Borough of Honesdale v. M.C. Morris & S.G. Smith ( 2019 )

IN THE COMMONWEALTH COURT OF PENNSYLVANIA
Borough of Honesdale, :
Appellant :
:
v. : No. 795 C.D. 2018
: ARGUED: September 10, 2019
Michael C. Morris and Stephen G. Smith :
:
Borough of Honesdale :
:
v. :
:
Michael C. Morris :
:
Borough of Honesdale :
:
v. : No. 896 C.D. 2018
: ARGUED: September 10, 2019
Stephen G. Smith :
:
Appeal of: Michael C. Morris and :
Stephen G. Smith :
BEFORE: HONORABLE P. KEVIN BROBSON, Judge
HONORABLE MICHAEL H. WOJCIK, Judge
HONORABLE BONNIE BRIGANCE LEADBETTER, Senior Judge
OPINION NOT REPORTED
MEMORANDUM OPINION BY
SENIOR JUDGE LEADBETTER FILED: October 11, 2019
The Borough of Honesdale appeals from orders of the Court of
Common Pleas of Wayne County (1) partially granting the amended petitions to
open confessed judgments of Stephen G. Smith and Michael C. Morris (Developers);
(2) granting Developers’ oral motion to mold the jury’s verdict as to strike the
(confessed) judgments entered against them and to dismiss, with prejudice, the
complaints for confession of judgment that the Borough had filed; and (3) denying
the Borough’s post-trial motion. In relevant part, Developers cross appeal from
orders striking their counterclaims. We affirm all of the orders at issue.
The relevant background is as follows. In 2011, Developers formed
Smith & Morris Holdings, LLC (SMH), purchased the Old Sullums Building at 560
Main Street in the Borough, and began renovating the 10,800-square-foot building
(the project). SMH planned to use one-third of the building for a technical
center/high-speed internet hub and the remainder for office space. Financing for the
project included, inter alia, a grant through the Department of Community and
Economic Development (DCED) for $255,076.00, a bridge loan with Dime Bank,
and a construction loan agreement (Agreement) with the Borough.
As the applicant/grantee for the 2013 DCED grant, the Borough formed
a three-person committee to handle its responsibilities and appointed a committee
chair to manage the paperwork. As for the mechanics of the grant, “SMH was
required to provide [the Borough] with invoices for qualifying expenses. Upon
receipt of those invoices, [the Borough] was required to send DCED reimbursement
requests. Grant money would not be disbursed by DCED until a reimbursement
request was received from [the Borough].” (Trial Court’s Sept. 28, 2018 Op. at 3.)
As for the April 2013 bridge loan, SMH secured interim financing with
Dime Bank in the amount of $255,076.00 with the proceeds from the grant serving
as collateral. In practice, SMH submitted invoices to the Borough and the committee
chair reviewed them. Upon approval, the committee chair would send a letter to
Dime Bank, which in turn would pay SMH’s contractors.1 (Id. at 7.)
1
At some point, Dime Bank froze the account where the grant money was being deposited.
2
In May 2013, the parties entered into the Agreement whereby the
Borough was to make progress payments to SMH pursuant to paragraph nine of the
Agreement:
During the Construction Period, progress payments will be
disbursed by Lender [Borough] to Borrower’s [SMH’s]
Contractor(s), upon Lender’s receipt of Construction
Progress Payment Authorizations executed by the
Borrower, and a satisfactory inspection report from
Lender’s representative or nominee. Minor finish items of
a cosmetic nature for which the Borrower is responsible
must be completed before the final payment can be made
to the contractor.
(Id. at 4.) Once the Borough received the authorizations, the Agreement did not
specify the time by which the Borough was obligated to disburse progress payments
(grant money) to SMH. (Id.)
