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HomeMy WebLinkAbout07-26-93 IN RE ESTATE OF ROBERT M. MUMMA, COURT OF COMMON PLEAS CUMBERLAND COUNTY ORPHANS' COURT DIVISION Deceased. No. 21-86-398 BRIEF OF ROBERT M. MUMMA, II, IN SUPPORT OF THE PETITION OF ROBERT M. FREY FOR PRELIMINARY INJUNCTION AND RULE TO SHOW CAUSE I. Introduction Robert M. Mumma, II ("Mr. Mumma") respectfully submits this Brief in Support of the Petition for Preliminary Injunction and Rule to Show Cause ("the Petition") filed by Robert M. Frey, Esquire, the Court-appointed Guardian Ad Litem ("Guardian") for all minor beneficiaries of the above-referenced Estate. The Guardian seeks to enjoin the sale of certain assets owned or controlled by the Estate of Robert M. Mumma, Sr. ("the Estate") and the Marital Trust under the will of Robert M. Mumma, Sr. ("the Marital Trust"). These assets are administered by Barbara McK. Mumma and Lisa M. Morgan, the executrices of the Estate and trustees of the Marital Trust. Mr. Mumma has filed a Joinder in the Petition to enjoin the unlawful sale. II. Chronology Of Events Regarding Sale Of pennsy Supply Businesses As best as can be gleaned from the fragmented and incomplete information supplied by counsel for the executrices, apparently a majority consent of the shareholders of Nine Ninety- 2057 Nine, Inc. ("999, Inc."), and Hummelstown Quarries, Inc., ("HQI") was executed on July 8, 1993. This consent purportedly approved the sale of those entities pursuant to a convoluted and complicated series of transactions. It i~ further understood that those documents were amended and re-executed in amended form on July 9, 1993. Notice of the transactions was served on Robert M. Mumma, II, by mail which he received on Monday, July 12, and on his legal counsel, Gerald K. Morrison, Esquire, which he received by personal service by Marc Sonnenfeld of Morgan, Lewis & Bockius on that same day. In both instances, the disclosure documents were served at approximately 9:00 a.m. on July 12. Those documents brought with them a call of a shareholders meeting for July 22 at 10:30 a.m., in the case of 999, Inc., and at 11:00 a.m. with respect to HQI. The purpose of the shareholders meetings as stated in the call was to approve the sale of the stock and assets of each corporation to Kodie Acquisition Corporation and then subsequently to CRH pIc, an Irish conglomerate, and to ratify the actions of the majority shareholders in previously consenting to the sale. On July 20, 1993, Robert M. Frey, Esquire, the Court- appointed Guardian Ad Litem for the minor beneficiaries' of the Estate of Robert M. Mumma, filed with this Honorable Court a Petition to enjoin the proposed sale to CRH. Counsel for Robert M. Mumma, II, advised counsel for the executrices of this - 2 - 2058 fact on July 21, 1993, at 9:00 a.m. Subsequently, counsel for Mr. Mumma was advised by letter from Ivo otto, Esquire, dated July 23, 1993, that the executrices closed the sale with CRH on July 21, 1993. Mr. otto's letter was addressed to Judge Sheely with copy to counsel for Robert M. Mumma, II, and read as follows: These matters are filed in anticipation of the hearing on July 26 at 9:00 a.m., and we would respectfully point out to the Court that the transaction sought to be enjoined was completed on July 21, 1993. Further, all funds with respect to this transaction have been transferred, and the purchaser, CRH pIc, has been in full possession of all the assets and properties purchased and has assumed control of the operations thereof. Despite the fact that the closing allegedly occurred on July 21, 1993, the shareholders meetings which were called for July 22 were held. Although neither Mrs. Mumma nor Mrs. Morgan were present at the shareholders meetings, proxies were presented to indicate that a majority of the votes necessary to pass the sale resolutions were present. The resolutions were presented and passed with respect to each corporation. Mr. Mumma was present along with his counsel, Gerald K. Morrison. Robert M. Mumma, II, cast negative votes to the sale of each corporation and also offered his protective dissenter's election. At no time during either shareholders meeting was mention ever made that the transactions had been closed or that the sales had occurred. David Landrey, Esquire, who conducted - 3 - 2053 the meeting as self-appointed chairman, voted the proxies of Mrs. Mumma, Mrs. Morgan and Mrs. Roth, and he conducted the meetings as if the meetings had