Loading...
HomeMy WebLinkAbout2013-6252 DAVID COULSTON, C.B.R. : IN THE COURT OF COMMON PLEAS OF INDUSTRIES, INC., & R.J.C. : CUMBERLAND COUNTY, PENNSYLVANIA INDUSTRIES, INC., : PLAINTIFFS : : V. : : NO. 2013-06252 JOHN COULSTON, : DEFENDANT : IN EQUITY OPINION AND ORDER OF COURT Ebert, J., March 09, 2016 - Plaintiffs, David Coulston, C.B.R. Industries, Inc. (hereinafter “C.B.R.”), and R.J.C. Industries, Inc. (hereinafter “R.J.C.”), brought an action sounding in Equitable Partition, Breach of Fiduciary Duty and Conversion against Defendant, John Coulston. After trial, and for the following reasons, this Court finds that the Defendant’s fifty percent (50%) shares of the two subject businesses, C.B.R. and R.J.C., have a combined valuation of $233,000.00, with an offset in the amount of $5,500.00 for money already paid to Defendant. As such Plaintiff, David Coulston, shall tender $227,500.00 to Defendant, John Coulston, as the purchase price for Defendant’s shares in C.B.R. and R.J.C. within ninety (90) days of the date of this Order. Regarding Plaintiffs’ Breach of Fiduciary Duty and Conversion claims, this Court finds for the Defendant. Procedural History Plaintiffs filed the instant action on October 23, 2013, seeking an equitable partition of the companies. Plaintiffs also sought to compel Defendant to reimburse the companies for corporate funds allegedly misappropriated in order to pay Defendant’s personal expenses. Defendant filed an Answer with New Matter on December 31, 2013, denying all of Plaintiffs’ allegations and alleging that Defendant was the driving force 1 behind the success of the businesses. Defendant also raised the affirmative defenses of the Plaintiffs’ claims being barred by the statute of limitations, the doctrine of waiver, the doctrine of estoppel, and that Plaintiffs failed to state a claim upon which relief could be granted. Plaintiffs filed a response to Defendant’s Answer with New Matter on January 24, 2014, denying Defendant’s averments. A praecipe to list the matter for nonjury trial was filed on August 04, 2015, and the matter was scheduled for trial on January 11, 2016, and January 12, 2016. The parties were permitted to file post-trial memorandum, which both sides did in a timely fashion. The matter is now ripe for decision. Findings of Fact 1. Plaintiffs are David Coulston, an adult individual residing in Boiling Springs, Cumberland County, Pennsylvania, and R.J.C. and C.B.R., two Pennsylvania corporations with registered business addresses in Carlisle, Cumberland County, Pennsylvania. 2. Defendant is John Coulston, an adult individual residing in Carlisle, Cumberland County, Pennsylvania. 3. Plaintiff, David Coulston, and Defendant, John Coulston, are equal co- owners of R.J.C. and C.B.R. 4. There is no corporate tie-breaking provision in the event of a deadlock between David and John Coulston. 5. R.J.C. exists solely to provide maintenance services to ABF Freight Systems, a relationship that ABF may dissolve at any time with no penalty. While R.J.C. 2 is a profitable entity, the overwhelming majority of its annual revenue is dedicated to paying the salaries of its employees. 6. C.B.R. perennially operates at a loss, and its chief asset is in the value of its business equipment. 7. Both David and John Coulston were employed as officers of R.J.C. and C.B.R., and both received salaries during the course of their employment. 8. While David and John Coulston were employed by both R.J.C. and C.B.R., David typically oversaw R.J.C. and John typically oversaw C.B.R. 9. John Coulston resigned his positions with R.J.C. and C.B.R. on April 19, 2013. 10. After he resigned from his corporate officer positions with R.J.C. and C.B.R., John Coulston was paid $5,500.00 by R.J.C. over the course of approximately eleven weeks. These payments occurred because Plaintiffs’ office manager failed to remove Defendant from the corporate payroll following his resignation from R.J.C. and C.B.R., and the payments ceased when the oversight was discovered. 11. Both David and John Coulston were amenable to a partition of R.J.C. and C.B.R.; David so that he could buy out John and have exclusive control over the companies, and John so that he could receive fair compensation for the value of his shares. 