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Abdelgawad v. Mangieri

United States District Court, W.D. Pennsylvania

December 22, 2017

BAHER ABDELGAWAD, Plaintiff,
v.
MARK MANGIERI, et al., Defendants.

          MEMORANDUM AND ORDER

          Cathy Bissoon United States District Judge

         Pending before the Court is Plaintiff Baher Abdelgawad's Motion for Partial Summary Judgment (Doc. 65) and Defendant Mark Mangieri's Motion for Summary Judgment (Doc. 69). For the reasons below, Plaintiff's Motion for Partial Summary Judgment will be DENIED and Defendant's Motion for Summary Judgment will be DENIED in part and GRANTED in part. Specifically, Defendant's Motion for Summary Judgment is GRANTED as to Counts I, II and III and DENIED as to Counts IV, V, VI and VII of Plaintiff's Amended Complaint. Plaintiff's Partial Motion for Summary Judgment is DENIED as to Counts II, V, VI and VII.

         BACKGROUND

         Due to the lengthy factual and procedural history in this matter, the Court will recite only those facts that are material to the Court's ruling on the pending motions for summary judgment. Plaintiff Baher Abdelgawad, a California citizen, and Defendant Mark Mangieri, a citizen of Pennsylvania, were joint shareholders of a Pennsylvania corporation formed on or about June 17, 2005, and known as Exclusive Supplements, Inc. (“ESI”). (Amended Complaint, hereafter “AC, ” at ¶¶ 2-4, 19-22, Doc. 8; Mangieri's Answer to Amended Complaint, hereafter “MAAC, ” at ¶¶ 2-4, 19-22, Doc. 37.) Plaintiff was originally a 35% minority shareholder in the company, while Defendant Mangieri was originally a 65% majority shareholder and served at all relevant times as ESI's president, a member of its board of directors and its employee. (AC at ¶¶ 4-5, 19-20; MAAC at ¶¶ 4-5, 19-20.)

         In 2012, Plaintiff filed a lawsuit against Mangieri and others claiming breaches of fiduciary duty and defamation related to Plaintiff's status as a minority shareholder of ESI. (AC Ex. 2 at p. 1.) ESI then filed a lawsuit against Plaintiff and others asserting trademark infringement and breaches of fiduciary duty. (Id.) On February 20, 2013, Plaintiff and Mangieri, along with several others, entered into two related contracts that provide the basis for the instant dispute: a Global Settlement Agreement (“GSA” AC Ex. 2, Doc. 8-2) and a Stock Purchase Agreement (“SPA” AC Ex. 1, Doc. 8-1). (AC at ¶ 41; MAAC at ¶ 41.) The purpose of the GSA and SPA was to resolve the two prior lawsuits. As part of the GSA, ESI agreed to pay Plaintiff $200, 000 in exchange for the settlement and release of Plaintiff's claims. (AC Ex. 2 at ¶ 1.1.) The GSA required Mangieri, in his personal capacity, to guaranty payment of this amount, and Mangieri contemporaneously executed a Guaranty of Payment of Debt Agreement. (Id. at ¶ 1.3; id. at p. 13.)

         Under the SPA, executed by Plaintiff, ESI, and Mangieri, Plaintiff transferred his 35% interest in ESI to Mangieri for the sum of $575, 000.00. (AC at ¶¶ 41-42, 183; MAAC at ¶¶ 41-42, 183; AC Ex. 1.) The GSA was appended to, and its terms were incorporated into, the SPA. (See AC Ex. 1, Schedule II.)

         The SPA contained provisions concerning the preparation of tax documents, access to records, notification of audits, and indemnification. (See AC Ex. 1 at ¶¶ 7.3, 8.2, 8.3.) The SPA required Mangieri's and ESI's assistance in preparing Plaintiff's tax returns. (Ex. 1, AC at ¶ 7.3.) The agreement also required Mangieri and ESI to give Plaintiff access to records relating to ESI's taxes and common stock. (Id.) Finally, the SPA contained mutual indemnification provisions, whereby Plaintiff and Mangieri indemnified each other for costs incident to a “breach of a material representation or warranty made by [the other party] in this Agreement, the collateral agreements or in any other document delivered pursuant to or in connection with this Agreement or the Collateral Agreement.” (AC at ¶ 55; MAAC at ¶ 55; AC Ex. 1 at ¶¶ 8.2, 8.3.)

