author: LASH, J.,

text:
    Swenk v. Asbury

      C.P. of Berks County,
    no. 03-3769.

      James M. Potter, for petitioners.

      Jeffrey Lewis and Jeffrey B. Albert, for intervenors.
    June 19, 2003
   LASH, J.,

The matter before this court is a dispute over entitlement to legal fees between intervenors, Mark A. Verlin, Esquire, and Verlin Law Offices, the former counsel of petitioners, Ralph W. Swenk Jr., a minor, by Wanda D. Hall and Ralph W. Swenk Sr., his parents and natural guardians, and Wanda D. Hall and Ralph W. Swenk Sr., in their own right and petitioners’ current counsel, James M. Potter, Esquire, and Liever, Hyman and Potter PC. The fees at issue, totaling $28,750, accrued as a result of settlement of the personal injury claims of Ralph W. Swenk Jr. (Billy Swenk). The gross settlement of $115,000 includes payment by respondent, State Auto Insurance Companies, of its limits of liability insurance coverage of $50,000, payment by State Auto Insurance Companies of its limits of uninsured motorist coverage of $50,000 and payment by State Farm Fire & Casualty Insurance Company of its limits of secondary liability insurance coverage available to respondent, Daniel Asbury, in the amount of $15,000. The fees, which represent 25 percent of the gross settlement figure, were approved by this court on May 27, 2003, pursuant to a minor’s compromise petition. The court then ordered the legal fees to be placed in escrow pending disposition of this matter.

Intervenors assumed representation of petitioners pursuant to a contingency fee agreement executed by Billy Swenk’s mother, petitioner, Wanda D. Hall, dated June 13, 2002. Although subsequently discharged by petitioners prior to consummation of the settlement, intervenors claim entitlement under a theory of quantum meruit, arguing that the engineering of the settlement, and all work performed to create the ability to obtain the settlement, was performed by them and not by Attorney Potter. They also urge that quantum meruit is not limited to fees accrued on an hourly basis, but may also include contingency fees, under these facts and circumstances.

Attorney Potter denies that intervenors are entitled to any portion of the fees. He claims that not only were intervenors discharged by petitioners, but that intervenors should never have assumed representation in the first place, due to a conflict of interest, and other ethical considerations. For reasons set forth herein, this court rules that intervenors are not entitled to any portion of the attorney’s fees.

On April 2,2002, minor petitioner, Billy Swenk, along with Amanda Bryan, were passengers in an automobile owned by David H. and Peggy Bryan, and operated by Daniel Asbury, when they were involved in a collision with a tractor-trailer. The accident occurred on Route 61 in Port Clinton, Schuylkill County, Pennsylvania. After the accident, the tractor-trailer left the scene. The identity of the owner and/or operator of the tractor-trailer has not been ascertained.

By all accounts, each of the three individuals in the Bryans’ vehicle suffered serious injuries. At the time of the accident, Billy Swenk was 16 years old.

Both Daniel Asbury and Amanda Bryan subsequently retained intervenors to handle their personal injury claims. At the time intervenor, Mark A. Verlin, Esquire, met with Daniel Asbury and Amanda Bryan, he handed them business cards to give to petitioner, Billy Swenk, and asked them to have Billy call him.

What happened next is in dispute. According to Billy Swenk, he never contacted intervenors and was surprised when intervenor, Mark A. Verlin, Esquire, appeared at Billy’s grandmother’s house where Billy was residing. According to Attorney Verlin, he made this contact only after Billy telephoned him and requested the contact.

In any event, neither parent was present when Attorney Verlin met with Billy. Attorney Verlin distributed a blank contingency fee agreement and medical authorization forms to Billy to give to his mother. Although Attorney Verlin never met personally with either parent, he did have phone contact with Billy’s mother, Wanda D. Hall, who agreed to sign the paperwork and return it to intervenors. Wanda D. Hall did forward the documentation to the intervenors, who then assumed representation of Billy Swenk, as well as the other two claimants.

Intervenors then began processing the claims. They obtained medical reports. They investigated the accident in an attempt to identify the tractor-trailer, but were unsuccessful. Subsequently, on November 27, 2002, invervenor, Mark A. Verlin, Esquire, sent correspondence to the Bryans’ auto carrier, State Auto Insurance Companies, demanding the uninsured motorist policy limits of $200,000. This demand was on behalf of all three claimants.

At some point prior to the demand letter being sent, Billy Swenk and his mother, as a result of a discussion with intervenor, Mark A. Verlin, Esquire, became apprehensive that Billy may be shortchanged on his financial recovery. As a result, they met with Attorney Potter and subsequently retained him to represent their interests. After Attorney Potter was retained, he sent correspondence by ordinary mail to intervenor, Mark A. Verlin, Esquire, dated October 8, 2002, advising intervenor Verlin that Attorney Potter was retained to represent Billy Swenk. Attorney Potter also raised his concern that Attorney Verlin may be operating under a conflict of interest because he represented all three parties. Intervenors denied receiving this correspondence from Attorney Potter and continued to proceed with representation of all three parties. Attorney Potter then sent a second correspondence, this time by certified mail, dated December 13,2002, reiterating his representation of petitioners, and enclosing another copy of the October 8, 2002 letter. Attorney Potter also set forth, in furtherance of his belief that Attorney Verlin’s representation of all three claimants was a conflict of interest, that Billy Swenlc had given a statement to a representative of State Auto Insurance Companies, setting forth that Mr. Asbury was driving his vehicle in excess of 80 miles per hour at the time of the accident.

In his testimony, intervenor, Mark A. Verlin, Esquire, acknowledged receipt of the December 13, 2002 letter, and conceded that he was discharged by petitioners at that point in time. Nevertheless, additional correspondence was issued by intervenors on behalf of petitioners. The first, dated January 15, 2003, and sent by Attorney Jerome Verlin to State Auto Insurance Companies, confirmed the insurance company’s decision to offer the policy limits of $200,000 on the uninsured motorist claim. A second correspondence from Attorney Mark A. Verlin, dated January 16, 2003, and addressed to all three claimants, reported State Auto’s decision to offer the policy limits. Further, in this correspondence, Attorney Verlin states the following:

“The next step would be to fairly split the money among the three of you. An argument could be made that the split should be equal and that all three of you have had surgery, need future surgery, have permanent scarring, and unpaid medical expenses. However, this could only be done if all three of you would agree to such an even division. If anyone of you objects, I then plan to follow the procedure set forth in my November 27,2002 letter to have a hearing with a retired judge to independently evaluate your cases to make sure the split is as fair as possible. This is essentially the same procedure that would occur if all three of you were represented by different counsel and we needed to determine how to properly split the $200,000.”

Attorney Verlin then closes by acknowledging Attorney Potter’s representation regarding other “avenues of recovery.”

On February 20, 2003, Attorney Michael Saltzburg, representing State Auto Insurance Companies, sent correspondence to intervenors and Attorney Potter, which stated, among other things, that the $200,000 could only be allocated in one manner: $100,000 to the claim of Amanda Bryan, $50,000 to the claim of Daniel Asbury, and $50,000 to the claim of Billy Swenk. This allocation was based upon a recovery of the policy limits of $50,000 for each claimant, with Amanda Bryan getting an additional $50,000 because she was the only claimant who was also an insured under the Bryans’ policy and could, therefore, receive stacked coverage, resulting from the Bryans’ coverage of two automobiles. This disclosure by Attorney Saltzburg was the first time either counsel knew of the restrictions on allocation of the settlement proceeds.

On behalf of petitioners, Attorney Potter then obtained a settlement with State Auto Insurance for the limits of the liability coverage of $50,000, and from State Auto Insurance on the limits of the secondary liability insurance coverage of Daniel Asbury in the amount of $15,000. All three settlements were approved by this court pursuant to an order dated May 27, 2003.

The first matter to determine is whether intervenors committed ethical violations, and if so, what effect those violations have on recovery of the legal fees. Attorney Potter alleges that intervenors substantially breached the Lawyers’ Rules of Professional Conduct, first by soliciting petitioners to obtain the right to represent them, secondly, by representing all three claimants despite a conflict of interest, and finally, by continuing with representation of petitioners, even after being discharged.

Although intervenors may well have committed violations in all three areas, we will focus our inquiry on the most serious charge, conflict of interest.

Rule 1.7 of the Rules of Professional Conduct deals with the general rules for a conflict of interest, stating:

“(a) A lawyer shall not represent a client if the representation of that client will be directly adverse to another client, unless:
“(1) the lawyer reasonably believes the representation will not adversely affect the relationship with the other client; and
“(2) each client consents after consultation.
“(b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer’s responsibilities to another client or to a third person, or by the lawyer’s own interests, unless:
“(1) the lawyer reasonably believes the representation will not be adversely affected; and
“(2) the client consents after full disclosure and consultation. When representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implications of the common representation and the advantages and risks involved.”

There are two potential conflicts here. First, there is the issue of liability involving a conflict between Daniel Asbury, the operator of the vehicle, and petitioner, Billy Swenk. Secondly, there is an issue on damages, as all three claimants, each with substantial injuries, were faced with the prospect of sharing proceeds of $200,000.

