author: TUNNELL, J.,

text:
    Downingtown Area School District v. Chester County Board of Assessment Appeals

      C.P. of Chester County,
    No. 2012-11947

      Mark P. Thompson, for appellant.

      Sigmund J. Fleck, for appellee.

      Sharon DiPaolo, for intervener.
    Oct. 29, 2014
   TUNNELL, J.,

Downingtown Area School District filed a timely appeal to this court from the decision of the Chester County Board of Assessment Appeals on October 17,2012 not to change the assessment for the commercial property in question for tax year 2013 in the amount of $1,256,750.00.

This commercial property is encumbered by a long-term lease that is presently non-advantageous to the lessor and owner, appellant SPC 2001A-CSF-67 LLC (“Taxpayer”). Under the terms of the lease, Taxpayer is not receiving any annual rent from the property for the next ten (10) years. The property is no longer “income-producing,” despite the presence of a long-term lease. The result is a property for which a buyer, who otherwise would be enticed by a property’s ability to generate income, is limited if not prevented entirely from realizing such a benefit. Its value in the market place to the willing buyer is thus significantly diminished. This fact bears greatly on the court’s determination of the “actual value” of the property for assessment purposes.

The appeal was consolidated for trial only with another property tax appeal, Downingtown Area School District v. Chester County Board of Assessment Appeals, et al., No. 2012-11946, which raised generally the same legal issue, namely the effect of a long-term lease on the actual value of a property. Although each property involved a similar legal issue, and the parties’ positions were supported by the same expert witnesses, that property and its related appeal is factually the polar opposite of the one presently before the court. Encumbered by a long-term lease that is highly advantageous to the appellant LTK, the lessor and owner, its marketplace value as an income-producing property is significantly increased by its above market rents and necessarily so is its resultant actual value.

Hearings in the trial de novo were held on August 12, 2014 and September 18, 2014.

The court will issue separate decisions.

The court grants the appeal and makes the following:

FINDINGS OF FACT

1. The appellant is Downingtown Area School District (“School District”).

2. The appellees are the Chester County Board of Assessment Appeals, and the Intervener, the taxpayer, SCP 2001A-CSF-67 LLC (“Taxpayer”).

3. The property that is the subj ect of the appeal is located at 109 East Uwchlan Avenue, Uwchlan Township, Chester County, PA 19341, Tax Parcel ID No. 33-04-0030.09A.

4. The School District filed an appeal of the assessment for the subject property for tax year 2013.

5. On October 17, 2012, The Chester County Board of Assessment Appeals issued a decision sustaining the assessment at $1,256,750.

6. On November 14, 2012, the School District filed an appeal of the decision of the Board of Assessment Appeals.

7. At this time the appeal covers three (3) tax years.

8. The applicable common level ratio for tax year 2013 is 59%.

9. The applicable common level ratio for tax year 2014 is 60.2%.

10. The applicable common level ratio for tax year 2015 is 57.7%.

11. The property consists of 1.706 acres of land, improved by a one-story building constructed in 2001 containing 10,125 square feet. There are 59 parking spaces.

12. The construction costs for the property in 2001 were $2,329,342.

13. The construction of the building is masonry with concrete floors.

14. The building is configured for use by a single tenant.

15. The property is located in a neighborhood with commercial, office, industrial and retail uses.

16. Currently, the property is occupied by Lionville CVS, Inc. (“CVS”), a related entity of CVS, Inc..

17. CVS has occupied the property since construction in 2001, pursuant to a long-term lease with an initial term of 22 years, and ten 5-year options (the “CVS Lease”). If all options are exercised, the lease extends until 2074.

18. The CVS Lease is structured under Section 467 of the Internal Revenue Code, 26 U.S. Code §467, with a pre-paid lump-sum payment of rent, deferred payments, and no current monthly rent.

19. Beginning in 2013, the annual contract rent for the subject property is $0.

20. This rent condition continues for the next ten (10) years, or until the end of the initial term of the CVS Lease. (CVS Ex. 7).

21. CVS does not own the grounds, building or improvements.

22. Taxpayer’s interest in the property is a “leased fee.”

23. CVS’ interest in the property is a “leasehold interest.”

24. Only about 15% of the square footage of the subject property is currently used as a pharmacy.

25. The remaining 85% of the square footage of the subject property is used for general retail purposes.

26. The School District called as its expert witness appraiser Patrick F. Noone.

27. Mr. Noone developed all three approaches to value: cost, sales, and income.

28. In developing the sales approach, all of the sales comparables selected by Mr. Noone were of CVS occupied buildings.

29. Taxpayer called as its expert witness appraiser Mark R. Shonberg.

30. Mr. Shonberg also developed all three approaches to value: cost, sales, and income. However, Mr. Shonberg did not complete his assessment of the property under the “sales approach.”

DISCUSSION

Chester County is a third class county. Accordingly, the Consolidated County Assessment Law applies to tax assessment appeals arising in Chester County. 53 P.S. §8801(b)(l)(i). Pursuant to the Consolidated County Assessment Law, “all subjects and properties made taxable by the laws of this Commonwealth...including all real estate” shall be valued and assessed. Consolidated County Assessment Law, 53 P.S. §8811(a)(1); see also, General County Assessment Law, 72 P.S. Sec. 5020-201. Under the Consolidated County Assessment Law, the county has the power to rate and value all objects of taxation according to the “actual value” thereof. 53 P.S. §8842; see also, F&M Schaeffer Brewing Co. v. Lehigh County Bd. of Appeals, 530 Pa. 451, 456, 610 A.2d 1, 3 (Pa. 1992).

The term “actual value” is defined as market value or fair market value, which in turn are defined as “the price which a purchaser, willing but not obliged to buy, would pay an owner, willing but not obliged to sell, taking into consideration all uses to, which the property is adapted and might in reason be applied.” F&M Schaeffer, 530 Pa. at 457, 610 A.2d at 3 (quoting Buhl Found, v. Bd. of Prop. Assmt, 407 Pa. 567, 570, 180 A.2d 900, 902 (1962)). In arriving at the “actual value” under 72 P.S. §5020-402(a), all three appraisal methods — cost, income and comparable sales approaches — must be considered in conjunction with one another. Morelyn Plaza Ltd. Partnership v. Bucks County Bd. of Assessments, 1997 WL 68578, *3 (Bankr. E.D.Pa. 1997), aff’d, 149 E3d 1164 (3rd Cir. 1998).

In a tax assessment appeal, the court of common pleas must proceed de novo. Murtagh v. County of Berks, 715 A.2d 548, 552 (Pa. Cmwlth. 1998). In a de novo appeal, it is the trial court’s duty “to independently determine the fair market value of the parcel on the basis of the competent, credible and relevant evidence presented by the parties.” Green v. Schuylkill County Bd. of Assessment Appeals, 565 Pa. 185, 196, 772 A.2d 419, 426 (2001); Westinghouse Electric Corp. v. Bd. of Property Assessment, 539 Pa. 453, 463, 652 A.2d 1306, 1311 (1995). The trial court also has the discretion to decide which of the methods of valuation is the most appropriate and applicable to the given property. Willow Valley Manor, Inc., 810 A.2d 720, 723 (2002). If the trial court is presented with conflicting testimony by equally credible experts, it is appropriate for the court to find that the fair market value of the property is “somewhere between the values presented by the competing experts.” Green, 565 Pa. at 208, 772 A.2d at 433; Westinghouse, 539 Pa. at 464, 652 A.2d at 1312; Trustees of the Int’l Brotherhood of Painters v. Bd. of Revision of Taxes, 1997 WL 1433766 (Phila. C.P. 1997). The trial court is free to accept all, part or none of an expert’s testimony in determining value. West Mifflin Area School Dist. v. Bd. of Property Assessment, 802 A.2d 687, 691 (Pa. Cmwlth. 2002).

In a tax assessment appeal, once the taxing authority has presented its assessment record into evidence, it has made out a prima facie case for the validity of the assessment by fixing the time when the burden of coming forward with evidence shifts to the appellant. Deitch Co. v. Bd. of Property Assessment, 471 Pa. 213, 221, 209 A.2d 397, 402 (1965). If the appellant produces sufficient proof to overcome its initially allotted status, the evidentiary value of the taxing authority’s assessment record ceases and may no longer influence the court’s determination of the assessment’s correctness. Green, 565 Pa. at 195, 772 A.2d at 425-426. In that event, the appellant continues to cany the burden. Westinghouse Electric Corp. v. Board of Property Assessment, 539 Pa. 453, 460, 652 A.2d 1306, 1310 (1995). See also 16 McQuillin, The Law of Municipal Corporations §44.124 (3rd Ed.).

Finally, at the center of every real property assessment appeal is uniformity. The Uniformity Clause of the Pennsylvania Constitution provides that:

“All taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax, and shall be levied and collected under general laws.” Pa. Const, art. VIII, §1.

The Supreme Court reminded recently, in Friends of Pennsylvania Leadership Charter School v. Chester County Board of Assessment Appeals, 61 A.3d 354 (Pa.2014):

“Taxation, however, is not a matter of exact science; hence, absolute equality and perfect uniformity are not required to satisfy the constitutional uniformity requirement.” Clifton v. Allegheny Co., 969 A.2d 1197, 1210 (Pa. 2009) (citing Leonard v. Thornburgh, 489 A.2d 1349, 1352 (Pa. 1985); In re: Harleigh Realty Co., 149 A. 653, 654 (Pa. 1930) (“Scientific formulae, arithmetical deductions andmental contemplations, have small value in making assessments under our practical system of taxation.”)). “Some practical inequalities are obviously anticipated, and so long as the taxing scheme does not impose substantially unequal tax burdens, rough uniformity with a limited amount of variation is permitted.” Id., at 1210-11 (citation omitted), see also Delaware, L&W.R. Co. ’s Tax Assessment, 73 A. 429, 430 (Pa. 1909) (noting Uniformity Clause requires only “substantial uniformity, which means as nearly uniform as practicable in view of the instrumentalities with which and subjects upon which tax laws operate”).

Determining the “Actual Value” of the Real Property Encumbered by the CVS Lease

The existence of a long-term lease, which encumbers the present property and creates different interests in the property, impacts the court’s value assessment, as discussed below.

