HomeMy WebLinkAbout93-0055 EquityROGER L. BAKER,
Plaintiff
Ve
R.M.C. VENTURES, INC.,
MARK L. BUTLER and
K. CRAIG BREAM,
Defendants
IN THE COURT OF COMMON PLEAS OF
CUMBERLAND COUNTY, PENNSYLVANIA
CIVIL ACTION - EQUITY
NO. 93-0055 EQUITY TERM
IN RE: ADJUDICATION
BEFORE OLER, J.
DECREE NISI
AND NOW, this ~ay of November, 1996, upon consideration of
Plaintiff's complaint in the above-captioned matter, following a
trial, and for the reasons stated in the accompanying opinion, the
court finds generally in favor of Defendants and against Plaintiff
on Plaintiff's breach of contract claim, and specifically for
Defendants on the issues of the nature of funds provided to the
corporate defendant by the individual defendants, the payment of
interest on said loans, the propriety of equipment rental fees, the
imposition of charges upon the individual defendants for expenses
and fees involved in a prior injunctive proceedings, and corporate
counsel fees. The court finds in favor of Plaintiff on the issue
of the amount of interest properly to be paid on the loans - i.e.,
5% per annum; and in favor of Plaintiff on Plaintiff's claims for
dissolution of the corporate defendant and an accounting, but only
to the extent that the Defendants are directed to wind up the
affairs of the corporation, effect its dissolution and provide an
accounting in accordance with this adjudication.
IF NO MOTION for post-trial relief is filed within 10
days, this Decree Nisi shall, upon praecipe, be entered as a final
decree.*
BY THE COURT,
* See Pa. R.C.P. 227.4
Wayne F. Shade, Esq.
Attorney for Plaintiff
Hubert X. Gilroy, Esq.
Attorney for Defendants
: rc
JU~esley Oler~r., J. 'U' '
ROGER L. BAKER,
Plaintiff
R.M.C. VENTURES, INC.,
MARK L. BUTLER and
K. CRAIG BREAM,
Defendants
IN THE COURT OF COMMON PLEAS OF
CUMBERLAND COUNTY, PENNSYLVANIA
CIVIL ACTION - EQUITY
NO. 93-0055 EQUITY TERM
IN RE: ADJUDICATION
BEFORE OLER, J.
OPINION and DECREE NISI
In this equity case involving a corporation and its three
shareholders, one of the shareholders filed a complaint against the
other two shareholders and
contained counts for breach
corporation and an accounting.
the corporation. The complaint
of contract, dissolution of the
A trial was held before the writer of this opinion on July 31,
August 1, August 2 and August 5, 1996.~ At the trial, the issues
presented for adjudication were (1) whether certain funds provided
by the individual defendants to the corporate defendant were loans
or capital contributions; (2) whether, and at what rate, interest
was properly payable to the individual defendants on these funds by
the corporate defendant; (3) whether certain equipment rental fees
were properly payable to the individual defendants by the corporate
defendant; (4) whether various expenses and fees involved in an
earlier injunctive proceeding should be charged to the individual
~ The notes of testimony and opinion in a related case at No.
25 Equity 1991 were incorporated into an earlier proceeding in this
case. Hearing, N.T. 4-6 (April 18, 1995).
NO. 93-0055 EQUITY TERM
defendants; and (5) whether certain attorney's fees were properly
payable to the corporation's attorney by the corporate defendant.2
Briefs and proposed findings of fact and conclusions of law
were received from the Plaintiff and the Defendants on September 4,
1996, and September 20, 1996, respectively. For the reasons stated
in this opinion, the court will find generally in favor of the
Defendants.
FINDINGS OF FACT
Plaintiff Roger L. Baker is an adult individual residing at
425 Kerrsville Road, Carlisle, Cumberland County, Pennsylvania.3
Defendant Mark L. Butler is an adult individual residing at 21
Kitszell Drive, Carlisle, Cumberland County, Pennsylvania.4
Defendant K. Craig Bream is an adult individual residing at 83
Smith Road, Gardners, Cumberland County, Pennsylvania.~ Defendant
R.M.C. Ventures, Inc., is a Pennsylvania business corporation
having offices at 1450 Trindle Road, Carlisle, Cumberland County,
2 Trial, N.T. 2-4 (July 31, 1996).
3 Plaintiff's Complaint, paragraph 1;
Complaint, paragraph 1.
