Kowalski v. Pocono Country Place, Inc. 1

Transcription

1 1 (2015) Kowalski v. Pocono Country Place, Inc. 1 Kowalski v. Pocono Country Place, Inc. Property owners association Board of directors election Indispensable party Substitution of correct party A property owners association was an indispensable party in a suit concerning improprieties in the election of its board of directors, and plaintiff was therefore permitted to amend his complaint to substitute the POA s governing corporation. Demurrer sustained. Defendants A Pocono Country Place, Inc. and Deborah Boyle filed preliminary objections to the complaint of plaintiff Zbigniece Kowalski, alleging that defendants selectively enforced the bylaws of A Pocono Country Place Property Owners Association, Inc. with respect to the election of the board of directors of APCPPOA, Inc., in which election plaintiff was a candidate. Plaintiff alleged that he had sufficient votes to be elected to the board of directors, but was disqualified because he was not a member of the property owners association in good standing as required for every candidate. Although plaintiff acknowledged that he was not in good standing, he alleged that he was not notified until after ballots had been mailed to members and came into compliance shortly after being notified, but that another candidate with the highest vote total was notified of her noncompliance before ballots were mailed out, giving her sufficient time prior to the election to correct her noncompliance. Defendants preliminary objections concerned the jurisdiction of the court over defendants. Defendants argued that plaintiff s complaint did not state a cause of action against them, and that plaintiff should have properly named APCPPOA, Inc., which was the property owners association that managed plaintiff s community and was the corporation which plaintiff sought to serve as a board member. Plaintiff acknowledged that A Pocono Country Place, Inc. was not the proper defendant, and argued that he should be permitted to amend his complaint to name the correct defendant. The court dismissed the complaint as to A Pocono Country Place, Inc., and granted plaintiff leave to amend his complaint to name APCPPOA, Inc. The court further sustained the demurrer as to defendant Boyle, noting that plaintiff sought relief against her in her capacity as the judge of election for APCPPOA, Inc. Because APCPPOA, Inc. was not a party to the suit, the court held that Ms. Boyle was unable to provide the relief requested by plaintiff, and that APCPPOA, Inc. was an indispensable party to the suit as any order would involve the management of APCPPOA, Inc. and the interpretation of its bylaws., giving APCPPOA,

2 2 Kowalski v. Pocono Country Place, Inc. Pa. D. & C.5th Inc. a fundamental interest in the outcome of the case. C.P. of Monroe County, No CV 2014 Brett J. Riegel, for plaintiff. John C. Prevoznik, for defendants. ZULICK, J., April 2, 2015 This case comes before the court on Defendants preliminary objections to Plaintiffs complaint. Plaintiff Zbigniece Kowalski filed a complaint on November 24, 2014 for injunctive relief, alleging that Defendant A Pocono Country Place, Inc. (PCP), a private residential community in which Kowalski was a property owner and a member, selectively enforced its bylaws against Kowalski. Kowalski was a candidate for the PCP board of directors election in The PCP bylaws required all candidates for the board to be members in good standing. Although Kowalski appeared on the ballot, his votes were not counted after the judge of election ruled that he was not a member in good standing and was disqualified. Kowalski contends that the judge of election notified another candidate, Lisa Butler, that she too was not in good standing, but gave her sufficient notice before the election that she could remedy her impediment and continue as a candidate, while he was not given that opportunity. Kowalski requests the court to order PCP to seat Kowalski on the board of directors, or, alternatively, to order a new election with Kowalski as a candidate. Defendants A Pocono County Place, Inc. and Deborah Boyle filed preliminary objections on January 5, 2015 arguing that (1) both PCP and Boyle should have been included in one count, rather than two, as neither could

3 1 (2015) Kowalski v. Pocono Country Place, Inc. 3 correct the corporate action individually; (2) Kowalski failed to state a claim upon which relief could be granted because Kowalski was not a member in good standing of his association as required by the bylaws at the time his candidacy was challenged; (3) Exhibits D and E of Kowalski s complaint concerning third-party non-litigants should be stricken; and (4) Kowalski sued the wrong party and misnamed Deborah Boyle in paragraph 41. Both parties submitted briefs, and oral arguments were held in this court on March 2, DISCUSSION The facts as alleged in Kowalski s complaint are as follows. In late May/early June 2014, PCP held an election for five positions on the board of directors. Kowalski obtained a position on the ballot as a candidate. Ballots were mailed to members in May, 2014, and were returned and counted before June 26, Defendant Deborah Boyle was the judge of elections, charged with administering the election and addressing challenges to the candidates filed by PCP members. After a challenge was filed to Kowalski s candidacy, Boyle notified Kowalski on June 26, 2014 by that he was disqualified because he was not a member in good standing. According to Article III, Paragraph 26 of the PCP by-laws, a member is in good standing if: (1) s/he is up to date on all financial obligations due to the Association on all Units owned by that member, and (2) s/he is in compliance with all other requirements of the Governing Documents of the Association. Plaintiff s Complaint, 16. Kowalski was disqualified by Boyle because he failed to provide the following documents to PCP as required by Association