In May 2013, Developers also entered into two personal guaranty and
suretyship agreements in favor of the Borough by which they personally secured the
obligation of SMH. On August 5, 2016, the Borough filed two complaints for
confession of judgment, one against each of Developers in the sum of $304,176.31
based on their personal guaranty and suretyship agreements. The prothonotary
entered both judgments.2 Shortly thereafter Developers, acting pro se, filed answers
with affirmative defenses and counterclaims, and petitions to open the confessed
judgments. The trial court struck Developers’ answers, affirmative defenses, and
counterclaims but granted them the opportunity to file amended petitions to open the
confessed judgments.
2
For a total of $304,176.31, the calculation was as follows: original debt—$250,076.00
(Borough did not use $255,076.00); interest—$15,191.27; late fees—$1,397.64; and attorney’s
fees of 15% per document—$37,511.40. (Reproduced Record “R.R.” at 73a.)
3
In February 2017, Developers’ counsel filed amended petitions to open
the confessed judgments. Notably, the amended petitions did not contain
counterclaims. In June 2017, the trial court granted their amended petitions pursuant
to Rule 2959 of the Pennsylvania Rules of Civil Procedure, stating that viewing the
evidence in the light most favorable to them, they had raised a meritorious defense
(breach of contract). In addition, the trial court stated that the exclusive issue to be
tried was whether the Borough was contractually obligated under the Agreement to
make disbursements to SMH pursuant to the schedule of progress payments set forth
in the Agreement and whether the Borough breached the Agreement by disbursing
the grant money to SMH in a manner so untimely, erratic, and improper that it caused
the project to fail. (Trial Court’s June, 15, 2017, Order.) In September 2017, the
trial court consolidated the two cases.
In November 2017, Developers’ counsel filed answers, new matter, and
counterclaims. The Borough filed preliminary objections in the form of a motion to
strike, to which Developers each filed an answer. In addition, Developers filed
motions for summary judgment and the Borough filed cross-motions for summary
judgment. In January 2018, the trial court granted the Borough’s motion to strike
the answers, new matter, and counterclaims from the record, citing Rule 2960 of the
Pennsylvania Rules of Civil Procedure. The trial court denied both parties’ motions
for summary judgment, characterizing the issue of whether the Borough disbursed
the grant money to SMH within a reasonable time as a disputed material issue of fact
dependent upon various factors. Acknowledging that the Agreement did not provide
a specific schedule by which the Borough was to disburse progress payments (grant
money) to SMH, the trial court relied on long-established precedent that, in the
absence of a time frame in which a contractual obligation is to be performed, the law
4
requires performance within a reasonable amount of time.3 (Trial Court’s Sept. 28,
2018, Op. at 2.)
In May 2018, the trial court presided over a three-day jury trial. SMH
alleged that the Borough breached the Agreement by disbursing the money to SMH
in a manner so erratic and untimely that it caused the project to fail. The Borough
alleged that it was not obligated to disburse payments to SMH pursuant to a schedule
in the Agreement and that the project failed because it was undercapitalized and
wasteful. (Trial Court’s Jan. 31, 2018, Op. at 3.) The jury entered a verdict in favor
of Developers, in pertinent part finding that they proved by a preponderance of the
evidence that the Borough was contractually obligated pursuant to the Agreement to
make disbursements to them within a reasonable time, that it materially breached its
duty to do so, and that its failure caused the project to fail. (May 18, 2018, Hearing,
Notes of Testimony “N.T.” at 191; Reproduced Record “R.R.” at 1274a.)
After the jury announced its verdict, the trial court granted Developers’
oral motion to mold the verdict so as to strike the confessed judgments against them
and to dismiss the complaints for confession of judgment with prejudice.
Subsequently, both parties filed post-trial motions, which the trial court denied. The
parties’ timely appeals followed.4
Borough’s Appeal-Cognizable Issues:
(1) Whether the trial court erred in determining that two individual guarantors could
raise a defense held by their limited liability company (LLC).
3
E.g., Hodges v. Pa. Millers Mut. Ins. Co., 673 A.2d 973, 974-75 (Pa. Super. 1996).
