Zelnick, Mann and Winikur, P.C. v. Warner, D.

J-A17004-21
NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37
ZELNICK, MANN AND WINIKUR, P.C., : IN THE SUPERIOR COURT OF
: PENNSYLVANIA
Appellant :
:
:
v. :
:
:
DAVID WARNER, ALAN STEINBERG, : No. 1789 EDA 2020
RICHARD SCHEINOFF, AND SWS :
GROUP,P.C. :
Appeal from the Judgment Entered September 2, 2020
In the Court of Common Pleas of Montgomery County Civil Division at
No(s): No. 2017-04312
ZELNICK, MANN AND WINIKUR, P.C., : IN THE SUPERIOR COURT OF
: PENNSYLVANIA
Appellant :
:
:
v. :
:
:
DAVID WARNER, ALAN STEINBERG, : No. 1790 EDA 2020
RICHARD SCHEINOFF, AND SWS :
GROUP,P.C. :
Appeal from the Judgment Entered September 10, 2020
In the Court of Common Pleas of Montgomery County Civil Division at
No(s): No. 2017-04312
ZELNICK, MANN AND WINIKUR, P.C., : IN THE SUPERIOR COURT OF
: PENNSYLVANIA
Appellant :
:
:
v. :
:
:
DAVID WARNER, ALAN STEINBERG, : No. 1791 EDA 2020
RICHARD SCHEINOFF, AND SWS :
GROUP,P.C. :
J-A17004-21
Appeal from the Judgment Entered September 10, 2020
In the Court of Common Pleas of Montgomery County Civil Division at
No(s): No. 2017-04312
ZELNICK, MANN AND WINIKUR, P.C., : IN THE SUPERIOR COURT OF
: PENNSYLVANIA
Appellant :
:
:
v. :
:
:
DAVID WARNER, ALAN STEINBERG, : No. 1792 EDA 2020
RICHARD SCHEINOFF, AND SWS :
GROUP,P.C. :
Appeal from the Judgment Entered September 10, 2020
In the Court of Common Pleas of Montgomery County Civil Division at
No(s): No. 2017-04312
BEFORE: McLAUGHLIN, J., KING, J., and PELLEGRINI, J.*
MEMORANDUM BY McLAUGHLIN, J.: FILED DECEMBER 8, 2021
Appellant Zelnick, Mann and Winikur, P.C. (“ZMW”), an accounting firm,
brought this civil lawsuit against three accountants formerly employed by
ZMW – Appellees David Warner, Alan Steinberg, and Richard Scheinoff
(collectively, “Individual Appellees”) – who left ZMW and formed their own
accounting firm, SWS Group, P.C. (“SWS”). After a seven-day bench trial, the
court ruled in favor of Individual Appellees and SWS, finding that ZMW failed
to prove damages. We affirm.
The following factual recitation is from the trial court’s findings of fact.
ZMW is an accounting firm that has been in business for over 20 years. Michael
____________________________________________
* Retired Senior Judge assigned to the Superior Court.
-2-
J-A17004-21
Mann and Alan Winikur, both certified public accountants, formed ZMW
following the death of the founder of a prior firm, Zelnick & Associates, in
1995. Warner began working at Zelnick & Associates in 1990 and became an
employee of ZMW after its founding.
Warner entered into a written employment agreement with ZMW in
1996, in which he agreed to keep ZMW’s customers and business affairs
confidential. The agreement also included confidentiality and non-solicitation
provisions lasting two years after termination of his employment. However, it
contained a handwritten provision, that both Mann and Warner initialed,
stating, “It is agreed and understood that any clients directly originated by
David Warner of which full commissions are being paid will be considered
proprietary to David Warner upon his employment termination.” Trial Ex. P-2.
In 2000, Warner became a shareholder of ZMW when Mann and Winikur
each granted him a 2.5% interest in ZMW. Warner purchased additional
shares in ZMW from Mann and Winikur throughout the years, and as of the
trial court’s decision, he was a 17% shareholder in ZMW. Mann and Winikur
each retained a 41.5% interest.
Scheinoff started working at ZMW in 2001. When he joined ZMW,
Scheinoff brought with him nearly all of his clients for which he had primary
responsibility for at his former accounting firm. Scheinoff did not have a
written employment agreement with ZMW.
Steinberg started working at ZMW in 2011. Like Scheinoff, when he
joined ZMW, Steinberg brought with him practically all of his clients for which
-3-
J-A17004-21
he had primary responsibility at his previous accounting firm. Steinberg had a
written employment agreement with ZMW that contained the same
confidentiality and non-solicitation provisions as Warner’s employment
agreement, except there was no handwritten addendum in Steinberg’s
employment agreement. None of the Individual Appellees had a non-compete
agreement with ZMW.