4 Plaintiff's Complaint, paragraph 3;
Complaint, paragraph 3.
s Plaintiff's Complaint, paragraph 4;
Complaint, paragraph 4.
Defendants' Answer to
Defendants' Answer to
Defendants' Answer to
NO. 93-0055 EQUITY TERM
Pennsylvania.6
In mid-1988, Defendant Butler approached Defendant Bream with
the concept of establishing a miniature golf course business.
Defendant Butler suggested that they approach Plaintiff Baker, a
brick mason, with a view toward enlisting him as a third party in
the venture.
During the summer or fall of 1988, Defendant Butler contacted
Plaintiff Baker with a proposal whereby Plaintiff Baker would
contribute to the enterprise in the form of construction labor and
participation in the day-to-day operation of the business,
Defendant Bream would furnish some money, assist in construction,
and participate in the daily operation, and Defendant Butler would
furnish most of the money.
Under the proposal, the business was to be owned equally by
Defendant Butler, Defendant Bream and Plaintiff Baker. The initial
requirements for the enterprise were the acquisition of land for
the miniature golf course, construction of the course, and
formation of the business entity.
In January of 1989, Michael L. Bangs, Esq., of Lemoyne,
Cumberland County, Pennsylvania, was consulted for legal advice
with respect to the business. Mr. Bangs, by letter dated January
18, 1989, recommended that the new business be in the form of "a
6 Plaintiff's Complaint, paragraph 2; Defendants' Answer to
Complaint, paragraph 2; Trial, Plaintiff's Exhibit 4 (Copy of the
Articles of Incorporation).
NO. 93-0055 EQUITY TERM
Sub-Chapter S Corporation with each of [the owners] as equal
shareholders," contributing "a nominal sum for [the] purchase of
shares initially."7
In his letter, addressed to Defendant Butler, Mr. Bangs wrote
as follows:
After the corporation is set up, a simple
agreement will be made between you
individually and the corporation identifying
the amount you initially invested. This
initial investment will be set up as a loan to
the corporation and in the agreement it will
spell out that the loan is to be paid back
first. For example, if you are to give the
corporation $50,000.00 we will create a loan
document between you individually and the
corporation and also form an agreement between
you individually and the corporation whereby
it will indicate that the corporation owes you
that money and that it agrees to pay you back
first from operating proceeds.8
The business entity was incorporated as R.M.C. Ventures,
Incorporated (R, M and C being derived from Roger, Mark and Craig),
on February 27, 1989. On May 1, 1989, Defendant Butler, Defendant
Bream, and Plaintiff Baker met with Mr. Bangs in his office,
discussed the structure of the corporation and the proposition that
the corporation pay back as promptly as possible the moneys
provided by them, and executed various corporate documents incident
to commencement of the enterprise.
7 Trial, Plaintiff's Exhibit 3 (letter from Michael L. Bangs,
Esq., dated January 18, 1989).
Id.
NO. 93-0055 EQUITY TERM
It was agreed and understood by Defendant Butler, Defendant
Bream and Plaintiff Baker that cash contributions to the
corporation were to be treated as loans, as opposed to capital
contributions. Initially, each shareholder contributed $3,333.33,
which was used for a $10,000.00 down payment for land for the golf
course.9
A final installment sales agreement for the land, located at
1450 Trindle Road, Carlisle, Cumberland County, Pennsylvania, was
executed on May 26, 1989, with Defendant R.M.C. Ventures, Inc.,
being the grantee.~° A 19-hole miniature golf course was
constructed on the 3.7-acre parcel of land;~ it included a small
"clubhouse" and a gazebo.~2 The course opened on April 21, 1990.
Each of the shareholders had separate full-time employment.
Defendant Butler served as liaison with the corporation's counsel
and initially worked to secure the necessary governmental approvals
for the project. During construction, each of the shareholders
contributed hundreds of hours of personal labor. The hours of
9 Each shareholder was also supposed to pay $1000.00 for 100
shares of stock in the corporation, but it appears that these
payments were not actually made.