Regarding the liability issue, intervenor, Mark A. Verlin, Esquire, testified that he did not recognize any conflict between Daniel Asbury and Billy Swenk. He urged that all three consistently stated that Daniel Asbury had no fault in the accident. His analysis of the case was that the tractor-trailer operator was solely at fault and that Daniel Asbury could not be held liable for contributory negligence. He maintained this position even when confronted on cross-examination with the Pottsville Hospital Emergency Department report, compiled on the day of the accident, which stated that Billy Swenk advised a health care provider that “the [Bryan] vehicle was moving at approximately 80 miles per hour at the time of the accident and the vehicle struck a truck.” Intervenor Verlin’s testimony is disingenuous. For him, an attorney with 20 years of experience, with the last 10 years being devoted almost exclusively to personal injury actions, to claim that it never crossed his mind that an 18-year-old operator of a motor vehicle, with two other teenagers in the vehicle, could not be found by a fact-finder to have at least a small percentage of culpability, is not believable. Setting this aside, his review of the emergency report, which disclosed that one of his clients was reporting that another client operated the vehicle at 80 miles an hour, should certainly have given him pause.

In fact, petitioners had a colorable claim against Daniel Asbury. This is demonstrated by the settlement Attorney Potter was able to obtain on liability coverage on the Bryan auto and the secondary liability coverage on Daniel Asbury. Depending on the extent of Billy Swenk’s injuries, petitioners could have obtained a judgment against Daniel Asbury beyond the limits of insurance coverage. There is no question that an actual conflict of interest existed.

Regarding the damages issue, it is conceded that, with the benefit of hindsight, there was no actual conflict on the apportionment of the $200,000 fund. Intervenors, however, did not know this until so notified by Attorney Saltzburg, well after Attorney Potter had already assumed representation of petitioners. Attorney Verlin’s proposed resolution, if there was a dispute, as set forth in his correspondence of January 16, 2003, and his previous correspondence of November 27, 2002, was inappropriate. To send the matter to a retired judge who would divide the proceeds, without providing any of the three claimants the opportunity to advocate his position, demonstrates the difficulty when one attorney attempts to represent parties with competing interests.

Rule 1.7 permits an attorney to represent two clients with adverse interests when the lawyer reasonably believes the representation will not adversely affect either client’s rights, and each client consents after consultation. If intervenors had the belief that their dual representation would have no effect on the potential claims of their clients, this belief was certainly not reasonable. Further, there was no evidence that any client was consulted on the conflict of interest or consented to continued representation after consultation. In fact, as already stated, Attorney Verlin refused to recognize the conflict and, therefore, could not have consulted his clients in an appropriate manner.

The actions taken by intervenors in representing petitioners after already agreeing to represent Daniel Asbury and Amanda Bryan constituted a conflict of interest and was inappropriate.

We turn then to the question of the effect the presence of the conflict of interest has on the outcome of the issue at bar. Intervenors argue that even assuming a violation of the Rules of Professional Conduct, said violations are not actionable against them. They point to language in the preamble to the Rules of Professional Conduct which states:

“Violation of a rule should not give rise to a cause of action nor should it create any presumption that a legal duty has been breached. The rules are designed to provide guidance to lawyers and to provide a structure for regulating conduct through disciplinary agencies. They are not designed to be a basis for civil liability. Furthermore, the purpose of the rules can be subverted when they are invoked by opposing parties as procedural weapons. The fact that a rule is a just basis for a lawyer’s self-assessment, or for sanctioning a lawyer under the administration of a disciplinary authority, does not imply that an antagonist in a collateral proceeding or transaction has standing to seek enforcement of the rule. Accordingly, nothing in the rules should be deemed to augment any substantive legal duty of lawyers or the extra-disciplinary consequences of violating such a duty.”

They also argue that no harm came to petitioners as a result of their representation. They point out that they provided all the legal work and advice necessary to maximize petitioners’ recovery. If they had continued in their representation of petitioners, petitioners would have enjoyed the same result. They even go so far as to suggest that they would have also obtained the settlement on the policy limits of liability coverage and secondary coverage, which Attorney Potter was able to obtain by making a claim against the culpability of Daniel Asbury.

The Supreme Court case of Maritrans GP Inc. v. Pepper, Hamilton & Scheetz, 529 Pa. 241, 602 A.2d 1277 (1992), is instructive. That case involved a conflict between a former client and a current client of defendant law firm, as both were business competitors. In holding that the courts have the power to enjoin an attorney from breaching his duty to avoid representing conflicting interests, the Supreme Court noted that an activity is actionable if it constitutes breach of a duty imposed by a statute or by common law. At common law, an attorney owes a fiduciary duty to his client. Such duty demands undivided loyalty and prohibits the attorney from engaging in a conflict of interest. It then follows that a breach of such a duty is actionable. The Supreme Court reversed the Superior Court, and upheld the trial court’s decision to enter a preliminary injunction, prohibiting the defendant law firm from continuing to act as counsel for several competitors of another client.

We believe that the holding in Maritrans applies here. As already stated, intervenors’ theory for recovery of attorney’s fees is based on quantum meruit. As noted in intervenors’ brief, quantum meruit is an equitable remedy. Feingold v. Pucello, 439 Pa. Super. 509, 654 A.2d 1093 (1995). As such, a determination should be based on principles of fairness.

In the determination of a fair and just result, the courts may look to the conduct of the proponent to determine an appropriate remedy. The doctrine of “unclean hands” is a defense in equity when a court finds a party seeking affirmative relief to be guilty of fraud, unconscionable conduct or bad faith directly related to the matter at issue, which injures the other party and affects the bounds of equities between litigants. Equibank v. Adle Inc., 407 Pa. Super. 553, 595 A.2d 1284 (1991). Transgressors should not be allowed to profit from their own wrongdoing.

By assuming representation of all three claimants, intervenors breached their duty to their clients. The accrual of attorney’s fees comes directly from the improper representation. This type of ethical violation was actionable under the Maritrans matter and is actionable here.

The fact that petitioners, nor the other claimants, did not suffer any harm and that intervenors performed the work necessary to achieve the recoveries does not change this result. The Supreme Court in Maritrans cites the United States Supreme Court, stating:

“A fiduciary... may not perfect his claim to compensation by insisting that although he had conflicting interests, he served his several masters equally well or that his primary loyalty was not weakened by the pull of his secondary one. Only strict adherence to these equitable principles can keep the standard of conduct for fiduciaries ‘at a level higher than that trodden by the crowd.’ ” 529 Pa. at 258, 602 A.2d at 1285-86, citing Woods v. City National Bank & Trust Company, 312 U.S. 262, 269, 61 S.Ct. 493, 497, 85 L.Ed. 820 (1941) (quoting Justice Cardozo).

In its analysis, the Maritrans’ court cited with approval decisions of courts of other jurisdictions who ordered the disgorgement of fees paid or the forfeiture of fees owed to attorneys who have breached their fiduciary duties to their clients by engaging in impermissible conflicts of interest. (Maritrans, supra, 529 Pa. at 258, 602 A.2d at 1285.)

Intervenors had no business assuming the representation of petitioners. Any work performed on petitioners’ behalf, or any fees or recovery generated by intervenors stemmed solely from the wrongful representation. Intervenors should not now be rewarded for their wrongful activity. Accordingly, this court orders that based on the violation of the conflict of interest, intervenors are not entitled to any portion of the legal fees. All legal fees shall be distributed to Attorney Potter and his firm.

Wherefore, we enter the following order:

ORDER

And now, June 19, 2003, upon consideration of the petition of intervenors, Verlin Law Offices and Mark A. Verlin, Esquire, regarding payment of legal fees, briefs of the parties, and after hearing held, the court orders that the entire escrowed fund of $28,750 shall be distributed to James M. Potter, Esquire, and/or the Law Firm of Liever, Hyman and Potter PC., forthwith. The claim of intervenors to said fund is denied.

      . Although dated June 13, 2002, it appears, from other evidence, that the agreement was executed sometime after July 3, 2002.

      . Intervenor, Mark A. Verlin, Esquire, testified that his assessment was that each of the three had a personal injury claim worth “at least six figures.”

      . Billy Swenlc’s date of birth was November 12, 1985.

      . At no time did Attorney Verlin, nor anyone from his office, have any contact with Billy’s father, Ralph W. Swenk Sr.

      . Although Wanda D. Hall was not the primary custodian of Billy, she did have authority to act on his behalf, pursuant to a custody order entered by the Honorable Jeffrey K. Sprecher in Berks County Court to no. 98-9589. The custody order provides that both parents shall share legal custody. That order was apparently entered November 13, 1998 and remains in effect.

      . State Auto eventually agreed to tender the limits and so notified intervenors sometime in January 2003.

      . Billy Swenk testified that his concern stemmed from the fact that he would have to share the $200,000 pot with the two other claimants, and that he was advised that his injuries were not as serious as the other two. Attorney Verlin testified that he believed the concern arose after petitioners were advised of the potential for a limited tort issue, which issue was eventually resolved when the seriousness of Billy’s injuries was determined through review of the medical reports.

      . The petitioners first met with Attorney John A. Hoffert Jr., who referred the matter to Attorney Potter.

