Barter v. Diodoardo

• Decision Date: 09 April 2001
• Citation: 771 A.2d 835
• Parties: Peter BARTER, Appellant, v. Arcangelo DIODOARDO and Wendy Diodoardo, and Southmoore Golf Associates, Inc., Appellees.
• Court: Pennsylvania Superior Court

771 A.2d 835

Peter BARTER, Appellant, v. Arcangelo DIODOARDO and Wendy Diodoardo, and Southmoore Golf Associates, Inc., Appellees.

Superior Court of Pennsylvania.

Argued December 6, 2000.

Filed April 9, 2001.

Malcolm J. Gross, Allentown, for appellant.

Charles Bruno, Easton, for Southmoore Golf Associates, appellee.

Before JOHNSON, TODD, JJ., and CERCONE, President Judge Emeritus.

TODD, J.:

¶ 1 Peter Barter appeals the judgment entered against him in his lawsuit seeking, among other things, to enjoin or rescind a merger which cashes him out of his interest in Southmoore Golf Associates, Inc. We affirm.

¶ 2 The facts of this case are largely undisputed but involve a complicated corporate history. Southmoore Golf Course, apparently the brainchild of Arcangelo Diodoardo ("Diodoardo"), was owned by Southmoore Limited Partnership. The general partner of Southmoore Limited Partnership was Southmoore Golf Associates, Inc. ("SGAI"), a 98.25% owner of the partnership.

¶ 3 John J. Bartos, Esquire, as its sole incorporator, filed articles of incorporation for SGAI in Pennsylvania on May 3, 1993. The articles authorized 1,000 shares of stock, and indicated no limitations on those shares. On that same day, Bartos signed a unanimous consent, in lieu of an organizational meeting of incorporators, appointing a five person board of directors, including Diodoardo. The board signed a unanimous consent, also dated May 3, 1993, appointing Diodoardo chairman and, despite the limitation in the articles, directing the issuance of 1,150 voting shares and 6,550 nonvoting/restricted shares.¹ All of the 1,150 voting shares were to be issued to Arcangelo Diodoardo and Wendy Diodoardo, and the nonvoting shares apportioned to 15 other people, including 1,500 shares to Barter. However, no shares were issued throughout 1993.

¶ 4 On or about February 15, 1994, Barter agreed to loan $1,000,000 to SGAI at a reduced interest rate of 6%, and issued a check for that amount on February 16, 1994. The loan was secured by a mortgage on the golf course and served as the only consideration for his 1,500 shares of stock.

¶ 5 An amendment to the articles of incorporation, dated February 10, 1994 and signed by Diodoardo, increased the authorized shares of SGAI to 1,150 voting and 7,850 nonvoting shares. The amendment indicated that it was to be effective on the date of its filing with the Pennsylvania Department of State. Bartos testified that he mailed the amendment on February 15, and it was filed on February 23, 1994.

¶ 6 Bartos drafted a shareholders agreement which was dated February 18, 1994 and signed by all the voting and nonvoting shareholders. In this agreement, the shareholders acknowledged their ownership of shares of SGAI as set forth in the May 3, 1993 board of directors consent resolution. Bartos testified that the consent resolution was in fact drafted in February 1994 and backdated. The first stock certificates were issued on February 18, 1994, five days before the articles of amendment authorizing their issuance were filed.

¶ 7 After the articles of amendment were filed, Barter purchased 3,500 additional shares of nonvoting stock—1,200 shares directly from SGAI and 2,300 shares from original shareholders—for a total amount of $525,000. Over the succeeding years, Barter made three additional loans to SGAI and, in all, he loaned $3,500,000 to the corporation.

¶ 8 By 1997, SGAI was having difficulty repaying these loans. During that year, Barter attempted to negotiate concessions from Diodoardo which would have permitted him to have some voting authority and/or control over SGAI, but no agreement was reached. By January 1998, Barter filed a foreclosure action on the mortgage he had taken in return for his initial loan.

¶ 9 In the spring of 1998, SGAI attempted to secure financing to repay the loans owed Barter; however the bank would not agree to financing without personal guarantees from all the shareholders, a demand which, in effect, would have required Barter to personally guarantee monies to be paid to himself. He refused to give such a guarantee.

¶ 10 Diodoardo testified that in an effort to make SGAI a more attractive candidate for financing he designed a strategy to eliminate Barter's interest in the corporation. On March 1, 1999, Barter was notified that a vote on a merger plan was scheduled for March 12, 1999. Under the plan, SGAI would merge into a preexisting corporation also controlled by Diodoardo, Lehigh Valley PIC ("PIC"). In the process, Barter and five other SGAI shareholders would be cashed-out for $15 a share, with no resulting ownership interest in PIC. Thus, Barter would have received only $75,000 for all of his shares.

