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INDEX TO WITNESSES
FOR THE PETITIONER
Robert M. Mumma, II
DIRECT
41
CROSS
50
REDIRECT
RECROSS
FOR THE RESPONDENTS
Lisa Morgan
Barbara Mumma
79
122
107
127
INDEX TO EXHIBITS
FOR THE PETITIONER MARKED ADMITTED
Ex. No. 1 - adjudication 30 38
Ex. No. 2 - decree 30 38
Ex. No. 3 - order 30 38
Ex. No. 4 - appeal 30 38
Ex. No. 5 - order 30 38
*Petitioner's Exhibit No. 6 was never marked
Ex. No. 7 - order 30 38
Ex. No. 8 - testimony 31 38
Ex. No. 9 - document 31 38
Ex. No. 10 - memo 35 38
Ex. No. 11 - fax 35 38
Ex. No. 12 - financial statement 36 38
Ex. No. 13 - financial statement 37 38
Ex. No. 14 - petition 40 41
171';'
*Petitioner's Exhibit No. 15 was withdrawn
Ex. No. 16 - letter
Ex. No. 17 - letter
FOR THE RESPONDENTS
Ex. No.
Ex. No.
1 - testimony
2 - affidavit
1-748
48
48
81
95
50
50
1 MR. SHIELDS: May it please the Court. Your
2 Honor, Mr. costopoulos is unable to attend because he's tied
3 up in a homicide trial in Franklin County. We have Mr.
4 Baughman on stand by, so he will be handling --
5 THE COURT: You're the Petitioners. You may
6 proceed.
7 MR. BAUGHMAN: Thank you, Your Honor. With
8 your permission, I would like to make an opening statement,
9 but before doing so I would like to take care of a matter I
10 think we can resolve by stipulation in order to release a
11 witness that we have subpoenaed.
12 Part of the urgency and our concern in bringing
13 this petition and having it heard had to do with a mortgage,
14 a balloon payment on a mortgage that was due on December 31,
15 1991. We anticipate a considerable difficulty in getting
16 that renewed.
17 There were papers forwarded by the bank for a
18 one-year renewal, and those papers were signed and returned
19 by Mr. Mumma. We understand that initially the estate
20 signed certain papers -- we haven't seen them -- and
21 returned them with a letter which had some conditions which
22 were not acceptable to Dauphin Deposit.
23 However, I understand second hand from Mr. Shannon
24 who we subpoenaed because the officer, bank officer in
25 question was not available, and directly from Mr. Katzman
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1 that as of this morning the estate has submitted new
2 documents and that the bank has said that they will be
3 acceptable so that the mortgage will be in place for one
4 year.
5 Mr. Katzman can say if I misstated that, but if
6 that is indeed the case, I would then like to release Mr.
7 Shannon.
8 MR. KATZMAN: Yes, that is accurately stated,
9 Your Honor.
10 MR. BAUGHMAN: Thank you, Mr. Shannon. Your
11 Honor, if I may proceed with a brief opening statement why
12 we are here today because I believe that that is really the
13 issue before the Court.
14 There have been some papers which have been filed
15 both here and in Dauphin County about whether we're really
16 trying to litigate something that is being litigated in
17 Dauphin County. We believe that we will be able to
18 demonstrate to the Court that what we're here about has
19 nothing to do with what is going on in Dauphin County.
20 If Dauphin County Court is able to resolve all of
21 the Lebanon Rock matters which are before it, and we believe
22 it will, and it has a schedule of hearings to do that, there
23 will still be a serious problem in that recent events have
24 shown that there will continue to be a deadlock between the
25 two 50 percent shareholders of Lebanon Rock over important
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1 matters which would deprive Lebanon Rock of needed funds,
2 needed among other things, to pay the payments on this
3 mortgage that we now have for one year and also which will
4 lead ultimately to force the sale of Lebanon Rock.
5 And we believe we will be able to demonstrate that
6 if an independent custodian is appointed to handle the
7 matters relating to the two 50 percent of the Lebanon Rock
8 shares on behalf
9 THE COURT: Are you interchanging words here?
10 I'm not really sure. I see that the Superior Court remanded
11 this matter back to Dauphin County to determine whether or
12 not a custodian should be appointed or the corporation
13 should be dissolved, and they said it was in error to
14 appoint a receiver. Now, are you using the words custodian
15 and a temporary fiduciary interchangeably?
16 MR. BAUGHMAN: Your Honor, I was referring to
17 what I'm requesting.
18 THE COURT: Today you're asking for a
19 temporary fiduciary, not a custodian?
20 MR. BAUGHMAN: I apologize.
21 THE COURT: Because I'm not sure what a
22 custodian--
23 MR. BAUGHMAN: As Your Honor is aware, I'm
24 not very schooled in those matters.
25 THE COURT: I don't pretend to be an expert
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1 either. The only thing I saw was they remanded it back to
2 Dauphin County, and in this petition today I see is asking
3 for a temporary fiduciary. I assume they're two different
4 people.
5 MR. BAUGHMAN: Indeed, Your Honor, and what
6 we're asking for is someone to take care of, on behalf of
7 the estate as a shareholder and perhaps as a shareholder the
8 right to elect a director, the matters of Lebanon Rock
9 because the executrices have on the face of it what we
10 believe is a very clear conflict of interest in making
11 decisions on behalf of Lebanon Rock because of their control
12 interest in E1co.
13 That's the issue before the Court. And what we'll
14 do with your permission, Your Honor, is introduce a series
15 of orders in Dauphin County, not to get into those issues
16 but simply to lay the background of what indeed that case
17 was about, which we don't want to get into, but to show the
18 Court what the problem is with which we are faced.
19 Very briefly what these orders and opinions, both
20 by the Superior Court and by Judge Schaffner, will show is
21 that there are two types of claims that are being litigated
22 in Dauphin County, and one of them has to do with who has
23 rights to the dolomite at the Lebanon Rock quarry.
24 Now, that litigation began over the rights to the
25 dolomite, and the history of the situation as recited in the
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1 opinions is that Lebanon Rock was formed early in 1986 or
2 actually December of 1985. Mr. Mumma died shortly
3 thereafter in April of 1986.
4 It's clear that Lebanon Rock owned the quarry and
5 all of it. The game plan initially, and there was no
6 dispute over this, was to take dolomite off of what was
7 called Sam's Knob to expose 600,000 tons of high calcium
8 limestone which Lebanon Rock would then sell, and it was
9 agreed that Elco could take off that dolomite and expose it
10 and would not have to pay for it other than renting Lebanon
11 Rock equipment to do that and paying rental on equipment to
12 do it.
13 The dispute, Your Honor, and this is very
14 important to this case, and it will be shown, the facts will
15 be shown by these opinions in Dauphin County, the dispute
16 arose after Mr. Mumma's death when Mr. Mumma, II, was
17 supervising the activities of Lebanon Rock and was upset to
18 see Elco not getting dolomite from the knob but rather from
19 other areas of the quarry where there was better dolomite
20 that was easier to get, and Mr. Mumma was not getting to
21 that high calcium.
22 Now, putting aside who's right or who's wrong,
23 we're not asking the Court to decide that. That was a
24 dispute that arose. Mr. Mumma eventually told Elco to keep
25 their equipment out of the quarry. They then came in with
~753
7
1 their own equipment into the quarry, and Mr. Mumma on behalf
2 of Lebanon Rock started a lawsuit.
3 One more fact that ultimately became important
4 with regard to the litigation of the dolomite claims was the
5 argument by Elco that Elco had a right to get all of the
6 dolomite within what was called the pit limits without
7 paying for it at all. Elco said that once they were outside
8 the pit limits, they would still get dolomite, but they
9 would pay a royalty for it.
10 Now, aside from those claims involving the
11 dolomite, Your Honor, and this is important also, there were
12 being litigated in Dauphin County claims by the executrices
13 that Mr. Mumma is acting improperly as president of Lebanon
14 Rock, and he should be removed as president. He's
15 self-dealing they say and things like that.
16 Those issues were initially litigated by Judge
17 Schaffner as well as the issues involving the dolomite. On
18 the mismanagement Judge Schaffner did not find any. On the
19 dolomite issue, Judge Schaffner held that there was a
20 tenative agreement as to what to do at least within the pit
21 limits, and that is that the quarry would be shared but he
22 couldn't determine anymore definitely what any agreement
23 was. He further held that there was no legal agreement
24 between Lebanon Rock and Eleo as to any rights to dolomite
25 outside of the pit limits.
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1 This issue then went up on appeal. Now, while it
2 was up on appeal all of the dolomite inside the pit limits
3 was exhausted and Elco began mining dolomite outside the pit
4 limits.
5 THE COURT: What does that mean?
6 MR. BAUGHMAN: There was an area of the
7 quarry that the geologist named Sam Simms -- and that is
8 where we got Sam's Knob -- had said there's so much dolomite
9 in here and there's so much high calcium in here that a
10 mining plan for getting it out
11 THE COURT: Pit limits would be in the
12 existing hole?
13 MR. BAUGHMAN: It's not all of the existing
14 hole but would be within an area that would surveyed by Mr.
15 Simms, which was part of the original plan for mining the
16 quarry. He did not get into what was up in the upper part
17 of the quarry. That's what we mean by outside the pit
18 limits. There's a lot of dolomite up on the hill, we'll
19 call it, and that's what we mean by outside of the pit
20 limits.
21 Now, Elco started to mine outside the pit limits
22 and apparently realized that there was no agreement, at
23 least Judge Schaffner had held with regard to that, so Mrs.
24 Mumma purportedly on behalf of Lebanon Rock entered into a
25 written agreement with Mr. Lake, who was the chief financial
~755
9
1 officer of Elco and who reported to Mrs. Mumma, who was the
2 chief executive of Elco.
3 The two of them entered into an agreement between
4 Lebanon Rock and Elco which gave Elco the right to mine
5 dolomite outside the pit limits. Now, no consultation with
6 the president of Lebanon Rock, Mr. Mumma.
7 We went in and sought to have her held in contempt
8 for that and to have the agreement abrogated. Judge
9 Schaffner said, I'm not going to hold Mrs. Mumma in contempt
10 of court, but I will abrogate the agreement; however, we
11 will have a hearing to determine what to do about Elco's
12 concern that they absolutely need to have dolomite.
13 And we will introduce, Your Honor, to you an order
14 of september the 7th, 1990, when Judge Schaffner said,
15 pending appeal, maintaining the status quo pending appeal,
16 I'm going to order that Elco can continue to mine dolomite
17 outside the pit limits and that they should pay a royalty of
18 forty cents a ton to Lebanon Rock.
19 Then the Court, the Superior Court came down with
20 their decision, and the Superior Court said that what Judge
21 Schaffner had done was to impose a receivership over both
22 Elco and Lebanon Rock and said they should be run for the
23 common good.
24 And the Superior Court said you can't do that, and
25 you can only do something if you sign a legally binding
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1 agreement. We're going to vacate everything, send it back
2 to you to do that, and we're going to vacate all of the
3 rulings so that nothing was left unturned, and Judge
4 Schaffner had to start allover.
5 Then you will see that Mr. Mumma came back in and
6 said, Judge Schaffner, the Superior Court has vacated
7 everything and that should vacate your September the 7th,
8 1990, order. Please tell Elco to stop mining dolomite.
9 Nothing happened on that petition, and in the
10 interim Lebanon Rock began to mine dolomite itself. Elco at
11 that point came in and said Judge Schaffner barred them from
12 doing that. They shouldn't be allowed to mine dolomite
13 themselves.
14 Judge Schaffner issued a temporary order or
15 preliminary injunction if you will that said, Lebanon Rock,
16 you can't mine dolomite and, Elco, you can continue to mine
17 dolomite all pending hearing these issues and reaching a
18 final decision.
19 Now, Your Honor, I'm sorry it took so long to get
20 to this point, but we get to the point why we're here;
21 because Judge Schaffner in explaining why he wouldn't let
22 Lebanon Rock mine dolomite -- and I'm going to offer up what
23 he said at sidebar on the subject -- said, Look, I
24 understand, Lebanon Rock, you want to prove that it would be
25 beneficial, more beneficial to Lebanon Rock to mine your own
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11
1 dolomite than to get forty cents a ton from Elco, but, you
2 know, I don't even know if I should hear that evidence
3 because I won't get to that point.
4 The decision to enter into the dolomite business
5 by Lebanon Rock is an important corporate decision, and I'm
6 not sure that Mr. Mumma as president without the consent of
7 the other two 50 percent shareholder has the right to make
8 that important move.
9
THE COURT: Who owns the stock of Elco?
10
MR. BAUGHMAN: Ultimately Nine Ninety-Nine,
11 Your Honor.
12
THE COURT: And who owns Nine Ninety-Nine?
13
MR. BAUGHMAN: That is owned what, about 30
14 percent by the estate, 14 percent by Mr. Mumma, about 12
15 percent by each of the other children. Part of the evidence
16 we're going to put on, and we are very concerned about, is a
17 lot of the Nine Ninety-Nine stock has been taken out of the
18 estate by Mrs. Mumma pursuant to her distribution, her
19 yearly 35 percent draw on the marital trust. Now, the exact
20 numbers I think are set forth in our petition.
21
THE COURT: I think I have it. I have that
22 somewhere.
23
MR. BAUGHMAN: And that's been admitted, I
24 believe, by the answer to the petition. Now--
25
THE COURT: What you have to show me today is
1~r8
(J
12
1 what the statutory language is; that the executrices,
2 they're now in a position of conflicting interest or they're
3 in a situation where their functions as executrices for a
4 temporary period would not be in the best interest of the
5 estate.
6 MR. BAUGHMAN: Yes, Your Honor, that's right.
7 And so the issue I would like to focus the Court on is one
8 Judge Schaffner says he can't do anything about. He says,
9 Look, 1 have to look at 50 percent is owned by this
10 shareholder, 50 percent by that.
11 What we're saying, Your Honor, is this 50 percent
12 shareholder is not in a position to act objectively and do
13 what's best as a shareholder of Lebanon Rock because this
14 shareholder has a very heavily invested interest against
15 making that decision to mine dolomite, and, therefore, there
16 is a deadlock being created and the best interest of Lebanon
17 Rock can't be followed because there is an irreconcilable
18 conflict involved here.
19 And let me say also we'll introduce an order by
20 Judge Schaffner that he agrees that what this Court has to
21 decide doesn't have anything to do with what he's dealing
22 with.
23 Now, before I get to the conflict itself, let me
24 just mention briefly, because the issue of standing has been
25 raised in the answer to the petition, let me just say that
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1 the way the record stands now Mr. Mumma himself is
2 petitioning as a beneficiary, and he now is a beneficiary.
3 The Court has agreed that the disclaimer should not be
4 affected, and he is properly a beneficiary himself.
5 Also, the custodians for Mr. Mumma's two daughters
6 are petitioning, and they were appointed by the Court in
7 York County where they reside; and the other side says that
8 they're not properly appointed custodians because Mr. Frey
9 is the custodian, and our response to that is in two or
10 three fold.
11 First of all, the order appointing Mr. Frey was
12 narrow and simply doesn't apply here, and, as a matter of
13 fact, Mr. Frey agrees with that and I believe has so
14 testified.
15 Secondly, the Respondents do not have standing
16 even to raise this issue, and if anything should be raising
17 it in York County; so we don't believe the standing issue
18 has any merit.
19 As to the conflict itself, Your Honor, we think it
20 is absolutely patent and obvious that the executrices, who
21 have a large personal interest in Nine Ninety-Nine and
22 therefore in Elco, its 100 percent granddaughter, if you
23 will, corporation have a large personal interest before
24 as they only have an interest through the estate, and at
25 that a 50 percent interest in Lebanon Rock.
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1 Also, there are several other specific pieces of
2 evidence that are very important on this issue of conflict.
3 As has been pointed out in the petition, the executrices are
4 making a concerted effort to take as much Nine Ninety-Nine
5 stock as possible out of the estate and to hold it
6 personally by Mrs. Mumma.
7 That means there is more Nine Ninety-Nine stock
8 that she has no fiduciary obligation with regard to but
9 increases her personal interest in the corporation. Also,
10 we'll introduce evidence, Your Honor, that although they
11 have, I forget, forty some individually, they have less than
12 50 percent interest in Nine Ninety-Nine.
13 with the estate they have control, but they have a
14 much greater interest in the dividends in Nine Ninety-Nine
15 in that they own 100 percent of an 8 percent preferred issue
16 of stock, and they own a very high percentage of the 10
17 percent convertable preferred issue of stock.
18 And we will show the Court that over the last
19 three years they have paid all of the back dividends on that
20 preferred stock, which in the case of the 8 percent goes
21 back eight or ten years, have paid all of that to the
22 detriment of paying common dividends, and, therefore, I
23 think it's like 75 percent of the money coming out of Nine
24 Ninety-Nine in the last three years went to them personally,
25 not through the estate but personally. We'll have a chart.
~761
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1 THE COURT: Did Mr. Mumma share in any of
2 that?
3 MR. BAUGHMAN: No. Well, let's see. He got
4 some. You have some convertable. You have some ten percent
5 preferred. He has no eight percent preferred. They own 100
6 percent of that, and we're not saying it's wrong that they
7 own the eight percent, Your Honor.
8 What we're saying is that they're getting 75
9 percent in the last three years of all the money to come out
10 of Nine Ninety-Nine which shows, you know, very heavy
11 interest in trying to benefit Elco, which is a legitimate
12 interest if you don't also have the Lebanon Rock. That's
13 the reason we're offering this, and we have a chart that
14 will lay that out.
15 Also, the conflict is further exacerbated by the
16 commercial situation. There were only three quarries in
17 Lebanon County, Elco, a quarry at Annville, and something
18 called the Smith quarry.
