Harold C. Lampe, Jr V. , 665 F.3d 506 ( 2011 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
______________
No. 11-1819
______________
HAROLD C. LAMPE, JR.,
Debtor
Jestyn G. Payne, Esq. Custodian for
LL, a Minor,
Appellant
v.
Harold C. Lampe, Jr.
______________
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civ. No. 2-11-cv-00184)
Honorable Timothy J. Savage, District Judge
______________
Argued October 5, 2011
BEFORE: McKEE, Chief Judge, and FUENTES and
GREENBERG, Circuit Judges
(Filed: December 30, 2011)
______________
Barry W. Sawtelle (argued)
Kozloff Stoudt
2640 Westview Drive
P.O. Box 6286
Wyomissing, PA 19610-0000
Attorneys for Appellant
Corrine M. Samler
Paul J. Winterhalter (argued)
1717 Arch Street
Suite 4110
Philadelphia, PA 19103
Attorneys for Appellee
______________
OPINION OF THE COURT
______________
GREENBERG, Circuit Judge.
I. INTRODUCTION
Jestyn G. Payne, successor custodian for shares of stock
owned by L.L., a minor, appeals from an order of the District
Court affirming the Bankruptcy Court‟s order dismissing an
adversary proceeding that Payne brought against the debtor,
2
Harold C. Lampe, Jr. (“Harold”), the prior custodian for the
shares, and sustaining Harold‟s objections to Payne‟s proof of
claim. In the Bankruptcy Court, Payne sought to recover
$345,000 from Harold, claiming that Harold breached his
fiduciary duties owed to L.L. when he secured and retained that
sum in partial satisfaction of a judgment that he obtained against
WEL Management, Inc. (“WEL”), a family business of which
he was a director and in which he and L.L. were the
shareholders of record. In particular, Harold held one WEL
share and was the custodian for L.L. of nine WEL shares, the
remaining 90% of its outstanding shares. Despite the potentially
conflicting interests between his role both as a WEL director
and custodian of L.L.‟s shares on the one hand, and his status as
a creditor of WEL on the other, the District Court and the
Bankruptcy Court determined that Harold did not breach his
fiduciary duties either as a WEL director or as the custodian for
L.L.‟s shares when he secured the judgment and partially
obtained satisfaction for it from the sale of WEL‟s assets. For
the following reasons, we will reverse.
II. FACTS AND PROCEDURAL HISTORY
A. The Lampe Family Businesses
In approximately 1983, Harold, a paper salesman for a
company not involved in this case, wrote a book about problems
associated with the use of paper in commercial printing
operations. About two years later, Harold and his son William
Lampe (“William”) started Paper Complaints, Inc. (“PCI-1”), a
3
Pennsylvania corporation, to market Harold‟s book and to
provide consulting services to the printing industry. Harold and
William were PCI-1‟s sole shareholders. After they formed
PCI-1, Harold continued to work as a paper salesman while
William ran PCI-1‟s day-to-day operations. Between 1985 and
1991, Harold made loans to PCI-1 to assist its business, either
by writing checks to PCI-1 or paying bills on its behalf.
Although there were no written agreements memorializing the
terms of the loans, Harold testified in the Bankruptcy Court that
he and William agreed that PCI-1 would repay the loans with
around nine or ten percent interest.
Around 1985 William married Theresa Lampe
(“Theresa”) and during the marriage, L.L. was born. In 1991
William told Harold that Theresa wanted to start a new
company, Printing Consulting, Inc. (“PCI-2”), that Theresa and
William would own equally, to replace PCI-1. Harold agreed to
the arrangement on the condition that the loans he had made to
PCI-1 were repaid. In 1992, as agreed, PCI-1 ceased operating
and William and Theresa formed PCI-2, another Pennsylvania
corporation to take its place. Nevertheless, Harold‟s loans were
not repaid. PCI-2 engaged in the same kind of business as PCI-
1 but it differed to the extent that it focused more on consulting
services than on selling Harold‟s book. Between 1991 and
2003, Harold made loans to PCI-2, both to help with the
formation of the company and with its ongoing operations. As
had been the case with Harold‟s loans to PCI-1, there was no
documentation evidencing his loans to PCI-2. Harold testified
at the adversary proceeding, however, that he made the loans
with the understanding that, like his loans to PCI-1, they would
be repaid at nine or ten percent interest. In total, Harold lent
4
almost $300,000 to PCI-1 and PCI-2.
In addition to forming PCI-2, between 1991 and 2003
William and Theresa formed or acquired a number of other
closely-held Pennsylvania corporations as well as substantial
real estate holdings. As significant here, in 1991 William and
Theresa formed WEL to provide a variety of services to the
couple‟s other businesses. William, Theresa, and Harold were
WEL‟s directors. WEL made intercompany financial transfers,
provided accounting services to PCI-2, and made investments.
Theresa was primarily responsible for running WEL and served
as its president, while William devoted his time to PCI-2 and
GTP Plastics, another company that he and Theresa owned. As
we stated above, WEL issued one share of stock to Harold
around the time that it was formed,1 and, in addition, issued a
certificate dated January 14, 1993—soon after L.L.‟s birth—that
certified that it had issued nine shares of stock to Harold as
custodian for L.L. under the Pennsylvania Uniform Gifts to
Minors Act, the predecessor to the Pennsylvania Uniform
Transfers to Minors Act.
B. Harold‟s Lawsuits and Judgment Against WEL
1
According to William, the stock in WEL was issued to Harold
because when William and Theresa formed that corporation
neither “could really take ownership in anything based on the
workouts that we were dealing with [with a creditor] . . . so . . .
we put the shares in with [Harold.]” App. at 239. It seems
evident, however, that William and Theresa regarded themselves
as the real owners of WEL.
5
Eventually Harold came to believe that WEL was using
and managing some of the money he was lending to PCI-2.2
The evidence in the Bankruptcy Court adversary proceeding
showed that PCI-2 made significant payments to WEL marked
as “loans,” but there was no evidence that WEL ever repaid
PCI-2 for any loans. Notably, the Bankruptcy Court found that
PCI-2 transferred income to WEL for the purpose of making
payments to Royal Bank on a loan that the bank made to a
Lampe company, apparently GTP Plastics.3
In September of 2002, Harold filed a state court action
against WEL, PCI-2, William, Theresa, and several other
entities, seeking repayment of his loans. Theresa retained
separate counsel to represent her and WEL in this litigation.
Harold, however, dismissed the 2002 lawsuit without prejudice.
At the adversary proceeding, Harold offered several reasons to
the Bankruptcy Court explaining why he dismissed the 2002
lawsuit, including one explanation that Harold‟s lawyer was “in
over her head,” and another that William told him that the
lawsuit was interfering with divorce proceedings then pending
between Theresa and him. App. at 208.
On December 8, 2003, Harold and William held a WEL
2
The loans to PCI-2 were separate from a loan that Harold
claims he made to WEL.
