Loading...
HomeMy WebLinkAbout2008-5290 Civil MATTHEW P. AMOS, : IN THE COURT OF COMMON PLEAS : CUMBERLAND COUNTY, PENNSYLVANIA Plaintiff : : NO. 08-5290 CIVIL v. : : COMMUNITY FINANCIAL, INC. : CIVIL ACTION and LOWELL R. GATES, : : Defendants : Shareholder Derivative Action IN RE: MOTION TO MAINTAIN A DERIVATIVE LAWSUIT BEFORE OLER, J., AND EBERT, J. ORDER OF COURT th AND NOW , this 9 day of March, 2009, upon consideration of Plaintiff’s Motion to Maintain Derivative Lawsuit, IT IS HEREBY ORDERED AND DIRECTED that the Plaintiff’s Motion to Maintain DENIED DISMISSED. Derivative Lawsuit is and his Complaint is By the Court, M. L. Ebert, Jr., J. Matthew P. Amos Plaintiff Pro Se 2503 Hoffer Street Harrisburg, PA 17103 James D. Flower, Jr., Esquire Dean E. Reynosa, Esquire Attorneys for Defendants Saidis, Flower & Lindsay 26 West High Street Carlisle, PA 17103 MATTHEW P. AMOS, : IN THE COURT OF COMMON PLEAS : CUMBERLAND COUNTY, PENNSYLVANIA Plaintiff : : NO. 08-5290 CIVIL v. : : COMMUNITY FINANCIAL, INC. : CIVIL ACTION and LOWELL R. GATES, : : Defendants : Shareholder Derivative Action IN RE: MOTION TO MAINTAIN A DERIVATIVE LAWSUIT BEFORE OLER, J., AND EBERT, J. OPINION and ORDER OF COURT EBERT, J., March 9, 2009 - STATEMENT OF FACTS Plaintiff Matthew P. Amos is a shareholder of Community Financial, Inc. (CFI). Plaintiff has brought this derivative action against Defendants CFI and Lowell R. Gates, Chairman of the Board of CFI, pursuant to Pa.R.C.P. 1506, to forestall a merger between CFI and Franklin Financial. Plaintiff claims as a result of corporate mismanagement, self dealing and fraud, he must pursue this stockholder’s derivative action in order to determine the reasons why the value of the shares of stock in CFI have decreased significantly. The Plaintiff is a shareholder in CFI and currently owns 25,700 shares which he initially purchased for $82,000.00 in 1989. The current dispute was precipitated by what Plaintiff perceives as efforts to prevent him from obtaining corporate information that he argues he and other shareholders are entitled to under 15 Pa. C.S. §1508 and this Court’s decision in Helm v. CFI, No. 07-2122 (Cumberland County CCP, J. Ebert). In July and August 2008, Plaintiff exchanged correspondence with Susan A. Russell (“Russell”), President and Chief Executive 2 Officer of CFI, to arrange for an inspection of CFI’s corporate documents, pursuant to 15 Pa. C.S. §1508. On August 12, 2008, Plaintiff sent Russell a Verified Demand for Inspection of Corporate Documents. Russell notified Plaintiff by letter on August 20, 2008, that the requested records would be made available for Plaintiff’s inspection and copying at CFI’s offices between 9 a.m. and 3 p.m. on Wednesday, August 27, 2008. On August 27, 2008, Plaintiff went to CFI’s offices during this scheduled time and inspected the documents. One day after inspecting the documents, Plaintiff sent Russell another Verified Demand for Inspection of Corporate Documents which was substantially similar to his previous requests. On September 4, 2008, Plaintiff filed this shareholder derivative action. Plaintiff began this action by filing a “MOTION TO MAINTAIN A DERIVATIVE LAWSUIT PURSUANT TO PA.R.C.P. NO. 1506(b).” Plaintiff’s entire Motion consists of the following: AND NOW comes the Plaintiff Matthew P. Amos, representing himself, and moves to maintain a derivative lawsuit in accordance with Pa.R.C.P. No. 1506(b) because there is a strong prima facie case in favor of the claim asserted on behalf of the corporation and without the action serious injustice will result. Respectfully submitted, Matthew P. Amos On the same day, Defendant filed a “COMPLAINT” requesting that CFI and chairman Lowell Gates pay compensatory damages, punitive damages, and be enjoined from merging with Franklin Financial. The issue to be decided in this case is whether Plaintiff has set forth sufficient facts in his Motion and Complaint to meet the requirements of Pa.R.C.P. 1506, such that he can maintain a shareholder derivative action against CFI. 3 DISCUSSION A shareholder derivative suit permits an individual shareholder to bring suit to enforce a corporate cause of action against the corporation’s officers, directors, and third parties. Garber v. Lego, 11 F.3d 