 (E.D. Pa. Sept.
27, 2001) (quoting Blue Line Coal C. v. Equibank, 693 F. Supp. 493, 496
(E.D. Pa. 1988)). “Control over the borrower is demonstrated when there is
evidence that the lender was involved in the actual day-to-day management
and operations of the borrower or that the lender had the ability to compel
the borrower to engage in unusual transactions.” Id. (quotations and
citation omitted).
Sabatine has failed to plead facts indicating that there exists a duty
between Sabatine and Blue Mountain that Pennsylvania law recognizes as a
matter of social policy. As alleged, the relationship between Sabatine and
Blue Mountain is that of a lender and borrower. As noted above, ordinarily,
13
such a relationship does not create a duty imposed as a matter of social
policy. Fed. Land Bank of Baltimore, 410 A.2d at 348. In addition, Sabatine
has not averred facts indicating that the lender became involved in the
actual day-to-day management and operations of the borrower or the lender
had the ability to compel the borrower to engage in unusual transactions,
which would create such a duty. See I & S Assocs. Trust, 2001 WL
1143319, at *7. In fact, in the instant matter, the parties have the opposite
roles, i.e., Sabatine is the lender and Blue Mountain is the borrower.
To create a duty between a lender and borrower, Sabatine, as a
lender, must have been involved in the actual day-to-day management and
operations of Blue Mountain, or had the ability to compel Blue Mountain to
engage in unusual transactions. Id. Furthermore, assuming arguendo, that
the roles of lender and borrower could be reversed, Sabatine has not
averred facts indicating that Blue Mountain was involved in Sabatine’s actual
day-to-day activities or that Blue Mountain compelled Sabatine to engage in
unusual transactions. See id.
In Strausser v. Pramco, III & Mfrs. and Traders Trust Co., Strausser, a
mortgagor, filed a counterclaim against Pennsylvania National Bank and
Trust Company, the mortgagee, alleging breach of contract, negligence,
fraud and misrepresentation with respect to a loan agreement. 944 A.2d
761, 763 (Pa. Super. 2008). Through his negligence claim, Strausser
alleged that the lender “breached a duty to properly supervise its employees
14
in that their employee engaged in fraud and misrepresentation as set out in
[the complaint].” Id. at 767. The trial court dismissed Strausser’s
negligence claim under the gist of the action doctrine. On appeal, the
Pennsylvania Superior Court, through its then President Judge Kate Ford
Elliot, affirmed the dismissal of the negligence claim holding that:
All of these alleged misrepresentations are directly related to the
underlying contractual rights and obligations of the parties as defined by the loan agreements and mortgages between them,
and all of them can be resolved only through a determination of those contractual rights and obligations.
. . .
All of the other misrepresentations are the same, being directly related to underlying contractual relationships. The trial court
properly dismissed these counts because the gist of the action at trial was in contract.
Id. at 768.
In a case involving a Ponzi scheme arising out of mortgage contracts,
the United States Court of Appeals for the Third Circuit recently held that
because the duties owed from the lender to the borrower arose from the
mortgage contracts, plaintiffs’ negligence claims were barred by the gist of
the action doctrine. See Jones v. ABN AMRO Mortg. Grp., Inc., 606 F.3d
119, 124 (3d Cir. 2010).2 In Jones, “the heart of the issue before [the Third
Circuit was] a mortgage loan-servicing Ponzi scheme.” Id. at 121.
2 Although this Court is not bound by federal court opinions interpreting
Pennsylvania law, we may consider federal cases as persuasive authority. See Cambria-Stoltz Enter v. TNT Invs., 747 A.2d 947, 952 (Pa. Super. 2000).
15
In 2002, Wesley Snyder, a mortgage broker, discussed with the
plaintiffs the refinancing of their home mortgage loan through one of his
companies. Id. He offered the plaintiffs what he called the “Equity Slide
Down Mortgage,” a product that was the centerpiece of his mortgage-loan
servicing Ponzi scheme. Id. For the plaintiffs to refinance their home
mortgage with Snyder, they were required to sign two sets of documents at
two separate closings. Id. At the first closing, the plaintiffs signed a
legitimate mortgage and note with SunTrust, a traditional mortgage lender,
which provided the funds for the refinancing. Id. at 121-22. Six days later,
Snyder presented the plaintiffs with a purported “Equity Slide Down
Mortgage” note and mortgage that “converted” the terms of the SunTrust
mortgage to a lower interest rate and lower monthly payments, based on
the plaintiffs’ prepayment of a large portion of the principal balance to
Snyder. Id. at 122. However, SunTrust was not a party to the second
transaction and the plaintiffs’ obligations to SunTrust pursuant to the first
transaction remained unchanged. Id.