4 4 Kowalski v. Pocono Country Place, Inc. Pa. D. & C.5th Policy Resolution A-022: a. Pennsylvania Sales, Use, and Hotel Occupancy Tax License; b. A certificate of authorization to collect hotel excise tax issued by Monroe County; c. A fully executed written lease agreement for any rental property; and d. A Crime Free Lease Addendum. Id., 19. Kowalski admitted that he was not in compliance at the time he was notified, but shortly [thereafter he] came into full compliance with the Policy and all other governing documents. Id., 19. On June 28, 2014, PCP held its annual meeting and announced the election results, including names and the number of votes each candidate received. Kowalski was not listed, as he had been disqualified, but he alleges that he would have been in the top five candidates, and thus on the Board of Directors. Kowalski further alleges that Lisa Butler, the candidate with the highest number of votes, was notified of her non-compliance with the bylaws on May 22, 2014 which was before the date on which ballots were mailed out to members, allowing her sufficient time to correct the deficiencies and stand for election. Two other PCP members challenged Kowalski s disqualification within the 10 day period permitted by the bylaws. Plaintiff did not file a written objection because he was not a member in good standing and was not permitted

5 1 (2015) to do so. Kowalski v. Pocono Country Place, Inc. 5 The court will first address Defendants challenge to the court s jurisdiction over A Pocono Country Place Property Owners Association, Inc. The Plaintiff sued Defendants A Pocono Country Place, Inc. and Deborah Boyle in her capacity as Judge of Elections by writ of summons filed on July 30, When Plaintiff filed the complaint, on November 24, 2014, he named A Pocono County Place, Inc. and Ms. Boyle as defendants in the caption. This error was repeated in the body of the complaint, where in Paragraph 2 he stated that Defendant Pocono County Place, Inc. (hereinafter PCP ) was the defendant. All other allegations in the complaint referred to Defendant Pocono County Place, Inc. through its shorthand designation PCP. Plaintiff attached the bylaws of A Pocono Country Place Property Owners Association which state on the cover page Adopted by the APCPOA, Inc. B.O.D. 9/12/2009 as Exhibit B to his complaint, and he refers to the bylaws as the controlling bylaws for his suit. Id. 16. Defendants preliminary objection states that the Plaintiff s complaint does not state a cause of action against them, and should have been filed against A Pocono Country Place Property Owners Association, Inc., which is the non-profit corporation that manages Kowalski s community and is the corporation which Kowalski sought to serve as a board member. Kowalski acknowledges that neither A Pocono Country Place, Inc. nor A Pocono County Place, Inc. is the proper defendant, and that his community association is actually A Pocono Country Place Property Owners Association,

6 6 Kowalski v. Pocono Country Place, Inc. Pa. D. & C.5th Inc., (hereinafter APCPOA, Inc.) a corporation which is not a party to this suit. He argues that he should be permitted to amend his complaint to correct the name of the defendant. Rule 1033 was recently amended to allow an amendment to add a party. Amendment dated December 20, 2013, effective January 23, This amendment changed previous law that did not permit Rule 1033 to be used to add or substitute a new party. Hoare v. Bell Telephone Co., 500 A.2d 1112 (Pa.1985); Paulish v. Bakaitis, 442 Pa. 434, 275 A.2d 318 (Pa.1971) (called into question on other grounds); Gozdonovic v. Pleasant Hills Realty Co., 357 Pa. 23, 53 A.2d 73, 76 (1947) ( [t]he question for determination is whether the right party was sued but under a wrong designation, or whether a wrong party was sued and the amendment was designed to substitute another and distinct party ). See also Goodrich Amram 2d ( [a]n amendment which is ostensibly for the purpose of correcting the name of a party, but which has the effect of substituting a new party where the plaintiff has sued the wrong party is generally prohibited ); Standard Pennsylvania Practice 2d Here the wrong party, or the wrong parties, were sued. The case will be dismissed for this reason against A Pocono County Place, Inc. and A Pocono Country Place, Inc. Plaintiff will be given twenty days to file an amended complaint. Since A Pocono Country Place Property Owners Association, Inc. is not now a party to this case, the rest of Defendants preliminary objections that relate to that party will not be considered at this time, but may be raised again should Plaintiff amend.

7 1 (2015) Kowalski v. Pocono Country Place, Inc. 7 Defendants also demur to the claim against Deborah Boyle. When considering preliminary objections in the nature of a demurrer, the court must accept as true all well-pleaded material facts in the complaint and reasonably deducible inferences. Lazor v. Milne, 499 A.2d 369, 370 (Pa. Super. 1985). A demurrer does not admit as true averments in a complaint that conflict with attached exhibits. Framlau v. County of Delaware, 299 A.2d 335, 338 (Pa. Super. 1972). Here, Kowalski seeks injunctive relief against Deborah Boyle in her capacity as the Judge of Election for APCPPOA, Inc. However, that corporation is not a party to this suit. On her own, Ms. Boyle is not able to provide the relief the Plaintiff is seeking through an injunction. Although the complaint alleges that she acted as an agent of A Pocono Country Place, Inc., this is at variance with the bylaws attached to the complaint. Her actual principal is thus an indispensible party, as any order directed to her would involve the management of APCPPOA, Inc. through its board of directors. A party is indispensable when its rights are so connected with the claims of the litigants that no decree can be fashioned between them without impairing those rights. Posel v. Redevelopment Auth. of City of Philadelphia, 72 Pa. Cmwlth. 115, 119, 456 A.2d 243, (Pa. Cmwlth. 1983). It is fundamental that a court in equity cannot grant relief without the joinder of all indispensable parties. Reifsnyder v. Pittsburgh Outdoor Advertising Co., 152 A.2d 894 (Pa.1959); Powell v. Shepard, 113 A.2d 261 (Pa.1955); Hartley v. Langkamp and Elder, 90 A. 402 (Pa.1914).