      . Regarding the solicitation issue, this court accepts the testimony of Billy Swenk as credible over that of Attorney Verlin. It is unlikely that an attorney would arrange for a meeting with a minor claimant without first discussing the matter with one of the parents, or at least securing the presence of one of them. His appearance at Billy Swenk’s grandmother’s house to speak with Billy was certainly out of order. On the representation of the discharge issue, even assuming that you accept intervenors’ assertion that they never received Attorney Potter’s correspondence of October 8,2002, there is sufficient evidence through intervenors’ own correspondence of January 15,2003 and January 16, 2003, as well as the admission in the testimony of intervenor, Mark A. Yerlin, Esquire, that intervenors continued to act on behalf of petitioners, even after being discharged.

      . Daniel Asbury’s date of birth was March 5, 1984.

      . They also make a claim for the fees generated from these settlements. Considering their position on the conflict of interest issue, their insistence on attorney’s fees here is audacious.

      . He who comes into equity must come with clean hands.

      . As a result of this holding, we do not decide the question on whether a successful claim for quantum meruit can result in the recovery of attorney’s fees based on a contingent fee.


source: Caselaw Access Project

author: PARAS, Arbitrator,

license: Public Domain

text:
    Sell v. Brantner
    C. P. of Mercer County,
    no. 1994-2599.

      John P. Kopesky, for plaintiff.

      David M. Neuhart, for defendants.

      June 10, 2003
   PARAS, Arbitrator,

And now, to wit, June 10,2003, following a hearing on May 30,2003 and subsequent review of evidence submitted by the parties following the hearing, this arbitrator makes the following finding and enters the following award:

FINDINGS

This arbitrator finds that the claimant, Pamela Sell, was not advised by Dr. James Brantner of the risk of rupture of her breast implants prior to breast augmentation surgery on May 26,1989. This arbitrator accepts as credible the testimony of Pamela Sell, to the effect that she was not advised as to the risk of future potential rupture and believed that the implants would last her lifetime. Ms. Sell testified credibly that, since this was elective, voluntary surgery, she would have opted against breast implant surgery if she knew or was warned that there was a risk of rupture with attendant surgery to remove ruptured implants. If she had been provided with this information, the claimant forcefully testified that she would have not undergone the procedure.

Dr. Brantner offered detailed testimony concerning the risk of breast augmentation surgery in general as well as the specific risks he conveyed to the claimant. He may have indicated a risk of future surgery if claimant developed capsular contracture, but Dr. Brantner did not testify affirmatively and convincingly that he directly warned Pamela Sell as to the risk of rupture with attendant surgery. Beyond Dr. Brantner’s testimony, the “permission for operation” form sets forth certain general risks of breast augmentation surgery, including the risk of bleeding, infection, poor scarring and unexpected reactions to medications. The consent form sets forth the specific risks associated with her breast augmentation surgery, including capsular contracture, asymmetry, and decreased nipple sensation. The consent form is conspicuous in its failure to list rupture as a potential risk. The package insert for Pamela Sell’s implants specifically states that “the patient should be informed that the life expectancy of any implant varies from patient to patient.” Under “complications,” the package insert sets forth that “the potential for rupture during surgery or even well after surgery (e.g., spontaneously caused by unknown etiology or caused by external trauma-stress-forces.) Ruptured implants, as well as all the gel contents, must be removed because of possible extravasation of the gel.” Furthermore, the package insert states that a complication is “rupture due to material fatigue (i.e., crease fold phenomenon). If this phenomenon does occur, additional surgery may be required to remove the gel.” This arbitrator did not hear Dr. Brantner testify specifically that he warned Pamela Sell of these complications set forth in the package insert and, furthermore, the A.S.P.R.S. pamphlet on breast augmentation, allegedly provided to the claimant by Dr. Brantner or his office, also fails to list or identify the risk of rupture.

Defendant’s expert witness, Dr. Charles E. Pappas, addresses in his report the A.S.P.R.S. booklet and states that in this booklet “that Ms. Sell was exposed to all of the material risks of breast augmentation that were known to us and which were identified and explained, including but not limited to . . . implant rupture.” To this arbitrator’s review, the A.S.P.R.S. booklet submitted fails to list implant rupture as a risk of surgery, contrary to Dr. Pappas’ assertions in his expert report. Dr. Pappas states that, in paragraphs 4 through 9 of Dr. Mallin’s report, Dr. Mallin gives his impression of informed consent, and the multiple risks that in his opinion should have been related to Ms. Sell and Dr. Pappas agrees with the information set forth in those paragraphs. Dr. Pappas then goes on to state that, unfortunately for the veracity of Dr. Mailin’s report, Dr. Mallin ignored the information given to Ms. Sell in the A.S.P.R.S. booklet, assuming wrongfully that the A.S.P.R.S. booklet sets forth the risk of rupture. For this reason, this arbitrator cannot accept the findings and conclusions set forth in Dr. Pappas report.

For these reasons, this arbitrator finds that the risk of rupture, although perhaps not the primary risk of breast augmentation surgery, was a known and recognized risk of the procedure which constituted a “material risk” and one which a reasonable and prudent person would have wanted to know of and would have considered material to her decision whether to undergo breast augmentation surgery. This arbitrator finds that Pamela Sell would have considered knowledge of the risk of rupture significant in making her decision and that claimant was not provided with this material risk information.

In regards to damages, this arbitrator recognizes that the claimant had to undergo a surgical procedure for ex-plantation of the implants under general anesthesia. During the surgical procedure, Dr. Lu-Jean Feng’s records reveal that it was necessary to remove the implants from a different surgical site than the one into which they were inserted, resulting in new incisions made in the infra-mammary folds. Although the claimant presumably has some scarring underneath her breasts from this procedure, this arbitrator was not shown the scars or provided with photographic evidence of the same. The claimant testified that there were tender and painful scarring areas on her breasts from drainage tubes, but there was no medical evidence submitted verifying or causally connecting these complaints to the removal surgery. She also paid for the removal procedure. Therefore, this arbitrator finds that the claimant’s damages consist of having to undergo the second surgical procedure with its consequent recovery and costs. This arbitrator further recognizes that the claimant may have some scarring from the removal procedure, but that the scarring is limited to incisional scars underneath her breasts, and is not highly visible or grossly disfiguring or else this arbitrator would have seen it. As a result of the foregoing, this arbitrator enters an award of damages in the claimant’s favor in the amount of $40,000.

AWARD

I, the undersigned arbitrator, Harry M. Paras, Esquire, having been duly appointed by the court and sworn make the following award:

The arbitrator enters an award in favor of the claimant, Pamela C. Sell and against the defendant, James N. Brantner M.D., in the amount of $40,000.


author: JELIN, J.,

text:
    Spector Gadon & Rosen P.C. v. Valero Terrestrial Corp.
    C.P. of Philadelphia County,
    no. 899.

      Brooke C. Madonna, for appellee.

      Albert A. DeGennaro, for appellants.
    May 22, 2003
   JELIN, J.,

The plaintiff, appellee, brought this action against defendants to recover unpaid legal fees. Defendants filed a counterclaim to recover damages resulting from plaintiff’s alleged breach of contract.

This case was tried before a jury and a verdict was recorded on April 26, 2002, in favor of plaintiff in the amount of $205,000; and in favor of defendants on the counterclaim, in the amount of $46,000.

Defendants filed post-trial motions on May 3, 2002. Plaintiff filed post-trial motions on May 6,2002. A hearing was held on March 20,2003, at which time this court denied defendants’ and plaintiff’s post-trial motions. Defendants filed their notice of appeal on April 14,2003.

In their statement of matters complained of on appeal, defendants contend: this court erred by instructing the jury on the definitions of trial, summary judgment, and declaratory judgment; this court erred in not granting judgment n.o.v.; and this court erred in not modifying the verdict. Id.

In the instant case, Mr. Bruce Thall, Esquire, and defendants entered into a written contract for legal representation. The contract contained a fee cap for work “up through trial of the issues.” One of the issues for the jury to decide was when in fact the “trial” of the issues occurred.

Defendants contend it was error for this court to let the jury interpret the word “trial” because it is not ambiguous and the court is required to interpret unambiguous terms. “A contract is ambiguous if it is reasonably susceptible of different constructions and capable of being understood in more than one sense.” Thomas Rigging & Construction Co. Inc. v. Contraves Inc., 798 A.2d 753, 756 (Pa. Super. 2002). (citations omitted) “The court, as a matter of law, determines the existence of an ambiguity and interprets the contract whereas the resolution of conflicting parol evidence relevant to what the parties intended by the ambiguous provision is for the trier of fact.” Id.

In the instant case, this court determined the phrase “up through trial” to be ambiguous because the word “trial” can have various definitions as evidenced by the array of interpretations presented in this case. It was therefore, proper for the jury to determine what the parties intended by the phrase “up through trial.” Hence, this court did not err in sending that issue to the jury.

Defendants contend the court should not have instructed the jury with the definitions of “trial,” “summary judgment,” and “declaratory judgment.” “A charge will be found adequate unless the issues are not made clear to the jury or the jury was palpably misled by what the trial judge said or unless there is an omission which amounts to fundamental error.” Machado v. Kunkel, 804 A.2d 1238, 1244 (Pa. Super. 2002) (quoting Boutte v. Seitchik, 719 A.2d 319, 324-25 (Pa. Super. 1998)).