12. Purchases for R.J.C. and C.B.R., sometimes in excess of $10,000.00 per month, were routinely made on John Coulston’s personal credit card. Business expenses were co-mingled with John Coulston’s personal expenses on this card, and 3 no effort was made to perform an accounting of the personal versus business expenses. 13. John Coulston regularly paid himself $9,900.00 per month as reimbursement for corporate expenses placed on his personal credit card. Discussion To begin, the standard of review for an action brought in equity is rather straightforward. “\[A\] court of equity has broad powers to fashion relief according to the equities of the case.” Hicks v. Saboe, 555 A.2d 1241, 1245 (Pa. 1989). Additionally, The factual findings of a trial judge sitting as a Chancellor in Equity are entitled to the weight of a jury verdict and will not be upset by an appellate court if supported by adequate evidence. Olson v. North Am. Indus. Supply, 441 Pa. Super. 598, 605 (Pa. Super. 1995). A. Equitable Partition The first, and chief, issue raised by the parties is how this Court should equitably partition the two companies at the heart of this matter, C.B.R. and R.J.C. Plaintiff argues that this Court should assign a combined value of $233,000.00 to Defendant’s fifty percent (50%) share of both companies, deduct $5,500.00 from this sum for funds Defendant already received, and order Plaintiff to tender $227,500 to Defendant within 90 days of the date of this Court’s order. Defendant argues that this Court should assign a value of $320,446.50 to his share of R.J.C., and direct that an orderly liquidation of the assets of C.B.R. be held, with the parties equally dividing the proceeds. Both parties presented expert testimony and expert reports supporting their positions and their valuations of the businesses. The difference between the parties’ experts on the question of valuation is so great that this Court cannot reasonably split 4 the difference between the two, or otherwise substitute its own opinion on valuation. This Court must decide which party’s experts it will find credible. As the Superior Court noted, Credibility of \[a\] witness is not for \[an appellate court\] to pass upon; we will not substitute our judgment for that of the fact finder when there is sufficient evidence to support his conclusions. The fact finder treats an expert like any other witness and applies to him the same standards of credibility as to any other witness. Smith v. Penbridge Assocs., 440 Pa. Super. 410, 420 (Pa. Super. 1995) (internal citations omitted). For the purposes of this opinion and simply for the sake of convenience, the valuations 1 of each company will be examined individually. i. Valuation of R.J.C. R.J.C. is both the most profitable and most challenging to value of the subject companies in this matter. R.J.C. exists solely to provide maintenance services for the tractor trailers owned by ABF Freight Systems. It is an arrangement that dates back several years, and generates over a million dollars in annual revenues for R.J.C. However, there is no contract in existence between R.J.C. and ABF, and the parties do not dispute that ABF has the right to terminate the maintenance agreement between the two companies at any time and for any reason. In short, R.J.C. exists and remains profitable only so long as ABF remains satisfied with its work performance and chooses to continue relying on R.J.C. Plaintiff, David Coulston, credibly testified that his personal 1 While the companies are examined individually, this Court is persuaded by Plaintiffs’ argument that the two companies were, effectively, run as one entity and should be valued as such. Funds from R.J.C. were used to provide financial support for C.B.R. without any security or guarantee of repayment, business machinery was transferred from R.J.C. to C.B.R. as needed, and Defendant, in his position as president of both companies, used one credit card to purchase supplies and miscellaneous items for both businesses. However, examining the companies individually allows this Court to more expediently and effectively address each company’s unique circumstances. 