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Joseph L. Castle v. Cohen

argued: January 7, 1988.

JOSEPH L. CASTLE, II, ALAN M. FELDMAN, MIGUEL A. MORA AND ROBERT S. SELTZER, TRUSTEES OF THE PSYCHIATRIC HOSPITALS OF AMERICA, INC. EMPLOYEE STOCK OWNERSHIP PLAN AND RETIREMENT PLAN COMMITTEE OF THE PSYCHIATRIC HOSPITALS OF AMERICA, INC. EMPLOYEE STOCK OWNERSHIP PLAN
v.
ROBERT M. COHEN, HARTSELL, INC., CHEYENNE CORPORATION AND ROLAND M. JERMYN, JR.; ROBERT M. COHEN, HARTSELL, INC. AND CHEYENNE CORPORATION, APPELLANTS AT NO. 87-1662; JOSEPH L. CASTLE, II, ALAN M. FELDMAN, MIGUEL A. MORA AND ROBERT S. SELTZER, TRUSTEES OF THE PSYCHIATRIC HOSPITALS OF AMERICA, INC. EMPLOYEE STOCK OWNERSHIP PLAN AND RETIREMENT PLAN COMMITTEE OF THE PSYCHIATRIC HOSPITALS OF AMERICA, INC. EMPLOYEE STOCK OWNERSHIP PLAN, APPELLANTS AT NO. 87-1669 V. ROBERT M. COHEN, HARTSELL, INC., CHEYENNE CORPORATION AND ROLAND M. JERMYN, JR.; JOSEPH L. CASTLE, II, ALAN M. FELDMAN, MIGUEL A. MORA AND ROBERT S. SELTZER, TRUSTEES OF THE PSYCHIATRIC HOSPITALS OF AMERICA, INC. EMPLOYEE STOCK OWNERSHIP PLAN AND RETIREMENT PLAN COMMITTEE OF THE PSYCHIATRIC HOSPITALS OF AMERICA, INC. EMPLOYEE STOCK OWNERSHIP PLAN V. ROBERT M. COHEN, HARTSELL, INC., CHEYENNE CORPORATION AND ROLAND M. JERMYN, JR.; ROLAND M. JERMYN, JR., APPELLANT AT NO. 87-1677



On Appeal from the United States District Court for the Eastern District of Pennsylvania, D.C. Civil Action No. 87-1402.

Gibbons, Chief Judge, Hutchinson and Garth, Circuit Judges.

Author: Hutchinson

Opinion OF THE COURT

HUTCHINSON, Circuit Judge.

In this appeal we are called upon to interpret a complex stock purchase agreement. The purchasers brought an action in the district court with claims premised upon various federal statutes. The complaint also sought specific performance and resolution of a number of pendent and ancillary state claims. In their answer, the sellers posited a host of counterclaims founded upon both state and federal law. The trial court had jurisdiction under 28 U.S.C.A. § 1331 (West Supp. 1987). We have jurisdiction over this appeal from a final order. 28 U.S.C.A. § 1291 (West Supp. 1987). We will affirm the district court's order granting specific performance of the disputed contract. However, we will vacate the trial court's decree dismissing the remaining claims.

I

Appellants at Nos. 87-1662 and 87-1677, Robert M. Cohen, Hartsell, Inc., Cheyenne Corp. and Roland M. Jermyn, Jr. (stockholders), are the owners of a 56.2 % interest in the Psychiatric Hospitals of America, Inc. (PHA). Joseph L. Castle, II, Alan M. Feldman, Miguel A. Mora and Robert S. Seltzer (trustees) are the trustees of PHA's Employee Stock Ownership Plan (ESOP).*fn1 On December 4, 1984, Mr. Cohen, the owner of 250,000 shares of PHA, pleaded guilty to Medicare fraud. The guilty plea threatened PHA's ability to secure Medicare reimbursements. See 42 U.S.C.A. § 1320a-7(c) (West Supp. 1987); 42 C.F.R. § 489.12 (1986). To insure the continuing flow of government funds, the trustees sought to acquire the stockholders' shares for the benefit of the ESOP.

