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CentiMark Corp. v. Pegnato & Pegnato Roof Management

May 5, 2008

CENTIMARK CORPORATION, PLAINTIFF,
v.
PEGNATO & PEGNATO ROOF MANAGEMENT, INC., D/B/A PEGNATO & PEGNATO BUILDING SYSTEM SERVICES, INC., AND WILLIAM S. PEGNATO, AND MARYELLA PEGNATO, DEFENDANTS.



The opinion of the court was delivered by: Hay, Magistrate Judge

OPINION

Presently before the Court is a motion for summary judgment filed by plaintiff CentiMark Corporation ("CentiMark") [Dkt. 44], a motion for partial summary judgment filed by the individual defendants, William and Maryella Pegnato ("William" and "Maryella," respectively) (collectively, "the Pegnatos") [Dkt. 48]; a motion to withdraw as counsel for defendant Pegnato & Pegnato Building System Services ("Pegnato") [Dkt. 34]; and a motion for spoliation sanctions against William and Maryella filed by CentiMark [Dkt. 62].

I. Procedural and Factual History

CentiMark markets, sells, installs, and services roofs and roofing systems to commercial and industrial customers. On August 22, 2001, CentiMark entered into a Strategic Alliance Agreement (the "Alliance") with Pegnato whereby Pegnato would provide roofing repair services to customers on CentiMark's behalf. Pegnato would bill and collect the amounts due from the customers and then remit a portion of the fees collected to CentiMark. William and Maryella Pegnato are husband and wife and co-founded Pegnato in approximately 1992. William and Maryella were the majority shareholders of Peganto until 1999 when twenty-five percent of the outstanding shares were sold to outside investors to raise capital. By August 2001, outside investors owned fifty-one percent of the voting shares of stock.

For approximately three years, Pegnato and CentiMark conducted business in accordance with the provisions of the Alliance. Then, in March 2004, Pegnato was experiencing some financial difficulty and anticipated a problem paying CentiMark. In an email dated March 22, 2004, from Donna Taylor, Pegnato's National Account Manager to Susan Crile, a marketing representative for CentiMark/Pegnato, Pegnato requested permission to pay CentiMark by check, rather than by wire transfer. The pertinent correspondence read:

I spoke with [WilliamPegnato] about the wire transfers and he explained to me that for the next 60 days we are going to have some problems getting these to you on a regular basis due to internal situations. He asked that you please be patient with us and he can assure you that it'll be resolved soon. In the meantime, he has asked if you would prefer getting weekly checks? This will resolve the not knowing.

Plaintiff's Appendix to Brief in Support of Motion for Summary Judgment ("Pl.'s Appx."), Exh. G [Dkt. 47]. When Crile questioned why the alternative payment method was necessary, Taylor responded: "This is what Bill Pegnato explained to me yesterday." Id.

In August 2004, although Pegnato continued to provide and receive payment for roofing services to customers, it ceased paying CentiMark as dictated by the terms of the Alliance. Starting in October of that year and into January 2005, some customers paid CentiMark directly for roofing services provided by Pegnato. On February 15, 2005, CentiMark and Pegnato negotiated a letter agreement whereby CentiMark would apply the amounts customers paid directly to it to the balance owed by Pegnato. The letter memorializing the agreement was signed by "Maryella Pegnato, President." Id. at Exh. H. The joint enterprise established under the Alliance ended in April 2005 when CentiMark gave written notice to Pegnato that it was terminating the agreement.

On May 23, 2005, CentiMark filed an action against Pegnato and William and Maryella. The complaint included breach of contract and unjust enrichment counts, and a request for accounting against Pegnato. The complaint also included a conversion claim against both Pegnato and William and Maryella, individually. According to an order dated September 30, 2005, counsel had advised that the matter had been settled and the court decreed that the case be marked closed noting that "the only matters remaining to be completed are the payment of the settlement proceeds, if any, and the submission of a stipulation for dismissal ...." See Dkt. 11. The court also informed that the order was not a dismissal or disposition of the action and retained jurisdiction to consider any issue arising until the settlement was finalized.

On November 18, 2005, before a stipulation of dismissal had been filed, however, Pegnato filed a Voluntary Petition seeking Chapter 11 relief in the United States Bankruptcy Court for the Central District of California. William signed the petition as the Chief Executive Officer of Pegnato, and represented in a number of sworn declarations filed in conjunction with the bankruptcy proceedings that he was the CEO of Pegnato, "directly responsible for all facets of [Pegnato's] financial affairs . . . . Accordingly, [William] ha[s] personal knowledge of the material aspects of [Pegnato's] day-to-day business operations, financial condition, and books and records." Id. at Exh. N, ¶ 3.

On January 3, 2006, the bankruptcy court entered an order approving the sale of substantially all of Pegnato's assets to First Service Networks, Inc. ("First Service"), and the bankruptcy case was thereafter dismissed and closed.*fn1

The hibernation of the present action was disturbed by the conclusion of the bankruptcy proceedings and an order of court entered on April 16, 2007, granting CentiMark's consent motion to reopen the case and place it on the active docket. The action was designated for placement in the court's Alternate Dispute Resolution ("ADR") Program and the parties stipulated to mediation before a neutral arbitrator. That process failed to produce a settlement and discovery proceeded.

