Philip Siegel v. Mark Goldstein ( 2022 )

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
______________
Nos. 20-3547 and 20-3550
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PHILIP T. SIEGEL, DDS,
Appellant
v.
MARK GOLDSTEIN, DDS; BRIAN SMITH, DMD;
JOSEPH MULLIGAN, DMD; SAMER ABDELSAMIE, DMD;
DELAWARE VALLEY MAXILLOFACIAL AND ORAL SURGERY, P.C.
______________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
(D.C. No. 2-19-cv-02890)
District Judge: Honorable Wendy Beetlestone
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Submitted Under Third Circuit L.A.R. 34.1(a)
February 7, 2022
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Before: GREENAWAY, JR., SCIRICA, and COWEN*, Circuit Judges.
(Opinion Filed: June 22, 2022)
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OPINION**
______________
*
The Honorable Robert E. Cowen assumed inactive status on April 1, 2022, after the
conference in this case, but before the filing of the opinion. This opinion is filed by a
quorum of the panel pursuant to 28 U.S.C. § 46(d) and Third Circuit I.O.P. Chapter 12.
**
This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not
constitute binding precedent.
GREENAWAY, JR., Circuit Judge.
In this appeal, Appellant Philip T. Siegel, DDS, seeks to undo the decision of an
arbitrator approving his former business partners’ cancellation of his shares in Delaware
Valley Maxillofacial and Oral Surgery, P.C. (“DVMOS”). Because Siegel entered into a
binding arbitration agreement to resolve legal claims with his former partners in
DVMOS, Mark Goldstein, DDS, Brian Smith, DMD, Joseph Mulligan, DMD, Samer
Abdelsamie, DMD (collectively with DVMOS, “Appellees”), we will affirm the order of
the District Court confirming the arbitration award. However, because all parties also
agreed that equitable claims would fall outside the scope of the arbitration agreement, we
will vacate the District Court’s order dismissing Siegel’s federal action and remand for
further proceedings on all claims that sound in equity.
I. BACKGROUND
This appeal arises out of a business dispute and subsequent arbitration between the
parties. In January 2003, Goldstein and Siegel co-founded Delaware Valley
Maxillofacial and Oral Surgery LLC (“DVMOS LLC”). Additional members
subsequently joined DVMOS LLC, and all members executed an operating agreement,
effective May 1, 2005. In April of 2016, DVMOS LLC was converted into a professional
corporation (“DVMOS”) at the recommendation of DVMOS LLC’s and Siegel’s
accountant, William Burns. The conversion entailed execution of a shareholders’
agreement (“Shareholders’ Agreement”) by Siegel and the other partners. At the time of
the conversion, each partner had an equal share in, and received equal distributions from,
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DVMOS. The Agreement provided that all shareholders would be licensed to render oral
and maxillofacial surgery services in Pennsylvania. Moreover, the Shareholders’
Agreement included an arbitration clause. The claims at issue in this action arise solely
from Shareholders’ Agreement.
In February 2019, Siegel’s partners discovered that his dentistry license had been
inactive since December of 2014, before the partners entered into the Shareholders’
Agreement. Siegel did not notify the other members that his license was inactive at the
time of execution of the Shareholders’ Agreement. Nevertheless, he continued to collect
his distributions1 pursuant to the 2005 operating agreement and the Shareholders’
Agreement.
The partners contacted Siegel to determine if he would be willing to be bought
out. The partners, however, were unable to come to an agreement concerning the terms
of a buyout. Instead, Appellees issued a notice of cancellation, cancelling Siegel’s shares
(and hence, all distributions) on the theory that the initial transfer of shares to him was
void ab initio due to his inactive status.
Procedural Background
On July 2, 2019, Siegel commenced this suit in the District Court, seeking an
injunction requiring Appellees to return his shares. The next day, Appellees initiated a
JAMS arbitration.
1
The distributions to each partner came about as a result of the number of shares each
held. Appellees argued that given Siegel’s inactive status he should not have received
any distributions beginning in April 2016 going forward.
3
In its arbitration demand, DVMOS sought:
(i) a declaratory award confirming that [Siegel’]s shares of [DVMOS] were
properly cancelled, under the . . . Shareholders’ Agreement, because he was
not licensed to perform dental services in Pennsylvania, and (ii) a monetary
award against [Siegel] for distributions received while he was not properly
licensed and, consequently, ineligible to be an owner of [DVMOS].
JA488. Siegel objected, arguing that his claims were equitable and thus were subject to
an arbitration exception in the Shareholders’ Agreement. After Siegel filed an amended
complaint, the District Court stayed the case pending conclusion of the arbitration
proceeding.
