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holding that statute of limitations for claims brought pursuant to section 10(b) applies with equal force to claims brought pursuant to section 20 of the Exchange Act
Summary of this case from Lieberman v. Cambridge Partners, L.L.C.Opinion
CIVIL ACTION NO. 99-3778
January 21, 2004
MEMORANDUM AND ORDER
On February 11, 2003, plaintiff, Frank J. Dalicandro, filed a third amended complaint against Legalgard Inc., Reliance Insurance Co., Inc., Howard Steinberg, Dennis Costello, Edward Charlton, and Lawrence Kwasny, alleging violations of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 (Counts I and II), common law fraud (Count III), breach of fiduciary duty (Count IV), violation of § 1-501 of the Pennsylvania Securities Act of 1976 (Count V), breach of contract (Count VI), unjust enrichment (Count VII), and fraud as to present and future creditors (Count VIII).
Presently before the court is a motion for judgment on pleadings which defendants Costello, Charlton, and Kwasny bring pursuant to Federal Rule of Civil Procedure 12(c). For the reasons stated below, the motion will be granted in part and denied in part.
Facts
From 1987 until 1998, plaintiff, Frank Dalicandro ("Dalicandro"), was a founder, shareholder, director, and officer of Legalgard, Inc. ("Legalgard"), a corporation that "offers independent analysis and consulting related to legal services performed for insurance companies by outside counsel." Third Amd. Compl. ¶ 12 (identifying plaintiff as a founder); id. at ¶ 21 (implying that plaintiff was a shareholder as he signed a shareholders' agreement); id., Exh. A. at 1 (identifying plaintiff as a director); id., Exh. A at 2 (identifying plaintiff as an officer). In 1996, another company, Reliance Insurance Co., Inc. ("Reliance"), "acquired an 80% majority interest in Legalgard by purchasing or acquiring an option to purchase all shares held by outside shareholders." Id. at ¶ 15. This action resulted in Reliance taking control of the company. Id. at ¶ 16.
Following Reliance's acquisition of the control of Legalgard, Dalicandro entered into a Shareholders' Agreement in December 1996 with the defendant corporations and the individual defendants — Dennis Costello ("Costello"), Edward Charlton ("Charlton"), and Lawrence Kwasny ("Kwasny"), all of whom were also employee shareholders — which "provided for the purchase of shares held by the employee shareholders who terminated employment with the Company within the first two years of the Agreement, as follows: a) If terminated for cause, the lower of $0.70 or adjusted book value per share; b) If terminated without cause, the higher of $0.70 or adjusted book value per share; c) If employment terminated voluntarily, the higher of $0.70 or adjusted book value per share." Id. at ¶ 21.
In October 1998, Dalicandro and other employee shareholders requested that this agreement be altered to reflect a recent commitment by Reliance to invest additional funds into the company, thereby altering the book value. Third Amd. Compl. ¶ 25-26. Specifically, they wanted the buy-out value changed to $1.36 per share. Id. Additionally, they wanted the terms extended through year 2000. Id. at ¶ 26. On October 16, 1998, the defendant companies and the individual defendants agreed at a Board of Directors' meeting to extend the current by-out terms through year 2000, but the board of directors of Legalgard rejected the proposal to alter the buy-out figure. Id. ¶ 27-28.
This agreement also contained a clause stating that "neither the Corporation, its shareholders nor its directors and officers has any duty or obligation to disclose to the Executive any material information regarding the business of the Corporation or affecting the value of the capital stock of the Corporation before or at the time of a termination of the employment of the Executive, including, without limitation, any information concerning plans for the Corporation to make a public offering of its securities or to be acquired by or merged with or into another firm or entity." Defs. Mot., Exh. 5 at 9-10.
Ordinarily, where a defendant attaches extrinsic evidence to a Rule 12(c) motion, the court must convert that motion into one for summary judgment under Rule 56 to give the plaintiff an opportunity to respond. FED.R. CIV.P. 12(c) (WEST 2003) ("If, on a motion for judgment on the pleadings, matters outside the pleadings are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56.").
Where, however, an attached document is integral to the plaintiff's claims and its authenticity is not disputed, the plaintiff "obviously is on notice of the contents of the document and the need for a chance to refute evidence is greatly diminished." Pension Ben. Guar. Corp. v. White Consol. Industries, Inc., 998 F.2d 1192, 1196-1197 (3d Cir. 1993); see also Pryor v. National Collegiate Athletic Ass'n., 288 F.3d 548, 560 (3d Cir. 2002) ("Documents that the defendant attaches to the motion to dismiss are considered part of the pleadings if they are referred to in the plaintiff's complaint and are central to the claim; as such, they may be considered by the court.").
Although these cases were decided in the context of motions brought pursuant to Federal Rule of Civil Procedure 12(b) as opposed to Rule 12(c), the court can find no reason why that distinction would be meaningful, especially since Rule 12(b) contains identical language to that contained in Rule 12(c). See FED.R. CIV.P. 12(b) ("If, on a motion asserting the defense numbered (6) to dismiss for failure of the pleading to state a claim upon which relief can be granted, matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56.").
In this case, plaintiff makes numerous references to sections of the contract in his complaint, and it is clearly integral to each of his claims. Hence, this court is free to consider the contract without converting this motion to one for summary judgment.
During the course of 1998, Legalgard and Reliance negotiated with two other companies — Examen, Inc. ("Examen") and Policy Management System, Inc. ("Policy Management") — for the sale of or merger with Legalgard. In January 1998, the companies began merger negotiations with Examen, which promptly ended in February that same year when Examen "withdrew from the negotiations in order to focus on raising additional capital." Third Amd. Compl. at ¶ 31-33. Examen eventually renewed these negotiations in April or May 1998. Id. at ¶ 35. At about the same time, the companies also initiated negotiations with Policy Management for the sale of Legalgard. Id. at 55 59. As a result of these negotiations, on March 31, 1999, Policy Management purchased the assets of Legalgard for "approximately $23 million, which represented a price of approximately $4.00 per each Legalgard share." Id. at ¶ 93.
During this same time, Dalicandro alleges that Reliance and its representatives, including Costello and Charlton, were engaged in a scheme "to push Dalicandro into resigning from Legalgard and selling his shares for amounts much less than they were worth . . . in order to increase the amount of money paid to Reliance, Costello, and Charlton as shareholders in Legalgard." Id. at ¶¶ 95-96. As part of this scheme, none of the defendants informed Dalicandro about the negotiations with the companies interested in acquiring Legalgard despite their knowledge of or participation in the negotiations. See id. at ¶¶ 30-49, 50-75 (stating that Costello participated in both the Examen and Policy Management negotiations and failed to disclose); id. at ¶ 48 (stating Charlton knew of the Examen negotiations and failed to disclose); id. at ¶¶ 50-52, 55-56, 59-62, 67-75 (stating that Charlton participated in the Policy Management negotiations and failed to disclose); id. at ¶¶ 99-100 (stating Kwasny knew of the negotiations by mid-December 1999 and participated in the subsequent January and February 1999 negotiations and failed to disclose).