Ownership Interests in Property

There are several types of ownership interests in property, two of which are involved in this case. “Fee simple” is the most complete form of ownership. It is absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power and escheat. The Appraisal of Real Estate, 14th ed. 2013 at 4, The Dictionary of Real Estate Appraisal, 5th ed. 2010 at 78. A “leased fee” interest is “[a]n ownership interest held by the landlord with the rights of use and occupancy transferred by the lease to others.” Tech One, 617 Pa. at 445 n.8 (Pa. 2012)(quoting The Appraisal of Real Estate, 12th ed. 2001 at 83). See also, The Appraisal of Real Estate, 14th ed. 2013 at 72; The Dictionary of Real Estate Appraisal, 5th ed. 2010 at 111. A “leasehold” interest is “[t]he interest held by the lessee (the tenant or renter) through a lease transferring the rights of use and occupancy for a stated term under certain conditions.” Tech One, 617 Pa. at 447 n. 13, 53 A.3d at 690 n. 13 (quoting The Dictionary of Real Estate Appraisal 4th ed. 2002 at 162); see also, The Appraisal of Real Estate, 14th ed. 2013 at 72; see also, The Dictionary of Real Estate Appraisal 5th ed. 2010 at 111.

In this case, the CVS Lease creates two interests in the subject property: a leased fee and a leasehold interest. Taxpayer holds the “leased fee.” CVS holds the “leasehold interest.”

Impact of a Long-term Lease on the Value of A Property

The question of whether or not a property subject to a long-term lease should be valued for assessment purposes in its “unencumbered” or “fee simple” form was addressed by the Pennsylvania Supreme Court In re Appeal of Marple Springfield, 530 Pa. 122, 706 A.2d 708 (1992) [.Marple Springfield I]. The court concluded that it should not. According to the court, “to interpret the tax assessment statute as requiring valuation of property in hypothetical “unencumbered form,” ...is to ignore the economic realities of commercial real estate transactions.” Id. Marple Springfield I established two basic principles applicable to valuing real property encumbered by a long-term lease. First, the “economic reality” of the existence of the lease must be considered by an appraiser in establishing the market value of property encumbered by a lease as it will be a factor which affects the price which a purchaser of the property is willing to pay. Second, when the property generates income, the capitalization of income approach is an appropriate method to use in ascertaining its value and when applying that method, the “contract rent” received under the lease is the relevant income stream which is to be capitalized, even if it is below prevailing market rental rates. Id.

In the recent case of Tech One Assocs. v. Bd. of Property Assessment, Appeals and Review of Allegheny County, 617 Pa. 439, 465, 53 A.3d 685, 700 (Pa. 2012), the court went further in addressing the impact of long-term leases on property values when it considered which of the interests created by such a long-term lease should be valued in assessing property taxes. It concluded that the market value of the property as a whole (both the leased fee and leasehold interest) must be considered for tax assessment purposes. Id. The appellant lessor in Tech One challenged the trial court’s rejection of its appraisal method because it did not include consideration of the value of buildings and other improvements on the land, which were owned by the lessee under the terms of a long-term lease. The lessor argued that the improvements were not taxable real estate because they were owned by the lessee as leasehold interests. The Tech One Court summarized the facts before it as follows:

The subject of this appeal is a 47.5 acre piece of land... upon which is situated a community shopping center..., a multi-screen movie theater, and a restaurant.... The land and buildings comprise one tax parcel....
[Lessor] purchased the then-undeveloped land during the 1980’s. In 1989, [Lessor] entered into a 50-year lease agreement... 1990, with Lessee in a transaction that [was] found to be “arm’s length.”...Lessee was given the right under this lease to construct buildings on the land and to make other improvements to the land, and, in the early 1990’s, Lessee constructed the shopping center, movie theater, and restaurant, as well as their surrounding parking lots, lighting fixtures, and the access roads.
The lease guarantees Lessee the first opportunity to purchase any part of [Lessor’s]...interest in the premises which it elects to sell during the term of the lease, and it also gives Lessee a purchase option for the land on which the buildings sit, which it is entitled to exercise in the sixth month of year 49 of the lease. If Lessee fails to exercise this purchase option, upon the termination of the lease, [Lessor]...has the right to retake possession of the entire premises....
Lessee was required to pay [Lessor]...$665,000 in rent annually for the entire term of the lease. The lease also required Lessee to pay all real estate taxes levied on the premises, and granted Lessee the option, at any time of its choosing, to assign all of the rights, title, and interests which it possessed under the lease, and, correspondingly, required any assignee to assume Lessee’s obligations under the lease. Lessee was also permitted to sublease part or all of the premises to a tenant for any use permitted by the lease.

The court concluded that “the statutes of this Commonwealth authorizing the taxation of real estate are concerned with the particular nature of the property involved, not the means by which the property is owned... Consequently, the mere fact that the shopping center buildings and other improvements to the land in the instant matter were owned by Lessee as leasehold interests does not alter the fact that they are particular types of real estate enumerated in Section 201 (a) and, thus, are proper subj ects of taxation.” Having determined that the leasehold interest in buildings and improvements at the shopping center were “real estate” and, thus, subjects of taxation, the remaining question for the Tech One Court to answer was whether their market value had been properly established, taking into account its earlier decision in Marple Springfield /.

The Tech One Court reasoned that, although not mentioned therein, Marple Newtown I did not preclude the consideration of a leasehold interest, but simply necessitated that, in conducting this valuation, the impact of the lease on the market value of the real estate owned as the leased fee and, also, on the market value of the real estate owned as a leasehold interest must be considered. The Tech One Court further held that if the holder of the leased fee and the leasehold interest each receive rent pursuant to a contractual arrangement, it is appropriate, pursuant to Marple Springfield /, to employ the capitalization of income approach to value those interests utilizing the contract rent. In sum, the court held that “in conducting this type of valuation, the impact of the market value of the real estate owned as the leased fee and, also, the market value of the real estate owned as a leasehold interest must be considered.” Id.

Tech One stands for the proposition that:

the...“economic reality test” be applied separately to the leasehold and the leased fee interests, rather than only to the leased fee. Thus, the “test” is to be used as a valuation tool for determining the market value of these real property interests. That is, what a willing buyer would pay a willing seller for the leasehold and what a willing buyer would pay a willing seller for the leased fee interest. Their combined value equals the total assessable real estate.

Assessment Law and Procedure in Pennsylvania, by Bert M. Goodman, Esquire 14th ed. (2013) at 190-91.

Stated in mathematical terms, and as developed in Marple Newtown I and Tech One, a property subject to a long-term lease is valued as follows:

Actual value = leased fee value (economic reality test + contract rent) + leasehold value (economic reality test + contract rent).

Although some of the facts presented in Tech One appear to differ from those here (i.e. “ownership” of the buildings on the land), the essential facts for valuation purposes are the same — the lessee is a tenant occupying property by virtue of a long-term lease and thus has a “leasehold interest.” Furthermore, nowhere in the decision did the Pennsylvania Supreme Court state that it was limiting its holding to just the facts presented. There were factual distinctions in Marple Newtown I and Tech One, yet those did not preclude the Tech One Court from applying the principles oí Marple Newtown I'm conducting its analysis. The same reasoning is applicable here. The concepts of leased fee and leasehold interests should apply to all leased properties, transcending the fact pattern presented in Tech One. The court, therefore, must consider both of the interests created by the CVS Lease.

The Selection of An Appraisal Method

Income Approach

The above analysis of value is appropriate for encumbered properties because ordinarily the property is “income-producing,” which is marketable, and thus purchased, because of the right to receive a future income stream.” See Assessment Law and Procedure in Pennsylvania, by Bert M. Goodman, Esquire 14th ed. (2013) at 195. Yet, this is not an ordinary lease or by implication an ordinary case. Under the “economic realities” of the CVS Lease, the only lease with which the court must be concerned, there is currently no income stream or “contract rent” — for either the leased fee or leasehold interest. A purchaser of the leased fee would not view this property as potentially “income-producing property” because the rent for the applicable years is $0, a fact agreed to by both experts. Even more significant is the fact that it will remain that way for the foreseeable future. Thus, in this instance, the income approach does not assist the court in determining the actual value of the leased fee.

Moreover, neither expert provided the court with credible evidence from which it could ascertain the market or actual value of the “leasehold interest” held by CVS. There is no sublease as in Tech One and no income to CVS to be valued. In the case of Mr. Noone, he did not consider the leasehold interest at all. Mr. Shonberg opined that the court must assign a value to the leasehold interest and adjusted the property’s actual value based upon the so-called leasehold “benefit” to CVS. According to Mr. Shonberg, there is a “leasehold benefit” to CVS resulting from the current $0 monthly rent. He values that “benefit” as the variance “between the contract occupancy costs (rent and expense) and market costs”. Neither Taxpayer nor Mr. Shonberg offered any legal support for this proposition. Taxpayer attempted to support its analysis by referring in its briefing to the general proposition that the sum of the fee subject to the leases and the leasehold interest “tend to be the same as the value of the property free and clear” .citing In re Appeal of Cynwyd Investments, 679 A.2d 304, n.10 (Pa. Commw. Ct. 1995), which in turn quoted The Appraisal of Real Estate 469 (7th ed. 1978)). That proposition does not apply in all situations as evidenced by the use of the term “tend.” There can be exceptions to any rule and the present situation is necessarily one of those situations. As stated in the 14th edition of that same appraisal manual, The Appraisal of Real Estate 449, “the incremental value created by a lease premium can result in a leased fee value that exceeds the fee simple value.” The reverse can also be true.

The court’s task in this case, as dictated by controlling case law, is to consider the impact of the CVS Lease on the property, not to assess the property in its “unencumbered” or “fee simple form.” The court determines that the impact of the CVS Lease on the property is such that the “income approach” is not the appropriate approach for determining value given this lease’s “economic reality.” With no credible value estimate provided for the leasehold interest, the court must look to the approach that best values the remaining interest, the “leased fee” held by Taxpayer.

Sales and Cost Approaches

Highest and Best Use

Real property has both a use value and a market value which may be the same or different depending on the property and the market. The Appraisal of Real Estate, 14th ed. at 62. “Use value” in real estate appraisal means “the value a specific property has for a specific use.” Id. Use value may vary based on external factors such as changes in business operations. Id.

