INSURANCE-RELATED COURT CASES
Digested from case reports published online
COURT DECISIONS
Negligence claim upheld
The law firm of Margolis Edelstein represented GMG Insurance Agency and Howard Wilson, one of GMG’s employees, in a non-compete dispute with Lyons Insurance Agency and USI Insurance Services in the Delaware Court of Chancery. After GMG failed to prevail fully on a motion for summary judgment in that underlying dispute and settlement talks broke down, GMG fired Margolis.
On the eve of trial, with GMG represented by new counsel and Wilson represented by separate counsel, Wilson filed an affidavit recanting his prior testimony and providing new testimony that was drastically inconsistent with his prior testimony and unfavorable to GMG. GMG settled the litigation shortly thereafter.
GMG then sued Margolis in superior court for legal malpractice. GMG asserted that but for Margolis’s negligent representation in the Court of Chancery, GMG would not have been exposed to the consequences of Wilson’s pre-trial eleventh-hour change in testimony.
The superior court granted summary judgment in favor of Margolis on GMG’s professional negligence claim, finding that Wilson’s affidavit was a superseding cause that broke the causal chain linking Margolis’s alleged negligence and GMG’s claimed damages. Margolis appealed.
The court held that the superior court’s decision was in error because disputes of material fact existed as to whether Margolis deviated from the requisite standard of care. The superior court also erred by failing to address GMG’s contention that, but for Margolis’s alleged negligence, GMG would have prevailed on all claims in the Court of Chancery litigation—a circumstance that would have effectively negated Margolis’s superseding cause argument. Accordingly, the court reversed the judgment of the superior court and remanded the case for further proceedings.
In July 2014, Wilson resigned from USI and joined Lyons Insurance Agency with the understanding that he would bring his customer relationships from USI to Lyons. About three-quarters of his clients followed him from USI to Lyons. Wilson, however, was bound by a non-compete agreement with USI, of which Lyons was aware.
USI sued Wilson and Lyons in Pennsylvania state court to enforce Wilson’s non-compete obligations. On August 8, 2014, the court issued an 18-month injunction against Lyons and Wilson, prohibiting them from servicing any clients that moved with Wilson from USI to Lyons. In July 2016, one month before the injunction was to be lifted, some of Wilson’s former clients changed brokers to GMG. On July 18, 2016, Lyons and USI settled, ending the litigation. The court subsequently lifted the injunction and USI’s non-compete rights ended.
After the injunction was lifted, Lyons instructed Wilson to solicit back his former clients. Wilson contacted his largest former client—OTG Management Inc.—to gauge its interest in switching brokers. At the time OTG was serviced by GMG. OTG was not interested in moving its business. At that point, Wilson was struggling to bring in business to Lyons and felt that his career was in balance. After taking a vacation in late July 2016, Wilson resigned from Lyons on August 12, 2016. Upon resigning from Lyons he joined GMG, with which he had been in talks while employed at Lyons. Wilson, however, was bound by a non-compete agreement with Lyons that was still in effect at the time of his hiring at GMG.
On February 7, 2017, Lyons sued Wilson and GMG in the Court of Chancery seeking injunctive relief and money damages. Lyons claimed that Wilson’s employment with GMG breached his non-compete agreement with Lyons and that GMG aided and abetted that breach and tortiously interfered with the agreement between Lyons and Wilson. GMG retained Margolis to represent itself and Wilson in the matter.
On February 28, 2017, the Court of Chancery granted Lyons’s motion to expedite, and the parties pursued discovery in advance of a hearing on Lyons’s motion for a preliminary injunction. During the month of April 2017, Margolis’s attorneys corresponded with each other about being “wholly inexperienced” and “ill-equipped” to handle discovery in the Court of Chancery. On July 12, 2017, the court refused to issue a preliminary injunction, and both sides took additional discovery.
On February 23, 2018, Lyons filed a renewed motion for summary judgment on three counts, and GMG and Wilson moved for summary judgment on all counts. On September 28, 2018, the Court of Chancery granted summary judgment in favor of GMG on all counts except for Lyons’s tortious interference and breach of contract claims. As to that claim, the court held that “the factual record [was] not sufficiently developed as to whether GMG’s actions satisf[ied] the remainder of the tortious interference requirements.”