19 Elco -- in the past the Annville quarry hasn't
20 sold much dolomite, and the smith quarry has not sold much
21 dolomite, and Elco has been the majority seller of dolomite
22 in Lebanon County.
23 The prices we'll show are very high, so high that
24 new people have been coming in and buying dolomite at
25 Annville to compete with them.
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1 THE COURT: What's that used for just off the
2 cuff?
3 MR. BAUGHMAN: Paving, road paving. And,
4 also, we don't know how much money Elco makes on this, but
5 it's obviously profitable because recently Elco has
6 contracted to buy the smith quarry, which is one of the
7 three quarries. They then would own two or have the rights
8 to dolomite at two of the three quarries.
9 What we're pointing out, Your Honor, is that this
10 is very important economically to Elco and thus clearly we
11 see on the face of it, you don't have to get into the issue
12 of whether they're intending to do anything wrong.
13 How could anybody objectively decide whether
14 Lebanon Rock should enter into competition with Elco to sell
15 dolomite? In case of any doubt, we would submit that the
16 Court should err in favor of appointing a custodian. What
17 harm could be done with an objective person making the
18 decision of what's best for Lebanon Rock?
19 We compare this to the situation of appointing a
20 guardian for Mr. Mumma's children. When those initial
21 lawsuits arose, he did not object to that; that is, his
22 children in a sense had a different interest than him, and
23 there was a guardian, Mr. Frey, appointed to do that.
24 Nobody was casting aspersions on Mr. Mumma and we
25 need not cast aspersions on anybody here. It's simply a
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1 matter, we think, of very clear fact.
2 Also, Your Honor, I would point out and do as part
3 of my opening although I guess it could be considered
4 evidence, but if the Court looks at the answer to the
5 petition at Page 12, there is a statement made that I think
6 shows that even now the executrices perhaps don't realize
7 that they simply are not acting objectively here.
8 It says in paragraph 15 on Page 12, It is further
9 averred that the petition referred to was granted by the
10 Court of Common Pleas by order of October 18th, 1991
11 that's when Judge Schaffner said we couldn't mine dolomite,
12 and I told you, you know, why he was doing that.
13 And then this continues, On the basis that that
14 court, after well over three years of litigation,
15 understands all of the various factors involved in these
16 matters and recognizes that Lebanon Rock does not have any
17 authority or basis for entering the dolomite business in
18 competition with Elco.
19 And I explained the reason he says that is you
20 need the majority of the corporation to agree to do it.
21 continuing with their answer to the petition, Any action by
22 a temporary fiduciary to authorize same would compel a
23 further round of expensive litigation to be brought by
24 Respondents to protect the estate's value.
25 In other words, if you would appoint a temporary
~764
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1 fiduciary to determine it was in Lebanon Rock's best
2 interest to mine dolomite, they would initiate a lawsuit to
3 try to stop that. Now, I think, Your Honor, that shows
4 unequivocally that they have a conflict of interest here.
5 THE COURT: Why didn't you try to get Judge
6 Schaffner to appoint a temporary fiduciary? Doesn't he have
7 the authority?
8 MR. BAUGHMAN: No jurisdiction, Your Honor,
9 that's the problem.
10 THE COURT: That issue has never been -- that
11 issue hasn't been up and back yet?
12 MR. BAUGHMAN: No, sir, that has never been
13 raised, and we raised it because of this issue of not being
14 able to mine our own dolomite. That's all my opening
15 statement, Your Honor.
16 THE COURT: Mr. Katzman.
17 MR. KATZMAN: Yes, sir. From hearing that
18 perhaps the Court might want to reconsider whether this
19 really does involve rehashing of everything that's gone on
20 in Dauphin County for the last three and a half to four
21 years because that's really what Mr. Baughman is indicating
22 is the gist of the action here.
23 I would say this to the Court. While Mr. Baughman
24 explained once his slip-up of saying custodian, one of the
25 last statements he said, and I copied it I think word for
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1 word was, What harm could be done by appointing an
2 independent person to make decisions for Lebanon Rock, Inc.?
3 Your Honor, the estate has been trying to reach
4 that point in the Dauphin county litigation for three and a
5 half years, and Mr. Mumma has continuously been objecting
6 and not agreeing the custodian be appointed.
7 What they're now asking is that some impartial
8 person be appointed only for the estate's 50 percent
9 interest so that Mr. Mumma can continue doing what he's been
10 doing for three and a half years and what's really provoked
11 all the litigation in Dauphin County, milking funds out of
12 Lebanon Rock for his own benefit, and the estate is left
13 without having received any benefit from Lebanon Rock for
14 the three and a half years that he's been unilaterally
15 running it.
16 He gets money out of the company by renting
17 equipment from his other companies to it and by taking a 35
18 percent override on its gross sales. The estate has gotten
19 nothing out of Lebanon Rock for three and a half years.
20 What Mr. Mumma is concerned about is if the
21 Dauphin county Court continues as it did in its first
22 decision and feels that something has to be done in this
23 company that's in a deadlock, he's not going to be able to
24 continue controlling that company and milking monies out of
25 it as he has been doing. And so seeing that that's going to
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1 come to an end rather soon because of Judge Schaffner, he
2 now comes to this Court on what we consider to be a very
3 bogus basis.
4 Number one, Judge Schaffner never articulated what
5 Mr. Baughman has indicated was the basis for this petition
6 being filed until December 12th of 1991. The petition was
7 filed in October of 1991.
8 So to say to the Court that the reason for filing
9 the petition is an articulation by Judge Schaffner of some
10 reasoning with respect to Lebanon Rock's ability or
11 authority to acquire dolomite is misleading at best.
12 We see this action as basically aSking the Court
13 to remove, on perhaps some limited basis, to remove these
14 two executrices from their fiduciary responsibilities
15 because while the section -- and we point out in our brief
16 to the Court -- while the section speaks of appointing a
17 temporary fiduciary to take charge of an asset, what you're
18 really doing is removing the people that are going to be
19 out.
20 And we submit that you have to legally find all
21 the things that you would have to find in order to remove a
22 fiduciary, and they just aren't present, we submit, in the
23 evidence Mr. Baughman said to you.
24 Judge Schaffner has ordered that Elco has the
25 right to continue quarrying dolomite and that Lebanon Rock
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1 does not have the right. Now, whether he's right or wrong
2 is somewhat irrelevant. The point is, are the executrices
3 acting prudently in a good and reasonable discharge of their
4 fiduciary obligations?
5 For a Court to twice rule that what they're doing
6 is valid certainly goes a long way to say that they are
7 acting prudently and that there's no basis for the Court to
8 find any mismanagement or any harm to the estate.
9 THE COURT: You know, there's never been a
10 case decided on this particular section. It looks to me
11 like it's been effective since '72. It's just amazing in
12 all those years there wouldn't have been a case helping us.
13 MR. BAUGHMAN: Well, I think the reason,
14 Judge, if I may suggest, is if you look at the official
15 comment as reflected in Purdon's, the statutory predecessor
16 was one which allowed the appointment of a temporary
17 fiduciary in the event that the fiduciary was in the armed
18 services and had to go overseas.
19 THE COURT: That's still part of this.
20 MR. KATZMAN: That's right, but if you look
21 at the history you see it's not a situation where you can
22 take some asset and say somebody has got to handle it. It's
23 either -- it's a time situation.
24 Somebody else has got to handle the estate for a
25 particular period of time so you don't slice it up asset by
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1 asset. You slice it up on a time frame that somebody has
2 got to handle it because someone is sick or someone becomes
3 incompetent or someone had to leave the country, etc.
4 So we don't even think the section is applicable
5 in this situation, and the reason that I would urge you to
6 consider that seriously is this: The executrices have to
7 look at this as a whole, all of the estate assets.
8 Mr. Mumma is interested in his own individual 50
9 percent interest in Lebanon Rock. What's good for Mr.
10 Mumma's 50 percent interest in Lebanon Rock is not
11 necessarily good for the estate even though it owns the
12 other 50 percent of Lebanon Rock because it also owns Elco
13 and other companies.
14 And the jOb of the executrice is to maximize the
15 benefit to the estate not to maximize the benefit to Mr.
16 Mumma because of his individual ownership of Lebanon Rock.
17 As a beneficiary of the estate, he benefits if the estate
18 itself is benefited.
19 But to the extent that he's talking here -- and
20 this is really what he's after -- to the extent that he's
21 here to maximize his own individual 50 percent ownership of
22 Lebanon Rock is misplaced.
23 All the talk about Nine Ninety-Nine, the stock, is
24 not even before the Court at this point. There's nothing in
25 the petition that deals with that whatsoever, so we would
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1 ask the Court to disregard that.
2 There were two court orders, as I see, that
3 support what the executrices are doing here. The whole
4 history of the evidence, I think, was cited in our answer
5 and attached is the sworn testimony of Mr. Bill Boswell at
6 the December 12th hearing just this past month as to how
7 these two companies were set up by the decedent, and they
8 were set up so that Elco would quarry at the same quarry the
9 dolomite and sell it and so that Lebanon Rock would be in
10 the high calcium business.
11 And that was the -- all the evidence except for
12 Mr. Mumma's own undocumented and self-serving oral
13 statements support that situation.
14 THE COURT: Is Judge Schaffner's order
15 indicating that Elco can continue to mine, is that on appeal
16 now?
17 MR. KATZMAN: No. It was October 18 of just
18 this past year. The first order, which was September 7th of
19 1990, and we attached both orders to our trial brief, that
20 order was on appeal and that order set the whole basis for
21 doing it; in other words, establish a royalty basis, etc.,
22 at forty cents a ton.
23 And nobody has come in and claimed that that's an
24 unfair thing. That was vacated by the Superior Court along
25 with everything else that was done in this case.
~770
24
1 Now, of course we have to understand -- I think
2 Mr. Baughman misapplies this a little bit from time to
3 time -- vacating doesn't mean reverse. It doesn't mean
4 affirm. It just says we sweep it away and it goes back for
5 another hearing, and that's the stage we are at.
6 Now, after the Superior Court does that, the
7 additional order that Judge Schaffner issued on October
8 18th, 1991, reestablished the right, if you need to put it
9 that way, reestablished the right of Elco to quarry the
10 dolomite and for Lebanon Rock not to quarry the dolomite.
11 And so, you know, the executrices, if you're
12 talking about faithful discharge of their fiduciary
13 responsibilities are doing just that and the Court has
14 agreed with them at least on the present basis.
15 Now, if you would appoint a substitute fiduciary,
16 Mr. Mumma is banking on the fact that substitute fiduciary
17 is going to agree with them. There's no guarantee that
18 that's going to happen. And if that substitute fiduciary
19 didn't agree with them, you're still at a 50/50 situation.
20 As was pointed out, Judge Schaffner indicated that
21 the request of appointing a custodian for Lebanon Rock, and,
22 by the way, let me explain the concept of a custodian, if I
23 can, for the Court.
24 It's part of the Corporation Code, and the
25 specific section escapes me. It's 125 Purdon's, and it
1.7'71.
25
1 might come to mind. I think you know they changed those
2 numbers, and I'm not -- I can't remember clearly.
3 But in the event of a deadlock, SO/50
4 shareholders, which this situation for Lebanon Rock clearly
5 is and has been and is spawning four years of litigation,
6 and in other situations also where there's way to
7 mismanagement, that kind of thing, the Court has the power
8 to appoint a custodian whose job it would be to operate the
9 company on an independent basis independent of both of
10 the -- well, in this case both the shareholders.
11 THE COURT: That would be an opening now that
12 Judge Schaffner will have.
13 MR. KATZMAN: That's right. Now, what he did
14 in his order, he appointed a common law receiver to do just
15 that, and the superior --
16 THE COURT: For both corporations?
17 MR. KATZMAN: For both corporations. And, of
18 course, there was no deadlock in Elco because Elco is 100
19 percent owned by Pennsy and so forth, but -- so the Superior
20 Court in vacating that said, You can't appoint anybody.
21 We used the generic term caretaker because
22 sometimes it's easier to refer. You can't appoint any kind
23 of a caretaker for Elco because none of the statutory
24 grounds are there where you can, you know, do something like
25 that.
1.'";'72
26
1 You can appoint a custodian for Lebanon Rock or
2 dissolve it because the grounds are there, but you can't --
3 but the statute superseded the common law receiver
4 arrangement and so they sent it back, and we think they
5 thought it was more of a definitional situation.
6 The Judge had appointed what we say was a generic
7 caretaker for Lebanon Rock, but he called it the wrong thing
8 and sent it back and say either a custodian under the
9 corporation law or dissolve it.
10 So the custodian would take away basically the
11 difficulty here because you would have an independent person
12 operating Lebanon Rock without being beholding really to
13 either of the shareholders.
14 A fiduciary, even a substitute fiduciary can't
15 just put blinkers on and say I'm only involved in Lebanon
16 Rock. That temporary fiduciary would nevertheless have to
17 consider the benefits and the effect on the entire estate
18 and all of the companies and their relationship.
19 He can't just say I'm going to vote for Mr. Mumma
20 and let him do what he wants to do. They have a fiduciary
21 responsibility, and, indeed, if he doesn't vote for Mr.
22 Mumma, then what? We're back to a 50/50 situation. So I
23 think as Mr. Baughman perhaps unwittingly said, a custodian
24 is really the answer here.
25 And that's over in Dauphin county, and there's
~773
27
1 been hearings scheduled. There was two days of hearings in
2 December. There's two next week before Judge Schaffner.
3 There's two in February scheduled, two in March, and I think
4 even two in April so that he can act on the remand that the
5 Superior Court sent and make some decisions in these cases.
6 The reason we filed our petition to stay is it's
7 wasteful for the estate to have to come and litigate what
8 really is the same case or the same series of cases in two
9 counties at two different times.
10
THE COURT: Lebanon Rock, is that in Lebanon
11 County?
12
MR. KATZMAN: Yes.
13
THE COURT: How did that get in Dauphin
14 County Court?
15
MR. KATZMAN: It got into the Dauphin County
16 Court because its corporate register's office is in Dauphin
17 county. As a matter of fact, it's in the -- at the
18 headquarters of pennsy Supply, at the same address.
19 Actually it was brought in Lebanon County at
20 various times but the first shot out of the bag was Robert
21 bringing an action against Elco. He used the name Lebanon
22 Rock, but he had no authority, we claim, to do that because
23 he's only a 350 percent shareholder.
24 But he did it in the name of Lebanon Rock and then
25 the estate eventually ended up bringing a shareholder
28
1774
1 derative action because of his waste, what we consider his
2 waste and improper operation of Lebanon Rock, and,
3 therefore, the harm to the estate of its 50 percent interest
4 in Lebanon Rock.
5 He then brought a shareholder derative action
6 against all of the estate and so forth claiming that we were
7 somehow damaging Lebanon Rock, so that's the status of that
8 litigation in Dauphin County.
9 So the deadlock situation, Your Honor, is not
10 necessarily going to be solved by appointing a temporary
11 fiduciary. The deadlock situation can only be resolved by
12 the Dauphin County Court appointing a custodian to run this
13 corporation without being beholding to either of its
14 shareholders.
15 The estate as I say has asked for that for the
16 last three and a half years, and Mr. Mumma has constantly
17 and consistently opposed it; and we think that that's really
18 what the issue is here and that the thing to do is to let
19 the Dauphin County Court proceed to decide first if the
20 custodian is going to be appointed and if it is that takes
21 care of the problem.
22 If it isn't then perhaps the Court might want to
23 consider further, but the consideration has to have the
24 executrices exercise in a prudent manner the fiducairy
25 responsibilities, and if they have, the Court should not act
1775
29
1 to remove them either with respect to a temporary situation
2 or with respect to a permanent situation.
3 And so we see the issue as being the actions of
4 the fiduciaries and whether they are prudent and whether
5 they are reasonable under all of the circumstances.
6 And, of course, the burden that has to be borne by
7 somebody requesting that they be removed is a substantial
8 burden, and as the cases say it will only be granted in a
9 drastic case where the assets of the case are in danger.
10 There hasn't been an allegation in the petition that any of
11 those circumstances are present, so that's our position,
12 Your Honor.
13
THE COURT: Mr. Baughman, you may proceed. I
14 think maybe what we better do is start putting in the
15 testimony of this case rather than opening statements or
16 we'll be here
17
MR. BAUGHMAN: I was going
I will refrain
18 from asking you to reply at this point. Let me begin, Your
19 Honor. I would like to introduce those orders that I was
20 telling you about.
21 (Whereupon, Petitioner's Exhibits 1 through 7
22 were marked for identification.)
23
MR. BAUGHMAN: Your Honor, with your
24 permission I would hand up what I've marked as 1 through 7.
25 I just want to recite, not argue or read, what they are.
1776
30
1 P-1 is Judge Schaffner's original ruling, his adjudication.
2 P-2 is his final decree.
3 P-3 is the June 1990 order which abrogated the
4 agreement that Mrs. Mumma entered into with Mr. Lake
5 purportedly on behalf of Lebanon Rock. P-4 is the September
6 1990 order where Judge Schaffner set as an interim measure
7 pending an appeal Elco could mine and pay royalty.
8 P-5 -- I screwed up, didn't I? That was not P-4.
9 That was P-7, right? The record will have it. And then P-5
10 is the Superior Court decision. P-6 is the October 18th,
11 1991, order saying that Lebanon Rock could not mine dolomite
12 pending the hearings, and finally P-4 is Judge Schaffner's
13 order denying the petition to stay the proceedings here
14 today.
15 (Whereupon, Petitioner's Exhibit No. 8 was
16 marked for identification.)
17 MR. BAUGHMAN: P-8, Your Honor, is a decision
18 with counsel where he points out that the problem that he
19 has with letting Lebanon Rock do this is that he thinks
20 that's a major decision, and there's a deadlock between the
21 shareholders.