In the instant case plaintiff and defendants presented a memorandum opinion authored by the Honorable Frederick P. Stamp Jr., United States District Court for the Northern District of West Virginia, which resolved the issues covered by the contract entered into between the parties. Judge Stamp, however, referred to his order as a “summary judgment” in one portion of the opinion, and a “declaratory judgment” in another portion of the opinion. This court could not expect the jury to resolve the conflicting evidence regarding the meaning of the word “trial” without understanding the terminology being presented throughout the trial. After thoroughly reviewing the rules and definitions submitted by all counsel, this court determined that instructing the jury on the definitions of trial, summary judgment, and declaratory judgment, per Blacks Law Dictionary, would be the most beneficial for the jury.

Defendants contend this court erred in not granting judgment n.o.v. after the jury verdict because the motion for declaratory relief in the McCoy case was considered a summary judgment motion and therefore was a pretrial disposition and should have been within the fee cap. The determination of when the “trial” of the issues occurred was an issue for the jury. “Entry of judgment n.o.v. on the basis of evidentiary insufficiency is appropriate only in a clear case, where the facts are such that no two reasonable minds could fail to agree that the verdict was improper.” Andaloro v. Armstrong World Industries Inc., 799 A.2d 71, 86 (Pa. Super. 2002) (quoting Coward v. Owens-Corning, 729 A.2d 614, 622 (Pa. Super. 1999)). This is not such a case. Hence, judgment n.o.v. was not warranted.

Defendants contend this court erred in not modifying the verdict because it was inconsistent for the jury to find that plaintiff breached the contract by failing to include in its complaint a challenge to the landfill closure fee, yet included as part of its award to plaintiff, legal fees for the reconsideration petition and petition to amend the landfill closure fee challenge. Defendants’ argument is based on the premise that the jury accepted defendants’ version of the facts. A jury is free to accept all, part or none of the evidence presented. Nemirovsky v. Nemirovsky, 776 A.2d 988 (Pa. Super. 2001). The jury apparently accepted portions of the evidence presented by the plaintiff, as well as portions of the evidence presented by defendants. Hence, it was not an inconsistent verdict.

Defendants contend that the time billed by plaintiff for preparation of its attorney fee petition should not have been included in the damage award, therefore this court should have molded the verdict. “The duty of assessing damages is within the province of the fact-finder and should not be interfered with unless it clearly appears that the amount awarded resulted from partiality, caprice, prejudice, corruption or some other improper influence.” Sehl v. Vista Linen Rental Service Inc., 763 A.2d 858, 864 (Pa. Super. 2000). Whether the time billed by plaintiff for preparing its counsel fee petition was part of the contract was clearly an issue for the jury. This court finds no reason to warrant disturbing their finding.

For all of the above reasons, the judgment should be affirmed.

      . Mr. Thall was subsequently hired by plaintiff, Spector Gadon & Rosen RC.

      . District court memorandum opinion and order dated September 17, 1997.

      . The McCoy case was one of the cases covered under the contract between plaintiff and defendants.


author: HERRON, J.,

text:
    Del Borrello v. Del Borrello

      Gary Perkiss, for plaintiff.

      Jeffrey Zucker, Lane Fisher and Dennis George, for defendants.
    August 28, 2001
   HERRON, J.,

This case is one of the many disturbingly common lawsuits in which family members turn on each other in fighting for control of a close corporation. Defendants Paul Del Borrello, Dennis Leonard, Glen Strafella and United Financial Services Group Inc. have filed preliminary objections to the amended complaint of plaintiff Peter Del Borrello. In addition, Peter has filed a motion to disqualify defendants’ counsel from continuing their representation in this matter. For the reasons set forth in this opinion, the court is issuing a contemporaneous order sustaining the objections in part and overruling the objections in part. The court is also ordering that discovery be taken as to the factual disputes raised by the motion to disqualify.

BACKGROUND

Peter, Paul, Dennis and Glen each own 25 percent of the issued and outstanding shares of United Financial Services Group Inc., a Pennsylvania check-cashing agency and franchisor. Each of the individual defendants is currently a United director and officer, while Peter is a former United director and officer. According to the complaint, United’s shareholders and directors operated according to an informal rule under which no action would be taken unless approved by all shareholders or directors. This rule was neither memorialized in United’s bylaws nor required by Pennsylvania law.

The plaintiff alleges that Paul approached Peter in December 1999 and proposed to oust Glen from United. Under this “December plan,” Paul, Dennis and Peter would act in concert to force Glen to transfer his United shares to either United or Paul. The complaint asserts that Dennis was conceived of as an alternate target of the December plan but that Paul considered Glen more financially vulnerable. When Peter rejected Paul’s overtures, Paul allegedly turned his sights on Peter and secured the cooperation of Glen and Dennis.

According to the complaint, the conflict between Peter and the individual defendants came to a head at the United board meeting on December 19, 2000. Prior to the meeting, all three individual defendants supposedly agreed that they would vote in unison and would refuse to consider any issues or proposals raised by Peter. In addition, the individual defendants allegedly prepared an amendment to the United bylaws to provide that United’s vice president, then Peter, would have only the powers and responsibilities delegated by United’s chief executive officer, then Paul, and United’s board of directors.

At the meeting, Peter introduced a resolution that called for establishing an investigative committee to determine whether certain conduct by United officers should have been disclosed to United franchisees. This resolution was rejected by the individual defendants, while the amendment was approved, over Peter’s objections. The complaint states that the United board further voted to remove Peter from his position as vice president, although the transcript of the meeting, as attached to the complaint, indicates that Peter resigned his position as vice president. Complaint, exhibit C at 43-44.

The complaint alleges that Peter has continued to dominate the operations of United and that the individual defendants have oppressed Peter in the following ways, both before and after the meeting:

“(1) Excluding Peter from a United board meeting on November 30, 2000 and meetings with United’s corporate counsel, as well as numerous other informal meetings;
“(2) Depriving Peter of and preventing Peter from obtaining information regarding United franchisees and vendors and other United financial information;
“(3) Omitting Peter from the circulation of memoranda and newsletters regarding United franchisees;
“(4) Excluding Peter from participation at a trade convention;
“(5) Refusing to approve the establishment of the disclosure committee, thereby endangering Peter’s investment in United;
“(6) Excluding Peter from decisions related to personnel, including the hiring of a president and chief operating officer and the discipline and termination of employees; and
“(7) Resisting Peter’s efforts to obtain an office within United’s new corporate headquarters upon its move.”

It is also asserted that Paul and other United employees have sought to intimidate Peter’s son, Thomas, a United district manager, causing him anxiety and fear. As a result of these alleged actions, Peter has brought claims for oppression and breach of fiduciary duty and requested the appointment of a custodian for United. In response, the defendants have filed the objections, which assert that the complaint is legally insufficient.

In this opinion, the court also considers the motion to disqualify. This motion is based on Peter’s assertion of a prior attorney-client relationship between himself and each of Lane Fisher, Jeffrey Zucker and Fisher Schumacher & Zucker LLC, and the conflict of interests arising therefrom.

DISCUSSION

The allegations that the individual defendants have oppressed Peter by defrauding and failing to disclose certain information to United franchisees are not actionable, and Count I, which is based solely on such allegations, must be dismissed. Because the complaint alleges oppressive conduct in the remaining counts, however, the remaining objections asserting legal insufficiency are without merit and are overruled. The motion to disqualify requires additional factual development before it can be ruled on.

I. With the Exception of Count I, the Counts Set Forth in the Complaint Are Legally Sufficient

The defendants contend that the conduct alleged in the complaint does not qualify as “oppressive” and therefore does not justify the appointment of a receiver or any of the other equitable remedies Peter has requested. While some of the conduct Peter complains of qualifies as “oppressive,” the allegations supporting Count I do not qualify as oppression, and that count must be dismissed.

For the purposes of reviewing preliminary objections in the form of a demurrer, “all well-pleaded material, factual averments and all inferences fairly deducible therefrom” are presumed to be true. Tucker v. Philadelphia Daily News, 757 A.2d 938, 941-42 (Pa. Super. 2000). When presented with preliminary objections whose end result would be the dismissal of a cause of action, a court should sustain the objections only where “it is clear and free from doubt from all the facts pleaded that the pleader will be unable to prove facts legally sufficient to establish [its] right to relief.” Bourke v. Kazaras, 746 A.2d 642, 643 (Pa. Super. 2000). (citation omitted) Furthermore,

“[I]t is essential that the face of the complaint indicate that its claims may not be sustained and that the law will not permit recovery. If there is any doubt, it should be resolved by the overruling of the demurrer. . . . Put simply, the question presented by demurrer is whether, on the facts averred, the law says with certainty that no recovery is possible.” Bailey v. Storlazzi, 729 A.2d 1206, 1211 (Pa. Super. 1999).