3
We find the circumstances surrounding the bank loan to be
unclear, but we believe that GTP Plastics was the obligor on the
bank loan. In any event, our result does not depend on the
details of the loan.
6
directors‟ meeting to remove Theresa as its president though
they did not remove her as a director at that time. Harold
testified that he called the meeting because Theresa had
defaulted on all of WEL‟s bank loans and he and William
needed to regain access to company records. The Bankruptcy
Court found that “there is no evidence in the record that
[Harold] agreed to vote Theresa out as President of WEL so that
he could obtain a judgment against WEL for the loans that had
[been] made to [PCI-1] or [PCI-2].” 4 App. at 35.
On May 28, 2004, Harold filed a second loan repayment
lawsuit against WEL and PCI-2 in the Court of Common Pleas
of Berks County, Pennsylvania. Harold alleged in this action
that PCI-2 owed him over $800,000, consisting of nearly
$300,000 in loan principal and over $500,000 in interest
calculated at ten percent per year. Harold asserted that he also
had lent WEL $31,000 by borrowing from his personal line of
credit and that WEL now owed him over $96,000, a figure that
included accrued interest. Though Harold acknowledges that
he had made the bulk of the loans to PCI-2, as we have indicated
he claimed that William and Theresa diverted PCI-2‟s funds to
WEL and thus PCI-2‟s and WEL‟s funds were commingled. He
4
Though we do not make a finding that Harold sought to remove
Theresa as president of WEL so that he could obtain a judgment
against that corporation, we point out that, contrary to what the
Bankruptcy Court seemed to believe, it is reasonable to draw an
inference that he sought to remove Theresa for that precise
purpose. After all, he knew that she had contested his original
action and thus he had reason to believe that she would oppose
his second action as well.
7
therefore contended that PCI-2 and WEL were alter egos so that
the court should pierce the corporate veil between them and
regard them as a single entity. William, who by this time was
running WEL‟s affairs, accepted service of process in Harold‟s
action on behalf of both PCI-2 and WEL, but he did not take any
action to defend either corporation in the case. In the adversary
proceeding, William testified that he did not defend the
corporations against the lawsuit “because there was no means
[by] which even [to] try to defend it. There was no money.”
App. at 254.
Ultimately, Harold obtained default judgments in the
state court against PCI-2 and WEL in the amounts of
$1,107,550.09 and $1,204,439.12, respectively. Though
William has contended otherwise, the Bankruptcy Court
believed that Theresa was not aware of the case when Harold
initiated the Berks County lawsuit and did become aware of it
until late in 2004 after Harold obtained the judgments. She
testified in the Bankruptcy Court that if she had known about
Harold‟s lawsuit, she would have hired counsel separately to
defend against it. This testimony seems credible because she
had retained counsel to defend against Harold‟s earlier action.
On March 25, 2005, Harold commenced execution
proceedings on his judgment against property that WEL owned
on Reading Avenue in Boyertown, Pennsylvania, and on July 8,
2005, Harold purchased the parcel at a sheriff‟s sale.5 He then
5
Payne contends that the execution against the Reading Avenue
property appropriated all of WEL‟s assets as he states that “[t]he
sale [was of] WEL‟s only assets.” Appellant‟s br. at 17.
8
resold the property for $345,000, and retained approximately
$320,000 in net proceeds. Thus, his judgment was partially
satisfied.6
C. The Present Litigation
On August 6, 2008, by order of the Court of Common
Pleas of Berks County, Orphan‟s Court Division, Payne
Therefore, according to Payne, Harold converted the assets of
WEL to himself, leaving WEL “a worthless entity and an empty
shell.” Id. The Bankruptcy Court‟s findings that “WEL still
owned other properties at this time” contradicts this contention.
App. at 47. Overall the uncertainty as to the identification of
WEL‟s assets makes it unclear what WEL was worth in March
2005 or the share of its assets that the Reading Avenue property
constituted. It is, however, clear that L.L. through her
ownership of WEL shares had a significant indirect financial
interest in that property that its sale price demonstrated was
valuable.
6
We are treating the proceeds of the resale rather than the lesser
amount for which Harold acquired the property at the sheriff‟s
sale as a partial satisfaction of the judgment because Harold
apparently regards the proceeds of the resale in that light. We
are aware that arguably in a legal sense only the proceeds of the
sheriff‟s sale itself should be treated as having satisfied the
judgment but for purposes of this opinion it is immaterial which
sale price is regarded as having partially satisfied the judgment.
9
succeeded Harold as custodian for L.L‟s shares in WEL.7 After
conducting an investigation, Payne concluded that Harold
wrongfully deprived L.L. of the value of her shares when he
sued WEL and secured a judgment against it and then obtained
partial satisfaction of the judgment from a sale of its assets.
On October 24, 2008, Payne, as custodian for L.L.‟s
shares, commenced an action in the Berks County Court of
Common Pleas against Harold, William, WEL, and other Lampe
family businesses. This lawsuit included claims against Harold
for breach of his fiduciary duties as the previous custodian for
L.L.‟s shares and as a WEL director, alleging that Harold
engaged in self-dealing and other malfeasance when he sued
WEL and secured partial satisfaction of the judgment that he
obtained from the sale of its assets, particularly to the extent that
it was PCI-2 that was the obligor on the debt owed Harold.
Payne stated that Harold‟s allegation in his 2004 litigation that
led to the judgment against WEL that WEL and PCI-2 were alter
egos was a sham. He further contended that he could
demonstrate that if the officers and directors of WEL had
exercised reasonable care, they could have defended WEL
successfully against Harold‟s case insofar as Harold sought to
hold WEL liable for his loans to PCI-2. It is obvious that the
recognition of WEL and PCI-2 as alter egos was significant for,
as WEL‟s ownership of the Reading Avenue property
demonstrated, WEL owned substantial assets, unlike PCI-2.
On December 4, 2008, less than two months after Payne
7
The parties do not set forth the details of the proceedings
leading to Payne‟s appointment as the custodian.
10
initiated his litigation, Harold filed a Voluntary Petition for
Relief under Chapter 11 of the Bankruptcy Code in the
Bankruptcy Court that automatically stayed Payne‟s Berks
County litigation.8 See 11 U.S.C. § 362. In his schedules in the
bankruptcy case, Harold listed Payne as a creditor with a
disputed claim in the amount of $345,000. On January 15,
2009, Payne filed an unsecured claim in the bankruptcy case for
$500,000 and, on the same day, he commenced an adversary
proceeding largely tracking his stayed Berks County action. The
adversary complaint sought: (1) a judgment in the amount of
$345,000 against Harold; (2) the allowance of a claim in the
same amount based on the judgment that Payne sought; and (3) a
determination that the debt underlying the claim was not
dischargeable because Harold engaged in fraud or defalcation
while acting in a fiduciary capacity. See 11 U.S.C. § 523(a)(4).
Harold filed objections to Payne‟s proof of claim and contended
that the claim was not entitled to be treated as prima facie valid
under Federal Rule of Bankruptcy Procedure 3001(c) and (f).