5 relationship with officials at ABF played a significant role in ABF retaining R.J.C. for its maintenance needs. Plaintiffs’ expert, Gail Bollinger, testified that if she were to place a value solely on R.J.C. for Defendant’s fifty percent (50%) interest, she would value that interest at $78,000.00. The chief reason for this valuation turned on the uncertainty over whether R.J.C. had any long-term future as a business entity. Neither party contested that ABF could terminate its business relationship with R.J.C. at any time. Without its contract with ABF, R.J.C. effectively has no value, because its only asset is the value of the service that it provides for ABF. Defendant’s expert, Eric Blocher, placed a value of $320,446.50 for Defendant’s share of R.J.C. The chief reasons for this valuation turned on R.J.C. consistently turning a substantial profit, even accounting for a comparatively high officer salary and other business expenses. Defendant projected that R.J.C. would return increasing profits for several years into the future, which would make the company attractive to an investor. However, this Court finds it unreasonable to believe that a third party purchaser would be willing to pay $320,446.50 for Defendant’s share of R.J.C. given the uncertainty surrounding the business. R.J.C. exists to serve only one customer, which could terminate its business relationship with R.J.C., without penalty, at any time and for any reason. That uncertainty is magnified because Plaintiff, David Coulston, would be immediately free to start a competing business in the event of R.J.C.’s sale and could potentially secure the ABF maintenance agreement for himself, given his role in securing the same agreement for R.J.C. Even if David Coulston did not do so, there is no guarantee that ABF would continue to hire R.J.C. to perform maintenance services in 6 the event that the company was sold, which would make any potential investor hesitant to pay a substantial sum for a fifty percent interest in the company. Plaintiffs’ valuation of Defendant’s fifty percent share of R.J.C. at $78,000.00 is a much more reasonable sum. This sum reflects that R.J.C. is a profitable entity, while also taking into consideration the risk that R.J.C. could become defunct and valueless at any time. As such, this Court finds Plaintiffs’ expert, Gail Bollinger, credible with regard to the valuation of R.J.C., and Defendant’s expert, Eric Blocher, not credible with regard to the valuation of R.J.C. This Court finds the value of Defendant’s fifty percent share of R.J.C. to be $78,000.00. ii. Valuation of C.B.R. Of the two companies involved in this dispute C.B.R. is not profitable, but it is easier to value. As both parties conceded that C.B.R. operated at a loss, the main value for this business comes from the value of its equipment. Plaintiffs submit that the value of Defendant’s fifty percent (50%) interest in C.B.R. is approximately $155,000.00, while Defendant concluded that the value is approximately $311,000.00. The first issue for this Court to address is which method of valuation to use for the business equipment owned by C.B.R. Plaintiffs’ expert presented the forced liquidation value of this equipment, while Defendant’s expert presented the orderly liquidation value. This Court finds that using the forced liquidation value for the equipment owned by C.B.R. is more appropriate than using the orderly liquidation value. While an orderly liquidation would carry the potential to bring in more revenue from the sale of the equipment, this Court does not find such a sale to be reasonable under the particular circumstances of this case. The testimony and evidence presented to this Court indicate 7 that an orderly liquidation sale would stretch out over a period of months, as buyers were found for each individual piece of heavy industrial machinery. C.B.R. would be closed during that period, but required to maintain its present business location to store the machines, and required to ensure they remained in an operable condition for prospective purchasers to inspect prior to sale. Additionally, the testimony and evidence established that some of the machinery was so large that portions of the building would have to be dismantled in order to safely remove it, which would be impractical at best for individual sales stretched out over the course of months. The testimony and evidence presented to this Court also raised a question regarding precisely how 2 Defendant arrived at its orderly liquidation value. Question aside, C.B.R. would continue accruing expenses during an orderly liquidation sale while being unable to generate any revenue to offset these expenses. A forced liquidation would allow for all of the equipment