E5 Solutions v. Grotenhuis, K. ( 2017 )

J-S13031-17
NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37
E5 SOLUTIONS GROUP, LLC IN THE SUPERIOR COURT OF
PENNSYLVANIA
v.
KURT GROTENHUIS,
Appellant No. 2754 EDA 2016
Appeal from the Judgment Entered August 12, 2016
in the Court of Common Pleas of Montgomery County Civil Division
at No(s): 2010-31397
BEFORE: BENDER, P.J.E., LAZARUS, and FITZGERALD,* JJ.
MEMORANDUM BY FITZGERALD, J.: FILED DECEMBER 15, 2017
Appellant, Kurt Grotenhuis (“Appellant”), appeals from the judgment of
the Montgomery County Court of Common Pleas (“trial court”) ruling in favor
of Appellee, e5 Solutions Group, LLC (“the Company”), on Count III of its
amended complaint and granting attorney fees and costs to the Company in
the amount of $466,294.00. We vacate this judgment, reverse the award of
attorney fees and remand for further proceedings in accordance with this
memorandum.
This matter has a tangled procedural history due to overlapping
proceedings before the trial court and the arbitrator. We begin with an
overview of the parties and their agreement.
* Former Justice specially assigned to the Superior Court.
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The Company is a Pennsylvania limited liability company that performs
consulting and design services for SAP Treasury Software. R.R. 42a.1
Appellant is a former member and owner of an eight percent interest in the
Company. Id. at 48a.
On January 15, 2010, Appellant signed an operating agreement
(“Agreement”) defining the terms of his membership with the Company. The
terms relevant to this appeal are as follows. First, in Article XV, section 15.2,
Appellant agreed not to disclose confidential information concerning the
Company’s business to any third party during or after his membership in the
Company (“the non-disclosure clause”). Id. at 93a. Second, in Article XV,
section 15.5, Appellant agreed that during the period in which he held an
interest in the Company, and for two years thereafter, he would not attempt
to interfere with the Company’s business relationships (“the non-solicitation
clause”). Id.
Third, Article XV, section 15.7, entitled “Injunctive Relief,” provides:
Recognizing the irreparable nature of the injury that could
be caused by the Member’s violation of the covenants
contained in this Article XV, and that monetary damages
would be inadequate compensation to the Company, it is
agreed that any violation of this Article XV by a Member
constitutes a proper subject for immediate injunctive relief,
specific performance and other equitable relief to the
Company without the need to post a bond. The prevailing
party shall be awarded reasonable attorneys’ fees and
litigation costs. The Members consent to the jurisdiction of
1 For the parties’ convenience, we cite to the reproduced record whenever
possible.
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the Court of Common Pleas in the Commonwealth of
Pennsylvania.
Id. at 94a.
Fourth, Article XV, section 15.8, entitled “Purchase of Interest,”
provides:
If any Member whose Interest has been purchased and
payment therefore has not been paid in full violates the
nondisclosure or non-piracy/noncompetition provisions of
this Article XV, the Company or purchasing Members, as the
case may be, shall have the right to suspend payment. If
the violation continues for thirty (30) days beyond
notification to the Member of such violation, the Company
or other Members shall have the right to acquire (or reduce
the Purchase Price to have otherwise been paid) the
Member’s entire Interest for such Member's Capital Account
balance. To the extent the breaching person is a former
Member who has sold his Interest to the Company or
Member, if such former Member has received any payments
in excess of the above amount, the Member shall
immediately repay such excess to the Company or the
purchasing Members upon written demand and full title to
the Interest shall be vested in the purchasing Company or
Members without any further payment.
Id.
Fifth, Article XVIII, section 18.1 provides in relevant part:
Except with disputes involving injunctive or other equitable
relief, resolution of any and all disputes arising from or in
connection with this Agreement, whether based on contract,
tort, or otherwise, shall be exclusively governed by and
settled in accordance with [arbitration in accordance with
American Arbitration Association (“AAA”) rules] . . .
Id. at 96a.
Finally, Article XVIII, section 18.2(ii) provides in relevant part:
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The prevailing party [in AAA arbitration] shall be awarded
reasonable attorneys’ fees and costs. The arbitration award
shall be final and binding upon the parties. Judgment on
the arbitration award may be entered in any court having
jurisdiction thereof. The prevailing party shall be awarded
all costs and expenses of litigation, including reasonable
attorneys’ fees and expenses . . .
Id. at 97a.
