Court Opinion

ID: 4160213
Source: CourtListenerOpinion
Date Created: 2017-04-13 19:13:36.566113+00
Date Added: 2024-06-11T14:24:08.835792
License: Public Domain

J-A17023-16

NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37

FRED POTOK, INDIVIDUALLY AND AS             IN THE SUPERIOR COURT OF
TRUSTEE OF THE FLOORGRAPHICS,                     PENNSYLVANIA
INC., MINORITY SHAREHOLDER TRUST

                 v.

RICHARD G. REBH, RICHARD REBH,
ELIZABETH REBH, EXECUTOR OF THE
ESTATE OF GEORGE L. REBH,
DECEASED, MICHAEL DEVLIN AND YVES
ANIDJAR, NEWS AMERICA MARKETING
IN-STORE SERVICES, LLC, NEWS
AMERICA IN-STORE LLC, NEWS
AMERICA MARKETING IN-STORE
SERVICES, INC.

APPEAL OF: RICHARD G. REBH,
ELIZABETH REBH, EXECUTOR OF THE
ESTATE OF GEORGE L. REBH,
DECEASED, MICHAEL DEVLIN AND YVES
ANIDJAR
                                                 No. 444 EDA 2015

             Appeal from the Order Entered January 5, 2015
          In the Court of Common Pleas of Philadelphia County
                   Civil Division at No(s): 090303768

                                   *****

FRED POTOK, INDIVIDUALLY AND AS             IN THE SUPERIOR COURT OF
TRUSTEE OF THE FLOORGRAPHICS,                     PENNSYLVANIA
INC., MINORITY SHAREHOLDER TRUST

                      Appellants

                 v.

RICHARD REBH, ELIZABETH REBH,
EXECUTOR OF THE ESTATE OF GEORGE
L. REBH, DECEASED, MICHAEL DEVLIN
J-A17023-16

AND YVES ANIDJAR, NEWS AMERICA
MARKETING IN-STORE SERVICES, LLC,
NEWS AMERICA IN-STORE LLC, NEWS
AMERICA MARKETING IN-STORE
SERVICES, INC.

                            Appellees                  No. 647 EDA 2015

                   Appeal from the Judgment January 21, 2015
              In the Court of Common Pleas of Philadelphia County
              Civil Division at No(s): March Term, 2009 No. 03768

BEFORE: GANTMAN, P.J., LAZARUS, J., and PLATT, J.*

MEMORANDUM BY LAZARUS, J.:                             FILED APRIL 13, 2017

        Fred Potok, individually and as Trustee of the Floorgraphics, Inc.,

Minority Shareholder Trust (“Potok”), appeals from the judgment entered in

the Court of Common Pleas of Philadelphia County, regarding Potok’s action

against Appellees News America Marketing In-Store Services, LLC, News

America In-Store LLC, and News America Marketing In-Store Services, Inc.

(“News America”) for breach of fiduciary duties.      Upon careful review, we

affirm.

        The following facts have been gleaned from the trial court’s findings of

fact, dated September 16, 2014. Potok is the founder of Floorgraphics, Inc.

(“FGI”), which was in the business of facilitating in-store advertising and

____________________________________________

*
    Retired Senior Judge assigned to the Superior Court.

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marketing.1 Potok was a former officer and director of FGI and is currently a

minority shareholder.        He is also the trustee of the Floorgraphics, Inc.,

Minority Trust, which was established to hold shares of FGI common stock

for the benefit of certain FGI minority shareholders.      Potok ran FGI from

1994 through 1997.          In 1998, FGI secured $5 million in financing from

Interlaken Capital, Inc.         As a condition of its investment, Interlaken

required that Richard Rebh, who had joined FGI as a consultant in 1997 and

became a full-time employee in 1998, become FGI’s CEO. FGI subsequently

experienced dramatic growth, with yearly revenues peaking at $70 million in

2004.     After Richard Rebh became CEO, Potok’s role with FGI became

limited; his employment was terminated in August 2006 and he was

removed as a director in July 2007.