to be sold at one time, taking away some uncertainty regarding how much additional expense would be accrued. This Court finds that using the orderly liquidation value would be impractical for C.B.R., while using the forced liquidation value of C.B.R.’s machinery would be equitable as between the parties. With the question of equipment valuation determined, the only significant difference remaining between Plaintiffs’ and Defendant’s positions is the question of taxation. Defendant submits that a capital gain tax rate would be appropriate for the proceeds of the sale of C.B.R.’s business equipment. Plaintiffs submit that the sale should be taxed as regular income, which is assessed at a higher rate, due to the strong 2 Defendant’s report from its expert, Eric Blocher, established that a 12.5% reduction was applied to convert the fair market value of C.B.R.’s machinery to orderly liquidation value, without explaining why the figure of 12.5% was chosen or what factors went into computing it. 8 possibility that there would be depreciation recapture on at least some of C.B.R.’s equipment. Depreciation recapture would occur when a piece of equipment was depreciated for tax purposes, and then sold for more than the remaining basis in the equipment. Subsequently the owner would have to treat the gain from the sale of the equipment, up to the original purchase price of the equipment, as regular income. Any gain in excess of the original purchase price would be treated as a capital gain and taxed accordingly. This Court finds Plaintiffs’ testimony and evidence credible, establishing that the sale of at least some of the business equipment would be taxed as regular income, and assessed at a higher tax rate. It is entirely reasonable that at least some of C.B.R.’s equipment would be subject to depreciation recapture, which would be assessed at a higher tax rate than that computed by Defendant. Because Defendant’s valuation did not account for this possibility at all, this Court finds Defendant’s valuation less credible than Plaintiffs’. With the questions of which valuation approach and which taxation method to use resolved in Plaintiff’s favor, there is no other significant distinction between Plaintiffs’ and Defendant’s expert reports. As such, this Court finds the Plaintiffs’ experts to be credible and the valuation of C.B.R. to be $155,000.00. B. Breach of Fiduciary Duty and Conversion Though listed as separate counts, Plaintiffs’ Breach of Fiduciary Duty and Conversion claims will be addressed together because they center on the allegation that Defendant misappropriated corporate funds for personal use. Plaintiffs seek an order that Defendant either pay David Coulston half of the amount allegedly misappropriated, or repay the companies the entire amount allegedly misappropriated. To begin, Plaintiffs 9 concede that this Court should find in favor of Defendant with regard to Plaintiffs’ Conversion claims. This Court does so, and finds in favor of the Defendant with regard to Plaintiffs’ Count III and Count V Conversion claims. Plaintiffs next contend that this Court should find in their favor with regard to the Count II or, in the alternative, Count IV Breach of Fiduciary Duty claims. Plaintiffs allege that Defendant breached his fiduciary duty by taking corporate money as reimbursement for personal expenses. Plaintiffs allege that Defendant misappropriated $25,284.00, of which half, or $12,642.00, he would be obligated to repay to David Coulston under Count II, or all of which he would be required to repay to C.B.R. under Count IV. Plaintiffs fail to meet their burden to prove that Defendant misappropriated any funds, let alone that he misappropriated $25,284.00. Plaintiffs alleged, and presented testimony that Defendant paid himself approximately $9,900.00 per month as a credit card reimbursement for expenses accrued, both personal and corporate. Plaintiffs did not present any credible testimony or evidence breaking down that $9,900.00 figure into proper or improper payments, or how they specifically identified $25,284.00 that Defendant misappropriated. Rather, Defendant credibly testified that he would regularly accumulate in excess of $10,000.00 per month in corporate expenses on his personal credit card, and receive reimbursements spread over the course of several months. While it would be generous to describe the record-keeping