Court Opinion

ID: 4245024
Source: CourtListenerOpinion
Date Created: 2018-02-14 19:22:00.870301+00
Date Added: 2024-06-11T14:43:32.052900
License: Public Domain

J-A26008-17

NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37

TIMOTHY G. LONG                               IN THE SUPERIOR COURT OF
                                                    PENNSYLVANIA
                         Appellant

                    v.

DOUGLAS K. DENLINGER AND DAVID
ISAAC LUTZ

                         Appellees                 No. 416 MDA 2017

              Appeal from the Order Entered February 17, 2017
              In the Court of Common Pleas of Franklin County
                     Civil Division at No(s): 2015-01435

BEFORE: BOWES, OLSON, AND RANSOM, JJ.

MEMORANDUM BY BOWES, J.:                      FILED FEBRUARY 14, 2018

     Timothy G. Long appeals from the February 17, 2017 order denying

his motion to deny recommendations of the receiver, and the January 6,

2016 order sustaining the preliminary objections in the nature of a demurrer

of Appellees Douglas K. Denlinger and David Isaac Lutz. We conclude that

the averments contained in Mr. Long’s amended complaint sufficiently

alleged a cause of action for breach of contract to survive a demurrer.

Accordingly, we reverse and remand for further proceedings.

     Based on a review of the record, the pertinent facts can be

summarized as follows.     In 1990, Appellant founded a financial planning

business, Keystone Financial Associates, LLC (“KFA”).         In 2002, Mr.

Denlinger joined Appellant’s business. In 2007, KFA employed Mr. Lutz, and
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in 2009, the parties agreed to make Mr. Lutz a part owner of the business

through a ten-year vested stock program garnering a one percent ownership

interest per year. In 2013, the parties agreed to divide the business, with

Appellant establishing a new company, and Mr. Denlinger and Mr. Lutz

establishing a separate one.       The parties negotiated an agreement for

splitting KFA into distinct entities, which they memorialized in a Statement of

Understanding (“SOU”) signed by the parties on October 30, 2013.

      The SOU provided the process by which the parties would dissolve KFA

and create two separate financial planning businesses. The parties agreed

that Appellant would receive 48.5% of the value of KFA in keeping with his

ownership interest. Further, this distribution would be effectuated through a

division of KFA’s client base.    Accordingly, the parties agreed to assign a

value to each client, and allocate those clients to the newly-created entities

in such a manner as to divide the company as nearly as possible to align

with the agreed-upon ownership interests. The SOU purported to provide a

value formula, which delineated base percentages and adjustments by which

the parties would evaluate client value, without further explicating the

method by which these values would be ascertained.              It provided an

adjustment period during which the parties would determine, adjust, and

allocate clients in order to fulfill the purposes of the SOU.

      Thereafter, the parties were unable to agree upon a distribution of the

entire client list.   The parties made numerous changes to this list through

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2015.     In February 2015, Appellant initiated an independent valuation of

KFA’s business. That independent analysis determined that the value of the

client base allocated to Appellant fell significantly short of the 48.5% agreed

upon in the SOU.

        Based on the foregoing, Appellant commenced this action by filing a

complaint on April 14, 2015, alleging breach of contract and calling for the

dissolution of KFA and the appointment of a receiver to aid in that endeavor.

Appellees filed preliminary objections, and in response, Appellant filed an

amended complaint on August 20, 2015. Appellees again filed preliminary

objections, and after a hearing on the matter, the court sustained Appellees’

preliminary objections in the nature of a demurrer to Appellant’s breach of

contract claim.    The trial court overruled the preliminary objections to

Appellant’s second count seeking dissolution of the partnership, but

appointed a receiver to oversee that dissolution.

        Subsequently, the receiver filed a memorandum adopting Appellees’

proposed dissolution strategy, declined to provide an independent valuation

of KFA’s business, and determined that the valuation had been fairly and

equitably negotiated. Appellant filed a motion to deny recommendations of

the receiver, which, after a hearing, the trial court rejected.     The court

directed the receiver to proceed with the dissolution as set forth in the

previously filed memorandum. Appellant filed a timely notice of appeal and

complied with the court’s order to file a Rule 1925(b) concise statement of

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errors complained of on appeal.       The court authored its Rule 1925(a)

opinion, and this matter is now ready for our review.