Under the terms of the “Equity Slide Down Mortgage,” the plaintiffs
agreed to make monthly payments to Snyder, who would purportedly remit
to SunTrust the full monthly payments due by supplementing the plaintiffs’
monthly payments with monies from their large prepayment. Id. In 2005,
the plaintiffs completed a similar transaction with Snyder on another
property, with financing by nBank, later assigned to Countrywide. Id. The
16
Ponzi scheme collapsed in 2007 and Snyder was indicted and ultimately
pleaded guilty to mail fraud. Id. SunTrust and Countrywide subsequently
demanded from the plaintiffs the monthly payments due on their mortgage
loans. Id.
Thereafter, plaintiffs filed a putative class action against SunTrust,
Countrywide, and other lenders, alleging negligence, fraudulent
misrepresentation, and violations of the Real Estate Settlement Procedures
Act (RESPA). Id. The plaintiffs alleged that the lenders “had a continuing
duty to take reasonable steps to supervise the Snyder Entities to ensure that
all payments and prepayments of principal and interest were properly
credited against the mortgage loans . . . .” Id. at 123. The plaintiffs further
alleged that lenders breached that duty and, as such, are liable for
negligence. Id. The district court dismissed the plaintiffs’ negligence claim
under the gist of the action doctrine. Id. at 123.
On appeal, the Third Circuit affirmed the district court’s dismissal of
the negligence claim. The court held that the negligence claim, phrased as
the lenders’ failure “to supervise the Snyder Entities to ensure that all
payments . . . were properly credited against the mortgage loans,” failed
under Pennsylvania’s “gist of the action” doctrine. Id. at 123-24. The Third
Circuit found that the negligence claim was based on Snyder’s failure to
properly remit the plaintiffs’ payments, which was a contractual duty arising
from the various contracts, not subject to being recast as a tort claim. Id.
17
Therefore, because the duties owed from the lender to the borrower arose
from the mortgage contracts, plaintiffs’ negligence claims were barred by the
gist of the action doctrine. Id. at 124. See also Nat’l Consumer Coop. Bank
v. Morgan Stanley & Co., Inc., 2010 WL 3975847 at *10 (M.D. Pa. October
8, 2008) (holding that the negligence claim for a breach of a loan agreement
was barred by the gist of the action doctrine where duties allegedly breached
were set forth in the contract, i.e., the loan).
Therefore, if the relationship between Sabatine and Blue Mountain is
characterized as that of borrow and lender, Sabatine has failed to aver facts
indicating the existence of a duty imposed by Pennsylvania law as a matter
of social policy. See Strausser, 944 A.2d 761 at 768; Jones, 606 F.3d at
124; Fed. Land Bank of Baltimore, 410 A.2d at 348.
In addition to characterizing the relationship between Sabatine and
Blue Mountain as that of borrower and lender, it can also be characterized as
that of a bank/financial institution and customer. See Third Amended
Complaint at ¶¶ 10-13. Blue Mountain is the bank/financial institution and
Sabatine is the customer. The Pennsylvania Supreme Court has observed
that “[i]t is well established that the legal relationship between a financial
institution and its depositors is based on contract, and that the contract
terms are contained in the signature cards and deposit agreements.” First
Fed. Sav. and Loan Ass’n of Hazelton v. Office of the State Treasurer,
Unclaimed Prop. Review Comm., 669 A.2d 914, 915 (Pa. 1995). Moreover,
18
the United States District Court for the Eastern District of Pennsylvania has
held that because the duty of a financial institution to its customers is a
contractual duty, it is not a duty imposed by law as a matter of social policy.
See Hospicomm, Inc. v. Fleet Bank, N.A., 338 F. Supp. 2d 578, 583-84 (E.D.
Pa. 2004).