4
Although both parties filed concise statements, the trial court filed an opinion pursuant to
Rule 1925 of the Pennsylvania Rules of Appellate Procedure only with respect to the Borough’s
appeal and not with respect to Developers’ cross-appeal. However, we are able to discern the trial
court’s rationale from its earlier orders and/or opinions with respect to Developers’ sole cognizable
issue on cross-appeal.
5
(2) Whether the trial court erred in partially granting Developers’ amended petitions
to open judgment in light of their alleged failure to submit evidence of their
meritorious defense.
(3) Whether the trial court erred in refusing to allow graphs that summarized
voluminous financial records without authentication by any witness.
(4) Whether the trial court erred in permitting hearsay testimony from Developers
concerning why contractors walked off the job.
(5) Whether the trial court erred in denying the Borough’s motion to enter judgment
notwithstanding the verdict or to grant a new trial when the verdict was allegedly
against the great weight of the evidence. 5
5
In addition, the Borough proffers the following issues in its “Statement of Questions
Involved”: (1) whether the trial court erred in permitting testimony from non-party lay witnesses
regarding their opinions; and (2) whether the trial court erred in sustaining an objection during
closing arguments and failing to explain the basis for sustaining the objection. Although the
Borough raised these issues in paragraphs twelve and thirteen of its concise statement, it failed to
develop them in the argument portion of its brief in accordance with Rule 2119 of the Pennsylvania
Rules of Appellate Procedure.
In any event, the Borough’s arguments with respect to these issues are without merit. With
respect to the testimony of lay witnesses, especially the retired DCED employee who was directly
involved with the grant at issue, the trial court has broad latitude in assessing the admissibility of
evidence. Commonwealth v. Poplawski, 130 A.3d 697, 716 (Pa. 2015). As for the trial court’s
ruling on an objection during closing arguments, an evidentiary ruling will be reversed only for an
abuse of discretion. Notably, “[a]n abuse of discretion may not be found merely because an
appellate court might have reached a different conclusion, but requires a result of manifest
unreasonableness, or partiality, prejudice, bias, or ill-will, or such lack of support so as to be clearly
erroneous.” Id.
6
Developers’ Cross-Appeal-Cognizable Issue:
(1) Whether the trial court erred in striking the Developers’ counterclaims in a
confession of judgment action.6
Borough’s Appeal
(1) Whether the trial court erred in determining that two individual guarantors
could raise a defense held by their LLC.
It is clear that if a petitioner moves promptly to open a confession of
judgment and presents a meritorious defense sufficient to require submission of
issues to a jury, a trial court does not err in opening that judgment. M.N.C. Corp. v.
Mt. Lebanon Med. Ctr., Inc., 509 A.2d 1256, 1258 (Pa. 1986). Here, the Borough
first challenges the trial court’s grant of the petition to open on the ground that
Developers could not assert a defense held by SMH. We disagree. Even though
SMH was the party to the Agreement, Developers personally guaranteed the
indebtedness of SMH. The jury found that SMH was not in default; rather, the
Borough was in default. Thus, because there was no liability on the part of SMH,
there was no right to confess judgment against Developers based on their personal
6
Developers also argue that the trial court erred in denying Developers’ motion for summary
judgment when they established that the Borough was contractually obligated to make
disbursements within a reasonable period of time and failed to do so. This issue is moot in light
of the judgment ultimately entered in their favor. They also claim that the trial court erred in
denying Developers’ amended petitions to open confessed judgments “when the warrant of
attorney constitutes an impermissible penalty, in that DCED has not demanded that the [Borough]
pay it back the subject monies and as such the [Borough] has not suffered any actual loss, and
[Developers] present[ed] sufficient evidence to indicate that they did not knowingly, intelligently,
and voluntarily sign the personal guaranties.” (Developers’ Brief at 10.) In addition to being
moot, this argument is difficult to understand since the trial court did, in fact, grant the amended
petitions to open the judgments.
