HomeMy WebLinkAbout2007-4040
KLINGLER & ASSOCIATES, : IN THE COURT OF COMMON PLEAS OF
P.C., : CUMBERLAND COUNTY, PENNSYLVANIA
Plaintiff :
:
:
v. :
:
JOSEPH J. ELWOOD and :
ELWOOD & ASSOCIATES, :
INC., :
Defendants :
:
:
v. :
:
:
JOHN H. KLINGLER, : NO. 07-4040 CIVIL
Individually :
Additional Defendant :
IN RE: NON-JURY TRIAL
ORDER OF COURT
th
AND NOW
, this 9 day of December, 2011, after a non-jury trial in the above-captioned
matter, the verdict of the Court is as follows:
1. On Plaintiff’s Complaint, Count I, Klingler & Associates, P.C.’s claim
against Joseph J. Elwood and Elwood & Associates, Inc. for Breach of Contract, the Court finds
for the Defendants and against the Plaintiff.
2. On Plaintiff’s Complaint, Count II, Klingler & Associates, P.C.’s claim
against Joseph J. Elwood and Elwood & Associates, Inc. for Intentional Interference with
Contractual Relations, the Court finds for the Defendants and against the Plaintiff.
3. On Defendants’ Amended Counterclaim, Count I & II, Joseph J. Elwood
and Elwood & Associates, Inc.’s claim against Klingler & Associates, P.C. and John H. Klingler
for Breach of Contract and Breach of Guaranty & Surety Agreement, the Court finds for the
Defendants in the amount of $50,680.41 and against the Plaintiff and Additional Defendant, with
interest at the rate of six percent per annum from March 1, 2007.
By the Court,
M. L. Ebert, Jr., J.
David Baric, Esquire
Attorney for Plaintiff and Additional Defendant
Rob Bleecher, Esquire
Attorney for Defendants
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KLINGLER & ASSOCIATES, : IN THE COURT OF COMMON PLEAS OF
P.C., : CUMBERLAND COUNTY, PENNSYLVANIA
Plaintiff :
:
:
v. :
:
JOSEPH J. ELWOOD and :
ELWOOD & ASSOCIATES, :
INC., :
Defendants :
:
:
v. :
:
:
JOHN H. KLINGLER, : NO. 07-4040 CIVIL
Individually :
Additional Defendant :
IN RE: NON-JURY TRIAL
OPINION AND ORDER OF COURT
Ebert, Jr., J., December 9, 2011 -
Background
In this civil case, Plaintiff Klingler & Associates, P.C. brought an action for breach of
contract and intentional interference with contractual relations. Defendants Elwood &
Associates, Inc. and Joseph J. Elwood, firm and proprietor, respectively, provide financial
services. Plaintiff had arranged to purchase Defendants’ book of business. The overall goal of the
purchase was to increase Plaintiff’s client base by transitioning Defendants’ tax preparation
service clients to Plaintiff’s firm.
Plaintiff claims that Mr. Elwood materially breached the contract through a series of
actions and inactions that resulted in a failure under the contract to properly transition clients
successfully from Defendants to Plaintiff. Additionally, Plaintiff claims that Mr. Elwood
solicited his former clients back to his business, thus interfering with the contractual relation
Plaintiff had established with these clients and again materially breaching the contract by failing
to abide by a covenant not to compete.
Alternatively, Defendants brought an action for breach of contract and breach of a
Guaranty Surety Agreement against Additional Defendant, John H. Klingler. Mr. Klingler is the
proprietor of Klingler & Associates who purchased Defendants’ book of business. Defendants
claims Mr. Klingler breached the contract and the personal Guaranty Surety Agreement by
failing to pay monies owed to Defendants for the purchase of the book of business and sub-
contracting work performed by Mr. Elwood.
Procedural History
A brief procedural history is provided to better illustrate the extensive timeframe of
events occurring before this Court. Plaintiff filed a Complaint on July 5, 2007. On July 30, 2007,
Defendants filed Preliminary Objections to Plaintiff’s Complaint. On August 17, 2007, Plaintiff
filed a Response to Defendants’ Preliminary Objections. On December 6, 2007, Defendants’
Preliminary Objections to Plaintiff’s Complaint were denied. On January 29, 2008, Defendants
filed an Answer with New Matter and Counterclaim. On February 8, 2008, Plaintiff and
Additional Defendant filed Preliminary Objections to Defendants’ Counterclaims. Defendants
filed an Amended Counterclaim on February 28, 2008. On March 17, 2008, Plaintiff and
Additional Defendant filed Preliminary Objections to Defendants’ Amended Counterclaims. On
May 19, 2008, the Court sustained the Plaintiff and Additional Defendants’ Preliminary
Objections. As a result, Defendants’ Counterclaim Count III – Unjust Enrichment, Counterclain
Count IV – Conversion – Unauthorized Taking, Counterclaim V – Conversion – Diminishment
in Value, and Counterclaim Count VI – Fraud were dismissed with prejudice. Defendants
2
remaining Counterclaims, Count I – Breach of Contract – Asset Purchase Agreement and Count
II – Breach of Contract – Guarantee and Surety Agreement remained pending and were litigated
in the non-jury trial held before this Court.
