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Bair v. Purcell

March 17, 2009

CURTIS BAIR, ET AL., PLAINTIFFS
v.
FRANCIS PURCELL, ET AL., DEFENDANTS



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

MEMORANDUM

Before the Court are the parties proposed findings of fact and conclusions of law on Plaintiff Curtis Bair's breach of fiduciary duty/shareholder oppression claim (Doc. Nos. 163, 165), objections to these proposed findings (Doc. Nos. 168, 170), and the jury's advisory findings and verdict (Doc. No. 158). The Court heard testimony on this matter at the trial that occurred in February 2008, the proposed findings are fully briefed, and the matter is ripe for disposition. For the reasons that follow, the Court will render a verdict in favor of Plaintiff Curtis Bair on his breach of fiduciary duty/shareholder oppression claim. Also before the Court is Plaintiffs' motion for attorney fees and costs. (Doc No. 161.) Because the Plaintiffs' fee petition is not currently sufficient for the Court to exercise its discretion in assessing the motion, the Court will reserve ruling on the motion until Plaintiffs have an opportunity to supplement their petition.

I. BACKGROUND

A. Procedural Background

After a nine day trial in the above-captioned matter in February 2008, the jury returned a verdict in favor of Plaintiffs on three claims. (Doc. No. 158.)*fn1 Before trial, the Court determined that Curtis Bair's fiduciary duty claim was equitable in nature and determined it was properly for the Court to render a verdict on the claim. To assist the Court in crafting an equitable verdict, the issue was submitted to the jury, which has made advisory factual findings and rendered an advisory verdict in favor of the Plaintiffs on this claim. (Doc. No. 158 at 7-17.)

B. Findings of Fact

Based on the testimony and evidence put forward by the parties at trial and pursuant to Rule 52(a)(1) of the Federal Rules of Civil Procedure, the Court makes the following findings of fact by a preponderance of the evidence:

1. In 1998, Defendant Francis Purcell incorporated the Appalachian Baking Company ("Appalachian Baking") in Pennsylvania as a closely held business corporation with offices in Harrisburg, Pennsylvania and entered into a ten year franchise agreement with Atlanta Bread Company International, Inc. pursuant to which Appalachian Baking was granted exclusive development rights for Atlanta Bread Company stores in Dauphin, Cumberland and Lebanon Counties; the State College area; and the Baltimore, Maryland area.

2. Prior to their involvement with Appalachian Baking, Plaintiffs Curtis Bair and Patrice Bair (husband and wife) lived and worked in Atlanta, Georgia. Curtis Bair and Patrice Bair have known Francis Purcell and his wife Norma Purcell for a number of years and had previously worked with them in an Atlanta, Georgia franchise operation known as Peachtree Pretzel Time Inc., ("Peachtree"). As of May 1998, Curtis Bair held a ten percent ownership interest in the Peachtree franchise and both he and his wife worked in the franchise operation.

3. During a meeting in May of 1998, Francis and Norma Purcell, Curtis and Patrice Bair and Deborah and Jay James began discussing franchise opportunities with a franchise known as the Atlanta Bread Company. Later in 1998, Francis Purcell informed Curtis and Patrice Bair that he had decided to pursue an Atlanta Bread Company franchise.

4. During the course of this meeting and subsequent meetings, Francis and Norma Purcell made promises and projections to Curtis Bair and Patrice Bair to the effect that Curtis and Patrice Bair would have a long-term role with the new company; that Curtis Bair's salary would start at $55,000 and would increase to $100,000 after the company's third Atlanta Bread Company store opened; that after five years, Francis Purcell would retire and Curtis Bair would step into his position in the company.

5. In June 2000, Francis Purcell sent Curtis Bair a packet of documents to be circulated to potential investors in Appalachian Baking. The packet included an offering and subscription memorandum, a confidential descriptive memorandum, a form subscription agreement, a form shareholder joinder, and a form shareholders agreement. The confidential descriptive memorandum stated that the company planned to operate one or more retail bakery and café restaurants under the name "Atlanta Bread Company" within the exclusive development territory described above.

