Thomas E. Sprecher, individually and on behalf of BT Realty and BT Colebrook Realty, LLC v. William Sprecher and Lebanon Gasket & Seal, Inc. No. 2015-01193

Civil Action-Law-Contract-Tort-Payment of Rents-Preliminary Objections-Gist of the Action Doctrine-Recovery of Counsel Fees

Thomas E. Sprecher and William A. Sprecher own real estate with buildings owned by BT Colebrook, LLC, a limited liability corporation also owned by Thomas E. Sprecher and William A. Sprecher. BT Colebrook, LLC, leased part of the real estate to Lebanon Gasket & Seal, Inc., a corporation owned by William A. Sprecher. Plaintiffs filed a Complaint and a subsequent Amended Complaint against Defendants in Conversion, Breach of Contract, Breach of Fiduciary Duty, Fraud and Quantum Meruit alleging that rental income from third parties relating to the real estate had been diverted into accounts owned by William A. Sprecher and Lebanon Gasket & Seal, Inc., by Defendants as opposed to placement in accounts owned by BT Colebrook Realty, LLC. Defendants filed Preliminary Objections to the Amended Complaint.

1. Preliminary objections should be sustained only in cases that are clear and free from doubt from all of the facts pleaded that the pleader will be unable to prove facts legally sufficient to establish a right to relief. The court must consider as true all well-pleaded material facts in the complaint and all reasonable inferences that may be drawn therefrom.

2. The gist of the action doctrine is designed to maintain the conceptual distinction between breach of contract and tort claims. Tort actions lie for breaches of duties imposed by law as a matter of social policy, while contract actions lie only for breaches of duties imposed by mutual consensus agreements between particular individuals. To permit a promisee to sue his promisor in tort for breach of contract would erode the usual rules of contractual recovery and inject confusion into the well-settled forms of action.

3. Claims for breach of fiduciary duty and breach of contract may coexist if the fiduciary duty is based upon duties imposed as a matter of social policy, not based upon a contractual agreement between the parties.

4. Plaintiffs failed to plead in the Amended Complaint that their claims of Conversion, Breach of Fiduciary Duty and Fraud are based upon broader social duties of Defendants. Rather, these claims are based upon a contractual agreement between the parties such that these causes of action are precluded by the gist of the action doctrine.

5. Plaintiffs are permitted to seek attorneys’ fees against Defendants, as the agreement between the parties provides that a party is entitled to recover reasonable attorney’s fees and costs when attempting to enforce its rights after a breach of the agreement by the other party.

IN THE COURT OF COMMON PLEAS

OF LEBANON COUNTY, PENNSYLVANIA

CIVIL DIVISION No. 2015-01193

THOMAS E. SPRECHER, individually and on behalf of BT REALTY and BT COLEBROOK REALTY, LLC, Plaintiffs

v.

WILLIAM A. SPRECHER and LEBANON GASKET & SEAL, INC., Defendants

ORDER

AND NOW, this 15th day of December, 2015, after careful consideration of the record, Defendants’ Preliminary Objections to Plaintiffs’ Amended Complaint are hereby SUSTAINED in part and OVERRULED in part. Plaintiffs are directed to file a Second Amended Complaint within 30 days of the date of this Order.

BY THE COURT:

CHARLES T. JONES, JR., J.

APPEARANCES:

Timothy Huber, Esquire For Plaintiff

Buzgon Davis Law Offices

Wiley P. Parker, Esquire For Defendant

Henry & Beaver, LLP

OPINION BY JONES, J.:

Before this Court are Defendants’ Preliminary Objections to Plaintiffs’ Amended Complaint.

FACTUAL HISTORY

Thomas E. Sprecher and William A. Sprecher are the owners of certain real estate along Colebrook Road in Lebanon County, Pennsylvania. On or about August 31, 2007, Thomas and William executed a Partnership Agreement relating to the property. There are various buildings located on the property which house manufacturing operations and warehouse space. These buildings are owned by BT Colebrook LLC. BT Colebrook LLC is governed by an Operating Agreement which is dated August 31, 2007. Thomas and William are the sole and equal owners of both BT Realty and BT Colebrook LLC.

The execution of the Operating Agreement and Partnership Agreement were conditions of a corporate reorganization pursuant to a Shareholders Agreement for Divisive Reorganization of Lebanon Machine and Manufacturing Company, Incorporated. William is the owner of Lebanon Gasket & Seal, Incorporated. On or about August 31, 2007, BT Colebrook LLC leased space located on Colebrook Road to Lebanon Gasket & Seal, Inc. All rents from the buildings on the Property located on Colebrook Road are the property of BT Colebrook LLC. The buildings are rented to entities controlled by Thomas and William, as well as independent third parties.