While at ZMW, the five principal accountants – Mann, Winikur, Warner,
Scheinoff, and Steinberg – each had his own set of clients with whom he had
developed close professional and personal relationships over the years. Most
of the clients were long-term clients and had the personal cell phone number
of their respective accountant. Such clients generally had no professional or
personal relationships with the other accountants at ZMW.
All tax returns, client documents, accountant workpapers, and related
data at ZMW were stored in “cloud” accounting software provided by Thomas
Reuters. All accountants at ZMW were authorized users on ZMW’s Thomas
Reuters account and had access to such data.
In the summer 2016, Individual Appellees began exploring the
possibility of leaving ZMW and starting their own firm. They thereafter
purchased computer equipment, leased new office space, and filed corporate
documents for the formation of their new firm, SWS. They did so without
informing Mann or Winikur.
In December 2016, Individual Appellees copied electronic client data
files by backing up the files through ZMW’s Thomson Reuters account onto
-4-
J-A17004-21
flash drives or disks. These files included client documents, tax returns, and
accountant workpapers prepared by Individual Appellees. The client files were
then put into the new SWS account at Thomson Reuters, which allowed
Individual Appellees to access the client files. The client files backed up by
Individual Appellees were the files of clients for which they had primary
responsibility at ZMW. However, because some of Mann and Winikur’s client
documents were misfiled under Individual Appellees’ client files, the backups
included a small number of files of clients serviced primarily by Mann or
Winikur. Individual Appellees have insisted that any copying of Mann and
Winikur’s client files was inadvertent and in error, and they made no use of
any such information after they left ZMW. The copying of the client files was
done without any advance authorization by the clients.
On January 11, 2017, Individual Appellees submitted resignation letters
to ZMW, stating that their resignations would be effective that day at 10:00
a.m. After 10:00 a.m., an email “blast” announcing their departure from ZMW
(the “Announcement”) was sent to the clients for which Individual Appellees
had primary responsibility. The Announcement from Warner stated:
I am pleased to announce that effective January 11, 2017,
at 10:01AM, I have left Zelnick, Mann and Winikur, P.C. and
have formed a new accounting firm, SWS Group, P.C. I am
excited to join my colleagues Richard Scheinoff, CPA and
Alan Steinberg, CPA, whom I have worked with for many
years, in this new company. We bring diverse qualifications
and many years of experience to this venture as Certified
Public Accountants and Business Advisors. Should you have
any questions or wish to contact me, I can be reached at
this email address or at the following address: . . . .
-5-
J-A17004-21
The Announcements from Scheinoff and Steinberg were the same,
except for the individual names. The Announcement was the first contact that
Individual Appellees had with any clients about leaving ZMW and starting
SWS. Subsequently, nearly all of Individual Appellees’ clients notified them
that they wanted to continue their professional relationships with them and
followed them to SWS. Whenever clients notified one of the Individual
Appellees that they wanted them to remain their accountant, the Individual
Appellees would send the client an Authorization to Release Information form,
addressed to ZMW, to be signed and returned to SWS. Nearly all such clients
signed and returned the authorization form to SWS. ZMW did not contact any
such clients at any point to request them to stay at ZMW. After Individual
Appellees’ departure from ZMW, five other ZMW employees left ZMW and
began working for SWS.
ZMW commenced this action in March 2017 and filed a 12-count
complaint asserting, among other things, claims of breach of contract,
conversion, breach of fiduciary duties, misappropriation of trade secrets, and
tortious interference. It also sought indemnification and a permanent
injunction.
Following a bench trial in November 2019, the court rendered a decision
in favor of Individual Appellees and SWS. It found that ZMW “failed to prove
any quantifiable measure of damages to support a recovery on any of its
causes of action.” Trial Court Decision, 6/1/20, Conclusions of Law at ¶ 1.
-6-
J-A17004-21
Following the denial of post-trial motions and the entry of judgment, this
timely appeal followed.
ZMW raises two questions for our review:
1. . . . Did the trial court err in finding, without applying the
correct legal standards of causation, that Individual
Appellees’ conduct was not a cause of any of ZMW’s
claimed damages?
2. Relatedly, did the trial court err by rejecting all of ZMW’s
causes of action based upon its conclusion that ZMW
failed “to prove any quantifiable measure of damages,”
despite substantial lay, expert and documentary
evidence from Individual Appellees’ own files that
established a reasonable basis for assessing ZMW’s
claimed damages with at least a fair degree of
probability? Stated alternatively, did the trial court use
the wrong legal standard in evaluating ZMW’s proof of
damages?
