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HomeMy WebLinkAbout99-3981 / 99-3542 / 97-5584 CivLOUIS J. CAPOZZI, JR., PLAINTIFF LATSHA & CAPOZZI, P.C., KIMBER L. LATSHA, GLENN R. DAVIS and DOUGLAS C. YOHE, DEFENDANTS IN THE COURT OF COMMON PLEAS OF CUMBERLAND COUNTY, PENNSYLVANIA 99-3981 CIVIL TERM 99-3542 CIVIL TERM 97-5584 CIVIL TERM IN RE: DAMAGES OPINION AND VERDICT Bayley, J., December 22, 2003:-- Plaintiff, Louis J. Capozzi, Jr., an attorney, was a shareholder and employee of the Cumberland County law firm of defendant, Latsha & Capozzi, P.C. Attorneys Kimber L. Latsha, Glenn R. Davis and Douglas C. Yohe, were the other shareholders in the firm. On June 6, 1997, after plaintiff overbilled clients of the firm and following a period of other contentious disagreements, the firm notified him that his employment would only be continued for an open probationary period subject to thirteen conditions. Plaintiff did not accept the conditions and his employment terminated. On June 11, 1997, plaintiff started his own law firm, Capozzi Associates, in Harrisburg, Dauphin County. Many of the clients of Latsha & Capozzi employed plaintiff's new firm. Plaintiff instituted litigation to recover (1) the value of his stock in Latsha & Capozzi as of June 6, 1997, and (2) money owed on a demand note the law firm gave to him. Defendants filed a counterclaim seeking damages against plaintiff for his 99-3981 CIVIL TERM 99-3542 CIVIL TERM 97-5584 CIVIL TERM overbilling clients of the law firm.1 In response to plaintiff's claim to recover the value of his stock in the law firm, defendants maintained that all of the shareholders of Latsha & Capozzi had an oral agreement that if any shareholder left his employment, and then competed with the firm, that shareholder would receive the amount of his capital contribution for his stock, which was $5,000. Defendants counterclaim for recovery from plaintiff for his proportional share of the money the firm returned to clients, for the cost of identifying those clients, and for determining the amount of the overbillings. The parties agreed to bifurcate the trial with respect to plaintiff's stock, with a jury determining liability and the trial judge determining damages as to value if in excess of $5,000. On November 1, 2000, a jury returned a verdict on liability answering "Yes" to the following three questions: (1) Are Latsha & Capozzi, P.C., Kimber L. Latsha, Glenn R. Davis and Douglas C. Yohe liable to Louis J. Capozzi, Jr. for payment of the demand note the law firm gave to Capozzi? (2) Is Louis J. Capozzi, Jr., liable to Latsha & Capozzi, P.C., Kimber L. Latsha, Glenn R. Davis and Douglas C. Yohe, as a shareholder for his 1 There are lawsuits at three captions in which the various claims of the parties are interdispursed. On October 10, 1997, Louis Capozzi instituted a suit in this court at 97-5584. On December 12, 1997, Kimber Latsha, Glenn Davis and Douglas Yohe instituted a multiple count complaint against Louis Capozzi in the United States District Court for the Middle District of Pennsylvania. Capozzi filed a multiple count counterclaim. Some of plaintiff's counts and some of the counts of the counterclaim were transferred by the District Court to this court and are docketed at 99-3981. Other counts by both parties were dismissed with prejudice. On June 10, 1999, Latsha, Davis and Yohe instituted a suit in this court at 99-3542. -2- 99-3981 CIVIL TERM 99-3542 CIVIL TERM 97-5584 CIVIL TERM proportional share of the money the law firm returned to clients who were overbilled by him, and for the cost of identifying the clients and determining the amounts of the overbillings? (3) Did the shareholders of Latsha & Capozzi, P.C. have an oral agreement with Louis J. Capozzi, Jr., that if a shareholder left the law firm, and competed with the firm, that shareholder's stock would be valued at his capital contribution? On December 18, 2000, the court, after taking additional evidence on damages, entered the following verdict: (1) Louis J. Capozzi, Jr., is awarded principal in the amount of $38,071.50 plus interest totaling $8,668.48 through December 18, 2000, for a total of $46,683.98, against Latsha & Capozzi, P.C., Kimber L. Latsha, Glenn R. Davis and Douglas C. Yohe, on the demand note as found by the jury in Question Number 1.2 (2) Latsha and Capozzi, P.C., Kimber L. Latsha, Glenn R. Davis and Douglas C. Yohe are awarded damages, and as a setoff, from Louis J. Capozzi, Jr., of $14,140.78 for client refunds representing his proportional share of the money the law firm returned to clients who were overbilled by him, and auditing expenses of $5,679.02 representing the total cost of identifying the clients and determining the amounts of the overbillings, for a total of $19,819.80 as found by the jury in Question Number 2. (3) Louis J. Capozzi, Jr., is awarded $5,000 against Latsha and Capozzi, P.C., Kimber L. Latsha, Glenn R. Davis and Douglas C. Yohe, with legal interest from June 6, 1997, for the value of his stock at his capital contribution as found by the jury in Question Number 3. 