legal import. At no time did he ever advise either Mr. Morrison or Mr. Mumma that the meetings were nothing more than a charade. Marc Sonnenfeld, Esquire, also attended the meetings, and he, too, gave no indication that the sales transactions had purportedly closed the previous day. III. Petitioner, Robert M. Frey, Has Legal Standing To Pursue The Action Herein The instant action seeking an injunction against the sale of certain estate and trust assets by the executrices was instituted by Robert M. Frey, Esquire, in his capacity as Guardian Ad Litem. Attorney Frey instituted this action based upon his independent, fiduciary judgment that (i) "it would be in the best interests of the parties [in the Estate] and in particular, the minor children of Robert M. Mumma, II, to have the terms of the sale... presented to and approved by the Orphans' Court of Cumberland County..." and (ii) based upon his sincere belief that an "opportunity should be given to Robert M. Mumma, II, to purchase the [assets]... [as] such a purchase would further the expressed desire of Robert M. Mumma, deceased, that ownership of the [assets should] continue within the family, if possible." (Per Petition of Robert M. Frey). In opposition to the Guardian's Petition, the executrices have challenged the legal standing of the Guardian to - 4 - 2060 act herein. This challenge is not only inconsistent with this Honorable Court's original appointment of Attorney Frey; it is inconsistent with the executrices' prior position in other court proceedings. The original appointment of Robert M. Frey by this Honorable Court clearly empowers him to act herein. In particular, by Order of this Court dated December 29, 1988, Attorney Frey was appointed Guardian Ad Litem "for the minor persons interested in the Estate of Robert M. Mumma, deceased,...in all matters related to the sale of Nine Ninetv- Nine. Inc.. and Hummelstown Ouarries. ~... and in any further or other proceedings in the Court of Common Pleas of Cumberland County or the Court of Common Pleas of Dauphin County, Pennsylvania, relating to or arising out of such matters." (Emphasis Added.) This appointment, ironically, was made upon the petition of, and at the behest of, the executrices themselves. The appointment is clear on its face that Attorney Frey has standing in all matters relating to the sale of the family businesses. Since the instant action clearly involves the sale of those businesses, the executrices, as the parties having procured the entry of the order, should not now be heard to contravene its expressed terms and clear intent. The fundamental invalidity of the executrices' claim that Attorney Frey lacks standing herein is further evidenced by the executrices' own court pleading filed in litigation in York - 5 - 2061 County. In April of 1992, the executrices unsuccessfully sought to restrain Robert M. Mumma, II, and Gary M. Gilbert, Esquire, the Court-appointed guardians of the estates of Mr. Mumma's minor daughters, from representing their wards in matters relating to the Estate of Robert M. Mumma. In so doing, the executrices clearly and unequivocably represented to the York County Court that Attorney Frey had the authority to represent Mr. Mumma's minor children in the Estate proceedings, and they even went so far as to state that such authority extended not only to the sale of the family businesses but to all matters involving the Estate. This position was asserted by the executrices at a time when this Honorable Court had already sanctioned the revocation of Mr. Mumma's disclaimer. Obviously, the executrices did not view this Honorable Court's decision on the disclaimer as limiting in any way the authority of Attorney Frey to act as guardian. Having adopted this position in the York County Court, the executrices should not be permitted to assert the opposite position in another county simply because this new position serves their interests in shielding their sale of the family businesses from judicial scrutiny. IV. The Court May Enjoin The Proposed Sale Because No Valid Sale Has Occurred A. The purported sale is not authorized by shareholder vote. On July 12, 1993, the executrices first notified - 6 - 2062 Mr. Mumma by mail of. a special shareholders meeting called for July 22, 1993, under 15 Pa.C.S.A. S1755(b) to vote on the proposed transfer of the sale assets to CRH. On Tuesday, July 20, 1993, Robert M. Frey, Guardian Ad Litem for the minor beneficiaries of the Estate, filed a Petition