In June 2010, Appellant left the Company and sold his interest to other
members of the Company in a purchase agreement, which called for monthly
payments to Appellant for a five-year period. On October 26, 2010, the
Company filed a complaint against Appellant in the trial court at No. 2010-
31397 (“Case I”), claiming that Appellant violated the non-disclosure and non-
interference clauses of the Agreement, before and after he left the Company,
by misappropriating confidential information that belonged to the Company
and interfering with the Company’s relationships with existing clients. On
November 22, 2010, the Company filed a three-count amended complaint
against Appellant. Id. at 39a-62a. Counts I and II requested injunctions
against further violations of the non-interference clause and non-disclosure
clause, respectively. Id. at 55a-59a. Count III requested a declaratory
judgment action that Appellant’s violation of the non-disclosure and non-
interference clauses entitled the Company to withhold further payments to
Appellant under the June 2010 purchase agreement. Id. at 59a-62a.
Appellant filed preliminary objections to the amended complaint,
asserting, inter alia, that the trial court lacked jurisdiction over Count III
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because it was an equitable claim for relief and should proceed to arbitration.
The trial court overruled Appellant’s preliminary objections.
In 2012, Appellant commenced an action in the trial court at No. 2012-
13005 (“Case II”) alleging various claims against the Company for monetary
damages. Id. at 670a. Subsequently, the Company filed a motion to compel
Appellant to arbitrate Case II in accordance with Article XVIII, section 18.1 of
the Agreement. Id.
On October 3, 2012, Appellant filed a motion for summary judgment in
Case I, arguing that Counts I and II of the amended complaint were moot due
to expiration of the two-year restrictive covenant in the non-interference
clause. Id. at 208a-388a. Appellant also argued that the Company’s action
for declaratory judgment in Count III failed for lack of sufficient evidence. Id.
On November 2, 2012, the trial court ordered Appellant to prosecute his
claims in Case II in AAA arbitration. Id. at 670a. In 2013, Appellant filed an
AAA action against the Company in Case II seeking monetary damages for (1)
breach of contract for failure to pay monies due and owing under the
Agreement (the “Non-Payment Of Purchase Price Claim”); (2) breach of
contract for failure to pay sums due in addition to the Agreement; and (3) and
two claims of breach of fiduciary duty.2 Id. at 1015a-1024a.
2 Appellant filed other claims against the Company but withdrew them prior to
the arbitration hearing.
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The Company filed counterclaims in the Case II arbitration seeking
declaratory and monetary relief for violation of the non-disclosure and non-
competition clauses of the Agreement. Id. at 674a. In particular, as it did in
Case I, the Company sought a declaration that it was entitled to suspend all
payments due to Appellant under the Agreement due to his breach of the non-
solicitation and non-interference clauses. Id.
On April 7, 2014, the arbitrator ruled that he would decide the
Company’s counterclaims if it obtained a stay of proceedings in Case I. On
April 14, 2014, the Company filed a petition for stay in the trial court in Case
I, asserting that its counterclaims in Case II were within the arbitrator’s
jurisdiction. The Company stated in relevant part:
3. In an arbitration commenced by [Appellant] now pending
before the [AAA], the Arbitrator has determined that [the
Company] may proceed with counterclaims which are
essentially identical (except for damages relief) to [the
Company’s] remaining claims in this case and directed [the
Company] to pursue this stay.
* * *
6. In this case, [Appellant has] admitted that the remaining
claims by [the Company] are within the scope of a valid
arbitration agreement between the parties. Therefore, this
case must be stayed pending arbitration.
* * *
17. As Respondents, [the Company] and its individual
members asserted counterclaims, including a counterclaim
for breach of Sections 15.3 and 15.5 of the . . . Agreement,
invoking the remedy provided in Section 15.8 and seeking
money damages (the “Article XV Counterclaim”). The only
difference between the Article XV Counterclaim in the AAA
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Arbitration and Count III of the Amended Complaint in this
action is that [the Company] and its members in the AAA
Case Article XV Counterclaim seek an award of money
damages which they cannot get in this Court because the
exceptions to ADR in the Operating Agreement only allow
pursuit in court of equitable relief.
Company’s Pet. For Stay, 4/14/14, at ¶¶ 3, 6, 17.
On July 14, 2014, the Company filed a supplemental response to
Appellant’s pending motion for summary judgment in Case I. Therein, the
Company admitted:
Given that the request for an injunction in Count I is now
moot, [the Company’s] remaining claim for a declaratory
judgment [in] Count III of the amended complaint . . . is
subsumed in [the Company’s] counterclaim for damages in
the [a]rbitration in the form of the remedy provided for in
section 15.8 of the [Agreement].