6. The form shareholder agreement was dated June 1, 2000, and listed Curtis Bair as one of the original shareholders in the company and as a member of the board of directors.

7. Francis Purcell instructed Curtis Bair to sign ten copies of the last page of the shareholder agreement as secretary of the corporation and forward those copies to Francis Purcell. Curtis Bair followed these instructions. Curtis Bair was told by Francis Purcell and believed that from that point forward he was a party to the shareholders agreement sent out with the offering package.

8. Section 2.02 of the June 1, 2000, shareholders agreement specifically indicates that Curtis Bair would be a member of the Board of Directors of the corporation. Section 2.02 further provides that in the event Curtis Bair ceases to be a shareholder, Francis Purcell may designate another shareholder to be a director. The shareholders agreement contains a certificate of value dated May 10, 2000, establishing a value of $17,000 per share which is the price to be used to purchase a shareholder's shares upon the death, withdrawal from the enterprise or disability of a shareholder under the shareholders agreement.

9. The offering information packet was sent to other potential investors, including Robert and Lori Green and Jay and Deborah James. This information packet contained, among other things, a confidential descriptive memorandum, which provides that the estimated gross profits from restaurant sales of $1 million would be $190,000 per year. The confidential descriptive memorandum also provided that the estimated gross profits was not a financial projection or a statement of profitability. The provided estimate comported with Curtis Bair's prior experience in the food service industry and also the average business of an Atlanta Bread Company store at that point in time.

10. Robert and Lori Green and Jay and Deborah James executed the shareholder joinder to the Appalachian Baking Company and shareholders agreement indicating that "as of the date written below, shareholder shall become a party as a shareholder to the company shareholders agreement effective June 1, 2000 or any amendment thereto. Shareholder agrees to be bound by all the terms and provisions of the shareholders agreement, or any amendment thereto, as though he or she was an original party thereto and was included in the definition of "shareholder" as used therein."

11. Robert and Lori Green executed the above-quoted shareholder joinder subscribing to six shares for $100,000 on June 20, 2000, and Deborah and Jay James executed the above-quoted shareholder joinder subscribing to two shares for $40,000 on July 28, 2000.

12. On June 7, 2000, Appalachian Baking Company entered into a ten year lease for a restaurant located in Harrisburg, Pennsylvania at a location known as the Paxton Towne Center.

13. On February 5, 2001, Appalachian Baking Company issued shares of stock to Robert and Lori Green and Jay and Deborah James. On the same date, Norma Purcell also became the co-owner of Francis Purcell's majority shareholdings in Appalachian Baking Company, Inc.

14. On October 30, 2000, a stock purchase agreement for the outstanding capital stock of Peachtree Pretzel Time, Inc. was entered into with Mrs. Fields Holding Company, Inc. The agreement included a covenant not to compete barring shareholders in Peachtree, including Curtis Bair, from owning, managing, operating, or controlling, or participating in the ownership, management, operation or control of, or being connected with, or having any interest in as a stockholder, director, officer, employee, agent, consultant, assistant, advisor, sole proprietor, partner or otherwise, in any shipping mall based food business or retail baked goods business other than Appalachian Baking Company.

15. Francis Purcell negotiated the stock purchase agreement with Mrs. Fields on behalf of all shareholders of Peachtree Pretzel Time. After the sale, Curtis Bair informed Francis Purcell about a good opportunity to open a sports bar in a mall in Atlanta. Francis Purcell warned Curtis Bair that this may be prohibited by the non-compete agreement he had signed.

16. After the stock purchase agreement was entered into, Curtis Bair and his wife Patrice Bair, agreed to Francis Purcell's request to become employees of Mrs. Fields to monitor the business and be in place to keep running the company to minimize transition losses in case Mrs. Fields defaulted on their payments under the stock purchase agreement. Curtis Bair took a reduction in salary from over $100,000 per year to $70,000 per year when he went to work for Mrs. Fields.