Harold predicated this contention on the circumstance that the
proof of claim did not include any attachments or factual
explanation for the claim other than a generalized allegation that
Harold had engaged in “fraud and breach of fiduciary duties.”
App. at 48.
The Bankruptcy Court consolidated the adversary
proceeding and Harold‟s objections to Payne‟s proof of claim
and held a bench trial in the consolidated proceedings on April 9
and 12, 2010. On November 19, 2010, the Court issued an
8
Payne unsuccessfully sought relief from the stay so that he
could pursue the Berks County case.
11
opinion and order upholding Harold‟s objection to Payne‟s
claim and entering judgment on the adversary complaint in
Harold‟s favor.
At the threshold of its opinion, the Bankruptcy Court
concluded that Payne‟s proof of claim was not entitled to prima
facie validity as it agreed with Harold that Payne did not file
documentation to establish his connection to Harold or to
support the claim. The Court also noted:
In any event, even if Payne‟s claim was given
prima facie effect, the Court would rule in the
same manner on the Objection. The Debtor
[Harold] provided evidence which refutes Payne‟s
contention that he breached his fiduciary duties.
Moreover, there is no evidence that the debtor
committed fraud.
App. at 50 n.28. In addressing the substance of the claim, the
Bankruptcy Court framed the issues as follows:
In order to find that Payne has a claim against the
estate in the amount of $345,000, the Court must
find, by a preponderance of the evidence, that: (i)
[Harold] was the custodian of nine (9) shares of
stock in WEL for his granddaughter, [L.L.]; and
(ii) that [Harold] breached his fiduciary duty to
[L.L.] in his role as a director of WEL or as the
custodian for her of her WEL stock.
App. at 50. The Court determined that Harold was the custodian
12
for L.L.‟s shares when he obtained the judgment that led to the
sale of the Reading Avenue property and he was aware of the
custodianship.9 Harold does not challenge those findings on this
appeal. The Court thereafter focused its discussion on the issue
of whether Harold breached his fiduciary duties under
Pennsylvania law.
The Bankruptcy Court began its breach of fiduciary duty
analysis by noting that as a WEL director Harold owed the
corporation10 the familiar fiduciary duties of care and loyalty.
9
In the Bankruptcy Court Harold argued that L.L. did not own
the nine WEL shares because: (1) the Pennsylvania Uniform
Gift to Minors Act did not exist when the shares were issued to
her, (2) he did not consent to being the custodian for the shares,
and (3) at relevant times William and Theresa held themselves
out either as sole or co-equal shareholders of WEL. The
Bankruptcy Court did not find any of these arguments
persuasive and concluded that Harold was the custodian of the
shares.
10
Under Pennsylvania law, a director ordinarily owes his
fiduciary duties to the corporation rather than to its individual
shareholders. 15 Pa. Cons. Stat. Ann. § 517 (West 2011); see
In re Insulfoams, Inc., 184 B.R. 694, 703 (Bankr. W.D. Pa.
1995). After noting that Harold did not object, the Bankruptcy
Court accepted Payne‟s characterization of the adversary
proceeding as a shareholder‟s derivative action. Accordingly,
Payne stands in the shoes of WEL for purposes of his breach of
fiduciary duties claim, and we must analyze the question of
whether the corporation would have such a claim against
13
See 15 Pa. Cons. Stat. Ann. §§ 512(a), 1712 (West 2011);
Anchel v. Shea, 762 A.2d 346, 357 (Pa. Super. Ct. 2000). Next,
after stating that the test for liability for breach of fiduciary duty,
but not distinguishing between the duties of care and loyalty, is
whether a director was unjustly enriched by his actions, the
Court concluded that Harold was not unjustly enriched by the
sale of the Reading Avenue property and his retention of the
proceeds of the sale because the Court believed that Harold‟s
judgment was based on a legitimate claim against WEL. Thus,
the Court indicated that “[i]n seeking a judgment against WEL
for his loans and in executing on that judgment against real
property which WEL owned, [Harold] exercised his right to
obtain what he was validly owed.” App. at 46. See Seaboard
Indus., Inc. v. Monaco, 276 A.2d 305, 309 (Pa. 1971). Though
the Court held that Harold also owed L.L. fiduciary duties under
the Pennsylvania Uniform Transfers to Minors Act, see 20 Pa.
Cons. Stat. Ann. § 5312 (West 2011), it concluded that he did
not breach those duties because, as it held with respect to
Harold‟s duties to WEL, he “exercised his right to obtain what
he was validly owed.” App. at 46. Thus, the Court entered an
order dismissing Payne‟s adversary proceeding and upholding
Harold‟s objections to Payne‟s proof of claim.11
Harold.
11
Having granted the objection, the Bankruptcy Court did not
address the issue of dischargeability under 11 U.S.C. § 523(a)(4)
as there was no debt to discharge. We thus are perplexed by
Payne‟s argument that “[t]he bankruptcy court and the district
court erred in finding that [L.L.‟s] claims against Harold were
14
Payne appealed to the District Court but it affirmed and
in doing so adopted the Bankruptcy Court‟s reasoning. Payne
then appealed to this Court.
III. JURISDICTION AND STANDARD OF
REVIEW
The Bankruptcy Court had jurisdiction under 28 U.S.C.
§§ 157 and 1334, the District Court had jurisdiction under 28
U.S.C. § 158(a), and we have jurisdiction pursuant to 28 U.S.C.
§ 1291 and 28 U.S.C. 158(d). We exercise plenary review of the
District Court‟s order and, like that Court, apply a clearly
erroneous standard of review to the Bankruptcy Court‟s factual
findings and review its conclusions of law de novo. In re
Siciliano, 13 F.3d 748, 750 (3d Cir. 1994). In effect, we are
reviewing the Bankruptcy Court‟s disposition of this case.
IV. DISCUSSION
A. Burdens of Proof for an Objection to a
Proof of Claim
dischargeable.” Appellant‟s br. at 18. Though as a practical
matter there may not be a difference between a holding that
there is no debt as the Court held in the adversary proceeding,
and a holding that a debt is dischargeable, they simply are not
the same thing.
15
Payne argues that the Bankruptcy Court erred in holding
that his proof of claim was not entitled to prima facie validity.
We agree. “The burden of proof for claims brought in the
bankruptcy court . . . rests on different parties at different
times.” In re Allegheny Int‟l, Inc., 954 F.2d 167, 173 (3d Cir.
1992). Under section 502(a) of the Bankruptcy Code, a proof
of claim “is deemed allowed, unless a party in interest . . .
objects.” 11 U.S.C. § 502(a). Bankruptcy Court Rule 3001(f)
provides: “A proof of claim executed and filed in accordance
with these rules shall constitute prima facie evidence of the
validity and the amount of the claim.” Therefore, a proof of
claim that alleges sufficient facts to support liability satisfies the
claimant‟s initial obligation to proceed, after which the burden
shifts to the objector to produce sufficient evidence to negate the
prima facie validity of the filed claim. Allegheny Int‟l, 954 F.2d
at 173-74. Nevertheless, the claimant always has the burden of
persuasion in a contested proceeding. Id. at 174.
