NON-PRECEDENTIAL DECISION SEE SUPERIOR COURT I.O.P 65.37 RONALD LUTZ AND SUSAN LUTZ, : IN THE SUPERIOR COURT OF : PENNSYLVANIA Appellants : : v. : : EDWARD G. WEAN, JR., KRISANN M. : WEAN AND SILVER VALLEY DRILLING : & BLASTING, INC., : : Appellees : No. 703 EDA 2013 Appeal from the Order entered February 13, 2013, Court of Common Pleas, Monroe County, Civil Division at No. 6686 CIVIL 2008 BEFORE: BENDER, P.J., DONOHUE and MUSMANNO, JJ. MEMORANDUM BY DONOHUE, J.: FILED NOVEMBER 01, 2013 Appellants, Ronald Lutz and Susan Lutz (the Lutzs ), appeal from the trial court s order dated February 13, 2013, granting the motion for summary judgment of Appellees, Edward G. Wean, Jr., Krisann M. Wean (the Weans ), and Silver Valley Drilling and Blasting, Inc. ( Silver Valley ). For the reasons that follow, we reverse the order granting summary judgment and remand the case for further proceedings consistent with this memorandum. In 2003, the Lutzs and the Weans together incorporated West End Drilling and Blasting, Inc. ( West End ). Ronald Lutz and Edward Wean each owned 40% of the stock and Susan Lutz and Krisann Wean each owned 10% of the stock. In March 2005, the Lutzs filed a petition for the involuntary
dissolution and winding up of West End, pursuant to 15 Pa. C.S.A. 1981 (hereinafter, the West End Litigation ), along with the appointment of a liquidating receiver pursuant to 15 Pa. C.S.A. 1984, 1985. The trial court appointed John C. Prevoznik, Esquire, as the Receiver in the West End Litigation. In July 2008, the Lutzs filed a complaint against the Weans and Silver Valley Drilling and Blasting, Inc. ( Silver Valley ), a corporation in the same general business as West End (hereinafter, the Silver Valley Litigation ). In a subsequently filed amended complaint, the Lutzs alleged that the Weans had effectively controlled the operation and finances of West End and had oppressively obstructed the Lutzs involvement in the business. Amended Complaint, 12/10/2010, at 22-23. Count I sets forth a claim against the Weans for breach of fiduciary duty; Count II asserts a claim against Silver Valley for aiding and abetting a breach of fiduciary duty by the Weans; and Count III states a fraud claim against all three defendants. In October 2008, the Receiver filed a pleading to file tax returns, pay corporate money into court, and terminate the receivership. On February 19, 2009, the trial court, per the Honorable Ronald E. Vican, P.J., granted the requested relief. Judge Vican subsequently granted the Receiver s request for more time to resolve certain corporate tax issues. On November 29, 2010, Judge Vican entered a final order terminating the receivership and the West End Litigation. - 2 -
In September 26, 2012, the Lutzs filed a motion for partial summary judgment in the Silver Valley Litigation, and the Weans and Silver Valley responded with a motion for summary judgment. On February 13, 2013, the trial court, per the Honorable David J. Williamson, granted summary judgment in favor of the Weans and Silver Valley. Judge Williamson ruled that Judge Vican s order terminating the West End Litigation constituted a bar to litigating the Lutzs claims in the Silver Valley Litigation, per the doctrine of res judicata, since those claims could have been raised in the West End Litigation. This timely appeal followed, in which the Lutzs raise four issues for our consideration and determination: 1. Does the doctrine of res judicata support the granting of [the Weans and Silver Valley s] motion for summary judgment and dismissal of [the Lutzs] lawsuit with prejudice[.] 2. Did the law of the case doctrine and/or the rule of coordinate jurisdiction preclude the court below from granting [the Weans and Silver Valley s] motion for summary judgment on [the] basis of res judicata[.] 3. Does Pa. Con. Stat. 1979(a) permit an action to be brought against a shareholder prior to and subsequent to a dissolution of a corporation[.] 4. Do genuine issues of material fact exist which preclude the granting of [the Weans and Silver Valley s] motion for summary judgment[.] Lutzs Brief at 4. We will address the second listed issue, as we consider it to be dispositive. - 3 -