In Hospicomm, the plaintiff asserted a negligence claim against its
bank as a result of the alleged unauthorized issuance and use of an ATM
card. Id. at 580. Plaintiff averred an implied contract was formed from the
financial institution/customer relationship. Id. at 583. Based on this
implied contract, as well as the legal principle that any duty of the financial
institution arises from a contract, the court held that the negligence claim
was barred by the “gist of the action doctrine.” Id. at 584. The federal
district court stated:
The duties Plaintiff accuses Defendant of violating arise in contract, rather than in tort. The Complaint alleges that “[u]pon
establishing the Fleet Fiduciary Accounts, an implied contract was entered into between Hospicomm and Fleet Bank.” Thus,
the plain-language of the Complaint suggests that the action
sounds in contract law. Pennsylvania common law also supports the proposition that the duties a bank owes to its customers are
created through contract rather than tort. In Cortez v. Keystone Bank, Inc., NO. Civ. A. 98–2457, 2000 WL 536666, *1 (E.D.Pa.
May 2, 2000), the plaintiff brought suit against a bank with which it had an open line of credit for breach of contract,
negligence, gross negligence and fraud. The court dismissed the tort claims because it found that the “allegations of wrongful
assessment of interest charges sound in contract and not tort. [The Bank’s] duties to plaintiffs arose solely from the parties’
agreement.” Id. at *8.
19
Other Pennsylvania courts have also found that the duty a bank
has to its customers is a contractual duty rather than a social duty. In McGuire v. Shubert, the court considered whether “a
cause of action for a breach of a duty of confidentiality to a bank customer exists in the Commonwealth.” 722 A.2d 1087, 1090
(Pa.Super.1998). The court first noted that “it is established in Pennsylvania that the legal relationship between a financial
institution and its depositors is based on contract.” Id. at 1091 (citing First Fed. Savings & Loan Assoc. of Hazleton v. Office of
State Treasurer, 543 Pa. 80, 669 A.2d 914, 915 (1995)). The court went on to determine that “the duty on a bank ... to keep
a customer’s bank account information confidential ... is present as an implied contractual duty under Pennsylvania common law.”
Id. at 1091. See also Heritage Surveyors & Eng’r, Inc. v. Nat’l Penn Bank, 801 A.2d 1248, 1252–53 (Pa.Super.2002) (citing
McGuire for the proposition that a bank has an affirmative duty
to keep its customer’s financial information confidential).
Hospicomm, 338 F. Supp. 2d at 583.
Therefore, if the relationship between Sabatine and Blue Mountain is
characterized as that of bank/financial institution and customer, Sabatine
has failed to aver facts indicating the existence of a duty imposed by
Pennsylvania law as a matter of social policy. See Fed. Land Bank of
Baltimore, 410 A.2d at 348; Hospicomm, 338 F. Supp. 2d at 583.
Sabatine cites Beaver’s Estate v. McGrath, 50 Pa. 479 (Pa. 1865), an
1865 Pennsylvania Supreme Court case, for the proposition that there is a
duty imposed upon a savings and loan company to its depositors by
Pennsylvania law as a matter of social policy. For the reasons set forth
below, we maintain that Sabatine’s reliance on McGrath is substantively
misplaced.
20
The defendants in McGrath were twenty-nine members of an
unincorporated savings fund association known as the Loudon Savings Fund
Society. Id. at 479. The plaintiffs were the administrators of the Estate of
John Beaver. Id. Beaver had loaned money to Loudon in exchange for
Loudon’s promise to pay interest to Beaver. Id. at 480-81. Essentially,
Beaver purchased certificates of deposit from Loudon. Id. Before the
certificates of deposit matured, Loudon became insolvent. Id. at 482.
Thereafter, plaintiffs filed an action against the twenty-nine members
of the association, claiming that the members were individually liable to
Beaver’s Estate. Id. The bylaws of Loudon provided as follows:
The funds of this society, as defined by the fourth article of this constitution, shall at no time exceed $50,000, and these funds,
whether consisting of money, rights, credits, goods, chattels, stocks, or estate, or of whatever kind of property the said funds
may be invested in, exclusive of the dividends that may be made in the manner hereafter mentioned, shall alone be responsible
for the debts and engagements of said society. And no person who shall or may deal with this society, or to whom this society
shall or may become in anywise indebted, shall, on any pretence whatever, have recourse against the separate property of any
original or future member of this society, or against their
persons, further than may be necessary to secure or compel the faithful application of the funds thereof, to the purposes to which
by this constitution they are made liable. And it is hereby expressly declared that no engagement can be legally made in
the name or in the behalf of this society, nor any valid check, draft, or order be given or passed thereon unless the same shall
contain a limitation or restriction to the effect above recited.