22 (Whereupon, Petitioner's Exhibit No. 9 was
23 marked for identification.)
24 MR. BAUGHMAN: Okay. Shifting gears, Your
25 Honor, P-9 is the -- is several pages from a brief we
1777 31
1 submitted before Judge Schaffner, and I've introduced it for
2 what it says about the dividends paid on the stock, and that
3 begins at Page 3 and continues on Page 4.
4 And what it shows is that Mrs. Morgan and Mrs.
5 Mumma -- and this is in their individual and representative
6 capacities -- but of course Mrs. Mumma gets all of the
7 income from the estate.
8 THE COURT: What was the date that that brief
9 was filed?
10 MR. BAUGHMAN: It was filed
11 THE COURT: Was that before it went up to the
12 Superior Court?
13 MR. BAUGHMAN: It was recently, Your Honor,
14 November 27th. This was for a hearing we had in December,
15 and the reason that it was raised before Judge Schaffner is
16 we are asking Judge Schaffner to delay appointing a
17 custodian because of the deadlock because if the deadlock
18 can be broken by an independent fiduciary, then there's no
19 deadlock and no need for a custodian.
20 THE COURT: Is that in your brief?
21 MR. BAUGHMAN: Yes, it is, Your Honor, and
22 let me show you what we're going to be offering. And I
23 would ask Mr. Katzman if he would agree as to the numbers
24 because his clients have testified and agreed as to all the
25 numbers.
1778
32
1 MR. KATZMAN: Your Honor, what was in the
2 brief, the testimony on December 11th and 12th this past
3 year showed that that was inaccurate, and I object to
4 putting something in that Mr. Baughman sat through court and
5 heard sworn testimony to show that these figures were not
6 accurate.
7 MR. BAUGHMAN: Well, I would certainly
8 appreciate hearing what is inaccurate.
9 MR. KATZMAN: That's inaccurate. It was
10 testified that the monies were paid to other children of the
11 Mummas besides Mrs. Morgan and Mrs. Mumma, and you presented
12 it wrongly there, and you presented it wrongly before the
13 Court today.
14 THE COURT: I'll tell you what, if there's an
15 objection made, then I'm not going to admit the
16 MR. BAUGHMAN: That's fine, Your Honor, and
17 you don't need to admit it. I'll have to go through and
18 prove it, and I will do that.
19 THE COURT: Okay.
20 MR. BAUGHMAN: And by the way let me say Mr.
21 Katzman is correct that there's testimony that some of the
22 preferred dividends were paid prior to Mrs. Mumma buying the
23 shares and that those dividends would indeed have been paid
24 to one of the daughters who previously held the shares. To
25 that extent I agree that there's an inaccuracy.
:17',3
33
1 Unfortunately the executrices didn't know how much
2 of it, and we didn't nail that down. But to that -- if
3 that's what it is that Mr. Katzman is referring to, I agree
4 that indeed that was corrected.
5 MR. KATZMAN: There were dividends paid to
6 two of the other daughters not just one of the other
7 daughters.
8 MR. BAUGHMAN: Well, I think that there's a
9 lack of recollection as to the timing. I don't think that
10 that in detail -- that's something that's very difficult to
11 nail down, but let me just -- I will offer other evidence,
12 Your Honor.
13 What is involved here, Your Honor, as you can see
14 from this chart which has been marked for identification as
15 P-9 is that we're dealing with cumulative preferred stock,
16 and the dividends had not been paid on some of this stock
17 for a number of years.
18 And the shares provide -- and I'm going to offer
19 this next exhibit -- that it is not imperative that the
20 dividends be paid, but that if they were not paid, they then
21 be added to the price of the stock on redemption.
22 And what happened in 1988, 1989, and 1990 was that
23 the executrices went back and paid back dividends, which is
24 entirely proper by the way and we're not arguing it's not,
25 but the preferred dividends on those shares over a period of
1780 34
1 years -- and when you look at the chart what you can see is
2 that the dividends for a number of years were paid.
3 And the bottom line was that the executrices in
4 both their representative and individual capacities over
5 that three-year period received out of all the income coming
6 to Nine Ninety-Nine almost 74 percent.
7 So we/re just offering this to show that they
8 received a very large percentage of the money coming from
9 Nine Ninety-Nine, and, therefore, the money coming from
10 Elco, and that/s the reason once again not to cast
11 aspersions but to show a conflict of interest. And in that
12 regard, rIll ask the reporter to mark this as P-10.
13 (Whereupon, Petitionerls Exhibit No. 10 was
14 marked for identification.)
15 THE COURT: Does this list all the
16 shareholders or is this just to show
17 MR. BAUGHMAN: That shows what the stock
18 provided for. That/s the reason. This came from Mr.
19 Hadley/s files as back-up for paying those back dividends,
20 and it shows the consent of the shareholders to pay these
21 dividends.
22 (Whereupon, Petitioner's Exhibit No. 11 was
23 marked for identification.)
24 MR. BAUGHMAN: P-11, Your Honor, is a fax
25 once again from Mr. Hadley/s work files sent by Mrs. Morgan
1781
35
1 in November of 1989 which would show that she was telling
2 Mr. Hadley, Here's a resolution authorizing the payment of
3 all back dividends.
4 (Whereupon, Petitioner's Exhibit No. 12 was
5 marked for identification.)
6 MR. BAUGHMAN: P-12, if you look at the sixth
7 page, this is the Nine Ninety-Nine consolidated financial
8 statements as of the year ending June 30th, 1990, and June
9 30th, 1989.
10 And if you look on that, I guess it's the sixth
11 page, which is the statement of income, and you look down
12 near the bottom it shows what dividends for year ending June
13 30th, 1990, and 1989 were paid on the 10 percent
14 non-cumulative preferred stock and on the 8 percent
15 non-cumulative preferred stock.
16 THE COURT: What page is that, Mr. Baughman?
17 MR. BAUGHMAN: The sixth page of the exhibit.
18 The sixth page has Exhibit B at the top. You have to look
19 at it sideways. And those numbers for the dividends paid
20 1990 and 1989 match what's set forth on my chart on P-9 for
21 those years.
22 In other words, that there were for 1990, there
23 was dividends on the common paid of 423,400, dividends on 10
24 percent preferred of 66,000, dividends on 8 percent
25 preferred of 23,520, and then there's different numbers for
1782
36
1 1989.
2 (Whereupon, Petitioner's Exhibit No. 13 was
3 marked for identification.)
4 MR. BAUGHMAN: And on P-13 if you'd look at
5 the fifth page, you will see the same numbers near the
6 bottom for the years 1989 and 1988. They already, of
7 course, have 1989, but this has the numbers for 1988 and
8 they once again match what's in P-9.
9 MR. KATZMAN: Your Honor, again P-9, I don't
10 have any problem with the first two pages of P-9, but the
11 testimony in Dauphin County -- and I'll bring it to the
12 Court after the break -- shows that what's at the top of
13 page four was incorrect.
14 MR. BAUGHMAN: And I certainly will accept
15 that testimony, and I agree that it shows that at least some
16 of those preferred dividends for certain periods of time
17 and I think it's more specific than your recollection or
18 mine -- were paid to the predecessor owners which would have
19 been Linda and Barbara.
20 And I will join with Mr. Katzman and submit that
21 testimony. I've got no problem or quarrel with Mr. Katzman
22 with regard to that, but subject to that, Your Honor, and
23 with that clarification, I would offer Exhibits 1 through
24 13.
25 THE COURT: Mr. Katzman.
1783
37
1 MR. KATZMAN: Your Honor, I have no objection
2 with respect to Exhibits 1 through 8. The objection with
3 respect to No.9, I believe that all of the exhibits from 9,
4 10, 11, 12, and 13 are totally irrelevant to what's being
5 asked for here.
6 There's nothing there that would indicate any
7 conflict of interest. There's a community interest between
8 the executrices, the beneficiaries, and the estate to the
9 extent that if Nine Ninety-Nine benefits, all of them
10 benefit because they're all shareholders.
11 THE COURT: Other than the irrelevance part
12 of it, do you have any objection?
13 MR. KATZMAN: I have no objection otherwise.
14 THE COURT: All right. They're admitted
15 subject to the objection on irrelevance.
16 MR. BAUGHMAN: Thank you, Your Honor.
17 (Whereupon, Petitioner's Exhibits 1 through
18 13 were admitted into evidence.)
19 MR. BAUGHMAN: Your Honor, we call Mr.
20 Shields to the stand.
21 MR. KATZMAN: Your Honor, I note that Mr.
22 Shields is counsel of record in this case, and I think it's
23 highly unusual for this to occur, if not improper. Could I
24 have an offer perhaps?
25 MR. BAUGHMAN: Yes, Your Honor. My offer is
~781
38
1 Mr. Shields indeed is counsel, and I'm trying to proceed
2 expeditiously this afternoon. I would propose to use Mr.
3 Shields to demonstrate that the petition lays out the extent
4 to which the executrices have been taking 35 percent a year
5 solely on the stock of Nine Ninety-Nine and thus have been
6 increasing their personal interest as opposed to the estate
7 share of that corporation.
8 And that indeed -- that I believe has been
9 admitted in the answer, and if not it's been verified by Mr.
10 Shields through the accounting which has been filed; and,
11 secondly, through Mr. Shields to introduce what I think
12 already has been admitted in other proceedings in Orphans'
13 court, which is the petition filed for appointment of the
14 custodian in York County which shows that indeed the parties
15 have filed that petition fully disclosing to the York County
16 Judge all of the potential conflicts of interest of Mr.
17 Mumma and all of the information which in the answer of the
18 petition has said was mistaken.
19 MR. KATZMAN: Your Honor, I would object to
20 Mr. Shields testifying as an attorney representing a party.
21 I believe that's highly irregular and improper for him to
22 even attempt to do so particularly when no request was made
23 of us heretofore with respect to -- to the extent that
24 anything that's admitted in the pleadings.
25 To the extent it's identified in the petition that
1785 39
1 was filed in York county court, fine. If it looks official,
2 we'll agree to it, but to have the attorney for the
3 Petitioner get up on the stand and talk about his
4 petition -- I think he signed the petition I think it's
5 highly irregular, and I strongly object to it.
6 THE COURT: I'm going to sustain the
7 objection. What the petition and answer says, it says, and
8 we won't need the testimony of Mr. Shields.
9 MR. BAUGHMAN: Thank you, Your Honor, and I
10 would simply point out to the Court that all of the
11 allegations made concerning the acquisitions by Mrs. Mumma
12 individually from the estate of the Nine Ninety-Nine stock
13 and all of the percentages and numbers of the stock, Your
14 Honor, have been admitted so they are deemed established.
15 And I would offer as P-14, and I've showed this to Mr.
16 Katzman, the petition was indeed filed in York County.
17 (Whereupon, Petitioner's Exhibit No. 14 was
18 marked for identification.)
19 MR. BAUGHMAN: That's P-14, Your Honor, and I
20 move its admission.
21 THE COURT: Was there an answer filed to that
22 petition?
23 MR. SHIELDS: Not that I'm aware of, Your
24 Honor.
25 MR. BAUGHMAN: It's being offered, Your
1786 40
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Honor, to show what we disclosed to the York County Court.
MR. KATZMAN: Can I see a copy?
MR. SHIELDS: I have a number of extras.
THE COURT: I guess we're ready to proceed.
MR. BAUGHMAN: I think where we are is
whether Mr. Katzman objects to the York County petition.
MR. KATZMAN: No.
THE COURT: Petitioner's Exhibit No. 14 is
admitted.
MR. BAUGHMAN: Thank you, Your Honor.
(Whereupon, Petitioner's Exhibit No. 14 was
admitted into evidence.)
MR. BAUGHMAN: Your Honor, we call Mr. Mumma.
Whereupon,
ROBERT M. MUMMA, II
having been duly sworn, testified as follows:
DIRECT EXAMINATION
BY MR. BAUGHMAN:
Q Mr. Mumma, I believe you've testified before
in these proceedings. You're one of the Petitioners, is
that correct?
A That's correct.
Q I'd like to focus you on Lebanon Rock
commencing mining activity to build a stockpile of dolomite
and to get into the dolomite business in 1991. Did that
1787 41
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occur in 1991?
A That did occur.
Q And who at that time was president of Lebanon
Rock?
A I was president of Lebanon Rock.
Q And who initiated that activity; that is,
what I just described about dolomite?
A The entering in the dolomite or roadstone
business was initiated in 19 -- well, the first discussions
of it took place in 1986 and '87. The first time they had a
sale, I think, was in Mayor June of 1992 when they started
selling dolomite.
Q '91 you mean?
A Or, excuse me, 1991. We started selling
dolomite in July of '91. They started stripping the area
and clearing the area where they were going to start mining
dolomite. They had a big pile.
THE COURT: When he's saying they, who is he
referring to?
THE WITNESS: Lebanon Rock, sir.
THE COURT: Lebanon Rock, okay.
THE WITNESS: Lebanon Rock had a big
stockpile of dolomite from 1986, and they started to crush
that throughout the period of 1990 and '91. They started to
sell it in Mayor June of '91. They started to mine it in
1788
42
1 October of '91, and it wasn't until they started to mine it
2 that there was any problem.
3 BY MR. BAUGHMAN:
4 Q Okay. Now, why was it that you on behalf of
5 Lebanon Rock did initiate activities to sell dolomite?
6 A Lebanon Rock owned all the property down
7 there, which piece of property has two types, two grades of
8 stone, the high calcium and the dolomite. Lebanon Rock owns
9 the dolomite, and they have a fixed amount of overhead and
10 costs.
11 They have a plant that is capable of producing and
12 has produced 400,000 plus tons of crushed stone a year.
13 There is a market for dolomite in that area of roughly
14 500,000 tons per year. Elco can only service about 250,000
15 tons of that market.
16 There were many instances last year where Elco
17 could not provide dolomite into that market area. In fact,
18 a guy built a large parking lot immediately across the
19 street from the Lebanon Rock quarry and Elco operation, and
20 he bought his stone from Annville twelve miles away because
21 Elco could not supply it. So it was obvious that there was
22 a market there that needed to be taken care of.
23 Lebanon Rock had the excess crushing capacity to
24 do it, they had the quarrying equipment to do it, and they
25 had the dolomite. There was no reason for them not to do it
1789
43
1 other than by so doing they were competing with Elco.
2 And obviously if Elco makes a profit, and they're
3 making a substantial profit off of this dolomite because
4 they're not paying anything for it, forty cents a ton
5 doesn't even cover the amortization of any portion of or any
6 significant portion of the mortgage. It doesn't even cover
7 the interest expense on the mortgage.
8 Q Now, when you're talking about forty cents a
9 ton, you're talking about what Lebanon Rock receives per ton
10 from Elco for dolomite that Elco takes out?
11 A Under this royalty agreement that's very
12 favorable to Elco. The royalty agreement that they entered
13 into, Lebanon Rock is being -- Lebanon Rock can make $2.00 a
14 ton for every ton of roadstone that they mine, crush, and
15 sell into the marketplace.
16 Instead -- because I mean the difference is that
17 if they -- if Lebanon Rock does it, they make $2.00 a ton.
18 If Elco pays them a royalty, they get forty cents a ton.
19 That's $1.60 a ton difference.
20 It even at this time ends up -- Elco, Pennsy, Nine
21 Ninety-Nine ends up going out as a dividend through the Nine
22 Ninety-Nine operation instead of directly to the
23 shareholders of Lebanon Rock, which is a Subchapter S
24 corporation.
25 The tax treatment to the shareholders is much more
~790
44
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B
9
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IB
19
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favorable at Lebanon Rock than it is at Nine Ninety-Nine
because Nine Ninety-Nine is a double taxation.
Q Let me just I want to concentrate a little
bit more on the accounting aspect, if you will, of why you
believe that it's profitable for Lebanon Rock to mine the
dolomite. Let's assume for the moment that just to mine and
sell hi-cal, that Lebanon Rock would get 100 of the receipts
from customers.
A Okay.
Q And let's assume that all of the expenses
would be ninety, and they would make ten, whether this be
ten trillion dollars or ten dollars, they would make ten per
year, let's say.
A Right.
Q Now, I take it that there are going to be
both receipts and expenses for dolomite if they also do
that, is that right?
A That's correct.
Q Now, would you explain why it is that it is
profitable, in fact profitable more than forty cents a ton,
to do the dolomite in terms of adding it to the hi-cal
operations?
A Okay. The only additional expenditure is the
drilling and shooting expense to blast rock. The labor and
fuel expense and the loading expense to load the material,
1791
45
1 that's a very small percentage, maybe fifty cents of the
2 total or one dollar maybe of the total production costs.
3 The majority of the expenses are going to be borne
4 by Lebanon Rock anyway, and they are the electrical expenses
5 which run about $15,000.00 a month, and that's due mainly to
6 the pumping operations that we're forced to do.
7 The amortization of the mortgage and the interest
8 expenses are the same. The equipment rental expenses are
9 the same. The core group of the employees is the
10 difference. It's just that they will work more hours, and
11 so we have an incremental cost for the additional hours
12 worked.
13 We have an incremental cost for the additional
14 fuel used. We have an incremental cost for the increased
15 drilling and dynamiting of the rock, but the whole deal is
16 everything is in place.
17 They own and are paying for the reserves, and they
18 should be able to go ahead and sell those; and, as I said,
19 the whole market down there just in Lebanon County is
20 probably 500,000 ton.
21 Elco can only meet a demand of 250,000 ton, so
22 there's about a 250,000 ton market there that somebody else
23 is getting, and that somebody else is smith, the quarry she
24 just bought, or Annville instead of Lebanon Rock.
25 The other aspect of this is this quarry is located
1792
46
1 on Conrail lines and because of that can market stone into
2 New Jersey, Maryland, and Delaware, and that has been the
3 long-term plan of Lebanon Rock.