Payne takes issue with the Bankruptcy Court‟s conclusion
that his proof of claim was subject to Bankruptcy Rule 3001(c).
That rule provides:
When a claim, or an interest in property of the
debtor securing the claim, is based on a writing,
the original or a duplicate shall be filed with the
proof of claim. If the writing has been lost or
destroyed, a statement of the circumstances of the
loss or destruction shall be filed with the claim.
We agree with Payne that Rule 3001(c) was inapplicable to his
claim inasmuch as he did not base the claim on a writing, but
16
rather advanced his claim on what are essentially state law tort
principles. See Restatement (Second) of Torts § 874 (1979)
(“One standing in a fiduciary relation with another is subject to
liability to the other for harm resulting from a breach of duty
imposed by the relation.”). We reach this conclusion because
even though we have not addressed comprehensively the
meaning of “writing,” and Rule 3001(c) does not define that
term, courts have observed that the rule only applies when a
writing created the purported obligation and is not applicable
merely because a document might play some role in establishing
the claim. See In Re Los Angeles Int‟l Airport Hotel Assoc.,
106 F.3d 1479, 1480 (9th Cir. 1997) (“Rule 3001(c) is invoked
where the obligation itself, and not its consequent enforcement,
is based upon a writing.”); In re Fuller, 204 B.R. 894, 898
(Bankr. W.D. Pa. 1997) (holding that a claim based on an IRS
tax lien was not “based on a writing,” but rather on federal
statutes).
Harold argues that Payne based his claim on multiple
writings, including Payne‟s earlier state-court complaint,
documents relating to the sheriff‟s sale of the Reading Avenue
property, and the shareholder‟s certificate establishing Harold‟s
custodianship for L.L.‟s nine shares. While these documents
have evidentiary value in establishing Payne‟s claim, they do not
demonstrate that Harold engaged in unlawful conduct and we
see no way to hold that they created Harold‟s obligation. If we
adopted Harold‟s argument with respect to the scope of Rule
3000(c) we would subject every claim in which a writing could
play any role to the requirements of that rule. The rule is meant
to “provide the debtor with fair notice of the conduct,
transaction, and occurrences that form the basis of the claim.”
17
In re O‟Brien, 440 B.R. 654, 662 (Bankr. E.D. Pa. 2010)
(quoting In re Sandifier, 318 B.R. 601, 611 (Bankr. M.D. Fla.
2004)) (internal quotation marks omitted). Clearly, Harold had
that notice. We are satisfied that within the context of Rule
3000(c) the writings here cannot be equated functionally to, for
example, a promissory note on which a debtor is the obligor.
Therefore, inasmuch as we conclude that Payne‟s proof of claim
was not “based on a writing,” he was not required to attach
documentation to the claim, and thus his claim was entitled to
prima facie validity. See In Re Los Angeles, 106 F.3d at 1480.12
B. Harold‟s Duties as a WEL Director
Payne‟s next assertion of error is that the Bankruptcy
Court erred in its determination that Harold did not breach his
12
Although we conclude that Payne‟s claim was entitled to
prima facie validity, even if we treated his claim as an ordinary
civil complaint our result on this appeal would not differ from
that we reach. Consequently, though we reach an opposite result
on the merits of this case from that of the Bankruptcy Court, we
follow its approach in not predicating its conclusion on a
presumption when it explained that “even if Payne‟s claim was
given prima facie effect, the Court would still rule in the same
manner on the objection.” App. at 50 n.28. We take this
approach because though there are many facts in dispute in this
case the facts that we regard as controlling are not in dispute and
we are resolving the case through the application of legal
principles. Thus, this case does not turn on the prima facie
validity of Payne‟s claim.
18
fiduciary duties as a WEL director. “The basic federal rule in
bankruptcy is that state law governs the substance of claims,
Congress generally having left the determination of property
rights in the assets of a bankrupt's estate to state law.” Raleigh
v. Ill. Dep‟t of Revenue, 530 U.S. 15, 20, 120 S.Ct. 1951, 1955
(2000) (internal citation and quotation marks omitted).
Section 512 of Pennsylvania‟s Business Corporation Law
states:
A director of a domestic corporation shall stand in
a fiduciary relation to the corporation and shall
perform his duties as a director . . . in good faith,
in a manner he reasonably believes to be in the
best interests of the corporation and with such
care, including reasonable inquiry, skill and
diligence, as a person of ordinary prudence would
use under similar circumstances.
15 Pa. Cons. Stat. Ann. § 512(a); see also 15 Pa. Cons. Stat.
Ann. § 1712(a). A director‟s duty of care requires him to
“discharge duties to the corporation with the same diligence,
care, and skill which ordinary prudent persons exercise in their
personal affairs; failure to exercise such care renders any
corporate director liable for resulting corporate losses.” In re
Main, Inc., 239 B.R. 281, 291 (Bankr. E.D. Pa. 1999). A
director also owes a corporation a second duty, a duty of loyalty,
which requires him in dealing with the affairs of the corporation
to promote the interests of the corporation rather than his own
interests. See Anchel, 762 A.2d at 357; Fitzpatrick v. Shay, 461
A.2d 243 (Pa. Super. Ct. 1983).
19
1. Duty of Care
The Bankruptcy Court rejected Payne‟s claim predicated
on Harold‟s alleged breach of his duty of care as it concluded
that because Harold had not been unjustly enriched by his
actions, he could not be liable on the basis of breach of fiduciary
duty. In this regard, the Court concluded that “the test for
liability for breach of fiduciary duty is whether a director was
unjustly enriched by his actions.” App. at 54. We think,
however, that the Court‟s conclusion misapplied Pennsylvania
case law as we are satisfied that, although when there is a breach
of fiduciary duty a culpable fiduciary well may have been
unjustly enriched, the party charging the fiduciary with breach
of duty need not always show that the fiduciary has been
unjustly enriched by his conduct.
At the outset of our duty of care discussion we quote
from a leading Pennsylvania Supreme Court decision in which
that court focused on unjust enrichment. We start at this point
because, as we have indicated, the Bankruptcy Court believed
that the absence of such enrichment was critical in this case. In
that decision, Bailey v. Jacobs, 189 A. 320 (Pa. 1937), the
Supreme Court explained:
Directors and officers occupy toward stockholders
what is commonly characterized as a fiduciary
relationship. They must act in the utmost good
faith, and cannot deal with the funds and property
of the corporation, nor utilize the influence and
advantage of their offices, for any but the
common interest. If they make a personal profit
20
through the use of corporate assets, they must
account for it to the stockholders. It is immaterial
that their dealings may not have caused a loss or
been harmful to the corporation; the test of
liability is whether they have unjustly gained
enrichment.
