Bardsley v. POWELL, TRACHTMAN, LOGAN, CARRLE
| Decision Date | 20 February 1996 |
| Docket Number | No. 95-CV-2287.,95-CV-2287. |
| Citation | 916 F. Supp. 458 |
| Parties | Norman BARDSLEY, Plaintiff, v. POWELL, TRACHTMAN, LOGAN, CARRLE & BOWMAN, P.C., et al., Defendants. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
Steven E. Angstreich, Steven P. Burkett, Michael Coren, Levy, Angstreich, Finney, Baldante, Mann & Burkett, P.C., Philadelphia, PA, for Plaintiff.
Andrew L. Braunfeld, Margaret Mary Maguire, Masterson, Braunfeld, Maguire and Brown, Norristown, PA, for Powell, P.C., Joel P. Perilstein and Jonathan K. Hollin.
Mark C. Schultz, Sherr, Joffe & Zuckerman, P.C., W. Conshocken, PA, for Scott E. Bardley, Leigh Bardley and David E. Miller.
This Memorandum and Order addresses four outstanding motions filed by the plaintiff in this dispute arising from a struggle for control of Inofast Manufacturing, Inc. ("Inofast"), a Pennsylvania corporation. The plaintiff is Norman Bardsley ("Norman"), a United States citizen domiciled in Austria, and a shareholder and director of Inofast. Norman commenced this action by filing a complaint on April 19, 1995 and an amended complaint on July 5, 1995. The defendants include the Montgomery County law firm of Powell, Trachtman, Logan, Carrle & Bowman, P.C. ("Powell, Trachtman"), which served as counsel to Inofast; Joel P. Perlstein and Jonathan K. Hollin, who are members of the Powell, Trachtman firm; Scott Bardsley ("Scott"), who is Norman's twin brother and a shareholder of Inofast; Leigh Bardsley ("Leigh"), who is Scott and Norman's father; and David Miller. Inofast is a nominal defendant.
In his amended complaint, Norman alleges that Scott and the other defendants entered into a series of improper transactions for the purpose of divesting Norman of his majority shareholder status. The amended complaint contains five counts. In the first count, Norman seeks equitable and declaratory relief under §§ 10(b) and 29(b) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a-78kk (the "Exchange Act"). In Count II, Norman alleges that he is entitled to treble damages under § 1964(c) of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-68 ("RICO"). In Counts III-V, Norman asserts an entitlement to relief under the common law theories of legal malpractice, waste and mismanagement, and breach of the duty of good faith and fair dealing, respectively. Norman also seeks an award of punitive damages.
As we noted at the outset, our ruling today resolves four motions. On September 15, 1995, Scott, Leigh and Mr. Miller (collectively, the "Individual Defendants") through their attorneys, Sherr, Joffe & Zuckerman, P.C. ("Sherr, Joffe"), submitted the first of these motions, one seeking the dismissal of the amended complaint, or in the alternative, a stay of the proceeding pending the resolution of a related action in the Court of Common Pleas of Montgomery County. On the same day, the Powell, Trachtman firm and Messrs. Perilstein and Hollin (collectively, the "Law Firm Defendants") also filed a motion to dismiss. On October 16, Inofast, also represented by the Sherr, Joffe firm, filed a motion to stay the proceeding. Finally, on November 6, Norman submitted a response to Inofast's motion and a cross-motion to disqualify the Sherr, Joffe firm from representing Inofast. For the reasons set forth below, we conclude that the amended complaint must be dismissed. As a result, we will grant the motions to dismiss and deny as moot both Inofast's motion to stay and Norman's motion to disqualify counsel.
The facts, as recited in the amended complaint, are as follows. Inofast is engaged in the business of manufacturing and distributing fasteners. As of 1985, Norman held 18,750 shares and Scott owned 11,250 shares. Thus, Norman controlled 62.5% of Inofast's issued stock, while Scott's shares accounted for the remaining 37.5% of the issued stock. Scott was Inofast's president, managing its day-to-day operation, while Norman assumed the role of passive investor. In 1986, 1987 and 1989, Norman, Scott, Leigh, Mr. Miller and Guy Mallick entered into three separate shareholders' agreements, pursuant to which the company's issued and outstanding stock would be apportioned as follows:
Norman 35%
Scott 25%
Mr. Mallick 20%
Mr. Miller 10%
Leigh 10%
The parties to the agreements contemplated that the transfer of shares to Leigh and Messrs. Mallick and Miller would be achieved via gifting from Norman and Scott. Despite this agreement, the shares were never gifted due to an unresolved dispute regarding the party who would be liable for the associated gift tax. Thus, according to the plaintiff, the shareholders' agreements were never "implemented;" and he continued to maintain control over 62.5% of the issued and outstanding stock, the shareholders' agreements notwithstanding.