to enjoin the sale. Upon learning of the Guardian's Motion and Judge Sheely's pending Order, the executrices attempted to, and apparently did, physically transfer the sale assets on July 21, 1993, before the shareholders could ever vote on the decision. Since the purported transfer pre-dated any shareholder vote, obviously the sale's validity cannot be predicated thereon, and, if the sale is to be upheld, its validity must be based upon some other form of corporate action. B. The purported sale is not authorized by partial shareholder consent. On July 12, 1993, the executrices also notified Mr. Mumma of their partial shareholder consent to the proposed sale to CRH under 15 Pa.C.S.A. S1766(b). The statute, however, explicitly states: Effectiveness of action by partial written consent.--An action taken pursuant to subsection (b) shall not become effective until after at least ten days' written notice of the action has been given to each shareholder entitled to vote thereon who has not consented thereto. This subsection may not be relaxed by any provision of the articles. 15 Pa.C.S. S1766(c). The 1990 Amended Committee Comment to this section establishes that this section "lay[s] the foundation for an - 7 - 2063 action in equity by a non-consenting shareholder to enjoin consummation of the corporate decision." The legislature enacted this provision to protect shareholders such as Mr. Mumma and the grandchildren from the very actions of the executrices taken here. Mr. Mumma received notice on July 12, 1993. Under S1766(C), the partial shareholder consent could not become effective until July 22, 1993. Mr. Mumma filed a joinder to the Guardian's Motion to enjoin the sale on July 21, 1993. Yet on July 21, 1993, the same day this Court was fashioning an Order setting a hearing for Monday, July 26, 1993, the executrices ignored the statute and attempted to transfer the sale assets -- one full day before their shareholder consent would have been effective. Since the purported transfer was made prior to the expiration of the required ten-day notice provision, the transfer was made in contravention of S1766(C). Consequently, the statutory requirements with respect to partial shareholder consent were not satisfied, and the validity of the purported transfer may not be based thereon. C. An injunction is not moot because there has been no valid sale. An injunction is not moot because, for the reasons set forth above, the executrices had no authority to attempt to transfer the sale assets on July 21, 1993. They acted without a shareholder vote and without effective shareholder consent. In addition, this Court has full equitable authority to issue an injunction to maintain the status quo, which is defined - 8 - 2064 to be "the last uncontested status which precedes the pending controversy. " American Can Co. v. Local u. 7420. united Steelworkers, 350 F. Supp. 810 (E.D. PA, 1972), Warner Bros. Pictures. Inc. v. Gittone, 110 F. 2d 292 (3rd Cir. 1940); Fredericks v. Huber, 180 Pa. 572. The last uncontested status preceding this controversy was the ownership and structure in place before the executrices attempted to enact the proposed division and ultimate sale of HQI and 999, Inc. This Court has full authority to enjoin the invalid transaction and maintain the status quo which existed before the purported sale. Finally, equity has jurisdiction on the filing of the Guardian's Petition, and the executrices cannot divest equity of its jurisdiction despite their blatant attempt to do so on July 21, 1993. EDstein v. Ratkoskv, 283 Pa. 168; Gerner v. Kespelher, 26 West. 123. The Court obtained jurisdiction on July 20, 1993, when the Guardian filed his Petition. An injunction herein is not moot because the executrices have no right to circumvent the jurisdiction of this Court. The executrices have acted with blatant disrespect toward the Court, by attempting to circumvent its jurisdiction in flagrant disregard of its authority. The executrices scheduled the shareholders meeting for July 22, 1993, the same day the ten-day notice period expired under S1766(c), and they demonstrated no intent to take any action until that time. However, as soon as the executrices - 9 - 2065 learned that the Court might order a hearing to evaluate the actions of the executrices and the proposed sale, the executrices leapt into unauthorized action in a blatant attempt to circumvent the authority of this Court by trying to complete their plans before the Court