8 8 Kowalski v. Pocono Country Place, Inc. Pa. D. & C.5th In Mechanicsburg Area School District v. Kline, 431 A.2d 953 (Pa. 1981), our supreme court articulated some of the questions to be considered in the determination of indispensable parties: 1. Do absent parties have a right or interest related to the claim? 2. If so, what is the nature of that right or interest? 3. Is that right or interest essential to the merits of the issue? 4. Can justice be afforded without violating the due process rights of absent parties? Id. at 956. Here A Pocono Country Place Property Owners Association, Inc. has an interest in the proper interpretation of its bylaws and the conduct of its elections for the board of directors. Justice cannot be afforded here without giving that corporation an opportunity to be heard. ORDER AND NOW, this 2nd day of April, 2015, upon consideration of Defendants preliminary objections and the briefs and arguments of both parties, IT IS ORDERED as follows: 1. Defendants demurrer to the complaint is sustained. 2. Plaintiff shall have twenty days to amend his complaint in accordance with the accompanying opinion.

9 9 (2015) Red Run Mountain, Inc. v. Earth Energy Red Run Mountain, Inc. v. Earth Energy Consultants, LLC Business entities Agency Oil and gas exploration Royalty payments The president of a three-shareholder closed corporation had both statutory, as well as inherent/implied/apparent authority and agency by estoppel to execute an oil and gas exploration contract and royalty agreement on behalf of the corporation. Summary judgment granted. Defendants Earth Energy Consultants, Bradley Gill, Sylvia Mase and Michael Hughes as executors of the estate of Richard Mase motioned for summary judgment in the action brought by plaintiff Red Run Mountain, Inc., relating to a series of oil and gas exploration and royalty contracts from production on Red Run s property. Red Run was a corporation formed and owned by Richard Mase, John McDowell, and Roy Cummings to manage property owned by Red Run as a recreation area for its shareholders. Although all three shareholders served on the board of directors, Mase was appointed president of Red Run, and pursuant to the broad powers granted by Red Run s bylaws, managed the affairs of Red Run in between annual board meetings. Through Mase, Red Run became involved with Gill for oil and gas research and exploration. Red Run subsequently entered into a contract with Gill to provide overriding royalty payments from oil and gas produced by a company marketed by Gill, with the royalty to be assigned by contract and referenced in any oil/gas lease. Mase signed the contract as president, with the secretary of Red Run, Patricia Warren, also signing above a line marked Witness. Red Run later entered into an oil and gas lease with East Resources, a company marketed by Gill, with the lease executed by Mase for Red Run; however, the lease failed to include an assignment or reference to Gill s overriding royalty, and Ease Resources refused to amend the lease to include it. The other shareholders did not become aware of Red Run s relationship with Gill until nearly 7 years after Gill had initiated discussions with Mase, although several of them had become aware of attempts to develop oil and gas production a year or so prior to Mase disclosing the contracts with Gil. In its complaint, Red Run argued that Mase had no authority to enter into the agreements with Gill without a vote of the board or shareholders. However, defendants contended that Mase had full authority to enter into the agreements on behalf of Red Run. The court first agreed with defendants contention that Mase had authority pursuant to 15 Pa.C.S. 9

10 10 Pa. D. & C.5th Red Run Mountain, Inc. v. Earth Energy 1506, which provided that a contract was properly executed by a corporation when signed by the president and a secretary or treasurer; the court found that, although Red Run s secretary signed on a line labeled witness, her signature along with Mase s rendered the contract enforceable upon Red Run. However, the court further found that Mase possessed inherent/ implied/apparent authority to enter into contracts on behalf of Red Run, noting that Mase had run the business affairs of Red Run without involvement or interference by the other shareholders for nearly 20 years, and that their lack of involvement was a direct contributor to their lack of knowledge of Red Run s involvement with Gill. The court further noted that prior cases held that a president of a closed corporation with few shareholders possessed apparent authority to act on behalf of the corporation. The court additionally held that the Gill contracts were not outside the ordinary business of Red Run, given that Gill s royalty was intended to be paid by the production company, and Red Run only became liable through the negligence of Mase in negotiating the lease with the production company. Finally, the court held that Red Run, through its attorneys, led Gill to believe Mase had authority to execute contracts on behalf of Red Run. C.P. of Lycoming County, No. CV ,259 Robert H. Nemeroff, for plaintiffs. Robert Seiferth, for defendants Earth Energy Consultants LLC and Bradley R. Gill. Clifford Rieders and Pamela L. Shipman, for defendants Sylvia B. Mase and Michael Hughes, Executors of the Mase Estate GRAY, J., June 18, 2015 Before the Court is Defendants Earth Energy and Bradley R. Gill s motion for summary judgment filed on February 6, Plaintiff filed a response to the motion on March 5, Defendants filed a brief in support of their motion for summary judgment on March 10, Plaintiff filed a reply brief on March 20, Argument was heard on