On January 31, 1985, the parties executed the "Stock Sale Agreement" which is the basis of this lawsuit. The contract states that the defendant/appellant majority stockholders "hereby sell to the Trustees and the Trustees hereby purchase from the Stockholders all of the Offered Shares at the price and upon the terms and conditions hereinafter set forth, subject only to the Alternative Valuation procedure." Joint Appendix of defendant/appellants (Def. App.) at 144a. Pending the determination of the value of the shares and their transfer to the buyer, the shares were to be held in escrow. Id. at 144a-145a.

The agreement provided a method for determining the price of the stock. First, the trustees were to select an independent appraiser to determine the fair market value of the stock as of January 31, 1985. The purchase price was to reflect the sum of both this appraised value plus interest from January 31, 1985 to the date of delivery of the shares from escrow and the transfer of title to the trustees for the ESOP. Id. at 146a. If the trustees' price was unacceptable, the selling stockholders could invoke the "Alternative Valuation" procedure.

The alternative procedure contemplated an "appraisal period" equal to the time available to the trustees to secure their appraisal plus a reasonable time as needed by the stockholders' appraiser to prepare his alternative report. Id. at 148a. In the event the stockholders' appraisal was higher than the trustees', the agreement further provided: "If during the Appraisal Period, the Stockholders' appraiser shall determine a fair market value for the Offered Shares as of the Effective Date which valuation exceeds the Appraised Value [ i.e., that price tendered by the trustees] by more than 10 % (the "Higher Appraised Value") or if Stockholders prior to the end of the Appraisal Period shall obtain a written offer from an unrelated third party which offer exceeds the Appraised Value by more than 10 % (the "Higher Offer"), the Stockholders shall not be required to accept the ESOP Purchase Price for the Offered Shares." Id. The stockholders then could elect to receive the higher appraised value from the trustees, if the trustees were willing to pay it, or, if not, they could sell to the unrelated third party for his higher offer. Id. at 148a-149a. In short, the trustees enjoyed a right of first refusal over any such sale to a third party. Id. at 150a. Lastly, should a sale to an unrelated third party be consummated, the trustees were entitled to receive the amount by which the sale to the third party exceeds the stockholders' valuation. Id. at 153a-154a.*fn2

Shortly after the execution of the January 31, 1985 agreement, the trustees retained the firm of Marshall & Stevens to appraise the stock. On August 7, 1985, Marshall & Stevens submitted its appraisal of $13.1 million to the trustees. John Poole, the stockholders' appraiser, determined that the value of the stock as at January 31, 1985, the date of the contract, was $39 million. The stockholders' valuation was communicated to the trustees some time in August of 1986. Each party sharply assails the integrity of the other's appraisal.

On February 27, 1987, the stockholders executed a stock purchase agreement purportedly conveying the disputed shares to the Ramsay Hospital Corporation of Pennsylvania (Ramsay). In consideration of the transfer of the controlling shares of PHA to Ramsay, Ramsay agreed to pay the stockholders approximately $28 million.*fn3

Shortly thereafter, on March 11, 1987, the trustees filed a complaint against the stockholders, alleging a host of violations of federal and state law stemming from the failure of the stockholders to consummate the transfer of the shares to the ESOP and the proposed sale to Ramsay.*fn4 The complaint also sought a declaratory judgment pursuant to 28 U.S.C.A. § 2201 (West Supp. 1987) declaring (1) a breach of the agreement for sale of the stock, (2) that both the stockholders' appraisal and the agreement to transfer the shares to Ramsay were violative of the stock sale agreement and (3) that the trustees be empowered to complete the purchase of the stock. The trustees also sought specific performance of the agreement. In their answer, the stockholders denied the averments of the trustees' complaint and raised numerous counterclaims premised upon federal and state law.*fn5

The district court, pursuant to Fed.R.Civ.P. 42(b), severed the contract claim from the remaining issues raised by the parties. The issues pertaining to the contract dispute were submitted to a jury. In response to special interrogatories, the jury found that (1) the stockholders' appraisal was not submitted in conformity with the January 31, 1985 agreement, (2) the trustees' appraisal was not submitted in conformity with that same agreement and ...


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