Moreover, plaintiff alleges that Costello and Charlton actually misrepresented the status of negotiations. Specifically, he claims that instead of advising plaintiff about the "renewed negotiations with Examen" or the "serious overture from Policy Management," both "Costello and Charlton merely informed Dalicandro that other businesses, but not Policy Management and Examen, might be interested in Legalgard." Id. at ¶ 83-84. Moreover, despite his knowledge of Policy Management's interest in purchasing Legalgard, "Costello specifically represented to Dalicandro that Policy Management was only interested in doing joint marketing and joint business development with Legalgard." Id. at ¶¶ 86-87. Plaintiff alleges that Costello made this misrepresentation with the intent "to mislead Dalicandro into believing that Policy Management had no interest in purchasing Legalgard." Id. at ¶ 89. Similarly, "Costello told Dalicandro that nothing further had proceeded with Examen subsequent to February, 1998." Id. at ¶ 49. Finally, plaintiff claims that Costello specifically told Dalicandro that Reliance wanted him to continue his employment with Legalgard despite the fact that he knew otherwise. Id. at ¶¶ 90-91. This alleged "misrepresentation was intended to mislead Dalicandro into believing that Reliance wanted to 'lock him in' to continued employment and to conceal Examen's and Policy Management's interest in Legalgard." Id. at ¶ 92.
Plaintiff does not articulate how this statement furthered the alleged scheme.
In November 1998, Reliance, with the participation of Costello and Charlton, then insisted that Dalicandro sign an amendment to the Shareholders' Agreement. Id. at ¶ 76. The amendment would have altered the terms such that "the price of the shares [would] be reduced to thelower of book value or $0.70 per share in the event of voluntary termination or in the event of termination without cause through June 10, 2000." Id. Unless Dalicandro signed this amended agreement, "Reliance [would] refuse to invest the additional funds" promised to Legalgard. Id. at ¶ 77. The adjusted book value at the time was "no more than $0.10 per share." Id. at ¶ 78. As a result of defendants' omissions and misrepresentations, and in an effort to avoid signing the amendment to the Shareholders' Agreement, which would have disappointed other Legalgard executives who wanted Reliance to invest additional funds, Dalicandro resigned on December 11, 1998. Id. at ¶ 81. Pursuant to the Shareholders' Agreement, on February 16, 1999, Legalgard exercised its right to buy back his shares at $0.70 per share as that was the greater figure as compared to the then-book value of $0.10 per share. Id. at ¶ 82.
Dalicandro claims that he would not have left his job had he known about the negotiations to sell Legalgard. Id. at ¶¶ 103-04. Furthermore, he asserts that he would have purchased additional shares of the company. Id. at ¶ 104. As a result of this alleged fraud, he claims to have lost $731,475 in stock value, $875,000 in salary over a five-year period (less those severance payments made to him), bonuses, and royalties. Id. at ¶ 107.
Procedural Background
Plaintiff filed his initial complaint on July 26, 1999, alleging claims against only Legalgard and Reliance. See Doc. #1. On September 24, 1999, plaintiff amended his complaint to include a breach of contract claim. See Doc. #7. On January 24, 2001, plaintiff moved to amend his complaint a second time in order to include claims against the current defendants, who are individual employees, executives, and officers of Legalgard and Reliance. See Doc. #32; Sec. Amd. Compl. ¶¶ 14, 17-19. The court denied plaintiffs motion to amend due to undue delay in making the request and the then-impending trial date. Ord. (Yohn, J., Feb. 15, 2001) (Doc. #34). On February 27, 2001, plaintiff filed a motion requesting the court to reconsider its decision. See Doc. #35. The court granted plaintiffs motion, vacated its previous decision, and proceeded to evaluate the merits of plaintiffs motion to amend his complaint. Ord. (Yohn, J., Mar. 15, 2001) (Doc. #37). Plaintiff's motion to amend was granted "only to the extent that it adds claims against four new parties and a claim of unjust enrichment against Legalgard." Ord. (Yohn, J., Jan. 11, 2002) (Doc. #48). On January 17, 2002, plaintiff filed his second amended complaint. See Doc. #49. Thereafter, defendant Steinberg filed a motion to dismiss (Doc. #59), which the court granted with prejudice as to Counts I, II and V and without prejudice to the right of plaintiff to file a third amended complaint as to Count III. Plaintiff then filed a third amended complaint on February 12, 2003. See Doc. #72. Defendants Costello, Charlton and Kwasny filed their answer and affirmative defenses on March 13, 2003. See Doc. #75. On May 9, 2003, plaintiff voluntarily dismissed this complaint as against defendant Steinberg. See Doc. #84. Defendants Costello, Charlton, and Kwasny thereafter filed the instant motion.
On November 14, 2001 the court stayed the action as to Reliance which was undergoing state liquidation proceedings.
On January 30, 2002 Legalgard filed a suggestion of bankruptcy and the action was placed in civil suspense.
By so doing, plaintiff voluntarily dismissed Count VIII as plaintiff brought that claim only against Steinberg.
Standard of Review
Federal Rule of Civil Procedure 12(c) states that "[a]fter the pleadings are closed but within such time as not to delay the trial, any party may move for judgment on the pleadings." FED. R. Civ. P. 12(c) (WEST 2003). The standard for reviewing such a motion is the same as that applied to motions brought pursuant to Federal Rule of Civil Procedure 12(b)(6). See Turbe v. Government of Virgin Islands, 938 F.2d 427, 428 (3d Cir. 1991) (citations omitted) (stating that because "Rule 12(h)(2) provides that a defense of failure to state a claim upon which relief can be granted may also be made by a motion for judgment on the pleadings . . ., we apply the same standards as under Rule 12(b)(6)"). Thus, to survive this motion, the plaintiff must set forth facts that state a claim as a matter of law. See Constitution Bank v. DiMarco, 815 F. Supp. 154, 157 (E.D.Pa. 1993) ("[V]iewing all of the facts in a light most favorable to the non-moving party and accepting as true the allegations in that party's pleadings and as false all controverted assertions of the movant, the court may only grant the motion if it is beyond doubt that the non-movant can plead no facts that would support his claim for relief"). The district court must view these facts and the inferences drawn there from in the light most favorable to the non-moving party. See Janney Montgomery Scott, Inc. v. Shepard Niles, Inc., 11 F.3d 399, 406 (3d Cir. 1993). The court may grant the motion only "if no relief could be granted under any set of facts that could be proved." Turbe, 938 F.2d at 428 (citing Unger v. National Residents Matching Program, 928 F.2d 1392, 1394-95 (3d Cir. 1991)).
Discussion
I. Counts I and II: Plaintiff's Federal Claims Against Costello, Charlton, and Kwasny
In his Third Amended Complaint, plaintiff alleges that, through their acts and omissions, the moving defendants violated §§ 10(b) and 20(a) of the Securities Exchange Act. In their motion for judgment on the pleadings, defendants argue that the statute of limitations has expired on plaintiff's federal securities claims because he had inquiry notice of defendants' possible involvement in the alleged fraudulent scheme at the time he filed his first amended complaint. As the court will discuss below, their motion will be granted in part with reference to these federal claims.