4 It has been discussed at board of directors'
5 meetings with all of these parties. They have known about
6 it for over two years, and that's not why they don't want us
7 to do it.
8 The real point here, they don't want to see
9 Lebanon Rock be successful because in their attempt to sell
10 Nine Ninety-Nine they will get more money for their Nine
11 Ninety-Nine shares that they own personally if Nine
12 Ninety-Nine can control the dolomite at the Lebanon Rock
13 quarry, and conversely the shareholders of Lebanon Rock will
14 get SUbstantially less for their money if there is a
15 long-term contract that's not favorable to Lebanon Rock but
16 to Nine Ninety-Nine.
17 And that's what, in my opinion, is really going
18 that's why they're conflicted. If there was an independent
19 fiduciary there making these decisions on behalf of Lebanon
20 Rock, it is clear that making $2.00 a ton is better than
21 making 40 cents a ton.
22 THE COURT: When he said referring to they in
23 this last sentence, is he referring to Mrs. Morgan and his
24 mother?
25 MR. BAUGHMAN: He is referring to they and
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1 Nine Ninety-Nine, the executrices, Your Honor, trustees.
2 Now, they --
3 (Whereupon, Petitioner's Exhibits 15, 16, and
4 17 were marked for identification.)
5 BY MR. BAUGHMAN:
6 Q Mr. Mumma, I'm going to show you three
7 exhibits I've had marked for identification. Would you
8 first look at what I've had marked for identification as
9 P-15 and tell the Court what that is, if you know what it
10 is.
11 A Now, that's a letter that we found out about.
12 It came from a file from DER when this litigation first
13 started. Elco in February of 1988 went out and bought some
14 trucks and loaders and entered the Lebanon Rock quarry and
15 started mining dolomite. We called DER and raised to their
16 attention that Elco was not permitted and was not licensed
17 to mine in dolomite.
18 MR. BAUGHMAN: Let me interrupt you.
19 Unfortunately, although this is an important document
20 Your Honor, I apologize. I was attempting to get a copy of
21 the agreement that Mrs. Mumma entered into with Mr. Lake in
22 1990.
23 I got the wrong agreement. We'll save this
24 another day. I withdraw P-19. We haven't gotten to 19 yet,
25 I'm sorry. That's what happens when you -- P-15, I
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1 apologize. I withdraw P-15.
2 THE COURT: Fine.
3 BY MR. BAUGHMAN:
4 Q How about P-16, is that a letter you received
5 from your mother?
6 A Yes, P-16.
7 Q And in that letter she objected, and she
8 objected on September 30th, 1991, to entering into the
9 business of mining dolomite, is that right?
10 A That's right.
11 Q And what is P-17?
12 A That's my response.
13 Q Would you read to the Court what your
14 response was?
15 A I am in receipt of your letter of September
16 30th on the subject of mining dolomite at the Lebanon Rock
17 quarry. Your letter advises that you are completely against
18 Lebanon Rock quarrying and selling dolomite but no reasons
19 for your position are set forth.
20 I believe that it is absolutely clear that such
21 operations will be profitable to Lebanon Rock and therefore
22 to its shareholders. I would, of course, be happy to answer
23 any specific questions that you might have as to the
24 profitability of such an operation.
25 Further, I would be willing to discuss this either
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informally or at a board meeting called for this purpose.
Please advise me as to when you would be available for such
purposes. If I do not hear from you, I will have to assume
that you have no questions and also no substantive reasons
for opposing this operation, and I will therefore proceed in
the best interests of the corporation with the quarrying of
dolomite.
MR. BAUGHMAN: Your Honor, I move for the
admission of P-16 and P-17.
THE COURT: Any objections to those two?
MR. KATZMAN: No.
THE COURT: They're admitted, both of them.
(Whereupon, Petitioner's Exhibits 16 and 17
were admitted into evidence.)
BY MR. BAUGHMAN:
Q And did you ever receive any response to
P-17?
A No, I did not.
MR. BAUGHMAN: Thank you. No further
questions.
THE COURT: Cross-examine.
CROSS-EXAMINATION
BY MR. KATZMAN:
Q Mr. Mumma, your counsel put into evidence,
among other things, the order and memorandum of Judge
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1 Schaffner that was entered on September 7th, 1990. Do you
2 recall that?
3 A I recall it, yes.
4 Q And wasn't that the decision that Judge
5 Schaffner had made authorizing a royalty agreement between
6 Elco and Lebanon Rock as proposed by the estate rather than
7 the proposed plan that was put forward by you?
B A I'm not sure that that was what his decision
9 was.
10 Q Well, there was a hearing on September 4,
11 wasn't there? Do you remember that?
12 A There was a hearing.
13 Q Okay. And that hearing was the result of
14 Judge Schaffner asking each party to put forth a plan for
15 operating in the quarry with respect to dolomite. Do you
16 remember that?
17 A Right, but my understanding, Mr. Katzman, of
18 what Judge Schaffner wanted us to do was
19 MR. KATZMAN: Your Honor, I'm not asking what
20 his understanding was. I'm just asking him whether that's
21 what precipitated the September 4th hearing.
22 THE COURT: Well, maybe he doesn't know what
23 precipitated
24 MR. KATZMAN: I think he said yes, he did,
25 then he went on.
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Q You recall that each side was supposed to
present a plan?
A No, I think each side was supposed to present
their position, in which we presented our plan, but it was
my understanding that what Judge Schaffner ultimately
decided was that he was going to maintain the status quo of
Elco until he heard from the Superior Court, and Elco was
doing the mining at the time and they continued to do it.
THE COURT: We're going to have to rely on
what Schaffner did by what his orders were.
MR. BAUGHMAN: It's spelled out what he said,
Your Honor.
BY MR. KATZMAN:
Q Well, Mr. Mumma, again
A If I could see it, maybe it will refresh my
memory.
THE COURT: Do you need one? What exhibit is
that?
MR. BAUGHMAN: Seven, Your Honor.
THE COURT: I'll give him mine. It's in
fourth position. It's seven.
MR. KATZMAN: He said fourth position, but
it's number seven, is that right?
THE COURT: There's exhibit seven. I'm not
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1 sure what it is.
2 MR. BAUGHMAN: Does it begin, These cases
3 have involved two corporations.
4 MR. KATZMAN: And you say that's number
5 seven?
6 MR. BAUGHMAN: That's No.7, I think.
7 THE COURT: I think I gave him the right one.
8 MR. KATZMAN: Yes.
9 THE COURT: While he's looking at that, Mr.
10 Katzman, was this part of the whole ball of wax that was
11 reversed, that decision?
12 MR. KATZMAN: well, Your Honor, that was the
13 whole ball of wax that was vacated.
14 THE COURT: I'm sorry, vacated.
15 MR. KATZMAN: Yes, and then after that came
16 the October 18, '91, order which in a sense reinstated as we
17 see it this same arrangement.
18 THE COURT: And now you're trying to find out
19 from Mr. Mumma about that particular order?
20 MR. KATZMAN: Yes, I'm trying to find out
21 from him if that's the very testimony that he gave about the
22 profitability to Lebanon Rock because of incremental costs
23 as presented to Judge Schaffner at the September 4th hearing
24 and was not accepted by him in making his decision that
25 instead Lebanon Rock should receive a royalty and that Elco
1799 53
1 should continue quarrying the dolomite.
2 THE COURT: Does Judge Schaffner's decision
3 indicate that he did not accept any testimony of Mr. Mumma?
4 MR. KATZMAN: He says on Page 3, Counsel duly
5 submitted to us on August 15 their contending plans. And he
6 then, you know, says that we're persuaded that Elco's
7 proposal is more reasonable as an interim operating method
8 under all the circumstances of this case. I'm not going to
9 read the whole thing.
10 MR. BAUGHMAN: Well, I object.
11 THE COURT: We'll certainly accept, Mr.
12 Katzman, whatever the Judge said, and I'm not sure what
13 you're asking Mr. Mumma he can really answer.
14 MR. KATZMAN: Well--
15 THE COURT: I think Judge Schaffner's order
16 will have to speak for itself whether or not he accepted
17 everything that he offered or not.
18 MR. KATZMAN: Well, this is why I have to
19 question him, Your Honor.
20 BY MR. KATZMAN:
21 Q Because don't you remember that you submitted
22 an affidavit signed by Mr. Ametrano that gave a glowing
23 picture of the profit that Lebanon Rock would make if it was
24 allowed to get into the dolomite business?
25 A That was
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MR. BAUGHMAN: I object, Your Honor, because
if Mr. Katzman were to continue reading, it is obvious Judge
Schaffner did not decide what would be more profitable for
Lebanon Rock, but took a lot of factors into consideration
and basically said we're going to keep the people in place
as had been doing. He said -- what he said, Your Honor --
THE COURT: I think this is where we better
leave this one. I think whatever Judge Schaffner said in
his order and whether or not he accepted what they proposed
or not, if that's what he said in this order, then I would
rely on that.
MR. KATZMAN: But you don't know what was
proposed, Your Honor, unless we get some additional evidence
before you, and, as a matter of fact, I'll do that as part
of our case at this point.
THE COURT: Okay.
BY MR. KATZMAN:
Q Do you have any documentation, Mr. Mumma,
with respect to how you've calculated this profit that you
say Lebanon Rock would make?
A We did an analysis back at that time, and I
am relying on that and the knowledge of the cost that
Lebanon Rock currently experiences to do the hi-cal.
Q All right. Do you have any documentation I
think was my question.
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A Just the report that was submitted
previously.
Q At the September 4, 1990, court hearing?
A Right.
Q Okay. Now, when the dividends are paid on
the common stock of Nine Ninety-Nine, you get your share,
don't you?
A On the common stock?
Q Yes.
A Common stock, I would think so.
Q Well, do you know or don't you?
A I don't know what other people get.
Q You don't know what?
A I don't see the checks that other people
receive.
Q I'm talking about you.
A I know what I get, yes.
Q Okay. You do get a dividend based on the
number of shares that you own, do you not?
A I think that's correct.
Q All right. And to the extent that any of
Elco's profits come through to constitute dividends that
Nine Ninety-Nine would pay, you get your appropriate share,
do you not?
A I don't know that. If you're talking -- if
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you're trying to say if there's a dollar, let's say $2.00
made on the sale of a ton of roadstone, it's what I would
get or what the shareholders of Lebanon Rock would get of
that $2.00 is vastly different than what shareholders of
Nine Ninety-Nine would get out of that $2.00.
Q Well, because they're different shareholders,
right?
A Not only that but because of the tax
treatment also.
Q Well, in the years that you've operated
Lebanon Rock, and you have been operating it pretty much on
your own, have you not?
A No.
Q You haven't?
A On my own, no. We have people in place down
at Lebanon that do the day-to-day operations.
Q As far as vis-a-vis the executrices, you've
been operating it on your own?
A The executrices have refused to attend any
director's meetings since at least the Spring of 1990, I
believe it was, and they have refused to address important
issues to the corporation.
Because of that I have been required to advance
hundreds of thousands of dollars of my own money to keep the
place operating and to have my companies advance credit in
1803 57
1 excess of $200,000.00 to keep it operating, and I'm doing
2 the best I can, Mr. Katzman, to keep the company afloat.
3 And I signed on immediately to the bank guarantee,
4 and it's only going to last one more year. That's the only
5 extension they gave us. And the problems of that
6 corporation need to be resolved, and they can only be
7 resolved with directors which will come with an open mind to
8 a direcctor's meeting and sit down and discuss the
9 operations of this company.
10 Q Speaking of $200,000.00, you used $200,000.00
11 of Lebanon Rock's money to pay your own attorney's fees in
12 the Lebanon in the Dauphin County action?
13 A Now, you know that's not true. It was to pay
14 the attorney's fees of Richard WiCkersham, who was the
15 attorney for Lebanon Rock, and that issue has been up to, I
16 believe the whole way to the Supreme Court of Pennsylvania.
17 And it was -- we were they agreed though that this was
18 proper for Mr. Wickersham's fees to be paid from the
19 corporation. He represented Lebanon Rock.
20 Mr. Baughman represents me, and he has not
21 received any payments of fees from Lebanon Rock, which is
22 contrary to Mrs. Mumma. Mr. Lake and all the other parties'
23 fees to you have been paid out of Nine Ninety-Nine, which
24 I'm a shareholder.
25 MR. BAUGHMAN: Your Honor, let me just say at
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1 least the Petitioner here is not attempting to raise before
2 Your Honor all of the issues that are before Judge
3 Schaffner, and indeed the issue of the attorney's fees is
4 something that went up to the Superior Court and has been
5 litigated a lot and I don't want to have to argue one way or
6 another before Your Honor. I just don't want to take the
7 time to do that.
8 THE COURT: Unfortunately you gentlemen have
9 a much better background of that litigation. I hope we're
10 not going to rehash here something that's been rehashed at
11 that proceeding.
12 MR. KATZMAN: Your Honor, I don't know that
13 anything is irrelevant to this proceeding that's happened in
14 the Dauphin County litigation. I think it all has to be
15 taken into consideration.
16 THE COURT: I think, you know, if it has any
17 bearing as to whether or not I appoint temporary fiduciaries
18 it's relevant, so --
19 MR. KATZMAN: Exactly.
20 BY MR. KATZMAN:
21 Q You're aware, are you not, that in Mr.
22 Baughman'S brief to the Superior Court it was represented
23 that Mr. Wickersham was representing you personally?
24 MR. BAUGHMAN: Objection, Your Honor. Your
25 Honor, I would like to argue the relevance of that to this
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1 petition. If indeed, Your Honor
2 THE COURT: We're not asking to have him
3 removed.
4 MR. KATZMAN: No, but we're going to ask of
5 Your Honor -- he's talking about trying to keep Lebanon Rock
6 afloat, and the problem with Lebanon Rock is he's been
7 milking money out of it to the detriment of the estate for
B his own personal purposes.
9 THE COURT: You can certainly ask him
10 anything relevant to that. I didn't think Mr. Wickersham's
11 fees were for his personal purpose. I thought it was for
12 the whole corporation.
13 MR. KATZMAN: It was. Well, they've
14 fluctuated, but --
15 THE COURT: Can somebody give me a citation
16 on that case? If you can, I'll read it.
17 MR. BAUGHMAN: In the adjudication, Your
18 Honor, is a final decree somewhere, which is P-2. It should
19 cover that.
20 THE COURT: I'll tell you, I'm not really
21 sure, Mr. Katzman, if I have enough knowledge and
22 understanding of what took place in connection with this to
23 write anything on it in my opinion. I don't even know.
24 MR. BAUGHMAN: The short answer, Your Honor,
25 is if indeed Mr. Katzman is right with regard to the Mr.
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Wickersham argument that was vacated along with everything
else and Judge Schaffner has a hearing set up, he has his
remedy to go before Judge Schaffner.
That's not what's before the Court here. The only
question here is a very narrow question of whether the
executrices have a conflict of interest vis-a-vis Lebanon
Rock, excuse me, the estate.
THE COURT: I'm not going to -- rather than
having a big hassle about objecting to this and objecting to
that, if I don't think it's relevant, I won't even consider
it. I don't see how it's relevant now.
MR. KATZMAN: Well, Your Honor, Mr. Mumma
brought up the fac't that he was trying to keep this company
going, and the problem is that he keeps milking the money
out of it. That's what the relevance is. If ours isn't
relevant, then his statement is not relevant either, so
we'll go on.
THE COURT: That might very well be.
MR. KATZMAN: All right.
BY MR. KATZMAN:
Q Now, Mr. Mumma, your problem before the Court
today is that the executrices won't agree with you on things
to do for Lebanon Rock with respect to entering the dolomite
business?
A They won't even discuss this, Mr. Katzman.
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1 They won't even come to the board of directors' meetings to
2 discuss it.
3 Q And if they would come to a board of
4 directors' meeting and discuss it and vote against your
5 wishes, would that be all right?
6 A Well, let me say I don't think that Mrs.
7 Mumma should be put in that position. First of all, she
8 can't logically vote. If she votes that Lebanon Rock should
9 be put into the dolomite business, I think she feels that
10 that would harm Elco.
11 Q Wouldn't it?
12 A Well, like I say, there's a 250,000 ton
13 market there. If Elco can be run efficiently, I wouldn't
14 think that it should harm them. They're only capable of
15 supplying 250,000 tons.
16 The main thrust, the major thrust for our
17 roadstone business, as you know, was out of state sales
18 which you have pre-empted us from doing. That's been what
19 you've discussed all along. If we picked up -- you know, we
20 wrote a letter, sent a letter to local customers also, and
21 they came in and they were buying stone from us.
22 Now, as I said, across the street at the bus
23 garage Elco didn't even have stone to sell them at the
24 blacktop plant that's right there at the quarry. They have
25 to go to Annville to buy certain sizes of stone because Elco
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are of such poor quality and they don't have the capacity to
keep them up.
Q When was that?
A That was this past summer, the past two
summers.
Q But when exactly?
A When exactly?
Q On a day-to-day basis?
A Which week?
Q Not which week, which month?
THE COURT: Now, that's hearsay.
MR. KATZMAN: Excuse me, Your Honor, what
month?
THE WITNESS: All summer long, Mr. Katzman.
BY MR. KATZMAN:
Q Now, if you're wrong about the 500,000
potential then Elco would be hurt, wouldn't it?
A Well, if it's 250,000 tons, I mean if I'm
wrong by 50 percent, no; and Elco, why should Elco be hurt?
They weren't even in the dolomite business in 1985.
Q Well, is it your position then that Elco
should remain in the dolomite business paying a royalty but
that Lebanon Rock should also get into the business?