1197, 1200-01 (3d Cir. 1993). In a shareholder derivative action, the corporation has the first opportunity to bring a lawsuit, because the corporation is the directly injured party. Therefore, the cause of action stated in the complaint first belongs to the corporation, through its officers and directors. Kistler v. Faller, 8 Pa. D. & C. 2d 682, 684-85 (Cumberland Cty, 1956). Providing the corporation with the first opportunity to address the alleged wrong is consistent with the principle that the decision to litigate or refrain from litigating the claim is a decision concerning the corporation’s management and is therefore the rd responsibility of the corporation’s directors. Garber v. Lego, 11 F.3d 1197 at 1201 (3 Cir. 1993); Blasband v. Rales, 971 F.2d 1034, 1048 (3d Cir. 1992). The shareholder derivative action is a powerful tool that, if left unrestrained, can undermine the basic principle of corporate governance that the board of directors should make the corporation’s decisions. Daily Income Fund, Inc. v. Foz, 464 U.S. 523, 531 (1984). In addressing this case, under Pennsylvania law, two prerequisites must be met before a shareholder can bring a shareholder derivative action against a corporation in which he or she holds an interest. Rule 1506 (a) (1), (2) requires a plaintiff in shareholder derivative action to allege two specific items in his complaint. A plaintiff is required to allege that (1) he or she is a stockholder or owner of an interest in the corporation and (2) the specific efforts that the plaintiff made to secure enforcement by the corporation or the reasons for not making such efforts. It is clear from the record that the Plaintiff is a shareholder of CFI. Therefore, to determine if 4 Plaintiff can maintain his shareholder derivative action against CFI, this Court must determine whether he has met the second requirement contained in Rule 1506, (a) (2). To maintain his shareholder derivative action against CFI, Plaintiff must have alleged in his Complaint that he either sought corporate enforcement or that such efforts would have been futile. Requiring pre-suit demand assures that the corporation, through its directors and officers, will have the opportunity to utilize sound business judgment in deciding whether and how to address any claims asserted on its behalf. Rule 1506(2) does not state what specific efforts must be pleaded in order to satisfy this pre-suit demand requirement. However, the cases hold that to recover a shareholder must demonstrate that he has left nothing undone which he might have done to prevail on the corporation to bring such action. Burdon v. Erskine, 401 A.2d 369, 371 (Pa. Super. Ct. 1979). On the other hand, if no efforts were made by the shareholder, then in order to excuse the pre-suit demand requirement, the plaintiff must set forth sufficient facts to rd establish why demand would be futile. Garber v. Lego, 11 F.3d 1197 at 1203 (3 Cir. 1993). A. Pre-suit Demand Requirement. Plaintiff alleges that he has made several “demands” upon CFI: (1) a “Verified Demand” letter dated June 30, 2008, sent to CFI’s corporate counsel, (2) a “Verified Demand” letter dated August 12, 2008 and sent to CFI president Russell and CFI’s counsel, (3) a “Verified Demand” letter dated August 22, 2008 to CFI president Russell, and (4) a “Verified Demand” letter dated August 28, 2008, to CFI president Russell and CFI’s counsel. An examination of these letters reveal that they can be best described as requests for information under the provisions of 15 Pa.C.S.A. §1508. CFI responded to the first letter on July 29, 2008, informing Plaintiff that his letter did not comply with Pennsylvania Business Corporation Law. In response to Plaintiff’s next letter, CFI provided Plaintiff with the opportunity to inspect the documents that he 5 requested. Clearly, none of these “verified demand” letters requested that the corporation or any of its board of directors or officers take legal action on behalf of the corporation to prevent or correct what the Plaintiff described in his complaint as breach of fiduciary duty, waste of corporate assets, or fraud or fundamental unfairness. It is clear from the pleadings that the board of directors of CFI consists of 5 members. The Plaintiff