The Pennsylvania Supreme Court has recognized that authorities in the field of real estate valuation distinguish between market value (or value-in-exchange) and use value. F&M Schaeffer, 530 Pa. at 457, 610 A.2d at 3 (citing the The Appraisal of Real Estate, 9th edition.) “Use value” or “value-in-use” represents the value to a specific user. Id. “Because value-in-use is based on the use of the property and the value of that use to the current user, it may result in a higher value than the value in the marketplace.” Id. Value-in-use is not a reflection of fair market value and is not relevant in tax assessment cases because only the fair market value (or value-in-exchange) is relevant in tax assessment cases. Id. at 458, 610 A.2d at 4. The Pennsylvania Supreme Court held that “[a] property’s use and its resulting value-in-use cannot be considered in assessing the fair market value of property for tax assessment purposes in Pennsylvania.” Id..

Accordingly, appraisals of real estate in assessment appeals must present value-in-exchange, or market value, and not the value-in-use to the particular user. This concept ties in with the appraisal concept of determining the property’s highest and best use. The purpose of the highest and best use analysis is to help identify comparables. (N.T. 83, 8/12/14). Accordingly, in determining the highest and best use for the subject properties, the appraiser must consider all uses to which the properties apply and not just the current use. If the appraiser incorrectly identifies the highest and best use which, in turn, informs the appraiser as to what comparables to select, that error will carry all the way through the valuation opinion. If the appraiser identifies an improperly narrow highest and best use (e.g. selecting only the current use), then that determination will inform the comparables selected, and will carry all the way through the valuation opinion which will be a value-in-use opinion.

Analysis Under the Sales Approach

The court rejects the comparables (all CVS occupied buildings) selected by Appellant’s appraisal, Mr. Noone, in constructing his “sales approach” as the appropriate comparables consistent with the highest and best use of the property. In determining the highest and best use for a subject property, an appraiser must consider all uses to which the properties apply and not just the current use. Mr. Shonberg completed this exercise correctly by considering all of the uses to which the improvements might be put, concluding that the properties’ highest and best use is general retail use which, of course, includes drug store use but potentially other retail uses as well. Mr. Shonberg, however, developed the sales approach only as a “test” and not as an indicator of value. Although he provided the court with the price per square foot of the buildings on the nine (9) comparable properties, he did not complete the analysis and necessarily failed to provide the court with valuation estimates for each of the years in question. The court, as a result, is left only with the third approach to value, the “cost approach,” as the best indicator of value in this case.

Analysis Under the Cost Approach

The final approach to value presented to the court by the parties’ experts was the “cost approach.” After considering the analysis and testimony of both experts, the court concludes that the valuation provided by Taxpayer’s expert, which utilized and examined the actual construction costs of the property in question and considered replacement costs for single user retail, Class C buildings, was the most credible assessment of value. Based upon that expert testimony, the court concludes that the actual value of the property in accordance with the cost approach as of January 1, 2013 (effective 8/1/2012) is $2,110,000, as of January 1, 2014 is $2,200,000 and as of January 1, 2015 is $2,200,000.

CONCLUSIONS OF LAW

1. The Board of Assessment Appeals established a prima facie case which was rebutted by competent, credible and relevant evidence.

2. The competent, credible and relevant evidence was nonetheless conflicting in certain respects, and it is the court’s obligation to weigh the same and determine the value of the property.

3. Mr. Shonberg’s conclusion of highest and best use of the property as improved represents value-in-exchange.

4. The “cost approach” is the most appropriate approach to value for the given circumstances involved with this property.

5. Mr. Shonberg’s ultimate conclusion of actual value is value-in-exchange.

6. Using the cost approach as developed by Mr. Shonberg, the actual value of the property as of January 1, 2013 (effective 8/1/2012) is $2,110,000, as of January 1, 2014 is $2,200,000.

7. Using the cost approach as developed by Mr. Shonberg, the actual value of the property as of January 1, 2015 is $2,200,000.

8. Application of the respective common level ratios to the actual value yields the following assessed values:

For January 1,2013: $1,244,900

For January 1, 2014: $1,336,440

For January 1, 2015: $1,336,440

An appropriate Order follows.

ORDER

And now, this 29th day of October, 2014, following a trial de novo in the above captioned matter by the undersigned, sitting without a jury, the court hereby grants the appeal of Downingtown Area School District, and determines the assessed value for Tax Parcel No. 33-04-0030.09A as follows:

For January 1, 2013: $1,244,900

For January 1, 2014: $1,336,440

For January 1, 2015: $1,336,440

      . Taxpayer referred the court to discussions in appraisal materials of the concept of “positive and negative leaseholds.” However, nothing in those selections provided the court with any controlling case law endorsing Taxpayer’s analysis as presented. Although Mr. Shonberg testified that he has utilized such an analysis in bankruptcy proceedings, this is not such a proceeding.


source: Caselaw Access Project

author: MCINERNEY, J.,

license: Public Domain

text:
    LEM 2Q, LLC v. Guaranaty National Title Co.

      Paul R. Rosen, Bruce L. Thall and Neal R. Troum, for plaintiffs.

      Robert H. Dickman, Suzanne McDonough and Scott C. Gottel, for defendants.
    Nov. 6, 2014
   MCINERNEY, J.,

Six motions for summary judgment require this court to determine whether escrow agents in a loan/investment transaction involving real estate, had a duty to disclose to lenders/ investors the existence of prior unrecorded encumbrances upon the realty. For the reasons below, this court finds that the escrow agents had no duty to disclose the existence of prior unrecorded encumbrances upon the realty.

Background

Plaintiffs are successors-in-interest of an entity that invested $3 million in real property under a preferred equity scheme. Defendant Fidelity National Title Insurance Company (“Fidelity”), is an Illinois title i insurance company registered to conduct business in Pennsylvania. Defendant Guaranty National Title Company (“Guaranty”), is an Illinois entity. At all times relevant to this action, Guaranty was title assurance agent on behalf of Fidelity, pursuant to an Issuing Agent Agreement (the “IAA”) executed before the occurrence of any of the facts relevant to this action. Individual defendant Robert J. Voegel (“Voegel”), a resident of Illinois, executed the IAA on behalf of Guaranty in his role as president and counsel thereof. Individual defendant Robert R. Rothstein, Esquire (“Rothstein”), was or is Senior Vice President of Guaranty. Individual defendant Joseph P. Cacciatore (“Cacciatore”), is an Illinois resident. Voegel and Cacciatore are or were members of an entity known as C&V Investments, LLC (“C&V”), a non-party in the instant action. Whenever necessary, Guaranty, Voegel, Rothstein and Cacciatore will be indentified herein as the “Guaranty defendants.”

On May 1, 1999, Fidelity and Guaranty entered into the IAA, whereby Fidelity appointed Guaranty as its agent for real estate title assurance. The IAA remained in effect at all times relevant to his action. Pursuant to the IAA, Fidelity specifically appointed Guaranty—

to countersign and issue title insurance commitments, guarantees, endorsements, title insurance policies of [Fidelity], or any other form whereby [Fidelity] assumes liability (collectively, Title Assurances) in [Guaranty’s] territory set forth in Schedule A.

In the Spring of 2007, individual defendants Voegel and Cacciatore, through C&V, loaned funds to a real estate investor, Russell M. Meusy, II (“Meusy”), and his company (collectively, the “Meusy Interests”), to facilitate Meusy’s purchase of a 234 multi-family property (the “property”), located in Reno, Nevada. The loan transactions occurred in Illinois; none of the loans was recorded with any public agency. Subsequently, closing on the property occurred on May 11, 2007, with defendant Guaranty performing the duties of settlement agent. The closing papers prepared by Guaranty did not disclose that C&V had loaned funds to the Meusy Interests.

After closing on the property, the Meusy Interests approached plaintiffs’ predecessors in interest to obtain additional funding. Plaintiffs’ predecessors reviewed the settlement papers prepared by Guaranty at the property closing of May 11, 2007, and decided to provide funding to the Meusy Interests. Thus, on June 29, 2007, plaintiffs predecessors invested $3 million in a company known as Manzanita Gate Apartment Holdings, LLC (“Manzanita Holdings”), an entity formed by Meusy to act as the direct or indirect owner of the property. Plaintiffs’ $3 million investment in Manzanita Holdings was made through a financial device known in the real estate investment business as a “mezzanine loan.” The purpose of the mezzanine loan was to provide the Meusy Interests with capital, and to allow plaintiffs’ predecessors to acquire a preferred equity stake in Manzanita Holdings. Defendant Guaranty performed the duties of escrow agent and closing officer to the $3 million mezzanine loan. During this closing, Guaranty did not disclose the existence of C&V’s prior unrecorded loans to the Meusy Interests. Shortly thereafter, the Meusy Interests defaulted on all of their obligations, including the C&V loans and the mezzanine loan provided by plaintiffs’ predecessors in interest.

Plaintiffs commenced the instant action in July 2007. After a long and convoluted procedural history, which included the filing of an amended complaint in January of 2011, plaintiffs filed a motion for summary judgment against Guaranty, Voegel, Rothstein and Cacciatore. This motion essentially asserts that Guaranty, as the escrow agent to the mezzanine loan, had a duty to disclose to plaintiffs’ predecessors the existence of C&V’s “usurious” loans. According to this motion, if plaintiffs’ predecessors had been informed of the existence of such usurious loans, they would have concluded that any investment in Manzanita Holdings would have been risky; consequently, plaintiffs’ predecessors would have refrained from funding Manzanita Holdings, and would not have lost their $3 million investment.

Plaintiffs also filed a motion for summary judgment against Fidelity, as principal of Guaranty. According to this motion, Fidelity is liable for the losses suffered by plaintiffs, under a theory of respondeat superior, pursuant to the terms of the IAA which Fidelity and Guaranty executed in 1999. On July 21, 2014, defendants Guaranty, Voegel and Rothstein filed a cross-motion for summary judgment against plaintiffs. On the same day, defendants Fidelity and Cacciatore filed their respective cross-motions for summary judgment. All the motions have been fully briefed and are ripe for a decision.

Discussion

I. Choice-of-law analysis.

The action presents facts requiring this court to determine whether the substantive laws of Nevada, Illinois or Pennsylvania apply to the resolution of the motions for summary judgment.