2 The figures used in the verdict are as set forth in plaintiff's Exhibit Number 1 at the hearing on damages. Two are incorrect. The principal amount of the note as shown on plaintiff's Exhibit Number 2, in the jury trial, was $38,017.50. When this figure is added to the interest of $8,668.48, it totals $46,685.98. Plaintiff and defendants filed motions for post-trial relief. Plaintiff maintained, -3- 99-3981 CIVIL TERM 99-3542 CIVIL TERM 97-5584 CIVIL TERM inter alia, that the oral agreement found by the jury to have existed between the shareholders of the law firm was unenforceable. In a written opinion in support of an order of February 27, 2001,: we stated: Implicit in the oral agreement of all of the shareholders of Latsha & Capozzi, P.C., was that if a shareholder left the law firm, he would be paid for his stock. The issue is what that shareholder would be paid, not whether he would be paid. Concluding that "the oral agreement between the shareholders is unenforceable to the extent that it limits plaintiff to receiving $5,000 for the value of his stock in Latsha & Capozzi, P.C.," the following order was entered: (1) The motion of plaintiff for a judgment notwithstanding the verdict on liability as to the value of his stock in Latsha & Capozzi, P.C., IS GRANTED. Plaintiff is awarded a new trial on damages. (2) The motion of the defendants, Kimber L. Latsha, Glenn R. Davis and Douglas C. Yohe, for a judgment notwithstanding the verdict on their individual liability on a demand promissory note, IS GRANTED. (3) The verdict in favor of defendants against plaintiff in the amount of $19,819.80, IS MOLDED to add legal interest at the rate of six percent per annum from August 1, 1997. On April 19, 2002, the order was affirmed by the Superior Court of Pennsylvania. 797 A.2d 314 (Pa. Super. 2002). The court stated: We... affirm the trial court's finding that Latsha & Capozzi's forfeiture for competition clause is an unreasonable restraint on competition. Appellee is entitled to a trial to determine the value of his stock in Latsha & Capozzi, P.C. as of the date of his departure. (Emphasis added.) On April 28, 2003, the Supreme Court of Pennsylvania denied a petition for : 50 Cumberland L.J. 119 (2001). -4- 99-3981 CIVIL TERM 99-3542 CIVIL TERM 97-5584 CIVIL TERM review. 821 A.2d 586 (Pa. 2003). On September 17, 2003, a non-jury trial was conducted on the issue of damages. Post-trial briefs were filed on October 17, 2003. Both sides presented the testimony of a certified public accountant: Robert Murphy for plaintiff and James Smeltzer for defendants. Latsha & Capozzi was incorporated on May 23, 1994. By the end of 1996, the law firm had fifteen attorneys and gross revenue for that year of 2.6 million dollars. Plaintiff drew an annual salary of $175,000. At the end of each year, any money remaining after the payment of expenses was distributed to the shareholders, one-half in proportion to their ownership interest and the other half in proportion to the amount of each shareholder's individual billings during that year. When plaintiff's employment with Latsha & Capozzi ended, he and Kimber Latsha each owned thirty-seven and one- half percent of the stock, Douglas Yohe owned fifteen percent and Glenn Davis owned ten percent. To value plaintiff's stock when he left the law firm, Robert Murphy converted the financial data from its modified cash basis of accounting to an accrual basis of accounting which is consistent with general accepted accounting principles.3 Adjusting the law firm's data to an accrual basis required: 3 During a single accounting period the accrual basis achieves a better matching of revenue and related costs and provides a more comprehensive inclusion of all assets and liabilities relevant to determining shareholder equity. Revenue is recognized