~0 The rather complicated history of this land transaction,
and the determination that the corporate entity was the intended
grantee, is the subject of an opinion and decree of this court
dated August 9, 1993, at No. 25 Equity 1991.
Trial, Defendants' Exhibit 2 (Scrapbook).
~2 Id.
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NO. 93-0055 EQUITY TERM
Plaintiff Baker and Defendant Bream were approximately equal in
this regard, with those of Defendant Butler being significantly
fewer.~3
Ultimately, in terms of finances, Defendant Butler provided
almost $100,000.00 to the corporation, Defendant Butler about
$36,000.00 and Plaintiff Baker about $3,300.00. The interest rate
initially contemplated with respect to these funds was 5%;TM the
parties' understanding that the funds were loans was not formalized
as the funds were provided, although the corporation treated them
as loans in its tax returns and paid some interest.~s
In its first year of operation, the business grossed
$82,000.00. Unfortunately, the relationship between Defendants
Butler and Bream and Plaintiff Baker deteriorated, and competition
from a new, nearby enterprise of a similar nature seriously
impacted upon the parties' endeavor. By their choice, Defendants
Butler and Bream began to operate the business without the benefit
of day-to-day participation by Plaintiff Baker, and in 1990 and
1991 they drew salaries of $10,000.00 each. They also purchased
~3 Additional labor was supplied by family members and friends
of the shareholders, and by contractors engaged by them.
~4 This figure was later increased to 8.5%, but the court can
not conclude that the parties agreed to that increase.
~s Plaintiff Baker declined to accept the proffered interest
payments.
NO. 93-0055 EQUITY TERM
and rented to the corporation a few items of equipment at, in the
court's view, not unreasonable prices.
No compensation was received by any of the shareholders after
1991, and it became apparent that the continuing infusion of time
and money by the individual defendants into the business was a
losing proposition. The gross revenues of the corporation in 1994
fell to $25,000.00, the enterprise was losing money, and funds were
lacking to pay even interest on its debts to the shareholders.~6
At a meeting of the board of directors on January 19, 1995,
the corporate officers were authorized to try to sell the golf
course at auction.~7 Plaintiff Baker sought a preliminary
injunction against the sale on the ground that it was intended to
facilitate the purchase of the property by Defendants Butler and
Bream at a nominal price. Following a hearing, the court declined
to enjoin the sale but did impose a minimum sale price in the
amount of $130,000.00 to avoid the possibility of the harm
envisioned by Plaintiff.~8
The required reserved price was later reduced to $110,000.00,~9
to increase the possibility of a sale. On November 29, 1995, the
~ See Hearing, April 18, 1995, Plaintiff's Exhibit 2 (Minutes
of January 19, 1995 board meeting).
Id., Defendants' Exhibit 5 (Corporate resolution).
Order of Court, April 18, 1995.
Order of Court, June 27, 1995 (sealed).
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NO. 93-0055 EQUITY TERM
property was successfully sold for $151,000.00 to an independent
buyer.2° Net proceeds of the sale received by the corporation were
about $93,000.00.2~
DISCUSSION
Nature of funds provided by shareholders to corporation -
loans or capital contributions. The primary matter in dispute'in
the present case is whether the funds provided by the shareholders
to the corporation were intended to be loans or capital
contributions. After a careful review of all the evidence in the
record, the court has found that the parties' intention and'
understanding was that the moneys provided were to be regarded as
loans. In making this finding, the court was appreciative of
Plaintiff's position that he was less sophisticated in his
comprehension of the consequences of such treatment than were his
fellow shareholders. The court was also cognizant of the fact that
the formalities which could have assisted in a determination of
whether loans or capital contributions were intended were not
observed.
In the latter regard, however, the court has been unable to
find support for the proposition that a failure to follow
2O
21
Trial, Plaintiff's Exhibit 64 (Settlement statement).
This money has been placed in escrow.
8
NO. 93-0055 EQUITY TERM
prescribed procedures for corporate borrowing22 will convert an
intended loan into a capital contribution. Such a result would be
particularly anomalous where, as here, a finding has been made that
no party to the litigation had agreed upon such a result.
Interest on the loans. With respect to interest on the loans,
the court has found that the figure initially contemplated was 5%.