In Pennsylvania,
choice of law analysis first entails a determination of whether the laws of the competing states actually differ. If not, no further analysis is necessary.
However, if the court determines that a conflict of laws exists, then the court must analyze the governmental interests underlying the issue to identify the state with the greater interest in the application of its laws.
In resolving conflict-of-law issues...Pennsylvania follows the flexible conflicts methodology. Under this methodology, the court must apply the law of the state with the most significant contacts or relationships with the particular issue. In applying this process, the court does not simply count the parties’ contacts with the competing states; rather, it identifies the jurisdiction with the greater interest by measuring the quality of each contact
However, the court will not engage in a choice-of-law analysis indiscriminately; instead, the court will proceed with this analysis only in the presence of conflicts of substantive law-namely, in the presence of laws which fix the parties’ rights and duties to a judicial proceeding, as opposed to procedural laws which lay down how the parties may have their rights enforced, and their duties imposed, in a judicial proceeding.

Plaintiffs contend that the law of Nevada should apply to determine whether Guaranty, as escrow agent to the Closing Escrow Agreement, owed a duty to disclose to Plaintiffs the existence of prior unrecorded loans encumbering the property, Review of the pertinent law in Nevada shows that plaintiffs have misinterpreted the laws of that state. Generally, under Nevada law, “the escrow instructions control the parties’ rights and define the escrow agent’s duties.” Moreover, “an escrow agent must strictly comply with the terms of the escrow agreement.”

Nevertheless, plaintiffs rely on a Nevada case for the proposition that an escrow agent, such as Guaranty, owed them a duty to disclose the existence of any unrecorded encumbrances upon the property. In support of this argument, plaintiffs cite Mark Properties, Inc. v. National Title Co. The facts in Mark Properties are readily distinguishable from those involved herein, and do not apply to the resolution of the issue at hand.

In Mark Properties, two Israeli businessmen, Snop and Raiter, wished to develop land in Nevada. They contacted two local businessmen, Ventura and Bash, to inquire about real estate development opportunities in the Las Vegas market. Ventura informed Snop and Raiter that a third-party owner was willing to sell a forty-acre parcel of land at a specific price. Snop, Raiter, Ventura and Bash determined that the selling price was agreeable and decided to structure the acquisition as follows: Snop and Raiter would form a corporation, Mark Properties, Inc., which would provide sixty percent of the money required to buy the forty-acre parcel; Ventura and Bash, on the other hand, would provide the remaining forty percent of the needed capital through an entity under their control, Terra Vegas Corporation.

Unknown to the two Israelis, Bash acquired the parcel from its owner at a price below the figure agreed-upon by Snop and Raiter. At closing, the Escrow Agent, National Title Company (“National Title”), performed a double escrow. Through this device, National Title received in escrow the full amount agreed upon by Snop, Raiter, Ventura and Bash. Upon receipt of this escrowed amount, National Title closed first on Bash’s acquisition by using the funds of Mark Properties, Inc. to satisfy the third-party seller. Simultaneously, National Title closed on the second transaction by which Bash transferred the parcel to Snop and Raiter for the full, original price. In other words, Bash, and presumably Ventura, pocketed the difference between the lower price paid by Bash, and the higher price ultimately paid by Snop and Raiter, while using the funds of Mark Properties, Inc. without the knowledge or consent of Snop or Raiter. All along, National Title, as the escrow agent, knew that Ventura and Bash, through their self-dealing, had breached their fiduciary duties to business partners Snop and Raiter.

Snop and Raiter, through Mark Properties, Inc., filed an action against National Title as the escrow agent of the double escrow transaction. The complaint alleged that National Title breached its duty by failing to disclose the fraud perpetrated against Mark Properties, Inc. and its owners by business partners, Ventura and Bash. National Title filed a motion for summary judgment, and a district county court in Nevada granted the motion. Snop and Raiter, through Mark Properties, Inc., appealed the lower court’s decision. Reversing, the Nevada Supreme Court held that “generally, the escrow instructions control the parties’ rights and define the escrow agent’s duties.” However, the Nevada Supreme Court also explained that “an escrow agent has a duty to disclose fraud committed by another party to the escrow if the facts actually known to the escrow agent present substantial evidence of fraud.” The facts in Mark Properties are clearly distinguishable from those involved in this case. In Mark Properties, the fraud of self-dealing, known to the escrow agent, was committed by two businessmen, Ventura and Bash, against their own business partners, Snop and Raiter, despite the existence of a fiduciary duty binding together the four business partners. This breach presented “substantial evidence” of fraud such as to create a duty to disclose the known fraud. Whereas, in this case, Guaranty was involved in two separate and distinct closings: in the first, Guaranty acted as settlement and escrow agent to the sale of the property from sellers to the Meusy Interest; in the second closing, which took place nearly two months after the first, Guaranty was acting merely as an escrow agent to a transaction between the Meusy Interests and plaintiffs. This transaction involved a mezzanine loan-a financial device designed to allow plaintiffs to acquire not a direct stake in the property, but an equity interest in an entity controlling the Property directly or indirectly. The duties of Guaranty in the second closing were purely administrative because they required only holding the escrowed funds and disbursing them at closing. In short, unlike the escrow agent’s duties triggered in Mark Properties, Guaranty’s duties under the Closing Escrow Agreement did not present the “substantial evidence of fraud,” and did not require Guaranty to disclose the existence of prior unrecorded encumbrances upon the property. This court finds that the law articulated in Mark Properties is inapposite to the facts in this case; in addition, the court finds that the law of Nevada, which “generally” limits the duties of an escrow agent to any instructions contained in the escrow agreement, do not differ from the law of Pennsylvania on the same issue. Finally, the court finds that the laws of Nevada, Illinois and Pennsylvania as to each claim asserted in plaintiffs’ amended complaint, do not differ from each other. For this reason, the court will rely on Pennsylvania law to resolve each issue presented by the motions for summary judgment.

II. The Guaranty Defendants had no duty to disclose the existence of prior loans to Plaintiffs’ predecessors.

Plaintiffs’ case hinges on the proposition that Guaranty, as the escrow agent to the mezzanine loan transaction, owed a duty to disclose to plaintiffs’ predecessors the existence of prior unrecorded encumbrances upon the property. In Pennsylvania,

[t]he escrow agent or depositary is generally considered the agent of both parties under a special agency agreement, where authority of the agent is strictly construed and whose responsibilities are set forth in the escrow agreement.

Here, the Closing Escrow Agreement for the mezzanine loan states that the duties of the Escrow Agent are purely “ministerial in nature” and “no additional obligations of Escrow Agent [should] be implied from the terms of this agreement.” The Escrow Agreement further states that the “Escrow Agent shall incur no liability in connection with the discharge of its obligations under the agreement or otherwise in connection therewith, except such liability as may arise from the willful misconduct or gross negligence of Escrow Agent.” Finally, review of the entire document leaves no doubt: nothing in the Escrow Agreement required the Guaranty or Fidelity defendants to disclose to plaintiffs’ predecessors in interest the existence of unrecorded loans encumbering the property. For these reasons, the court finds that the Guaranty and Fidelity Defendants owed no duty to disclose to plaintiffs the existence of prior unrecorded encumbrances upon the property.

III. Plaintiffs may not maintain the claim of fraud against the Guaranty Defendants.

The amended complaint asserts that plaintiffs’ predecessors were fraudulently “induced to make a preferred equity investment of $3 million” in Manzanita Holdings as a result of Guaranty’s failure to disclose the existence of prior unrecorded loans which encumbered the property. In Pennsylvania,

Fraud consists of anything calculated to deceive, whether by single act or combination, or by suppression of truth, or suggestion of what is false, whether it be by direct falsehood or by innuendo, by speech or silence, word of mouth, or look or gesture....
To demonstrate fraud, the plaintiff must establish the following elements:
(1) a representation;
(2) which is material to the transaction at hand;
(3) made falsely, with knowledge of its falsity or recklessness as to whether it is true or false;
(4) with the intent of misleading another into relying on it;
(5) justifiable reliance on the misrepresentation; and
(6) the resulting injury was proximately caused by the reliance....

Finally,

One who fails to disclose to another a fact that he knows may justifiably induce the other to act or refrain from acting in a business transaction is subject to the same liability to the other as though he had represented the nonexistence of the matter that he has failed to disclose, if, but only if, he is under a duty to the other to exercise reasonable care to disclose the matter in question.

In this case, the duties owed by the Guaranty defendants to plaintiffs’ predecessors were those contained in the Closing Escrow Agreement. Nothing in that document required the Guaranty defendants to disclose the existence of prior unrecorded obligations encumbering the property; thus, in the absence of any duty to disclose such a matter, the Guaranty defendants may not be held liable to plaintiffs under the claim of fraud, and that claim, asserted in Count I of the amended complaint, is dismissed.

IV. Plaintiffs may not maintain the claim of negligent misrepresentation against the Guaranty Defendants.

In Pennsylvania,

Negligent misrepresentation requires proof of:

(1) a misrepresentation of a material fact;
(2) made under circumstances in which the misrepresenter ought to have known its falsity;
(3) with an intent to induce another to act on it; and;
(4) which results in injury to a party acting in justifiable reliance on the misrepresentation.
Moreover, like any action in negligence, there must be an existence of a duty owed by one party to another.

In this case, plaintiffs have failed to show an element of negligent misrepresentation —namely, the existence of any duty beyond the ministerial duties imposed upon the Guaranty defendants under the terms of the Closing Escrow Agreement. Since plaintiffs cannot show any duty owed by the Guaranty defendants, the claim of negligent misrepresentation may not be maintained against the Guaranty defendants, and that claim, asserted in Count II of the amended complaint, is dismissed in its entirety.

V. Plaintiffs may not maintain the claim of civil conspiracy.

In Pennsylvania, a “civil conspiracy is a combination of two or more persons to do an unlawful or criminal act or to do a lawful act by unlawful means or for an unlawful purpose.” In this case, there is no evidence that any defendants combined to do an unlawful or criminal act, whether by lawful or unlawful means, or that they combined for any unlawful purpose. Plaintiffs cannot prove the existence of any “combination of two or more persons” necessary to maintain the claim of civil conspiracy and that claim, asserted in Count III of the amended complaint, is dismissed as to all defendants, including John Doe 1 and Jane Doe 2.