Under 15 Pa.C.S. §1767, a court may appoint a custodian for a corporation upon application of a shareholder when:

“[I]n the case of a closely held corporation, the directors or those in control of the corporation have acted illegally, oppressively or fraudulently toward one or more holders or owners of 5 percent or more of the outstanding shares of any class of the corporation in their capacities as shareholders, directors, officers or employees.” 15 Pa.C.S. § 1767(a)(2). Oppressive conduct in the context of a close corporation “often takes the form of freezing-out a minority shareholder by removing him from his various offices or by substantially diminishing his power or compensation,” although no further description is given. 15 Pa.C.S. §1767 amended comment— 1990.

Much ink has been spilt over what exactly constitutes “oppressive conduct.” Courts in the United States have used three approaches to determine whether a minority shareholder is being oppressed:

“Some courts describe oppression as ‘burdensome, harsh and wrongful conduct... a visible departure from the standards of fair dealing and a violation of fair play on which every shareholder who entrusts his money to a company is entitled to rely.’ Other courts link the term directly to breach of the fiduciary duty of good faith and fair dealing majority shareholders owe minority shareholders, a duty that many courts recognize as enhanced in a close corporation setting. ... A third view ties oppression to frustration of the reasonable expectations of the shareholders.” Robert B. Thompson, The Shareholder’s Cause of Action for Oppression, 48 Bus. Law. 699, 711-12 (1993). (footnotes omitted) See also, Hollis v. Hill, 232 F.3d 460, 465 n.8 (5th Cir. 2000) (noting that definitions of minority shareholder oppression usually take one of these three forms).

While remarkably few Pennsylvania state cases address or define shareholder oppression, it appears that Pennsylvania has adopted the “reasonable expectations” test to define oppression. In Gee v. Blue Stone Heights Hunting Club Inc., 145 Pa. Commw. 658, 604 A.2d 1141 (1992), the court considered the treatment of a nonprofit corporation’s shareholders in a case of first impression. The court relied on a New York Court of Appeals case to find that “[oppressive actions refer to conduct that substantially defeats the ‘reasonable expectations’ held by minority shareholders in committing their capital to the particular enterprise.” 145 Pa. Commw. at 665, 604 A.2d at 1145 (quoting In the Matter of the Judicial Dissolution of Kemp & Beatley Inc., 64 N.Y.2d 63, 484 N.Y.S.2d 799, 473 N.E.2d 1173 (1984)).

While Gee’s adoption of a specific “oppression” test is helpful, it does not speak to oppression in a close corporation context or elaborate on what expectations may be reasonable and is thus of limited use in the instant matter.

More recently, the Pennsylvania Superior Court looked outside of case law on shareholder oppression and relied on a non-legal dictionary to define “oppression” as “unjust or cruel exercise of authority or power.” Leech v. Leech, 762 A.2d 718, 720 (Pa. Super. 2000) (quoting Meriam Webster’s Collegiate Dictionary (10th ed.1996)). Given this general and non-legal source, however, the definition provided in Gee is more apt, even though Leech involved a close corporation.

Other than Gee and Leech, no Pennsylvania cases of any significance address the issue of shareholder oppression, let alone oppression of a minority shareholder of a close corporation. This forces the court to look to other states for guidance in defining a close corporation minority shareholder’s reasonable expectations.

Numerous courts have remarked on the susceptibility of close corporation minority shareholders to oppression by the majority shareholders. See e.g., Crosby v. Beam, 548 N.E.2d 217, 220 (Ohio 1989) (reviewing scenarios involving oppression of close corporation minority shareholders); Donahue v. Rodd Electrotype Co. of New England Inc., 328 N.E.2d 505, 513-15 (Mass. 1975) (reviewing cases and articles on vulnerability of close corporation minority shareholders). See also, William Meade Fletcher, 12B Fletcher Cyclopedia of the Law of Private Corporations §5820.10 (“minority shareholders in close corporations are particularly vulnerable to oppressive conduct”). Of the foreign courts that have considered oppression under these circumstances, the court finds those of New Jersey the most persuasive. First, like Pennsylvania, New Jersey has adopted the reasonable expectations test. See Brenner v. Berkowitz, 634 A.2d 1019, 1029 (N.J. 1993) (“[cjourts also should consider whether the misconduct thwarts the minority shareholder’s reasonable expectations of his or her role in the corporation”). In addition, Pennsylvania’s section 1767(a)(2) eschews the approach taken in the Statutory Close Corporation Supplement to the Model Business Corporation Act, which disallows relief where a minority shareholder is oppressed in his or her capacity as an employee, and “follows the New Jersey law ... in providing relief for non-officer employee shareholders.” 15 Pa.C.S. §1767 amended comment — 1990. See also, John W. McLamb and Wendy C. Shiba, Pennsylvania Corporation Law & Practice §5.8 (“[t]he New Jersey statute and others like it should be considered in interpreting 1988 BCL § 1767(a)(2)”); Sandra K. Miller, A Note on the Definition of Oppressive Conduct by Majority Shareholders: How Can the Reasonable Expectations Standard be Reasonably Applied in Pennsylvania, 12 J.L. & Com. 51, 63-64 (1992) (setting forth reasons for relying on New Jersey law to interpret definition of oppressive conduct under section 1767(a)(2)). For these reasons, the court will focus its discussion on cases addressing N.J.S.A. §14A:12-7(l)(c), which serves as New Jersey’s equivalent of section 1767(a)(2) and addresses equitable relief in the context of close corporation oppression and other misconduct.

At least one New Jersey court has cautioned against overgeneralizing the expectations of minority shareholders in close corporations:

“Close coiporations ... are frequently formed by individuals most aptly described as partners, These persons desire the tax benefits, the insulation from personal liability and the perpetual life that flows from the corporate form. The amassing of capital through the sale of stock to investors is at best of secondary importance. The personal relationship between shareholders, which is more or less peculiar to and usually antedates the formation of close corporations, makes it impossible to hypothesize a set of expectations that will be held in common by all minority shareholders in these corporations.” Exadaktilos v. Cinnaminson Realty Co., 400 A.2d 554, 560-61 (N.J. Super. Ct. Law Div. 1979), aff’d, 414 A.2d 994 (N.J. Super. Ct. App. Div. 1980). See also, 16A Fletcher Cyclopedia §8046.10 (“[e]ach case claiming oppression of shareholders as the basis for dissolution must be determined on its own facts”).

In spite of this caveat, several New Jersey cases discuss the close corporation shareholder expectations that may be reasonable. For example, the New Jersey Supreme Court explored oppression in the context of a close corporation in Muellenberg v. Bikon Corp., 669 A.2d 1382 (N.J. 1996):

“Unlike their counterparts in a publicly held corporation, shareholders in a close corporation are typically involved in the management and operation of the company. Oftentimes, these parties consist of family members or friends whose participation in the business is their principal source of employment and income. . . . Because majority shareholders have the power to dictate to the minority the manner in which the corporation is run, a minority shareholder in a close corporation becomes vulnerable when dissension develops. The controlling shareholders’ voting power enables them to freeze out minority shareholders by terminating their employment, excluding them from participation in management decision-making, and reducing their salary and other income.
“The vulnerability of minority shareholders is exacerbated by the illiquidity of their financial stake in the company. They cannot dissolve the company at will like members of a partnership, nor can they sell their shares on the open market like shareholders in a publicly held corporation. As a consequence, a shareholder challenging the majority in a close corporation is on the horns of a dilemma. The shareholder can neither profitably leave nor safely stay with the corporation. In reality, the only prospective buyer turns out to be the majority shareholder. This inability of minority shareholders to withdraw from the venture on their own terms makes it easy for controlling shareholders to exploit minority shareholders and defeat their reasonable expectations.” 669 A.2d at 1386.

After noting that oppression ordinarily is shown when majority shareholders “have awarded themselves excessive compensation, furnished inadequate dividends, or misapplied and wasted corporate funds,” the Muellenberg court went on to outline what may constitute a close corporation shareholder’s reasonable expectations:

“When personal relations among the participants in a close corporation break down, the ‘reasonable expectations’ that participants had, for example, the expectation that their employment would be secure or that they would enjoy meaningful participation in the management of the business, become difficult, if not impossible, to fulfill. A person who buys a minority interest in a close corporation does so, not only in the hope of enjoying an increase in the value of the shareholder’s stake in the business, but for the assurance of employment in the business in a managerial position. In addition to the security of long-term employment and the prospect of financial return in the form of salary, the expectation includes a voice in the operation and management of the business and the formulation of its plans for future development.” Id. at 1388. Cf. Gimpel v. Bolstein, 477 N.Y.S.2d 1014, 1019 (N.Y. Super. Ct. 1984) (“the relationship between the founders of a close corporation approximates that between partners, ... and the ‘reasonable expectations’ test is indeed an examination into the spoken and unspoken understanding upon which the founders relied when entering into the venture”).

The description given in Muellenberg does not mean that showing oppression is a straightforward task for a minority shareholder. Indeed, as the Muellenberg court noted, a “minority shareholder’s expectations must. . . be balanced against the corporation’s ability to exercise its business judgment and run its business efficiently. Thus, courts should always be wary of interfering in the internal affairs of a corporation.” 669 A.2d at 1387. See also, Brenner, 634 A.2d at 1133 (noting the necessity to “balance the need to redress the statutory violation against society’s interest in maintaining functioning corporations”).