ZMW’s Br. at 5.
Our standard of review in a non-jury trial is well established:
We must determine whether the findings of the trial court
are supported by competent evidence and whether the trial
judge committed error in the application of law. Additionally,
findings of the trial judge in a non-jury case must be given
the same weight and effect on appeal as a verdict of a jury
and will not be disturbed absent error of law or abuse of
discretion.
Davis ex rel. Davis v. Gov’t Employees Ins. Co., 775 A.2d 871, 873
(Pa.Super. 2001) (citations omitted). Our scope of review of questions of law
is plenary. Century Indem. Co. v. OneBeacon Ins. Co., 173 A.3d 784, 802
(Pa.Super. 2017) (citations omitted).
-7-
J-A17004-21
ZMW argues that the court erred by failing to recognize any causal
connection between Individual Appellees’ conduct and ZMW’s damages.
ZMW’s Br. at 36. ZMW contends that if Individual Appellees did not secretly
copy the client files, they “would have been unable to service the ZMW clients
they expected to constitute SWS’s clientele upon opening their doors for
business on January 11, 2017 – i.e., at the beginning of SWS’s first, and
critically important, ‘tax season.’” Id. ZMW maintains that had Individual
Appellees “gone through proper channels, it would have taken SWS months
to obtain the clients’ files (assuming those clients with outstanding [accounts
receivable] balances paid them) and input all of the information into SWS’s
computer system in usable form.” Id. ZMW also argues that it was deprived
of leverage to collect payment of outstanding accounts receivable balances
because Individual Appellees took client workpapers without those clients
paying their balances.1 Id. at 37.
ZMW further contends that it “presented more than sufficient evidence
that it [was] more likely than not ZMW would have retained a significant
percentage, if not all, of the clients’ business for at least that first tax season”
after Individual Appellees left had they not engaged in misconduct. Id. at 48.
ZMW argues damages need not be proved by mathematical certainty and its
expert sufficiently quantified ZMW’s damages of (1) lost profits, (2) loss of
____________________________________________
1 The Association of International Certified Professional Accountants Code of
Conduct permits an accountant whose client requests to transfer to another
firm to withhold that client’s workpapers until the client pays its outstanding
fees owed to that firm.
-8-
J-A17004-21
accounts receivable, and (3) extra expenses it incurred as a result of
Individual Appellees’ actions. Id. at 35, 54. According to ZMW, the trial court
erroneously held it “to an incorrect standard of proof that it could not possibly
satisfy – essentially, to identify which clients would have stayed with ZMW and
for how long they would have stayed absent [Individual Appellees’] data heist
and solicitation.” Id. at 59. ZMW contends that it was only required to provide
the court with sufficient information to fairly estimate its damages. Id.
The trial court found no causal nexus was shown between the copying
of the client files and the loss of any client by ZMW. Trial Ct. Decision, Finding
of Fact at ¶ 63. The court asserted that the clients who followed Individual
Appellees did so because of their close professional and personal relationships
with them. Id. at ¶ 62. The court observed that there was no evidence that
such clients were aware at the time of their decision to leave ZMW that SWS
already had copies of their files from ZMW. Id. at ¶ 63.
The court further found that ZMW failed to sufficiently prove damages
that it incurred as a result of Individual Appellees’ actions. As to lost profits,
the court concluded that ZMW’s expert on damages, James Stavros, based his
calculations on an assumption that was wholly unsupported by the evidence
presented at trial – namely, that but for Individual Appellees’ conduct in
copying clients’ files and allegedly soliciting clients’ business, all of the clients
would have stayed with ZMW instead of following their accountants to SWS.
Id. at ¶ 72. To the contrary, the court found that there was overwhelming
evidence presented that virtually all of the Individual Appellees’ clients would
-9-
J-A17004-21
have moved their business to SWS even in the absence of Individual Appellees’
copying of files or sending out the Announcement. Pa.R.A.P. 1925(a) Opinion,
11/16/20, at 5-6. Indeed, the court found that the clients’ decisions to move
to SWS were driven by their ongoing personal relationships with Individual
Appellees and not with the ZMW firm. Id. at 7. The court opined that “[e]ven
if the copying of files and the sending of the Announcement could have had
some impact on the decisions of the clients to continue with Individual
[Appellees], ZMW failed to present any persuasive evidence of the quantity of
business or profits lost as a result of such conduct.” Id. at 9 (emphasis in
original). The court emphasized that the problem with Stavros’ calculations
was not a lack of precision, but rather a lack of any evidentiary basis for his
primary assumption that but for Individual Appellees’ actions, 100% of the
clients would have stayed with ZMW instead of following their personal
accountants to SWS. Id. at 10-11 n.8.
