Michael Reis, Sr. v. Barley, Snyder, Senft & Cohen

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
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No. 09-4237
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MICHAEL REIS, SR.; LAWRENCE J. KATZ, on their own behalf;
and as assignees of Weaver Nut Company, Inc.,
Appellants
v.
BARLEY, SNYDER, SENFT & COHEN, LLC
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
(D.C. Civil No. 05-01651)
District Judge: Honorable James Knoll Gardner
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Submitted Under Third Circuit LAR 34.1(a)
January 11, 2011
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Before: SCIRICA, BARRY and VANASKIE, Circuit Judges
(Opinion Filed: February 11, 2011)
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OPINION
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BARRY, Circuit Judge
The District Court granted in part and denied in part defendant‟s motion to
dismiss. After a bench trial of thirty-five days, the Court entered judgment in favor of
defendant on the remaining claims. Plaintiffs appeal the Court‟s decisions. We will affirm
in part and reverse and remand in part.
I. FACTUAL BACKGROUND1
Weaver Nut Company (“Weaver Nut”) distributes candy, nuts, and dried fruit. Ten
years ago, E. Paul Weaver, III (“Weaver”), and Miriam Weaver, his wife (collectively the
“Weavers”), owned Weaver Nut, but the company was in financial straits. For “many
years” under Weaver‟s leadership, Weaver Nut “engaged in practices including below
cost sales to customers, purchasing without regard to existing inventory and anticipated
demand and sale of „out of date‟ product.” (R. at 58.) In the spring of 2001, Michael Reis,
Sr. (“Reis”), learned about Weaver Nut‟s situation and told Lawrence Katz about it. Katz
does business as the Summit Private Capital Group (“Summit”), and Katz proposed to
Weaver that Weaver Nut and Summit enter into a Merchant Banking and Corporate
Development Agreement (“Agreement”). The Agreement was executed by Weaver and
Katz in the summer of 2001. Under its terms, Reis became the CFO of Weaver Nut; Reis,
Katz, and Weaver received compensation; and Summit was entitled to certain payments,
including a commission on the financing deals it arranged. By virtue of an option in the
Agreement, Reis and Katz became shareholders in Weaver Nut, and by the end of 2001,
they collectively owned one half of the company, and the Weavers owned the other half.
1
The differences between the facts alleged in the amended complaint and the facts
that the District Court found after trial are not material to our resolution of this appeal.
We will, therefore, summarize the facts as found by the Court.
2
Reis began working at Weaver Nut in September of 2001 and was on site for
approximately two weeks out of each month. He “was responsible for the day-to-day
operations.” (Id.) Katz, on the other hand, visited “every couple of months, or
approximately six to eight times” during his involvement with the company. (Id. at 57.)
During the period between late 2001 and early 2003, Katz “worked behind the scenes” to
find business partners or acquisitions for Weaver Nut. (Id. at 58.) Reis and Katz helped
Weaver Nut obtain a non-traditional line of credit that was “very time consuming and
cumbersome,” as well as “more expensive for the company than traditional bank
financing.” (Id. at 57.) Reis hired new employees, including more salespeople. Weaver
Nut also put into place an inventory-control policy that required two signatures for every
purchase order (“two-signature policy”), and although Weaver initially approved the
policy, he later claimed that he did not and refused to follow it. Tensions between Weaver
and Reis boiled over regarding the two-signature policy, and they sent contradictory
letters to Weaver Nut‟s vendors regarding whether the policy was in place.
On March 26, 2003, Weaver sought legal advice from defendant Barley, Snyder,
Senft & Cohen, LLC (“Barley Snyder”). Weaver told Barley Snyder about the
Agreement, but when Weaver and his wife met with Barley Snyder on April 1, 2003, he
“falsely advised [the Barley Snyder attorney] that Mr. Reis and Mr. Katz were not
shareholders in the Company and that the stock warrants mentioned in the development
agreement had not been exercised by them.” (Id. at 60.) Barley Snyder asked Weaver
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Nut‟s corporate counsel for the company‟s “corporate records,” but counsel did not have
them. (Id. at 60-61.) Weaver Nut and Barley Snyder could not find the “corporate
records” because Reis took them from the company and, without telling Weaver, placed
them in a safe deposit box; the documents in the safe deposit box included Weaver Nut‟s
original share certificates.