        George Rebh was FGI’s executive vice president, secretary, treasurer,

a director, and a shareholder. Yves Anidjar is the CFO and a shareholder of

FGI. Mike Devlin is FGI’s senior vice president and a shareholder. Together,

the Rebhs, Anidjar and Devlin (collectively, “Individual Defendants”) own the

majority of FGI’s stock.

        News America is also involved in the in-store advertising business.

Beginning in 2000, News America became a fierce competitor of FGI, luring

____________________________________________

1
  In essence, FGI acted as a middle-man between retailers and consumer
packaged goods manufacturers who pay to advertise their products in retail
establishments.

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away FGI personnel and retailer accounts.      In order to lure FGI’s retailers

away, News America made huge guarantees for which it paid above market

price. Competition from News America eventually resulted in sharp declines

in revenue for FGI.

      In 2004, FGI initiated litigation against News America in federal district

court in New Jersey over News America’s competitive tactics.        Both sides

were represented by sophisticated counsel and prosecuted the matter

vigorously. Prior to trial, both the court and its own attorneys encouraged

FGI to settle. FGI made an initial demand of approximately $65 million in

October 2008; News America countered with an offer of $5 million. Shortly

before trial, FGI proposed a stock sale of FGI to News America, which

rejected the stock sale and proposed an asset sale.          However, by the

beginning of trial in March 2009, News America had withdrawn all its prior

settlement offers.

      Once trial in the New Jersey matter began, it was apparent to George

Rebh and FGI’s counsel that things were not going well for FGI.         On the

advice of counsel, FGI began negotiating a transaction with News America.

On March 6, 2009, the parties agreed to an asset purchase for $29.5 million.

News America insisted on the following components to the agreement: (1)

that the transaction take the form of an asset sale; (2) that FGI and News

America execute a mutual release; (3) that none of the proceeds be

allocated to settlement of the New Jersey litigation; (4) that FGI execute a

non-compete agreement; and (5) that the Rebhs, Anidjar and Devlin enter

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into personal agreements with News America, including a seven-year non-

compete agreement, personal releases and one-year consulting agreements.

      Richard Rebh made a preliminary allocation of the $29.5 million as

follows: (1) $13 million to FGI for assets and inventory; (2) $12 million to

the purchase of the Individual Defendants’ goodwill; (3) $4.452 million to

non-compete agreements with the Individual Defendants; and (4) $48,000

to consulting agreements with the Individual Defendants.      News America,

however, required that FGI obtain a “true-up” of the preliminary allocation

from a nationally recognized valuation appraiser acceptable to News

America.   FGI obtained the services of Ladenburg Thalmann & Co., Inc.,

which had not previously provided services to either FGI or News America.

Ladenburg prepared its appraisal based solely on information provided to it

by FGI and submitted a final allocation dividing the proceeds as follows: (1)

$9.614 million to FGI for assets and inventory; (2) $17.086 million to the

purchase of the Individual Defendants’ goodwill; (3) $3.081 million to non-

compete agreements with the Individual Defendants; and (4) $48,000 to

consulting agreements with the Individual Defendants.        Ultimately, Rebh

decided to proceed with the original allocation, which allotted more of the

proceeds to FGI. The money allocated to FGI was retained for reinvestment

in other ventures rather than distributed to shareholders.

      On March 23, 2009, Potok, individually and on behalf of other minority

shareholders, filed the instant suit in equity, in which he alleged claims of

breach of fiduciary duties by the Individual Defendants, aiding and abetting

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the Individual Defendants in their breach of fiduciary duties by News

America, and conspiracy to breach fiduciary duties by the Individual

Defendants and News America.

      Following the completion of discovery, both the Individual Defendants

and News America filed for summary judgment. By order of March 5, 2012,

the trial court granted News America’s summary judgment motion and

entered judgment in favor of News America.           The court granted the

Individual Defendants’ motion in part, precluding Potok from attempting to

prove at trial that the New Jersey litigation could have been resolved for

more than $29.5 million. The rest of the Individual Defendants’ motion was

denied, and the remaining parties proceeded to trial.