Id. at 324. Although after Bailey courts applying Pennsylvania
law have continued to consider whether there has been unjust
enrichment when certain breach of loyalty claims are advanced,
the courts have not required a showing of unjust enrichment in
every case involving the related but distinct claim of breach of
fiduciary duty predicated on the fiduciary‟s lack of due care.
See In re Main, 239 B.R. at 290 (holding that corporate directors
breached their fiduciary responsibilities because they failed to
show that the transactions were in the best interests of the
company, without addressing whether those directors were
unjustly enriched). It is logical that Bailey should not be applied
in cases involving breach of care claims as that case dealt with
the misappropriation of a business opportunity and a director
certainly can breach his fiduciary duties including the duty of
care by other conduct. Thus, well-established corporate law
recognizes that a director can breach his duty of care by
mismanaging a corporation to its detriment even though he does
not obtain any benefit from his mismanagement. See Selheimer
v. Manganese Corp. of Am., 224 A.2d 634, 647 (Pa. 1966)
(holding directors liable to the corporation for losses caused by
their “negligent and wasteful conduct” in expending undue
corporate resources on an unprofitable manganese oxide plant).
Payne contends that Harold breached his duty of care as a
21
WEL director because he did not cause WEL to retain counsel
and defend itself against his 2004 lawsuit that resulted in the
judgment against WEL. Harold counters by invoking the
business judgment rule. The business judgment rule, however,
only insulates a director from liability for decisions made:
(1) in good faith; (2) where the director or officer
is not interested in the subject of the business
judgment; (3) is informed with respect to the
subject of the business judgment to the extent he
reasonably believes to be appropriate under the
circumstances; and (4) rationally believes that the
business judgment in question is in the best
interests of the corporation.
Viener v. Jacobs, 834 A.2d 546, 557 (Pa. Super. Ct. 2003). In
this case, Harold undoubtedly was “interested in the subject of
the business judgment” and was engaging in self-dealing
conduct when he sought to satisfy his judgment from the assets
of WEL and failed to take any steps to procure an attorney for
WEL to defend against his suit. Accordingly, the presumption
afforded by the business judgment rule does not apply to his
actions in this case. See 15 Pa. Cons. Stat. Ann. § 1716(b)
(West 2011) (“Absent breach of fiduciary duty, breach of good
faith or self-dealing, actions taken as a director shall be
presumed to be in the best interests of the corporation.”).
After considering the facts of the case, including the
Bankruptcy Court‟s findings of historical facts, which we
accept, we hold that Harold breached his duty of care as a WEL
22
director.13 Our conclusion does not depend on a showing that he
was unjustly enriched at WEL‟s expense though, in fact, as we
will explain, that may have been the case. Harold protests that
he did not shoulder the duty to defend WEL alone, and that
William could have hired an attorney to defend it.14 Even if this
is so, William‟s duties as a WEL director are not at issue here;
Harold had a duty of care independent of any duty William
owed with respect to WEL. See Seaboard Indus., 276 A.2d at
309 (“[D]irectors and officers of a corporation are jointly as well
as severally liable for mismanagement, willful neglect or
misconduct of corporate affairs . . . .”). Though it might seem
13
We are aware that the Bankruptcy Court indicated that Harold
“was, by far, the most credible and convincing witness.” App.
at 18. Though the record can be read to support a conclusion
that in one important respect Harold‟s testimony might not have
been completely credible, see supra note 4 and the
accompanying text, we nevertheless will accept the Court‟s
assessment but that assessment does not affect our result.
14
Though, as we noted above, William contended otherwise, the
Bankruptcy Court believed that Theresa, although also a WEL
director, did not find out about the 2004 lawsuit and default
judgment until late 2004. Thus, she could not have defended
WEL in the case when Harold filed it, though she might have
sought to reopen the case when she became aware of it after the
judgment was entered. However, to the best of our knowledge
she did not take any action to challenge the judgment he
obtained. But, as we have indicated with respect to William‟s
inaction, that circumstance does not absolve Harold from
liability as he owed an independent duty of care to WEL.
23
odd that Harold should have been expected to take steps to
defend against a lawsuit that he initiated, he was obligated to do
exactly that at least to the extent of attempting to obtain an
attorney to represent WEL in the case. See 15 Pa. Cons. Stat.
Ann. § 512(a) (a director must discharge his duties after
“reasonable inquiry,” and must exercise “reasonable . . . skill
and diligence.”). Nevertheless, Harold made no effort to have
WEL obtain an attorney to attempt to stave off a default
judgment against WEL of over $1 million and he did nothing to
ensure that WEL‟s interests were represented at the sheriff‟s
sale of the Reading Avenue property.
Under Pennsylvania law, a director is liable to the
corporation for breaching his duty of care for “losses which
were proximately caused by the negligent and wasteful conduct”
at issue. See Selheimer, 224 A.2d at 647. Proximate causation
is defined as “a wrongful act which was a substantial factor in
bringing about the plaintiff‟s harm.” Dudley v. USX Corp., 606
A.2d 916, 923 (Pa. Super. Ct. 1992) (citations omitted), see
Restatement (Second) of Torts § 431 (1965). Whatever the
merits of Harold‟s 2004 lawsuit, he did nothing to protect
WEL‟s interests either in connection with the lawsuit or the sale
of the Reading Avenue property.15 Though we cannot be certain
15
Harold implies that the Rooker-Feldman doctrine forecloses
any inquiry into the 2004 litigation. That doctrine “is implicated
when, in order to grant the federal plaintiff the relief sought, the
federal court must determine that the state court judgment was
erroneously entered or must take action that would render that
judgment ineffectual.” See In re Madera, 586 F.3d 228, 232 (3d
Cir. 2009) (internal quotation marks omitted). However, the
24
of what the outcome would have been if an attorney had
defended WEL against Harold‟s action, we see no escape from
the conclusion that, by permitting a default judgment to be
entered against WEL on which there was execution, Harold
contributed to the reduction of the value of the corporation.16
We reach our conclusion even though we accept the Bankruptcy
Court‟s finding that Harold by his lawsuit was seeking to
recover a valid debt on which he was the obligee. In this regard,
we point out that the shortfall in the Bankruptcy Court‟s finding
is that it did not establish that WEL owed that the entirety of that
debt to Harold or that PCI-2 and WEL were alter egos.17
Rooker- Feldman doctrine is “narrow” and “applies only in
limited circumstances.” Lance v. Dennis, 546 U.S. 459, 464-66,
126 S.Ct. 1198, 1201-02 (2006) (internal quotation marks and
citations omitted). The Rooker-Feldman doctrine does not apply
when—as is the case here—a plaintiff asserts an independent
violation of his rights that does not turn on the correctness of a
state-court judgment. See In re Madera, 586 F.3d at 232.
16
We are not oblivious to the reality that as a practical matter
directors of large corporations cannot be expected to have day-
by-day responsibility for managing the corporate affairs. Here,
however, we are dealing with a closely held family corporation
with few shareholders and our statements as to Harold‟s
responsibility with respect to the defense of his case should be
understood in that context.
