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Gilliland v. Hergert

November 15, 2007

DAVID L. GILLILAND, SOUTHEASTERN IMAGING GROUP, LLC, PLAINTIFFS,
v.
JONATHAN K. HERGERT, DEFENDANT.



The opinion of the court was delivered by: Terrence F. McVerry United States District Court Judge

MEMORANDUM ORDER

Before the Court for consideration and disposition are the MOTION FOR SUMMARY JUDGMENT (Document No. 84) filed by Defendant, the MOTION IN LIMINE TO EXCLUDE TESTIMONY OF EXPERT WITNESS (Document No. 89), and the MOTION FOR PARTIAL SUMMARY JUDGMENT (Document No. 90) filed by Plaintiffs. The issues have been thoroughly briefed and are ripe for disposition.

Factual and Procedural Background

In May 2005, Main Medical Holdings, LLC, Mid Atlantic Imaging, Inc., and Main Medical Ventures (collectively, the "Main Medical Companies") abruptly ceased operations, thus spawning several legal actions. In the instant case, Plaintiffs assert violations of Pennsylvania securities law and common law based on statements and omissions which allegedly induced Plaintiffs to purchase worthless stock in the Main Medical Companies. Gilliland entered into a promissory note and security agreement dated August 16, 2004 (the "August 16 Note") with Anthony Geramita, by which Geramita obtained $550,000. On December 17, 2004 Southeastern Imaging Group, LLC ("Southeastern") entered into an equipment loan promissory note (the "December 17 Note") with Main Medical Holding, LLC ("Main Holding"), by which Main Holding obtained $810,000. The parties advance starkly different versions of the facts and object to many of the allegedly "undisputed" facts asserted by their adversary. Anthony Geramita, the founder and chief executive officer of the Main Medical Companies, is now deceased and was not deposed, which has contributed to the unsettled factual record.

Defendant Hergert and the law firm for which he worked, Eckert Seamans Cherin & Mellott, LLC ("ESCM"), acted as legal counsel for the Main Medical Companies. Hergert also served as a manager and/or director of the Main Medical Companies and as Assistant Secretary for Main Holdings. On December 29, 2006, the Court granted Plaintiffs' motion to voluntarily dismiss claims against Geramita without prejudice. Thus, Hergert is the sole remaining defendant.

Motions for Summary Judgment

The Second Amended Complaint asserts six claims on behalf of Gilliland and Southeastern: Counts I and IV assert violations of the Pennsylvania Securities Act, 70 P.S. §§ 1-401, 1-501 and 1-503 in connection with the August 16 Note and December 17 Note, respectively; Counts II and V assert claims for Negligent Misrepresentation; Counts III and VI assert claims for Unlawful Concerted Action. The Court will address each legal theory seriatim.

Standard of Review

Summary judgment should be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). Thus, the Court's task is not to resolve disputed issues of fact, but to determine whether there exist any factual issues to be tried. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-49 (1986). The non-moving party must raise "more than a mere scintilla of evidence in its favor" in order to overcome a summary judgment motion. Williams v. Borough of West Chester, 891 F.2d 458, 460 (3d Cir. 1989) (citing Liberty Lobby, 477 U.S. at 249). Further, the non-moving party cannot rely on unsupported assertions, conclusory allegations, or mere suspicions in attempting to survive a summary judgment motion. Id. (citing Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986)). Distilled to its essence, the summary judgment standard requires the non-moving party to create a "sufficient disagreement to require submission [of the evidence] to a jury." Liberty Lobby, 477 U.S. at 251-52.

A. Pennsylvania Securities Act (Counts I and IV)

1. "Direct" Liability Pursuant to Sections 1-401 and 1-501 The Pennsylvania Securities Act, 70 P.S. § 1-401 provides: It is unlawful for any person, in connection with the offer, sale or purchase of any security in this State, directly or indirectly:

(a) To employ any device, scheme or artifice to defraud;

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading; or

(c) To engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person.

Section 1-501 makes actionable and sets forth the civil penalties for a violation of section 1-401. Section 1-401 of the Pennsylvania Securities Act is modeled after Rule 10b-5 of the federal securities laws, and requires virtually the same elements of proof. Sunquest Information Sys., Inc. v. Dean Witter Reynolds, Inc., 40 F.Supp.2d 644, 659 (W.D. Pa.1999). Therefore, the elements of this cause of action are: (1) that defendant made misstatements or omissions of material fact; (2) with scienter; (3) in connection with a purchase or sale of securities; (4) upon which plaintiffs relied; and (5) plaintiffs' reliance was the cause of their injury. EP Medsystems, Inc. v. EchoCath, Inc., 235 F.3d 865, 871 (3d Cir. 2000) .

Plaintiffs argue that Hergert exceeded the customary role of legal counsel such that he is liable under the statute. Defendant contends that the August 16 Note and the December 17 Note were not "securities." Defendant further contends that he was not a "seller" of securities.*fn1 The Court will address each contention seriatim.

a. Definition of "Security"

The Pennsylvania Securities Act explicitly defines the term"security." Section 1-101(t) states (emphasis added):

(t) "Security" means any note; stock; treasury stock; bond; debenture; evidence of indebtedness; share of beneficial interest in a business trust; certificate of interest or participation in any profit-sharing agreement; collateral trust certificate; preorganization certificate or subscription; transferable share; investment contract; voting trust certificate; certificate of deposit for a security; limited partnership interest; certificate of interest or participation in an oil, gas or mining title or lease or in payments out of production under such a title or lease; membership interest in a limited liability company of any class or series, including any fractional or other interest in such interest unless excluded by clause (v); or, in general, any interest or instrument commonly known as or having the incidents of a "security"; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. All of the foregoing are securities whether or not evidenced by written document. "Security" does not include:

(i) Any beneficial interest in any voluntary inter vivos trust which is not created for the purpose of ...


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