      After the Individual Defendants and Potok submitted their proposed

findings of fact and conclusions of law, the trial court issued its Findings of

Fact, Conclusions of Law and Opinion on September 16, 2014, in which it

concluded as follows: (1) the overall purchase price of $29.5 million was

reasonable under the circumstances; (2) the allocations to the Individual

Defendants for the non-compete agreements and consulting services were

reasonable; (3) the valuation of the retailer contracts was reasonable; and

(4) the allocation of $12 million to “personal goodwill” was improper, both

economically and legally. See Trial Court Opinion, 9/16/14, at 28-29.      The

court concluded that the Individual Defendants were unjustly enriched and,

as such, had breached their fiduciary duties.    Id. at 61.   Accordingly, the

court ordered the Individual Defendants to pay the $12 million originally

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allocated to “personal goodwill” to FGI (rather than directly to its

shareholders), as such a remedy “negate[d] the need for a further hearing.”

Id. at 62.

       The parties filed post-trial motions, in response to which the trial court

issued an order modifying and clarifying its September 16, 2014 order.2

Judgment was entered on January 21, 2015 by praecipe.               Potok and the

Individual Defendants filed cross-appeals to this Court.

       This Court held oral argument on June 29, 2016. Subsequent thereto,

on October 31, 2016, Potok and the Individual Defendants filed a joint

application for a partial stay, in which they stated that they had engaged in

negotiations and made substantial progress toward a settlement.              As a

result, this Court granted a stay.             Potok and the Individual Defendants

eventually reached an agreement, which rendered moot the appellate claims

raised by Potok and the Individual Defendants with respect to each other.

Accordingly, the only claim remaining for us to resolve is Potok’s assertion
____________________________________________

2
  The court’s order was modified to require that the Individual Defendants
only be required to disgorge the net proceeds they received for “personal
goodwill,” after deduction of counsel fees, escrow fees and amounts held in
escrow, rather than the gross amount attributable to each Individual
Defendant as listed in the original order. The court also clarified, with
respect to its verdict on Count IV (breach of fiduciary duty), that Individual
Defendant Michael Devlin was not an officer of the company and, therefore,
could not be held liable on that count. The court further changed its ruling
on Count V (conspiracy) to find that the Individual Defendants did conspire
with each other to breach (or in the case of Devlin, to aid and abet in the
breaching of) their fiduciary duties.     Finally, the court assessed pre-
judgment interest at a rate of 3.25%.

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that the trial court erred as a matter of law in granting summary judgment

in favor of News America “based on the [c]ourt’s erroneous finding that

there was no evidence that News America had any knowledge of any breach

of fiduciary duty by the Individual Defendants[.]” Potok’s Brief, at 7.

      We review the grant of summary judgment using the following scope

and standard of review:

      Our scope of review is plenary, and our standard of review is the
      same as that applied by the trial court. Our Supreme Court has
      stated the applicable standard of review as follows: An appellate
      court may reverse the entry of a summary judgment only where
      it finds that the lower court erred in concluding that the matter
      presented no genuine issue as to any material fact and that . . .
      the moving party was entitled to a judgment as a matter of law.
      In making this assessment, we view the record in the light most
      favorable to the non-moving party, and all doubts as to the
      existence of a genuine issue of material fact must be resolved
      against the moving party.        As our inquiry involves solely
      questions of law, our review is de novo.

      Thus, our responsibility as an appellate court is to determine
      whether the record . . . contains insufficient evidence of facts to
      make out a prima facie cause of action, such that there is no
      issue to be decided by the fact-finder. If there is evidence that
      would allow a fact-finder to render a verdict in favor of the non-
      moving party, then summary judgment should be denied.

Reinoso v. Heritage Warminster SPE LLC, 108 A.3d 80, 84 (Pa. Super.