7
guarantees of SMH’s obligations. Under these circumstances, the Borough’s
argument that individuals could not assert a defense for their LLC lacks merit.7
(2) Whether the trial court erred in partially granting Developers’ amended
petitions to open judgment in light of their alleged failure to submit evidence of
their meritorious defense.
Next, the Borough challenges the opening of the confession of
judgments on the ground that Developers’ petitions stated, but did not offer evidence
of, a meritorious defense. We agree that ordinarily a petition to open judgment
should cite evidence in support of its defense(s). However, the Borough waived this
issue by failing to raise it in its opposition to the amended petitions to open confessed
judgments or in its concise statement of errors pursuant to Rule 1925 of the
Pennsylvania Rules of Appellate Procedure. Moreover, we observe that Developers
presented numerous witnesses and documents at trial and ultimately proved a
meritorious defense before the final order striking the confessed judgments and
dismissing the Borough’s complaints with prejudice.
(3) Whether the trial court erred in refusing to allow graphs that summarized
voluminous financial records based on the preparer’s unavailability for cross-
examination.
At trial, the Borough sought to submit graphs prepared by an associate
of the law firm representing the Borough that allegedly depicted the total monthly
liabilities that SMH owed to Dime Bank, the total amount that SMH spent on
vendors and laborers, and the percentage of funds that SMH spent from April 2013
7
Notably, LLCs are composed of their members, thereby bolstering the determination that
Developers could raise arguments on behalf of their LLC. See the Limited Liability Company
Law of 1994, 15 Pa.C.S. §§ 8901-8993 (repealed 2016) and the Pennsylvania Uniform Limited
Liability Company Act of 2016, 15 Pa.C.S. §§ 8811-8898 (applies to LLCs formed after February
21, 2017).
8
to January 2014. (Trial Court’s Sept. 28, 2018, Op. at 12.) The Borough alleges
that the associate extrapolated these summaries from the balance sheet and monthly
statements for SMH’s checking account with Dime Bank. The Borough asserts that
these summaries were necessary to explain cogently to the jury how SMH used the
funds that it received from the bridge loan. The trial court determined that it did not
err in excluding the summaries on the ground that the preparer was unavailable for
cross-examination, despite the fact that the Borough made them available to
Developers before trial. We conclude that the trial court did not err in excluding the
summaries. In making its argument, the Borough cites Rule 1006 of the
Pennsylvania Rules of Evidence, Summaries to Prove Content, which provides:
The proponent may use a summary, chart, or
calculation to prove the content of voluminous writings,
recordings, or photographs that cannot be conveniently
examined in court. The proponent must make the originals
or duplicates available for examination or copying, or
both, by other parties at a reasonable time and place. And
the court may order the proponent to produce them in
court.
Rule 1006 “is aimed at efficiency in the presentation of evidence” and at helping a
jury to comprehend voluminous evidence that cannot be conveniently examined in
court and that may be difficult to digest without the assistance of some sort of
summaries. West’s Pa. Practice, Pa. Evidence, § 1006-1 (2013).
This rule does not stand alone, however. Rule 901(a) and (b)(1) of the
Pennsylvania Rules of Evidence provides:
Rule 901. Authenticating or Identifying Evidence
(a) In General. To satisfy the requirement of
authenticating or identifying an item of evidence, the
proponent must produce evidence sufficient to support a
finding that the item is what the proponent claims it is.
9
....
(b ) Examples. . . . .
(1) Testimony of a Witness with Knowledge.
Testimony that an item is what it is claimed to be.
Applying the applicable evidentiary rules to the summaries at issue: “A
diagram, chart, map, or model may be authenticated under Pa.R.E. 901(b)(1) by a
witness with knowledge who testified that the exhibit accurately represents what it
purports to represent. The authenticating witness need not have prepared the exhibit,
but must have sufficient knowledge to verify it.” West’s Pa. Practice, Pa. Evidence,
§ 901-4 (2013) (footnotes omitted) (emphasis added). This is consistent with
Pennsylvania case law pertaining to demonstrative evidence. E.g., Commonwealth
v. Serge, 896 A.2d 1170, 1177 (Pa. 2006) (citing Rule 901 and stating that the
proponent of demonstrative evidence such as a chart must authenticate it by
testimony from a witness who has knowledge that it is what it purports to be).