A No. My position, which has been indicated in
Dauphin County, is that Elco has no rights to the dolomite
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1 at the quarry. Lebanon Rock is supposed to be the quarry
2 operator. That's laid out in the memorandum that's been
3 laid out everywhere.
4 Up until February of 1988 Elco didn't even have
5 quarrying equipment on the site. They didn't move the
6 equipment in until 1988. Lebanon Rock did all of the
7 quarrying at the site.
8 Q You were in court on December 12th of last
9 year, were you not?
10 A Yes, I was.
11 Q You heard Mr. Boswell's testimony, did you
12 not?
13 A Yes, I did.
14 Q Mr. Boswell's testimony was that Elco was to
15 be in the dolomite business, isn't that correct?
16 A That was not his testimony, and I'd like you
17 to read his testimony if you're going to present it as such.
18 Q I'm going to present it to the Court, and the
19 Court can decide.
20 A And also, Mr. Katzman, just so we don't
21 confuse this issue too much --
22 THE COURT: We've got to respond solely to
23 the questions. The question was, What was Mr. Boswell's
24 testimony? He said it was something. You said it was
25 something. You said it's in the notes. That's that and
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1 let's go on with some other questions.
2 MR. KATZMAN: Your Honor, I believe I
3 attached Mr. Boswell's, part of his testimony to our answer.
4 THE COURT: If you have it, I will read it.
5 MR. KATZMAN: Well, if not, when it comes our
6 turn, I will put that into evidence.
7 BY MR. KATZMAN:
8 Q Now, Mr. Mumma, if the Court would appoint a
9 substitute or temporary fiduciary and that person wouldn't
10 agree with you for one reason or another that the wise thing
11 to do is for Lebanon Rock not to get into the dolomite
12 business, what then?
13 A I would abide by this decision. I would not
14 threaten to sue the fiduciary.
15 Q Okay. What about the -- aren't there other
16 issues that have created a deadlock in Lebanon Rock such as
17 yourself dealing with the equipment that you rent to the
18 company?
19 A Mr. Katzman, you keep talking about
20 self-dealings and milking the company and everything else.
21 Judge Schaffner has ruled that he saw none of that, and the
22 testimony is that the rates that I charge for the equipment
23 rental are below market rates, and they're less than what
24 Elco was charging for the same services.
25 Q Nevertheless when you sell from a company
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1 that you own 100 percent of or you lease a piece of
2 equipment to Lebanon Rock which you own 50 percent of and
3 which you're director of, you don't consider that
4 self-dealing, do you?
5 A Mr. Katzman, the history --
6 Q Can you answer that question whether --
7 A No, I don't. I consider it a necessity
8 because the way we were put into that situation is that Mrs.
9 Mumma refused to invest the money on behalf of Lebanon Rock
10 that they needed to buy the equipment.
11 Elco, when this originally started, Elco was to
12 provide all of the crushing for Lebanon Rock, and they did
13 provide that for two years.
14 MR. KATZMAN: Excuse me. I believe my
15 question was, What does he consider self-dealing. And he
16 said--
17 THE COURT: I think he's trying to explain
18 that. I think what he's saying now is proper. Overrule
19 your objection.
20 MR. KATZMAN: All right.
21 THE WITNESS: They provided that service for
22 two years for a fixed fee. I think it was like $150.00 a
23 ton. They decided unilaterally from 1987 that they would no
24 longer provide that service even though that's what had been
25 agreed to and that I should bring a portable crusher in to
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provide the crushing facilities, and they agreed to the
rates that were being charged.
Now, that has continued so that Lebanon Rock would
have crushing capacity. There have been numerous occasions
when they have asked them to attend a director's meeting so
that Lebanon Rock could attempt to buy their own crUShing
facilities, and they've refused to attend.
I think it's part of the tactic so that they can
come in and say that I'm at fault and I'm milking the
company because I keep renting this equipment from myself,
but the fact is they were the ones that initiated this and
now they refuse to attend a board meeting to stop because
they can come in every time and beat me over the head with
it.
Q Well, irrespective of all your explanations,
when you rent equipment from a company you own 100 percent
of to Lebanon Rock which you own 50 percent of and which
you're 50 percent director, you don't consider that
self-dealing?
A
independent.
director.
Not when the decision was made by an
The decision was made by Mrs. Mumma as the
Q
A
Q
For the crusher?
To rent the crusher.
How about for the other equipment?
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A There's only one other piece of equipment
that I know of that she was not involved in that decision
because she wouldn't attend a board meeting.
Q I just want to get your definition of
self-dealing.
A I don't consider it self-dealing when Mrs.
Mumma was at the director's meeting and in fact made the
motion and voted for it.
Q And indeed that crusher, because of the rent
that Lebanon Rock has paid your company over the last three
and a half years, that was enough money for you to payoff
and own the crusher in its entirety, and you're still
renting it to them?
A No, that's not true. The crusher is not paid
off and owned in its entirety.
Q Well, the crusher that was originally there
is paid off, isn't it?
A I don't believe so.
Q Do you know?
A I don't think it is. My advice to you is
that it is not.
Q All right. Do you know whether it will be
paid off?
A In about three years from now, I believe.
Q Three years from now?
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1 A That's my belief.
2 Q You filed this action after Judge Schaffner's
3 October 18th, 1991, order, did you not?
4 A I'm not sure what the date is.
5 Q Well, the date of your affidavit appears to
6 be October 27th, I believe.
7 A Then it was filed afterwards, yes.
8 Q And this situation with Lebanon Rock has been
9 going on to your dissatisfaction, I think you said, since
10 1988?
11 A 1988 is when Elco entered the quarry with
12 their own equipment and started mining the roadstone.
13 Q And why did you wait four and three quarters
14 years before filing this petition?
15 A Mr. Katzman, the situation has changed. It
16 wasn't until this year in september that anybody raised the
17 issue of whether or not Lebanon Rock had the right to mine
18 their own dolomite.
19 There's never been a question as to whether or not
20 Lebanon Rock owns the dolomite. The question is whether or
21 not Elco has this unilateral right to mine it at a cheap
22 rate, and that's what Judge Schaffner has been deciding.
23 We've now crossed another boundary, and now the
24 estate is saying Lebanon Rock can't even mine the dolomite
25 that they own because it will compete with our interest at
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Elco. And this is a whole other world.
And the thing for four years we have been
discussing and planning for Lebanon Rock to sell dolomite
and reporting on a monthly basis to the estate our efforts
to sell dolomite out of state and to other contractors in
state, and now all of a sudden when things get going they
come up in September or whenever it was and say, Oh, now we
don't think they should mine their own dolomite. It's an
entirely new issue.
Q Well, don't you recall that your attorney,
Mr. Vale, who was from Mr. Baughman's firm at the September
4, 1990, hearing told the Court that Elco has the right to
quarry the dolomite; that is, to the exclusion that Lebanon
Rock would not be able to quarry the dolomite? Do you
recall him saying that?
A No, sir.
Q All right. We'll present that. So you've
wanted, you say, since the beginning of 1988 for Lebanon
Rock to quarry dolomite, and you waited until October of '91
to file this petition?
A Mr. Katzman, as early as 1986 Bud Lake and I
discussed Lebanon Rock selling dolomite or roadstone, okay.
In 1988 for the first time Elco moved men and equipment into
the quarry and started to quarry the roadstone, and that's
what precipitated the litigation as to whether or not they
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had any right to do that.
This year in september, I think it was, or October
after watching Lebanon Rock strip the quarry, strip the
area, drill the holes, sell off the shot and start to crush
the dolomite, this year in October they carne in and said,
Oh, we don't think Lebanon Rock should even be allowed to
mine their own dolomite.
Q And Judge Schaffner on October 18 agreed, did
he not?
A No, I think what he agreed to from what I can
understand from my attorney is that without the consent of
the board of directors, Lebanon Rock should not start to do
this.
Q But nevertheless he agreed that Lebanon Rock
should not do it, isn't that correct?
A No, I think you're trying to convey a message
that wasn't there. What he said was that for Lebanon Rock
to do that you need to have a director's meeting and make a
business decision to do it. He didn't say it wasn't a good
thing to do or it was a good thing to do. He said it's a
matter for the directors to decide.
Q Well, let me show you the October 18
decision. It's only a couple pages, and you know where he
said that, the language that you just repeated.
MR. BAUGHMAN: Well, Your Honor --
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THE COURT: There again he might be in error,
Mr. Katzman, but there again the order certainly will speak
for itself.
MR. KATZMAN: Well, Your Honor, my point is
we're talking about credibility. We hear a lot of things
being said off the top of the head with no documentation,
and I want the Court to know that credibility is an issue
here, and that
THE COURT: I don't know if credibility is an
issue. I might be in error.
That's credibility.
And P-18 is where the Judge
MR. KATZMAN:
MR. BAUGHMAN:
explained his order.
THE COURT: In any event I think in order to
save time, I'll look at the order and whatever Judge
Schaffner said in his order, that's what he said and not
what Mr. Mumma thinks that he said.
THE WITNESS: Your Honor
THE COURT: We need not explain.
THE WITNESS: Okay.
BY MR. KATZMAN:
Q Now, you've asked in your petition that if
there's a fiduciary appointed, that they be given the power
to sell the estate shares in Lebanon Rock. Do you recall
that?
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A I don't recall that.
Q Is that something that you're looking to have
happen?
A No. The purpose of this is to have a board
of directors who will make decisions that are most favorable
to Lebanon Rock and the shareholders of Lebanon Rock.
Q Well, it speaks for itself, but I believe
Paragraph 17 of your petition says that you want them to be
vested with the same fiduciary powers that Mrs. Mumma and
Lisa Morgan now hold including the power to sell the same at
a price that's fair to the estate and reflect the current
fair market value of such stock.
A Does it say -- I have to see it. Can I see
it?
THE COURT: That's what it says.
THE WITNESS: okay. I didn't --
THE COURT: The bottom five lines there say
that.
THE WITNESS: Fine.
BY MR. KATZMAN:
Q Okay. Is that one of the things that you're
looking to achieve by having the Court grant your petition?
A No. What I'm looking to achieve is to be
able to run the affairs of Lebanon Rock for the benefit of
the shareholders. I mean, I still firmly believe that
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1 profit at Lebanon Rock is fair more advantageous for its
2 shareholders than profit at Elco because of two reasons.
3 One, the tax code provides that Lebanon Rock can
4 be a Subchapter S Corporation, so any profit there is can be
5 distributed to the shareholders and the estate directly.
6 The tax rate for that is the personal -- is
7 whatever rate the estate and the shareholders are at but
8 from the pennsylvania state, state of Pennsylvania,
9 pennsylvania rate is much lower than that of the individual
10 tax rate, which I think is three and a half percent versus
11 thirteen and a half, I believe, this year for a corporate
12 tax return because of the surcharge. So they save around
13 ten and a half percent of state tax at least.
14 Second thing is that there's only one step of
15 taxes because it's passed directly through. If it goes to
16 the shareholders through a C Corporation, Elco has to file a
17 consolidated return with Nine Ninety-Nine.
18 They pay tax at the corporate rate of
19 approximately 34 percent on that consolidated return, then
20 when the rest is distributed there's another tax due which
21 would probably be in the same 34 percent neighborhood; so it
22 is almost confiscatory to pay the 68 percent versus paying
23 the much lower rate that the Subchapter S would yield.
24 Plus, there's a difference in ownership. The
25 beneficiaries of the estate ultimate gain is diluted through
1.820 74
1 in the Nine Ninety-Nine side by whatever shares Mrs. Mumma
2 has that she owns as part of Nine Ninety-Nine.
3 She is not a shareholder of Lebanon Rock, Inc.
4 She gets no dividends from -- the money comes through
5 Lebanon Rock, Inc. Other than the income that passes
6 through the estate, if it comes through Nine Ninety-Nine,
7 she'll get dividends due to her shareholding in Nine
8 Ninety-Nine and that reduces the amount of dividends that
9 each of the beneficiaries would get.
10 Q But each of the beneficiaries get some
11 dividends including yourself from Nine Ninety-Nine, isn't
12 that correct?
13 A It's a lesser amount, Mr. Katzman. That's
14 where the conflict is.
15 Q The conflict is because you and your sisters
16 get dividends from Nine Ninety-Nine?
17 A No, the conflict is because if it's treated
18 directly, the estate owns Lebanon Rock shares versus owning
19 the Nine Ninety-Nine shares. Mrs. Mumma owns individually
20 shares of Nine Ninety-Nine that she has been withdrawing
21 under the 50 percent power. She owns no shares of Lebanon
22 Rock, Inc., so the amount of money to come out to the
23 beneficiaries is less.
24 Q But as the income beneficiary from the
25 estate, isn't she entitled to the income, 50 percent of the
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total income of Lebanon Rock?
A That's correct.
Q All right.
A But the estate, the value of the shares of
Lebanon Rock are greater if Lebanon Rock controls its
dolomite than they are if Elco controls the dolomite.
Q All right. So you're not really talking
about the income now?
A No, I'm really talking about. the interest
income, too, yes.
Q But Mrs. Mumma would get 50 percent of the
income of Lebanon Rock, would she not, as an income
beneficiary?
A That's right.
Q Okay. Of course, she hasn't gotten any since
you've been operating the company, has she, because there's
been no profits, right?
A I don't think there's ever been a profit at
Lebanon Rock. There will be, if we win our position with
Judge Schaffner, I think we'll have found it was quite
profitable over the years.
Q Well, you think there is, right? That's your
position?
A
profitable.
Our position is that it is and was
If the estate had not siphoned off the
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dolomite, it would have been a profitable corporation.
MR. KATZMAN: That's all I have, Your Honor.
BY THE COURT:
Q Before I forget, has Lebanon Rock ever sold
dolomite?
Yes, sir, they did.
Over what years did they do that?
They have sold it to cement companies ever
A
Q
A
since 1986.
Q Was there a time then when both Lebanon Rock
and Elco were mining and selling dolomite?
A In 1986 the only person mining, the only
corporation mining in the quarry was Lebanon Rock, okay.
They were mining both dolomite and hi-cal.
Q And when was it then Elco came in and started
mining?
A In 1988, Elco -- February of 1988 -- brought
in two trucks, a loader, and a drill in and started mining
dolomite for their own purposes.
Q When did Lebanon Rock stop mining and selling
dolomite?
A Well, they never really stopped doing it.
They had this pile of dolomite that was piled up at the one
end of the quarry, and they stopped marketing it. They
were --
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Q
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And when was that?
They did not market it actively in the years
3 '88 and '89.
4 Q Why was that?
5 A Well, because their plate was full in their
6 high calcium production. They were selling all the high
7 calcium they could make in that period of time. I shouldn't
8 have said they didn't actively market it, but they did sell
9 the dolomite to Keystone Cement and one of the other cement
10 companies up in the valley on an occasional basis.
11 In the spring of '90 and '91 or '91 they started
12 to sell it in the local market to contractors who would come
13 in and buy it.
14 THE COURT: Mr. Baughman, redirect.
15 MR. BAUGHMAN: None, Your Honor.
16 THE COURT: I have no other questions. Thank
17 you. You may step down.
18 MR. BAUGHMAN: We rest, Your Honor.
19 (Whereupon, a recess was taken.)
20 MR. KATZMAN: Call Lisa Morgan to the stand,
21 Your Honor. I presume the Petitioner has rested?
22 THE COURT: They have.
23 Whereupon,
24 LISA MORGAN
25 having been duly sworn, testified as follows:
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DIRECT EXAMINATION
BY MR. KATZMAN:
Q Would you state your name, please.
A Lisa Morgan.
Q And what is your position with the estate?
A I'm co-executrix along with my mother.
Q What is your profession, Mrs. Morgan?
A Multi-profession. I am currently vice
president and general counsel of Pennsy supply, Inc. I also
have a J.D.
Q A law degree?
A Right.
Q You're the daughter of the decedent?
A Yes, sir.
Q sister of the Petitioner?
A Yes, sir.
Q Now, would you indicate -- I don't want to
take a lot of time, but I think this has to happen to some
degree -- when did the first problem arise with respect to
the administration of your father's estate so far as
problems with your brother is concerned?
A Your Honor, this all happened about the same
time as the problems that we're having in the other lawsuit
that is currently pending here, about the spring and summer
of 1987, and the same thing happened in this corporation
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around that time.
My mother and the pennsy people had been running
Lebanon Rock and Elco operations after my dad's death. My
dad had been running those operations before he passed away,
and all of a sudden in the summer of '87 when personal
situations started falling apart, my brother went down and
took possession of all of the books and records of Lebanon
Rock physically off the property in Lebanon where they're
located and moved them up to his office in Harrisburg and
started unilaterally running the company.
Q Now, in 1986, which was right at the
beginning of 1986 right after Lebanon Rock was formed, was
quarrying going on down there to your knowledge in the first
say three or four months before your father died in 1986?
A Yes, there was.
Q And was Elco quarrying?
A Yes, it was.
Q And whose equipment was being used for the
quarrying?
A Quarry equipment was being rented for the
high calcium and dolomite business from pennsy Supply as
well as Elco equipment was being used also for certain
aspects of the quarrying.
Q Okay. Lebanon Rock was started in December
of '85, is that correct?
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A Yes.
Q And had Elco been involved before that?
A Yes, Elco was bought by my father in 1982,
Your Honor, and from the day Elco was bought, Elco was in
the dolomite business contrary to what my brother tells you;
and, in fact, when Lebanon Rock was bought in 1986, there
were dolomite piles there in inventory and those inventory
piles went to Elco.
They did not go to Lebanon Rock in the sales
transaction, and that's because Elco was in the quarry
business and that whole arrangement and deal was testified
to by Bill Boswell at our last hearing.
(Whereupon, Respondent's Exhibit No. 1 was
marked for identification.)
BY MR. KATZMAN:
Q You were in the Dauphin County Court on
December 12th, were you not?