could rule. Their arrogance demonstrates flagrant disregard for the statute, this Court and the broad powers of Judge Sheely in his capacity as Chancellor in EqUity. V. The Executrices' Sale Of Assets violates Section 3356 Of The Pennsylvania Probate, Estates and Fiduciaries Code And Is Void Under The Established Case Law The legal prohibition against self-dealing by a fudiciary has its roots in the earliest pronouncements of legal jurisprudence. See,~, Campbell v. Walker, 5 Vesey, Jr. 678, 31 Eng. Rep. 801 (Ch. 1800) and ~ Parte Bennett, 10 Vesey, Jr. 381, 32 Eng. Rep. 893 (Ch. 1805). Whenever potential elements of self-dealing are involved in a transaction, leave of court must be obtained to give validity to the transaction. See,~, Heaqer's Appeal, 15 Sergo & Rawle (pa.) 65 (1826); Boswell V. Coaks, 23 Ch.D. 302 (1883), reversed 27 Ch.D. 424 (1884), restored, sub. nom.; Coaks V. Boswell, 11 App. Cas. 232 (H.L. 1886). These principles find their present manifestation in section 3356 of the Pennsylvania Probate, Estates and Fiduciaries Code (20 Pa.C.S.A. S3356) which is made applicable to trust estates by reason of Section 7133 of the Code. In accordance with Section 3356, no personal - 10 - 2066 representative or trustee, in his or her individual capacity, may bid for, purchase, or take by exchange, real or personal property belonging to an estate or trust without approval of court. This section is directly applicable to the executrices' sale of assets herein because an integral and substantive element of such sale was a transfer by the executrices, in their capacities as executrices of the Estate and trustees of the Marital Trust, to a new corporation individually owned by them. As specifically set forth in the Information statement attached to the disclosure document provided to shareholders of 999, Inc. and HQI (See Exhibit nAn to the Response of the executrices filed herein), the executrices' sale of assets was effectuated through a new corporation known as Kodie Acquisition Corp. ("Kodien). This corporation "was formed and all of its stock at all times has been owned by Mrs. Mumma and Lisa [Morgan] in their individual capacities", and by Linda Roth, a daughter of the Decedent (See page 14 of the Information Statement). The executrices' personal ownership of Kodie not only existed as of the date of the Information Statement (ie. July 9, 1993) but continued until the purported final closing of the sale on July 21, 1993. As of the date of the Information Statement, the executrices, through Kodie "entered into subscription agreements for 1,000 shares of 999 stock, 300 shares of HQI stock, an agreement of sale with MRA-I for the purchase of the portions of - 11 - 2067 the Paxton street Yards owned by the tenants-in-common, an agreement of sale with the Marital Trust for Benders Quarry and the Lebanon Rock Option executed by the Estate." (~Pages 14 and 15 of the Information statement.) These agreements, which comprised the executrices' so-called stage I closing, fixed the consideration for the assets being sold, and obligated the Marital Trust and the Estate to sell upon the terms thereof. Although the executrices at the same time gave CRH the right to acquire 1,000 shares of Kodie, clearly CRH did not exercise this right at that time and, instead, the executrices remained in both control and ownership of Kodie. As a result, as of the consummation of the stage I closing, the executrices had clearly effectuated a legally binding transaction between themselves, in their fiduciary capacities, and themselves, in their individual capacities, in clear violation of the requirements of Section 3356. In defense of their actions, the executrices first attempt to disinguously confuse the issue by arguing that Mr. Mumma has misunderstood the nature of the transaction. Specifically, on Page 7 of their Memorandum, they state "Bob's argument incorrectly implies that Mrs. Mumma and Mrs. Morgan were the shareholders of Kodie at the time of the completion of the transaction." (Emphasis Added.) The executrices make this statement knowing full well that, in actuality, it is the Stage I closing that gives rise to the self-dealing transaction, and it - 12 - 2068 is this closing which is the gravemen of Mr. Mumma's complaint. However, rather than admit the obvious that the stage I closing was a transaction by and between the executrices in their individual capacities and the executrices in their fiduciary capacities they attempt to evade the