      Appellant raises two questions for our consideration:

      I. Did the trial court commit reversible error in sustaining a
         demurrer on the grounds that the complaint seeks damages
         based on an independent valuation of the involved company?

      II. Did the trial court err in approving the receiver’s report
          without requiring the receiver to value the partnership assets
          as part of the dissolution process?

Appellant’s brief at 6.

      Appellant’s first issue challenges the court’s order sustaining Appellees’

preliminary objections in the nature of a demurrer to his claim that Appellees

breached the SOU. We are guided by the following principles:

      Preliminary objections in the nature of a demurrer test the legal
      sufficiency of the complaint.       When considering preliminary
      objections, all material facts set forth in the challenged pleadings
      are admitted as true, as well as all inferences reasonably
      deducible therefrom.      Preliminary objections which seek the
      dismissal of a cause of action should be sustained only in cases
      in which it is clear and free from doubt that the pleader will be
      unable to prove facts legally sufficient to establish the right to
      relief. If any doubt exists as to whether a demurrer should be
      sustained, it should be resolved in favor of overruling the
      preliminary objections.

Gross v. Nova Chemicals Services, Inc., 161 A.3d 257, 261 (Pa.Super.

2017) (citation omitted). In order to sufficiently plead a count of breach of

contract, Appellant must set forth facts that establish: (1) the existence of a

contract, including its essential terms; (2) a breach of the contract; and, (3)

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resultant damages.    McCabe v. Marywood University, 166 A.3d 1257,

1262 (Pa.Super. 2017).

      In sustaining Appellees’ preliminary objections in the nature of a

demurrer, the trial court noted that the only claim at issue was whether

Appellees had breached the requirements of the SOU. In this vein, the trial

court determined that, since the terms of the agreement controlled over any

allegations levied in the complaint, the independent valuation that Appellant

relied upon to prove that Appellees owed him damages for failing to provide

him clients with a value equal to a 48.5% share of KFA was irrelevant.

Rather, the court reasoned, the valuation procedure contained within the

SOU controlled, and the agreement did not otherwise provide for an outside

valuation. As such, the court concluded that Appellant could not rely upon

an independent valuation to prove that Appellees had improperly valued

KFA’s client base.    Thus, it dismissed Appellant’s claim for breach of

contract.

      Appellant assails this reasoning, contending that the trial court erred in

finding that the outside valuation could not be employed to prove Appellees

breached the SOU.      He maintains that, despite the supposed valuation

process contained within the SOU, Appellees allotted him a lower percentage

of business than contemplated by the agreement.             Appellant asserts,

“[w]hile the court may be correct that the contract established a method for

the parties to attempt a fair division of clients, the contract contains no

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language which makes that process unassailable by a court.”         Appellant’s

brief at 15. He concludes that, although the process was intended to guide

the division of the business, where that process “results in an injustice, [he]

must be allowed to prove that injustice with the help of some outside

source.” Id. at 16.

      Upon review of the certified record, when considering all the material

facts set forth in Appellant’s amended complaint as true, we find that

Appellant averred sufficient allegations to support a claim that Appellees

breached the SOU. Significantly, Appellant alleged the following:

      19. As determined by an independent firm who valued the book
      of business retained by [Appellees] and the book of business
      given to [Appellant], [Appellant’s] book of business fell far short
      of being 48.5% of the value of the company.

      20. Pursuant to said valuation, which is attached hereto as
      Exhibit D, [Appellant] is entitled to an adjusted value of
      $1,089,795.00.

      21. According to the valuation, the clients [Appellant] received
      did not provide him with that value.

      22. Despite demand, [Appellees] have failed and refused to
      compensate [Appellant] for the adjusted amount due to him as
      required by the [SOU].

Amended Complaint, 8/20/15, at ¶¶ 19-22. With regard to the process of

dividing the client base, the SOU states, in pertinent part:

      2.   Process for dividing the client base between the new
           companies:

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                        a. Develop a list of all accounts and polices and assign a
                           value to each. Values and new company assignments
                           have been completed effective August 1, 2013.

                                        ....

                        c.   Adjustments to assignment will be updated to reflect
                             client decisions as soon as possible so that the
                             partners can monitor how the splits are impacted by
                             client decisions.     Efforts will be made to make
                             adjustments to make the resulting splits to be as close
                             as possible to the split targets as possible.