and accounting practices for these companies as poor, and fraught with the potential for abuse, insinuation on its own is not sufficient for Plaintiffs to meet their burden. Plaintiffs failed to establish that Defendant misappropriated any corporate funds, let alone well over 10 twenty thousand dollars. Thus, this Court finds in favor of Defendant with regard to Plaintiffs’ Counts II and IV. C. Defendant’s Post-Resignation Compensation Finally, Plaintiffs seek the repayment of $5,500.00 that Defendant was paid subsequent to his resignation from corporate officer positions with R.J.C. and C.B.R. Plaintiff, David Coulston, presented credible testimony and evidence establishing that there were eleven payments of $500.00 each that were made to Defendant following his resignation from the employ of R.J.C. and C.B.R. Defendant presented no credible testimony or evidence establishing any right or reasonable expectation to receive those payments; rather, the testimony and evidence established that these payments to Defendant were made as an oversight in Plaintiffs’ bookkeeping, and were halted as soon as the oversight was discovered. As such, this Court, sitting in equity, must find that Defendant was not entitled to receive $5,500.00 in compensation following his resignation from R.J.C. and C.B.R. It would not be equitable as between the parties to permit Defendant to retain this windfall. Therefore, the value of Defendant’s fifty percent shares in R.J.C. and C.B.R. will be reduced by the sum of $5,500.00 for the purpose of Plaintiff, David Coulston, purchasing those shares. Conclusion The heart of this matter concerns how to value the businesses co-owned by David and John Coulston. Both parties presented experts on business valuation, provided expert reports and presented testimony at trial concerning the valuations. The complexity of the matter and the difference of opinion between the experts were such 11 that this Court could not reasonably disregard both sides and conduct its own valuation of the businesses. Ultimately, Plaintiffs’ valuations strike this Court as more reasonable, and more likely to result in an equitable outcome between the parties. As for Plaintiffs’ claims against Defendant on the grounds of Breach of a Fiduciary Duty and Conversion, the Plaintiffs failed to meet their burden of proving that Defendant misappropriated any funds. As such, on Plaintiffs’ Count I, Equitable Partition, this Court finds the combined value of the businesses to be $233,000.00, with an offset of $5,500.00 for money already paid to the Defendant. On Plaintiffs’ Counts II through V, this Court finds for the Defendant. Accordingly, the following Order will be entered: ORDER OF COURT th AND NOW , this 9 day of March, 2016, upon review of the pleadings, a trial on the merits, and both parties’ post-trial briefs, this Court finds that Defendant’s fifty percent ownership interests in R.J.C. Industries, Inc., and C.B.R. Industries, Inc., shall have a combined valuation of $233,000.00, with an offset of $5,500.00 for money already paid to the Defendant. On Plaintiffs’ Count II through Count V, this Court finds for the Defendant. By the Court, _______________________ M.L. Ebert, Jr., J. 12 Michael A. Scherer, Esq. BARIC SCHERER, LLC 19 West South Street Carlisle, PA 17013 Attorney for Plaintiffs Katie J. Maxwell, Esq. Martson Law Offices 10 East High Street Carlisle, PA 17013 Attorney for Defendant 13 DAVID COULSTON, C.B.R. : IN THE COURT OF COMMON PLEAS OF INDUSTRIES, INC., & R.J.C. : CUMBERLAND COUNTY, PENNSYLVANIA INDUSTRIES, INC., : PLAINTIFFS : : V. : : NO. 2013-06252 JOHN COULSTON, : DEFENDANT : IN EQUITY ORDER OF COURT th AND NOW , this 9 day of March, 2016, upon review of the pleadings, a trial on the merits, and both parties’ post-trial briefs, this Court finds that Defendant’s fifty percent ownership interests in R.J.C. Industries, Inc., and C.B.R. Industries, Inc., shall have a combined valuation of $233,000.00, with an offset of $5,500.00 for money already paid to the Defendant. On Plaintiffs’ Count II through Count V, this Court finds for the Defendant. By the Court, _______________________ M.L. Ebert, Jr., J. Michael A. Scherer, Esq. BARIC SCHERER, LLC 19 West South Street Carlisle, PA 17013 Attorney for Plaintiffs Katie J. Maxwell, Esq. Martson Law Offices 10 East High Street Carlisle, PA 17013 Attorney for Defendant 14