         The purchase price for Plaintiffs shares of ESI, as set forth in the SPA, was based almost entirely on a valuation of the company by Dr. Peter Woodlock that ESI had commissioned at the request of Mangieri in 2012 (the “2012 Valuation”). (AC at ¶¶ 38, 40, 43; MAAC at ¶¶ 38, 40, 43.) The 2012 Valuation assigned a Fair Market Value of $534, 000 to Plaintiffs shares as of October 31, 2012, based largely upon financial information provided by Mangieri and others at ESI. (Id.) Plaintiff relied upon the information and averments in the 2012 Valuation when negotiating the sales price for his shares. (Id at ¶ 44.) He claims that Mangieri intentionally manipulated the affairs and financial reporting of ESI in order to misrepresent the value of the company, and/or negligently made misrepresentations or omissions in connection with the 2012 Valuation, such that Plaintiff was induced to sell his ownership shares at an artificially depressed price. (Id at ¶¶ 99-115, 117-28.)

         Following the execution of the GSA and the SPA, Plaintiff requested a completed Schedule K-1 Form (the “K-1”) from ESI indicating his tax liability for his ownership interest in ESI relative to the 2013 tax year. (See AC at ¶¶ 69-70; MAAC at ¶¶ 69-70.) On September 15, 2014, Mangieri and others provided Plaintiff a K-1, which was calculated based on Plaintiffs purported ownership interest in ESI as of May 14, 2013 (AC at ¶¶ 71, 130; MAAC at ¶¶ 71, 130.) Plaintiff claims that the actual closing date of the stock transfer was February 20, 2013, and therefore his basis should have been calculated as of that date. (AC at ¶¶ 45-49, 71, 131.) Plaintiff also claims that the ordinary business income allocated to him in the K-1 represented a 98% increase in his tax liability as compared to 2012, despite the fact that he was a minority shareholder of ESI for only part of the 2013 tax year. (Id. at ¶ 72.) Plaintiff contends that he attempted to verify the accuracy of the Schedule K-1 prior to his tax filing deadline but, because of a lack of cooperation, he was unable to do so. (Id. at ¶¶ 132-37.) As a result, Plaintiff claims he was forced to incur a greater tax liability than was warranted due to the inflated basis set forth in the K-1. (Id. at ¶¶ 138-39.)

         Based on the foregoing events and allegations, Plaintiff commenced this lawsuit on December 4, 2014. The operative Amended Complaint (Doc. 8) sets forth claims for fraud (Count I), negligent misrepresentation (Count II), securities fraud (Count III), declaratory relief (Count IV), and breach of contract (Counts V, VI and VII).[1] On December 11, 2015, this Court issued a Memorandum Order (Doc. 17) denying Defendants' joint motion to dismiss the Amended Complaint in all respects material to the action against Mangieri.[2] Following discovery and settlement discussions, Plaintiff filed a Partial Motion for Summary Judgment on May 22, 2017 (hereafter “Plaintiff's SJM, ” Doc. 65) moving for judgment against Mangieri as to Counts II, V, VI and VII. On the same day, Mangieri filed a Motion for Summary Judgment (hereafter “Mangieri's SJM, ” Doc. 69) moving for judgment against Plaintiff on all Counts. The parties have filed their respective briefs, statements of material facts, responses and replies (Docs. 66-67, 70-75, 77-78) and the pending motions for summary judgment are now ripe for disposition.

         ANALYSIS [3]

         1. Spoliation sanctions are inappropriate

         As the Court will discuss below, several of Plaintiff's claims depend on Mangieri's alleged misrepresentations, which, according to Plaintiff, caused the 2012 Valuation to understate the true value of Plaintiff's shares and caused the K-1 to overstate Plaintiff's tax liability for 2013. Plaintiff alleges that-due to Mangieri's delivery of digital QuickBooks files in inaccessible form, passive destruction of relevant documents during ESI's eviction, and failure to deliver requested bank statements-he has been unable to assess the accuracy of the conclusions in the 2012 Valuation and the K-1, which would be necessary for determining the existence of misrepresentations. (Plaintiff's Brief in Support of its Partial Motion for Summary Judgment, hereafter “Plaintiff's SJ Brief, ” p. 10, Doc. 66; Plaintiff's Response to Defendant Mangieri's Concise Statement of Facts, hereafter “Response to Mangieri's Facts, ” at ¶¶ 67-71, Doc. 72.) Plaintiff thus raises a spoliation argument as to a combination of paper and electronic documents. While the Court agrees with Plaintiff that Defendant has not met his obligation to produce relevant evidence, and has committed spoliation, the Court finds that no sanctions are appropriate in this case for the reasons below.

         First, the Court may presume that the missing electronic documents contain information unfavorable to Mangieri only if Mangieri acted with the intent to deprive Plaintiff of the information's use in litigation. Specifically, under Federal Rule of Civil Procedure 37(e):[4]

If electronically stored information that should have been preserved in the anticipation or conduct of litigation is lost because a party failed to take reasonable steps to preserve it, and it cannot be restored or replaced through additional discovery, the court:
(1) upon finding prejudice to another party from loss of the information, may order measures no greater than necessary to cure the prejudice; or
(2) only upon finding that the party acted with the intent to deprive another party of the information's use ...

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