By Patricia Collins

Reprinted with permission from the February 28th edition of the The Legal Intelligencer © 2017 ALM Media Properties, LLC. All rights reserved.Further duplication without permission is prohibited

The Pennsylvania Superior Court, in Metalico Pittsburgh v. Newman, et al (No. 354 WDA 2016, April 19, 2017), dealt a blow to employees attempting to avoid the application of a non-solicitation covenant. 

In Metalico, two employees, Newman and Medred, executed employment agreements containing a covenant not to solicit customers, suppliers and employees during the “Post-Employment Period.”  The Post-Employment Period varied depending upon the manner of the termination of employment, and commenced upon the last day of employment with Metalico.  At the end of the three-year period, Metalico terminated the employment agreements, but continued to retain Newman and Medred as “at-will” employees, and recited new compensation and other terms of employment.  These terms differed from those contained in the employment agreement.  Newman and Medred were terminated one year later.  Metalico filed suit against Newman and Medred, alleging that they were violating the non-solicitation covenant in their subsequent employment. 

On the eve of a preliminary injunction hearing, Newman and Medred filed a Motion for Partial Summary Judgment, arguing that the employment agreements containing the non-solicitation covenants had terminated, and therefore the non-solicitation provisions no longer applied.  They argued that the agreement to continue as “at-will” employees acted as a novation of the employment agreement.

The trial court agreed with Newman and Medred, and granted their motion for partial summary judgment.  But the Superior Court did not agree.  Instead, the Superior Court found that the covenant remained in place pursuant to a survival provision in the employment agreement.  That provision stated that if employment under the agreement “expires,” the agreement continues in effect “as is necessary or appropriate to enforce” the non-solicitation covenant. 

The trial court found that upon converting Newman’s and Medred’s status to “at will” employees, the parties had stated new terms for the employment relationship going forward.  In so doing, the parties did not recite that the non-solicitation provision would stay in place.  The failure to continue the compensation and benefits provided in the employment agreement, in the trial court’s view, invalidated the non-solicitation covenant.  The trial court justly noted: “Metalico cannot claim the benefits of its bargain while denying its employees the same.” 

The Superior Court disagreed, noting that because the survival language was included in the employment agreement, it constituted the bargained-for benefit for the employees.  The Superior Court rejected any argument that there was a failure of consideration, because failure of consideration only applies if the consideration was never received – the employees here did receive three years of the promised compensation and benefits under the agreement.  The Superior Court refused to find that the parties to the employment agreement intended to terminate and extinguish the previous agreement, thus extinguishing the non-solicitation covenant as well.  In so doing, the Superior Court relied upon Boyce v. Smith-Edwards-Dunlap Co., 580 A.2d 1382 (Pa. Super. 1990).  However, the Boyce case dealt with the use of the restrictive covenant as a defense to a claim raised by the employee.

It is well-settled that restrictive covenants in employment agreements are disfavored under Pennsylvania law.  Courts, including the Superior Court, have refused to enforce such agreements on technicalities.  For example, in Socko v. Mid-Atlantic Systems of CPA, Inc., 99 A.3d 928 (Pa. Super. 2014), the Superior Court refused to enforce a covenant not to compete in an employment agreement entered into after the commencement of employment and not accompanied by any beneficial change in the employee’s status, but which recited that it was signed “under seal” under the Uniform Written Obligations Act.  The Court found that a seal does not provide adequate consideration to enforce a restrictive covenant.  Instead, the Superior Court noted, there must be “actual valuable consideration.”  The holding in Socko left employment law practitioners and litigators with the belief that there are no “gotchas” when it comes to restrictive covenants. 

Metalico appears to change that.  Metalico voluntarily agreed to let the employment agreement terminate and to continue employment on an “at-will” basis.  This change of status benefits Metalico, leaving it free to terminate the employees or change their compensation and benefits at will (thus the name) and without concern about the terms of a written agreement.  The employees lost these protections.  The practical result of the Superior Court’s holding is that the employees lost the protections of the agreement, but retained their post-employment obligations.  This is inconsistent with Pennsylvania’s historical animosity towards these restrictive covenants, and appears to truly represent a “gotcha” for these employees. 