As to accounts receivable loss, the court recognized that ZMW likely
incurred some loss in the collection of outstanding accounts receivable as a
result of Individual Appellees’ conduct because by copying the clients’
workpapers, ZMW could not exercise its right to withhold such papers to collect
the unpaid fees. Id. at 11. However, once again, the court found that ZMW
failed to present any persuasive estimate of the amount of the loss. Id. The
court observed that Stavros’ calculation was based on an unsupportable
assumption — that all of ZMW’s outstanding receivables due from clients
serviced by Individual Appellees were uncollectable because of Individual
- 10 -
J-A17004-21
Appellees’ copying of the client files. Id. at 11-12. The court stated that
“[w]hile ZMW’s loss of leverage may have resulted in its ability to collect some
of the receivables, Mr. Stavros’ assumption that all of the receivables were
uncollectable because of the copying of files lack[ed] any evidentiary basis.”
Id. at 12 (emphasis in original). It noted that Stavros presented a list of 60
clients who had failed to fully pay fees owed to ZMW after Individual Appellees’
departure. Id. Of those clients, one client was serviced by Warner, 15 clients
were serviced by Scheinoff, and 44 clients were serviced by Steinberg. Id.
Some clients on the list had not made payments to ZMW for years prior to
Individual Appellees’ departure. Id. at 13. The court also observed there was
extensive evidence presented that Steinberg, while at ZMW, was consistently
late in billing his clients and had a backlog of client billing by months or even
years. Id. The court found that Stavros did not explain how receivables that
had gone uncollected for years before Individual Appellees’ departure would
suddenly have become collectable if Individual Appellees had not copied the
workpapers for those clients. Id.
As to extra legal expenses allegedly incurred by ZMW as a result of
Individual Appellees’ conduct, the court found that, again, ZMW failed to prove
the amount of the extra expenses. Stavros testified that ZMW’s extra
expenses consisted of legal fees from three different lawyers/law firms. First,
Stavros testified that the Schoenberg Law Office (“Schoenberg”) provided
legal services to ZMW dealing with the “data breach” issue. As to the
Schoenberg legal fees, the court concluded:
- 11 -
J-A17004-21
According to Mr. Stavros, someone on behalf of ZMW, either
a principal or counsel, reviewed Schoenberg’s invoices,
redacted line items that were purportedly unrelated to the
data breach issue, and circled the items that were
purportedly related to the data breach issue. No evidence
was provided on who performed this task or how he went
about doing it. Further, Mr. Stavros made no independent
judgment on which items were redacted and which were
circled. His role was limited to adding up the dollar amounts
of the circled items, which totaled $10,535. (Tr. 11/19/19,
Stavros, at 112-14.) The invoices themselves were not
presented to the [c]ourt or offered in evidence. This
evidence was clearly insufficient to support a damage
award. Mr. Stavros exercised no expertise regarding this
item but simply added up numbers that were provided to
him by some unknown redactor. The absence from the
record of Schoenberg’s invoices merely reinforces the
inadequacy of ZMW’s evidence.
Id. at 15.
Second, Stavros testified that Steven G. Sklar, Esq. provided legal
services to ZMW in attempting to collect accounts receivable. The court found
insufficient evidence to grant ZMW recovery of Sklar’s fees:
Once again, the invoices were not presented to the [c]ourt
or offered in evidence. Further, as with the absence of proof
on ZMW’s claim of lost accounts receivable, there was no
showing that the accounts that Mr. Sklar attempted to
collect were made uncollectable or difficult to collect as the
result of the copying of files or other purportedly wrongful
conduct by Individual [Appellees]. Mr. Stavros confirmed
that Mr. Sklar’s fees for account collection were included
“regardless as to whether this was a 2011, ’12, ’13, ’14, ’15,
or ’16 account receivable.” (Tr. 11/[19]/19, Stavros, at
111.)
Id. at 16.
- 12 -
J-A17004-21
Third, Stavros included in his list of extra expenses fees in the amount
of $6,926 billed by the Braverman Kaskey law firm. Braverman Kaskey
represented ZMW throughout most of the present lawsuit. The court again
found a lack of adequate proof of these damages, noting that although these
fees were listed in Stavros’ exhibit of extra expenses, he was not asked about
them on direct examination and no invoices were presented to the court. Id.
