J-E02003-24
J-E02004-24
2024 PA Super 192
MICHAEL D. TOTH AND LINAWATI : IN THE SUPERIOR COURT OF
TOTH : PENNSYLVANIA
:
:
v. :
:
:
BRYAN E. TOTH, EUGENE W. TOTH, :
MARIE TOTH, AND LEARNING : No. 266 WDA 2022
SCIENCES INTERNATIONAL, LLC :
:
:
APPEAL OF: BRYAN E. TOTH, :
EUGENE W. TOTH, AND MARIE TOTH :
Appeal from the Order Entered February 15, 2022
In the Court of Common Pleas of Allegheny County Civil Division at
No(s): GD-21-000372
MICHAEL D. TOTH AND LINAWATI : IN THE SUPERIOR COURT OF
TOTH : PENNSYLVANIA
:
:
v. :
:
:
BRYAN E. TOTH, EUGENE W. TOTH, :
MARIE TOTH, AND LEARNING : No. 267 WDA 2022
SCIENCES INTERNATIONAL, LLC :
:
:
APPEAL OF: BRYAN E. TOTH, :
EUGENE W. TOTH, AND MARIE TOTH :
Appeal from the Order Entered February 15, 2022
In the Court of Common Pleas of Allegheny County Civil Division at
No(s): GD-21-000372
MICHAEL D. TOTH AND LINAWATI : IN THE SUPERIOR COURT OF
TOTH : PENNSYLVANIA
:
:
v. :
J-E02003-24
J-E02004-24
:
:
BRYAN E. TOTH, EUGENE W. TOTH, :
MARIE TOTH, AND LEARNING : No. 403 WDA 2022
SCIENCES INTERNATIONAL, LLC :
:
:
APPEAL OF: BRYAN E. TOTH, :
EUGENE W. TOTH, AND MARIE TOTH :
Appeal from the Order Entered April 5, 2022
In the Court of Common Pleas of Allegheny County Civil Division at
No(s): G.D. 21-000372
MICHAEL D. TOTH AND LINAWATI : IN THE SUPERIOR COURT OF
TOTH : PENNSYLVANIA
:
:
v. :
:
:
BRYAN E. TOTH, EUGENE W. TOTH, :
MARIE TOTH, AND LEARNING : No. 846 WDA 2022
SCIENCES INTERNATIONAL, LLC :
:
:
APPEAL OF: BRYAN E. TOTH, :
EUGENE W. TOTH, AND MARIE TOTH :
Appeal from the Order Entered July 21, 2022
In the Court of Common Pleas of Allegheny County Civil Division at
No(s): GD-21-000372
MICHAEL D. TOTH AND LINAWATI : IN THE SUPERIOR COURT OF
TOTH : PENNSYLVANIA
:
:
v. :
:
:
BRYAN E.TOTH, EUGENE W. TOTH, :
MARIE TOTH, AND LEARNING : No. 514 WDA 2023
SCIENCES INTERNATIONAL, LLC :
:
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:
APPEAL OF: BRYAN E.TOTH, EUGENE :
W. TOTH AND MARIE TOTH :
Appeal from the Order Dated April 19, 2023
In the Court of Common Pleas of Allegheny County Civil Division at
No(s): GD-21-000372
BEFORE: LAZARUS, P.J., BOWES, J., STABILE, J., DUBOW, J., NICHOLS, J.,
MURRAY, J., McLAUGHLIN, J., KING, J., and SULLIVAN, J.
OPINION BY NICHOLS, J.: FILED: August 27, 2024
Appellants Bryan E. Toth, Eugene W. Toth, and Marie Toth appeal from
the February 15, 2022 order granting partial summary judgment in favor of
Appellees Michael D. Toth and Linawati Toth (266 WDA 2022); the February
15, 2022 order denying Appellants’ motion for summary judgment against
Appellees (267 WDA 2022); the April 5, 2022 order granting Appellees’
petition to dissolve Learning Sciences International, LLC, (LSI) (403 WDA
2022); the July 21, 2022 order appointing a custodian for LSI (846 WDA
2022); and the April 19, 2023 order approving a protective sale and
assignment of assets (514 WDA 2023).1 Appellants contend that the trial
____________________________________________
1 The appeals at 266 WDA 2022, 267 WDA 2022, and 403 WDA 2022 were
consolidated sua sponte at Superior Court Journal No. J-A06019-23. See
Order, 6/28/22. The related appeal at 846 WDA 2022 was assigned Superior
Court Journal No. J-A06020-23, and it was consolidated with the appeals at
266 WDA 2022, 267 WDA 2022, and 403 WDA 2022, in an order filed on
August 1, 2022. After this Court’s initial decision was filed at Superior Court
Journal Nos. J-A06019-23 and J-A06020-23, Appellees filed an application for
reconsideration/reargument, and we granted en banc reargument in the
appeals at 266 WDA 2022, 267 WDA 2022, 403 WDA 2022, and 846 WDA
2022. While the appeals at 266 WDA 2022, 267 WDA 2022, 403 WDA 2022,
and 846 WDA 2022 remained pending, the trial court filed an order approving
(Footnote Continued Next Page)
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court erred in granting summary judgment in favor of Appellees, ordering the
dissolution of LSI, appointing a custodian, and approving a protective sale and
assignment of assets. After review, we affirm all five orders.
The trial court summarized the relevant facts and procedural history of
this matter as follows:
I. THE PARTIES & BACKGROUND.
Plaintiff Michael Toth (“Michael”) is the founder, President, Chief
Executive Officer, and owner of 50% voting interest and 25%
equity interest of [LSI,] a Pennsylvania educational training LLC
operating in and servicing multiple states. Linawati Toth (“Lina”),
Michael’s wife, is an LSI manager and employee. Bryan Toth
(“Bryan”), Michael’s brother, owns 50% voting interest and 25%
equity interest of LSI. Eugene Toth (“Eugene”), Michael’s father,
and Marie Toth (“Marie”), Michael’s mother, are each 25% owners
in equity interest of LSI.
After founding LSI in 2002, Michael gifted Marie, Eugene, and
Bryan their respective interests. Around the Thanksgiving holiday
in 2020, relations between the parties began to deteriorate. On
January 8, 2021, Bryan, Eugene, and Marie met with Florida legal
counsel and executed three legal agreements: a “Written Consent
to Actions Taken Without a Meeting by the Members of Learning
Sciences International, LLC” (“First Written Consent”) an
“Amended and Restated Operating Agreement of Learning
____________________________________________
a protective sale and assignment of assets on April 19, 2023. Appellants filed
an appeal from that order at Superior Court docket 514 WDA 2023. On
February 12, 2024, this Court ordered the appeal at 514 WDA 2023 to be
considered en banc and listed consecutively to the appeals at 266 WDA 2022,
267 WDA 2022, 403 WDA 2022, and 846 WDA 2022. The appeals at 266 WDA
2022, 267 WDA 2022, 403 WDA 2022, and 846 WDA 2022 were assigned
Superior Court Journal No. J-E02003-24, and the appeal at 514 WDA 2023
was assigned Superior Court Journal No. J-E02004-24. Because the appeals
at J-E02003-24 and J-E02004-24 are related, we consolidate all of Appellants’
appeals at 266 WDA 2022, 267 WDA 2022, 403 WDA 2022, 846 WDA 2022,
and 514 WDA 2023 and address them in this opinion.
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Sciences International, LLC” (“2021 [Operating] Agreement”),
and an additional “Written Consent to Actions Taken Without a
Meeting by the Members of Learning Sciences, International, LLC”
(“Second Written Consent”).
The First Written Consent, signed only by [Appellants],
acknowledged that LSI was a Pennsylvania LLC governed by a
2012 Operating Agreement (“2012 [Operating] Agreement”) and
allegedly allowed [Appellants to] “ratify, approve, and adopt” the
2021 [Operating] Agreement in Michael’s absence pursuant to
Section 13.5 of the 2012 [Operating] Agreement, which provides
that the 2012 [Operating] Agreement “may not be amended
except by the written agreement of Members holding Two-Thirds
Interest of the Company.” By “adopting” the 2021 [Operating]
Agreement in light of the First Written Consent, [Appellants]
aimed to “approve LSI’s change of its headquarters and subject
laws to Florida.”
The Second Written Consent, signed only by [Appellants],
acknowledged Michael and Lina’s then-current status as LSI
“officers and/or management personnel,” yet allegedly allowed
[Appellants] to terminate Michael and Lina, having determined
that “it was in the best interests of LSI to change some of its
current officers and management personnel.”
Despite executing the First Written Consent, the 2021 [Operating]
Agreement, and the Second Written Consent under the guise of
having met the Two-Thirds Interest requirement of Section 13.5
of the 2012 [Operating] Agreement, [Appellants] overlook Section
1.37 of the 2012 [Operating] Agreement which states “Two-thirds
Interest shall mean one or more Voting Interests of Members
which taken together exceed 66.67% of the aggregate of all
Voting Interests.” Section 1.39 of the 2012 [Operating]
Agreement further provides that Bryan and Michael each have
50% Voting Interest.
II. PROCEDURAL HISTORY
On December 12, 2021, [Appellees] filed a Complaint seeking
injunctive relief and damages against Marie, Eugene, Bryan, and
LSI (collectively referred to herein as “ Defendants”) including the
following counts: Temporary Restraining Order, Preliminary
Injunction, and Permanent Injunction (Count I), Breach of
Contract (2012 Operating Agreement) (Count II), Breach of
Fiduciary Duty and Common Law Duty of Loyalty (Count III),
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Conversion, fraud and Defamation (Count IV, V, & VI),
Declaratory Judgment (Count VII), and Constructive Trust and
Accounting (Count VIII).
With respect to Count VII, [Appellees] sought judgment declaring
that:
(a) The 2012 . . . Operating Agreement remains in full force
and Effect, and that the purported Written Consents and
2021 Operating Agreement are null and void and therefore
without lawful import, authority or legitimacy;
(b) Mr. Michael Toth remains the President, Chief Executive
Officer and employee of LSI, with all of the right, title and
privileges of those positions;
(c) Ms. Linawati Toth remains a manager and employee of
LSI, with all of the right, title and privileges of these
positions;
(d) Defendant LSI is Pennsylvania corporation and must
remain so, and any action taken to changes that must be
undone as without authorization or legal justification.
In response to [Appellees’] request for injunctive relief, on
January 19, 2021, [the trial c]ourt granted [Appellees’]
Emergency Motion for Temporary Restraining Order pending
resolution of the preliminary injunction, which was scheduled for
argument on February 5, 2021. On February 2, 2021, [the trial
c]ourt entered an order staying all case activity pending the
parties’ engagement in alternative dispute resolution [(ADR)] —
later deemed to be unsuccessful. While the case was stayed in
[the trial c]ourt, [Appellants] brought an additional lawsuit against
[Appellees] in Florida state court.
On May 3, 2021, [Appellants’] Preliminary Objections were
overruled and [the trial c]ourt ultimately appointed Mr. John
McGinley, Jr. as the Interim Custodian Pendente Lite (“[Interim]
Custodian”) on August 4, 2021.[2] More specifically, [the trial
c]ourt tasked the [Interim] Custodian with the purpose of
providing interim findings of fact and conclusions of law as to
whether the Members were deadlocked in the management of
LSI’s affairs and whether it would be reasonably practicable for
____________________________________________
2 On May 25, 2021, Appellees filed a motion to dissolve and wind-up LSI.
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LSI’s Members to carry on the business . . ., as well as other
recommendations regarding LSI’s management, direction, and
ownership. In accordance with the [c]ourt’s August 4th order, the
[Interim] Custodian filed Interim Finding of Fact and Conclusions
of Law (“[Interim] Custodian’s Report”) on October 22, 2021.
Amongst other things, the [Interim] Custodian found that, in light
of [Appellants’] failed attempt to adopt the 2021 [Operating]
Agreement without Michael’s consent, the 2012 Operating
Agreement continues to govern LSI and the rights of its Members.
After determining that the dispute as to LSI’s governing document
was a legal issue capable of resolution via summary judgment,
[the trial c]ourt ordered the parties to file cross-motions for
summary judgment. On January 12, 2022, [Appellees] filed a
Motion for Partial Summary Judgment and [Appellants] filed a
Cross-Motion for Summary Judgment, both which are the focus of
this appeal. Following argument on the motions, [the trial c]ourt
entered two orders — one denying [Appellants’] Cross-Motion for
Summary Judgment [(the order at 267 WDA 2022)] and another
granting [Appellees’] Motion for Partial Summary Judgment [(the
order at 266 WDA 2022)].
Trial Ct. Op., 6/24/22, at 1-5 (some formatting altered and footnotes
omitted).
Appellants filed timely and separate notices of appeal from the February
15, 2022 orders. See Docket No. 266 WDA 2022 (appeal from the order
granting partial summary judgment relief in the form of declaratory judgment
in favor of Appellees that the 2012 Operating Agreement controls); Docket
No. 267 WDA 2022 (appeal from the order denying Appellants’ motion for
summary judgment). Both the trial court and Appellants complied with
Pa.R.A.P. 1925.
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On March 11, 2022 and March 16, 2022, the trial court held hearings on
Appellees’ motion to dissolve and wind-up LSI. The trial court subsequently
entered an order stating:
AND NOW, this 5th day of April, 2022, having considered
[Appellees’] Amended Petition to Dissolve and Wind-Up Learning
Sciences International, LLC, [Appellants’] response thereto, and
following a hearing thereupon, the court makes the following
factual findings and legal conclusions:
A. Michael D. Toth (“Michael”), Bryan E. Toth (“Bryan”),
Eugene W. Toth (“Eugene”) and Marie Toth (“Marie”) are
each owners of 25% of the issued and outstanding units
of Learning Sciences International, LLC (“LSI”).
B. Michael and Bryan each control 50% of the voting rights
of LSI.
