The opinion of the court was delivered by: James Knoll Gardner, United States District Judge
The undersigned presided over a 35-day non-jury trial*fn1 in this matter on July 7-9, 11, 16-18, 21-23, 25, 28-29, August 6-8, 11-15, September 9-12, 18, 23-26, November 14, 2008, January 13-15 and 27, 2009.
There are six claims in plaintiff's Amended Complaint for adjudication, brought by plaintiffs Michael Reis, Sr. and Lawrence J. Katz in either their individual capacity or as assignees of the rights of Weaver Nut Company, Inc. against defendant Barley, Snyder, Senft & Cohen, LLC. They are as follows:
Count I: (1) breach of fiduciary duty brought by plaintiffs Reis and Katz as assignees of the rights of Weaver Nut Company, Inc. ("Company"); (2) aiding and abetting breach of a fiduciary duty brought by Reis and Katz individually; and (3) aiding and abetting breach of a fiduciary duty brought by Reis and Katz as assignees of the Company.
Count II: (4) professional negligence against Barley Snyder, brought by Reis and Katz as assignees of the Company.
Count IV: (5) tortious interference with contractual relations against Barley Snyder, brought by Reis and Katz as assignees of the Company.
Count VI: (6) breach of contract brought against defendant Barley Snyder by plaintiffs Reis and Katz in their capacity as assignees of the rights of the Company.
For the reasons expressed below, I now find in favor of defendant Barley, Snyder, Senft & Cohen, LLC and against plaintiffs Michael Reis, Sr. and Lawrence J. Katz on all six claims.
This action is before the court on diversity jurisdiction. Plaintiff Michael Reis, Sr. is a resident of the State of Illinois and plaintiff Lawrence J. Katz is a resident of the State of New Jersey. Defendant Barley, Snyder, Senft & Cohen, LLC is a Pennsylvania limited liability company. The amount in controversy is in excess of $75,000. See 28 U.S.C. § 1332.
Venue is proper because plaintiffs allege that the facts and circumstances giving rise to the cause of action occurred in Lancaster County, Pennsylvania, which is in this judicial district. 28 U.S.C. §§ 118, 1391.
Regarding Count I of plaintiffs' Amended Complaint*fn2, I find in favor of defendant on plaintiffs' claim for breach of fiduciary duty brought by plaintiffs Reis and Katz as assignees of the rights of the Company. Specifically, I conclude that Barley Snyder did have a fiduciary duty to its client Weaver Nut Company which demanded undivided loyalty and prohibited Barley Snyder from engaging in conflicts of interest. A breach of such duty is actionable. However, I conclude that Barley Snyder neither breached its duty of loyalty to Weaver Nut Company nor engaged in any other conflict of interest.
In addition, regarding the two other claims contained in Count I, aiding and abetting breach of a fiduciary duty brought by Reis and Katz individually, and aiding and abetting breach of a fiduciary duty brought by Reis and Katz as assignees of the Company, I conclude that E. Paul Weaver, III, as President of Weaver Nut Company owed fiduciary duties to Mr. Reis, Mr. Katz and the Company, which he breached.
However, I conclude that plaintiffs failed to prove by a preponderance of the evidence that Barley Snyder either had knowledge of the breach by Mr. Weaver, or provided substantial assistance or encouragement to Mr. Weaver. Rather, I conclude that based upon the information provided to Barley Snyder, the firm acted both legally, ethically, and in good faith, concerning both of its clients (the Weavers and the Company).
Regarding Count II alleging professional negligence against Barley Snyder, brought by Reis and Katz as assignees of the Company, I conclude that plaintiffs have failed to establish by a preponderance of the evidence that Barley Snyder failed to exercise the ordinary skill and knowledge that attorneys are required to utilize or that there are any damages owing to the Company as a result of the actions of Barley Snyder.
Regarding Count IV alleging tortious interference with contractual relations against Barley Snyder, brought by Reis and Katz as assignees of the Company, I conclude that a contract existed, but defendant did not take purposeful action specifically intended to harm the existing relation because the law firm was the agent of the Company. Moreover, I conclude that there was either privilege, legal justification, or both, for the actions taken by defendant. Also, I conclude that plaintiffs have failed to establish damages on count IV by a preponderance of the evidence.
Finally, Count VI alleges breach of contract for the professional services rendered to Weaver Nut Company, brought by plaintiffs Reis and Katz in their capacity as assignees of the rights of the Company. I conclude that there was a contract between the Company and Barley Snyder for legal services, but that the contract was not breached by Barley Snyder. Moreover, plaintiffs have failed to establish by a preponderance of the evidence that the Company suffered any damages under the contract.
On April 10, 2005 plaintiffs Reis and Katz, on their own behalf and as assignees of Weaver Nut Company, Inc., filed their initial Complaint in this matter. The original Complaint alleged the five following causes of action: breach of fiduciary duty (Count I); professional negligence (Count II); abuse of process (Count III); interference with a contractual relationship (Count IV); and conversion (Count V).