Although plaintiff alleges violations of both §§ 10(b) and 20(a) against Costello and Charlton, he only brings a § 20(a) claim against Kwasny.
Defendants' argument that the doctrine of the law of the case governs the court's disposition of plaintiff's federal claims is misplaced. That doctrine applies to specific legal conclusions, such as my holding that the statute of limitations had run on the federal and state securities claims that plaintiff alleged against Steinberg. See Discussion II.B.1 (discussing the doctrine and offering citations). Hence, the doctrine is analogous to issue and claim preclusion. In the instant action, the court has not made any determinations with reference to defendants Costello, Charlton, or Kwasny. Because plaintiff may well have had different storm warnings as to these individuals' involvement in the scheme, it is possible that the same statute of limitations would not have expired as to them. Stated differently, because any determination as to the expiration of claims against these defendants rests on an interpretation of facts which may be different from those previously considered, the law of the case doctrine is not implicated with reference to these claims.
While § 10(b) of the 1934 Securities Exchange Act, codified as amended at 15 U.S.C.A. § 78j(b) (WEST 2003), does not contain a statute of limitations, in Lampf, Pleva, Lipkind, Prupis Petigrow v. Gilbertson, 501 U.S. 350 (1991), the Supreme Court held that the "1-year period after discovery combined with a 3-year period of repose" contained within § 13 of the 1933 Securities Act, and mentioned in other sections of the 1934 Act, should apply to these claims. Id. at 360. Our Court of Appeals has held that this statute of limitations is triggered when a plaintiff has "inquiry notice" of the fraud. In re NAHC, 306 F.3d 1314, 1325 (3d Cir. 2002) (citations omitted). In order to determine whether a plaintiff had such notice, the court must engage in a two-part inquiry. First, the defendants must demonstrate that the plaintiff "had 'sufficient information of possible wrongdoing to place [him] on inquiry notice or to excite storm warnings of culpable activity.'" Id. (citations omitted). The court further held that the "test for storm warnings is an objective one," and that a "[p]laintiff need not know all of the details or narrow aspects of the alleged fraud to trigger the limitations period; instead, the period begins to run from the time at which plaintiff should have discovered the general fraudulent scheme." Id. at 1326 (citations and internal quotations omitted).
The rules governing the statute of limitations for § 10(b) claims also govern plaintiffs § 20(a) claim. That section states that:
Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.15 U.S.C.A. § 78t(a).
While the Third Circuit has yet to delineate the appropriate statute of limitations which this court should apply to § 20(a) claims, that court has held that these claims are predicated on establishing liability under other sections of the Securities Exchange Act. Shapiro v. UJB Financial Corp., 964 F.2d 272, 279 (3rd Cir. 1992). Applying the same reasoning, several district courts within this circuit and at least one other court of appeals have held that the statute of limitations governing § 10(b) claims also governs § 20(a) claims. See Tracinda, Corp. v. Daimlerchrysler AG, 197 F. Supp.2d 42, 55 n. 5 (D. Del. 2002) (citing Hill v. Equitable Trust Company, 562 F. Supp. 1324, 1340 (D. Del. 1983) for the proposition "that because 'controlling person claims are predicated upon another person's violation of different provisions of the securities laws, the statute of limitations period governing these claims is the same as the limitations period governing the claims against the controlled person'"); Dodds v. Cigna Securities, Inc., 12 F.3d 346, 350 n. 2 (2d Cir. 1993)(same). Similarly, this court holds that the statute of limitations for claims brought pursuant to § 10(b) applies with equal force to claims brought pursuant to § 20(a) of that statute.
This section states "[n]o action shall be maintained to enforce any liability created under this section, unless brought within one year after the discovery of the facts constituting the violation and within three years after such violation." 15 U.S.C.A. § 78i(e) (WEST 2003)
Second, once the defendants have proven that storm warnings did exist prior to the expiration of the limitations period, "'the burden shifts to the plaintiffs to show that they exercised reasonable due diligence and yet were unable to discover their injuries.'" In re NAHC, 306 F.3d at 1327 (quoting Matthews v. Kidder, Peabody Co., Inc., 260 F.3d 239, 252 (3d Cir. 2001)). This prong of the "inquiry is both subjective and objective. The plaintiffs must first show that they investigated the suspicious circumstances. Then, [the court] must determine whether their efforts were adequate — i.e., whether they exercised the due diligence expected of reasonable investors of ordinary intelligence." Matthews, 260 F.3d at 252. Should plaintiffs fail to investigate these storm warnings, "they are 'deem[ed] . . . on inquiry notice of their claims." Id. (quoting Matthews, 260 F.3d at 252). In other words, if plaintiffs fail to investigate, the one-year statute of limitations will begin to run from the time at which there objectively were storm warnings of the fraud. Moreover, plaintiffs "cannot bolster their cause by arguing the difficulty of discovering the alleged fraud . . . [because] 'excusing [plaintiffs'] lack of inquiry because, in retrospect, reasonable diligence would not have uncovered their injury . . . would, in effect, discourage investigation. . . .'" Id. (quoting Matthews, 260 F.3d at 252 n. 16).
Although the Third Circuit never explicitly stated that the burden to initially prove the existence of storm warnings lies on the defendant, this quote implies as much. Moreover, a number of those courts of appeals that have addressed the issue have also placed this burden on defendant. See Young v. LePone, 305 F.3d 1, 9 (1st Cir. 2002) ("If . . . a defendant seeks to truncate the limitations period by claiming that the plaintiff had advance notice of the fraud through the incidence of storm warnings, then the defendant bears the initial burden of establishing the existence of such warnings."); Tregenza v. Great American Communications, Co., 12 F.3d 717, 718 719 (7th Cir. 1993) (stating in the securities context that "[t]he statute of limitations is an affirmative defense, and a plaintiff is not required to negate an affirmative defense in his complaint," and rejecting the argument that a statutorily mandated statute of limitations "is an element of the claim itself as such an argument is "a conclusion rather than an explanation, and an especially dubious one where as in this case the statute of limitations isn't even found in the statute that creates the substantive right"); Ritchey v. Horner, 244 F.3d 635, 639 (8th Cir. 2001) (same); Law v. Medco Research, Inc., 113 F.3d 781, 786 (7th Cir. 1997) (placing the entire burden of proving that the statute of limitations has run on defendants); Smith v. Duff and Phleps, 5 F.3d 488, 492 n. 9 (11th Cir. 1993) (same); but see Pennsylvania Co. for Insurances on Lives and Granting Annuities v. Deckert, 123 F.2d 979, 985 (3d Cir. 1941) ("It has been held almost universally that when a statute creating a new cause of action contains in itself a statute of limitations, the limitation imposed becomes an integral part of the right of action created by the statute and so limits it that an aggrieved person cannot maintain his suit after the time fixed by the statute has expired. In our opinion the provisions of Section 13 are part of a limitation upon the right of action given by Section 12(2) and that the effect of the limitation thus imposed must be passed upon by the District Court."); Cook v. Avien, Inc., 573 F.2d 685, 695 (1st Cir. 1978) (same). Lastly, I read the Third Circuit's holding in In re NAHC as abrogating the holding in Deckert, which that court has never since referenced.