2015) (citations and brackets omitted).

      Pursuant to the Rules of Civil Procedure, summary judgment may be

granted if, “after the completion of discovery . . . an adverse party who will

bear the burden of proof at trial has failed to produce evidence of facts

essential to the cause of action[.]” Pa.R.C.P. 1035.2(2).     “Parties seeking

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to avoid the entry of summary judgment against them may not rest upon

averments contained in their pleadings; rather, they are required to show,

by depositions, answers to interrogatories, admissions or affidavits that

there is a genuine issue for trial[.]” Overly v. Kass, 554 A.2d 970, 972 (Pa.

Super. 1989). Summary judgment is proper when the plaintiff has failed to

establish an element necessary to its case. Eckenrod v. GAF Corp., 544
A.2d 50, 52 (Pa. Super. 1988). “Whether direct or circumstantial evidence is

relied upon, our inquiry, under a motion for summary judgment, must be

whether plaintiff has pointed to sufficient material facts in the record to

indicate that there is a genuine issue of material fact[.]” Id. at 53.

       In order to establish News America’s liability for aiding and abetting

the Individual Defendants’ breach of fiduciary duty, Potok was required to

prove the following: (1) a breach of a fiduciary duty owed to another; (2)

knowledge of the breach by the aider and abettor; and (3) substantial

assistance or encouragement by the aider and abettor in effecting that

breach. Koken v. Steinberg, 825 A.2d 723, 732 (Pa. Cmwlth. 2003), citing

Thompson v. Glenmede Trust Co., 1993 WL 197031 at 7 (E.D. Pa.

1993).3     The second element requires actual knowledge of the breach.

____________________________________________

3
  To date, the Commonwealth Court is the highest appellate court which has
recognized aiding and abetting a breach of fiduciary duty as a cause of
action in this Commonwealth.     See Official Comm. of Unsecured
Creditors of Allegheny Health Educ. & Research Found. v.
PriceWaterhouseCoopers, LLP, 989 A.2d 313, 327 n.14 (Pa. 2010). The
(Footnote Continued Next Page)

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Mitchell Partners, L.P. v. Irex Corp., 2010 WL 3825719, at *9 (E.D. Pa.

2010), rev'd in part on other grounds, 656 F.3d 201 (3d Cir. 2011) (noting

Commonwealth Court decision in Koken and predicting Pennsylvania

Supreme Court would recognize cause of action for aiding and abetting

breach of fiduciary duty).

      In granting summary judgment, the trial court concluded that Potok

failed to present evidence that News America was aware of any breach by

the Individual Defendants of their fiduciary duties to FGI and/or the minority

shareholders. The court noted:

      [T]here is no evidence News America knew the allocation of the
      $29.5 million was improper. Instead, the evidence shows the
      [Individual Defendants] provided News America with an allegedly
      independent appraiser’s report showing FGI’s assets were worth
                       _______________________
(Footnote Continued)

cause of action is grounded in section 876 of the Restatement (Second) of
Torts, which provides as follows:

      § 876 Persons Acting in Concert

      For harm resulting to a third person from the tortious conduct of
      another, one is subject to liability if he

      (a) does a tortious act in concert with the other or pursuant to a
      common design with him, or

      (b) knows that the other’s conduct constitutes a breach of duty
      and gives substantial assistance or encouragement to the other
      so to conduct himself, or

      (c) gives substantial assistance to the other in accomplishing a
      tortious result and his own conduct, separately considered,
      constitutes a breach of duty to the third person.

Restatement (Second) of Torts § 876.

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      less than the $13 million News America paid for them. The
      evidence also shows News America made its own independent
      business decision not to allocate any of the $29.5 million to
      settlement of the [New Jersey] lawsuit.

Trial Court Opinion, 3/6/12, at 6-7. The court further declined to impose a

duty on News America to conduct its own investigation to determine the

fairness of the Individual Shareholders’ proposed allocation. Consequently,

having concluded that Potok could not prevail against News America as a

matter of law, the court granted summary judgment in favor of News

America and dismissed Potok’s claim against it.