Weaver consulted with Barley Snyder about terminating the Agreement and ending
Weaver Nut‟s relationship with Reis and Katz, and Barley Snyder told Weaver that this
“was an aggressive strategy which might lead to litigation.” (Id. at 61.) Weaver
nonetheless decided to move ahead and “end [Weaver Nut‟s] relationship with Messrs.
Reis and Katz.” (Id.) The partner at Barley Snyder who represented Weaver Nut, Weaver,
and Miriam Weaver “reasonably believed that Barley Snyder was able to provide
competent and diligent representation [to these three parties] at the same time because
their interests were not adverse to one another, based upon Mr. Weaver‟s false
representations that Messrs. Reis and Katz were not shareholders.” (Id.)
Taking direction from Weaver as the President and sole director of Weaver Nut,
and without consulting with Reis or Katz, Barley Snyder sent a letter to Reis and Katz on
April 11, 2003, advising them that Weaver Nut was terminating the Agreement and “their
employment with Weaver Nut Company.” (Id. at 62.) Four days later, on April 15, 2003,
Reis and Katz told Barley Snyder that they collectively owned half of the shares in
Weaver Nut. Weaver denied this, and Barley Snyder recognized that ownership was in
4
dispute but could not independently investigate this issue “[b]ecause the corporate books
and records were missing.” (Id.) That same day, the parties met and agreed to hire an
independent accountant “to take a look at the financial condition of the Company and to
make recommendations.” (Id. at 63.) The accountant identified a number of problems and
recommended, among other things, replacing the financing that Reis and Katz helped
Weaver Nut secure. He also “found numerous deficiencies” in parts of Weaver Nut‟s
operation that were under Reis‟s supervision and “concluded that Weaver Nut Company
was better off without the [Agreement] or the employment of Mr. Reis, Mr. Katz or the
[other employees that Weaver fired around the same time].” (Id. at 65.)
Weaver and Weaver Nut then sued Reis, Katz, and Summit, and Reis, Katz, and
Summit brought a shareholder derivative action against Weaver Nut and the Weavers. At
that point, Barley Snyder informed Weaver Nut that it could no longer represent the
Weavers and Weaver Nut due to the potential conflict of interest. Barley Snyder
continued to represent the Weavers individually, but Weaver Nut retained other counsel.
All litigation among Weaver Nut, the Weavers, Reis, and Katz was settled in December
of 2003, and as part of the settlement agreement Weaver Nut assigned any claims it had
against Barley Snyder to Reis and Katz.2 The District Court concluded that Weaver
breached the fiduciary duties that he owed to Reis, Katz, and Weaver Nut. The Court also
2
The District Court wrote that “Weaver Nut Company assigned to Mr. Reis and
Mr. Katz any claims the Company might have against Weaver Nut Company,” (R. at 70.),
but this clearly was a proofreading error. Reis and Katz released their claims against
5
found, however, that Barley Snyder did not know that Weaver “was breaching fiduciary
duties to either the Company or to Messrs. Reis and Katz.” (Id. at 69.)
After Reis and Katz were out of the picture, Weaver Nut hired a new CFO and
obtained new financing that was less expensive than that which Reis and Katz had
negotiated. Weaver Nut also saved money by cutting staff. The District Court concluded
that “[t]he increases in operating costs implemented by Messrs. Reis and Katz offset the
increase in gross profit margin that the Company enjoyed during their tenure” and that
Weaver Nut “significantly decreased its operating costs” after Reis and Katz were no
longer involved. (Id. at 68.) Even though sales fell, Weaver Nut “was more profitable in
2004, 2005 and 2006 than it had been in 2001-2003.” (Id. at 69.) The defense expert, who
testified that the firing of Katz and Reis caused no damages to Weaver Nut, was “credible
and persuasive” while Katz‟s lay testimony regarding damages to Weaver Nut was “self-
serving and unconvincing.” (Id. at 79-80.) The Court ultimately “conclude[d] that there
was no failure to act by Barley Snyder that was a factor in bringing about any damage to
Weaver Nut Company and that the Company suffered no actual damages.” (Id. at 78.)