On June 20, 2008, Plaintiff and Additional Defendant’s Answer and New Matter to
Defendants’ Counterclaims (Amended) were filed. On July 10, 2008, Defendants filed a Reply to
Plaintiff and Additional Defendant’s New Matter. Beginning in October of 2009, various
motions and responses were filed with regard to a Plaintiff’s Request for a Protective Order.
That litigation was resolved by an Order of Court issued by Judge J. Wesley Oler on June 10,
2010. Finally, on December 6, 2010, a non-jury trial was scheduled. The non-jury trial was held
on May 16 – 17, 2011.
Statement of Facts
I.The Parties
Plaintiff, Klingler & Associates, P.C. (“Plaintiff”) is a firm that provides accounting and
1
tax-related services, located at 1156 Walnut Bottom Road, Suite 2, Carlisle, Pennsylvania.
Defendants, Joseph J. Elwood (“Seller”) and Elwood & Associates, Inc. (“Defendant”,
collectively “Defendants”), a sole proprietor and Pennsylvania corporation, respectively, provide
2
financial and tax-related services at 2260 Spring Road, Suite 1, Carlisle, Pennsylvania. Seller
3
holds various financial licenses and founded Elwood & Associates, Inc. in 1987. Additional
Defendant, John H. Klingler (“Buyer”), resides at 550 Harvest Lane, Mechanicsburg,
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Pennsylvania. Buyer has been a licensed Certified Public Accountant since 1981 and founded
1
Notes of Testimony, Non-Jury Trial, 5, May 16-17, 2011 (hereinafter N.T. ___).
2
N.T. 170, 172, 183.
3
N.T. 171.
4
N.T. 5.
3
5
Klingler & Associates, P.C. in 2005. This case arises from the contract between the above-
mentioned parties.
II.The Contract
In the summer of 2005, Seller and Buyer began preliminary discussions for the purchase
6
of various business assets, including a book of business, from Defendant. Although Seller had
cautioned Buyer about taking on too many new clients, Buyer assured Seller that adequate staff
7
would be available to handle the new client volume and thus further negotiations proceeded. On
January 24, 2006, an asset purchase agreement (“contract”), prepared by Plaintiff’s attorney, was
8
signed between Plaintiff, Defendant, Buyer, and Seller. The contract included the sale of a client
list, client accounts, copy of client records, and intangibles associated with the accounting and
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tax service business of Seller and Defendant. The contract included the purchase price and
payment method, wherein Buyer would pay an initial $25,000 at closing and deliver a note in the
10
sum of $115,000 amounting to a total of $140,000 owed to Seller. The Note required monthly
payments of 20% of Buyer’s cash receipts resulting from business associated with the purchased
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client list. The 20% payments were planned to span seven months, starting in February 10,
12
2006, and are credited toward the full payment of the Note.
After the seven-month period, Buyer was required to pay the remaining balance on the
13
Note in thirty-six monthly installments. During the seven-month period, interest accrued on all
5
N.T. 5.
6
N.T. 11.
7
N.T. 177.
8
N.T. 18; Pl.s’ Ex. 2
9
Pl.s’ Ex. 2, ¶ 1.
10
N.T. 20; Pl.s’ Ex. 2, ¶ 4.
11
N.T. 20; Pl.s’ Ex. 2, ¶ 4.
12
N.T. 20; Pl.s’ Ex. 2, ¶ 4.
13
Pl.s’ Ex. 2, ¶ 4.
4
14
monies owed at a yearly rate of 5% and after October 1, 2006, at a rate of 6%. Subsequent to
the first tax year (2005), the total principal purchase price of the contract ($140,000) was to be
adjusted downward based upon gross receipts collected from the active clients between the
closing on the contract through the end of September of 2006 to reflect a more accurate
15
prediction of Buyer’s future total gross receipts from the purchase. Buyer personally
guaranteed payment of the Note through the Guaranty and Surety Agreement signed in
16
conjunction with the contract. Therefore, the retention of clients leading to increased cash
17
receipts under the contract was in the best financial interest of both Buyer and Seller.
Additionally, the covenants of the parties expressed in the contract included a covenant
18
not to compete. The covenant not to compete (“non-compete clause”) restricted Seller for three
years after closing on the contract from soliciting, enticing, or inducing clients whose tax
19
preparation service accounts Buyer had purchased (“active clients”). However, Seller was
permitted to continue providing tax services categorized as the financial services aspect of his
business. Also, Seller would continue to prepare tax returns in a limited capacity for clients
20
included in a “carved out” list from the active clients, agreed to by both Buyer and Seller. At a
later time active clients could be added to the carved out list through Buyer relinquishing a client
21
to Seller and having the value of the account charged back to Seller. Furthermore, Buyer had
agreed to hire Seller as an independent contractor to perform tax preparation services for Buyer
22
at a rate of $45 an hour. These services would help lighten the work load created by the new
14
Pl.s’ Ex. 2, ¶ 4.