R.R. 674a. In a footnote, the Company explained that its claims for injunctive
relief in Counts I and II of the amended complaint were moot:
Discovery after [the Company’s] initial response to the
summary judgment motion has not revealed any further
non-disclosure violations by [Appellant] beyond those
identified in [the Company’s] initial memorandum[,] and
herein, the violations do not involve any continuing use of
confidential information[,] and [Appellant] claim[s] that
[he] took no other confidential information . . . Thus, there
is no present need for injunctive relief under Count II of the
amended complaint[,] and the fact of the violation of the
non-disclosure provision can be resolved by arbitration.
Id.
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In an order dated July 22, 2014, the trial court dismissed Counts I and
II in Case I as moot “by agreement of the parties.”3 Id. at 1003a. The trial
court denied summary judgment to Appellant in the declaratory judgment
action in Count III. Id.
On August 1, 2014, the trial court granted the Company’s motion for
stay of proceedings in Case I. Id. at 13a.
On April 24, 2015, following an evidentiary hearing, the arbitrator
entered a partial final award in Case II against Appellant on all of his claims.4
Id. at 1013a-1030a. The arbitrator found in favor of the Company on its
counterclaim for declaratory judgment seeking a declaration of its right to
3 The Company did not appeal the dismissal of Counts I and II.
4 In Section III of his opinion, the arbitrator rejected Appellant’s Non-Payment
Of Purchase Price Claim on the ground that Appellant forfeited this payment
by violating the non-interference clause. Id. at 1015a-1020a. In Section IV,
the arbitrator denied Appellant’s claims for monies due in addition to the
purchase agreement on the ground that the Agreement did not contemplate
payments in addition to the purchase price. Id. at 1020a-1023a. In Section
V, the arbitrator concluded that the Company did not breach its fiduciary duty
to Appellant by declining to give him a subcontract to complete a project for
one of the Company’s clients, because (1) the Company was not under any
obligation to offer Appellant a subcontract; (2) any breach of such obligation
would be a breach of contract, not a breach of fiduciary duty; and (3) a
subcontract would not have been in the Company’s best interests due to the
parties’ strained relationship. Moreover, the arbitrator determined that the
Company did not breach its fiduciary duty in connection with preparation of a
notice of sale of Section 751 property accompanying Appellant’s 2010 Form
K-1, because (1) the Company’s accountants prepared this notice instead of
the Company itself, and (2) Appellant was not bound by this notice and was
free to take a different position with the IRS. Id. at 1023a-1024a.
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suspend the remainder of the purchase price. Id. at 1024a. The arbitrator
granted this counterclaim “for reasons discussed in Section III,”5 the section
that rejected Appellant’s Non-Payment Of Purchase Price Claim.6 The
arbitrator determined that the Company was the prevailing party in the
arbitration because it prevailed on all of Appellant’s claims and one of its
counterclaims. Id. at 1027a. Accordingly, the arbitrator directed Appellant
to pay all of the Company’s reasonable attorney fees and costs incurred in the
arbitration. Id.
On June 22, 2015, the arbitrator entered a final award in Case II
granting the Company $344,120.86 in attorney fees and costs. Id. at 1033a-
1034a. On July 23, 2015, the Company filed a petition in the trial court to
enter judgment on the arbitration award in Case II. On October 6, 2015, the
trial court granted this petition, stating: “[The Company’s] counterclaim for a
declaration entitling them to suspend all further payments under the . . .
Agreement is granted.” Id. at 1166a. The trial court entered judgment in
favor of the Company and against Appellant in the amount of $344,120.86 “in
accordance with the final award of [the] arbitrator allowing [the Company] to
recover attorneys’ fees and costs.” Id. at 1167a. Appellant did not appeal
the judgment in Case II.
5 See supra note 4.
6 The arbitrator denied the Company’s two other counterclaims.
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On September 9, 2015, the Company filed a petition in Case I to enter
judgment on the arbitration award in favor of the Company and against
Appellant on Count III of the amended complaint. Id. at 1152a-1159a. The
trial court granted the Company’s petition and scheduled a hearing to
determine reasonable attorney fees and costs. The Company filed a
verification seeking attorney fees and costs in the amount of $466,294.00 in
attorney fees and costs. Id. at 1307a-1322a.
On June 30, 2016, following a hearing, the trial court awarded the
Company $66,111.13 in Case I for fees and costs that the Company spent in
the trial court litigating its claims for equitable relief in Counts I and II of its
amended complaint. Id. at 1442a. On July 15, 2016, the Company filed a
motion for reconsideration, arguing that the Agreement required Appellant to
pay fees for “any claims brought, whether in arbitration . . . or in [the trial]
court.” Id. at 1450a.