17
The Bankruptcy Court believed that because funds were
intermingled between PCI-2 and WEL Harold had “a good faith
25
2. Duty of Loyalty
A director‟s duty of loyalty necessitates that he not
engage in self-dealing. Directors must advance “the common
interests and not their own; they cannot directly or indirectly,
utilize their position to obtain any personal profit or advantage
other than that enjoyed also by their fellow shareholders.” Tyler
v. O‟Neill, 994 F. Supp. 603, 612 (E.D. Pa. 1998). Pennsylvania
law in 15 Pa. Cons. Stat. Ann. § 1728 (West 2011) spells out a
statutory explanation of the duty of loyalty:
(a) General rule. A contract or transaction
between a business corporation and one or more
of its directors or officers or between a business
corporation and another domestic or foreign
corporation for profit or not-for-profit,
partnership, joint venture, trust or other enterprise
in which one or more of its directors or officers
are directors or officers or have a financial or
other interest, shall not be void or voidable solely
for that reason, or solely because the director or
basis” for his allegations that “WEL should be held liable for his
loans” to PCI-2, app. at 5, that because of the siphoning of funds
Harold “acted within his right in seeking repayment of his loans
from WEL,” app. at 57, and that Harold “had reasonable
grounds for asserting his claim in state court to have WEL held
liable for these loans.” App. at 59. We accept these findings
but they are not dispositive because they do not establish that
WEL could not have successfully advanced a defense to
Harold‟s claim.
26
officer is present at or participates in the meeting
of the board of directors that authorizes the
contract or transaction, or solely because his or
their votes are counted for that purpose, if:
(1) the material facts as to the relationship
or interest and as to the contract or
transaction are disclosed or are known to
the board of directors and the board
authorizes the contract or transaction by
the affirmative votes of a majority of the
disinterested directors even though the
disinterested directors are less than a
quorum;
(2) the material facts as to his relationship
or interest and as to the contract or
transaction are disclosed or are known to
the shareholders entitled to vote thereon
and the contract or transaction is
specifically approved in good faith by vote
of those shareholders; or
(3) the contract or transaction is fair as to
the corporation as of the time it is
authorized, approved or ratified by the
board of directors or the shareholders.
Harold addressed section 1728 by contending that his
defense does not depend on a showing that its demanding
requirements were satisfied. Rather, he contends that his
27
acquisition of the Reading Avenue property did not constitute a
“contract or transaction” subject to that law. Appellee‟s br. at
46. Though we do not take a position on the question of
whether section 1728 is a complete statement of a director‟s
duty of loyalty,18 we think that, in substance, Harold‟s purchase
and resale of the property was a “transaction” subject to section
1728 and the common law‟s exacting scrutiny of self-dealing.
Neither of the requirements that section 1728(a)(1) or (a)(2) sets
forth has been met in this case, and Harold‟s acquisition of the
Reading Avenue property could not have been fair to WEL as it
arose out of a default judgment in an action against WEL which
it never defended. See In re Athos Steel and Aluminum, Inc., 71
B.R. 525, 541 (Bankr. E.D. Pa. 1987) (when a plaintiff makes a
prima facie showing that the director has a self-interest in a
transaction, the director must show that the transaction is
intrinsically fair to the corporation).
It is clear that Harold by not taking any steps to assist
WEL in avoiding a default in a case in which he took actions
that resulted in the sheriff‟s sale of the Reading Avenue
property, in the words of Tyler v. O‟Neill, used his “position to
18
In Warehime Enterprises, Inc. v. Warehime, 731 A.2d 128(Pa. 1999), the Pennsylvania Supreme Court granted allocatur
on the issue of whether section 1728 “defines the outer limits of
a director‟s fiduciary duties of care, good faith and/or loyalty in
connection with an interested transaction which the director
knows will result in unfairness or fraud to the corporation.”
Ultimately, however, the court did not reach this issue.
Warehime v. Warehime, 761 A.2d 1138 (Pa. 2000).
28
obtain . . . personal profit or advantage other than that enjoyed
also by their fellow shareholders.” 994 F. Supp. at 612.
Although WEL may have been indebted to Harold, he
contributed to depriving WEL of a substantial asset, perhaps
unjustifiably as he acquired the Reading Avenue property for
himself to its detriment.19 Accordingly, Harold breached his
duty of loyalty to WEL.
As a general rule, “the conduct forbidden in the
acquisition of interests adverse to the corporation is the
realization of a profit,” see Weissman v. A. Weissman, Inc., 114
A.2d 797, 799 (Pa. 1955), and Pennsylvania courts often have
used the concept of unjust enrichment as a measure of liability
in this context. See Seaboard Indus., 276 A.2d at 309.20 Thus,
19
In his May 28, 2004 complaint Harold alleged that he had lent
$31,000 to WEL and that $65,880.93 interest had accrued on
that loan. Harold‟s recovery from the sale of WEL‟s property to
satisfy in part the Berks County judgment far exceeded the sum
of those that amounts and thus it would be difficult to argue that
his wrongful actions merely eliminated WEL‟s debt even
without regard to the alter ego theory that Harold advanced in
the Berks County litigation.
20
In CST, Inc. v. Mark, 520 A.2d 469, 472 (Pa. Super. Ct. 1987),
the Superior Court of Pennsylvania noted that unjust enrichment
is the standard test for corporate fiduciary liability, but affirmed
the trial court‟s holding that a director breached his duty of
loyalty where the breach “had been a substantial factor” in
bringing about harm to the corporation even though the director
was not unjustly enriched. We have noted already that
29
although as we have explained, a director may breach his duty of
due care without being unjustly enriched, a showing of unjust
enrichment still may be significant in a case involving a claim of
breach of fiduciary duties, particularly when the duty is of
loyalty. A showing of unjust enrichment requires a
demonstration that: (1) a benefit was conferred on the
defendant; (2) the defendant retained that benefit; and (3) it
would be inequitable for the defendant to retain the benefit
without paying full value for it. Schenck v. K.E. David, Ltd.,
666 A.2d 327, 328 (Pa. 1995). But there is not a rigid formula
that can be applied in a determination of whether there has been
unjust enrichment as that determination “depends on the unique
factual circumstances of each case.” Safe Auto Ins. Co. v.
Berlin, 991 A.2d 327, 336 n.6 (Pa. Super. Ct. 2010). In this
case, it is clear that by securing the judgment, executing on it,
acquiring the Reading Avenue property at the sheriff‟s sale,
reselling the property, and personally taking the proceeds from
the resale Harold obtained a benefit that he kept. Considering
all the circumstances of this case we are satisfied that it was
inequitable for Harold to retain the proceeds from the Reading
Avenue property resale in the light of the duty of loyalty that he
owed WEL.
C. Harold‟s Duties as Custodian for L.L.‟s Shares
Pennsylvania law is not so rigid as to require unjust enrichment
in every case charging liability on the basis of a breach of
corporate fiduciary duty. See Selheimer, 224 A.2d at 647.