Metalico expands the universe of enforceable restrictive covenants.  This is not an uncommon fact pattern, and one which might have given an employer’s attorney pause prior to filing for a preliminary injunction in the past.  The holding could have the impact of reducing the care required in drafting, terminating and enforcing disfavored restrictive covenants, and eliminating some of the defenses available to employees seeking to avoid the covenant.  Interestingly, nowhere in the opinion does the Superior Court recite the oft-cited language that such covenants are disfavored in the law.  It will be interesting to see if the Supreme Court takes the opportunity to do so on appeal. 

Patricia Collins is a Partner with Antheil Maslow & MacMinn, LLP, based in Doylestown, PA. Her practice focuses primarily on commercial litigation, employment and health care law. To learn more about the firm or Patricia Collins, visit www.ammlaw.com.

By Gabriel Montemuro

Reprinted with permission from the February 28th edition of the The Legal Intelligencer © 2017 ALM Media Properties, LLC. All rights reserved.

Further duplication without permission is prohibited

The attorney-client privilege is the well-known and long-established court recognized protection of the substantive communications between an individual and his or her appointed counsel. The privilege protects litigants and their counsel from testifying or otherwise disclosing confidential communications between them despite the communications’ potential relevance or probative value. 42 Pa.C.S.A. § 5928; See also In re Grand Jury, 705 F.3d 133, 151 (3d. Cir. 2012). 

The attorney-client privilege is designed to foster a public policy that encourages clients to make full disclosure of facts to their attorneys and to allow counsel to properly, competently, and ethically carry out representation.  Idenix Pharm. V. Gilead Sci., Inc., 2016 WL 4060098 at 1 (D. Del. 2016).  The privilege further fosters full and frank communications between counsel and their clients, thereby promoting public interests in law and the administration of justice.  See J.N. S. W. School Dist., 55 F.Supp.3d 589, 598 (M.D. Pa. 2014); See also Magnetar Tech. Corp. v. Six Flags Theme Park Inc., 886 F.Supp.2d 466, 477 (D. Del. 2012).

The attorney-client privilege is widely recognized as a nearly insurmountable bar to discovery, however confidential communications between an attorney and his or her client may still be discoverable in limited circumstances.  The privilege may be waived, either expressly by consent or implicitly by disclosing communications at issue to a third party, or by failing to timely assert the privilege.  See Serrano v. Chesapeake Appalachia, LLC, 298 F.R.D. 271, 284 (W.D. Pa. 2014); see also Law Office of Phila. Waterfront Partners, 957 A.2d 1223, 1233 (Pa. Super. 2008); Nationwide Mut. Ins. Co. v. Fleming, 924 A.2d 1259, 1265 (Pa. Super. 2007).

Reprinted with permission from the December 30, 2016 issue of The Legal Intelligencer. (c) 2016 ALM Media Properties. Further duplication without permission is prohibited.

Historically, the courts of the Commonwealth of Pennsylvania have been loathe to blur the distinction between tort and contract.  The gist of the action doctrine, well formed and frequently litigated, precludes  recasting contract claims as tort claims or claims of negligent performance of contractual duties.  The courts have specifically held that parties to business agreements such as partnership, shareholder or LLC operating agreements may contract away or severely limit fiduciary duties owed by partners, directors and managers.  Notwithstanding these long standing and often contested principles of law, the Pennsylvania Supreme Court is set to address an emergent trend toward the expansion of duties imposed by contract through the implication of the duty of good faith and fair dealing in the context of business relationships.  Specifically, the Court has granted allocator on the issue of whether “the implied covenant of good faith and fair dealing” applies to “all limited partnership agreements under Pennsylvania law.”  Assuming the Court answers the question in the affirmative, as have the Courts in neighboring Delaware in a similar cases involving business governance agreements, the bright line between tort and contract will dim.