Arbitration commenced, and the Arbitrator determined that Siegel was precluded
from being a shareholder. Specifically, the Arbitrator reasoned that “[a]t the time the
[Shareholders’ Agreement] was signed [Siegel] knew he was not able to perform dental
services. While no one may have intended the conversion to preclude [Siegel] from
owning shares, it unfortunately did just that.” JA552. The Arbitrator further concluded
that the Appellees “were legally entitled to cancel the shares, however, not without
proper compensation.” JA553. The Arbitrator made the following conclusions as part of
the arbitration award:
1) [Appellees’] cancellation of [Siegel’s] shares was justified, and
[Siegel’s] shares are not reinstated.
2) [Siegel] is not entitled to a monetary award and [Siegel] is not required
to return any previous distribution.
3) Section 21 (d) of the Shareholder’s Agreement gives the Arbitrator sole
discretion whether to allocate to the non-prevailing party all or part of the
fees of the arbitrator and/or the reasonable fees and costs of the prevailing
party. I decline to award [Appellees] any fees or costs in this case.
4
Although DVMOS is the prevailing party, this was a close call and each
side will bear their own costs and attorney fees.
JA554.
Siegel then moved to vacate or modify the arbitration award or in the alternative
leave to file a second amended complaint. Specifically, he argued that the Arbitrator’s
ruling that his stock could not be reinstated should be vacated because it impermissibly
resolved his claim for equitable relief. In opposing this motion, Appellees cross-moved
to confirm the arbitration award. The District Court declined to address the parties’
cross-motions concerning the arbitration award, and instead granted Siegel leave to file a
Second Amended Complaint.
In his Second Amended Complaint, Siegel added several claims based on theories
of reformation and oppression of a minority shareholder. He also sought a declaratory
judgment requesting Appellees be estopped from cancelling his shares. Appellees in turn
moved to dismiss his Second Amended Complaint. The District Court then confirmed
the Arbitrator’s Award, granted Appellees’ motion to dismiss, and issued a memorandum
explaining the bases for the dismissal of Siegel’s complaint. Siegel timely appealed both
the order confirming the arbitration award and the order dismissing his Second Amended
Complaint.
Shareholders’ Agreement
Three of the provisions from the Shareholders’ Agreement are most relevant to
this appeal. The first is the “Qualified Shareholders” provision, which states that “no
shares shall be issued by the Corporation . . . except . . . to a person licensed to render the
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Services in the [Commonwealth].” JA68 ¶2(c)(i)). The provision further provides that
“[a]ny attempted issuance . . . in violation of this provision shall be void and ineffective
. . . .” Id. ¶2(c)(ii).
The second is the “Involuntary Transfer” provision. Broadly speaking, events
triggering an involuntary transfer fall into the following categories: (1) misappropriation
or disloyalty; (2) criminal conduct or convictions related to fraud or the practice of
dentistry; (3) suspension, revocation, or surrender of license related to professional
misconduct; (4) professional misconduct more generally; (5) an inability of the
corporation to purchase liability insurance at a certain price; and (5) an uncured breach of
the Shareholders’ Agreement.
If an involuntary transfer event occurs, the Shareholders’ Agreement dictates that
“such Shareholder shall be deemed a Transferring Shareholder and shall be deemed to
have sent a Sale Notice to the Purchaser offering to sell all of the Transferring
Shareholder’s Shares to the Purchaser for the Purchase Price.” JA72 ¶(4)(b)(i). The
“Purchase Price” is a defined term, setting the value of a share at fifty percent of
DVMOS’s gross receipts for the preceding twelve months multiplied by the
Shareholder’s proportional ownership interest in DVMOS.
Third, the Shareholders’ Agreement includes an arbitration provision, which
states:
The parties are agreeing that expedited arbitration shall be the
exclusive remedy to resolve any dispute or alleged breach relating to
this agreement, whether statutory or sounding in contract or in tort,
excepting (i) the enforcement of the restrictive covenants, (ii) other
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actions in equity, and (iii) actions with an amount in dispute of less
than $12,000.00.
JA78 ¶ 21(b) (emphasis added).
II. JURISDICTION AND STANDARD OF REVIEW
The District Court had jurisdiction pursuant to 28 U.S.C. §1332. We have
jurisdiction pursuant to 9 U.S.C. § 16(a)(1)(D) and 28 U.S.C. §1291.
In reviewing a district court’s order confirming an arbitration award, we review
that court’s factual findings for clear error, and its legal conclusions de novo. China
Minmetals Materials Imp. & Exp. Co., Ltd. v. Chi Mei Corp., 334 F.3d 274, 278 (3d Cir.