The test for determining whether a cause of action is a direct one belonging to the plaintiff or a derivative one belonging to the corporation is straightforward. If the injury is one to the plaintiff as a stockholder and to him individually, and not to the corporation... it is an individual action. Fishkin v. Hi-Acres, Inc., 462 Pa. 309, 316 n.4, 341 A.2d 95, 98 n.4 (1975) (quoting 13 Fletcher Cyclopedia Corporations (Perm. Ed.) 5911); see also Reifsnyder v. Pittsburgh Outdoor Advertising Co., 405 Pa. 142, 147, n. 4, 173 A.2d 319, 321 (1961). On the other hand, if the wrong is primarily against the corporation, the redress must be brought by the corporation, except where a derivative action is allowable, and a stockholder may not sue as an individual. The action is derivative, i.e., in the corporate right, if the gravamen of the complaint is injury to the corporation, or to the whole body of stock or property, without any severance or distribution among individual shareholders, or if it seeks to recover assets for the corporation or to prevent dissipation of its assets. 13 Fletcher Cyclopedia Corporations (Perm. Ed.) 5911. Under Pennsylvania law, a shareholder cannot ordinarily file a derivative action without first making a demand on the corporation to pursue the action. Cuker v. Mikalauskas, 547 Pa. 600, 613, 692 A.2d 1042, 1049 50 (1997). A liquidating receiver stands in the same position as the corporation and has the rights and powers of the corporation. Schmidt v. Paul, 377 Pa. 377, 381-82, 105 A.2d 118, 121 (1954). By statute, a liquidating receiver - 4 -
must collect all of the assets of the corporation, from whatever source, and then distribute them to, inter alia, corporate creditors and shareholders. 15 Pa. C.S.A. 1985, 1975. His power to collect assets includes the authority to file suit in all courts in his own name as receiver of the corporation. 15 Pa. C.S.A. 1985. In his written opinion granting summary judgment in favor of the Weans and Silver Valley in the Silver Valley Litigation, Judge Williamson described the Lutzs amended complaint as alleging that the Weans acted improperly while shareholders with [the Lutzs] in the West End corporation, [diverting] assets to [Silver Valley]. Trial Court Opinion, 2/13/2013, at 5-6. According to Judge Williamson, because the Receiver had the duty to collect all of West End s corporate assets, the Lutzs causes of action in the Silver Valley Litigation, which alleged a diversion of West End s assets, properly belonged to West End (and thus to the Receiver). As a result, Judge Williamson ruled that the Lutzs should have brought their claims through the [R]eceiver in the West End Litigation Id. at 6-7. The Receiver never asserted any such claims, however, and Judge Vican terminated the West End Litigation and approved the Receiver s action in his November 29, 2010 order. Id. at 2. Because the Lutzs did not bring their claims through the Receiver, and they did not object to entry of the November 29, 2010 order, Judge Williamson ruled that the doctrine of res judicata precluded the Lutzs - 5 -
from continuing to prosecute the same claims in the Silver Valley Litigation. Id. at 7. The coordinate jurisdiction rule provides that a judge should not overrule the previous decision of another judge of coordinate jurisdiction presiding over the same case. Schwarz v. Wells Fargo Advisors, LLC, 58 A.3d 1270, 1274 (Pa. Super. 2012) (citing Ario v. Reliance Ins. Co., 602 Pa. 490, 509, 980 A.2d 588, 599 (2009)). The rule, applicable in both civil and criminal cases, falls within the ambit of the law of the case doctrine. Riccio v. American Republic Ins. Co., 683 A.2d 1226, 1230 (1996) (quoting Commonwealth v. Starr, 541 Pa. 564, 573, 664 A.2d 1326, 1331 (1995)). In Starr, our Supreme Court instructed that the law of the case doctrine refers to a family of rules which embody the concept that a court involved in the later phases of a litigated matter should not reopen questions decided by another judge of that same court or by a higher court in the earlier phases of the matter. Id. at 574, 664 A.2d at 1331. The rule is based on a policy of fostering the finality of pre-trial rulings in an effort to maintain judicial economy and efficiency, and operates (1) to protect the settled expectations of the parties; (2) to insure uniformity of decisions; (3) to maintain consistency during the course of a single case; (4) to effectuate the proper and streamlined administration of justice; and (5) to bring litigation to an end. Id.; Okkerse v. Howe, 521 Pa. 509, 516-517, 556 A.2d 827, 831 (1989). - 6 -