17. On February 5, 2001, a consent of shareholders and directors in lieu of a special meeting was entered on the corporate books by Francis Purcell in which Certificate N. 1 issued to Francis Purcell for 100 shares of Appalachian Baking Company, Inc. was marked void and a new certificate was issued to Francis and Norma Purcell for 77 shares, Robert L. Green and Lori Dunn Green for six shares and Jay James and Deborah James for two shares.

18. Investors in Appalachian Baking Company had an expectation that a full $500,000 would be raised for initial operation of the company. After the investment of the Greens and Jameses, there was still a $360,000 shortfall in this initial operational capital from unsold shares. The initial offering to investors had a provision that any unsold shares would be purchased by Francis Purcell. Instead, Francis and Norma Purcell loaned Appalachian Baking up to $238,000 rather than making a capital investment in the company by purchasing shares. In 2003, the Purcells received $119,000 back on the loan. The loaned money was paid back to the Purcells from the company without attending to any of the formalities of a dividend and not allowing other shareholders to participate.

19. In early July 2001, an emergency developed when John Krulock, the manager of the newly opened Appalachian Baking Company restaurant at Paxton Towne Center, sought to quit his position and leave employment of the company because of extremely demanding hours and conflicts with Jessica Purcell, an employee under his supervision who was also the daughter of Francis and Norma Purcell.

20. Francis Purcell contacted Curtis Bair and requested him to immediately resign his position at Mrs. Fields, put his house in Atlanta up for sale and relocate to the Harrisburg area to take over the management of the first store. Curtis Bair agreed to do all this and on July 12, 2001, submitted his letter of resignation to the Mrs. Fields organization.

21. The Bair residence in Atlanta, Georgia was put on the market by Patrice Bair who stayed to sell the residence and execute the move. Francis Purcell requested that Bair put the residence on the market at a lower price so that it would sell within 30 to 60 days and it actually sold within 20 days.

22. When Curtis Bair came to Harrisburg and began managing the restaurant at the Paxton Towne Center, the store was doing a high volume of business. At this time, Curtis Bair took another cut in pay to $45,000. He was also issued 15 shares of Appalachian Baking Company stock on August 8, 2001. Text on these stock certificates provided that the certificates may not be sold, assigned, transferred, pledged or otherwise disposed of except in accordance with the terms and conditions of the bylaws of the corporation.

23. On August 14, 2001, Francis Purcell wrote to Michael Ward, counsel for Mrs. Fields Holding Company, Inc. requesting approval for Appalachian Baking Company, Inc. to employ Patrice Bair. This was necessary in order for Francis Purcell to be relieved of his obligation under the stock purchase agreement not to hire former employees of Pretzel Time, Inc.

24. On September 22, 2001, Jessica Purcell married Oliver Kiely and changed her name to Jessica Kiely.

25. Between July 2001 and April 2002, significant efforts were made to locate new sites for additional Atlanta Bread Company restaurants within the exclusive sales territory of Appalachian Baking Company. Store sites were located in York and Camp Hill with projected opening dates for those locations in the later part of 2002.

26. Despite progress on the additional locations, on April 9, 2002, Francis Purcell informed Curtis Bair that he decided not to open up any more locations because he wanted to retire. Francis Purcell presented a handwritten outline of four different options that were available to Curtis Bair: (1) open another store in the territory, borrow $500,000 at 8.5% for 5 years with payments of $10,258 per month, pay Francis Purcell consulting fees of $300 weekly until the loan is satisfied, pay $105,000 to buyout Robert and Lori Green and Jay and Deborah James; (2) buy a Pretzel Time type cookie store for up to $150,000; (3) take a $100,000 buyout of his stock; or (4) buy the existing store for $750,000 plus $210,000 to Robert and Lori Green and Jay and Deborah James. Francis Purcell indicated that the Bairs should take this list of options with them on vacation and discuss it.