The New Jersey position overall finds significant support from commentators who agree with the assessment that the exclusion of a close corporation shareholder from employment and the corporate decision-making process may interfere with the shareholder’s reasonable expectations and may constitute oppression:

“A person acquiring a substantial interest in a close corporation often invests a large percentage of his personal resources to acquire that interest. Typically, he enters the corporation expecting to participate actively in the corporation’s affairs as a key employee and perhaps as a director and principal officer. He may give up other employment with accumulated seniority and security features to work full-time for the corporation. He may have no income other than his salary. As a close corporation usually does not pay dividends or pays only small and infrequent dividends, a shareholder who is excluded from employment is effectively denied anything more than a token return on his investment, even though the investment may be substantial. Therefore, discharge of the shareholder-employee often produces an immediate financial crisis for him. He is forthwith deprived of his sole source of income; the majority shareholders, in order to make the squeeze more effective, may cause the corporation to cancel its insurance policies on him and may try to deprive him of every economic benefit he derives from the corporation so that he may even find himself without life, accident, hospitalization or health insurance or the prospect of income when he reaches retirement age.” F. Hodge O’Neal, Oppression of Minority Shareholders: Protecting Minority Rights, 35 Clev. St. L. Rev. 121, 126-27 (1986/1987). See also, Thompson, 38 Bus. Law. at 701 (“[shareholders in a close corporation usually expect employment and a meaningful role in management, as well as a return on the money paid for the shares”); Adam Chernichaw, Oppressed Shareholders in Close Corporations: A Market-Oriented Statutory Remedy, 16 Cardozo L. Rev. 501, 507 (1994) (“[investors in close corporations usually expect employment, a return on their capital, and a ‘meaningful role in management’ ”). Cf. Orchard v. Coveli, 590 F. Supp. 1548, 1557 (W.D. Pa. 1984) (the fiduciary duty owed a minority shareholder may be breached by “restricting or precluding employment in the corporation ... and excluding the minority from a meaningful role in the corporate decision-making”); Douglas K. Moll, Shareholder Oppression v. Employment at Will in the Close Cooperation: The Investment Model Solution, 1999 U. Ill. L. Rev. 517 (1999) (reconciling at will employment law with a close corporation shareholder’s reasonable expectations by positing that an expectation of employment may be part of a shareholder’s investment).

Experts similarly have concluded that cutting off a minority shareholder’s access to corporate information may constitute oppression:

“An attempt to squeeze out a minority shareholder often includes deliberate withholding of information from the shareholder. The chance of a squeeze technique succeeding is usually improved if the squeeze remains in the dark about the affairs of the corporation and the actions of its directors and officers. The type of information withheld varies with the squeeze techniques being employed, but most commonly concerns the value of the enterprise and of an interest in it, the corporation’s prospects for profitable operations in the future, the controlling shareholders’ plans for the business, and any plans they may have for disposing of their interests in it. Since the public reporting and disclosure requirements of the federal securities law do not apply to close corporations, shareholders in a close corporation do not have access to sources of information available to securities holders in a public-issue corporation.” O’Neal, 35 Clev. St. L. Rev. at 130. See also, Leech, 762 A.2d at 720 (holding that, in certain situations, it is oppressive for majority shareholders “to parse out the information or documents that the duly elected and constituted secretary/treasurer has access to”); Miller, Note, 12 J.L. & Com. at 81 (arguing that “withholding information relevant to the operation of the corporation as to important corporate matters” would indicate the existence of oppressive conduct). Cf. Orchard, 590 F. Supp. at 1557 (tactics employed against a minority shareholder to effect a squeeze out and thus breaching the fiduciary duty owed such a shareholder may include “withholding information relating to the operation of the corporation”); Robert A. Ragazzo, Toward a Delaware Common Law of Closely Held Corporations, 77 Wash. U. L.Q. 1099, 1115 (1999) (“denying the minority access to corporate information [has] contributed to findings of breach of fiduciary duty in the close corporation context”).

Most of Peter’s allegations speak to interference with what Pennsylvania could consider his reasonable expectations. According to the complaint, the individual defendants excluded Peter from United management decisions and impeded Peter’s ability to obtain United financial and other information. In the context of a close corporation, these actions may qualify as oppressive in nature and may be grounds for the appointment of a custodian, if proven.

Peter relies on Brenner to argue that the individual defendants’ rejection of the disclosure committee and supposed scheme to defraud United franchisees, as well as the treatment accorded Tommy, also constituted oppressive conduct warranting the appointment of a custodian. The court disagrees.

In Brenner, the New Jersey Supreme Court distinguished between oppression and illegal or fraudulent conduct:

“Illegality and fraud may also frustrate a shareholder’s reasonable expectations for a company but nonetheless not qualify as oppression. That is so because oppression is usually directed at a minority shareholder personally, whereas fraudulent or illegal conduct can instead be directed at solely the shareholder’s investment in the corporation. For example, misappropriation of funds within a corporation may violate a shareholder’s reasonable expectations regarding the management of the company but it may not be oppressive because it is not directed specifically at a minority shareholder.” 634 A.2d at 1028. (emphasis added) See also, 12B Fletcher Cyclopedia §5820.11 (noting that “ ‘oppression’ is an expansive term covering a myriad of situations involving improper conduct that is neither ‘fraudulent’ or ‘illegal’ ”).

Based on this distinction, Peter’s allegations that the failure to set up the disclosure committee had negative implications for his investment in United are best considered allegations of fraud and illegality, not oppression. Ultimately, the Brenner court concluded that illegal and fraudulent conduct was actionable under New Jersey law, regardless of whether the minority shareholder was the target of the conduct. In this regard, however, New Jersey law is distinguishable from that of Pennsylvania. Nowhere does section 14A: 12-7(l)(c) require that the controlling party’s fraudulent or illegal conduct be directed toward the minority shareholders at all, let alone in a specific capacity. Indeed, under the New Jersey statute, it appears that any fraudulent and illegal misconduct may be grounds for relief, regardless of the misconduct’s target. Section 1767(a)(2), in contrast, mandates that the illegal or fraudulent actions be directed toward qualifying minority shareholders “in their capacities as shareholders, directors, officers or employees.” Here, any illegal or fraudulent conduct that took place was directed at United franchisees, not Peter, and thus cannot serve as a basis for the claims set forth in the complaint under Pennsylvania law, even if accurate.

The alleged attempts to intimidate Tommy are also not actionable. Peter highlights the Brenner court’s statement that “termination of the employment of the shareholder’s children in certain situations may constitute oppressive conduct sufficient to constitute a violation” of New Jersey law and may violate the shareholder’s reasonable expectations. 634 A.2d at 1029. Even if Pennsylvania law holds similarly, there is no indication in the complaint that Peter had any reasonable expectations with regard to the defendants’ relationship with Tommy. As a result, the court must conclude that the alleged fraudulent and illegal conduct, as well as the conduct directed toward Tommy and his position with United, cannot form the basis for a claim for shareholder oppression, and Count I must be dismissed. The other allegations, however, are sufficient to allow Peter’s remaining claims to proceed.

II. The Motion To Disqualify Requires Additional Factual Development Before It Can Be Resolved

Peter has filed the motion to disqualify, which seeks to disqualify the defendants’ attorneys from representing the defendants in this matter. Because the motion to disqualify raises disputed issues of material fact, the court is instructing the parties to engage in discovery and to submit additional briefs so that this matter can be resolved.

The Pennsylvania Rules of Professional Conduct address an attorney’s conflict of interest with a former client:

“A lawyer who has formerly represented a client in a matter shall not thereafter:
“(a) represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client consents after a full disclosure of the circumstances and consultation; or
“(b) use information relating to the representation to the disadvantage of the former client except as Rule 1.6 would permit with respect to a client or when the information has become generally known.” Pa.R.P.C. 1.9.

In Estate of Pew, 440 Pa. Super. 195, 655 A.2d 521(1994), the Pennsylvania Superior Court elaborated on Rule 1.9 and set forth a three-prong test for when it might apply:

“An attorney is prohibited from undertaking a representation adverse to a former client in a matter ‘substantially related’ to that in which the attorney previously had served the client.... The fact that the two representations involved similar or related facts is not, in itself, sufficient to warrant the finding of a substantial relationship so as to disqualify the attorney from the representation, but, rather the test is whether information acquired by an attorney in his former representation is substantially related to the subject matter of subsequent representation. ... If the attorney might have acquired confidential information related to the subsequent representation, Pennsylvania Rule of Professional Conduct 1.9 would prevent the attorney from representing the second client. . . . Confidential information gained by one member of a law firm is imputable to other members of the same law firm.... Therefore, a former client seeking to disqualify a law firm representing an adverse party on the basis of its past relationship with a member of the law firm has the burden of proving: (1) that a past attorney/client relationship existed which was adverse to a subsequent representation by the law firm of the other client; (2) that the subject matter of the relationship was substantially related; (3) that a member of the law firm, as attorney for the adverse party, acquired knowledge of confidential information from or concerning the former client, actually or by operation of law.” 440 Pa. Super. at 243-44, 655 A.2d at 545-46. (citations omitted and emphasis added)

Peter asserts that he, as an individual, had an attorney-client relationship with the defendants’ attorneys. Because Peter has not attached a contract evidencing any relationship between himself and the defendants’ attorneys, the court must focus solely on whether an implied relationship existed. Pennsylvania courts have adopted the following test to determine if an attorney-client relationship has arisen by implication:

“Absent an express contract, an implied attomey/client relationship will be found if (1) the purported client sought advice or assistance from the attorney; (2) the advice sought was within the attorney’s professional competence; (3) the attorney expressly or impliedly agreed to render such assistance; and (4) it is reasonable for the putative client to believe the attorney was representing him.” Atkinson v. Haug, 424 Pa. Super. 406, 411-12, 622 A.2d 983, 986 (1993) (citing Sheinkopf v. Stone, 927 F.2d 1259, 1264 (1st Cir. 1991)). In addition, Pa.R.P.C. 1.13(a) states that “[a] lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.” This makes it clear that an attorney representing a corporation generally represents the corporation and not the corporation’s shareholders, officers or directors.