Based upon our review of the certified record on appeal, we conclude that Judge Williamson s grant of summary judgment in favor of the Weans and Silver Valley violated the coordinate jurisdiction rule. It constituted a direct overruling of Judge Vican s denial of preliminary objections, previously filed by the Weans and Silver Valley. In his written opinion denying the preliminary objections, Judge Vican summarized the arguments presented by the Weans and Silver Valley as follows: In their first Preliminary Objection, [the Weans and Silver Valley] assert that the Lutzs complaint, brought in their individual capacities, seeks redress for injuries to a corporation and therefore should be brought derivatively in the name of the corporation. [The Weans and Silver Valley] contend that [w]here the shareholder cannot show any direct injury, personal to himself and apart from injury to the corporation, he cannot sue in his own right. [The Weans and Silver Valley] argue that the Lutzs action is a claim for redress for injuries to West End and therefore must be brought as a shareholder s derivative action. [The Weans and Silver Valley] further argue that Because the Lutzs complaint does not show any direct injury, personal to themselves and apart from injury to West End, and (sic) they cannot sue in their own right. The cause of action, if any, lies with West End, and West End is the proper plaintiff. Trial Court Opinion, 2/11/2009, at 3 (citations omitted) (emphasis added). Judge Vican began by disputing the description of the Lutzs claims in the Silver Valley Litigation as derivative in nature: [T]he present case presents a situation where shareholders, in their individual capacities, are filing suit against other shareholders of the corporation, alleging direct - 7 -
injuries to themselves. Id. at 4. In this regard, Judge Vican indicated that Pennsylvania law allows a minority shareholder, especially in a close corporation, to maintain a direct suit against a majority shareholder for oppressive conduct. Id. at 8 (citing Feber v. American Lamp Corp., 503 Pa. 489, 496, 469 A.2d 1046, 1050 (1983)). Although the Lutzs and the Weans each owned 50% of West End s stock, Judge Vican ruled that the Lutzs qualified as minority shareholders in asserting a breach of fiduciary duty claim, citing to Liss v. Liss, 2002 WL 576510 at *7 (Philadelphia Ct. Com. Pleas, March 22, 2002) and Baron v. Pritzker, 2001 WL 1855054 at *6 (Philadelphia Ct. Com. Pleas, March 6, 2001). 1 Judge Vican acknowledged that the Lutzs had also asserted various derivative injuries asserted on behalf of [West End] in their complaint. Judge Vican ruled, however, that in this case, the Lutzs could assert these claims directly in the Silver Valley Litigation without first making a demand of West End to file them derivatively. In Cuker v. Mikalauskas, 547 Pa. 600, 692 A.2d 1042 (1997), the Pennsylvania Supreme Court adopted various provisions of the Principles of Corporate Governance authored by the 1 In Baron, the trial court cited to cases from other jurisdictions in support of its ruling regarding the fiduciaries duties owed by 50%-50% shareholders in a close corporation. Delaney v. Georgia Pacific Corp., 564 P.2d 277, 281 (Or. 1977) (holding that equal owners of a close corporation are each entitled to the other's performance of fiduciary duties of loyalty, good faith, and full disclosure ); Gilbert v. El Paso Co., 490 A.2d 1050, 1055 (Del. Ch. 1984) (holding that a non-majority shareholder who controls or dominates the corporation owes fiduciary duties). - 8 -
American Law Institute (the ALI Principles ), including the demand requirement before a shareholder may file a derivative action. Id. at 613, 692 A.2d at 1049; Drain v. Covenant Life Ins. Co., 551 Pa. 570, 580-81, 712 A.2d 273, 278 (1998). In reaching his decision that the Lutzs could bring their claims directly in the Silver Valley Litigation rather than having to assert them derivatively after making demand upon West End, Judge Vican applied section 7.01(d) of the ALI Principles, which provides as follows: (d) In the case of a closely held corporation, the court in its discretion may treat an action raising derivative claims as a direct action, exempt it from those restrictions and defenses applicable only to derivative actions, and order an individual recovery, if it finds that to do so will not (i) unfairly expose the corporation or the defendants to a multiplicity of actions, (ii) materially prejudice the interests of creditors of the corporation, or (iii) interfere with a fair distribution of the recovery among all interested persons. ALI Principles, 7.01(d). Although the Supreme Court in Cuker did not specifically adopt section 7.01(d) of the ALI Principles, it commented that The entire publication, all seven parts, is a comprehensive, cohesive work more than a decade in preparation. Courts of this Commonwealth are free to consider other parts of the work and utilize them if they are helpful and appear to be consistent with Pennsylvania law. 2 Cuker, 547 at 614 n.5, 692 A.2d at 1050 n.5. 2 In his decision to apply section 7.01(d), Judge Vican followed similar decisions by other trial courts, including those in Liss, Baron, and Levin v. - 9 -