VI. Plaintiffs may not maintain their claim asserted against defendant Fidelity in Count IV of the Amended Complaint.

Count IV of the amended complaints asserts that defendant Fidelity is liable to plaintiffs, under the theory of respondeat superior, as a result of the alleged wrongdoings of the Guaranty defendants while acting as agents/servants on behalf of their master, Fidelity. Plaintiffs specifically assert that Fidelity is liable as a result of the “acts and omissions” of the Guaranty defendants in connection with the issuance by such defendants of a Closing Protection Letter for the benefit of plaintiffs.

Under Pennsylvania law,

Agency is the relationship which results from the manifestation of consent of one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.
A master is a principal who employs an agent to perform a service in his affairs and who controls or has the right to control the physical conduct of the agent in the performance of the service.
A servant is an agent employed by a master to perform a service in his affairs whose physical conduct, in the performance of the service is controlled or is subject to the right to control by the master.
A master controls and may direct the manner in which work is done. He, therefore, controls more than merely the result of the work....
Because a master has the right to exercise control over the physical activities of the servant within the time of service, he is vicariously liable for the servant’s negligent acts committed within the scope of his employment.

This court has already determined that the Guaranty defendants are not liable to plaintiffs for any form of misrepresentation, and owed no duty whatsoever to disclose the existence of prior encumbrances upon the property. Since the Guaranty defendants as agents/ servants of Fidelity are not liable to plaintiffs, it follows that Fidelity, as a master of the Guaranty defendants, may not be held liable to plaintiffs under respondeat superior. The claim asserted against Fidelity in Count IV of the amended complaint is dismissed.

VII. Plaintiffs may not maintain the claim of breach-of-fiduciary-duty asserted against defendants Voegel and Rothstein.

The amended complaint asserts that defendants Voegel and Rothstein, as plaintiffs’ escrow agents pursuant to the Closing Escrow Agreement, owed a fiduciary duty to plaintiffs to “act with the utmost good faith in representing and carrying out plaintiffs’ interests.” This court has already determined that the Guaranty defendants, including Voegel and Rothstein, owed no duty to plaintiffs under the Closing Escrow Agreement, aside from any duties set forth in the agreement itself. Nothing in that document shows that Voegel and Rothstein owed a fiduciary duty to plaintiffs, and the claim of breach-of-fiduciary-duty asserted in Count V of the amended complaint is dismissed.

VIII. Plaintiffs may not maintain the claim of malpractice asserted against Voegel and Rothstein.

The amended complaint asserts that defendants Voegel and Rothstein “were retained by plaintiffs to, inter alia, represent plaintiffs’ interests and to serve as plaintiffs’ escrow agents” pursuant to the Closing Escrow Agreement. Specifically, the amended complaint avers that Voegel and Rothstein failed “to possess and exercise the ordinaiy skill, knowledge and care normally possessed and exercised by members of good standing in the legal profession....”

To establish legal malpractice under Pennsylvania law, a plaintiff must show: 1) employment of the attorney or other basis for a duty; 2) the failure of the attorney to exercise ordinary skill and knowledge; and 3) that such negligence was the proximate cause of damage to the plaintiff.

This court has already determined that the Guaranty defendants, including Voegel and Rothstein, owed no duty to plaintiffs under the Closing Escrow Agreement, aside from any duties set forth in the agreement itself. In addition, plaintiffs have offered no evidence showing that Voegel and Rothstein had been retained by plaintiffs as attorneys in conjunction with the Closing Escrow Agreement. Plaintiffs cannot prove the existence of any duty owed by Voegel and Rothstein, and the claim of malpractice, asserted in Count VI of the amended complaint, is dismissed.

The court shall issue a simultaneous order consistent with this memorandum opinion.

ORDER

And now, this 6th day of November, 2014, upon consideration of:

A) the motion for summary judgment of plaintiffs LEM 2Q, LLC et al. against defendants Guaranty National Title Company, Robert J. Voegel, Robert Rothstein and Joseph P. Cacciatore, the answer in opposition of defendants Guaranty National Title Company, Robert J. Voegel and Robert Rothstein, the answer in opposition of defendant Joseph P. Cacciatore, the parties’ memoranda of law, and plaintiffs’ reply memorandum, it is ordered that the motion is denied;
B) the motion for summary judgment of plaintiffs LEM 2Q, LLC et al., the answer in opposition of defendant Fidelity National Title Insurance Company, and the parties’ respective reply and sur-reply, it is ordered that the motion is denied;
C) the motion for summary judgment of defendants Guaranty National Title Company, Robert J. Voegel Robert Rothstein and Joseph P. Cacciatore, the answer in opposition of plaintiffs and the respective memoranda of law, it is ordered that the motion is granted in its entirety and all claims asserted against these defendants in the amended complaint are dismissed;
D) the motion for summary judgment of defendant Fidelity National Title Insurance Company, the answer in opposition of plaintiff LEM 2Q, LLC, and the respective memoranda of law, it is ordered that the motion is granted in its entirety and all claims asserted against this defendant in the amended complaint are dismissed;
E) the motion for summary judgment of defendant Joseph P. Cacciatore, the answer in opposition of plaintiff LEM 2Q, LLC, and the respective memoranda of law, it is ordered that the motion is granted and all claims asserted against this defendant in the amended complaint are dismissed.

It is further ordered as follows:

F) the claim of civil conspiracy is dismissed as to defendants John Doe 1 and Jane Doe 2 because such defendants, at the close of discovery, remain unidentified.
G) The filing by defendant Joseph P. Cacciatore, improperly captioned “motion for summary judgment” under control no. 14060967, is dismissed as moot.

      . In reality, there are only five motions for summary judgment before the Bench. Motion control no. 14060967, improperly filed by defendant Joseph P. Cacciatore as a motion for summary judgment, is actually a response in opposition to the motion for summary judgment of plaintiffs, control no. 14050901. This improper filing is counted as a motion for summary judgment for docketing purposes only. Moreover, defendants Guaranty National Tile Company, Robert J. Voegel and Robert Rothstein improperly filed their response in opposition to the motion for summary judgment of plaintiffs under control no. 14050848. This response should have been properly filed under control no. 14050901.

      . Issuing agency agreement, Exhibit A to the motion for summary judgment of plaintiffs, control no. 14050848.

      . Exhibits A through E to the amended complaint.

      . Statement of settlement for purchasers, Exhibit Q to the motion for summary judgment of plaintiffs, control no. 14050484.

      . Exhibit I to the motion for summary judgment of defendants guaranty, Voegel and Rothstein, control no. 1407030.

      . Motion for summary judgment of plaintiffs, control no. 14050901.

      . Id., ¶ 71. See also memorandum of law in support of motion for summary judgment no. 14050901 at II.

      . Motion for summary judgment of plaintiffs, control no. 14050901, ¶¶28-31.

      . Motion for summary judgment of plaintiffs, control no. 14050848.

      .Memorandum of law in support of plaintiffs motion for summary judgment, at II-C, control no. 14050848.

      . Control no. 14073030

      . Control no. 14073024, 14073032.

      . Ratti v. Wheeling Pittsburgh Steel Corp., 758 A.2d 695, 702 (Pa. Super. 2000).

      . Pyrites Co. v. Century Indem. Co., 4514 Jan. Term 2003, 2007 WL 5160528 (Pa. Com. Pl. Dec. 12, 2007) (citing Caputo v. Allstate Insurance Co., 4958 A.2d 959, 961 (Pa. Super. 1985), Wilson v. Transportation Insurance Co., 889 A.2d 563, 571 (Pa. Super. 2005)).

      . Wilson. Transportation Insurance Co., 889 A.2d 571 (Pa. Super. 2005).

      . Memorandum of law in support of motion for summary judgment of plaintiffs at II-A, control no. 14050901.

      . Harris v. Equity Title Co, LLC, No. 52197, 2010 WL 3295591, at *2 (Nev. July 20, 2010).

      . Id.

      . Mark Properties. Inc. v. National Title Co., 117 Nev. 941; 34 P.3d 587 (Nev. 2001).

      . Mark Properties. Inc. v. National Title Co., 117 Nev. at 942-943; 34 P.3d at 588-589 (Nev. 2001).

      . Nevada courts have described a double escrow as follows: “[i] n a double escrow, the broker or salesman purchases a principal’s property in the first escrow, and sells it to a third party at a profit in a second escrow without a full disclosure to both the principal and the third party. The escrows close at the same time and the broker or salesman thereby uses the proceeds from the sale in the second escrow to purchase his principal’s property. The broker or salesman receives a commission on the sale in the first escrow and a secret profit on the closing in the second escrow.” Alley v. Nevada Real Estate Div., 94 Nev. 123, 124-25, 575 P.2d 1334, 1335 (1978).

      . Mark Properties, Inc. v. National Title Co., 117 Nev. at 943-944; 34 P.3d at 589-590 (Nev. 2001).

      . Mark Properties. Inc. v. National Title Co., 117 Nev. at 943-944; 34 P.3d at 589-590 (Nev. 2001).

      . Mark Properties, Inc. v. National Title Co., 117 Nev. at 945; 34 P.3d at 590 (Nev. 2001).

         Knoll v. Butler, 675 A.2d 1308, 1312 (Pa. Commw. 1996) aff’d, 548 Pa, 18, 693 A.2d 198 (1997). Paragraph 10 of the Closing Escrow Agreement states that “[t]his agreement shall be governed by, interpreted under, and construed and enforced in accordance with, the laws of the State of Nevada.” However, the real issue in this instance does not involve a dispute arising out of the interpretation of the Closing Escrow Agreement; rather, the issue in this case is whether the guaranty defendants owed a duty to disclose to plaintiffs the existence of prior unrecorded encumbrances. There is no need to rely on the laws of Nevada, and Pennsylvania law suffices to resolve the issue.

      . Closing Escrow Agreement, Exhibit I to the motion for summary judgment of guaranty, ¶ 11.

        . Id.

      . Amended complaint, ¶ 9.