11 9 (2015) Red Run Mountain, Inc. v. Earth Energy March 25, On March 30, 2015, Defendants filed a reply brief. On April 10, 2015, Plaintiff filed their final response brief. Upon review of the motion, briefs, the summary judgment record of evidence, and argument, summary judgment is GRANTED. The Court provides the following in support of its decision. Factual Background This matter arises from a series of contracts between Plaintiff, Red Run Mountain, Inc. (Red Run), and Defendants, Earth Energy and/or Bradley R. Gill (Collectively Gill), that relate to oil and gas exploration and overriding royalty payments from production on Red Run s property. Red Run s property consists of 2, acres in McIntyre Township, Lycoming County. In essence, the contracts provided for a percentage of overriding royalty interest from any oil and/or natural gas produced on Red Run s property by a company which Gill marketed. Richard D. Mase executed contracts as president of Red Run. Richard D. Mase served as president of Red Run until January 19, Red Run seeks a declaratory judgment that the contracts are void and unenforceable because there was no authorization to enter any of them. Even if the contracts are enforceable by Gill against Red Run, Red Run seeks a declaration that the Mase Estate 1 is solely liable because Richard Mase was not authorized to enter the contracts. Gill has a crossclaim against the Mase Estate on the grounds that even if Red Run is not liable, the Mase Estate is liable for the contracts executed by Mase. 1. Mase died on July The executors of his estate were substituted as parties on September 4,

12 12 Pa. D. & C.5th Red Run Mountain, Inc. v. Earth Energy Red Run incorporated on November 29, 1990 in the State of Delaware. Red Run is a small corporation with three stockholders who also served as sole directors throughout the relevant time period. The initial directors of Red Run were Mase, John L. McDowell, III, and Roy W. Cummings, Sr. In approximately 1983, Mase purchased Red Run s property at an auction and Mase, McDowell, III, and Cummings, Sr. became equal 1/3 owners of the property. Upon his death in 2002, John McDowell s shares passed to his wife, Susan McDowell. For twenty years, Mase served as both a member of the board of directors and as president of Red Run. The purpose of Red Run was broadly defined in the articles of incorporation as any lawful purpose. Red Run managed its land and operated its property as a recreation area for its shareholders. Article V, Section 4 of Red Run s By-laws provided that the president shall have general and active management of the business of the corporation, shall see that all orders and resolutions of the Board are carried into effect and the power to execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation. 2 These By-Laws provide broad powers to the 2. Article V. Section 4 provides as follows. PRESIDENT: The President shall be the chief executive officer of the corporation; he shall preside at all meetings of the stockholders and directors; he shall have general and active management of the business of the corporation, shall see that all orders and resolutions of the Board are carried into effect, subject, however to the right of the directors to delegate any specific powers, except such as may be by statute exclusively conferred on the President, to any other officer or officers of the corporation. He shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation. He shall be EX-OFFICIO a member of all committees, and shall have the general power and duties of supervision and management usually vested in the office of President of the corporation.

13 9 (2015) Red Run Mountain, Inc. v. Earth Energy president. 13 The board of directors typically met once a year in the fall. At those meetings, the board approved the minutes from the prior year s meeting. The meetings were simple, and included discussions of the property. There was only minor business of any substance. Mase took care of Red Run business between meetings. Roy Cummings, Sr. did not pick up mail for Red Run or look at corporate records. He believed the office of record for Red Run was in Blossburg. Mase had authority to sign documents in the name of Red Run and could authorize checks. Patricia Warren had been elected by the board and served as secretary of Red Run for about 20 years. Warren performed accounts payable, accounts receivable and kept the corporate records. Warren had unlimited check-signing authority. Mase presented the information for the corporate book to Warren, approved all invoices, and made the dealings as far as land leases and royalties. In her 20 years as secretary to the board, Warren does not recall any board members, other than Mase, showing up at the corporate office for any business-related reason. There was never any discussion of limitations upon the authority of Mase. Simply stated, Mase ran Red Run with minimal supervision or oversight for many years. At some point in 2003, Red Run became involved with Gill, as reflected in the corporate records. The records list an expenditure item for natural gas research in the amount of $1, to Gill, dispersed to Earth Energy in On July 7, 2003, Gill issued an invoice for the period from September 3, 2002 to July 10, 2003 that included an amount due from Red Run of $1, Prior to the

14 14 Pa. D. & C.5th Red Run Mountain, Inc. v. Earth Energy 2003 agreement with Gill, Red Run had never previously signed an oil and gas lease or a consulting agreement in anticipation of an oil and gas lease. On February 21, 2003, Bradly R. Gill wrote a letter to Mr. Mase at Mase s home address to follow up on a discussion they had about being pro-active in obtaining oil and gas production on properties. The correspondence included other properties in which Mase had an interest that were not owned by Red Run. Gill proposed that he would prepare a geological report and base maps to attract companies and then use those in his marketing efforts. Gill wrote: [m]y real incentive to sell this package wouldn t be this retainer, but rather an overriding royalty interest in the acreage. If the acreage is burdened only by your 12.5% landowner royalty, there would be plenty of room to include a 1/32 (3.125%) O.R.R.I. in the form of a geological fee. Gill further noted that [t]his is quite common in oil and gas deals of this nature, and it would not affect your net income as it would be in addition to your override, paid out of production and borne by the operator and/or investors. Since the non-royalty interest could still be as high as %, Gill believed the property would still be very attractive even with his ORRI. Gill proposed that the ORRI assignment be made after the geological work has been completed and before undertaking the marketing efforts. This override would be evidenced by an assignment of record and be recorded in the appropriate jurisdiction. Gill explained his opinion that it was important to present the acreage together as a geological play so that companies do not cherry pick acreage. Cherry picking would reduce the income