15
N.T. 20; Pl.’s Ex. 2, ¶ 4 (d).
16
N.T. 185, 209; Def.’s Ex. 17, tab 3, Ex. B.
17
N.T. 184.
18
N.T. 15; Pl.’s Ex. 2, ¶ 10(e).
19
N.T. 15; Pl.s’ Ex. 2, ¶ 10(e)(1).
20
N.T. 16, 186.
21
N.T. 257.
22
N.T. 13-14, 181.
5
23
clients and better transition to Buyer the active clients obtained under the contract. From
February 1, 2006, through March 31, 2006, Seller worked for Buyer in assisting with the active
24
clients’ tax preparation. Over the span of three months Seller had recorded 350 hours of work
25
for Buyer.
III.The Problems
After the execution of the contract, Buyer and Seller faced complications with the
transition and retention of clients. Buyer attributes the complications to the overall transition
process and more specifically to Seller’s poor record keeping, miscommunication with the active
26
clients and breaches of the non-compete clause. Buyer claims that Seller was untimely in
27
providing the active client records and when the records were delivered they were illegible.
Seller wanted to be the “point man” for certain clients during the transition but the transfer of
28
information to Buyer took too long. Therefore, Buyer determined that completing the tax
preparation for the active clients before the tax filing deadline would be impossible and filed
29
extensions for the active client files.
Buyer faults Seller for a lack of transition and retention of active clients because of
30
miscommunication, among other things. The miscommunication was regarding Seller’s role in
31
providing tax preparation services for the active clients after the contract was executed. Buyer
found the representations of Seller to the active clients objectionable and confusing, specifically
Seller’s annual letter to clients sent on January 14, 2006 and Seller’s letter sent on April 1, 2006
23
N.T. 14.
24
N.T. 206; Def.’s Ex. 19.
25
N.T. 205-06.
26
N.T. 60-62.
27
N.T. 60, 70, 161
28
N.T. 261.
29
N.T. 35, 68.
30
N.T. 37.
31
N.T. 61.
6
32
attempting to explain the transition to the active clients. Buyer believes the memorandums,
letters, and various forms of communication with the active clients interfered with his contractual
33
relation and were in breach of the non-compete clause of the contract.
Contrary to Buyer’s poor opinion of Seller’s transitioning strategies, Seller had previous
successful transitions when he transitioned clients from his solo practice to a larger firm,
34
Waggoner, Frutiger & Daub, and back again to his solo practice. Seller’s January 14, 2006
letter was sent at the beginning of January every year to remind clients of the upcoming tax
35th
season. The January 14letter did not mention any sale of his book of business or transition of
active clients to Buyer because the letter was sent before the execution of the contract on January
36
24, 2006. On or around the signing of the contract, Buyer was provided with electronic files of
37
the active clients’ previous tax returns. Also, Buyer was given the names and address of all
38
active clients. Similar to the actions of Seller during his previous transitions, in the present case
Seller sent a memorandum on April 1, 2006 to the active clients in an attempt to explain his
39
relation to Buyer and help transition the active clients to Buyer’s business. On or about March
26, 2006, seven to eight file boxes of active clients’ tax returns were brought to the office of
40
Buyer after Seller had attempted an earlier drop-off and processing of those files. Buyer had
notice of Seller’s recorded files and handwritten notes after viewing approximately ten client
32
N.T. 53, 104, 124.
33
N.T. 62.
34
N.T. 182.
35
N.T. 106, 184.
36
Pl.s’ Ex. 5; N.T. 106, 184.
37
N.T. 110.
38
N.T. 129.
39
N.T. 183.
40
N.T. 36, 178.
7
41
files to ensure that the proper documentation existed to prepare a tax return. Any files that were
42
deemed illegible, upon request, would be hand typed by Seller.
No agreement between Buyer and Seller outlined the process through which a transition
43
of active clients would be accomplished. Buyer never sent a letter to Seller asking for an
44
expedited delivery of the active client files. Although Buyer had expressed his concerns about
confusion with the active clients, Buyer made no attempts to take any steps in establishing
45
contact with the active clients until June 1, 2006. Additionally, Buyer did not meet with Seller
to draft a joint letter to be sent to the active clients to better explain the agreement between the
46
parties and how the active clients would be affected.
Seller continued to experience difficulties in collecting fees for sub-contracting work
47
performed for Buyer. Buyer’s payments to Seller were “continually tardy,” “severely
48
delinquent,” and “stalling” at times. Several memorandums were sent from Buyer to Seller
49
consistently challenging the amount owed and asking for reductions. All payments ceased in
February of 2007 leaving money owed for the purchase of Seller’s business and open invoices
50
for sub-contracting work.