      . Youndt v. First Nat. Bank of Port Allegany, 2005 Pa. Super. 42, 868 A.2d 539, 550 (Pa. Super. 2005)(citing Restatement (Second) of Torts', § 521)(emphasis supplied). The laws are substantially the same in Nevada and Illinois. In Nevada, [“t]he elements of intentional misrepresentation are a false representation made with knowledge or belief that it is false or without a sufficient basis of information, intent to induce reliance, and damage resulting from the reliance. Collins v. Burns, 103 Nev. 394, 397, 741 P.2d 819, 821 (1987). In Illinois, “the elements of a cause of action for fraudulent misrepresentation (sometimes referred to as ‘fraud and deceit or ‘deceit’) are: (1) false statement of material fact (2) known or believed to be false by the party making it; (3) intent to induce the other party to act; (4) action by the other party in reliance on the truth of the statement; and (5) damage to the other party resulting from such reliance.” Soules v. Gen. Motors Corp., 79 III. 2d 282, 286, 402 N.E.2d 599, 601 (1980).

         Eortz v. Noon, 556 Pa. 489, 500, 729 A.2d 555, 561 (1999). The law is substantially the same in Nevada and Illinois. Nevada defines the tort of negligent misrepresentation as follows: “[o]ne who, in the course of his business, profession or employment, or in any other action in which he or she has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he or she fails to exercise reasonable care or competence in obtaining or communicating the information. Chamani v. Mackay, 124 Nev. 1457, 238 P.3d 800 (2008). In addition, “[a] claim for negligence in Nevada requires that the plaintiff satisfy four elements: (1) an existing duty of care, (2) breach, (3) legal causation, and (4) damages.” Turner v. Mandalay Sports Entm ’l, LLC, 124 Nev. 213, 217, 180 P.3d 1172, 1175 (2008). In Illinois, “[negligent misrepresentation has essentially the same elements [as intentional misrepresentation], except that the defendant’s mental state is different. The defendant need not know that the statement is false. His own carelessness or negligence in ascertaining its truth will suffice for a cause of action. Bd. of Educ. of City of Chicago v. A. C&S. Inc., 131 Ill. 2d 428, 452, 546 N.E.2d 580, 591 (1989). In addition, “Illinois recognizes that an action for negligent misrepresentation is maintainable if the complaint alleges the necessary elements of an action for negligence. These elements are a duty owed by defendants to plaintiffs, a breach of such duty, and injury resulting proximately from such breach. Duhl v. Nash Realty Inc., 102 Ill. App. 3d 483, 493, 429 N.E.2d 1267, 1275 (1981).

      . Milliken v. Jacono, 2012 Pa, Super. 284, 60 A.3d 133, 141 (Pa. Super. 2012) aff’d, 96 A.3d 997 (Pa. 2014), withdrawn from bound volume (Oct. 15, 2014) and appeal granted in part, 620 Pa, 601, 71 A.3d 250 (2013).

      . Baker v. Rangos, 229 Pa. Super. 333, 351, 324 A.2d 498, 506 (1974). The law is substantially the same in Nevada and Illinois. In Nevada, an actionable civil conspiracy “consists of a combination of two or more persons who, by some concerted action, intend to accomplish an unlawful objective for the purpose of harming another, and damage results from the act or acts.” Consol. Generator-Nevada, Inc. v. Cummins Engine Co., 114 Nev. 1304, 1311, 971 P.2d 1251, 1256 (1998). In Illinois, “[t]he elements of a civil conspiracy are: (1) a combination of two or more persons, (2) for the purpose of accomplishing by some concerted action either an unlawful purpose or a lawful purpose by unlawful means, (3) in the furtherance of which one of the conspirators committed an overt tortious or unlawful act. Redelmann v. Claire Sprayway, Inc., 375 III. App. 3d 912, 923, 874 N.E.2d 230, 240 (2007).

      . The claim of civil conspiracy is dismissed also as against defendants John Doe 1 and Jane Doe 2 because at this stage of the litigation, with discovery closed, said defendants remain unidentified.

      . Closing protection letter dated June 20, 2007, Exhibit H to the amended complaint, issued by guaranty as escrow agent, document preparer, and settlement officer to the acquisition of the properly by the Meusy Interests.

         Trurley v. Kotter, 263 Pa. Super. 523, 529, 398 A.2d 699, 702 (1979).

      . Amended complaint, ¶ 125.

        Tld. ¶ 130.

      . id. ¶ 148.

      . Myers v. Robert Lewis Seigle. P.C., 2000 Pa. Super. 136; 751 A.2d 1182, 1184(2000).

      . See footnote 1 to the court’s memorandum opinion filed simultaneously with this order.


author: VARRICCHIO, J.,

text:
    Lehigh Street Properties LLC v. Lehigh County Board of Assessment Appeals

      C.P. of Lehigh County,
    No. 2012-C-4854

      Timothy J. Siegfried, for petitioner.

      David Backenstoe, for respondent.

      John E. Freund, III, for intervenor.
    Nov. 10, 2014
   VARRICCHIO, J.,

Lehigh Street Properties, LLC, petitioner, is appealing from a decision of the Lehigh County Board of Assessment Appeals, respondent, concerning a tax assessment of petitioner’s property, located at 3401 Lehigh Street, Salisbury Township, Allentown, Lehigh County, Pennsylvania. Based on the evidence presented and the stipulation agreements, this court makes the following findings of fact and conclusions of law:

FACTS

Petitioner owns the property located at 3401 Lehigh Street, Salisbury Township, Allentown, Lehigh County, Pennsylvania (the property). The property is approximately 3.794 acres and improved with a series of connected buildings having an aggregate square footage of 50,822. Currently, the property is utilized for new and used franchised car sales, specifically: Audi, Mercedes, and Porsche.

In 2012, Lehigh County, by and through the Lehigh County Tax Assessment Office, reassessed all properties within Lehigh County. The property was reassessed at $5,890,400, which broke down to $1,570,000 attributable to the land and $4,320,400 attributable to the value of the improvements to the land. On May 22, 2012, petitioner appealed to the Lehigh County Board of Assessment Appeals.

A hearing was held by the Lehigh County Board of Assessment Appeals on September 26, 2012 and, by written notice, petitioner was informed on October 18, 2012 that the reassessment of the property was still valued at $5,890,400.

On November 14, 2012 Petitioner filed the instant appeal. Petitioner asserts that respondent’s valuation of the property was excessive, improper, unjust and contrary to law. Specifically, petitioner argues that respondent’s decision is based, in whole or in part, upon an appraisal or information that does not represent the actual fair market value of the property. Petitioner also argues the assessment lacks uniformity with other comparable properties in the area.

STANDARD OF REVIEW

In a real estate tax assessment appeal, the trial court has a duty to hear, without jury, a tax assessment appeal, to consider competent and credible evidence, and to make determination as to fair market value based upon the evidence presented. 72 P.S. § 5020-518.1. The matter before the trial court is heard de novo. Green v. Schuylkill County Bd. of Assessment Appeals, 772 A.2d 419 (Pa. 2001); 72 P.S. § 5020-518.1. In the de novo proceeding, the taxing authority first presents its assessment record into evidence, establishing a prima facie case for the validly of the assessment. See Deitch Co. v. Board of Property Assessment, Appeals and Review of Allegheny County, 209 A.2d 397, 402 (Pa. 1965); See also Koppel Steel Corporation v. Board of Assessment Appeals of Beaver County, 849 A.2d 303 (Pa. Cmwlth. 2004). The burden then shifts to the taxpayer to present sufficient, competent, credible, and relevant evidence of the fair market value of the property to rebut the validity of the assessment. See Kemble’s Estate, 124 A. 694, 696 (Pa. 1924); See also Ritter’s Appeal, 24 A.2d 470 (Pa. 1942).

DISCUSSION

In a tax assessment appeal, the trial court must make two determinations: (1) the fair market value of the property involved; and (2) the appropriate ratio of assessed value to market value of the property. Deitch Co. v. Board of Property Assessment, 209 A.2d 397, 402 (1965). Then, the court must apply the ratio to the fair market value of the property in order to arrive at the proper assessment. Id. The fair market value is “the price which a purchaser, willing but not obliged to buy, would pay an owner, willing but not obliged to sell, taking into consideration all uses to which the property is adapted and might in reason be applied.” Buhl Foundation v. Board of Property Assessment, 180 A.2d 900, 902 (1962).

When determining fair market value of a property, a court must consider three approaches, in conjunction with one another: the sales comparison approach; the income approach; and the cost approach. See Whitcomb v. City of Philadelphia, 107 A. 765 (Pa. 1919); See Brown v. Forest Water Co., 62 A. 1078 (Pa. 1906); See also Appeals and Review of Allegheny County, 519 A.2d 1080 (Pa. 1987).

First, the sales comparison approach compares the property to other “comparables” that have recently sold. See generally Grand Prix Harrisburg, LLC v. Dauphin County Bd. of Assessment, 51 A.3d 275 (Pa. Cmwlth. 2012). Second, the income approach to property valuation takes into consideration how much income the property would produce if it were rented. The approach then determines, through a capitalization formula, what a prudent investor would typically pay for the property. Id. Finally, the cost approach is based on the cost of replacing the property, less depreciation. Id.; See also McKnight Shopping Center, Inc. v. Board of Property Assessment, 209 A.2d 389 (Pa. 1956).

In the present case, respondent offered the tax assessment records and the testimony of Francis Unger, Chief Assessor for Lehigh County, into evidence, thus making out a prima facie case to show the validity of the assessment. Deitch Co. v. Board of Property Assessment, Appeals and Review of Allegheny County, 209 A.2d 397, 402 (Pa. 1965) (“In presenting his case, the taxpayer must first offer proof with respect to the actual or market value of the property”). “The complaining real estate owner then had the laboring oar to show by the weight of the evidence that it had been aggrieved by the valuation so fixed.” Buhl Foundation v. Board of Property Assessment, 180 A.2d 900, 902 (1962) (citing Washington County v. Marquis, 82 A. 756 (Pa. 1912); Hammermill Paper Co. v. City of Erie, 92 A.2d 422 (Pa. 1952)).

Next, petitioner’s expert, Frederick M. Lesavoy, MAI, SRA, prepared an appraisal report of the property’s fair market value as of July 17, 2012, which was submitted into evidence. Lesavoy also testified. Additionally, Salisbury School District offered an expert report via Raymond C. Geiger, Jr., a Pennsylvania State Certified General Appraiser.