Therefore, the trial court had the authority to require the proponent of the summaries
to present a witness (whether or not the preparer) with sufficient personal knowledge
to authenticate the charts and to explain them.
Moreover, having reviewed the charts in question, we note they would
be almost impossible for a jury to understand without contemporary explanation. In
other words, without testimony of what they purport to show (in addition to
testimony that they show what they purport), the charts would have been virtually
meaningless, and it would have been demonstrable error for the trial court to allow
counsel to explain them to the jury in the absence of testimony supporting his
10
statements.8 Accordingly, the trial court did not abuse its discretion in refusing to
admit the charts without authentication.
(4) Whether the trial court erred in permitting alleged hearsay testimony from
Developers concerning why contractors walked off the job.
With respect to this issue, the trial court stated that it did not recall a
specific instance where it overruled a hearsay objection. (Trial Court’s Sept. 28,
2018, Op. at 10.) Developers maintain that the Borough waived this issue by failing
to specify in its brief where in the record any rulings and/or objections were made
in violation of the appellate rules pertaining to “statement of place of raising or
preservation of issues.” [Rule 2117(c) of the Pennsylvania Rules of Appellate
Procedure (statement of the case) and Rule 2119(e) (argument)]. In addition, the
Borough did not seem to develop this issue sufficiently in its brief for meaningful
appellate review. To the extent that the Borough did not waive the issue, it is without
merit.
Developer Morris testified that the contractors walked away when he
could not pay them. This information was within his personal knowledge as the
principal of SMH with responsibility for the “daily activities in the building, hiring
contractors. . . .” (May 18, 2018, Hearing, N.T. at 94; R.R. at 1377a). While
testimony of what contractors told him about why they walked away would
constitute hearsay, the record reflects that the Borough made approximately two
hearsay objections to such statements. (N.T. at 41; R.R. at 1324a [objection as to
what a subcontractor said about not being paid] and N.T. at 115; R.R. at 1398a
8
A trial court has considerable discretion to determine whether to accept demonstrative
evidence and its evidentiary rulings are entitled to great deference. See, e.g., Commonwealth v.
Rickabaugh, 706 A.2d 826, 837 (Pa. Super. 1997).
11
[objection to Smith’s statements that contractors “bad mouthed us around town”
because they weren’t getting paid].)9 Nonetheless, there were numerous other
statements to the same effect to which the Borough made no objection. (See
generally, N.T. at 40-65; R.R. at 1323a-48a.) (See also N.T. at 116; R.R. at 1399a
[testimony of Smith that after the original contractors walked, other “contractors
wouldn’t even walk into the building unless they were tripling their charge or getting
money up front to even start.”; N.T. at 192-203; R.R. at 1240a-51a [testimony of
executive director of Wayne County Economic Development Corporation regarding
an email describing the domino effect of the Borough’s delay in disbursing progress
payments causing Developers’ inability to pay contractors and bringing the project
to a halt].) Accordingly, any error regarding the two particular objections is of no
moment.
(5) Whether the trial court erred in denying the Borough’s motion to enter
judgment notwithstanding the verdict or to grant a new trial when the verdict
was allegedly against the great weight of the evidence.
As this Court has noted, “a new trial based on weight of the evidence
issues will not be granted unless the verdict is so contrary to the evidence as to shock
one’s sense of justice.” Dep’t of Gen. Servs. v. U.S. Mineral Prods. Co., 927 A.2d
717, 723 (Pa. Cmwlth. 2007). In this regard, the Borough is simply re-arguing its
version of the facts, but credibility is for the jury, which has the right to believe some
or none of the evidence presented. Commonwealth v. Larsen, 682 A.2d 783, 788
(Pa. Super. 1996). After three days of considering extensive documentary evidence
9
We note that both of these “objections” were made after the statements were uttered, and
neither a motion to strike nor a cautionary instruction was requested. An objection to the question,
“Why did Duffy [the subcontractor] stop working?” was overruled, but the answer given did not
contain any hearsay statements. (N.T. at 43; R.R. at 1326a).