IV.The Outcome
In November of 2006, Buyer and Seller met to reconcile the purchase price based upon
51
the actual volume of active clients received under the contract. The total owed to Seller was
41
N.T. 262.
42
N.T. 169.
43
N.T. 110.
44
N.T. 109.
45
N.T. 122-24, 184.
46
N.T. 132.
47
N.T. 186-87.
48
N.T. 187, 194.
49
N.T. 194.
50
N.T. 133.
51
N.T. 100.
8
reduced from the original price of $140,000 to $84,609 to reflect the actual amount of active
52
clients transitioned to Buyer. However, Buyer did not achieve the levels of yearly retention for
53
the active clients that were anticipated. Buyer predicted a conservative attrition rate of
approximately 8-10%, but instead experienced an attrition rate in the following year of
54
approximately 68%, roughly seven-times more than the prediction. In 2006, after the execution
of the contract, Buyer had provided tax preparation for 226 active clients purchased from
55
Seller. The following two years, 2007 and 2008, Buyer retained only 72 and 49 active clients,
56
respectively. Buyer had lost 177 of the 226 active clients originally obtained under the contract
over the span of a mere three years. Conversely, Seller provided tax preparation in 2007 and
57
2008 for 60 and 58 members of the active client list, respectively.
After February 2007, Buyer placed monthly payments into an escrow account and later
58
spent that money on legal fees because Buyer suspected Seller of breaching the contract. After
payments were stopped in February of 2007, Buyer owed the difference between the total
amount initially owed (purchase price plus open invoices), $93,404, minus the amount already
paid, $41,921.20, and a relinquished account of $1,000, leaving $50,482.20, the outstanding
59
principal balance. The actual amount that would be paid by Buyer is more accurately reflected
in the adjusted outstanding balance, $55,287.72, which included the outstanding principal
60
balance plus the accruing 6% interest. As of the time Buyer stopped making payments, the
adjusted outstanding balance, $55,287.72, minus the payments made (three monthly payments of
52
N.T. 200.
53
N.T. 61.
54
N.T. 55.
55
N.T. 143; Pl.s’ Ex. 4.
56
N.T. 143.
57
N.T. 240.
58
N.T. 133-34.
59
Def.’s Ex. 10.
60
Def.’s Ex. 10-11.
9
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$1,535.77), came to the current adjusted outstanding balance of $50,680.41. Following the
amortization schedule, Buyer would need to pay $1,535.77 a month, for 33 months to pay back
62
the principal balance and agreed upon interest. Therefore, Buyer still owed Seller $50,680.41
under the contract and Note.
Discussion
I.Breach of Contract
“Generally speaking, for a plaintiff to successfully maintain a cause of action for breach
of contract requires that the plaintiff establish: (1) the existence of a contract, including its
essential terms, (2) a breach of a duty imposed by the contract and (3) resultant damages.”
Gorski v. Smith, 812 A.2d 683, 692 (Pa. Super. 2002). Often the language of a contract is
essential in determining whether a duty imposed by the contract was breached. See, e.g., Bruan
v. Wal-Mart Stores, Inc., 24 A.3d 875, 957 (Pa. Super. 2011). Interpreting the terms of a contract
is a question of law to be decided by the court. Id. (citing McCullen v. Kutz, 985 A.2d 769, 773
(Pa. 2009)).
Contract interpretation . . . requires the court to ascertain and give effect to the
intent of the contracting parties as embodied in the written agreement. Courts
assume that a contract's language is chosen carefully and that the parties are
mindful of the meaning of the language used. When a writing is clear and
unequivocal, its meaning must be determined by its contents alone.
Id. (quotation and citation omitted). The Pennsylvania Supreme Court has made it clear that the
intent of the parties is “embodied in the writing itself, and when the words are clear and
unambiguous the intent is to be gleaned exclusively from the express language of the
agreement.” Delaware County v. Delaware County Prison Employees Indep. Union, 713 A.2d
1135, 1137 (Pa. 1998). Furthermore, “the focus of interpretation is upon the terms of the
61
Def.’s Ex. 10-11.
62
Def.’s Ex. 11.
10
agreement as manifestly expressed, rather than as, perhaps, silently intended.” Id. (quotation
omitted).
“Contractual language is ambiguous ‘if it is reasonably susceptible of different
constructions and capable of being understood in more than one sense.’” Genaeya Corp. v. Harco
Nat. Ins. Co., 991 A.2d 342, 346-47 (Pa. Super. 2010) (quoting Madison Constr. Co. v.