The case of Hanaway v. Parkersburg Group, L.P. 132 A.3d. 461 (Pa. Super. 2015) arises out of a limited partnership agreement for the development and sale of real estate.  The complaint alleges various breaches of fiduciary duty, conversion and contract based on the general partner’s sale of real estate at below market value to a separate entity also controlled by the general partner and involving many of the same limited partners as had invested in the original limited partnership – to the exclusion of the plaintiffs.  All tort claims based on breach of fiduciary duty were found to be time barred.   Further, the trial court granted summary judgment on the contract claims.  On appeal to the Superior Court, plaintiffs argued that the trial court erred in granting summary judgment on breach of contract claims by finding that the provisions of the limited partnership agreement granting the general partner exclusive right to manage the business affairs of the partnership negated the duty of good faith and fair dealing.  Plaintiffs argued the covenant is implied in every contract and imposes on each party a duty of good faith and fair dealing in its performance and enforcement, notwithstanding the grant of exclusive management rights.  

The Superior Court held that the implied covenant of good faith and fair dealing imposed the duty to exercise a contractual obligation, even a contractual obligation expressly conferring the exercise of discretion, must be exercised in good faith.  “Good faith” was interpreted to mean “faithfulness to an agreed common purpose and consistency with the justified expectations of the other party; it excludes a variety of types of conduct characterized as involving bad faith because they violate community standards of decency, fairness or reasonableness”.  The Court went on to describe the implied duty as requiring “honesty in fact in the conduct of the transaction concerned”.   Thus, the Court concluded that the general partner’s sale of partnership assets at below market rate for its own benefit and the benefit of its like minded limited partners to the detriment of others may constitute a breach of the implied duty and an issue for trial which should not have been dismissed on summary judgment.   

The Pennsylvania Supreme Court’s impending decision will undoubtedly be guided by precedent from the Delaware Supreme Court and the statutory preservation of the duty of good faith and fair dealing even in the face of the right to contract including the right to limit other duties- even fiduciary duties.   Delaware has adopted both a Revised Uniform Limited Partnership Act and a Limited Liability Company Act which permit parties to business agreements within the scope of those Acts to limit fiduciary duties owed to each other and the business. The Limited Liability Company Act goes so far as to confirm the premise that managers in an LLC owe fiduciary duties to each other under law by default, but allows for modification of such duties in the  operating agreement. The Revised Uniform Partnership Act, while allowing for a contractual waiver of fiduciary duties, specifically rejects waiver of the covenant of good faith and fair dealing.  Accordingly, while the parties are free to modify the fiduciary relationship with regard to management of business entities traditionally governed by contract, the implied covenant of good faith and fair dealing remains.  That premise was confirmed by the Delaware Supreme Court in Gerber v. Enterprise Products Holdings, LLC 67 A.3d 400 (Del. 2013).    In Gerber, the Supreme Court explained that the implied covenant “seeks to enforce the parties’ contractual bargain by implying only those terms the parties would have agreed to during their original negotiations had they thought to address them”. Gerber, at 418.  

The blending of tort and contract in the Pennsylvania Superior Court’s analysis in Hanaway is clearly evident by the Court’s summary conclusion that the breach of contract claims should have been preserved for the jury.  Although directly addressing the breach of contract claim, the Court applied tort principles by finding that the evidence, if credited, could support a finding that the Defendant orchestrated the sale of partnership assets at a price below market value for its own benefit.  The Court then concluded  such sale could have constituted a breach of the contractual duty to exercise management of the limited partnership in “good faith”.  Hanaway, 132 A.3d at 476.

A Supreme Court opinion which imposes the duty of good faith and fair dealing to all agreements governing business relationships will have far reaching implications.  Clearly, if breach of contract can be successfully alleged in a business setting under circumstances described in Hanaway, the statute of limitations analysis is substantially modified.  Owners of a minority business interest may no longer be limited to a two year statute.  Business practitioners and drafters of organizational documents who once believed a disclaimer of fiduciary duty was sufficient must now reconsider the inclusion of a “good faith” definition.  For litigators, the permissible theories of damage claims in business disputes concerning internal governance documents are expanded.

Although the Hanaway Superior Court decision is at odds with many traditional notions of separation between tort and contract, any Supreme Court determination that excludes the principal of good faith and fair dealing from business agreements would be at odds with the overarching and recognized principle that the duty is “implied in every contract”.  Further, any such ruling would be at odds with recent precedent from the Supreme Court of Delaware. 