issue by mis-stating the nature of the information herein. Having attempted to confuse the nature of the self- dealing issue herein, the executrices then resort to defending their actions by belittling the importance of the stage I closing itself. On Page 8 of their Memorandum, the executrices downplay the stage I closing as "merely an intermediate phase in the completion of the transaction." This description is in marked contrast to their view of the stage I closing in their own Information statement. In that document, the executrices take great pains to highlight the significant and substantive nature of the closing. They also take great pride in highlighting the fact that the stage I closing was intentionally undertaken, after exhaustive legal consultation, because the closing had distinct and far-reaching legal repercussions. In fact, the executrices devote a large portion of the Information statement to congratulating themselves for having concocted a novel two-step procedure which, in their opinion, resulted in the elimination of dissenting shareholder rights as to CRH. since the stage I closing was intended to be a legally recognized, enforceable transfer under the Pennsylvania Business Corporation Law, and - 13 - 2069 since it was undertaken in the belief that it had substantive legal consequences with respect to the elimination of dissenting shareholder rights, the executrices may not now be heard to dispute the legal efficacy of the transaction. As a final defense of their self-dealing transaction, the executrices arque that Section 3356 is inapplicable to the Stage I closing because "Mrs. Mumma and Mrs. Morgan gained absolutely no financial advantage as a result of the transfer of the assets and properties comprising the Pennsy Supply Businesses into Kodie." (See Page 8 of the executrices' Memorandum). This argument, however, is totally misplaced. In point of fact, it is now established law that self-aggrandizement is not a precondition to the application of section 3356, since it is immaterial whether the fiduciary acts in good faith or even pays fair consideration. In ~ Barnes Estate, 305 A.2d 723, 452 Pa. 388 (1973) and ApDeal of Burke, 108 A.2d 58, 378 Pa. 616 (1954). Instead, the application of Section 3356 arises solely upon the existence of one element the exchange of property between a person acting in both individual and fiduciary capacities. If this element is present, the requirements of section 3356 become absolute, and the transaction which is the subject of the self- dealing can only be completed with the approval of the Court. This is not to say that the executrices did not profit from their sale of Estate assets to Kodie. Mrs. Mumma regularly and consistently withdrew 999, Inc. shares from the Marital Trust - 14 - 2070 based upon a reported value of $3,170,723. She increased her personal ownership of 999, Inc. stock from less than 1% at Mr. Mumma's death to more than 24.5% as a result of her withdrawals. The sale to Kodie was arranged to generate $5,299,000 to Mrs. Mumma personally -- a very handsome profit for her. All of this money would have gone to the Estate -- a very significant loss __ directly resulting from her self-dealing. In the present instance, the requisite element for the application of Section 3356 is clearly existent. By selecting the two-staged format for their asset sale, the executrices made an inside, highly profitable established the requirement deal for themselves. This for court approval of their transaction. If their transaction is fair and in the best interests of the estate beneficiaries, as they argue, they should have no trepidation about subjecting the transaction to court scrutiny. VI. The Executrices Are Required To Keep The Family Businesses And possible Under The Decedent's will In The Family If Expedient In effectuating the sales transaction herein, the executrices have relied upon their generic power under the Decedent's will to sell estate and trust assets. This power, however, is clearly circumscribed. Under Article Thirteenth of his Will, the Decedent manifested an explicit intention concerning the retention of his - 15 - 20'71 family businesses, and this expression clearly governs the executrices' generic power of sale. Specifically, the Decedent provided: It is my desire that if expedient and possible, the businesses which I have personally directed during my lifetime and of which I have had an interest be continued for the benefit of and under the