A Yes, I was.
Q I'm showing you Pages 171 through 174 of Mr.
Bos -- the transcript of Mr. Boswell's testimony.
MR. BAUGHMAN: Your Honor, Mr. Katzman had
problems with me using a witness to get in something that
has nothing to do with the witness. If that's part of the
transcript of Mr. Boswell's testimony in December and he
wants to offer it for the Court to read, so long as I have
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1 the right to add the rest of that testimony plus his
2 deposition testimony which was admitted before Judge
3 Schaffner, I have no objection to the Court accepting it and
4 reading it.
5 MR. KATZMAN: I have no problem with that.
6 THE COURT: As long as somebody can
7 authenticate that is the true testimony.
8 MR. BAUGHMAN: We should have no trouble.
9 THE COURT: And if you want to introduce
10 through her the rest of his testimony, why certainly you may
11 do that.
12 MR. KATZMAN: Your Honor, our only purpose in
13 doing that was as he waited what we see as an issue in this
14 case was that there was a reasonable basis for the
15 executrices acting as they do and for taking the positions
16 that they have.
17 MR. BAUGHMAN: Your Honor, let me just say as
18 to that, who has rights to the dolomite is going to be
19 decided by Judge Schaffner. The question here is whether in
20 deciding who has what rights -- the question here is
21 deciding whether or not the executrices are conflicted such
22 that they can't decide on behalf of Lebanon Rock whether
23 Lebanon Rock should enter the dolomite business which was
24 the problem Judge Schaffner has and can't decide.
25 THE COURT: Now, if this testimony of Mr.
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1 Boswell is relevant in that issue, I'm going to receive it.
2 I'm not going to bother looking at it now as to whether it
3 was or not.
4 MR. BAUGHMAN: And if I may after the
5 hearing, I would submit the rest, and I'll send it to Mr.
6 Katzman. I'm sure we'll have no difficulty with that.
7 THE COURT: As long as that's what he said,
8 somebody will say that's what he said, I have no problem
9 with it.
10 BY MR. KATZMAN:
11 Q Mrs. Morgan, what, to your understanding,
12 what was the original arrangement that was made by your
13 father at the time Lebanon Rock was formed?
14 MR. BAUGHMAN: Objection, Your Honor.
15 THE COURT: I would sustain that objection.
16 MR. KATZMAN: Your Honor, Mr. Mumma testified
17 to all sorts of things about what was said in hearings and
18 so forth.
19 THE COURT: I don't recall that he said
20 anything his father said in hearings.
21 MR. KATZMAN: I didn't ask what her father
22 said. I asked her what the original arrangement was that
23 her father had made.
24 THE COURT: Well, that's going to require
25 what her father had said, so I'm going to sustain the
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objection to that.
MR. KATZMAN: If it doesn't, can she testify
to it?
THE COURT: As long as it doesn't involve
what her father said. I don't know how she can answer it
otherwise.
MR. KATZMAN: Because it was delivered in the
Dauphin County proceeding of writing Mr. Mumma.
MR. BAUGHMAN: Well, Your Honor, once again
if there were writings, the writings speak for themselves.
This witness is not competent to testify about that.
MR. KATZMAN: Well--
THE COURT: I'm not going to leave hearsay,
what her father said --
MR. KATZMAN:
THE COURT:
That's the point, Your Honor.
No one knows what her father
said.
MR. KATZMAN: Exactly. There has been
substantial testimony based on documentation in Dauphin
County Court as to what the plan was and what the
arrangements were when this Lebanon Rock company was formed
by her father.
THE COURT: If that's in any of the exhibits
that Mr. Baughman introduced and she wants to testify as to
any of those exhibits, why she doesn't have to say what her
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1 father said, I'll let her answer the question.
2 BY MR. KATZMAN:
3 Q Okay. without saying what your father said,
4 would you please answer the question.
5 A Sure. Based on the relationship, the working
6 relationship that was going on at the quarry at the time,
7 and--
8 MR. BAUGHMAN: Your Honor, I object.
9 THE COURT: How can you object when she
10 hasn't even answered the question?
11 MR. BAUGHMAN: Because there's been no
12 foundation laid that she was even present and participated.
13 THE COURT: That's a matter of
14 cross-examination. You can ask her that on
15 cross-examination. Now, go ahead.
16 THE WITNESS: Based on what actually took
17 place in the operations of the quarry in 1986 and after
18 that, based on the testimony of Bill Boswell, whose
19 testimony is exactly what my mother and I say wa.s the
20 original working relationship, and understanding that Elco
21 Concrete Products was to be in the dolomite business, that
22 means that Elco was to mine dolomite within a certain area
23 that Mr. Baughman referred to as the pit limits.
24 And dolomite, Your Honor, so that you understand
25 it because I know these terms have been thrown around
1831 85
1 loosely, dolomite is a type of stone that overlays a second
2 type of stone called high calcium.
3 Elco was to remove the dolomite as to expose the
4 high calcium stone that was Lebanon Rock's business, and for
5 that they would take the -- forgetting that waste product,
6 which was a waste product to Lebanon Rock because they were
7 in the high calcium business -- Elco would take that
8 dolomite and use it in its concrete block operations and
9 sell the raw stone.
10 Once they got out of the so-called pit limits into
11 areas where they were no longer exposing high calcium stone,
12 they would then pay a royalty to Lebanon Rock for that
13 stone. That's what has been going on ever since my
14 father -- well, my father was alive and since my father
15 died.
16 BY MR. KATZMAN:
17 Q Now, I would refer you to your answer,
18 Exhibit C, which sets forth a petition that was filed with
19 the Dauphin County Court on October 1st of 1991, and going
20 to Page 3 and 4 of that petition, I ask you to look at that
21 and then answer to the Court. Has your brother confirmed
22 that those arrangements as you discussed them were indeed
23 the arrangements?
24 A Yes, he did.
25 Q On Pages 3, 4, and 5 of that, he agreed that
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1 that was the plan that was set out at that time?
2 A (No audible response.)
3 Q Okay. I think the first one is -- I think
4 the first one at the bottom of Page 3 his attorney filed
5 proposed fidnings of fact with the Dauphin county Court in
6 1989. Would you read that to the Court?
7 A Mr. Mumma, Sr.'s intention regarding the
8 quarry was to have Lebanon Rock, Inc. exploit the high
9 calcium reserves for about three years and then to cease
10 high calcium mining at Lebanon Rock.
11 On LRI ceasing hi-cal extraction, Mr. Mumma, Sr.
12 apparently foresaw two sources of revenue for Lebanon Rock.
13 First, the development of real estate along Route 422, and,
14 second, a royalty agreement with Elco for the extraction of
15 dolomite.
16 This is consistent with our provision and with Mr.
17 Boswell, who was the attorney at this time handling the
18 business relations for my mother and my father and my
19 brother.
20 Q And also then at the top of Page 4 of this
21 Exhibit C to our answer, there's a reference to a proposed
22 finding of fact No.9 that was submitted by Mr. Robert Mumma,
23 II's attorney to the Dauphin county Court at the same time.
24 What does that say?
25 A Lebanon Rock, Inc. was formed to purchase the
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quarry. RMMII and his father intended that Lebanon Rock
Inc. would mine and market high calcium from the quarry and
at a later point develop some of the land around the quarry.
Q And the third reference is to a May 25th,
1989, transcript of a board of directors' meeting. What was
said by Robert at that meeting?
A There's no reason for Lebanon Rock not to
continue right down the line and producing as much high
calcium as they can. As director of the corporation I would
like to remind you that you have a fiduciary responsibility
to maximize the profit of the corporation. The way to do
that is to mine high calcium.
Q And D on Page 4 in the June 1, 1989, board of
directors' meeting, what did your brother say?
A The future of Lebanon Rock is going to be
that we're going to continue to mine all the high calcium
stone that we can and make as much money as we can.
Q Has the company under Robert ever made any
money?
A No.
THE COURT:
MR. KATZMAN:
THE WITNESS:
BY MR. KATZMAN:
Q Has there ever been any distribution to the
You mean profit or money?
Well, profit.
No.
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estate of any income?
A No.
Q All right. Now, you indicated that
difficulties started in the latter part of 1987?
A Yes, mid-part of 1987.
Q And what was done, if anything, to try by the
estate, by you and your mother as executrices, to try to
remedy the situation?
A We participated in mediation between my
mother and I as executrices of the estate and my brother.
We hired two people out of New York who came recommended to
us by my brother-in-law to mediate specifically the Lebanon
Rock/Elco problems that were revolving at that time.
Q There were two companies operating at the
same premises?
A Yes.
Q And difficulties were starting to be
encountered in that?
A Yes, Lebanon Rock and Elco both operate off
the same physical property in Lebanon County. When Elco was
bought in 1982, it acquired certain acreage, and then in
1985 when Lebanon Rock was bought, Lebanon Rock took certain
acreage and Elco took certain other acreage which was in
dispute as to who got what, but both companies are located
on the same site.
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Q Now, did the mediation process continue into
the beginning of 1988?
A Yes.
Q And what happened at the last mediation
session so far as the lawsuits are concerned?
A Well, we were physically in New York
mediating
Q We being?
A My mother, myself, my brother, and the two
mediators were in New York mediating. We received a phone
call and were informed that Bobby had filed a lawsuit in
Dauphin county as Lebanon Rock against Elco Concrete
Products while we were in the midst of that mediation on
exactly that issue, those issues.
Q Was there any action to your knowledge taken
by Lebanon Rock to authorize such a suit?
A Not to our knowledge.
Q Did that -- what effect did that have on the
mediation?
A There ended the mediation.
Q And there's been litigation ever since?
A Yes.
Q Now, is the -- have you been asked to be
present at meetings of the directors of Lebanon Rock?
A As a matter of fact, Your Honor, I have been
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1 specifically told by my brother that I am not welcome at any
2 meetings regarding Lebanon Rock, and, in fact, with the
3 course of discovery and things that have been brought in
4 Dauphin county, I have been informed by my attorney, Mr.
5 Katzman, that there's been specific information, information
6 that's been produced with the specific designation that I as
7 co-executrix are not allowed to see any of the Lebanon Rock
8 information.
9 Q Has there been any problems with the estate
10 obtaining information about Lebanon Rock?
11 A Routinely ever since 1986 we've been to court
12 several times trying to get records produced, etc.
13 Q Now, during the course of the litigation,
14 what problems has the estate seen or encountered with
15 respect to the operations and management of Lebanon Rock?
16 A I'll give you a quick overview because we
17 could be here all day, but the very first thing that started
18 happening was my brother physically started blocking Elco
19 out of the quarry.
20 He parked trucks in front of our equipment. He
21 piled boulders up. He dug up dynamite that we had put down
22 in the ground to blast stone out. He had them dug up, and
23 we had to go to Lebanon County and get an injunction against
24 him, which we got.
25 Q Was that in March of '88 if you recall?
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1 A Yes. He subsequently then kept doing it
2 anyway, so we went back to Lebanon County and got a contempt
3 order against him. So the physical blocking has stopped
4 since the Court found him in contempt down there.
5 With respect to Lebanon Rock in and of itself, we
6 have been litigating for, I guess, four years now and are
7 still litigating issues involving him making deals with
8 Lebanon Rock and his own personal corporations that the
9 estate feels is not to the benefit of Lebanon Rock
10 financially.
11 And we are litigating those issues in Dauphin
12 County and trying to get a custodian appointed to run
13 Lebanon Rock, Inc. for the benefit of both shareholders, the
14 estate and my brother, and not just solely for the benefit
15 of my brother to the detriment of the estate.
16 Q In the event Lebanon Rock doesn't make a
17 profit, does your brother personally or through his
18 solely-owned corporations ever receive a benefit?
19 A Sure does.
20 Q What is that?
21 A My brother has a couple of ways he does that.
22 The first is through various rental agreements that he has
23 made from companies, Gemini Equipment and Kimbob, companies
24 that are owned 100 percent by my brother. He rents
25 equipment to Lebanon Rock and whether or not they show a
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1 profit, he gets paid his rentals.
2 The other way is his company, Caco III, which is a
3 marketing company, is getting 35 percent on all sales out of
4 that quarry, so he's getting that money, too.
5 Q Is that on the gross or on the net?
6 A It's on the gross.
7 Q And this has been going on since at least
8 mid-1987?
9 A Yes.
10 Q Does the estate have any objection to Lebanon
11 Rock being profitable and making a profit?
12 A Absolutely not. In fact, that's why we're
13 trying to have the custodian appointed because we feel if
14 the custodian runs it, it will show a profit.
15 Q Have you been given any documentation that
16 would indicate whether or not it would be profitable for
17 Lebanon Rock to enter into the dolomite business?
18 MR. BAUGHMAN: Objection to testifying to
19 documents unless we're going to see the documents.
20 THE COURT: I think if you're going to ask
21 her to respond from what a document says, I think we ought
22 to have a document here.
23 MR. KATZMAN: Well, I just asked -- we have
24 been furnished with no documentation, Your Honor.
25 THE COURT: Okay. She can say that.
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Overrule the objection to that question.
THE WITNESS: Yes and no, Your Honor. There
was a document submitted to Dauphin County, an affidavit of
a Carmen Ametrano who was the controller of Lebanon Rock.
BY MR. KATZMAN:
Q Was that at the September 4th, 1990, hearing?
A Yes, it was.
MR. KATZMAN: We have been outside of that
document, which has great problems in that we subsequently
got Carmen Ametrano, the controller, subsequently left
Bobby'S employ and after he did he came to us and notified
us that the affidavit that Bobby had him
MR. BAUGHMAN: Objection, hearsay.
THE COURT: That's -- if she's going to
testify from the document, let's see it, otherwise then I
don't see any purpose in this testimony.
MR. KATZMAN: Well, the purpose, Your Honor,
is to show that the executrices had information which would
indicate that they have acted reasonably in their position.
THE COURT: Fine. If you have got the
information they have to indicate something, why you can
have it marked and we'll go from there, gentlemen.
BY MR. KATZMAN:
Q Was there an affidavit from Mr. Ametrano that
was prepared and given to you?
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1 A Yes.
2 (Whereupon, Respondent's Exhibit No.2 was
3 marked for identification.)
4 MR. BAUGHMAN: Your Honor, let me say that
5 affidavit, we object to the Court receiving the substance of
6 the affidavit. I mean, one, because it's irrelevant. Two,
7 because that was the sUbject of a great deal of testimony by
8 Mr. Ametrano.
9 I don't object to the Court reading that, although
10 I think it's a waste of time, but I certainly object to the
11 affidavit which in material respect is false and was proven
12 so by the testimony.
13 THE COURT: Well, you want to respond to
14 that?
15 MR. KATZMAN: Yes, Your Honor. I don't think
16 that is an accurate characterization at all, but again our
17 position is that the estate was given information which has
18 given a basis for the fiduciaries to take the positions that
19 they have taken with reasonable basis and in the exercise of
20 their prudent responsibilities as fiduciaries.
21 THE COURT: May I see that?
22 MR. BAUGHMAN: Sure.
23 THE COURT: Who is this person?
24 MR. KATZMAN: He was the controller of
25 Lebanon Rock, Inc. He was the employee of one of Robert
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1 Mumma, II's companies, but he acted as controller of Lebanon
2 Rock.
3 THE COURT: Well, I'll admit this with the
4 idea that what's said in here is truthful, but the fact that
5 they -- if they relied on this to make decisions, it's
6 not -- I'm not going to accept it as to what's being said in
7 here is accurate.
8 MR. KATZMAN: That's the only purpose it's
9 being offered for, Your Honor, the fact that this was given
10 to them. Whether it's truthful or not, I don't know.
11 THE COURT: Now, the question to her is, Did
12 they utilize this how?
13 BY MR. KATZMAN:
14 Q Did you use this and other similar
15 information in making determinations as to whether Lebanon
16 Rock under Robert's direction would ever turn a profit?
17 A Yes, we did. We -- the information that we
18 were able to obtain from Lebanon Rock, in our opinion, we
19 felt that Lebanon Rock is not turning a profit because Bobby
20 is taking money out to his own personal corporations and
21 that the corporation with the custodian could be run so that
22 it could turn a profit.
23 We used this, and we used other things. What I
24 started to talk about relative to the dolomite issue itself
25 was that we had been requesting from Bobby -- and I think,
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1 in fact, you even asked him on the stand as you did here
2 today do you have any documentation showing that dolomite
3 would be more profitable?
4 How can the estate make a decision unless they're
5 given information? We were always told there wasn't
6 anything until this affidavit of Carmen Ametrano appeared,
7 not this one, a different one which set forth the supposed
8 profits that Lebanon Rock would make if they went into the
9 dolomite business, and they were never given any back-up for
10 that, just the face.
11 But what we were given was Carmen came to us and
12 told us, and I think in this affidavit one of these
13 paragraphs testified to the fact that Bobby doctored the
14 numbers on that proposal he submitted to the Court after
15 Carmen prepared it. Carmen, as controller, prepared
16 documents to be submitted to the Court.
17 He gave them to Bobby, and Carmen said that Bobby
18 went through the data that Carmen produced and changed the
19 numbers to increase tonages, etc., the net results of which
20 gave a much more rosy picture of the profitability of
21 Lebanon Rock.
22 Subsequently we did not believe the veracity of
23 that report, and from our own independent knowledge and the
24 knowledge of the quarry people we have under us working in
25 the quarry business for thirty-some odd years, the estate
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1 made the decision that it could not rely on that, and that,
2 in fact, we did not think that there was any reason to
3 deviate from the original game plan that was set out.
4 And it's important to remember here that the
5 original game plan was Bobby admitted that Lebanon Rock was
6 going to be solely in the high calcium business and then go
7 into real estate. There was never any original game plan
8 that they have the dolomite business.