                             i.       Through client assignments

                             ii.      Through monetary                payment     if    needed     (see
                                      payment terms)

                             iii.     Value formula for all existing client accounts and
                                      policies:  Note:   The below values represent
                                      “Base” Percentages.

             Advisory Mutual Funds    VA    Fixed Annuity    Direct     LTC      Life    Health    Medicare    Disability

multiplier     1.76%          0.44% 0.44%          0.22%      0.86% $ 100.00    $ 25.00 $ 125.00    $ 125.00      $ 85.00

                              [iv.]    There are adjustments to the calculations (ie.
                                       Fee breakpoints, H&M relationship, personal
                                       accounts, etc.) Client/account specific multiplier
                                       adjustments are listed in columns AN titled
                                       “Adjustments for the amount of the fee we get”
                                       and AO titled “advisor % fee be charged to
                                       account”    See Below: [providing chart with
                                       further adjustments].

        Statement of Understanding, 10/30/13, at ¶ 2.

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      Finally, the independent valuation described and relied upon the

“Market Approach” in arriving at its assessment of the value of Appellant’s

portion of the KFA business. Valuation Analysis and Estimate, 2/10/15, at 5.

Although the SOU noted that the client base had been valued as of August 1,

2013, and outlined some metrics and adjustments upon which this value was

determined, it did not specifically define the methodology by which that

valuation was done.     In this regard, the trial court made the following

observation:

      This Court is unable to ascertain whether the two valuations (one
      by KFA and one by the independent firm) were obtained using
      the same method. If the Independent Valuation is returning a
      different value than KFA’s own while using the same process,
      then there is [a] potential cause of action for breach of contract
      based on fraud.

Trial Court Opinion, 1/6/16, at 5 n.2.         Inexplicably, the court

continued:

      However, that does not appear to be the case here. There is no
      description, in the [SOU] . . . as to the exact process that is to
      be used to value the clients. However, there is discussion of the
      method of valuation within the Independent Valuation[.]

Id. It is not clear from this footnote what conclusion the trial court invited

the reader to draw from this line of reasoning.    However, on our reading,

this observation clearly indicates that preliminary objections in the nature of

a demurrer were improperly sustained in this case.

      It is beyond doubt that Appellant has averred a disparity between the

valuation promised by the SOU, and that delivered by Appellees.            It is

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irrelevant at this early stage of litigation that this evidence was obtained by

a process potentially outside the four-corners of the contract, since the SOU

does not specifically set forth the mechanism for valuing each client.

Indeed, at this stage, we cannot fathom the means by which a party could

assail Appellees’ valuation without the aid of an independent source.       As

such, material questions of fact remain that preclude us from concluding

that, at this juncture, it is clear and free from doubt that Appellant will be

unable to prove facts legally sufficient to establish that Appellees breached

the SOU.   Thus, we find that, based on the disparity between the values

arrived at by the parties herein, when considered in light of the questions of

material fact that cannot be determined on the record before us, the trial

court erred in sustaining Appellees’ preliminary objections as to Appellant’s

breach of contract claim.

      Simply, when viewing the allegations contained in the amended

complaint as true, Appellant has alleged the existence of a contract, the

SOU, a breach of that contract, i.e., the allocation of clients which do not

satisfy a 48.5% of Appellant’s ownership interest, and damages induced

thereby, valued at the difference between the portfolio transferred to

Appellant’s new business and the outstanding value purportedly owed.

Hence, we reverse the trial court’s ruling, and remand for further

proceedings consistent with this disposition.

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     Appellant’s second claimed error challenges the receiver’s failure to

independently assess the value of KFA’s business before authoring its

memorandum outlining the procedure to finalize the dissolution of KFA.

Based on our disposition above, Appellant will have the opportunity to

gather and introduce evidence of that value in future proceedings.   Since

Appellant presented his second issue as an alternate mechanism by which to

determine the value of the business transferred to his new company, we

need not reach it here.

     Order sustaining preliminary objections in the nature of a demurrer

reversed. Case remanded. Jurisdiction relinquished.

Judgment Entered.

Joseph D. Seletyn, Esq.
Prothonotary

Date: 2/14/2018

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