Court Opinion

ID: 2755252
Source: CourtListenerOpinion
Date Created: 2014-11-25 21:06:26.082364+00
Date Added: 2024-06-11T11:26:32.672173
License: Public Domain

J-S66002-14

NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37

DELIA MCCOY-MCMAHON,                          IN THE SUPERIOR COURT OF
                                                    PENNSYLVANIA
                         Appellant

                    v.

J. CARLTON GODLOVE, II, BRIAN R.
KELLY, PATRICK M. MCCOY, LEWIS J.
MCCOY, JR., AND SPOTTS, STEVENS
AND MCCOY, INC.,

                         Appellees                  No. 542 MDA 2014

              Appeal from the Order Entered February 24, 2014
               In the Court of Common Pleas of Berks County
                       Civil Division at No(s): 08-14641

BEFORE: BENDER, P.J.E., SHOGAN, J., and MUSMANNO, J.

MEMORANDUM BY BENDER, P.J.E.:                 FILED NOVEMBER 25, 2014

     Appellant, Delia McCoy-McMahon (McMahon), appeals from an order

granting summary judgment in favor of Appellees, J. Carlton Godlove II,

Brian R. Kelly, Patrick M. McCoy, Lewis J. McCoy, Jr., and Spotts, Stevens

and McCoy, Inc. (SSM), in a shareholder action initiated by McMahon against

Appellees. After careful review, we affirm.

     The trial court summarized the applicable facts as follows:

     [T]his dispute arose out of the financial and organizational
     activities of the closely-held corporation operating under the
     legal name Spotts, Stevens, & McCoy Inc., hereinafter SSM,
     which deals primarily in the business of advanced civil,
     municipal, and environmental engineering services. The primary
     actions aggrieved involve a statutory merger with another
     corporate entity, Wyomissing Holdings, Inc. (hereinafter WHI),
     and the use of corporate assets to fund bonus pools for the
     SSM's executive officers, the expenditure of corporate assets on
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     furnishings. It is important to note that this is not a case where
     the actual actions taken by SSM and its directors are at issue,
     rather it is the legal colorization of [Appellees’] actions and
     intentions which are contested. While the crux of the argument
     may seem that the dispute is purely a business issue, it is
     apparent to the Court that there is a familial dispute as well.
     While both SSM and WHI operate under the corporate
     governance structures, it is abundantly clear that both
     corporations were primarily family operated businesses. Both
     SSM and WHI are closely-held, almost exclusively by members
     of the McCoy family, of which Plaintiff, Delia McCoy-McMahon,
     and [Appellees] are a part. While [] [Appellees] served as the
     officers and directors of [SSM], and as such largely administered
     the day-to-day operations of the company, [McMahon] had
     absolutely no involvement with the operation of the company.

            [McMahon] alleges twelve counts of tortious conduct, ten
     of which are clearly stockholder derivative claims. These ten
     [c]ounts, numbered I-III and VI-XII respectively, incorporate a
     myriad of grievances ranging from breach of fiduciary duty to
     fraud. Count V is asserted as a direct claim and is based on a
     theory of breach of fiduciary duty stemming from an unlawful
     freeze-out merger. In regards to the remaining [c]ount, it is
     unclear whether [c]ount IV is assert[ing] a direct or derivative
     claim.    Regardless, [c]ount IV is essentially a duplicate of
     [c]ount V, in that the primary grievance stems from the alleged
     organized unlawful minority freeze-out merger. While the lack of
     clarity as to the theory of standing under which [c]ount IV is
     brought certainly serves to further procedurally discompose this
     case, the Court finds that a determination as to whether [c]ount
     IV is a direct or derivative is entirely ancillary, as the Court feels
     it can be aptly disposed [of] under either theory.   •

           This litigation was initiated October 31, 2008 and, through
     two distinct iterations, has been presented to multiple judges,
     both in the Berks County Court of Common Pleas and the
     Pennsylvania Superior Court[,] as well as in the U.S. District
     Court for the Eastern District of Pennsylvania. The case has
     manifested itself through two separate suits, the October 31,
     2008 [c]omplaint which is now before the Court, and a January
     5, 2009 [a]ppraisal [a]ction.       Upon the filing of the 2008
     [c]omplaint, [Appellees] attempted to remove the case to the
     U.S. District Court for the Eastern District of Pennsylvania which,
     after nearly two years of litigation, was ultimately unsuccessful.