C. Michael, Bryan, Eugene and Marie are collectively
referred to as the “Members.” LSI and the Members are
parties to [the 2012 Operating Agreement].
D. The Members are and have been engaged in a series of
disputes concerning the management, operation and
future direction of LSI, which disputes are the subject of
litigation with this court in the above captioned case.
E. The Members have been unable to resolve their
differences despite efforts to do so at the request of the
court through multiple formal mediations and informal
settlement discussions.
F. The court has determined that the disputes, divisiveness
and litigation among the Members of LSI that currently
exist are and will continue to have a lasting and
significant adverse consequence upon the viability of LSI
to operate as an ongoing concern.
G. LSI is not currently profitable in the current year but for
one-time Government assistance, and was barely above
break-even for 2020.
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H. The court has determined that the Members are
irrevocably deadlocked in the management of [LSI’s]
affairs, and that it is not otherwise reasonably practicable
to carry on the business in conformity with LSI’s
Certificate of Incorporation and Operating Agreement.
I. The Court has determined that [LSI] should begin a
process of dissolution under Pennsylvania law applicable
to LSI, including, without limitation, the provisions of 15
Pa.C.S. § 8872.
J. The court, having found good cause, hereby exercises its
discretion to appoint a liquidating trustee for LSI
pursuant to 15 Pa.C.S. § 8872(e) to accomplish such
dissolution.
K. The court hereby appoints James Chiafullo, Esq., of
Dentons, Cohen & Grisby (the “Liquidating Trustee”) to
serve as Liquidating Trustee of LSI, with all power,
authority, protection and duty of a Liquidating Trustee
appointed under . . . 15 Pa.C.S. § 8872(e) for the
purpose, inter alia, of consummating such dissolution,
and to carry out such dissolution with all possible
deliberation and speed.
Trial Court Order, 4/5/22, at 1-2. Appellants filed a timely appeal from the
trial court’s order, which was docketed at 403 WDA 2022. Appellants moved
for a stay pending appeal, and this Court granted the motion for stay on June
16, 2022.
Thereafter, the trial court explained:
During the pendency of the appeal, Michael Toth initially continued
to manage the company as CEO. However, the uncertainty
surrounding this litigation and the future existence of LSI have
created roadblocks to maintaining business as usual. Employees,
some of whom are key personnel, have been leaving LSI and it
has become understandably difficult to recruit and retain new
employees. Due to LSI’s primary clients being school districts, its
contracts typically begin in August and last for the entire school
year. The uncertainty and low retention of employees has made
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it impossible to anticipate whether LSI is able to enter into and
perform new contracts for the school year or whether such
contracts would create greater liability for the company. As such,
LSI formed no new contracts and currently has no new income.
The litigation and deadlock has gone so far as to cause hesitancy
among LSI’s existing clients about its ability to perform. Also
contributing to this de facto slowing down and winding up of LSI
is Michael’s stepping down as CEO. Despite the stay of [the trial
c]ourt’s dissolution order, Michael has allegedly taken steps to
form a new company in anticipation of LSI’s eventual dissolution,
such as creating a website and hiring former LSI employees.
As a result of these developments, on June 28, 2022[, Appellees]
sought temporary relief from the Superior Court’s stay order so as
to petition [the trial c]ourt to appoint a receiver to manage the
company’s remaining affairs and pay its debts as they come due
pending the resolution of [Appellants’] appeal. By order dated
June 29, 2022, the Superior Court granted the relief and
temporarily lifted the stay order for the limited purpose of having
[the trial c]ourt rule on [Appellees’] petition to appoint a receiver.
On July 15, 2022[, the trial c]ourt heard argument on the petition
to appoint the receiver. Despite the numerous allegations of
Michael’s apparent conflict of interest in running LSI and winding
up its affairs, [Appellants] astonishingly opposed the appointment
of an impartial receiver to run the company. By order dated July
21, 2022, [the trial c]ourt granted the petition and appointed a
receiver.
Trial Ct. Op., 9/2/22, at 1-2. Appellants subsequently filed a timely appeal
from the July 21, 2022 order appointing the custodian, which was docketed at
846 WDA 2022.
While the appeals at 266 WDA 2022, 267 WDA 2022, 403 WDA 2022,
and 846 WDA 2022 remained pending, on April 19, 2023, the trial court
approved the custodian’s recommendation for a protective sale and
assignment of assets. Appellants filed an appeal from that order, which was
docketed at 514 WDA 2023. In sum, the instant matter involves five
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separate docket numbers: 266 WDA 2022, 267 WDA 2022, 403 WDA 2022,
846 WDA 2022, and 514 WDA 2023. Appellants and the trial court have
complied with Pa.R.A.P. 1925 in all five matters.
In these consolidated and related appeals, Appellants raise the following
issues:
1. [Appeals at 266 WDA 2022 and 267 WDA 2022:] Whether the
trial court committed reversible error by granting, on a motion
for summary judgment, a declaratory judgment in [Appellees’]
favor insofar as: (1) as a matter of law, [Appellants] were
entitled to judgment in their favor on [Appellees’] declaratory
judgment claim; and (ii) alternatively, at a minimum, genuine
issues of material fact remained as to [Appellees’] declaratory
judgment claim and [Appellants’] defenses thereto?
2. [Appeal at 403 WDA 2022:] Whether the trial court committed
reversible error by ordering the dissolution of LSI, insofar as:
(i) the decision was inextricably linked to the trial court’s
erroneous declaratory judgment; and (ii) alternatively, even if
the declaratory judgment was proper, myriad other
independent factual and legal deficiencies precluded the trial
court’s order as a matter of law?
3. [Appeal at 846 WDA 2022:] Whether the trial court committed
reversible error by appointing James Chiafullo as custodian of
LSI insofar as: (i) the decision was directly at odds with this
Court’s Orders staying the Plan of Dissolution ordered
previously by the trial court; and (ii) independent of this Court’s
Stay Order, the factual and legal predicates for said
appointment were unsatisfied as a matter of law?
Appellants’ Brief at 6-7. Further, in the most recent and related appeal at 514
WDA 2023, Appellants raise the following issue:
Whether the trial court committed reversible error by approving
the Custodian’s actions, on behalf of LSI, to sell and license LSI’s
valuable intellectual property and certain other assets to Michael
Toth and his new company where: (1) such transactions exceeded
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his legal authority as a custodian; (2) such transactions violated
this Court’s Stay Order; (3) the transactions reflected a poor value
proposition for LSI; and (4) the transactions constituted unlawful
self-dealing by Michael Toth, to his own benefit and to the
detriment of LSI and his co-owners?
Appellants’ Brief at 514 WDA 2023, at 5.3
Appealability of Orders - 266 WDA 2022 & 267 WDA 2022
As an initial matter, we first address whether the appeals at 266 WDA
2022 and 267 WDA 2022 are properly before this Court. It is well settled that
the appealability of an order directly implicates the jurisdiction of
the court asked to review the order. Knopick v. Boyle, 189 A.3d
432, 436 (Pa. Super. 2018) (internal citation omitted). As a
general rule, appellate courts have jurisdiction only over appeals
taken from a final order. In re Bridgeport Fire Litigation, 51
A.3d 224, 229 (Pa. Super. 2012). A final order is one that
disposes of all the parties and all the claims; or is entered as a
final order pursuant to the trial court’s determination under Rule
341(c). Pa.R.A.P. 341(b)(1), (3). An appeal may also be taken
from an order that is made final or appealable by statute or
general rule, even though the order does not dispose of all claims
and of all parties. Pa.R.A.P. 311(a)(8).
Schmitt v. State Farm Mutual Auto. Ins. Co., 245 A.3d 678, 681 (Pa.
Super. 2021) (quotation marks omitted).
Additionally, 42 Pa.C.S. § 7532 provides:
Courts of record, within their respective jurisdictions, shall have
power to declare rights, status, and other legal relations whether
or not further relief is or could be claimed. No action or proceeding
shall be open to objection on the ground that a declaratory
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3 For clarity, we refer to Appellants’ Brief at 266 WDA 2022, 267 WDA 2022,
403 WDA 2022, and 846 WDA 2022 as “Appellants’ Brief,” and we shall refer
to the brief in the most recent appeal at 514 WDA 2023 as “Appellants’ Brief
at 514 WDA 2023.”
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judgment or decree is prayed for. The declaration may be either
affirmative or negative in form and effect, and such declarations
shall have the force and effect of a final judgment or decree.
42 Pa.C.S. § 7532.
“Although the [Declaratory Judgments] Act provides that the declaration
shall have the ‘force and effect of a final judgment or decree,’ . . . . It is the
nature of the order at issue that dictates whether it is final and appealable.”
Schmitt, 245 A.3d at 682 (citation omitted). This Court has summarized the
case law regarding declaratory judgment actions that do not dispose of all
claims and all parties as follows:
In Bolmgren v. State Farm Fire and Cas. Co., 758 A.2d 689
(Pa. Super. 2000), the appellee brought an action against State
Farm for a declaration of coverage under a homeowner’s policy
and for damages. Specifically, Counts I-III of the appellee’s
amended complaint sought relief in the form of declaratory
judgment, and Count IV sought damages, attorney’s fees, interest
and costs. Following competing motions for summary judgment,
the court granted summary judgment in favor of the appellee on
Counts I-III. State Farm appealed. As a prefatory matter, this
Court considered whether the appeal was properly before us,
where the damages claim in Count IV of the amended complaint
remained outstanding.
In addressing whether the appeal was proper under Rule
311(a)(8) by way of the Declaratory Judgments Act, this Court
explained:
Although the Act provides that the declaration shall have the
“force and effect of a final judgment or decree,” this partial
adjudication does not become appealable merely because it
is cast in the form of a declaratory judgment. Appellee’s
complaint in this matter, although captioned a declaratory
judgment, sought ordinary civil relief and remedies in the
form of a declaration of coverage and damages.[FN1] Her
request for further relief, in the form of damages, has yet to
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be determined. Because an appeal will not lie from an
interlocutory order, the present appeal must be quashed.
[FN1] It is the nature of the order at issue that dictates
whether it is final and appealable. In this case, the
order is not final since it does not dispose of the claim
of damages raised in the complaint, in addition to the
request for declaratory judgment. This case is
different than that in Redevelopment Authority of
Cambria County v. International Insurance Co.,
[685 A.2d 581 (Pa. Super. 1996), appeal denied,
695
A.2d 787 (Pa. 1997)]. In that case the complaint
sought relief in the form of declaratory judgment that
Erie [Insurance Group] and International [Insurance
Co.] owed a duty to defend and to indemnify the
Authority in an action filed by a third party. In that
case, the order was final because the trial court’s
determination that Erie [Insurance Group] had a duty
to defend the third-party claim effectively ended the
litigation. Here, in addition to the declaration of
rights, the trial [c]ourt was asked to award damages
under the policy. Under these circumstances, the
[trial] court is required to address this request.
Without doing so, the order is not final.
Id. at 691. . . .
This Court has repeatedly applied Bolmgren when discussing the
appealability of orders that resolve declaratory judgment claims
but leave other claims outstanding. See, e.g., Bombar v. West
American Ins. Co., 932 A.2d 78, 85-86 (Pa. Super. 2007)
(holding that trial court’s initial January 19, 2005 order granting
summary judgment on declaratory judgment count of complaint
was not final and appealable, where that order did not determine
amount of damages for remaining bad faith claim; appeal from
later December 30, 2005 order resolving outstanding bad faith
claim was proper); Cresswell v. Pennsylvania Nat. Mut. Cas.
Ins. Co., 820 A.2d 172, 176 n.2 (Pa. Super. 2003) (determining
trial court’s initial December 20, 2001 order granting partial
summary judgment in favor of appellee on declaratory judgment
claim was interlocutory and unappealable, where court’s order left
unresolved additional bad faith claim; trial court’s later order of
May 28, 2002, which disposed of sole remaining bad faith claim,
was final and appealable); Moore Motors, Inc. v. Beaudry, 775
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A.2d 869, 870 (Pa. Super. 2001) (per curiam) (quashing appeal
from order granting appellees’ motion for partial summary
judgment as interlocutory and unappealable; although court
granted summary judgment in favor of appellees on all nine
counts of appellants’ amended complaints, and on count I of
appellees’ counterclaim seeking declaratory judgment, court’s
order left unresolved counts II and III of appellees’ counterclaim;
holding “absent an express determination of finality under Rule
341(c), the dismissal of a complaint with the concomitant
dismissal of only one count of a multi-count counterclaim is
interlocutory and unappealable. . . . To hold otherwise would
permit the kind of piecemeal litigation that the Supreme Court
specifically tried to eliminate when it enacted Rule 341”).
Simultaneous to this Court’s continued application of Bolmgren,
our Supreme Court has issued a line of cases also dealing with the
appealability of orders resolving declaratory judgment claims,
beginning with Nationwide Mut. Ins. Co. v. Wickett, 763 A.2d
813 (Pa. 2000). In Wickett, our Supreme Court explained that
under Section 7532, “an order in a declaratory judgment action
that either affirmatively or negatively declares the rights and
duties of the parties constitutes a final order.” Id.,763 A.2d at
818. Consequently, the Court held that an order sustaining the
preliminary objections in the nature of a demurrer of some
defendants in a declaratory judgment action, and dismissing those
defendants from the case, was a final, appealable order, even
though claims against other defendants remained outstanding.
In Pennsylvania Bankers Ass’n v. Pennsylvania Dep’t of
Banking, 948 A.2d 790 (Pa. 2008), the Court limited the breadth
of Wickett. In that case, certain banks filed a complaint against
the Pennsylvania Department of Banking asserting different
theories for declaratory relief, including several constitutional
claims. The Commonwealth Court, which had original jurisdiction
in the case, sustained the Department of Banking’s preliminary
objections in the nature of a demurrer regarding some of the
banks’ claims. Our Supreme Court quashed the appeal as
interlocutory, distinguishing Wickett as follows:
The Banks . . . argue that the Commonwealth Court’s order
constitutes a final, appealable order pursuant to Wickett.