when the services are provided and expenses are recognized when incurred. In modified cash basis accounting, revenue is recognized when cash is received for services rendered and expenses are recognized when paid. -5- 99-3981 CIVIL TERM 99-3542 CIVIL TERM 97-5584 CIVIL TERM (1) Establishing the equity under the modified cash basis as of May 31, 1997.4 (2) Adding to assets revenue earned but not yet received, primarily in the form of accounts receivable and work performed but not billed (work in progress). (3) Removing from liabilities prepaid expenses to the extent they related to future periods. (4) Adding to liabilities accounts payable and other expenses incurred but not yet recorded. Plaintiff, through the testimony of Robert Murphy, seeks damages of $425,328. Defendants, through the testimony of James Smeltzer, maintain that the damages are $75,304.5 In offering his opinion as to the value of plaintiff's stock, Smeltzer deducted $128,459 based on his assessment of the economic consequences caused by plaintiff's departure from and direct competition with Latsha & Capozzi. In support of this calculation, defendants cite Howard v. Babcock, 863 P.2d 150 (California 1993), the reasoning of which both this court and the Superior Court accepted in the liability part of this case. In Howard, the Supreme Court of California concluded that an 4 Although plaintiff's employment terminated at the end of the first week in June, 1997, May 31st was the closest date for which financial records were available. Any change in financial condition as to the value of the stock approximately a week later was nominal. 5 Smeltzer prepared a supplemental report, which was not produced until the day he testified, that set the damages at $66,182. His original report set the damages at $51 ,O52. -6- 99-3981 CIVIL TERM 99-3542 CIVIL TERM 97-5584 CIVIL TERM agreement among lawyers that imposed a reasonable toll on departing partners who then competed with the firm was enforceable. In the present case, we concluded, and the Superior Court agreed, that restrictive covenants between attorneys that contain reasonable provisions may be enforced if: (1 employment, (2) is reasonably necessary, (3) the agreement relates to a contract of is supported by adequate consideration, and (4) the application of the agreement is reasonably limited in both time and territory? The oral agreement between the shareholders of Latsha & Capozzi, that any shareholder who left his employment and then competed with the firm would receive the amount of his capital contribution for his stock, was held unenforceable because it was not limited in time and territory. Unlike in Howard, no enforceable agreement exists. Therefore, the defendants cannot reduce the amount they owe plaintiff for the costs of his departure and competition with Latsha & Capozzi. Accordingly, we need not determine if $128,459 fairly reflects the economic consequence of plaintiff leaving and competing with Latsha & Capozzi. James Smeltzer calculated the amount due plaintiff on the basis of thirty-five percent stock ownership in Latsha & Capozzi rather than the thirty-seven and a half percent of the stock plaintiff actually owned when his employment terminated. That 6 As stated in our opinion of February 27, 2001: "[w]e conclude as a matter of public policy that in Pennsylvania, attorneys that are shareholders of the professional corporation may enter into an enforceable agreement that reasonably prevalues the stock of a departing shareholder who then competes with the law firm." -7- 99-3981 CIVIL TERM 99-3542 CIVIL TERM 97-5584 CIVIL TERM calculation was based on his understanding that Glenn Davis had met certain levels of -8- 99-3981 CIVIL TERM 99-3542 CIVIL TERM 97-5584 CIVIL TERM performance at the end of 1996 that warranted the increase of his stock from ten percent to fifteen percent. That would decrease plaintiff's actual ownership by two and a half percent. Plaintiff testified that Davis had not met performances bonuses warranting an increase of his stock in 1997. More importantly, the shareholders never increased Davis's stock ownership to fifteen percent or reduced plaintiff's stock to thirty-five percent by the time plaintiff's employment terminated. As the Superior Court has already stated, plaintiff "is entitled to a trial to determine the value of his stock in Latsha & Capozzi, P.C., as of the date of his departure." Plaintiff owned thirty-seven and one-half