15 9 (2015) Red Run Mountain, Inc. v. Earth Energy potential for the entire acreage. 15 On April 24, 2003, Red Run and Gill entered a contract that provided for payment of 3.125% overriding royalty interest payments (ORRI) to Gill from any oil and/or natural gas produced on Red Run s property by a company which Gill marketed. This provision was to compensate Gill for time spent on the marketing phase. The provision was to be assigned by contract and referenced in the oil and gas leases. The assignment was to be made after the product generation phase, but before the marketing phase. Mase signed the contract as president of Red Run. The secretary of Red Run, Patricia Warren, also signed the contract. Her signature appeared above the line marked for a witness. The contract divided the relationship into two phases, the product generation phase and the marketing phase. The agreement lasted 30 months from the time that the promotional materials are completed. Drilling commenced within five year period of the oil and gas lease to trigger an extension of the original term. However, as of the date of the filing of the Complaint, no royalty payments had been made because no oil or gas had been extracted from the acreage. The April 24, 2003 agreement was not specifically disclosed to the other shareholders until September On October 10, 2003, Red Run and Gill executed a new agreement to commence the marketing phase because prospective purchasers preferred to prepare their own leases, and the April 24, 2003 agreement called for a new contract and language in the lease agreement before starting the marketing efforts. The new agreement reiterated paragraph 8 and provided for compensation for

16 16 Pa. D. & C.5th Red Run Mountain, Inc. v. Earth Energy the marketing phase in the amount of 3.125% of 8/8ths ORRI from any oil and/or natural gas produced from the acreage being marketed. Gill listed the companies it contacted as of October 2003, which included East Resources. On June 14, 2005, Red Run entered an oil and gas lease with East Resources, Inc. (now Shell). East Resources Inc. was a company marketed by Gill. The lease gave East Resources five years to drill to trigger rights to extend the lease. The oil and gas lease provided a royalty payment to Red Run in the amount of 1/8 or 12.5% of the gross proceeds for oil and gas production on the property. The oil and gas lease also required payment of $10 per acre the first year and $5 per acre thereafter to keep lease in play. This provision was consistent with that which was recommended by Gill in the October 9, 2003 letter. The lease was executed by Mase for Red Run. The lease did not contain an assignment or provision for payment of ORRI to Gill. On June 15, 2005, Gill wrote to Mase. Gill stated that he was glad to hear that East Resources had expressed interest and reminded Mase about the 1/32 overriding royalty interest encumbering the property. Gill indicated that an assignment should be recorded. On July 13, 2005, Gill contacted East Resources about the ORRI assignment. East Resources refused to amend the lease to include the assignment. On August 1, 2005, Mase executed an Assignment and Conveyance of Overriding Royalty Interest to assign 3.125% of 8/8ths (25% of Red Run s royalty payment) to

17 9 (2015) Red Run Mountain, Inc. v. Earth Energy Gill which was filed October 17, 2005 in the Register and Recording Office of Lycoming County. On October 15, 2008, Susan McDowell s shares of Red Run transferred to Jeff Pifer. Pifer was elected as a director. On October 20, 2008, Red Run s counsel, Thomas Marshall, Esq., and the firm of McNerney, Page, Vanderlin & Hall, sent Gill a letter stating that Gill had not been instrumental in obtaining the lease with East Resources, that the 3.125% ORRI was excessive and unconscionable and proposing a reduction to 1% in lieu of litigation. On December 9, 2008, an attorney for Gill countered with a proposal of 2.5%. Ultimately the parties agreed to 2%. On March 6, 2009, Mase executed an amended assignment and conveyance of overriding royalty interest that reduced the ORRI from 3.125% to 2%. The amendment was recorded in the Lycoming County Register and Recorder s Office on April 9, On April 27, 2010, Roy Cummings, Sr. transferred all of his shares of stock equally to his three sons, Roy W. Cummings, Jr., Lee P. Cummings, and Gary R. Cummings. At that time, Lee Cummings was aware that there was an oil and gas lease on the property. In September 2010, the board of directors met at Mase s house to discuss a buy-out for Mase. Mase was ill with cancer. At that time, Mase discussed how the consulting agreements and assignment of the ORRI of 2% would impact his buy-out price. It was reported that Mase prefaced the discussion with stating he wanted to come clean about something. Mase maintained that he had authority to execute the documents and never conceded that he did not have authority. This meeting is the first time 17

18 18 Pa. D. & C.5th Red Run Mountain, Inc. v. Earth Energy that Mase discussed the ORRI with the board members. The board members had been unaware of the recorded assignments. On January 19, 2011, Roy Cummings, Jr. became president of Red Run. In January 2011, Red Run issued a corporate resolution signed on January 23, 2011 authorizing Mase to begin negotiations with Gill to cap his ORRI to one million dollars. McNerney, Page, Vanderlin & Hall (McNerney Page) represented Red Run in these negotiations. Gill did not agree and this litigation followed. Throughout the years, Red Run utilized the law firm of McNerney Page to represent its interests. McDowell, Cummings, Sr., and Mase all considered the law firm McNerney Page to be Red Run s legal counsel over the years. As attorney for Red Run, attorneys from McNerney Page answered questions, prepared agreements, attended board meetings, and consulted on an as needed basis. Mase served as the point of contact with McNerney Page. When dealing with closed corporations, the attorney does not undertake to speak to each board member or shareholder about representation sought by the president of the company. In 2009, McNerney Page billed Red Run regarding conversations with EEC attorneys and drafting assignment of royalties and revisions. Summary Judgment Legal Standards Pursuant to Pa. R.C.P , the Court may grant summary judgment at the close of the relevant proceedings