We find Wickett distinguishable, however, for the following
reasons. In Wickett, the trial court’s order put certain
defendants out of court by dismissing all of the plaintiff’s
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claims against them. In so doing, the order prevented the
plaintiffs from obtaining any relief against these parties. It
would therefore be appropriate in this context to
characterize the trial court’s order as a final order under 42
Pa.C.S. § 7532 because it, in essence, declared that the
plaintiffs did not have any viable theory of recovery against
such defendants.
In contrast . . . , the Commonwealth Court’s order in this
case did not dismiss any party, but merely narrowed the
scope of the Banks’ declaratory judgment action, which
raised alternative theories of relief. Because the Banks
might still obtain the relief they are seeking based on one of
the remaining constitutional theories, the Commonwealth
Court’s order sustaining the [Department of Banking’s]
preliminary objections has no certain effect upon the
ultimate relief to which the Banks may be entitled. Thus,
we find that the Commonwealth Court’s order in this case
did not declare the parties’ rights within the meaning of 42
Pa.C.S. § 7532, and therefore, it is not a final order under
Wickett.[FN16]
[FN16] Notably, the intermediate appellate courts have
limited Wickett to contexts where at least one party
has been dismissed from the case. See Wimer v. Pa.
Employees Benefit Trust Fund, 868 A.2d 8, 13 (Pa.
Super. 2005), aff’d, 939 A.2d 843 (Pa. 2007) (finding
Wickett applies when a complaint is dismissed and
the plaintiffs are put out of courts); Consolidation
Coal Co. v. White, 875 A.2d 318, 325 (Pa. Super.
2005) (holding an order is only final under Wickett
when there is “no conceivable legal theory under
which Appellants could prevail”); Creswell, [820 A.2d
at 176 n.2] (granting partial summary judgment was
not a final order under Wickett because one claim
remained); Independ. Oil & Gas Ass’n of Pa. v. Pa.
Pub. Util. Comm’n, 804 A.2d 693, 701 (Pa. Cmwlth.
2002) (determining that Wickett does not apply
unless the plaintiffs are put out of court).
…
For the reasons outlined above, we conclude that the
Commonwealth Court’s order in this case, which sustained
the [Department of Banking’s] preliminary objections in the
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nature of a demurrer with respect to some, but not all, of
the Banks’ constitutional claims, is not a final, appealable
order. Our conclusion today is not only informed by our
well-established policy of avoiding piecemeal litigation, it
also recognizes that such an order does not represent an
affirmative or negative declaration of the parties’ rights
within the meaning of 42 Pa.C.S. § 7532 because alternate
avenues of relief can still be pursued against the same
parties in the courts below.
Accordingly, we quash the instant appeal as interlocutory.
Pennsylvania Bankers Ass’n, 948 A.2d at 799-800 (some
internal footnotes omitted). See also United States
Organizations for Bankruptcy Alternatives, Inv. v.
Department of Banking (“USOBA”), 26 A.3d 474 (Pa. 2011)
(quashing appeal from Commonwealth Court’s order striking two
provisions of Debt Management Services Act (“Act 117”) as
unconstitutional; Commonwealth Court did not address several of
USOBA’s arguments and did not ultimately decide whether USOBA
was entitled to full relief originally requested, which remains
available via USOBA’s alternate arguments; essentially,
Commonwealth Court simply narrowed scope of USOBA’s
declaratory judgment action, without ultimately deciding case;
Department of Banking appealed order which, in light of USOBA’s
original challenge to Act 117, granted USOBA only partial
declaration of parties’ rights, status, or legal relations).
Most recently in the Wickett line of cases, our Supreme Court
summarized these holdings in Pennsylvania Manufacturers’
Assoc. Ins. Co. v. Johnson Matthey, Inc., 188 A.3d 396 (Pa.
2018), stating:
This Court last expounded upon the appealability of an order
declaring the rights of parties in [USOBA]. In that decision,
the Court provided a rather straightforward two-part test for
appellate courts to apply when considering whether an order
declaring the rights of parties is final and appealable: (1)
what is the effect of the lower court’s decision on the scope
of the litigation; and (2) what practical effect does the
court’s decision have on the ultimate outcome of the case. .
. . If the order in question merely narrows the scope of the
litigation and does not resolve the entirety of the parties’
eligibility for declaratory relief, then the order is
interlocutory and not immediately appealable.
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Pennsylvania Manufacturers’, 188 A.3d at 399-400 (quashing
appeal as interlocutory where Commonwealth Court entered order
that effectively denied appellant’s claim for declaratory relief but
left unresolved appellee’s related but broader counterclaim for
declaratory relief; as order on appeal does not resolve parties’
competing claims for declaratory relief but merely narrowed
dispute, order is not appealable at this time). See also Titeflex
Corp. v. National Union Fire Ins. Co. of Pittsburgh, PA, 88
A.3d 970 (Pa. Super. 2014) (holding order declaring that
appellant-insurer had duty to defend appellee-corporation in
underlying actions was appealable because order resolved
declaratory judgment action for all practical purposes; only
conclusion left for trial court to reach was amount of
indemnification, which could not be made until underlying actions
were completed; once trial court determined that insurer had duty
to defend, underlying actions could continue; thus, this case is
analogous to Redevelopment Authority, and not subject to
limitation on Wickett announced in Pennsylvania Bankers
Ass’n).
Schmitt, 245 A.3d at 682-85 (some formatting altered).
In sum, applying the two-part test from Pennsylvania
Manufacturers’ requires this Court to determine (1) the effect of the trial
court’s decision on the scope of the litigation; and (2) the practical effect the
trial court’s decision has on the outcome of the case. Pennsylvania
Manufacturers’, 188 A.3d at 400. As noted, if an order “merely narrows the
scope of the litigation and does not resolve the entirety of the parties’ eligibility
for declaratory relief, then the order is interlocutory and not immediately
appealable.”
Id. (citation omitted).
In the instant case, Appellants appealed from the trial court’s February
15, 2022 orders granting declaratory judgment in favor of Appellees at 266
WDA 2022 and denying Appellants’ cross-motion for summary judgment at
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267 WDA 2022. In its June 24, 2022 opinion, the trial court concluded that
neither order was appealable. See Trial Ct. Op., 6/24/22, at 9.
On March 23, 2022, this Court issued a rule directing Appellants to show
cause why the appeals at 266 WDA 2022 and 267 WDA 2022 should not be
quashed as interlocutory. See Superior Court Order, 3/23/22. Appellants
filed a response asserting that the February 15, 2022 orders are appealable
pursuant to Rule 311(a)(8), and asserting that Schmitt is distinguishable.
Resp. to Rule, 4/1/22, at 1-2. On June 28, 2022, this Court discharged the
rule to show cause and informed the parties that the issue would be decided
by the merits panel. Superior Court Order, 6/28/22.
As noted previously, with respect to the appeal at 266 WDA 2022,
Appellees sought partial summary judgment in the form of declaratory relief
concerning which operating agreement was LSI’s governing document and
whether Michael Toth would continue to remain president and CEO of LSI.
See Trial Ct. Op., 6/24/22, at 4; Appellees’ Mot. for Partial Sum. Jud.,
1/12/22, at 3, 14.
In granting Appellees’ motion, the trial court issued an order stating:
AND NOW, to wit, this 15th day of February, 2022, upon due
consideration of [Appellees’] Motion for Partial Summary
Judgment, all filings relevant thereto, and after hearing oral
argument on the same, it is hereby ORDERED, ADJUDGED, and
DECREED that said motion is GRANTED. Accordingly, the Court
enters a declaratory judgment as follows:
(1) The 2012 [Operating Agreement for LSI] remains in full force
and effect; and
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(2) The purported 2021 [Operating Agreement for LSI] was, from
its inception, null and void, without lawful import, authority, or
legitimacy.
Trial Court Order on Appeal at 266 WDA 2022, 2/15/22.
Following our review, we conclude that the trial court’s order at 266
WDA 2022 meets the two-part test for an appealable order. See
Pennsylvania Manufacturers’, 188 A.3d at 400. We recognize that the trial
court’s order did not address whether Michael Toth should continue as LSI’s
president. However, because the trial court found that the 2012 Operating
Agreement was controlling, the order effectively resolved Appellees’
declaratory judgment claims for all practical purposes. Therefore, the trial
court’s interlocutory order was appealable as of right. See id.; see also
Titeflex Corp.,
88 A.3d at 976; Pa.R.A.P. 311(a)(8); 42 Pa.C.S. § 7532.
Accordingly, we are constrained to disagree with the trial court’s conclusion
that the appeal at 266 WDA 2022 should be quashed.
With respect to the order on appeal at 267 WDA 2022, Appellants filed
a cross-motion for summary judgment requesting that the trial court dismiss
Appellees’ petition to dissolve and wind-up LSI and asking the court to make
a determination that the 2021 Operating Agreement should control. See
Appellants’ Cross-Mot. for Sum. Jud., 1/12/22, at 12-44, 45. Unlike Appellees,
Appellants did not request summary judgment in the form of declaratory relief.
In denying Appellants’ motion, the trial court issued an order stating:
AND NOW, to wit, this 15th day of February, 2022, upon due
consideration of [Appellants’] Cross-Motion for Summary
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Judgment, all filings relevant thereto, and after hearing oral
argument on the same, it is hereby ORDERED, ADJUDGED, and
DECREED that said motion is DENIED.
Trial Court Order on Appeal at 267 WDA 2022, 2/15/22.
We recognize that the trial court’s order at 267 WDA 2022 did not
explicitly resolve Appellants’ dispute concerning Appellees’ motion to
involuntarily dissolve LSI and that Appellants did not seek declaratory relief.
However, because the trial court denied Appellants’ motion in its entirety, the
order had the practical effect of denying declaratory relief concerning the 2021
Operating Agreement and the dissolution of LSI, see, e.g., Coticchia v.
Malcovery Security, LLC, 143 WDA 2021, 2021 WL 5827318, at *4 (Pa.
Super. 2021) (unpublished mem.),4 both of which were critical issues at the
center of this litigation and the outcome of this case. See Pennsylvania
Manufacturers’,
188 A.3d at 400; Schmitt,
245 A.3d at 683; Titeflex
Corp.,
88 A.3d at 976. Therefore, we conclude that the trial court’s order
had the effect of doing more than narrowing the scope of the litigation. See
Pennsylvania Manufacturers’,
188 A.3d at 400; Schmitt,
245 A.3d at 683;
Titeflex Corp.,
88 A.3d at 976.
For these reasons, we conclude that the order denying Appellants’ cross-
motion for summary judgment at 267 WDA 2022 is an interlocutory
____________________________________________
4 See Pa.R.A.P. 126(b) (non-precedential Superior Court decisions filed after
May 1, 2019, may be cited for their persuasive value).
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appealable order as of right pursuant to Pa.R.A.P. 311(a)(8).5 Accordingly,
we are constrained to disagree with the trial court’s conclusion that the appeal
at 267 WDA 2022 should be quashed. See Pennsylvania Manufacturers’,
188 A.3d at 400; see also Titeflex Corp.,
88 A.3d at 976; Pa.R.A.P.
311(a)(8); 42 Pa.C.S. § 7532.
In sum, because we conclude that the appeals at both 266 WDA 2022
and 267 WDA 2022 are properly before this Court, we will address the merits
of Appellants’ claims.
Appeal at 266 WDA 2022
On the merits, Appellants contend that the trial court erred in concluding
that the 2012 Operating Agreement controlled and that the 2021 Operating
Agreement was a nullity. Specifically, Appellants argue that the 2012
Operating Agreement’s provision regarding voting rights permitted Appellants
to amend LSI’s governing documents, and therefore the 2021 Operating
Agreement is valid. Appellants’ Brief at 31-37. Alternatively, Appellants claim
that the language concerning voting rights in the 2012 Operating Agreement
is ambiguous and subject to different but reasonable interpretations, and
____________________________________________
5 We note that the order on appeal at 403 WDA 2022, which ordered the
dissolution of LSI, the order on appeal at 846 WDA 2022, which appointed a
custodian, and the appeal at 514 WDA 2023, which approved a protective sale
and assignment of assets, all affect the possession or control of property.
Therefore, these orders are interlocutory appeals as of right. See Pa.R.A.P.
311(a)(2).
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therefore presents a genuine issue of fact, accordingly summary judgment
was entered in error. See id. at 38-39.
When reviewing a trial court’s decision granting or denying a motion for
summary judgment, we adhere to the following standard and scope of review:
We view the record in the light most favorable to the nonmoving
party, and all doubts as to the existence of a genuine issue of
material fact must be resolved against the moving party. Only
where there is no genuine issue as to any material fact and it is
clear that the moving party is entitled to a judgment as a matter
of law will summary judgment be entered. Our scope of review of
a trial court’s order granting or denying summary judgment is
plenary, and our standard of review is clear: the trial court’s order
will be reversed only where it is established that the court
committed an error of law or abused its discretion.
Siciliano v. Mueller, 149 A.3d 863, 864 (Pa. Super. 2016); see also Jones
v. Unitrin Auto and Home Ins. Co.,
40 A.3d 125, 127 (Pa. Super. 2012)
(noting that “ordinary summary judgment procedures are applicable to
declaratory judgment actions”).
This Court has explained that where an agreement contains definitions
for the words contained therein, the court will apply those definitions in
interpreting the agreement. See Monti v. Rockwood Ins. Co., 450 A.2d 24,
25 (Pa. Super. 1982). Moreover,
[i]f the contractual terms are clear and unambiguous on their face,
then such terms are deemed to be the best reflection of the intent
of the parties. If, however, the contractual terms are ambiguous,
then resort to extrinsic evidence to ascertain their meaning is
proper. A contract’s terms are considered ambiguous if they are
subject to more than one reasonable interpretation when applied
to a particular set of facts.