Tom Donnelly is a Partner of the firm. His practice focuses primarily on commercial litigation and transactions, employment disputes and personal injury.  To learn more about the firm or Tom Donnelly, visit www.ammlaw.com.
   
 

The law requires drivers in the Commonwealth of Pennsylvania and New Jersey to maintain a certain minimum level of liability coverage with regard to any automobile.  That coverage serves the important function of providing a fund from which an injured person may recover for injuries caused by the negligence of the person securing the coverage known as the “insured”.  Liability coverage also serves the equally important role of protecting the insured’s personal assets by providing a monetary barrier between the claims of an injured person and the personal assets of the insured  

Some other provisions of an automobile policy which get far less attention, however, are also designed to protect the insured as opposed to someone injured by the insured’s negligence.  Policy provisions such as “stacking”, the limited tort option (known in New Jersey as the “verbal threshold”) and uninsured/underinsured protections are critically important to the insuring relationship and may be the difference between a successful recovery and a recovery which is not enough to satisfy your own medical bills, even if you are involved in an accident caused by the negligence of someone else.  “Penny wise and pound foolish” is a dangerous proposition when it comes to automobile coverage.

We recently and successfully tried a week long jury trial in the Bucks County Court of Common Pleas where the predominant issue in the case was the clients’ election of the limited tort option in his auto insurance policy. By choosing the limited tort option, the client had relinquished his right to bring suit against anyone whose negligence may have caused him to be injured,  unless the accident resulted in a “serious impairment of a bodily function”.  In our case, the client had suffered a mild traumatic brain injury – a concussion.  Unlike the majority of individuals who suffer such injuries, our client did not recover as expected, and continued to suffer mild neuropsychological deficits such as difficulty in word finding and rapid processing of information. Notwithstanding those deficits, the client was able to return to his normal occupation.  Because our client had chosen the limited tort option, the tortfeasor’s insurer refused to make any offer of settlement whatsoever based on his neuropsychological deficits, offering only to satisfy the client’s lost wages.  Our negotiating position on behalf of our client in settlement discussions was clearly disadvantaged since the insurance company knew there was substantial potential that the very specific and nuanced nature of the injury would be difficult for a jury to grasp, and might lead a jury to conclude the client had not suffered a “serious impairment of a bodily function”.  While we were successful at trial, the matter is one which should and would have been resolved in settlement but for the election of limited tort coverage by the client.  Had our client invested in full tort coverage, he would have been spared an emotionally taxing and all-consuming trial on merits and damages.

Reprinted with permission from the August 19, 2016 issue of The Legal Intelligencer. (c) 2016 ALM Media Properties. Further duplication without permission is prohibited.

The rights of shareholders to dissent to corporate actions are set forth in PA C.S.A. §1571 et seq., the Pennsylvania Business Corporation Law. Dissenters who comply with the formalities of the statute have the right to demand payment for the fair value of their stock interest at the time of the corporate action giving rise to the right to dissent – provided the corporate goes through with that action. Since a shareholder in a publicly traded company can simply sell his shares if he disagrees with a proposed corporate action, dissenters’ rights do not apply to such corporations.

What triggers dissenters’ rights?
The corporate actions giving rise to dissenter’s rights are specified in the BCL and generally involve fundamental changes to the entity, such as a merger or a change in voting rights.   When the corporation proposes to undertake such a change, a specific procedure must be followed by the dissenting shareholder.

Dissenters need not necessarily assert their dissenters’ rights to all of their shares. They must, however, assert those rights as to “all the shares of the same class or series beneficially owned by any one person.” Beneficial owners of shares should have the written consent of the record holder of the shares.  15 PA C.S.A. §1573.

Dissenters must file their dissent with the corporation prior to the vote on the proposed corporate action. The dissent must be in writing and must include a demand for payment of the “fair value for his shares” if the corporation adopts the proposed action.  Merely abstaining or voting against the change is not sufficient to invoke dissenters’ rights. Once invoked, to preserve dissenters’ rights, the shareholder cannot change the beneficial ownership of the shares while the vote is pending, nor can he vote in favor of the proposed action.