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            During the pendency of the [f]ederal action, the
     aforementioned [a]ppraisal [a]ction was initiated in the Berks
     County Court of Common Pleas. That case was filed pursuant to
     [McMahon]’s statutory rights as a dissenting shareholder to a
     corporate merger, and solely for the purpose of determining the
     fair value of the corporation's shares at the time of the merger.
     [McMahon] petitioned this Court to delay the [a]ppraisal
     proceedings until the culmination of the initial civil action, which
     this Court denied. On appeal, the Superior Court affirmed this
     Court's decision to deny [McMahon]’s request for the delay of
     the [a]ppraisal proceedings. The [a]ppraisal action has since
     culminated. In the [a]ppraisal [a]ction's final determination, this
     Court concluded that the value assessed by [Appellees] was fair
     and adequate compensation for the divested minority shares in
     the corporation.

           Upon the [f]ederal [c]ourt[’]s remand of the initial 2008
     [c]omplaint to the Berks County Court of Common Pleas[,] the
     [p]arties proceeded to trade [p]reliminary [o]bjections and
     [a]mended [p]leadings for approximately two years. Finally, in
     late 2012 the [p]arties had filed a complete set of [p]leadings.
     From late 2012 until present[,] the parties have engaged in
     limited discovery, including document requests and the
     deposition of [McMahon]. Although the case has been pending
     for nearly six years, little discovery has actually taken place,
     particularly on [McMahon]’s part, despite the Court[’]s affording
     both parties tremendous leave to do so.

Trial Court Opinion (TCO), 6/4/14, 1 – 3.

     On February 24, 2014, the trial court entered an order granting

Appellees’ motion for summary judgment. McMahon filed a timely notice of

appeal and a timely Pa.R.A.P. 1925(b) concise statement of errors

complained of on appeal. She now presents the following questions for our

review:

     I.    Do counts IV and V of the amended complaint succeed as
           a matter of law because all “reasons” purported by
           Appellees for the freeze-out merger are mere pretext
           contrived by the Appellees to hide their/its only reason –
           to eliminate Appellant from the corporation so the

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             Appellees could continue the business for themselves/itself
             and to circumvent liability for the numerous actions taken
             and decisions made by these self-interested Appellees?

     II.     Should the Superior Court reverse the trial court’s granting
             Appellees’ motion for summary judgment related to counts
             I, II, III, IV, V, VI, VII, VIII, IX, X and XII because
             Appellant has maintained standing to assert these claims?

McMahon’s brief at 4.

     Our standard of review with regard to the granting of a motion for

summary judgment is well-settled:

     “Our scope of review of a trial court's order granting or denying
     summary judgment is plenary, and our standard of review is
     clear: the trial court's order will be reversed only where it is
     established that the court committed an error of law or abused
     its discretion.” Universal Health Services, Inc. v.
     Pennsylvania Property and Casualty Insurance Guaranty
     Assoc., 884 A.2d 889, 892 (Pa. Super. 2005) (citation omitted).

           The entry of summary judgment is proper whenever no
           genuine issue of any material fact exists as to a necessary
           element of the cause of action. The moving party's right
           to summary judgment must be clear and free from doubt.
           We examine the record, which consists of all pleadings, as
           well as any depositions, answers to interrogatories,
           admissions, affidavits, and expert reports, in a light most
           favorable to the non-moving party, and we resolve all
           doubts as to the existence of a genuine issue of material
           fact against the moving party.

     LJL Transp., Inc. v. Pilot Air Freight Corp., 599 Pa. 546, 962
     A.2d 639, 647 (Pa. 2009) (citations omitted).