II. JURISDICTION AND STANDARDS OF REVIEW
The District Court had jurisdiction pursuant to 28 U.S.C. §§ 1332 and 1367, and
we have jurisdiction pursuant to 28 U.S.C. § 1291. Reis and Katz brought claims against
Barley Snyder individually (the “individual claims”) and on behalf of Weaver Nut as its
Weaver Nut, and Weaver Nut assigned to Reis and Katz any claims that it had against
Barley Snyder. (Id. at 199-200.)
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assignees. The Court dismissed all but one of the individual claims, and we exercise
plenary review over that decision. After a bench trial, the Court granted judgment in favor
of Barley Snyder on all remaining claims. As to the claims that went to trial, we exercise
plenary review over the Court‟s legal conclusions and review factual findings for clear
error. We review the Court‟s rulings regarding admission of evidence for abuse of
discretion.
III. ANALYSIS
A. Motion to Dismiss
The District Court granted Barley Snyder‟s motion to dismiss five of the individual
claims primarily because it predicted that the Supreme Court of Pennsylvania would hold
that Reis‟s and Katz‟s release of their claims against the Weavers and Weaver Nut also
released their agent, Barley Snyder, notwithstanding an agreement to the contrary in the
release. After plaintiffs filed this appeal, however, the Supreme Court of Pennsylvania
came to the opposite conclusion and held that “[i]n the scenario entailing a plaintiff's
surrender of vicarious liability claims only and express preservation of claims against an
agent, we hold that the parties to a settlement should be afforded latitude to effectuate
their express intentions.” Maloney v. Valley Med. Facilities, Inc., 984 A.2d 478, 487 (Pa.
2009). The Court in Maloney specifically disapproved the opinion on which the District
Court most directly relied, Pallante v. Harcourt Brace Jovanovich, Inc., 629 A.2d 146(Pa. Super. Ct. 1993).
7
Plaintiffs contend that we should reverse and remand the five dismissed individual
claims for trial. We will affirm the dismissal of two of the individual claims on alternative
grounds found by the District Court, affirm the dismissal of one claim on an alternative
ground that was presented to the Court, and reverse the Court on two of the individual
claims and remand them for further proceedings.
1. Professional Negligence and Conversion
The District Court dismissed the individual claims for professional negligence and
conversion on alternative grounds that plaintiffs acknowledged but did not address in
their initial brief on appeal. The Court clearly stated those grounds, and plaintiffs waived
any objection to them by failing to address them in their opening brief.3 See F.D.I.C. v.
Deglau, 207 F.3d 153, 169 (3d Cir. 2000). We, thus, will affirm the Court‟s dismissal of
these claims.
2. Abuse of Process
The parties do not dispute that the elements of an abuse of process claim in
Pennsylvania are that the defendant “(1) used a legal process against the plaintiff, (2)
primarily to accomplish a purpose for which the process was not designed[,] and (3) harm
has been caused to the plaintiff.” Rosen v. Am. Bank of Rolla, 627 A.2d 190, 192 (Pa.
Super. Ct. 1993). There is also no dispute that abuse of process is “concerned with a
perversion of a process after it is issued,” while “[m]alicious use of civil process has to do
3
We, therefore, will not discuss the arguments that plaintiffs made for the first
time in their reply brief.
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with the wrongful initiation of such process.” McGee v. Feege, 535 A.2d 1020, 1023 (Pa.
1987) (emphasis added). The plaintiffs assert a claim for abuse of process, but they did
not allege any facts that could support a conclusion that Barley Snyder engaged in “a
perversion of a process” after it filed the action at issue. We will therefore affirm the
District Court‟s dismissal of the claim for abuse of process.
3. Plaintiffs’ Other Dismissed Individual Claims
The District Court dismissed plaintiffs‟ individual claims for breach of fiduciary
duty and tortious interference with contractual relations (“tortious interference”) solely on
the basis of what turned out to be its erroneous prediction of Pennsylvania law. Barley
Snyder contends that the Court‟s factual findings after the bench trial preclude plaintiffs
from recovering on these individual claims. Plaintiffs respond that this approach is
improper because the “trial court‟s trial findings [were] on different counts against a
different plaintiff.” (Appellants‟ Reply Br. at 5.) They argue that we should apply the
standard for a motion to dismiss and look only to the factual allegations they made in the
amended complaint.