Harleysville Mut. Ins. Co., 735 A.2d 100, 106 (Pa. 1999)). Ambiguity exists in a contract when
there is either a patent or latent ambiguity. See Metzger v. Clifford Realty Corp., 476 A.2d 1, 5
(Pa. Super. 1984). “A patent ambiguity appears on the face of the instrument and arises from the
defective, obscure, or insensible language used. Latent ambiguities arise from extraneous or
collateral facts which render the meaning of a written contract uncertain although the language,
on its face, appears clear and unambiguous.” Id. (citation omitted). Determining whether
contract language is ambiguous should not be “resolved in a vacuum,” but instead considered
ambiguous only “if [the language is] subject to more than one reasonable interpretation when
applied to a particular set of facts.” Madison Constr., 735 A.2d at 106 (quotation and citations
omitted). “A contract is not rendered ambiguous by the mere fact that the parties do not agree
upon the proper construction.” Metzger, 476 A.2d at 5. Courts “will not [ ] distort the meaning of
the language or resort to a strained contrivance in order to find an ambiguity.” Madison Constr.,
735 A.2d at 106.
In Pennsylvania, the determination of damage awards for a breach of contract is a well
settled principle. See Omicron Systems, Inc. v. Weiner, 860 A.2d 554, 564-65 (Pa. Super. 2004).
The Superior Court has held:
The general rule in this Commonwealth is that the plaintiff bears the burden of
proof as to damages.
11
The determination of damages is a factual question to be decided by the fact-
finder. The fact-finder must assess the testimony, by weighing the evidence and
determining its credibility, and by accepting or rejecting the estimates of the
damages given by the witnesses.
Although the fact-finder may not render a verdict based on sheer conjecture or
guesswork, it may use a measure of speculation in estimating damages. The fact-
finder may make a just and reasonable estimate of the damage based on relevant
data, and in such circumstances may act on probable, inferential, as well as direct
and positive proof.
Id. (quoting Judge Technical Services, Inc. v. Clancy, 813 A.2d 879, 885 (Pa. Super. 2002)).
There is no dispute to the formation of a contract between the parties. Plaintiff and
Defendants entered into a valid agreement on January 24, 2006, to sell a book of business and
various related assets to Plaintiff as embodied in the Asset Purchase Agreement signed by all
parties. This Court relies on the contract to represent and define the duties owed between the
parties. The facts of the present case with the language of the contract are used in determining
whether either party has breached duties owed resulting in damages.
A.Klingler & Associates, P.C. v. Joseph J. Elwood and Elwood & Associates, Inc.
The issues to be decided are (1) whether Seller breached a duty owed to Plaintiff through
his actions/inactions involved with the transition of active clients to Plaintiff, and; (2) whether
Seller breached a duty owed to Plaintiff under a non-compete clause pursuant to the contract.
Based upon the following facts and analysis, this Court finds that Defendants did not breach any
duty owed to Plaintiff under the contract.
The contract does not provide detailed instructions or even a general plan regarding the
responsibilities of the parties for transitioning purchased assets, such as the active clients’ files,
subsequent to the closing. The portions of the contract referencing transition are reproduced
below (with emphasis added):
12
1. Purchase and Sale of Business. Subject to the terms and conditions of
this Agreement, at the Closing (as hereinafter defined), the Buyer shall purchase
Seller shall sell, transfer, convey, assign and deliver to the Buyer
and the , all
of the Seller’s right, title and interest in and to all client lists, client accounts and
copies of client records relating to the Seller’s accounting and tax service business
and other intangibles associated with the tax and accounting business of Seller
(the “Client Records”);
* * *
5. Closing.
(a) ….
Seller shall deliver any and all requested copies
(b) of the
at Closing
Client Records and other records of the Active Clients to Buyer .
The contract did not provide elaborate responsibilities of the parties, beyond the language
mentioned above, as to how such a “transfer” or “convey[ance]” of assets were to be achieved.
The contract focused on the purchase rather than transition, thus the duties owed by Seller under
the contract for the transition of the assets purchased are minimal.
A(i). Transition
Buyer holds Seller at fault for Buyer’s failure to retain clients because of Seller’s poor
transitioning of the active clients. Buyer is unwilling to accept any responsibility for the failure
to retain active clients after the 2005 tax year. Buyer provides examples of when he purchased
books of business with different sellers for a similar amount of clients that resulted in much
higher retention rates in an attempt to absolve him and shift fault to Seller. However, there are
glaring differences between the various purchases for books of business regarding the transition,
and especially the timing of the purchases. In both examples, Buyer purchased books of business
in the fall of the tax year leaving adequate time to prepare taxes for the purchased clients. In the
present matter, Buyer, against the recommendation of Seller, purchased Seller’s book of business
13
in January leaving little-to-no time to prepare the taxes for roughly the same amount of clients
purchased. Buyer attributes the lack of retention, and ultimately the unsuccessful transition to,
inter alia, Seller’s illegible handwriting and failure to deliver necessary files in a timely manner.