Id. at 481 (emphasis added). Therefore, the bylaws provided that the
members could not be individually liable for the debts of Loudon. Id.
Moreover, the bylaws required that all certificates of deposit set forth
21
specific language limiting liability to Loudon and not to the individual
members. Id. The certificates of deposit issued to Beaver, however, did not
set forth the specific language limiting liability to Loudon. Id. at 488.
The Pennsylvania Supreme Court held that because the certificates of
deposit issued to Beaver did not set forth the language limiting liability to
Loudon, the individual members could thereby be liable to Beaver’s Estate.
Id. In so holding, the Court stated:
It is clearly, therefore, against the general policy of the state to
encourage or foster attempts on the part of individuals to secure
to themselves a personal irresponsibility, which is appropriated to corporations created by or under special or general laws of
the Commonwealth.
. . .
These large loans were negotiated to enhance the profits of the association, and appear to have been intrusted to the direction
of the treasurer, to whom the association loaned about twenty-five thousand dollars without security, and his failure caused the
insolvency of the society. If there ever was a case in which partners should be made personally responsible this is the one,
and the court should have submitted all the facts to the jury, with proper instructions on the law as understood in this state.
Id. at 484, 488. Therefore, based upon the facts in McGrath, in 1865 the
Pennsylvania Supreme Court held that individual members of the Loudon
Savings Fund Society could be personally liable for the association’s debts
because the certificates of deposit failed to set forth language limiting
liability to Loudon. The McGrath case in no manner holds that there is a
duty imposed upon a savings and loan company to its depositors by
22
Pennsylvania law as a matter of social policy. Consequently, Sabatine’s
reliance on McGrath is substantively misplaced.
b. No duty imposed by Pennsylvania Consumer
Discount Company Act
Sabatine argues that because Blue Mountain is a Consumer Discount
Company, a duty is thereby imposed on Blue Mountain pursuant to the
Pennsylvania Consumer Discount Company Act, 7 P.S. § 6201. Sabatine
relies on the following language from the Act, set forth under the section
entitled “Authority of the Secretary of Banking,” to impose a duty upon Blue
Mountain as a matter of social policy:
The Secretary of Banking shall have the power to reject any
application for license if he is satisfied that the financial responsibility, experience, character and general fitness of the
person or persons shown on the application for license as officers and directors of the applicant corporation are not such as to
command the confidence of the community and to warrant the conclusion that the business will be operated honestly, fairly,
and within the intent and purpose of this act and in accordance with the general laws of this Commonwealth . . . .
7 P.S. § 6212 (1978). Although Sabatine maintains that the above language
imposes a duty as a matter of social policy on Blue Mountain independent of
its contractual duties, Sabatine does not cite to any reported decisions from
Pennsylvania or federal courts which recognize such a duty imposed by law.
In fact, as noted above, courts addressing the issue of whether a
bank/financial institution has a duty to its customers imposed upon it as a
matter of social policy, have held that because the duty of a financial
institution to its customers is a contractual duty, it is not a duty imposed by
23
a social policy. See Hospicomm, 338 F. Supp. 2d at 583-84 (holding that
because the duty of a financial institution to its customers is a contractual
duty it is not a duty imposed by a social policy.); see also First Fed. Sav. and
Loan Ass’n of Hazelton, 669 A.2d at 915 (“It is well established that the legal
relationship between a financial institution and its depositors is based on
contract, and that the contract terms are contained in the signature cards
and deposit agreements.”).