While Rule 1.13(a) is easily interpreted in the context of a large corporation, it is more difficult when addressing a close corporation, as noted recently by this court in First Republic Bank v. Brand, August term, 2000, no. 147 (C.P. Phila. April 30, 2001) (Herron, J.). After a thorough and exhaustive review of the subject, the court concluded that 10 factors are of particular importance when determining whether an attorney-client relationship had been formed between a close corporation’s attorney and one of the corporation’s shareholders:

“The relevant case law and literature, therefore, suggest that the following criteria are helpful in determining whether a corporation’s attorney has entered into an attorney-client relationship with the corporation’s shareholder:
“(1) Whether the shareholder was separately represented by other counsel when the corporation was created or in connection with its affairs;
“(2) Whether the shareholder sought advice on and whether the attorney represented the shareholder in particularized or individual matters, including matters arising prior to the attorney’s representation of the corporation;
“(3) Whether the attorney had access to shareholder’s confidential or secret information that was unavailable to other parties;
“(4) Whether the attorney’s services were billed to and paid by the corporation or the shareholder;
“(5) Whether the corporation is closely held;
“(6) Whether the shareholder could reasonably have believed that the attorney was acting as his individual attorney rather than as the corporation’s attorney;
“(7) Whether the attorney affirmatively assumed a duty of representation to the shareholder by either express agreement’ or implication;
“(8) Whether the matters on which the attorney gave advice are within his or her professional competence;
“(9) Whether the attorney entered into a fee arrangement; and
“(10) Whether there was evidence of reliance by the shareholder on the attorney as his or her separate counsel or of the shareholder’s expectation of personal representation.” Slip op. at 13. (footnote omitted)

The court believes that these 10 criteria are just as relevant in analyzing the relationship between the defendants’ attorneys and Peter, a United shareholder, director and officer, as they were in Brand.

In the motion to disqualify, Peter asserts the following to establish a past attorney-client relationship with the defendants’ attorneys:

“(1) Peter met privately with Fisher as a shareholder four times in October and November 2000 to discuss his disputes with the individual defendants and related problems.
“(2) Peter spoke with Fisher as recently as November 16, 2000 with regard to the matters in dispute in this lawsuit.
“(3) Peter also discussed with Fisher non-corporate matters such as his personal financial situation and other personal family matters relating to his wife and children. This included United’s treatment of Tommy.
“(4) At no time did Fisher or any of the other defendants’ attorneys inform Peter that any of the information exchanged during their discussions could be used against him.
“(5) Fisher never told Peter, either orally or in writing, that his position as United’s corporate counsel precluded him from meeting with or representing Peter or that there was any potential conflict of interest. Fisher also never requested that Peter sign a letter waiving such conflicts or consenting to representation.
“(6) The defendant attorneys have represented three partnerships in which Peter is a partner and have performed legal services for other members of Peter’s family.” Motion to disqualify at ¶¶7-9.

If true, these allegations would support the existence of an attorney-client relationship between Peter and the defendants’ attorneys. Peter had no separate representation and sought advice on individual matters related to his dispute with the other United shareholders. This would have given the defendants’ attorneys information unavailable to other persons. While the billing situation is unclear, United is a closely held corporation, and at least some of the matters on which the defendants’ attorneys advised Peter appear to be within their area of professional competence. Under these circumstances, Peter could have reasonably believed that the defendants’ attorneys, and Fisher in particular, were serving as his personal attorneys.

The defendants deny the majority of Peter’s allegations. Response to motion to disqualify at ¶¶7-9. In addition, the defendants also point out that Peter and the defendants’ attorneys never entered into a fee arrangement and contend that the defendants’ attorneys never affirmatively assumed a duty of representation.

Factual disputes such as these must be resolved through interrogatories, depositions or an evidentiary hearing, with depositions or written interrogatories being the preferred method of investigation. See Phila. Civ. R. *206.1(E); American Housing Trust III v. Jones, 548 Pa. 311, 319-20, 696 A.2d 1181, 1185 (1997) (“[t]he trial court may not reach a determination based upon its view of the controverted facts, but must resolve the dispute by receiving evidence thereon through interrogatories, depositions, or an evidentiary hearing”); Miltenberg & Samton Inc. v. Assicurazioni Generali, S.p.A., January 2000, no. 3633, slip op. at 11-12 (C.P. Phila. October 11, 2000) (Herron, J.) (citing Luitweiler v. Northchester Corp., 456 Pa. 530, 535, 319 A.2d 899, 902-903 (1974); Ambrose v. Cross Creek Condominiums, 412 Pa. Super. 1, 13-14, 602 A.2d 864, 869 (1991) and Slota v. Moorings Ltd., 343 Pa. Super. 96, 100, 494 A.2d 1, 2 (1985)). Accordingly, the court is ordering that the parties take depositions as to those facts that either confirm or refute the assertion that Peter had an attorney-client relationship with the defendants’ attorneys, as well as the extent and timing of such relationship. These depositions are to be completed within 45 days of the issuance of this opinion and in accordance with Pa.R.C.P. 4007.1. Once this has been accomplished and within 60 days of the issuance of this opinion, the parties are to file briefs addressing the issues surrounding the alleged relationship between Peter and the defendants’ attorneys and referencing the depositions and any other relevant evidence. Once this is completed, the court will be able to proceed with its analysis under the three-prong Pew test. In the interim, the motion to disqualify will be held under advisement.

CONCLUSION

Because even fraudulent or illegal conduct directed toward a third party cannot constitute minority shareholder oppression in a close corporation, Count I is stricken. The remaining objections asserting legal insufficiency are overruled, and the parties are ordered to engage in discovery regarding the disputed issues of material fact raised by the motion to disqualify.

ORDER

And now, August 28,2001, upon consideration of the preliminary objections of defendants Paul Del Borrello, Dennis Leonard, Glen Strafella and United Financial Services Group Inc. to the amended complaint of plaintiff Peter Del Borrello, the plaintiff’s response thereto, the plaintiff’s motion to disqualify and the defendants’ response thereto, and in accordance with the memorandum opinion being filed contemporaneously with this order, it is hereby ordered and decreed as follows:

(1) Paragraphs 36 through 41 of the complaint are stricken;

(2) The preliminary objections to Count I — failure to disclose required disclosure events warranting appointment of a custodian for United Financial Pursuant to 15 Pa.C.S. § 1767(a)(2) are sustained, and Count I is stricken;

(3) The remaining preliminary objections are overruled;

(4) The defendants are directed to file an answer to the amended complaint within 20 days of the date of entry of this order; and

(5) The motion to disqualify will be held under advisement for 60 days so that within 45 days, depositions pursuant to Pa.R.C.P. 4007.1 may be taken to resolve the factual questions raised by the motion to disqualify. After the 45th day but on or before the 60th day, the parties shall file with this court, briefs offering any further argument and referencing the depositions or other relevant evidence.

      . Paul, Dennis and Glen are referred to collectively as the “individual defendants.”

      . Although the United bylaws did not specify that the corporation had a position of vice president, Peter served as United’s vice president from the corporation’s formation in 1991.

      . Peter alleges that this conduct could be in violation of Pennsylvania and federal law and could lead to United incurring heavy financial penalties.

      . In addition to the actions described supra, Peter asserts that Paul devised a scheme to defraud United franchisees.

      . The objections also contend that the complaint includes scandalous and impertinent allegations of the individual defendants’ behavior that were to have been investigated by the disclosure committee. The court finds certain allegations in the complaint so inappropriate and prejudicial that a discussion of them is unnecessary and orders that these allegations be stricken. See Commonwealth Department of Environmental Resources v. Hartford Accident & Indemnity Co., 40 Pa. Commw. 133, 137-38, 396 A.2d 885, 888 (1979) (a court may strike scandalous and impertinent allegations “when a party can affirmatively show prejudice”). Those allegations regarding conduct toward Tommy, while not actionable, as discussed infra, are not sufficiently prejudicial to require that they be stricken.

      . Because United has only four shareholders, it meets the definition of a “closely held corporation,” which is defined as “[a] business corporation that: (1) has not more than 30 shareholders; or (2) is a statutory close corporation.” 15 Pa.C.S. §1103.