27. On or about May 2, 2002, Francis Purcell and Curtis Bair met at the restaurant and Curtis Bair presented documents reviewing these various offers to Francis Purcell. Curtis Bair reviewed the four options showing why they were not to his economic advantage and indicated that what he wanted to do was to have the company buy back his stock for $250,000. Francis Purcell suggested that the corporation instead buy Curtis Bair's stock back for $203,000 and Curtis Bair agreed.

28. Shortly after May 10, 2002, Curtis Bair asked Francis Purcell whether he had told the other shareholders what he was doing with the business. Francis Purcell indicated he had sent them a memorandum. Curtis Bair asked for a copy and was provided with a copy of a memorandum sent to Robert and Lori Green and Jay and Deborah James on May 10, 2002, to which Francis Purcell had added, in his own handwriting, an option to sell back their stock for $203,000 and had also added writing concerning a plan to sell his stock in the company to Jessica Kiely for $200,000. In a handwritten note only on the May 10, 2002, memorandum to Curtis Bair, Francis Purcell also indicated that this plan also involved a consulting fee and hospitalization plan for Francis Purcell for approximately 17 years.

29. Francis Purcell offered to sell the store to Jessica Kiely on terms more favorable than those that he offered to Curtis Bair.

30. At one point in the latter part of May 2002, Francis Purcell called Bair to his house to discuss the potential sale of the company to Jessica Kiely. Francis Purcell disclosed that he and Norma Purcell were concerned about whether Jessica Kiely could handle the store by herself. He asked Curtis Bair to consider purchasing the restaurant instead of selling back his stock for the agreed $203,000. Curtis Bair indicated that he would need more information about the company's worth and the structure of the contract before making his decision.

31. Curtis Bair reviewed the proposition and prepared a written critique comparing the various offers made by Francis Purcell to Curtis Bair and other shareholders. Curtis Bair met with Francis Purcell and showed him the comparison, indicating that purchasing the restaurant was not economical and/or feasible, especially considering the 17 year consulting fee and health insurance plan for Francis Purcell in the agreement.

32. On June 24, 2002, Curtis Bair wrote "I Curtis L. Bair elect to sell my stock under Option A: sell my stock for 203,000" and signed it and faxed it to Francis Purcell.

33. During the period leading up to Curtis Bair's election to sell his stock back to the company, Jessica Kiely and Curtis Bair had several disagreements about operation of the restaurant, at one point culminating in a loud verbal confrontation in the presence of customers. Jessica Kiely also had threatened to run Curtis Bair and Patrice Bair out of the company.

34. On July 3, 2002, a meeting occurred between Francis Purcell, Curtis Bair, and Patrice Bair on the patio at the Atlanta Bread Company store. Francis Purcell indicated that the buyout for $203,000 is no longer available and that the Bairs would have to stay on to manage the store until an outside investor purchased the company. During the argument that ensued, Francis Purcell threatened that Bair's 15 shares would be worthless if he left the company to pursue other options or if he got an attorney involved because he would see to it that the company never paid out a dividend. He specifically threatened to destroy the Bairs.

35. Shortly after this July 3 confrontation, Curtis Bair went to Attorney Sacks, the Appalachian Baking corporate attorney. Sacks had a long time business and social relationship with Francis Purcell. Curtis Bair asked Sacks for a copy of the shareholders agreement. Sacks told Curtis Bair that he would have to get clearance from Francis Purcell before giving him a copy.

36. Shortly after the July 3 confrontation, Francis Purcell gave Curtis Bair a notice of Combined Special meeting of the Board of Directors and Shareholders to be held July 20, 2002, in accordance with the bylaws. Curtis Bair asked at that time for a copy of the bylaws. Francis Purcell gave Curtis Bair a two page ...


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