19 9 (2015) Red Run Mountain, Inc. v. Earth Energy if there is no genuine issue of material fact or if an adverse party has failed to produce evidence of facts essential to the cause of action or defense. Keystone Freight Corp. v. Stricker, 31 A.3d 967, 971 (Pa. Super. 2011). A nonmoving party to a summary judgment motion cannot rely on its pleadings and answers alone. Pa. R.C.P ; 31 A.3d at 971. When deciding a motion for summary judgment, the Court must view the record in the light most favorable to the non-moving party, with all doubts as to whether a genuine issue of material fact exists being decided in favor of the non-moving party. 31 A.3d at 971. If a non-moving party fails to produce sufficient evidence on an issue on which the party bears the burden of proof, the moving party is entitled to summary judgment as a matter of law. Keystone, 31 A.3d at 971 (citing Young v. Pa. Dep t of Transp., 744 A.2d 1276, 1277 (Pa. 2000). Statutory Recognition of Properly Executed Documents for Corporation 15 Pa.C.S provides that contracts meeting certain requirements shall be held to have been properly executed for and in behalf of the corporation. It provides, in pertinent part, as follows. SUBCHAPTER A. GENERAL PROVISIONS Form of execution of instruments. General rule. Any form of execution provided in the articles or bylaws to the contrary notwithstanding, any note, mortgage, evidence of indebtedness, contract or other document, or any assignment or endorsement thereof, executed or entered into between any business 19

20 20 Pa. D. & C.5th Red Run Mountain, Inc. v. Earth Energy corporation and any other person, when signed by one or more officers or agents having actual or apparent authority to sign it, or by the president or vice president and secretary or assistant secretary or treasurer or assistant treasurer of the corporation, shall be held to have been properly executed for and in behalf of the corporation. 15 Pa.C.S (2014) Agency Inherent/Implied/Apparent Authority and Authority by Estoppel Inherent authority is defined in the Restatement (Second) of Agency as a term used... to indicate the power of an agent which is derived not from authority, apparent authority or estoppel, but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent. Ortiz v. Duff- Norton Co., 975 F. Supp. 713 (E.D. Pa. Aug. 13, 1997) quoting, RESTATEMENT (SECOND) OF AGENCY 8A (1957). The Restatement (Second) of Agency 161 provides the following. A general agent for a disclosed or partially disclosed principal subjects his principal to liability for acts done on his account which usually accompany or are incidental to transactions which the agent is authorized to conduct if, although they are forbidden by the principal, the other party reasonably believes that the agent is authorized to do them and has no notice that he is not so authorized. RESTATEMENT (SECOND) OF AGENCY 161 (1957). Inherent authority is authority derived by virtue of being given the position by the principal[.] Ortiz, supra, 975 F.

21 9 (2015) Red Run Mountain, Inc. v. Earth Energy Supp. at 720. The reasoning behind this type of authority involves the understanding that commercial convenience requires that the principal should not escape liability where there have been deviations from the usually granted authority by persons who are such essential parts of his business enterprise. Ortiz, supra, 975 F. Supp. at 720, quoting, RESTATEMENT (SECOND) OF AGENCY 161 cmt. a. As between an equally innocent principal and third party, liability is best placed on the party with the most control over the agent, i.e. the principal. Ortiz, supra, 975 F. Supp. at 720, citing, See Lincoln Bank v. National Life Ins. Co., 476 F. Supp. 1118, 1123 (E.D. Pa. 1979). Moreover, because the principal enjoys the benefits of employing an agent, it is only fair that the principal bear the burden of supervision. Ortiz, supra, 975 F. Supp. at 720, citing, RESTATEMENT (SECOND) OF AGENCY 161 cmt. a. While not expressly adopted by the Supreme Court of Pennsylvania, in Ortiz, the District Court examined in detail the case-law in the area and concluded that the concepts of inherent authority as contained in Sections 8A or 161 of the Restatement (Second) of Agency had very clearly been adopted in Pennsylvania. Ortiz, supra, 975 F. Supp. at Specifically, the District Court noted that federal courts have cited Rednor & Kline[, Inc. v. Department of Highways, 413 Pa. 119, 125, 196 A.2d 355, 358 (1964)] as Pennsylvania s version of inherent authority and the Restatement (Second) of Agency 8A Ortiz, supra, 975 F. Supp. at 721, citing, Tiernan v. Devoe, 923 F.2d 1024, 1036 n.9 (3d Cir. 1991). In Rednor, the Pennsylvania Supreme Court stated the 21

22 22 Pa. D. & C.5th Red Run Mountain, Inc. v. Earth Energy following. The authority of the President of a small corporation, which in this case is run or managed by four persons, to act for the corporation in the situation here involved, should be and will be sustained on the ground of his implied or, as the Restatement (2d), Agency, 8A, calls it inherent, as well as his apparent authority. Rednor, supra, 196 A.2d at 358. (citations omitted) Rednor, involved an eminent domain proceeding in which the corporation, Rednor & Kline, sought detention damages. The Department of Highways contended that Rednor & Kline was not entitled to detention damages because any delay in payment was a result of an excessive or exorbitant or unconscionable claim of $106,000 that had been submitted by Rednor & Kline. Rednor & Kline sought a new trial on the grounds that the $106,000 claim document was inadmissible because the president of Rednor & Kline was not authorized to execute the document. In concluding that the president of the corporation was authorized to execute the document, the Court noted that: Rednor & Kline, Inc. was, we repeat, a very small corporation, composed of four persons, all of whom were active in the management of its business. Implied Authority and Apparent Authority Intertwined with inherent authority is the concept of implied and apparent authority. Implied authority exists in situations where the agent s actions are proper, usual and necessary to carry out express agency. Walton v. Johnson, 2013 PA Super 108, 66 A.3d 782, 786 (Pa. Super. 2013). (citation omitted)