Krapf v. St. Luke’s Hospital, 4 A.3d 642, 649 (Pa. Super. 2010), appeal

denied, 34 A.3d 831 (Pa. 2011).

     Moreover, our Supreme Court has stated:

     Rule 1035 also provides that “[w]hen a motion for summary
     judgment is made and supported as provided in this rule, an

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      adverse party may not rest upon the mere allegations or denials
      of his pleading, but his response, by affidavits or as otherwise
      provided in this rule, must set forth specific facts showing that
      there is a genuine issue for trial. If he does not respond,
      summary judgment, if appropriate, shall be entered against
      him.”    Pa.R.C.P. 1035(d).    Therefore, where a motion for
      summary judgment has been made and properly supported,
      parties seeking to avoid the imposition of summary judgment
      must show by specific facts in their depositions, answers to
      interrogatories, admissions or affidavits that there is a genuine
      issue for trial. See Overly v. Kass, 382 Pa. Super. 108, 554
      A.2d 970 (1989), and Tom Morello Construction Co., Inc. v.
      Bridgeport Federal Savings and Loan Assn., 280 Pa. Super.
      329, 421 A.2d 747 (1980).

Marks v. Tasman, 589 A.2d 205, 206 (Pa. 1991).

      We begin by addressing McMahon’s second argument, regarding her

standing   to   pursue   derivative   shareholder   claims   against   Appellees.

Notwithstanding McMahon’s claim that the trial court dismissed the eleven

claims she enumerates in her brief for lack of standing, it appears that the

trial court instead dismissed ten claims on this basis. These were numbered

in McMahon’s complaint as counts I, II, III, VI, VII, VIII, IX, X, XI, and XII.

In its opinion, the trial court stated it found that these claims were derivative

stockholder claims, and that counts IV and V were construable as direct

stockholder claims.

      A derivative claim is brought on behalf of a corporation; in such an

action, “the gravamen of the complaint is injury to the corporation, or … to

recover assets for the corporation or to prevent dissipation of its assets.”

Hill v. Ofalt, 85 A.3d 540, 549 (Pa. Super. 2014). Thus, a derivative claim

must be brought by a shareholder of a corporation. Pa.R.C.P. § 1506 states:

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       (a) In an action to enforce a secondary right brought by one or
       more stockholders or members of a corporation or similar entity
       because the corporation or entity refuses or fails to enforce
       rights which could be asserted by it, the complaint shall set
       forth:

         (1) that each plaintiff is a stockholder or owner of an
         interest in the corporation or other entity.

       McMahon concedes that the merger became effective on October 27,

2008. The terms of that merger divested McMahon of her shares of stock in

SSM.    McMahon filed a writ of summons on October 31, 2008, and a

complaint on November 25, 2008.         Accordingly, we are constrained to

conclude that the trial court did not commit an error of law when it granted

Appellees summary judgment with regard to these claims, as McMahon was

without standing to bring a derivative shareholder action.

       In support of her argument that she had standing to pursue this

action, McMahon relies on Mitchell Partners, L.P., v. Irex Corp., 53 A.2d

39 (Pa. 2012).   However, the Mitchell court did not address the issue of

standing.    Rather, that case involved the interpretation of a particular

statute, 15 Pa.C.S. § 1105, which dictates what types of equitable relief are

available to shareholders, and Mitchell is not controlling with regard to the

instant case.

       Likewise, McMahon argues that in Drain v. Covenant Life Ins. Co.,

685 A.2d 119 (Pa. Super. 1996), this Court rejected “a strict construction of

Rule 1506 of the Pennsylvania Rules of Civil Procedure.” McMahon’s brief at

51 – 52.    We do not agree with this analysis.   As noted supra, derivative

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stockholder suits must be brought by stockholders. The Drain Court held

that if a stockholder is divested of their shares during the pendency of

litigation, that shareholder nonetheless retains standing to pursue their

derivative claim.    Id. at 126 – 127.    Thus, Drain does not apply to the

circumstances of the instant case, where McMahon was divested of her

shares prior to the time she filed her complaint. Accordingly, we conclude

the trial court did not err when it granted Appellees’ motion for summary

judgment with regard to McMahon’s derivative claims, as there was no

genuine issue of material fact with regard to her lack of standing to raise

them.