“The determination of damages is within the trial court’s exclusive
authority as fact-finder to weigh and assess the credibility of the evidence.”
Snyder v. Crusader Servicing Corp., 231 A.3d 20, 32 (Pa.Super. 2020)
(citing Boehm v. Riversource Life Ins. Co., 117 A.3d 308, 328 (Pa.Super.
2015); Lou Botti Constr. v. Harbulak, 760 A.2d 896, 898 (Pa.Super.
2000)). Damages may not “be awarded where the evidence is insufficient for
the finder of fact to determine what, if any amount, of damages the plaintiff
suffered.” Id. Although we do not require mathematical exactness, the law
“does not permit a damages award to be based on mere guesswork or
speculation, but rather requires a reasonable basis to support such an award.”
Helpin v. Trs. of Univ. of Pa., 10 A.3d 267, 270 (Pa. 2010) (citations
omitted).
Further, the law provides that
expert testimony is incompetent if it lacks an adequate basis
in fact. While an expert’s opinion need not be based on
absolute certainty, an opinion based on mere possibilities is
not competent evidence. This means that expert testimony
cannot be based solely upon conjecture or surmise. Rather,
an expert’s assumptions must be based upon such facts as
the jury would be warranted in finding from the evidence.
- 13 -
J-A17004-21
Gillingham v. Consol Energy, Inc., 51 A.3d 841, 849 (Pa.Super. 2012)
(citation omitted).
The trial court’s findings are supported by competent evidence and the
court did not err in its application of the law. Our review shows that ZMW did
not meet its burden in proving damages or showing a causal nexus between
the copying of the client files and the loss of any client by ZMW. The record
supports the trial court’s finding that although the availability of client files to
SWS at the start of its operations may have given SWS a two-month “jump
start” in servicing those clients, there was no evidence that this jump start
was the reason that those clients went to SWS, nor that ZMW suffered any
damages as a result of this jump start.2 To the contrary, the record was replete
with evidence that those clients followed Individual Appellees to SWS because
of their long-standing personal and professional relationships with those
accountants.3
____________________________________________
2 Indeed, on cross-examination, Stavros admitted that he did not calculate
the amount of profit that SWS was able to obtain as a result of a jump start
in getting the client documents, nor was he asked to calculate those alleged
damages. N.T., 11/19/19, at 58.
3 SWS presented the testimony of several former ZMW clients (now current
SWS clients) who testified unequivocally that they went to SWS because of
their personal relationships with their individual accountants and not because
of any alleged solicitation or advanced copying of client files. See N.T.,
11/20/19, at 245-52, 257; N.T., 11/21/19, at 9-12, 17-18, 20-22, 215-18.
They testified that they were unaware that their files were copied, and the
copying of their files did not influence their decision to follow their accountants
to SWS. N.T., 11/20/19, 258-59; N.T., 11/21/19, at 20-22, 217. ZMW takes
issue with the fact that Individual Appellees only had a small number of clients
(Footnote Continued Next Page)
- 14 -
J-A17004-21
Most significantly, the court properly determined that ZMW’s expert’s
primary assumption of his calculation for damages – that but for Individual
Appellees’ actions, all of the clients would have stayed with ZMW and all of
the outstanding accounts receivable from clients serviced by Individual
Appellees would have been collectable – had no evidentiary basis. The court
concluded that this assumption, essential to the expert’s opinions, was not
supported by the record. After review, we find that the expert testimony
proffered by ZMW lacked an adequate factual basis for his conclusions. The
expert repeatedly testified that his damages calculation was based on this
assumption,4 which had no basis in fact. Although an expert may properly rely
on assumptions in forming their opinion, the assumptions “must be based
upon such facts as the jury would be warranted in finding from the evidence.”
Gillingham, 51 A.3d at 849 (citation omitted).
Lastly, the record reflects that ZMW presented inadequate evidence in
support of its legal expense damages claim. Thus, the court did not err in
finding that ZMW failed to meet its burden of proof.
Judgment affirmed.
____________________________________________
testify about their close relationships with them. ZMW’s Br. at 58. However,
the court stated that it would not have allowed any more clients to testify, if
SWS offered to do so, because any further testimony would have been
redundant and unnecessarily cumulative. Trial Ct. Op. at 18. We agree. In any
event, ZMW had the burden of proof and did not present any evidence that
even one client would have stayed at ZMW but for Individual Appellees’
actions.
4 See N.T., 11/19/19, at 47, 50-52, 59, 64-65, 127.
- 15 -
J-A17004-21
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 12/08/2021
- 16 -