Neither side addresses the question of whether the District Court‟s factual findings
as to Weaver Nut‟s claims should bind Reis and Katz and preclude them from pursuing
their individual claims. Even a non-party may be “bound by the determination of issues”
if he or she “controls or substantially participates in the control of the presentation on
behalf of a party.” Marshak v. Treadwell, 240 F.3d 184, 195 (3d Cir. 2001) (internal
9
quotation marks omitted); see also Richards v. Jefferson County, 517 U.S. 793, 798-99
(1996). This is a factual inquiry, and the Court is in a better position than we are to
address it in the first instance. Ransburg Electro-Coating Corp. v. Lansdale Finishers,
Inc., 484 F.2d 1037, 1038 (3d Cir. 1973). We will therefore reverse the dismissal of the
individual claims for breach of fiduciary duty and tortious interference, and will remand
this case for an analysis of the preclusion issues and, if necessary, further proceedings on
these two individual claims.
B. Post-Trial Judgment
1. Damages to Weaver Nut
As to the claims that went to trial, we will first review the District Court‟s factual
finding that Barley Snyder did not cause damages to Weaver Nut. The Court granted
judgment in favor of defendant on Weaver Nut‟s claims for breach of fiduciary duty,
professional negligence, tortious interference, and breach of contract because, inter alia,
Barley Snyder caused no damages to Weaver Nut. Plaintiffs do not challenge the Court‟s
legal conclusion that Weaver Nut must show damages to succeed on each of these four
claims, but they contend that the Court erred in its factual finding that Weaver Nut
suffered no damages attributable to Barley Snyder.
Plaintiffs have not shown that the District Court committed clear error on this
issue, and we will affirm the judgment in favor of Barley Snyder on Weaver Nut‟s claims
for breach of fiduciary duty, professional negligence, tortious interference, and breach of
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contract.4
2. Aiding and Abetting a Breach of Fiduciary Duty
For plaintiffs to succeed on their claims that Barley Snyder aided and abetted
Weaver‟s breach of fiduciary duty under either Pennsylvania or New Jersey law, they
must show that Barley Snyder knew that Weaver was breaching his fiduciary duty to
Weaver Nut, Reis, and Katz. Koken v. Steinberg, 825 A.2d 723, 731 (Pa. Commw. Ct.
2003); Judson v. Peoples Bank & Trust Co., 134 A.2d 761, 767 (N.J. 1957), cited in State
ex rel. McCormac v. Qwest Commc’ns Int’l, Inc., 904 A.2d 775, 782 (N.J. Super. Ct.
App. Div. 2006). Plaintiffs argue that Barley Snyder should have known about the
shareholder relationship and Weaver‟s breach, and that Barley Snyder was negligent in
not conducting an independent investigation into the ownership of Weaver Nut. They
have not, however, carried their burden of showing that the District Court committed
clear error in finding that Barley Snyder did not actually know about Weaver‟s breach,
and we will affirm the Court‟s judgment in favor of defendant on plaintiffs‟ claims –
individually, and as Weaver Nut‟s assignees – for aiding and abetting.
4
Because we will affirm the dismissal of the professional negligence claim due to
the lack of damages to Weaver Nut, we need not address plaintiffs‟ claim that the District
Court erred in applying the law of Pennsylvania, rather than New Jersey, and in finding
that there was no joint venture.
The only individual claim that went to trial was that for aiding and abetting, which,
as discussed below, we will affirm on other grounds. We will not address plaintiffs‟
arguments that the District Court erred in finding that Reis and Katz individually suffered
no damages.
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3. Preclusion of Testimony Regarding Other Conflicts of Interest
Plaintiffs challenge the District Court‟s decision to preclude testimony as to Barley
Snyder‟s alleged conflict of interest regarding its representation of two other companies
during the time that it represented Weaver Nut. The Court precluded this testimony
because plaintiffs “[did] not have expert testimony to establish such a conflict,” and the
issues were complex enough to require expert testimony. (R. at 128, 137-38.) Plaintiffs
argue that this evidence was relevant and should have been admitted, but they do not
address the grounds for the Court‟s ruling or show that the Court abused its discretion in
barring this evidence due to the lack of expert testimony. We will affirm the Court as to
this issue.
IV. CONCLUSION
We will reverse the District Court as to the individual claims for breach of
fiduciary duty and tortious interference, and will remand those claims for further
proceedings consistent with this Opinion. We will affirm the Court in all other respects.
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