Each expert valued the property using similar methodology under a sales comparison approach, specifically: (1) unity of use; and (2) determining the value based upon a price per square foot of gross building area. However, the appraisals differed with respect to the properties considered to be comparable.

Lesavoy’s three comparable properties were: (1) 2639 Bristol Pike, Bensalem, PA; (2) 140-160 Old York Road, Jenkintown, PA; and (3) 1015 Lancaster Avenue, Reading, PA. Lesavoy concluded, when adjusting for value of land and buildings/improvements, but considering the loss of franchise elements, a valuation of $3,086,000 for the property. Further, while Lesavoy considered an income approach and cost approach, he concluded both approaches to be unreliable and did not perform an analysis under either.

In contrast, Geiger choose four comparable properties, all car dealerships that were sold between February 2012 and the present. Specifically, the first property Geiger selected was a Subaru dealership located at 4611 Hamilton Boulevard, Allentown, PA and the property remained a Subaru dealership after it was sold. Geiger also indicated that this comparable property was most similar to the one at issue. Ultimately, Geiger determined a range of $104 to $153 per square foot for the four comparable properties he considered under the sales comparison approach, but Geiger judged the property at issue to be near the low end of the range, specifically he assessed the value to be $110 per square foot, due to the large number of improvements on the property.

Geiger also considered the income approach and the cost approach. Under the cost approach, he determined the “as if unimproved” land to be valued at $1,400,000 and Geiger used a Marshall-Swift Cost data to estimate the replacement cost for the property, concluding a valuation of $5,550,000. Last, Geiger performed an analysis under the income approach, which tested the validity of his valuations under the previous two approaches. Under the income approach, Geiger determined the property to be valued at $5,500,000.

The Commonwealth Court has held, to be sufficient, competent, credible, and relevant evidence, it is not enough for a taxpayer to merely present evidence from a qualified expert in order to meet his initial burden of overcoming the validity of the property tax assessment record. Craftmaster Mfg., Inc. v. Bradford County Bd. of Assessment Appeals, 903 A.2d 620, 627 (Pa. Cmwlth. 2006). The evidence must be sufficient to rebut the validity of the assessment, which means the evidence must be believed in the sense that the trial court accepts the veracity of the expert, for example, based on his demeanor, and relevant and competent in the sense that it is not dubious, but legally and factually sound so that it is of practical value to the court in its effort to arrive at the fair market value. Id.

In the case at hand, this court finds Lesavoy’s testimony was sufficient, competent, credible, and relevant to rebut the validity of the original assessment. Lesavoy’s testimony was both legally and factually sound and of practical value to the court in its effort to arrive at the fair market value.

Lesavoy’s valuation is only called into question in that Lesavoy’s selected comparable properties and the property at issue differ greatly in both type and quality. For example, Lesavoy’s first comparable property is actually a motorcycle dealership. While Mr. Lesavoy’s appraisal report relies upon suspect comparable properties, it is still sufficient to rebut the implied value of $5,980,400. This court simply finds the comparables Geiger utilized in the sales comparison approach valuation to be most useful. Of particular import is the fact that Geiger determined a range of $104 to $153 per square foot for the four comparable properties he considered and he judged the property at issue to be near the low end of the range.

On the other hand, Lesavoy testimony was particularly useful in regard to rebutting the validity of the original assessment in that Lesavoy considered franchise improvements when choosing comparable properties. As he noted, franchise elements will not remain at the property; rather, upon relocation of the franchises, the property would need to be stripped of any franchise design elements, colors, architecture and materials. While the cost to remove franchise design elements from the property, in the opinion of the petitioner, is in excess of $600,000, currently petitioner has no intention to sell the property.

Additionally, Lesavoy supplied evidence that the usability of the property, by itself, for vehicle sales is substantially limited without use of or access to adjacent properties because, although permitted to co-exist on the property now, each franchise would not permit its franchise to stay at the property if a sale were to occur and none of the franchises would permit co-location.

Given the limitations posed by the economic realities of the franchises being unable to remain at the property and the franchise design elements needing to be removed, this court finds that a lower value would be applicable to the property at issue here. Taking the lowest of Geiger’s range, or.$104 per square foot and subtracting $10 per square foot for the removal of franchise elements, the property has a market value of $4,777,268.00 total, or $94 per square foot for the 50,822 square feet in question.

Conclusion

Based on the evidence presented and the stipulation agreements, this court finds the fair market value for the property owned by Lehigh Street Properties, LLC, located at 3401 Lehigh Street, Salisbury Township, Allentown, Lehigh County, Pennsylvania, identified as Tax Parcel No. 549562544489 1, to be $4,777,268.00 for the 2013 and 2014 tax years.

ORDER

And now, this 10th day of November, 2014, upon consideration of the November 14, 2012 petition by Lehigh Street Properties L.L.C. for appeal of the October 18, 2012 decision of the Board of Assessment Appeals of Lehigh County, having reviewed the briefs from petitioner and respondent and having heard argument thereon, the court finds the following:

It is hereby ordered that the fair market value of the subject property for real estate tax purposes shall be $4,777,268.00 for the 2013 and 2014 tax years.

      . This square footage, which was undisputed, includes both the improvements and the land. See notes of testimony, May 23, 2014, p. 229.

      . The parties have stipulated that only the 2013 and 2014 tax years are at issue in the instant appeal.

      . In the present case, the parties stipulated that the applicable common level ratio is 100%, thus, a determination concerning the actual, or fair market value, of the property at present would also determine the assessed value.

      . Before any sales can be used in this approach it must be determined if they are “arm’s length” or good, open market sales. As there may be outside factors that go into a sale price, the assessor must analyze each sale very carefully. Other important valuation considerations are location, size, condition, quality, and time of sale.

      . To make this calculation the assessor must consider many things including current market rents, insurance, maintenance costs, operating expenses, vacancy rates, and the expected rate of return on investment.

      . In order to calculate this valuation method, the assessor begins by estimating how much money it would take, with current costs of labor and material, to replace the property with one similar. In addition to the value of any improvements, the assessor must also separately estimate the value of the land as if it were vacant. Then, if the property is not new, the assessor must determine the amount your property has depreciated and adjust the assessment accordingly. Although all three approaches must be considered, they do not all have to be used in arriving at the final valuation of the property.


author: TUNNELL, J,

text:
    Smith v. Hemphill

      C.P. of Chester County,
    No. 2012-04425

      Barry R. Rothman, for plaintiffs

      John F Bradley, for defendants
    Nov. 14, 2014-
   TUNNELL, J,

ORDER

And now, this 14th day of November, 2014, the plaintiff’s petition for attorney’s fees pursuant to 42 Pa. C.S.A. §2503 and Pa. R.C.P. 1023.1 is denied.

      . Pa. R.C.P. 1023.1
      Rule 1023.1 was promulgated by the Supreme Court of Pennsylvania to provide trial courts with a procedure to deter groundless and abusive litigation practices in civil litigation. In summary, it provides that all pleadings must be signed, and thus certified, by an attorney of record (or pro se litigant) which represents to the court that he or she has read the pleading and, to the best of his or her knowledge, information and belief, formed after an inquiry reasonable under the circumstances, that: (1) it is not being presented for any improper purpose, such as to harass or cause unnecessary or needless increase in cost of litigation; (2) the claims, defenses and other legal contentions therein are warranted by existing law or by a non-frivolous argument for the extension, modification or reversal of existing law or the establishment of new law; (3) the factual allegations have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery; and (4) the denials of factual allegations are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief. Thus, unlike former Rule 1023, which merely requires documents to be submitted to the court in “good faith,” Rule 1023.1 requires a pre-filing inquiry to both the facts and the law set forth in submissions to the court. No longer may an attorney blindly sign on the client’s word.
      A few things are obvious: an averment made in the teeth of documents to the contrary violates Rule 1023.1. So does an argument of law without citation, or an argument supposedly for good faith modification or reversal that does not mention directly contrary authority. In other words, where it is clear that a claim has absolutely no chance of success under existing precedent, Rule 1023.1 has been violated. See generally Thomas G. Wilkinson, Jr., Sanctioning Power Available to Pennsylvania Trial Judges in Civil Litigation — With an Emphasis on Pennsylvania’s New Rule of Civil Procedure 1023.1 (unpublished presentation to the Conference of Pennsylvania State Trial Court Judges) (on file with the court) (2002).
      Under Rule 1023.1, the person signing, filing or later advocating a pleading has a non-delegable responsibility to the court; in most situations, this is the individual who will be sanctioned for the offending conduct. See Pa. R.C.P. 1023.1, explanatory comment.
      Mechanically, motions for sanctions under Rule 1023.1 must be submitted separately from any other motion, describe the specific conduct which violated the rule, and must be filed before the entry of final judgment. Id. Nor may Rule 1023.1 motions be filed until at least twenty-eight (28) days after a written demand has been served upon the alleged offender. If the violation is cured within the 28-day period, as by withdrawing or correcting the challenged paper, then the motion becomes moot and may not be filed with the court. This is intended to provide a type of “safe harbor”. Where, however, the alleged offender fails to do so within 28 days after having been served with a written demand, then consideration of the motion is appropriate. The motion should include (1) a certification from the movant verifying that written notice and a demand to correct was sent to the offender, and (2) include a copy of the notice and demand. It is necessary that the notice demand identify with specificity the portions of the challenged pleading believed to have violated Rule 1023.1, and set forth with specificity the basis for that relief.
      If after notice and reasonable opportunity to respond the trial court determines that Rule 1023.1 has been violated, it may impose an appropriate sanction upon the individual responsible for the violation. The court should describe in its written order or on the record the conduct determined to be a violation of Rule 1023.1 and explain the basis for the sanction imposed. See Pa. R.C.P. 1023.4(c) and explanatory comment.
      The rule does not attempt to enumerate an inclusive list of every possible sanction that could be prescribed for violations of the rule. It does provide some examples of potential sanctions, which include an order directing payment to the movant of some or all of the reasonable attorneys’ fees and expenses incurred as a direct result of the violation. Pa. R.C.P. 1023.4(a)(2)(iii).
      The court has significant discretion in determining whether or not to impose sanctions. Sanctions should be granted sparingly lest they have a chilling effect on the right of all parties to litigate a controversy to conclusion. Com. v. Jash Int’l., Inc., 847 A.2d. 125, 134 (Cmwlth. Ct. 2004).
      After receiving the defendant’s answer and counterclaims, counsel for the plaintiff wrote a letter on September 24, 2012 requesting that the defendant withdraw the counterclaims. This, plaintiff contended, was being presented for the improper purpose of harassing and to cause unnecessary delay and needless increase in the cost of litigation. Defendant declined to do so. In the response of Lawrence E. Wood, Esquire to plaintiff’s motion for counsel fees and costs, and as he argued during oral argument, the new matter and counterclaims were based on the facts perceived by the defendant at that time and conveyed to counsel. Plaintiff points out that the matter was submitted to an arbitration panel which found in its favor. Defendant countered that the adverse award was based on testimony that had to be presented under severe time constraints. Defendant’s counsel felt that there was good reason to appeal it. Finally, counsel signed all pleadings in good faith and in the belief that the evidence warranted taking the positions.
      During oral argument, plaintiff baldly reiterated that the defendant’s claims were not supported in law or in fact. Certainly the defendant lost at trial, but that was based on credibility determinations.
      42 Pa. C.S.A. §2503(7), (9)
      Under the “American Rule,” parties to litigation are responsible for their own counsel fees unless otherwise provided by statutory authority, agreement of the parties, or some other recognized exception. Mrozek v. Exter, 805 A.2d 535, 538 (Pa. Super. 2002).
      The judicial code permits the award of attorney’s fees in order to curb the filing of frivolous and otherwise improperly brought lawsuits, as our Supreme Court has noted on a number of occasions. See Old Forge SchoolDist. v. Highmark, Inc., 592 Pa. 307, 924 A.2d 1205 (2007); and Thunberg v. Strause, 545 Pa. 607, 616, 682 A.2d 295, 300 (1996).
      The judicial code provides at 42 Pa. C.S.A. §2503 in relevant part:
      The following participants shall be entitled to a reasonable counsel fee as part of the taxable costs of the matter:

