Opinion ID: 3021453
Heading Depth: 3
Heading Rank: 1

Heading: Was summary judgment correctly granted on

Text: the malpractice claim? To survive summary judgment on this claim, Seitz must present sufficient evidence to allow a reasonable jury to find in his favor. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986); Fed. R. Civ. P. 56(e). Pennsylvania recognizes professional malpractice claims on a theory of negligence. See Guy v. Liederbach, 459 A.2d 744, 750 (Pa. 1983). Thus, Seitz must establish that (1) Detweiler owed a duty to CitX, (2) Detweiler breached that duty,7 (3) CitX was actually harmed, and (4) Detweiler’s breach caused that harm. See Martin v. 7 Although Seitz argues that the District Court incorrectly found facts by ignoring his evidence that Detweiler breached its duty, we need not discuss that element or the duty element in light of our conclusions on the harm and causation elements. 10 Evans, 711 A.2d 458, 461 (Pa. 1998).
Seitz must establish harm to CitX—“actual loss or damage”—to support a negligence action. Id. He alleges harm to it in the form of “deepening insolvency”—that Detweiler “dramatically deepened the insolvency of CitX, and wrongfully expanded the debt of CitX and waste of its illegally raised capital, by permitting CitX to incur additional debt by virtue of the compilation statements prepared and relied upon by third parties.” Compl. ¶ 32. This requires us to decide whether deepening insolvency is a viable theory of damages for negligence (as opposed to whether it is a viable cause of action—a topic dealt with in section B below). Our only opinion to address “deepening insolvency,” Official Committee of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340 (3d Cir. 2001), defined it, in predicting Pennsylvania law, as “an injury to [a debtor’s] corporate property from the fraudulent expansion of corporate debt and prolongation of corporate life.” Id. at 347. In that opinion, we concluded that deepening insolvency was a valid Pennsylvania cause of action. Id. at 344. Although we did describe deepening insolvency as a “type of injury,” id. at 347, and a “theory of injury,” id. at 349, we never held that it was a valid theory of damages for an independent cause of action. Those statements in Lafferty were in the context of a deepening- 11 insolvency cause of action. They should not be interpreted to create a novel theory of damages for an independent cause of action like malpractice.8 Also, we note that Seitz did not provide sufficient evidence to allow a reasonable jury to find harm. Assuming for the sake of argument that Detweiler’s financial statements allowed CitX to raise over one million dollars, that did nothing to “deepen” CitX’s insolvency. Rather, it lessened CitX’s insolvency. Cf. Sabin Willett, The Shallows of Deepening Insolvency, 60 Bus. Law. 549, 552–57 (2005) (discussing loans). Before the equity infusion, CitX was $2,000,000 in the red (using round numbers for ease of discussion). With the added $1,000,000 investment, it was thereby insolvent only $1,000,000. This hardly deepened insolvency. Any increase in insolvency (i.e., the several million dollars of debt incurred after the $1,000,000 investment) was wrought by CitX’s management, not by Detweiler. The crux, then, is the claim that the $1,000,000 equity investment allowed CitX to exist long enough for its management to incur millions more in debt. But that looks at the issue backward. As noted, the equity investment was hardly harmful to CitX. Its management surely misused the 8 By this we do not mean to imply that deepening insolvency would be a valid theory of damages for any other cause of action, such as fraud, and Lafferty did not so hold. 12 opportunity created by that investment; that was unfortunate. But they could have instead used that opportunity to turn the company around and transform it into a profitable business. They did not, and therein lies the harm to CitX. Put another way, “[t]he deepening of a firm’s insolvency is not an independent form of corporate damage. Where an independent cause of action gives a firm a remedy for the increase in its liabilities, the decrease in fair asset value, or its lost profits, then the firm may recover, without reference to the incidental impact upon the solvency calculation.” Id. at 575.9
Even if CitX’s insolvency deepened between when it issued financial statements in January 2000 and when it filed for Chapter 11 protection 18 months later, Seitz must establish that Detweiler’s actions caused that condition (which for the sake of argument we assume to be a harm). See Martin, 711 A.2d at 461. Seitz’s complaint alleges that—by failing to investigate CitX’s problems, determine that the financial statements were wrong, and tell CitX’s board of directors about those issues—Detweiler did not give the board the chance to 9 In any event, even Seitz’s counsel acknowleged that deepening insolvency as a measure of damages merely replicates malpractice damages. In a letter to counsel for Detweiler that Seitz’s counsel wrote in January 2005, he concedes that “the damages analyses under the deepening insolvency theory and under the malpractice theory are identical.” 