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Commonwealth ex rel. Kane v. UPMC, 129 A.3d 441, 463 (Pa. 2015)
(formatting altered and citations omitted). Further,
our review is guided by certain principles, or canons, of contract
interpretation. . . . First, the entire contract should be read as a
whole . . . to give effect to its true purpose. Second, a contract
must be interpreted to give effect to all of its provisions. Thus,
our Court will not interpret one provision of a contract in a manner
which results in another portion being annulled. Third, a word
used by the parties in one sense is to be interpreted as employed
in the same sense throughout the writing in the absence of
countervailing reasons, such as thwarting the intent of the
agreement. And, finally, a party’s performance under the terms
of a contract is evidence of the meaning of those terms.
Id. at 463-64 (formatting altered and citations omitted).
Finally, when reviewing an LLC’s operating agreement, we note that
“[a]n operating agreement may specify that its amendment requires the
approval of a person that is not a party to the agreement or the satisfaction
of a condition. An amendment is ineffective if its adoption does not include
the required approval or satisfy the specified condition.” 15 Pa.C.S. § 8817(a)
(citations omitted).
Instantly, in Appellants’ appeal at 266 WDA 2022, they argue that the
language from the 2012 Operating Agreement permitted Appellants to amend
the agreement and create the 2021 Operating Agreement. Appellants assert
that “Section 13.5 of the 2012 Operating Agreement provided that the
agreement ‘may not be amended except by the written agreement of Members
holding Two-Thirds Interest of the Company.’” Appellants’ Brief at 32 (quoting
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2012 Operating Agreement at Section 13.5). Appellants claim that the 2012
Operating Agreement establishes the following:
• Section 1.22: Membership Interest means “A Member[’]s entire
interest in the Company, including such Member’s Economic
Interest and such other rights and privileges that the Member may
enjoy . . . .”
• Section 1.24: Ownership Interest means: “in the case of a
Member, the Member’s Membership Interest . . . .”
• Section 1.39: Voting Interests are held by Michael Toth and
Bryan Toth, each said interest carrying 50% weight, i.e., each
individual holds an equal Voting Interest.
• Section 1.37: Two-Thirds Interest means: “one or more Voting
Interests of Members which taken together exceed 66.67% of the
aggregate of all Voting Interests.”
• Section 1.20: Majority Interest means “one or more Voting
Interests of Members which taken together exceed fifty percent
(50%) of the aggregate of all Voting Interests.”
Appellants’ Brief at 32 (formatting altered and citations omitted).
Appellants claim that this language supports the conclusion that
Appellants were members holding a combined interest in 75% of LSI, and
therefore, Appellants’ total votes constituted more than 66.67% allowing
Appellants to vote to amend the 2012 Operating Agreement. Appellants’ Brief
at 32-35. Appellants assert that “it was absolutely the parties’ intent that a
decision as fundamental as amending the [2012 O]perating [A]greement
would be reserved for all of the company’s owners.” Appellants’ Brief at 34
(emphasis omitted).
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Appellants allege that the language from Section 13.5, which sets forth
the requirements to amend the 2012 Operating Agreement, states that the
agreement “may not be amended except by the written agreement of
Members holding Two-Thirds Interest of the Company[.]” Id. at 37.
Appellants assert that the inclusion of the words “of the company” modifies
and expands the definition of “Two-Thirds Interest” from Sections 1.37 and
1.39, and it allows for the conclusion that “Voting Interest” includes Eugene
and Marie, in addition to Bryan and Michael. Id. at 33-38; Appellants’ Reply
Brief at 5-6.
In resolving Appellants’ claims, the trial court concluded that (1)
Appellants did not satisfy the voting requirements necessary to amend the
2012 Operating Agreement; and (2) the terms of the 2012 Operating
Agreement were unambiguous. See Trial Ct. Op., 6/24/22, at 11-12.
As noted previously, Section 13.5 of the 2012 Operating Agreement
states: “This Agreement may not be amended except by the written
agreement of Members holding Two-Thirds Interest of the Company.” 2012
Operating Agreement at Section 13.5. The 2012 Operating Agreement defines
a “Two-Thirds Interest” as follows: “Two-thirds Interest shall mean one or
more Voting Interests of Members which taken together exceed 66.67% of
the aggregate of all Voting Interests.” Id. at Section 1.37. The 2012
Operating Agreement specifically and exclusively limited “Voting Interest” to
Bryan and Michael. See id. at 1.39. Indeed, Michael has 50% Voting Interest,
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and Bryan has 50% Voting Interest. See id. Further, Section 1.39 expressly
states that Eugene and Marie have “0%” Voting Interest. Id. at Section 1.39.
Accordingly, Appellants’ voting rights claims are belied by the record
and are meritless. Although the 2012 Operating Agreement provides that
Bryan, Eugene, and Marie each have a 25% sharing ratio pursuant to Section
1.33, the 2012 Operating Agreement does not provide Eugene nor Marie with
voting interests. The 2012 Operating Agreement unambiguously and
expressly states that only Bryan and Michael have voting interests to amend
the 2012 Operating Agreement. See id. at Sections 1.20, 1.37, 1.39, and
13.5. Contrary to Appellants’ assertions, there is no support in the record for
their claim that Bryan, Eugene, and Marie’s aggregate 75% economic interest
and sharing ratio pursuant to Sections 1.14, 1.15, 1.17,6 and 1.33, could be
combined to satisfy the “Two-Thirds Interest” required to amend the 2012
Operating Agreement. On this record it is clear that the 2012 Operating
Agreement does not provide voting interests to Eugene and Marie such that
they cannot parlay their economic interests into voting interests. See id. at
Section 1.39. In sum, we agree with the trial court that Appellants have not
____________________________________________
6 Pursuant to Sections 1.14, 1.15, and 1.17, Eugene and Marie have limited
interests in LSI, and they are Equity Owners with an Economic Interest. See
2012 Operating Agreement at Sections 1.14, 1.15, and 1.17. The Agreement
specifies that Equity Owners and Economic Interest Owners are not
“Members” such as Bryan and Michael, and expressly lack “the right to
participate in the management or affairs of the Company, including the right
to vote on, consent to or otherwise participate in any decision of the Members
or Officers.” 2012 Operating Agreement at Section 1.14; see also id. at
Sections 1.15, 1.17, and 1.33.
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satisfied the voting requirements necessary to amend the 2012 Operating
Agreement. See Trial Ct. Op., 6/24/22, at 11-12.
Further, we agree with the trial court that the terms of the 2012
Operating Agreement are unambiguous. The trial court explained as follows:
[Appellants] also go on to assert that, in the alternative, [the trial
c]ourt erred in entering a declaratory judgment in [Appellees’]
favor on a motion for summary [judgment and alleged] the
existence of ambiguous language in Section 13.5 of the [2012
Operating Agreement] and the existence of a genuine issue of
material fact concerning what the parties’ intended under
[Section] 13.5 of the 2012 [Operating] Agreement.
When construing agreements involving clear and unambiguous
terms, courts need only examine the writing itself to give effect to
the parties’ understanding. Stephan v. Waldron Elec. Heating
& Cooling LLC, 100 A.3d 660, 665 (Pa. Super. 2014) (“This Court
must construe the contract only as written and may not modify
the plain meaning under the guise of interpretation.”)[.] As
discussed above, [Section] 13.5 of the 2012 [Operating]
Agreement was not ambiguous. In examining [Section] 13.5 of
the Agreement, requiring “Two-Thirds Interest” for a valid
amendment with [Section] 1.37, defining Two-Thirds Interest to
be the excess of 66.67% of all Voting Interest, defined as the
interests belonging only to Michael and Bryan in equal share in
[Section] 1.[3]9, the parties’ understanding is clear under the
2012 [Operating] Agreement’s plain meaning as written. See
Stephan, 100 A.3d at 665. Thus, given the absence of any
genuine issue of material fact, [the trial c]ourt properly entered
a declaratory judgment on [Appellees’] . . . Motion for Partial
Summary Judgment.
Trial Ct. Op., 6/24/22, at 12 (some formatting altered and footnote omitted).
On this record, we agree with the trial court and conclude that there is
no ambiguity in the language of the 2012 Operating Agreement. The trial
court concluded that “Voting Interest” was defined in the 2012 Operating
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Agreement and unambiguously reflected that the only voting interests were
held by Bryan and Michael, each holding a 50% interest. As such, the 2012
Operating Agreement unambiguously precluded the 2021 Operating
Agreement, and the trial court correctly concluded that the 2012 Operating
Agreement is LSI’s governing document.
For these reasons, Appellants lacked sufficient voting interests to amend
the 2012 Operating Agreement. Because Appellants lacked the votes to
amend the 2012 Operating Agreement, we agree with the trial court that the
2021 Operating Agreement is a legal nullity. Accordingly, we discern no error
in the trial court entering partial summary judgment on this issue in favor of
Appellees, finding that the 2021 Operating Agreement was a nullity, and
concluding that the 2012 Operating Agreement remained in force. On this
record, we affirm the order on appeal at 266 WDA 2022 and no relief is due.
Appeal at 267 WDA 2022
Appellants next argue that the trial court erred in denying their cross-
motion for summary judgment and concluding that the 2012 Operating
Agreement controlled and that the 2021 Operating Agreement was a nullity.
Appellants’ Brief at 31-39.
In addressing Appellants’ claim, the trial court explained:
Although [Appellants] argue that this court erred by failing to
grant . . . summary judgment in [Appellants’] favor, asserting that
this court was required to determine, as a matter of law, that the
2021 Agreement was lawfully adopted, displaced the 2012
Agreement, and now governs LSI’s affairs — this court disagrees.
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…
With respect to the 2012 Agreement, Article 13.5 provides in
pertinent part that the agreement may not be amended except by
the written agreement of Members holding two-thirds interest of
the Company. Two-thirds interest is defined as one or more
voting interests of Members which taken together exceed 66.67%
of the aggregate of all voting interests. Voting interest is further
defined as those interests belonging only to Michael and
[Appellant] Bryan Toth in equal share (50% each) under Art. 1.19.
Although Article 1.19 makes clear that Eugene and Marie have 0%
voting interest, [Appellants’] assertion that their collective 75%
economic interest as members meets the requirements of Article
13.5 to allow for amendment in the absence of Michael flies in the
face of the only reasonable interpretation of the 2012 Agreement.
Seeing that there was certainly evidence to allow a factfinder to
render a verdict in favor of [Appellees], this court did not err by
[denying Appellants’ motion for summary judgment].
See Trial Ct. Op., 6/24/22, at 10-11 (formatting altered and internal citations
and footnotes omitted).
Following our review, we agree with the trial court that “Voting Interest”
was defined in the 2012 Operating Agreement and unambiguously reflected
that the only voting interests were held by Bryan and Michael, each holding a
50% interest. See id. at 10-12. The 2012 Operating Agreement
unambiguously precluded the 2021 Operating Agreement, and the trial court
correctly concluded that the 2012 Operating Agreement is LSI’s governing
document. See Kane, 129 A.3d at 463. Therefore, Appellants lacked
sufficient voting interests to amend the 2012 Operating Agreement, and the
2012 Operating Agreement remains in control. On this record, we discern no
error in the trial court’s order denying Appellants’ motion for summary
judgment, and we affirm the order on appeal at 267 WDA 2022.
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Appeal at 403 WDA 2022
In the appeal at 403 WDA 2022, Appellants contend that the trial court
erred in entering the April 5, 2022 order granting Appellees’ petition to
dissolve LSI. Appellants first argue that dissolution was foreclosed by the
terms of the 2021 Operating Agreement. Appellants’ Brief at 39. Appellants
also assert that dissolution was not raised properly in the trial court. Id. at
40. Further, Appellants contend that, assuming the 2012 Operating
Agreement remains in force, the trial court erred in dissolving LSI because
Section 7.11 of the 2012 Operating Agreement mandated binding mediation.7
Id. at 41-46.
We reiterate here that we agree with the trial court that the 2012
Operating Agreement remains in effect, and that the 2021 Operating
Agreement is a nullity. Therefore, Appellants’ argument that the dissolution
of LSI was foreclosed by the terms of the 2021 Operating Agreement is
meritless and no relief is due.
Next, Appellants assert that the issue of LSI’s dissolution was not
properly raised before the trial court. Appellants’ Brief at 40. Appellants argue
____________________________________________
7 Binding mediation is a form of ADR. See Armstrong World Indus., Inc.
v. Travelers Indem. Co., 115 A.3d 342, 346 (Pa. Super. 2015) (stating that
ADR is defined as “[a] procedure for settling a dispute by means other than
litigation, such as arbitration or mediation.” (quoting BLACK’S LAW
DICTIONARY (9th ed. 2009)). Moreover, ADR is a matter of contract. See,
e.g., Humphrey v. GlaxoSmithKline PLC,
263 A.3d 8, 14 (Pa. Super.
2021).
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that dissolution must be specifically pleaded as a cause of action in a complaint
or in a counterclaim. See id. Appellants contend that the issue of dissolution
was not before the trial court until Appellees raised it in a motion for
dissolution on May 25, 2021. See
id. at 41.
It is well settled that Pennsylvania is a fact pleading jurisdiction. See
Griffin v. Rent-A-Center, Inc., 843 A.2d 393, 395 (Pa. Super. 2004) (per
curiam). Indeed, this Court has explained:
Pennsylvania is a fact pleading rather than a notice pleading
jurisdiction. As a result, courts are presumed to know the law and
plaintiffs need only plead facts constituting the cause of action and
the courts will take judicial notice of the statute involved. The
plaintiff is not required to specify the legal theory . . . underlying
the complaint.
Griffin, 843 A.2d at 395 (formatting altered and citations omitted).
With respect to dissolution of an LLC, 15 Pa.C.S. § 8871 provides that
an LLC may be dissolved and its activities and affairs wound up when “it is not
reasonably practicable to carry on the company’s activities and affairs in
conformity with the certificate of organization and the operating
agreement[.]” 15 Pa.C.S. § 8871(a)(4)(ii).