Applying section 7.01(d) in this case, Judge Vican ruled as follows: First, there is no danger of a multiplicity of suits because the Lutzs and Weans are the only shareholders and directors of West End. (ALI 7.01(d)(i).) Further, the Weans are not precluded from bringing a counterclaim against the Lutzs if the facts warrant such a claim. Second, pursuant to reports from the Receiver in the [West End Litigation] (No. 1504 Civil 2005), all creditors of West End have been paid; thus, allowing a direct action in the present case will not materially prejudice the interests of the creditors of West End. (ALI 7.01(d)(ii)). Finally, allowing a direct action will not interfere with a fair distribution of the recovery among all interested persons because such recovery can be decided at trial and the named parties appear to be the only interested persons. (ALI 7.01(d)(iii).) Based on the foregoing, we find that [the Lutzs] have met the three-prong test set forth in 7.01(d) of the ALI Principles. Trial Court Opinion, 2/11/2009, at 7-8. Based on these findings, Judge Vican held that in exercising the discretion granted to us by the Supreme Court of Pennsylvania in Cuker, we will treat all of [the Lutzs ] claims including any corporate waste claims as direct claims for which demand is not required. Id. at 8. Schiffman, 2001 WL 1807922 at *5 (Philadelphia Ct. Com. Pleas, February 1, 2001). In Lemenestrel v. Warden, 964 A.2d 902 (Pa. Super. 2008), this Court rejected an appellant s argument that section 7.01(d) applied, but only because sufficient facts had not been alleged in support. Id. at 922 ( [T]he LeMenestrels fail to point to places in the record that support their argument that all of the criteria noted above, i.e., that a direct action would not expose the corporation or defendants to multiple actions, materially prejudice creditors, etc., are present in the instant case. ). - 10 -
Judge Williamson s grant of summary judgment in favor of the Weans and Silver Valley constitutes a direct overruling of Judge Vican s denial of preliminary objections earlier in the case. 3 Simply put, Judge Vican ruled that the Lutzs could assert their claims, including the corporate waste claims, as direct claims in a separate proceeding (the Silver Valley Litigation). Judge Williamson ruled directly to the contrary, that all of the 3 Departure from the coordinate jurisdiction rule is allowed only in exceptional circumstances such as where there has been an intervening change in the controlling law, a substantial change in the facts or evidence giving rise to the dispute in the matter, or where the prior holding was clearly erroneous and would create a manifest injustice if followed. Starr, 541 Pa. at 575-76, 664 A.2d at 1332. In their appellate brief, the Weans and Silver Valley do not argue that there has been any intervening change in the controlling law or that Judge Vican s ruling was clearly erroneous. The Weans and Silver Valley do argue, however, that after denying their preliminary objections, Judge Vican subsequently ruled on a motion for summary judgment filed in August 2009, in which they raised, inter alia, the same res judicata argument later accepted by Judge Williamson. Weans/Silver Valley Brief at 17. According to the Weans and Silver Valley, if Judge Vican s denial of the preliminary objections had precluded consideration of a res judicata argument, he would have denied the motion for summary judgment on its merits, rather than merely doing so because it was premature. Id. We disagree. From our review of the record, it is clear that Judge Vican denied the August 2009 motion for summary solely because discovery was not yet complete and thus it was premature to rule on any substantive issues presented by the parties. In his written opinion, Judge Vican dedicated less than a page of text to the motion for summary judgment, citing to the applicable rules of civil procedure and concluding that [i]nasmuch as we have determined that discovery is not complete in this matter, Defendants Motion for Summary Judgment must be DENIED as premature. Trial Court Opinion, 12/29/2009, at 13. The record on appeal contains no information or evidence to suggest that Judge Vican considered the Weans res judicata argument on its merits at this time. - 11 -
