HomeMy WebLinkAbout12-10-93
IN RE ESTATE OF ROBERT M,
MUMMA, Late of Cumberland
County, Pennsylvania
IN THE COURT OF COMMON PLEAS
OF CUMBERLAND COTJNTY,
PENNSYLVANIA
No. 21-86-398
Orphans' Court Division
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BRIEF OF THE ESTAl'EIN OPPOSITIQK.TO
PETITION TO ENJOIN SALE OF THE ESTATE'S
LEBANON ROCK STOCK TO CRR Dle
I. Background
The dispute currently brought before this Court involves the pending sale of the
Estate's 50% stock interest in Lebanon Rock, Inc., to CRH pic, through its wholly
owned subsidiary, KOOie Corporation. Purchase of Estate assets by eRR p\c, of which
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this transaction was a part, has already been the subject of litigation lTi this Court, before
the Honorable Harold E. Sheely. The Estate's committment to sell the Lebanon Rock
stock to CRH pk has been known to Robert M. Mumma II and Gary Gilbert, instant
petitioners (collectively "RMMII"), since the time the other Estate assets were sold to
eRH pIc this summer, in July. All of the documents involved in the sale of Estate assets,
including the Lebanon Rock option, were delivered to RMMII and his attorneys on July
12, 1993.
The other Estate assets sold to CRR pIc were essentially those representing the
locally operated corporation known as Pennsy Supply. In the course of deciding to
purchase those assets, CRR pic had the opportunity to purchase the Lebanon Rock stock
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from the Estate, but, because of extensive and ongoing litigation concerning Lebanon Rock,
Inc. mvolving the Estate and RMMII, eRR was unable to decide, without further time to
evaluate the prudence of making such a purchase, whether it wanted to buy Lebanon Rock
under current circumstances.
Attmcted to the Lebanon Rock assets, however, CRR pIc did pay the Estate
$160,000 for a 120 day exclusive option to purchase the Estate's 50% stock interest in
Lebanon Rock. Based on this, the Executrixes determined it prudent to memorialize their
offer to sell the Estate's Lebanon Rock stock in an option agreement. The Estate and its
Executixes admit that this option was granted, and that no court approval of the option
agreement was sought. However, as is further argued below, the Estate was prepared to
sell the Lebanon Rock stock to CRR pic this summer, and, in exchange for $160,000,
was essentially demonstrating its willingness to give CRR pIc more time -- 120 days -- to
think about the purchase, and to decide whether to accept the Exeuctrixes' offer to sell.
Indeed, irrespective of the existence of the option agreement, the Executrixes were
willling to sell the Lebanon Rock stock to CRR pic for $2,000,000 plus substantial other
consideration, as further set out below.
At the time the sale of the Pennsy operation to CRH pIc was made, all of the
family stockholders, including RMMII, were made aware of all of the details of the
transaction, including the Lebanon Rock option. Indeed, RMMII attempted,
unsuccessfully, to block that sale in this Court, and much of his current reasoning was
rejected by President Judge Sheely in that proceeding. Importantly, at the time RMMII
attempted to block the overall sale of the Pennsy assets to CRR pIc, he, despite being
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fully aware, made no objection concerning the Lebanon Rock option, about which he now
complains.
The stock sale is now sche.duled to close on Monday, December 13, 1993. Just
four days prior to that closing, RMMII, for the first time, sought injunctive and
declaratory relief in this court based on the Lebanon Rock option. The relief RMMII
seeks goes beyond simply asking the Court to void the option and enjoin the sale;
indeed, RMMII wants the Court to compel the Estate to sell its Lebanon Rock stock .tQ
him, for the allegedly better price of $2,500,000. His Petition is a thinly-veiled effort to
promote a personal desire, and it is not to be viewed as being offered in the interests of
all of the Estate beneficiaries.
