Santoro v. Morse

• Decision Date: 01 August 2001
• Citation: 781 A.2d 1220,2001 Pa. Super. 223
• Parties: Peter v. SANTORO, Appellee, v. Paul E. MORSE, Cable Technologies International, Inc., and Cable Technologies International of New York, Inc., Appellants.
• Court: Pennsylvania Superior Court

781 A.2d 1220

2001 Pa. Super. 223

Peter v. SANTORO, Appellee, v. Paul E. MORSE, Cable Technologies International, Inc., and Cable Technologies International of New York, Inc., Appellants.

Superior Court of Pennsylvania.

Argued May 3, 2001.

Filed August 1, 2001.

Raymond McGarry, Philadelphia, for Morse, appellant.

Mark J. Oberstaedt, Philadelphia, for appellee.

Before: DEL SOLE, President Judge, CAVANAUGH, J., McEWEN, President Judge Emeritus, JOHNSON, JOYCE, STEVENS, MUSMANNO, LALLY-GREEN, and TODD, JJ. McEWEN, President Judge Emeritus.

¶ 1 This appeal¹ has been taken by Paul Morse (hereinafter "appellant"), Cable Technologies International, Inc. (hereinafter "CTI"), and Cable Technologies of New York, Inc. (hereinafter "CTINY"), from a preliminary injunction entered on February 7, 2001². That injunction provided:

ORDER

AND NOW, this 7th day of February, 2000, after hearings on 12/29/98; 12/30/98; 2/10/99; 2/11/99; 3/23/99; 3/25/99; and conference on December 23, 1999, on Plaintiff's Request for Preliminary Injunction, and after review of the record as well as the parties briefs, findings of fact and conclusions of law submitted by the parties, as well as all relevant case law, we hereby ORDER and DECREE as follows:

1. Plaintiff is, and at all times was, fifty percent (50%) owner of CTI;

2. Plaintiff is restored as an employee of CTI effective January 1, 1997, with his 401k plan effective as of that date;

3. All of Defendant CTINY's stock is hereby placed in constructive trust on behalf of CTI;

4. An accounting is ORDERED from Defendant Morse for all funds disbursed to him by CTI, or used by him to repay CTI;

5. An accounting is ORDERED for all business operations for CTI and CTINY;

6. Plaintiff is given unfettered access to the offices of CTI and CTINY via his attorney as long as such access does not impede the normal business of either corporation;

7. Plaintiff is given unfettered access to the books of CTI and CTINY, via his attorney, as long as such access does not impede the normal business of either corporation; and,

8. All of Plaintiff's remaining injunctive requests are DENIED.

¶ 2 Appellants, Paul E. Morse, Cable Technology International, Inc., and Cable Technologies of New York, Inc. (hereinafter "CTINY") contend that there were no reasonable grounds³ for the entry of the preliminary injunction issued by the trial court, and thus request that we vacate the injunction.

[O]ur review of the grant ... of a preliminary injunction is limited to determining whether there were any apparently reasonable grounds for the action of the trial court. We will interfere with the trial court's decisions regarding a preliminary injunction only if there exist no grounds in the record to support the decree, or the rule of law relied upon was palpably erroneous or misapplied. It must be stressed that our review of a decision regarding a preliminary injunction does not reach the merits of the controversy.

Palladinetti v. Penn Distribs., Inc., 695 A.2d 855, 863 n. 11 (Pa.Super.1997) (citations and quotation marks omitted). "The court which is to exercise discretion in the matter of issuance of an injunction is the trial court and not the appellate court and the action of the trial court may be reviewed on appeal only in the case of a clear abuse of discretion but not otherwise." Maritrans GP, Inc. v. Pepper, Hamilton & Scheetz, 529 Pa. 241, 602 A.2d 1277, 1286 (1992).

Anchel v. Shea, 762 A.2d 346, 351 (Pa.Super.2000).

¶ 3 Cable Technologies (hereinafter CTI) was founded in 1986 by three individuals then employed by General Instruments, Paul Morse, Peter Santoro, and Jim Ware. The company, incorporated in 1986 as a New Jersey corporation,⁴ supplies new and refurbished cable television equipment to wireless and cable television companies throughout the United States.