Seller’s transition of assets to Buyer has not breached the contract and went beyond his
obligated duties. Buyer and Seller testified that no document to guide the transition process was
ever created. Prior to January 24, 2006, Buyer had visited Seller’s business to review a portion of
Seller’s active clients’ files to ensure that all the necessary information was present to complete
tax preparation. Buyer claims the tax preparation could not be completed for the active clients
because Seller did not provide the necessary information and the hardcopy files were delivered
late with illegible handwriting. However, Seller provided Buyer with electronic files of the active
clients at closing and hardcopy files in a timely manner when requested. Buyer, at the closing,
was given electronic files with the necessary information to contact active clients to gather all the
necessary information to prepare tax returns. Also, Buyer was aware of the quantity, type, and
quality of files he was receiving, as well as the time frame needed to complete the preparation
before the tax deadline. Plaintiff’s own employee testified that Seller would type any files Buyer
or his staff determined to be illegible.
Under the contract Seller satisfied his obligations. Seller provided active clients’
electronic files at closing and hardcopy files in a timely manner. Therefore, Seller satisfied all
duties required under the contract and provided above and beyond what was required to further
help transition active clients.
A(ii). Non-compete Clause
Buyer claims that Seller breached the non-compete clause by providing tax preparation
services to active clients within a three-year period from the execution of the contract. The
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relevant portion of the contract, section 10 “Covenants of the Parties.” is provided (emphasis
added):
(e) Covenant Not to Compete: In consideration of the Purchase
Price and other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged by Seller, for a period of Three (3) years following
Closing, Seller shall not:
solicit, entice or induce
(1)directly or indirectly, any of the
Active Clients to become a client, customer or other business
relation of any other person, firm, corporation or business
entity which is substantially related to the business of Buyer; or
* * *
Buyer and Seller acknowledge that Seller shall continue to operate Seller’s
business providing financial services. Seller’s business shall involve some aspects
of tax services to Seller’s clients. Seller shall not be prohibited from providing
such tax services which are incidental to Seller’s financial services business.
Although parties dispute the meaning of the terms “solicit, entice or induce” and claim a possible
ambiguity, this Court finds no ambiguity in the language used. The language creating the dispute
is commonly used, clearly understood and not subject to a meaning that would create doubt in
63
the reader’s mind. In the present case, the parties could not have reasonably believed the terms
“solicit, entice or induce” to mean anything other than the typical understanding. Merriam-
Webster’s online dictionary defines the terms in question as follows:
Solicit:
1 a : to make petition to : entreat
b : to approach with a request or plea
2 : to urge (as one’s cause) strongly
3 a : to entice or lure especially into evil
b : to proposition (someone) especially as or in the character of a prostitute
4 : to try to obtain by usually urgent requests or pleas
63
In Meyer-Chatfield v. Century Bus, Servicing, Inc., the E.D. Pennsylvania provided an excellent example of a
latent ambiguity when the Court discussed the proper evidence to establish such an ambiguous term. The Court said,
“if the evidence showed that the parties normally meant to refer to Canadian dollars when they used the term
‘dollars,’ this would be evidence of the right type. Evidence regarding a party’s beliefs about the general
ramifications of the contract would not be the right type to establish latent ambiguity.” 732 F. Supp. 2d 514, 520
(E.D. Pa. 2010) (quotation omitted).
15
Entice:
: to attract artfully or adroitly or by arousing hope or desire : tempt
Induce:
1a : to move by persuasion or influence
b : to call forth or bring about by influence or stimulation
2a : effect, cause
b : to cause the formation of
c : to produce (as an electric current) by induction
3: to determine by induction; specifically : to infer from particulars
Merriam-Webster’s Online Dictionary, http://www.merriam-webster.com/ (search “Dictionary”
for “solicit”, “entice”, “induce”). The common link between solicit, entice, and induce is a
connotation that an action is taken with the mindset to achieve a specific goal. Words used
within the definitions such as “approach, request, plea, lure, tempt” and “influence” indicate
more than mere action and suggest a purposeful state of mind of the actor. See id.
The Eastern District Court of Pennsylvania performed an extensive review of the
meaning of the term “solicit.” Meyer-Chatfield v. Century Bus. Servicing, Inc. 732 F. Supp. 2d
514, 519 (E.D. Pa. 2010). The Court’s analysis included a Georgia state court’s holding
interpreting the term “solicit” to require “more than ‘merely accepting business to constitute a
solicitation of that business.’” Id. at 520 (quoting Akron Pest Control v. Radar Exterminating
Co., Inc., 455 S.E.2d 601, 601, 603 (Ga. Ct. App. 1995)). The Georgia state court in addressing
the issue of “whether a party bound by a nonsolicitation agreement should ‘refuse and, in fact,
turn away pest control business if contacted by any customer[,]’” held that “solicitation requires
affirmative action
‘some ’ on the part of the solicitor.” Id. (second emphasis added). The Meyer-
Chatfield court persuasively reasoned, inter alia, that under Pennsylvania law “the term ‘solicit’
was not ambiguous, and cannot be defined to include mere hiring[,]” where no additional
affirmative action was taken by the defendants. Id. at 522.