Moreover, the cases discussed above that have addressed whether the
relationship between either that of lender and borrower or that of
bank/financial institution and customer creates a duty imposed as a matter
of social policy, have all held that such a duty is not imposed as a matter of
social policy. Further, these cases have reached this conclusion
notwithstanding the fact that Pennsylvania banks/financial institutions3 are
3 The Banking Act of 1965 provides the following definitions:
f) “Bank”--a corporation which exists under the laws of this Commonwealth and, as a bank under the Banking Code of 1933, was authorized to engage in the business of receiving demand deposits on
the effective date of this act, or which receives authority to engage in such business as a bank pursuant to this act, but which is not
authorized to act as fiduciary. (g) “Bank and trust company”--a corporation which exists under
the laws of this Commonwealth and, as a bank and trust company under the Banking Code of 1933, was authorized to engage in the
business of receiving demand deposits and to act as fiduciary on the effective date of this act, or which receives authority both to engage in such business and to act as fiduciary as a bank and trust company
pursuant to this act.
7 P.S. § 102(f),(g).
24
governed by the Banking Code of 1965, which sets forth language similar to
the portions of the Consumer Discount Company Act cited by Sabatine. The
Banking Code of 1965 provides:
Declaration of purposes; standards for exercise of power and
discretion by department
(a) Purposes of the act--The General Assembly declares as its purposes in adopting this act to provide for:
(i) the safe and sound conduct of the business of
institutions subject to this act, (ii) the conservation of their assets,
(iii) the maintenance of public confidence in them,
(iv) the protection of the interests of their depositors, creditors and shareholders and of the interest of the public
in the soundness and preservation of the banking system . . . .
7 P.S. § 103. Although the language in the Banking Act is nearly identical
to the provisions of the Consumer Discount Company Act relied upon by
Sabatine, such language has not been the basis for recognizing a duty
imposed upon a financial/banking institution as a matter of social policy.
See Hospicomm, 338 F. Supp. 2d at 583; Fed. Land Bank of Baltimore, 410
A.2d at 348.
3. Gist of the Action - Conclusion
Assuming that Blue Mountain did have a duty to supervise Lambert
and to use adequate record keeping methods, accounting methods, and
other safeguards in the management of Sabatine’s loans, and that these
duties are legally recognized duties, the only possible source for these duties
is the loan, i.e., a contract. Like the sources of duty in Pennsylvania Mfrs.’
25
Ass’n Ins. Co., Reardon, and Freestone, the source of the duty in this case
stems from a contract. Accordingly, Sabatine’s claim that Blue Mountain
was negligent in failing to supervise Lambert, and in failing to use adequate
record keeping methods, accounting methods and other safeguards in the
management of Sabatine’s loans, is barred by the gist of the action doctrine.
See Pennsylvania Mfrs.’ Ass’n Ins. Co., 831 A.2d at 1182; see also
Strausser, 944 A.2d at 768.
Because we determined that Sabatine’s negligence claim is barred by
the gist of the action doctrine, Blue Mountain’s preliminary objections, in the
nature of demurrers, that (1) the economic loss doctrine bars Sabatine’s
claim for negligence, and (2) Sabatine failed to state a claim for negligence,
are moot.
C. Concerted Action
Sabatine brings a claim under the Restatement (Second) of Torts
§ 876, Persons Acting in Concert. “In determining liability [under § 876],
the factors are the same as those used in determining the existence of legal
causation where there has been negligence.” Cummins v. Firestone Tire &
Rubber Co., 495 A.2d 963, 969 (Pa. Super. 1985) (citation omitted).
Section 876 of the Restatement (Second) of Torts states:
For harm resulting to a third person from the tortious conduct of
another, one is subject to liability if he
(a) does a tortious act in concert with the other or pursuant to a common design with him, or
26
(b) knows that the other's conduct constitutes a breach of duty
and gives substantial assistance or encouragement to the other so to conduct himself, or
(c) gives substantial assistance to the other in accomplishing a
tortious result and his own conduct, separately considered, constitutes a breach of duty to the third person.
Restatement (Second) of Torts § 876.
Through its Third Amended Complaint, Sabatine avers “[a]ll of the
Defendants engaged in tortuous [sic] acts and acts of negligence as set forth
throughout this complaint in concert with the other or pursuant to common
designs as set forth heretofore, all originating with calculated acts of
fraudulent inducement and fraud in the inception.” Third Amended
Complaint at ¶ 64. Furthermore, “[e]ach of the Defendants knew that the
others’ conduct constituted a breach of duties owed to the Plaintiff herein
and gave substantial assistance or encouragement to the other defendants
so to conduct themselves.” Id. at ¶ 64.