Accordingly, this rate, rather than that of 8.5% advanced by
Defendants,23 will be accepted as proper by the court.
Rental fees. With respect to rental charges to the
corporation for equipment owned by the individual defendants, the
court has been unable to discern any impropriety in the
transactions. For this reason, no relief will be afforded to
Plaintiff on this aspect of his claim.
Expenses and fees involved in prior injunctive proceedinq.
With respect to Plaintiff's claim related to fees and expenses
involved in the prior injunctive proceeding, it is Plaintiff's
contention that imposition of a charge upon the individual
defendants would be warranted because "[i]t is obvious from the
injunction that issued thereafter that [the court] found [the
~2 See, e.g., Act of December 21, 1988, P.L. 1444, S103(a)(7),
15 Pa. C.S. S1502(a)(7) (power of business corporation to borrow);
Act of December 19, 1990, P.L. 834, §102, 15 Pa. C.S. §1721
(exercise of power by board of directors).
See note 14 supra.
9
NO. 93-0055 EQUITY TERM
individual defendants'] actions to be inequitable." The court did
not, however, make a specific finding of that sort.
In general, the "business judgment rule" leads courts to
refrain from interference in the business decisions of the board of
directors of a corporation in the absence of fraud or a gross abuse
of discretion. See In re Athos Steel, 71 B.R. 525 (E.D. Pa. 1987).
In the present case, the court's response to Plaintiff's request
for an order enjoining a sale of corporate property - the
imposition of a minimum sale price - served to protect Plaintiff's
interests without in any way representing a finding of improper
activity on the part of the individual defendants. Under these
circumstances, the court does not believe that the individual
defendants should be charged for expenses and fees involved in that
aspect of this litigation.
Attorney's fees of corporate counsel. A reView of the record
in this case has not led the court to conclude that the evidence
supports a finding that any fees charged by the corporate counsel
to Defendant R.M.C. Ventures, Inc., were excessive or otherwise
improper. To the extent that Plaintiff is continuing to pursue
this issue, relief must be denied.
CONCLUSIONS OF LAW
1. This court has jurisdiction over the parties and subject
matter of this litigation.
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NO. 93-0055 EQUITY TERM
2. The moneys furnished by the individual defendants to the
corporate defendant were loans as opposed to capital contributions,
and the interest rate to be properly applied to such loans is 5%.
3. Plaintiff's claims respecting (a) rental fees, (b)
expenses and fees involved in a prior injunctive proceeding, and
(c) corporate counsel fees can not be sustained on the basis of the
court's findings.
4. It appearing to be the desire of all the parties that the
affairs of the corporate defendant be concluded and the corporation
dissolved, Plaintiff's claims for dissolution of the corporate
defendant and an accounting in accordance with this adjudication
may properly be granted.
DECREE NISI
AND NOW, this 15 day of November, 1996, upon consideration of
Plaintiff's complaint in the above-captioned matter, following a
trial, and for the reasons stated in the accompanying opinion, the
court finds generally in favor of Defendants and against Plaintiff
on Plaintiff's breach of contract claim, and specifically for
Defendant on the issues of the nature of funds provided to the
corporate defendant by the individual defendants, the payment of
interest on said loans, the propriety of equipment rental fees, the
imposition of charges upon the individual defendants for expenses
and fees involved in a prior injunctive proceedings, and corporate
counsel fees. The Court finds in favor of Plaintiff on the issue
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NO. 93-0055 EQUITY TERM
of the amount of interest properly to be paid on the loans - i.e.,
5% per annum; and in favor of Plaintiff on Plaintiff's claims for
dissolution of the corporate defendant and an accounting, but only
to the extent that the Defendants are directed to wind up the
affairs of the corporation, effect its dissolution and provide an
accounting in accordance with this adjudication.
IF NO MOTION for post-trial relief is filed within 10 days,
this Decree Nisi shall, upon praecipe, be entered as a final
decree.*
BY THE COURT,
* See Pa. R.C.P. 227.4
Wayne F. Shade, Esq.
Attorney for Plaintiff
Hubert X. Gilroy, Esq.
Attorney for Defendants
: rc
s/ J. Wesley Oler, Jr.
J. Wesley Oler, Jr., J.
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