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In the case sub judice, Seller’s actions were non-affirmative and lacking the mindset for
soliciting, enticing, or inducing active clients to return to his business. The testimony of
Rosemary Donaldson and Robert P. Sariano corroborated Seller’s testimony that no affirmative
action was taken in providing tax preparation services to the active clients. Seller did not lure,
plea, tempt or even approach active clients about coming back to his business for the purpose of
tax preparation. Mrs. Donaldson and Mr. Sariano both testified that they did not have their
subsequent tax preparation performed by Plaintiff because of the quality of service he provided.
They were dissatisfied with Plaintiff’s business and decided against re-hiring Plaintiff after the
2005 tax year. Mrs. Donaldson testified that while visiting Seller she overheard him speaking
with a client about their tax preparation which prompted her to ask if Seller would perform her
tax preparation. Seller did not solicit, entice, or induce Mrs. Donaldson and “merely accept[ed
her] business,” with no affirmative action on his part. Although the specific reasons why certain
active clients, other than Mrs. Donaldson, left Plaintiff and switched to Defendants may never be
known, no evidence has been presented to prove Seller affirmatively acted with the mindset of
attracting active clients to Defendants. Therefore, Defendants did not breach the duty owed
under the non-compete clause and ultimately the contract as a whole.
B.Joseph J. Elwood and Elwood & Associates, Inc. v. John H. Klingler
As mentioned previously, supra I., a breach of contract exists when there is a contract, a
breach of a duty owed under the contract, and resultant damages. In the present case, a valid
contract existed between the parties and there is no dispute as to Buyer’s duty owed pursuant to a
Guaranty and Surety Agreement for payment of a note to Defendants. The issue is whether
Buyer was justified in refusing payment because Defendants had already breached the contract.
“The general rule is that a party who has materially breached a contract may not complain if the
17
other party refuses to perform his obligations under the contract.” Ott v. Buehler Lumber, 541
A.2d 1143, 1145 (Pa. 1988). However, Buyer has no justification for a breach of the Guaranty
and Surety Agreement because Defendants have not breached the contract with the Plaintiff
Buyer. Buyer retains a duty owed to make payments under the Note. The Defendants have
suffered resulting damages from Buyer’s breach of the Guaranty and Surety Agreement in the
amount of $50,680.41 of unpaid monies. However, no expert testimony was given regarding the
extent of accruing damages for failure to make payments under the Note between Buyer and
Seller. Also, Seller never brought an action against Buyer to collect on penalty damages until a
counterclaim against Plaintiffs’ suit for breach of contract. Therefore, an award of $50,680.41 is
reflective of the original amount Seller expected from Buyer under the contract and Note. Thus,
this Court finds that John H. Klingler, Buyer, breached the contract (Guaranty and Surety
Agreement) with Defendants resulting in $50,680.41 of damages.
II.Intentional Interference with Contractual Relations
In Pennsylvania, intentional, or tortious interference with contractual relations is a well
settled principal influenced by the Restatement (Second) of Torts (“Restatement”) section 766.
See Adler, Barish, Daniels, Levin and Creskoff v. Epstein, 393 A.2d 1175, 1183 (Pa. 1978). The
Superior Court has established the following elements for a claim of intentional interference with
contractual relations (“IICR”): “(1) the existence of a contractual relationship; (2) an intent on
the part of the defendant to harm the plaintiff by interfering with the contractual relationship; (3)
the absence of a privilege or justification for such interference; and (4) damages resulting from
the defendant’s conduct.” Triffin v. Janssen, 626 A.2d 571, 574 (Pa. Super. 1993). The Superior
Court turns to Restatement Section 767 to determine whether certain conduct is deemed
18
intentional and improper in making a claim for IICR. Id.; see also Restatement (Second) of Torts
§ 767 cmt. a (1979). Under section 767 the following factors should be considered:
1) the nature of the actor’s conduct; 2) the actor’s motive; 3) the interests of the
other with which the actor’s conduct interferes; 4) the interests sought to be
advanced by the actor; 5) the proximity or remoteness of the actor’s conduct to
interference, and 6) the relationship between the parties.
Ira G. Steffy & Son, Inc. v. Citizens Bank of Pennsylvania, 7 A.3d 278, 289 (Pa. Super. 2010).
This Court finds that Seller did not intentionally interfere with existing or prospective
contractual relations between Buyer and the active clients. In the case sub judice, the issue of
whether Seller intentionally interfered with contractual relations can be resolved with an analysis
of the first element. Pennsylvania allows an action for both existing and prospective contractual
64
or business relations. See Thompson Coal Co. v. Pike Coal Co., 412 A.2d 466, 471 (Pa. 1979).