Additionally, the doctrine of equitable tolling after plaintiff has "inquiry notice" does not apply to claims brought pursuant to § 10(b) claims. The doctrine of equitable tolling maintains that a statute of limitations should toll for the time during which "the party injured by the fraud remains in ignorance of it without any fault or want of diligence or care on his part." Lampf, 501 U.S. at 363 (citing Bailey v. Glover, 21 Wall. 342, 22 L.Ed. 636 (1875)). As the Court held in Lampf, "it is evident that the equitable tolling doctrine is fundamentally inconsistent with the 1-and 3-year structure" because "[t]he 1-year period, by its terms, begins after the discovery of the facts constituting the violation, making tolling unnecessary[,]" and "'[t]he inclusion of the three-year period can have no significance in this context other than to impose an outside limit.'" Lampf, 501 U.S. at 363 (quoting Harold S. Bloomenthal, The Statute of Limitations and Rule 10b-5 claims: A Study of Judicial Lassitude, 60 U. COLO. L.REV. 235, 288 (1989)).
Finally, on a procedural note, although these inquiries are fact intensive and hence courts are generally reluctant to dismiss a complaint as untimely prior to discovery, such a dismissal may be warranted where a plaintiff has pled "facts that show that his suit is time-barred or otherwise without merit." Tregenza v. Great American Communications, Co., 12 F.3d 717, 718 (7th Cir. 1993) (stating that, in such instances, the plaintiff "has pleaded himself out of court"). As the Third Circuit has held, despite "the language of Fed.R.Civ.P. 8(c) [, which] indicates that a statute of limitations defense cannot be used in the context of a Rule 12(b)(6) motion to dismiss, an exception is made where the complaint facially shows noncompliance with the limitations period and the affirmative defense clearly appears on the face of the pleading." Oshiver v. Levin, Fishbein, Sedran Berman, 38 F.3d 1380, 1385 n. 1 (3d Cir. 1994). That court has also stated that when evaluating statute of limitations defenses in the context of a motion to dismiss, a court "may also consider matters of public record, orders, exhibits attached to the complaint and items appearing in the record of the case." Id. at 1385 n. 2.
See Gruber v. Price Waterhouse, 911 F.2d 960, 968-69 (3d Cir. 1990) (affirming the district court's denial of summary judgement "because of the presence of genuine issues of material fact in relation to the expiration of the limitations period"); In re Ames Dept. Stores, Inc. Note Litigation, 991 F.2d 968, 980-81 (2d Cir. 1993) (same reasoning); Young v. LePone, 305 F.3d 1, 9 (1st Cir. 2002) (stating that because these inquiries involve issues of fact, in the "archetypical case," they should be resolved by the factfinder); In re Daimler Chrysler AG Securities Litigation, 2003 WL 21513154 at * 8 (D.Del. June 25, 2003) (stating that where there are material issues regarding whether the statute of limitations has expired, that question is for the fact finder to resolve).
1. Defendant Costello
In the instant case, giving plaintiff every benefit of the doubt, he had storm warnings of defendant Costello's role in the alleged fraudulent scheme at least by September 24, 1999, when he filed his first amended complaint against the corporate defendants and did not name Costello as a defendant until at least January 24, 2001 when he filed his motion to amend. Moreover, despite plaintiff's argument that defendants concealed information about Costello's role in the scheme, plaintiff nonetheless had pled sufficient facts in the first amended complaint to bring a claim against Costello. For these reasons, the court will order judgment on the pleadings in favor of this defendant with regard to these federal claims.
In the first amended complaint, plaintiff identified Costello as the C.E.O. of Legalgard, a position to which he was allegedly appointed by Reliance, his former employer. First Amd. Compl. at 5, ¶ 28-29. Plaintiff stated plainly that "Costello was loyal to Reliance . . . and was the agent of Reliance and Legalgard at all relevant times in the effort to deceive Dalicandro." Id. at 6, ¶ 30. Moreover, plaintiff alleged that "Costello specifically represented to [him] that Policy Management was only interested in doing joint marketing and joint business development with Legalgard" despite his knowledge that "Policy Management was interested in purchasing [the company]." Id. at ¶ 31-32, 38. He alleged that Costello knew this information "as a result of several trips which [he] took to South Carolina to meet with Policy Management." Id. at ¶¶ 32.
Additionally, in furtherance of the fraudulent scheme, plaintiff claimed that Costello told him that Reliance was advocating that plaintiff sign an amendment to his original shareholders' agreement because the company "wanted Dalicandro to continue working for Legalgard." Id. at ¶¶ 34-35. He claimed that this statement was "[a] misrepresentation [that] was intended to mislead Dalicandro into believing that Reliance wanted to 'lock him in' to continued employment and to conceal Policy Management's interest in Legalgard." Id. at ¶ 36. Lastly, plaintiff alleged that the corporate defendants, "through the misrepresentations and concealments of . . . Costello, intentionally and recklessly concealed the negotiations with Policy Management so as to push Dalicandro into resigning from Legalgard and selling his shares for an amount much less than they were worth." Id. at ¶ 39.
Despite all of these "storm warnings" of Costello's involvement in the fraud, for which he must have had some basis, plaintiff did not name Costello as a defendant in the first amended complaint. Plaintiff, however, argues that defendants frustrated his unidentified duly diligent attempts to investigate these warnings by concealing the "smoking gun" letter which evidenced Costello's involvement in the scheme. Specifically, he argues that because defendants did not include this letter in response to plaintiff's original discovery requests, plaintiff could not reasonably have discovered Costello's role in the scheme prior to the date on which he received the letter. Thus, in plaintiff's view, the statute of limitations would begin to run from that date.
In support of this decision, plaintiff also argues that, at the time he filed the first amended complaint, he believed that Costello was simply defendant Steinberg's agent. As such, he thought that Costello was only aiding and abetting defendant Steinberg's illegal acts. Because, plaintiff argues, aiding and abetting does not sufficiently meet the scienter requirement of § 10(b), he did not name Costello as a defendant.
This argument, however, lacks merit. Although the Supreme Court has held that "the text of the 1934 Act does not itself reach those who aid and abet a § 10(b) violation[,]" Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 177-78 (1994), the allegations that plaintiff made against Costello in his first amended complaint were sufficient to support §§ 10(b) and 20(a) claims against Costello irrespective of his alleged aiding and abetting of Steinberg's actions. As detailed above, plaintiff alleged facts supporting his contention that Costello made misrepresentations with the intent to deceive plaintiff. The fact that the first amended complaint states that Costello was an agent of Reliance and Steinberg in no way alters these facts.