12
and testimony, the jury believed Developers and found that the Borough was
responsible for the failure of the project. Accordingly, the Borough’s argument that
the verdict was against the great weight of the evidence is without merit.
Developers’ Cross-Appeal
(1) Whether the trial court erred in striking Developers’ counterclaims in a
confession of judgment action.
In considering counterclaims in confession of judgment proceedings, it
is instructive to consider both Rules 2959 and 2960 of the Pennsylvania Rules of
Civil Procedure. Rule 2959(a)(1) and (c) provide:
Rule 2959. Striking Off or Opening Judgment;
Pleadings; Procedure
(a)(1) Relief from a judgment by confession shall be
sought by petition. . . . [A]ll grounds for relief whether to
strike off the judgment or to open it must be asserted in a
single petition.
....
(c) A party waives all defenses and objections
which are not included in the petition.
Rule 2960 provides, in pertinent part:
Rule 2960. Proceedings upon Opening of Judgment.
Pleadings. Jury Trial. Waiver
If a judgment is opened in whole or in part the issues
to be tried shall be defined by the complaint if a complaint
has been filed, and by the petition, answer and order of the
court opening the judgment. There shall be no further
pleadings.
As the Superior Court observed, the provision in Rule 2960 providing that “[t]here
shall be no further pleadings” complements the provision in Rule 2959(c) providing
that “[a] party waives all defenses and objections which he does not include in his
13
petition or answer.” J.M. Korn & Sons, Inc. v. Fleet-Air Corp., 446 A.2d 945, 947
n.2 (Pa. Super. 1982).
On appeal, Developers maintain that the trial court erred in striking both
their August 2016 pro se counterclaims and November 2017 counterclaims filed by
their counsel as this precluded them from raising additional affirmative defenses and
counterclaims in the confession of judgment proceeding. We reject Developers’
assertion that the trial court should have determined that their August 2016 pro se
counterclaims were somehow preserved. Once Developers secured counsel and the
trial court afforded them an opportunity to file amended petitions to open judgment,
they waived the opportunity to raise counterclaims before the judgments were
opened by failing to do so in their amended petitions. Consequently, the trial court
did not err in striking Developers’ November 2017 counterclaims as further
pleadings prohibited by the plain language of Rule 2960.10 Malicia v. Proietta
Catering and Cocktail Lounge, Inc., 411 A.2d 751, 753 (Pa. Super. 1979)
(unambiguous language of Rule 2960 does not call for additional pleadings beyond
those expressly identified).
Conclusion:
Accordingly, we affirm all of the orders at issue.
_____________________________________
BONNIE BRIGANCE LEADBETTER,
Senior Judge
10
See Rule 1017 of the Pennsylvania Rules of Civil Procedure, Pleadings Allowed, for the
proposition that an answer and new matter constitute “pleadings.”
14
IN THE COMMONWEALTH COURT OF PENNSYLVANIA
Borough of Honesdale, :
Appellant :
:
v. : No. 795 C.D. 2018
:
Michael C. Morris and Stephen G. Smith :
:
Borough of Honesdale :
:
v. :
:
Michael C. Morris :
:
Borough of Honesdale :
:
v. : No. 896 C.D. 2018
:
Stephen G. Smith :
:
Appeal of: Michael C. Morris and :
Stephen G. Smith :
ORDER
AND NOW, this 11th day of October, 2019, the orders of the Court of
Common Pleas of Wayne County with respect to the appeal of Appellant, Borough
of Honesdale, and the cross-appeal of Cross-Appellants, Michael C. Morris and
Stephen G. Smith, are hereby AFFIRMED in accordance with the foregoing opinion.
_____________________________________
BONNIE BRIGANCE LEADBETTER,
Senior Judge