For the reasons set forth below, the Petition should be denied summarily. There is
simply no basis for the equitable relief sought by RMMII. If those for whom he purports
to act are entitled to any relief, a remedy at law h in a surcharge action -- is adequate,
and they are not harmed in any manner not reparable by money damages.
ll. The Option Agreement is Moot
Petitioners' make much of the allegedly "illegal and unauthorized" option
agreement granted by the Executrixes to CRR. Their argument is premised entirely on 20
Pa.C.S. ~3354, which states that a personal representative's power to sell does not include
the right to grant an option without court order. This argument is without merit because it
ignores the fact that an option, once exercised, becomes a valid and binding contract:
The distinction between an option and a contract
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is broad and plain. An option is an unaccented offer.
It states the terms and conditions on which the owner
is willing to sell...if the holder elects to accept them
within the time limited. If the holder does so elect...
the acceJ'ted offer becomes a valid and binding co~
Uhlman v. SullivlUl, 242 Pa. 436,440, 89 A. 550 (1913), Quoting McMillan v. Philadelphia
Company, 159 Pa. 142, 144 (1893). Thus, because the option agreement has been exercised,
the Estate's offer to sell contained therein has been accepted, and a valid and binding
contract for the sale of the Estate's Lebanon Rock stock exists.'
The manner in which the parties to that contract arrived at their agreement -- the option
-- is moot, in the first instance because it has been exercised and in the second instance
because it has given rise to something the Executrixes are completely empowered to do --
sell Estate assets without court approval. Clearly, Petitioners could have complained about
the Option Agreement when it was made known to them, in July, and at any time during its
pendency, but they did not. Because of this, the option agreement cannot form a basis fOt
their objection to the sale, as all that exists now is a valid and binding contract. ~S.Q,
Kerr v. Day, 14 Pa. 112 (1850 )(a lessee who exercises an option to purchase is considered
the owner ab initio); PeoJ'les Street Ry. Co. v. Spencer, 156 Pa. 85, 27 A. 113
(1893)(optionees' interest upon exercise relates back to the date the option was agreed to and
is not merely prospective from the date of exercise);[both also for the proposition that an
option is merely an offer which, when accepted, becomes a valid and binding contract]. The
Court is only confronted with the pending closing of a stock sale by the Executrixes which
1 Indeed, CRH pIc and the Estate have gone so far as to put that valid and binding contract
into a separate writing, attached as Exhibit B to the Estate's Answer with New Matter.
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they are empowered to perform under the will without court approval.
a. The ValiditY of the Ootion is Not a Neeessan Condition Precedent for the Sale
to CRR Die Q.f the Estate's Lebanon Rock Stock.
RMMII's Petition is premised on an allegation that the Executixes failed to have
the Court approve the Lebanon Rock option agreement, in violaton of 20 Pa.C.S. ~3354.
The validity of the Option Agreement itself, however, is not a prerequisite to the validity
of the sale of the stock. Nevertheless, as is argued further in note 3, below, the option
agreement is arguably valid under the terms of the will in any event.
RMMII's argument about Article THIRTEENTH of the Will has been rejected by
this Court, in Judge Sheely's Order of March 8, 1989, in which he stated:
under Article THIRTEENTH of decedent's will,
the [executrixes] may sell Mumma family company
stock to non-family members once the [executrixes]
unanimously agree in writing. Therefore, the language
Qf Anicle THIRTEENTH is Drecatory and not
mandatory.
(Opinion and Order of March 8, 1989, at 15, emphasis supplied). Significantly, RMMII
did not appeal that Order, and it is now final. His use of the Article THIRTEENTH
argument, as set forth in Paragraph 14 of his Petition, raises an issue already finally
adjudicated in this Estate, such that RMMII is bound by the res judicata effect thereof
and is collaterally estopped to litigate that issue further. Judge Sheely also stated in that
same order that the Executrixes "have the power to sd1 estate assets under 20 Pa.C.S.
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. "
3354", id. at 11.2
Given the prior holdings of Judge Sheely regarding Article THIRTEENTH, it is
entirely appropriate for the Executrixes to agree to sell the Lebanon Rock stock, bound
only by their responsibility as fiduciaries to act in the best interests of the Estate.
