Pennsylvania Federal Court Finds that Principal Has No Right to Assert Breach of FiduciaryDuty and Bad Faith Claims Against Surety

Pennsylvania Federal Court Finds that Principal Has No Right to Assert Breach of FiduciaryDuty and Bad Faith Claims Against Surety

The United States District Court for the Western District of Pennsylvania recently issued an opinion in a diversity action dismissing with prejudice a principal’s claims for tortious interference with a contractual relationship, breach of fiduciary duty and bad faith against its surety.

In Reginella Construction Company, Ltd. v. Travelers Casualty and Surety Company of America, Civ. A. No. 12-1047, 2013 WL 2404140 (W.D. Pa. May 31, 2013), Reginella Construction Company, Ltd (“Reginella”) sued its surety, Travelers Casualty and Surety Company of America (“Travelers”) for breach of fiduciary duty, tortious interference with a contractual relationship and bad faith. The court, however, granted Travelers Motion to Dismiss all claims against Travelers with prejudice.

Regarding Reginella’s breach of fiduciary duty claim, the court looked to Pennsylvania case law regarding sureties, insurers, and commercial guarantees, and concluded that (1) surety bond agreements are standard commercial contracts; (2) imposing a fiduciary duty relationship between parties to a contract is the exception rather than the rule; and (3) a surety is not an insurer.  Based upon these conclusions, the court predicted that the Pennsylvania Supreme Court would not find a fiduciary relationship between a surety and its principal.  Therefore, the court concluded that Travelers owed no fiduciary duty to Reginella.

The court then turned to Reginella’s tort claims (i.e. its bad faith and tortious interference with a contractual relationship claims) and held that Pennsylvania’s gist of the action doctrine barred Reginella’s ability to assert either claim. Specifically, Pennsylvania’s gist of the action doctrine bars tort claims (1) that arise solely from a contract between the parties; (2) where the duties allegedly breached were created and grounded in the contract itself; (3) where the liability stems from a contract; or (4) where the tort claim essentially duplicates a breach of contract claim or the success of which is wholly dependent on the terms of a contract. The court found that the relationship between Reginella and Travelers was purely contractual in nature, and therefore, the gist of the action contract barred Reginella’s tort claims.

Although the Pennsylvania Supreme Court has not yet ruled upon the issue, Reginella suggests and supports the notion that a principal’s only cause of action against its surety under Pennsylvania law is one for breach of contract. Therefore, pursuant to Reginella, the terms of the contract between a principal and its surety will strictly govern the relationship and obligations between the parties.