2003) (citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 947–48 (1995)).
We exercise plenary review over a district court’s grant of a motion to dismiss,
pursuant to Federal Rule of Civil Procedure 12(b)(6), for failure to state a claim. Grier v.
Klem, 591 F.3d 672, 676 (3d Cir. 2010). “[I]n deciding a motion to dismiss, all well-
pleaded allegations of the complaint must be taken as true and interpreted in the light
most favorable to the plaintiffs, and all inferences must be drawn in favor of them.”
McTernan v. City of York, 577 F.3d 521, 526 (3d Cir. 2009). To withstand a Rule
12(b)(6) “motion to dismiss, a complaint must contain sufficient factual matter, accepted
as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009) (internal quotation marks omitted).
III. DISCUSSION
Confirmation of the Arbitration Award
The Federal Arbitration Act (“FAA”) provides that:
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If the parties in their agreement have agreed that a judgment of the
court shall be entered upon the award made pursuant to the
arbitration, and shall specify the court, then at any time within one
year after the award is made any party to the arbitration may apply to
the court so specified for an order confirming the award, and
thereupon the court must grant such an order unless the award is
vacated, modified, or corrected as prescribed in sections 10 and 11
of this title.
9 U.S.C. § 9. The FAA further provides that an arbitration award may be vacated
“where the arbitrators exceeded their powers, or so imperfectly executed them that a
mutual, final, and definite award upon the subject matter submitted was not made.” 9
U.S.C. § 10(a)(4); see also Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662(2010).
In addition, the FAA provides that an arbitration award may be modified “[w]here
the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not
affecting the merits of the decision upon the matter submitted.” 9 U.S.C. § 11(b).
Pursuant to the Shareholders’ Agreement, the arbitration award should be
confirmed in so far as it resolves legal claims above a certain amount. Indeed, the
arbitration provision sets forth that arbitration is the exclusive remedy to resolve disputes
or breaches under the agreement unless a party brings forth a claim: (1) to enforce a
restrictive covenant; (2) that sounds in equity; or (3) is for damages less than $12,000.
In the arbitration, DVMOS brought legal claims. It sought a declaratory judgment
that it properly cancelled Siegel’s shares and money damages for the shares that were
disbursed. Siegel does not dispute that Appellees brought legal claims through the
arbitration proceedings. Instead, Siegel challenges the Arbitrator’s ruling declining to
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reinstate his shares. He contends that the Arbitrator’s ruling effectively determined his
equitable claim for breach of contract.
Upon review, however, the Arbitrator did not squarely address Siegel’s equitable
claims. Although it declined to reissue Siegel his shares, it did not make a determination
that Siegel was not entitled to equitable relief; rather, it simply decided the legal issues in
Appellees’ demand. Accordingly, Siegel has not set forth any valid basis to vacate,
modify or otherwise correct the arbitration award. See 9 U.S.C. § 9.
Motion to Dismiss
The District Court correctly observed that its task in resolving the motion to
dismiss “in essence involves a question of line-drawing” as to whether Siegel’s claims
were actions at law or in equity. JA20. However, we conclude that Siegel pleaded
several claims on the equity side of the line. In short, Siegel alleged that his ownership
interest in DVMOS was cancelled in violation of the Shareholders’ Agreement and
sought judgment returning his stake in this professional corporation. Because the
particulars of Siegel’s ownership interest leave him without an otherwise adequate
remedy at law, Siegel’s claims for equitable relief are not precluded solely on the basis of
the arbitration provision of the Shareholders’ Agreement.2
2
Our determination does not preclude application of the doctrine of collateral estoppel.
See Witkowski v. Welch, 173 F.3d 192, 199-200 (3d Cir. 1999). We leave it to the
District Court to determine whether collateral estoppel is applicable and, if so, what its
effect on Appellant’s surviving claims is.
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i. Breach of Contract
Pursuant to Pennsylvania law,3 breach of contract claims may sound in law or
equity. A determination as to whether a party brings a legal or equitable breach of
contract claim turns on the type of remedy sought. While a breach of contract claim for
monetary damages is an action at law, a breach of contract claim seeking equitable relief
is an action in equity. See, e.g., Aldrich v. Geahry, 80 A.2d 59, 61 (Pa. 1951) (contract
action for specific performance sounded in equity, rather than in law); Martindale
Lumber Co. v. Trusch, 681 A.2d 803, 805-06 (Pa. Super. Ct. 1996) (contrasting breach of
contract actions seeking monetary damages with those seeking equitable relief).
Siegel’s breach of contract claim sought equitable relief in the form of a
reissuance of his shares. The District Court concluded that Siegel’s claim had an
adequate remedy at law. It reasoned that the involuntary termination provision of the
Shareholders’ Agreement established the value of Siegel’s shares.