percent of the stock on the date of his departure. Smeltzer's valuation at thirty-five percent is not supported by the evidence. James Smeltzer concluded that a contingent fee due from HCF, Inc. of $203,319 was substantially earned by Latsha & Capozzi before plaintiff was terminated. In accrual accounting once an agreement has been reached to settle a case and the contingent fee can be calculated it is treated as an asset. Robert Murphy also included the $203,319 as an asset for purposes of valuing plaintiff's stock.7 Smeltzer, unlike Murphy, also included a contingent fee of $185,000 of a Latsha & Capozzi client, IHS. IHS hired plaintiff to continue the case after he left Latsha & 7 In February, 1997, the parties to the HCF lawsuit agreed to settle for $1,016,595 which generated a contingent fee of $203,319 owing to Latsha & Capozzi. The settlement proceeds did not reach HCF until about August 1, 1997. Latsha & Capozzi then made competing claims for the fee, after which HCF interpleaded the $203.319 -9- 99-3981 CIVIL TERM 99-3542 CIVIL TERM 97-5584 CIVIL TERM Capozzi. Smeltzer made this calculation based on his understanding that the actual contingent fee would be between $145,000 to $225,000; therefore, he used an average of $185,000. Plaintiff testified that he has yet to receive a fee from IHS and that the case still has not been settled. Obviously, the fee could not be calculated on June 6, 1997. Accordingly, we agree with plaintiff that under accrual basis accounting any prospective fee from IHS cannot be used in a calculation of the value of plaintiff's stock on the date of his termination.8 James Smeltzer concluded that there was no value in the fixed assets of Latsha & Capozzi while Robert Murphy concluded that the assets had a value of $137,104 when plaintiff was terminated. Murphy's calculation represented furniture and fixtures at an original cost of $89,496, with a net book value of $38,200, and office into federal court. 8 On November 10, 2003, defendants filed a petition to reopen the record. They aver that on or about October 23, 2003, they learned that plaintiff had negotiated a "Stipulation of Settlement" in the IHS suit on August 28, 2003, before he testified on September 17th. On December 22, 2003, the petition was dismissed. It makes no difference if in fact a settlement agreement, by which a contingent fee may now finally be calculated, was reached on August 28, 2003. Any such agreement by IHS that chose Capozzi Associates as its attorney, would be six years and two months after plaintiff's termination on June 6, 1997. Under accrual basis accounting, this contingent fee cannot be used in a calculation of the value of plaintiff's stock on June 6, 1997 because it could not be fairly calculated on that date. To the extent that such evidence, if true, would attack plaintiff's credibility, the relevance is not sufficient to reopen the record. Plaintiff's credibility has already been diminished by the verdict of the jury which determined, contrary to his testimony, that the shareholders of Latsha & Capozzi had an oral agreement that if any shareholder left his employment, and then competed with the firm, that shareholder would receive for his stock the amount of his capital -10- 99-3981 CIVIL TERM 99-3542 CIVIL TERM 97-5584 CIVIL TERM contribution, which was $5,000. -11- 99-3981 CIVIL TERM 99-3542 CIVIL TERM 97-5584 CIVIL TERM equipment at an original cost of $183,105 with a net book value of $98,904. ($38,200 + $98,904 = $137,104). These are the figures actually reported by Latsha & Capozzi on the firm's financial statement of June 30, 1997. We do not understand how Smeltzer could conclude that the fixed assets of the law firm had no value as of June 6, 1997. The firm was incorporated near the end of May, 1994. The total acquisition cost of the fixed assets was $272,601. Of the amount, $143,754 was acquired prior to 1996, $89,958 in 1996, and $38,889 in the first five months of 1997. Murphy used the best evidence available to value the furniture and fixtures as of June 6, 1997, which was the net book value of $137,104 set by the law firm less than a month after plaintiff's termination. We agree with that valuation. Both parties agree that there were accounts receivable billed as of the termination of plaintiff, of $478,359.74. All of these fees were collected by the law firm. At plaintiff's termination, the law firm had unbilled time for the entire month of May and