management and control of my immediate family. Although this language has been the subject of prior litigation before this Honorable Court, it has not been construed in the present context -- whether, as between the equal, competing bids of a family member and a non-family member, the executrices have the authority to ignore with impunity the directives of the Decedent and to accept the bid of the non-family member. Instead, the context of the prior litigation was simple and direct -- could the executrices sell the family businesses to an outsider. In this latter context, this Court found that the executrices could effectuate such a sale. However, in so doing, the Court did not hold that Article Thirteenth was nugatory or meaningless. Instead, the Court also found that by reason of Article Thirteenth, it was the Decedent's hope that "if expedient, the trustees should retain the family company stock within the Mumma family," (See Page 15 of Opinion of March 8, 1989) and the Court further found that any such sale would be sUbject to the executrices' normal fiduciary obligations. (See Page 13 of the Opinion.) - 16 - 2072 In the present instance, the facts show that the Decedent's son, Robert M. Mumma, II, is interested in acquiring the family businesses and has, in fact, initiated the steps necessary to accomplish this objective. This being the case, the issue before this Court is whether the executrices can, for reasons of spite and family animosity, not only ignore Mr. Mumma's offer, but also divest Mr. Mumma and his sister, Barbara MCClure, of their own individual interests in such companies upon terms and conditions that they have not consented to. Resolution of this issue, we submit, becomes self-evident upon postulating the following question As between his only son, Robert M. Mumma, II, and a group of foreign investors, which party would the Decedent prefer to have operating his family businesses? The decision, we believe, is clear, both in light of the Decedent's clear intent and the general principle of statutory construction that wills should always be interpreted in favor of the decedent's heirs or next of kin. Woods Estate, 321 Pa. 164 (1936). The fact that the Decedent expressed the intention to have his family businesses, which he inherited from his father, remain within the Mumma family is reason enough to afford Robert M. Mumma, II, the opportunity to buy the businesses. However, in this instance, there is a very definite, practical side benefit to this course of action. Sale of the businesses to Mr. Mumma will result in the effective termination of the bulk of the - 17 - 2073 litigation now pending before this Court and Courts in Dauphin and Lebanon Counties. Sale of the businesses to the foreign investors, however, results in no such resolution of the current litigation between the parties but, instead, leaves open cases such as Equity 84 which was filed in 1990 to determine the very ownership of 999, Inc. stock and which has never been heard by this court, as well as giving rise to potential additional causes of action. This Court has the duty to uphold the testamentary wishes of the Decedent in the action herein and to grant the relief requested by the Guardian Ad Litem. As set forth in Melchor's Estate, 47 D. & C. 2d 332, 18 Fiduciary 281 (1968): It is the duty of the Court to supervise the disposition of the property of the decedent's estate in a manner which is conducive to the best interests of all parties concerned. This Court should not countenance the executrices' attempt to shield their asset sale from judicial scrutiny, but should, instead, enjoin the sale until a full examination of the sale can be completed and until Mr. Mumma is afforded reasonable opportunity to match the sale terms. VII. Conclusion For the foregoing reasons, Robert M. Mumma, II, respectfully requests this Honorable Court to grant the Petition - 18 - 207,1 of Robert M. Frey, Esquire, for Preliminary Injunction and Rule to Show Cause. , erald K. orr~so, Esqu~re Christopher F. Farrell, Esquire Buchanan Ingersoll Professional Corporation 30 N. Third street, 8th Floor P.O. Box 12023 Harrisburg, PA 17108-2023 Charles E. Shields, III, Esquire Commonwealth National Bank Bldg. Two West Main Street Mechanicsburg, PA 17055 ~E Attorneys for Robert M. Mumma, II - 19 - 2075 II ::> \'1'> .:;, ,y BUCHA.NAH'NGERSO\.L ~ROF=SSIONA!.. CORPORATION II VARTAA! PARe 30 NORTH 3rd STREET- 8th FLOOR~I HARRISBURG, PA U10'1 TELEPHONE (717) 237.4800