In 1991, Norman returned to the United States and began working actively for Inofast for the purpose of establishing an Austrian subsidiary. Upon his return, Norman discovered that Inofast was in financial turmoil. According to the amended complaint, gross revenues were falling, the company was taking on more debt, and the number of employees had fallen from 43 to 20. As a result of Inofast's deteriorating fiscal state, Norman became a personal guarantor of one-half of the company's debt. Moreover, he decided that dramatic action was called for, and announced his intention to utilize his majority status to replace management. When the defendants realized what Norman intended to accomplish, they hatched a plan in an effort to defeat his bid to control the company. Accordingly, the defendants, without Norman's knowledge or approval, caused a total of 12,857.143 additional shares to be issued to Scott, Leigh and Mr. Miller, so that together they could control Inofast.
Thus, prior to a shareholders' meeting scheduled for April 26, 1993, in response to a request for the names of the shareholders entitled to vote at the meeting, Mr. Perilstein informed Norman by letter dated April 21 of the identity of the shareholders and their respective ownership interests, as follows:
Norman 18,750 shares (43.75%)
Scott 13,392.857 shares (31.25%)
Leigh 5,357.143 shares (12.50%)
Mr. Miller 5,357.143 shares (12.50%)1
Norman thus became aware that additional shares had been issued. When he requested information regarding the authority and basis for the disputed transactions, the defendants refused to so inform him. At the April 26 shareholders' meeting, over Norman's objection, Scott and Leigh appointed Mr. Perilstein to serve as the company's judge of elections. Mr. Perilstein then ruled that the disputed 12,857.143 shares could be voted. Mr. Miller gave his proxy to Leigh, who voted in support of Scott's position. Thus, the board of directors elected at the April 26 meeting consisted of Scott, Norman and Leigh. Norman's bid to take control of the company was thereby thwarted.
Another shareholders' meeting was convened in October of 1993, by which time Norman had returned to Austria. Norman was given advance notice of the meeting and requested an agenda, but his request went unanswered. At the October, 1993 meeting, Scott and Leigh approved the issuance of an additional 5,359 bonus shares to Scott, bringing his total to 18,751.857 shares, 1.857 more shares than Norman held. This transaction occurred without Norman's knowledge or approval. Norman alleges that if he had known that the directors were to vote on an award of bonus shares for Scott, then he would have attended the meeting and voted against the measure.
In preparation for the 1994 shareholders' meeting, Norman again asked for a list of current shareholders. In response to this request, Mr. Hollin informed him by letter that "the shareholders identified on that last list provided to you by Mr. Perilstein is still accurate as far as the identity of the current shareholders." It was therefore not until the 1994 shareholders' meeting convened that Mr. Perilstein informed Norman that Scott had received the 5,359 bonus shares. Scott and Leigh again appointed Mr. Perilstein as judge of elections over Norman's objection. Mr. Perilstein again ruled that the disputed shares could be voted. Scott, Leigh and Norman were then reelected to another term on the board of directors.
The defendants persisted in refusing to inform Norman of the basis for the issuance of the disputed shares. Finally, on August 22, 1994, Mr. Hollin notified Norman by letter that "the basis of the issuance of the disputed shares was to effectuate share distribution provided for in the July 5, 1989 Shareholders Agreement." Mr. Hollin added that an agreement the company reached with Mr. Mallick when he resigned from Inofast "could also be considered authorization" for the issuance of the disputed shares. Norman contends that neither the shareholders' agreement nor the agreement regarding Mr. Mallick can legally justify the issuance of the disputed shares. Thus, he argues that the issuance was achieved fraudulently, without legal basis, and for the improper purpose of usurping his majority voting power.
Norman initiated a lawsuit in the Court of Common Pleas for Montgomery County on December 2, 1993. In that action, Norman sought a declaration to the effect that the 1989 shareholders' agreement was invalid and requested the court to rescind the issuance of the disputed stock. This lawsuit was voluntarily withdrawn on May 19, 1994. On June 16, 1994, Norman commenced a second action in Montgomery County, in which he sought injunctive and compensatory relief under the following three theories of liability: (1) violation of fiduciary duty, (2) fraud and misrepresentation; and (3) violation of Pennsylvania's Business Corporation Law. The second lawsuit is currently pending.
A motion filed pursuant to Fed.R.Civ.P. 12(b)(6) is the...
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