After the Court of Chancery’s ruling, the parties engaged in mediation from October 2018 through April 2019. In March 2019, Margolis advised GMG to settle the litigation but also expressed its willingness to take additional discovery and proceed to trial. In April 2019, GMG terminated Margolis after mediation was unsuccessful. It hired Smith, Katzenstein & Jenkins LLP as replacement counsel. GMG also informed Wilson that he would need to hire separate counsel to represent him.
In the ensuing months, GMG’s new counsel productively conferred with Lyons and produced additional documents. In June 2019, GMG made additional document productions to cure earlier deficiencies. GMG produced documents—which were not produced in the early stages of litigation in 2017—tending to show that its partners had relied on the advice of counsel in making the decision to hire Wilson despite his non-compete obligations.
Following the production of these documents, Lyons moved for sanctions, arguing that “[b]ut for wrongful withholding of evidence … the tortious interference count would have been resolved at summary judgment,” as the “the newly-disclosed, wrongfully withheld evidence” revealed “pre-planning [of] Mr. Wilson’s hiring in connection with GMG’s obtaining the business of Lyons’[s] clients or prospects.”
Although the Court of Chancery declined to decide on an appropriate sanction until after trial, it acknowledged the significance of the newly produced information, noting that the information should have “clearly” been produced, given its “extraordinar[y] important[ce]” to the underlying theories of the case. The court also recognized that the information could have affected the court’s resolution of the summary judgment motion. On June 29, 2020, the parties informed the Court of Chancery that in light of the court’s ruling on Lyons’s sanctions motion, Lyons would forgo supplemental depositions and proceed to trial on the outstanding issues in the case.
On December 9, 2020, one day before the parties were scheduled to go to trial, Wilson filed an affidavit “disavow[ing] and recant[ing] any prior sworn testimony inconsistent with” his new affidavit. In the affidavit, in direct contravention of his prior testimony, Wilson stated that he, GMG, and OTG had participated in a series of meetings and phone calls in late 2015 and early 2016, during which they agreed that OTG would change brokers to GMG. He also stated that they collectively agreed that GMG would hire Wilson to service OTG and other clients as soon as the USI injunction was lifted. GMG moved to continue the trial, but the Court of Chancery denied the continuance the same day. Shortly thereafter, Lyons and GMG informed the court that they had reached a settlement in principle and that the trial would move forward only as to the causes of action remaining against Wilson.
On July 1, 2021, GMG sued Margolis for legal malpractice in the superior court, claiming that its attorneys “negligent[ly] deviat[ed] from the standard of care expected of lawyers licensed to practice” in Delaware. Margolis answered GMG’s complaint on September 17, 2021, and discovery ensued. On March 22, 2022, Margolis moved for summary judgment on all of GMG’s claims.
The superior court granted Margolis’ motion for summary judgment on April 10, 2023. As to the underlying allegations of negligence, the court held that Margolis did not breach the standard of care owed by a Delaware attorney in developing the factual record or in presenting GMG’s motion for summary judgment on Lyons’s tortious interference claim because GMG prevailed on all the other causes of action at the summary judgment stage. The court also found that the Wilson affidavit was a superseding cause that broke the causal chain leading to the settlement of the chancery litigation. GMG appealed the superior court’s summary judgment decision on June 14, 2023.
On appeal to the Delaware Supreme Court, the court concluded that the superior court erred in two ways. First, the court erred in granting summary judgment in favor of Margolis because there were disputes of material fact as to whether Margolis’s representation of GMG in the chancery litigation breached the standard of care owed by Delaware attorneys. Second, the court erred by failing to address GMG’s contention that, but for Margolis’s alleged negligence, GMG would have prevailed on all claims in the Court of Chancery litigation.
Therefore, the supreme court reversed the superior court’s grant of summary judgment and remanded the case to the superior court for trial.
GMC Insurance Agency v. Margolis Edelstein—Superior Court of the State of Delaware—No. N21C-07-002—April 19, 2024.