Sabatine’s concerted action claim appears to be based on both
negligence and fraudulent inducement acts by Blue Mountain and the other
defendants. Because we determined that Sabatine’s negligence claims are
barred by the gist of the action doctrine, Sabatine’s negligence-based claim
for concerted action is also necessarily barred by the gist of the action
doctrine. See Pennsylvania Mfrs.’ Ass’n Ins. Co., 831 A.2d at 1182.
However, unlike its previous complaints in this matter, Sabatine seemingly
27
now asserts fraudulent inducement by all of the defendants, including Blue
Mountain, as a basis for its concerted action claim.
Fraud describes “anything calculated to deceive, whether by single act
or combination, or by suppression of truth, or suggestion of what is false,
whether it be by direct falsehood or by innuendo, by speech or silence, word
of mouth, or look or gesture.” Debbs v. Chrysler Corp., 810 A.2d 137, 155
(Pa. Super. 2002) (citing Moser v. DeSetta, 589 A.2d 679, 682 (Pa. 1991)).
To sufficiently plead a claim for fraud, a plaintiff must aver facts
demonstrating the six elements of common law fraud:
(1) a representation; (2) which is material to the transaction at hand; (3) made falsely, with knowledge of its falsity or
recklessness as to whether it is true or false; (4) with the intent of misleading another into relying on it; (5) justifiable reliance
on the misrepresentation; and (6) the resulting injury was proximately caused by the reliance.
Debbs, 810 A.2d at 155 (citing Gibbs v. Ernst, 647 A.2d 882, 889 (Pa. 1994)
(footnote omitted)). Moreover, Pa.R.C.P. 1019(b) states “[a]verments of
fraud or mistake shall be averred with particularity.” Pa.R.C.P. 1019(b).
With respect to whether the gist of the action doctrine applies to
claims of fraud, the
cases seem to turn on the question of whether the fraud concerned the performance of contractual duties. If so, then the
alleged fraud is generally held to be merely collateral to a contract claim for breach of those duties. If not, then the gist of
the action would be the fraud, rather than any contractual relationship between the parties.
28
eToll, Inc., 811 A.2d at 19. In applying this standard, the Superior Court
has concluded that claims of fraud in the performance of contractual duties
are barred by the gist of the action doctrine, since the alleged fraud is
considered “to be merely collateral to a contract claim for breach of those
duties.” eToll, Inc., 811 A.2d at 19. See also Hart, 884 A.2d at 340
(“[C]laims of fraud in the performance of a contract are generally barred
under the gist of the action doctrine.”). However, a claim for fraud in the
inducement to enter into a contract, as opposed to fraud in the performance
of a contractual duty, is not necessarily foreclosed by the gist of the action
doctrine. Sullivan v. Chartwell Inv. Partners, LP, 873 A.2d 710, 719 (Pa.
Super. 2005) (“[W]e conclude that since [plaintiff’s] tort claims relate to the
inducement to contract, they are collateral to the performance of the
contracts and therefore are not barred by the gist of the action doctrine.”);
Air Prods. & Chemicals, Inc. v. Eaton Metal Prods. Co., 256 F. Supp. 2d 329,
341 (E.D. Pa. 2003) (discussing eToll and holding that “fraud in the
inducement claims are much more likely to present cases in which a social
policy against the fraud, external to the contractual obligations of the
parties, exists.”).
Although Sabatine asserts fraudulent inducement as a basis for
concerted action against Blue Mountain, the Third Amended Complaint does
not separately set forth a claim for fraudulent inducement against Blue
Mountain. Because it may be possible for Sabatine to properly plead a cause
29
of action for fraudulent inducement that is not barred by the gist of the
action doctrine and the economic loss doctrine4 and that such a fraudulent
inducement claim can form the basis of a concerted action claim, we will
grant Sabatine leave to file a fourth amended complaint.5
WHEREFORE, we enter the following:
4 By way of example, if Sabatine asserts a fraud claim in a fourth amended
complaint, Sabatine may be able to aver facts establishing that the alleged fraud was not so intertwined with the contract such that the fraud claim is extraneous to
Sabatine’s breach of contract claim, and, as such, not barred by the Economic Loss Doctrine. See Werwinski v. Ford Motor Co., 286 F.3d 661, 678 (3d Cir. 2002).