Here, Harold was on both sides of a transaction that was
detrimental to WEL. This conflict of interests is sufficient for
us to hold that Harold breached his duty of loyalty to WEL.
30
The Pennsylvania Uniform Transfers to Minors Act
(“PUTMA”) is the successor legislation to the Pennsylvania
Uniform Gifts to Minors Act (“PUGMA”), and “provide[s] an
inexpensive, easy way for giving property to minors.”21
Sternlicht v. Sternlicht, 822 A.2d 732, 737 (Pa. Super. Ct. 2003).
Under the PUTMA, a “person may make a transfer by
irrevocable gift to . . . a custodian for the benefit of a minor
pursuant to section 5309 . . . .” 20 Pa. Cons. Stat. Ann. § 5304
(West 2011). The custodian must manage the minor‟s property
and its proceeds until the minor reaches the age of 21 years. 20
Pa. Cons. Stat. Ann. § 5320 (West 2011). Under 20 Pa. Cons.
Stat. Ann. § 5309 (West 2011), a property may be held by a
custodian when it is “registered in the name of the transferor . . .
followed in substance by the words, „as custodian for (name of
minor) under the Pennsylvania Uniform Transfers to Minors
21
A transfer of ownership of a security to a minor under the
PUTMA allows parents and others to make transfers to minors
without complex legal arrangements such as creating a trust or a
guardianship. The PUTMA also preserves certain federal tax
benefits to the donor. See Sutliff v. Sutliff, 528 A.2d 1318,
1323 (Pa. 1987) (discussing the PUGMA). We recognize that
the transfer to Harold as custodian was recited to be made under
the PUGMA even though at the time of the transfer the PUTMA
had replaced the PUGMA. We nevertheless are applying the
PUTMA because the notes to 20 Pa. Cons. Stat. Ann. § 5301
(West 2011), the title and definition section of the PUTMA,
indicate that when the PUTMA was enacted the enacting
legislation provided that it would apply to transfers after its
effective date even though the transfers purport “to have been
made under the [PUGMA.]”
31
Act‟ . . . .” 20 Pa. Cons. Stat. Ann. § 5309(a)(1)(i). “Whatever
its source, custodial property that is held pursuant to Section
5304 is the property of the minor child.” Sternlicht, 822 A.2d at
737. In managing property for a minor‟s benefit, “a custodian
may deliver or pay to the minor or expend for the minor‟s
benefit so much of the custodial property as the custodian
considers advisable for the use and benefit of a minor, without
court order . . . .” 20 Pa. Cons. Stat. Ann. § 5314(a) (West
2011).
The PUTMA further provides:
In dealing with custodial property, a custodian shall
observe the standard of care that would be observed
by a prudent person dealing with property of another
and is not limited by any other statute restricting
investments by fiduciaries. If a custodian has a
special skill or expertise or is named custodian on
the basis of representations of a special skill or expertise,
the custodian shall use that skill or expertise.
20 Pa. Cons. Stat. Ann. § 5312(b) (West 2011). The PUTMA
also imposes a duty of loyalty: “A custodian may not use
PUTMA property to benefit himself.” Sternlicht, 822 A.2d at
740. Thus, the duties owed by a custodian to a minor track
those owed by a director to his corporation.
1. Duty of care
The Bankruptcy Court‟s conclusion that Harold did not
violate his duties as a PUTMA custodian rested on two bases.
32
First, the Court, not distinguishing between a duty of care and a
duty of loyalty, concluded:
In seeking a judgment against WEL for loans and
executing on that judgment against real property
which WEL owned, [Harold] exercised his right
to obtain what he was validly owed. In doing so,
he did not deprive [L.L.] of her nine shares of
stock in WEL nor of any assets to which WEL
was legally entitled.
App. at 59. Second, the Bankruptcy Court concluded that
William and Theresa, being “well aware at the time of the gift to
L.L. that [Harold] was owed money from WEL,” waived on
L.L.‟s behalf any conflict of interest existing between Harold
and L.L. Id. In considering Harold‟s duty of care as a custodian
we pass directly to the Court‟s conclusion with respect to waiver
inasmuch as the Court‟s first basis for its conclusion cannot
survive with respect to the duty of care for the same reasons that
we have held that Harold breached his duty of care to WEL as a
director.
The Bankruptcy Court‟s finding of waiver cannot support
its decision. The PUTMA does not contemplate waivers of
conflicts of interest on the minor‟s behalf, at least in a situation
like that here where the waiver cannot possibly benefit the
minor.22 Rather, a transfer under the PUTMA “is irrevocable,
22
We are not suggesting that there never can be a situation in
which a custodian‟s conflict of interest with respect to dealing
with custodial property can be waived. After all, a waiver of the
33
and the custodial property is indefeasibly vested in the minor,
but the custodian has all the rights, powers, duties and authority
provided [under the PUTMA], and neither the minor nor the
minor‟s legal representative has any right, power, duty, or
authority with respect to custodial property except as provided
[under the PUTMA].” 20 Pa. Cons. Stat. Ann. § 5311(b) (West
2011); see 20 Pa. Cons. Stat. Ann. § 5301 (West 2011) (defining
“legal representative” as “[a]n individual‟s personal
representative or guardian.”). The PUTMA vests extensive
management powers and duties in the custodian, and does not
provide or imply that a minor‟s parents may ratify a custodian‟s
decisions that may be adverse to the minor‟s interests. See 20
Pa. Cons. Stat. Ann. §§ 5312, 5313, 5314.
2. Duty of Loyalty
In considering this case it is important to emphasize that
just as Harold owed a duty of loyalty to WEL as a director, he
owed L.L. a duty of loyalty under the PUTMA. In considering
whether Harold acted consistently with this duty we recognize
that, as he points out, he did not do what the PUTMA clearly
proscribes: converting L.L.‟s shares or selling them and
conflict might be in a minor‟s interest as, for example, if the
custodian is seeking to purchase for himself custodial property
for a price far exceeding its market value. In that situation a
minor well might benefit if the custodian personally brought the
property and invested the proceeds from the sale in more
valuable assets. Perhaps in such a case the custodian could seek
authority to acquire the property from a court with jurisdiction
over such an application.
34
appropriating the proceeds. Thus, this case differs from cases
such as In re Gumpher, 840 A.2d 318, 323 (Pa. Super. Ct. 2003),
in which the court held that a mother‟s actions in liquidating a
child‟s PUTMA account for the mother‟s immediate benefit was
a breach of her custodial responsibilities. However, as Payne
observes, “[t]he stock of WEL has no inherent value. It has
value only to the extent that WEL owns assets and generates
income.” Appellant‟s br. at 27. Thus, shares of stock cannot be
viewed as simply sheets of paper or notations in computer
records. Consequently, Harold had not only a duty to look after
the shares themselves, but also not to do anything that would
reduce their value to L.L.‟s detriment.