On July 26, 2016, the trial court granted the Company’s motion for
reconsideration in Case I and awarded the Company $466,294.00 in fees and
costs. Id. at 1601a-1602a. On August 12, 2016, the Company entered
judgment in this amount. Id. at 1603a-1605a. Appellant filed a timely notice
of appeal, and both Appellant and the trial court complied with Pa.R.A.P. 1925.
Appellant raises three issues in this appeal:
1. Whether the [trial] court erred in failing to sustain
Appellant’s preliminary objection to count III of [the
Company’s] amended complaint seeking a declaratory
judgment[in Case I,] where the agreement at issue provides
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that only claims seeking equitable relief may be pursued in
the court of common pleas?
2. Whether the [trial] court erred in denying summary
judgment on count III of [the Company’s] amended
complaint seeking declaratory judgment[in Case I,] as the
relief sought was not an action in equity[,] thus depriving
the court of jurisdiction pursuant to the agreement at
issue[,] and where the arbitrator had directed [the
Company] to withdraw the claim in the court of common
pleas?
3. Whether the [trial] court erred in granting reconsideration
of its June 30, 2016[] order[in Case I,] as no new evidence
or legal theory was advanced and the court was not bound
by the prior rulings of a judge sitting in a coordinate
jurisdiction as the prior ruling was in error.
Appellant’s Brief at 1.
This appeal boils down to one question: having obtained a judgment in
Case II for $344,120.86 in attorney fees and costs, can the Company recover
additional attorney fees based on the judgment in its favor on Count III in
Case I? Appellant suggests that the Company is not entitled to any more fees
and costs in Case I because it won all of its fees and costs in Case II. See
Appellant’s Brief at 17. We conclude that it might be possible for the Company
to obtain additional fees in Case I, but perhaps considerably less than the trial
court awarded.
“Under the American Rule, applicable in Pennsylvania, a litigant cannot
recover counsel fees from an adverse party unless there is express statutory
authorization, a clear agreement of the parties, or some other established
exception.” Trizechahn Gateway, LLC v. Titus, 976 A.2d 474, 482-83 (Pa.
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2009) (citation omitted). We review orders granting attorney fees and costs
for abuse of discretion. See Boehm v. Riversource Life Ins. Co., 117 A.3d
308, 335 (Pa. Super. 2015).
Here, section 15.7 of the Agreement provides that the “prevailing party”
in any action for injunctive relief in the trial court shall receive attorney fees,
and section 18.2(ii) provides the same relief to the “prevailing party” in an
arbitration of contract or tort claims. In short, the Agreement provided that
the parties would litigate all injunction and equity disputes in the trial court
and all other disputes in AAA arbitration, but no matter where the parties
chose to litigate, the prevailing party had the right to obtain attorney fees and
expenses from the losing party. Thus, there is a “clear agreement of the
parties” relating to recovery of attorney fees. Trizechahn Gateway, 976
A.2d at 482-83.
At first, the trial court awarded $66,111.13 in fees and costs to the
Company in Case I. The trial court later explained that this award represented
the fees that the Company spent on Counts I and II of its three-count
amended complaint in Case I. Trial Ct. Op., 10/27/16, at 3. Subsequently,
the trial court granted the Company’s motion for reconsideration and awarded
$466,294.00 in fees and costs, seven times more than its original award. The
court explained that the jump from $66,111.13 to $466,294.00 represented
the fees spent in prosecuting Count III, the action for declaratory judgment
in Case I.
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We have several concerns with the trial court’s reasoning that
necessitate a remand for further proceedings. To begin with, the Company is
not the prevailing party on Counts I and II, and cannot recover fees and costs
on these counts, because the trial court dismissed them as moot. See Profit
Wize Marketing v. Wiest, 812 A.2d 1270, 1275 (Pa. Super. 2002) (plain
and unambiguous meaning of “prevail” requires plaintiff to “triumph” or
“win[;]” thus, plaintiff did not prevail where trial court never reached merits
of case or vindicated plaintiff’s position).
The Company did prevail in its declaratory judgment in Count III
because the trial court entered judgment in its favor on this count. Even so,
it is important to remember that (1) the Company admitted that Count III was
“subsumed” in its declaratory judgment claim in Case II, and (2) the Company
has already prevailed in Case II and has been awarded attorney fees and costs
in that case. Consequently, the Company cannot obtain fees and costs
relating to Count III that duplicate fees and costs that it won in Case II. We
leave it to the trial court to determine in the first instance whether any fees
or costs related to Count III are different from fees and costs that the
Company won in Case II.
Judgment vacated. Case remanded with instructions. Jurisdiction
relinquished.
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Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 12/15/17
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