According to the Complaint, William has been primarily responsible for negotiating leases and collecting rents from the third parties on behalf of BT Colebrook LLC and making deposits of said funds into BT Colebrook LLC accounts. On or about June 4, 2015, William and Lebanon Gasket & Seal, Inc. produced invoices that reflect that rental income from the third parties has been diverted into accounts of William and Lebanon Gasket, rather than the accounts of BT Colebrook LLC.

PROCEDURAL HISTORY

Thomas Sprecher, on behalf of BT Realty and BT Colebrook LLC (herein Plaintiffs) filed the Complaint on July 14, 2015 against William Sprecher and Lebanon Gasket & Seal, Inc. (herein Defendants) for Conversion, Breach of Contract, Breach of Fiduciary Duty, Fraud, and Quantum Meruit. Defendants filed Preliminary Objections to the Complaint on August 7, 2015. Plaintiffs filed an Amended Complaint on August 26, 2015, rendering Defendants’ Preliminary Objections moot. Defendants filed Preliminary Objections to the Amended Complaint on September 15, 2015. Plaintiffs filed an Answer to Defendants’ Preliminary Objections on October 2, 2015. Plaintiffs filed a Praecipe for Disposition on October 20, 2015 requesting Oral Argument. An Order directing the Prothonotary to list the matter for Oral Argument was filed on October 30, 2015. Notice of Argument and the Briefing Schedule was sent out on the same day. Argument was scheduled for November 27, 2015. Defendants filed a Motion to submit the matter on briefs, with Plaintiffs’ counsel’s agreement, on November 24, 2015. The Court granted the Motion on November 25, 2015. The matter is now ripe for disposition.

STANDARD OF REVIEW

Preliminary objections should be sustained only in cases that are clear and free from doubt. Baker v. Brennan, 213 A.2d 362 (Pa. 1965). The test for preliminary objections is whether it is clear and free from doubt from all of the facts pleaded that the pleader will be unable to prove facts legally sufficient to establish his right to relief. Firing v. Kephart, 353 A.2d 833 (Pa. 1976). To determine whether preliminary objections have been properly sustained, the court must consider as true all of the well-pleaded material facts set forth in the complaint and all reasonable inferences that may be drawn from those facts. Feingold v. Bell of Penn., 383 A.2d 791 (Pa. 1977).

DISCUSSION

Defendants have raised six (6) objections to the Amended Complaint, which are:

Plaintiffs’ claim of Conversion should be stricken under the “gist of the action” doctrine;

Plaintiffs’ demand for attorney’s fees should be stricken for failure to set forth sufficient facts to support a claim for attorney’s fees;

Plaintiffs’ claim of Breach of a Fiduciary Duty should be stricken under the “gist of the action” doctrine;

Plaintiffs’ claim for Fraud should be stricken for failure to allege fraud with particularity;

Plaintiffs’ claim of Fraud should be stricken under the “gist of the action” doctrine; and

Plaintiffs’ claim of Quantum Meruit should be stricken because recovery is prohibited where there is an express written contract.

This Court will address all of the objections based upon the “gist of the action” doctrine first and then will address each of the other objections individually.

A.”Gist of the Action” Objections

Defendants argue that Plaintiffs’ claims for Conversion, Breach of Fiduciary Duty, and Fraud should be stricken from the Amended Complaint under the “gist of the action” doctrine. Plaintiffs argue that these claims are valid because they are based on Defendants’ broader social duty, rather than simply on the Agreements.

“Generally, the [gist of the action] doctrine is designed to maintain the conceptual distinction between breach of contract claims and tort claims.” eToll, Inc. v. Elias/Savion Advertising, Inc., 811 A.2d 10, 14 (Pa.Super. 2002) (citing Bash v. Bell Tel. Co., 411 Pa.Super. 347 (1992)). The Superior Court has explained the difference between contract and tort claims as follows:

Although they derive from a common origin, distinct differences between civil actions for tort and contract breach have developed at common law. Tort actions lie for breaches of duty imposed by law as a matter of social policy, while contract actions lie only for breaches of duties imposed by mutual consensus agreements between particular individuals …. To permit a promisee to sue his promisor in tort for breaches of contract inter se would erode the usual rules of contractual recovery and inject confusion into our well- settled forms of actions.

Bash, 411 Pa.Super. at 356 (citing Iron Mountain Security Storage Corporation v. American Specialty Foods, Inc., 457 F. Supp 1158, 1165 (E.D. Pa. 1978); Glazer v. Chandler, 414 Pa. 304, 308-09 (1964)).

The gist of the action doctrine focuses on the source of the claims to evaluate whether tort claims pleaded along with contract claims constitute freestanding causes of action. A breach of fiduciary duty claim is barred by the gist of the action doctrine if the fiduciary duty alleged is grounded in contractual obligations. However, claims for breach of fiduciary duty and breach of contract can coexist if the fiduciary duty is based on duties imposed as a matter of social policy and if the fiduciary duty is not based on a contractual agreement between the parties.