      . Several other states have adopted the reasonable expectations test in one form or another. See e.g., Capital Toyota Inc. v. Gerwin, 381 So.2d 1038, 1039 (Miss. 1980) (examining plaintiff’s reasonable expectations); Fox v. 7L Bar Ranch Co., 645 P.2d 929, 933 (Mont. 1982) (“[b]ecause of the special circumstances underlying closely held corporations, courts must determine the expectations of the shareholders concerning their respective roles in corporate affairs”); Brenner v. Berkowitz, 634 A.2d 1019, 1029 (N.J. 1993) (“[c]ourts also should consider whether the misconduct thwarts the minority shareholder’s reasonable expectations of his or her role in the corporation”); Landstrom v. Shaver, 561 N.W.2d 1, 8 (S.D. 1997) (“oppressive actions to refer to conduct that substantially defeats the ‘reasonable expectations’ held by minority shareholders in committing their capital to the particular enterprise”). Cf. Minn. Stat. §302A.751, subd. 3a (directing courts to take into account “the reasonable expectations of all shareholders” when determining relief for oppression); Meiselman v. Meiselman, 307 S.E.2d 551, 563 (N.C. 1983) (“a complaining shareholder’s ‘rights or interests’ in a close corporation include the ‘reasonable expectations’ the complaining shareholder has in the corporation”); Kiriakides v. Atlas Food Sys. & Servs., 541 S.E.2d 257, 264 (S.C. 2001) (a court may not “order a corporate dissolution solely upon the basis that a party’s ‘reasonable expectations’ have been frustrated by majority shareholders,” although it may take reasonable expectations into account); Masinter v. Webco Co., 262 S.E.2d 433, 442 (W.Va. 1980) (“[a] claim of a freeze-out rests on the wrongful denial by the majority shareholders of the legitimate claims or expectations of a minority shareholder”).

      . This is not to say that the reasonable expectations test is without detractors in Pennsylvania. See Sandra K. Miller, Should the Definition of Oppressive Conduct by Majority Shareholders Exclude a Consideration of Ethical Conduct and Business Purpose ? 97 Dick. L. Rev. 227, 263 (1993) (criticizing the reasonable expectations test and urging the adoption of a “hybrid approach” that would examine “whether there has been burdensome, harsh, and wrongful conduct violating standards of fair dealing and fair play on which every shareholder should be entitled to rely in entrusting money to a corporation”).

      . Leech is remarkable in that it does not cite a single case and focuses, instead, solely on the defendant’s actions and the language of section 1767.

      . The court believes firmly that it should follow the guidance set forth in Gee, despite criticism that has been leveled against that decision. See Sandra K. Miller, A Note on the Definition of Oppressive Conduct by Majority Shareholders: How Can the Reasonable Expectations Standard be Reasonably Applied in Pennsylvania, 12 J.L. & Com. 51, 66 (1992) (arguing that Gee “fails to evaluate alternative approaches, and fails to refer to New Jersey’s precedents,” rendering the decision “somewhat distressing” and “incomplete”).

      . Other cases addressing section 1767 and its predecessor are of little value. See Miller, Note, 12 J.L. & Com. at 64-65 and 65 n.72 (1992) (discussing, inter alia, ARC Mfg. Co. Inc. v. Konrad, 321 Pa. Super. 72, 467 A.2d 1133 (1983), and O’Malley v. Desmond, 62 D.&C.2d 645 (C.P. Phila. 1973)).

      . In its entirety, section 14A:12-7(l)(c) reads as follows:
      “In the case of a corporation having 25 or less shareholders, the directors or those in control have acted fraudulently or illegally, mismanaged the corporation, or abused their authority as officers or directors or have acted oppressively or unfairly toward one or more minority shareholders in their capacities as shareholders, directors, officers, or employees.”

      . Other jurisdictions are not as generous as New Jersey when determining the existence of shareholder oppression. In Willis v. Bydalek, 997 S.W.2d 798 (Tex. Ct. App. 1999), for example, the Texas Court of Appeals balanced the minority shareholders’ reasonable expectations against the corporation’s desire to run its business efficiently and held that the lock-out and firing of minority shareholders did not constitute oppression. 997 S.W.2d at 801-802. In other jurisdictions, the minority shareholder’s defeated expectations must have been “central to the minority’s decision to join the venture.” Gunderson v. Alliance of Computer Professionals Inc., 628 N.W.2d 173, 191 (Minn. Ct. App. 2001) (quoting In re Dissolution of Kemp & Beatley Inc., 473 N.E.2d at 1179). Similarly, a single violation of these expectations alone may not be grounds for court action. See Hayes v. Olmsted & Assocs. Inc., 21 P.3d 178, 182 (Or. Ct. App. 2001) (“the existence of one or more badges of oppression in isolation does not necessarily justify relief. Instead, we examine the pattern of conduct of those in control and the effect of that conduct on the minority to determine whether, in sum, they show oppression”).

      . As discussed supra, the allegations regarding the termination of Peter’s tenure as United’s vice president are unclear. Depending on the circumstances surrounding this termination, however, it could constitute an additional act of oppression by the individual defendants.

      . Both of these actions allegedly imperiled Peter’s investment in United and now form the basis for Count I in the complaint.

      . This contrasts with oppressive or unfair conduct, which under section 14A:12-7(l)(c) must be directed at the minority shareholders to be actionable.

      . While at least one commentator has noted that statutes like Pennsylvania’s do not require that oppressive conduct be directed toward a shareholder qua shareholder, there has been no parallel statement with regard to fraudulent or illegal conduct. See Thompson, 48 Bus. Law. at 713-14 (rejecting the argument that an oppression statute “only protects a shareholder against oppression in his capacity as a shareholder”).

      . In addition, it does not appear that Tommy’s employment with United has been terminated.

      . The Pew court observed that “[t]he test of whether an attorney has conflicting interests so as to preclude his representation of a party is not actuality of conflict, but possibility that a conflict may arise.” 440 Pa. Super. at 243, 655 A.2d at 545 (citing Middleberg v. Middleberg, 427 Pa. 114, 233 A.2d 889 (1967)).

      . No Pennsylvania state cases, however, specifically address an implied attorney-client relationship as between a corporation’s attorney and the corporation’s shareholders. This distinction is important because, in a corporate setting, the question is not whether an attorney-client relationship has been formed but rather with whom the relationship has been formed.

      . Available at http://courts.phila.gov/cptcvcomp.htm.

      . The defendants assert that Peter obtained separate representation by November 21, 2000. Even if this is so, it does not preclude finding that an attorney-client relationship existed at some earlier point in time.

      . Available at http://courts.phila.gov/cptcvcomp.htm.


author: CARRAFIELLO, J.,

text:
    Kzylan v. Business Men’s Assurance Agency Inc.

      Francis P. Bums, for appellee.

      Michael O. Pansini, for appellant.
    May 21, 2001
   CARRAFIELLO, J.,

This appeal arises from the entry of an order sustaining preliminary objections based upon improper venue. The case was transferred to Delaware County.

The plaintiff, Albert Kzylan, is a resident of Broomall, Delaware County. The defendant, Business Men’s Assurance Agency Inc., is a Missouri corporation that issued a disability policy to Kzylan.

At issue in this appeal is whether venue is vested in Philadelphia County pursuant to Pa.R.C.P. 2198. The plaintiff maintains that Philadelphia County is appropriate since it regularly conducts business in this locale. The defendant disputes this assertion.

In assessing whether venue is proper in Philadelphia County under Pa.R.C.P. 2198, the court must consider both the quality and quantity of the defendant’s acts in that locale. Masel v. Glassman, 456 Pa. Super. 41, 689 A.2d 314 (1997). Quality of acts signifies those acts directly furthering or essential to corporate objectives rather than incidental conduct. Quantity of conduct means “those acts which are so continuous and sufficient to be general or habitual.” Id. at 46, 689 A.2d at 317.

Plaintiff Albert Kzylan never proffers either in his complaint or in response to the preliminary objections that the defendant has any office in Philadelphia, employs sales representatives in such location, or entered into contractual negotiations and discussions there. All that is advanced is that the defendant issued some insurance policies in Philadelphia.

Under relevant case law, it has been determined that the mere solicitation of business is not enough to show that a corporation regularly conducts business in a forum for purposes of establishing venue. Kubik v. Route 252 Inc., 762 A.2d 1119 (Pa. Super. 2000). Furthermore, the fact that a corporation may enter into contracts with persons in a specific county has been rejected as being sufficient by itself for establishing proper venue. See Masel, supra.

In this case, neither the quality nor quantity of contacts is sufficient to meet the requisite for a corporation that regularly conducts business in Philadelphia County. The plaintiff never disputes the averments in the defendant’s affidavit that it has no office or place of business in Philadelphia, no phone listing in Philadelphia, and no registered agent in such location. Moreover, it is uncontroverted that while the defendant has issued some insurance policies to persons in Philadelphia, they were not disability policies. Finally, there is nothing to controvert the evidence proffered by the defendant that less than one percent of its policies nationwide were issued to persons in Philadelphia.

Given the foregoing, venue was appropriately transferred to the location of the plaintiff’s residence, which is Delaware County.