“Defining a ‘prospective contractual relation’ is admittedly problematic. To a certain extent the
term has an evasive quality, eluding precise definition.” Id. The Court turns to their analysis in
Glenn v. Point Park College to better define what should be considered a prospective contractual
relationship, where an uncertain relationship can be considered prospective when there is a
“reasonable likelihood or probability” of occurrence. See id. (quoting 272 A.2d 895, 898 (Pa.
1971)). A prospective contractual relationship is “something less than a contractual right, [but]
something more than a mere hope.” Id.; see, e.g., InfoSAGE, Inc. v. Mellon Ventures, L.P., 896
A.2d 616, 628-30 (Pa. Super. 2006) (finding no reasonable probability of contractual relations
with potential investors); Sylk v. Bernsten, Nos. 1906, 2003 WL 1848565, at *7 (Pa. Com. Pl.)
(finding no evidence submitted of prospective contractual relationship with third-party other than
unsupported assertion); Rapid Freight Systems, Inc. v. Ofer Express, L.L.C., No. 03304, 2003
64
The Thompson Court outlines the four elements of intentional interference with a prospective contractual/business
relation. The elements are analogous to a claim where a contract exists with the exception of the terms “prospective”
and “relation,” as well as the phrase “the purpose or intent to harm the plaintiff by preventing the relation from
occurring;” within elements one and two, respectively.
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WL 1848211, at *2 (Pa. Com. Pl.) (finding no proof of existing or prospective contractual
relationship or evidence that but-for the alleged conduct client would have continued business).
In the present case, Buyer did not have an existing contractual relationship with the active
clients because tax preparation is a year-to-year engagement. Although most clients who come to
trust their accountants over an extended period of time might be more likely to re-hire those
accountants for the coming year, there is no existing contractual relationship until tax preparation
is requested and then performed. Also, Buyer cannot claim to have a prospective contractual
relationship with the active clients because there was no continuing business relationship
established from only one season of tax preparation. Buyer’s support for prospective contractual
relationships through predicted rates of attrition are unpersuasive because they are based upon
other client purchases with differing circumstances. The anticipated attrition rates are only an
estimation that is speculative at best with no solid foundation, and with no evidence of
reasonable probability provided. Therefore, this Court finds no existing or prospective
contractual relation beyond a mere hope for which a claim for IICR can be upheld.
Assuming, arguendo, this Court found an existing or prospective contractual relationship
between Buyer and the active clients, Buyer’s claim still fails under a totality of factors analysis
for IICR. Under the Restatement first and second factors, the nature of Seller’s conduct was not
improper or intentional. See Ira, 7 A.3d 289; Restatement (Second) of Torts §§ 766B, 767. Seller
did not approach any of the active clients in an attempt to induce a breach of contract with
Buyer. See § 767 cmt. c; § 766 cmt. k-n. Also, Seller had no ill will or malice toward Buyer and
was only providing tax preparations for clients when asked because he felt a sense of
responsibility if they were displeased with how their tax preparation was performed by Buyer.
See id. Seller did not have the desire for any active clients to breach an existing or prospective
20
contractual relationship with Buyer. See § 767 cmt. d. Seller had purposefully sold his book of
tax preparation clients because, at this point in his life and career, he wanted to reduce his work
load. Therefore, this Court finds Seller’s actions were not intentional or improper pursuant to the
factors enumerated in the Restatement to satisfy a claim for IICR.
Conclusion
This Court finds that Defendants were not in breach of the contract with Plaintiff and
have not committed intentional interference with contractual relations. Alternatively, Buyer, Mr.
Klingler, is in breach of the Guaranty and Surety Agreement with Defendants.
Accordingly the following Order is entered:
th
AND NOW
, this 9 day of December, 2011, after a non-jury trial in the above-captioned
matter, the verdict of the Court is as follows:
1. On Plaintiff’s Complaint, Count I, Klingler & Associates, P.C.’s claim
against Joseph J. Elwood and Elwood & Associates, Inc. for Breach of Contract, the Court finds
for the Defendants and against the Plaintiff.
2. On Plaintiff’s Complaint, Count II, Klingler & Associates, P.C.’s claim
against Joseph J. Elwood and Elwood & Associates, Inc. for Intentional Interference with
Contractual Relations, the Court finds for the Defendants and against the Plaintiff.
3. On Defendants’ Amended Counterclaim, Count I & II, Joseph J. Elwood
and Elwood & Associates, Inc.’s claim against Klingler & Associates, P.C. and John H. Klingler
for Breach of Contract and Breach of Guaranty & Surety Agreement, the Court finds for the
Defendants in the amount of $50,680.41 and against the Plaintiff and Additional Defendant, with
interest at the rate of six percent per annum from March 1, 2007.
By the Court,
M. L. Ebert, Jr., J.
David Baric, Esquire
Attorney for Plaintiff and Additional Defendant
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Rob Bleecher, Esquire
Attorney for Defendants
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