the beginning of June. James Smeltzer, after filing an initial report that failed to account for the value of this work in progress, filed a supplemental report concluding that the amount was $114,509. Robert Murphy concluded that the amount was $252,000. The reason for the large discrepancy is that Smeltzer calculated the amount only to May 21, 1997, while Murphy calculated the amount to plaintiff's termination. Because plaintiff is entitled to the value of his stock as of his termination, Murphy's calculations are supported by the evidence while Smeltzer's are not. -12- 99-3981 CIVIL TERM 99-3542 CIVIL TERM 97-5584 CIVIL TERM In their brief, the individual defendants maintain, (1) that their law firm and not them individually is liable to plaintiff for the value of his stock, and (2) plaintiff is not entitled to prejudgment interest from his date of termination.9 On December 18, 2000, the following verdict was entered: Louis J. Capozzi, Jr., is awarded $5,000 against Latsha & Capozzi, P.C., Kimber L. Latsha, Glenn R. Davis and Douglas C. Yohe, with legal interest from June 6, 1997, for the value of his stock... On February 27, 2001, the following order was entered: The motion of plaintiff for a judgment notwithstanding the verdict on liability as to the value of his stock in Latsha & Capozzi, P.C., IS GRANTEE). Plaintiff is awarded a new trial on damages. (Emphasis added.) On defendants' appeal, the order was affirmed by the Superior Court. Defendants did not raise in their appeal any issue as to their individual liability or the award of prejudgment interest. Accordingly, the remaining issue is the amount of the judgment on the liability already found against the law firm and its shareholders with interest from June 6, 1997. The verdict as to individual liability and prejudgment 9 These positions are in contrast to the position taken by the individual defendants in their claim in which they and the law firm were awarded damages with prejudgment interest for client refunds representing plaintiff's proportional share of the money the law firm returned to clients who were overbilled by plaintiff ($14,140.78), and the auditing expenses for identifying those clients and determining the amount of the overbillings ($5,679.02). -13- 99-3981 CIVIL TERM 99-3542 CIVIL TERM 97-5584 CIVIL TERM interest is final.1° We have analyzed the major differences in the opinions of James Smeltzer and Robert Murphy as to the value of plaintiff's stock on his termination. All of these differences have been decided in favor of plaintiff. While there are other lesser differences in the opinions of the two accountants, we find overall that the testimony of Robert Murphy is more credible than James Smeltzer. The real reason for the great disparity in the valuations of the two accountants can be gleaned from the argument in defendants' post-hearing brief, which James Smeltzer erroneously bought into: There is no question that the parties to the implied repurchase agreement intended for a departing shareholder to share in the diminution in the value of the firm, resulting from the competing shareholder's erosion of the firm's client base and corresponding revenue stream while the firm's fixed costs remained constant. In supplying a price term or stock value for the implied stock repurchase agreement, this Court at a minimum should take into account the loss in the value of the firm as reasonably calculated by Defendants' expert. Accounting for the economic reality of the loss in the firm's value in evaluating Capozzi's stock is not a forfeiture. It is merely a reflection of the economic consequences of the removal of that value from the LDY firm and transferring it to the new Capozzi firm. The LDY position on valuation fairly accounts for the economic impact of Capozzi's departure on the firm and the value of his stock, but also secures for Capozzi a total return of $66,182, which reflects a substantial return on his stock purchase price of $5,000. It also prevents Capozzi from securing a windfall from the IHS contingency fee, and by his 10 There are often disputes as to the amount due to which prejudgment interest is applicable. The value of plaintiff's stock was ascertainable as of June 6, 1997. Unlike disputes involving unliquidated damages, prejudgment interest is a matter of right not discretion, measured from the date payment was due to the time of judgment. Fernandez v. Levin, 519 Pa. 375 (1988). -14- 