Reprinted with permission from the June 24, 2016 issue of The Legal Intelligencer. (c) 2016 ALM Media Properties. Further duplication without permission is prohibited.

The digital age and pervasive use of email communication gives rise to an entirely new and complex set of issues pertaining to the application of the attorney client privilege and the potential claim for waiver of that privilege.  Many commentators have addressed the use of commercial email servers and the implications of the terms and conditions applicable to such email accounts citing the potential that emails transmitted through such accounts may not be secure or protected.  The commercial provider’s right to use, retain or review the information communicated may impact on the privilege.   Even more complex are the issues that arise when email communications pass between a lawyer and a client utilizing an email account provided to the employee by the employee’s employer, or using an employer provided computer. While the law on an employer’s right to review information passing through its computer systems is continuing to develop, the application of that law to potentially attorney client privileged communications is in its infancy.   Research regarding the application of attorney client privilege to email communications exchanged through an employer’s email server reveals no case directly on point where the advice of counsel is sought regarding matters involving the employer.   

Litigants seeking discovery of attorney client communications through an employer sponsored email account cite the principles developed in cases of inadvertent disclosure and the requirements for invoking the attorney client privilege.  Pennsylvania law permits the invocation of the privilege if the communication relates to a fact of which the attorney was informed by his client, without the presence of strangers, for the purpose of securing either an opinion of law, legal services or assistance in a legal matter.   Nationwide Mutual Ins. Co. v. Fleming, 924 A.2d 1259 (Pa.Super. 2007).  In Carbis Walker, LLPv. Hill Barth and King, LLP, 930 A.2d 573 (Pa.Super.2007), the Superior Court adopted the five factor test to determine whether inadvertent disclosure amounted to a waiver of the attorney client privilege; (1) the reasonableness of the precautions taken to prevent inadvertent disclosure in view of the extent of the document production; (2) the number of inadvertent disclosures;(3) the extent of the disclosure;(4) the delay and measures taken to rectify the disclosure; and (5) whether the overriding interests of justice would or would not be served by relieving the party of its errors.

Pennsylvania has adopted specific provisions relating to a shareholder’s right to inspect the books and records of a corporation duly organized under the laws of the Commonwealth.  The Business & Corporations Law clearly provides for a shareholder’s inspection of corporate records, including the share registry, books of account and records of proceedings upon written notice stating a proper purpose.  However, when the legislature adopted the Limited Liability Company Law of 1994 (the “LLC law”) no similar provision was made relating to a member’s right to review company books and records, and no reference was made to the right of inspection applicable to corporations.

The absence of a specific reference in the LLC law does not mean that a member in a Limited Liability Company does not have the right to inspect business records.  The statute approaches that right from a different direction through the application and incorporation of partnership law.  Section 8904 of the LLC law incorporates by reference provisions relating to general partnerships in the case of a member managed LLC and additional provisions related to limited partnerships in the case of a manager managed LLC.  In either case, the provisions of Chapter 83 relating to general partnerships are rendered applicable.

Section 8332 provides that “the partnership books shall be kept, subject to agreement between the partners, at the principal place of business of the partnership, and every partner shall at all times have access to and may inspect and copy any of them”.  While partnership law does not define the types of records which are to be maintained in the same manner as the provisions relating to corporations, the statutory intent appears to be the same and thus the types of records subject to inspection are arguably similar in scope.           

There are material differences between the right applicable to corporations and partnerships/ LLC’s.  One major difference is that the partnership/LLC provision does not reference a requirement that the partner seeking an inspection state a “proper purpose” for the inspection.  The right as stated appears to be absolute as to partnerships/LLCs whereas in a corporate setting the shareholder must identify and communicate the purpose.  In addition, the provisions relating to corporations specifically provide for a cause of action for review of corporate records and for the recovery of attorney fees associated with the enforcement of that right.  No provision in the partnership law applicable to LLCs provides a specific similar right, nor the recovery of attorney fees.  A practitioner is left to argue the applicability of the provisions relating to corporations and the similarity of purposes served by the two statutory provisions.  

