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Bair v. Purcell

January 29, 2008


The opinion of the court was delivered by: Chief Judge Kane


Before the Court are motions in limine filed by Plaintiffs (Doc. No. 97) and Defendants (Doc. Nos. 98-100) seeking the exclusion of certain types of evidence. The motions have been briefed and are ripe for adjudication. Additionally, on November 29, 2007, the Court held oral argument on the motions.

Because the parties are familiar with the background of this case, which is also set forth in the Court's opinion dated August 2, 2007 (Doc. No. 87), the Court will omit a lengthy recitation of the factual background and procedural history of this litigation, which arises generally from the deterioration of the business relationship between Plaintiffs and Defendants. The claims remaining for trial are: (1) a breach of contract claim against Francis Purcell and/or Appalachian Baking Company (the "company") for their alleged breach of a stock buy-out agreement; (2) a breach of contract claim against the company for its alleged breach of long-term employment agreements with the Bairs; (3) Curtis Bair's breach of fiduciary duty/shareholder oppression claim against the Purcells; (4) Curtis Bair's claim, in the alternative, against Norma Purcell for aiding and abetting her husband's breach of his fiduciary duties; and (5) Patrice Bair's claim that the company, Francis and Norma Purcell, and Jessica Kiely, violated Pennsylvania's Wage Payment and Collection Law. Additionally, Plaintiffs have requested that the Court pierce the corporate veil to hold Francis Purcell individually liable for certain acts of the company, such as the breach of employment contract claim in count two of the amended complaint.


A. Defendants' proffered valuation by James Smeltzer, C.P.A.

Plaintiffs challenge Smeltzer's testimony on the basis that it is unreliable, irrelevant, and incapable of assisting the trier of fact. Plaintiffs raise three grounds upon which they contend exclusion is appropriate. First, Plaintiffs complain that Smeltzer inappropriately "perceived" the stock held by Ms. Green and the Jameses to be analogous preferred stock, whereby these individuals "received a preferred return on their investment." Second, Plaintiffs assert that Smeltzer improperly used fair market value, rather than fair value, in his analysis. Third, they argue that Smeltzer's valuation date -- December 31, 2004 -- should have been either July 2002, when Purcell and/or the company allegedly breached the stock buy-out agreement, or December 2003, when Curtis Bair was removed from his positions as an officer and director of the company. The Court will address these arguments, and Defendants' responses thereto, in turn.

1. Analogy to Preferred Stock

Plaintiffs' first and primary argument for exclusion of Smelter's expert testimony is that he improperly discounted the stock redemptions by Ms. Green and the Jameses as a reference for estimating the value of the corporate stock, and that he did so because he considered their stock to be "analogous to preferred stock, whereby these investors received a preferred investment." Plaintiffs maintain that treating the stock of the other minority shareholders as "preferred" is impermissible under state law, and that the injection of "preferred stock" into the trial will be misleading and confusing. Defendants' response to this argument is simply to reiterate why Ms. Green and the Jameses were offered the redemption rate that they were and to defer to the expert's judgment that the situation is one that can be analogized to that of preferred stock. Defendants also emphasize that they are not contending, nor have they ever contended, that the company offered preferred stock to any shareholder.

Here, Smeltzer was given the task of determining the fair market value of the outstanding shares of company stock. In making his valuation, he determined that the redemption of the shares held by Ms. Green and the Jameses were not appropriate indicators of the fair market value of the company's stock. Smeltzer will have an opportunity to explain why, in his opinion, these transactions were not accurate indicators of the stock's value and why this opinion comports with the standards of business valuation.

To the extent that this testimony is presented to the jury, and in order to dispel any confusion as to whether preferred stock was -- or could be -- offered by the company, the Court believes a limiting instruction may be appropriate and invites Plaintiffs to propose such an instruction, should they so desire. However, at this time, the Court does not believe Smeltzer's testimony should be excluded based solely on an analogy contained in his report.

2. Fair Market Value v. Fair Value

Plaintiffs complain that Defendants' expert "relies upon a faulty utilization of 'fair market value' as a standard of value for the Company's stock," rather than its "fair value." (Doc. No. 101, at 6-7) (Smeltzer's firm was "engaged to prepare an estimate of the fair market value for the outstanding common stock of Appalachian Baking Company, Inc., as of December 31, 2004."); see also 15 Pa. Cons. Stat. § 1572 (defining fair value in the context of dissenters' rights as: "The fair value of shares immediately before effectuation of the corporate action to which the dissenter objects, taking into account all relevant factors, but excluding any appreciation or depreciation in anticipation of the corporate action."). According to Plaintiffs, Smeltzer's utilization of the fair market value standard is contrary to state law. This argument, however, fails to acknowledge that a determination of "fair value" under Pennsylvania law is informed by the consideration of "all relevant factors," and that courts have traditionally considered market value as a relevant factor. 15 Pa. Cons. Stat. § 1572; In re Glosser Bros., Inc., 555 A.2d 129, 132-35 (Pa. Super. Ct. 1989) (discussing at length the relevance of market value in stock valuations);*fn1 see also 12B Fletchers Cylopedia of Corporations § 5906.120 ("No one factor governs the valuation of the shares; rather, all factors, such as market value, asset value, future earning prospects, etc., should be considered."). Plaintiffs may argue that the factfinder should accord minimal weight to Smeltzer's fair market value calculation in light of other circumstances and relevant factors, but they have not articulated a basis for excluding Smeltzer's testimony simply because the stated purpose of his report was to determine the fair market value for the outstanding common stock of the company.

3. Valuation Date

Plaintiffs' final argument with respect to Smeltzer's valuation is that he calculated the fair market value of the outstanding common stock of the company as of the year ended December 31, 2004, "an entire year after Plaintiff Curtis Bair was squeezed off the Board of Directors and out of his position as Secretary at the December 12, 2003 Combined Special Meeting."*fn2 (Doc. No. 101, at 8.) Plaintiffs assert that the "passage of time alone" renders the valuation unreliable and irrelevant. (Id.) Having considered ...

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