Instantly, the trial court correctly observed that Pennsylvania is a fact
pleading state and that “[a]s such, causes of action and legal theories need
not specifically be alleged in a complaint, as long as the legally operative facts
underlying those causes of action have been pleaded.” Trial Ct. Op., 6/29/22,
at 6 (citation omitted). Further, the trial court explained:
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Here, the legally operative facts upon which [Appellees’] Petition
to Dissolve was brought were sufficiently plead in [Appellees’]
Complaint and were sufficient to support a cause of action to
dissolve the company. [Appellees] plead that [Appellants]
attempted to execute [an] agreement[] that would remove
[Appellees] from LSI in violation of the 2012 Operating Agreement
and that the personal relations between the parties are
dissentious. Further[,] facts to support dissolution were
developed and litigated as the case progressed. Even if it was
error for [the trial c]ourt to allow dissolution when that cause of
action was not specifically pleaded in [Appellees’] Complaint, it
was harmless error. [Appellants] were aware of legally operative
facts at issue in this case and had an opportunity to prepare a
defense and be heard in court on the matter of dissolution. As
such, [the trial c]ourt’s Order dissolving the company should not
be reversed for this reason.
Id.
On this record, we conclude that Appellees pled sufficient operative facts
in their complaint to establish a cause of action for dissolution. In their
complaint, Appellees pleaded that the 2012 Operating Agreement controlled
the governance of LSI. Compl., 1/12/21, at ¶¶ 21, 59. Appellees complained
that Appellants were in breach of the 2012 Operating Agreement and asked
the trial court to enjoin Appellants from actions taken that were not in
conformity with the 2012 Operating Agreement, and to take further necessary
action at law and equity. See id. at ¶¶ 36, 46. Appellees alleged that
Appellants were attempting to wrest control over LSI such that it deprived
Appellees of their rights and property interests. See id. at ¶ 57. Appellees
further requested that the trial court impose a constructive trust to protect
Appellees’ interests. See id. at ¶¶ 60, 61. As the trial court noted, it was
evident that Appellees alleged that the operations of LSI were impracticable,
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the facts asserted a claim for winding up and dissolving LSI, and the trial court
was permitted to take judicial notice of the relevant statute involved. See
Trial Ct. Op., 6/29/22, at 6-7, 15; see also 15 Pa.C.S. § 8871(a)(4)(ii). On
this record, we conclude that the trial court did not err in considering the issue
of dissolution and no relief is due.
Next, we address the propriety of the trial court’s order dissolving LSI.
Appellants argue that even if the trial court was correct in finding that the
2012 Operating Agreement remains controlling and “assum[ing] arguendo
that the 2012 Operating Agreement governs LSI’s affairs,” dissolving LSI was
premature because of the ongoing conflicts among the parties, that binding
mediation is mandated under Section 7.11 of the 2012 Operating Agreement,
and that binding mediation has not occurred. Appellants’ Brief at 40, 41-47.8
As stated, LSI is a Pennsylvania LLC which is governed pursuant to the
Pennsylvania Associations Code and Pennsylvania Uniform LLC Act. See 15
Pa.C.S. § 101; see also id. at §§ 8102, 8811-8898 (addressing regulation,
formation, and applicability to partnerships, LLCs, and corporate forms of
____________________________________________
8 In their January 19, 2021 preliminary objections, Appellants specifically
raised the mediation provisions. See Prelim. Obj., 1/19/21, at ¶¶ 7-15.
Accordingly, Appellants did not waive alternative dispute resolution. See,
e.g., O’Donnell v. Hovnanian Enter., Inc., 29 A.3d 1183, 1187 (Pa. Super.
2011).
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organization). Section 8871 of the Uniform LLC Act addresses dissolution of
an LLC and provides as follows:
(a) General rule.—A limited liability company is dissolved, and
its activities and affairs shall be wound up, upon the occurrence
of any of the following:
(1) An event or circumstance that the operating agreement
states causes dissolution.
(2) The consent of all the members.
(3) The passage of 180 consecutive days after the company
ceases to have any members unless before the end of the
period:
(i) consent to admit at least one specified person as a
member is given by transferees owning the rights to receive
a majority of distributions as transferees at the time the
consent is to be effective; and
(ii) at least one person becomes a member in accordance
with the consent.
(4) On application by a member, the entry by the court of an
order dissolving the company on the grounds that:
(i) the conduct of all or substantially all the company’s
activities and affairs is unlawful;
(ii) it is not reasonably practicable to carry on the company’s
activities and affairs in conformity with the certificate of
organization and the operating agreement; or
(iii) the managers or those members in control of the
company:
(A) have acted, are acting, or will act in a manner that is
illegal or fraudulent; or
(B) have acted or are acting in a manner that is
oppressive and was, is or will be directly harmful to the
applicant.
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(b) Other remedies.—In a proceeding brought under subsection
(a)(4)(iii)(B), the court may order a remedy other than
dissolution.
15 Pa.C.S. § 8871(a)-(b). Moreover, “[a] dissolved [LLC] shall wind up its
activities and affairs, and the company continues after dissolution only for the
purpose of winding up.” 15 Pa.C.S. § 8872(a). We note that the application
of a statute is a question of law, and our scope of review is plenary and our
standard of review is de novo. See E.C.S. v. M.C.S., 256 A.3d 449, 454 (Pa.
Super. 2021).
As discussed above, we conclude that the 2012 Operating Agreement
remains in force, and the parties continue to be bound by its terms. See 15
Pa.C.S. §§ 8815, 8816(a). With respect to dissolution, the 2012 Operating
Agreement states:
(a) The Company shall be dissolved only upon the occurrence of
any of the following events:
(1) by the written agreement of Members holding a Two-Thirds
Interest;
(2) by an order of a court of competent jurisdiction in an action
commenced by any Member in which the Member can show
that:
(i) Except as set forth in Section 7.11 of this Agreement,
the Members are deadlocked in the management of the
Company’s affairs, and irreparable injury to the corporation
is threatened or being suffered, or the business and affairs
of the corporation can no longer be conducted, because of
the deadlock;
(ii) The Officers or other Members in control of the Company
have acted, are acting, or will act in a manner that is illegal,
oppressive, or fraudulent;
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(iii) There have been repeated, material breaches of the
Agreement by the Company or by other Members or
Officers; or
(iv) It is otherwise not reasonably practicable to carry on
the business in conformity with the Operating Agreement.
Notwithstanding anything to the contrary in the Act, the Company
shall not be dissolved upon the death, retirement, resignation,
expulsion, bankruptcy or dissolution of an Equity Owner.
(b) As soon as possible following the occurrence of any of the
events specified in Section 12.1(a) effecting the dissolution of
the Company, the appropriate representative of the Company
shall execute all documents required by the Act at the time of
dissolution and file or record such statements with the appropriate
officials.
2012 Operating Agreement at Section 12.1 (emphases in original).9
Section 7.11 of the 2012 Operating Agreement contemplates a deadlock
in certain matters and provides as follows:
7.11 Dispute Resolution for Members. In the event that the
Members are deadlocked and cannot come to an agreement with
respect to any decision of the Company (including any items
referred to the Members pursuant to Section 5.15 of this
Agreement [involving dispute resolution for officers]), the
Members hereby agree to submit any and all such disputes
between them to binding mediation in accordance with the
provisions set forth on Exhibit 7.11 attached hereto and made a
part hereof. Any decision reached by the mediator shall be final
and binding upon the Members.
____________________________________________
9 Appellants contend that Appellees waived argument concerning Section
12.1(a)(2)(ii) and (iii). See Appellants’ Supplemental Brief at 7. We disagree.
Even if Appellees had not raised these subsections, this Court has the
authority to affirm the trial court’s order on any proper basis. See Cardona
v. Buchanan, 230 A.3d 476, 478 (Pa. Super. 2020); see also
Commonwealth v. Moore,
937 A.2d 1062, 1073 (Pa. 2007) (“an appellate
court may affirm a valid judgment based on any reason appearing as of record,
regardless of whether it is raised by the appellee” (citation omitted)).
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2012 Operating Agreement at Section 7.11 (some formatting altered).
The record reflects that on August 4, 2021, the trial court appointed
John R. McGinley, Jr., Esquire, as an interim custodian of LSI. See Trial Court
Order, 8/4/21, at ¶ 1. The trial court directed Attorney McGinley to make
findings of fact and conclusions of law “as to whether the Members [of LSI]
are deadlocked in the management of [LSI’s] affairs and/or whether it is
reasonably practicable for the Members of LSI to carry on the business of LSI
in conformity with the provisions of LSI’s [2012] Operating Agreement.” Id.
at ¶ 2. In his findings of fact and conclusions of law, Attorney McGinley stated:
49. The Custodian concludes that each side is intractable in its
belief and in good faith differ on how to manage LSI, conduct its
business and whether Michael should remain the CEO and
President of LSI. The differences have resulted in the litigation
before [the trial court], litigation in Florida and efforts to replace
Michael and reconstitute LSI as a manager-managed, Florida
limited liability company.
50. The holders of the “Voting Interests” of LSI[10] are deadlocked.
Their disagreements are not over issues that arise in the day-today operation of a business, but rather go to the core issues such
as the governing law applicable to a limited liability company, the
allocation of voting rights, hence power among members, and the
primary areas of corporate investment.
…
71. The Custodian concludes that Michael and Bryan, the
members of LSI of who have Voting Interests, are deadlocked.
The deadlock manifests itself at two levels. They are deadlocked
on the appropriate business plan for LSI and they are deadlocked
on the election of Officers. Bryan and Michael, the holders of the
____________________________________________
10As stated, only Bryan and Michael have “voting interests.” See 2012
Operating Agreement at Section 1.39.
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Voting Interests, cannot agree on the Officers of LSI or who should
direct its day-to-day business affairs. Bryan, Eugene and Marie’s
attempt to oust Michael as the CEO and President and their
attempt to convert LSI to a manger-managed, Florida limited
liability company and amend the 2012 Operating Agreement,
further evidences this dysfunction and deadlock.
72. Accordingly, the Custodian concludes as follows:
The Members who control Voting Interests decisions are
deadlocked – neither Michael nor Bryan will yield to the
other and comity among the Members has dissolved.
…
77. Section 7.11 of the 2012 Operating Agreement also
contemplates a dispute resolution mechanism for Members. It
provides:
In the event that the Members are deadlocked and cannot
come to an agreement with respect to any decision of
the Company . . ., the Members hereby agree to submit
any and all such disputes between them to binding
mediation[.]
78. The predicate for disagreement among members is limited to
a “decision of the Company.” While some of the disagreements in
this case deal with the direction of [LSI] and thus its business
plans, others are disagreements not with respect to [LSI] but
rather disagreements in their capacity as Members. The
architecture of the dispute resolution may aid in connection with
certain of the disputes among the parties but is of little help with
regard to the core disputes among the Members. For example,
the decision to advocate a change from a member-managed
limited liability company, to a manager-managed limited liability
company is a decision taken as a member. It is a governance
decision adopted by the members rather than a “decision of the
Company.” Indeed, that analysis may have been the reason why
in the first instance Bryan, Eugene and Marie attempted to oust
Michael and amend the 2012 Operating Agreement rather than
take their concerns to a mediator pursuant to section 7.11 of the
2012 Operating Agreement.
…
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80. Section 7.11 may offer some limited vehicle for deciding
conflicts that arise among members, relating to the decisions of
the Company, but it does not encompass all of the deeper disputes
among the Members. Section 7.11 is inapplicable to differences
on whom to elect as Officers. The selection of Officers is the
prerogative of the owners of the Voting Interests and its deeply
divided between Michael and Bryan.
…
93. The parties have attempted a conventional mediation with
Attorney David White, an accomplished and respected mediator.
That effort failed.
94. Based upon the diverging viewpoints among the holders of the
Voting Interests, the Custodian finds that there is an irreconcilable
deadlock on certain operational issues “with respect to any
decision of the Company” within the meaning of section 7.11 of
the 2012 Operating Agreement. If such operational disputes
constituted exclusive issues among the parties, such issues would
be a matter for mediation under the 2012 Operating Agreement.
In this case, day-to-day decisions are not the primary issues.
Interim Custodian’s Findings of Fact and Conclusions of Law, 10/15/21, at ¶¶
49, 50, 71, 72, 77, 78, 80, 93, 94 (emphasis in original).
As stated, under the Pennsylvania Uniform LLC Act, a court may dissolve
an LLC upon petition by a member when “[a]n event or circumstance[s] that
the operating agreement states causes dissolution” occurs, or “it is not
reasonably practicable to carry on the company’s activities and affairs in
conformity with the certificate of organization and the operating
agreement[.]” 15 Pa.C.S. § 8871(a)(1), (a)(4)(ii). Moreover, the 2012
Operating Agreement provides that the company shall be dissolved if
“[e]xcept as set forth in Section 7.11 of this Agreement [(concerning
decisions of the company)], the Members are deadlocked in the management
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of the Company’s affairs, and irreparable injury to the corporation is
threatened or being suffered, or the business and affairs of the corporation
can no longer be conducted, because of the deadlock[.]” 2012 Operating
Agreement at Section 12.1(2)(i) (emphasis in original).
The trial court addressed dissolution of LSI as follows:
Although Pennsylvania case law is sparse on what circumstances
are sufficient to give rise to a ground for dissolution, a court may
look to dissolution in similar forms of business associations, such
as partnerships and close corporations, for guidance. Slaiger v.
Holohan, 100 A.3d 622, 624 (Pa. Super. 2014). This [c]ourt is
also guided by persuasive authority from other jurisdictions in
determining the contours of deadlock and impracticability.