13 “safeguard the remaining assets of CitX.” Compl. ¶ 33. Thus, whatever harm occurred to CitX was “[a]s a result of the damage caused by [Detweiler].” Compl. ¶ 34. Seitz provides as support for these allegations an affidavit given by Richard Marks, CitX’s Chief Operating Officer and a former member of the CitX board. This affidavit suggests, among other things, that Marks was misled by the Detweilercompiled financial statements and that, had he known that the statements were incorrect, he would not have pursued investor capital, would have started CitX’s dissolution, would have taken steps to avoid further losses, and would have prompted investigations to protect CitX’s assets. The District Court found Marks’s affidavit ineffective in creating a genuine issue of material fact, for Marks in a subsequent deposition virtually disavowed the affidavit. Contrary to the suggestion in his affidavit, Marks testified that he continued to solicit investor funds. He pursued investor funds even into 2001, which was well after PRSI’s problems became apparent. He also admitted that he “absolutely knew for a fact that PRSI was shut down before the shareholders meetings. No question in my mind.” Apparently Marks gave his affidavit as part of a deal to get a suit against him dropped. The affidavit was purely hypothetical; Marks described his intent in signing it as “if, back then, you were told this, or, if, back then, you were apprised of 14 that, could you have, would you have. And . . . my affidavit pretty much says, I may have, based on that—those facts. There’s no absolute.” And even Marks’s hypothetical answers were armchair theory, because, as he said, “the may or may not . . . could also be academic because, if the truth be told, Mr. Roemmele really is the one who influenced and determined what or what did not occur in the CitX Corporation, not the board members, not any officers . . . .” In signing his affidavit, Marks relied on but a couple hours’ study of CitX’s corporate minutes from its 2000 shareholder meeting, its financial statements, and two expert opinions pointing out to him the problems in those financial statements. So Marks—disclaiming his own knowledge of any inaccuracies in CitX’s financials—took the expert opinions as fact in his affidavit.10 Most damaging to the credibility of 10 It is characterized by statements like “I now understand that collection of the PRSI receivable was highly doubtful at best and should have been backed out of the financial statements.” Marks explained in his deposition, however, “I said, you know, based on what you’re showing me now, and I’m reading these . . . expert witness opinions on the financial statements, they have a lot more expertise in these matters than I do, I was relying on what they showed me. So it was my understanding at the time that they showed me those ex[p]ert opinions, at that time that we were sitting in that room, and that’s what the ‘I now understand’—‘now’ refers to sitting in that room at that time.” 15 Mark’s affidavit is the following exchange in his deposition: Q: Okay. Now, the affidavit that you signed that we went through, is there anything in there that’s untrue? [Marks]: You know, I’m going to—how do I say this? I don’t want to answer this with a simple yes or no answer, because there are issues here, if you can appreciate, which impact me and I feel uncomfortable making that answer— Q: Okay. [Marks]: —without the advice of legal counsel. This non-affirming affirmance seems to say that Marks’s affidavit was a scheme to provide sufficient “facts” to survive a summary judgment motion. The District Court properly disregarded it under the principles of the “sham affidavit” doctrine. That doctrine generally “refers to the trial courts’ practice of disregarding an offsetting affidavit that is submitted in 16 opposition to a motion for summary judgment when the affidavit contradicts the affiant’s prior deposition testimony.” Baer v. Chase, 392 F.3d 609, 624 (3d Cir. 2004) (internal quotation marks omitted). As this quote suggests, the doctrine typically applies when the deposition precedes the affidavit. See also Martin v. Merrell Dow Pharms., Inc., 851 F.2d 703, 706 (3d Cir. 1988) (noting that the doctrine applies to contradictions of “prior testimony” (emphasis added)); Black’s Law Dictionary 63 (Bryan A. Garner ed., 8th ed. 2004) (“[A sham affidavit is a]n affidavit that contradicts clear testimony previously given by the same witness, usu. used in an attempt to create an issue of fact in response to a motion for summary judgment.” (emphasis added)). That is, the affidavit comes in later to explain away or patch up an earlier deposition in an attempt to create a genuine issue of material fact. In this case, however, the affidavit came first, and only later did the deposition uncover the untruths in the affidavit. We perceive no principle that cabins sham affidavits to a particular sequence. Cf. Shearer v. Homestake Mining Co., 557 F. Supp. 549, 558 n.5 (D.S.D. 1983) (“When a witness has given testimony both by affidavit and by deposition, the two forms should be considered on a motion for summary judgment, but greater reliability is usually attributed to the deposition. Summary judgment may be granted based upon the deposition testimony if the court is satisfied that the issue potentially created by the affidavit is not genuine.” (citations omitted)), aff’d, 727 F.2d 707, 709 & n.3 (8th Cir. 1984). Indeed, cross- 17 examining the affiant in a later deposition seems the better way to find the flaws in a bogus affidavit. See 10B Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 2738, at 334–35 (3d ed. 1998) (“[A] witness’ affidavit will not be automatically excluded because it conflicts with the witness’ earlier or later deposition, despite the greater reliability usually attributed to the deposition. The court may, however, consider whether the conflict creates a credibility issue preventing summary judgment from being entered.” (emphasis added) (footnotes omitted)); see also 10A id. § 2722, at 373, 379 (noting that depositions are “one of the best forms of evidence for supporting or opposing a summary-judgment motion,” and that affidavits, not being subject to cross-examination, “are likely to be scrutinized carefully by the court to evaluate their probative value”). We hold that the District Court properly discounted Marks’s affidavit in light of his deposition testimony. Because, without Marks’s affidavit, there is nothing in the record to support a finding that anyone extended credit to CitX in reliance on the financial statements compiled by Detweiler, Seitz cannot establish that Detweiler caused any harm to CitX.