Alpart v. Gen. Land Partners, Inc., 574 F. Supp. 2d 491, 499 (E.D. Pa. 2008) (citing to Bohler–Uddeholm America, Inc. v. Ellwood Group, Inc., 247 F.3d 79 (3d Cir.2001) and eToll, Inc. v. Elias/Savion Advertising, Inc., 811 A.2d 10, 19 (Pa.Super.Ct.2002)).

The court ruled that the fraud claims were barred by the gist of the action doctrine because the fraud claims were “intertwined” with breach of contract claims. Id. (“breach of contract claim cannot be ‘bootstrapped’ into a fraud claim merely by adding the words ‘fraudulently induced’ or alleging the contracting parties never intended to perform.”)

eToll, Inc. v. Elias/Savion Advert., Inc., 2002 PA Super 347, ¶ 21, 811 A.2d 10, 17 (2002). “To be construed as in tort … the wrong ascribed to defendant must be the gist of the action, the contract being collateral. A claim ex contractu cannot be converted to one in tort simply by alleging that the conduct in question was wantonly done.” Bash, 411 Pa.Super. at 355-56 (citing Closed Circuit Corporation of America v. Jerrold Electronics Corporation, 426 F. Supp. 361, at 364 (E.D.Pa. 1977)).

Plaintiffs’ claims for Conversion, Breach of Fiduciary Duty, and Fraud are all based on the factual allegations that Defendant William collected the rents of third parties and failed to deposit those funds into the BT Colebrook LLC accounts, and in the alternative, that Defendant Lebanon Gasket & Seal did not pay rent. Plaintiffs simply add the language of each tort claim to that of the Breach of Contract language, which is that Defendant William collected the rents, but did not place the funds in the Colebrook account.

As explained above, these claims can coexist with Breach of Contract claims, but the wrong alleged must be the gist of the action. It cannot be a contract claim restated as a tort claim without more. The contract must be collateral to the claims of Plaintiffs, not the basis of the claims. This Court finds that Plaintiffs have failed to state the claims of Conversion, Breach of Fiduciary Duty, and Fraud as based on broader social duties of Defendants. These claims are based on the Agreements between the parties. Therefore, Defendants’ Preliminary Objections based on the gist of the action doctrine are sustained. This Court finds that Plaintiffs have failed to properly state the tort claims of Conversion, Breach of Fiduciary Duty, or Fraud against the Defendants. Plaintiffs are directed to file an Amended Complaint within thirty days of this Opinion and Order.

Attorney’s Fees

Plaintiffs’ Amended Complaint requests attorney’s fees as part of the relief for Count II, Breach of Contract. Defendants argue that there is no statutory authority, agreement, or other recognized exception that would entitle Plaintiffs to the award of attorney’s fees. Plaintiffs’ argue that the “Shareholder Agreement” between the parties states that:

In the event that either party breaches the terms of this Agreement, any other party shall be entitled to recover reasonable counsel fees, expert fees, and other costs incurred in enforcing his or its rights under this Agreement.

See Original Complaint, Exhibit D, p 12, paragraph 20. The Shareholder Agreement is an agreement between Plaintiff Thomas and Defendant William. The Agreement clearly states that one party to the Agreement shall be permitted to seek attorney’s fees when attempting to enforce their rights after a breach of the Agreement by the other party. Thus, Defendants did agree to allow Plaintiffs to seek attorney’s fees in the event of a breach and subsequent enforcement of the contract. Therefore, Defendants’ Preliminary Objection to Plaintiffs’ request for attorney’s fees is overruled.

Failure to State Fraud Claim with Particularity

Defendants argue that Plaintiffs have failed to state a claim for Fraud with particularity as required by the Rules of Civil Procedure. Rule 1019(b) states, in part, that “averments of fraud or mistake shall be averred with particularity.” Pa.R.C.P. 1019(b). Plaintiffs argue that the claim was pled with sufficient particularity and should not be dismissed. This Court has already determined that Plaintiffs have failed to plead sufficient factual allegations to support a separate cause of action for the tort of Fraud. Therefore, Defendants’ Preliminary Objection to this claim is sustained. Plaintiffs are directed to file an Amended Complaint within thirty days of the date of this Opinion and Order.

Quantum Meruit

Defendants argue that Plaintiffs cannot claim Unjust Enrichment because the relationship between the parties is governed by an express written contract. Plaintiffs argue that they are permitted to argue in the alternative and that it is too early to determine whether Plaintiffs will be successful on this claim. Since this Court has already directed Plaintiffs to file an Amended Complaint, it is unnecessary to determine this objection at this time.

CONCLUSION

For the reasons set forth above, Defendants’ Preliminary Objections to Plaintiffs’ Amended Complaint are sustained in part and overruled in part as discussed above. Plaintiffs are directed to file a Second Amended Complaint within thirty (30) days of the date of this Opinion. An Order will be entered consistent with the foregoing.