¶ 11 On March 9, 1999, Barter notified SGAI that he planned to exercise his dissenting shareholder rights under the Pennsylvania Business Corporation Law. He also indicated that he believed he was entitled to a right of first refusal under the shareholders agreement and was willing to purchase the remaining shares of SGAI for a price "substantially higher" than $15/ share. Nevertheless, the merger plan was approved on March 12, 1999 by Arcangelo Diodoardo and Wendy Diodoardo, the only shareholders of SGAI with voting rights. Barter, as an owner of nonvoting stock, was not permitted to vote. The articles of merger were filed with the Commonwealth on April 26, 1999. ¶ 12 On March 15, 1999, Barter brought the present suit seeking to enjoin or rescind the merger of SGAI into PIC, asserting that it was the result of fraud and fundamental unfairness to him. He also sought a declaration that the merger is invalid, arguing that the shares issued to him on February 18, 1994 were technically unauthorized and asserting that as a result of this overissuance of stock, he was entitled to vote on the merger plan. Finally, he asserted that he was entitled to statutory remedies on account of the overissuance. Following a nonjury trial on September 27 and 28, 1999, the trial court, by the Honorable Stephen G. Baratta, denied all of Barter's requests for relief. However, concluding that Barter had timely asserted his dissenting shareholder's rights under 15 Pa.C.S.A. § 1579, the court scheduled a hearing for purposes of establishing the fair market value for his shares of SGAI stock.² Barter's post-trial motions were denied and this timely appeal followed.

¶ 13 On appeal, Barter asks the following:

1. Should a corporate merger be restrained or rescinded (as the case may be) on the grounds of fraud or fundamental unfairness where additional benefits outside of the stated terms of the Plan of Merger were granted to other shareholders, but were withheld and concealed from the one dissenting shareholder the merger was designed to involuntarily "cashout"?

2. Can an issuance of stock which was unauthorized by the Articles of Incorporation at the time of issuance be retroactively "cured" by a later-filed Amendment to the Articles?

3. Can an overissuance of stock be retroactively "cured" by a later-filed Amendment to the Articles of Incorporation?

(Brief for Appellant, at 4.)

¶ 14 As an initial matter, Appellees argue that the trial court and this Court lack subject matter jurisdiction to entertain Barter's claim for injunctive relief. Appellees cite In re Jones & Laughlin Steel Corp., 488 Pa. 524, 412 A.2d 1099 (1980), for the proposition that, once a merger has been consummated, a dissenting shareholder's remedies are limited to an appraisal of the fair value of their stock.

¶ 15 We reject this argument, however, because at the time Barter brought suit seeking injunctive relief the merger was not yet effective. The merger agreement clearly states that the merger would be effective upon the filing of the articles of merger with the secretary of state. (Plan and Agreement of Merger, 3/12/99, Exhibit A to Complaint, at ¶ 9.) See 15 Pa.C.S.A. § 1928 (effective date of merger is the date specified in the plan or the date of filing of the articles of merger, whichever is later). Barter filed suit on March 15, 1999, several days after the merger plan was voted on, but well before April 26, 1999, the date on which the articles of merger were filed with the Commonwealth. We therefore conclude that Appellees' argument that this Court and the trial court lacked subject matter jurisdiction is without merit.

¶ 16 We now turn to the merits of Barter's appeal. In his first issue on appeal, Barter argues that the trial court erred in failing to enjoin or rescind the merger on the grounds of fraud or fundamental unfairness. The crux of Barter's claim concerns a "side-deal" involving the other shareholders who were being cashed-out by the merger whereby they would accept promissory notes in lieu of their $15/share cash-out payment in exchange for continued playing privileges at Southmoore Golf Course. Barter was never offered this deal and asserts that such additional consideration, offered specially to the other shareholders without his knowledge, constitutes fraud and fundamental unfairness.

¶ 17 The record is unclear when this side-deal was first discussed, but Franklin Graver, one of the other cashed-out shareholders, testified that it was discussed at the March 12, 1999 merger meeting at the latest. (N.T., Trial 9/28/99, at 314.) The trial court found as a fact that the side-deal was agreed to only after the merger plan had been adopted. The other cashed-out shareholders sent a letter to PIC dated April 7, 1999 formally making the offer. Apparently this offer was accepted. The trial court found that these golf-playing privileges cost the general public $2,500 a year per individual, and an additional $1,250 for spouses and family members— thus, a substantial value in comparison with the value of the shares of some of the cashed-out shareholders.

¶ 18 The source of Barter's claim of his right to an injunction is 15 Pa.C.S.A. § 1105, which states:

Restriction on equitable relief

[3] A shareholder of a business

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