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.

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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

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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

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“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

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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

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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.

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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

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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

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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,

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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

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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).

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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

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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.

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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,

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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.

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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.

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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).