5 Sabatine cites Howe v. LC Philly, LLC, 2011 WL 1465446 (E.D. Pa. Apr. 15, 2011)
for the proposition that the Economic Loss Doctrine does not bar claims for fraudulent or negligent misrepresentation. As noted above, we determined that Sabatine’s negligence and concerted action claims are barred by the gist of the
action doctrine. Therefore, we have deemed Blue Mountain’s preliminary objections based upon the Economic Loss Doctrine to be moot. Consequently, Howe is
irrelevant to our present analysis.
IN THE COURT OF COMMON PLEAS OF NORTHAMPTON COUNTY
COMMONWEALTH OF PENNSYLVANIA CIVIL DIVISION - LAW
NICHOLAS R. SABATINE, III, P.C. PROFIT SHARING PLAN,
Plaintiff,
v.
BLUE MOUNTAIN CONSUMER DISCOUNT COMPANY, First Defendant,
CAROL L. KING, Second Defendant,
JANE CINELLI, Third Defendant, WALTER P. LAMBERT, JR., Fourth
Defendant, FRANCIS J. CINELLI, Fifth Defendant, CINELLI FAMILY LIMITED
PARTNERSHIP, Sixth Defendant, and ELEANOR CINELLI, Seventh
Defendant,
Defendants.
No.: C-48-CV-2011-5066
ORDER OF COURT
AND NOW, this 12th day of June, 2012, upon consideration of Blue
Mountain Consumer Discount Company’s (“Blue Mountain”) Preliminary
Objections to the Third Amended Complaint filed by Nicholas R. Sabatine,
III, P.C. Profit Sharing Plan (“Sabatine”), and upon consideration of the
parties’ briefs thereon, it is hereby ORDERED and DECREED that:
1. Blue Mountain’s preliminary objection, in the nature of a
demurrer, seeking to dismiss Sabatine’s claim for negligence on
2
the ground that it is barred by the gist of the action doctrine, is
SUSTAINED WITH PREJUDICE.
2. Blue Mountain’s preliminary objection, in the nature of a
demurrer, seeking to dismiss Sabatine’s claim for concerted
action on the ground that it is barred by the gist of the action
doctrine, is SUSTAINED.
3. Blue Mountain’s preliminary objection, in the nature of a
demurrer, seeking to dismiss Sabatine’s claim for negligence on
the ground that it is barred by the economic loss doctrine, is
denied as MOOT. 6
4. Blue Mountain’s preliminary objection, in the nature of a
demurrer, seeking to dismiss Sabatine’s claim for concerted
action on the ground that it is barred by the economic loss
doctrine, is denied as MOOT.
5. Blue Mountain’s preliminary objection, in the nature of a motion
to strike all references to a Consent Agreement and Order as
impertinent, is DENIED.
6 Because we determined that Sabatine’s negligence and concerted action claims are barred by the gist of the action doctrine, Blue Mountain’s preliminary
objections, in the nature of demurrers, that Sabatine’s negligence and concerted action claims are barred by the Economic Loss Doctrine, are moot.
3
6. Blue Mountain’s preliminary objection, in the nature of a
demurrer, on the basis that Sabatine failed to state a claim for
negligence, is denied as MOOT.
Sabatine shall file an amended complaint within twenty (20) days of
the filing date of this Order.7
BY THE COURT:
_____________________
MICHAEL J. KOURY, JR., J.
7 Generally, this Court liberally grants parties leave to amend deficient complaints. Absent an error of law or demonstrated prejudice to an adverse party, such a
decision is proper. See Ibn-Sadiika v. Riester, 551 A.2d 1112, 1116-17 (Pa. Super. 1988). Although we will grant Sabatine leave to file a fourth amended complaint,
we note that the right of amendment is not absolute and “the decision to grant or deny leave to amend is within the sound discretion of the trial court.” Id. at 1117 (citations omitted). Moreover, “where allowance of an amendment would . . . be a
futile exercise, the complaint may properly be dismissed without allowance for amendment.” Carlino v. Whitpain Investors, 453 A.2d 1385, 1388 (Pa. 1982)
(emphasis added, citations and internal quotations omitted).