23 9 (2015) Red Run Mountain, Inc. v. Earth Energy Apparent authority exists where a principal, by words or conduct, leads people with whom the alleged agent deals to believe that the principal has granted the agent authority he or she purports to exercise. Turner Hydraulics, Inc. v. Susquehanna Constr. Corp., 414 Pa. Super. 130, (Pa. Super. 1992) (citations omitted) The third party is entitled to believe the agent has the authority he purports to exercise only where a person of ordinary prudence, diligence and discretion would so believe. Id. Thus, a third party can rely on the apparent authority of an agent when this is a reasonable interpretation of the manifestations of the principal. Id. Authority by Estoppel Authority by estoppel occurs when a principal, by his culpable negligence, permits an agent to exercise powers not granted to him, even though the principal did not know or have notice of the agent s conduct. In the event that a principal fails to take reasonable steps to safeguard himself and to safeguard third persons dealing with an agent from harm caused by the agent, then the principal may be estopped from denying the authority of the agent. Apex Financial Corp. v. Decker, 245 Pa. Super. 439, , 369 A.2d 483, 486 (Pa. Super. 1976), citing, Reifsnyder v. Dougherty, 301 Pa. 328, 152 A. 98 (1930). The doctrine of agency by estoppel as defined by the RESTATEMENT (SECOND) OF AGENCY, 8B was embraced in Reifsnyder, supra. Turnway Corp. v. Soffer, 461 Pa. 447, (Pa. 1975). While an agent cannot simply by his own words vest himself with authority, a principal who clothes his agent with apparent authority is estopped to deny such authority. Id. By carelessness or 23

24 24 Pa. D. & C.5th Red Run Mountain, Inc. v. Earth Energy negligence, the authority emanates from the action of the principal. See, e.g., Id. Discussion Applying these basic legal standards to the present case, the Court concludes as a matter of law that Gill is entitled to summary judgment. The Court will first address Gill s contention that the documents are presumptively valid pursuant to 15 Pa.C.S Second, the Court will discuss Gill s contention that Mase had implied/inherent/ apparent authority and authority by estoppel to enter the contracts and Red Run is bound by them Pa.C.S Gill s first contention is that he is entitled to summary judgment because Red Run is bound by documents that the President of its corporation executed pursuant to 15 Pa.C.S Gill argues that the plain reading of the statute means that a contract executed by a president of a corporation alone is properly executed regardless of whether the president had authority. The statute provides that such contracts are properly executed when signed...by the president or vice president and secretary or assistant secretary or treasurer or assistant treasurer of the corporation[.] 15 Pa.C.S The Court s plain reading of that portion of the statute is that it requires two signatures to qualify as presumptively properly executed. It requires the signature of either the president or vice president and the signature of one of the following: 3. By opinion and order filed May 30, 2013 on preliminary objections, this Court ruled that Pennsylvania Law applied to Red Run s claims against Gill. Accordingly, this opinion discusses Pennsylvania Law.

25 9 (2015) Red Run Mountain, Inc. v. Earth Energy secretary or assistant secretary or treasurer or assistant treasurer of the corporation. Next, Gill contends that the April 24, 2003 Contract is properly executed pursuant to 15 Pa.C.S because it was signed by Richard D. Mase as president of Red Run and witnessed by Patricia Warren, the secretary/treasurer for Red Run. The Court agrees. The Court is not aware of any cases that support the proposition that 15 Pa.C.S requires anything other than the officers signature. The Court concludes that the secretary/treasurer s signature on the document with the president s signature satisfies the plain wording of 15 Pa.C.S even when it appears on a line labeled as witness. As such, Gill is entitled to summary judgment on his claim that the April 23, 2003 agreement is enforceable against Red Run. Inherent / Implied / Apparent Authority and Agency by Estoppel Even if the April 23, 2003 agreement were not presumptively valid, the Court concludes that all of the contracts at issue are enforceable by Gill as authorized by Red Run. Upon exhaustive review of the entire summary judgment record, the Court concludes there are no material facts in dispute, and Gill is entitled to summary judgment Although the question of whether a principal agent relationship exists is ordinarily one of fact for the jury, where the facts giving rise to the relationship are not in dispute, the question is one which is properly decided by the court. Joyner v. Harleysville Ins. Co., 393 Pa. Super. 386, 393, 574 A.2d 664, 668 (Pa. Super. 1990) (citations omitted) The Court strained to identify issues of material fact in dispute from the summary judgment record but found none. Gill s summary judgment motion is not based upon actual or expressed authority of Mase. The Court does not discuss whether Mase had actual or expressed authority. 25