9 This was a new venture that Bobby was proposing,
10 and mother and I did not believe and still do not believe
11 that it is in the best interest of the estate to do that.
12 We have to look at the estate as a whole and not as Lebanon
13 Rock in isolation.
14 Q Now, it was indicated that your mother, I
15 believe Robert's testimony was saying that your mother, that
16 the interest of your mother in Nine Ninety-Nine is something
17 that's greater, and that's why she's preferring Elco to
18 Lebanon Rock. Am I phrasing that the way you understood it?
19 A That's what he said in one breath, but then
20 the next breath he contradicted himself. That is absolutely
21 not true. My mother as income beneficiary would be
22 entitled, to the extent there was any income out of Lebanon
23 Rock, to 50 percent of that income as income beneficiary.
24 If one makes the assumption, and I think it is
25 important, Your Honor, that you understand Bobby sitting
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here would have you believe that for every dime that goes
into Elco, that dime goes out three tiers up out of Nine
Ninety-Nine to the beneficiaries of the estate and the
shareholders, and that's absolutely not true.
And, in fact, later he gave you some example about
$2.00 and 160 and he then said the 160 when it went into
Elco would be diluted on the way up, and, you know, you
can't have it both ways here.
What my mother gets out personally of Nine
Ninety-Nine is a substantially less percentage than she
could get in dividends, than she could get out of the
marital trust or -- the estate owns Lebanon Rock, not the
marital trust.
Q So actually it would be to her benefit to
have income in Lebanon Rock?
A It's to her benefit to have both companies
operating profitably and not one company operating in the
detriment of the other or vice versa.
Q Now, are you and your mother as the
shareholders for 50 percent of Lebanon Rock unwilling or
unable to act in your capacity?
A Absolutely not, and that's the whole thing
that upsets me here. The whole reason that we have been
embroiled in this Lebanon Rock litigation in Dauphin County
is because we want to be able to act. We have been denied
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1 information in order to make educated decisions, and we're
2 concerned about that.
3 We are ready, willing, and able to act, and, in
4 fact, have acted when we have been given the proper
5 information. The best example of that is recently with the
6 loan documents. We were given the proper information, and
7 we acted.
8 Q Now, do you recall an attempt at a
9 shareholder meeting, the attempt of who was to try to break
10 the deadlock?
11 A Yes, I do.
12 Q Do you recall when that was?
13 A At least two years ago.
14 Q Okay. And what occurred?
15 A There was more than one quote on quote
16 deadlock here. I think the deadlock that Bobby -- Mr.
17 Baughman keeps talking about is this dolomite issue, but
18 there were many other issues where the board can't agree or
19 the shareholders can't agree.
20 First and foremost is sometime in 1987 Bud Lake,
21 who at that time was director of Lebanon Rock along with my
22 brother, was removed from the board of directors. Since
23 that time we have tried to get a third director appointed
24 because now it's just my mother and my brother.
25 Bobby has refused and at that meeting refused to
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recognize that there should even be three directors let
alone be able to name the third director to the corporation.
Lebanon Rock has not formally adopted bylaws, and Mr.
Boswell testified to that in Dauphin county. Therefore,
under the corporation law, you have to have three directors.
And so our point is, let's elect a third director
because then you don't have a deadlock. Two to one, you can
vote two to one instead of one to one, and we have been
unable since 1988, '89, whenever it was to get -- actually
since 1987 when Bud Lake was removed -- to get a third
director appointed. Bobby has refused to recognize that
there should even be three.
Q Now, it's been referred to that the estate in
litigation in Dauphin County is requesting a custodian for
Lebanon Rock?
A Yes, we are.
Q And I think you've given the general nature
of the reasons for that. Is that still what you feel is
best for the estate?
A Absolutely.
Q Do you feel it would be beneficial to the
estate to have some other person or persons appointed as
fiduciaries with respect to Lebanon Rock?
A No. First of all, I don't think it's going
to solve the problem because Lebanon Rock has been run by
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1 Bob for the past three and a half years, and the estate has
2 been trying to get a custodian appointed because it has not
3 been able to participate in decisions and get information,
4 etc.
5 To appoint a third person or somebody else to
6 handle the estate shares isn't going to remove that problem
7 unless all of a sudden Bob decides that he's going to give
8 somebody else the information or allow them to participate.
9 It is still not going to allow, in the estate's
10 opinion, Lebanon Rock to run profitably as long as Bobby is
11 running it unilaterally, which is why we feel the only
12 solution here is the custodian.
13 It also, in mother and my opinion, would create
14 substantial problems for the estate to just split out
15 essentially an asset and have somebody running that while
16 we're running the rest.
17 I don't know how we would possibly coordinate
18 that, and frankly I don't think that another person is going
19 to have any different -- certainly they're not going to have
20 any different duties than we do.
21 And that's to look at the estate as a whole
22 instead of just looking we can't just look at Elco. We
23 can't just look at Lebanon Rock. We have to look at all the
24 assets of the estate and what needs to be done to make the
25 estate as a whole the most valuable asset that we can.
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1 And this temporary person is going to have to do
2 the same thing, which means that the temporary person cannot
3 look at Lebanon Rock in isolation, which is what Bobby is
4 here aSking to do, and what I think has been repeated over
5 and over by his attorney, too, is what is in the best
6 interest of Lebanon Rock?
7 While we do have to look at the best interest of
8 Lebanon Rock, we also have to look at the best interest of
9 Elco, of Pennsy, of Nine Ninety-Nine as a mixture, as a
10 whole, and that the other person is going to have to do the
11 same thing.
12 Q Do you feel that this is a conflict of
13 interest position that you're in that prevents you from
14 making an informed decision?
15 A Absolutely not.
16 Q Would you explain that?
17 A The conflict of interest that Bobby is
18 alleging, the one that I have heard or seen alleged is that
19 we, because of the estate and my mother and I personally
20 have shares in Nine Ninety-Nine, we somehow have a
21 motivation to generate money into Elco to the exclusion of
22 Lebanon Rock, and, therefore, because of that motivation we
23 can't possibly act in the best interest to generate money
24 into Lebanon Rock.
25 The problem there is this: By Bobby's own
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1 admission, money that goes into Elco is diluted on the way
2 up and so you cannot make the assumption that he wants
3 everybody to make here that every dime that goes into Elco
4 comes out the other end of Nine Ninety-Nine.
5 Secondly and foremost, I think this is important,
6 Mr. Baughman keeps talking about these preferred shares.
7 Your Honor, these preferred shares are a set number. We
8 don't determine that number on the face of that stock
9 certificate. It tells you the price to be paid per share.
10 If the profits of the company, Nine Ninety-Nine,
11 are over $350,000.00 a year, I can assure you that the
12 profits of pennsy Supply are over $350,000.00 a year
13 regardless of what Elco does.
14 And those dividends would be due and payable
15 whether Elco existed or whether it didn't exist, and,
16 furthermore, to the extent that there may be some
17 allegations about the monies that go into Elco affecting
18 mother and my salaries and benefits, that's absolutely not
19 true.
20 We get no salary in Elco Concrete Products at all,
21 and I guess I should comment on common shares to the extent
22 that any money coming out in dividends on common shares, my
23 brother actually gets more than I do. He's gotten over
24 $70,000.00 or close to $70,000.00 a year in dividends from
25 Nine Ninety-Nine.
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1 Q Would you comment to the Court on whether or
2 not you feel that you're exercising your fiduciary
3 responsibility appropriately?
4 A I feel that my mother and 1 are doing one
5 heck of a jOb particularly under the constraints that we've
6 been under with the continual litigation. I feel that we
7 have competent counsel as attorneys, as accountants who we
8 consult before we make major decisions, and I feel that we
9 are acting prudently in all aspects of the estate.
10 And with respect to Lebanon Rock, I think we are
11 acting prudently with respect to Lebanon Rock and with
12 respect to the estate as a whole.
13 Q Would you explain to the Court why you feel
14 it's important to carry out what you've described as the
15 original purpose of Lebanon Rock as far as what you've said
16 to be the high calcium business and then receive royalties
17 from Elco and about real estate.
18 A Your Honor, when my father set that up, there
19 was a method to his madness. Lebanon Rock was going to be
20 in the high calcium business, and then there was property
21 there that they were going to develop in real estate, and
22 they were going to get royalties from Elco Concrete
23 Products. In the plan that followed --
24 Q Excuse me, the royalties would come from?
25 A The dolomite. In the plan that followed,
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1 Lebanon Rock essentially becomes a company that collects
2 royalty income and sells real estate. There is no risk of
3 substantial things happening that happen in the quarry
4 business.
5 There is no responsibility for reclamation of the
6 dolomite, which if Lebanon Rock is in, quarry's dolomite, it
7 would be responsible for reclamation. My brother didn't
8 tell you that part.
9 There are other risks incident with the quarry
10 business, and we don't feel that that was ever the intent to
11 be into it, and we don't feel particularly, since Lebanon
12 Rock is a Subchapter S corporation and the risk would flow
13 directly through to the estate, that the estate should do
14 that. It is a very different situation from Nine
15 Ninety-Nine which is a C corporation and three tiers up.
16 Q What is the distinction, if any, where the
17 estate owns directly the 50 percent of Lebanon Rock as
18 opposed to its interest at Elco and Nine Ninety-Nine?
19 A Elco and Pennsy Supply -- and, Your Honor, I
20 think this is important because my dad deliberately set up
21 corporate shields, so to speak, which is why although
22 frustrating at times, which is a convoluted corporate
23 structure where Nine Ninety-Nine, which is the corporation
24 that is held directly by the shareholders, is not an
25 operating company.
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1 pennsy and Elco are the operating companies so
2 that if for some reason there would be some sort of
3 liability there, reclamation or whatever, those liabilities
4 are shielded within those corporations and are not the
5 responsibility of the shareholders.
6 That is not the case with Lebanon Rock where the
7 estate owns 50 percent of those shares directly, and as a
8 shareholder will be directly responsible for any liabilities
9 in Lebanon Rock.
10 And that's one of the reasons that we do not feel
11 it is prudent to deviate from the original plan laid out and
12 throw Lebanon Rock into an ad infinitum dolomite business.
13 MR. KATZMAN: That's all we have, Your Honor.
14 THE COURT: Cross-examine.
15 CROSS-EXAMINATION
16 BY MR. BAUGHMAN:
17 Q Mrs. Morgan, you've testified that Elco was
18 purchased in 1982 from the previous owner, is that right?
19 A Yes.
20 Q Where were you in 1982?
21 A Here in Carlisle.
22 Q Doing what?
23 A Going to law school.
24 Q Now, what was purchased as Elco at that time
25 was a concrete business and a building block business,
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right?
A Well, there was also some stone inventory. A
dolomite sales business was purchased, too. They purchased
the dolomite inventory.
Q And it's your testimony on the basis of
whatever knowledge you have that in 1982 Elco was actively
selling roadstone to customers?
A Through -- that was the testimony of Bud Lake
and the people who were involved in Elco in Dauphin county.
They testified to that.
Q So based on your recollection of what Bud
Lake said, you believe that to be so?
A And based on documents I've seen, the sales
documents, etc., yes.
Q Now, Elco did use some stone, and roadstone
would qualify in the building block business, right?
A Yes.
Q And they did use some stone in the redi-mix
business?
A Yes, sir.
Q And it's your testimony that in 1982 when it
was bought, that they were actively in the roadstone
business?
A You're putting some emphasis on actively.
Q They were selling a lot of roadstone, is that
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correct? Is that your recollection of what Mr. Lake said?
A I don't know how much roadstone they were
selling. I am telling you that they took dolomite stone,
and, yes, they sold it to third party customers outside
Elco.
Q Now, when Lebanon or, excuse me, when Pennsy
Supply -- I take it pennsy Supply purchased Elco as a
subsidiary company?
A Yes.
Q And when they purchased Elco, isn't it true
they didn't even buy dolomite from the people who still own
the quarry because it was such lousy dolomite? Isn't that
right?
A No, I don't know that that is right.
Q You don't know one way or the other, isn't
that right?
A I'm not sure sitting here.
Q Right. Isn't it correct that Mr. Lake
testified that Elco was not really into the roads tone
business selling a lot to customers until after Lebanon Rock
was purchased? Isn't that what his testimony was?
A No, I don't believe that was his testimony.
Q Where were you in 1985 and 1986?
A I was in Philadelphia.
Q Working for Morgan, Lewis and Bockius, right?
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A Yes.
Q And that is the time period that you
testified about what the plan was and what the deal was?
Isn't that the time period you were testifying about?
A Yes.
Q Now, you testified about what you heard Mr.
Boswell say in his testimony, right?
A Urn-hum.
Q And you also heard Mr. Boswell say, did you
not, that he suggested to your father -- well, first of all,
didn't he testify that your father thought it would be a
good idea to buy Lebanon Rock because he wanted his son to
be able to be in the aggregate business, and he thought that
Lebanon county was far enough away from Pennsy Supply that
they wouldn't be competing and that would be a good place
for him to be in the aggregate business?
A Exactly, the high calcium aggregrate
business, Mr. Baughman, and that's exactly what it was
bought for, the high calcium business.
Q Didn't Mr. Boswell also testify that he knew
from dealing with your father that your father was
considering at the time of the purchase of Lebanon Rock
selling Elco to your brother?
A No, I believe what Mr. Boswell testified to
is that there had been discussions about a potential sale of
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1 Elco not only to my brother but to Bud and Ward and Ronnie
2 Nye, who were three employees of Pennsy, and that while
3 there were general discussions they never got further than
4 that and nothing ever happened.
5 Q Now, I think you said not only to your
6 brother, but you did agree indeed that Mr. Boswell testified
7 that your father was discussing selling Elco to your
8 brother, right?
9 A I don't know when he mentioned my brother
10 specifically, but I know he received -- there was a
11 consideration of potential sale.
12 Q And Mr. Boswell also testified, did he not,
13 that he suggested to your father that since Lebanon Rock was
14 a 50/50 corporation, he thought it would be a good idea to
15 have a shareholder agreement which shareholder agreement
16 would provide that if one of them should die, the other one
17 would get to buy the other 50 percent of Lebanon Rock.
18 Isn't that what Mr. Boswell testified to?
19 A No, I believe Mr. Boswell testified that in
20 the normal course of his business he sent one down to my
21 father and then, in fact, he never heard anything back from
22 my father on it.
23 Q He testified that he talked to your dad about
24 that, isn't that right?
25 A He may have testified that he had a
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conversation with him. I think he was foggy on that.
Q And he actually drafted it and sent it to
him, but by your dad's death he had not yet signed it, is
that right?
A Well, what he did, he took one off, Hi-Spec,
another corporation, and he marked it out and wrote Lebanon
Rock in. It wasn't even a finalized draft. He just sent
him a sample.
Q Now, you testified about your position with
regard to rights in dolomite, and you're litigating that in
Dauphin county, right?
A Um-hum.
Q And Judge Schaffner will ultimately issue
rulings on that, is that right?
A Yes.
Q And you testified about your complaints about
how your brother is running Lebanon Rock, acting as
president of Lebanon Rock, and all of those complaints
you've had ample opportunity to tell Judge Schaffner about
in your testimony, is that right?
A Well, we're still yes, the case is not
over. We're still testifying to those things up there.
Q Right. And he's going to decide those,
right?
A Yes, he is.
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1 Q Now, you testified you don't object to
2 Lebanon Rock making a profit, is that right?
3 A Right.
4 Q Do you object to Lebanon Rock making a profit
5 and selling dolomite?
6 A Yes. As I think I testified before, based on
7 the information that we have at this point, weighing all of
8 the items not just profitability which we do not feel you
9 can do in exclusion, weighing risk, weighing the total
10 picture of the estate, and weighing the profitably, which as
11 we see it is very different from the picture that Bobby
12 paints, we don't think there is any reason to deviate and
13 take Lebanon Rock in the dolomite business at present.
14 Q So you would object to Lebanon Rock even if
15 they could make a profit? Because of other considerations
16 that would not be enough from your point of view for Lebanon
17 Rock to do that?
18 A Depends on what the profit is, how much is
19 the profit, and it depends on a bunch of other factors. I
20 don't think you can look at that in the blind.
21 Q Well, isn't it true that your idea of the
22 game plan is simply inconsistent with Lebanon Rock doing
23 that no matter how much profit they would make? You don't
24 want Lebanon Rock to do that, isn't that right?
25 A I don't think we've ever said that.
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1 Q That is contrary with your idea of the game
2 plan, isn't it?
3 A What the original game plan is, and I think
4 my testimony is that based on the facts that we have before
5 us right now, all the circumstances before us right now, we
6 don't believe it's a good decision to deviate from the
7 original game plan right now and go into the dolomite
8 business.
9 Q And so from your point of view it's not just
10 the original game plan, it's the game plan you believe that
11 should be followed; that is, that Lebanon Rock should not be
12 in the dolomite business no matter how profitable?
13 A I never said that, Mr. Baughman.
14 Q Now, you said that your brother belives that
15 every dime that goes out of Elco goes to the shareholders of
16 Nine Ninety-Nine, and that's not so, is that right?
17 A That's what he said. That's what you have to
18 assume on the petition he filed.
19 Q Well, I don't understand what your position
20 is on that. To the extent that Elco makes money, isn't it
21 available for dividends to Nine Ninety-Nine shareholders?
22 A Not necessarily, no.
23 Q Why not?
24 A Well, because first of all there's a tier
25 between Elco and Nine Ninety-Nine, Pennsy Supply, first of
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all.
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about that?
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Sure.
18 Q And so they can pay dividends for money paid
19 by the subsidiaries, and they only pay one corporate tax,
20 and then the shareholders pay the tax on the dividends,
21 right? It's not a tax every time it's passed up a ladder?