Therefore, even if their failure to have the option agreement pre-approved by the court
was a violation of 20 Pa.C.S. ~3354, their sale of stock -- the result of the acceptance of
their offer to sell embodied in the option exercised by eRR plc -- is entirely within their
power. While entering into the option agreement arguably could have been characterized
as ultra vires as RMMII suggests, the sale of the stock clearly is not. J
Thus, raising the issue of whether the option agreement was authorized either by
2 Also, RMMII's theory about Article THIRTEENTH belies his underlying belief that he
was intended to be the person in the family to take the reigns of the family businesses after his
father's death. If this is the case, why is Robert not mentioned in the will in this fashion, and
why is he not named as executor and trustee?
3 The Estate does not agree that the option agreement is ultra vires. The Probate Code's
alleged prohibition against option agreements unless specifically authorized in the will or
approved by the court is intended primarily to prohibit personal representatives who have a
testamentary mandate to sell assets from surrendering that obligation during the pendency of an
option which does not require the optionee to make the purchase. ~, ~, Moore v. Trainer,
252 Pa. 367, 370-71 (1916). Here,the Executrixes have no mandate to sell, and indeed, Article
THIRTEENTH's precatory language, at most, urges caution in the decision to sell to non-family
members but neither proscribes such a sale nor mandates such a sale. The Executrixes have the
power to sell if they unanimously agree to do so. Thus, this option is no more than an
embodiment of their offer to sell, or to do a discretionary act, and it WdS not the avoidance of
an obligation to do a mandatory act.
Moreover, the Executrixes' power under the will is broad enough to include the power to
grant options,particularly since all of the Estate property is ultimately destined for a trust, in
which the trustees, under the will, ~ granted the specific power to enter into options.
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the Will or court order under 20 Pa.C.S. ~3354 is a classic "red-herring". The real issue
being raised is two-fold -- RMMII objects to both the adequacy of the consideration being
paid by CRR pic, and to the fact that the Estate's Lebanon Rock stock is not being sold
to him. RMMII is clearly not acting on behalf of all estate beneficiaries -- he is instead
acting to promote his own personal desire to have complete control of Lebanon Rock.
Interestingly, however, the commiltmentlelter set forth at Exhibit B to the Petition is not
intended to personally fund RMMII -- it is a loan to Lebanon Rock, and would be,
therefore, a vehicle for no more than the company's buying back or redeeming its own
stock from the Estate. This mechanism gives rise to the future possibility of a fraudulent
conveyance claim which would put the Estate at substantial risk. ~ U.S. v. Gleneagles
Inv. Co., 565 F.Supp. 556 (M.D.Pa. 1983), affd in part and vacated in part sub nom,
U.S. v. Tabor Court Realty, 803 F.2d 1288 (3d Cir. 1986), cert. denied sub nom,
McClellan Realty Cor.p. v. U.S., 438 U.S. 1005 (1987).
Nevertheless, even if the underlying option agreement is null and void, the Estate
can sell the stock to CRR pic, leaving RMMH with only a remedy at law under 20
Pa.C.S. ~3360, in a surcharge action.
b. Section 3355 of the Probate Code Does Not AplJlv Here
In Paragraph 13 of his Petition, RMMII argues that the Court has the power to
restrain the sale of stock because it is being made "under an authority not given by the
will or from carrying out any contract of sale made by the executrixes without proper
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authority. " Even if the option and its exercise are viewed as a "contract of sale made by
the executrixes without proper authority", the Executrixes do have the authority, as held
by President Judge Sheely, to enter into a contract under the will to sell the stock. In
other words, the Executrixes could have sold the stock without the prior interevening
event of an option agreement. The existence of the option agreement, moreover,
benefitted the Estate, because $160,000 was paid for the 120 day exclusive option, and,
nevertheless, but significantly, no other Qffers to bIOI the Estate's shares in Lebanon Rock
were received during the 120 day oDtion oeriod. Indeed,the $2,500,000 offer made by
RMMII in his petition was made after the expiration of the option period, and indeed also
after the option was exercised.
Thus, even if the option was improper, it was not "necessary" given the
Executrixes independent power under the will to sell the Lebanon Rock stock. Because of
this, their acts were not ultra vires and 20 Pa.C.S. ~3355 does not apply here.
c. The Real Issue Raised is Adeouacv of Consideration. and the Remedv for Such a
Protest is at Law Under 20 Pa.C.S. fl3360.