99-3981 CIVIL TERM 99-3542 CIVIL TERM 97-5584 CIVIL TERM attempt to avoid any financial consequences associated with the loss in the value of the firm caused by his departure. The adoption of the LDY position on value will leave the parties much closer to the intent of their original agreement, and causes no harm to Capozzi. This is law not equity. It has already been determined that these attorneys had no enforceable restrictive stock agreement. There can be no implied repurchase agreement that has any bearing on the value of plaintiff's stock at his termination. The clients of Latsha & Capozzi choice whether to remain with that firm, go to plaintiff's new firm, or retain another firm. Plaintiff was an integral part in creating the value to the stock of Latsha & Capozzi, P.C. While he wrongfully overbilled clients, for which he is being held accountable for his proportional share of the fees and costs associated with determining the fees, that is not relevant as to the value of his stock on the date of his termination. Likewise, the other contentious differences between these attorneys that resulted in plaintiff's termination are not relevant to that determination. Arguing that plaintiff will receive a windfall from the IHS contingency fee is to ignore the principles of accrual accounting applicable to the value of his stock on a date certain. As plaintiff set forth in his post-trial brief: Capozzi (and Latsha) began with very little except their ability, their client contracts, and their willingness to work. They succeeded in building a law firm, as the $2.6 million in annual billings reflect; similarly, that firm allowed defendants to pay themselves more than $735,000 in salaries and bonuses in 1997 .... Capozzi was a substantial creator of that value. He left behind not merely Accounts Receivables and Work In Progress, but office equipment (fixed assets -- $137,000), a substantial quantity of cash ($252,000), and a finalized contingent fee ($203,000). -15- 99-3981 CIVIL TERM 99-3542 CIVIL TERM 97-5584 CIVIL TERM Both experts place the value of the firm's equity as of departure at a comparable amount -- $1.096 million according to plaintiff's expert and $1.014 million according to defendants' expert. Capozzi seeks in this proceeding his portion of the net assets he created and left behind on June 6, 1997. We agree with plaintiff. It is the value of the stock he owned on the date of his termination to which he is legally entitled, no more and no less. Plaintiff was awarded $38,071.50 plus interest of $8,668.48 through December 18, 2000, for a total of $46,685.98 against Latsha & Capozzi for the amount due on his demand note. Defendants were awarded $14,140.78 against plaintiff for his proportional share of his overbilling of clients plus $5,679.02 in costs toward determining the amount of the overbilling. Legal interest was from August 1, 1997. These verdicts are final. In connection with the matter now before us we find that the value of plaintiff's thirty-seven and a half percent ownership in the stock of Latsha & Capozzi was $425,328 as of the date of his termination. For the foregoing reasons, the following order is entered. VERDICT AND NOW, this day of December, 2003, plaintiff, Louis J. Capozzi, Jr., is awarded $425,328, with legal interest at six percent per annum from June 6, 1997, against Latsha & Capozzi, P.C., Kimber L. Latsha, Glenn R. Davis and Douglas C. Yohe. By the Court, -16- 99-3981 CIVIL TERM 99-3542 CIVIL TERM 97-5584 CIVIL TERM Edgar B. Bayley, J. -17- 99-3981 CIVIL TERM 99-3542 CIVIL TERM 97-5584 CIVIL TERM Robert B. Hoffman, Esquire For Louis J. Capozzi, Jr. Richard H. Wix, Esquire For Latsha and Capozzi, P.C. Kimber L. Latsha, Glenn R. Davis and Douglas C. Yohe :sal -18- LOUIS J. CAPOZZI, JR., PLAINTIFF IN THE COURT OF COMMON PLEAS OF CUMBERLAND COUNTY, PENNSYLVANIA LATSHA & CAPOZZI, P.C., KIMBER L. LATSHA, GLENN R. DAVIS and DOUGLAS C. YOHE, DEFENDANTS 99-3981 CIVIL TERM 99-3542 CIVIL TERM 97-5584 CIVIL TERM IN RE: DAMAGES VERDICT AND NOW, this day of December, 2003, plaintiff, Louis J. Capozzi, Jr., is awarded $425,328, with legal interest at six percent per annum from June 6, 1997, against Latsha & Capozzi, P.C., Kimber L. Latsha, Glenn R. Davis and Douglas C. Yohe. By the Court, Edgar B. Bayley, J. Robert B. Hoffman, Esquire For Louis J. Capozzi, Jr. Richard H. Wix, Esquire For Latsha and Capozzi, P.C. Kimber L. Latsha, Glenn R. Davis and Douglas C. Yohe :sal