22 A Every time what's passed up there?
23 Q The money earned by Elco.
24 A If money earned by Elco is, in fact, passed
25 up, and I will tell you as I'm sitting here that we have not
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dolomite?
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Supply?
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Q And you're chief legal officer, right?
A Urn-hum.
Q Now, you say that the preferred shares say
what is to be paid. It is true, is it not, that the
preferred shares -- you don't have to pay what the dividend
stated on the shares certificate is every year, isn't that
right?
A You don't want to.
Q You don't have to pay it in 1992?
A Well, I think it's a little misleading. If
Nine Ninety-Nine has over $350,000.00 in profits, those
monies are due and owing. If you physically don't issue a
check that year, those monies are still due and owing, so
any answer to that is yes. You have to pay that money. If
you don't pay it that year, you have to pay it the next year
or whatever.
Q Well, at least you would have to pay it if
you ever redeem the shares?
A Right.
Q That's the only time you really have to pay
it, right?
A Well, I'm not so sure about that. I'm not so
sure that if the company was making over $350,000.00 a year
and we weren't paying on those preferred shares, that a
preferred shareholder couldn't object to the fact that we
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1 weren't paying, so I don't agree with that.
2 Q Well, who presently owns the 8 percent
3 preferred?
4 A Presently the 8 percent preferred is just
5 owned by my mother and myself.
6 Q Individually?
7 A Yes.
8 Q Now, take a look at P-9 if you would.
9 A I don't think I have it up here.
10 Q Okay. If you take a look at Page No.3 on
11 P-9, that sets forth the dividends that were paid on the 8
12 percent in 1990, 1989, and 1988. Do you see that?
13 A I see where you wrote that down, yes.
14 Q And we actually introduced the Nine
15 Ninety-Nine financial statements so we know that is
16 accurate. NOW, what was paid in 1990 was $23,520.00, and
17 that's what the dividend is on the 8 percent preferred for
18 one year, right?
19 A I think so, yes.
20 Q And then in 1988 you paid $141,000.00, right?
21 A Yes.
22 Q And so that is like six years worth of
23 dividends, right?
24 A I don't have a calculator.
25 Q But close? Five, six, seven, somewhere in
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1 that neighborhood, right?
2 A Twenty-three divided into that.
3 Q Right. And what you did was make a decision
4 that all or although there's no dividends then that year,
5 you determined to pay five or six years worth of dividends,
6 right?
7 A Well, I think you need to understand that our
8 accountant, George Hadley, and our lawyers at Morgan, Lewis,
9 the estate lawyers, we were advised that these back
10 dividends were due and owing and that they should be paid,
11 and then we paid them.
12 Q Your father had not paid anything in the
13 number of years from when he was president of the company,
14 right?
15 A That's right. That's because the company was
16 in financial trouble for several of those years, and around
17 1987, 1988 with the help of the economy and what we think is
18 good management, the company has become much more
19 profitable; and we were in a financial position where our
20 accountant advised us that he financially could afford to
21 pay those dividends, and the estate counsel advised us that
22 these dividends were legitimate debts that should be paid.
23 Q Now, is it correct that for the estate tax
24 purposes, Lebanon Rock was your -- your one-half was valued
25 by the estate at $50,000.00?
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A I don't recall. It may be.
Q Sound about right?
A Yes, I think so.
Q And is it correct that you gave eRR an option
to buy the estate's 50 percent interest in Lebanon Rock for
$100,000.00?
A I don't recall that.
Q Is it correct that you, the estate, turned
down an offer to buy your 50 percent of Lebanon Rock for 2.5
million dollars?
A No.
Q Did you ever turn down any offer to buy you
out?
A I recall an offer being made by Bob that he
would either buy or sell it at 2.5 million, and an offer was
made to Mr. Wickersham'S office, and before we responded,
within a week they received a letter that the offer was
revoked.
Then I recall receiving an offer from a Mr. John
Thomas for 1.5 million dollars, and we did not take that
offer, yes.
Q For 1.5 you refused to sell your one-half?
A Under the terms and conditions of that offer.
I can't remember what they all were.
Q And at the time the 2.5 offer was open for a
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week, I take it in that one-week period you didn't accept
the offer?
A No. We were considering buying. The offer
was to buy or to sell, and we weren't interested and still
aren't interested in selling the estate shares. We were
perhaps interested in buying Bobby's shares.
Q Even at 2.5 million?
A I don't know. We never got that far in our
analysis before the offer was revoked.
Q I mean, you had an offer made to you for 2.5
million?
Yes, for a few days.
A week, I think you said.
Well, a few days, a week.
A
Q
A
specifically.
I don't know
MR. BAUGHMAN: That's all I have. Thank you.
MR. KATZMAN: I have no further questions.
THE COURT: No questions.
MR. KATZMAN: Your Honor, I know the hour is
late, but may I just have one minute to discuss with Mrs.
Mumma as to whether it's --
THE COURT: Sure you may.
MR. KATZMAN: We call Mrs. Mumma. I think
the direct examination should be very short.
Whereupon,
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BARBARA MUMMA
having been duly sworn, testified as follows:
DIRECT EXAMINATION
BY MR. KATZMAN:
Q Would you identify yourself.
A Barbara Mumma better known as Kim.
Q And you're the widow of the decedent, Robert
M. Mumma?
A Yes, I am.
Q And the mother of the Petitioner?
A Yes.
Q And you're also a co-executrix and co-trustee
of the estate?
A Yes.
Q Have you testified in this courtroom before
Judge Sheely before?
A I have.
Q Mrs. Mumma, you heard your daughter testify
concerning what the purpose was for Lebanon Rock and for
Elco at the time they were formed?
A Yes, I did.
Q And would you indicate to His Honor whether
or not you agree with that?
A Yes, because I was originally going to be the
other partner, so I knew what the details were.
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1 Q You were involved in discussions about it at
2 the time with your husband, at the time these things --
3 A At the time he was negotiating for this sale,
4 yes.
5 Q Now, there was statements made about
6 director's meetings and failure to attend director's
7 meetings until, I think it was, the summer of 1989 or 1990.
8 Did you attend director's meetings?
9 A I did.
10 Q How did they come about? How were they
11 called?
12 A Bobby would just either call or write a
13 letter and say he wanted to have a director's meeting.
14 Q Did he specify the date?
15 A Yes, he did.
16 Q Did he ever ask you beforehand whether the
17 date was satisfactory?
18 A No, he did not. I've never received an
19 agenda or any information about what was to be discussed at
20 the meetings.
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Q Did you ever get any records or data with
Lebanon Rock that you could study before coming to the
meeting?
A I did not.
Q What was the nature of the meetings that you
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did have?
A Well, they were very unpleasant, is that what
you mean? The nature -- Bobby would grit his teeth, yell at
me, and slap his hands on the desk to the point that I
refused to go back to any more meetings. In fact, his
partner, John Thomas, said to him one time, Bobby, you're
talking to your mother.
Q John Thomas is who? I think he was
identified.
A Bobby's partner in another business.
Q John Thomas who was identified in a question
asked by Mr. Baughman is a business associate of your son?
A Yes.
Q And what effect did these meetings have upon
you and
A Well, they were very upsetting. No one likes
to have their son yelling at them and talking to them the
way Bobby talked to me.
Q Did we eventually send a letter to Robert
concerning the basis upon which you would come to additional
director's meetings?
A I think that's the letter I asked that you
send to Mr. Baughman or Bobby's attorney aSking him to
specify dates, agenda, what would be on the agenda, and any
pertinent information so that I would know. I would come
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1 into the meeting with a full deck. I wouldn't come into
2 there if I could not make a decision without a full deck.
3 Q And did that ever happen?
4 A No, it did not.
5 Q And the director's meeting notice that you
6 would get, did they continue just to be a date picked
7 without any consultation with you?
8 A Yes. As a matter of fact, Bobby knew I was
9 going to be out of the country in July. He learned that
10 from Mr. Shields. He learned it in May, and he called a
11 meeting, when I was leaving the 27th of June, he called a
12 director's meeting for the 5th of July and would not change
13 it.
14 I responded to that, and I told him to please pick
15 some other date that I would try and be available for one of
16 them to have a meeting in August. I never heard from him.
17 Q The conversation you referred to in May, and
18 you're talking about last year?
19 A Yes.
20 Q The conversation you referred to in May, you
21 say Bobby knew that you would be out of town when he called
22 the meeting?
23 A Yes. We had to be in court here, and we
24 wanted to have the date changed; and Mr. Shields called
25 Bobby because I was going to be in Europe. And Mr. Shields
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1 called Bobby and asked if he would consent to the date
2 change because I was going to be leaving June the 27th and
3 be in Europe all of July with my grandchildren, would he
4 agree to it? And Bobby said, No, he wouldn't agree. So he
5 knew then in May that I wouldn't be here in July.
6 Q And thereafter, however, before you left, he
7 sent a notice of a director's meeting?
8 A He sent the notice that he was going to have
9 it whether I would attend or not.
10 Q Is that the way things generally had gone?
11 A That was the way they always went.
12 Q Again without trying to repeat, you heard
13 your daughter testify as to the feelings of herself at least
14 and I think she said for you also as the fiduciaries as to
15 the situation with Lebanon Rock entering into the dolomite
16 business?
17 A Yes, I agree with her. It would not be
18 profitable in the first place, Your Honor. The liabilities
19 for this would be drastic on Lebanon Rock if there would be
20 an accident.
21 Reclamation is tremendously expensive, costs
22 millions. They would be making a lot more money at forty
23 cents a ton and developing the real estate without anything,
24 no liability.
25 Sitting back and doing nothing they would be
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making this. It would all be very profitable, and I feel
that that's the best way to go. This is why it was figured
this way because they did not want Lebanon Rock because
it was only by the two individuals at that time to have
these liabilities. They wanted to get the stone out and get
themselves out as individuals.
Q And do you feel that you have examined this
issue appropriately?
A Yes, I do. We've had many meetings and
talked about it. We've talked to other people. We have
gotten as much data as we could, and we feel it's not a
profitable situation for Lebanon Rock; not just the estate,
but for Lebanon Rock itself.
MR. KATZMAN: Cross-examine.
CROSS-EXAMINATION
BY MR. BAUGHMAN:
Q Mrs. Mumma, you testified you believe that
Lebanon Rock basically should simply develop or sell the
real estate that is available there at the Lebanon Rock
property, is that right?
A That was always the understanding. Bobby
knew that when he walked into it.
Q Are you aware that -- do you know what it
means to be a subchapter S Corporation?
A Yes, I am.
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1 Q And are you aware that if the Subchapter S
2 shareholders do not actively participate in the business
3 that they do not have Subchapter S status selling real
4 estate in a business?
5 A They weren't going to go out of business.
6 They were going to keep the name Lebanon Rock and sell the
7 real estate.
8 Q And do you know one way or the other whether
9 you're eligible for Subchapter S status by being in the
10 business of selling real estate?
11 A By what?
12 Q Whether being in the business of selling real
13 estate qualifies for Subchapter S status?
14 A I'm quite sure it does especially since
15 Lebanon Rock was established as a Subchapter S back in '86.
16 A And at that time it's true, is it not,
17 Lebanon Rock actively mined the hi-cal, right?
18 A Yes.
19 Q And that also it rented both men and
20 equipment to Elco to strip the dolomite from over the
21 hi-cal, did it not?
22 A Yes, and I think pennsy also had rented
23 equipment.
24 Q But the point is Lebanon Rock was actively
25 doing those mining activities, isn't that right?
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A That was always the agreement.
Q And they still are, and they're still
qualified for subchapter S, right?
A And they'll still qualify to have Subchapter
S, as far as I understand it, because if they sold the real
estate, it's still part of the property, the original
property. It's not as though they went out and got the real
estate after they stopped mining. They had the real estate
from the very beginning when he applied for subchapter S.
Q You haven't talked to any tax lawyers
recently about that issue, have you?
A No, not recently. No, but I will.
Q You're aware that -- are you aware that there
was a memorandum -- Mr. Felmeden was your husband's chief
accountant, isn't that right?
A Yes.
Q He died shortly after your husband?
A About three months afterward.
Q And do you remember when he prepared a
memorandum back in December of 1986? Had you ever seen
that?
A Probably.
Q And do you remember when he discussed the tax
effects in there?
A I can't say that's the one. I remember that
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the reason that I wasn't the partner was because I had so
much of my personal money invested in my husband's
enterprises that he felt it was a bad situation for me to
put anymore eggs in this basket, so I'm very familiar with
what went on with Elco and Lebanon Rock.
MR. BAUGHMAN: That's all I have, Your Honor.
MR. KATZMAN: Just one question, Your Honor,
one follow-up on redirect.
THE COURT: Go ahead.
REDIRECT EXAMINATION
BY MR. KATZMAN:
Q with respect to the Subchapter S Corporation
on real estate, does the estate also own a 50 percent
interest in a company called Hi-Spec?
A Yes, we do.
Q And is Robert the other 50 percent owner?
A Yes, he is.
Q And is there litigation with that company as
well with Lebanon Rock?
A Yes, he's
MR. BAUGHMAN: Your Honor, I don't think this
is within the scope of cross-examination. He's brought up
an entirely new area.
THE COURT: I think this is certainly beyond
the scope of cross-examination.
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1 MR. KATZMAN: The question I want to get
2 into--
3 MR. BAUGHMAN: Well, I object.
4 MR. KATZMAN: Now, wait a second, Your Honor.
5 Mr. Baughman brought up what a subchapter area is, and what
6 I want to know is if Hi-Spec is a Subchapter S Corporation.
7 THE COURT: You know, if you guys think that
8 this subchapter S business is going to mean anything to
9 me -- I don't even know what a Subchapter S Corporation is.
10 If you want to proceed with that, go ahead.
11 MR. KATZMAN: If it's considered irrelevant,
12 then I won't proceed. That's the only questions I have.
13 THE COURT: Thank you. I guess that's the
14 end of that. Do you have -- obviously you have no further
15 questions.
16 MR. BAUGHMAN: Right, Your Honor.
17 THE COURT: Mr. Katzman, do you have any
18 other witnesses?
19 MR. KATZMAN: No, that's all, Your Honor.
20 THE COURT: That's the end of the testimony.
21 MR. BAUGHMAN: Your Honor, for rebuttal the
22 only thing I would ask permission to do, I would just ask
23 permission to admit the memorandum that I asked Mr. Mumma
24 about. I'd simply like to offer that document. I will
25 submit it along with the rest of the Boswell testimony and
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1 the testimony about the dividends that I have to submit.
2 MR. KATZMAN: Your Honor, that raises the
3 problem that there were several other documents that are
4 relevant to the issue back with the Felmeden one, and then
5 do we then start sending all of these to the Court?
6 That's a document Mr. Mumma, himself, in his own
7 handwriting, you know, established this plan. There'S all
8 kinds of other documents, and Mr. Baughman just wants to
9 submit one of them.
10 If you're going to submit one, I guess we would
11 have to submit them all, I would say, and then I don't know
12 where that leaves the Court as far as any explanations or
13 any testimony about them.
14 MR. BAUGHMAN: I just don't have it with me,
15 Your Honor.
16 THE COURT: I think Mrs. Mumma was questioned
17 on it, and she answered the questions that were relevant. I
18 don't know why we need to submit the document. I don't
19 know, if it was submitted you're not going to do that
20 anymore today.
21 If you want to put him on, we're coming back,
22 which I'm not complaining about doing, but I'm not staying
23 any longer today.
24 MR. BAUGHMAN: Your Honor, I apologize. We
25 will--
1S',8 13 2
1 THE COURT: You don't have to apologize about
2 anything, Mr. Baughman. I realize, you know, there may be
3 some other testimony that should be presented. I certainly
4 want to, but we're not going to do it. I'll be happy to set
5 a short time in the future if it's agreeable to counsel.
6 MR. KATZMAN: Are you talking about
7 additional testimony?
8 THE COURT: I'll tell you what. We have
9 trials for the next three weeks starting Monday.
10 MR. KATZMAN: Your Honor, I have a vacation
11 planned from the sixth through the eighteenth of February.
12 THE COURT: sixth through the eighteenth of
13 February.
14 MR. KATZMAN: And I did that because I'm
15 putting in between Judge Schaffner's schedule where he has
16 hearings on these maters for each month.
17 THE COURT: Okay.
18 MR. BAUGHMAN: Your Honor, we would be
19 willing, and, you know, it's frankly -- and this is not
20 because of anything except for recognizing the difficulties
21 of the situation -- we would be willing, Your Honor, to
22 submit this and have no rebuttal, and I think that closes it
23 because certainly Mr. Katzman closed. And to offer
24 THE COURT: If you submit this other
25 document, apparently --
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1 MR. BAUGHMAN: We'll withdraw that. We won't
2 submit anything. And, Your Honor, by the end of this week
3 we would propose that we each submit a letter, argument on
4 our position, and we'll submit it by Friday and then it's
5 under submission.
6 THE COURT: Okay. We'll just note that we'll
7 give each counsel until January 24th, 1991, to submit any
8 brief memorandums on the issues involved in this case.
9 MR. BAUGHMAN: Thank you, Your Honor.
10 THE COURT: If you have any particular cases,
11 why I'll consider them.
12 MR. KATZMAN: Your Honor, we already
13 submitted a trial memorandum this morning, and I believe you
14 have that.
15 THE COURT: You need not submit anything else
16 at this point unless you wish to.
17 MR. KATZMAN: Thank you.
18 MR. BAUGHMAN: Thank you very much, Your
19 Honor.
20 (Whereupon, the above proceeding concluded.)
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CERTIFICATION
I hereby certify that the proceedings are
contained fully and accurately in the notes taken by me on the
above cause and that this is a correct transcript of the same.
The foregoing record of the proceedings on the
hearing of the within matter is hereby approved and directed to
be filed.
}- J..-L ~~y-
1881