Plaintiff, however, fails to appreciate that because the letter did not provide him with any more information than that which he already knew well prior to November 2000 and, more importantly, facts which plaintiff had already pled against the corporate defendants in his first amended complaint on September 24, 1999, defendants' alleged concealment of the letter has no bearing on plaintiff's due diligence investigation. The letter, which was an employment agreement between Legalgard and Howard Lawson Co., a financial advisor, to assist with the proposed sale to Policy Management, only confirms that there were negotiations between Legalgard and Policy Management prior to plaintiff's leaving his job on December 11, 1998. If the information available to plaintiff in 1999 was enough to plead with particularity that the companies were negotiating, that same evidence would be enough to support this element of a claim against Costello in 1999.
As to Costello's knowledge of the proposed sale, the fact that the letter is addressed to Costello and several others would only seem to bolster the allegations that plaintiff already felt comfortable making in the first amended complaint. Moreover, as to Costello's intent to deceive, the letter makes no mention of it; it says nothing about deceiving plaintiff or any alleged plan to force plaintiff into retirement. Thus, while it is clear from the first amended complaint that plaintiff exercised all due diligence to investigate Costello and through these efforts was able to make allegations of fraud against him, plaintiff has failed to demonstrate that, despite these efforts, he was unable to discover his injuries. To the contrary, the first amended complaint makes plain that he was able to so do. For this reason, the 1-year statute of limitations began to run at least from the date on which plaintiff filed the first amended complaint.
Plaintiff also appears to contend that, even if the court holds — as it does — that the first amended complaint triggered the limitations period, the court should employ the doctrine of equitable tolling because defendants concealed information about Costello's role in the fraud. As I made clear above, however, this doctrine does not apply to plaintiffs federal claims after the plaintiff has "inquiry notice." See Sec. IA (discussing this rule). Even if the doctrine of equitable tolling applied, plaintiff had ample time between March 15, 2000 when the motion to dismiss was resolved and September 24, 2000 when the statute of limitations expired. Even so, he did not file his motion to amend until four months later on January 24, 2001. Moreover, equitable tolling would not apply to the period between October 24, 1999 when the motion to dismiss was filed and March 15, 2000 when it was resolved because plaintiff did not take advantage of his opportunity under the Private Securities Litigation Reform Act of 1995 to have the stay lifted. 15 U.S.C. § 78u-4(b)(3)(B). Whether plaintiff could have established "undue prejudice" or not, he had an obligation to attempt to do so given the allegations in the first amended complaint. Finally, discovery is not the only investigative means through which plaintiff could have investigated Costello's knowledge of the pending negotiations with Policy Management.
In sum, by the time he filed his first amended complaint on September 24, 1999, plaintiff certainly had at least inquiry notice of Costello's possible involvement in the fraud and yet he did not bring suit against Costello at least until he filed his motion to amend the first amended complaint on January 24, 2001; a period well in excess of the one-year statute of limitations. Thus, giving plaintiff every benefit of the doubt, it appears on the face of the complaints that the statute of limitations has expired on plaintiff's federal securities claims against Costello. Moreover, because the "smoking gun" letter was not the basis for establishing plaintiff's claims, the date of its receipt cannot be the trigger for the limitations period. Consequently, the court will enter judgment in favor of Costello on the federal claims which plaintiff asserted against him.
2. Defendants Charlton and Kwasny
Although, unlike defendant Costello, neither Charlton nor Kwasny was mentioned in the first amended complaint, defendants argue that the information contained in that pleading nonetheless raised storm warnings of these defendants' involvement in the alleged fraudulent scheme. In support of this argument, they contend that because the first amended complaint contained allegations of a corporate scheme of fraud and a corporation can only act through its agents, plaintiff did have storm warnings that Charlton and Kwasny may have been involved in the scheme. As such, plaintiff had a duty to investigate with all due diligence their involvement in that scheme.
Defendants also argue that, because the first amended complaint refers to "other employee shareholders" who are identified in the Third Amended Complaint as defendants Charlton and Kwasny and who, with plaintiff, signed the Shareholders' Agreement, plaintiff had storm warnings of their participation in the fraud. This fact, however, has no bearing on their knowledge of Policy Management's pending acquisition of Legalgard's assets. It is defendants' knowledge thereof combined with their alleged misrepresentations and/or omissions regarding that information, made with the intent to harm plaintiff or in reckless disregard of his possible injury, that form the factual basis of plaintiff's claims.
Defendants correctly state that a corporation can only act through its controlling agents; generally, its officers, directors, or controlling shareholders. See Rochez Bros., Inc. v. Rhoades, 527 F.2d 880, 884 (3d Cir. 1975) (holding that "the fraud of an officer of a corporation is imputed to the corporation when the officer's fraudulent conduct was (1) in the course of his employment, and (2) for the benefit of the corporation" because, inter alia, "a corporation can speak and act only through its agents"); Official Committee of Unsecured Creditors v. R.F. Lafferty Co., Inc., 267 F.3d 340, 361 (3d Cir. 2001) (citing same); see also Nix v. Temple University of Com. System of Higher Education, 596 A.2d 1132 (Pa.Super. 1991) (holding in the contract and tort context that "a corporation acts only through its agents and officers"); Killian v. McCulloch, 850 F. Supp. 1239, 1251-52 (E.D. Pa. 1994) (same). Consequently, it can be forcefully argued that plaintiff's knowledge of the corporation's fraudulent scheme, which he had when filing the first amended complaint, put him on notice that those individuals who controlled the company might be involved in the fraud. Moreover, it is undisputed that by virtue of his position as the former founder and director of Legalgard, plaintiff knew the identities of these controlling persons prior to filing the first amended complaint.
However, without some allegation that plaintiff had sufficient evidence that Charlton and Kwasny were in fact involved in the alleged fraud, I am not prepared to conclude that plaintiff had sufficient evidence of possible wrongdoing by them to put him on inquiry notice. Therefore, defendants' motion for judgment on the pleadings on the federal claims against Charlton and Kwasny will be denied.
The fact that Kwasny allegedly did not become involved in the scheme until mid-December 1999, after plaintiff filed his first amended complaint, reinforces the conclusion as to him.
II. Plaintiff's Pennsylvania Claims
A. Count V: Securities Claim Against Costello, Charlton, and Kwasny
Plaintiff also alleges that defendants' conduct violated § 1-501 of Pennsylvania's Securities Act of 1972. As with his federal claims, however, the statute of limitations has expired on this state law claim as to Costello.
Section 1-504(a) of the Pennsylvania Securities Act of 1972 articulates the statute of limitations for claims brought pursuant to § 1-501, and states that
[n]o action shall be maintained to enforce any liability created under section 501 . . . unless brought before the expiration of three years after the act or transaction constituting the violation or the expiration of one year after the plaintiff receives actual notice or upon the exercise of reasonable diligence should have known of the facts constituting the violation, whichever shall first expire.
70 Pa.C.S.A. § 1-504(a) (emphasis added).
As this language parallels that of the federal statute of limitations, and as there is no Pennsylvania Supreme or Superior Court decision to the contrary, this court holds that the statute's language requires claims to be brought within one year of either actual or inquiry notice of the fraud. As detailed in the prior section, plaintiff was certainly on inquiry notice of Costello's possible involvement in the scheme when he filed his first amended complaint in September 1999.