        We   now    address   McMahon’s    argument   concerning    her   direct

shareholder claims; namely, that the merger at issue was unlawful.

McMahon raises a number of specific objections to the merger, which we will

address in turn.

        First, McMahon argues that she is due equitable relief as the merger

was a prohibited “freeze out” merger, and that Appellees’ motivation for the

merger was to remove her as a shareholder.        Our courts have recognized

that “it is a violation of the majority shareholders’ fiduciary duty to minority

shareholders to freeze out the minority for the sole purpose of continuing

the business for the benefit of the majority.”      In re Jones & Laughlin

Steel Corp., 412 A.2d 1099, 1102 (Pa. 1980).

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     McMahon states that the “‘reasons’ purported by Appellees for the

freeze-out merger are mere pretext contrived by the individual Appellees….”

McMahon’s brief at 24. We note that in construing Appellees’ motivation for

the merger as “pretext,” McMahon has conceded that Appellees offered

some independent rationale for the merger. Moreover, as noted by the trial

court:

     Despite [] [McMahon’s] contention that the sole purpose of the
     merger was to remove her as a shareholder, [Appellees] have
     come forth with four legitimate reasons for the merger: (1) to
     remove a shareholder working as a consultant for one of SSM's
     major competitors; (2) to remove as shareholders former
     employees who were working or might eventually go to work for
     competitors while continuing to receive SSM's confidential
     information; (3) to eliminate the disparity between the limited
     number of employees with shares and the overwhelming number
     of employees without; and (4) to position the [c]ompany for
     potential future tax savings. Godlove Affidavit ¶30. Further,
     during her deposition [McMahon] admitted that at least three of
     the proffered business reasons were valid business reasons.
     Pl.Dep. at 211-212, 313. Finally, [McMahon’s] evidence consists
     entirely of an unauthenticated handwritten note, purportedly
     created at an SSM board meeting regarding the merger, which
     read only "DeDe ([McMahon’s] nickname)—freeze out?".
     However, even if the note was assumed to be trustworthy and
     admissible, it is apparent to the Court that in light of the dearth
     of other substantive facts and [Appellees] additional
     justifications for executing the merger, that [McMahon’s] facts in
     support of an unlawful freeze-out merger are insufficient to
     deprive [Appellees] from summary judgment in their favor.

TCO at 7.     Given the reasons provided by Appellees for the merger,

McMahon’s concessions that these reasons were legitimate business reasons,

and the absence of evidence offered to the contrary by McMahon, the record

does not support the contention that there was a genuine issue of material

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fact with regard to McMahon’s claim that the sole purpose for the merger

was to remove her as a shareholder. Therefore, we conclude that the trial

court did not err in granting summary judgment for Appellees.

      Next, McMahon argues that Appellees’ actions constituted oppressive

conduct, as they defeated her reasonable expectation that she would not be

“arbitrarily excluded from gaining a return from the potential future sale of

[SSM],” and the “loss of any future gains that could have been experienced

when [SSM] sold its stock for 40 to 50 dollars a share.” McMahon’s brief at

27.

      15 Pa.C.S. § 1767(a)(2) permits the appointment of a custodian in a

closely held corporation where “the directors or those in control of the

corporation have acted illegally, oppressively or fraudulently to one or more

[shareholders].”    In addition, 15 Pa.C.S. § 5981(2) provides for the

involuntary winding up and dissolution of a non-profit corporation where the

acts of the directors are “illegal, oppressive or fraudulent.”   In the instant

case, however, McMahon seeks neither the appointment of a custodian, nor

the dissolution of a non-profit.   Moreover, while McMahon alleges that her

expectation of receiving nearly five to ten times the amount she was paid for

her shares is reasonable, at her deposition, McMahon conceded that when

the merger occurred there was not a buyer willing to pay such an amount for

SSM’s shares.      Consequently, we cannot conclude a genuine issue of

material fact existed with regard to this issue.

