GEICO's defense lawyers face fraud claims for allegedly pushing their insured into bankruptcy to dodge bad faith and malpractice liability.
A New York appellate court ruled January 21 that fraud allegations can proceed against two law firms that defended an insured in a personal injury case, while similar claims against GEICO were rejected.
The Appellate Division, Second Department allowed Marc Pergament, acting as Chapter 7 bankruptcy trustee for Melissa Gace Bryant's estate, to amend his complaint to add claims under Judiciary Law § 487(1) against the firms Picciano & Scahill and Neil H. Greenberg & Associates, along with individual attorneys Gilbert J. Hardy and Neil H. Greenberg. The statute permits treble damages when attorneys engage in deceit or collusion.
The proposed amendment alleges that the defendants engaged in deceit and collusion to intentionally mislead Bryant by convincing her to file for bankruptcy in an effort to wipe out a judgment in an underlying personal injury action to the extent that the judgment exceeded her available insurance coverage.
The trustee's complaint characterizes this as part of a scheme to avoid bad faith and legal malpractice claims against the defendants and to protect their own interests to the detriment of Bryant.
The allegations further claim that the defendants misled Bryant into rejecting a settlement offer made after the judgment was entered. That proposed settlement would have included Bryant assigning her rights to bring bad faith and malpractice claims against the defendants in exchange for the injured plaintiff agreeing to forbear from collecting the excess judgment amount.
The court found that the law firms and attorneys failed to demonstrate they would be surprised or prejudiced by the proposed amendment, and that the claims were not palpably insufficient or patently devoid of merit. The decision allows the fraud allegations to move forward to the next stage of litigation.
The court distinguished between fraud claims and legal malpractice, noting that a violation of Judiciary Law § 487(1) requires proof of intent to deceive, while malpractice claims are based on negligent conduct. The court rejected arguments that the fraud claims were duplicative of existing malpractice allegations.
However, the court denied the trustee's request to add fraud claims against GEICO itself. The ruling noted that the plaintiff did not allege GEICO acted as counsel of record in any legal proceeding involving Bryant. Under New York law, Judiciary Law § 487(1) applies specifically to attorneys, not insurance companies.
The court emphasized that relief under this statute is not lightly given and requires a showing of egregious conduct or a chronic and extreme pattern of behavior. Allegations of deceit or intent to deceive must be stated with particularity.
The law firms had argued that the proposed fraud claims were time-barred by the applicable statute of limitations. The court disagreed, finding that the new fraud cause of action related back to the date of the original timely complaint because it was premised upon the same facts, transactions, and occurrences alleged in the original complaint seeking damages for legal malpractice.
The decision referenced a prior appeal in the same matter that summarized the underlying facts giving rise to the current action. That earlier case involved claims for bad faith refusal to settle and legal malpractice.
For insurance professionals, the case illustrates potential risks when handling claims that may result in excess judgments. The fraud allegations, if proven at trial, would represent a significant breach of duties owed to policyholders. However, the court's decision at this stage addresses only whether the claims are sufficient to proceed, not whether the alleged conduct actually occurred.