Plaintiff, however, argues that the court should apply the doctrine of equitable tolling to this case. This defense is not available to him for the same reasons articulated with reference to the federal claims. Consequently, the court will grant defendants' motion with respect to this claim as to Costello and deny it as to Charlton and Kwasny.
B. Count III: Common Law Fraud Claim Against Costello and Charlton
Plaintiff alleges that defendants defrauded him by making material misrepresentations and failing to disclose information to him regarding Legalgard's negotiations with Examen or Policy Management. In response, defendants Costello and Charlton argue that neither of them made any misrepresentations. Rather, they argue that plaintiff's allegations are only that they omitted information about these negotiations. Based on the doctrine of the law of the case, they argue that my previous holding — that directors of defendant corporations did not have a duty to disclose information regarding the pending sale specifically to plaintiff — governs the instant motion, thereby defeating plaintiffs claim. Alternatively, they contend that if they did make any affirmative misrepresentations, they did not do so with the intent to mislead plaintiff and plaintiff did not rely on these misrepresentations when he left Legalgard's employ. As will be discussed below, 1) the law of the case does bind this court to grant judgement in favor of defendants regarding their alleged omissions, but 2) because plaintiff has successfully pled fraud pursuant to a theory of material misrepresentation against defendant Costello, plaintiff's fraud count may proceed on that basis against him.
In their reply to plaintiff's response to their motion, defendants argue that plaintiff's reliance was not reasonably justified. In support of this argument, defendants state only that "[b]ecause Dalicandro knew that other businesses were potentially interested in Legalgard, [his] decision to sell his stock was at his own peril." Def. Sur-Reply at 5. Because defendants cite no law whatsoever — let alone that establishing the standard by which the court could evaluate the reasonableness on a motion for judgment on the pleadings — the court is unpersuaded by this argument.
1. Intentional Non-disclosure and the Law of the Case Doctrine
The doctrine of law of the case dictates that "when a court decides upon a rule of law, that rule should continue to govern the same issues in subsequent stages in the litigation." Devex Corp. et al. v. General Motors Corp., 857 F.2d 197, 199 (3d Cir. 1988) (citation omitted). The doctrine only applies "to issues expressly decided by a court in prior rulings and to issues decided by necessary implication." Bolden v. Southeastern Pennsylvania Transp. Auth., 21 F.3d 29, 31 (3d Cir. 1994). The policy undergirding this doctrine is "'to maintain consistency and avoid reconsideration of matters once decided during the course of a continuing lawsuit.'" Casey v. Planned Parenthood, 14 F.3d 848, 856 (3d Cir. 1994) (quoting 18 CHARLES A. WRIGHT ET AL., FEDERAL RULES AND PRACTICE § 4478 (1981)). Hence, "it is not improper for a court to depart from a prior holding if convinced that it is clearly erroneous and would work a manifest injustice." Arizona v. California, 460 U.S. 605, 619 n. 8 (1983) (citations omitted).
In the instant case, the threshold question in this case is whether I have previously decided that the directors of Legalgard had a duty to disclose to plaintiff information regarding the pending Legalgard sale. In a Memorandum and Order dated January 23, 2003, I ruled that "neither the 1996 Shareholders' Agreement, which governed defendant [Steinberg's] fiduciary relationship with plaintiff, nor federal and state securities laws required defendant [Steinberg] to share information concerning negotiations with Examen or Policy Management with plaintiff absent a duty to make a public disclosure to all shareholders." Dalicandro v. Legalgard, Inc., 2003 WL 182942 at *9 (Yohn, J. Jan. 23, 2003). This holding applies with equal force to the instant motion. As I stated in that decision,
In order to successfully plead the tort of intentional mon-disclosure, plaintiff must allege that defendants had a duty to speak. See Wilson v. Donegal Mutual Ins. Co., 598 A.2d 1310, 1316 (Pa.Super. 1991) (citing Smith v. Renaut, 564 A.2d 188, 192 (Pa.Super. 1989) for the proposition that while "concealment may constitute fraud, . . . mere silence is not sufficient in the absence of a duty to speak"). A duty to disclose can be imposed either by virtue of the parties' relationship or by statute.
the Shareholders' Agreement specifically stated that 'neither the Corporation, its shareholders nor its directors and officers has any duty or obligation to disclose to the Executive any material information regarding the business of the Corporation or affecting the value of the capital stock of the Corporation before or at the time of a termination of the employment of the Executive, including, without limitation, any information concerning plans for the Corporation to make a public offering of its securities or to be acquired by or merged with or into another firm or entity.'Id. In his complaint, plaintiff alleges that both of the current moving defendants were directors of Legalgard. Third Amd. Compl. at ¶ 23. Thus, pursuant to this agreement, they specifically had no duty to disclose information about the sale negotiations to plaintiff. As plaintiff has still not alleged that he was "coerced, defrauded, or forced into signing this agreement," there remains "no basis for not concluding that this provision specifically eliminates any duty [defendants] might have had simply as a consequence of [their] fiduciary relationship with plaintiff." Id.
Additionally, I held that while "the federal and Pennsylvania securities laws impose a duty on companies to publicly disclose material information regarding their financial well-being, or lack thereof," plaintiff had "not alleged that the negotiations had become material to all shareholders — thereby imposing a duty of public disclosure on the defendant corporations — prior to plaintiff's resignation. Absent such allegations, the securities laws [does] not impose such a duty." Id. at *10. Plaintiff has still not made such an allegation. Thus, the federal and state securities laws did not impose a duty on the moving defendants to inform plaintiff or any other shareholder about the sale negotiations. Consequently, defendants' motion will be granted on this theory of liability for plaintiffs fraud count. 2. Material Misrepresentations
Pursuant to both § 10(b) of the federal law and § 401 of Pennsylvania law, information becomes "material" when there is "a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); see also Basic v. Levinson, 485 U.S. 224, 232 (1988) (applying the Northway rule in the § 10(b) context); GFL Advantage Fund, Ltd. v. Colkitt, 272 F.3d 189, 214 (3rd Cir. 2001) (citing Rosen v. Communication Serv. Group, Inc., 155 F. Supp.2d 310, 321 n. 14 (E.D. Pa. 2001) for the proposition that "Section 401 of the Pennsylvania Securities Act is modeled after Rule 10b-5 of the federal securities laws, and requires virtually the same elements of proof').
To the extent that plaintiff bases his breach of fiduciary duty claim (Count IV) on Costello and Charlton's omissions, the court's fraud analysis above would apply. Plaintiff alleges that Costello and Charlton had a duty as "officers, directors, and/or shareholders of Legalgard . . . to disclose the material facts regarding the negotiations and not to make affirmative misrepresentations." Third Amd. Compl. at ¶ 184. The Shareholders' Agreement, however, which governed defendants' fiduciary relationship with plaintiff, clearly stated that they had no duty to disclose information regarding the sale negotiations. Moreover, the state and federal laws do not impose such a duty in this case.