Because the analyses and facts to support a finding of deadlock
and impracticability are virtually indistinguishable in this case, this
[c]ourt’s analysis will treat them as one and the same. Ultimately,
there are three major factors in this case that support such a
finding: (1) [Appellants’] violation of the 2012 Operating
Agreement in order to circumvent Michael’s control and
management of the LLC, (2) the irreconcilable views of both
parties over major structural decisions of the LLC, and (3) the
utter distrust and animosity between the parties personally.
Trial Ct. Op., 6/29/22, at 7. The trial court further addressed the factors
supporting its conclusion that dissolution was proper:
In Staiger, the Superior Court upheld a dissolution of an LLC
where there were two fifty percent (50%) members “such that
when they disagree, the result is a deadlock and decisions cannot
be made pursuant to the operating agreement.” [Staiger, 100
A.3d] at 625. The Pennsylvania Supreme Court has cautioned,
however, that “[a] going and prosperous business will not be
dissolved merely because of friction among the partners; [equity]
will not interfere to determine which contending faction is more at
fault.” Potter v. Brown, 195 A. 901, 904 (Pa. 1938). The
Superior Court distinguished the type of friction that arose in
Potter with the type of friction between the members in Staiger.
Whereas in Potter the defendant partner had not conducted
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himself in any way other than in accordance with the partnership
agreement, the defendant member in Staiger unilaterally
excluded the plaintiff member from management decisions, in
violation of the membership agreement, in order to bypass the
need for the unanimous consent of both members. Staiger, 100
A.3d at 625.
In Potter, the plaintiffs’ grievances stemmed from the fact that
they lacked management rights in the company, for which the
plaintiffs failed to bargain when they signed the partnership
agreement. The plaintiffs’ action in equity did not lie where the
defendant, whose sole control over management of the
partnership was vested by the agreement, would not relinquish
those rights. [Appellants] here are no different. [Appellants] are
parties to a membership agreement that requires Michael’s
consent in order to make the structural changes to LSI that
[Appellants] desire. In an attempt to circumvent this roadblock,
[Appellants] sought to unilaterally alter the power structure and
jurisdictional home of LSI in violation of the 2012 Operating
Agreement. This is the same type of conduct that warranted
dissolution in Staiger.
[Appellants] have contended that, since the commencement of
this litigation, they have allowed Michael to remain in control of
the company and to run the day-to-day operations. As such,
Michael has not been excluded from management of the company.
However, [Appellants] overlook the critical detail that this would
not be the case were it not for this [c]ourt’s intervention in the
matter. But for this [c]ourt’s injunction, Michael likely would still
be physically locked out of the company’s offices and without
access to the company’s email or computer systems. Moreover,
Michael’s management of the day-to-day has allowed the
company to remain operational, but this status quo is not
sustainable long-term. The status quo still fails to address the
other major roadblocks to practicably operating the business,
namely the parties’ disparate visions for LSI’s future and the
parties’ mutual animosity.
Trial Ct. Op., 6/29/22, at 7-9. The trial court also discussed the irreconcilable
positions of both parties over structural decisions of LSI:
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Due to the dearth in Pennsylvania case law addressing deadlock
and dissolution,[11] this [c]ourt looks to persuasive authority from
other jurisdictions that have more closely analyzed the issue. The
Supreme [Judicial] Court of Massachusetts collected a variety of
authorities from other jurisdictions to analyze the circumstances
that give rise to deadlock and found the following four common
factors: (1) the existence of a stalemate between the members
on the primary functions of management, including business
strategy; (2) the size of the business association, where a 50-50
split of decision-making authority between two members makes
impasses more irreconcilable; (3) whether a party has
purposefully engineered a deadlock; and (4) the degree and
extent of distrust and antipathy between the members. Koshy v.
Sachdev, 81 N.E.3d 722, 730-31 (Mass. 2017).
Here, the voting shares of LSI, and hence the decisional authority
to make the kinds of structural changes to LSI over which the
parties disagree, is split equally between Michael and Bryan.[FN8]
This makes the differences between the parties all the more likely
to be incapable of resolution. See Black v. Graham, 464 S.E.2d
814, 815 (Ga. 1996) (finding that a company owned in equal
shares by two contending parties who could not agree on business
decisions presented the “classic situation of deadlock” and
warranted dissolution). This is especially so where the parties
disagree over rather fundamental issues of business governance,
such as whether Michael should remain in control of the company’s
management. The parties also disagree as to the types of
products and services LSI should offer, the type of clients it should
pursue, the tax classification of the business, its headquarters,
and its state of incorporation.
[FN8] 2012 Operating Agreement, art. 1.39.
Furthermore, Michael has done nothing to engineer this deadlock.
Michael is not the party that seeks to alter the company’s
operating agreement, that has violated the operating agreement,
or that has breached his fiduciary duties to other members.
____________________________________________
11 We note that although decisions from the courts of common pleas are not
binding authority, they may be considered persuasive. See Darrow v. PPL
Elec. Utilities Corp., 266 A.3d 1105, 1112 n.6 (Pa. Super. 2021). Similarly,
decisions of courts in other states are not binding but may cited for their
persuasive value. See Umbelina v. Adams,
34 A.3d 151, 160 n.3 (Pa.
Super. 2011).
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Instead, [Appellants’] conduct has resulted in LSI’s deadlock for
the purpose of seeking a forced buy-out of Michael’s interest. This
[c]ourt cannot, in the interests of equity, reward [Appellants’]
violative conduct by giving them exactly what they intended to
accomplish: forcing Michael out of the company.
…
The [next] factor considered by the Massachusetts Supreme Court
[in Koshy] was mutual animosity between the members of the
company. Koshy, 81 N.E.3d at 731 (“Mutual antipathy can
transform what may begin as a run of the mill disagreement into
irreconcilable conflict and stalemate where hostility precludes
compromise.”).
In this case, any trust the parties may have had in each other and
willingness to compromise was irretrievably lost when
[Appellants] went behind [Appellees’] backs to force them out of
the company. [Appellants] did not just stop at executing the
purported agreement without Michael’s knowledge o[r] consent,
but they prevented Michael’s access to LSI’s offices, emails, and
computers. [Appellants] went even further to spread rumors
amongst employees that Michael was mentally unwell and no
longer able to lead the company, despite having no reasonable
basis for such accusations.[FN9] [Appellants] have taken the
position, conveniently after the institution of the current
proceedings against them, that they have been willing to
compromise during mediation and that [Appellees] have not.[FN10]
However, at no point before [Appellants’] unilateral attempt to
remove Michael from LSI did they reach out to Michael to try to
resolve their differences amicably. Instead, [Appellants] created
an atmosphere of hostility from the start and tarnished any
possibility of rebuilding trust.
[FN9]Dr. Robert Marzano confirmed, when interviewed by
the Custodian, that [Appellants] rumored that Michael had
stepped down from leadership in LSI due to emotional or
mental problems.
[FN10] Article 7.11 of the 2012 Operating Agreement requires
the parties to pursue alternative dispute resolution before
seeking dissolution. As noted above, these attempts at
resolution have proved unfruitful, reinforcing the
determination that the parties are deadlocked.
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Moreover, the personal and familial nature of the dispute that
underlies this deadlock is such that “hostility precludes
compromise.” Koshy, 81 N.E.3d at 731. It is the unfortunate but
frequent truth that closely held businesses will often be unable to
overcome personal differences and animosity that develops wholly
apart from any business-related disagreements. Michael testified
that he is not on speaking terms with either his mother, father, or
brother. His father also made his antipathy known in testimony,
describing Michael as “a snot,” “extremely vain,” “condescending,”
“arrogant,” and possessing a “debased character.”[FN11] See id.
at 732 (“The record is replete with personal insults, questioning of
motives, and general acrimony between the parties.”). Even
during discovery in the parties’ concurrent litigation in Florida
state court,[FN12] [Appellants] sought to compel production of
immigration and work authorization status from Michael’s wife,
who is a lawful immigrant. Given the irrelevance of this
information to the parties’ dispute, one can only assume this
request was made out of spite. This is preeminently
demonstrative of the parties’ personal animosity. Such
dispositions are not conducive of compromise and are unlikely to
be resolved — indeed, have not been resolved — through legal
dispute resolution.
July 20, 2021 Hrg. Tr. at 138:15-19, 142:11-25,
[FN11]
143:1-2.
[FN12] Toth v. Toth, No. 50-2021-CA 003506-XXXX-MC (Fla.
15th Cir. Ct., filed Mar. 16, 2021).
…
In considering whether deadlock or the impracticability of carrying
on the business presents irreparable harm to the company, a court
cannot only look to the company’s short-term profitability, but to
the likelihood of its long-term success. Koshy, 81 N.E.3d at 733-
34. Additionally, financial harm is not the only thing a court may
consider; a court may also “take into account factors like ‘harm to
a corporation’s reputation, goodwill, customer relationships, and
employee morale.’” Shawe v. Elting, 157 A.3d 152, 161 (Del.
2017) (internal citations omitted).
Although [Appellants] have allowed [Appellees] to maintain
business operations as normal, enabling t[he] company to
maintain a slight margin of profitability during the course of
litigation, as long as the parties’ relationship remains acrimonious
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and intractable it will be impossible to make long-term decisions
for LSI. Once the specter of this [c]ourt’s supervision over the
parties’ behavior is gone, it seems unavoidable that the parties
will slide back towards the same maneuvering and jockeying for
control of the company that caused this litigation to ensue in the
first place. The parties’ irreconcilable differences are such that
any short- or long-term decision on behalf of LSI is likely to be
challenged with litigation, as the parties have demonstrated their
unwillingness to compromise amicably. The continued threat of
divisiveness and litigation will likely exhaust the company’s
financial resources and scare away customers.
This litigation has already had such an effect on LSI’s employees
and business partners. It has thus far caused the apprehension
of Dr. Marzano, whose licensed evaluation model is critical for
LSI’s current financial success. In a letter to LSI, Dr. Marzano
stated that he would no longer license his model to LSI if the
parties continued to litigate and if Michael ceased to manage the
company. Likewise, other essential personnel have resigned, such
as LSI’s former Finance Manager, Michelle Dean, who has stated
that she will only return to the company once the litigation has
ended, and only if Michael continues to run the company. Thus,
LSI is not only at risk of revocable financial loss, but irrevocable
loss of intellectual property, talent, employee satisfaction, and
reputation. In such circumstances, a finding of deadlock or
impracticability is appropriate.
Trial Ct. Op., 6/29/22, at 9-13 (some formatting altered).
The trial court further explained that ordering dissolution of LSI was an
equitable remedy:
Although Pennsylvania’s Business Corporation Law specifically
authorizes dissolution, 15 Pa.C.S. § 8871, this does not otherwise
limit a court’s powers of equity to fashion other appropriate
remedies. 15 Pa.C.S. § 104;[12] Baron v. Pritzker, 52 Pa. D. &
____________________________________________
12 “Except to the extent otherwise provided in this title in cases where a
statutory remedy is provided by this title, the court shall have the powers of
a court of equity or chancery insofar as those powers relate to the supervision
(Footnote Continued Next Page)
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C.4th 14, 19 (Pa. Ct. Com. Pl. 2001). A court is not required by
the statute to grant dissolution upon a showing of deadlock but
may grant equitable relief as it deems necessary. Baron, 52 Pa.
D. & C 4th at 19. “Courts sitting in equity hold broad powers to
grant relief that will result in an equitable resolution of a dispute.”
Williams Twp. Bd. of Supervisors v. Williams Twp.
Emergency Co., Inc., 986 A.2d 914, 921 (Pa. Commw. Ct.
2009); see also Matter of Kemp & Beatley, Inc., 473 N.E.2d
1173, 1179 (N.Y. 1984) (“The appropriateness of an order of
dissolution is in every case vested in the sound discretion of the
court considering the application.”). However, “[t]here is no hard
and fast rule applicable alike to all partnership dissolutions;
rather, ‘a wide discretion is necessarily vested in a court of
equity.’” Hankin v. Hankin, 420 A.2d 1090, 1108 (Pa. Super.
Ct. 1980). Again, due to the dearth in Pennsylvania precedent,
this [c]ourt is guided by persuasive authority.
As such, courts in other jurisdictions have held that dissolution
should not be granted merely because the statutory requirement
of deadlock was met, but also where equitable considerations
warrant dissolution as a remedy. See, e.g., Henry George &
Sons, Inc. v. Cooper-George, Inc., 632 P.2d 512, 517 (Wa.
1981). A court should consider whether dissolution would be
beneficial to all members, the company, and the public. Id.;
Hankin, 420 A.2d at 1108-09. A court should determine
“whether some remedy short of or other than dissolution
constitutes a feasible means of satisfying both the petitioner’s
expectations and the rights and interests of [the other members.]”
Matter of Kemp & Beatley, 473 N.E.2d at 1180. “[B]ut when
fulfillment of the oppressed petitioner’s expectations by these
means is doubtful, such as when there has been a complete
deterioration of relations between the parties, a court should not
hesitate to order dissolution.” Id.
A court should also consider the seriousness of the deadlock or
dissension between the parties. Henry George & Sons, 632 P.2d
at 517. For example, Pennsylvania courts, as well as courts of
other states, have found dissolution warranted where the
____________________________________________
and control of corporations and other associations.” 15 Pa.C.S. § 104. “Our
standard of review in equity matters is limited to determining whether the trial
court committed an error of law or an abuse of discretion.” Coldren v.
Peterman, 763 A.2d 905, 907 (Pa. Super. 2000) (citation omitted).
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deadlock goes beyond mere disagreement and one partner or
shareholder attempts to freeze out or oust the other. See
Staiger, 100 A.3d at 625; Delaney v. Georgia-Pacific Grp.,
564 P.2d 277, 288 (Or. 1977) (dissolution warranted where
defendant shareholder’s effective ouster of the plaintiff
shareholder from management was unjustified and a breach of
fiduciary duty).