On the contrary, we conclude that Siegel’s ownership interest “has a peculiar
value to plaintiff incapable of being measured in damages in an action at law.” Aldrich,
80 A.2d at 61. The object of his complaint, therefore, is not for damages but for the
rights and privileges of ownership in DVMOS. His claim therefore sounds in equity, not
law, and is subject to the arbitration exception.
3
Here, the Shareholders’ Agreement identified Pennsylvania law as governing
interpretation of the agreement in its choice-of-law provision.
10
Given that the arbitration clause carves out breach of contract claims sounding in
equity, the District Court erred when it dismissed Siegel’s breach of contract claim on the
basis that it was required to be submitted in arbitration.
ii. Fiduciary Duty and Minority Shareholder Oppression
Pursuant to Pennsylvania law, claims for breach of fiduciary duty “sound[] in tort
and in equity.” Linde v. Linde, 220 A.3d 1119, 1147 (Pa. Super. Ct. 2019). The related
claim for minority shareholder oppression sounds in equity. Ford v. Ford, 878 A.2d 894,
905 (Pa. Super. Ct. 2005) (a “claim of oppressive conduct, like a claim of breach of
fiduciary duty, sounds in equity”) (internal quotation marks and citation omitted)).
The District Court concluded, and Appellees likewise argue, that Siegel’s claims
“[n]evertheless . . . do not fall within the carve out provision of paragraph 21(b) because
‘a plaintiff in a shareholder suit, as in any other suit, must lack an adequate legal remedy
before bringing his suit in equity.’” JA27 (citation omitted). But here, Siegel does not
have an adequate remedy at law because the buyout formula contained in the
Shareholders’ Agreement only contemplates a method to value shares if a shareholder is
required to sell. It does not contemplate damages for improperly depriving a shareholder
of his rights in a corporation, including the rights to: (1) inspect the corporate books and
records, 15 Pa. Cons. Stat. §1508, (2) to receive notice of and attend meetings of
shareholders, 15 Pa. Cons. Stat. §1704, or (3) to vote his shares, 15 Pa. Cons. Stat. §1758.
The District Court improperly granted the motion to dismiss as to this claim.
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iii. Declaratory Judgment
A declaratory judgment claim may sound in law or equity. Owens-Illinois, Inc. v.
Lake Shore Land Co., 610 F.2d 1185, 1189 (3d Cir. 1979); accord Geisinger Clinic v. Di
Cuccio, 606 A.2d 509, 521 (Pa. Super. Ct. 1992). “A workable formula that has been
developed is to determine in what kind of suit the claim would have come to court if
there were no declaratory judgment remedy.” Owens-Illinois, 610 F.2d at 1189 (citation
omitted).
Siegel seeks a declaratory judgment in two counts of the Second Amended
Complaint. In Count VIII, he seeks a declaration that he is a shareholder in good
standing and that cancellation of his shares was invalid. In Count XI, Siegel seeks a
declaratory judgment that his shares are equitably estopped from being cancelled. To the
extent that the inverted breach actions sound in equity, the District Court improperly
granted the motion to dismiss.
iv. Reformation
Pursuant to Pennsylvania law, “[m]utual mistake will afford a basis for reforming
a contract.” Zurich Am. Ins. Co. v. O’Hanlon, 968 A.2d 765, 770 (Pa. Super. Ct. 2009)
(quoting Holmes v. Lankenau Hosp., 627 A.2d 763, 767 (Pa. Super. Ct. 1993)). A
“mutual mistake occurs when the written instrument fails to properly set forth the true
agreement among the parties.” Id. (quoting Daddona v. Thorpe, 749 A.2d 475, 487 (Pa.
Super. Ct. 2000)). But, “[m]utual mistake exists . . . only where both parties to a contract
are mistaken as to existing facts at the time of execution.” Felix v. Giuseppe Kitchens &
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Baths, Inc., 848 A.2d 943, 948 (Pa. Super. Ct. 2004) (internal quotation marks, brackets,
omitted).
Here, all parties were not mistaken as to the status of Siegel’s license, the critical
existing fact. Indeed, Siegel knew that his license was inactive at the time he executed
the Shareholders’ Agreement. Siegel operated under no such mutual mistake.
Accordingly, Siegel’s reformation claim fails, and the District Court correctly dismissed
it.
IV. CONCLUSION
We will affirm the District Court’s order confirming the arbitration award. We
will vacate the District Court’s order dismissing Siegel’s complaint with prejudice and
remand for further proceedings on Siegel’s requests for equitable relief.
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