On June 23, 2005 defendant filed its initial motion to dismiss. On July 7, 2005 plaintiffs responded, which included a request to amend the Complaint. My Order dated March 17, 2006 and filed March 20, 2006 granted plaintiffs' request.
On April 12, 2006 plaintiffs filed their Amended Complaint. The Amended Complaint contains the original five causes of action and an additional cause of action for breach of contract (Count VI). On May 2, 2006 defendants filed their second motion to dismiss. On May 19, 2006 plaintiffs responded. Oral argument was conducted before me on November 28, 2006. The matter was taken under advisement at the conclusion of oral argument on November 28, 2006.
By my Order and Opinion dated March 30, 2007 I granted in part and denied in part defendant's motion to dismiss plaintiffs' Amended Complaint.
Specifically, for reasons articulated in the Opinion, I granted defendant's motion to dismiss that portion of Count I of plaintiffs' Amended Complaint brought by plaintiffs Reis and Katz, in their individual capacities, alleging a breach of fiduciary duty by defendant law firm.
Also, I granted defendant's motion to dismiss that portion of Count II alleging a claim of professional negligence against defendant Barley Snyder, brought by plaintiffs Reis and Katz, individually.
I granted defendant's motion to dismiss Count III of plaintiffs' Amended Complaint alleging a cause of action against defendant for abuse of process brought by plaintiffs Reis and Katz in their individual capacities.
Moreover, I granted defendant's motion and dismissed from Count IV of the Amended Complaint the claims of Reis and Katz, individually, alleging tortious interference with contractual relations by defendant.
Finally, I granted defendant's motion to dismiss Count V of plaintiffs' Amended Complaint alleging a cause of action against Barley Snyder for conversion brought by plaintiffs Reis and Katz in their individual capacities.
The claims which remain are those set forth in the second paragraph of this Adjudication.
By Memorandum and Order dated March 28, 2008, and for the reasons expressed in the Memorandum, I granted the Motion of Defendant, Barley Snyder, LLC, to Strike Plaintiffs' Demand for a Jury Trial, denied plaintiffs' Countermotion Pursuant to Federal Rule of Civil Procedure 39 and struck plaintiffs' Demand for Jury Trial filed June 29, 2007. Thus, this matter was tried before the court, not a jury.
By Order dated July 3, 2008 I denied defendant's motion for summary judgment because I found there were numerous genuine issues of material fact placed on the record by me on that date.
Based upon the testimony and evidence adduced at trial,*fn4 the pleadings, record papers and the parties' post-trial submissions, I make the following Findings of Fact.
1. Plaintiff Lawrence J. Katz is an individual who resides at 11 Minuteman Court, Basking Ridge, New Jersey. Mr. Katz's background is in merchant banking, investment banking and commercial finance focused on special situations or companies that are in distress or in a restructuring mode.
2. Plaintiff Michael Reis, Sr., is an individual who resides at 941 Ann Road, Naperville, Illinois. Mr. Reis' background is in accounting. However, Mr. Reis is neither a public accountant, nor a certified public accountant.
3. Defendant Barley, Snyder, Senft & Cohen LLC ("Barley Snyder") is a law firm registered as a Pennsylvania limited liability company employing licensed professionals with a business address at 126 East King Street, Lancaster, Pennsylvania.
4. Weaver Nut Company, Inc. ("Weaver Nut Company" or "Company") is a business corporation organized and existing under the laws of the Commonwealth of Pennsylvania with a principal place of business at 1925 West Main Street, Ephrata, Pennsylvania.
5. Weaver Nut Company is a distributor of candies, nuts and dried fruits in the wholesale and retail markets.
6. In the year 2000, Weaver Nut Company was owned exclusively by E. Paul Weaver, III, and Miriam J. Weaver, his wife.
7. At all times, E. Paul Weaver, III, was the President and sole director of Weaver Nut Company.
8. In 2000, Weaver Nut Company was in significant financial trouble.
9. In 2000, Weaver Nut Company was behind on its payments of its loan agreements with its lender, Allfirst Bank.
10. Weaver Nut Company had entered into multiple forbearance agreements with Allfirst Bank between 2000 and 2001.
11. In early 2001, Robert Riesner was hired by Weaver Nut Company as Chief Financial Officer to help turn the company's financial situation around.
12. By letter dated July 18, 2001, Allfirst Bank addressed a letter to Mr. Riesner as Chief Executive Officer of Weaver Nut Company.
13. Robert Riesner explored numerous options to reduce the debt of Weaver Nut Company. One option explored was to locate a firm that would acquire an interest in Weaver Nut Company, and assist the Company to pay off the outstanding loans owed to Allfirst Bank.
14. In April 2001, Mr. Reis became aware of the situation involving Weaver Nut Company through a vendor of Weaver Nut Company, Eagle Food Snacks, through Eagle's President Akram Choudhry. Mr. Reis made Mr. Katz aware of the situation regarding Weaver Nut Company.