has not alleged in his complaint that he ever attempted to have any member of the governing body of Community Financial Inc. pursue the lawsuit he now asks this Court to approve as a shareholder derivative suit. In short, nothing in the record establishes anything which would satisfy the pre-suit demand requirement. B. Futility of Pre-suit Demand. In order to excuse the pre-suit demand requirement the plaintiff must then allege more than the fact that the board of directors merely exercised erroneous business judgment. Rather, it must be alleged that a majority of the board of directors engaged in fraudulent acts. Id.; Kelly v. Thomas, 83 A. 307, 309 (Pa. 1912). Allegations of corporate waste without alleging fraudulent acts or self-dealing in the Complaint are not sufficient to maintain a shareholder derivative action. Garber, 11 F.3d at 1206. In the instant case, Plaintiff has generally claimed that share value in CFI has declined because of corporate waste, and that one member of the board of directors, Chairman, Lowell Gates, engaged in “fraud and/or fundamental unfairness” which was harmful to CFI. Plaintiff’s claims appear to consist of mere speculation. His complaint uses terms like “mysteriously,” “interestingly” and “utilizing remarkable gall.” Plaintiff even recites in his brief that “he conjectured that there was a no interest loan in the form of a trust to Gates as well as a 6 sweetheart real estate deal from which Gates benefited.” The complaint contains no factual averments in support of these “conjectured claims.” Traditionally, Pennsylvania Courts have been aggressive in enforcing demand requirements. Plaintiffs must state with particularity averments that show self dealing, bias, bad faith or corrupt motive. Furthermore these averments must allege that a majority of the directors of a corporation or insiders have depleted or misappropriated corporate assets for their own personal gain. Tyler v. O’Neil, 994 F. Sup. 603 (E.D. PA 1998). Stated otherwise, in order to excuse demand under Pennsylvania law, a Plaintiff must allege that a majority of the board of directors engaged in acts that are fraudulent and not that they merely exercised erroneous business judgment. Id. at 12. The sine qua non of actual fraud is the showing of a deception. In Tyler v. O’Neil, a case involving a corporation with only two shareholders, fraud was averred with particularity. The averments clearly showed that majority shareholder O’Neil, who controlled 90% of the stock, had made false representations. O’Neil represented himself to be the company’s sole owner in loan applications, in income tax returns and in bankruptcy court filings. He falsely indicated that the corporation was purchasing real estate and building a new facility when in fact, O’Neil and his wife were taking title to both the property and the building. These claims were pled with sufficient particularity to even support claims under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §1961 et. seq. Given the close hold nature of the corporation, and the past fraudulent conduct of O’Neil and his wife, it was obvious that asking the corporation to institute suit would have been futile. This is not the situation presented in the case at bar. Plaintiff has clearly not shown that a majority of the board of directors of CFI have engaged in acts that are fraudulent. While there is 7 no question that it appears that the value of Plaintiff’s shares in CFI has declined, given the business climate in the United States at this time, such an averment does not establish fraud. Therefore, Plaintiff’s motion to maintain his shareholder derivative action must be denied and his Complaint dismissed. Accordingly, the following order shall be entered: ORDER OF COURT th AND NOW , this 9 day of March, 2009, upon consideration of Plaintiff’s Motion to Maintain Derivative Lawsuit, IT IS HEREBY ORDERED AND DIRECTED that the Plaintiff’s Motion to Maintain DENIED DISMISSED. Derivative Lawsuit is and his Complaint is By the Court, M. L. Ebert, Jr., J. Matthew P. Amos Plaintiff Pro Se 2503 Hoffer Street Harrisburg, PA 17103 James D. Flower, Jr., Esquire Dean E. Reynosa, Esquire Attorneys for Defendants Saidis, Flower & Lindsay 26 West High Street Carlisle, PA 17103 8