      Potok argues that, because his claims against News America turned on

a question of the state of mind of News America – i.e., whether it knew that

the Individual Defendants were breaching their fiduciary duty to FGI –

summary judgment was inappropriate.          Citing Nanty-Glo v. American

Surety Company, 163 A. 523 (Pa. 1932), Potok argues that testimonial

evidence may not be the only basis upon which summary judgment is

entered and that “[t]his case is replete with circumstantial evidence –

including the improper self-dealing inherent in the terms of the transaction –

that supports a compelling inference that News America knew that the

Individual Defendants were” in breach of their fiduciary duties when they

entered into the transaction.   Potok’s Brief, at 25.   Potok asserts that the

structure of the transaction itself is “compelling evidence” that News America

was aware of the Individual Defendants’ fiduciary breach. He characterizes

the transaction as an “illicit quid pro quo” in which News America essentially

bribed the Individual Defendants to agree not to allocate any funds to the

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settlement of the New Jersey litigation – thus allowing News America to

escape exposure to significant damages – by agreeing to an allocation that

disproportionately benefited the Individual Defendants.

      In response, News America asserts that Potok is unable to cite to any

record evidence to support his claim that News America was aware of, and

participated in, the Individual Defendants’ breach. It claims that summary

judgment was proper, as “a jury may not be permitted to reach its verdict

on the basis of speculation or conjecture.”      News America Brief, at 26,

quoting InfoSage, Inc. v. Mellon Ventures, L.P., 896 A.2d 606, 626 (Pa.

Super. 2006). With respect to Nanty-Glo, News America asserts that not

only did it rely on both testimonial and documentary evidence in its

summary judgment motion, but Potok also failed to present any affirmative

evidence in support of his own claim. Finally, News America argues that the

structure of the transaction does not lend itself to an inference that News

America knew the Individual Defendants were in breach of their fiduciary

duties.   To the contrary, News America asserts that it “had legitimate

business reasons for entering into the asset purchase transaction – namely,

to acquire the contracts of its market competitor and non-compete

restrictions on its direct competitor’s principals – and the transaction,

properly, furthered that interest.” News America’s Brief, at 35-36.

      We agree with News America and the trial court that Potok has

produced no evidence to prove that News America had actual knowledge

that the Individual Defendants were in breach of their fiduciary obligations to

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FGI or its minority shareholders and, thus, would be unable to prevail at

trial.

         When a motion for summary judgment is based on insufficient
         evidence to support the factual basis for the cause of action or
         defense, the non-moving party must come forward with
         sufficient evidence essential to preserve the cause of action. The
         evidence adduced by the non-moving party must be of such a
         quality that a jury could return a favorable verdict to the non-
         moving party on the issue or issues challenged by a summary
         judgment request. As our Supreme Court has observed:

           Allowing non-moving parties to avoid summary judgment
           where they have no evidence to support an issue on which
           they bear the burden of proof runs contrary to the spirit of
           [Pennsylvania Rules of Civil Procedure 1035.1-.5]. We
           have stated that the “mission of the summary judgment
           procedure is to pierce the pleadings and to assess the
           proof in order to see whether there is a genuine need for a
           trial.”   We have a summary judgment rule in this
           Commonwealth in order to dispense with a trial of a case
           (or, in some matters, issues in a case) where the party
           lacks the beginnings of evidence to establish or contest a
           material issue. . . . Forcing parties to go to trial on a
           meritless claim under the guise of effectuating the
           summary judgment rule is a perversion of that rule.

                                       ***

           Thus, we hold that a non-moving party must adduce
           sufficient evidence on an issue essential to his case and on
           which he bears the burden of proof such that a jury could
           return a verdict in his favor.

InfoSAGE, Inc. v. Mellon Ventures, L.P., 896 A.2d 616, 625–26 (Pa.