This [c]ourt’s determination as to the appropriate equitable
remedy is reviewed for abuse of discretion. See Hankin, 420
A.2d at 1109 (applying abuse of discretion standard). “[A]ppellate
review of equity matters is limited to a determination of whether
the chancellor committed an error of law or abused his discretion.
The scope of review of a final decree in equity is limited and will
not be disturbed unless it is unsupported by the evidence or
demonstrably capricious.” First Capital Life Ins. Co. v.
Schneider, Inc., 608 A.2d 1082, 1084 (Pa. Super. 1992)
(internal citations omitted).
This [c]ourt did not err or abuse its discretion by dissolving LSI
and fashioning an appropriate remedy by adopting [Appellees’]
proposed plan of dissolution.[FN13] The facts in this case warrant
dissolution because any other form of equitable relief, including
the forced buy-out that [Appellants] suggest, would have been
inadequate to satisfy [Appellees’] expectations and would not
have been in the best interests of LSI. This [c]ourt appropriately
found that the parties are hopelessly deadlocked and that their
differences are irreconcilable. Both the 2012 Operating
Agreement [FN14] and Pennsylvania’s statute authorize dissolution
on these grounds. 15 Pa.C.S. § 8871(a)(1), (a)(4)(ii). The
instant deadlock is serious enough to justify dissolution, where
here, as in the case law cited above, [Appellants] attempted to
force [Appellees] out of the company in violation of the Operating
Agreement and in breach of their fiduciary duties.
[FN13] Michael D. Toth’s Amended Petition to Dissolve. Ex. A.
[FN14] 2012 Operating Agreement, art. 12.1.
Ordering a forced buy-out, as [Appellants] requested of this
[c]ourt, would have been wholly inconsistent with the exercise of
this [c]ourt’s equitable powers. This action was initially brought
by [Appellees] to enjoin [Appellants] from forcing them out of the
company in violation of the terms of the Operating Agreement.
Rather than unlawfully seize control of the company, [Appellants]
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would have this [c]ourt judicially order Michael’s departure. As
such, [Appellants] have requested, with unclean hands, that this
[c]ourt order a form of equitable relief more favorable to them.
[Appellants] suggest that it would be equitable for this [c]ourt to
grant a form of relief not much different from the conduct that
[Appellees] requested this [c]ourt to enjoin in the first place. It
was not an abuse of discretion, therefore, for this [c]ourt to order
dissolution, finding that a forced buy-out would be inadequate to
remedy [Appellees’] grievances. A forced buy-out also likely
would have had poor consequences on LSI, as none of
[Appellants] are nearly as well-versed in the business’s
management, and multiple employees and business partners have
expressed their unwillingness to work with [Appellants]. A forced
buy-out would have been, for all intents and purposes, the least
equitable form of relief.
Moreover, the relief actually granted by this [c]ourt is not as
drastic as [Appellants] contend. Although this [c]ourt ordered a
“dissolution,” as it were, it provided more specifically for LSI to
continue as a going concern in the form of two separate
companies, one owned by [Appellees] and one owned by
[Appellants]. According to the dissolution plan, each of these
companies will have free and unfettered access to LSI’s
intellectual property, the right to offer employment to all of LSI’s
current employees, and to solicit business from all of its current
clients.[FN15] Not only does this plan permit LSI to continue
operations as normal, it allows [Appellants] to pursue their vision
of the company without being hindered by deadlock. [Appellants]
will be the sole members of their own LSI spinoff. Should they
choose, [Appellants] are free to employ a new CEO and President,
as was their wish. [Appellants] are free to develop different types
of products and clients, as was their wish. [Appellants] are free
to execute a new operating agreement that incorporates the
company under Florida law. [Appellants] will also be entitled to a
distribution of seventy-five percent (75%) of LSI’s remaining
assets, according to their pro rata equitable share of the company,
upon dissolution.
[FN15] Michael D. Toth’s Amended Petition to Dissolve, Ex. A.
As such, this [c]ourt’s “dissolution” was, in fact, a narrowly
tailored plan to remove the deadlock that would have inhibited the
success of LSI in the long-term. The plan then provides a means
for both parties to pursue their separate visions for LSI without
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the need for further litigation and disharmony. The decision to
grant this equitable relief cannot be described as “demonstrably
capricious” and, therefore, not an abuse of discretion. First
Capital Life Ins. Co., 608 A.2d at 1084.
Trial Ct. Op., 6/29/22, at 13-17 (some formatting altered).
After review of the trial court’s thorough discussion and disposition, we
agree with the trial court’s conclusion. Section 7.11 of the 2012 Operating
Agreement addresses binding mediation when the members are deadlocked
only over decisions of the company. However, under the circumstances
presented in the instant case, the parties became deadlocked over far more
than decisions of the company, and instead were deadlocked over
fundamental decisions about the company itself, including corporate
governance, structure, and leadership. See Trial Ct. Op., 6/29/22, at 9;
Interim Custodian’s Findings of Fact and Conclusions of Law, 10/15/21, at ¶¶
78, 80. As the trial court stated, the parties have previously engaged in
mediation and settlement negotiations, which were fruitless. See Trial Ct.
Op., 6/29/22, at 4, 11 n.10. Further, the LLC Act precludes an operating
agreement from varying grounds for judicial dissolution set forth in 15 Pa.C.S.
§ 8871(a)(4). See 15 Pa.C.S. § 8815(c)(15). As noted, Section 8871 clearly
provides that a member of the LLC may seek judicial dissolution when “it is
not reasonably practicable to carry on the company’s activities and affairs in
conformity with the certificate of organization and the operating
agreement[.]” 15 Pa.C.S. § 8871(a)(4)(ii).
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The record supports the trial court’s conclusion that there are
“irreconcilable differences that will only cause harm to [LSI] if continued to
persist.” Trial Ct. Op., 6/29/22, at 3; see also Interim Custodian’s Findings
of Fact and Conclusions of Law, 10/15/21, at ¶¶ 78, 80. The 2012 Operating
Agreement provides that the company shall be dissolved if “the Members are
deadlocked in the management of the Company’s affairs, and irreparable
injury to the corporation is threatened or being suffered[.]” 2012 Operating
Agreement at 12.1(2)(i). We reiterate that a court may dissolve an LLC upon
petition by a member when “[a]n event or circumstance[s] that the operating
agreement states causes dissolution” occurs, or “it is not reasonably
practicable to carry on the company’s activities and affairs in conformity with
the certificate of organization and the operating agreement.” 15 Pa.C.S. §
8871(a)(1), (a)(4)(ii). As set forth above, the trial court clearly explained the
facts of this matter, the deadlock between the parties, the injury and harm to
LSI, and that it was not practicable for the company to continue. See Trial
Ct. Op., 6/29/22, at 7-17. Indeed, the trial court explained that injury to LSI
was not merely “threatened,” injury was already occurring. See id. at 12;
see also 2012 Operating Agreement at 12.1(2)(i). We agree with the trial
court and conclude that any additional efforts to mediate would be a waste of
resources and would only serve to cause further delay and harm to LSI.
Therefore, we discern no error of law or abuse of discretion in the trial court
concluding that the parties are deadlocked, finding that it is not reasonably
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practicable to carry on LSI’s activities, and ordering the dissolution of LSI.
See Trial Ct. Op., 6/29/22, at 17; see also 2012 Operating Agreement at
Section 12.1; 15 Pa.C.S. § 8871(a)(1), (a)(4)(ii). Accordingly, we affirm the
order on appeal at 403 WDA 2022.
Appeal at 846 WDA 2022
As noted above, after the trial court ordered dissolution of LSI on April
5, 2022, Appellants filed the appeal docketed at 403 WDA 2022 and filed a
motion for a stay with this Court. Trial Ct. Op., 9/2/22, at 1-2. This Court
granted Appellants’ motion for a stay on June 16, 2022. See id. at 2. On
June 28, 2022, Appellees sought temporary relief from the stay in order to
petition the trial court to appoint a custodian to manage LSI pending the
resolution of Appellants’ appeal. See id. By order dated June 29, 2022, the
Superior Court temporarily lifted the stay for the limited purpose of having the
trial court rule on Appellees’ petition to appoint a custodian. See id. On July
15, 2022, the trial court heard argument on the petition to appoint the
receiver, and on July 21, 2022, the trial court granted Appellees’ petition and
appointed James Chiafullo, Esquire.13 See id. Thereafter, Appellants filed the
appeal docketed at 846 WDA 2022.
Appellants argue that Appellees’ motion to appoint a custodian violated
this Court’s stay order and that there was no emergency or necessity. See
____________________________________________
13 The trial court had previously appointed Mr. Chiafullo as liquidating trustee
in its April 5, 2022 order.
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Appellants’ Brief at 56-57. Appellants further contend that the appointment
of a custodian was error because Michael owed a duty of loyalty to LSI. See
id. at 57.
The appointment of a receiver or custodian is a decision left to the sound
discretion of the trial court. See Abrams v. Uchitel, 806 A.2d 1, 8 (Pa.
Super. 2002); Bayles v. Hamrock, 463 WDA 2022,
2023 WL 6878620, at
*11 (Pa. Super. filed Oct. 18, 2023) (unpublished mem.).
Among the factors that various courts have considered are the
existence of dissension among the partners, dissipation of the
partnership assets, fraud or mismanagement by the controlling
partners, the denial of the plaintiff partner’s rights as a partner,
and the balance of necessity and benefits against injury incident
to the appointment of a receiver.
Hankin v. Hankin, 420 A.2d 1090, 1103 (Pa. Super. 1980) (Hankin I)
(citations omitted). The trial court may appoint a receiver to preserve the
property and rights of the parties, and to prevent waste, dissipation of assets,
fraud, or mismanagement. See Hankin v. Hankin,
493 A.2d 675, 677 (Pa.
1985) (Hankin II).
Appellants first argue that the trial court abused its discretion in
appointing a custodian because it violated this Court’s stay order. See
Appellants’ Brief at 56. However, as stated above, this Court specifically
granted Appellees’ motion to temporarily lift the stay for the purpose of
permitting the trial court to rule on Appellees’ motion to appoint a custodian.
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See Superior Court Order, 7/29/22. Accordingly, we conclude that Appellants’
argument to the contrary is meritless.
The trial court addressed the remainder of Appellants’ argument as
follows:
[Appellants] argue that that the appointment of the receiver was
not warranted under the circumstances and/or would cause them
greater harm. To the contrary, appointment of a receiver is in
[Appellants’] best interests and should have been sought by them
prior to the recent events that precipitated [Appellees’] petition
for a receiver. The issue, ultimately, is that [Appellants] wish to
preserve LSI as a going concern in the event that the Superior
Court would reverse this [c]ourt’s dissolution order. While
[Appellants] sought and obtained a stay of this [c]ourt’s
dissolution order, so that LSI would be protected from judicial
dissolution, it took no steps to prevent its alleged de facto
winding-up by Michael Toth. If [Appellants’] allegations that
Michael acted contrary to LSI’s interests are true, [Appellants’]
have available remedies in law and equity, including the
appointment of a receiver to preserve LSI’s assets and protect
their rights. Regardless of whether the current situation was
“manufactured” by Michael or was caused by the specter of
litigation, the uncertain future of the company, and the inability
to retain employees, the fact remains that LSI is without a CEO
and is threatened with the waste and/or dissipation of its assets.
It is imperative that a neutral party preserves LSI’s remaining
assets and pay its obligations as they come due, in order to
prevent any further waste.
Another factor which moves this [c]ourt toward appointment of a
receiver is the dissension among LSI’s members. See Hankin I,
420 A.2d at 1103. There is no reconciling the conflicts of interest
between Michael and [Appellants] in preserving LSI. It is for this
same reason that [Appellants’] suggestion that Bryan Toth run the
company instead of a receiver should be denied. Any actions
taken on the company’s behalf by Bryan would surely be met with
resistance by Michael, who owns half the voting share in LSI. The
best course to ensure that LSI’s day-to-day operations continue
without hinderance is the appointment of a receiver.
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The benefits of appointing a receiver in this case are balanced
against the injury, if any, caused by the appointment. Hankin I,
420 A.2d at 1003. The only discernable harm to [Appellants] is
that they will be prevented from exercising managerial control
over LSI. As previously stated, allowing [Appellants] to manage
the company instead of a receiver would cause unnecessary
divisiveness. Therefore, there is substantial evidence to support
this [c]ourt’s appointment and [Appellants] cannot demonstrate
that this was a clear abuse of the [c]ourt’s discretion.
Trial Ct. Op., 9/2/22, at 5-6 (some formatting altered).
After review, we agree with the trial court’s conclusions. We discern no
abuse of discretion in the trial court’s decision to appoint a custodian under
the circumstances presented in this matter. See Abrams, 806 A.2d at 8. The
trial court thoroughly explained that due to the significant dissension among
the parties, the appointment of a custodian was necessary to prevent waste
and dissipation of LSI’s assets. See Hankin II,
493 A.2d at 677; Hankin I,
420 A.2d at 1103. Accordingly, we affirm the order on appeal at 846 WDA
2022.
Appeal at 514 WDA 2023
In the appeal at 514 WDA 2023, Appellants contend that the trial court’s
April 19, 2023 order approving the custodian’s recommendation of a
protective sale and assignment of assets exceeded the custodian’s legal
authority, because the custodian does not have legal authority to liquidate
LSI’s assets, and it violated this Court’s stay order. See Appellants’ Brief at
514 WDA 2023, at 5, 30. Appellants further argue that the sale and
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assignment was a poor value proposition for LSI and constituted unlawful self-
dealing by Michael. See id.
The trial court first addressed the scope of the authority its July 21, 2022
order:
Firstly, [Appellants] argue that Mr. Chiafullo had no authority to
sell and/or license certain of LSI’s assets as that would exceed the
scope of Mr. Chiafullo’s initial charge from this [c]ourt. In this
[c]ourt’s Order of July [21], 2022, Mr. Chiafullo was charged with
“assum[ing] the operations, management and control of [LSI],
pay[ing] obligations and invoices as they come due, preserving
dwindling assets and otherwise operat[ing] the business pending
further direction and order of this [c]ourt . . . .” While it is
arguable that Mr. Chiafullo acted within the scope defined by this
Court’s July [21], 2022 Order, such an argument is not necessary.