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      McMahon also argues that the merger was procedurally improper

because the Appellees “failed to submit the decision to organize” the merger

“to SSM’s shareholders for approval.” McMahon’s brief at 29. However, as

noted by the trial court, “pursuant to 15 Pa.C.S. § 1924(b)(1)(ii) and 15

Pa.C.S. § 2538(b)(3), where a corporate entity acquires 80% or more of the

shares of another corporation, as is the uncontroverted case here, the

approval of the non-interested shareholders is not required.”        TCO at 6.

McMahon argues that section 8.04 of SSM’s bylaws nonetheless required a

shareholder vote. According to this section, no shareholder vote is required

if a “contract or transaction is fair as to the corporation as of the time it is

authorized, approved or ratified by the board of directors or shareholders.”

Bylaws of SSM § 8.04(a)(3) (appended to SSM’s motion for summary

judgment of 10/11/13 as exhibit G).       McMahon does not suggest how the

merger was unfair to the corporation; as noted supra, during the pendency

of this litigation, she conceded that the reasons for the merger articulated by

SSM were legitimate business reasons. We conclude that the trial court did

not err in finding there was no genuine issue of material fact regarding the

procedural propriety of the merger.

      Finally, McMahon claims that the “totality of the circumstances”

demonstrate that “fraud or fundamental unfairness” was involved in the

merger transaction.    McMahon’s brief at 35, 36.       McMahon claims that

Appellees acted, through means such as expediting the completion of SSM’s

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business valuation, to preclude her from exercising her rights as a

shareholder. As stated by the trial court,

      While [McMahon] seeks broad equitable relief[,] the Pa. B.C.L.
      places stringent statutory limitations on the Court's ability to
      grant equitable relief. Pursuant to 15 Pa.C.S. § 1105, "in the
      absence of fraud or fundamental unfairness, an injunction
      against any proposed plan or amendment of articles authorized
      under any provision of this subpart, nor any right to claim the
      right to valuation and payment of the fair value of his shares
      because of the plan or amendment, except that he may dissent
      and claim such payment if and to the extent provided in
      Subchapter D of Chapter 15 (relating to dissenters rights)." 15
      Pa.C.S. § 1105. The rule goes on further to provide that "Absent
      fraud or fundamental unfairness, the rights and remedies so
      provided shall be exclusive." Id. Indeed, in Mitchell Partners,
      LLC v. Irex Corp. the Pennsylvania Supreme Court reiterated
      the principles proscribed by 15 Pa C.S. § 1105 and emphasized
      that "the fraud or fundamental unfairness exception may not be
      invoked lightly." Mitchell Partners, LLC v. Irex Corp., 53
      A.3d 39, 47 (Pa. 2012). … Barter v. Diodoardo defined
      unfairness as "something more than an unfairness in the price to
      be paid the dissenting shareholders for their shares in order for
      the court to enjoin the merger…. The unfairness must result
      from nondisclosure or misrepresentation concerning some
      essential [sic] of the merger itself. The minority shareholders
      are entitled to disclosure of all material facts in an atmosphere of
      complete candor." Barter v. Diodoardo[,] 771 A.2d 835, 840
      (Pa. Super. 2001).            Despite boilerplate allegations of
      impropriety and fraud, [McMahon] does not assert specific facts
      to indicate to the Court unfairness of any kind, only a
      dissatisfaction of the buy-back price. While [McMahon] alleges
      that some kind of misrepresentation or fraud occurred, she can
      provide nothing in the way of specific substantive proof [of] any
      such malfeasance. Under the Mitchell and Barter standards,
      [McMahon’s] argument is insufficient to justify precluding
      [Appellees] from [s]ummary [j]udgment, let alone awarding
      [McMahon] her requested equitable remedy.

TCO at 6. We agree with the trial court’s analysis. Accordingly, we conclude

that summary judgment on this claim was not error.

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Order affirmed.

Judgment Entered.

Joseph D. Seletyn, Esq.
Prothonotary

Date: 11/25/2014

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