RMMII's petition uses the "red-herring" option validity issue to raise his real
point -- he wants to obtain control of Lebanon Rock by arranging for Lebanon Rock to
finance the purchase of the Estate's stock for $2,500,000, and he wants the Court to
compel that sale.
Section 3360 of the Probate Code specifically provides for this situation:
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When a personal representative shall make a contract
!1Qt requiring approval of court, or when the court shall
approve a contract of a personal representative reouiring
approval of court, neither the inadequac'll of
~eration. nor the receipt of an offer to deal on
other te17lls...shall relieve the personal representative
of the obligation to perform his contract or sf!gH
constitute tround for an'll court to set aside the
contmct. or to refuse to ellforce it b'll q,ecific
lJeifonnance or otherwise: Provided, That this subsection
shall not affect or change the inherent right of the court
to set aside the contract for fraud, accident or mistake.
Nothint in this section shall affect the liability
flL(llJersonal relJffHl11atille for surchaNle on the
l!round of nel!lil!ence or bad faith in maldnt a contmct.
(emphasis supplied). Whether this court were, a fortiori, to approve the option and the
resulting performance thereof,4 or whether this Court were to view the stock sale as
within the Executrixes' powers irrespective of the existence of the option agreement,
RMMII's complaint about the inadequacy of price is properly the subject of an action at
law, a surcharge action. Given the adequacy of that remedy \ RMMU has not proven one
of the "cumulative" requirements for injunctive relief -- the inadequacy of a remedy at
law. Credit Alliance Coqx>ration v. Philadelphia Minit-Mart Car Wash Coqx>ration, 450
Pa. 367, 301 A.2d 816 (1973). Futhermore, the existence of the legal remedy itself
shows that the harm is not irreparable, as money damages would be part of the surcharge
claim. Thus, RMMIl cannot "fully and completely" establish each criteria necessary for
4 The Orphans' Court may ratify a sale made without previous order. Mussellman's 1\ppeal,
65 Pa. 416 (1852).
5 RMMII knows well of the surcharge remedy, as he has pending in this Court seventeen
pages of surcharge claims. This current complaint should simply be relegated to the end of that
list.
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injunctive relief to issue. IlL.
"Typically, inadequacy of consideration does not provide grounds for setting aside
a contract entered into by an executor." In re Estate of Dobson, 417 A.2d 138, 143, 470 Pa.
476 (1980). Prior to the enactment of section 3360 of the Probate Code, it was the
substantive law of the Commonwealth that the highest bid must be taken. ~ Brereton
Estate, 355 Pa. 45, 50-52, 48 A.2d 868 (1949). However, after the enactment of section
3360, when dealing with either contracts requiring ill: not requiring court approval, "such
contracts may be set aside for "fraud, accident or mistake," but not for a higher bid." .w.... at
52-53 (emphasis supplied).
Significantly, RMMII's petition does not raise "fraud, accident or mistake" as a
basis for the requested setting aside of the stock sale; indeed, the petition does not even plead
the relevant surcharge burdens of either negligence or bad faith. Instead, the petiiton simply
raises the unsubstantiated issue of RMMII allegedly offering more money for the Lebanon
Rock stock. In making that argument however, RMMII's argument fails because he is
comparing his alleged $2,500,000 offer to an incomplete accounting of the consideration
being received by the Estate for its Lebanon Rock stock.