By Patricia C. Collins, Esquire Reprinted with permission from the April 24, 2016 issue of The Legal Intelligencer. (c) 2016 ALM Media Properties. Further duplication without permission is prohibited

The Federal Rules of Civil Procedure regarding electronically stored information present challenging procedural and substantive issues for parties to litigation.  More practically, and, in most cases as a threshold issue, they present cost challenges for litigants.  The United States Court of Appeals for the Third Circuit recently reviewed whether the costs related to electronic discovery are taxable to the losing party under 28 U.S.C. § 1920(4) in Camesi v. University of Pittsburgh Medical Center, United States Court of Appeals for the Third Circuit No. 15-1865 (March 21, 2016). 

28 U.S.C. § 1920(4) (“Section 1920”) permits a judge or clerk of court to tax as costs the fees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case.    The prevailing party would include those costs in a bill of costs and the amount would be included in the judgment or decree.  This provision is at the heart of the dispute in Camesi.    In that case, the University of Pittsburgh Medical Center (“UPMC”) prevailed in a claim under the Fair Labor Standards Act (“FLSA”).  The case involved extensive discovery after the grant of conditional certification under the FLSA.  That discovery included the conditional class’s request for electronically stored information (“ESI”).  There were multiple motions to compel and for protective orders, resulting in the entry of a consent order that stayed further discovery of ESI until the Court ruled on competing motions to certify or decertify the conditional class.

By William T. MacMinn, Esquire Reprinted with permission from the February 25, 2016 issue of The Legal Intelligencer. (c) 2016 ALM Media Properties. Further duplication without permission is prohibited.

Can organization attorneys represent their agents in an individual capacity? A recent Pennsylvania Superior Court decision said no.

The confidentiality of attorney-client communications is a long-standing privilege across the United States. The U.S. Supreme Court, in Swidler & Berlin v. United States, 524 U.S. 399, 403 (1998), reasoned that full and frank disclosure is a prerequisite that attorneys need in order to give their clients the best legal advice available. "It is the most revered of the common law privileges," according to Commonwealth v. Chmiel, 738 A.2d 406, 414 (Pa. 1999).

There are exceptions to lawyer-client communications. Lawyers cannot hide knowledge that a future crime is going to be committed. The right to assert the privilege can be voided if the communication to the lawyer was also made to nonlawyers. Of current interest is a third exception¬—the client's right to waive the privilege.

By Thomas P. Donnelly, Esquire

Reprinted with permission from the November 23, 2015 issue of The Legal Intelligencer. (c) 2015 ALM Media Properties. Further duplication without permission is prohibited.

A high business “tide” does not necessarily float all boats.  Often, when business is good and profits increasing, a business owner’s desire to avoid sharing those increasing profits with an underperforming partner can create an irreconcilable divide; particularly in the case of a partner not intimately involved in the day to day operations of the business.  Similarly, more difficult economic times stress cash flow, and may motivate a performing partner to explore options to decrease or eliminate that portion of the business income flowing to those performing at a lower level.  Of course, the lesser performing partner generally adopts a contrary perspective.  In either case, the divergence between two or more partners can render the status quo unacceptable and threaten the business as a going concern.

In approaching disputes among shareholders several factors must be considered.  First, does the attorney represent the company, the majority interest, or the minority interest?  The practitioner’s potential strategies must be informed by the relative position of the parties.  Second, what are the respective goals of the parties?  Certainly, the long term goal of extracting the most gain in income or the value of the investment is the goal of all the parties, but short terms strategies can have a dramatic and sometimes unintended consequence.  Third, what is the impact of the potential short term strategies, not only on the business, but also on the individuals?   Financing arrangements and personal guarantees must be considered.  Finally, the respective rights and obligations of the shareholders post dissolution must guide the process.

When approached by a client considering business divorce, the attorney must consider potential conflicts of interest.  Often, the majority owner’s first call is to corporate counsel.  However, Rules of Professional Conduct 1.7, 1.8 and 1.9 bear upon whether corporate counsel can represent the interests of only one shareholder/member.  In summary, representation of the “company” in the same or substantially related matter, or receipt of confidential information which may bear upon the representation of the party not seeking to be represented by corporate counsel, would preclude corporate counsel from undertaking the representation of a single shareholder/member. In some circumstances, it may be appropriate for the company to have separate counsel, such as where the company is a potential defendant in litigation commenced by either a third party or a shareholder.  However, such representation is complicated by divergence among board members and can present difficult issues in corporate governance and communication between counsel and the corporate client.