        * * *
      (7) Any participant who is awarded counsel fees as a sanction against another participant for dilatory, obdurate or vexatious conduct during the pendency of a matter ...
      * * *
      (9) Any participant who is awarded counsel fees because the conduct of another party in commencing the matter or otherwise was arbitrary, vexatious or in bad faith. (Emphasis added)
      Section 2503(7), by its very terms, relates to conduct that takes place during the pendency of a matter. Section 2503(9) on the other hand is concerned with the parties’ conduct in commencing a matter; the courts have construed the words “or otherwise” to refer to a party’s conduct in raising defenses. White v. Redevelopment Auth, 451 A.2d 17 (Pa. Cmwlth. 1982), Slappo v. J’s Dev. Assoc., Inc., 791 A.2d 409, fn. 3 (Pa. Super. 2002), Norris v. Commonwealth, 634 A.2d 673 (Pa. Cmwlth. 1993).
      “Participant” is defined as “litigants, witnesses and their counsel.”
      “Arbitrary” for purposes of §2503(9) means “filed without reason.” Berg v. Georgetown Builders, Inc., 822 A.2d 810, 819 (Pa. Super. 2003). The term “obdurate” means “resistant to persuasion, inflexible or unyielding.” McDade v. Garland, 10 Pa. D. & C.4th 198 (Butler Co. 1991), Thomas v. Rensel, 59 Pa. D. & C.4th 150 (Butler Co. 2002), or being “stubbornly persistent in wrongdoing”. In Re: Estate of Burger, 852 A.2d 385 (Pa. Super. 2004). Conduct is “vexatious” if suit has been brought without sufficient grounds in either law or in fact and if the suit has served the sole purpose of causing annoyance. Thunberg v. Strause, supra.

      Because the language of the statute is in the disjunctive, a trial court may make an award when a participant’s conduct embraces any of the definitions. Estate of Roos, 451 A.2d 255, in. 2 (Pa. Super. 1982). The court’s decision concerning an award of counsel fees will not be disturbed absent an abuse of discretion. Brenckle v. Arblaster, 466 A.2d 1075 (Pa. Super. 1983). However, an award by the court requires the court to make specific findings of fact to support the award. Kulp v. Krivnak, 765 A.2d 796 (Pa. Super. 2000).
      While an attorney is not obliged to conduct such a thorough investigation prior to bringing action that discovery is not needed, an attorney, in order to avoid sanctions, is obliged to conduct at minimum a reasonable preliminary investigation to insure that there are sufficient facts which, if believed, would warrant bringing a specific claim against a particular party. Thunberg v. Strause, supra.

      An illustration of the application of this doctrine is the case of In Re: Estate of Liscio, 638 A.2d 1019 (Pa. Super. 1994). In that case, Mrs. DePema filed an action against the estate of her natural father with the knowledge that she had been adopted and that the law prohibited adopted children from recovering against estates of their natural parents. The claim prolonged the litigation and unnecessarily delayed the distribution of the estate. The child’s claim was clearly barred by statute, but she sought to avoid the effect of the statute by trying to assert a public policy argument: the natural father did not receive notice of the adoption proceeding or give consent to it. The court dismissed counsel’s assertion that the argument was in good faith because the law at the time clearly only required the consent of the natural mother. In reinstating that award, the court expressed the following rationale: If Mrs. DePema’s claim would have been merely weak and subsequently found devoid of merit, it would not necessarily have equated with conduct that is arbitrary, vexatious or in bad faith. However, because Mrs. DePema’s claim had no reasonable possibility of success and costs thousands of dollars in attorneys’ fees, her conduct was of the type envisioned by the statute permitting an award of attorneys’ fees. Estate of Liscio, supra, 638 A.2d at 1022.
      In a case that went to the Supreme Court, Thunberg v. Strause, supra, the Supreme Court reinstated the trial court’s award of counsel fees against the plaintiff who had filed suit against the estate of a man she had killed in an automobile collision. At the time of his death, the decedent had been traveling in his proper lane of traffic and plaintiff crossed a four-lane divided highway and struck the decedent’s vehicle head-on. Plaintiff, however, without conducting any investigation or having any factual support of her claim, initiated a suit in which she alleged that the decedent was negligent in failing to avoid the accident. Her attorney conceded that he had undertaken virtually no pre-filing investigation and had no evidence which would have supported his theory of negligent avoidance. This clearly demonstrated that there was no reasonable basis for the underlying suit.
      In Bykowski v. Chesed Co., 625 A.2d 1256 (Pa. Super. 1993), the Superior Court affirmed an award of counsel fees in the case where the trial court found that the plaintiff had acted “vexatiously” in continuing suit against a defendant who did not own the property where the alleged injury occurred. The court determined that the plaintiff improperly sued people having no connection with the incident, and failed to agree to removal of those parties when the error was repeatedly brought to his attention and, by failing to respond to a motion for a judgment on the pleadings, he forced the defendants to appear and argue his motion to extract themselves from a lawsuit that they should not have been brought into in the first place. Id. at 1259. These facts were sufficient for the Superior Court to conclude that “[c]learly ... appellant’s conduct in not responding and in continuing the suit and this appeal against the appellees was vexatious.” Id.

      In American Mut. Liab. Ins. Co. v. Zion & Klein, P.A., 489 A.2d 259 (Pa. Super. 1985), a judgment creditor’s attempt to use an invalid default judgment to force a garnishee to settle or obtain payment of the judgment creditor’s claim against the judgment debtor was without legal support and justified an award of counsel fees. The court noted that the garnishee was entitled to collect those attorneys’ fees from the party, rather than being required to pursue the assessment from the party’s counsel, even if the arbitrary and vexatious conduct supporting the award was the product of said counsel’s belligerence.
      On the other hand, the plaintiff in the case of McLaughlin v. Gerdts, 19 Pa. D. & C.3d. 293 (Warren Co. 1981), argued that because defendants refused to pay in accordance with a payment schedule as work progressed on a new house, they acted arbitrarily, vexatiously or in bad faith all to the expense of the plaintiff, who incurred counsel fees to collect the same. The court observed that every litigant contemplating commencing an action or defending one should not be automatically confronted with the unhappy thought that he may have to pay his opponent’s counsel fees if he is unsuccessful, irrespective of the reason for the dispute. Id., at 298-299. In the case of Diener Brick Co. v. Mastro Masonry Contractor, 885 A.2d 1034 (Pa. Super. 2005), plaintiff, a brick supplier, sued the general contractor for not paying for'deliveries of brick. Defendant filed a counterclaim for tortious interference with prospective contractual relations, which it withdrew as trial began. The trial court determined this to warrant the imposition of attorney’s fees. On appeal, the Superior Court noted that there is no authority to support the principle that a party who waits until the start of trial to withdraw a claim has exhibited conduct worthy of the sanction of the imposition of counsel fees, Id. at 1043, and so reversed the trial court’s award.
      The plaintiff is incensed at this litigation. His counsel repeatedly described it as just “a collection case.” He apparently expected the opponent to simply yield. Ultimately his cause was successful. He could not resist the temptation to be sanctimonious as well. The court sat through three hearing days listening to the dispute. Having practiced trial law for 34 years before attaining the bench, and in the three years since, the court believes it knows a frivolous case when it sees it. The defense of this case was not frivolous; neither was it arbitrary or vexatious. The court draws a necessary distinction between an unsuccessful defense and one that is merely frivolous and interposed for delay. Indeed, the defense had some chance of success. The counterclaims, one for breach of contract and the other for tortious interference with contractual relations, were dubious in retrospect. Had defendant but remembered to bring his documentary evidence to trial, he might have fared better.
      Defendant’s counsel was no dilettante. Lawrence E. Wood, Jr., Esquire is an esteemed member of the trial bar as well as a former judge who spent a quarter-century on this bench. He is a quiet and reflective individual, and the last person to engage in baseless litigation. The court cannot ignore these facts when deliberating on this request for sanctions. The court believes that the defendant did no more than carry out its claim to conclusion.

        Plaintiff is to be blamed for naming defendant’s principal, Brian Hemphill, as an individual party defendant through the end of trial, for no reason apparent to the court. This could well rise to the level of obdurate conduct.
      In sum, defendant’s actions were not sufficiently sinister to support an award of attorney’s fees.