d. CRH ole is in Fact PavinL' Almost Double What RMMll is Now Offering
RMMII would lead the Court to believe that CRR pIc is paying only $2,000,000
for the Estate's Lebaon Rock stock. This ignores the $160,000 paid for the option, which
is also part of the consideration received. RMMII also ignores the fact that the buyer will
be assuming the responsibility for any and all damages assessed against Lebanon Rock or
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Eleo Concrete Products, Inc.6 as a result of the Estate's prior activities as owners of
interests in those companies, and will be assuming liability for all costs associated with
all litigation which may give rise to such damages. All of that lideation is litifation
between. essentiallv. RMMIl and the Estate in its caoacitv as a stockholder of Lebanon
Rock or Elco Concrete Products. Inc. RMMII himself has stated, and keeps records to
show, that the Estate, in his opinion, is liable for in excess of $3,000,000 in damages in
those various lawsuits. If the sale of stock to CRH ole is allowed. those ootential
liabilities of the Estate will be assumed entirelv bv CRH ole. without anv indemnity
obli(!ation on the Estate. Moreover, CRH pie will also waive a possible $500,000
liquidated damages penalty against the Estate currently contained in the agreements by
which CRR plc acquired ownership of Elco Concrete Products, Inc.
Thus, the Estate is receiving not only cash of $2,000,000, but also: (a) $160,000
for the option; (b) relief from RMMII's claims of $3,000,000; (c) waiver of a $500,000
liability; and (d) relief from the costs associated with maintaining the Elco/I..ebanon Rock
litigation against RMMII in Dauphin and I..ebanon counties
RMMII is well aware that if he buys the Estate's I..ebanon Rock stock, the
litigation between him and the Estate involving Elco and Lebanon Rock will persist. In
fact, his own current Petition says only that "restraint of the proposed sale to CRR and a
sale to RMMII...would potentially terminate existing litigation in Dauphin County
relating to Lebanon Rock" [petition at Paragraph 23(b), emphasis supplied]. Thus, the
6 Elco Concrete Products, Inc. was a part of the family of Pennsy companies sold to CRH
pie in July.
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price allegedly being offered by RMMII does not include the other types of
consideration -- relief from potential and known liabilities -- being given to the Estate by
CRR pic.
Even if the Court allows the inadequacy of consideration issue to be considered
here, which is not appropriate under 20 Pa.C.S. ~3360, RMMII's consideration does not
meet the required burden of proof, i&., he cannot demonstrate th,'l CRR pic's
consideration is "grossly inadequate", as required under the Probate Code. &~_,
Frick's Estate, 16 Pa. Super. 38 (1901).7 Even the case relied on by RMMII, In re
Estate of Hughes, 538 A.2d 470, 517 Pa. 410 (1988) does not support his position. In
Hughe~, the existence of a higher offer did not give the trial court, in an action under 20
Pa.C.S. ~3360, the power to set aside the sale, because the administratix had the power
to make the sale, and there was no showing of fraud, accident or mistake.
7 Moreover, mere inadequacy of price is not sufficient to set aside a sale. In re Noonan's
~, 69 A.2d 374, 163 Pa. Super. 70 (1948), modified on other erounds. 63 A.2d 80, 361
Pa.26.
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Ill. Conclusion
This Court would be wise to follow the prior reasoning of President Judge Sheely
in his numerous opinions in similar matters raised during the course of the administration
of decedenfs estate and deny the most recently requested relief sought by RMMII. Equity
is not the proper forum and the sale to CRR pIc of the Estate's 50% stock interest in
Lebanon Rock, Inc. should be allowed to proceed.
Respectfully submitted,
GOLDBERG, KATZMAN & SHIPMAN, P.C.
e-d?O/M~
Ronald M. Katzman uire
Michael A. Finio, Esquire
320 Market Street
P.O. Box 1268
Harrisburg, PA 17108-1268
(717)234-6808
Counsel for the Estate of Robert M. Mumma
Date: December 10, 1993
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CERTIFICATE OF SERVICE
I hereby certify that I am this date serving a copy of the
foregoing document upon the person(s) and in the manner indicated
below, which service satisfies the requirements of the Pennsylvania
Rules of civil Procedure, by hand delivering a copy of same to:
John B. Consevage, Esq.
Buchanan Ingersoll
30 North Third Street
8th Floor Vartan Parc
Harrisburg, PA 17108-2023
GOLDBERG, KATZMAN & SHIPMAN, P.C.
By:
L~~
Ronald M. Katzman, squire
320 Market Street
P. O. Box 1268
Harrisburg, PA 17108-1268
(717) 233-4161
Attorney 1.0. #07198
Attorneys for the Estate
Dated: December 10, 1993