Representation of the majority interest provides for the implementation of whatever remedies may be available under the terms of written agreements among the shareholders or by means of corporate action as to a non-performer.   Significantly, there is no statutory right or method for the involuntary removal of a shareholder (arguably, such a remedy may be available in a partnership or Limited Liability Company setting).  Potential courses of action include severance of employment or reduction in employment benefits for the non-performer, voluntary dissolution if provided and appropriate pursuant to the agreements between the parties, and modification of corporate governance.  Of course, such potential courses of action do not come without risk, and the potential for litigation alleging minority oppression should be anticipated.  In such a case, documentation of non-performance and job duties is compelling.           

Representation of the minority owner is more difficult.  Many times, the minority owner is left with litigation alternatives such as actions for the appointment of a custodian or liquidating receiver pursuant to 15 Pa.C.S.A. Sections 1767 or 1985, respectively.  While these litigation remedies can be compelling, it should not be expected that litigation would result in continuation of the status quo indefinitely. Litigation rarely restores a broken relationship. Further, as recently noted by the United States District Court in Spina v. Refrigeration Service and Engineering, Inc. 2014 WL 4632427, a shareholder seeking the appointment of a receiver or a custodian bears a heavy burden and such appointment is at the discretion of the Court.

In addition, litigation alternatives necessarily incorporate business risk.  Can the company survive the appointment of a custodian? By definition, a custodian is designed to continue the business as opposed to liquidation.  The impact of a custodian on customer relationships, the entity’s capacity to contract and the willingness of business partners to engage in long term planning or projects may render liquidation inevitable. Certainly, the appointment of a custodian or receiver results in a loss of control on the part of the shareholders.  All policy and management decisions fall within the purview of the court appointee.  Such loss of control can be particularly problematic as it pertains to the case of tax reporting. 

That same loss of control must be considered in a liquidation scenario.  Liquidation contemplates an orderly winding down and distribution of assets which should be anticipated to include intellectual property and customer lists in addition to any fixed or hard assets possessed by the entity.  As noted in Spina, liquidation is generally carried out by public auction so as to ensure fairness among shareholders.  In the event of a liquidating receiver, a marketing campaign designed to enhance the value of the assets and maximize the selling price should be anticipated.  In such circumstance, neither party may be in a position to acquire the liquidated assets or may be forced to over-pay, thereby rendering such acquisition economically unfeasible.  Accordingly, while the goal at the outset of a liquidation proceeding may be to force a buy out of a shareholder, the end result may be that no party is in a position to acquire assets and engage in continued business operations.

The impact of a custodian or receivership on the individual business owners must also be considered.  Business owners frequently guaranty corporate debt.  The commencement of an action for the appointment of a custodian or receiver is almost always defined as an event of default with regard to the entity’s financing arrangements and could also trigger liability under the personal guaranty.

Finally, post liquidation obligations, or the lack thereof, should also be considered.  It should be anticipated that former partners would compete post liquidation.  The liquidation of the entity by definition precludes any claim for breach of fiduciary duty on the part of the company to the extent based on post liquidation acts or omissions and any right to enforce a post termination of employment restriction against competition.  However, arguably, the sale of the entity’s assets, including confidential information such as customer lists, may implicate the Uniform Trade Secrets Act and preclude use of information known to the shareholders in competition with the buyer.  While no case decided under Pennsylvania law addresses the application of the Act to such circumstance, the Act appears to be applicable where a shareholder retains possession of information which was subject to transfer in liquidation.
The complexities of business divorce through litigation mandate that the parties consider and pursue all avenues of amicable dissolution and consider all proposals for voluntary consolidation of ownership before pursuing litigation with uncertain results. 

Tom Donnelly is a Partner with Antheil, Maslow & MacMinn. His practice focuses primarily on commercial litigation and transactions, employment disputes and personal injury.