Plaintiff, however, argues that defendants are liable for aiding and abetting Legalgard's breach of fiduciary duty. In support of this proposition he cites Thompson v. Glenmede, 1993 U.S. Dist. LEXIS 7677 (E.D. Pa. June 8, 1993) and Stone Street Services, Inc. v. Daniels, 2000 WL 1909373 (E.D. Pa. Dec. 29, 2000). The plaintiffs in those cases, however, specifically articulated the alleged aiding and abetting not as a theory of fraud liability, but as an actual claim. As plaintiff has not presented a count of aiding and abetting a breach of fiduciary duty, it would be inappropriate for the court to now consider such a claim.
The Supreme Court of Pennsylvania has held that "[t]he elements of intentional misrepresentation are as follows: 1) A representation 2) which is material to the transaction at hand, 3) made falsely, 4) with the intent of misleading another into relying on it, 5) justifiable reliance on the misrepresentation, and 6) the resulting injury was proximately caused by the reliance." Bortz v. Noon, 729 A.2d 555, 560 (Pa. 1999).
In the instant case, defendants argue that plaintiff has not successfully alleged a false representation. Rather, they contend that the allegations contained in the complaint are more aptly characterized as omissions. Plaintiff, however, argues to the contrary that he has alleged that defendants made specific statements that were misrepresentations. In support of this contention, he points to two factually-based allegations contained in the complaint. While defendants' argument is persuasive that the first allegation is merely an omission, the second allegation does sufficiently state an affirmative material misrepresentation. Hence, defendants' motion will be denied as to defendant Costello, but granted as to defendant Charlton.
Plaintiff also cited his general allegation that "[defendants] intentionally or recklessly misled Dalicandro by . . . misrepresenting the nature of the negotiations with Examen and Policy Management to sell Legalgard." TAC ¶ 185. As this is nothing more than a "bald assertion" or "legal conclusion," the court need not credit it when deciding this motion. See In re Burlington Coat Factory Securities Litigation, 114 F.3d 1410, 1429-30 (3d Cir. 1997) (citations omitted) (stating this proposition in the context of a 12(b)(6) motion).
In his response to defendants' motion, plaintiff first directs the court's attention to the following statement contained in the complaint: "Costello and Charlton merely informed [plaintiff] that other businesses, but not Policy Management and Examen, might be interested in Legalgard." Third Amd. Compl. at ¶ 84. However, he also specifically alleges that the statement was mendacious "because it omitted the fact that both Examen and Policy Management were negotiating to merge with or purchase Legalgard." Id. at ¶ 85. Reading these allegations together, they are — as defendants argue — more aptly characterized as one for material non-disclosure rather than for misrepresentation. Defendants did not say that Policy Management and Examen were or were not interested in Legalgard; only that the other businesses were. See e.g., Savarese v. Davis, 36 Pa. D. C. 2d 63, 68-69 (Lehigh County, 1964) (holding that defendant's failure to state that "the costs of the sewerage were unpaid" did not convert the representation that "the premises had sewerage" into a misrepresentation; rather defendant might be liable for fraud based on non-disclosure if he had a duty to speak). As I have stated above, however, because defendants were under no duty to disclose information about the pending negotiations with plaintiff, their omission of those facts cannot form the basis of plaintiff's fraud claim. Moreover, no where in plaintiff's complaint or in his briefs does he allege that this statement was untrue. In other words, he does not allege other businesses were not interested in purchasing some aspect of Legalgard. Thus, this allegation cannot form the basis for plaintiff's fraud claim.
Defendants make the same argument with regard to plaintiffs second allegation of misrepresentation; namely, that "Costello specifically represented to [plaintiff] that Policy Management was only interested in doing joint marketing and joint business development with Legalgard." Id. at ¶ 86. This statement, however, is an alleged affirmative misrepresentation. The statement specifically indicates that Costello told him that the company's interest in Legalgard was only — i.e. limited to — joint marketing and business development. While Costello had no duty to speak and therefore could have remained silent, he allegedly chose to speak and in so doing misrepresented Policy Management's interest in Legalgard, which he knew was "purchasing Legalgard." Id. at ¶ 87. Thus, plaintiff has sufficiently alleged the first and third elements of fraud.
Plaintiff also alleged in his complaint that "Costello told Dalicandro that nothing further had proceeded with Examen subsequent to February 1998." Id. at ¶ 49. For the same reasons cited in the text accompanying this footnote, Costello's statement regarding the Examen negotiations may also form the basis for plaintiff's fraud count if untrue. Plaintiff alleges that Costello knew the negotiations between Examen and Legalgard had resumed in April or May 1998. Yet, he allegedly made affirmative representations to the contrary. Thus, even if the court had concluded that the allegation to which plaintiff drew my attention was not a misrepresentation, the court would still allow plaintiff's fraud count to proceed upon this allegation.
Alternatively, defendants argue that plaintiff has failed to allege that 1) Costello made this alleged misrepresentation with the intend to mislead plaintiff into resigning and selling shares or 2) plaintiff resigned and sold his share because "he believed that Policy Management was interested in only in joint marketing and business development with Legalgard and no longer had an interest in acquiring it." Defendants, however, are mistaken. Plaintiff specifically alleges that "[t]his misrepresentation was intended to mislead Dalicandro into believing that Policy Management had no interest in purchasing Legalgard." Id. at ¶ 89; see also id. at ¶ 95-96 ("Reliance and Legalgard, through Costello and Charlton, intentionally or recklessly concealed the negotiations with Examen and Policy Management so as to push Dalicandro into resigning from Legalgard and selling his share for an amount much less than they were worth. They did this in order to increase the amount of money paid to Reliance, Costello, and Charlton as shareholders in Legalgard."). Additionally, plaintiff alleges that had he "known of the negotiations with Examen and Policy Management, he would not have sold his 240, 750 shares." Id. at ¶ 103; see also id. at ¶ 106 ("[B]ut for the misrepresentations . . ., Dalicandro would have continued on as an employee of Legalgard once its business was sold to Policy Management. . . ."). Thus, as is evident from these allegations, plaintiff has successfully pled intent to defraud and reliance.
Def. Br. at 13.
The court offers no opinion regarding the eventually success or failure of plaintiff to prove that these allegations are in fact true. At this point in the proceedings, I must accept them as so being.
In sum, plaintiff may not proceed on any theory of fraud predicated on defendants' omissions as neither defendant had a duty to disclose information about the negotiations. As this is the only basis upon which plaintiff has alleged that Charlton defrauded him, defendants' motion on this count of the complaint with be granted with reference to that defendant. Plaintiff, however, has stated a claim of fraud against Costello on the theory that he made material misrepresentations regarding the negotiations for the sale of Legalgard's assets. For this reason, defendants' motion will be denied and plaintiff may proceed with his fraud claim against Costello on this basis.