Because this [c]ourt subsequently approved of Mr. Chiafullo’s
recommended actions by order of court, Mr. Chiafullo acted with
the necessary authority.
This [c]ourt has the power to appoint a receiver pendente lite upon
the filing of a petition for involuntary dissolution. 15 Pa.C.S. §
5984. That receiver has “such powers and duties as the court
from time to time may direct.” Id. The powers of a receiver are
subject to the court, as reflected in the orders of the court
empowering the receiver. Katz v. Katz, . . . 2014 WL 10575352,
*7 (Pa. Super. Sept. 3, 2014) (quoting Duplex Printing Press
Co. v. Clipper Pub. Co., 62 A. 841-42 (Pa. 1906)).[14] Moreover,
____________________________________________
14 Although the trial court cited Katz, a non-precedential unpublished decision
of this Court, we note that the cases cited in Katz are precedential decisions.
Indeed, “[t]he authority of a receiver and the effect of his action depend
almost entirely on the purpose of his appoint[]ment and the extent of his
powers conferred by the decree appointing him.” Duplex Printing Press Co.
v. Clipper Pub. Co.,
62 A. 841, 842 (Pa. 1906). Even where a receiver acts
without authority from the court in the first instance, his acts may be ratified
by court approval, and “[t]he right of the court to approve and sanction that
which it might have originally authorized cannot be disputed.” In re Wilson’s
Estate,
97 A. 453, 454 (Pa. 1916) (citations omitted).
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[s]ubsequent ratification and approval by a court also offers safe
harbor for a receiver’s activities.” Id. at *8. Thus, this [c]ourt’s
initial charge in no way limits this [c]ourt from ordering, ratifying,
or approving further actions of the receiver.
Here, Mr. Chiafullo sought explicit approval from this [c]ourt for
the sale and licensing of certain of LSI’s assets. Having approved
Mr. Chiafullo’s recommendation by order of court, this [c]ourt
authorized Mr. Chiafullo to so act. Whether or not the custodian’s
actions were within the scope of authority initially granted to him
when he was appointed is irrelevant.[15] Therefore, [Appellants’]
contention that Mr. Chiafullo acted outside of the authority
granted by this [c]ourt is without merit . . . .
Trial Ct. Op., 7/5/23, at 4-5 (unpaginated).
Appellants also argue that the trial court’s order violates this Court’s
stay. See Appellants’ Brief at 514 WDA 2023, at 31. Appellants contend that
the trial court lacked the authority to convert Mr. Chiafullo’s role as a custodian
into the role of liquidating trustee in the April 19, 2023 order. See id. The
trial court addressed this issue as follows:
[Appellants] argue that Mr. Chiafullo’s actions — or rather this
Court’s approval of those actions — violate the Superior Court’s
Orders staying the dissolution of LSI and the liquidation of its
assets by a receiver. [Appellants] make much of the narrow legal
distinction between a receiver, as liquidator, and a custodian. See
O’Malley v. Desmond, Inc., 62 Pa. D.&C.2d 645, 647 (C.P.
Phila. 1973) (A “receiver” liquidates a corporation[], while a
“custodian” conducts the business of the corporation). However,
this distinction means little in practice as a custodian or a receiver
is authorized to act as the Court so directs.
A receiver or custodian is “the officer — the executive hand — of
a court of equity. His duty is to protect and preserve, for the
____________________________________________
15 See Wilson’s Estate, 97 A. at 454; Duplex Printing Press Co.,
62 A. at
842.
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benefit of the persons ultimately entitled to it, an estate over
which the court has found it necessary to extend its care.”
Warner v. Conn, 32 A.2d 740, 741 (Pa. 1943) (quoting
Schwartz v. Keystone Oil Co., 25 A. 1018, 1019 (Pa. 1893).[16]
While Pennsylvania’s business corporations statute contains a
separate section for the appointment of a “custodian,” it notably
provides that “[a] custodian appointed under this section shall
have all the power and title of a receiver appointed under
Subchapter G of Chapter 19. . . .” 15 Pa.C.S. § 1767(c). Under
Subchapter G of Chapter 19, the statute provides that a receiver
pendente lite — or a custodian — may have “such powers and
duties as the court from time to time may direct and proceed as
may be requisite to preserve the corporate assets wherever
situated and to carry on the business of the corporation. . . .” 15
Pa.C.S. § 1984. The only caveat to the appointment of a
“custodian” that the statute provides is that the custodian shall
not “liquidate [the corporation’s] affairs and distribute its assets
except when the court shall otherwise order.” 15 Pa.C.S. §
1767(c).
Thus, the question is whether this [c]ourt ordered Mr. Chiafullo to
liquidate LSI’s affairs and distribute its assets, thereby dissolving
the business in violation of the Superior Court’s stay. Selling
and/or licensing certain assets of a business as may be necessary
to preserve the assets’ value or to avoid liabilities is notably
different from the liquidation and dissolution of a business. When
a business is involuntarily dissolved, the legal existence of the
business ceases and articles of dissolution are filed with the
Department of State. 15 Pa.C.S. § 1989. Additionally, all of the
business’s remaining assets are distributed to its shareholders.
Id.
This [c]ourt’s Order of April 19, 2023 falls far short of liquidating
and distributing all of LSI’s assets and dissolving the business’s
____________________________________________
16 Under the circumstances presented here, we agree with the trial court that
although the terms receiver and custodian are not identical, a receiver and
custodian would have largely the same function and provide the company the
same protections. See, e.g., Simms v. Exeter Architectural Products,
Inc., 868 F.Supp. 668, 671-72 (M.D. Pa. 1994); see also Toppy v. Passage
Bio, Inc.,
285 A.3d 672, 690 n.7 (Pa. Super. 2022) (stating “[a]lthough not
binding on us, we may cite federal authority for its persuasive value.” (citation
omitted)).
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legal existence. The Order directed Mr. Chiafullo to sell two of
LSI’s assets and license a third. These assets were (1) textbooks
and tradeshow materials stored in warehouses, (2) contracts for
conference rooms at Disney Land, and (3) LSI’s proprietary
iObservation software. In the case of two of those assets, the
current state of LSI’s affairs renders them useless and
depreciating. The remaining asset presents more of a liability to
LSI than an asset. In order to understand why the sale and
licensing of these assets was necessary to preserve LSI’s value for
the benefit of all parties, it is important to look at the current state
of LSI’s business affairs.
Significantly, [Appellants’] initiation of the series of events which
lead to this lawsuit has caused numerous tangible effects on LSI’s
ability to continue operating as a going concern. [Appellants]
either fail to see, or willfully choose to ignore, that their real-world
actions have real-world consequences. [Appellants’] actions and
the specter of this litigation have alienated . . . Michael Toth, and
caused key employees and business partners to leave LSI. This
has hamstrung LSI’s operations to the point where it formed no
new contracts to provide services due to doubts that it would be
able to perform. The Superior Court’s stay order is not a magic
salve that can preserve LSI as it existed before these events took
place. Michael Toth cannot be forced to continue to work for LSI.
U.S. Const. amend. XIII, § 1. Even if the Superior Court would
reverse this Court’s dissolution of LSI, there is simply no going
back.
Particularly important, as it relates to LSI’s iObservation software,
Michael’s stepping down as CEO caused a key partner in LSI’s
business, Dr. Robert Marzano (“Dr. Marzano”), to cease licensing
his proprietary teacher evaluation model to LSI. In order to allow
its clients to administer Dr. Marzano’s model when evaluating
teacher performance, LSI had developed a proprietary evaluation
software, called iObservation. The iObservation software is one
of LSI’s few remaining assets. However, its value as an asset is
largely, if not solely, tied to the concurrent licensure of Dr.
Marzano’s evaluation model.
Without being able to sell its iObservation software tool to school
districts, and having formed no new contracts to provide services,
Mr. Chiafullo made a calculated business decision to license the
software in an attempt to generate some kind of revenue for LSI.
Understandably, given its limited usefulness, the only market for
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licensing the software is Michael’s new company which works with
Dr. Marzano. It should also be noted that licensing [the] use of
the iObservation software for a period of 5 years is not the same
as liquidating that asset. LSI remains the owner of that
proprietary software. The alternative, which [Appellants] suggest
was the better course of action, would have been to let the
software remain unused and non-revenue-generating. The only
conceivable motive [Appellants] have for suggesting this
alternative is simply to stymie Michael’s new enterprise out of
spite, which is consistent with their modus operandi throughout
this litigation.
Aside from the iObservation software, this [c]ourt also approved
the sale of contracts under which LSI promised to rent convention
room space at Disney Land. Because of LSI’s current inoperative
state of affairs, it had no ability or intention to honor those
contracts, which immediately made them a liability. The contracts
with Disney contained liquidated damages provisions that would
have been triggered in the event of breach. Thus, Mr. Chiafullo
again made a prudent decision to assign the contracts in order to
avoid the potential for significant liability to LSI.
[Appellants] baldly assert in their statement of errors that the
liquidated damages would never have been triggered without
elucidating, either in their written filings or arguments before this
[c]ourt, why the liquidated damages would not be triggered.
[Appellants] only point out that Michael “unlawfully” manufactured
the conditions under which LSI became unable to perform under
these contracts. However, as already stated, this [c]ourt has no
power to compel Michael, Dr. Marzano, or any other employees
and business partners to continue working with LSI. Whether or
not Michael’s unilateral actions in leaving and starting a competing
business are legally justifiable, that does not bear on Mr.
Chiafullo’s and this [c]ourt’s obligation to preserve LSI in the
condition it is presently in. Thus, while [Appellants] continue to
grandstand about Michael’s “self-dealing and maneuvering” they
offer no alternative to avoiding the liability of the liquidated
damages in the contracts. As such, this [c]ourt approved the
assignment of those contracts.
Lastly, this [c]ourt also authorized the sale of some of LSI’s store
of physical assets, such as textbooks and tradeshow material.
While LSI remains inoperable, these assets were useless and
continuing to incur storage expenses in warehouses. These assets
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were also depreciable. Therefore, this [c]ourt agreed with Mr.
Chiafullo that maintaining these depreciable assets in storage
facilities would only erode LSI’s cash value to the detriment of all
parties.
Trial Ct. Op., 7/5/23, at 5-9 (unpaginated) (emphases in original).
After review, we agree with the trial court’s analysis and conclusion. Mr.
Chiafullo’s recommendations were consistent with the July 21, 2022 order
appointing him and directing him to preserve LSI’s assets and operate the
business pending further direction by the trial court. See Trial Ct. Order,
7/21/22. Moreover, the trial court’s April 19, 2023 order clearly did not permit
Mr. Chiafullo to liquidate and dissolve LSI; rather, the April 19, 2023 order
merely approved his limited recommendation to sell and license some of LSI’s
assets. See Trial Ct. Order, 4/19/23. Accordingly, we conclude that the April
19, 2023 order did not violate this Court’s stay order, and we discern no abuse
of discretion.
Finally, with respect to Appellants’ assertion that Mr. Chiafullo’s
recommendation and the April 19, 2023 order approving the recommendation
was a poor value to LSI and amounted to self-dealing, we conclude that no
relief is due. The trial court stated:
Finally, in [Appellants’] last two statements of error — to the
extent that they can be construed as assigning any legal error at
all — take issue with the prudence or equity of this [c]ourt’s
decision to sell and license some of LSI’s assets. Put simply,
[Appellants] disagree with the business decision of the custodian.
However, there is no legal standard or authority with which to
analyze or evaluate the prudence of this business decision, and
therefore [Appellants] have no basis to challenge this [c]ourt’s
order.
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In examining the liability of a receiver for negligence or
misconduct while operating the business under his or her care,
our Supreme Court has said “[w]hile the receiver will be held to a
rigid accountability, nothing more is required of him than that he
act in good faith, and exercise the discretion and prudence of
ordinarily careful men in pursuits of similar character.” Pa. Eng’g
Works v. New Castle Stamping Co., 103 A. 215, 217 (Pa.
1918). . . .
…
[T]his Court’s supervisory role over Mr. Chiafullo should be
sufficient to guard against the gross misconduct, “self-dealing,”
and “maneuvering” that [Appellants] seem to think is occurring.
Although [Appellants] stated in their Objections to the Custodian’s
Recommendations that they “do not believe that Mr. Chiafullo is a
willing participant” in [Appellees’] “self-serving arrangement,” the
implication to the contrary is clear. For the reasons stated above,
Mr. Chiafullo’s recommendations were soundly reasoned business
decisions to generate revenue and avoid expenses and liability
while LSI remains inactive. Therefore, this [c]ourt can find no
abuse of discretion or error in approving Mr. Chiafullo’s actions.
Trial Ct. Op., 7/5/23, at 9-10 (unpaginated) (footnote omitted). After review,
we agree with the trial court that Appellants have not provided a legal basis
upon which to conclude that the trial court erred or that Mr. Chiafullo acted in
bad faith. See, e.g., Pa. Eng’g Works, 103 A. at 217. Further, we agree
with the trial court that Mr. Chiafullo made reasonably sound business
recommendations aimed at preserving LSI’s dwindling assets pursuant to the
July 21, 2022 order, and we discern no abuse of discretion in the trial court’s
April 19, 2023 order. Accordingly, we affirm the order on appeal at 514 WDA
2023.
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J-E02003-24
J-E02004-24
Conclusion
For the reasons set forth herein, we affirm the orders of the trial court
on appeal at 266 WDA 2022, 267 WDA 2022, 403 WDA 2022, 846 WDA 2022,
and 514 WDA 2023. Jurisdiction is relinquished.
DATE: 8/27/2024
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