Lutzs claims involved the diversion of assets from West End and thus had to be asserted through the Receiver in the West End Litigation, rather than as direct claims in the Silver Valley Litigation. In this regard, Judge Williamson apparently misunderstood or misconstrued the nature of Judge Vican s November 29, 2010 order terminating the West End Litigation. While it is true that this order did not contain any language preserving the Lutzs claims in the Silver Valley Litigation, it may not be interpreted in a vacuum without any consideration of the events resulting in its entry. The Receiver filed his initial motion to terminate the West End Litigation in October 2008, in a pleading entitled Receiver s Motion to Authorize Filing of Amended Tax Returns, Pay Corporate Funds into Court, Approve Receiver s Acts and Terminate Receivership. In his motion, the Receiver advised Judge Vican as follows: 6. Further, the Receiver believes the continuation of the receivership serves no useful purpose while it depletes corporate assets while generating charges for the services rendered by the receiver, his attorney, and his accountant. Additionally, the Receiver believes that the best financial interest of the corporation would be served by terminating the receivership, paying the remaining corporate assets of approximately $615,000 into court and permitting the shareholders to litigate their various differences. Nevertheless, before his duties may be terminated, the receiver requests approval of the court to amend the corporation s 2005 and 2006 federal and state tax returns to more accurately reflect income and expenses incurred in those years. The receiver s accountant, Mr. Conforti, has prepared, and the receiver has circulated to the - 12 -
parties, drafts of the amended returns. The parties have voiced no objection to amendment of the returns. Affidavit of Frank P. Spada, Jr. in Support of Plaintiffs Partial Summary Judgment Motion and in Opposition to Defendants Motion for Summary Judgment, 11/12/2012, at Exhibit C (emphasis added). Based in part on these representation, in his February 11, 2009 order granting the Receiver s motion to terminate the West End Litigation, Judge Vican ruled in pertinent part as follows: 2. Receiver s Motions to Pay Corporate Funds into Court, Approve Receiver s Acts, and Terminate Receivership are GRANTED as follows: (a) it is ORDERED that John C. Prevoznik, courtappointed Receiver, is authorized to: * * * (ii) distribute the balance of approximately $615,000 fifty percent to the Lutz parties and fifty percent to the Wean parties. This distribution is without prejudice to the parties raising any claims against each other, including, but not limited to, claims raised in a currently pending civil action in this Court at Monroe County Docket No. 6686 Civil 2008 [the Silver Valley Litigation]. Id. at Exhibit B (emphasis added). This order indicated that the receivership would terminate on June 1, 2009. Id. - 13 -
The Receiver subsequently filed a motion to extend the receivership temporarily to permit more time to complete his duties. Judge Vican granted this request, issuing a new order stating that this Court s Order of February 11, 2009 only insofar as it terminated Mr. Prevoznik s appointment as Receiver as of June 1, 2009, is vacated Id. (emphasis added). The highlighted only insofar language in this order preserved the reservation of rights of the parties to continue litigating claims in the Silver Valley Litigation set forth in the February 11, 2009 order, as Judge Vican made clear that he was not vacating that portion of his prior order. After the Receiver advised Judge Vican that he had completed his assigned tasks, 4 on November 29, 2009, Judge Vican issued a final order directing the Receiver to distribute the remaining funds to the Lutzs and the Weans and to close the receivership account. While it is true that the November 29, 2009 order does not include the same reservation of rights language set forth in the February 11, 2009 order, the reservation of rights in the February 11, 2009 order remained in effect. Judge Vican never vacated that portion of his order, and issued new orders only to extend the duration of the receivership to permit the Receiver time to fulfill his assigned responsibilities. Judge Williamson s decision to construe Judge Vican s November 29, 2009 order as a termination of all litigation, including the 4 The Receiver so advised Judge Vican in his Motion of John C. Prevoznik to Terminate Receivership and Distribute Remaining Funds, filed November 24, 2009. - 14 -
Silver Valley Litigation, is directly contrary to Judge Vican s order of February 11, 2009 reserving the rights of the shareholders to continue litigating their claims after termination of the receivership an order directly conforming to his prior ruling (discussed at length hereinabove) that the Lutzs claims in the Silver Valley Litigation were direct, non-derivative, causes of action. For these reasons, based upon application of the coordinate jurisdiction rule, we reverse the grant of summary judgment in favor of the Weans and Silver Valley and remand the case to the trial court for further proceedings consistent with this memorandum. Jurisdiction relinquished. Judgment Entered. Joseph D. Seletyn, Esq. Prothonotary Date: 11/1/2013-15 -