Plaintiff additionally argues that defendants are liable for "their mere participation, direction, or cooperation with Legalgard in the fraudulent scheme." In support of this proposition, plaintiff cites Wicks v. Milzoco Builders, Inc., 470 A.2d 86 (Pa. 1983). In that case, the court, in an effort to distinguish between the two possible theories — namely, "piercing the corporate veil" and "the participation theory" — under which a director of a corporation may be individually liable for his actions, held that, pursuant to the latter theory, "[l]iability . . . attaches only where the corporate officer is an actor who participates in the wrongful acts." Id. at 90. Thus, plaintiff must allege facts demonstrating that the moving defendants were personally engaged in misfeasance. In other words, unless plaintiff can allege facts from which the court could hold defendants liable independent of their relationship with the company, the participation theory of liability is not available to him.
C. Count VI: Breach of Contract Against Costello and Charlton
In Pennsylvania, "[a] cause of action for breach of contract must be established by pleading (1) the existence of a contract, including its essential terms, (2) a breach of a duty imposed by the contract and (3) resultant damages." Corestates Bank, N.A. v. Captiously, 723 A.2d 1053, 1058 (Pa.Super. 1999) (citations omitted).
In the instant case, plaintiff alleges that on October 18, 1998, defendants agreed to extend the terms of the shareholders' agreement — pursuant to which an employee may sell his shares to the company upon leaving his job for the greater of the adjusted book value or $0.70 per share — to December 30, 2000. Defendants allegedly breached this agreement by insisting that plaintiff sign a new amendment, providing that an employee shareholder, such as plaintiff, would receive the lower of the book value or $0.10 per share upon termination of employment prior to June 10, 2000. Because the book value at the time was $0.10 per share, plaintiff left his job prior to two year anniversary of the original agreement — the date at which the agreement would expire — thereby receiving $0.70 per share. He alleges that as result of this breach, he received substantially less than he would have had he remained at his job after Policy Management purchased Legalgard's assets.
Defendants only argue that plaintiff did not suffer any damages as a result of the alleged breach. Specifically, they contend that, pursuant to the Shareholders' Agreement, plaintiff received $0.70 per share. Therefore, he cannot allege damages. Defendants, however, fail to grasp that, had the agreement been honored to extend the terms of the shareholders' agreement through December 31, 2000, as the parties agreed on October 16, 1998, plaintiff would have received a far greater sum than he did when he resigned in December of 1998. Thus, provided that 1) the original shareholders' agreement was a contract, which 2) the October agreement validly amended and which 3) defendants breached by demanding that plaintiff execute an additional amendment thereby altering the already amended agreement, plaintiff most certainly would have suffered damages. As this last point — seemingly the least vulnerable to dismissal — is the only one with which defendants concern themselves, their motion will be denied as to this count.
E. Count VII: Unjust Enrichment Against Costello, Charlton, and Kwasny
In Pennsylvania, "the elements of unjust enrichment [are described] as 'benefits conferred on defendant by plaintiff, appreciation of such benefits by defendant, and acceptance and retention of such benefits under such circumstances that it would be inequitable for defendant to retain the benefit without payment of value.'" Schenk v. K.E. David, Ltd., 666 A.2d 327, 328 (Pa.Super. 1995.) (quoting Wolf v. Wolf, 514 A.2d 901 (Pa.Super. 1986), overruled on other grounds, Van Buskirk v. Van Buskirk, 527 Pa. 218, 590 A.2d 4 (1991) and citing Burgettstown-Smith v. Langeloth, 588 A.2d 43 ( Pa. Super. 1991)).
In the instant case, defendants argue that plaintiff cannot allege both a breach of contract and unjust enrichment claim. In support of this proposition, they cite Halstead v. Motorcycle Safety Foundation, Inc., 71 F. Supp.2d 455 (E.D.Pa., 1999). The court in that case, however, clearly stated that "plaintiffs are free to pursue the alternative theories of recovery of breach of contract and unjust enrichment. . . ." Id. at 459. It is only "the finding of a valid contract [that] prevents a party from recovering for unjust enrichment as the measure of damages is limited to that which is provided for in the contract itself." Id. (emphasis added). Additionally, numerous courts within this circuit have reached the same conclusion. See Benigno v. Flatley, 2001 WL 1132211 at *1 (E.D. Pa. Sept. 13, 2001) ("A plaintiff may sue on alternative theories of recovery, including, breach of contract and unjust enrichment. If, upon evidence, a valid contract is found to exist, plaintiff will be precluded from recovery for unjust enrichment."); Gonzalez v. Old Kent Mortg. Co., 2000 WL 1469313 at *6 (E.D.Pa., Sept. 21, 2000)) (same); U.S. v. Kensington Hosp., 760 F. Supp. 1120, 1135 (E.D.Pa. 1991) (same). As there has as yet been no finding as to the existence of the contract, I may and will allow plaintiff to proceed with both claims.
Defendants also contend that plaintiff did not cause defendants to receive a benefit because, just like plaintiff, they were compensated on a per share value basis. In response, plaintiff argues that his shares were sold back to the company, thereby increasing the payment to defendants upon the sale of Legalgard's assets. He alleges that defendants were conferred a benefit "by their sharing of money that would have been paid to Dalicandro. . . ." Third Amd. Compl. at ¶ 203.
In short, at this stage of the proceedings, plaintiff may present both a breach of contract and unjust enrichment claim. Moreover, plaintiff has sufficiently alleged he conferred a benefit onto defendants. Thus, defendants' motion as to this claim will be denied.
Conclusion
In sum, because plaintiff had inquiry notice of Costello's role in the fraudulent scheme when he filed his first amended complaint and failed to investigate those storm warnings, his federal and state securities claims are time-barred as to Costello and judgment in favor of Costello will be granted with regard to these claims. The motion will be denied as to defendants Charlton and Kwasny with reference to the securities claims. Furthermore, the law of the case dictates that neither Costello nor Charlton had a duty to disclose information regarding negotiations for the sale of Legalgard. Consequently, they cannot be liable for their omissions, and plaintiff may not maintain a fraud or breach of fiduciary duty claim on this basis. As this is the only alleged basis for these claims against defendant Charlton, judgment will be granted in his favor on these claims. As, however, plaintiff alleges that Costello made material misrepresentations, defendants' motion will be denied as to Costello as to these claims. Defendants' motion will also be denied as to plaintiffs breach of contract and unjust enrichment claims as 1) plaintiff has alleged that he suffered damages and 2) may plead in the alternative. An appropriate order follows.
Order
___And now on this ___ day of January, 2004, upon consideration of the Motion for Judgment on the Pleadings of Dennis Costello, Edward Charlton, and Lawrence Kwasny (Docs. # 77, 87); plaintiff's opposition thereto (Docs. #83, 90); it is hereby ORDERED that defendants' motion is GRANTED in part and DENIED in part as follows:
1) With respect to Counts I, II, and V, JUDGMENT IS ENTERED IN FAVOR of Dennis Costello;
2) With respect to Counts III and IV, JUDGMENT IS ENTERED IN FAVOR of Edward Charlton and IN FAVOR of Dennis Costello on the claim of material omissions only;
3) The balance of the motion is denied.
4) A status conference is SCHEDULED for February 20, 2004 at 1:30 p.m. in Courtroom 14-B .