15. Mr. Katz operates a company named Summit Private Capital Group, which is a fictitious name under which he does business.
16. Mr. Katz was interested in the opportunity involving Weaver Nut Company and proceeded to obtain information about the company, met with E. Paul Weaver, III and Robert Riesner, and ultimately proposed an agreement to Mr. Weaver, a Merchant Banking and Corporate Development Agreement between Summit Private Capital Group and Weaver Nut Company.
17. Weaver Nut Company, through its President E. Paul Weaver, III, entered into the Merchant Banking and Corporate Development Agreement with Summit Private Capital Group through Lawrence J. Katz as Executive Managing Director.
18. The Merchant Banking and Corporate Development Agreement is dated June 12, 2001. The agreement was not executed by E. Paul Weaver, III, until July 13, 2001. Michael Reis also signed the agreement as "CFO Designatee" [sic].*fn5
19. The Company passed a corporate resolution ratifying the Merchant Banking and Corporate Development Agreement.
20. Mr. Reis assumed the position of Chief Financial Officer of Weaver Nut Company pursuant to the Merchant Banking and Corporate Development Agreement.
21. Under the Merchant Banking and Corporate Development Agreement Mr. Reis and Mr. Katz (as Summit) were entitled to a total aggregate compensation amount of $200,000 ($105,000 as a "Financial Management Advisory Fee" to Mr. Reis; $75,000 as a "Financial Management Advisory Fee" to Summit and $10,000 each to Mr. Reis and Summit for expenses). In addition, Summit was entitled to a percentage commission on financing which it arranged and on strategic acquisitions in which it participated.
22. Mr. Katz and Mr. Reis each received 500 shares of common stock in Weaver Nut Company equal to a 25% stake each in the Company.*fn6
23. Under the Merchant Banking and Corporate Development Agreement Mr. Reis and Mr. Katz had authority to negotiate on behalf of the Company with various parties including creditors, customers and vendors. However, neither Mr. Reis nor Mr. Katz had the power to legally bind Weaver Nut Company whatsoever. They had the power to hire and fire employees only with Company approval.
24. After execution of the Merchant Banking and Corporate Development Agreement, a sale-lease back was negotiated with William Roberts for the building and real estate occupied by the company.
25. William Roberts is a real estate investor active in purchasing industrial and commercial properties.
26. On July 27, 2001, Mr. Roberts purchased for $1,750,000 the building and real estate owned by E. Paul Weaver, III and Miriam Weaver and occupied by Weaver Nut Company. In addition, Mr. Roberts loaned Mr. and Mrs. Weaver an additional $100,000. The proceeds of the sale of the building and real estate and additional loan was used to payoff Allfirst Bank.
27. Mr. Riesner's position at Weaver Nut Company ended when Allfirst Bank was paid off.
28. In September 2001, Michael Reis began working at Weaver Nut Company.
29. Mr. Reis would be at the company location approximately two weeks a month.
30. Mr. Katz would visit Weaver Nut Company every couple of months, or approximately six to eight times over the entire time he was involved with the Company.
31. With the assistance of Mr. Reis and Mr. Katz, Weaver Nut Company was able to negotiate a line of credit with a company named KBK Financial.
32. The financing obtained from KBK Financial provided Weaver Nut Company a line of credit in excess of $1,000,000. KBK bought Weaver Nut Company receivables on a non-recourse basis. There was a daily settlement of receivables and customers were instructed to make payments to a lock box controlled by KBK Financial.
33. The financing provided to Weaver Nut Company by KBK Financial was a non-traditional financing arrangement that was more expensive for the company than traditional bank financing.
34. The KBK financing required daily work that was very time consuming and cumbersome for Weaver Nut Company personnel.
35. Mr. Reis hired a number of new employees including Marie Wagner and Dave Fischer. Mr. Reis also hired additional salesmen to attempt to increase sales volume.
36. Marie Wagner was hired as an Office Manager with responsibilities including oversight of the accounts receivable and payable, general accounting, cash management and oversight of the staff and customer service people. Miss Wagner also dealt with the daily reports to KBK Financial. Miss Wagner reported directly to Mr. Reis, but had some contact with E. Paul Weaver, III.
37. In August or September 2002 David Fisher was hired as an inventory control manager of Weaver Nut Company. In January 2003 Mr. Fisher was promoted to general Manager. Mr. Fisher reported directly to Mr. Reis, but was also subordinate to the desires of E. Paul Weaver, III.
38. Miss Wagner and Mr. Fisher, among others, were hired by Mr. Reis to help eliminate or minimize many unsound business practices that led to Weaver Nut Company's financial problems.
39. Weaver Nut Company, through E. Paul Weaver, III, had for many years engaged in practices including below cost sales to customers, purchasing without regard to existing inventory and anticipated demand and sale of "out of date" product.
40. One of the policies instituted to control inventory was a two-signature purchase order policy. Mr. Weaver initially approved the policy, but later resisted the policy and refused to ...