¶ 4 Appellant Paul Morse left his job as a marketing director for General Instruments to devote his full-time energies to CTI, while appellee Peter Santoro continued as the director of software development for General Instruments until 1991, spending evenings and weekends working on developing and maintaining the computer system of CTI. In the early days of CTI, all three individuals assisted in every sphere of the operation, from strategic planning to unloading trucks. Upon the withdrawal of Jim Ware from the corporation in 1991, Mr. Morse and Mr. Santoro each became a 50% shareholder in CTI. Mr. Morse served as the President of CTI and as its unofficial Chief Executive Officer from the inception of the company until the hearing on the injunction.⁵ The shareholders agreed when they began CTI that the net profits of the corporation would be recorded on the corporation's books as having been paid as bonuses to the employee/shareholders, who would then lend the entire bonuses, minus the resulting tax liability, to the corporation as shareholder loans. These loans were carried on the books of the corporation as bearing interest at prime plus two percent. Mr. Morse testified that these "loans" were necessary to provide working capital to the corporation. While the company continued to grow and prosper from 1986 through 1997, no corporate meetings were held and most, if not all, business decisions were made—unilaterally—by Mr. Morse. The relationship between Mr. Morse and Mr. Santoro began to deteriorate after Mr. Santoro became a full-time employee in 1991, and in 1993 they discussed the possibility of a buyout by Mr. Morse of Mr. Santoro's 50% interest in the corporation. Mr. Morse testified that in December of 1993 he orally offered to acquire Mr. Santoro's 50% share in the corporation in exchange for payment of 50% of the retained earnings of CTI for the years 1994 through 1998 plus repayment of Mr. Santoro's outstanding shareholder loans.⁶ Although Mr. Morse disputes Mr. Santoro's claim that this offer was rejected, in a letter dated July 17, 1994, and introduced into evidence at the hearing on the injunction, Mr. Morse suggested a "shotgun approach" buyout, whereby Mr. Santoro would establish the purchase price for 50% of the corporation and Mr. Morse could either accept the offer or tender his 50% share of the corporation in exchange for the price set by Mr. Santoro. Mr. Santoro responded in September of 1994 with an outline of an offer in a document entitled "Intent of Proposed Document,"⁷ but this document was never signed and no written evidence of a completed offer and acceptance was produced by Mr. Morse. Moreover, the corporation's federal and state tax returns were produced and all of the official filings reflected, for each of the years up until the time of the hearing, that Mr. Morse and Mr. Santoro were each owners of 50% of the corporation. Mr. Morse's individual tax returns for 1993 through 1997 also reflected that he was a 50% owner of CTI, and not, as he now contends, the sole owner of CTI.

¶ 5 In March of 1994, Mr. Morse submitted a proposal to Converter Parts Incorporated for the acquisition of all of its assets by "Cable Technologies International, Inc. or a newly formed company owned by P.E. Morse, Jr." The agreement provided, inter alia, for CTI rather than the new company to incur penalties of 2% interest on any late payments to Converter Parts, and obligated CTI and not the new company to rent Converter Parts' Espera, New York, facility for 5 years at $500 per month. The proposal also provided that CTI would be the party responsible for payment of a total of $473,200 for the purchase of Converter Parts. This agreement was signed only by Paul Morse, acting not in his individual capacity, but as "Paul E. Morse, Jr., President, Cable Technologies International, Inc.".

¶ 6 On November 17, 1994, Cable Technologies International of New York, Inc. (hereinafter "CTINY") was incorporated and Paul Morse became the sole shareholder in the corporation. The next day, on November 18, 1994, CTINY, CTI and Converter Parts, Inc., entered into a contract entitled: "Agreement of Understanding and Contract for Sale and Lease Between Converter Parts, Inc. (CPI), and Cable Technologies International, Inc., and Cable Technologies International of NY, Inc. (CTI), Paul E. Morse, Jr. Both Parties Being Authorized by the Owners of CPI and CTI." There was no corporate resolution by CTI authorizing such purchase, nor was the consent of Mr. Santoro sought or obtained.

¶ 7 CTI began making installment purchase payments to Converter Parts, Inc., pursuant to the agreement for the purchase of its assets. In early 1995 Mr. Morse transferred all of the parts business previously conducted by CTI to his new, wholly-owned corporation, CTINY. Mr. Santoro's authorization or consent for this transfer of business opportunities previously enjoyed by CTI was not sought. No compensation was paid by CTINY to CTI for its entire parts business despite the fact that in 1994 CTI had received more than $500,000 in revenue as a result of the sale of parts.⁸

¶ 8 Uncontradicted evidence produced at the hearings before the distinguished Judge Maurino J. Rossanese, Jr., established that

A $10,000 check drawn on CTI was used for the initial down payment.

A $40,000 check drawn on CTI was used for the second payment.

Two additional checks, each in the amount of $100,000 were drawn on CTI's account for the payments for acquisition of Converter Parts, Inc.

¶ 9 Mr. Santoro also introduced substantial, uncontradicted evidence which established that in 1997 Mr. Morse caused CTI to purchase 50,000 new converters from Jerrold Communications. This purchase was made possible by an increase in CTI's existing line of credit to $3.5 million, which line of credit had originally been and continued to be guaranteed by Mr. and Mrs. Santoro individually as well as Mr. and Mrs. Morse individually, and secured by mortgages on their respective residences. CTINY received in excess of $5 million in revenue from the sales of the converters obtained from Jerrold, and realized a net profit...