Super. 2006), quoting Ertel v. Patriot-News Co., 674 A.2d 1038, 1042

(Pa. 1996) (internal citation omitted).

         Potok argues that the case is replete with circumstantial evidence in

the form of inferences to be drawn from (1) the structure of the transaction

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itself and (2) News America’s demand for indemnification from FGI.

However, a distinction must be made between evidence-based inference, on

the one hand, and speculation and conjecture, on the other.           Here, Potok

can point to no evidence to support its allegation of an “illicit quid pro quo”

between News America and the Individual Defendants. He likewise produced

no evidence of collusion between the parties. While he attributes nefarious

motives to News America’s demand that no funds be allocated to the

settlement of the New Jersey litigation, he can point to no evidence –

beyond mere speculation – that News America’s demand was anything but

self-interested.   Indeed, the evidence of record demonstrates that News

America’s requirements for the transaction were, fundamentally, three-fold:

(1) to eliminate its main competitor via asset (rather than stock) purchase;

(2) to allocate no proceeds to settlement of the New Jersey litigation; and

(3) to ensure that the final allocation of the proceeds was objectively

reasonable.   News America was indifferent regarding the manner in which

the   Individual   Defendants   chose   to   allot   the   proceeds   as   amongst

themselves and FGI, so long as the allocation was objectively reasonable as

determined by an independent appraiser.

      The cases Potok relies upon are inapt. Potok cites Crescent/Mach I

Partners, L.P. v. Turner, 846 A.2d 963 (Del. Ch. 2000), for the proposition

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that “[a] court should4 ‘infer a non-fiduciary’s knowing participation [when] a

fiduciary breaches its duty in an inherently wrong manner, and the plaintiff

alleges specific facts from which that court could reasonably infer knowledge

of the breach.’”     Potok’s Brief, at 28, quoting Crescent, 846 A.2d at 990

(emphasis in Crescent). Similarly, in In re USACafes, 600 A.2d 43 (Del.

Ch. 1991), the court “inferred that a purchaser knowingly induced the

sellers’ fiduciaries to breach their duties [where] the personal consideration

offered to them represented a significant percentage of the total transaction

value.” Potok’s Brief, at 28. However, both of these cases were decided in

the preliminary stages on motions to dismiss. Thus, they do not speak to

the issue before this Court, which is the quantum of evidence necessary to

survive summary judgment.             Finally, Potok relies on In re Del Monte

Foods Co. Shareholder Litig., 25 A.3d 813 (Del. Ch. 2011), for the

proposition that an acquirer “may not knowingly participate in the target

board’s breach of fiduciary duty by extracting terms which require the

opposite party to prefer its interests at the expense of its shareholders.” Id.

at 837.    Here, however, there is no evidence to show that News America

“extracted” any terms from the Individual Defendants that “required” them

to prefer their own interests over those of Potok and the minority

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4
  In his brief, Potok inserts the imperative “should” before the excerpt from
the Crescent court’s opinion. The court used the permissive “may.”

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shareholders, including not allocating any money to the settlement of the

New Jersey lawsuit.

      Finally, we note that the trial court’s dismissal on summary judgment

did not violate Nanty-Glo. Indeed, the trial court’s decision rested largely

on the independent appraiser’s report, which News America itself had

required as a condition of the transaction based on tax considerations. The

court noted that the appraiser’s allocation was, in fact, more favorable to the

Individual Defendants, yet the Individual Defendants opted to use the initial

allocation, which was more advantageous to Potok and the minority

shareholders.   This scenario does not support an inference that News

America knew that the allocation constituted a breach of duty by the

Individual Defendants; in fact, it suggests the opposite.

      In sum, Potok has failed to produce evidence that would allow a jury

to find that News America knowingly participated in the Individual

Defendants’ breach of their fiduciary duties. Reinoso, supra. Accordingly

the trial court properly entered summary judgment in favor of News

America.

      Order affirmed.

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Judgment Entered.

Joseph D. Seletyn, Esq.
Prothonotary

Date: 4/13/2017

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