26 26 Pa. D. & C.5th Red Run Mountain, Inc. v. Earth Energy The Court concludes that Mase s authority is clearly supported by our Supreme Court s pronouncements in Rednor & Kline, Inc. v. Department of Highways, 413 Pa. 119, 125, 196 A.2d 355, 358 (1964). In Rednor, the president of a small corporation had implied, inherent and apparent authority to execute the document making a claim to the Department of Highways by virtue of his position as president and in light of the small nature of the corporation. The document was signed Rednor & kline, Inc. [by] Harry Kline, Pres. Rednor, supra, 196 A.2d at 358. While the document in Rednor was perhaps less significant than the agreements in the present case, the Rednor Court focused on the position of the agent and the small nature of the corporation. In concluding that the president of the corporation was authorized to execute the document, the Court noted that: Rednor & Kline, Inc. was, we repeat, a very small corporation, composed of four persons, all of whom were active in the management of its business. As in Rednor, Red Run is a very small corporation. It had only three stockholders who also served as sole directors; Mase conducted the business of Red Run without much supervision or oversight from the other two. For 20 years, Mase served as both a board of directors and as President and ran the business. Mase managed Red Run between meetings, which occurred only once a year. When the board meetings occurred, they were simple. Despite this simplicity, records show significant funds transferred in and out of accounts for Red Run and that Red Run managed significant funds with respect to its property. Mase was the only shareholder who wrote

27 9 (2015) Red Run Mountain, Inc. v. Earth Energy checks. The Board never discussed any limitations upon the authority of Mase. Red Run placed Mase, one of three shareholders, in the position of president. The other two shareholders, Susan McDowell (and previously her husband) and Roy W. Cummings, Sr. trusted Mase to run the business of Red Run. The shareholders, McDowell, followed by her son Jeff Pifer as of 2009, and Cummings, Sr., allowed Mase to run the business unchecked until September Cummings, Sr. did not know why Red Run incorporated in Delaware. Roy Cummings, Sr. did not review the mail of the corporation or go over corporate records. The Board never voted on something as significant as whether to enter the oil and gas lease with East Resources. It is unclear from the evidence whether the lease was even discussed before or after it was executed by Mase. 5 By placing Mase in the position of president of a small corporation and by not supervising or checking on his activities, Red Run, as principle, manifested conduct to vest Mase with inherent/ apparent/implied authority to enter the contracts with Gill. Red Run has not pointed to evidence in support of its contention that this lease was outside the ordinary business dealing of Red Run. At most, they assert that the shareholders were unaware and would have had to vote on something that breached the covenant of the mountain. 5. Red Run points to Susan McDowell s deposition testimony as evidence that the board of directors / shareholders was aware of the lease and approved it. However, McDowell s testimony is that she did not know whether she discussed the lease before or after the lease was actually signed. McDowell depo., 44:1-4. McDowell testified that one of the ways she knew she was aware of the lease was because there were obvious indications of it on the land itself. McDowell depo., 42:

28 28 Pa. D. & C.5th Red Run Mountain, Inc. v. Earth Energy Specifically, Red Run asserts that McDowell explained that in order for an agreement of that magnitude to be consummated, the other shareholders would have had to vote on it; and the fact that a diminution in the ownership rights of fellow shareholders without their knowledge or approval violated the covenants of the mountain. Red Run s Brief, at However, Red Run shareholders were unaware of much of Mase s business activities. Mase entered an oil and gas lease with East Resources without a vote from the Board. McDowell, who referenced the so called covenant of the mountain, could not say whether an equivalent transaction, execution of an oil and gas lease on almost 3,000 acres of property, was discussed before or after it was signed. She knew about the oil and gas lease because she saw signs of it on the property. McDowell s opinion, after the fact, that the contracts with Gill would have required a vote, is inconsistent with the practice of Red Run as evidenced in the summary judgment record. While Red Run broadly claims that the agreement was not in the ordinary course of the business, that opinion is not consistent with the record of the practice of Red Run. McDowell s opinion was based upon her claim that the agreements with Gill constituted a diminution in ownership rights of fellow shareholders. The April 24, 2003 agreement, however, provided that the ORRI was to be paid by the company executing an oil and gas lease on the property, not by Red Run. At the time, no oil and gas lease existed and the decision whether to enter a lease or which company to enter it with had not been made. Red Run could have entered a lease with a company that had not been marketed by Gill. As such, the significance of the

29 9 (2015) Red Run Mountain, Inc. v. Earth Energy Gill Agreements is equivalent or less than the significance of the oil and gas lease. There is no justification to suggest that the Gill Agreements violated the covenants of the mountain when the oil and gas lease did not. McDowell s unsubstantiated opinion, which is not based upon expertise and which is not supported by the practice or Red Run, is insufficient to create an issue of fact. Red Run contends that Mase was not authorized to enter the Gill agreements because they created a diminution in the value of their land interests. However, that was not a consequence of the proposed agreement with Gill. It was a consequence of the mistake of failing to include the ORRI in the lease with East Resources. It is not clear to the Court how this transaction was any less significant than the oil and gas lease, which was never voted on by the Board and which McDowell cannot state whether it was discussed before or after it was signed. It was the error of Mase which reduced the amount of income available from the oil and gas lease, not the agreements with Gill. The Court suggests it is truly the error of Mase, and not his lack of authority, to which Red Run objects. Red Run contends that Gill had notice and/or turned a blind eye to Mase s lack of authority. However, Red Run does not point to evidence that Gill was aware that Mase lacked authority. Red Run contends that Gill knew that Mase was not authorized to make the agreements with him because Gill did not deal with anyone but Mase and because Gill sent correspondence to Mase s home. The Court concludes that these arguments are woefully insufficient to raise an issue of material fact as to whether Gill knew that the Mase was not authorized to enter the 29