On October 26, 2007, counsel for Pegnato filed a motion to withdraw its representation averring that the resignation of Pegnato's corporate officers and directors in conjunction with the bankruptcy case resulted in an "evaporation" of its corporate client. Counsel claimed that it cannot fulfill its obligation to act on behalf of the corporation because that entity is now defunct. CentiMark has opposed the motion, asserting that it would be prejudiced by what it characterized as a veiled attempt by Peganto to avoid its discovery obligations.

On October 30, 2007, CentiMark filed an emergency motion to compel production of documents, claiming that the defendants failed to produce internal correspondence regarding the Alliance, correspondence with third parties on the subject agreement, including communications with First Service, and/or any board of directors, shareholder, or committee meeting minutes where the Alliance or CentiMark were discussed. On December 3, 2007, the court denied the motion, reasoning that an emergency did not exist as CentiMark had the option of seeking additional time for discovery and noting that CentiMark itself had not complied with the court's order on motion practice. Three days later, the court held a telephone hearing on the discovery dispute wherein CentiMark reiterated its complaint concerning the non-production of integral documents. The court provided CentiMark with the choice to either issue a subpoena for the requested documents or to file a motion for spoilation.

On December 21, 2007, CentiMark filed a motion for summary judgment against Pegnato and William. On that same date, William and Maryella filed their motion for partial summary judgment against CentiMark. Pegnato neither filed a summary judgment motion nor responded to CentiMark's motion against it.

On March 7, 2008, CentiMark filed a motion for spoilation sanctions. In response to opposing counsel's suggestion that some of the documents requested through discovery may have been transferred in conjunction with the purchase of Pegnato's assets, CentiMark served a subpoena on First Service. First Service advised that it did not possess the documents, and CentiMark therefore concluded that they no longer existed and that the defendants breached their obligation to preserve information that might be relevant to the litigation. CentiMark thus petitioned the court to preclude the defendants from introducing testimony regarding the identities of individuals who did or did not participate in Pegnato's alleged retention of CentiMark funds.

William and Maryella responded to the motion on April 9, 2008, arguing therein that CentiMark has failed to point to any evidence that would demonstrate that defendants were responsible for the loss of the documents at issue or that it has been prejudiced by the loss. Moreover, William and Maryella argue that even if CentiMark could demonstrate prejudice, the sanction CentiMark seeks is out of proportion to the conduct attributed to them.

II. Motion to Withdraw as Counsel for Pegnato*fn2

Counsel moves to withdraw for the stated reason that its corporate client disappeared on August 29, 2006, when the corporation's bankruptcy case was dismissed and the corporate officers and directors resigned. Counsel claims that the resignation of the corporate officers/directors placed it in "the untenable position of being obligated to act on behalf of the Corporation, while lacking the ability to do so." Motion to Withdraw, ¶ 15 [Dkt. 34].

Although it appears clear that counsel has taken no further action on behalf of Pegnato since the instant motion was filed on October 27, 2007, review of the progress of the present litigation reveals that counsel continued to act on behalf of Pegnato after the bankruptcy case was dismissed. Indeed, the record demonstrates that counsel entered a stipulation regarding selection of the ADR process in May of 2007 [Dkt. 17], filed a motion to reschedule a case management conference in June of 2007 [Dkt. 19], consented to jurisdiction of the magistrate judge in September of 2007 [Dkt. 30], and apparently attended a mediation before a neutral arbitrator in August of 2007 [Dkt. 27], all on behalf of Pegnato. Particularly contrary to counsel's position that it was afloat without a corporate boat is that Justin Barron, Esquire, one of the attorneys now petitioning to withdraw, entered his appearance on behalf of the corporation on June 22, 2007, some ten months after Pegnato supposedly disintegrated [Dkt. 21].

Additionally, although counsel invokes terms such as "defunct" and "evaporated" to describe the current state of Pegnato, the actual legal status of the corporate defendant is listed as "suspended" on the California Business Portal website. Further, as of April 25, 2008, the corporation still has an address and an agent listed for service of process. See http://www.sos.ca.gov/business.

Finally, the pertinent local rule advises that counsel seeking to withdraw must give notice to the client. W.D. Pa. L.R. 83.2.2 D. Even though the California Business website still lists a designated individual for service of process for Pegnato, there was no certificate of service attached to counsel's motion to withdraw, nor was service to the designated agent indicated on the docket.

Non-compliance with the local rule, combined with counsels' activity on behalf of the corporation subsequent to the bankruptcy proceeding and Pegnato's continuing existence as a corporate entity and a defendant in this litigation suggest that, at this juncture, counsels' motion to withdraw from representation of Pegnato is properly denied. See Rhino Associates, L.P. v. Berg Manufacturing and Sales Corp., 531 F. Supp. 2d 652, 656 (M.D. Pa. 2007) ("[A] corporation must be represented in court by counsel").

III. Motion for Spoliation Sanctions

It appears undisputed that during discovery CentiMark requested that defendants produce internal correspondence regarding the Alliance, correspondence with third parties on the subject agreement, including communications with First Service, and/or any board of directors, shareholder, or committee meeting minutes where the Alliance or CentiMark were discussed. See Plaintiff's Exhibits to Motion for Spoliation Sanctions ("Pl.'s Spoliation Exh."), Exh. C, Request Nos. 2-4 [Dkt. 63]. It also appears undisputed that no such documents were produced by defendants. Consequently, in a letter dated October 10, 2007, counsel for CentiMark sent defendants a letter indicating as much and asking that they produce the missing documents. Id. at Exh. D. Counsel for defendants responded on October 15, 2007, indicating that William and Maryella "are not the custodians of the corporation's documents, and they do not know ...


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