On this point, we find the Supreme Judicial Court of
Massachusetts‟ decision in Fogelin v. Nordblom, 521 N.E.2d
1007 (Mass. 1988), to be instructive.23 In Fogelin, two
custodians held 82% of preferred shares of a business trust that
were given to minors under the Massachusetts version of the
Uniform Gifts to Minors Act. After its establishment, the
trustees executed an amendment to the trust that greatly
diminished the liquidation value of the proposed shares. On a
23
Given the paucity of case law under the PUTMA, which we
observe is a happy state of affairs, Pennsylvania courts look to
cases decided in other jurisdictions under their versions of the
Uniform Transfers to Minors Acts and its predecessor, the
Uniform Gifts to Minors Act, for guidance. See In re Gumpher,
840 A.2d at 322; 1 Pa. Cons. Stat. Ann. § 1927 (West 2011)
(“Statutes uniform with those of other states shall be interpreted
and construed with their general purpose to make uniform the
law of those states which enact them.”).
35
challenge to this action, the Supreme Judicial Court held that the
custodians breached their custodial duties by consenting to the
dramatic reduction in the value of the shares . Here, as in
Fogelin, the circumstance that after the sale of the Reading
Avenue property the minor retained ownership of the shares in
WEL does not excuse Harold‟s conduct. Payne asserts—and
Harold does not dispute—that the sale of the Reading Avenue
property greatly reduced the value of WEL and thus the value of
L.L.‟s shares in that corporation.
Harold‟s role as the custodian for L.L.‟s shares conflicted
with his personal interest in recovering monies WEL owed him,
and Harold‟s entitlement to payment from WEL did not absolve
him of his duty to manage the nine shares for L.L.‟s benefit.
The Bankruptcy Court‟s conclusion that Harold did not breach
his fiduciary duties because he was “validly owed” money by
WEL only underscores the existence of his conflict of interest.
Harold‟s appropriation of L.L.‟s property involved
multiple steps: (1) suing WEL; (2) not taking steps on behalf of
WEL to defend against the suit; (3) commencing execution
proceedings; (4) purchasing the property; and (5) reselling it and
retaining the proceeds. Though Harold well may have been
justified in instituting his action against WEL, clearly he
breached his custodial duty of loyalty to L.L. by his actions with
respect to the other four steps involved in his appropriation of
the property. A custodian‟s duties under the PUTMA are
“analogous to those of a trustee with the broadest possible
discretionary powers,” who “owes a fiduciary duty to the
beneficiary.” See Sutliff v. Sutliff, 528 A.2d 1318, 1323 (Pa.
1987) (discussing the PUGMA). He “violates that duty when he
36
has a personal interest in trust dealings that might affect his
judgment.” Id. (citing Restatement (Second) of Trusts § 170,
cmts. b, c (1959)). Though a custodianship is a different legal
entity than a trust, we believe comment b to section 170(1) of
the Second Restatement of Trusts is applicable to the facts
here24:
A trustee with power to sell trust property is under
a duty not to sell to himself either by private sale
or at auction, whether the property has a market
price or not, and whether or not the trustee makes
a profit thereby. It is immaterial that the trustee
acts in good faith in purchasing trust property for
himself, and that he pays a fair consideration.
The trustee cannot properly purchase trust
property for himself even though he does not
make the sale. Thus, he cannot properly purchase
24
Though we are treating the comment as applicable here, we
cannot help but wonder whether it overstates what should be the
constraints on the conduct of a trustee. See supra note 22. After
all, there could be a situation in which local zoning laws coupled
with a trustee‟s personal ownership of property adjacent to the
trust property would preclude anyone other than the trustee from
making use of the property he holds in trust. Thus, while the
Restatement sets forth a bright-line rule, always much
appreciated by judges and attorneys because of its certainty and
easy application, in practice perhaps there should be limitations
on it. But in this case we are not concerned with such a situation
in which it would be unwise to apply the Restatement rule.
37
trust property for himself on a foreclosure sale or
tax sale or sale on execution of a judgment. To
permit him to do so would create a situation
where his personal interest would be in conflict
with his duty as trustee. It is his duty as trustee to
prevent the sale if possible or to see that the
property is sold for as much as can be obtained. If
he were permitted to bid in the property for
himself at the sale, it would be for his personal
advantage not to prevent the sale and to have as
few bidders and as low bids as possible. The
trustee who bids in the property for himself at
such a sale is not permitted to keep the property,
even though in the particular case he attempted to
secure as many bidders and as high bids as he
could and the amount which he bid was a fair
consideration for the property.
When Harold acquired and sold the Reading Avenue
property, he effectively appropriated L.L.‟s assets. Inasmuch as
there was at least a dispute as to the validity of his claim against
WEL, he violated his duty of loyalty to L.L. by his self-dealing
actions.25 As the Pennsylvania Supreme Court has stated,
25
As we have indicated Payne has contended that WEL had a
defense against Harold‟s Berks County action. Though we are
taking note of Payne‟s contention we are not implying that if
Harold‟s claim against WEL was not disputed, our result would
be different as we do not reach that issue because we are dealing
with a disputed claim. In this regard, we point out that the
Pennsylvania courts at this late date almost certainly would not
38
“[w]here there is self-dealing on the part of a fiduciary, it is
immaterial to the question of his liability in the premises
whether he acted without fraudulent intent or whether the price
received for his sale of trust property was fair and adequate.” In
re Noonan‟s Estate, 63 A.2d 80, 84 (Pa. 1949).26
V. CONCLUSION
For the foregoing reasons, we will reverse the order of
the District Court entered March 9, 2011, and remand the case to
that Court.27 Unless that Court retains the case it should further
rerun the course in Harold‟s 2004 lawsuit and determine who
would have prevailed if WEL had defended against that case. In
any event, Harold does not request that somehow they be given
that opportunity.
26
As we indicated above, it is conceivable that in some
circumstances there could be a waiver of a custodian‟s conflict
of interest so that he could acquire the custodial property, but
this is not such a case. See supra note 24.
27
In its opinion the Bankruptcy Court, after acknowledging that
some of Harold‟s “statements were self-serving,” stated that:
What came across vividly to this Court was that
this is a gentleman who supported the business
endeavors of his son and daughter-in-law by
providing loans to start up and then keep the
39
remand the case to the Bankruptcy Court for further
proceedings. Regardless of whether the District Court or the
Bankruptcy Court takes jurisdiction on the remand the
proceedings should be consistent with this opinion. Inasmuch as
we have determined that Harold breached his duties as a WEL
director and as a custodian for L.L.‟s shares, we leave it to the
District Court or the Bankruptcy Court, as the case may be, on
remand to determine the relief to which Payne is entitled on his
claim and the issue of dischargeability of Payne‟s claim in
Harold‟s bankruptcy proceedings.
business going, who after patiently waited to be
repaid for the loans and who was finally forced to
take action to be repaid when it because clear that
was the only way that it was going to happen.
App. at 18-19. We do not disagree with what the Court said, but
the problem is that Harold obtained his partial satisfaction of his
judgment in the state-court action at the expense of L.L. and she
was not the cause of his problems.
40